The following table provides a reconciliation of cash, cash
equivalents and restricted cash reported within the condensed balance sheets that sum to the total of the same such amounts shown
in the condensed statement of cash flows (in thousands):
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
|
1.
|
Organization and Summary of Significant Accounting
Policies
|
The Company
We are a pharmaceutical company developing
proprietary therapeutics for the treatment of serious medical disorders. Our product development programs utilize our proprietary
long-term drug delivery platform, ProNeura™, and focus primarily on innovative treatments for select chronic diseases for
which steady state delivery of a drug provides an efficacy and/or safety benefit. We are directly developing our product candidates
and also utilize corporate, academic and government partnerships as appropriate. We operate in only one business segment, the development
of pharmaceutical products.
Basis of Presentation
The accompanying unaudited condensed financial
statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim
financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by U.S. GAAP for complete financial statement presentation. In the opinion
of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the three month period ended March 31, 2018 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2018, or any future interim periods.
The balance sheet at December 31,
2017 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes
required by U.S. GAAP for complete financial statements. These unaudited condensed financial statements should be read in conjunction
with the audited financial statements and footnotes thereto included in the Titan Pharmaceuticals, Inc. Annual Report on Form 10-K
for the year ended December 31, 2017, as filed with the Securities and Exchange Commission (“SEC”).
The preparation of financial statements
in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those estimates.
The accompanying financial statements have
been prepared assuming we will continue as a going concern.
At March 31, 2018, we had cash and cash
equivalents of approximately $3.5 million, which we believe are sufficient to fund our planned operations into the third quarter
of 2018. We will require additional funds to finance our operations, including the advancement of our current ProNeura development
programs to later stage clinical studies. While we are currently evaluating the various financing alternatives available to us,
our efforts to address our liquidity requirements may not be successful.
Going concern assessment
With the implementation of FASB's standard
on going concern, Accounting Standard Update, or ASU No. 2014-15, beginning with the year ended December 31, 2016 and all annual
and interim periods thereafter, we will assess going concern uncertainty in our financial statements to determine if we have sufficient
cash on hand and working capital, including available borrowings on loans, to operate for a period of at least one year from the
date the financial statements are issued or available to be issued, which is referred to as the “look-forward period”
as defined by ASU No. 2014-15. As part of this assessment, based on conditions that are known and reasonably knowable to us, we
will consider various scenarios, forecasts, projections, estimates and will make certain key assumptions, including the timing
and nature of projected cash expenditures or programs, and its ability to delay or curtail expenditures or programs, if necessary,
among other factors. Based on this assessment, as necessary or applicable, we make certain assumptions around implementing curtailments
or delays in the nature and timing of programs and expenditures to the extent we deem probable those implementations can be achieved
and we have the proper authority to execute them within the look-forward period in accordance with ASU No. 2014-15.
Based upon the above assessment, we concluded
that, at the date the financial statements in this Quarterly Report on Form 10-Q for the months ended March 31, 2018, we did not
have sufficient cash to fund our operations for the next 12 months without additional funds and, therefore, there was substantial
doubt about our ability to continue as a going concern within 12 months after the date the financial statements were issued.
Revenue Recognition
Beginning January 1, 2018, we have followed
the provisions of ASC Topic 606,
Revenue from Contracts with Customers
. The guidance provides a unified model to determine
how revenue is recognized.
We generate revenue principally from collaborative
research and development arrangements, technology licenses, and government grants. Consideration received for revenue arrangements
with multiple components is allocated among the separate performance obligations based upon their relative estimated standalone
selling price.
In determining the appropriate amount of
revenue to be recognized as we fulfill our obligations under our agreements, we perform the following steps: (i) identification
of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance
obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price,
including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations
based on estimated selling prices; and (v) recognition of revenue when (or as) we satisfy each performance obligation.
Performance Obligations
A performance
obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC
Topic 606. Our performance obligations include commercialization license rights, development services and services associated with
the regulatory approval process.
