IDERA PHARMACEUTICALS, INC. - FORM 10-Q

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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 March 31, 2020

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

For transition period from to .

Commission File Number: 001-31918

IDERA PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)


Delaware		04-3072298
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

505 Eagleview Blvd., Suite 212 Exton, Pennsylvania (Address of principal executive offices)		19341 (Zip code)

(484) 348-1600

(Registrant’s telephone number, including area code)

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.001 per share	IDRA	Nasdaq Capital Market

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

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

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


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

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

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


Common Stock, par value $.001 per share		33,702,854
Class		Outstanding as of April 30, 2020

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IDERA PHARMACEUTICALS, INC.

FORM 10-Q

TABLE OF CONTENTS


		Page
PART I — FINANCIAL INFORMATION

Item 1.	Financial Statements	1
	Condensed Balance Sheets as of March 31, 2020 and December 31, 2019	1
	Condensed Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended March 31, 2020 and 2019	2
	Condensed Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019	3
	Condensed Statements of Redeemable Preferred Stock and Stockholders’ Equity (Deficit) for the Three Months Ended March 31, 2020 and 2019	4
	Notes to Condensed Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4.	Controls and Procedures	33

PART II — OTHER INFORMATION

Item 1A.	Risk Factors	34
Item 6.	Exhibits	35

	Signatures	36

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

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

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NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

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

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

IDERA PHARMACEUTICALS, INC.

CONDENSED BALANCE SHEETS

(UNAUDITED)


	March 31,		December 31,
(In thousands)	2020		2019*
ASSETS
Current assets:
Cash and cash equivalents	$	27,909	$	40,019
Short-term investments		5,578		2,774
Prepaid expenses and other current assets		2,422		3,475
Total current assets		35,909		46,268
Property and equipment, net		80		97
Operating lease right-of-use asset		1,007		1,054
Other assets		70		70
Total assets	$	37,066	$	47,489

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	941	$	457
Accrued expenses		7,385		7,461
Operating lease liability		162		163
Future tranche right liability		25,725		46,436
Total current liabilities		34,213		54,517
Warrant liability, long-term		2,140		3,241
Operating lease liability, net of current portion		857		899
Total liabilities		37,210		58,657

Commitments and contingencies
Preferred stock, $0.01 par value, Authorized — 5,000 shares:
Series B1 redeemable convertible preferred stock (Note 7); Designated — 278 shares, Issued and outstanding — 24 shares at March 31, 2020 and December 31, 2019		—		—

Stockholders’ equity (deficit)
Preferred stock, $0.01 par value, Authorized — 5,000 shares:
Series A convertible preferred stock; Designated — 1,500 shares, Issued and outstanding — 1 share		—		—
Common stock, $0.001 par value, Authorized — 70,000 shares; Issued and outstanding — 30,607 and 29,672 at March 31, 2020 and December 31, 2019, respectively		31		30
Additional paid-in capital		711,898		709,692
Accumulated deficit		(712,073)		(720,890)
Total stockholders’ deficit		(144)		(11,168)
Total liabilities and stockholders’ deficit	$	37,066	$	47,489

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

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

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IDERA PHARMACEUTICALS, INC.

CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)


	Three Months Ended
	March 31,
(In thousands, except per share amounts)	2020		2019
Operating expenses:
Research and development	$	9,510	$	8,102
General and administrative		3,642		3,143
Restructuring costs		—		131
Total operating expenses		13,152		11,376
Loss from operations		(13,152)		(11,376)
Other income (expense):
Interest income		125		404
Warrant revaluation income		1,101		—
Future tranche right revaluation income		20,711		—
Foreign currency exchange gain (loss)		32		(2)
Net income (loss)	$	8,817	$	(10,974)

Net income (loss) per share applicable to common stockholders (Note 12)
— Basic	$	0.27	$	(0.40)
— Diluted	$	0.22	$	(0.40)
Weighted-average number of common shares used in computing net income (loss) per share applicable to common stockholders
— Basic		30,300		27,676
— Diluted		33,010		27,676

Comprehensive income (loss):
Net income (loss)	$	8,817	$	(10,974)
Other comprehensive income (loss):
Unrealized gain on available-for-sale securities		—		2
Total other comprehensive income		—		2
Comprehensive income (loss):	$	8,817	$	(10,972)

