SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
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Sep. 30, 2011 |
Dec. 31, 2010 |
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| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The
accompanying financial statements reflect the application of
certain accounting policies, as described in this note and
elsewhere in the accompanying notes to the financial
statements. The unaudited financial statements as of and for
the nine months ended September 30, 2011 are presented on a
consolidated basis to reflect the Acquisition described in Note
4.
The
accompanying consolidated unaudited September 30, 2011 balance
sheet, the statements of operations and cash flows for the nine
months ended September 30, 2011 and 2010, and the statements of
stockholders’ equity for the nine months ended September 30,
2011 and the related interim information contained within the notes
to the financial statements have been prepared in accordance with
the rules and regulations of the Securities and Exchange Commission
(“SEC”) for interim financial information. Accordingly,
they do not include all of the information and the notes required
by U.S. generally accepted accounting principles for complete
financial statements. In the opinion of management, the unaudited
interim financial statements reflect all adjustments, consisting of
normal and recurring adjustments, necessary for the fair
presentation of the Company’s financial position at September
30, 2011 and results of its operations and its cash flows for the
nine months ended September 30, 2011 and 2010 and the period from
November 7, 2002 (inception) to September 30, 2011. The results for
the nine months ended September 30, 2011 are not necessarily
indicative of future results.
Development Stage Company — Cellectar has been in the
development stage since its inception. The primary activities
since inception have been organizational activities, research and
development and raising capital. No significant revenues have
been generated from planned principal operations. As of
September 30, 2011 and December 31, 2010 and 2009 the Company
continues to be in the development stage.
The
summary unaudited condensed statement of operations for the
cumulative development-stage period from November 7, 2002 (date of
inception) through September 30, 2011 is as follows:
The
summary unaudited condensed statement of cash flow for the
cumulative development-stage period from November 7, 2002 (date of
inception) through September 30, 2011 is as follows:
Use of
Estimates — The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make estimates and judgments
that may affect the reported amounts of assets, liabilities,
revenue and expenses and disclosure of contingent assets and
liabilities. On an on-going basis, management evaluates its
estimates including those related to unbilled vendor amounts and
share-based compensation. Management bases its estimates on
historical experience and on various other assumptions that are
believed to be reasonable, the results of which form the basis for
making judgments about the carrying values of assets and
liabilities. Actual results may differ from those estimates under
different assumptions or conditions. Changes in estimates are
reflected in reported results in the period in which they become
known.
Cash and Cash Equivalents — All short-term investments
purchased with original maturities of three months or less are
considered to be cash equivalents.
Restricted Cash — Restricted cash at September 30,
2011 consists of a certificate of deposit required under the
Company’s lease agreement (see Note 14). Restricted
cash at December 31, 2010 and December 31, 2009 consists of a
certificate of deposit required for collateral for a promissory
note with a bank (see Note 8) and a certificate of deposit required
under the Company’s lease agreement (see Note
14).
Fixed Assets — Property and equipment are stated at
cost. Depreciation on property and equipment is provided using the
straight-line method over the estimated useful lives of the assets
(5 years). Due to the significant value of leasehold
improvements purchased during the initial 3-year lease term and the
economic penalty for not extending the building lease, leasehold
improvements are depreciated over 17 years (their estimated useful
life) which represents the full term of the lease, including all
extensions (Note 14).
Intangible Assets — Intangible assets at September 30,
2011 consist of the excess of purchase price over net assets
acquired in connection with the Acquisition and will be allocated
to intangibles, which could potentially include the fair value of
the compounds developed prior to the Acquisition by Novelos, with
the remainder allocated to goodwill once the Company completes the
final allocation of purchase price (Note 4). Intangible
assets at December 31, 2009 consisted of costs incurred to obtain
trademarks. These costs were capitalized when the expense was
incurred and at which time the assets were deemed to have an
indefinite life. During 2010, following a reduction in staff
and suspension of research and manufacturing activities in order to
reduce operating costs, it was determined that the trademarks had
been impaired and the carrying value was reduced to
zero.
Impairment of Long - Lived
Assets — Whenever events or circumstances change, an
assessment is made as to whether there has been an impairment in
the value of long-lived assets by determining whether projected
undiscounted cash flows generated by the applicable asset exceed
its net book value as of the assessment date.