We have optional
additional items in contracts, which are accounted for as separate contracts when the customer elects such options. Arrangements
that include a promise for future commercial product supply and optional research and development services at the customer’s
discretion are generally considered as options. We assess if these options provide a material right to the customer and, if so,
such material rights are accounted for as separate performance obligations. If we are entitled to additional payments when the
customer exercises these options, any additional payments are recorded in revenue when the customer obtains control of the goods
or services.
Transaction Price
We have both fixed
and variable consideration. Non-refundable upfront payments are considered fixed, while milestone payments are identified
as variable consideration when determining the transaction price. Funding of research and development activities is considered
variable until such costs are reimbursed at which point they are considered fixed. We allocate the total transaction price to each
performance obligation based on the relative estimated standalone selling prices of the promised goods or services for each performance
obligation.
At the inception
of each arrangement that includes milestone payments, we evaluate whether the milestones are considered probable of being achieved
and estimate the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant
revenue reversal would not occur, the value of the associated milestone is included in the transaction price. Milestone payments
that are not within our control, such as approvals from regulators, are not considered probable of being achieved until those approvals
are received.
For arrangements
that include sales-based royalties or earn-out payments, including milestone payments based on the level of sales, and the license
or purchase agreement is deemed to be the predominant item to which the royalties or earn-out payments relate, we recognizes revenue
at the later of (a) when the related sales occur, or (b) when the performance obligation to which some or all of the
royalty or earn-out payment has been allocated has been satisfied (or partially satisfied).
Allocation of Consideration
As part of the
accounting for these arrangements, we must develop assumptions that require judgment to determine the stand-alone selling price
of each performance obligation identified in the contract. Estimated selling prices for license rights are calculated using
the residual approach. For all other performance obligations, we use a cost-plus margin approach.
Timing of Recognition
Significant management
judgment is required to determine the level of effort required under an arrangement and the period over which we expect to complete
our performance obligations under an arrangement. We estimate the performance period or measure of progress at the inception of
the arrangement and re-evaluate it each reporting period. This re-evaluation may shorten or lengthen the period over which revenue
is recognized. Changes to these estimates are recorded on a cumulative catch up basis. If we cannot reasonably estimate when our
performance obligations either are completed or become inconsequential, then revenue recognition is deferred until we can reasonably
make such estimates. Revenue is then recognized over the remaining estimated period of performance using the cumulative catch-up method.
Revenue is recognized for licenses or sales of functional intellectual property at the point in time the customer can use and benefit
from the license. For performance obligations that are services, revenue is recognized over time proportionate to the costs that
we have incurred to perform the services using the cost-to-cost input method.
Research and Development Costs and Related
Accrual
Research and development expenses include
internal and external costs. Internal costs include salaries and employment related expenses, facility costs, administrative expenses
and allocations of corporate costs. External expenses consist of costs associated with outsourced contract research organization,
or CRO, activities, sponsored research studies, product registration, patent application and prosecution, and investigator sponsored
trials. We also record accruals for estimated ongoing clinical trial costs. Clinical trial costs represent costs incurred by CROs
and clinical sites. These costs are recorded as a component of research and development expenses. Under our agreements, progress
payments are typically made to investigators, clinical sites and CROs. We analyze the progress of the clinical trials, including
levels of patient enrollment, invoices received and contracted costs when evaluating the adequacy of accrued liabilities. Significant
judgments and estimates must be made and used in determining the accrued balance in any accounting period. Actual results could
differ from those estimates under different assumptions. Revisions are charged to expense in the period in which the facts that
give rise to the revision become known.
Recent Accounting Pronouncements
In November 2016, the FASB issued ASU No.
