NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) Organization and Nature of the Business
Bellerophon Therapeutics, Inc., or the Company, is a clinical-stage therapeutics company focused on developing innovative products at the intersection of drugs and devices that address significant unmet medical needs in the treatment of cardiopulmonary diseases. The focus of the Company’s clinical program is the continued development of its nitric oxide therapy for patients with pulmonary hypertension, or PH, using its proprietary delivery system, INOpulse, with pulmonary arterial hypertension, or PAH, representing the lead indication. The Company has three wholly-owned subsidiaries: Bellerophon BCM LLC, a Delaware limited liability company; Bellerophon Pulse Technologies LLC, a Delaware limited liability company; and Bellerophon Services, Inc., a Delaware corporation.
The Company’s business is subject to significant risks and uncertainties, including but not limited to:
|
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•
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The risk that the Company will not achieve success in its research and development efforts, including clinical trials conducted by it or its potential collaborative partners.
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•
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The expectation that the Company will experience operating losses for the next several years.
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•
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Decisions by regulatory authorities regarding whether and when to approve the Company’s regulatory applications as well as their decisions regarding labeling and other matters which could affect the commercial potential of the Company’s products or product candidates.
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•
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The risk that the Company will fail to obtain adequate financing to meet its future operational and capital needs.
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•
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The risk that the Company will be unable to obtain additional funds on a timely basis and hence there will be substantial doubt about its ability to continue as a going concern.
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•
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The risk that key personnel will leave the Company and/or that the Company will be unable to recruit and retain senior level officers to manage its business.
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(2) Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements were prepared following the requirements of the Securities and Exchange Commission, or the SEC, for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by accounting principles generally accepted in the United States of America, or U.S. GAAP, can be condensed or omitted. The Company operates in
one
reportable segment and solely within the United States. Accordingly, no segment or geographic information has been presented.
The Company is responsible for the unaudited condensed consolidated financial statements. The condensed consolidated financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of the Company’s financial position, results of operations, comprehensive loss and its cash flows for the periods presented. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended
December 31, 2016
, included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2016
. The results of operations for the
three
months ended
March 31, 2017
for the Company are not necessarily indicative of the results expected for the full year.
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of costs and expenses during the reporting period, including accrued expenses, accrued research and development expenses, stock-based compensation, common stock warrant liabilities and income taxes. Actual results could differ from those estimates.
(b) Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity date of three months or less to be cash equivalents. All investments with maturities of greater than three months from date of purchase are classified as available-for-sale marketable securities.
(c) Stock-Based Compensation
The Company accounts for its stock-based compensation in accordance with Accounting Standards Codification, or ASC, 718
Compensation- Stock Compensation,
which establishes accounting for share-based awards, including stock options and restricted stock, exchanged for services and requires companies to expense the estimated fair value of these awards over the requisite service period. The Company recognizes stock-based compensation expense in operations based on the fair value of the award on the date of the grant. The resulting compensation expense is recognized on a straight-line basis over the requisite service period or sooner if the awards immediately vest. The Company determines the fair value of stock options issued using a Black-Scholes-Merton option pricing model. Certain assumptions used in the model include expected volatility, dividend yield, risk-free interest rate, and expected term. For restricted stock, the fair value is the closing market price per share on the grant date. See Note 8 - Stock-Based Compensation for a description of these assumptions.
(d) Common Stock Warrant Liability
The Company accounts for common stock warrants issued as freestanding instruments in accordance with applicable accounting guidance provided in ASC Topic 480, Distinguishing Liabilities From Equity, as either liabilities or as equity instruments depending on the specific terms of the warrant agreement. The Company classifies warrant liabilities on the consolidated balance sheet as long-term liabilities, which are revalued at each balance sheet date subsequent to the initial issuance. Changes in the fair value of the warrants are reflected in the consolidated statement of operations as “Change in fair value of common stock warrant liability.” The Company uses the Black-Scholes-Merton pricing model to value the related warrant liabilities. Certain assumptions used in the model include expected volatility, dividend yield, risk-free interest rate, and expected term. See Note 6 - Fair Value Measurements for a description of these assumptions.
