eq-10q_20200930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-38692

 

EQUILLIUM, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

82-1554746

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

 

 

2223 Avenida de la Playa, Suite 105, La Jolla, CA

92037

(Address of principal executive offices)

(Zip Code)

 

Registrant's telephone number, including area code: (858) 412-5302

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol

 

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

 

EQ

 

The Nasdaq Global Market

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and ‘‘emerging growth company’’ in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company filer

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

 

As of November 6, 2020, the registrant had 24,727,544 shares of common stock, par value $0.0001 per share, outstanding.

 

 

 


EQUILLIUM, INC.

TABLE OF CONTENTS

 

 

 

 

 

Page No.

PART I

 

FINANCIAL INFORMATION

 

1

ITEM 1.

 

FINANCIAL STATEMENTS

 

1

 

 

Condensed Consolidated Balance Sheets

 

1

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss

 

2

 

 

Condensed Consolidated Statements of Stockholders' Equity

 

3

 

 

Condensed Consolidated Statements of Cash Flows

 

4

 

 

Notes to Condensed Consolidated Financial Statements

 

5

ITEM 2.

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

15

ITEM 3.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

24

ITEM 4.

 

CONTROLS AND PROCEDURES

 

24

PART II

 

OTHER INFORMATION

 

25

ITEM 1.

 

LEGAL PROCEEDINGS

 

25

ITEM 1A.

 

RISK FACTORS

 

25

ITEM 2.

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

75

ITEM 6.

 

EXHIBITS

 

76

SIGNATURES

 

77

 

 

 


PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Equillium, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share and par value data)

 

 

 

September 30,

 

 

December 31,

 

 

 

2020

 

 

2019

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

49,249

 

 

$

13,219

 

Short-term investments

 

 

41,288

 

 

 

39,924

 

Prepaid expenses and other current assets

 

 

1,623

 

 

 

2,288

 

Total current assets

 

 

92,160

 

 

 

55,431

 

Property and equipment, net

 

 

225

 

 

 

93

 

Other assets

 

 

-

 

 

 

15

 

Total assets

 

$

92,385

 

 

$

55,539

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,681

 

 

$

1,873

 

Accrued expenses

 

 

2,631

 

 

 

2,010

 

Current portion of long-term notes payable

 

 

833

 

 

 

-

 

Total current liabilities

 

 

5,145

 

 

 

3,883

 

Long-term notes payable

 

 

9,043

 

 

 

9,681

 

Other non-current liabilities

 

 

71

 

 

 

127

 

Total liabilities

 

 

14,259

 

 

 

13,691

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock, $0.0001 par value; 200,000,000 shares authorized;

   24,724,544 and 17,425,654 shares issued and outstanding as of

   September 30, 2020 and December 31, 2019, respectively

 

 

2

 

 

 

1

 

Additional paid-in capital

 

 

140,161

 

 

 

82,938

 

Accumulated other comprehensive (loss) income

 

 

(30

)

 

 

21

 

Accumulated deficit

 

 

(62,007

)

 

 

(41,112

)

Total stockholders' equity

 

 

78,126

 

 

 

41,848

 

Total liabilities and stockholders' equity

 

$

92,385

 

 

$

55,539

 

 

See accompanying notes.

1


Equillium, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except share and per share data)

(Unaudited)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

4,218

 

 

$

4,182

 

 

$

12,817

 

 

$

12,191

 

General and administrative

 

 

2,298

 

 

 

2,142

 

 

 

7,761

 

 

 

6,920

 

Total operating expenses

 

 

6,516

 

 

 

6,324

 

 

 

20,578

 

 

 

19,111

 

Loss from operations

 

 

(6,516

)

 

 

(6,324

)

 

 

(20,578

)

 

 

(19,111

)

Other (expense) income, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(276

)

 

 

(2

)

 

 

(823

)

 

 

(2

)

Interest income

 

 

81

 

 

 

324

 

 

 

423

 

 

 

1,097

 

Other income (expense), net

 

 

