| Significant Accounting Policies and Use of Estimates | Note 1. Significant Accounting Policies and Use of
Estimates
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 and six months ended June 30, 2015 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 ®
In January 2015, the Company entered into a license agreement with
Nicox S.A. (“Nicox”), a France-based publicly traded
company, for the development and commercialization of AzaSite (1%
azithromycin), AzaSite Xtra TM TM
Under the license agreement, Nicox can request up to twelve
full-time equivalent (“FTE”) employees from the Company
to assist with presenting data to regulatory authorities in the
European Union, obtaining European Union regulatory approvals and
dealing with the approved product manufacturer in the United
States. Nicox has agreed to reimburse the Company for the use of
its employees. Should the twelve FTE employees be needed for a full
year, the reimbursement to the Company would be approximately $3.6
million.
A joint collaboration and development committee will oversee
further product development of the licensed products for the
European Union including AzaSite Xtra and any additional
indications for BromSite. The Company has the right to utilize the
jointly developed data for regulatory approval outside of the Nicox
territory including in the United States. Each company will bear
50% of the development cost.
In the fourth quarter of 2014, the Company entered into a
Securities Purchase Agreement (the “Purchase
Agreement”) with certain purchasers (the
“Purchasers”). Pursuant to the Purchase Agreement, the
Company agreed to sell 12% Senior Secured Notes (the
“Notes”) to the Purchasers and issue warrants to
purchase shares of the Company’s common stock. The Company
sold Notes to the Purchasers having an aggregate principal amount
of $5.2 million in the fourth quarter of 2014 and had the option to
sell additional Notes to the Purchasers in an aggregate principal
amount of $2.6 million until October 9, 2016. In accordance
with the Purchase Agreement, on April 17, 2015, the Company
sold Notes to the Purchasers having an aggregate principal amount
equal to $2.6 million and issued warrants to purchase an aggregate
of 3,464,456 shares of the Company’s common stock at an
exercise price of $0.18 per share. The Company has no remaining
borrowings under the Purchase Agreement.
Riverbank Capital Securities acted as the placement agent (the
“Placement Agent”) for the offering of Notes and
warrants pursuant to the Purchase Agreement and received $155,900,
a 6% cash commission on the gross proceeds from the sale of the
Notes and issuance of the warrants on April 17, 2015. Timothy
McInerney, the Chairman of the Board of the Company and a member of
the Company’s Board of Directors, is a principal of the
Placement Agent and was a Purchaser in the offering of Notes and
warrants under the same terms as the other Purchasers.
On June 8, 2015, the Company, QLT Inc., a corporation
incorporated under the laws of British Columbia
(“QLT”), and Isotope Acquisition Corp., a Delaware
corporation and indirect wholly owned subsidiary of QLT
(“Merger Sub”), entered into an Agreement and Plan of
Merger (the “Merger Agreement”) pursuant to which
Merger Sub will merge with and into the Company, and the Company
will be the surviving corporation (the “Surviving
Corporation”) in the merger and a wholly owned indirect
subsidiary of QLT (the “Merger”).
Pursuant to the terms of the Merger Agreement, each share of the
Company’s common stock issued and outstanding (the
“Company Common Stock”) (except shares owned by QLT or
a subsidiary of QLT and shares held by stockholders who exercise
their appraisal rights under Delaware law) will be cancelled and
will be automatically converted into the right to receive 0.048 of
validly issued, fully paid and non-assessable shares of QLT common
shares (the “Merger Consideration”). No fractional
shares will be issued in connection with the Merger, and the
Company’s stockholders will receive cash in lieu of any
fractional shares in the Merger pursuant to the terms of the Merger
Agreement.
Pursuant to the terms of the Merger Agreement, each option to
acquire shares of Company Common Stock that is outstanding and
unexercised will terminate and have no further effect, and the
holder thereof will have no right to receive any consideration
therefor. However, holders of any such options will have at least
five days prior to the closing of the Merger to fully exercise
their options.
Pursuant to the terms of the Merger Agreement, each holder of a
warrant to purchase shares of Company Common Stock (collectively,
the “Company Warrants”) will have the right to elect to
surrender such holder’s warrants to the Company as the
surviving corporation of the Merger in return for a cash payment.
Each Company Warrant that has not been cancelled in exchange for a
cash payment form the Company in accordance with the terms of the
Company Warrants will become converted into and become a warrant to
purchase QLT common shares and QLT will assume each such Company
Warrant in accordance with its terms.
Pursuant to the terms of the Merger Agreement, the Company was
required to submit to the United States Food and Drug
Administration (the “FDA”) a new drug application
(“NDA”) with respect to BromSite™. The Company
filed the NDA with the FDA on June 11, 2015. In addition,
QLT’s obligation to consummate the Merger is conditioned on,
among other things, (1) the FDA not having issued a written
communication refusing to file the NDA with respect to BromSite for
review by August 10, 2015, which is the 60th day following the
FDA’s receipt of the BromSite NDA, and (2) the FDA not
having asserted a deficiency that is reasonably likely to require
one or more additional clinical studies with respect to BromSite by
August 24, 2015, which is the 74th day following the
FDA’s receipt of the BromSite NDA.
The Merger Agreement is subject to adoption by the Company’s
stockholders, among other things.
The Merger Agreement contains certain termination rights for each
of the Company and QLT, including the right of each party to
terminate the Merger Agreement if the Merger has not been
consummated by December 8, 2015. The Company may be required
to pay to QLT a termination fee of $1,170,000.