(e) Income Taxes
The Company uses the asset and liability approach to account for income taxes as required by ASC 740,
Income Taxes
, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Valuation allowances are provided when necessary to reduce deferred tax assets to the amount expected to be realized, on a more likely than not basis. The Company recognizes the benefit of an uncertain tax position that it has taken or expects to take on income tax returns it files if such tax position is more likely than not to be sustained on examination by the taxing authorities, based on the technical merits of the position. These tax benefits are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution.
The Company’s estimated tax rate for
2017
excluding any benefits from any sales of net operating losses or research and development, or R&D, tax credits is expected to be
zero
because the Company expects to generate additional losses and currently has a full valuation allowance. The deferred tax assets balance before valuation allowance as of
March 31, 2017
was approximately
$52.8 million
. The valuation allowance is required until the Company has sufficient positive evidence of taxable income necessary to support realization of its deferred tax assets. The Company did not have material uncertain tax positions as of
March 31, 2017
.
(f) Marketable Securities
The Company’s marketable securities consist of federally insured certificates of deposit classified as available-for-sale that are recorded at amortized cost, which approximates fair value, and corporate or agency bonds classified as available-for-sale that are recorded at fair value. Unrealized gains and losses are reported as accumulated other comprehensive (loss) income, except for losses from impairments which are determined to be other-than-temporary. Realized gains and losses, and declines in value judged to be other-than-temporary on available-for-sale securities are included in the determination of net loss and are included in interest income, at which time the average cost basis of these securities are adjusted to fair value. Fair values are based on quoted market prices at the reporting date. Interest on available-for-sale securities are included in interest income.
(g) Research and Development Expense
Research and development costs are expensed as incurred. These expenses include the costs of the Company’s proprietary research and development efforts, as well as costs incurred in connection with certain licensing arrangements. Upfront and milestone payments made to third parties in connection with research and development collaborations are expensed as incurred up to the point of regulatory approval. Payments made to third parties upon or subsequent to regulatory approval are capitalized and amortized over the remaining useful life of the related product. The Company also expenses the cost of purchased technology and equipment in the period of purchase if it believes that the technology or equipment has not demonstrated technological feasibility and it does not have an alternative future use. Nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities are deferred and are recognized as research and development expense as the related goods are delivered or the related services are performed.
(h) Recently Issued Accounting Pronouncements
Adopted
In August 2014, the FASB issued ASU, 2014-15, “Presentation of Financial Statements - Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” This guidance clarifies that an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. The amendments in this update are effective for annual reporting periods ending after December 15, 2016, and annual and interim periods thereafter, and early application is permitted. The Company adopted ASU 2014-15 during the year ended December 31, 2016. Note 3 - Liquidity incorporates the disclosure requirements from the adoption of ASU 2014-15.
In March 2016, the FASB issued ASU 2016-09, "Compensation - Stock Compensation - Improvements to Employee Share-Based Payment Accounting" which provides for simplification of several aspects related to the accounting for share-based payment transactions. The provisions of ASU 2016-09 that are currently applicable to the Company are as follows: (a) forfeitures and (b) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. This standard is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company adopted ASU 2016-09 during the quarter ended March 31, 2017. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements. The Company will continue to use its current method of estimated forfeitures each period rather than accounting for forfeitures as they occur. ASU 2016-09 requires the presentation of cash paid by an employer when directly withholding shares for tax-withholding purposes as a financing activity in the cash flow statement. The Company’s historical accounting treatment is consistent with such guidance.
Not Yet Adopted
In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2014-09, “Revenue from Contracts with Customers,” which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2018. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is assessing ASU 2014-09’s impact and will adopt it when effective.
In January 2016, the FASB issued ASU 2016-01, "Financial Instruments - Overall - Recognition and Measurement of Financial Assets and Financial Liabilities," which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This standard will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is assessing ASU 2016-01’s impact and will adopt it when effective.
