Document

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 September 30, 2019



☐	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: 000-21088

BRICKELL BIOTECH, INC.

(Exact name of registrant as specified in its charter)



Delaware				93-0948554
(State or other jurisdiction of incorporation or organization)				(I.R.S. Employer Identification No.)

	5777 Central Avenue,	Boulder,	CO	80301
(Address of principal executive offices)				(Zip Code)

(720) 505-4755

(Registrant’s telephone number, including area code)

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



Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common stock, $0.01 par value per share	BBI	The Nasdaq Stock Market LLC

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 ☒

As of November 7, 2019, there were 7,810,680 shares of the registrant’s common stock outstanding.

BRICKELL BIOTECH, INC.

FORM 10-Q

INDEX



PART I. FINANCIAL INFORMATION
	ITEM 1. Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018	4
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2019 and 2018	5
	Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2019 and 2018	6
	Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the Three and Nine Months Ended September 30, 2019 and 2018	7
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018	9
	Notes to Condensed Consolidated Financial Statements for the Nine Months Ended June 30, 2019 and 2018	10
	ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
	ITEM 3. Quantitative and Qualitative Disclosures About Market Risk	37
	ITEM 4. Controls and Procedures	37
PART II. OTHER INFORMATION
	ITEM 1. Legal Proceedings	38
	ITEM 1A. Risk Factors	38
	ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	62
	ITEM 3. Defaults Upon Senior Securities	62
	ITEM 4. Mine Safety Disclosures	62
	ITEM 5. Other Information	62
	ITEM 6. Exhibits	62
SIGNATURES		63

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BRICKELL BIOTECH, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

(unaudited)



	September 30, 2019			December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	7,225		$	8,067
Marketable securities, available-for-sale	18,473			—
Prepaid expenses and other current assets	5,034			204
Total current assets	30,732			8,271
Property and equipment, net	20			37
Operating lease right-of-use asset	176			—
Intangible assets	441			441
Total assets	$	31,369		$	8,749
Liabilities, redeemable convertible preferred stock, and stockholders’ equity (deficit)
Current liabilities:
Accounts payable	$	1,291		$	4,067
Accrued liabilities	3,475			3,272
Lease liability, current portion	75			—
Deferred revenue, current portion	2,464			8,117
Note payable	—			4,639
Total current liabilities	7,305			20,095
Contingent consideration	145			145
Lease liability, net of current portion	94			—
Warrant liability	—			242
Deferred revenue, net of current portion	—			1,595
Research and development funding liability	5,600			—
Total liabilities	13,144			22,077
Redeemable convertible preferred stock (Series A, B, C and C-1), $0.01 par value, 5,000,000 and 4,182,943 shares authorized at September 30, 2019 and December 31, 2018, respectively; 0 and 1,256,466 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively; aggregate liquidation preference of $0 and $46,985 at September 30, 2019 and December 31, 2018, respectively	—			58,290
Commitments and contingencies (Note 8)
Stockholders’ equity (deficit):
Common stock, $0.01 par value, 50,000,000 and 8,000,000 shares authorized at September 30, 2019 and December 31, 2018, respectively; 7,810,680 and 589,001 issued and outstanding at September 30, 2019 and December 31, 2018, respectively	78			6
Additional paid-in capital	92,276			—
Accumulated other comprehensive loss	(11		)	—
Accumulated deficit	(74,118		)	(71,624		)
Total stockholders’ equity (deficit)	18,225			(71,618		)
Total liabilities, redeemable convertible preferred stock, and stockholders’ equity (deficit)	$	31,369		$	8,749

See accompanying notes to these condensed consolidated financial statements.

BRICKELL BIOTECH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

(unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Collaboration revenue	$	1,183		$	3,042		$	7,248		$	8,415

Operating expenses:
Research and development	3,337			4,135			13,585			8,571
General and administrative	3,901			1,206			7,290			4,694
Total operating expenses	7,238			5,341			20,875			13,265
Loss from operations	(6,055		)	(2,299		)	(13,627		)	(4,850		)
Investment and other income, net	54			23			64			45
Gain on extinguishment	2,318			—			2,318			—
Interest expense	(1,098		)	(267		)	(1,982		)	(769		)
Change in fair value of derivative liability	—			—			(11		)	—
Change in fair value of warrant liability	—			2			223			8
Net loss	(4,781		)	(2,541		)	(13,015		)	(5,566		)
Reduction (accretion) of redeemable convertible preferred stock to redemption value	(82		)	(966		)	10,274			(5,071		)
Net loss attributable to common stockholders	$	(4,863	)	$	(3,507	)	$	(2,741	)	$	(10,637	)
Net loss per share attributable to common stockholders, basic and diluted	$	(1.65	)	$	(5.98	)	$	(1.98	)	$	(18.13	)
Weighted-average shares used to compute net loss per share attributable to common stockholders, basic and diluted	2,943,896			586,738			1,382,592			586,701

See accompanying notes to these condensed consolidated financial statements.

BRICKELL BIOTECH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Net loss	$	(4,781	)	$	(2,541	)	$	(13,015	)	$	(5,566	)
Other comprehensive loss:
Unrealized loss on available-for-sale marketable securities arising during holding period, net of tax benefit of $0	(11		)	—			(11		)	—
Total comprehensive loss	$	(4,792	)	$	(2,541	)	$	(13,026	)	$	(5,566	)

See accompanying notes to these condensed consolidated financial statements.

BRICKELL BIOTECH, INC.

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

(in thousands, except share and per share data)

(unaudited)



	Series A, B, C & C-1 Redeemable Convertible Preferred Stock					Common Stock			Additional Paid-In Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Stockholders’ Equity (Deficit)
	Shares		Carrying Value			Shares	Par Value		Additional Paid-In Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Stockholders’ Equity (Deficit)
Balance, December 31, 2018	1,256,466		$	58,290		589,001	$	6	$	—		$	—		$	(71,624	)	$	(71,618	)
Stock based compensation	—		—			—	—		384			—			—			384
Reduction of redeemable convertible preferred stock to redemption value	—		(10,521		)	—	—		—			—			10,521			10,521
Net loss	—		—			—	—		—			—			(4,580		)	(4,580		)
Balance, March 31, 2019 (unaudited)	1,256,466		47,769			589,001	6		384			—			(65,683		)	(65,293		)
Stock based compensation	—		—			—	—		299			—			—			299
Accretion of redeemable convertible preferred stock to redemption value	—		165			—	—		(165		)	—			—			(165		)
Net loss	—		—			—	—		—			—			(3,654		)	(3,654		)
Balance, June 30, 2019 (unaudited)	1,256,466		47,934			589,001	6		518			—			(69,337		)	(68,813		)
Accretion of redeemable convertible preferred stock to redemption value	—		82			—	—		(82		)	—			—			(82		)
Conversion of redeemable convertible preferred stock and preferred stock dividends to common stock	(1,256,466	)	(48,016		)	2,783,951	28		47,988			—			—			48,016
Common stock issued in recapitalization	—		—			3,367,988	34		36,059			—			—			36,093
Conversion of convertible notes payable and accrued interest to common stock	—		—			1,069,740	10		5,082			—			—			5,092
Reclassification of warrant liability to equity	—		—			—	—		1,511			—			—			1,511
Common stock warrants issued in connection with the research and development funding liability	—		—			—	—		876			—			—			876
Stock based compensation	—		—			—	—		324			—			—			324
Unrealized loss on available-for-sale marketable securities	—		—			—	—		—			(11		)	—			(11		)
Net loss	—		—			—	—		—			—			(4,781		)	(4,781		)
Balance, September 30, 2019 (unaudited)	—		$	—		7,810,680	$	78	$	92,276		$	(11	)	$	(74,118	)	$	18,225

BRICKELL BIOTECH, INC.

