Nature of Business and Summary of Significant Accounting Policies | 6 Months Ended |
Jun. 30, 2014 |
Accounting Policies [Abstract] | ' |
Nature of Business and Summary of Significant Accounting Policies | ' |
1 | Nature of Business and Summary of Significant Accounting Policies | | | | | | | | | | | | | | | |
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Organization |
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ZS Pharma Inc. is a biopharmaceutical company focused on the development and commercialization of highly selective, non-absorbed drugs to treat renal, cardiovascular, liver and metabolic diseases. Our proprietary zirconium silicate technology allows us to create highly selective ion traps that can reduce toxic levels of specific electrolytes without disturbing the balance of other electrolytes. We are currently conducting a Phase III study with our lead product candidate, ZS9 for the treatment of hyperkalemia, a life-threatening condition in which elevated levels of potassium increase the risk of muscle dysfunction, including cardiac arrhythmias and sudden cardiac death. |
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On June 17, 2014, our registration statement on Form S-1 (File No. 333-195961) relating to our initial public offering (IPO) of our common stock was declared effective by the Securities and Exchange Commission (SEC). Our shares began trading on The NASDAQ Global Select Market on June 18, 2014. The public offering price of the shares sold in the offering was $18.00 per share. The IPO closed on June 23, 2014 and included 6,836,111 shares of common stock, which included 891,667 shares of common stock issued pursuant to the option granted to the underwriters to purchase additional shares. We received total proceeds from the offering of $114.4 million, net of underwriting discounts and commissions of $8.6 million. After deducting offering expenses of approximately $2.2 million, net proceeds were approximately $112.2 million. Upon the closing of the IPO, all shares of convertible preferred stock then outstanding converted into 11,979,479 shares of common stock. |
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Upon the effectiveness of the Amended and Restated Certificate of Incorporation of the Company on June 23, 2014, the number of shares of capital stock the Company is authorized to issue was increased to 255,000,000 shares, of which 250,000,000 shares are common stock and 5,000,000 shares are preferred stock. Both the common stock and preferred stock have a par value of $0.001 per share. There were no shares of preferred stock outstanding at June 30, 2014. |
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Basis of Presentation |
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The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. |
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The condensed interim balance sheet as of June 30, 2014, and the interim condensed statements of operations for the three and six months ended June 30, 2014 and 2013, and the condensed statements of cash flows for the six months ended June 30, 2014 and 2013, are unaudited. The unaudited interim condensed financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly our financial position as of June 30, 2014, and our results of operations for the three and six months ended June 30, 2014 and 2013, and cash flows for the six months ended June 30, 2014 and 2013. The financial data and the other financial information disclosed in these notes to the financial statements related to the three-month periods and the six-month periods, are also unaudited. The results of operations for the three months ended June 30, 2014, are not necessarily indicative of the results to be expected for the year ending December 31, 2014, or for any other future annual or interim period. The condensed balance sheet as of December 31, 2013 included herein was derived from the audited financial statements as of that date. These financial statements should be read in conjunction with our audited financial statements included in our prospectus dated June 17, 2014, filed with the SEC pursuant to Rule 424(b)(4) of the Securities Act. |
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Reverse Stock Split |
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In June 2014, our board of directors and our stockholders approved an amendment to our amended and restated certificate of incorporation to effect a reverse split of shares of our common stock on a 1-for-2.56437 basis (the Reverse Stock Split). The par values and the authorized shares of the common and convertible preferred stock were not adjusted as a result of the Reverse Stock Split. All issued and outstanding common stock, convertible preferred stock, options for common stock, warrants for common and preferred stock, and per share amounts contained in the financial statements have been retroactively adjusted to reflect this Reverse Stock Split for all periods presented. The Reverse Stock Split was made effective on June 11, 2014. |
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Use of Estimates |
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The preparation of the financial statements in accordance with U.S. GAAP requires management to make certain estimates and judgments that affect the reported amounts of assets, liabilities, and expenses. Actual results could differ from those estimates. |
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We estimate our clinical trial expense accrual for a given period based on the number of patients enrolled at each site and the length of time each patient has been in the trial, less amounts previously billed, plus any ancillary clinical trial expenses that have been incurred but not yet recorded. |
