Full Press Release Details
Management s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion reflects the retrospective application of Accounting Standards Update (ASU) 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18), adopted on January 1, 2018. See Note 12 to the consolidated financial statements for additional information.
The following table provides information regarding our cash flows for the years ended December 31, 2017, 2016, and 2015:
| Year Ended December 31, | ||||||||||
| 2017 | 2016 | 2015 | ||||||||
| (in thousands) | ||||||||||
| Net cash provided by (used in): | ||||||||||
| Operating activities | $ | (29,460 | ) | $ | (23,219 | ) | $ | (6,752 | ) | |
| Investing activities | (110,044 | ) | (5,110 | ) | (17 | ) | ||||
| Financing activities | 167,200 | 41,711 | ||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | $ | 27,696 | (28,329 | ) | 34,942 |
Net cash used in operating activities
The use of cash in all periods resulted primarily from our net losses adjusted for non-cash charges and changes in components of working capital.
Net cash used in operating activities was $29.5 million for the year ended December 31, 2017, and consisted primarily of a net loss of $29.3 million adjusted for non-cash items, which were comprised of stock-based compensation, depreciation and amortization and the mark to market revaluation of the 2017 Series A Investor Instrument. The significant items in the change in operating assets and liabilities include an increase in accounts payable, accrued expenses and other current liabilities of $1.9 million offset by an increase of approximately $1.9 million in prepaid expenses and other current assets.
Net cash used in operating activities was $23.2 million for the year ended December 31, 2016, and consisted primarily of a net loss of $24.5 million adjusted for non-cash items, which consisted of stock-based compensation, depreciation and amortization and deferred rent expense. The significant items in the change in operating assets and liabilities include a decrease of $1.5 million in deferred issuance costs offset by a decrease in deferred grant income of approximately $0.3 million.
Net cash used in operating activities was $7.0 million for the year ended December 31, 2015, and consisted primarily of a net loss of $9.4 million adjusted for non-cash items, which were comprised of stock-based compensation, warrant amendment expense and mark to market revaluation of the 2015 Series A Investor Right/Obligation. The significant items in the change in operating assets and liabilities include an increase in accounts payable, accrued expenses and other current liabilities of $4.7 million offset by an increase of approximately $2.1 million in deferred issuance costs and prepaid expenses and other current assets.
Net cash used in investing activities
Net cash used in investing activities for the year ended December 31, 2017 relates to the net purchases of short-term investments of $110.0 million.
Net cash used in investing activities for the year ended December 31, 2016 relates to the net purchases of short-term investments of $4.1 million and the buildout of our offices and furniture and equipment of $1.1 million.
Net cash used in investing activities for the year ended December 31, 2015 relates to our design costs incurred related to our new facility lease.
Net cash provided by financing activities
Net cash provided by financing activities was $167.2 million for the year ended December 31, 2017, which represents the net proceeds of $40.8 million from the 2017 issuance of series A preferred stock and the net proceeds of $125.7 million from our IPO in October 2017.
Net cash provided by financing activities was $41.7 million for the year ended December 31, 2015, consisting of $39.6 million of net proceeds from the issuance of series A preferred stock and an equity contribution of $2.1 million from the LLC entity.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Rhythm Pharmaceuticals, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Rhythm Pharmaceuticals, Inc. (the Company) as of December 31, 2017 and 2016, the related consolidated statements of operations and comprehensive loss, convertible preferred stock and stockholders equity (deficit) and cash flows for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the consolidated financial statements ). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
These financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on the Company s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company s auditor since 2015.