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

(in thousands, except share and per share data)

(unaudited)



	Series A, B, C & C-1 Redeemable Convertible Preferred Stock			Common Stock			Additional Paid-In Capital			Accumulated Other Comprehensive Loss		Accumulated Deficit			Total Stockholders’ Deficit
	Shares	Carrying Value		Shares	Par Value		Additional Paid-In Capital			Accumulated Other Comprehensive Loss		Accumulated Deficit			Total Stockholders’ Deficit
Balance, December 31, 2017	1,256,466	$	52,354	585,262	6		—			$	—	(59,942		)	(59,936		)
Effect of adoption of Topic 606	—	—		—	—		—			—		2,734			2,734
Stock based compensation	—	—		—	—		190			—		—			190
Issuance of common stock through exercise of stock option	—	—		1,438	—		17			—		—			17
Accretion of redeemable convertible preferred stock to redemption value	—	3,240		—	—		(207		)	—		(3,033		)	(3,240		)
Net income	—	—		—	—		—			—		527			527
Balance, March 31, 2018 (unaudited)	1,256,466	55,594		586,700	6		—			—		(59,714		)	(59,708		)
Stock based compensation	—	—		—	—		175			—		—			175
Accretion of redeemable convertible preferred stock to redemption value	—	865		—	—		(175		)	—		(690		)	(865		)
Net loss	—	—		—	—		—			—		(3,552		)	(3,552		)
Balance, June 30, 2018 (unaudited)	1,256,466	56,459		586,700	6		—			—		(63,956		)	(63,950		)
Stock based compensation	—	—		—	—		151			—		—			151
Issuance of common stock through exercise of stock option	—	—		863	—		10			—		—			10
Accretion of redeemable convertible preferred stock to redemption value	—	966		—	—		(161		)	—		(805		)	(966		)
Net loss	—	—		—	—		—			—		(2,541		)	(2,541		)
Balance, September 30, 2018 (unaudited)	1,256,466	$	57,425	587,563	$	6	$	—		$	—	$	(67,302	)	$	(67,296	)

See accompanying notes to these condensed consolidated financial statements.

BRICKELL BIOTECH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)



	Nine Months Ended September 30,
	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(13,015	)	$	(5,566	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation	25			37
Accretion of discount on marketable securities	(25		)	—
Non-cash interest expense	666			—
Change in fair value of derivative liability	11			—
Change in fair value of warrant liability	(223		)	(8		)
Gain on extinguishment	(2,318		)	—
Amortization of operating lease right-of-use assets	50			—
Amortization of convertible promissory notes discount	828			—
Amortization of debt discounts and financing costs	215			310
Stock-based compensation	1,007			516
Changes in operating assets and liabilities:
Prepaid expenses and other current assets	(2,480		)	14
Accounts payable	(2,776		)	473
Accrued liabilities	(2,207		)	(343		)
Lease liability	(50		)	—
Research and development funding liability	5,600			—
Deferred revenue	(7,248		)	12,188
Net cash provided by (used in) operating activities	(21,940		)	7,621
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash and cash equivalents acquired in recapitalization	13,017			—
Maturities of marketable securities	5,500			—
Capital expenditures	(8		)	(8		)
Net cash provided by (used in) investing activities	18,509			(8		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of principal of note payable	(4,808		)	(509		)
Proceeds from issuance of convertible promissory notes	7,397			—
Proceeds from the exercise of stock options	—			27
Net cash provided by (used in) financing activities	2,589			(482		)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	(842		)	7,131
CASH AND CASH EQUIVALENTS—BEGINNING	8,067			5,399
CASH AND CASH EQUIVALENTS—ENDING	$	7,225		$	12,530
Supplement Disclosure of Cash Flow Information:
Interest paid	$	319		$	310
Supplement Disclosure of Non-Cash Investing and Financing Activities:
Conversion of redeemable convertible preferred stock and preferred stock dividends to common stock	$	48,016		$	—
Accretion (reduction) of redeemable convertible preferred stock to redemption value	$	(10,377	)	$	5,041
Shares issued in recapitalization	$	23,076		$	—
Accretion of redeemable convertible preferred stock issuance costs	$	103		$	30
Derivative liability issued with convertible promissory notes	$	1,442		$	—
Warrants to purchase common stock issued with funding agreement	$	876		$	—
Warrants to purchase common stock issued with convertible promissory notes	$	1,492		$	—
Change in unrealized loss on available-for-sale marketable securities	$	(11	)	$	—

See accompanying notes to these condensed consolidated financial statements.

BRICKELL BIOTECH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1. ORGANIZATION AND NATURE OF OPERATIONS

Brickell Biotech, Inc. (the “Company” or “Brickell”) is a clinical-stage pharmaceutical company focused on the development of innovative and differentiated prescription therapeutics for the treatment of debilitating skin diseases. The Company’s pipeline consists of potential novel therapeutics for hyperhidrosis, cutaneous T-cell lymphoma, psoriasis, and other prevalent dermatological conditions. Its pivotal Phase 3-ready clinical-stage product candidate, sofpironium bromide, is a proprietary new molecular entity that belongs to a class of medications called anticholinergics. The Company is developing sofpironium bromide as a potential best-in-class, self-administered, once daily, topical therapy for the treatment of primary axillary hyperhidrosis. The Company’s operations to date have been limited to business planning, raising capital, developing its pipeline assets (in particular sofpironium bromide), identifying product candidates, and other research and development.

On August 31, 2019, the Company, then known as Vical Incorporated (“Vical”), and Brickell Biotech, Inc., a then privately-held Delaware corporation that began activities in September 2009 (“Private Brickell”), completed a recapitalization in accordance with the terms of the Agreement and Plan of Merger and Reorganization, dated June 2, 2019, as further amended on August 20, 2019 and on August 30, 2019 (the “Merger Agreement”), by and among Vical, Vical Subsidiary, Inc., a wholly owned subsidiary of Vical (“Merger Sub”), and Private Brickell. Pursuant to the Merger Agreement, Merger Sub merged with and into Private Brickell, with Private Brickell surviving as a wholly-owned subsidiary of Vical (the “Merger”). Additionally, on August 31, 2019, immediately after the completion of the Merger, the Company changed its name from “Vical Incorporated” to “Brickell Biotech, Inc.” and Private Brickell changed its name from "Brickell Biotech, Inc." to "Brickell Subsidiary, Inc."

The accompanying condensed consolidated financial statements and related notes reflect the historical results of Private Brickell prior to the Merger and of the combined company following the Merger, and do not include the historical results of Vical prior to the completion of the Merger. These financial statements and related notes should be read in conjunction with the audited financial statements of Private Brickell for the year ended December 31, 2018, included in the Company’s Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on September 3, 2019.

On August 31, 2019, in connection with, and prior to the consummation of the Merger, Vical effected a reverse stock split of its common stock, par value $0.01 per share, at a ratio of 1-for-7 (the “Reverse Stock Split”). Unless otherwise noted herein, references to share and per-share amounts give retroactive effect to the Reverse Stock Split.