Stock-Based Compensation — Employee stock-based
compensation is accounted for in accordance with the guidance of
Financial Accounting Standards Board Accounting Standards
Codification (“FASB ASC”) Topic 718, Compensation – Stock
Compensation which requires all share-based payments to
employees, including grants of employee stock options, to be
recognized in the financial statements based on their fair
values. Non-employee stock-based compensation is accounted
for in accordance with the guidance of FASB ASC Topic 505,
Equity. As such,
the Company recognizes expense based on the estimated fair value of
options granted to non-employees over their vesting period, which
is generally the period during which services are rendered and
deemed completed by such non-employees.
Research and Development — Research and development
costs are expensed as incurred.
Income Taxes — Income taxes are accounted for using
the liability method of accounting. Under this method,
deferred tax assets and liabilities are determined based on
temporary differences between the financial statement and tax basis
of assets and liabilities and net operating loss and credit
carryforwards using enacted tax rates in effect for the year in
which the differences are expected to reverse. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date. Valuation allowances are established when it is more
likely than not that some portion of the deferred tax assets will
not be realized. Management has provided a full valuation
allowance against the Company’s gross deferred tax
asset. Tax positions taken or expected to be taken in the
course of preparing tax returns are required to be evaluated to
determine whether the tax positions are “more likely than
not” of being sustained by the applicable tax
authority. Tax positions deemed not to meet a
more-likely-than-not threshold would be recorded as tax expense in
the current year. There were no uncertain tax positions that
require accrual or disclosure to the financial statements as of
September 30, 2011, December 31, 2010 and 2009.
Comprehensive Loss — There were no components of
comprehensive loss other than net loss in all of the periods
presented.
Grant Income — Cellectar received a cash grant of
$44,000 and $200,000 for the nine-month period ended September 30,
2011 and the year ended December 31, 2010, respectively, from the
U.S. Internal Revenue Service as a qualifying therapeutic discovery
project credit pursuant to the Patient Protection and Affordable
Care Act. This grant has been recorded as a component of
other income.
Fair Value of Financial Instruments — The guidance
under FASB ASC Topic 825, Financial Instruments
, requires disclosure of the fair value of certain financial
instruments. Financial instruments in the accompanying financial
statements consist of cash equivalents, accounts payable,
convertible debt and long-term obligations. The carrying
amount of cash equivalents, investments and accounts
payable approximate their fair value due to their
short-term nature. The estimated fair value of the
convertible debt, determined on an as-converted basis including
conversion of accumulated unpaid interest, was approximately $0 and
$3,264,000 at September 30, 2011 and December 31, 2010,
respectively. The carrying value of long-term obligations,
including the current portion, approximates fair value because the
fixed interest rate approximates current market rate of interest
available in the market.
Derivative Instruments – The
Company generally does not use derivative instruments to hedge
exposures to cash flow or market risks. However, certain
warrants to purchase common stock that do not meet the requirements
for classification as equity, in accordance with the Derivatives
and Hedging Topic of the Financial Accounting Standards Board
Accounting Standards Codification (“FASB
ASC”), are classified
as liabilities. In such instances, net-cash settlement is
assumed for financial reporting purposes, even when the terms of
the underlying contracts do not provide for a net-cash settlement.
These warrants are considered derivative instruments because the
agreements contain “down-round” provisions whereby the
number of shares for which the warrants are exercisable and/or the
exercise price of the warrants are subject to change in the event
of certain issuances of stock at prices below the then-effective
exercise price of the warrants. The number of shares issuable under
such warrants was 77,729 at September 30, 2011. The primary
underlying risk exposure pertaining to the warrants is the change
in fair value of the underlying common stock. Such financial
instruments are initially recorded at fair value with subsequent
changes in fair value recorded as a component of gain or loss on
derivatives in each reporting period. If these instruments
subsequently meet the requirements for equity classification, the
Company reclassifies the fair value to equity. At September 30,
2011, these warrants represented the only outstanding derivative
instruments issued or held by the Company. There were no
outstanding derivative instruments at December 31, 2010 or
2009.
Concentration of Credit Risk — Financial instruments
that subject the Company to credit risk consist of cash and
equivalents on deposit with financial institutions, which may
exceed federally insured limits. Excess cash is invested on
an overnight basis in an investment account that is fully
collateralized principally by government-backed obligations.
Cash and equivalent balances are maintained with a stable and
well-capitalized financial institution.
