To the extent that
a valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company
inwhen determining fair value is greatest for
financial instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
Revenue recognition
The Company has primarily generated revenue through collaboration agreements, sponsored research arrangements with nonprofit organizations for the development and commercialization of product candidates and revenues from federal research and development grant programs. The Company recognizes revenue when amounts are realized or realizable and earned. Revenue is considered realizable and earned when the following criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the price is fixed or determinable; and (iv) collection of the amounts due are reasonably assured.
Amounts received prior to satisfying the revenue recognition criteria are recorded as deferred revenue in the Company’s balance sheets. Amounts expected to be recognized as revenue within the 12 months following the balance sheet date are classified as current liabilities. The Company recognizes revenue for reimbursements of research and development costs under collaboration agreements as the services are performed. The Company records these reimbursements as revenue and not as a reduction of research and development expenses, as the Company has the risks and rewards as the principal in the research and development activities.
The Company evaluates the terms of sponsored research agreement grants and federal grants to assess the Company’s obligations and if the Company’s obligations are satisfied by the passage of time, revenue is recognized on a straight-line basis. In situations where the performance of the Company’s obligations has been satisfied when the grant is received, revenue is recognized upon receipt of the grant. Certain grants contain refund provisions. The Company reviews those refund provisions to determine the likelihood of repayment. If the likelihood of repayment of the grant is determined to be remote, the grant is recognized as revenue. If the probability of repayment is determined to be more than remote, the Company records the grant as a deferred revenue liability, until such time that the grant requirements have been satisfied.
Collaboration revenue
On July 1, 2015, the Company entered into a Collaboration Agreement with Biogen. This collaboration is discussed further in Note 6 of notes to the financial statements. The terms of the Collaboration Agreement and other potential collaboration or commercialization agreements the Company may enter into generally contain multiple elements, or deliverables, which may include, among others, (i) licenses, or options to obtain licenses, to its technology, and (ii) research and development activities to be performed on behalf of the collaborative partner. Payments made under such arrangements typically include one or more of the following:non-refundable,up-front license fees; option exercise fees; funding of research and/or development efforts; milestone payments; and royalties on future product sales.
Multiple element arrangements are analyzed to determine whether the deliverables within the agreement can be separated or whether they must be accounted for as a single unit of accounting. Deliverables under an agreement are required to be accounted for as separate units of accounting provided that (i) a delivered item has value to the customer on a stand-alone basis; and (ii) if the agreement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item is considered probable and substantially in the control of the vendor. The allocation of consideration amongst the deliverables under the agreement is derived using a “best estimate of selling price” if vendor specific objective evidence and third-party evidence of fair value is not available. If the delivered element does not have stand-alone value or if the fair value of any of the undelivered elements cannot be determined, the arrangement is then accounted for as a single unit of accounting, and the Company recognizes the consideration received under the arrangement as revenue on a straight-line basis over the estimated period of performance.
The Company determines the estimated selling price for deliverables within each agreement using vendor-specific objective evidence, or VSOE, of selling price, if available, third-party evidence, or TPE, of selling price if VSOE is not available, or best estimate of selling price, or BESP, if neither VSOE nor TPE are available. Determining the best estimate of selling price for a deliverable requires significant judgment. The Company uses BESP to estimate the selling price related to licenses to its proprietary technology, since it often does not have VSOE or TPE of selling price for these deliverables. In those circumstances where it utilizes BESP to determine the estimated selling price of a license to our proprietary technology, the Company considers market conditions as well as entity-specific factors, including those factors contemplated in negotiating the agreements as well as internally developed models that include assumptions related to the market opportunity, estimated development costs, probability of success and the time needed to commercialize a product candidate pursuant to the license. In validating its best estimate of selling price, the Company evaluates whether changes in the key assumptions used to determine the best estimate of selling price will have a significant effect on the allocation of arrangement consideration among multiple deliverables.
If the delivered element does not have stand-alone value, the arrangement is then accounted for as a single unit of accounting and the Company recognizes the consideration received under the arrangement as revenue on a straight-line basis over its estimated period of performance. The Company’s anticipated periods of performance, typically the terms of its research and development obligations, are subject to estimates by management and may change over the course of the collaboration agreement. Such changes could have a material impact on the amount of revenue recorded in future periods.
