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Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2020

OR

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

For transition period from                      to                     .

Commission File Number: 001-31918

Graphic

IDERA PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

Delaware

    

04-3072298

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

505 Eagleview Blvd., Suite 212

Exton, Pennsylvania

(Address of principal executive offices)

19341

(Zip code)

(484) 348-1600

(Registrant’s telephone number, including area code)

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.001 per share

IDRA

Nasdaq Capital 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, a 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

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  

Common Stock, par value $.001 per share

    

35,199,246

Class

Outstanding as of July 31, 2020

Table of Contents

IDERA PHARMACEUTICALS, INC.

FORM 10-Q

TABLE OF CONTENTS

    

Page

PART I — FINANCIAL INFORMATION

Item 1.

Financial Statements

1

Condensed Balance Sheets as of June 30, 2020 and December 31, 2019

1

Condensed Statements of Operations and Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2020 and 2019

2

Condensed Statements of Cash Flows for the Six Months Ended June 30, 2020 and 2019

3

Condensed Statements of Redeemable Preferred Stock and Stockholders’ Equity (Deficit) for the Three and Six Months Ended June 30, 2020 and 2019

4

Notes to Condensed Financial Statements

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

35

Item 4.

Controls and Procedures

35

PART II — OTHER INFORMATION

Item 1A.

Risk Factors

36

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

36

Item 6.

Exhibits

37

Signatures

38

Unless the context otherwise indicates, references in this Quarterly Report on Form 10-Q to “Idera,” the “Company,” “we,” “us,” and “our” refer to Idera Pharmaceuticals, Inc.

IMO® and Idera® are our trademarks. All other trademarks and service marks appearing in this Quarterly Report on Form 10-Q are the property of their respective owners.

i

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NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (“Form 10-Q”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical fact, included or incorporated in this report regarding our strategy, future operations, clinical trials, collaborations, intellectual property, cash resources, financial position, future revenues, projected costs, prospects, plans, and objectives of management are forward-looking statements. The words “believes,” “anticipates,” “estimates,” “plans,” “expects,” “intends,” “may,” “could,” “should,” “potential,” “likely,” “projects,” “continue,” “will,” “schedule,” “would,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We cannot guarantee that we actually will achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties, and other factors, which may be beyond Idera’s control, and which may cause the actual results, performance, or achievements of the Company to be materially different from future results, performance, or achievements expressed or implied by such forward-looking statements.

There are a number of important factors that could cause our actual results to differ materially from those indicated or implied by forward-looking statements. These important factors include those set forth under Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, which was filed with the Securities and Exchange Commission (“SEC”) on March 12, 2020 (the “2019 Form 10-K”), and in our other disclosures and filings with the SEC. These factors and the other cautionary statements made in this Quarterly Report on Form 10-Q should be read as being applicable to all related forward-looking statements whenever they appear in this Quarterly Report on Form 10-Q.

In addition, any forward-looking statements represent our estimates only as of the date that this Quarterly Report on Form 10-Q is filed with the SEC and should not be relied upon as representing our estimates as of any subsequent date. All forward-looking statements included in this Quarterly Report on Form 10-Q are made as of the date hereof, and are expressly qualified in their entirety by this cautionary notice. We do not assume any obligation to update any forward-looking statements. We disclaim any intention or obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as may be required by law.

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PART I — FINANCIAL INFORMATION

Item 1.

Financial Statements.

IDERA PHARMACEUTICALS, INC.