114

 

 

 

(12

)

 

 

83

 

 

 

(17

)

Total other (expense) income, net

 

 

(81

)

 

 

310

 

 

 

(317

)

 

 

1,078

 

Net loss

 

$

(6,597

)

 

$

(6,014

)

 

$

(20,895

)

 

$

(18,033

)

Other comprehensive (loss) income, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized (loss) gain on available-for-sale securities, net

 

 

(71

)

 

 

(14

)

 

 

(2

)

 

 

69

 

Foreign currency translation (loss) gain

 

 

(56

)

 

 

7

 

 

 

(48

)

 

 

6

 

Total other comprehensive (loss) income, net

 

 

(127

)

 

 

(7

)

 

 

(50

)

 

 

75

 

Comprehensive loss

 

$

(6,724

)

 

$

(6,021

)

 

$

(20,945

)

 

$

(17,958

)

Net loss per share, basic and diluted

 

$

(0.31

)

 

$

(0.35

)

 

$

(1.11

)

 

$

(1.04

)

Weighted-average common shares outstanding,

   basic and diluted

 

 

21,374,240

 

 

 

17,376,236

 

 

 

18,885,623

 

 

 

17,376,236

 

 

See accompanying notes.

2


Equillium, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(In thousands, except share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Accumulated

Other

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-in

 

 

Comprehensive

 

 

Accumulated

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2018

 

 

17,376,236

 

 

$

1

 

 

$

80,441

 

 

$

5

 

 

$

(15,512

)

 

$

64,935

 

Vesting of restricted stock liability

 

 

-

 

 

 

-

 

 

 

19

 

 

 

-

 

 

 

-

 

 

 

19

 

Stock-based compensation expense

 

 

-

 

 

 

-

 

 

 

446

 

 

 

-

 

 

 

-

 

 

 

446

 

Other comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

44

 

 

 

-

 

 

 

44

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(5,950

)

 

 

(5,950

)

Balance at March 31, 2019

 

 

17,376,236

 

 

$

1

 

 

$

80,906

 

 

$

49

 

 

$

(21,462

)

 

$

59,494

 

Vesting of restricted stock liability

 

 

-

 

 

 

-

 

 

 

19

 

 

 

-

 

 

 

-

 

 

 

19

 

Stock-based compensation expense

 

 

-

 

 

 

-

 

 

 

581

 

 

 

-

 

 

 

-

 

 

 

581

 

Other comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

38

 

 

 

-

 

 

 

38

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(6,069

)

 

 

(6,069

)

Balance at June 30, 2019

 

 

17,376,236

 

 

$

1

 

 

$

81,506

 

 

$

87

 

 

$

(27,531

)

 

$

54,063

 

Vesting of restricted stock liability

 

 

-

 

 

 

-

 

 

 

18

 

 

 

-

 

 

 

-

 

 

 

18

 

Stock-based compensation expense

 

 

-

 

 

 

-

 

 

 

633

 

 

 

-

 

 

 

-

 

 

 

633

 

Issuance of common stock warrants

 

 

-

 

 

 

-

 

 

 

266

 

 

 

-

 

 

 

 

 

 

 

266

 

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(7

)

 

 

-

 

 

 

(7

)

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(6,014

)

 

 

(6,014

)

Balance at September 30, 2019

 

 

17,376,236

 

 

$

1

 

 

$

82,423

 

 

$

80

 

 

$

(33,545

)

 

$

48,959

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Accumulated

Other

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-in

 

 

Comprehensive

 

 

Accumulated

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income (Loss)

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2019

 

 

17,425,654

 

 

$

1

 

 

$

82,938

 

 

$

21

 

 

$

(41,112

)

 

$

41,848

 

Issuance of common stock under ATM facility,

net of issuance costs

 

 

174,649

 

 

 

-

 

 

 

825

 

 

 

-

 

 

 

-

 

 

 

825

 

Issuance of common stock

 

 

83,662

 

 

 

-

 

 

 

252

 

 

 

-

 