New Accounting Pronouncements — In January 2010,
the FASB issued ASU No. 2010-06, Improving Disclosures about
Fair Value Measurements , which requires additional
disclosures about the amounts of and reasons for significant
transfers in and out of Level 1 and Level 2 fair value
measurements. This standard also clarifies existing disclosure
requirements related to the level of disaggregation of fair value
measurements for each class of assets and liabilities and
disclosures about inputs and valuation techniques used to measure
fair value for both recurring and non-recurring Level 2 and
Level 3 measurements. Since this new accounting standard only
required additional disclosure, the adoption of the standard in the
first quarter of 2010 did not impact the accompanying financial
statements. Additionally, effective for interim and annual periods
beginning after December 15, 2010, this standard will require
additional disclosure and require an entity to present
disaggregated information about activity in Level 3 fair value
measurements on a gross basis, rather than one net amount.
The adoption of this accounting standard did not impact the
accompanying financial statements.
In
December 2010, the FASB issued ASU No. 2010-29, Disclosures of Supplementary
Pro Forma Information for Business Combinations, which, if
comparative financial statements are presented, requires the
supplemental pro forma disclosure of revenue and earnings to be
presented as if the business combination had occurred at the
beginning of the comparable prior annual reporting period
only. This standard also expands the supplemental pro forma
disclosures required under FASB ASC Topic 850, Business Combinations
, to include a description of the nature and amount of material
nonrecurring pro forma adjustments directly attributable to the
business combination in the reported pro forma revenue and
earnings. This standard is effective for the Company for any
business combinations completed after January 1, 2011. The
Company adopted the provisions of this standard during the first
quarter of 2011.
In
May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common
Fair Value Measurement and Disclosure Requirements in U.S.
Generally Accepted Accounting Principles (“GAAP”) and
International Financial Reporting Standards
(“IFRSs”). This standard updates
accounting guidance to clarify the measurement of fair value to
align the guidance and improve the comparability surrounding fair
value measurement within GAAP and IFRSs. The standard also
updates requirements for measuring fair value and expands the
required disclosures. The standard does not require
additional fair value measurements and was not intended to
establish valuation standards or affect valuation practices outside
of financial reporting. This standard will become effective
for the Company on January 1, 2012. The Company does not
expect that the adoption of this standard will have a material
impact when applied prospectively on the Company’s financial
statements or required disclosures.
In
June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive
Income. This standard eliminates the current option to
report other comprehensive income and its components in the
statement of changes in equity. The standard is intended to enhance
comparability between entities that report under US GAAP and
those that report under IFRS, and to provide a more consistent
method of presenting non-owner transactions that affect an entity's
equity. Under the ASU, an entity can elect to present items of net
income and other comprehensive income in one continuous statement,
referred to as the statement of comprehensive income, or in two
separate, but consecutive, statements. Each component of net income
and each component of other comprehensive income, together with
totals for comprehensive income and its two parts, net income and
other comprehensive income, would need to be displayed under either
alternative. The statement(s) would need to be presented with equal
prominence as the other primary financial statements. The ASU does
not change items that constitute net income and other comprehensive
income, when an item of other comprehensive income must be
reclassified to net income or the earnings-per-share computation
(which will continue to be based on net income). The new
US GAAP requirements are effective for public entities as of
the beginning of a fiscal year that begins after December 15,
2011 and interim and annual periods thereafter. Early adoption is
permitted, but full retrospective application is required under the
accounting standard. The Company does not expect that the adoption
of this standard will have a material impact on our results of
operations, cash flows, and financial position.
In
September 2011, the FASB issued ASU No. 2011-08, Intangibles – Goodwill
and Other (Topic 350) Testing Goodwill for
Impairment. This standard simplifies how an
entity tests goodwill for impairment and allows an entity to first
assess qualitative factors in determining whether it is more likely
than not that the fair value of a reporting unit is less than its
carrying amount as a basis for determining whether it is necessary
to perform the two-step goodwill impairment test. This
standard is effective for entities as of the beginning of a fiscal
year that begins after December 15, 2011 and interim and annual
periods thereafter. Early adoption is
permitted. The Company does not expect the adoption of
this standard will have a material impact on our results of
operations, cash flows, and financial position.
Reclassifications — Certain prior-period amounts have
been reclassified to conform to the current-period
presentation.