2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
. ASU No. 2016-18 is intended to reduce diversity in practice
in the classification and presentation of changes in restricted cash on the Condensed Statement of Cash Flows. The ASU requires
that the Condensed Statement of Cash Flows explain the change in total cash, cash equivalents and amounts generally described as
restricted cash or restricted cash equivalents when reconciling the beginning-of-period and end-of-period total amounts. The ASU
also requires a reconciliation between the total of cash, cash equivalents and restricted cash presented on the Condensed Statement
of Cash Flows and the cash and cash equivalents balance presented on the Condensed Balance Sheet. We adopted ASU No. 2016-18, and
the guidance has been retrospectively applied to all periods presented. The adoption of the guidance did not have an impact on
our Condensed Balance Sheet or Statement of Operations and Comprehensive Loss.
In July 2017, the Financial Accounting
Standards Board, or FASB, issued a two-part Accounting Standards Update, or ASU, No. 2017-11,
I. Accounting for Certain Financial
Instruments With Down Round Features and II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments
of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests With a Scope Exception
amending guidance
in FASB ASC 260, Earnings Per Share, FASB ASC 480, Distinguishing Liabilities from Equity, and FASB ASC 815, Derivatives and Hedging.
The amendments in Part I of ASU 2017-11 change the classification analysis of certain equity-linked financial instruments (or embedded
features) with down round features. The amendments in Part II of ASU 2017-11 re-characterize the indefinite deferral of certain
provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. Those amendments do
not have an accounting effect. ASU 2017-11 is effective for public business entities for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2018. Early adoption is permitted. We adopted ASU 2017-11 for the year ended December
31, 2017, and retrospectively applied ASU 2017-11 as required. There was no retrospective impact as a result of the adoption of
ASU 2017-11 on the financial statements. See Note 10, “Debt Agreements”.
In August 2016, the FASB issued ASU No.
2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,
addressing eight
specific cash flow issues in an effort to reduce diversity in practice. The amended guidance is effective for fiscal years beginning
after December 31, 2017, and for interim periods within those years. The adoption of ASU No. 2016-15 did not have a material impact
on our statements of cash flows.
In March 2016, the FASB issued ASU No.
2016-09,
Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting
(“ASU 2016-09”).
ASU 2016-09 addresses several aspects of the accounting for share-based payment award transactions, including: (a) income tax consequences;
(b) classification of awards as either equity or liabilities; (c) classification on the statement of cash flows; and (d) accounting
for forfeitures. We adopted the provisions of ASU 2016-09 in the first quarter of 2017. We have elected to continue to estimate
forfeitures based on the estimated number of awards expected to vest. In addition, the adoption of ASU 2016-09 resulted in the
recognition of $12.0 million of previously unrecognized excess tax benefits in deferred tax assets, fully offset by a valuation
allowance. All tax-related cash flows resulting from stock-based compensation, including the excess tax benefits related to the
settlement of stock-based payment awards, are now classified as cash flows from operating activities on our statements of cash
flows. The adoption of ASU 2016-09 did not have a material impact on our results of operations or financial condition.
In February 2016, the FASB issued ASU No.
2016-02,
Leases (Topic 842)
. This ASU requires most lessees to recognize right of use assets and lease liabilities, but
recognize expenses in a manner similar with current accounting standards. The new standard is effective for fiscal years and interim
periods beginning after December 15, 2018. Entities are required to use a modified retrospective approach, with early adoption
permitted. We are currently evaluating the impact of this new standard on the financial statements.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
and has subsequently issued several supplemental or clarifying ASUs (collectively,
“ASC 606”), ASC 606 supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle
of ASC 606 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the
consideration to which an entity expects to be entitled for those goods or services. ASC 606 defines a five step process to achieve
this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are
required under existing U.S. GAAP.
The standard is effective for annual periods
beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective
approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients,
or (ii) a retrospective approach with the cumulative effect of initially adopting ASC 606 recognized at the date of adoption.
We adopted the new standard effective January
1, 2018 under the modified retrospective transition method, applying the new guidance to the most current period presented. Upon
adoption, there was no change to the units of accounting previously identified under legacy GAAP, which are now considered performance
obligations under the new guidance, and there was no change to the revenue recognition pattern for each performance obligation.
