Business and Summary of Significant Accounting Policies | 12 Months Ended |
Dec. 31, 2014 |
Accounting Policies [Abstract] | |
Business and Summary of Significant Accounting Policies | 1. Business and Summary of Significant Accounting Policies |
InSite Vision Incorporated (“InSite,” the “Company,” “we,” or “our”) is an ophthalmic product development company advancing ophthalmic pharmaceutical products to address unmet eye care needs. The Company’s current portfolio of products is based on its proprietary DuraSite® drug delivery technology. The Company’s DuraSite sustained drug delivery technology is a proven synthetic polymer-based formulation designed to extend the residence time of a drug relative to conventional topical therapies. It enables topical delivery of a drug as a solution, gel or suspension and can be customized for delivering a wide variety of drug candidates. |
DuraSite® 2 is the Company’s next-generation enhanced drug delivery system, which is designed to provide a broad platform for developing superior ophthalmic therapeutics. DuraSite 2 is based on the original DuraSite technology, and incorporates a cationic polymer to achieve sustained and enhanced ocular delivery of drugs. The Company plans to focus its research and development and commercial support efforts on topical products formulated with the DuraSite 2 drug delivery technology. |
Historically, the Company has incurred substantial cumulative losses and negative cash flows from operations. Clinical trials and costs to prepare a New Drug Application (“NDA”) for the Company’s product candidates with the U.S. Food and Drug Administration (“FDA”) are very expensive and difficult, in part because they are subject to rigorous regulatory requirements. As of December 31, 2014, the Company’s accumulated deficit was $175.3 million and its cash and cash equivalents were $1.7 million. Further, the Company anticipates that its existing cash and cash equivalent balances, together with cash flows from operations, and the net proceeds from existing debt financing arrangements (See Note 8, “Secured Notes Payable” for further discussion) will only be adequate to fund its cash requirements through May 2015. 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. |
Principles of Consolidation. The consolidated financial statements include the accounts of InSite Vision Incorporated as well as its wholly-owned subsidiaries. All intercompany transactions have been eliminated in consolidation. |
Industry Segment and Geographic Information. The Company operates in one segment and is focused on developing drugs and drug delivery systems principally for ophthalmic indications. The Company had limited foreign-based operations for the years ended December 31, 2014, 2013 and 2012. All long-lived assets are located in the United States. |
Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires the Company to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates. |
Reclassifications. Certain amounts in prior years’ financial statements have been reclassified to conform to the current presentation. These reclassifications had no impact on previously reported results of operations or stockholders’ deficit. |
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Cash and cash equivalents. The Company considers all highly liquid investments with maturities of 90 days or less from the date of purchase to be cash equivalents. |
Short-term investments. The Company considers all investments with original maturities of 12 months or less from the date of purchase to be short-term investments. They are classified as trading securities principally bought and held for the purpose of selling them in the near term, with unrealized gains and losses included in earnings. |
Property and Equipment. Property and equipment is stated at cost, less accumulated depreciation and amortization. Depreciation of property and equipment is provided over the estimated useful lives of the respective assets, which range from three to five years, using the straight-line method. Leasehold improvements and property acquired under capital leases are amortized over the lives of the related leases or their estimated useful lives, whichever is shorter, using the straight-line method. Depreciation and amortization expense for the years ended December 31, 2014, 2013 and 2012 was $335,000, $107,000 and $95,000, respectively. The costs of repairs and maintenance are expensed as incurred. |
Impairment of Long-Lived Assets. The Company periodically assesses the recoverability of its long-lived assets for which an indicator of impairment exists by determining whether the carrying value of such assets can be recovered through undiscounted future operating cash flows. If the Company concludes that the carrying value will not be recovered, the Company measures the amount of such impairment by comparing the fair value to the carrying value. For the years ended December 31, 2014, 2013 and 2012, no impairment of property and equipment was recorded. |
Patents. As a result of the Company’s research and development efforts, the Company has obtained, or is applying for, a number of patents to protect proprietary technology and inventions. All costs associated with patents for product candidates under development are expensed as incurred. As of December 31, 2014 and 2013, the Company had no capitalized patent costs. |