 

 

-

 

 

 

252

 

Vesting of restricted stock liability

 

 

-

 

 

 

-

 

 

 

18

 

 

 

-

 

 

 

-

 

 

 

18

 

Stock-based compensation expense

 

 

-

 

 

 

-

 

 

 

787

 

 

 

-

 

 

 

-

 

 

 

787

 

Other comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

453

 

 

 

-

 

 

 

453

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(7,837

)

 

 

(7,837

)

Balance at March 31, 2020

 

 

17,683,965

 

 

$

1

 

 

$

84,820

 

 

$

474

 

 

$

(48,949

)

 

$

36,346

 

Issuance of common stock pursuant to employee

stock purchase plan

 

 

39,885

 

 

 

-

 

 

 

96

 

 

 

-

 

 

 

-

 

 

 

96

 

Vesting of restricted stock liability

 

 

-

 

 

 

-

 

 

 

18

 

 

 

-

 

 

 

-

 

 

 

18

 

Stock-based compensation expense

 

 

-

 

 

 

-

 

 

 

1,350

 

 

 

-

 

 

 

-

 

 

 

1,350

 

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(377

)

 

 

-

 

 

 

(377

)

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(6,461

)

 

 

(6,461

)

Balance at June 30, 2020

 

 

17,723,850

 

 

$

1

 

 

$

86,284

 

 

$

97

 

 

$

(55,410

)

 

$

30,972

 

Issuance of common stock, net of issuance costs

 

 

5,461,169

 

 

 

1

 

 

 

35,722

 

 

 

-

 

 

 

-

 

 

 

35,723

 

Issuance of common stock under ATM, net of issuance costs

 

 

1,539,525

 

 

 

-

 

 

 

17,290

 

 

 

-

 

 

 

-

 

 

 

17,290

 

Vesting of restricted stock liability

 

 

-

 

 

 

-

 

 

 

18

 

 

 

-

 

 

 

-

 

 

 

18

 

Stock-based compensation expense

 

 

-

 

 

 

-

 

 

 

847

 

 

 

-

 

 

 

-

 

 

 

847

 

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(127

)

 

 

-

 

 

 

(127

)

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(6,597

)

 

 

(6,597

)

Balance at September 30, 2020

 

 

24,724,544

 

 

$

2

 

 

$

140,161

 

 

$

(30

)

 

$

(62,007

)

 

$

78,126

 

 

See accompanying notes.

3


Equillium, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended

September 30,

 

 

 

2020

 

 

2019

 

Operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(20,895

)

 

$

(18,033

)

Adjustments to reconcile net loss to cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

28

 

 

 

17

 

Stock-based compensation

 

 

2,984

 

 

 

1,660

 

Net unrealized (gain) loss on foreign currency transactions

 

 

(85

)

 

 

19

 

Non-cash consulting expense

 

 

81

 

 

 

-

 

Amortization of term loan discount and issuance costs

 

 

195

 

 

 

-

 

Realized gain on investments

 

 

(13

)

 

 

-

 

Amortization/accretion of investments, net

 

 

30

 

 

 

(327

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

862

 

 

 

495

 

Accounts payable

 

 

(229

)

 

 

1,559

 

Accrued expenses

 

 

671

 

 

 

694

 

Net cash used in operating activities

 

 

(16,371

)

 

 

(13,916

)

Investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(172

)

 

 

(56

)

Purchases of short-term investments

 

 

(30,314

)

 

 

(36,095

)

Maturities of short-term investments

 

 

28,930

 

 

 

39,315

 

Net cash (used in) provided by investing activities

 

 

(1,556

)

 

 

3,164

 

Financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock, net of issuance costs

 

 

35,758

 

 

 

-

 

Proceeds from issuance of common stock under ATM facility, net of issuance costs

 

 

18,080

 

 

 

-

 

Proceeds from issuance of notes payable, net of issuance costs

 

 

-

 

 

 

9,941

 

Proceeds from ESPP purchase

 

 

96

 

 