Boston, Massachusetts
March 12, 2018, except for Note 12, as to which the date is June 11, 2018
RHYTHM PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
| December 31, 2017 | December 31, 2016 | ||||||
| Assets | |||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 34,236 | $ | 6,540 | |||
| Short-term investments | 113,846 | 3,997 | |||||
| Prepaid expenses and other current assets | 2,589 | 638 | |||||
| Total current assets | 150,671 | 11,175 | |||||
| Property, plant and equipment, net | 840 | 930 | |||||
| Deferred issuance costs | 9 | ||||||
| Restricted cash | 225 | 225 | |||||
| Total assets | $ | 151,736 | $ | 12,339 | |||
| Liabilities, convertible preferred stock and stockholders equity (deficit) | |||||||
| Current liabilities: | |||||||
| Accounts payable | $ | 2,427 | $ | 1,895 | |||
| Due to related party | 105 | ||||||
| Deferred rent | 83 | 76 | |||||
| Accrued expenses and other current liabilities | 4,210 | 2,655 | |||||
| Total current liabilities | 6,720 | 4,731 | |||||
| Long-term liabilities: | |||||||
| Deferred rent | 228 | 311 | |||||
| Total liabilities | 6,948 | 5,042 | |||||
| Commitments and contingencies | |||||||
| Preferred stock: | |||||||
| Series A Convertible Preferred Stock, $0.001 par value: 10,000,000 shares authorized; no shares issued and outstanding at December 31, 2017 and 40,000,000 shares issued and outstanding at December 31, 2016; (aggregate liquidation preference of $0 and $44,129 at December 31, 2017 and December 31, 2016 respectively) | 40,000 | ||||||
| Stockholders equity (deficit): | |||||||
| Common stock, $0.001 par value: 120,000,000 shares authorized; 27,284,140 and 10,196,292 shares issued and outstanding and December 31, 2017 and December 31, 2016, respectively | 27 | 10 | |||||
| Additional paid-in capital | 255,013 | 43,830 | |||||
| Accumulated deficit | (110,252 | ) | (76,543 | ) | |||
| Total stockholders equity (deficit) | 144,788 | (32,703 | ) | ||||
| Total liabilities, convertible preferred stock and stockholders equity (deficit) | $ | 151,736 | $ | 12,339 |
The accompanying notes are an integral part of these financial statements
RHYTHM PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except share and per share data)
| Year Ended December 31, 2017 | Year Ended December 31, 2016 | Year Ended December 31, 2015 | ||||||||
| Operating expenses: | ||||||||||
| Research and development | $ | 22,894 | $ | 19,594 | $ | 7,148 | ||||
| Selling, general, and administrative | 9,518 | 6,311 | 3,425 | |||||||
| Total operating expenses | 32,412 | 25,905 | 10,573 | |||||||
| Loss from operations | (32,412 | ) | (25,905 | ) | (10,573 | ) | ||||
| Other income (expense): | ||||||||||
| Revaluation of Series A Investor Instrument and Series A Investor Right/Obligation | (1,863 | ) | (500 | ) | ||||||
| Interest income, net | 566 | 33 | ||||||||
| Total other income (expense): | (1,297 | ) | 33 | (500 | ) | |||||
| Net loss and comprehensive loss | $ | (33,709 | ) | $ | (25,872 | ) | $ | (11,073 | ) | |
| Net loss attributable to common stockholders | $ | (37,582 | ) | $ | (29,074 | ) | $ | (12,000 | ) | |
| Net loss attributable to common stockholders per common share, basic and diluted | $ | (2.83 | ) | $ | (2.85 | ) | $ | (1.18 | ) | |
| Weighted average common shares outstanding, basic and diluted | 13,267,960 | 10,196,292 | 10,196,292 |
The accompanying notes are an integral part of these financial statements
RHYTHM PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS EQUITY (DEFICIT)
(in thousands, except share and per share data)
| Total | ||||||||||||||||||||||||||
| Series A Convertible | Series A-1 Junior | Additional | Stockholders | |||||||||||||||||||||||
| Preferred Stock | Common Stock | Preferred Stock | Paid-In | Accumulated | Equity | |||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||||
| Balance at December 31, 2014 | $ | 10,196,292 | $ | 10 | $ | $ | 39,230 | $ | (39,598 | ) | $ | (358 | ) | |||||||||||||