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

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IDERA PHARMACEUTICALS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Three Months Ended
	March 31,
(In thousands)	2020		2019
Cash Flows from Operating Activities:
Net income (loss)	$	8,817	$	(10,974)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Stock-based compensation		750		1,016
Warrant liability revaluation income		(1,101)		—
Future tranche right liability revaluation income		(20,711)		—
Issuance of common stock for services rendered		26		23
Accretion of discounts on short-term investments		(18)		(181)
Unrealized gain on available-for-sale securities		—		2
Depreciation and amortization expense		24		35
Gain on disposal of property and equipment		—		(8)
Changes in operating assets and liabilities:
Prepaid expenses and other assets		1,313		(576)
Accounts payable, accrued expenses, and other liabilities		148		(2,694)
Other		4		—
Net cash used in operating activities		(10,748)		(13,357)

Cash Flows from Investing Activities:
Purchases of available-for-sale securities		(5,535)		(35,485)
Proceeds from maturity of available-for-sale securities		2,749		—
Proceeds from the sale of property and equipment		—		8
Purchases of property and equipment		(7)		(4)
Net cash used in investing activities		(2,793)		(35,481)

Cash Flows from Financing Activities:
Proceeds from common stock financings, net		1,406		1,585
Proceeds from employee stock purchases		25		26
Other		—		(6)
Net cash provided by financing activities		1,431		1,605
Net decrease in cash and cash equivalents		(12,110)		(47,233)
Cash and cash equivalent, beginning of period		40,019		71,431
Cash and cash equivalents, end of period		27,909	$	24,198


Supplemental disclosure of cash flow information:
Increase to right-of-use asset upon adoption of ASC 842	$	—	$	261
Increase to lease liability upon adoption of ASC 842	$	—	$	261
Supplemental disclosure of non-cash financing and investing activities:
Capitalized offering costs in accounts payable and accrued expenses	$	260	$	—

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

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IDERA PHARMACEUTICALS, INC.

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

(UNAUDITED)


	For the Three Months Ended March 31, 2019
											Accumulated
	Series B1 Preferred			Common Stock			Additional				Other		Total
	Number of	$0.01 Par		Number of	$0.001 Par		Paid-In		Accumulated		Comprehensive		Stockholders’
(In thousands)	Shares	Value		Shares	Value		Capital		Deficit		Income		Equity
Balance, December 31, 2018	—	$	—	27,188	$	27	$	728,342	$	(664,375)	$	—	$	63,994
Sale of common stock, net of issuance costs	—		—	533		1		1,584		—		—		1,585
Issuance of commitment shares (Note 8)	—		—	270		—		—		—		—		—
Issuance of common stock under employee stock purchase plan	—		—	11		—		26		—		—		26
Issuance of common stock for services rendered	—		—	6		—		23		—		—		23
Stock-based compensation	—		—	—		—		1,016		—		—		1,016
Unrealized gain on marketable securities	—		—	—		—		—		—		2		2
Net loss				—		—		—		(10,974)		—		(10,974)
Balance, March 31, 2019	—	$	—	28,008	$	28	$	730,991	$	(675,349)	$	2	$	55,672


	For the Three Months Ended March 31, 2020
											Accumulated
	Series B1 Preferred			Common Stock			Additional				Other		Total
	Number of	$0.01 Par		Number of	$0.001 Par		Paid-In		Accumulated		Comprehensive		Stockholders’
(In thousands)	Shares	Value		Shares	Value		Capital		Deficit		Income		Deficit
Balance, December 31, 2019	24	$	—	29,672	$	30	$	709,692	$	(720,890)	$	—	$	(11,168)
Sale of common stock, net of issuance costs	—		—	854		1		1,405		—		—		1,406
Issuance of common stock under employee stock purchase plan	—		—	19		—		25		—		—		25
Issuance of common stock under equity incentive plan (vesting of restricted stock units)	—		—	48		—		—		—		—		—
Issuance of common stock for services rendered	—		—	14		—		26		—		—		26
Stock-based compensation	—		—	—		—		750		—		—		750
Net income	—		—	—		—		—		8,817		—		8,817
Balance, March 31, 2020	24	$	—	30,607	$	31	$	711,898	$	(712,073)	$	—	$	(144)