In February 2016, the FASB issued ASU 2016-02, "Leases," which is intended to improve financial reporting about leasing transactions. This standard requires a lessee to record on the balance sheet the assets and liabilities for the rights and obligations created by lease terms of more than 12 months. This standard will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is assessing ASU 2016-02’s impact and will adopt it when effective.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows: Clarification of Certain Cash Receipts and Cash Payments”, which eliminates the diversity in practice related to the classification of certain cash receipts and payments in the statement of cash flows, by adding or clarifying guidance on eight specific cash flow issues. ASU 2016-15 is effective for annual and interim reporting periods beginning after December 15, 2017 and early adoption is permitted. ASU 2016-15
provides for retrospective application for all periods presented. The Company is assessing ASU 2016-15’s impact and will adopt it when effective.
In November 2016, the FASB issued ASU 2016-18 "Statement of Cash Flows: Restricted Cash", which eliminates the diversity in practice related to the inclusion of restricted cash in the statement of cash flows by requiring that a statement of cash flows include the change during the period in restricted cash when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for annual and interim reporting periods beginning after December 15, 2017 and early adoption is permitted. ASU 2016-18 provides for retrospective application for all periods presented. The Company is assessing ASU 2016-18’s impact and will adopt it when effective.
(3) Liquidity
In the course of its development activities, the Company has sustained operating losses and expects such losses to continue over the next several years. The Company expects to continue to incur significant expenses and operating losses for the foreseeable future as it continues the development and clinical trials of, and seeks regulatory approval for, its product candidates. The Company's primary uses of capital are, and it expects will continue to be, compensation and related expenses, third-party clinical research and development services, contract manufacturing services, laboratory and related supplies, clinical costs, legal and other regulatory expenses and general overhead costs.
The Company had cash and cash equivalents of
$13.5 million
and marketable securities of
$3.1 million
as of
March 31, 2017
.
The Company's existing cash and cash equivalents and marketable securities as of
March 31, 2017
will be used primarily to fund the first of two INOpulse for PAH Phase 3 trials and to a lesser extent for the Phase 2 trials for PH-COPD and PH-IPF. In addition, as of
March 31, 2017
, the Company had
$6.2 million
prepayments of research and development expenses related to its amended drug supply agreement with Ikaria and the clinical research organization it has partnered with for the first of the two Phase 3 clinical trials for INOpulse for PAH. The corresponding prepayments balance as of
December 31, 2016
was
$7.2 million
. These prepayment amounts are presented on the respective consolidated balance sheets as follows (in thousands):
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|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
Prepaid expenses and other current assets
|
5,380
|
|
|
5,842
|
|
Other non-current assets
|
832
|
|
|
1,406
|
|
|
6,212
|
|
|
7,248
|
|
On May 5, 2016, the Company filed a shelf registration statement with the SEC on Form S-3, which as amended became effective on May 23, 2016. The shelf registration will allow the Company to issue, from time to time at prices and on terms to be determined prior to the time of any such offering, up to
$30.0 million
of any combination of the Company’s common stock, preferred stock, debt securities, warrants, rights, purchase contracts or units, either individually or in units.
On May 27, 2016, the Company entered into a Sales Agreement, with FBR Capital Markets & Co. and MLV & Co. LLC, or the Distribution Agents, pursuant to which the Company may issue and sell shares of the Company's common stock having an aggregate offering price of up to
$5.7 million
through the Distribution Agents. As of
March 31, 2017
, the Company had sold
1,025,793
shares for gross and net proceeds of
$2.2 million
and
$2.1 million
, respectively, under the Company’s effective shelf registration statement on Form S-3 and the related prospectus supplement dated May 27, 2016 and filed with the SEC on May 27, 2016. Effective April 26, 2017, the Company terminated the Sales Agreement as it does not intend to utilize the Sales Agreement to raise additional capital.