CONDENSED BALANCE SHEETS

(UNAUDITED)

    

June 30, 

    

December 31, 

(In thousands)

2020

2019*

ASSETS

Current assets:

Cash and cash equivalents

$

27,810

$

40,019

Short-term investments

 

3,196

 

2,774

Prepaid expenses and other current assets

 

2,681

 

3,475

Total current assets

 

33,687

 

46,268

Property and equipment, net

 

63

 

97

Operating lease right-of-use asset

965

1,054

Other assets

 

70

 

70

Total assets

$

34,785

$

47,489

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

Current liabilities:

Accounts payable

$

345

$

457

Accrued expenses

 

7,023

 

7,461

Operating lease liability

166

163

Future tranche right liability

 

 

46,436

Total current liabilities

 

7,534

 

54,517

Warrant liability, long-term

3,053

3,241

Future tranche right liability, long-term

41,074

Operating lease liability, net of current portion

815

899

Total liabilities

 

52,476

 

58,657

Commitments and contingencies

Preferred stock, $0.01 par value, Authorized — 5,000 shares:

Series B1 redeemable convertible preferred stock (Note 7); Designated — 278 shares, Issued and outstanding — 24 shares at June 30, 2020 and December 31, 2019

Stockholders’ equity (deficit)

Preferred stock, $0.01 par value, Authorized — 5,000 shares:

Series A convertible preferred stock; Designated — 1,500 shares, Issued and outstanding — 1 share

 

 

Common stock, $0.001 par value, Authorized — 140,000 shares; Issued and outstanding — 34,291 and 29,672 at June 30, 2020 and December 31, 2019, respectively

 

34

 

30

Additional paid-in capital

 

718,574

 

709,692

Accumulated deficit

 

(736,299)

 

(720,890)

Total stockholders’ deficit

 

(17,691)

 

(11,168)

Total liabilities and stockholders’ deficit

$

34,785

$

47,489

*

The condensed balance sheet at December 31, 2019 has been derived from the audited financial statements at that date.

The accompanying notes are an integral part of these financial statements.

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IDERA PHARMACEUTICALS, INC.

CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(UNAUDITED)

Three Months Ended

Six Months Ended

June 30, 

June 30, 

(In thousands, except per share amounts)

    

2020

    

2019

    

2020

    

2019

Alliance revenue

$

$

1,448

$

$

1,448

Operating expenses:

Research and development

 

5,379

 

10,024

$

14,889

$

18,126

General and administrative

 

2,632

 

2,895

 

6,274

 

6,038

Restructuring costs

45

176

Total operating expenses

 

8,011

 

12,964

 

21,163

 

24,340

Loss from operations

 

(8,011)

 

(11,516)

 

(21,163)

 

(22,892)

Other income (expense):

Interest income

 

27

 

339

 

152

 

743

Warrant revaluation (loss) gain

(913)

188

Future tranche right revaluation (loss) gain

(15,349)

5,362

Foreign currency exchange gain (loss)

 

20

 

1

 

52

 

(1)

Net loss

$

(24,226)

$

(11,176)

$

(15,409)

$

(22,150)

Net loss per share applicable to common stockholders (Note 12)

— Basic

$

(0.72)

$

(0.39)

$

(0.48)

$

(0.79)

— Diluted

$

(0.72)

$

(0.39)

$

(0.52)

$

(0.79)

Weighted-average number of common shares used in computing net loss per share applicable to common stockholders

 

— Basic

33,583

28,461

 

31,941

 

28,070

— Diluted

33,583

28,461

 

34,123

 

28,070

Comprehensive loss:

Net loss

$

(24,226)

$

(11,176)

$

(15,409)

$

(22,150)

Other comprehensive income (loss):

Unrealized gain on available-for-sale securities

 

 

 

 

2

Total other comprehensive income

 

2

Comprehensive loss

$

(24,226)

$

(11,176)

$

(15,409)

$

(22,148)

The accompanying notes are an integral part of these financial statements.

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IDERA PHARMACEUTICALS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED)

Six Months Ended

June 30, 

(In thousands)

    

2020

    

2019

Cash Flows from Operating Activities:

Net loss

$

(15,409)

$

(22,150)

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

Stock-based compensation

 

1,504

 

1,905

Warrant liability revaluation gain

(188)

Future tranche right liability revaluation gain

(5,362)

Issuance of common stock for services rendered

98

 

59

Accretion of discounts on short-term investments

(36)

 

(353)

Unrealized gain on available-for-sale securities

 

2

Depreciation and amortization expense

 

41

 

67

Gain on disposal of property and equipment

(11)

Changes in operating assets and liabilities:

 

Prepaid expenses and other assets

819

 

(423)

Accounts payable, accrued expenses, and other liabilities

(575)

 

(2,426)

Other

8

Net cash used in operating activities

 

(19,100)

 

(23,330)

Cash Flows from Investing Activities:

Purchases of available-for-sale securities

 

(5,535)

 

(35,486)

Proceeds from maturity of available-for-sale securities

 

5,149

 

23,350

Proceeds from the sale of property and equipment

11

Purchases of property and equipment

 

(7)

 

(11)

Net cash used in investing activities

 

(393)

 

(12,136)

Cash Flows from Financing Activities:

Proceeds from common stock financings, net

 

7,230

3,857

Proceeds from employee stock purchases

 

54

 

68

Other

 

 

(6)

Net cash provided by financing activities

 

7,284

 

3,919

Net decrease in cash and cash equivalents

 

(12,209)

 

(31,547)

Cash and cash equivalent, beginning of period

 

40,019

 

71,431

Cash and cash equivalents, end of period

$

27,810

$

39,884

Supplemental disclosure of cash flow information:

Increase to right-of-use asset upon adoption of ASC 842

$

$

261

Increase to lease liability upon adoption of ASC 842

$

$

261

Supplemental disclosure of non-cash financing and investing activities:

Capitalized offering costs in accounts payable and accrued expenses

$

25

$

The accompanying notes are an integral part of these financial statements.

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IDERA PHARMACEUTICALS, INC.

CONDENSED STATEMENTS OF REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

(UNAUDITED)

For the Six Months Ended June 30, 2019

Accumulated

Series B1 Preferred

Common Stock

Additional

Other

Total

Number of

$0.01 Par

Number of

$0.001 Par

Paid-In

Accumulated

Comprehensive

Stockholders’

(In thousands)

Shares

 

Value

 

Shares

 

Value

 

Capital

 

Deficit

 

Income

 

Equity

Balance, December 31, 2018

 

$

27,188

$

27

$

728,342

$

(664,375)

$

$

63,994

Sale of common stock, net of issuance costs

 

 

533

 

1

 

1,584

 

 

 

1,585

Issuance of commitment shares (Note 8)

270

 

 

 

 

 

Issuance of common stock under employee stock purchase plan

 

 

11

 

 

26

 

 

 

26

Issuance of common stock for services rendered

 

 

6

 

 

23

 

 

 

23

Stock-based compensation

 

 

 

 

1,016

 

 

 

1,016

Unrealized gain on marketable securities

 

 

 

 

 

 

2

 

2

Net loss

 

 

 

 

(10,974)

 

 

(10,974)

Balance, March 31, 2019

$

28,008

$

28

$

730,991

$

(675,349)

$

2

$

55,672

Sale of common stock, net of issuance costs

 

786

1

2,271

2,272

Issuance of common stock under employee stock purchase plan

 

19

42

42

Issuance of common stock for services rendered

14

36

36

Stock-based compensation

889

889

Net loss

(11,176)

(11,176)

Balance, June 30, 2019

$

28,827

$

29

$

734,229

$

(686,525)

$

2

$

47,735

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IDERA PHARMACEUTICALS, INC.

CONDENSED STATEMENTS OF REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) (CONTINUED)

(UNAUDITED)

For the Six Months Ended June 30, 2020

Accumulated

Series B1 Preferred

Common Stock

Additional

Other

Total

Number of

$0.01 Par

Number of

$0.001 Par

Paid-In

Accumulated

Comprehensive

Stockholders’

(In thousands)

 

Shares

 

Value

Shares

 

Value

 

Capital

 

Deficit

 

Income

 

Deficit

Balance, December 31, 2019

 

24

$

29,672

$

30

$

709,692

$

(720,890)

$

$

(11,168)

Sale of common stock, net of issuance costs

 

 

854

1

1,405

1,406

Issuance of common stock under employee stock purchase plan

 

 

19

25

25

Issuance of common stock under equity incentive plan (vesting of restricted stock units)