Debt Issuance Costs. Debt issuance costs paid to third parties are capitalized and amortized over the life of the underlying debt, using the effective interest method. Amortization of debt issuance costs for the years ended December 31, 2014, 2013 and 2012 were $405,000, $418,000 and $419,000, respectively, and are included in interest expense and other, net in the Consolidated Statements of Operations. See Note 8, “Secured Notes Payable” for further discussion of the underlying debt. |
Warrant Liability. The Company issued warrants to purchase shares of the Company’s common stock in connection with a private placement equity financing transaction in July 2011 and private placement debt financing transactions in the fourth quarter of 2014. 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 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 Consolidated Statements of Operations under “Change in fair value of warrant liability.” |
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. | | | | | | | | | | | |
As of December 31, 2014 and 2013, less than $0.1 million and $8.2 million, respectively, of the Company’s cash, cash equivalents and short-term investments consisted of Level 1 Treasury-backed government securities or money market funds that are measured at fair value on a recurring basis. |
The Company’s financial instruments consist mainly of cash and cash equivalents, short-term investments, accounts receivable, other receivables, accounts payable, accrued liabilities and debt obligations. Accounts receivable, other receivables, and accounts payable are reflected in the accompanying 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. |
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 December 31, 2014 and 2013 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. |
The fair value of the warrant liability was estimated using the following weighted-average assumptions, as determined in accordance with the terms of the warrant agreements, at December 31, 2014 and 2013: |
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| | December 31, | | | December 31, | | | | | |
2014 | 2013 | | | | |
Risk-free interest rate | | | 0.9 | % | | | 0.8 | % | | | | |
Remaining term (years) | | | 2.4 | | | | 2.5 | | | | | |
Expected dividends | | | 0 | % | | | 0 | % | | | | |
Volatility | | | 101.2 | % | | | 100 | % | | | | |
The expected dividend yield is set at zero because the Company has never paid cash dividends and has no present intention to pay cash dividends. Per the terms of the warrant agreements, expected volatility is based on the historical volatility of the Company’s common stock and is equal to the greater of 100% or the 30-day volatility rate. The risk-free interest rates are 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 year ended December 31, 2014 and 2013 (in thousands): |
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| | Year Ended December 31, | | | | | |
| | 2014 | | | 2013 | | | | | |
Beginning balance | | $ | 1,685 | | | $ | 2,257 | | | | | |
Initial fair value of warrants as of issuance | | | 1,003 | | | | — | | | | | |
Net decrease in fair value of warrant liability on remeasurement | | | (1,497 | ) | | | (572 | ) | | | | |
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Ending balance | | $ | 1,191 | | | $ | 1,685 | | | | | |
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The initial value of the warrants issued in 2014 were recorded as “Debt issuance costs, net” in the Consolidated Balance Sheets. 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 Consolidated Statements of Operations. |
Revenue Recognition. The Company recognizes revenue when four basic criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the fee is fixed or determinable; and collectability is reasonably assured. The Company has arrangements with multiple revenue-generating elements. The Company analyzes its multiple element arrangements to determine whether the elements can be separated and accounted for individually as separate units of accounting. An item can generally be considered a separate unit of accounting if both of the following criteria are met: (i) the delivered item(s) has value to the customer on a stand-alone basis and (ii) the arrangement includes a general right of return and delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the Company. Items that cannot be divided into separate units are combined with other units of accounting, as appropriate. Consideration received is allocated among the separate units based on the unit’s selling price and is recognized in full when the criteria are met. The Company deems service to be rendered if no continuing obligation exists on the part of the Company. |
The Company’s revenues are primarily derived from royalties on product sales and licensing agreements, and such agreements may provide for various types of payments, including upfront payments, research funding and related fees during the terms of the agreements, milestone payments based on the achievement of established development objectives and licensing fees. |
The Company receives royalties from licensees based on third-party sales. The royalties are recorded as earned in accordance with the contract terms when third-party results are reliably measured and collectability is reasonably assured. |
