NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STAT
EMENTS
1.
|
Description of the Business
|
Insmed
®
is a biopharmaceutical company focused on developing and commercializing novel, targeted inhaled therapies for patients with high unmet need battling serious orphan lung diseases. Our lead product candidate, ARIKACE
®
(liposomal amikacin for inhalation), is a differentiated, inhaled antibiotic engineered to deliver a proven and potent anti-infective directly to the site of serious lung infections to improve the efficacy, safety and convenience of treatment for patients.
Currently, we are continuing late-stage clinical trials for two initial primary target indications for this product: lung infections caused by
Pseudomonas aeruginosa
, which we refer to as
Pseudomonas
, in cystic fibrosis (CF) patients and lung infections caused by non-tuberculous mycobacteria (NTM).
Our ongoing ARIKACE clinical development program includes a European and Canadian registration phase 3 clinical study of ARIKACE in CF patients with
Pseudomonas
lung infections (CLEAR-108) and an optional longer term open-label safety study (CLEAR-110), as well as a phase 2 clinical study of ARIKACE in patients with NTM lung disease (TARGET-NTM). We expect to report clinical results from both the CLEAR-108 and TARGET-NTM studies in 2013.
Our sole development focus is to obtain regulatory approval for, and to prepare for commercialization of, ARIKACE in the U.S. and Europe.
Corporate History
We were incorporated in the Commonwealth of Virginia on November 29, 1999. On December 1, 2010, we completed a business combination with Transave, Inc., or Transave, a privately held, New Jersey-based pharmaceutical company focused on the development of differentiated and innovative inhaled pharmaceuticals for the site-specific treatment of serious lung infections. Our integration with Transave was completed in 2011.
2.
|
Summary of Significant Accounting Policies
|
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. The consolidated balance sheet at December 31, 2011 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission on March 13, 2012.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Transave, LLC, Insmed Pharmaceuticals, Incorporated and Celtrix Pharmaceuticals, Incorporated. All significant intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company bases its estimates and judgments on historical experience and on various other assumptions that it believes are reasonable under the circumstances. The amounts of assets and liabilities reported in the Company’s balance sheets and the amounts of revenue and expenses reported for each of the periods presented are affected by estimates and assumptions, which are used for, but not limited to, the accounting for revenue recognition, stock-based compensation, income taxes, loss contingencies and accounting for research and development costs. Actual results could differ from those estimates.
Debt Issuance and Deferred Financing Costs
Debt issuance and deferred financing costs are amortized using the effective interest rate method, and amortized to interest expense over the term of the debt. Debt issuance costs are reflected as a discount to the debt, and deferred financing costs as other assets in the consolidated balance sheets.
Identified Intangible Assets
As part of the merger, we recorded in-process research and development as identified intangible assets. Identifiable intangible assets are measured at their respective fair values as of the acquisition date and are not amortized until commercialization. Once commercialization occurs, these intangible assets will be amortized over their estimated useful lives. While we believe the fair values assigned to our acquired intangible assets are based on reasonable estimates and assumptions given the available facts and circumstances as of the acquisition date, unanticipated events or circumstances may occur that require us to review the assets for impairment. Events or circumstances that may require an impairment assessment include negative clinical trial results, the non-approval of a new drug application (NDA) by the U.S. Food and Drug Administration, or the FDA, material delays in our development program or a sustained decline in market capitalization.
Indefinite-lived intangible assets are not subject to periodic amortization. Rather, indefinite-lived intangibles are reviewed for impairment by applying a fair value based test on an annual basis or more frequently if events or circumstances indicate impairment may have occurred. Events or circumstances that may require an interim impairment assessment are consistent with those described above. The Company has elected to perform its annual impairment test as of October 1 of each year.
Revenue Recognition and Collaboration Agreements
Our historic revenues reflected principally secondary revenue streams for IPLEX
®
(IPLEX) Expanded Access Program (EAP) in Italy for the treatment of Amyotrophic Lateral Sclerosis (ALS). Historically, this revenue was recognized when the drugs were provided to program patients and collectability was assured. We no longer manufacture IPLEX and the cost recovery revenues from our IPLEX EAP in Europe ceased in December 2011, when our IPLEX
inventory was fully depleted.
Revenue from collaborations is recognized as license fees when milestones are achieved and payments are due.
The Company analyzes each element of an agreement to determine if it shall be accounted for as a separate element or single unit of accounting. If an element shall be treated separately for revenue recognition purposes, the revenue recognition principles most appropriate for that element are applied to determine when revenue shall be recognized. If an element shall not be treated separately for revenue recognition purposes, the revenue recognition principles most appropriate for the bundled group of elements are applied to determine when revenue shall be recognized. Payments received in excess of revenues recognized are recorded as deferred revenue until such time as the revenue recognition criteria have been met.