On August 31, 2019, all shares of preferred stock of Private Brickell converted into shares of common stock of Private Brickell on a one-for-one basis.

At the effective date of the Merger, the Company issued shares of its common stock to Private Brickell stockholders, at an exchange rate of approximately 2.4165 shares of common stock in exchange for each share of Private Brickell common stock outstanding immediately prior to the Merger (the “Exchange Ratio”). The exchange rate was calculated by a formula that was determined through arms-length negotiations between the Vical and Private Brickell. Unless otherwise noted herein, references to share and per-share amounts give retroactive effect to the Reverse Stock Split and the Exchange Ratio, which was effected upon the Merger.

Immediately following the consummation of the Merger, there were 7,810,680 shares of common stock issued and outstanding, with Private Brickell’s former securityholders beneficially owning approximately 57% of the outstanding shares of common stock and Vical’s former securityholders beneficially owning approximately 43% of the outstanding shares of common stock.

Funding Agreement with NovaQuest

On August 31, 2019, concurrent with the Merger Agreement, the Company entered into a research and development arrangement with NovaQuest Capital Management, LLC (“NovaQuest”) pursuant to which NovaQuest committed up to $25.0 million in research and development funding to the Company following the closing of the Merger (the “Funding Agreement”). These proceeds will partially fund the Company's Phase 3 clinical trials in the United States for sofpironium bromide. The Company issued a warrant to NovaQuest to purchase 241,225 shares of common stock. Additional details of this agreement are described in Note 4. In October 2019, additional funding was temporarily suspended. Refer to Note 11 for additional details.

Liquidity and Capital Resources

The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The condensed consolidated financial statements do not reflect any adjustments relating to the recoverability and reclassification of assets and liabilities that might be necessary if the Company is unable to continue as a going concern. The Company has incurred significant operating losses and has an accumulated deficit as a result of ongoing efforts to develop product candidates, including conducting preclinical and clinical trials and providing general and administrative support for these operations. For the nine months ended September 30, 2019, the Company had a net loss of $13.0 million and net cash used in operating activities of $21.9 million. As of September 30, 2019, the Company had cash, cash equivalents, and marketable securities of $25.7 million, and an accumulated deficit of $74.1 million.

Pending resolution of the contentious matter discussed further in Note 11 and NovaQuest resuming additional funding, the Company intends to conserve its resources. The advancement of the Phase 3 clinical trials for sofpironium bromide may be negatively impacted by these developments. The Company may take actions to reduce its cash spend, including delaying the start of the clinical trials or staff reductions. Taking these measures into account, the Company believes that its cash, cash equivalents, and marketable securities as of September 30, 2019 would be sufficient to fund its operations for at least the next 12 months from the issuance of these condensed consolidated financial statements.

The Company expects to continue to incur additional substantial losses in the foreseeable future as a result of the Company’s research and development activities. Additional funding will be required in the future to maintain the Company’s current and proposed research activities. There can be no assurance that additional equity or debt financing will be available on acceptable terms, if at all. If the Company is unable to raise additional funding to meet its working capital needs in the future, it will be forced to delay or reduce the scope of its research programs and/or limit or cease its operations.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Brickell Subsidiary, Inc., are presented in U.S. dollars and have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and applicable rules and regulations of the SEC for interim reporting. As permitted under those rules and regulations, certain footnotes or other financial information normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted. These condensed consolidated financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the Company’s financial information. The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results to be expected for the full year ending December 31, 2019, for any other interim period, or for any other future period. The condensed consolidated balance sheet as of December 31, 2018 has been derived from audited financial statements at that date but does not include all of the information required by US GAAP for complete financial statements. All intercompany balances and transactions have been eliminated in consolidation.

The Merger has been accounted for as a recapitalization. Prior to the Merger, Vical wound down its pre-merger business assets and liabilities. The owners and management of Private Brickell have actual and effective voting and operating control of the combined company. In the Merger transaction, Vical is the accounting acquiree and Private Brickell is the accounting acquirer. A recapitalization is equivalent to the issuance of stock by the private operating company for the net monetary assets of the accounting acquiree accompanied by a recapitalization with accounting similar to that resulting from a reverse acquisition, except that no goodwill or intangible assets are recorded.

In connection with the Merger, 3,367,988 shares of common stock were transferred to the existing Vical stockholders and the Company assumed approximately $36.1 million in net tangible assets from Vical, which were recorded as charges against additional paid-in capital. The following table summarizes the net assets acquired based on their estimated fair values immediately prior to the Merger (in thousands):



Cash and cash equivalents	$	13,017
Marketable securities	23,959
Prepaid expenses and other current assets	1,474
Accrued liabilities	(2,357		)
Net acquired tangible assets	$	36,093

In connection with the Merger, the Company assumed warrants previously held by Vical, which provide the warrantholder the right to purchase 891,582 shares of common stock at an exercise price of $0.07 (the “Vical Warrants”). The Vical Warrants were classified as equity.

The combined company assumed all the outstanding options, under Vical’s equity incentive plan (the "Vical Plan") with such options representing the right to purchase a number of shares of Brickell common stock previously represented by such options, as adjusted for the recapitalization.

Use of Estimates

The Company’s condensed consolidated financial statements are prepared in accordance with US GAAP, which requires it to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on the Company’s knowledge of current events and actions it may take in the future, actual results may ultimately differ from these estimates and assumptions.

Risks and Uncertainties

The Company’s business is subject to significant risks common to early-stage companies in the pharmaceutical industry including, but not limited to, the ability to develop appropriate formulations, scale up and production of the compounds, dependence on collaborative parties, uncertainties associated with obtaining and enforcing patents and other intellectual property rights, clinical implementation and success, the lengthy and expensive regulatory approval process, compliance with regulatory and other legal requirements, competition from other products; uncertainty of broad adoption of its approved products, if any, by physicians and patients; significant competition; ability to manage third-party manufacturers, suppliers, contract research organizations, business partners and other alliance management, and obtaining additional financing to fund the Company’s efforts.

The product candidates developed by the Company require approvals from the U.S. Food and Drug Administration (“FDA”) and foreign regulatory agencies prior to commercial sales in the United States or foreign jurisdictions, respectively. There can be no assurance that the Company’s current and future product candidates will receive the necessary approvals. If the Company is denied approval or approval is delayed, it may have a material adverse impact on the Company’s business and its financial condition.

The Company expects to incur substantial operating losses for the next several years and will need to obtain additional financing in order to complete clinical studies and launch and commercialize any product candidates for which it receives regulatory approval. There can be no assurance that such financing will be available or will be at terms acceptable by the Company.

Fair Value Measurements

Fair value is the price that the Company would receive to sell an asset or pay to transfer a liability in a timely transaction with an independent counterparty in the principal market or in the absence of a principal market, the most advantageous market for the asset or liability. A three-tier hierarchy is established to distinguish between (1) inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on market data obtained from sources independent of the reporting entity (observable inputs) and (2) inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing an asset or liability developed based on the best information available in the circumstances (unobservable inputs), and establishes a classification of fair value measurements for disclosure purposes.

The hierarchy is summarized in the three broad levels listed below:

Level 1—quoted prices in active markets for identical assets and liabilities

Level 2—other significant observable inputs (including quoted prices for similar assets and liabilities, interest rates, credit risk, etc.)