Milestone revenue
The Company applies the milestone method of accounting to recognize revenue from milestone payments when earned, as evidenced by written acknowledgement from the collaborator or other persuasive evidence that the milestone has been achieved and the payment isnon-refundable, provided that the milestone event is substantive. A milestone event is defined as an event (i) that can only be achieved based in whole or in part on either the Company’s performance or on the occurrence of a specific outcome resulting from the Company’s performance; (ii) for which there is substantive uncertainty at the inception of the arrangement that the event will be achieved; and (iii) that would result in additional payments being due to the Company. Events for which the occurrence is either contingent solely upon the passage of time or the result of a counterparty’s performance are not considered to be milestone events. A milestone event is substantive if all of the following conditions are met: (i) the consideration is commensurate with either the Company’s performance to achieve the milestone, or the enhancement of the value to the delivered item(s) as a result of a specific outcome resulting from the Company’s performance to achieve the milestone; (ii) the consideration relates solely to past performance; and (iii) the consideration is reasonable relative to all the deliverables and payment terms (including other potential milestone consideration) within the arrangement.
The Company assesses whether a milestone is substantive at the inception of the arrangement. If a milestone is deemednon-substantive, the Company accounts for that milestone payment in accordance with the multiple element arrangements guidance and recognizes revenue consistent with the related units of accounting for the arrangement over the related performance period.
No milestone revenues were recognized during the three and six month periods ended December 31, 2017 and December 31, 2016.
Income taxes
The Company uses the asset and liability method for accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases. Deferred tax assets and liabilities are measured using enacted rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The Tax Cuts and Jobs Act of 2017 was signed into law on December 22, 2017. The law includes significant changes to the U.S. corporate income tax system, including a Federal corporate rate reduction from 35% to 21%. We have recorded an income tax benefit of $791,000 relating to our alternative minimum tax credit carryforward, which becomes refundable under the new law.
For the three and six months ended December 31, 2016, the Company recorded an income tax provision of $0.6 million and $1.2 million respectively, related to the Company’s federal alternative minimum taxable income (“AMTI”) and state income tax in multiple states where the Company is doing business. The Company calculates its AMTI using the alternative minimum tax (“AMT”) system. The Company’s federal income tax liability is the greater of the tax computed using the regular tax system or the tax under the AMT system. Corporations are exempt from AMT for all prior years in which their annual gross receipts for the3-year period ending before the current tax year did not exceed $7.5 million. As of June 30, 2017, the Company no longer qualifies for the small company exclusion. The AMT system limits the use of net operating losses used by taxpayers to offset taxable income.
As required by U.S. GAAP, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting themore-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. Any interest and penalties related to uncertain tax positions will be reflected in income tax expense. The Company is subject to examination of its income tax returns in the federal and state income tax jurisdictions in which it operates.
The Company’s net deferred tax asset decreased by $7.5 million, primarily due to a remeasurement of deferred tax assets and liabilities to the revised statutory tax rate under the new law. The net deferred tax asset is completely offset by valuation allowances established because realization of the deferred tax benefits are not considered more likely than not as of December 31, 2017.
For the six months ended December 31, 2016, the Company’s $1.2 million of tax expense included an uncertain tax position liability of $0.4 million related to uncertainty in how states may tax income from the Biogen Collaboration Agreement. The full amount of the uncertain tax position reflected on the balance sheet within accrued expenses and other liabilities as of December 31, 2017 is approximately $1 million. This collaboration agreement is described in more detail in Note 6 of the notes to the financial statements.
Research and development
Research and development costs include costs incurred in identifying, developing and testing product candidates and generally comprise compensation and related benefits andnon-cash share-based compensation to research related employees; laboratory costs; animal and laboratory maintenance and supplies; rent; utilities; clinical andpre-clinical expenses; and payments for sponsored research, scientific and regulatory consulting fees and testing.
As part of the process of preparing its financial statements, the Company is required to estimate its accrued expenses. This process involves reviewing quotations and contracts, identifying services that have been performed on its behalf and estimating the level of service performed and the associated cost incurred for services for which the Company has not yet been invoiced or otherwise notified of the actual cost. The majority of the Company’s service providers invoice the Company monthly in arrears for services performed or when contractual milestones are met. The Company makes estimates of its accrued expenses as of each balance sheet date in its financial statements based on facts and circumstances known to it at that time. The significant estimates in the Company’s accrued research and development expenses are related to expenses incurred with respect to academic research centers, contract research organizations, and other vendors in connection with research and development activities for which it has not yet been invoiced.