48

Issuance of common stock for services rendered

 

 

14

26

26

Stock-based compensation

 

 

750

750

Net income

 

8,817

8,817

Balance, March 31, 2020

 

24

$

30,607

$

31

$

711,898

$

(712,073)

$

$

(144)

Sale of common stock, net of issuance costs

 

3,607

3

5,821

5,824

Issuance of common stock under employee stock purchase plan

 

21

29

29

Issuance of common stock under equity incentive plan (vesting of restricted stock units)

Issuance of common stock for services rendered

 

56

72

72

Stock-based compensation

 

754

754

Net loss

 

(24,226)

(24,226)

Balance, June 30, 2020

 

24

$

34,291

$

34

$

718,574

$

(736,299)

$

$

(17,691)

The accompanying notes are an integral part of these financial statements

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IDERA PHARMACEUTICALS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2020

Note 1. Business and Organization

Business Overview

Idera Pharmaceuticals, Inc. (“Idera” or the “Company”), a Delaware corporation, is a clinical-stage biopharmaceutical company with a business strategy focused on the clinical development, and ultimately the commercialization, of drug candidates for both oncology and rare disease indications characterized by small, well-defined patient populations with serious unmet medical needs. The Company’s current focus is on its Toll-like receptor (“TLR”) agonist, tilsotolimod (IMO-2125), for oncology. The Company believes it can develop and commercialize targeted therapies on its own.  To the extent the Company seeks to develop drug candidates for broader disease indications, it has entered into and may explore additional collaborative alliances to support development and commercialization.

Liquidity and Financial Condition

As of June 30, 2020, the Company had an accumulated deficit of $736.3 million and a cash, cash equivalents, and short-term investments balance of $31.0 million. The Company expects to incur substantial operating losses in future periods and will require additional capital as it seeks to advance tilsotolimod and any future drug candidates through development to commercialization. The Company does not expect to generate product revenue, sales-based milestones or royalties until the Company successfully completes development of and obtains marketing approval for tilsotolimod or other future drug candidates, either alone or in collaboration with third parties, which the Company expects will take a number of years. In order to commercialize tilsotolimod and any future drug candidates, the Company needs to complete clinical development and comply with comprehensive regulatory requirements. The Company is subject to a number of risks and uncertainties similar to those of other companies of the same size within the biotechnology industry, such as uncertainty of clinical trial outcomes, uncertainty of additional funding, and history of operating losses.

The Company follows the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 205-40, Presentation of Financial Statements—Going Concern, which requires management to assess the Company’s ability to continue as a going concern within one year after the date the financial statements are issued. Management currently believes that the Company’s balance of cash, cash equivalents, and short-term investments on hand as of June 30, 2020, plus $5.1 million gross proceeds received in July 2020 pursuant to the July 2020 Securities Purchase Agreement (Note 13), is sufficient to fund operations into the second quarter of 2021. As a result, there is substantial doubt about the Company’s ability to continue as a going concern through the one-year period from the date these financial statements are issued. Management’s plans that are intended to mitigate the risk of going concern include raising additional capital through the Company’s December 2019 Securities Purchase Agreement (Note 7), Common Stock Purchase Agreement (Note 8), “At-The-Market” Equity Program (Note 8), April 2020 Securities Purchase Agreement (Note 8), July 2020 Securities Purchase Agreement (Note 13), or additional financing or strategic transactions.  Management’s plans may also include the possible deferral of certain operating expenses unless additional capital is received. The Company has and will continue to evaluate available alternatives to extend its operations beyond the one-year period after the date the financial statements are issued. Management’s operating plan, which underlies the analysis of the Company’s ability to continue as a going concern, involves the estimation of the amount and timing of future cash inflows and outflows. Actual results could vary from the operating plan.

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Note 2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited financial statements included herein have been prepared by the Company in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the rules and regulations of the SEC. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments, consisting of normal recurring adjustments, and disclosures considered necessary for a fair presentation of interim period results have been included. Interim results for the three and six months ended June 30, 2020 are not necessarily indicative of results that may be expected for the year ending December 31, 2020. For further information, refer to the financial statements and footnotes thereto included in the Company’s 2019 Form 10-K.