Level 3—significant unobservable inputs (including the Company’s own assumptions in determining the fair value of assets and liabilities)

The following tables set forth the fair value of the Company’s financial assets and liabilities measured at fair value on a recurring basis based on the three-tier fair value hierarchy as of September 30, 2019 and December 31, 2018 (in thousands):



	September 30, 2019
	Level 1		Level 2		Level 3
Assets:
Money market funds	$	7,225	$	—	$	—
U.S. treasuries	18,473		—		—
Total	$	25,698	$	—	$	—
Liabilities:
Contingent consideration	$	—	$	—	$	145



	December 31, 2018
	Level 1		Level 2		Level 3
Assets:
Money market funds	$	8,067	$	—	$	—
Liabilities:
Redeemable convertible preferred stock warrant liability	$	—	$	—	$	242
Contingent consideration	—		—		145
Total	$	—	$	—	$	387

Fair Value of Financial Instruments

The following methods and assumptions were used by the Company in estimating the fair values of each class of financial instrument disclosed herein:

Money Market Funds—The carrying amounts reported as cash and cash equivalents in the condensed consolidated balance sheets approximate their fair values due to their short-term nature and/or market rates of interest (Level 1 of the fair value hierarchy).

U.S. Treasuries—The Company has designated its investments in U.S. treasury securities as available-for-sale securities and accounts for them at their respective fair values. The securities are classified as short-term or long-term based on the nature of the securities and their availability to meet current operating requirements. Securities that are readily available for use in current operations are classified as short-term available-for-sale marketable securities and are reported as a component of current assets in the condensed consolidated balance sheets (Level 1 of the fair value hierarchy).

Securities that are classified as available-for-sale are measured at fair value, including accrued interest, with temporary unrealized gains and losses reported as a component of stockholders’ equity until their disposition. The Company reviews available-for-sale securities at the end of each period to determine whether they remain available-for-sale based on its then current intent. The cost of securities sold is based on the specific identification method. The securities are subject to a periodic impairment review. An impairment charge would occur when a decline in the fair value of the investments below the cost basis is judged to be other-than-temporary.

As of September 30, 2019, the Company’s available-for-sale securities had an amortized cost of $18.5 million, fair value of $18.5 million, and an unrealized gain of $20 thousand. Because the securities were acquired in August 2019 in connection to the Merger, there were no related balances as of December 31, 2018.

Contingent Consideration—These amounts represent future payments in conjunction with various business combinations related to the acquisition of certain early-stage pipeline assets. The ultimate amount of future payments is based on specified future criteria, such as the achievement of certain future development and regulatory milestones. The Company evaluates its estimates of the fair value of contingent consideration on a quarterly basis. The fair value of the contingent consideration was determined with the assistance of a third-party valuation firm applying the income approach. This approach estimates the fair value of the contingent consideration related to the achievement of future development and regulatory milestones by assigning an achievement probability and date of expected completion to each potential milestone and discounting the associated cash payment to its present value using a risk-adjusted rate of return. The probability of success of each milestone assumes that the prerequisite developmental milestones are successfully completed and is based on the asset’s current stage of development and anticipated regulatory requirements. The probability of success for each milestone is determined by multiplying the preceding probabilities of success. The unobservable inputs (Level 3 of the fair value hierarchy) to the valuation models that have the most significant effect on the fair value of the Company’s contingent consideration are the probabilities that certain in-process development projects will meet specified development milestones, including ultimate approval by the FDA, with individual cumulative probabilities ranging from 2.1% to 20.9%. Other unobservable inputs used in this approach include risk-adjusted discount rates ranging from 15.5% to 27.1% and estimates of the timing of the achievement of the various product development, regulatory approval, and sales milestones.

Redeemable Convertible Preferred Stock Warrant Liability—These amounts represented potential future obligations to transfer assets to the holders at a future date. The Company remeasured these warrants to current fair value at each balance sheet date, and any change in fair value was recognized as a change in fair value of warrant liability in the condensed consolidated statements of operations. The Company estimated the fair value of these warrants at December 31, 2018 using the Black-Scholes option-pricing model (Level 3 of the fair value hierarchy table). These warrants converted from warrants exercisable for redeemable convertible preferred stock to common stock in August 2019 in connection to the Merger (see further discussion in Note 7).

Inputs used to determine estimated fair value of the warrant liabilities included the estimated fair value of the underlying stock at the valuation date, the estimated term of the warrants, risk-free interest rates, expected dividends, and the expected volatility of the underlying stock. The most significant unobservable inputs used in the fair value measurement of the convertible preferred stock warrant liability were the fair value of the underlying stock at the valuation date and the estimated term of the warrants. Generally, increases (decreases) in the fair value of the underlying stock and estimated term resulted in a directionally similar impact to the fair value measurement.

The fair value of the outstanding warrants was remeasured as of each period end using the Black-Scholes option-pricing model with the following assumptions:



	2018
Expected term (in years)	7.1
Expected volatility	30.00	%
Risk free interest rate	2.59	%
Expected dividend yield	—	%

The fair value of the shares of the convertible preferred stock underlying the preferred stock warrants was historically determined with the assistance of a third-party valuation firm. Because there had been no public market for the Company’s convertible preferred stock, the third-party valuation firm determined fair value of the convertible preferred stock at each balance sheet date by considering a number of objective and subjective factors, including valuation of comparable companies, sales of convertible preferred stock to unrelated third parties, operating and financial performance, the lack of liquidity of capital stock, and general and industry specific economic outlook, among other factors.

Remaining Term. The Company derived the expected term based on the time from the balance sheet date until the preferred stock warrant’s expiration date.

Expected Volatility. Since the Company was a private entity with no historical data regarding the volatility of its preferred stock, the expected volatility used was based on volatility of a group of similar entities. In evaluating similarity, the Company considered factors such as industry, stage of life cycle, and size.

Risk-free Interest Rate. The risk-free interest rate was based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term of the warrants.

Expected Dividend Rate. The Company has never paid any dividends and does not plan to pay dividends in the foreseeable future and, therefore, used an expected dividend rate of zero in the valuation model.

Derivative Liability—These amounts represented potential future obligations to transfer assets to the holders at a future date. The fair value of the derivative liability has historically been determined with the assistance of a third-party valuation firm (Level 3 of the fair value hierarchy table) (see further discussion in Note 6). At the inception of the liability, there was no public market for the Company’s common stock, and a third-party valuation firm determined fair value of the stock by considering a number of objective and subjective factors, including valuation of comparable companies, sales of common stock to unrelated third parties, operating and financial performance, the lack of liquidity of capital stock, and general and industry specific economic outlook, among other factors. The derivative liability was marked-to-market each measurement period and any change in fair value was recorded in the condensed consolidated statements of operations. In August 2019, in connection to the Merger, the derivative liability was reclassified to equity in the condensed consolidated balance sheet (see further discussion in Note 6).

Common Stock Warrant Liability—These amounts represented potential future obligations to transfer assets to the holders at a future date. The fair value of the warrants was historically determined with the assistance of a third-party valuation firm (Level 3 of the fair value hierarchy table) (see further discussion in Note 6). At the inception of the liability, there was no public market for the Company’s common stock, and a third-party valuation firm determined fair value of the stock by considering a number of objective and subjective factors, including valuation of comparable companies, sales of common stock to unrelated third parties, operating and financial performance, the lack of liquidity of capital stock, and general and industry specific economic outlook, among other factors. The warrant liability was remeasured to fair value at each balance sheet date, and any change in fair value was recognized as a change in fair value of warrant liability in the condensed consolidated statements of operations. The Company estimated the fair value of these warrants using the Black-Scholes option-pricing model. In August 2019, in connection to the Merger, the warrant liability was reclassified to equity in the condensed consolidated balance sheet (see further discussion in Note 6).