Research and development costs are expensed as incurred, except for purchased in-process research and development (see Identified Intangible Assets policy above and Note 4). Research and development expenses consist primarily of salaries and related expenses, cost to develop and manufacture drug candidates, patent protection costs, amounts paid to contract research organizations, hospitals and laboratories for the provision of services and materials for drug development and clinical trials. Our expenses related to clinical trials are based on estimates of the services received and efforts expended pursuant to contracts with third-party organizations that conduct and manage clinical trials on our behalf. These contracts set forth the scope of work to be completed at a fixed fee or amount per patient enrolled. Payments under these contracts primarily depend on performance criteria such as the successful enrollment of patients or the completion of clinical trial milestones as well as time-based fees. Expenses are accrued based on contracted amounts applied to the level of patient enrollment and to activity according to the clinical trial protocol.
Stock-Based Compensation
Stock-based compensation transactions are accounted for using a fair-value-based method to recognize non-cash compensation expense; this expense is recognized ratably over the requisite service period, which generally equals the vesting period of options, and is adjusted for expected forfeitures.
Beneficial Conversion Charge
When issuing debt or equity securities that are convertible into common stock at a discount from the fair value of the common stock at the date the debt or equity financing is committed, we are required to record a beneficial conversion charge (“BCC”) at the time of issuance in accordance with Accounting Standards Codification (“ASC”) 470-20. This BCC is measured as the difference between the fair value of the securities on the issue date and the fair value of the common stock at the commitment date. The BCC is recorded as a non-cash charge to earnings for the period in which the securities are issued. See Note 5 for further information about the beneficial conversion feature.
Net (Loss) Income Per Share
Basic net (loss) per common share is calculated by dividing net loss by the weighted-average number of common shares outstanding for the period, without consideration for potentially dilutive securities. For the periods presented, basic and diluted net loss per common share are identical. Potentially dilutive securities from stock options and warrants would be antidilutive as the Company incurred a net loss.
The following potentially dilutive securities have been excluded from the computations of diluted weighted-average shares outstanding as of September 30, 2012 and 2011, because they would be anti-dilutive (in thousands):
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
Shares underlying warrants to purchase outstanding common stock
|
|
|
330
|
|
|
|
158
|
|
Shares underlying options to purchase outstanding common stock
|
|
|
1,690
|
|
|
|
377
|
|
Shares underlying restricted stock units
|
|
|
496
|
|
|
|
487
|
|
Recent Accounting Pronouncements
In May 2011, the FASB issued Accounting Standards Update (ASU) 2011-04,
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS
. The new guidance limits the highest-and-best-use measure to nonfinancial assets, permits certain financial assets and liabilities with offsetting positions in market or counterparty credit risks to be measured at a net basis, and provides guidance on the applicability of premiums and discounts. Additionally, the new guidance expands the disclosures on Level 3 inputs by requiring quantitative disclosure of the unobservable inputs and assumptions, as well as description of the valuation processes and the sensitivity of the fair value to changes in unobservable inputs. We adopted ASU 2011-04 effective January 1, 2012, and it did not have a material impact on our consolidated financial statements.
In June 2011, the FASB issued ASU 2011-05,
Presentation of Comprehensive Income
, which requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income, or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of equity. In December 2011, the FASB issued ASU 2011-12,
Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05
. ASU 2011-12 defers the effective date of the requirement in ASU 2011-05 to disclose on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income. All other requirements of ASU 2011-05 are not affected by ASU 2011-12. ASU 2011-05 and 2011-12 are effective for years beginning after December 15, 2011. We adopted ASU 2011-05 and ASU 2011-12 effective January 1, 2012 and it did not have a material impact on our consolidated financial statements.
In July 2012, the FASB issued ASU No. 2012-02,
Testing Indefinite-Lived Intangible Assets for Impairment
(the revised standard). The revised standard reduces cost and complexity of testing indefinite-lived intangible assets other than goodwill for impairment. It allows companies to perform a “qualitative” assessment to determine whether further impairment testing of indefinite-lived intangible assets is necessary. Under the revised standard, an entity would first assess qualitatively whether it is more likely than not (that is, a likelihood of more than 50 percent) that an indefinite-lived intangible asset is impaired, thus necessitating that it perform the quantitative impairment test. An entity would not be required to calculate the fair value of an indefinite-lived intangible asset and perform the quantitative impairment test unless the entity determines that it is more likely than not that the asset is impaired. The effective date for annual and interim impairment tests performed is for fiscal years beginning after September 15, 2012. We are evaluating the impact of this standard but do not expect its adoption to have a material impact on our consolidated financial statements.
