Notes to Condensed Consolidated Financial Statements (unaudited)
Note 1
– The Company and Description of Business
Windtree Therapeutics, Inc. (referred to as “we,” “us,” or the “Company”) is a biotechnology company focused on developing novel KL
4
surfactant therapies for respiratory diseases and other potential applications. Surfactants are produced naturally in the lung and are essential for normal respiratory function and survival. Our proprietary technology platform includes a synthetic, peptide-containing surfactant (KL
4
surfactant) that is structurally similar to endogenous pulmonary surfactant, and novel drug delivery technologies being developed to enable noninvasive administration of aerosolized KL
4
surfactant. We believe that our proprietary technology platform may make it possible to develop a pipeline of surfactant products to address a variety of respiratory diseases for which there are few or no approved therapies.
Our lead development program is AEROSURF
®
(lucinactant for inhalation), an investigational combination drug/device product that combines our proprietary synthetic KL
4
surfactant with our novel aerosol delivery system (ADS). We believe that AEROSURF has the potential to improve the management of respiratory distress syndrome (RDS) in premature infants. RDS, a serious respiratory condition caused by a deficiency of natural lung surfactant in lungs of premature infants, is the most prevalent respiratory disease in the neonatal intensive care unit (NICU) and can result in long-term respiratory problems, developmental delay and death. Surfactant therapy is a life-saving and the primary therapy to address RDS. In the U.S., surfactants are animal-derived and usually administered using invasive endotracheal intubation and mechanical ventilation, procedures that may result in serious respiratory conditions and other complications. To avoid the risks of these procedures, many premature infants are treated initially with noninvasive respiratory support such as nasal continuous positive airway pressure (nCPAP). Since nCPAP alone does not address surfactant deficiency, many premature infants on nCPAP respond poorly and may require intubation and delayed surfactant therapy (an outcome referred to as nCPAP failure). If surfactant therapy could be administered noninvasively, neonatologists would be able to provide surfactant therapy without exposing premature infants to the risks associated with intubation and mechanical ventilation.
We are developing AEROSURF to enable administration of aerosolized KL
4
surfactant to premature infants receiving nCPAP without invasive intubation and mechanical ventilation. We believe that AEROSURF has the potential to transform the treatment of RDS and reduce the number of premature infants who are subjected to invasive administration procedures, whether within minutes of birth or following nCPAP failure. By enabling noninvasive delivery of aerosolized KL
4
surfactant, we believe that AEROSURF will address a serious unmet medical need and potentially provide transformative clinical and pharmacoeconomic benefits.
Note 2
– Basis of Presentation
The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. for interim financial information in accordance with the instructions to Form
10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the U.S. for complete
condensed
consolidated financial statements. All share and per share information in this Quarterly Report related to our common stock has been retroactively restated to reflect the reverse stock split and reduction in authorized shares
that was approved by our Board of Directors and stockholders and made effective on January 22, 2016. In the opinion of management, all adjustments (consisting of normally recurring accruals) considered for fair presentation have been included. Operating results for the three and six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. There have been no changes to our critical accounting policies since December 31, 2015. For a discussion of our accounting policies,
see
, Note 4, “Accounting Policies and Recent Accounting Pronouncements,” in the Notes to
Condensed
Consolidated Financial Statements in our 2015 Form 10-K, as amended (2015 Form 10-K). Readers are encouraged to review those disclosures in conjunction with this Quarterly Report on Form 10-Q.
Note 3
– Liquidity Risks and Management’s Plans
As of June 30, 2016, we had cash and cash equivalents of $20.3 million, current accounts payable and accrued expenses of $15.1 million, including $4.5 million (of which $0.2 million is interest accrued at a rate of 12% per annum) due to Battelle Memorial Institute (Battelle) under our collaboration agreement and $25 million of long-term debt under a secured loan (Deerfield Loan) with affiliates of Deerfield Management, L.P. (Deerfield). The principal portion of the Deerfield Loan is payable in two equal installments in February 2018 (subject to potential deferral if we achieve a specified market capitalization milestone) and February 2019. In addition, as of June 30, 2016, we had negative stockholders
’ equity of $15.2 million. We have incurred substantial losses since inception, due to investments in research and development, manufacturing, and our previous efforts to commercialize SURFAXIN
®
, and we expect to continue to incur substantial losses over the next four to five years. The accompanying financial statements have been prepared assuming that we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As of June 30, 2016, the financial statements do not include any adjustments relating to recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.