 

-

 

Net cash provided by financing activities

 

 

53,934

 

 

 

9,941

 

Effect of exchange rate changes on cash and cash equivalents

 

 

23

 

 

 

(40

)

Net increase (decrease) in cash and cash equivalents

 

 

36,030

 

 

 

(851

)

Cash and cash equivalents at beginning of period

 

 

13,219

 

 

 

28,508

 

Cash and cash equivalents at end of period

 

$

49,249

 

 

$

27,657

 

Supplemental disclosures of non-cash activities:

 

 

 

 

 

 

 

 

Issuance of commitment shares to Lincoln Park pursuant to agreement

 

$

171

 

 

$

-

 

Equity issuance costs in accounts payable

 

$

50

 

 

$

-

 

Fair value of common stock warrants in connection with issuance of notes payable

 

$

-

 

 

$

266

 

Notes payable issuance costs in accounts payable

 

$

-

 

 

$

58

 

 

See accompanying notes.

 

4


Notes to Condensed Consolidated Financial Statements

1. Organization and Accounting Pronouncements

Description of Business

Equillium, Inc. (the Company) was incorporated in the state of Delaware on March 16, 2017. The Company is a clinical-stage biotechnology company leveraging deep understanding of immunology to develop novel products to treat severe autoimmune and inflammatory disorders with high unmet medical need.

From inception through September 30, 2020, the Company has devoted substantially all of its efforts to organizing and staffing the Company, business planning, raising capital, in-licensing rights to itolizumab (EQ001), conducting preclinical research, filing three initial Investigational New Drug applications (INDs), commencing clinical development of the Company’s initial product candidate, itolizumab (EQ001), conducting business development activities, and the general and administrative activities associated with operating as a public company. In addition, the Company has a limited operating history, has not generated revenues from its principal operations, and the sales and income potential of its business is unproven.

Liquidity and Business Risks

As of September 30, 2020, the Company had $90.5 million in cash, cash equivalents and short-term investments. The Company has incurred significant operating losses and negative cash flows from operations. The Company expects to use its cash, cash equivalents and short-term investments to fund research and development of itolizumab (EQ001) and for working capital and other general corporate purposes. The Company does not expect to generate any revenues from product sales unless and until the Company successfully completes development and obtains regulatory approval of itolizumab (EQ001) or any future product candidate, which is unlikely to happen within the next 12 months, if ever. Accordingly, until such time as the Company can generate significant revenue from sales of its product candidates, if ever, the Company expects to finance its cash needs through a combination of equity offerings, debt financings, and collaboration and license agreements. However, the Company may not be able to secure additional financing or enter into such other arrangements in a timely manner or on favorable terms, if at all. As a result of the COVID-19 pandemic and actions taken to slow its spread, the global credit and financial markets have experienced extreme volatility, including diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability. There can be no assurance that further deterioration in credit and financial markets and confidence in economic conditions will not occur. If equity and credit markets deteriorate, it may make any necessary debt or equity financing more difficult to obtain, more costly and/or more dilutive. The Company’s failure to raise capital or enter into such other arrangements when needed would have a negative impact on the Company’s financial condition and could force the Company to delay, reduce or terminate its research and development programs or other operations, or grant rights to develop and market product candidates that the Company would otherwise prefer to develop and market itself. Management believes that the Company’s cash, cash equivalents and short-term investments as of September 30, 2020 will be sufficient to fund operations for at least the next 12 months from the date this Quarterly Report on Form 10-Q is filed with the Securities and Exchange Commission (SEC).