3.
|
Risks and Uncertainties
|
For the period from inception to September 30, 2012, the Company has incurred recurring operating losses and has accumulated a deficit of $320.1 million. During the nine months ended September 30, 2012, the Company recognized a net loss of $25.9 million. Our net cash used in operations for the nine months ended September 30, 2012 was $22.1 million.
We believe we have sufficient funds to meet our financial needs for at least the next twelve months. In June 2012, we entered into a loan and security agreement (the “Loan and Security Agreement”) with Hercules Technology Growth Capital, Inc. (“HTGC”) for borrowings of up to $20 million under a term loan to further underpin our ARIKACE development program. The first $10 million of the term loan was funded at closing. The remaining $10 million of the Loan and Security Agreement is available at Insmed’s option throughout the availability period, which ends on December 31, 2012. In September 2012, we completed a registered direct offering of 6,304,102 shares of our common stock, at a price of $4.07 per share resulting in net proceeds of $25.7 million. In the future, we may require additional funds for the continued development of our potential product candidates or to pursue the license of complementary technologies. There can be no assurance that adequate funds will be available when we need them or on favorable terms. If at any time we are unable to obtain sufficient additional funds, we will be required to delay, restrict or eliminate some or all of our development programs, dispose of assets or technology or cease operations.
4.
|
Identified Intangible Assets
|
In the third quarter of 2011, the FDA placed a clinical hold on our phase 3 U.S. clinical trials for ARIKACE in CF patients with
Pseudomonas
lung infections and for patients with NTM lung infections.
In January 2012, the FDA lifted the clinical hold on ARIKACE in patients with NTM lung infections. In February 2012, we announced that we would be initiating the ARIKACE NTM trial as a phase 2 trial, as well as the previously planned phase 3 trial for ARIKACE in the CF indication in Europe. In April 2012, the Company announced the first patient dosed in the European phase 3 clinical study, which is called CLEAR-108 and is proceeding with an optional longer term open-label safety study called CLEAR-110. The Company also is conducting CLEAR-108 in Canada. We also initiated a nine-month dog inhalation toxicity study in April 2012. In May 2012, the FDA lifted the clinical hold on ARIKACE in the U.S. for the treatment of CF patients with
Pseudomonas
lung infections. In June 2012, we announced that the first patient was dosed in the Company's U.S. phase 2 clinical study
of ARIKACE in patients with NTM lung disease, which is called TARGET-NTM.
As a result of these events, the Company believes there are no indicators of impairment of in-process research and development intangible assets as of September 30, 2012.
Common and Preferred Stock
On December 1, 2010, we entered into an Agreement and Plan of Merger, or the merger agreement, with Transave. Under the terms of the merger agreement, the Transave stockholders received an aggregate of 2.6 million newly issued shares of the Company's common stock and 9.2 million shares of the Company's newly created convertible Series B Preferred Stock. They also received an aggregate of approximately $0.6 million in cash. Collectively, the shares of the Company’s common stock and the Company’s Series B Preferred Stock (on an as converted basis) issued in connection with the merger represented approximately 47% of the capital stock of the Company on a fully diluted basis.
On March 1, 2011, we held a special meeting of our shareholders to consider proposals relating to the conversion of our Series B Preferred Stock and a one-for-ten reverse stock split of the common stock. At the special meeting of shareholders, the shareholders approved all of those proposals.
As a result of the approval of the conversion of the Series B Preferred Stock, all 91.7 million shares of the Series B Preferred Stock outstanding (on a pre-reverse stock-split basis) were automatically and immediately converted into 91.7 million shares of our common stock. In addition, we filed Articles of Amendment to our Articles of Incorporation, as amended, to affect a one-for-ten reverse stock split of our common stock. The Amendment became effective on March 2, 2011. As a result of the Amendment, each holder of ten shares of common stock immediately prior to the effectiveness of the reverse stock split became the holder of one share of our common stock. Shareholders received a cash payment in lieu of any fractional shares of common stock they were entitled to receive. The following table (in thousands) summarizes the conversion of the shares of the Series B Preferred Stock and the reverse stock split.