See
, Note 5, “Summary of Significant Accounting Policies ̶ Recent Accounting Pronouncements.”
Before any additional financings or other transactions
and based on our current expectations
, we believe that we will have sufficient cash resources to support our development programs, business operations and debt service obligations through the planned completion of the AEROSURF phase 2b clinical trial and release of top line results, which currently is expected in the first quarter of 2017.
However, the execution of our clinical trials is subject to significant risks and uncertainties and there can be no assurance that we will be successful in completing the phase 2b clinical trial within our planned time, if at all. Moreover, if the clinical trial is delayed for any reason, we will require, but may be unable to secure, additional capital to be able to complete the clinical trial. Even if we are able to complete the clinical trial as planned, to execute our business strategy, we will require significant additional infusions of capital. However, if the results of our trial are inconclusive or require additional clinical work, or if the results present an unacceptable benefit/risk profile due to a suboptimal efficacy and/or safety profile, we may have difficulty securing the additional capital we will need. In addition, other factors may affect our ability to access capital markets at a time when we would like or require. Such factors include but are not limited to (i) because our public float is currently less than $75
million, our ability to use the 2014 Universal Shelf on Form S-3 is limited to no more than one third of our public float in a 12 month period, (ii) we have received a deficiency notice from The NASDAQ Stock Market (“Nasdaq”) that we are no longer in compliance with the minimum stockholders’ equity rule of the Nasdaq listing requirements (discussed below), (iii) our stockholders may not approve, as required under Nasdaq listing rules, a strategic transaction recommended by our Board that involves greater than 20% of our outstanding common stock, and (iv) our capital raising efforts may be affected by conditions in the broader financial and geopolitical markets.
To secure the additional capital that we will require, we plan to pursue all or a combination of potential strategic alliances, collaboration agreements and other strategic transactions (including merger, acquisition or other corporate transaction). We also may seek additional capital through public or private equity offerings (including our ATM Program). In addition, we have from time to time collaborated with research organizations and universities to assess the potential utility of our KL
4
surfactant in studies funded in part through non-dilutive grants issued by U.S. Government-sponsored drug development programs, including grants in support of initiatives related to our AEROSURF clinical program. We also have received grants in support of medical and biodefense-related initiatives under programs that encourage private sector development of medical countermeasures against chemical, biological, radiological, and nuclear terrorism threat agents, and pandemic influenza, and provide a mechanism for federal acquisition of such countermeasures. Although there can be no assurance, we expect to pursue additional funding opportunities that may be announced and expect that we may qualify for similar programs in the future.
Our ability to secure needed capital pursuant to our ATM Program or other public offerings pursuant to our 2014 Universal Shelf on Form S-3 is constrained under applicable rules of the Form S-3, which limits the size of primary securities offerings conducted by companies that have an aggregate market value of common stock held by nonaffiliated persons and entities (public float) of less than $75 million to no more than one-third of their public float in any 12-month period. With respect to our ATM Program, as of April 15, 2016, our public float
was approximately $31.6 million. On May 24, 2016, we filed a Prospectus Supplement to our 2014 Universal Shelf with respect to approximately $10.5 million in securities. To raise additional capital, we may be required to seek other methods of completing primary offerings, including, for example, under a registration statement on Form S-1, the preparation and maintenance of which would be more time-consuming and costly, or private placements, potentially with registration rights or priced at a discount to the market value of our stock, or other transactions, any of which could result in substantial equity dilution of stockholders’ interests.