The accompanying notes are an integral part of these financial statements

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IDERA PHARMACEUTICALS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

March 31, 2020

Note 1. Business and Organization

Business Overview

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

Liquidity and Financial Condition

As of March 31, 2020, the Company had an accumulated deficit of $712.1 million and a cash, cash equivalents, and short-term investments balance of $33.5 million, which includes the $6.2 million contingently refundable option fee received in connection with the 2019 Private Placement, as defined and more fully described in Note 7. The Company expects to incur substantial operating losses in future periods and will require additional capital as it seeks to advance tilsotolimod and any future drug candidates through development to commercialization. The Company does not expect to generate product revenue, sales-based milestones or royalties until the Company successfully completes development of and obtains marketing approval for tilsotolimod or other future drug candidates, either alone or in collaboration with third parties, which the Company expects will take a number of years. In order to commercialize tilsotolimod and any future drug candidates, the Company needs to complete clinical development and comply with comprehensive regulatory requirements. The Company is subject to a number of risks and uncertainties similar to those of other companies of the same size within the biotechnology industry, such as uncertainty of clinical trial outcomes, uncertainty of additional funding, and history of operating losses.

The Company follows the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 205-40, Presentation of Financial Statements—Going Concern, which requires management to assess the Company’s ability to continue as a going concern within one year after the date the financial statements are issued. The Company’s balance of cash, cash equivalents, and short-term investments on hand as of March 31, 2020, excluding the $6.2 million contingently refundable Option Fee (Note 7), plus the $5.0 million gross proceeds received in April 2020 pursuant to the April 2020 Securities Purchase Agreement (Note 13), is sufficient to fund operations into the first quarter of 2021, but is not sufficient to fund operations for the one-year period after the date the financial statements are issued. As a result, there is substantial doubt about the Company’s ability to continue as a going concern through the one-year period from the date these financial statements are issued.

However, the Company estimates that it is probable that the $6.2 million contingently refundable Option Fee will not need to be refunded and, in this scenario, the Company’s cash, cash equivalents, and short term-investments as of March 31, 2020, plus the $5.0 million gross proceeds received in April 2020 pursuant to the April 2020 Securities Purchase Agreement (Note 13), will be sufficient to fund operations into the second quarter of 2021. Management’s plans that are intended to mitigate the risk of going concern include raising additional capital through the Company’s December 2019 Securities Purchase Agreement (Note 7), Common Stock Purchase Agreement (Note 8), “At-The-Market” Equity Program (Note 8), April 2020 Securities Purchase Agreement (Note 13), or additional financing or strategic transactions. Management’s plans may also include the possible deferral of certain operating expenses unless additional capital is received. The Company has and will continue to evaluate available alternatives to extend its operations beyond the one-year period after the date the financial statements are issued. Management’s operating plan which underlies the analysis of the Company’s ability to continue as a going concern involves the estimation of the amount and timing of future cash inflows and outflows. Actual results could vary from the operating plan.

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Note 2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited financial statements included herein have been prepared by the Company in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments, consisting of normal recurring adjustments, and disclosures considered necessary for a fair presentation of interim period results have been included. Interim results for the three months ended March 31, 2020 are not necessarily indicative of results that may be expected for the year ending December 31, 2020. For further information, refer to the financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (“2019 Form 10-K”), which was filed with the SEC on March 12, 2020.

Cash and Cash Equivalents

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

Financial Instruments

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

Concentration of Credit Risk

Financial instruments that subject the Company to credit risk primarily consist of cash, cash equivalents, and investments. The Company’s credit risk is managed by investing in highly rated money market instruments, certificates of deposit, corporate bonds, commercial paper and debt securities. Due to these factors, no significant additional credit risk is believed by management to be inherent in the Company’s assets. As of March 31, 2020, all of the Company’s cash and cash equivalents were held at two financial institutions.

Operating Lease Right-of-use Asset and Lease Liability

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

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

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Note 2. Summary of Significant Accounting Policies (Continued)

Warrant Liability

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

Future Tranche Right Liability

In connection with the Company’s 2019 Private Placement, as more fully described in Note 7, the Company entered into the December 2019 Securities Purchase Agreement, which contains call options on redeemable preferred shares with warrants (conditionally exercisable for shares that are puttable). The Company determined that these call options represent freestanding financial instruments and accounts for the options as a liabilities (“Future Tranche Right Liability”) under ASC 480, which requires the measurement of the fair value of the liability at the time of issuance and recording changes as a charge to current earnings at each reporting period, which is included in Future Tranche Right Liability Revaluation Income in the Company’s condensed statements of operations and comprehensive income (loss).