Inputs used to determine estimated fair value of the warrant liabilities included the estimated fair value of the underlying stock at the valuation date, the estimated term of the warrants, risk-free interest rates, expected dividends, and the expected volatility of the underlying stock. The most significant unobservable inputs used in the fair value measurement of the warrant liability were the fair value of the underlying stock at the valuation date and the estimated term of the warrants. Generally, increases (decreases) in the fair value of the underlying stock and estimated term resulted in a directionally similar impact to the fair value measurement.

The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial instruments as follows (in thousands):



	Derivative Liability			Common Stock Warrant Liability			Redeemable Convertible Preferred Stock Warrant Liability			Contingent Consideration Liabilities
Fair value as of December 31, 2018	$	—		$	—		$	242		$	145
Fair value of financial instruments issued	1,442			1,492			—			—
Change in fair value	11			17			(240		)	—
Reclassification to equity	(1,453		)	(1,509		)	(2		)	—
Fair value as of September 30, 2019	$	—		$	—		$	—		$	145

Leases

On January 1, 2019, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 842, Leases (“ASC 842”), using the modified retrospective method for all lease arrangements at the beginning of the

period of adoption. Results for reporting periods beginning January 1, 2019 are presented under ASC 842, while prior period amounts were not adjusted and continue to be presented in accordance with the Company’s historical accounting under ASC Topic 840, Leases. ASC 842 had an impact on the Company’s condensed consolidated balance sheets but did not have a significant impact on the Company’s net loss.

Under ASC 842, the Company determines if an arrangement is a lease at inception. Leases with a term greater than one year are recognized on the balance sheet as right-of-use assets, lease liabilities and, if applicable, long-term lease liabilities. The Company has elected the practical expedient not to recognize on the balance sheet leases with terms of one-year or less and not to separate lease components and non-lease components for long-term real-estate leases. Lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected lease term. The interest rate implicit in lease contracts is typically not readily determinable. As such, the Company estimates the incremental borrowing rate based on industry peers in determining the present value of lease payments. The Company’s facility operating lease has one single component. The lease component results in a right-of-use asset being recorded on the balance sheet, which is amortized as lease expense on a straight-line basis in the Company’s condensed consolidated statements of operations.

Redeemable Convertible Preferred Stock

Redeemable convertible preferred stock was classified as a mezzanine instrument outside of the Company’s capital accounts. Accretion of redeemable convertible preferred stock included the greater of an adjustment to fair market value or the accrual of dividends on and accretion of issuance costs of the Company’s redeemable convertible preferred stock. The carrying values of the redeemable convertible preferred stock were increased or reduced by periodic accretion or reduction to their respective redemption values from the date of issuance to August 31, 2019, the date that all outstanding shares of redeemable convertible preferred stock converted into shares of common stock. The carrying value adjustments were recorded as charges against additional paid-in capital balance.

Preferred stock issuance costs represent costs related to the Company’s issuance of redeemable convertible preferred stock. These amounts were included as a reduction of redeemable convertible preferred stock and were amortized over the estimated redemption period until its conversion to common stock in August 2019. For the nine months ended September 30, 2019 and 2018, amortization of preferred stock issuance costs amounted to approximately $0.1 million and $30 thousand, respectively.

Redeemable Convertible Preferred Stock Warrants

The Company accounted for warrants to purchase shares of its redeemable convertible preferred stock as liabilities at their estimated fair value because the underlying shares were redeemable, which obligated the Company to transfer assets to the holders at a future date. The warrants were subject to remeasurement to fair value at each balance sheet date, and any fair value adjustments were recognized as change in fair value of redeemable convertible preferred stock warrant liability in the condensed consolidated statements of operations. The Company continued to adjust the liability for changes in fair value until the conversion of the redeemable convertible preferred stock into common stock in August 2019. At that time, the redeemable convertible preferred stock warrant liability was adjusted to fair value in the condensed consolidated statements of operations with the final fair value reclassified to equity.

Revenue Recognition

The Company recognizes revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. To determine revenue recognition for contracts with customers the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies the performance obligations. At contract inception, the Company assesses the goods or services promised within each contract and assesses whether each promised good or service is distinct and determines those that are performance obligations. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

To date, the Company’s drug candidates have not been approved for sale by the FDA or any other country’s regulatory authority, and the Company has not generated or recognized any revenue from the sale of products.

In March 2015, the Company entered into a license and collaboration agreement with Kaken Pharmaceutical, Co., Ltd. (“Kaken”), which is referred to as the “Collaboration Agreement.” Under the Collaboration Agreement, the Company granted to Kaken an exclusive right to develop, manufacture, and commercialize the Company’s sofpironium bromide compound (formerly BBI-4000), a topical anticholinergic, in Japan and certain other Asian countries (the “Territory”). In exchange, Kaken paid the Company an upfront, non-refundable payment of $11.0 million (the “upfront fee”). In addition, the Company is entitled to receive aggregate payments of up to $10.0 million upon the achievement of specified development milestones, and $30.0 million upon the achievement of commercial milestones, as well as tiered royalties based on a percentage of net sales of licensed products in the Territory. The Collaboration Agreement further provides that Kaken will be responsible for funding all development and commercial costs for the program in the Territory and, until such time, if any, as Kaken elects to establish its own source of supply of drug product, Kaken can purchase product supply from the Company to perform all non-clinical studies, and Phase 1 and Phase 2 clinical trials in Japan at cost. Kaken is also required to enter into negotiations with the Company, to supply the Company, at cost, with clinical supplies to perform Phase 3 clinical trials in the United States.

Collaboration Arrangement Subsequent to Adoption of Topic 606

The Company evaluates collaboration arrangements to determine whether units of account within the collaboration arrangement exhibit the characteristics of a vendor and customer relationship. The Company determined that the licenses transferred to Kaken in exchange for the upfront fees were representative of this type of a relationship. If a license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues from non-refundable, upfront fees allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses that are bundled with other performance obligations, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue. The Company evaluates the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition on a prospective basis.

Under Topic 606, the Company evaluated the terms of the Collaboration Agreement and the transfer of intellectual property and manufacturing rights (the “license”) was identified as the only performance obligation as of the inception of the agreement. The Company concluded that the license for the intellectual property was distinct from its ongoing supply obligations. The Company further determined that the transaction price under the arrangement was comprised of the $11.0 million upfront payment. The future potential milestone amounts were not included in the transaction price, as they were all determined to be fully constrained. As part of its evaluation of the development and regulatory milestones constraint, the Company determined that the achievement of such milestones is contingent upon success in future clinical trials and regulatory approvals, each of which is uncertain at this time. The Company will re-evaluate the transaction price each quarter and as uncertain events are resolved or other changes in circumstances occur. Future potential milestone amounts would be recognized as revenue from collaboration arrangements, if unconstrained. The remainder of the arrangement, which largely consisted of both parties incurring costs in their respective territories, provides for the reimbursement of the ongoing supply costs. These costs were representative of a collaboration arrangement outside of the scope of Topic 606 as it does not have the characteristics of a vendor and customer relationship. Reimbursable program costs are recognized proportionately with the delivery of drug substance and are accounted for as reductions to research and development expense and are excluded from the transaction price.