T
o be in a position to raise sufficient capital through strategic alliances or other strategic transactions involving the issuance of our capital stock, or through public or private equity offerings, we submitted to our stockholders for approval at the 2016 Annual Meeting of Stockholders held on June 21, 2016 a proposal to increase the number of shares of common stock authorized for issuance under our Amended and Restated Certificate of Incorporation from 36 million to 60 million shares. This proposal was approved by holders of a majority of the shares issued and outstanding on the record date for the meeting. In addition, if any offering were to involve the issuance of common stock in excess of 20% of our outstanding common stock, we may be required under Nasdaq listing rules to seek stockholder approval before we can proceed. There can be no assurance that we would be successful in obtaining such approvals. Failure to secure the additional capital that we will need, whether from non-dilutive sources or from equity offerings, would have a material adverse impact on our business and our ability to continue as a going concern.
Even if we are able to secure additional capital, such transactions and financings may only be available on unattractive terms, or could result in significant dilution of stockholders
’ interests, and the issuance or even potential issuance of shares could have a negative effect on the market price of our common stock. If none of the foregoing alternatives is available, or if available, we are unable to raise sufficient capital through such transactions, we ultimately may be forced to limit or cease our development activities. Moreover, if we fail in the future to make any required payment under our Deerfield Loan or fail to comply with any commitments contained in the loan documents, Deerfield would be able to declare us in default regarding that indebtedness, which could result in the acceleration of the payment obligations under all or a portion of our indebtedness. Since we have pledged substantially all of our assets to secure our obligations under the Deerfield Loan, a debt default would enable the lenders to foreclose on our assets securing the debt and could significantly diminish the market value and marketability of our common stock.
As of June 30, 2016, we had outstanding 2.9 million pre-funded warrants issued in a July 2015 public offering, of which the entire purchase price was pre-paid upon issuance. Upon exercise of the pre-funded warrants, we would issue the shares to the holders and receive no additional proceeds. In addition, as of June 30, 2016, there were 60 million shares of common stock and 5 million shares of preferred stock authorized under our Amended and Restated Certificate of Incorporation and approximately 41.0 million shares of common stock and 5 million shares of preferred stock were available for issuance and not otherwise reserved.
Nasdaq Deficiency Notice
On May 19, 2016, we received a notification letter from the Listing Qualifications Department (the “Staff”) of Nasdaq notifying us that we are no longer in compliance with the minimum stockholders
’ equity requirement for continued listing on the Nasdaq Capital Market. Nasdaq Listing Rule 5550(b)(1) requires listed companies to maintain stockholders’ equity of at least $2.5 million. In our Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, we reported stockholders’ equity of (5.0 million). The Staff noted that, as of May 19, 2016, we also did not meet either of the alternative compliance standards under Nasdaq Listing Rule 5550(b) of (i) a market value of listed securities of at least $35 million, or (ii) net income of $500,000 from continuing operations.
The deficiency notice has no immediate effect our listing status with the Nasdaq Capital Market.
In accordance with the deficiency notice, on July 5, 2016, we submitted a plan outlining the steps we would take to regain compliance and requested additional time. On July 12, 2016, the Staff granted us an extension until November 15, 2016 (representing the maximum extension the Staff can grant under the applicable rule) to evidence our compliance with the minimum stockholders’ equity rule. Under the terms of the extension, we must regain compliance with the minimum stockholders’ equity rule no later than November 15, 2016, provide to the Staff a publicly available report that evidences such compliance and otherwise complies with conditions included in the extension notice. Under the plan as submitted, we are working diligently to achieve a combination of transactions that will allow us to regain compliance with the continued listing requirements of Nasdaq. These transactions include potential debt modifications, strategic alliances and collaboration agreements, and transactions to secure additional capital through public or private equity offerings (including our ATM Program). If after publicly reporting that we have regained compliance on or before November 15, 2016, we should fail to evidence compliance in the filing with the SEC of our periodic report on Form 10-K for the year ending December 31, 2016, we may be subject to delisting. If we fail to satisfy the terms of the extension, the Staff will provide a written delisting notification that our common stock will be delisted. At that time, we would be entitled to appeal the Staff’s determination to a Listing Qualifications Panel. There can be no assurance that we will be successful in implementing our plan to regain compliance with the minimum stockholders’ equity rule. As the rule is one of several alternatives, if during the extension period, we should succeed in regaining compliance with the alternative minimum value of listed securities rule under Nasdaq Listing Rule 5550(b), we would regain compliance with the Nasdaq Listing Rules in any event. There can be no assurance that we will be able to regain compliance with either the minimum stockholders’ equity rule or the minimum value of listed securities rule within the extension period, or at all.