|
|
|
|
Common stock shares outstanding February 28, 2011
|
|
|
156,537
|
|
Series B Preferred Stock converted into common stock on March 1, 2011
|
|
|
91,746
|
|
Total shares outstanding prior to reverse stock split
|
|
|
248,283
|
|
|
|
|
|
|
1 for 10 reverse stock split
|
|
1:10
|
|
Approximate number of common shares outstanding March 2, 2011
|
|
|
24,828
|
|
As a result of the conversion of the Series B Preferred Stock, we recorded a non-cash charge for the beneficial conversion feature of the Series B Preferred Stock in the amount of $9.2 million, which reduced net income available to holders of our common shares and, in turn, reduced our earnings per common share on a basic and diluted basis by $0.48. The charge represents the $1.00 difference between the conversion price of the Series B Preferred Stock of $7.10 per share and its carrying value of $6.10 per share. The carrying value of the Series B Preferred Stock was based on its fair value at issuance, which was estimated using the common stock price reduced for a lack of marketability between the acquisition date (or issuance date) and the anticipated date of conversion. In June 2012, the Company amended its Articles of Incorporation to delete all provisions regarding the issuance of the Series B Preferred Stock.
On September 28, 2012, we completed a registered direct offering of 6,304,102 shares of our common stock, at a price of $4.07 per share resulting in net proceeds of $25.7 million.
Stock Warrants
Stock warrant activity for the nine months ended September 30, 2012 consisted of issuance of 0.3 million warrants with a weighted average price of $2.94 and an expiration date of June 29, 2017 and the expiration of 0.2 million warrants outstanding with a weighted average price of $11.00. As of September 30, 2011, we had 0.2 million warrants outstanding with a weighted average price of $11.00 and an expiration date of May 4,2012. See Note 7 for further information about the outstanding warrants. The Company recognized no stock-based compensation expense related to warrants for the three and nine month periods ended September 30, 2012 and 2011, respectively.
6.
|
Stock Based Compensation
|
Stock Options
As of September 30, 2012, we had two equity compensation plans under which we were granting stock options and shares of non-vested stock. We may grant stock-based awards from our Amended and Restated 2000 Stock Incentive Plan (the “2000 Plan”) and our Amended and Restated 2000 Employee Stock Purchase Plan (the “2000 ESPP”). Both the 2000 Plan and the 2000 ESPP are administered by the Compensation Committee of the Board of Directors and the Board of Directors (the “Board”).
The 2000 Plan was originally adopted by the Board and approved by our shareholders in 2000. Its original ten-year term was extended to March 30, 2015, when the 2000 Plan was amended in May 2005 after approval by our shareholders. At the 2011 annual meeting of shareholders, the Company’s shareholders approved an amendment to the 2000 Plan to reserve an additional 3 million shares of common stock. As of September 30, 2012, the 2000 Plan provides for the issuance of a maximum of 3.9 million shares of common stock. These shares are reserved for awards to all participants in the 2000 Plan, including non-employee directors.
The 2000 ESPP was adopted by the Board on April 5, 2000 and approved by our shareholders on the same date. The 2000 ESPP which, following the appropriate shareholder approval was subsequently amended in 2005 and 2006, provides for the issuance of a maximum of 150,000 shares of our common stock to participating employees. The Company did not offer employees the right to purchase common stock under the ESPP during the first nine months of 2012.
The following table summarizes stock option activity for the nine months ended September 30, 2012:
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life in Years
|
|
|
Aggregate
Intrinsic
Value
|
|
Options outstanding at December 31, 2011
|
|
|
891,751
|
|
|
$
|
5.15
|
|
|
|
|
|
|
|
Granted
|
|
|
932,384
|
|
|
|
3.63
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(78,525
|
)
|
|
|
3.03
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(55,251
|
)
|
|
|
18.93
|
|
|
|
|
|
|
|
Options outstanding at September 30, 2012
|
|
|
1,690,359
|
|
|
|
3.96
|
|
|
|
8.11
|
|
|
$
|
1,600,309
|
|
Vested and expected to vest at September 30, 2012
|
|
|
1,558,961
|
|
|
|
4.00
|
|
|
|
7.97
|
|
|
$
|
1,464,563
|
|
Exercisable at September 30, 2012
|
|
|
310,000
|
|
|
|
5.72
|
|
|
|
1.51
|
|
|
$
|
156,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non vested
|
|
|
1,380,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wgt. Avg remaining recognition period
|
|
|
3.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company calculates the fair value of stock options based upon the Black-Scholes-Merton valuation model. The following table summarizes the fair value and assumptions used in determining the fair value of stock options issued during the nine months ended September 30, 2012.
Volatility
|
|
|
100.2
|
%
|
Risk-free interest rate
|
|
|
0.6
|
%
|
Dividend yield
|
|
|
0.0
|
%
|
Expected option term (in years)
|
|
|
6.25
|
|
The volatility factor was estimated based on the Company’s historical volatility. The expected life was determined using the simplified method as described in ASC Topic 718,
Accounting for Stock Compensation
, which is the midpoint between the vesting date and the end of the contractual term. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant. Forfeitures are based on a historical percentage of actual option forfeitures since the business combination on December 1, 2010.