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We measure and recognize compensation expense for all stock options granted to our employees and directors, based on the estimated fair value of the award on the grant date. We use the Black-Scholes valuation model to estimate the fair value of stock option awards. The fair value is recognized as expense, net of estimated forfeitures, over the requisite service period, which is generally the vesting period of the respective award on a straight-line basis. We believe that the fair value of stock options granted to non-employees is more reliably measured than the fair value of the services received. As such, the fair value of the unvested portion of the options granted to non-employees is re-measured each period. The resulting increase in value, if any, is recognized as expense during the period the related services are rendered. The determination of the grant-date fair value of options using an option-pricing model is affected by our estimated common stock fair value, as well as assumptions regarding a number of other complex and subjective variables. |
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Cash and Cash Equivalents |
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We consider all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents. We place our cash with institutions with high credit quality. However, at certain times such cash may be in excess of Federal Deposit Insurance Corporation and Securities Investor Protection Corporation insurance limits. The carrying amount of cash approximates fair value. |
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Restricted Cash |
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On November 22, 2013, we executed an agreement to pledge, assign, transfer, and grant a security interest to J.P. Morgan Bank to secure the payment and performance of our credit card program. We have agreed to maintain $150,000 in a restricted cash account, given we are a pre-revenue company. |
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Redeemable Preferred Stock Warrant Liability |
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Freestanding warrants for shares that were either puttable or redeemable were classified as liabilities on the balance sheet and were carried at their estimated fair value. The Series B Redeemable Preferred Stock, which was able to be purchased with the warrants, was redeemable at a future date in 2017. As such, these warrants were classified as liabilities, and at the end of each reporting period, changes in the estimated fair value during the period were recorded in other income (expense). Prior to June 17, 2014, the warrants were all exercised into Series B Redeemable Preferred Stock, which was converted into Common Stock upon the IPO, and the amount of warrant liability was reclassified to shareholders’ equity. |
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Fair Value Measurements |
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ASC 820, Fair Value Measurement, provides a comprehensive framework for measuring the fair value of assets and liabilities, which provides for consistency in how fair value determinations are made under various existing accounting standards that permit, or in some cases require, estimates of fair market value. |
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Financial assets and liabilities that have recurring fair value measurements are shown below (in thousands): |
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| | | | | Fair Value Measurements at | |
December 31, 2013, Using |
| | | | | Quoted | | | Significant | | | Significant | |
Prices in | Other | Unobservable |
Active | Observable | Inputs |
Markets for | Inputs | |
Identical | | |
Assets | | |
Description | | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
Financial liabilities: | | | | | | | | | | | | | | | | |
Series B Redeemable Preferred Stock warrants | | $ | 2,667 | | | $ | — | | | $ | — | | | $ | 2,667 | |
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Total financial liabilities | | $ | 2,667 | | | $ | — | | | $ | — | | | $ | 2,667 | |
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Level 3 liabilities comprise redeemable preferred stock warrant liabilities. These warrants were classified as liabilities because the Series B Redeemable Preferred shares that were able to be purchased by these warrants were redeemable and, therefore, are classified as temporary equity. The following table sets forth a summary of the changes in the estimated fair value of our redeemable preferred stock warrants, which were measured at fair value on a recurring basis (in thousands): |
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Balance as of December 31, 2013 | | $ | 2,667 | | | | | | | | | | | | | |
Net increase in fair value | | | 3,071 | | | | | | | | | | | | | |
Amount reclassified to shareholders’ equity upon exercise | | | (5,738 | ) | | | | | | | | | | | | |
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Balance as of June 30, 2014 | | $ | — | | | | | | | | | | | | | |
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The fair value of the outstanding Series B Redeemable Preferred Stock warrants was measured using the Black-Scholes option-pricing model. Inputs used to determine estimated fair value included the estimated fair value of the warrant, as determined by the fair value of the underlying stock relative to the warrant exercise price at the valuation measurement date, volatility of the price of the underlying stock, the remaining contractual term of the warrants, risk-free interest rates, and expected dividends. |