Revenues associated with non-refundable up-front license fees under arrangements where the license fees cannot be accounted for as separate units of accounting are deferred and recognized as revenues on a straight-line basis over the expected term of the Company’s continued involvement. Revenues from the achievement of milestones are recognized as revenues when the milestones are achieved and the milestone payments are due and collectible. |
The Company allocates revenue in multiple-deliverable revenue arrangements using estimated selling prices of the delivered goods and services based on the relative selling price method. |
Research and Development Expenses. Research and development expenses include salaries, benefits, facility costs, services provided by outside consultants and contractors, administrative costs and materials for the Company’s research and development activities. The Company expenses these research and development activities as they are incurred. |
The Company accrues and expenses the costs for clinical trial activities performed by third parties based upon estimates of the percentage of work completed over the life of the individual study in accordance with agreements established with contract research organizations and clinical trial sites. The Company determines the estimates through discussions with internal clinical personnel and external service providers as to progress or stage of completion of trials or services and the agreed upon fee to be paid for such services. Costs of setting up clinical trial sites for participation in the trials are expensed immediately as research and development expenses. Clinical trial site costs related to patient enrollment are accrued as patients are entered into the trial. |
General and Administrative Expenses. General and administrative expenses include salaries, benefits, facility costs, services provided by outside consultants and contractors, legal services, advertising and marketing, investor relations, financial reporting, materials and other expenses related to general corporate and sales and marketing activities. The Company recognizes such costs as they are incurred. |
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Cost of Revenues. The Company recognizes royalties to third parties and the cost of inventory shipped related to the sale of the Company’s products when they are incurred. |
Stock-Based Compensation. The Company’s stock-based compensation programs consist of stock options granted to employees as well as our employee stock purchase plan, based on the grant date fair value of those awards. |
The grant date fair value of the award is recognized as expense over the requisite service period. The Company uses the Black-Sholes option pricing model to compute the estimated fair value of stock option awards. Using this model, fair value is calculated based on assumptions with respect to: expected volatility of our common stock price: the periods of time over which employees and members of our board are expected to hold their options prior to exercise; expected dividend yield on our common stock; and risk-free interest rates. Stock-based compensation expense also includes an estimate, which is made at the time of grant, of the number of awards that are expected to be forfeited. The estimate is revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. |
See Note 12, “Stock-Based Compensation” for further discussion of employee stock-based compensation. |
The Company occasionally issues stock options and warrants to consultants of the Company in exchange for services. The Company has valued these options and warrants using the Black-Scholes option pricing model, at each reporting period and has recorded charges to operations over the vesting periods of the individual stock options or warrants. Such charges amounted to approximately $1,000, $8,000 and $56,000 during the years ended December 31, 2014, 2013 and 2012, respectively. |
Net Income (Loss) per Share. Basic net income (loss) per share has been computed using the weighted-average number of common shares outstanding during the period. Dilutive net income (loss) per share is 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 income (loss) per share in 2014, 2013 and 2012 as their inclusion would be anti-dilutive. |
The following table sets forth the computation of basic and diluted net income (loss) per share: |
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| | Year Ended December 31, | |
(in thousands, except per share data) | | 2014 | | | 2013 | | | 2012 | |
Numerator: | | | | | | | | | | | | |
Net income (loss) | | $ | 26,761 | | | $ | 5,781 | | | $ | (8,277 | ) |
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Denominator: | | | | | | | | | | | | |
Weighted-average shares outstanding | | | 131,951 | | | | 131,951 | | | | 131,951 | |
Effect of dilutive securities: | | | | | | | | | | | | |
Stock options | | | 434 | | | | 482 | | | | — | |
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Weighted-average shares outstanding for diluted loss | | | 132,385 | | | | 132,433 | | | | 131,951 | |
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Net income (loss) per share: | | | | | | | | | | | | |
Basic | | $ | 0.2 | | | $ | 0.04 | | | $ | (0.06 | ) |
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Diluted | | $ | 0.2 | | | $ | 0.04 | | | $ | (0.06 | ) |