Note 4
–
Stockholders’ Equity
At-the-Market (ATM) Program
We have an ATM Program
with Stifel, Nicolaus & Company, Incorporated (Stifel), pursuant to which Stifel, as our exclusive agent, may sell through an “at-the-market” program (ATM Program), at such times that we may elect during a three-year term, up to a maximum of $25 million of shares of our common stock. In February 2016, we entered into an amendment to the Sales Agreement to extend the term three years to February 11, 2019. For a detailed description of our ATM Program,
see
, Note 10, “Stockholders’ Equity – At-the-Market Program,” in the 2015 Form 10-K. Shares of our common stock sold under the ATM Program are issued pursuant to our 2014 Universal Shelf, which currently is subject to limitations under the Form S-3 registration statement (
see
, Note 3 – “Liquidity Risks and Management’s Plans”).
During the second quarter, we completed
offerings under our ATM Program of 27,971 shares of our common stock for an aggregate purchase price of approximately $71,000, resulting in net proceeds to us of approximately $69,000, after deducting commissions due to Stifel.
As of
June 30, 2016, approximately $23.0 million remained available under the ATM Program.
Note 5
–
Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements, in conformity with accounting principles generally accepted in the U.S., requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Severance
Effective February 1, 2016, we terminated the Employment Agreement between ourselves and our then President and Chief Executive Officer (
Former CEO). During the first quarter of 2016, we incurred a severance charge of $1.2 million in selling, general and administrative expense under the terms of the Former CEO’s employment agreement, including $0.2 million related to stock option expense for those options that will continue to vest through August 1, 2017. Of the $1.0 million in severance not related to stock-based compensation, $0.1 million and $0.2 million was paid during the first and second quarters of 2016, respectively. The remaining $0.7 million will be paid through August 1, 2017.
2015 Restructuring Plan
In April 2015, we implemented a restructuring plan to voluntarily cease commercial
and manufacturing activities for SURFAXIN, close our manufacturing facility in Totowa, New Jersey, and focus our resources on the development of our aerosolized KL
4
surfactant pipeline for respiratory diseases, beginning with AEROSURF. The total severance cost for all impacted employees is $2.9 million, of which $1.0 million was accrued as of December 31, 2014 for Totowa employees. The remaining $1.9 million was charged to expense through the second quarter of 2015 ($1.0 million to research and development expenses and $0.9 million to selling, general and administrative expenses). We paid $2.6 million and $0.2 million of the severance and retention benefits during 2015 and the first half of 2016, respectively. The remaining $0.1 million was paid at the beginning of the third quarter of 2016.
2016 Restructuring Plan
In May 2016, we implemented a restructuring plan to conserve our resources
and focus on execution of the AEROSURF phase 2 clinical program in a timely manner. The total severance cost of $0.4 million for all impacted employees was charged to expense during the second quarter of 2016
($0.3 million to research and development expenses and $0.1 million to selling, general and administrative expenses)
. We paid $0.1 million of the severance during the second quarter of 2016. The remaining $0.3 million will be paid during the second half of 2016.
Research and development expense
We account for research and development expense by the following categories: (a) product development and manufacturing, (b)
medical and regulatory operations, and (c) direct preclinical and clinical programs. Research and development expense includes personnel, facilities, manufacturing and quality operations, pharmaceutical and device development, research, clinical, regulatory, other preclinical and clinical activities and medical affairs. Research and development costs are charged to operations as incurred.
Net loss per common share
Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted net loss per common share is computed by giving effect to all potentially dilutive securities outstanding for the period.