There may be instances in which the Company’s service providers require advance payments at the inception of a contract or in which payments made to these vendors will exceed the level of services provided, resulting in a prepayment of the research and development expense. Such prepayments are charged to research and development expense as and when the service is provided or when a specific milestone outlined in the contract is reached.
Prepayments related to research and development activities were $1.6 million and $1.5 million at December 31, 2017 and June 30, 2017, respectively, and are included within the prepaid and other current assets line item on the unaudited condensed balance sheets.
Share-based compensation
The Company accounts for share-based awards issued to employees in accordance with ASC Topic 718, Compensation—Stock Compensation and generally recognizes share-based compensation expense on a straight-line basis over the periods during which the employees are required to provide service in exchange for the award. In addition, the Company issues stock options and restricted shares of common stock tonon-employees in exchange for consulting services and accounts for these in accordance with the provisions of ASCSubtopic 505-50,Equity-Based Payments toNon-employees(“ASC 505-50”). UnderASC 505-50, share-based awards tonon-employees are subject to periodic fair valuere-measurement over their vesting terms.
For purposes of calculating stock-based compensation, the Company estimates the fair value of stock options using a Black-Scholes option-pricing model. The determination of the fair value of share-based payment awards utilizing the Black-Scholes model is affected by the Company’s stock price and a number of assumptions, including expected volatility, expected life, risk-free interest rate and expected dividends. The expected volatility is primarily based on the historical volatility of peer company data while the expected life of the stock options is based on historical and other economic data trended into the future. The risk-free interest rate assumption is based on observed interest rates appropriate for the expected terms of the Company’s stock options. The dividend yield assumption is based on the Company’s history and expectation of no dividend payouts. If factors change and the Company employs different assumptions, stock-based compensation expense may differ significantly from what has been recorded in the past. If there is a difference between the assumptions used in determining stock-based compensation expense and the actual factors which become known over time, specifically with respect to anticipated forfeitures, the Company may change the input factors used in determining stock-based compensation costs for future grants. These changes, if any, may materially impact the Company’s results of operations in the period such changes are made.
Net income (loss) per share
Basic net earnings (loss) per share is calculated by dividing net earnings (loss) by the weighted average shares outstanding during the period, without consideration for common stock equivalents. Diluted net earnings (loss) per share is calculated by adjusting weighted average shares outstanding for the dilutive effect of common stock equivalents outstanding for the period, determined using the treasury-stock method. For purposes of the diluted net earnings (loss) per share calculation, stock options and warrants are considered to be common stock equivalents. The dilutive impact of stock options and warrants for the three and six month periods ended December 31, 2017 totaled 0.2 million shares, compared to 0.3 million and 0.4 million shares for the three and six month periods ended December 31, 2016. The dilutive impact of stock options and warrants have been excluded from the calculation of diluted net loss per share for the for the three and six months ended December 31, 2017, as their effect would be anti-dilutive. Therefore, for the three and six months ended December 31, 2017, basic and diluted net loss per share are the same.
Comprehensive income or loss
Comprehensive income or loss consists of net income or loss and changes in equity during a period from transactions and other equity and circumstances generated fromnon-owner sources. The Company’s net income or loss equals comprehensive income or loss for all periods presented.
New accounting pronouncements
In May 2017, the FASB issued Accounting Standards Update (“ASU”)No. 2017-09,Scope of Modification Accounting, which amends ASC Topic 718,Compensation—Stock Compensation. The amendments in this Update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply
modification accounting in Topic 718. The amendments are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption of this standard on its financial statements.
In March 2016, the FASB issued ASUNo. 2016-09,Improvements to Employee Share-Based Payment Accounting, which amends Accounting Standards Codification (“ASC”) Topic 718, Compensation—Stock Compensation. The amendments simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, forfeitures, and classification on the statement of cash flows. The amendments are effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years and early adoption is permitted. The Company has adopted this standard for its 2018 fiscal year and it did not have a material effect on its balance sheets, results of operations or cash flows.