In March 2020, as a result of impacts and risks associated with the COVID-19 pandemic, the Company decided to pause enrollment in its Phase 1b clinical trials of itolizumab (EQ001) in uncontrolled asthma and lupus nephritis. This decision was not based on any observed safety issues associated with itolizumab (EQ001) but rather out of an abundance of caution related to the COVID-19 pandemic and the Company’s concern for the well-being of patients and their caregivers. In July 2020, the Company announced that patient enrollment in both of those trials had resumed. The Company did not pause enrollment of patients in the Phase 1b/2 clinical trial of itolizumab (EQ001) for the treatment of acute graft-versus-host disease (aGVHD) given the acute life-threatening severity of the disease, as the Company believes itolizumab (EQ001) represents a potentially life-saving treatment for these severely ill patients. However, there remains a risk that enrollment of that trial, as well as enrollment in the Company’s recently announced trial to evaluate itolizumab in hospitalized COVID-19 patients suffering from acute respiratory distress syndrome and the recently resumed Phase 1b trials in uncontrolled asthma and lupus nephritis, in addition to the timing of topline data from all four of those trials may also be adversely impacted by the COVID-19 pandemic.

The COVID-19 outbreak in the United States and the rest of the world has caused disruptions to the Company’s business, which may delay results of the Company’s clinical trials and adversely impact the Company’s business. The Company cannot predict how legal and regulatory responses to concerns about COVID-19 or other major public health issues will impact the Company’s business, nor can it predict potential adverse impacts related to the availability of capital to fund the Company’s operations. Additionally, the Company’s workforce and outside consultants may also be affected, which could result in an

5


adverse impact on the Company’s ability to conduct business. Any of these factors, alone or in combination with others, could harm the Company’s business, results of operations, financial condition or liquidity. However, the magnitude, timing, and duration of any such potential financial impacts cannot be reasonably estimated at this time.

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) and the rules and regulations of the SEC related to a quarterly report on Form 10-Q. Any reference in these notes to applicable guidance is meant to refer to GAAP as found in the Accounting Standards Codification (ASC) and Accounting Standards Updates (ASU) promulgated by the Financial Accounting Standards Board (FASB). Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations. The condensed consolidated financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results for the periods presented. All such adjustments are of a normal and recurring nature. The operating results presented in these condensed consolidated financial statements are not necessarily indicative of the results that may be expected for any future periods. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto for the year ended December 31, 2019 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 26, 2020.

Principles of Consolidation

In January 2019, the Company created a new wholly-owned subsidiary in Australia with the Company serving as the sole shareholder through the subscription of shares. The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All intercompany transactions and balances have been eliminated in consolidation.

Foreign Currency Translation

The Company’s wholly-owned subsidiary in Australia uses their local currency to be their functional currency. Assets and liabilities are translated into U.S. dollars at quarter-end exchange rates and revenues and expenses are translated at average exchange rates during the quarter and year-to-date periods. Foreign currency translation adjustments for the reported periods are included in accumulated other comprehensive income in the Company’s condensed consolidated statements of comprehensive loss, and the cumulative effect is included in the stockholders’ equity section of the Company’s condensed consolidated balance sheets. Realized and unrealized gains and losses denominated in foreign currencies are recorded in operating expenses in the Company’s condensed consolidated statements of operations. For both the three and nine months ended September 30, 2020, net realized and unrealized gains totaled $0.1 million. For the three and nine months ended September 30, 2019, net realized and unrealized losses totaled $12,000 and $17,000, respectively.

Recently Issued Accounting Pronouncements

 

In February 2015, the FASB issued ASU 2016-02, Leases (Topic 842), which amends the FASB ASC 840 and creates Topic 842, Leases. The new topic supersedes Topic 840, Leases, and increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requires disclosures of key information about leasing arrangements. For companies that are not emerging growth companies (EGCs), ASU 2016-02 is effective for fiscal years beginning after December 15, 2018. For EGCs, the ASU was to be effective for fiscal years beginning after December 15, 2019. However, in November 2019, the FASB issued ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815) and Leases (Topic 842), Effective Dates (ASU 2019-10), which included a one-year deferral of the effective date of ASU 2016-02 for certain entities. As a result, the ASU is now effective for EGCs for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. The Company expects to adopt the new standard in the fourth quarter of 2021 using the modified retrospective method, under which the Company will apply Topic 842 to existing and new leases as of January 1, 2021, but prior periods will not be restated and will continue to be reported under Topic 840 guidance in effect during those periods. The Company anticipates that the adoption will not have a material impact on its condensed consolidated statements of operations and condensed consolidated comprehensive loss or its condensed consolidated statements of cash flows but expects to recognize right-of-use assets and liabilities for lease obligations associated with its operating leases.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which is designed to improve the effectiveness of disclosures by removing, modifying and adding disclosures related to fair value measurements. ASU 2018-13 was effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption was permitted.