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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The
accompanying financial statements reflect the application of
certain accounting policies, as described in this note and
elsewhere in the accompanying notes to the financial
statements.
Use of Estimates — The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States requires the Company’s
management to make estimates and judgments that may affect the
reported amounts of assets, liabilities, revenue and expenses and
disclosure of contingent assets and liabilities. On an on-going
basis, the Company’s management evaluates its estimates
including those related to unbilled research and development costs,
valuation of derivatives and share-based compensation. The Company
bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable, the results of
which form the basis for making judgments about the carrying values
of assets and liabilities. Actual results may differ from those
estimates under different assumptions or conditions. Changes in
estimates are reflected in reported results in the period in which
they become known.
Cash Equivalents — The Company considers all
short-term investments purchased with original maturities of three
months or less to be cash equivalents.
Fixed Assets — Property and equipment are stated at
cost. Depreciation on property and equipment is provided using the
straight-line method over the estimated useful lives of the assets,
which range from three to five years. Leasehold improvements are
depreciated over the lesser of the estimated useful lives of the
assets or the remaining lease term.
Impairment of Long-Lived
Assets — Whenever events or circumstances change, the
Company assesses whether there has been an impairment in the value
of long-lived assets by determining whether projected undiscounted
cash flows generated by the applicable asset exceed its net book
value as of the assessment date. There were no impairments of
the Company’s assets at the end of each period
presented.
Stock-Based Compensation — The Company accounts for
employee stock-based compensation in accordance with the guidance
of FASB ASC Topic 718, Compensation – Stock
Compensation which requires all share-based payments to
employees, including grants of employee stock options, to be
recognized in the financial statements based on their fair
values. The Company accounts for non-employee stock-based
compensation in accordance with the guidance of FASB ASC Topic 505,
Equity
which requires that companies recognize compensation expense based
on the estimated fair value of options granted to non-employees
over their vesting period, which is generally the period during
which services are rendered by such non-employees.
Revenue Recognition — Revenue is recognized when
persuasive evidence of an arrangement exists, the price is fixed
and determinable, delivery has occurred, and there is reasonable
assurance of collection. Upfront payments received in
connection with technology license or collaboration agreements are
recognized over the estimated term of the related agreement.
The Company has not yet received milestone or royalty payments in
connection with license or collaboration agreements.
Research and Development — Research and development
costs are expensed as incurred.
Income Taxes — The Company uses the liability method
of accounting for income taxes. Under this method, deferred
tax assets and liabilities are determined based on temporary
differences between the financial statement and tax basis of assets
and liabilities and net operating loss and credit carryforwards
using enacted tax rates in effect for the year in which the
differences are expected to reverse. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
Valuation allowances are established when it is more likely than
not that some portion of the deferred tax assets will not be
realized. Tax positions taken or expected to be taken in the
course of preparing the Company’s tax returns are required to
be evaluated to determine whether the tax positions are “more
likely than not” of being sustained by the applicable tax
authority. Tax positions deemed not to meet a
more-likely-than-not threshold would be recorded as tax expense in
the current year. There were no uncertain tax positions that
require accrual or disclosure to the financial statements as of
December 31, 2010 and 2009.
Comprehensive Income (Loss) — The Company had no
components of comprehensive income other than net income (loss) in
all of the periods presented.
Fair Value of Financial Instruments — The guidance
under FASB ASC Topic 825, Financial Instruments
, requires disclosure of the fair value of certain financial
instruments. The Company’s financial instruments consist of
cash equivalents, accounts payable, accrued expenses and redeemable
preferred stock. The estimated fair value of the redeemable
preferred stock, determined on an as-converted basis including
conversion of accumulated unpaid dividends, was $114,780,000 at
December 31, 2009. The estimated fair value of the remaining
financial instruments approximates their carrying value due to
their short-term nature.
Concentration of Credit Risk — Financial instruments
that subject the Company to credit risk consist of cash and
equivalents on deposit with financial institutions. The
Company’s excess cash is on deposit in an overnight
investment account that is fully collateralized by
government-backed obligations.