Cash and Cash Equivalents

The Company considers all highly liquid investments with maturities of 90 days or less when purchased to be “cash equivalents.” Cash and cash equivalents at June 30, 2020 and December 31, 2019 consisted of cash and money market funds.

Financial Instruments

The fair value of the Company’s financial instruments is determined and disclosed in accordance with the three-tier fair value hierarchy specified in Note 3. The Company is required to disclose the estimated fair values of its financial instruments. As of June 30, 2020 and December 31, 2019, the Company’s financial instruments consisted of cash, cash equivalents, short-term investments, receivables and warrant and future tranche right liabilities. The estimated fair values of these financial instruments approximate their carrying values. As of June 30, 2020, the Company did not have any other derivatives, or any hedging or other similar financial instruments.

Concentration of Credit Risk

Financial instruments that subject the Company to credit risk primarily consist of cash, cash equivalents, and short-term investments. The Company’s credit risk is managed by investing in highly rated money market instruments, corporate bonds, commercial paper and/or other debt securities. Due to these factors, no significant credit risk is believed by management to be inherent in the Company’s assets. As of June 30, 2020, all of the Company’s cash, cash equivalents and short-term investments were held at two financial institutions.

Operating Lease Right-of-use Asset and Lease Liability

The Company accounts for leases under ASC Topic 842, Leases. The Company determines if an arrangement is a lease at inception. Operating leases are included in long-term right-of-use assets and current and long-term lease liabilities within the Company’s condensed balance sheets. Right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rates, which are the rates incurred to borrow on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The right-of-use assets are tested for impairment according to ASC Topic 360, Property, Plant, and Equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet and are recognized as lease expense on a straight-line basis over the lease term. 

As of June 30, 2020 and December 31, 2019, the Company’s operating lease ROU asset and corresponding short-term and long-term lease liabilities relate to its existing Exton, PA facility operating lease which expires on May 31, 2025 as a result of the Company’s election to exercise its five-year renewal option in January 2020.

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Note 2. Summary of Significant Accounting Policies (Continued)

Warrant Liability

The Company accounts for stock warrants as either equity instruments, liabilities or derivative liabilities in accordance with ASC Topic 480, Distinguishing Liabilities from Equity (ASC 480) and/or ASC Topic 815, Derivatives and Hedging (ASC 815), depending on the specific terms of the warrant agreement. Freestanding warrants for shares that are potentially redeemable, whereby the Company may be required to transfer assets (e.g. cash or other assets) outside of its control, are classified as liabilities. Liability-classified warrants are recorded at their estimated fair values at each reporting period until they are exercised, terminated, reclassified or otherwise settled. Changes in the estimated fair value of liability-classified warrants are recorded in Warrant Revaluation (Loss) Gain in the Company’s condensed statements of operations and comprehensive loss. Equity-classified warrants are recorded within additional paid-in capital at the time of issuance and not subject to remeasurement. For additional discussion on warrants, see Note 7.

Future Tranche Right Liability

On December 23, 2019, the Company entered into a Securities Purchase Agreement (the “December 2019 Securities Purchase Agreement”) with institutional investors affiliated with Baker Brothers (the “Purchasers”), an existing stockholder and related party (see Note 11). As more fully described in Note 7, the December 2019 Securities Purchase Agreement contains call options on redeemable preferred shares with warrants (conditionally exercisable for shares that are puttable). The Company determined that these call options represent freestanding financial instruments and accounts for the options as liabilities (“Future Tranche Right Liability”) under ASC 480, which requires the measurement and recognition of the fair value of the liability at the time of issuance and at each reporting period. Any change in fair value is recognized in Future Tranche Right Liability Revaluation (Loss) Gain in the Company’s condensed statements of operations and comprehensive loss.