Therefore, the adoption of the new standard resulted in no cumulative effect to the opening accumulated deficit balance.
We assessed the impact that the adoption
of ASC 606 will have on our financial statements by analyzing our current portfolio of customer contracts, including a review of
historical accounting policies and practices to identify potential differences in the application of ASC 606. Additionally, we
performed a comprehensive review of our current processes and systems to determine and implement changes required to support the
adoption of ASC 606 on January 1, 2018.
Subsequent Events
We have evaluated events that have occurred
after March 31, 2018 and through the date that the financial statements are issued.
Fair Value Measurements
We measure the fair value of financial
assets and liabilities based on authoritative guidance which defines fair value, establishes a framework consisting of three levels
for measuring fair value, and expands disclosures about fair value measurements. Fair value is defined as the exchange price that
would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for
the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of
inputs that may be used to measure fair value:
Level 1 – quoted prices in active markets for identical
assets or liabilities;
Level 2 – quoted prices for similar assets and liabilities
in active markets or inputs that are observable;
Level 3 – inputs that are unobservable (for example cash
flow modeling inputs based on assumptions).
Financial instruments, including receivables,
accounts payable and accrued liabilities are carried at cost, which we believe approximates fair value due to the short-term nature
of these instruments. Our warrant liabilities are classified within level 3 of the fair value hierarchy because the value is calculated
using significant judgment based on our own assumptions in the valuation of these liabilities.
We recorded no fair value adjustment of
the warrant liabilities for the three month periods ended March 31, 2018. We recorded a non-cash gain on decreases in the fair
value of approximately $422,000 for the three month periods ended March 31, 2017 in our Condensed Statements of Operations and
Comprehensive Loss. The underlying warrants expired by their terms on April 18, 2018. See Note 6, “Warrant Liability”
for further discussion on the calculation of the fair value of the warrant liability.
The following table summarizes the stock-based
compensation expense recorded for awards under the stock option plans for the three month periods ended March 31, 2018 and 2017:
|
|
Three Months Ended
March 31,
|
|
(in thousands, except per share amounts)
|
|
2018
|
|
|
2017
|
|
Research and development
|
|
$
|
163
|
|
|
$
|
117
|
|
General and administrative
|
|
|
269
|
|
|
|
304
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expenses
|
|
$
|
432
|
|
|
$
|
421
|
|
No tax benefit was recognized related to
stock-based compensation expense since we have incurred operating losses and we have established a full valuation allowance to
offset all the potential tax benefits associated with our deferred tax assets.
We use the Black-Scholes-Merton option-pricing
model with the following assumptions to estimate the stock-based compensation expense for the three month period ended March 31,
2018 and 2017:
|
|
Three Months Ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Weighted-average risk-free interest rate
|
|
|
2.75
|
%
|
|
|
2.16
|
%
|
Expected dividend payments
|
|
|
—
|
|
|
|
—
|
|
Expected holding period (years)
1
|
|
|
6.4
|
|
|
|
6.6
|
|
Weighted-average volatility factor
2
|
|
|
0.89
|
|
|
|
0.88
|
|
Estimated forfeiture rates for options granted
3
|
|
|
26
|
%
|
|
|
28
|
%
|
|
(1)
|
Expected holding period
is based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards,
vesting schedules and the expectations of future employee behavior.
|
|
(2)
|
Weighted average volatility
is based on the historical volatility of our common stock.
|
|
(3)
|
Estimated forfeiture rates
are based on historical data.
|
Options to purchase approximately 945,000
and approximately 436,000 common shares were granted during the three month periods ended March 31, 2018 and 2017, respectively.
