The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Interim Consolidated
Financial Statements
The accompanying unaudited interim condensed consolidated financial statements of Pieris Pharmaceuticals, Inc.
(Pieris or the Company) were prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for interim financial information. All significant intercompany balances and
transactions have been eliminated in the consolidation. Certain information and footnotes normally included in financial statement prepared in accordance with U.S. GAAP have been omitted pursuant to the rules and regulations of the Securities and
Exchange Commission (the SEC). Accordingly, the statements do not include all of the information and notes required by U.S. GAAP for complete annual consolidated financial statements. It is recommended that these financial statements be
read in conjunction with the consolidated financial statements and related footnotes that appear in the Annual Report on Form
10-K
of the Company for the year ended December 31, 2016 filed with the SEC on
March 30, 2017 (the 2016 Annual Report).
In the opinion of management, the unaudited interim condensed consolidated financial statements
have been prepared on the same basis as the audited condensed consolidated financial statements for the year ending December 31, 2016, and all adjustments, including normal recurring adjustments, considered necessary for the fair presentation
of the Companys unaudited interim consolidated financial statements have been included. The results of operations, for the three months ended March 31, 2017, are not necessarily indicative of the results that may be expected for the year
ending December 31, 2017 or any future period.
Use of estimates
The preparation of the condensed consolidated financial statements in accordance with U.S. GAAP requires management to make estimates, judgments, and
assumptions that affect the reported amounts of assets and liabilities, the reported amounts of revenues, and expenses in the financial statements and disclosures in the accompanying notes. Significant estimates are used for, but are not limited to,
revenue recognition, deferred tax assets, liabilities and valuation allowances, fair value of stock options and various accruals. Management evaluates its estimates on an ongoing basis. Actual results and outcomes could differ materially from
managements estimates, judgments and assumptions.
2. Critical Accounting Policies
Research and development expenses
Research and
development expenses are charged to the statement of operations as incurred. Research and development expenses are comprised of costs incurred in performing research and development activities, including salaries and benefits, facilities costs,
pre-clinical
and clinical costs, contract services, consulting, depreciation and amortization expense, and other related costs. Costs associated with acquired technology, in the form of upfront fees or milestone
payments, are charged to research and development expense as incurred.
Revenue Recognition
Pieris has entered into several licensing and development agreements with collaboration partners for the development of Anticalin
®
therapeutics against a variety of targets in diseases and conditions. The terms of these agreements contain multiple elements and deliverables, which may include: (i) licenses, or options to
obtain licenses, to Pieris Anticalin technology and (ii) research activities to be performed on behalf of the collaborative partner. Payments to Pieris, under these agreements, may include upfront fees (which include license and option
fees), payments for research activities, payments based upon the achievement of certain milestones and royalties on product sales. There are no performance, cancellation, termination, or refund provisions in any of the arrangements. Pieris follows
the provisions of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic
605-25,
Revenue RecognitionMultiple-Element Arrangements
and
ASC Topic
605-28,
Revenue RecognitionMilestone Method
in accounting for these agreements.
Multiple-Element Arrangements
When evaluating
multiple-element arrangements, Pieris identifies the deliverables included within the agreement and evaluates which deliverables represent separate units of accounting based on whether the delivered element has stand-alone value to the customer or
if the arrangement includes a general right of return for delivered items.
5
The consideration received is allocated among the separate units of accounting using the relative selling price
method, and the applicable revenue recognition criteria are applied to each of the separate units of accounting. Pieris has used best estimate of selling price (BESP) methodology to estimate the selling price for licenses and options to
acquire additional licenses to its proprietary technology because Pieris does not have vendor specific objective evidence (VSOE) or third party evidence (TPE) of selling price for these deliverables. To determine the
estimated selling price of a license to its proprietary technology, Pieris considers market conditions as well as entity-specific factors, including those factors contemplated in negotiating the agreements, terms of previous collaborative
agreements, similar agreements entered into by third parties, market opportunity, estimated development costs, probability of success, and the time needed to commercialize a product candidate pursuant to the license. In validating Pieris best
estimate of selling price, Pieris evaluates whether changes in the key assumptions used to determine the best estimate of selling price will have a significant effect on the allocation of arrangement consideration among multiple deliverables.
Multiple element arrangements, such as license and development arrangements, are analyzed to determine whether the deliverables, which often include a license
and performance obligations such as research and steering committee services, can be separated or whether they must be accounted for as a single unit of accounting in accordance with U.S. GAAP. The Company recognizes
up-front
license payments as revenue upon delivery of the license only if the license has stand-alone value. If the license is considered to not have stand-alone value, the arrangement would then be accounted
for as a single unit of accounting and the license payments and payments for performance obligations are recognized as revenue over the estimated period of when the performance obligations are performed.