The Company recognized stock-based compensation expense related to stock options of approximately $0.4 million and $0.1 million for the three months ended September 30, 2012 and 2011, respectively. General and administrative expenses include $0.3 million and less than $0.1 million and research and development expenses include $0.1 million and less than $0.1 million of stock-based compensation expense in the consolidated statement of operations for the three months ended September 30, 2012 and 2011, respectively.
The Company recognized stock-based compensation expense related to stock options of approximately $0.7 million and $0.2 million for the nine months ended September 30, 2012 and 2011, respectively. General and administrative expenses include $0.5 million and $0.1 million and research and development expenses include $0.2 million and $0.04 million of stock-based compensation expense in the consolidated statement of operations for the nine months ended September 30, 2012 and 2011, respectively. As of September 30, 2012, there was $3.3 million of unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted average period of 3.65 years.
Restricted Stock and Restricted Stock Units
In May 2008, under the 2000 Plan, we began granting Restricted Stock (“RS”) and Restricted Stock Units (“RSUs”) to eligible employees, including our executives. RS shares vest upon the completion of a specific period of continued service or our achievement of certain performance metrics. Each RSU represents a right to receive one share of our common stock upon the completion of a specific period of continued service or our achievement of certain performance metrics. Shares of RS are valued at the market price of our common stock on the date of grant and RSUs are valued based on the market price on the date of settlement. We recognize noncash compensation expense for the fair values of these RS and RSUs on a straight-line basis over the requisite service period of these awards, which is generally three years.
No RS was issued or outstanding during the nine months ended September 30, 2012. A summary of RSU activity for the nine months ended September 30, 2012 is as follows:
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Average
|
|
|
|
RSU's
|
|
|
Grant Price
|
|
Outstanding at December 31, 2011
|
|
|
487,025
|
|
|
$
|
6.37
|
|
Granted
|
|
|
61,011
|
|
|
|
3.44
|
|
Released
|
|
|
(43,819
|
)
|
|
|
5.98
|
|
Forfeited
|
|
|
(8,559
|
)
|
|
|
5.78
|
|
Outstanding at September 30, 2012
|
|
|
495,658
|
|
|
$
|
5.11
|
|
Expected to Vest
|
|
|
351,013
|
|
|
$
|
5.68
|
|
The Company recognized stock-based compensation expense related to RSUs of approximately $0.1 million and $0.4 million for the three months ended September 30, 2012 and 2011, respectively. General and administrative expenses include less than $0.1 million and $0.3 million and research and development expenses include less than $0.1 million and $0.1 million of stock-based compensation expense in the consolidated statement of operations for the three months ended September 30, 2012 and 2011, respectively.
The Company recognized stock-based compensation expense related to RSUs of approximately $0.8 million and $0.9 million for the nine months ended September 30, 2012 and 2011, respectively. General and administrative expenses include $0.5 million and $0.6 million and research and development expenses include $0.3 million and $0.3 million of stock-based compensation expense in the consolidated statement of operations for the nine months ended September 30, 2012 and 2011, respectively. As of September 30, 2012, there was $1.2 million of unrecognized compensation expense related to unvested RSUs, which is expected to be recognized over a weighted average period of 1.05 years.
A total of approximately 1.0 million shares of common stock were reserved for issuance at September 30, 2012 in connection with RSUs, stock options, stock warrants and the employee stock purchase plan.
On June 29, 2012, the Company and its domestic subsidiaries, as co-borrowers, entered into loan and security agreement (the “Loan and Security Agreement”) with Hercules Technology Growth Capital, Inc (“HTGC”) for borrowings of up to $20 million under a term loan. The Loan and Security Agreement bears interest at a rate per annum equal to the greater of (i) 9.25% or (ii) 9.25% plus the sum of the prevailing prime rate minus 4.50%. The first $10 million of the Loan and Security Agreement was funded at closing, with net proceeds to the Company of $9.7 million received, net of $0.3 million issuance costs. The Company also incurred an end of term charge of $0.2 million on the initial $10 million advance. As of September 30, 2012 debt issuance and deferred financing costs, net of accumulated amortization are $0.2 million and $0.1 million, respectively. The Company had no debt issued or deferred financing costs as of December 31, 2011. The issuance costs of $0.2 million are being amortized to interest expense using the effective interest rate over the term of the agreement. The end of term charge of $0.2 million is being accrued to interest expense and debt using the effective interest rate over the term of the agreement. The Loan and Security Agreement is repayable in installments over forty-two months including an initial interest-only period of twelve months after closing. The maturity date of this loan is January 1, 2016. The interest only period is extendable to December 31, 2013, contingent upon completion of certain ARIKACE-related development milestones. The remaining $10 million of the Loan and Security Agreement is available at the Company’s option throughout the availability period, which ends on December 31, 2012. In connection with this Loan and Security Agreement, the Company granted the lender a first position lien on all of the Company’s assets, excluding intellectual property.