The following table summarizes option activity
for the three month period ended March 31, 2018:
(in thousands, except per share amounts)
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Option
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at January 1, 2018
|
|
|
2,728
|
|
|
$
|
4.32
|
|
|
|
5.75
|
|
|
$
|
30
|
|
Granted
|
|
|
945
|
|
|
|
0.97
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Expired or cancelled
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2018
|
|
|
3,673
|
|
|
$
|
3.46
|
|
|
|
6.64
|
|
|
$
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2018
|
|
|
2,416
|
|
|
$
|
4.48
|
|
|
|
5.67
|
|
|
$
|
19
|
|
No shares of restricted stock were awarded
to employees, directors and consultants during the three month periods ended March 31, 2018 and 2017.
As of March 31, 2018, there was approximately
$892,000 of total unrecognized compensation expense related to non-vested stock options. This expense is expected to be recognized
over a weighted-average period of approximately 0.9 years.
Basic net loss per share excludes the effect
of dilution and is computed by dividing net loss by the weighted-average number of shares outstanding for the period. Diluted net
loss per share reflects the potential dilution that could occur if securities or other contracts to issue shares were exercised
into shares. In calculating diluted net loss per share, the numerator is adjusted for the change in the fair value of the warrant
liability (only if dilutive) and the denominator is increased to include the number of potentially dilutive common shares assumed
to be outstanding during the period using the treasury stock method.
The following table sets forth the reconciliation
of the numerator and denominator used in the computation of basic and diluted net loss per common share for the three months ended
March 31, 2018 and 2017:
|
|
Three months ended
March 31,
|
|
(in thousands, except per share amounts)
|
|
2018
|
|
|
2017
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net loss used for basic earnings per share
|
|
$
|
(2,605
|
)
|
|
$
|
(3,005
|
)
|
Less change in fair value of warrant liability
|
|
|
—
|
|
|
|
(422
|
)
|
Net loss used for diluted earnings per share
|
|
$
|
(2,605
|
)
|
|
$
|
(3,427
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic weighted-average outstanding common shares
|
|
|
21,204
|
|
|
|
21,199
|
|
Effect of dilutive potential common shares resulting from options
|
|
|
—
|
|
|
|
45
|
|
Effect of dilutive potential common shares resulting from warrants
|
|
|
—
|
|
|
|
132
|
|
Weighted-average shares outstanding—diluted
|
|
|
21,204
|
|
|
|
21,376
|
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.12
|
)
|
|
$
|
(0.14
|
)
|
Diluted
|
|
$
|
(0.12
|
)
|
|
$
|
(0.16
|
)
|
The table below presents common shares
underlying stock options and warrants that are excluded from the calculation of the weighted average number of common shares outstanding
used for the calculation of diluted net loss per common share. These are excluded from the calculation due to their anti-dilutive
effect for the three months ended March 31, 2018 and 2017:
|
|
Three months ended
March 31,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
Weighted-average anti-dilutive common shares resulting from options
|
|
|
2,991
|
|
|
|
1,913
|
|
Weighted-average anti-dilutive common shares resulting from warrants
|
|
|
2,044
|
|
|
|
246
|
|
|
|
|
5,035
|
|
|
|
2,159
|
|
Comprehensive loss for the periods presented
is comprised solely of our net loss. We had no items of other comprehensive loss during the three-month periods ended March 31,
2018 and 2017. Comprehensive loss for the three-month period ended March 31, 2018 and 2017 was $2.6 million and $3.0 million, respectively.
We are party to a license agreement with
Braeburn (as amended to date, the “Agreement”) pursuant to which we have granted Braeburn the exclusive commercialization
rights to Probuphine in the United States and its territories and Canada. Under the Agreement, we received a non-refundable license
fee of $15.75 million in December 2012 and a $15.0 million milestone payment upon FDA approval of the Probuphine NDA in 2016. We
receive royalties on net sales of Probuphine ranging in percentage from the mid-teens to the low twenties. Upon receipt of approval,
our obligation was fulfilled and we recognized the full amount of the milestone payment. The Agreement also provides for sales
and regulatory milestones. In addition, we are entitled to receive a low single digit royalty on sales by Braeburn of other competing
continuous delivery treatments for opioid dependence as defined in the Agreement. The Agreement provides for us to be reimbursed
by Braeburn for any developments services and activities undertaken at Braeburn’s request. Under ASC 606, there was no change
in the amount or timing of revenue recognized under this agreement.