On November 22, 2016, the Company filed a registration statement with the SEC, on Form S-1, which as amended became effective on November 22, 2016. On November 29, 2016, the Company completed the sale of
17,142,858
Class A Units consisting of an aggregate of
17,142,858
shares of its common stock and warrants exercisable for up to
17,142,858
shares of its common stock at a price of
$0.70
per Unit, or the Secondary Offering, resulting in net proceeds of
$10.9 million
, after deducting placement fees of
$0.8 million
and offering costs of
$0.3 million
. Each warrant will have an exercise price per full share of common stock equal to
$0.80
, will be immediately exercisable and will expire
five years
from the date on which such warrant becomes exercisable. The warrants require cash settlement by the Company under certain situations. During the quarter ended March 31, 2017, the Company received proceeds of
$0.5 million
for the exercise of
648,586
warrants. Refer to Note 5 - Common Stock Warrant Liability for further details on the warrants.
On May 9, 2017, the Company entered into a Securities Purchase Agreement, or the Purchase Agreement, with a single institutional investor for the sale of
2,000,000
shares of its common stock at a purchase price of
$1.50
per share and
warrants to purchase up to an aggregate of
1,000,000
shares of its common stock, or the Direct Offering. The warrants will be initially exercisable commencing six months from the issuance date at an exercise price equal to
$1.50
per full share of common stock, subject to adjustments as provided under the terms of the warrants. The warrants are exercisable for
five years
from the initial exercise date. The closing of the sales of these securities under the Purchase Agreement is expected to occur on or about May 15, 2017. The aggregate gross proceeds for the Direct Offering will be approximately
$3.0 million
and the net proceeds are estimated to be
$2.7 million
.
The Company continues to pursue potential sources of funding, including equity financing.
The Company evaluated whether there are any conditions and events, considered in the aggregate, that raise substantial doubt about its ability to continue as a going concern within one year beyond the filing of this Quarterly Report on Form 10-Q.
Based on such evaluation, management believes that its existing cash and cash equivalents and marketable securities as of March 31, 2017, funds that will become available under the Direct Offering, and proceeds that will become available to the Company upon sale of its state net operating losses, or NOLs, and R&D tax credits under the State of New Jersey’s Technology Business Tax Certificate Transfer Program will be sufficient to satisfy its operating cash needs for at least one year after the filing of this Quarterly Report on Form 10-Q.
The Technology Business Tax Certificate Transfer Program enables qualified, unprofitable New Jersey based technology or biotechnology companies to sell a percentage of NOLs and R&D tax credits to unrelated profitable corporations, subject to meeting certain eligibility criteria. Based on consideration of various factors, including application processing time and past trend of benefits made available under the program, management believes that it is probable that the Company’s plans to sell NOLs can be effectively implemented to address the Company’s short term financial needs. The Company participated in this program during November 2016 through the sale of R&D tax credits generated in the year ended December 31, 2015. The proceeds from this sale were recorded as Income tax benefit.
The Company’s estimates and assumptions may prove to be wrong, and the Company may exhaust its capital resources sooner than expected. The process of testing product candidates in clinical trials is costly, and the timing of progress in clinical trials is uncertain. Because the Company’s product candidates are in clinical development and the outcome of these efforts is uncertain, the Company cannot estimate the actual amounts that will be necessary to successfully complete the development and commercialization, if approved, of its product candidates or whether, or when, the Company may achieve profitability.
Until such time, if ever, as the Company can generate substantial product revenues, its expects to finance its cash needs through a combination of equity and debt offerings, existing working capital and funding from potential future collaboration arrangements. To the extent that the Company raises additional capital through the future sale of equity or debt, the ownership interest of its existing stockholders will be diluted, and the terms of such securities may include liquidation or other preferences or rights such as anti-dilution rights that adversely affect the rights of the Company's existing stockholders. If the Company raises additional funds through strategic partnerships in the future, it may have to relinquish valuable rights to its technologies, future revenue streams or product candidates or grant licenses on terms that may not be favorable to it. If the Company is unable to raise additional funds through equity or debt financings when needed, it may be required to delay, limit, reduce or terminate its product development or future commercialization efforts or grant rights to develop and market product candidates that it would otherwise prefer to develop and market itself.