| Equity contribution | 2,094 | 2,094 | ||||||||||||||||||||||||
| Modification of warrant in connection with a license agreement | 923 | 923 | ||||||||||||||||||||||||
| Stock compensation expense | 298 | 298 | ||||||||||||||||||||||||
| Dividend to Rhythm Holding Company LLC (associated with common stock options granted to employees of Motus Therapeutics, Inc.) | 2,695 | 2,695 | ||||||||||||||||||||||||
| Dividend to Rhythm Holding Company LLC (associated with common stock options granted to employees of Motus Therapeutics, Inc.) | (2,695 | ) | (2,695 | ) | ||||||||||||||||||||||
| Reclassification of Series A Investor Right/Obligation liability upon Series A second tranche closing | 883 | 117 | 117 | |||||||||||||||||||||||
| Issuance of Series A Convertible Preferred Stock | 40,000,000 | 39,117 | ||||||||||||||||||||||||
| Net loss | (11,073 | ) | (11,073 | ) | ||||||||||||||||||||||
| Balance at December 31, 2015 | 40,000,000 | 40,000 | 10,196,292 | 10 | 42,662 | (50,671 | ) | (7,999 | ) | |||||||||||||||||
| Stock compensation expense | 1,168 | 1,168 | ||||||||||||||||||||||||
| Net loss | (25,872 | ) | (25,872 | ) | ||||||||||||||||||||||
| Balance at December 31, 2016 | 40,000,000 | 40,000 | 10,196,292 | 10 | 43,830 | (76,543 | ) | (32,703 | ) | |||||||||||||||||
| Stock compensation expense | 2,278 | 2,278 | ||||||||||||||||||||||||
| Issuance of common stock in connection with exercise of stock options | 152,671 | 700 | 700 | |||||||||||||||||||||||
| Change in unrealized loss on marketable securities | (141 | ) | (141 | ) | ||||||||||||||||||||||
| Issuance of Series A Convertible Preferred Stock | 40,949,999 | 40,622 | (108 | ) | (108 | ) | ||||||||||||||||||||
| Settlement of Series A investor instrument | 328 | 1,863 | 1,863 | |||||||||||||||||||||||
| Exchange of common stock held by LLC entity for Series A-1 Junior Preferred Stock | (8,578,661 | ) | (8 | ) | 78,666,209 | 79 | (71 | ) | ||||||||||||||||||
| Issuance of common stock upon completion of initial public offering, net of offering costs | 8,107,500 | 8 | 125,650 | 125,658 | ||||||||||||||||||||||
| Conversion of Series A Convertible Preferred Stock and Series A-1 Junior Preferred Stock into common stock on a 9.17 to 1 basis | (80,949,999 | ) | (80,950 | ) | 17,406,338 | 17 | (78,666,209 | ) | (79 | ) | 81,012 | 80,950 | ||||||||||||||
| Net loss | (33,709 | ) | (33,709 | ) | ||||||||||||||||||||||
| Balance at December 31, 2017 | $ | 27,284,140 | $ | 27 | $ | $ | 255,013 | $ | (110,252 | ) | $ | 144,788 |
The accompanying notes are an integral part of these financial statements
RHYTHM PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share and per share data)
| Fiscal Year Ended December 31, | ||||||||||
| 2017 | 2016 | 2015 | ||||||||
| Operating activities | ||||||||||
| Net loss | $ | (33,709 | ) | $ | (25,872 | ) | $ | (11,073 | ) | |
| Adjustments to reconcile net loss to cash used in operating activities: | ||||||||||
| Stock-based compensation expense | 2,278 | 1,168 | 298 | |||||||
| Depreciation and amortization | 223 | 144 | ||||||||
| Non-cash rent expense | (76 | ) | 11 | |||||||
| Modification of warrant in connection with license agreement | 923 | |||||||||
| Mark to market revaluation of Series A Investor Instrument and Series A Investor Right/Obligation | 1,863 | 500 | ||||||||
| Changes in operating assets and liabilities: | ||||||||||
| Prepaid expenses and other current assets | (1,889 | ) | 41 | (581 | ) | |||||
| Deferred issuance costs | 9 | 1,472 | (1,481 | ) | ||||||
| Tenant improvement allowance | 376 | |||||||||
| Accounts payable, accrued expenses and other current liabilities | 1,946 | 160 | 3,838 | |||||||
| Deferred grant income | (249 | ) | 249 | |||||||
| Due to related parties | (105 | ) | (470 | ) | 575 | |||||
| Net cash used in operating activities | (29,460 | ) | (23,219 | ) | (6,752 | ) | ||||