Under Topic 606, the entire transaction price of $11.0 million was allocated to the license performance obligation. The license was deemed to be delivered in 2015 in connection with the execution of the Collaboration Agreement and upon transfer of the underlying intellectual property the performance obligation was fully satisfied. As a result, a cumulative adjustment to reduce deferred revenue and the corresponding sublicensing costs of $2.7 million was recorded upon the adoption of Topic 606 on January 1, 2018. As of September 30, 2019, the Company does not have a deferred revenue or deferred sublicensing costs balance related to the upfront fee on the condensed consolidated balance sheet.

In May 2018, the Company entered into an amendment to the Collaboration Agreement (as further amended, “Collaboration Agreement”), pursuant to which, the Company received an upfront non-refundable fee of $15.6 million (the “Collaboration R&D Payment”), which was initially recorded as deferred revenue, to provide the Company with research and development funds for the sole purpose of conducting certain clinical trials and other such research and development activities required to support the submission of a NDA for sofpironium bromide. These clinical trials have a benefit to Kaken and have the characteristics of a vendor and customer relationship. The Company has accounted for these under the provisions of Topic 606. This Collaboration R&D Payment will be initially recognized using an input method over the average estimated performance period of 1.45 years in proportion to the cost incurred. Upon receipt of the Collaboration R&D Payment, on May 31, 2018, a milestone payment

originally due upon the first commercial sale in Japan was removed from the Collaboration Agreement and all future royalties to the Company under the Collaboration Agreement were reduced 150 basis points.

Consequently, during the three and nine months ended September 30, 2019, the Company recognized revenue of $1.2 million and $7.2 million, respectively related to the Collaboration R&D Payment. As of September 30, 2019, the Company has a deferred revenue balance related to the Collaboration R&D Payment of $2.5 million, which is recorded in deferred revenue, current portion on the accompanying condensed consolidated balance sheets.

Milestones

At the inception of each arrangement that includes milestone payments (variable consideration), the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the Company or the Company’s collaboration partner’s control, such as regulatory approvals, are generally not considered probable of being achieved until those approvals are received. The transaction price is then allocated to each performance obligation on a relative stand-alone selling price basis, for which the Company recognizes revenue as or when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of such milestones and any related constraint, and if necessary, adjust the Company’s estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect license, collaboration or other revenues and earnings in the period of adjustment.

In October 2017, the Company entered into an amendment to the Collaboration Agreement, pursuant to which, the Company granted Kaken a prepayment option (the “Kaken Option”) on 50% of the Initiation of Phase 3 milestone (the “Phase 3 Milestone”). The Kaken Option was exercisable by Kaken within 25 business days of receipt of the BBI-4000-CL-203 study topline results. In December 2017, Kaken exercised the Kaken Option and paid the Company $5.0 million (the “Kaken Option Payment”). Upon receipt of the non-refundable Kaken Option Payment, the Company provided Kaken the right to negotiate an exclusive license to develop, manufacture and commercialize each of the Company’s other product candidates in Japan (“ROFN Agreement”). Under the ROFN Agreement, following the completion of any Initial Proof of Concept Clinical Trial (“Initial POC”) for the Company’s other product candidates, the Company must provide Kaken with certain information relating to the results of the clinical trial (“Initial POC Package”). The ROFN Agreement is exercisable by Kaken within 30 days of receipt of the Initial POC Package. In December 2017, the Company recognized collaboration revenue related to the Collaboration Agreement of $5.0 million, in connection with the Kaken Option. Additionally, the Company recognized sublicensing costs of $1.0 million, which are included in general and administrative expenses.

The Collaboration Agreement was further amended in March 2018 to accelerate payment of the Phase 3 Milestone. The Phase 3 Milestone was modified to be due upon the successful completion of the End of Phase 2 Meeting with the PMDA by Kaken on March 8, 2018, as determined by Kaken in its reasonable discretion (the “Third Milestone”). In March 2018, Kaken triggered the Third Milestone and paid the Company $5.0 million (the “Third Milestone Payment”). Upon receipt of the non-refundable Third Milestone Payment, the ROFN Agreement was amended (the “Amended ROFN Agreement”) to grant an additional option to exercise upon completion of a Subsequent Clinical Trial (first clinical trial after the Initial POC) for the Company’s other product candidates. The Company has determined that the ROFN Agreement is not a material right and has not allocated transaction price to this provision. As of September 30, 2019, Kaken has not exercised the Amended ROFN Agreement. In March 2018, the Company recognized collaboration revenue related to the Collaboration Agreement of $5.0 million in connection with the Third Milestone. Additionally, the Company recognized sublicensing costs of $1.0 million, which are included in general and administrative expenses.

Royalties

For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and for which the license is deemed to be the predominant item to which the royalties relate, the Company recognized revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, the Company has not recognized any royalty revenue from any collaborative arrangement.

Under collaborative arrangements, the Company has been reimbursed for a portion of the Company’s research and development expenses, including costs of drug supplies. When the research and development services are performed under a reimbursement

or cost sharing model with a collaboration partner, the Company records these reimbursements as a reduction of research and development expense in the Company’s condensed consolidated statements of operations.

Net Loss per Common Share

Basic and diluted net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding. When the effects are not anti-dilutive, diluted earnings per share is computed by dividing the Company’s net earnings by the weighted average number of common shares outstanding and the impact of all dilutive potential common shares.

Diluted earnings per share gives effect to all dilutive potential common shares outstanding during the period, including stock options and warrants, using the treasury stock method, and redeemable convertible preferred stock, using the if-converted method. In computing diluted earnings per share, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Potentially dilutive common share equivalents are excluded from the diluted earnings per share computation in net loss periods because their effect would be anti-dilutive.

The following table sets forth the potential common shares excluded from the calculation of net loss per common share, because their inclusion would be anti-dilutive:



	Three and Nine Months Ended September 30,
	2019	2018
Warrants to purchase common stock	1,632,495	55,360
Options to purchase common stock	1,802,895	1,347,500
Redeemable convertible preferred stock (as converted into common stock)	—	1,256,466
Warrants to purchase redeemable convertible preferred stock (as converted into common stock)	—	9,005
Total	3,435,390	2,668,331

NOTE 3. RECENT ACCOUNTING PRONOUNCEMENTS

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which amends certain disclosure requirements over Level 1, Level 2, and Level 3 fair value measurements. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of adopting ASU 2018-13, but does not anticipate it will have a material impact on its disclosures.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). ASU 2016-02 is aimed at making leasing activities more transparent and comparable and requires substantially all leases be recognized by lessees on their balance sheets as a right-of-use asset and corresponding lease liability, including leases currently accounted for as operating leases. The Company adopted ASU 2016-02 on January 1, 2019 using the modified retrospective approach. The adoption did not have a material impact on the Company’s condensed consolidated statements of operations. The new standard has required the Company to establish liabilities and corresponding right-of-use assets on its condensed balance sheet for operating leases of $0.2 million that existed as of the January 1, 2019 adoption date. The impact on the condensed consolidated balance sheets as of January 1, 2019 was as follows (in thousands):



Balance Sheet	Topic 840 January 1, 2019		Topic 842 January 1, 2019			Impact of Adoption
Operating lease right-of-use asset	$	—	$	219		$	219
Lease liability, current portion	—		(68		)	(68		)
Lease liability, net of current portion	—		(151		)	(151		)

NOTE 4. NOVAQUEST FUNDING ARRANGEMENT

On August 31, 2019, concurrent with the Merger Agreement, the Company entered into a research and development arrangement with NovaQuest pursuant to which NovaQuest committed up to $25.0 million in research and development funding to the

Company following the closing of the Merger. These proceeds will partially fund the Company’s Phase 3 clinical trials in the United States for its product candidate that contains sofpironium bromide, which treats hyperhidrosis of the skin. The Company is obligated to use commercially reasonable efforts to complete the clinical trials and file to obtain regulatory approval. The funding was projected to cover 67% of the product development costs up to $25.0 million.