As of June 30, 2016 and 2015, the number of shares of common stock potentially issuable upon the exercise of stock options and warrants was 9.1 million and 1.5 million shares, respectively. For the three and six months ended June 30, 2016 and 2015, all potentially dilutive securities were anti-dilutive and therefore have been excluded from the computation of diluted net loss per share.
In accordance with Accounting Standards Codification Topic 260 (ASC 260),
Earnings per Share,
when calculating diluted net loss per common share, a gain associated with the decrease in the fair value of warrants classified as derivative liabilities results in an adjustment to the net loss; and the dilutive impact of the assumed exercise of these warrants results in an adjustment to the weighted average common shares outstanding. We utilize the treasury stock method to calculate the dilutive impact of the assumed exercise of warrants classified as derivative liabilities. For the three and six months ended June 30, 2016 and 2015, the effect of the adjustments for warrants classified as derivative liabilities was anti-dilutive.
We do not have any components of other comprehensive income (loss).
Recent Accounting Pronouncements
In August 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-15,
Presentation of Financial Statements – Going Concern
, which is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or are available to be issued). ASU No. 2014-15 provides guidance to an organization’s management, with principles and definitions intended to reduce diversity in the timing and content of disclosures commonly provided by organizations in the footnotes of their financial statements. ASU No. 2014-15 is effective for annual reporting periods ending after December 15, 2016, and for annual and interim periods thereafter. While we currently intend to adopt the standard as of December 31, 2016, if this standard had been adopted as of June 30, 2016, management believes that it would have concluded that there is substantial doubt about the Company’s ability to continue as a going concern one year from the date of filing of this Form 10-Q.
See
, Note 3 for additional information on our liquidity risks and management’s plans.
In February 2016, the FASB issued ASU No. 2016-02, amending the accounting for leases in
Leases
(ASU Topic 482). This ASU requires lessees to put most leases on their balance sheets but recognize expenses in the income statement in a manner similar to current accounting standards. The ASU is effective for the annual period ending December 31, 2019 and interim periods thereafter. Early adoption is permitted. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. We are currently evaluating the effect that ASU 2016-02 may have on our condensed consolidated financial statements and related disclosures.
In March
2016, the FASB issued ASU 2016-09,
Compensation- Stock Compensation
(ASU 2016-09). ASU 2016-09 was issued as part of the FASB Simplification Initiative. This update addresses the income tax effects of stock-based payments and eliminates the windfall pool concept, as all of the tax effects related to stock-based payments will now be recorded at settlement (or expiration) through the income statement. The new guidance also permits entities to make an accounting policy election for the impact of forfeitures on the recognition of expense for stock-based payment awards. Forfeitures can be estimated or recognized when they occur. The standard is effective for annual periods beginning after December 15, 2016 and interim periods within that reporting period. Early adoption is permitted in any interim or annual period, with any adjustment reflected as of the beginning of the fiscal year of adoption. We are currently evaluating the effect that ASU 2016-09 may have on our condensed consolidated financial statements and related disclosures.
In June 2016, the FASB issued ASU No. 2016-13,
Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments
. This update amends the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in the more timely recognition of losses. The standard is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted beginning in 2019, with a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. We are currently evaluating the effect that ASU 2016-13 may have on our condensed consolidated financial statements and related disclosures
.
Note
6
– Fair Value of Financial Instruments
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability 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. The fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, as follows:
|
●
|
Level 1
– Quoted prices in active markets for identical assets and liabilities.