Derivative Instruments — The Company generally does
not use derivative instruments to hedge exposures to cash flow or
market risks; however, starting January 1, 2009, certain warrants
to purchase common stock that do not meet the requirements for
classification as equity, in accordance with the Derivatives and
Hedging Topic of the FASB ASC, are classified as liabilities. In
such instances, net-cash settlement is assumed for financial
reporting purposes, even when the terms of the underlying contracts
do not provide for a net-cash settlement. These warrants are
considered derivative instruments as the agreements contain
“down-round” provisions whereby the number of shares
for which the warrants are exercisable and/or the exercise price of
the warrants is subject to change in the event of certain issuances
of stock at prices below the then-effective exercise price of the
warrants. The number of such warrants was 91,524 at January 1,
2009, 48,489 at December 31, 2009 and 138,611 at December 31, 2010.
The primary underlying risk exposure pertaining to the warrants is
the change in fair value of the underlying common stock. Such
financial instruments are initially recorded at fair value, or
relative fair value when issued with other instruments, with
subsequent changes in fair value recorded as a component of gain or
loss on derivatives in each reporting period. If these instruments
subsequently meet the requirements for equity classification, the
Company reclassifies the fair value to equity. At December 31, 2010
and 2009, these warrants represent the only outstanding derivative
instruments issued or held by the Company. As a result of the
significant decline in the Company’s stock price following
the announcement of the results of the Phase 3 Trial, the Company
recorded a gain of approximately $8,118,000 during the year ended
December 31, 2010 in connection with the revaluation of the
derivative liability balance at December 31, 2010.
New Accounting Pronouncements — In September
2009, the Financial Accounting Standards Board (“FASB”)
amended the accounting standards related to revenue recognition for
arrangements with multiple deliverables and arrangements that
include software elements (“new accounting
principles”). The new accounting principles permit
prospective or retrospective adoption, and the Company elected
prospective adoption at the beginning of the first quarter of 2010.
The adoption of the standard in 2010 had no impact on the
Company’s financial statements.
In
January 2010, the FASB issued ASU No. 2010-06, Improving Disclosures about
Fair Value Measurements, which requires additional
disclosures about the amounts of and reasons for significant
transfers in and out of Level 1 and Level 2 fair value
measurements. This standard also clarifies existing disclosure
requirements related to the level of disaggregation of fair value
measurements for each class of assets and liabilities and
disclosures about inputs and valuation techniques used to measure
fair value for both recurring and non-recurring Level 2 and
Level 3 measurements. Since this new accounting standard only
required additional disclosure, the adoption of the standard in the
first quarter of 2010 did not impact the Company’s financial
statements. Additionally, effective for interim and annual periods
beginning after December 15, 2010, this standard will require
additional disclosure and require an entity to present
disaggregated information about activity in Level 3 fair value
measurements on a gross basis, rather than one net
amount.
Adoption of New Accounting Principle — Effective
January 1, 2009, the Company adopted the guidance of FASB ASC
815-40-15, Derivatives and
Hedging , which establishes a framework for determining
whether certain freestanding and embedded instruments are indexed
to a company’s own stock for purposes of evaluation of the
accounting for such instruments under existing accounting
literature. As a result of this adoption, certain warrants that
were previously determined to be indexed to the Company’s
common stock upon issuance were determined not to be indexed to the
Company’s common stock because they include
“down-round” anti-dilution provisions whereby the
number of shares for which the warrants are exercisable and/or the
exercise price of the warrants is subject to change in the event of
certain issuances of stock at prices below the then-effective
exercise price of the warrants. The fair value of the warrants at
the dates of issuance totaling $6,893,000 was initially recorded as
a component of additional paid-in capital. Upon adoption of this
guidance on January 1, 2009, the Company recorded a derivative
liability of $999,000, a decrease to the opening balance of
additional paid-in capital of approximately $6,893,000 and recorded
a decrease to accumulated deficit totaling approximately
$5,894,000, representing the decrease in the fair value of the
warrants from the date of issuance to December 31, 2008. The
increase in fair value of the warrants of approximately $12,114,000
during the year ended December 31, 2009 and the decrease in fair
value of the warrants of $8,118,000 during the year ended December
31, 2010 have been included as a component of other income
(expense) in the accompanying statement of operations. Certain of
the warrants that had been recorded as a derivative liability were
exchanged or exercised for shares of the Company’s common
stock during the years ended December 31, 2010 and 2009. See Note 6
for a description of those transactions. The fair value of the
warrants of $288,000 and $10,487,000 at December 31, 2010 and 2009
is included as a current liability in the accompanying balance
sheet as of that date.
Reclassifications — Certain prior year amounts have
been reclassified to conform to the current year
presentation.
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