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For the year ended December 31, 2012, due to the loss applicable to common stockholders, loss per share is based on the weighted average number of common shares only, as the effect of including equivalent shares from stock options and warrants would be anti-dilutive. At December 31, 2014, 2013 and 2012, 40,179,706, 31,407,604 and 28,156,898 options and warrants, respectively, were excluded from the calculation of diluted earnings per share because the effect was anti-dilutive. |
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Comprehensive Income (Loss). Comprehensive income (loss) is the change in equity from transactions and other events and circumstances other than those resulting from investments by owners and distributions to owners. The consolidated comprehensive income (loss) for the Company was equal to the net income (loss) attributable to the Company for the years ended December 31, 2014, 2013 and 2012. |
Key Suppliers. The Company is dependent on single or limited source suppliers for certain materials used in its research and development and commercial activities. The Company has generally been able to obtain adequate supplies of these components. However, an extended interruption in the supply of these components currently obtained from single or limited source suppliers could adversely affect the Company’s research and development and commercial efforts. |
Income Taxes. The Company accounts for income taxes under the liability method; under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax reporting bases of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Realization of deferred tax assets is dependent upon future earnings, the timing and amount of which are uncertain. |
The Company utilizes a two-step approach to recognize and measure uncertain tax positions, if any. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon tax authority examination, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. |
Significant Customers and Risk. All revenues recognized and/or deferred were primarily from AzaSite licensees. The Company is entitled to receive royalty revenues from net sales of AzaSite under the terms of its agreement with Inspire. Inspire was acquired by Merck in May 2011 and subsequently acquired by Akorn in November 2013. Accordingly, all trade receivables are concentrated with these parties during the years ended December 31, 2014, 2013 and 2012. Under the terms of the license with Inspire, Inspire, through its applicable parent company, has significant influence over the commercial success of AzaSite. Revenues from Akorn/Merck represented approximately 98%, 48% and 90% of total revenues for the years ended December 31, 2014, 2013 and 2012, respectively. In addition, in April 2013, the Company sold its rights to receive royalty payments relating to sales of Besivance and the amounts received in this sale represented 50% of the Company’s revenues for the year ended December 31, 2013. |
Credit Risk. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash, cash equivalents and short-term investments. The Company’s cash, cash equivalents and short-term investments are primarily deposited in demand accounts with two financial institutions. |
Risks from Third Party Manufacturing Concentration. The Company relies on a single source manufacturer for each of its product candidates and on a single source manufacturer for the active pharmaceutical ingredient in its product candidates. Accordingly, delays in the manufacture of the Company’s product candidates or the active pharmaceutical ingredients could adversely impact the development of the Company’s product candidates. Furthermore, the Company has no control over the manufacture and the overall product supply chain of products for which it is entitled to receive revenue. |
Recent Accounting Pronouncements |
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09 (“ASU 2014-09”), Revenue from Contracts with Customers. The FASB and the International Accounting Standards Board (“IASB”) initiated a joint project to clarify the principles for recognizing revenue and developed a common revenue recognition standard for U.S. generally accepted accounting principles (“GAAP’) and International Financial Reporting Standards (“IFRS”). Under the guidance, an entity should recognize revenue when the entity satisfies a performance obligation within a contract at a determined transaction price. This update is effective for interim and annual reporting periods beginning after December 15, 2016. Early adoption is not permitted. The Company does not expect that the adoption of this standard will materially impact the Company’s consolidated statement of financial position or results of operations. |
In August 2014, the FASB issued Accounting Standards Update No. 2014-15 (“ASU 2014-15”), Presentation of Financial Statements – Going Concern. This standard includes guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern within one year after the financial statements are issued. If conditions or events raise substantial doubt, the entity must disclose the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern, management’s evaluation of those conditions or events, and management’s plans to mitigate the conditions or events. This update is effective for interim and annual reporting periods beginning after December 15, 2016. Early adoption is permitted. The Company does not expect that the adoption of this standard will materially impact the Company’s consolidated statement of financial position or results of operations. |