Investment income consists of interest income
earned on our cash, cash equivalents and marketable securities.
Other Income (Expense), Net
Other income (expense), net consists of the
gain realized from non-cash gains and losses from currency exchange rate fluctuations on transactions or balances denominated in
a foreign currency and realized and unrealized gains and losses on the forward foreign currency contracts we entered into in the
second quarter of 2015 to purchase Swiss Francs to reduce our foreign currency exposure through 2016. This foreign currency exposure
is the result of a contract with the manufacturer of active pharmaceutical ingredient, or API, for our lead product candidate,
vonapanitase, which requires us to make payments in Swiss Francs. The last outstanding forward foreign currency contract was executed
during December 2016.
Derivative Financial Instruments
We purchase Swiss Francs or have entered into
forward foreign currency contracts to reduce our foreign currency exposure in making contractual payments under our Lonza agreement.
The latter are considered derivative financial instruments that are recorded on the consolidated balance sheet at fair value. Although
these derivative contracts are intended to economically hedge foreign exchange risk, we have not elected to apply hedge accounting.
As such, changes in the fair value of the Swiss Francs we hold or in these derivative instruments are recorded directly in earnings
as a component of other income (expense) as they occur. We execute derivative instruments with financial institutions that we judge
to be credit-worthy, defined as institutions that hold an investment-grade credit rating.
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis
of our financial position and results of operations is based on our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America, or GAAP. The preparation of financial statements
in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements
and accompanying notes. On an ongoing basis, we evaluate estimates, which include estimates related to clinical trial accruals,
stock-based compensation expense, embedded derivatives and reported amounts of revenues and expenses during the reported period.
We base our estimates on historical experience and other market-specific or other relevant assumptions that we believe to be reasonable
under the circumstances. Actual results may differ materially from those estimates or assumptions.
There have been no material changes to our accounting
policies from those described in our Annual Report on Form 10-K. It is important that the discussion of our operating results that
follows be read in conjunction with the critical accounting policies disclosed in our Annual Report on Form 10-K, as filed with
the SEC on March 16, 2017.