|
|
●
|
Level 2
– Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, 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
– Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
Fair Value on a Recurring Basis
The tables below categorize assets and liabilities measured at fair value on a recurring basis for the periods presented:
|
|
Fair Value
|
|
|
Fair value measurement using
|
|
|
|
June 30, 2016
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
20,330
|
|
|
$
|
20,330
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Certificate of deposit
|
|
|
225
|
|
|
|
225
|
|
|
|
–
|
|
|
|
–
|
|
Total assets
|
|
$
|
20,555
|
|
|
$
|
20,555
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
Fair Value
|
|
|
Fair value measurement using
|
|
|
|
December 31, 2015
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
38,722
|
|
|
$
|
38,722
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Certificate of deposit
|
|
|
225
|
|
|
|
225
|
|
|
|
–
|
|
|
|
–
|
|
Total assets
|
|
$
|
38,947
|
|
|
$
|
38,947
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock warrant liability
|
|
$
|
223
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
223
|
|
The tables below summarize the activity of Level 3 inputs measured on a recurring basis for the six months ended June
30, 2016 and 2015:
(in thousands)
|
|
Fair Value Measurements of
Common Stock Warrants Using
Significant Unobservable Inputs
(Level 3)
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
$
|
223
|
|
Change in fair value of common stock warrant liability
|
|
|
(223
|
)
|
Balance at June 30, 2016
|
|
$
|
–
|
|
(in thousands)
|
|
Fair Value Measurements of
Common Stock Warrants Using
Significant Unobservable Inputs
(Level 3)
|
|
|
|
|
|
|
Balance at December 31, 2014
|
|
$
|
1,258
|
|
Change in fair value of common stock warrant liability
|
|
|
(438
|
)
|
Balance at June 30, 2015
|
|
$
|
820
|
|
The significant unobservable inputs for a trinomial model used in the fair value measurement of the common stock warrants measured on a recurring basis are the historical volatility of our common stock market price, expected term of the applicable warrants, and the risk-free interest rate based on the U.S. Treasury yield curve in effect at the measurement date. In addition to the significant unobservable inputs noted above, certain fair value measurements also take into account an assumption of the likelihood and timing of the occurrence of an event that would result in an adjustment to the exercise price in accordance with the anti-dilutive pricing provisions in certain of the warrants. Any significant increases or decreases in the unobservable inputs, with the exception of the risk-free interest rate, may result in significantly higher or lower fair value measurements.
Significant Unobservable Input Assumptions of Level 3 Valuations
|
|
June 30, 2016
|
|
|
June 30, 2015
|
|
|
|
|
|
|
|
|
|
|
Historical volatility
|
|
|
–
|
|
|
|
82%
|
|
Expected term (in years)
|
|
|
–
|
|
|
|
0.6
|
|
Risk-free interest rate
|
|
|
–
|
|
|
|
0.16%
|
|
Fair Value of Long-Term Debt
At June 30, 2016 and December 31, 2015, the estimated fair value of the Deerfield Loan (
see,
Note 8, “Deerfield Loan”) approximated the carrying value of $25.0 million. The estimated fair value of the Deerfield Loan is based on discounting the future contractual cash flows to the present value at the valuation date. This analysis utilizes certain Level 3 unobservable inputs, including current cost of capital. Considerable judgment is required to interpret market data and to develop estimates of fair value. The estimates presented are not necessarily indicative of amounts we could realize in a current market exchange. The use of alternative market assumptions and estimation methodologies could have a material effect on these estimates of fair value.
Note
7
– Common Stock Warrant Liability
We account for common stock warrants in accordance with applicable accounting guidance provided in ASC Topic 815,
Derivatives and Hedging – Contracts in Entity’s Own Equity
(ASC 815), either as derivative liabilities or as equity instruments depending on the specific terms of the warrant agreement.
On February 22, 2011, we issued registered warrants (2011 Warrants) that expired on February 22, 2016 and had a fair value at issuance of $8.0 million. These warrants contained anti-dilution provisions
and were classified as derivative liabilities and reported, at each balance sheet date until their expiration, at estimated fair value determined using a trinomial pricing model.
No warrants were exercised during the six months ended June 30, 2016 and 2015.
Changes in the estimated fair value of warrants classified as derivative liabilities are reported in the accompanying Condensed Consolidated Statements of Operations as the “Change in fair value of common stock warrants.” The change for the six month ended June 30, 2016 represents the write-off of the derivative liability upon expiration of the underlying warrants in February 2016.