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The Company adopted this ASU on January 1, 2020. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements.

 

2. Summary of Significant Accounting Policies

Use of Estimates

The preparation of the Company’s condensed consolidated financial statements requires the Company to make estimates and assumptions that impact the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities in the condensed consolidated financial statements and accompanying notes. Significant estimates in the Company’s condensed consolidated financial statements relate to clinical trial accruals and the valuation of equity awards. Management evaluates its estimates on an ongoing basis. Although estimates are based on the Company’s historical experience, knowledge of current events, and actions it may undertake in the future, actual results may ultimately materially differ from these estimates and assumptions.

Accrued Research and Development Expense

The Company is required to estimate its expenses resulting from its obligations under contracts with vendors, consultants and contract research organizations, in connection with conducting research and development activities. The financial terms of these contracts are subject to negotiations, which vary from contract to contract and may result in payment flows that do not match the periods over which materials or services are provided under such contracts. The Company reflects research and development expenses in its condensed consolidated financial statements by matching those expenses with the period in which services and efforts are expended. The Company accounts for these expenses according to the progress of the preclinical or clinical study as measured by the timing of various aspects of the study or related activities. The Company determines accrual estimates through review of the underlying contracts along with preparation of financial models taking into account discussions with research and development personnel and other key personnel as well as considering input from representatives of our contract service providers as to the progress of studies, or other services being conducted. During the course of a study, the Company adjusts its rate of expense recognition if actual results differ from its estimates. The Company classifies its estimates for accrued research and development expenses as accrued expenses on the accompanying condensed consolidated balance sheet.

Australian Research and Development Tax Incentive

The Company is eligible under the Australian Research and Development Tax Incentive Program, or the Tax Incentive, to obtain a cash refund from the Australian Taxation Office for eligible research and development expenditures. However, the Company must have revenue of less than AUD $20.0 million during the reimbursable period and cannot be controlled by income tax exempt entities. The Tax Incentive is recognized as a reduction to research and development expense when there is a reasonable assurance that the Tax Incentive will be received, the relevant expenditure has been incurred, and the amount can be reliably measured.

Stock-Based Compensation

The Company measures employee and non-employee stock-based awards, including stock options and stock purchase rights, at grant-date fair value and records compensation expense on a straight-line basis over the vesting period of the award. The Company uses the Black-Scholes option pricing model to value its stock option awards. Estimating the fair value of stock option awards requires management to apply judgment and make estimates of certain assumptions, including the volatility of the Company’s common stock, the expected term of the Company’s stock options, the expected dividend yield and the fair value of the Company’s common stock on the measurement date. As a result, if factors change and management uses different assumptions, stock-based compensation expense could be materially different for future awards.

Net Loss per Share

Basic net loss per share is calculated by dividing the net loss by the weighted-average number of common shares outstanding for the period. Diluted net loss per share is computed by dividing the net loss by the weighted average number of common shares and common share equivalents outstanding for the period. Common stock equivalents are only included when their effect is dilutive. The Company’s potentially dilutive securities include outstanding options under the Company’s equity incentive plan and outstanding warrants to purchase common stock, each of which have been excluded from the computation of diluted net loss per share as they would be anti-dilutive to the net loss per share. For all periods presented, there is no difference in the number of shares used to calculate basic and diluted shares outstanding due to the Company’s net loss position.

