Significant Accounting Policies and Use of Estimates (Policies) | 3 Months Ended |
Mar. 31, 2014 |
Accounting Policies [Abstract] | ' |
Basis of Presentation | ' |
Basis of Presentation |
The accompanying unaudited condensed consolidated financial statements include the accounts of InSite Vision Incorporated (“InSite” or the “Company”) and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in the preparation of the condensed consolidated financial statements. |
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the Company’s financial results and financial condition have been included. Operating results for the three months ended March 31, 2014 are not necessarily indicative of the results that may be expected for any future period. |
The Company operates in one segment using one measure of profitability to manage its business. All of the Company’s long-lived assets are located in the United States. Revenues are primarily royalties from the North American license (the “Akorn License”) of AzaSite to Akorn, Inc. (“Akorn”). |
The Company has incurred substantial cumulative losses and negative cash flows from operations during the quarter ended March 31, 2014 and the years ended December 31, 2012 and 2011. As of March 31, 2014, the Company’s accumulated deficit was $206.7 million and its cash and short-term investments were $5.4 million. Further, the Company anticipates that its existing cash and short-term investment balances, together with cash flows from operations, will only be adequate to fund its cash requirements through September 2014. In addition, the Company’s subsidiary was not able to make the required interest payments on the secured notes during 2014 and will trigger an event of default on May 15, 2014. For further discussion, see Note 5. Management’s plans include exploring strategic alternatives or raising additional financing. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects relating to the recoverability and classification of the recorded asset amounts or amounts and classification of liabilities that might result from the outcome of this uncertainty. |
These unaudited condensed consolidated financial statements and notes should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2013. |
Use of Estimates | ' |
Use of Estimates |
The preparation of financial statements requires the Company to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates. |
Short-Term Investments | ' |
Short-Term Investments |
The Company’s investment policy is to limit the risk of principal loss of invested funds by generally attempting to limit market risk. Accordingly, as of March 31, 2014, the Company’s short-term investments of $1.0 million were invested in U.S. Treasury securities with original maturities of twelve months or less. They are classified as trading securities principally bought and held for the purpose of selling them in the near term with unrealized gains included in earnings. As of March 31, 2014, the unrealized gain on these short-term investments was insignificant. |
Warrant Liability | ' |
Warrant Liability |
In July 2011, the Company issued warrants to purchase shares of the Company’s common stock in connection with a private placement financing transaction. The Company accounted for these warrants as a liability measured at fair value due to a provision included in the warrant agreements that provides the warrant holders with an option to require the Company (or its successor) to purchase their warrants for cash in the event of a “Fundamental Transaction” (as defined in the warrant agreements). The actual amount of cash required if the mandatory purchase option is exercised would be determined using the Black-Scholes Option Pricing Model (the “Black-Scholes Model”) as determined in accordance with the terms of the warrant agreements. The fair value of the warrant liability is estimated using the Black-Scholes Model, which requires inputs such as the remaining term of the warrants, share price volatility and risk-free interest rate. These assumptions are reviewed on a monthly basis and changes in the estimated fair value of the outstanding warrants are recognized each reporting period in the Condensed Consolidated Statements of Operations under “Change in fair value of warrant liability.” |
Fair Value Measurements | ' |
Fair Value Measurements |
Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement: |
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Level 1: | | Quoted prices in active markets for identical assets or liabilities. | | | | | | |
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Level 2: | | Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. | | | | | | |
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Level 3: | | Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability. | | | | | | |
The Company’s financial instruments consist mainly of cash and cash equivalents, short-term investments, accounts receivable, accounts payable, accrued liabilities and debt obligations. Accounts receivable and accounts payable are reflected in the accompanying unaudited condensed consolidated financial statements at cost, which approximates fair value due to the short-term nature of these instruments. While the Company believes its valuation methodologies are appropriate and consistent with those of other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. |
At March 31, 2014, $5.1 million of the Company’s cash and cash equivalents and short-term investments consisted of Level 1 U.S. Treasury-backed government securities or money market funds that are measured at fair value on a recurring basis. |
The Company has debt, the AzaSite Notes, in the form of non-recourse, secured notes payable with a fixed interest rate, which constitute $41.3 million of Level 2 borrowings outstanding at March 31, 2014, measured at fair value on a nonrecurring basis, with an interest rate of 16%. At March 31, 2014, the Company’s debt was reflected in the accompanying unaudited condensed consolidated financial statements at face value. Due to a significant decline in, and uncertainty regarding the future of, AzaSite earned royalty revenues, it is reasonably possible that the fair value of the debt has declined. However, the amount of the decline in value of this debt is not reasonably determinable at this time. For a further discussion of the AzaSite Notes, see Note 5. |
As discussed above, the fair value of the warrant liability, determined using Level 3 criteria, was initially recorded on the grant date and remeasured at March 31, 2014 using the Black-Scholes Model, which requires inputs such as the remaining term of the warrants, share price volatility and risk-free interest rate. These inputs are subjective and generally require significant analysis and judgment to develop. A significant increase (decrease) of any of the subjective variables would result in a correlated increase (decrease) in the warrant liability and an inverse effect on net income (loss). |
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The fair value of the warrant liability was estimated using the following assumptions, as determined in accordance with the terms of the warrant agreements, at March 31, 2014 and December 31, 2013: |
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| | March 31, | | | December 31, | |
| | 2014 | | | 2013 | |
Risk-free interest rate | | | 0.4 | % | | | 0.8 | % |
Remaining term (years) | | | 2.3 | | | | 2.5 | |
Expected dividends | | | 0 | % | | | 0 | % |
Volatility | | | 118 | % | | | 100 | % |
The expected dividend yield was set at zero because the Company has never paid cash dividends and has no present intention to pay cash dividends. Expected volatility was based on the historical volatility of the Company’s common stock and was equal to the greater of 100% or the 30-day volatility rate. The risk-free interest rates were taken from the Daily Federal Yield Curve Rates as published by the Federal Reserve and represent the yields on actively traded U.S. Treasury securities for a term equal to the remaining term of the warrants. |
The following table provides a summary of changes in the fair value of the Company’s Level 3 financial liabilities for the three months ended March 31, 2014 (in thousands): |
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Balance at December 31, 2013 | | $ | 1,685 | | | | | |
Net decrease in fair value of warrant liability on remeasurement | | | (580 | ) | | | | |
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Balance at March 31, 2014 | | $ | 1,105 | | | | | |
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The net decrease in the estimated fair value of the warrant liability was recognized as income under “Change in fair value of warrant liability” in the Condensed Consolidated Statements of Operations. |
The warrant liability’s exposure to market risk will vary over time depending on interest rates and the Company’s stock price. Although the table above reflects the current estimated fair value of the warrant liability, it does not reflect the gains or losses associated with market exposures, which will depend on actual market conditions during the remaining life of the warrants. |
Net Loss per Share | ' |
Basic net loss per share has been computed using the weighted-average number of common shares outstanding during the period. Dilutive net loss per share was computed using the sum of the weighted average number of common shares outstanding and the potential number of dilutive common shares outstanding during the period. Potential common shares consist of the shares issuable upon exercise of stock options and warrants. Potentially dilutive securities have been excluded from the computation of diluted net loss per share in 2014 and 2013 as their inclusion would be anti-dilutive. For the three months ended March 31, 2014 and 2013, respectively, 34,557,625 and 31,185,339 options and warrants were excluded from the calculation of diluted net loss per share because the effect was anti-dilutive. |