If the Company is unable to raise capital when needed, it could be forced to delay, reduce or eliminate its product development programs or commercialization efforts. Moreover, if the Company is unable to obtain additional funds on a timely basis, there will be substantial doubt about its ability to continue as a going concern.
(4) Marketable Securities
The Company considers all of its investments to be available-for-sale. Marketable securities as of
March 31, 2017
consist of the following (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair Value
|
Certificates of deposit
|
2,163
|
|
|
—
|
|
|
—
|
|
|
2,163
|
|
Corporate bonds
|
950
|
|
|
—
|
|
|
—
|
|
|
950
|
|
Total
|
3,113
|
|
|
—
|
|
|
—
|
|
|
3,113
|
|
Marketable securities as of
December 31, 2016
, consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair Value
|
Certificates of deposit
|
3,619
|
|
|
—
|
|
|
—
|
|
|
3,619
|
|
Corporate bonds
|
1,952
|
|
|
—
|
|
|
—
|
|
|
1,952
|
|
Total
|
5,571
|
|
|
—
|
|
|
—
|
|
|
5,571
|
|
Maturities of marketable securities classified as available-for-sale were as follows at
March 31, 2017
and
December 31, 2016
(in thousands):
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
Due within one year
|
3,113
|
|
|
5,571
|
|
Due after one year
|
—
|
|
|
—
|
|
|
3,113
|
|
|
5,571
|
|
(5) Common Stock Warrant Liability
On November 29, 2016, the Company issued
17,142,858
warrants that were immediately exercisable and will expire
five years
from issuance at an exercise price of
$0.80
per share. As the warrants, under certain situations, could require cash settlement, the warrants were classified as liabilities and recorded at estimated fair value using a Black-Scholes-Merton pricing model. The following table summarizes warrant activity for the
three
months ended
March 31, 2017
(fair value amount in thousands):
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
Estimated Fair Value
|
Warrants outstanding as of December 31, 2016
|
|
17,142,858
|
|
|
$
|
5,215
|
|
Exercises
|
|
(648,586
|
)
|
|
(702
|
)
|
Change in fair value of common stock warrant liability recognized in consolidated statement of operations
|
|
—
|
|
|
14,387
|
|
Warrants outstanding as of March 31, 2017
|
|
16,494,272
|
|
|
$
|
18,900
|
|
See Note 6 for determination of the fair value of common stock warrant liability.
(6) Fair Value Measurements
Assets and liabilities recorded at fair value on the balance sheets are categorized based upon the level of judgment associated with the inputs used to measure the fair value. Level inputs are as follows:
· Level 1 — Values are based on unadjusted quoted prices for identical assets or liabilities in an active market which the company has the ability to access at the measurement date.
· Level 2 — Values are based on quoted market prices in markets where trading occurs infrequently or whose values are based on quoted prices of instruments with similar attributes in active markets.
· Level 3 — Values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset.
The following table summarizes fair value measurements by level at
March 31, 2017
for assets and liabilities measured at fair value on a recurring basis (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Marketable securities
|
|
$
|
—
|
|
|
$
|
3,113
|
|
|
$
|
—
|
|
|
$
|
3,113
|
|
Common stock warrant liability
|
|
—
|
|
|
—
|
|
|
18,900
|
|
|
18,900
|
|
The following table summarizes fair value measurements by level at
December 31, 2016
for assets and liabilities measured at fair value on a recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Marketable securities
|
|
$
|
—
|
|
|
$
|
5,571
|
|
|
$
|
—
|
|
|
$
|
5,571
|
|
Common stock warrant liabilities
|
|
—
|
|
|
—
|
|
|
5,215
|
|
|
5,215
|
|
The Company uses a Black-Scholes-Merton option pricing model to value its common stock warrants. The significant unobservable inputs used in calculating the fair value of common stock warrants represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. For volatility, the Company uses comparable public companies as a basis for its expected volatility to calculate the fair value of common stock warrants due to its limited history as a public company. The risk-free interest rate is based on U.S. Treasury notes with a term approximating the expected term of the common stock warrant. 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.