Long-term debt consists solely of amounts due under the Deerfield Loan for the periods presented:
|
|
June 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
Note payable
|
|
$
|
25,000
|
|
|
$
|
25,000
|
|
The principal amount of the loan is payable in two equal annual installments of $12.5 million
, payable in each of February 2018 and 2019. Under the Deerfield Loan agreement, the February 2018 installment is subject to a potential one-year deferral until February 2019 if we achieve the market capitalization milestone set forth in the Deerfield Loan agreement.
See
, Note 9, “Deerfield Loan,” in the Notes to Condensed Consolidated Financial Statements in our 2015 Form 10-K.
The following amounts comprise the Deerfield Loan interest expense for the periods presented:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
(in thousands)
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash interest expense
|
|
$
|
–
|
|
|
$
|
654
|
|
|
$
|
–
|
|
|
$
|
1,301
|
|
Amortization of prepaid interest expense
|
|
|
544
|
|
|
|
–
|
|
|
|
1,088
|
|
|
|
–
|
|
Non-cash amortization of debt discount
|
|
|
–
|
|
|
|
594
|
|
|
|
–
|
|
|
|
1,149
|
|
Amortization of debt costs
|
|
|
–
|
|
|
|
5
|
|
|
|
–
|
|
|
|
10
|
|
Total interest expense
|
|
$
|
544
|
|
|
$
|
1,253
|
|
|
$
|
1,088
|
|
|
$
|
2,460
|
|
For the three and six months ended June 30, 2015, cash interest expense represents interest at an annual rate of 8.75% on the outstanding principal amount for the period, paid in cash on a quarterly basis.
For the three and six months ended June 30, 2016, amortization of prepaid interest expense represents non-cash amortization of $5 million of Series A and Series B units that Deerfield agreed to purchase in our July 2015 public offering and accept in satisfaction of $5 million of future interest payments due under the Deerfield Notes at an interest rate of 8.75%. For the three and six months ended June 30, 2015, non-cash amortization of debt discount represents the amortization of previously capitalized transaction fees and the amortization of the reduction of the carrying value of the debt due to the fair value of the Deerfield Warrants issued.
Note 9
– Stock Options and Stock-Based Employee Compensation
We recognize in our condensed consolidated financial statements all stock-based awards to employees and non-employee directors based on their fair value on the date of grant, calculated using the Black-Scholes option-pricing model. Compensation expense related to stock-based awards is recognized ratably over the vesting period, which for employees is typically three years.
A summary of activity under our long-term incentive plans is presented below
:
(in thousands, except for weighted-average data
)
|
|
Share
s
|
|
|
Weighted-Average
Exercise Pric
e
|
|
|
Weighted-Average
Remaining Contractual
Term (In Yrs
)
|
|
Stock Option
s
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 201
5
|
|
|
517
|
|
|
$
|
51.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grante
d
|
|
|
432
|
|
|
|
2.33
|
|
|
|
|
|
Forfeited or expire
d
|
|
|
(112
|
)
|
|
|
77.84
|
|
|
|
|
|
Outstanding at June 30, 201
6
|
|
|
837
|
|
|
$
|
22.46
|
|
|
|
7.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable at June 30, 201
6
|
|
|
315
|
|
|
$
|
50.05
|
|
|
|
5.2
|
|
The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing formula based on the following weighted average assumptions:
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Weighted average expected volatility
|
|
|
79%
|
|
|
|
83%
|
|
Weighted average expected term (in years)
|
|
|
5.7
|
|
|
|
5.6
|
|
Weighted average risk-free interest rate
|
|
|
1.4%
|
|
|
|
1.5%
|
|
Expected dividends
|
|
|
–
|
|
|
|
–
|
|
The table below summarizes the total stock-based compensation expense included in the statements of operations for the periods presented:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
(in thousands)
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Research and development
|
|
$
|
140
|
|
|
$
|
146
|
|
|
$
|
322
|
|
|
$
|
359
|
|
Selling, general and administrative
|
|
|
110
|
|
|
|
189
|
|
|
|
531
|
|
|
|
575
|
|
Total
|
|
$
|
250
|
|
|
$
|
335
|
|
|
$
|
853
|
|
|
$
|
934
|
|