In connection with the consummation of the Merger, certain holders
of the Company’s outstanding Notes have agreed to waive their
rights to a mandatory redemption of such holders’ Notes in
connection with the consummation of the Merger.
See Note 7—Subsequent Events for additional information.
Secured Note
In connection with the execution of the Merger Agreement, the
Company and QLT entered into a secured note (the “QLT
Note”) pursuant to which QLT agreed to provide a secured line
of credit of up to $9,853,333 to the Company. Interest accrues on
the amounts borrowed at the rate of 12% per annum. All
borrowings under the QLT Note will be due and payable 12 months
following the termination of the Merger Agreement except that our
obligation to repay those amounts will accelerate and become due
and payable on the occurrence of any event of default or on the
termination of the Merger Agreement under the following
circumstances: (1) QLT terminates the Merger Agreement as a
result of our Board of Directors (A) changing or withdrawing
its recommendation following the time of its receipt of a superior
proposal or (B) failing to reaffirm its recommendation within
five days of QLT requesting such reaffirmation following a publicly
announced acquisition proposal; (2) we terminate the Merger
Agreement to engage in a competing transaction constituting a
superior proposal; or (3) we complete a competing transaction
following certain termination events under the Merger
Agreement.
Pursuant to the terms of the QLT Note, the Company borrowed
$2,360,000 in connection with the Company’s preparation of
the BromSite NDA. The Company has the right to draw an additional
$600,000 to finance certain manufacturing costs, and beginning in
June 2015, may also borrow up to $1,100,000 per month for six
months, and up to $293,333 in December. The Company also borrowed
$1,100,000 in June 2015. As of June 30, 2015, total borrowings
from the QLT Note were $3,460,000.
The QLT Note is secured by substantially all of the assets of the
Company pursuant to the terms of a Security Agreement. The QLT Note
is further secured by certain copyrights, trademarks, patents and
patent applications of the Company pursuant to the terms of an IP
Security Agreement.
All borrowings under the QLT Note will accelerate and become due
and payable under certain circumstances in which the Merger
Agreement terminates, including if (1) QLT terminates the
Merger Agreement as a result of the Company’s Board effecting
a change in its recommendation that Company stockholders vote in
favor of the Merger or recommend an alternative transaction or due
to the Company’s material breach of its obligations relating
to the solicitation of a competing transaction, (2) the
Company terminates the Merger Agreement to engage in a competing
transaction, or (3) the Company completes a competing
transaction following the termination of the Merger Agreement.
The Company has incurred significant losses since inception.
Clinical trials and costs to prepare an NDA for the Company’s
product candidates with the FDA are very expensive and difficult,
in part because they are subject to rigorous regulatory
requirements. As of June 30, 2015, the Company’s
accumulated deficit was $182.7 million and cash and cash
equivalents were $1.8 million. The Company’s ability to fund
its operations is dependent primarily upon its ability to
consummate the Merger with QLT or raise or have access to
sufficient funding to execute on its business plan.
Absent the transactions contemplated by the Merger Agreement
including the secured line of credit of up to $9,853,333 granted by
QLT to the Company, the Company expects that its cash and cash
equivalents balance, anticipated cash flows from operations and the
net proceeds from existing debt financing arrangements would have
only been adequate to fund its operations until approximately July
2015. In their audit report related to the Company’s
consolidated financial statements for the year ended
December 31, 2014, which is included in the Company’s
Annual Report on Form 10-K for the year ended December 31,
2014, the Company’s auditors refer to the Company’s
recurring losses from operations, available cash equivalent
balances and accumulated deficit and a substantial doubt about its
ability to continue as a going concern. The Company expects the
secured line of credit granted to it by QLT will fund operations
until completion of the Merger; however, if the Merger Agreement
terminates prior to completion, no additional funding from QLT
would be available and if the Company is unable to enter into a
strategic transaction or secure sufficient additional funding, its
management believes that it will need to cease operations and
liquidate its assets. The Company’s financial statements were
prepared on the assumption that it will continue as a going concern
and do not include any adjustments should it be unable to continue
as a going concern.
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, 2014.
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.
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 and the
second quarter of 2015. The Company accounts 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 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:
Level 1: Quoted prices in active markets for identical
assets or liabilities.
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.
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, 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 June 30, 2015, less than $0.1 million of the
Company’s cash and cash equivalents consisted of Level 1 U.S.
Treasury-backed government securities or money market funds that
are measured at fair value on a recurring basis.
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 June 30, 2015 and
December 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).
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 June 30, 2015 and
December 31, 2014:
June 30, December 31,
Risk-free interest rate 0.8 % 0.9 %
Remaining term (years) 2.3 2.4
Expected dividends 0.0 % 0.0 %
Volatility 100.0 % 101.2 %
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 warrant liability, its only Level 3
financial liability, for the six months ended June 30, 2015
(in thousands):
Balance at December 31, 2014 $ 1,191
Initial fair value of warrants as of date of issuance $ 345
Net decrease in fair value of warrant liability for all outstanding
warrants on remeasurement (200 )
Balance at June 30, 2015 $ 1,336
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.
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,
2017. 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.
In April 2015, the FASB issued Accounting Standards Update
No. 2015-03 (“ASU 2015-03”), Simplifying the
Presentation of Debt Issuance Costs. This standard requires that
debt issuance costs be presented in the balance sheet as a direct
reduction from the carrying value of the associated debt liability,
consistent with the presentation of a debt discount. The update is
effective for annual and interim reporting periods beginning after
December 15, 2015. Early adoption is permitted for financial
statements that have not been previously issued. The new guidance
will be applied on a retrospective basis. 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. |