The following are the assumptions used in estimating the fair value of warrants issued as of
March 31, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
Valuation assumptions:
|
|
|
|
Risk-free interest rate
|
1.85
|
%
|
|
1.91
|
%
|
Expected volatility
|
88.21
|
%
|
|
83.73
|
%
|
Expected term (in years)
|
4.7
|
|
|
4.9
|
|
Dividend yield
|
—
|
%
|
|
—
|
%
|
(7) Restructuring Charges
On July 27, 2015, the Company announced that its PRESERVATION I clinical trial for its BCM product candidate did not meet its primary or secondary endpoints. Following these results, on September 11, 2015, the Board of Directors of the Company approved a staff reduction plan in order to reduce operating expenses and conserve cash resources, or the Restructuring. The Restructuring included a workforce reduction of approximately
20
people and was completed by the end of 2015.
The Company offered severance benefits to the affected employees, including cash severance payments. Each affected employee’s eligibility for the severance benefits was contingent upon such employee’s execution (and non-revocation) of a separation agreement, which included a general release of claims against the Company.
The following table summarizes restructuring activities for the three months ended
March 31, 2017
(in thousands):
|
|
|
|
|
|
March 31, 2017
|
Opening balance (a)
|
$
|
110
|
|
Cash payments
|
(110
|
)
|
Ending balance
|
$
|
—
|
|
(a) Included in Accrued expenses.
(8) Stock-Based Compensation
Determining the appropriate fair value of stock-based awards requires the input of subjective assumptions, including the fair value of the Company’s units (prior to the date of the Company's initial public offering, or IPO) and for options, the expected term of the option and expected volatility. The Company uses the Black-Scholes-Merton option pricing model to value its stock option awards. The assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and management uses different assumptions, stock-based compensation expense could be materially different for future awards. The expected term of stock options is estimated using the “simplified method,” as the Company has no historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior for its stock options grants. The simplified method is based on the average of the vesting tranches and the contractual life of each grant. For volatility, the Company uses comparable public companies as a basis for its expected volatility to calculate the fair value of option grants due to its limited history as a public company. The risk-free interest rate is based on U.S. Treasury notes with a term approximating the expected term of the option. The estimation of the number of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from the Company’s current estimates, such amounts will be recorded as an adjustment in the period in which estimates are revised.
Bellerophon 2015 and 2014 Equity Incentive Plans
During 2015, the Company adopted the 2015 Equity Incentive Plan, or the 2015 Plan, which provides for the grant of options, restricted stock and other forms of equity compensation.
As of
March 31, 2017
, there was approximately
$3.2 million
of total unrecognized compensation expense related to unvested stock awards. This expense is expected to be recognized over a weighted-average period of
1.9
years.
No
tax benefit was recognized during the
three
months ended
March 31, 2017
and
2016
related to stock-based compensation expense since the Company incurred operating losses and has established a full valuation allowance to offset all the potential tax benefits associated with its deferred tax assets.
Options
Compensation expense is measured based on the fair value of the option on the grant date and is recognized on a straight-line basis over the requisite service period, or sooner if vesting occurs sooner than on a straight-line basis. Options are forfeited if the employee ceases to be employed by the Company prior to vesting.
During the year ended December 31, 2014, the Company adopted the 2014 Equity Incentive Plan, or the 2014 Plan, which provided for the grant of options. Following the effectiveness of the Company’s registration statement filed in connection with its IPO, no options may be granted under the 2014 Plan. The awards granted under the 2014 Plan generally have a vesting period of
four
years, of which
25%
of the awards vest on the second anniversary of grant date,
25%
vest on the third anniversary and the remaining
50%
vest on the fourth anniversary of the grant date. The awards granted under the 2015 Plan have a vesting period of either
three
or
four
years, of which equal annual installments vest over the vesting period either beginning on the date of grant or on the one year anniversary of the date of grant.