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Potentially dilutive securities not included in the calculation of diluted net loss per share attributable to common stockholders because to do so would be anti-dilutive are as follows (in common stock equivalent shares):

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Common stock options

 

 

2,474,461

 

 

 

1,203,483

 

 

 

2,474,461

 

 

 

1,203,483

 

Common stock warrants

 

 

80,428

 

 

 

80,428

 

 

 

80,428

 

 

 

80,428

 

Total

 

 

2,554,889

 

 

 

1,283,911

 

 

 

2,554,889

 

 

 

1,283,911

 

 

3. Fair Value of Financial Instruments

The following tables summarize the Company’s assets that require fair value measurements on a recurring basis and their respective input levels based on the fair value hierarchy (in thousands):

 

 

 

 

 

 

 

Fair Value Measurements Using

 

 

 

 

 

 

 

Quoted Prices in

 

 

Significant

 

 

Significant

 

 

 

 

 

 

 

Active Markets

 

 

Other

 

 

Unobservable

 

 

 

September 30,

 

 

for Identical

 

 

Observable

 

 

Inputs

 

 

 

2020

 

 

Assets (Level 1)

 

 

Inputs (Level 2)

 

 

(Level 3)

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury securities

 

$

37,119

 

 

$

37,119

 

 

$

-

 

 

$

-

 

Certificates of deposit

 

 

4,169

 

 

 

4,169

 

 

 

-

 

 

 

-

 

Total

 

$

41,288

 

 

$

41,288

 

 

$

-

 

 

$

-

 

 

 

 

 

 

 

 

Fair Value Measurements Using

 

 

 

 

 

 

 

Quoted Prices in

 

 

Significant

 

 

Significant

 

 

 

 

 

 

 

Active Markets

 

 

Other

 

 

Unobservable

 

 

 

December 31,

 

 

for Identical

 

 

Observable

 

 

Inputs

 

 

 

2019

 

 

Assets (Level 1)

 

 

Inputs (Level 2)

 

 

(Level 3)

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury securities

 

$

28,549

 

 

$

28,549

 

 

$

-

 

 

$

-

 

Agency securities

 

 

5,994

 

 

 

-

 

 

 

5,994

 

 

 

-

 

Certificates of deposit

 

 

5,381

 

 

 

5,381

 

 

 

-

 

 

 

-

 

Total

 

$

39,924

 

 

$

33,930

 

 

$

5,994

 

 

$

-

 

 

U.S. treasury securities and certificates of deposit are valued using Level 1 inputs. Level 1 securities are valued at unadjusted quoted prices in active markets that are observable at the measurement date for identical, unrestricted assets or liabilities. Fair values determined by Level 2 inputs, which utilize data points that are observable such as quoted prices, interest rates and yield curves, require the exercise of judgment and use of estimates, that if changed, could significantly affect the Company’s financial position and results of operations. Investments in agency securities are valued using Level 2 inputs. Level 2 securities are initially valued at the transaction price and subsequently valued and reported utilizing inputs other than quoted prices that are observable either directly or indirectly, such as quotes from third-party pricing vendors.

The carrying amounts of the Company’s financial instruments, including cash, prepaid and other current assets, accounts payable, and accrued liabilities, approximate fair value due to their short maturities. The carrying amount of the Company’s notes payable of $9.9 million at September 30, 2020 approximated their fair value as the terms of the notes are consistent with the market terms of transactions with similar profiles (Level 2 inputs). None of the Company’s non-financial assets or liabilities are recorded at fair value on a non-recurring basis.

At September 30, 2020 and December 31, 2019, the Company had investments in money market funds of $19.3 million and $10.3 million, respectively, that were measured at fair value using the net asset value per share (or its equivalent) that have not been classified in the fair value hierarchy. The funds invest primarily in U.S. government securities. 

 

The Company did not hold any Level 1, 2 or 3 financial liabilities that are recorded at fair value on a recurring basis as of September 30, 2020 or December 31, 2019.

 

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4. Certain Financial Statement Caption Information

Short-Term Investments

The following table summarizes the Company’s short-term investments (in thousands):

 

 

 

Maturity

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Estimated

 

 

 

(in years)

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

September 30, 2020