We
are currently in negotiations with Braeburn regarding the possible return to us of U.S. commercialization rights to Probuphine.
|
6.
|
Molteni Purchase Agreement
|
On March 21, 2018, we entered into an Asset
Purchase, Supply and Support Agreement (the “Purchase Agreement”) with Molteni pursuant to which Molteni acquired the
European intellectual property related to Probuphine, including the Marketing Authorization Application (“MAA”) under
review by the European Medicines Agency (“EMA”), and will have the exclusive right to commercialize the Probuphine
product supplied by us in Europe, as well as certain countries of the Commonwealth of Independent States, the Middle East and North
Africa (the “Molteni Territory”).
We received an initial payment of €2.0
million (approximately $2.4 million) for the purchased assets and will receive the following additional potential payments totaling
up to €4.5 million (approximately $5.5 million) upon the achievement of certain regulatory and product label milestones, including:
(i) a €1.0 million milestone payment upon the issuance by the EMA of the MAA and (ii) an aggregate of € 2.0 million of
milestone payments upon approval of the product reimbursement price in certain key countries, provided that the payments in (i)
and (ii) are subject to a 50% reduction if the EMA marketing authorization is not received on or prior to September 30, 2019 and
shall not be payable in the event such authorization is not received on or prior to March 31, 2020. Additionally, we are entitled
to receive earn-out payments for up to 15 years on net sales of Probuphine in the Molteni Territory ranging in percentage from
the low-teens to the mid-twenties.
We concluded that the performance obligations
identified in the Purchase Agreement included the transfer of the intellectual property and our efforts towards the approval by
the EMA and other regulatory bodies. The initial closing payment was allocated between the transfer of the intellectual property
and our efforts related to the EMA approval as follows.
We used the expected cost-plus approach
to estimate the standalone selling price of approximately $1.4 million related to our efforts towards the approval by the EMA and
other regulatory bodies. This includes employee related expenses as well as other manufacturing, regulatory and clinical costs
which will be incurred as part of our efforts. We believe that the services will be at a consistent rate and will be substantially
complete as of December 31, 2018. As such we will recognize the revenue ratably over the balance of year ending December 31, 2018.
If the facts and circumstances change, we will reassess these assumptions. The costs associated with these services will be expensed
over the same period.
We used the residual approach to value
the transfer of the intellectual property at approximately $1.0 million as we had not established and had no reliable way to establish
a standalone selling price for the intellectual property.
As a result of the outcome of the milestone
and earn-out payments being unpredictable due to the involvement of third parties, we believe that using the most likely amount
method is appropriate. Any subsequent revenue related to milestone and earn-out payments will be recognized at the time the milestones
are achieved or when the related net sales have occurred.
The Agreement provides that we will
supply Molteni with semi-finished product (i.e., the implant, the applicator and related technology) on an exclusive basis at a
fixed price through December 31, 2019, with subsequent price increases not to exceed annual cost increases to us for the active
pharmaceutical ingredient and under our current manufacturing agreement. Revenue will be recognized when the semi-finished product
has been transferred to Molteni.
Molteni will be prohibited from marketing
a Competitor Product (as defined in the Agreement) in the Territory for the five year period following approval of the MAA. Thereafter,
Molteni will be required to pay us a low single digit royalty on net sales of any Competitor Product.