There were no options issued during the
three
months ended
March 31, 2017
. The weighted average grant-date fair value of options issued during the
three
months ended
2016
was
$1.61
. The following are the weighted average assumptions used in estimating the fair value of options issued during the
three
months ended
March 31, 2016
.
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
Valuation assumptions:
|
|
|
|
Risk-free rate
|
|
1.38
|
%
|
Expected volatility
|
|
81.58
|
%
|
Expected term (years)
|
|
6.2
|
|
Dividend yield
|
|
—
|
|
A summary of option activity under the 2015 and 2014 Plans for the
three
months ended
March 31, 2017
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bellerophon 2015 and 2014 Equity Incentive Plans
|
|
|
Options
|
|
Range of
Exercise
Price
|
|
Weighted
Average
Price
|
|
Weighted Average
Remaining
Contractual
Life (in years)
|
Options outstanding as of December 31, 2016
|
|
3,189,881
|
|
|
$
|
0.49
|
|
-
|
13.28
|
|
|
$
|
3.08
|
|
|
9.4
|
Options outstanding as of March 31, 2017
|
|
3,189,881
|
|
|
$
|
0.49
|
|
-
|
13.28
|
|
|
$
|
3.08
|
|
|
9.1
|
Options vested and exercisable as of March 31, 2017
|
|
406,387
|
|
|
$
|
2.21
|
|
-
|
13.28
|
|
|
$
|
11.42
|
|
|
7.5
|
Restricted Stock
All restricted stock awards granted under the 2015 Plan as of March 31, 2017 were in relation to 2015 and 2016 incentives for employees and vest in full
one year
or less from the grant date.
A summary of restricted stock activity under the 2015 Plan for the
three
months ended
March 31, 2017
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bellerophon 2015 Equity Incentive Plan
|
|
|
Shares
|
|
Weighted
Average
Fair Value
|
|
Aggregate
Grant Date
Fair Value
(in millions)
|
|
Weighted Average
Remaining
Contractual
Life (in years)
|
Restricted stock outstanding as of December 31, 2016
|
|
155,846
|
|
|
$
|
2.05
|
|
|
$
|
0.3
|
|
|
0.0
|
Granted
|
|
637,473
|
|
|
1.48
|
|
|
0.9
|
|
|
|
Forfeited
|
|
(347,481
|
)
|
|
(1.74
|
)
|
|
(0.6
|
)
|
|
|
Restricted stock outstanding as of March 31, 2017
|
|
445,838
|
|
|
$
|
1.48
|
|
|
$
|
0.7
|
|
|
0.7
|
Ikaria Equity Incentive Plans prior to February 12, 2014
Options
In February 2014, prior to the Spin-Out, each Ikaria stock option, other than options held by non-accredited investors who were also not employees of Ikaria, was adjusted such that it became an option to acquire the same number of shares of Ikaria non-voting common stock as were subject to the Ikaria stock option, or an Adjusted Ikaria Option, and an option to acquire the same number of non-voting limited liability company units of the Company as the number of shares of Ikaria non-voting common stock that were subject to the Ikaria stock option, or a Bellerophon Option. There were
618,212
Bellerophon Options issued as a result of the adjustment of Ikaria stock options. The vesting of each Adjusted Ikaria Option and Bellerophon Option was fully accelerated on the date of the Spin-Out and all related compensation expense was recognized as an expense by Ikaria. The expiration date of the options was not modified.
Prior to and in connection with the Spin-Out, the exercise price of each Adjusted Ikaria Option and Bellerophon Option was adjusted by allocating the relative post Spin-Out estimated fair values of Ikaria and the Company in a ratio of
85%
and
15%
, respectively, to the original Ikaria option exercise price. The expiration date of the options was not modified.
