| Basis of presentation and significant accounting policies | NOTE 2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING
POLICIES
A. Basis of Presentation
The accompanying financial statements have been prepared in
conformity with accounting principles generally accepted in the
United States (“U.S. GAAP” or “GAAP”). All
adjustments necessary to state the financial statements under
generally accepted accounting principles have been made and were of
a normal and recurring nature.
As described in Note 16, on January 3, 2019, Salarius, Flex
Pharma, Inc. (“Flex Pharma”) and a wholly owned
subsidiary of Flex Pharma, entered into a merger agreement. The
merger was completed on July 19, 2019. The merger was
accounted for as a reverse acquisition with Salarius being deemed
the acquiring company for accounting purposes. Salarius’
historical financial statements have replaced Flex Pharma’s
historical consolidated financial statements with respect to
periods prior to the completion of the merger with retroactive
adjustments to Salarius’ legal capital to reflect the legal
capital of Flex Pharma. Flex Pharma (renamed Salarius
Pharmaceuticals, Inc.) remains the continuing registrant and
reporting company. Accordingly, the historical financial and
operating data of Salarius Pharmaceuticals, Inc., which covers
periods prior to the closing date of the merger, reflects the
assets, liabilities and results of operations of Salarius and does
not reflect the assets, liabilities and results of operations of
Flex Pharma Inc. for the periods prior to July 19, 2019,
Salarius retrospectively adjusted its Statement of Changes in
Stockholders’ Equity (Deficit) and the weighted average
shares used in determining loss per common share to reflect the
conversion of the outstanding common unit, profits interest common
unit and Series A Preferred unit of Salarius that converted into
shares of Flex Pharma’s common stock upon the merger, and to
reflect the effect of the 25 to 1 reverse stock split of Flex
Pharma’s common stock which occurred upon the merger.
B. Recent Financial Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09—Revenue No. 2015-14 2014-09
In August 2014, the FASB issued ASU 2014-15—Presentation 2014-15”), 2014-15
In February 2015, the FASB issued
ASU 2015-02, 2015-02”) 2015-02
In February 2016, the FASB issued
ASU 2016-02—Leases
In March 2016, the FASB issued ASU 2016-09—Compensation—Stock No. 2016-09
In November 2016, the FASB issued
ASU 2016-18—Statement beginning-of-period end-of-period No. 2016-18
In May 2017, the FASB issued ASU 2017-09—Compensation—Stock No. 2017-09
In July 2017, the FASB issued ASU 2017-11—Earnings 2017-11
In June 2018, the FASB issued ASU 2018-07—Improvements award-by-award
C. Use of Estimates
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses,
and related disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of
expenses during the reporting period. On
an on-going
D. Research and Development Costs
Research and development costs consist of costs Salarius incurred
for its own research and development activities and
for pre-clinical
Upfront and milestone payments due to third parties in connection
with research and development collaborations prior to regulatory
approval are expensed as incurred.
Nonrefundable advance payments for goods or services to be received
in the future for use in research and development activities are
deferred and capitalized. The capitalized amounts are expensed as
the related goods are delivered or the services are performed,
rather than when the payment is made.
E. Concentrations of Risk and Off-Balance
Financial instruments that potentially subject Salarius to
concentrations of depository risk include amounts held as cash and
restricted cash. Salarius uses a high quality, accredited financial
institution to maintain its cash and restricted cash and,
accordingly, such funds are subject to minimal depository risk.
Salarius has not experienced any losses in such accounts and
management believes that Salarius is not exposed to significant
depository risk due to the financial position of the depository
institutions in which those deposits are held. Salarius has no
financial instruments with off-balance
Salarius is potentially subject to a concentration of credit risk
related to revenue and cash proceeds from operating activities. All
revenue recognized for and cash proceeds from operating activities
for the years ended December 31, 2018 and 2017 were solely
related to contributions received from CPRIT.
F. Cash and Cash Equivalents
Salarius considers all highly liquid securities with original final
maturities of three months or less from the date of purchase to be
cash equivalents. As of December 31, 2018 and 2017, cash and
cash equivalents are comprised of cash in checking and savings
accounts as well as temporarily restricted cash deposited in these
same types of accounts.
G. Restricted Cash
At December 31, 2018 and December 31, 2017, Salarius held
restricted cash of approximately $2.9 million and
$0.1 million for the Series A Preferred proceeds and CPRIT
year 2 grant award, respectively. The CPRIT grant restricted cash
relates to the use of grant funds to allowable expenses, primarily
research and development expenses, and also has a mandatory fund
matching requirement. As of December 31, 2017, year 1 and year
2 fund matching requirements had not been fully met, which resulted
in the use of grant funds by Salarius being restricted until the
fund matching requirements had been met. There was no restricted
cash related to CPRIT as of December 31, 2018. Restricted cash
related to Series A Preferred proceeds received during 2018 were
restricted due to the minimum capital raise threshold not being
met.