Preferred Stock

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

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

Income Taxes

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

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Note 2. Summary of Significant Accounting Policies (Continued)

New Accounting Pronouncements

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

Recently Adopted Accounting Pronouncements

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

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

Note 3. Fair Value Measurements

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

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

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2: Quoted prices in markets that are not active or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each reporting period. There were no transfers between Level 1, 2 and 3 during the three months ended March 31, 2020.

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Note 3. Fair Value Measurements (Continued)

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



	March 31, 2020
(In thousands)	Total		Level 1		Level 2		Level 3
Assets
Cash	$	250	$	250	$	—	$	—
Cash equivalents – money market funds		26,860		26,860		—		—
Cash equivalents – commercial paper		799		—		799		—
Short-term investments – commercial paper		5,578		—		5,578		—
Total assets	$	33,487	$	27,110	$	6,377	$	—
Liabilities
Warrant liability	$	2,140	$	—	$	—	$	2,140
Future tranche right liability		25,725		—		—		25,725
Total liabilities	$	27,865	$	—	$	—	$	27,865


	December 31, 2019
(In thousands)	Total		Level 1		Level 2		Level 3
Assets
Cash	$	250	$	250	$	—	$	—
Cash equivalents – money market funds		39,769		39,769		—		—
Short-term investments – commercial paper		2,774		—		2,774		—
Total assets	$	42,793	$	40,019	$	2,774	$	—
Liabilities
Warrant liability	$	3,241	$	—	$	—	$	3,241
Future tranche right liability		46,436		—		—		46,436
Total liabilities	$	49,677	$	—	$	—	$	49,677

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

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

Warrant Liability and Future Tranche Right Liability

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


			Future
	Warrant		Tranche Right
(In thousands)	Liability		Liability
Balance, December 31, 2019	$	3,241	$	46,436
Change in the fair value of liability		(1,101)		(20,711)
Balance, March 31, 2020	$	2,140	$	25,725

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Note 3. Fair Value Measurements (Continued)

Assumptions Used in Determining Fair Value of Liability-Classified Warrants

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

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


	March 31,		December 31,
	2020		2019
Risk-free interest rate		0.53%		1.79%
Expected dividend yield		—		—
Expected term (years)		6.73		6.98
Expected volatility		80%		80%
Exercise price (per share)	$	1.52	$	1.52

Assumptions Used in Determining Fair Value of Future Tranche Rights

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

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


	March 31,		December 31,
	2020		2019
Risk-free interest rate for warrants		0.53%		1.79%
Risk-free interest rate for preferred stock		0.59% - 0.65%		1.84% - 1.88%
Expected dividend yield		—		—
Expected term (years) of call option on preferred stock		0.91 - 1.91		1.16 - 2.16
Expected term (years) of warrants		7.91 - 8.91		8.16 - 9.16
Expected volatility		80%		80%
Exercise price (per share) for common stock equivalent for preferred stock and warrant	$	1.52 - 1.82	$	1.52 - 1.82

As of March 31, 2020 and December 31, 2019, the Company deemed it probable that shareholder approval would be obtained, on or prior to December 31, 2020, with respect to increasing the Company’s authorized shares of common stock in an amount sufficient to cover the conversion of all potential convertible securities issuable upon exercise of the Future Tranche Rights. See Note 7 for further details on the such required shareholder approval.

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Note 4. Investments

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


	March 31, 2020
			Gross		Gross		Estimated
			Unrealized		Unrealized		Fair
(In thousands)	Cost		(Losses)		Gains		Value
Short-term investments – commercial paper	$	5,578	$	—	$	—	$	5,578
Total short-term investments		5,578		—		—		5,578
Total investments	$	5,578	$	—	$	—	$	5,578

December 31, 2019

Gross

Estimated

Unrealized

Fair

(In thousands)

Cost

IDERA PHARMACEUTICALS, INC. - FORM 10-Q - April 30, 2020

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