Pursuant to the Loan and Security Agreement, the Company issued a warrant to HTGC to purchase 329,932 shares of the Company’s common stock at an exercise price of $2.94 per share. The warrant is exercisable for five years from the date of issuance. The fair value of the warrants at the date of issuance was $0.8 million, which amount has been recorded as a discount to debt and is being amortized ratably over the term of the Loan and Security Agreement.
The following table presents the components of the Company’s debt balances as of September 30, 2012. The Company had no debt as of December 31, 2011.
|
|
September 30,
|
|
|
|
2012
|
|
Debt:
|
|
|
|
Loan and Security Agreement
|
|
$
|
10,000
|
|
Add:
|
|
|
|
|
End of term charge
|
|
|
21
|
|
Less:
|
|
|
|
|
Unamortized issuance costs
|
|
|
(220
|
)
|
Unamortized discount from warrant
|
|
|
(706
|
)
|
Current portion
|
|
|
(592
|
)
|
Long-term debt
|
|
$
|
8,503
|
|
8.
|
Investments and Fair Value Measurements
|
We categorize financial assets and liabilities measured and reported at fair value in the financial statements on a recurring basis based upon the level of judgments associated with the inputs used to measure their fair value. Hierarchical levels, which are directly related to the amount of subjectivity associated with the inputs used to determine the fair value of financial assets and liabilities are as follows:
|
·
|
Level 1 – Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
|
|
·
|
Level 2 – Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the assets or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
|
|
·
|
Level 3 – Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
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Each major category of financial assets and liabilities measured at fair value on a recurring basis are categorized in the tables below based upon the lowest level of significant input to the valuations. The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
Financial instruments in Level 1 generally include U.S. treasuries and mutual funds listed in active markets. Financial instruments in Level 2 generally include municipal bonds listed in secondary markets.
The following table presents assets and liabilities measured at fair value as of September 30, 2012 and December 31, 2011.
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Fair Value Measurements at Reporting Date Using
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Quoted Prices in
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Quoted Prices in
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Active Markets for
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Inactive Markets for
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Significant
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Identical Assets
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Identical Assets
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Unobservable Inputs
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Total
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(Level 1)
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(Level 2)
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(Level 3)
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As of September 30, 2012:
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Assets:
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Cash and cash equivalents
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$
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44,989
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$
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44,989
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$
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-
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$
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-
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Mutual funds
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44,759
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44,759
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-
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-
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Certificate of deposit
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2,132
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2,132
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-
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-
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$
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91,880
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$
|
91,880
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$
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-
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$
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-
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As of December 31, 2011:
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Assets:
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Cash and cash equivalents
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$
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14,848
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$
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14,848
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$
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-
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$
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-
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Mutual funds
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56,163
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56,163
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-
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-
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Government agency bonds
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5,261
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-
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5,261
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-
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Certificate of deposit
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2,085
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2,085
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-
|
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-
|
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$
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78,357
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|
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$
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73,096
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|
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$
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5,261
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$
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-
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The Company’s cash and cash equivalents permit daily redemption and the fair values of these investments are based upon the quoted prices in active markets provided by the holding financial institutions. Short-term investments such as U.S. treasury securities, mutual funds and government agency bonds are held to their maturities and are carried at cost, which approximates fair value. The cash equivalents consist of liquid investments with a maturity of three months or less and the short-term investments consist of instruments with maturities greater than three months and less than one year. The certificate of deposit matures in July 2013.
We recognize transfers between levels within the fair value hierarchy, if any, at the end of each quarter. There were no significant transfers into/out of level 1, level 2 or level 3 during the nine months ended September 30, 2012 and 2011.
As of September 30, 2012, we held one security which was in an unrealized loss position with a total estimated fair value of $5.0 million and gross unrealized losses of less than $0.1 million. We also recorded $0.9 million of gross unrealized gains. The net unrealized gain of $0.8 million is reported in accumulated other comprehensive income in the stockholder’s equity section of our balance sheet. This security had not been in a continuous unrealized loss position for greater than one year. The following table summarizes unrealized gains and losses for the nine months ended September 30, 2012.