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)No. 2016-02,Leases (Topic 842)in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases previously classified as operating leases under GAAP. The standard requires, in most instances, a lessee to recognize on its balance sheet a liability to make lease payments (the lease liability) and also aright-of-use asset representing its right to use the underlying asset for the lease term. The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those periods, using a modified retrospective approach and early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption of this standard on its financial statements.
In May 2014, the FASB issued ASUNo. 2014-09,Revenue from Contracts with Customers (Topic 606), which replaces the existing accounting standards for revenue recognition with a single comprehensive five-step model. The core principle is to recognize revenue upon the transfer of goods or services to customers at an amount that reflects the consideration expected to be received. It also requires enhanced disclosures about revenue, provides guidance for transactions that were not previously addressed comprehensively, and improves guidance for multiple-element arrangements. The guidance applies to any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. Since its issuance, the FASB has amended several aspects of the new guidance, including provisions that address revenue recognition associated with the licensing of intellectual property. In July 2015, the FASB delayed the effective date of this guidance by one year. The guidance is now effective for public companies for annual periods beginning after December 15, 2017 as well as interim periods within those annual periods using either the full retrospective approach or modified retrospective approach. The Company is working through an adoption plan which will include a review of collaboration agreements, applying the five-step model of the new standard and comparing the results to the Company’s current accounting. As part of this, the Company is evaluating the method of adoption and assessing changes that might be necessary to its processes, internal controls and address changes in financial reporting. Effective July 1, 2018, the Company will be revising its revenue recognition accounting policy and expanding revenue disclosures to reflect the requirements of the amended revenue recognition guidance. Because of the nature of the work that remains, at this time the Company is unable to reasonably estimate the impact of adoption on its consolidated financial statements.
3. | Share-based Compensation Plans: |
The Company uses stock options and awards of restricted stock to provide long-term incentives for its employees,non-employee directors and certain consultants. The Company has two equity compensation plans under which awards are currently authorized for issuance, the 2013 Employee Stock Purchase Plan and the 2013 Equity and Incentive Plan. No awards have been issued to date under the 2013 Employee Stock Purchase Plan and all of the 128,571 shares previously authorized under this plan remain available for issuance. A summary of the stock option activity for the six months ended December 31, 2017 and 2016 is as follows:
| | | | | | | | | | | | | | | | |
| | | For the Six Months Ended December 31, | |
| | | 2017 | | | 2016 | |
(In thousands, except per share amounts) | | Shares | | | Weighted
Average
Exercise
Price | | | Shares | | | Weighted
Average
Exercise
Price | |
Outstanding at June 30, | | | 2,714 | | | $ | 12.96 | | | | 2,037 | | | $ | 13.71 | |
Granted | | | 746 | | | | 4.83 | | | | 658 | | | | 11.85 | |
Exercised | | | (7 | ) | | | 0.35 | | | | (21 | ) | | | 1.16 | |
Forfeited | | | (309 | ) | | | 9.76 | | | | (31 | ) | | | 17.80 | |
Expired | | | (15 | ) | | | 15.35 | | | | (3 | ) | | | 22.64 | |
| | | | | | | | | | | | | | | | |
Outstanding at December 31, | | | 3,129 | | | $ | 11.35 | | | | 2,640 | | | $ | 13.28 | |
| | | | | | | | | | | | | | | | |
Exercisable at December 31, | | | 1,694 | | | | | | | | 1,267 | | | | | |
| | | | | | | | | | | | | | | | |
Weighted average fair value of options granted during the period | | $ | 3.49 | | | | | | | $ | 8.12 | | | | | |
| | | | | | | | | | | | | | | | |
For the three and six months ended December 31, 2017, share-based compensation expense related to stock options awarded to employees,non-employee directors and consultants amounted to approximately $1.3 million and $2.8 million, respectively, compared to $1.3 million and $2.9 million, respectively, for the three and six months ended December 31, 2016.