| Investing activities | ||||||||||
| Purchases of short-term investments | (126,917 | ) | (15,222 | ) | ||||||
| Maturities of short-term investments | 17,006 | 11,169 | ||||||||
| Purchases of property, plant and equipment | (133 | ) | (1,057 | ) | (17 | ) | ||||
| Net cash used in investing activities | (110,044 | ) | (5,110 | ) | (17 | ) | ||||
| Financing activities | ||||||||||
| Net proceeds from issuance of common stock | 125,658 | |||||||||
| Net proceeds from issuance of Series A Convertible Preferred Stock | 40,842 | 39,617 | ||||||||
| Equity Contribution | 2,094 | |||||||||
| Proceeds from the exercise of stock options | 700 | |||||||||
| Net cash provided by financing activities | 167,200 | 41,711 | ||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | 27,696 | (28,329 | ) | 34,942 | ||||||
| Cash, cash equivalents and restricted cash at beginning of year | 6,765 | 35,094 | 152 | |||||||
| Cash, cash equivalents and restricted cash at end of year | $ | 34,461 | $ | 6,765 | $ | 35,094 |
The accompanying notes are an integral part of these financial statements
Rhythm Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
(In thousands, except share and per share information)
1. Nature of Business
Rhythm Pharmaceuticals, Inc. (the Company ), is a biopharmaceutical company focused on the development and commercialization of peptide therapeutics for the treatment of genetic deficiencies that result in life-threatening metabolic disorders. The Company s lead product candidate is setmelanotide (RM-493), which is a potent, first-in-class, melanocortin-4, or MC4, receptor agonist for the treatment of rare genetic disorders of obesity caused by MC4 pathway deficiencies. The Company is currently evaluating setmelanotide for the treatment of six genetic disorders of obesity: pro-opiomelanocortin, or POMC, leptin receptor, or LepR, Bardet-Biedl syndrome, Alstr m syndrome, POMC heterozygous, and POMC epigenetic disorders.
Corporate Reorganization
The Company is a Delaware corporation organized in February 2013 under the name Rhythm Metabolic, Inc. Prior to the Company s organization and the Corporate Reorganization referred to below, the Company was part of Rhythm Pharmaceuticals, Inc. (the Predecessor Company ), a Delaware corporation which was organized in November 2008 and which commenced active operations in 2010.
In March 2013, the Predecessor Company underwent a corporate reorganization, (the Corporate Reorganization ), pursuant to which all of the outstanding equity securities of the Predecessor Company were exchanged for units of Rhythm Holding Company, LLC, a newly-organized limited liability company (the LLC entity ). After the consummation of this exchange and as part of the Corporate Reorganization, the Predecessor Company contributed setmelanotide and the MC4R agonist program to the Company and distributed to the LLC entity all of the then issued and outstanding shares of the Company s stock. The result of the Corporate Reorganization was that the Company and the Predecessor Company became wholly-owned subsidiaries of the LLC entity and the two product candidates and related programs that were originally held by the Predecessor Company were separated, with relamorelin and the ghrelin agonist program being retained by the Predecessor Company and setmelanotide and the MC4R agonist program being held by the Company. The Predecessor Company, after consummation of the Corporate Reorganization, is referred to within these Notes to Financial Statements as the Relamorelin Company and/or Motus.
On October 13, 2015, the Relamorelin Company changed its name to Motus Therapeutics, Inc ( Motus ) and the Company changed its name to Rhythm Pharmaceuticals, Inc. On December 15, 2016, Motus was sold to a large pharmaceutical company. On August 21, 2017, the LLC entity distributed to its members all of its shares of the Company (see Note 5 for further discussion).