A summary of option activity under the assumed Ikaria 2007 stock option plan and the assumed Ikaria 2010 long term incentive plan for the
three
months ended
March 31, 2017
, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ikaria Equity Incentive Plans
|
|
|
Options
|
|
Range of
Exercise
Price
|
|
Weighted
Average
Price
|
|
Weighted Average
Remaining
Contractual
Life (in years)
|
Options outstanding as of December 31, 2016
|
|
87,369
|
|
|
$
|
7.77
|
|
-
|
17.92
|
|
$
|
9.14
|
|
|
4.3
|
Forfeited
|
|
(118
|
)
|
|
7.77
|
-
|
8.65
|
|
8.36
|
|
|
|
Options outstanding as of March 31, 2017
|
|
87,251
|
|
|
$
|
7.77
|
|
-
|
17.92
|
|
$
|
9.14
|
|
|
4.0
|
Options vested and exercisable as of March 31, 2017
|
|
87,251
|
|
|
$
|
7.77
|
|
-
|
17.92
|
|
$
|
9.14
|
|
|
4.0
|
The intrinsic value of options outstanding, vested and exercisable as of
March 31, 2017
was
zero
.
Stock-Based Compensation Expense, Net of Estimated Forfeitures
The following table summarizes the stock-based compensation expense by the unaudited condensed consolidated statement of operations line items for the
three
months ended
March 31, 2017
and
2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
2016
|
|
Research and development
|
|
$
|
291
|
|
|
$
|
216
|
|
|
General and administrative
|
|
438
|
|
|
385
|
|
|
Total expense
|
|
$
|
729
|
|
|
$
|
601
|
|
|
(9) Income Taxes
The effective tax rate for each of the
three
months ended
March 31, 2017
and
2016
was
0.0%
. For the
three
months ended
March 31, 2017
and
2016
, the effective rate was lower than the federal statutory rates primarily due to the losses incurred and the full valuation allowance on deferred tax assets.
As of
March 31, 2017
, there were no material uncertain tax positions. There are
no
tax positions for which a material change in any unrecognized tax benefit liability is reasonably possible in the next 12 months.
(10) Net Loss Per Share
Basic net loss per share is calculated by dividing net loss by the weighted average number of shares outstanding during the period, as applicable. Diluted net loss per share is calculated by dividing net loss by the weighted average number of shares outstanding, adjusted to reflect potentially dilutive securities (options) using the treasury stock method, except when the effect would be anti-dilutive.
The Company reported a net loss for the
three
months ended
March 31, 2017
and
2016
, therefore diluted net loss per share is the same as the basic net loss per share.
As of
March 31, 2017
, the Company had
3,277,132
options to purchase shares,
445,838
restricted shares and
16,494,272
warrants to purchase shares outstanding that have been excluded from the computation of diluted weighted average shares outstanding, because such securities had an anti-dilutive impact due to the loss reported.
(11) Commitments and Contingencies
Legal Proceedings
The Company periodically becomes subject to legal proceedings and claims arising in connection with its business. The ultimate legal and financial liability of the Company in respect to all proceedings, claims and lawsuits, pending or threatened, cannot be estimated with any certainty.
As of this report, the Company is not aware of any proceeding, claim or litigation, pending or threatened, that could, individually or in the aggregate, have a material adverse effect on the Company’s business, operating results, financial condition and/or liquidity.
(12) Subsequent Events
On May 9, 2017, the Company entered into a Securities Purchase Agreement, or the Purchase Agreement, with a single institutional investor, or the investor, for the sale of
2,000,000
shares of its common stock at a purchase price of
$1.50
per share and warrants to purchase up to an aggregate of
1,000,000
shares of its common stock, or the Direct Offering. The warrants will be initially exercisable commencing six months from the issuance date at an exercise price equal to
$1.50
per full share of common stock, subject to adjustments as provided under the terms of the warrants. The warrants are exercisable for five years from the initial exercise date. In addition, the Company will issue the placement agent of the Direct Offering, warrants to purchase up to
60,000
shares. The placement agent warrants will have substantially the same terms as the warrants issued to the investor, except that the placement agent warrants will have an exercise price equal to
$1.875
and will be exercisable for
five years
from the date of the closing of this offering. The closing of the sales of these securities under the Purchase Agreement is expected to occur on or about May 15, 2017. The aggregate gross proceeds for the Direct Offering will be approximately
$3.0 million
and the net proceeds are estimated to be
$2.7 million
.