As there is a substantive and genuine transfer of risk, the development funding is accounted for as an obligation to perform contractual services. However, given the potential obligation to repay the amounts received, the Company defer any funding received as a liability unless and until it becomes probable that the Company will not have to make a repayment of the received funding to NovaQuest. If the research and development is successful and the product candidate is ultimately approved by the FDA, NovaQuest will be entitled to a payment in the amount of $37.5 million, with $20.0 million due upon approval and the remainder due within two years of approval. Additionally, NovaQuest will be entitled to royalty payments based on annual net sales (except for Japan and certain other Asian countries) of the product candidate based on a sliding scale starting from the date that is two years after the first commercial sale. The portion of the approval payment, should it occur, that exceeds any liabilities recorded on the balance sheet, will be expensed immediately as interest expense. The royalties will be expensed as incurred and will also be included in cost of sales.

If the funding arrangement is terminated in certain circumstances, the Company will be required to pay NovaQuest $25.0 million plus interest, ranging from 8% to 12%. However, in the event that the Company terminates its development program for sofpironium bromide for other specified reasons, including serious safety issues, a failure of the product’s Phase 3 studies, or the FDA’s unwillingness to approve the product, the Company will not be obligated to make any payments to NovaQuest.

In conjunction with the transaction, the Company issued a fully vested warrant to NovaQuest providing it with the right to purchase 241,225 shares of common stock at an exercise price of $10.36 that is exercisable any time within ten years of the execution of the research and development arrangement (the “NovaQuest Warrant”). At issuance, the NovaQuest Warrant was classified as equity and recorded at fair value with no subsequent remeasurement. The fair value of the outstanding warrants was derived from the Black-Scholes option-pricing model using the following assumptions: expected volatility of 85.56%; risk free interest rate of 1.50%; expected term of 10 years; and expected dividend yield of 0.00%.

As of September 30, 2019, $5.6 million of funding had been received from NovaQuest, of which $0.9 million was allocated to the NovaQuest Warrant and deferred on the balance sheet within other current assets and will be recorded as interest expense over the term of the NovaQuest Warrant. In October 2019, NovaQuest notified the Company that additional funding was suspended temporarily based on a material adverse event. Refer to Note 11 for additional details.

NOTE 5. ACCRUED LIABILITIES

Accrued liabilities consisted of the following (in thousands):



	September 30, 2019		December 31, 2018
Accrued contracted research and development services	$	1,715	$	847
Accrued professional fees	992		1,269
Accrued compensation	768		569
Accrued note issuance costs	—		587
Total	$	3,475	$	3,272

NOTE 6. CONVERTIBLE PROMISSORY NOTES

In March 2019, the Company initiated a convertible promissory notes offering pursuant to which the Company issued unsecured convertible promissory notes (the “Prom Notes”), bearing interest at 12.00% with a maturity of one year and convertible into shares of Series C-1 redeemable convertible preferred stock or the most senior preferred equity outstanding at the time of conversion at the option of the holder at a conversion price of $31.05 per share. In addition, the Prom Notes were automatically convertible upon closing of a qualified financing of at least $15.0 million before maturity at a conversion price equal to 80% of the effective price per share paid in the qualified financing, but not to exceed $38.82 per share. Through August 31, 2019, the Company had raised an aggregate principal amount of $7.4 million in Prom Notes. On August 31, 2019, prior to the Merger, the Prom Notes and related accrued interest converted into 1,069,740 shares of Private Brickell common stock at a conversion price of $7.54 per share (the “Conversion”).

The Prom Notes also provided for the issuance of warrants at 50% coverage, to acquire 490,683 shares of common stock. The warrants are exercisable for a term of five years at an exercise price of $10.36. Prior to the Merger, the warrants were exercisable at an exercise price of $42.70 or 10% premium to the effective price per share paid in a qualified financing. The Company evaluated the various financial instruments under ASC 480 and ASC 815 and determined the warrants required fair value accounting. The fair value of the warrants was recorded as a warrant liability upon issuance. The fair value of the warrants on the dates of issuance of $1.5 million was determined with the assistance of a third-party valuation firm. The fair value of the warrants was recorded as a debt discount upon issuance and was amortized to interest expense over the term of the Prom Notes based on the effective interest method.

At inception of the Prom Notes offering, the Company analyzed the conversion feature of the agreement for derivative accounting consideration under ASC 815 and determined that the embedded conversion features should be classified as a derivative because the exercise price of the Prom Notes are subject to a variable conversion rate. The Company determined that the variable conversion feature was a redemption feature that was not clearly and closely related to the Prom Notes and was therefore required to be bifurcated. In accordance with AC 815, the Company bifurcated the conversion feature of the Prom Notes and recorded a derivative liability.

The embedded derivative for the Prom Notes was carried on the Company’s condensed consolidated balance sheet at fair value. The derivative liability was marked-to-market each measurement period and any change in fair value was recorded as a component of the statements of operations. The fair value of the derivative liabilities on the date of issuance of $1.4 million was determined with the assistance of a third-party valuation firm. The fair value of the conversion feature was recorded as a debt discount upon issuance and was amortized to interest expense over the term of the Prom Notes based on the effective interest method.

The Company evaluated the conversion option to discern whether a beneficial conversion feature existed based upon comparing the effective exercise price of the convertible notes to the fair value of the shares they were convertible into. The Company concluded no beneficial conversion feature existed. During the three months ended September 30, 2019, the Company recognized $1.1 million of interest expense, including $0.4 million of accretion of discounts using an effective interest rate of 12.00%. During the nine months ended September 30, 2019, the Company recognized $2.0 million of interest expense, including $0.8 million of accretion of discounts using an effective interest rate of 12.00%.

As a result of the Conversion on August 31, 2019, the Prom Notes payable, warrant liability, and derivative liability balances were reclassified to equity in the condensed consolidated balance sheets. A gain of $2.3 million resulted from the Conversion of the Prom Notes, which is included in the gain on extinguishment line in the condensed consolidated statements of operations.

NOTE 7. NOTE PAYABLE

On February 18, 2016, the Company entered into a loan and security agreement (the “Loan Agreement”) with Hercules Capital, Inc. (the “Lender”) under which the Company borrowed $7.5 million upon the execution of the Loan Agreement on February 18, 2016. The interest rate applicable to each tranche was variable based upon the greater of either (i) 9.2% and (ii) the sum of (a) the Prime Rate as reported in The Wall Street Journal minus 3.5%, plus (b) 9.2%; notwithstanding the above, such rate could not exceed the permissible rates of interest on commercial loans under the laws of the State of California. Payments under the Loan Agreement were interest only until June 1, 2017, followed by equal monthly payments of principal and interest through the maturity date of September 1, 2019. The Company was required to make an end of term payment of 4.5% of the sum of (i) term loan advances, plus (ii) 50% of the aggregate unfunded term loan commitments. The Loan Agreement was further amended in December 2017, March 2018, and July 2018 (as further amended, “Loan Agreement”) to provide for an additional combined interest-only period of eight months, and the outstanding loan balance continued to be paid in equal monthly installments of principal and interest. As a result of the amendments, the Company was required to increase the end-of-term payment by $0.1 million. At the inception of the loan and the following amendment dates, the Company paid the Lender aggregate facility fees of $0.2 million in connection with the Loan Agreement.