The Company has incurred operating losses and negative cash flows from operations since inception, incurred a net loss of $33,709, $25,872 and $11,073 during the years ended December 31, 2017, 2016 and 2015, respectively, and has an accumulated deficit of $110,252 as of December 31, 2017. The Company has primarily funded these losses through capital contributions received from the LLC entity and the sale of preferred and common stock to outside investors. To date, the Company has no product revenue and management expects operating losses to continue for the foreseeable future. The Company has devoted substantially all of its resources to its drug development efforts, comprising research and development, manufacturing, conducting clinical trials for its product candidates, protecting its intellectual property and general and administrative functions relating to these operations. The future success of the Company is
Rhythm Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements (Continued)
(In thousands, except share and per share information)
1. Nature of Business (Continued)
dependent on its ability to develop its product candidates and ultimately upon its ability to attain profitable operations. At December 31, 2017, the Company had $148,082 of cash and cash equivalents and short-term investments on hand. In the future, the Company will be dependent on obtaining funding from third parties, such as proceeds from the issuance of debt, sale of equity, and funded research and development programs, to maintain the Company s operations and meet the Company s obligations. There is no guarantee that additional equity or other financings will be available to the Company on acceptable terms, or at all. If the Company fails to obtain additional funding when needed, the Company would be forced to scale back, terminate its operations or seek to merge with or be acquired by another company. Management believes that the Company s existing cash resources will be sufficient to fund the Company s operating plan into the second half of 2019.
2. Summary of Significant Accounting Policies
Basis of Presentation
The Company s consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States ( GAAP ). Any reference in these notes to applicable guidance is meant to refer to the authoritative United States generally accepted accounting principles as found in the Accounting Standards Codification ( ASC ) and Accounting Standards Updates ( ASU ) of the Financial Accounting Standards Board ( FASB ).
The Company has historically existed and functioned as part of the consolidated businesses of the Predecessor Company. As noted above, the Predecessor Company s setmelanotide and the MC4R agonist program were transferred to the Company as part of the Corporate Reorganization on March 21, 2013. These financial statements include the results of operations of setmelanotide and the MC4R agonist program from its inception. As part of the Corporate Reorganization, the Company also entered into a formal payroll services intercompany agreement with the Relamorelin Company. On November 16, 2016, the employees of the Relamorelin Company that were providing services to the Company, terminated their employment contracts with the Relamorelin Company and entered into new employment agreements with the Company. On December 15, 2016, the Relamorelin Company closed on its sale to a large pharmaceutical company. During 2016 and 2015, costs have been allocated to the Company for the purposes of preparing the financial statements based on a specific identification basis or, when specific identification is not practicable, a proportional cost allocation method which allocates expenses based upon the percentage of employee time and research and development effort expended on the Company s business as compared to total employee time and research and development effort of the combined Motus and Rhythm. The proportional use basis adopted to allocate shared costs is in accordance with the guidance of SEC Staff Accounting Bulletin ( SAB ) Topic 1B, Allocation Of Expenses And Related Disclosure In Financial Statements Of Subsidiaries, Divisions Or Lesser Business Components Of Another Entity. Management has determined that the method of allocating costs to the Company is reasonable. Cost allocation was no longer required subsequent to the 2016 sale of the Relamorelin Company.
Management believes that the statements of operations include a reasonable allocation of costs and expenses incurred by the Relamorelin Company, which benefited the Company. However, such amounts may not be indicative of the actual level of costs and expenses that would have been incurred by the Company if it had operated as an independent company or of the costs and expenses expected to be incurred in the future. Management has not presented an estimate of what the expenses of the Company
Rhythm Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements (Continued)
(In thousands, except share and per share information)
2. Summary of Significant Accounting Policies (Continued)
would have been on a standalone basis as it was not practicable to make a reasonable estimate. As such, the financial information herein may not necessarily reflect the financial position, results of operations and cash flows of the Company expected in the future or what it would have been had it been an independent company during the periods presented.
As described above, Relamorelin Company employee costs are allocated to the Company based on a proportional use method. For those employees who became employees of the Company on November 16, 2016, their full employment cost was $2,727 and $3,155 for the years ended December 31, 2016 and 2015, respectively.
On September 22, 2017, the Company s board of directors approved a 1-for-9.17 reverse stock split of the Company s issued and outstanding shares of common stock. All share and per share amounts in the financial statements have been retrospectively adjusted for all periods presented to give effect of the reverse stock split.
On October 5, 2017, the Company filed an amended and restated certificate of incorporation with the Secretary of State of the State of Delaware to increase its authorized number of shares of common stock to 120,000,000 shares of common stock, $0.001 par value per share and 10,000,000 shares of preferred stock, $0.001 par value per share.