The following table presents changes in
contract assets and liabilities during the three months ended March 31, 2018:
(
in thousands
)
|
|
Beginning
Balance
|
|
|
Additions
|
|
|
Deductions
|
|
|
Ending
Balance
|
|
Three months ended March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract assets
|
|
$
|
—
|
|
|
$
|
291
|
|
|
$
|
—
|
|
|
$
|
291
|
|
Contract liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
$
|
—
|
|
|
$
|
2,448
|
|
|
$
|
(1,039
|
)
|
|
$
|
1,409
|
|
At March 31, 2018, we had warrants outstanding
to purchase an aggregate of 983,395 shares of common stock (“Series A Warrants”). The Series A Warrants were exercisable
at $4.85 per share and expired by their terms on April 18, 2018. The Series A Warrants contained a provision where the warrant
holder had the option to receive cash, equal to the Black Scholes fair value of the remaining unexercised portion of the warrant,
as cash settlement in the event that there was a fundamental transaction (contractually defined to include various merger, acquisition
or stock transfer activities). Due to this provision, ASC 480,
Distinguishing Liabilities from Equity
required that these
warrants were classified as liabilities. The fair value of these warrants was determined using the Lattice valuation model, and
the changes in the fair value were recorded in the Condensed Statements of Operations and Comprehensive Loss.
In July 2017, we entered into a venture
loan and security agreement (“ Original Loan Agreement”) with Horizon Technology Finance Corporation (“Horizon”),
pursuant to which we received a loan in the amount of $7.0 million
The Original Loan Agreement provided for
repayment of the loan on an interest-only basis through December 31, 2018, followed by monthly payments of principal and accrued
interest for the balance of the 46-month term. The loan bears interest at a floating coupon rate of one-month LIBOR (floor of 1.10%)
plus 8.40%. A final payment equal to 5.0% of the loan will be due on the scheduled maturity date for such loan. The Original Loan
Agreement also contained a prepayment penalty based on a percentage of the then outstanding principal balance, equal to 4% if the
prepayment occurs during the interest-only payment period, 3% if the prepayment occurs during the 12 months following such period,
and 2% thereafter.
Our obligations under the Original Loan
Agreement were secured by a first priority security interest in all of our assets, with the exception of our intellectual property.
We agreed not to pledge or otherwise encumber our intellectual property assets, subject to certain exceptions.
The Original Loan Agreement included customary
affirmative and restrictive covenants, excluding any covenants to attain or maintain certain financial metrics, and also included
customary events of default, including for payment failures, breaches of covenants, change of control and material adverse changes.
Upon the occurrence of an event of default and following any applicable cure periods, a default interest rate of an additional
5% could be applied to the outstanding loan balance, and Horizon could declare all outstanding obligations immediately due and
payable and take such other actions as set forth in such agreement.
In connection with the Original Loan Agreement,
we issued Horizon seven-year warrants to purchase an aggregate of 280,612 shares of our common stock (“Horizon Warrants”).
The per share exercise price of the Horizon Warrants is the lower of (i) $1.96 or (ii) the price per share of any securities that
may be issued by the Company in an equity financing during the 18 months following the agreement date. We agreed to file a registration
statement covering the resale of the shares underlying the Horizon Warrants. In accordance with ASC 480,
Distinguishing Liabilities
from Equity
, as amended by ASU, No. 2017-11, which we early adopted during 2017, the Horizon Warrants have been classified
as equity and their fair value at the time of issuance was determined using a Lattice valuation model and was recorded in the Condensed
Balance Sheet as a discount to the debt obligation.
The key assumptions used to value the Horizon
Warrants were as follows:
Assumption
|
|
|
|
Date of issuance
|
|
|
July 27, 2017
|
|
Expected price volatility
|
|
|
47
|
%
|
Expected term (in years)
|
|
|
7.00
|
|
Risk-free interest rate
|
|
|
2.12
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
Weighted-average fair value of warrants
|
|
$
|
1.02
|
|
The anti-dilution provisions contained in the outstanding Series A warrants were triggered by the Horizon Warrant issuance,
resulting in a reduction of the exercise price of such warrants from $4.89 to $4.85 per share.