In connection with the Loan Agreement, the Company issued warrants to the Lender, which are exercisable for 9,005 shares of common stock at a per share exercise price of $33.31 (the “Hercules Capital Warrants”). The Hercules Capital Warrants will terminate, if not earlier exercised, on February 18, 2026. The fair value of the Hercules Capital Warrants was recorded at inception as a redeemable convertible preferred stock warrant liability upon issuance. The fair value of the Hercules Capital Warrants on the date of issuance of $0.3 million was determined using the Black-Scholes option-pricing model and was recorded as a debt discount upon issuance and was amortized to interest expense over the term of the loan based on the effective interest method.

On September 3, 2019, the Company repaid the remaining outstanding loan balance of $2.6 million and an associated accrued interest and aggregate end-of-term payment of $0.6 million, and the Loan Agreement was terminated. At the effective time of the Merger, the warrant liability was reclassified to equity in the condensed consolidated balance sheet. As of September 30, 2019, there were no remaining unaccreted debt discounts and issuance costs.

NOTE 8. COMMITMENTS AND CONTINGENCIES

Operating Leases

In August 2016, the Company entered into a five-year lease for office space in Boulder, Colorado that expires on October 31, 2021 (the “Boulder Lease”) subject to the Company’s option to renew the Boulder Lease for two additional terms of three years each. Pursuant to the Boulder Lease, the Company leased 3,038 square feet of space in a multi-suite building. Rent payments under the Boulder Lease included base rent of $4,430 per month during the first year of the Boulder Lease with an annual increase of 3.5%, and additional monthly fees to cover the Company’s share of certain facility expenses, including utilities, property taxes, insurance, and maintenance, which were $2,160 per month during the first year of the Boulder Lease.

The Company recognized a right-of-use asset and corresponding lease liability on January 1, 2019, by calculating the present value of lease payments, discounted at 12.0%, the Company’s estimated incremental borrowing rate, over the 2.8 years expected remaining term. As the Company’s lease does not provide an implicit rate, the Company estimated the incremental borrowing rate based on industry peers. Industry peers consist of several public companies in the biotechnology industry with comparable characteristics, including clinical trials progress and therapeutic indications. Amortization of the operating lease right-of-use asset for the Boulder Lease amounted to $17 thousand and $50 thousand for the three and nine months ended September 30, 2019, respectively, and was included in operating expense. As of September 30, 2019, the remaining lease term was 2.1 years.

The terms of the Boulder Lease provide for rental payments on a monthly basis on a graduated scale. The Company recognizes rent expense on a straight-line basis over the lease period. Lease expense for the three and nine months ended September 30, 2019 and 2018 was $22 thousand and $0.1 million, respectively.

NOTE 9. CAPITAL STOCK

Common Stock

Each share of common stock is entitled to one vote, and the holders of common stock are entitled to receive dividends when and as declared or paid by its board of directors. At the effective date of the Merger, each outstanding share of the Company’s common stock was converted into the right to receive approximately 2.4165 shares of the Private Brickell’s common stock.

The Company has reserved authorized shares of common stock, on an as-converted basis, for future issuance at September 30, 2019 as follows:



	September 30, 2019
Common stock options outstanding	1,802,895
Common stock warrants	1,632,495
Options available for grant under the Vical Plan	119,070
Options available for grant under the 2009 Plan	17,232
Total	3,571,692

Preferred Stock

In August 2019, in conjunction with the Merger, all outstanding shares of redeemable convertible preferred stock converted into shares of common stock at a ratio of 1:1 and were immediately exchanged for common stock at an Exchange Ratio of 2.4165 as a result of the Merger.

Redeemable convertible preferred stock consisted of the following prior to the conversion on August 31, 2019 (in thousands, except share data):



	Preferred Shares Authorized	Preferred Shares Issued and Outstanding	Par Value		Carrying Value		Common Stock Issued Upon Conversion
Series A	1,162,505	401,309	$	4	$	12,164	401,309
Series B	882,216	286,151	3		10,084		286,151
Series C	869,565	256,583	3		11,630		256,583
Series C-1	1,531,942	312,423	3		14,138		312,423
	4,446,228	1,256,466	$	13	$	48,016	1,256,466

Redeemable convertible preferred stock consisted of the following as of December 31, 2018 (in thousands, except share data):



	Preferred Shares Authorized	Preferred Shares Issued and Outstanding	Par Value		Carrying Value		Common Stock Issuable Upon Conversion
Series A	1,162,505	401,309	$	4	$	16,098	401,309
Series B	882,216	286,151	3		13,011		286,151
Series C	869,565	256,583	3		13,018		256,583
Series C-1	1,268,657	312,423	3		16,163		312,423
	4,182,943	1,256,466	$	13	$	58,290	1,256,466

As of September 30, 2019, the Company had no outstanding shares of redeemable convertible preferred stock and had not designated the rights, preferences, or privileges of any class or series of preferred stock. Although, the Company’s board of directors has the authority, at its discretion, to issue preferred stock in one or more classes or series and to fix the designations, powers, preferences and rights, and the qualifications, limitations, or restrictions thereof, including dividend rights, conversion right, voting rights, terms of redemption, liquidation preferences, and the number of shares constituting any class or series of preferred stock, without further vote or action by the stockholders.

NOTE 10. STOCK-BASED COMPENSATION

Equity Incentive Plans

The Company’s 2009 Equity Incentive Plan, as amended and restated (the “2009 Plan”), provides for the Company to sell or issue common stock or restricted common stock, or to grant incentive stock options or nonqualified stock options for the purchase of common stock, to employees, members of the Board of Directors, and consultants of the Company. At September 30, 2019, the total shares authorized under the 2009 Plan were 1,634,655 shares. The Board of Directors or a designated Committee of the Board is responsible for the administration of the 2009 Plan and determines the term, exercise price, and vesting terms of each option. Options granted under the 2009 Plan have an exercise price equal to the market value of the common stock at the date of grant and expire ten years from the date of grant. At September 30, 2019, a total of 17,232 shares were available for grant under the 2009 Plan.

In connection with the Merger, the Company adopted Vical’s Equity Incentive Plan (the “Vical Plan”). At September 30, 2019, the total shares authorized under the Vical Plan were 413,710 shares The Vical Plan, as amended, provides for the Company to sell or issue common stock or restricted common stock, or to grant incentive stock options or nonqualified stock options for the purchase of common stock, to employees, members of the Board of Directors, and consultants of the Company. The plan provides for the grant of incentive and nonstatutory stock options and the direct award or sale of shares, including restricted stock. The exercise price of stock options must equal at least the fair market value of the underlying common stock on the date of grant. The maximum term of options granted under the plan is ten years. The Vical Plan also limits the number of options that may be granted to any plan participant in a single calendar year to 1,300,000 shares. At September 30, 2019, a total of 119,070 shares were available for grant under the Vical Plan.

Share-based Compensation Expense