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We believe the recorded values of cash and cash equivalents, other current assets, accounts payable, and accrued expenses approximate fair value because of the short maturity of these financial instruments. |
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Income Taxes |
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We account for income taxes using the asset and liability approach in accordance with the provision of ASC 740, Income Taxes. Under this approach, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are provided if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. We continue to record a valuation allowance for the full amount of deferred tax assets, which would otherwise be recorded for tax benefits relating to the operating loss and tax credit carryforwards, as realization of such deferred tax assets cannot be determined to be more likely than not. |
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We account for uncertain tax positions in accordance with the provisions of ASC 740. When uncertain tax positions exist, we recognize the tax benefit of tax positions to the extent that the benefit will more likely than not be realized. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances. As of June 30, 2014 and 2013, we had no uncertain tax positions and no interest or penalties have been charged us from inception through June 30, 2014. If incurred, we will classify any interest and penalties as a component of tax expense. |
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In April 2014, we determined that we had a change of ownership, as defined under Internal Revenue Code Section 382 (Section 382), at the time of the closing of the first tranche of Series C Redeemable Preferred Stock in October 2012. According to the provisions of Section 382, our net operating losses and research credits will be subject to an annual limitation. We have not yet determined the amount of the annual limitations to our net operating losses or research credits. |
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Comprehensive Income (Loss) |
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Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions, and other events and circumstances from non-owner sources. For the three months ended June 30, 2014 and 2013 and the six months ended June 30, 2014 and 2013, net loss equaled comprehensive loss. |
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Net Loss per Common Share Attributable to Common Shareholders |
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Basic net loss per share attributable to common shareholders is calculated by dividing the net loss attributable to common shareholders by the weighted-average number of common shares outstanding during the period without consideration for common stock equivalents. Diluted net loss per share of common stock is the same as basic net loss per share of common stock, since the effects of potentially dilutive securities are antidilutive. The net loss per share of common stock attributable to common shareholders was computed using the two-class method required for participating securities. All series of our convertible preferred stock were considered to be participating securities as they were entitled to participate in undistributed earnings with shares of common stock. Due to our net loss, there was no impact on the earnings per share calculation in applying the two-class method since the participating securities had no legal requirement to share in any losses. |
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The following outstanding shares of common stock equivalents were excluded from the computations of diluted net loss per common share attributable to common shareholders for the periods presented as the effect of including such securities would be antidilutive: |
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| | Six Months | | | | | | | | | |
Ended June 30 | | | | | | | | |
| | 2014 | | | 2013 | | | | | | | | | |
Convertible preferred stock – as converted to common stock | | | — | | | | 7,478,998 | | | | | | | | | |
Warrants to purchase convertible preferred stock – as converted to common stock | | | — | | | | 377,743 | | | | | | | | | |
Warrants to purchase common stock | | | — | | | | 445,538 | | | | | | | | | |
Options to purchase common stock | | | 4,229,864 | | | | 2,308,044 | | | | | | | | | |
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| | | 4,229,864 | | | | 10,610,323 | | | | | | | | | |
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Recent Accounting Pronouncements |
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In June 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-10, which eliminates the financial reporting distinction between development stage entities and other reporting entities, thereby eliminating the requirements to present inception-to-date information in the statements of operations and stockholders’ equity and cash flow, or label the financial statements as those of a development stage entity. The Company has elected to early adopt this guidance, as permitted, for its financial statements for the year ended December 31, 2014, including this quarterly report, and therefore has no longer labeled its financial statements as those of a development stage entity or included any inception-to-date information. |