On February 2, 2018, we entered into an
amendment to the Original Loan Agreement (the “Amended Loan Agreement”) pursuant to which we prepaid $3.0 million of
the outstanding $7.0 million principal amount and provided Horizon with a lien on our intellectual property. The other terms of
the Original Loan Agreement remained unchanged.
On March 21, 2018, we entered into an Amended
and Restated Venture Loan and Security Agreement (the “Restated Loan Agreement”) with Horizon and L. Molteni &
C. Dei Frattelli Alitti Società Di Esercizio S.P.A. (“Molteni”) pursuant to which Horizon assigned approximately
$2.4 million of the $4.0 million outstanding principal balance of the loan to Molteni and Molteni was appointed collateral agent
and assumed majority and administrative control of the debt. Under the Restated Loan Agreement, the interest only payment and forbearance
periods were extended to December 31, 2019. In addition, Molteni has the right to convert its portion of the debt into shares of
our common stock at a conversion price of $1.20 per share and is required to effect this conversion of debt to equity if we complete
an equity financing resulting in gross proceeds of at least $10.0 million at a price per share of common stock in excess of $1.20
and repay the $1.6 million balance of Horizon’s loan amount. The lien on our intellectual property remains in place at this
time. As the present value of the cash flows under the terms of the Restated Loan Agreement is less than 10% different from the
remaining cash flows under the terms of the Amended Loan Agreement prior to being amended and restated, the Restated Loan Agreement
was accounted for as a debt modification. Accordingly, expenses incurred as a result of the modification were expensed as incurred
and the previously deferred fees and costs related to the debt will continue to be amortized over the remaining term along with
the related warrants issued as part of the Rights Agreement.
In connection with the Restated Loan Agreement,
we issued Horizon seven-year warrants to purchase 40,000 shares of our common stock at an exercise price of $1.20 per share. The
Horizon Warrants have been classified as equity and their fair value at the time of issuance was determined using a Black Scholes
valuation model and was recorded in the Condensed Balance Sheet as a discount to the debt obligation.
The key assumptions used to value the new
Horizon warrants were as follows:
Assumption
|
|
|
|
Date of issuance
|
|
|
March 21, 2018
|
|
Expected price volatility
|
|
|
86
|
%
|
Expected term (in years)
|
|
|
7.00
|
|
Risk-free interest rate
|
|
|
2.82
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
Weighted-average fair value of warrants
|
|
$
|
0.81
|
|
In consideration of Molteni’s entry
into the Restated Loan Agreement and the Purchase Agreement, on March 21, 2018, we entered into a Rights Agreement (the “Rights
Agreement”) with Molteni pursuant to which we agreed to (i) issue Molteni seven-year warrants to purchase 540,000 shares
of our common stock at an exercise price of $1.20 per share (the “Molteni Warrants”), (ii) provide Molteni customary
demand and piggy-back registration rights with respect to the shares of common stock issuable upon conversion of its loan and exercise
of the Molteni Warrants, (iii) appoint one member of our board of directors and (iv) provide board observer rights to Molteni if
it has not designated a board nominee as well as certain information rights. The board designation, observer and information rights
will terminate at such time as Molteni ceases to beneficially own at least one percent of our outstanding capital stock (inclusive
of the shares issuable upon conversion of its note and exercise of the Molteni Warrants). The Molteni Warrants have been classified
as equity and their fair value at the time of issuance was determined using a Black Scholes valuation model. The amount was allocated
equally between the Restated Loan Agreement and the Purchase Agreement and was recorded in the Condensed Balance Sheet as a discount
to the debt obligation and a contract asset, respectively.
The key assumptions used to value the Molteni
Warrants were as follows:
Assumption
|
|
|
|
Date of issuance
|
|
|
March 21, 2018
|
|
Expected price volatility
|
|
|
86
|
%
|
Expected term (in years)
|
|
|
7.00
|
|
Risk-free interest rate
|
|
|
2.82
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
Weighted-average fair value of warrants
|
|
$
|
0.81
|
|