As of June 30, 2020, the Future Tranche Right Liability is classified as a long-term liability in the Company’s condensed balance sheet as settlement is in the form of the applicable Series B convertible preferred stock and warrants exercisable for shares of either Series B1 Preferred Stock or the Company’s common stock. As of December 31, 2019, the Future Tranche Right Liability was classified as a current liability as the Future Tranche Rights and related Option Fee, each defined in Note 7, were subject to the Company obtaining required shareholder approval and filing the Charter Amendment, as defined in Note 3.

Preferred Stock

The Company applies ASC 480 when determining the classification and measurement of its preferred stock. Preferred shares subject to mandatory redemption are classified as liability instruments and are measured at fair value. Conditionally redeemable preferred shares (including preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control) are classified as temporary equity. At all other times, preferred shares are classified as stockholders’ equity.

Accretion of redeemable convertible preferred stock includes the accretion of the Company's Series B redeemable convertible preferred stock to its stated value. The carrying value of the Series B redeemable convertible preferred stock is being accreted to redemption value using the effective interest method, from the date of issuance to the earliest date the holders can demand redemption.

Income Taxes

In accordance with ASC Topic 270, Interim Reporting, and ASC Topic 740, Income Taxes, the Company is required at the end of each interim period to determine the best estimate of its annual effective tax rate and then apply that rate in providing for income taxes on a current year-to-date (interim period) basis.  For the three and six months ended June 30, 2020 and 2019, the Company recorded no tax expense or benefit due to the expected current year loss and its historical losses.  The Company has not recorded its net deferred tax asset as of either June 30, 2020 or December 31, 2019 because it maintained a full valuation allowance against all deferred tax assets as of these dates as management has determined that it is not more likely than not that the Company will realize these future tax benefits. As of June 30, 2020 and December 31, 2019, the Company had no uncertain tax positions.

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Note 2. Summary of Significant Accounting Policies (Continued)

New Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the FASB and rules are issued by the SEC that the Company has or will adopt as of a specified date. Unless otherwise noted, management does not believe that any other recently issued accounting pronouncements issued by the FASB or guidance issued by the SEC had, or is expected to have, a material impact on the Company’s present or future financial statements.

Recently Adopted Accounting Pronouncements

In June 2016, the FASB issued Accounting Standard Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). This standard requires that credit losses be reported using an expected losses model rather than the incurred losses model that is currently used, and establishes additional disclosures related to credit risks. For available-for-sale debt securities with unrealized losses, this standard now requires allowances to be recorded instead of reducing the amortized cost of the investment. The Company adopted ASU 2016-13 in the first quarter of 2020. The adoption of this ASU did not have a material effect on the Company’s financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which amends ASC 820, Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The Company adopted ASU 2018-13 in the first quarter of 2020. The adoption of this ASU did not have a material effect on the Company’s financial statements.

COVID-19

The full extent to which the novel coronavirus disease ("COVID-19") pandemic will directly or indirectly impact the Company’s business, results of operations and financial condition, including expenses and manufacturing, clinical trials and research and development costs, will depend on future developments that are highly uncertain at this time.

Note 3. Fair Value Measurements

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The Company applies the guidance in ASC Topic 820, Fair Value Measurement, to account for financial assets and liabilities measured on a recurring basis.  Fair value is measured at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability.

The Company uses a fair value hierarchy, which distinguishes between assumptions based on market data (observable inputs) and an entity's own assumptions (unobservable inputs). The guidance requires that fair value measurements be classified and disclosed in one of the following three categories:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2: Quoted prices in markets that are not active or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

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Note 3. Fair Value Measurements (Continued)

Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each reporting period. There were no transfers between Level 1, 2 and 3 during the six months ended June 30, 2020.

The table below presents the assets and liabilities measured and recorded in the financial statements at fair value on a recurring basis at June 30, 2020 and December 31, 2019 categorized by the level of inputs used in the valuation of each asset and liability.