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September 30, 2012
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Amortized Cost
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Gross
Unrealized
Gains
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Gross
Unrealized
Losses
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|
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Estimated Fair
Value
|
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Mutual funds
|
|
$
|
43,924
|
|
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$
|
857
|
|
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$
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(22
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)
|
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$
|
44,759
|
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As of December 31, 2011, we held two securities which were in an unrealized loss position with a total estimated fair value of $12.6 million and gross unrealized loss of approximately $0.2 million. These securities have not been in a continuous unrealized loss position for greater than one year. The net unrealized gain of $0.5 million is reported in accumulated other comprehensive income in the stockholder’s equity section of our balance sheet. The following table summarizes unrealized gains and losses for the year ended December 31, 2011.
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December 31, 2011
|
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Amortized Cost
|
|
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Gross
Unrealized
Gains
|
|
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Gross
Unrealized
Losses
|
|
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Estimated Fair
V
alue
|
|
Mutual funds
|
|
$
|
55,718
|
|
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$
|
652
|
|
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$
|
(207
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)
|
|
$
|
56,163
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Government agency bonds
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5,256
|
|
|
|
5
|
|
|
|
-
|
|
|
|
5,261
|
|
|
|
$
|
60,974
|
|
|
$
|
657
|
|
|
$
|
(207
|
)
|
|
$
|
61,424
|
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We review the status of each security quarterly to determine whether an other-than-temporary impairment has occurred. In making our determination, we consider a number of factors, including: (1) the significance of the decline, (2) whether the securities were rated below investment grade, (3) how long the securities have been in an unrealized loss position, and (4) our ability and intent to retain the investment for a sufficient period of time for it to recover.
9.
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License and Collaborative Agreements
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On May 25, 2012, the Company entered into an agreement with Premacure Holdings AB and Premacure AB of Sweden (collectively, “Premacure”) pursuant to which the Company agreed to grant to Premacure an exclusive, worldwide license to develop manufacture and commercialize IGF-1, with its natural binding protein, IGFBP-3, for the prevention and treatment of complications of preterm birth. (the “ Premacure License Agreement”). Premacure is currently focusing on retinopathy of prematurity. IGF- and IGFBP-3 were previously developed by the Company at higher concentrations as IPLEX®. The license is subject to the Company’s receipt of a consent and waiver from Tercica, Inc., now known as the Ipsen Group (“Tercica”), and from Genentech, Inc., now owned by Roche (“Genentech”), of certain rights granted by the Company to Tercica and Genentech under the Settlement, License and Development Agreement dated March 5, 2007. The Premacure License Agreement includes diligence milestones and royalty payments on prospective product sales. In September 2012, we entered into an amended and restated license agreement with Premacure (the “Amended and Restated Premacure License Agreement”) and received the waiver from Genentech. The license remains subject to the Company’s receipt of the waiver from Tercica.
10.
|
Commitments and Contingencies
|
Commitments
In January 2012, we entered into a contract with our drug supply manufacturer for drug required for our dog toxicology study at a total cost of $1.4 million. Additionally, in the quarter ended June 30, 2012, we entered into contracts totaling $3.0 million for the manufacturing of clinical drug supplies.
Legal Proceedings
Cacchillo v. Insmed
On October 6, 2010, a complaint was filed against us by Angeline Cacchillo (“Plaintiff”) in the U.S. District Court for the Northern District of New York (the “Court”), captioned
Cacchillo v. Insmed, Inc.
, No. 1:10-cv-0199, seeking monetary damages and a court order requiring Insmed to support Plaintiff’s compassionate use application to the FDA and if approved, to provide Plaintiff with IPLEX. Plaintiff was a participant in the phase II clinical trial of IPLEX sponsored by us evaluating the effectiveness of the investigational drug in patients with type 1 myotonic muscular dystrophy (“MMD”). In the complaint, Plaintiff alleged (i) violation of constitutional due process and equal protection by depriving Plaintiff of continued access to IPLEX, (ii) fraudulent inducement to enter the phase II clinical trial with the false promise to support Plaintiff’s compassionate use application to the FDA, (iii) negligent representation that we would support Plaintiff’s compassionate use application, (iv) breach of contract, seeking monetary and non-monetary damages, (v) intentional infliction of emotional distress by refusing to support Plaintiff’s compassionate use application after providing IPLEX, (vi) violation of an assumed duty of care to Plaintiff, (vii) breach of fiduciary duty to Plaintiff, (viii) negligence and (ix) unjust enrichment. Plaintiff seeks compensatory and punitive monetary damages and sought injunction relief as noted above.