As of December 31, 2017, there was $9.1 million of unrecognized compensation expense related tonon-vested stock options. During the six months ended December 31, 2017, 746,468 stock options were granted to the Company’s employees andnon-employee directors under the 2013 Equity and Incentive Plan. The fair value of each option granted is estimated on the grant date using the Black-Scholes stock option pricing model. The following assumptions were made in estimating fair value:
| | | | |
Assumption
| | Six months
ended
December 31,
2017 | |
Dividend yield
| | | 0.00 | % |
Expected term
| | | 6.25 years | |
Risk-free interest rate
| | | 1.83-2.21 | % |
Expected Volatility
| | | 83.53 | % |
Cash in excess of immediate requirements is invested in accordance with the Company’s investment policy that primarily seeks to maintain adequate liquidity and preserve capital.
The following table summarizes the Company’s investments by category as of December 31, 2017 and June 30, 2017:
| | | | | | | | |
| | | December 31, | | | June 30, | |
In thousands | | 2017 | | | 2017 | |
Investments—Current: | | | | | | | | |
Certificates of deposit | | $ | 2,820 | | | $ | 3,500 | |
Debtsecurities—held-to-maturity | | | 46,492 | | | | 92,494 | |
| | | | | | | | |
Total investments—current | | $ | 49,312 | | | $ | 95,994 | |
| | | | | | | | |
Investments—Noncurrent: | | | | | | | | |
Certificates of deposit | | $ | — | | | $ | 2,111 | |
Debtsecurities—held-to-maturity | | | — | | | | 9,638 | |
| | | | | | | | |
Totalinvestments—non-current | | $ | — | | | $ | 11,749 | |
| | | | | | | | |
A summary of the Company’s debt securities classified asheld-to-maturity is as follows:
| | | | | | | | | | | | | | | | |
| | | At December 31, 2017 | |
In thousands | | Amortized
Cost | | | Gross
Unrealized
Gains | | | Gross
Unrealized
Losses | | | Fair
Value | |
Investments—Current: | | | | | | | | | | | | | | | | |
U.S. government and agency obligations | | $ | 44,448 | | | $ | — | | | $ | (86 | ) | | | 44,362 | |
Corporate obligations | | | 2,044 | | | | — | | | | (7 | ) | | | 2,037 | |
| | | | | | | | | | | | | | | | |
Total investments—current | | $ | 46,492 | | | $ | — | | | $ | (93 | ) | | $ | 46,399 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | At June 30, 2017 | |
In thousands | | Amortized
Cost | | | Gross
Unrealized
Gains | | | Gross
Unrealized
Losses | | | Fair
Value | |
Investments—Current: | | | | | | | | | | | | | | | | |
U.S. government and agency obligations | | $ | 92,494 | | | $ | — | | | $ | (147 | ) | | $ | 92,347 | |
Corporate obligations | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
| | $ | 92,494 | | | $ | — | | | $ | (147 | ) | | $ | 92,347 | |
| | | | | | | | | | | | | | | | |
Investments—Noncurrent: | | | | | | | | | | | | | | | | |
U.S. government and agency obligations | | $ | 7,552 | | | $ | — | | | $ | (52 | ) | | $ | 7,500 | |
Corporate obligations | | | 2,086 | | | | — | | | | (12 | ) | | | 2,074 | |
| | | | | | | | | | | | | | | | |
| | $ | 9,638 | | | $ | — | | | $ | (64 | ) | | $ | 9,574 | |
| | | | | | | | | | | | | | | | |
The amortized cost and fair value ofheld-to-maturity debt securities as of December 31, 2017, by contractual maturity, were as follows:
| | | | | | | | |
In thousands | | Amortized
Cost | | | Fair
Value | |
Due in one year or less | | $ | 46,492 | | | $ | 46,399 | |
| | | | | | | | |
| | $ | 46,492 | | | $ | 46,399 | |
| | | | | | | | |
The Company believes that the unrealized losses disclosed above were primarily driven by interest rate changes rather than by unfavorable changes in the credit ratings associated with these securities and as a result, the Company continues to expect to collect the principal and interest due on its debt securities that have an amortized cost in excess of fair value. At each reporting period, the Company evaluates securities for impairment when the fair value of the investment is less than its amortized cost. The Company evaluated the underlying credit quality and credit ratings of the issuers, noting neither a significant deterioration since purchase nor other factors leading to an other-than-temporary impairment. Therefore, the Company believes these losses to be temporary. As of December 31, 2017, the Company did not have the intent to sell any of the securities that were in an unrealized loss position at that date.
5. | Fair Value of Financial Instruments and Investments: |