June 30, 2020

(In thousands)

Total

Level 1

Level 2

Level 3

Assets

Cash

$

250

$

250

$

$

Cash equivalents – money market funds

27,560

27,560

Short-term investments – commercial paper

 

3,196

 

 

3,196

 

Total assets

$

31,006

$

27,810

$

3,196

$

Liabilities

Warrant liability

$

3,053

$

$

$

3,053

Future tranche right liability

41,074

41,074

Total liabilities

$

44,127

$

$

$

44,127

December 31, 2019

(In thousands)

Total

Level 1

Level 2

Level 3

Assets

Cash

$

250

$

250

$

$

Cash equivalents – money market funds

39,769

39,769

Short-term investments – commercial paper

 

2,774

 

 

2,774

 

Total assets

$

42,793

$

40,019

$

2,774

$

Liabilities

Warrant liability

$

3,241

$

$

$

3,241

Future tranche right liability

46,436

46,436

Total liabilities

$

49,677

$

$

$

49,677

The Level 1 assets consist of money market funds, which are actively traded daily. The Level 2 assets consist of commercial paper whose fair value may not represent actual transactions of identical securities. The fair value of commercial paper is generally determined based on the relationship between the investment’s discount rate and the discount rates of the same issuer’s commercial paper available in the market which may not be actively traded daily. Since these fair values may not be based upon actual transactions of identical securities, they are classified as Level 2.

Changes in Level 3 Liabilities Measured at Fair Value on a Recurring Basis

Warrant Liability and Future Tranche Right Liability

The reconciliation of the Company's warrant and future tranche right liability measured at fair value on a recurring basis using unobservable inputs (Level 3) is as follows:

Future

Warrant

Tranche Right

(In thousands)

Liability

Liability

Balance, December 31, 2019

 

$

3,241

$

46,436

Change in the fair value of liability

 

 

(188)

 

(5,362)

Balance, June 30, 2020

 

$

3,053

$

41,074

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Note 3. Fair Value Measurements (Continued)

Assumptions Used in Determining Fair Value of Liability-Classified Warrants

The Company utilizes an option pricing model to value its liability-classified warrants. Inherent in the valuation model are assumptions related to volatility, risk-free interest rate, expected term, dividend rate, and other scenarios (i.e. probability of complex features of the warrants being triggered).

The fair value of the warrants has been estimated with the following weighted-average assumptions:

June 30, 

December 31, 

2020

2019

Risk-free interest rate

0.42%

1.79%

Expected dividend yield

Expected term (years)

6.48

6.98

Expected volatility

80%

80%

Exercise price (per share)

$

1.52

$

1.52

Assumptions Used in Determining Fair Value of Future Tranche Rights

The Company utilizes a binomial lattice model to value the Series B2 (tranche 2) and B3 (tranche 3) tranches and a Monte Carlo simulation to value the Series B4 (tranche 4) future tranche rights. The Company selected these models as it believes they are reflective of all significant assumptions that market participants would likely consider in negotiating the transfer of the Future Tranche Rights (as defined in Note 7). Such assumptions include, among other inputs, stock price volatility, risk-free rates, redemption and early exercise assumptions, cancellation and conversion assumptions, and the potential for future adjustment of the conversion price due to a future dilutive financing.

The estimated fair value of the Future Tranche Rights is determined using Level 2 and Level 3 inputs. Significant inputs and assumptions used in the valuation models are as follows:

June 30, 

December 31, 

2020

2019

Risk-free interest rate

0.49% - 0.55%

1.84% - 1.88%

Expected dividend yield

Expected term (years) of call option on preferred stock

0.66 - 1.62

1.16 - 2.16

Expected term (years) of warrants

7.66 - 8.62

8.16 - 9.16

Expected volatility

80%

80%

Exercise price (per share) for common stock equivalent for preferred stock and warrant

$

1.52 - 1.82

$

1.52 - 1.82

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Note 4. Investments

The Company’s available-for-sale investments at fair value consisted of the following as of June 30, 2020 and December 31, 2019:

June 30, 2020

    

    

Gross

    

Gross

    

Estimated

Unrealized

Unrealized

Fair

(In thousands)

Cost

(Losses)

Gains

Value

Short-term investments – commercial paper

$

3,196

$

$

$

3,196

Total short-term investments