H. Fair Value of Financial Instruments
Certain assets and liabilities are carried at fair value under
GAAP. Fair value is defined as the exchange price that would be
received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the asset
or liability in an orderly transaction between market participants
on the measurement date. Valuation techniques used to measure fair
value must maximize the use of observable inputs and minimize the
use of unobservable inputs. A fair value hierarchy based on three
levels of inputs, of which the first two are considered observable
and the last is considered unobservable, are used to measure fair
value:
•
Level 1—Unadjusted quoted prices in active
markets for identical assets or liabilities.
•
Level 2—Inputs other than Level 1 that are
observable, either directly or indirectly, such as quoted prices
for similar assets or liabilities; or other inputs that are
observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.
•
Level 3—Significant unobservable inputs
including Salarius’ own assumptions in determining fair
value.
I. Property and equipment
Property and equipment, including leasehold improvements, are
recorded at cost and depreciated over their estimated useful lives,
or the lease term if shorter, using the straight-line method.
Repairs and maintenance costs are expensed as incurred, whereas
major improvements that extend the useful lives of the assets are
capitalized as additions to property and equipment.
Depreciation begins at the time the asset is placed in service.
Depreciation is provided over the following estimated useful
lives:
Asset classification
Useful life
Furniture and equipment 5 years
Laboratory equipment 5 years
Leasehold improvements
Remaining life of the lease
J. Intangibles
Intangible assets that have finite useful lives are amortized over
their useful lives, and are reviewed for impairment when warranted
by economic conditions.
K. Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the
asset may not be recoverable. When such events occur, Salarius
compares the carrying amounts of the assets to their undiscounted
expected future cash flows. If this comparison indicates that there
is impairment, the amount of impairment is calculated as the
difference between the carrying value and fair value of the asset.
To date, no such impairments have been recognized.
L. Rent Expense
Salarius’ lease for its facility in Houston, Texas provides
for fixed minimum monthly rental payments. Salarius has
a 60-day
M. Revenue Recognition
Salarius currently generates revenue through a contribution
received from CPRIT for research and development activities.
Salarius recognizes revenue for exchange transactions in accordance
with Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) Topic 606,
Revenue for Contracts with Customers (“ASC 606”) and
for contributions in accordance with ASC Topic
958, Not-for-Profit Sub-Topic
Amounts received prior to satisfying the revenue recognition
criteria are recorded as deferred revenue in Salarius’
balance sheets. Amounts expected to be recognized as revenue within
the 12 months following the balance sheet date are classified as
current deferred revenue. Amounts not expected to be recognized as
revenue within the 12 months following the balance sheet date are
classified as deferred revenue, net of current portion.
Salarius evaluates collaboration agreements with respect to FASB
ASC Topic 808, Collaborative Arrangements, considering the nature
and contractual terms of the arrangement and the nature of its
business operations to determine the classification of the
transactions. When Salarius is an active participant in the
activity and exposed to significant risks and rewards dependent on
the commercial success of the collaboration, it will record its
transactions on a gross basis in the financial statements and
describe the rights and obligations under the collaborative
arrangement in the notes to the financial statements.
N. Equity-Based Compensation
Salarius measures equity-based compensation to employees and
managers based on the grant date fair value of the awards and
recognizes the associated expense in the financial statements over
the requisite service period of the award, which is generally the
vesting period.
Equity-based compensation costs for nonemployee awards are
recognized as services are provided, which is generally the vesting
period, on a straight-line basis. The measurement date for
nonemployee awards is the grant date. In determining the threshold
price for an incentive unit, Salarius’ board of managers
determines the price at which an incentive unit would have a
liquidation value of zero at the date of grant in setting the
threshold price for incentive units. The board of managers
considers the fair value of its assets and a third-party firm
performs an analysis to determine the per unit amount that a holder
would receive upon a distribution event. In determining the fair
value of its assets, Salarius relies on independent third-party
valuations, which take into account a variety of factors, including
Salarius’ financial position and historical financial
performance, the status of technological developments within
Salarius’ products, the composition and ability of the
current research and management team, an evaluation or benchmark of
Salarius’ competition, the current business climate in the
marketplace, the illiquid nature of the common stock and incentive
units, arm’s-length
Valuation methods utilized include the Cost or Backsolve methods in
2017 and the Backsolve method in 2018 which are accepted methods
similar to the Black-Scholes Merton Method and produced similar
results. Assumptions utilized in the model for valuing the
incentive units including expected volatility, dividend yield and
risk-free interest rate. Additionally, forfeitures are accounted
for in compensation cost as they occur. Incentive units do not have
an expiration date, thus, the expected term of incentive units
granted is determined based on the probability-weighted estimated
term to a distribution event.
Salarius records the expense for equity grants subject to defined
vesting periods. Salarius classifies equity-based compensation
expense in its statements of operations in the same manner in which
the award recipient’s payroll costs are classified or in
which the award recipients’ service payments are
classified.
O. Income Taxes
Effective May 19, 2011, Salarius was organized as a limited
liability company and subject to the provisions of Subchapter K of
the Internal Revenue Code. As such, Salarius is not viewed as a
taxpaying entity in any jurisdiction and does not require a
provision for income taxes. Each member is responsible for the tax
liability, if any, related to its proportionate share of the
LLC’s taxable income. |