On October 7, 2010, Plaintiff filed a motion for a preliminary injunction that would require us to provide a written statement supporting the “compassionate use” of IPLEX for Plaintiff and directing us to provide IPLEX to Plaintiff at cost in the event that the compassionate use application were granted by the FDA. On October 22, 2010, the Court denied Plaintiff’s motion for the preliminary injunction concluding that the Court lacked subject matter jurisdiction with respect to her claim for a preliminary injunction. Plaintiff appealed the Court’s denial of her motion for a preliminary injunction to the U.S. Court of Appeals for the Second Circuit, which affirmed the trial court’s order denying the Plaintiff’s motion for a preliminary injunction.
We filed a motion with the Court to dismiss all of the outstanding claims, and on June 29, 2011, the Court dismissed six of Plaintiff’s claims, leaving outstanding the claims for (i) fraudulent inducement, (ii) negligent misrepresentation, and (iii) breach of contract. We filed an answer and affirmative defenses with the Court on July 12, 2011. Plaintiff’s claim for monetary damages with respect to these claims remains outstanding. The parties completed discovery on or about June 1, 2012. We filed a Motion for Summary Judgment on August 1, 2012 seeking judgment in our favor on the three claims remaining in the case and the motion was fully submitted on October 9, 2012. We expect a decision from the Court sometime later this year. If the Court denies our motion with respect to any of Plaintiff’s claims, trial is currently scheduled to begin in January 2013.
We believe that the allegations contained in the complaint are without merit and we intend to continue to vigorously defend this action. It is not possible at this time to estimate the amount of loss or range of possible loss, if any, that might result from an adverse resolution of this action.
Pilkiewicz v. Transave LLC
On March 28, 2011, Frank G. Pilkiewicz and other former stockholders of Transave (collectively, the “Petitioners”) filed an appraisal action against our subsidiary Transave, LLC in the Delaware Court of Chancery captioned
Frank G. Pilkiewicz, et al. v. Transave, LLC
, C.A. No. 6319-CS. On December 13, 2011, following the mailing of the revised notice of appraisal rights in accordance with the settlement terms of
Mackinson et al. v. Insmed
, an Amended Petition for Appraisal of Stock was filed by the Petitioners.
The Petitioners seek appraisal under Delaware law of their total combined common stock holdings representing total dissenting shares of approximately 7.77 million shares of Transave, Inc. common stock (the “Transave Stock”). The Petitioners are challenging the value of the consideration that they would be entitled to receive for their Transave Stock under the terms of the merger.
Under the terms of the merger agreement, certain of the former stockholders of Transave (the “Transave Stockholders”) are obligated to indemnify us for certain liabilities in connection with the appraisal action. We notified the Transave Stockholders in May 2012 that we are seeking indemnification in accordance with the merger agreement and that we will continue to retain the aggregate amount of the holdback shares totaling 1.76 million shares, as security for any indemnification payments due under the merger agreement. Discovery is ongoing and we anticipate that trial will be scheduled in the second half of 2013. We believe that the allegations contained in the amended petition are without merit and we intend to continue to vigorously defend this action. It is not possible at this time to estimate the amount of loss or range of possible loss, if any, that might result from an adverse resolution of this action.
From time to time, we are a party to various other lawsuits, claims and other legal proceedings that arise in the ordinary course of our business. While the outcomes of these matters are uncertain, management does not expect that the ultimate costs to resolve these matters will have a material adverse effect on our consolidated financial position, results of operations or cash flows.
On September 28, 2012, we completed a registered direct financing with three investors pursuant to which we issued 6,304,102 shares of our common stock. The price at which the common stock was sold in the financing was $4.07 per share, equal to the consolidated closing bid price for our common shares on the day prior to the issuance. On October 5, 2012, we received telephonic notice from our outside counsel on the transaction that the Staff of The NASDAQ Stock Market LLC had informed such counsel of the Staff’s belief that the sale of the shares did not comply with Nasdaq Listing Rule 5365(d). The Staff’s concern was based on the fact that the shares were sold at a price that was below our book value per share as reflected in our Form 10-Q for the quarter ended June 30, 2012. As a result, it was the Staff’s belief that, pursuant to the Nasdaq Listing Rules, we were not permitted to issue 20% or more of our outstanding common shares, even though the sales price per share was equal to the market value per share on the date immediately preceding the issuance. Following communications by us with the Staff, on October 12, 2012, we received a Letter of Reprimand from the Staff pursuant to Listing Rule 5810(c)(4), based on our noncompliance with Listing Rule 5635(d). The Staff has informed us that it now considers the matter closed. The determination to issue a Letter of Reprimand was based on a number of factors, including that the noncompliance does not appear to have been the result of a deliberate intent to avoid compliance, that we have not demonstrated a pattern of non-compliance, that we relied on the advice of our outside counsel in structuring the financing, our decision to implement additional controls to prevent similar occurrences in the future and the fact that we will not be offering additional securities in the financing.