On October 10, 2017 the Company completed its initial public offering ( IPO ) of 8,107,500 shares of common stock at an offering price of $17.00 per share, which included the exercise in full by the underwriters of their option to purchase up to 1,057,500 additional shares of common stock. The Company received gross proceeds of approximately $137,828 or net proceeds of $125,658 after deducting underwriting discounts, commissions and estimated offering expenses. In connection with the IPO, the Company s outstanding shares of convertible preferred stock were automatically converted into 17,406,338 shares of common stock. After the IPO and as of December 31, 2017, our outstanding common shares were 27,284,140.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The Company bases its estimates on historical experience and other market-specific or other relevant assumptions that it believes to be reasonable under the circumstances. This process may result in actual results differing materially from those estimated amounts used in the preparation of the financial statements if these results differ from historical experience, or other assumptions do not turn out to be substantially accurate, even if such assumptions are reasonable when made. Significant estimates relied upon in preparing these financial statements include the allocation of costs from the Relamorelin Company in accordance with SAB Topic 1B, accrued expenses, stock-based compensation expense, the valuation allowance on the Company s deferred tax assets, and the fair value of the Series A Investor Instrument. See Note 4.
Rhythm Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements (Continued)
(In thousands, except share and per share information)
2. Summary of Significant Accounting Policies (Continued)
Principles of Consolidation
The consolidated financial statements include the accounts of Rhythm Pharmaceuticals, Inc. and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Off-Balance Sheet Risk and Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to significant concentration of credit risk, consist primarily of cash and cash equivalents and short-term investments, which are maintained at two federally insured financial institutions. The deposits held at these two institutions are in excess of federally insured limits. The Company has not experienced any losses in such accounts and management believes that the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held. The Company has no off-balance sheet risk, such as foreign exchange contracts, option contracts, or other foreign hedging arrangements.
Operating segments are defined as components of an entity about which separate discrete information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company views its operations and manages its business in one operating segment operating exclusively in the United States.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original or remaining maturity from the date of purchase of three months or less to be cash equivalents. Cash and cash equivalents includes bank demand deposits, U.S. treasury bills and money market funds that invest primarily in U.S. government treasuries.
Short-term Investments
Short-term investments consist of investments with original maturities greater than 90 days, as of the date of purchase. The Company has classified its investments with maturities beyond one year as short term, based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations. The Company considers its investment portfolio available-for-sale. Accordingly, these investments are recorded at fair value, which is based on quoted market prices. Unrealized gains and losses are reported as a component of accumulated other comprehensive income (loss) in stockholders equity (deficit). Realized gains and losses and declines in value judged to be other than temporary are included as a component of other income (expense), net based on the specific identification method. When determining whether a decline in value is other than temporary, the Company considers various factors, including whether the Company has the intent to sell the security, and whether it is more likely than not that the Company will be required to sell the security prior to recovery of its amortized cost basis. Fair value is determined based on quoted market prices.
Rhythm Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements (Continued)
(In thousands, except share and per share information)
2. Summary of Significant Accounting Policies (Continued)
Restricted cash consists of a security deposit in the form of a letter of credit placed in a separate restricted bank account as required under the terms of the Company s new lease arrangement for its corporate office in Boston, Massachusetts.
Deferred Issuance Costs
Deferred issuance costs, which consist of direct incremental legal and accounting fees relating to the IPO, were capitalized and included in non-current assets. The deferred issuance costs were to be offset against IPO proceeds upon the consummation of the offering. In the event the offering was terminated, deferred issuance costs would be expensed.
The Company had capitalized $1,825 of deferred issuance costs related to a prior registration statement confidentially submitted to the Securities and Exchange Commission in 2015 and 2016. In the fourth quarter of 2016, the Company wrote off these deferred issuance costs to general and administrative expenses because the offering was postponed significantly in excess of 90 days. As a result, the costs were not deemed realizable as the Company incurred similar costs in connection with its IPO in October 2017. The Company incurred $9 of deferred issuance costs as of December 31, 2016, which is included in non-current assets.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist primarily of costs incurred in advance of services being received, including services related to clinical trial programs.