If the Company is involved in a steering committee as part of a multiple element arrangement, the Company assesses whether its involvement constitutes a
performance obligation or a right to participate. Steering committee services that are determined to be performance obligations, are combined with other research services or performance obligations required under an arrangement, if any, in
determining the level of effort required in an arrangement and the period over which the Company expects to complete its aggregate performance obligations.
The Company recognizes arrangement consideration allocated to each unit of accounting when all of the revenue recognition criteria in ASC 605 are satisfied
for that particular unit of accounting. Whenever the Company determines that an arrangement should be accounted for as a single unit of accounting, it must determine the period over which the performance obligations will be performed and revenue
will be recognized. Revenue will be recognized using either a relative performance or straight-line method. The Company recognizes revenue using the proportional performance method provided the Company can reasonably estimate the level of effort
required to complete its performance obligations under an arrangement and such performance obligations are provided on a best-effort basis. Full-time equivalents are typically used as the measure of performance.
Significant management judgment is required in determining the level of effort required under an arrangement and the period over which the Company is expected
to complete its performance obligations under an arrangement.
The accounting treatment for options granted to collaborators is dependent upon the nature
of the option granted to the collaborative partner. Options are considered substantive if, at the inception of an agreement, Pieris is at risk as to whether the collaborative partner will choose to exercise the options to secure additional goods or
services. Factors that are considered in evaluating whether options are substantive include the overall objective of the arrangement, the benefit the collaborator might obtain from the agreement without exercising the options, the cost to exercise
the options relative to the total upfront consideration, and the additional financial commitments or economic penalties imposed on the collaborator as a result of exercising the options.
In arrangements where options to obtain additional deliverables are considered substantive, Pieris determines whether the optional licenses are priced at a
significant and incremental discount. If the prices include a significant and incremental discount, the option is considered a deliverable in the arrangement. However, if not priced at a discount, the elements included in the arrangement are
considered to be only the
non-contingent
elements. When a collaborator exercises an option to acquire an additional license, the exercise fee that is attributed to the additional license and any incremental
discount allocated at inception are recognized in a manner consistent with the treatment of
up-front
payments for licenses (
i.e.
, license and research services). In the event an option expires
un-exercised,
any incremental discounts deferred at the inception of the arrangement are recognized into revenue upon expiration. For options that are
non-substantive,
the
additional licenses to which the options pertain are considered deliverables upon inception of the arrangement, and Pieris applies the multiple-element revenue recognition criteria to determine accounting treatment. All of Pieris agreements
with options have been determined to include substantive options.
Payments or reimbursements resulting from Pieris research and development efforts
in multi-element arrangements, in which Pieris research and development efforts are considered deliverable, are recognized as the services are performed and are presented on a gross
6
basis so long as there is persuasive evidence of an arrangement, the fee is fixed or determinable, and collection of the related receivable is reasonably assured. Amounts received prior to
satisfying the above revenue recognition criteria are recorded as deferred revenue in the accompanying balance sheets.
Milestone Payments and
Royalties
At the inception of each agreement that includes milestone payments, Pieris evaluates whether each milestone is substantive and at risk to
both parties on the basis of the contingent nature of the milestone. This evaluation includes an assessment of whether: (a) the consideration is commensurate with either (1) the entitys performance to achieve the milestone, or
(2) the enhancement of the value of the delivered item(s) as a result of a specific outcome resulting from the entitys performance to achieve the milestone, (b) the consideration relates solely to past performance and (c) the
consideration is reasonable relative to all of the deliverables and payment terms within the arrangement. Pieris evaluates factors such as the scientific, regulatory, commercial and other risks that must be overcome to achieve the respective
milestone, the level of effort and investment required to achieve the respective milestone and whether the milestone consideration is reasonable relative to all deliverables and payment terms in the arrangement in making this assessment.
Pieris aggregates milestones into four categories: (i) research milestones, (ii) development milestones, (iii) commercial milestones and
(iv) sales milestones. Research milestones are typically achieved upon reaching certain success criteria as defined in each agreement related to developing an Anticalin protein against the specified target. Development milestones are typically
reached when a compound reaches a defined phase of clinical research or passes such phase, or upon gaining regulatory approvals. Commercial milestones are typically achieved when an approved pharmaceutical product reaches the status for commercial
sale or certain defined levels of net sales by the licensee, such as when a product first achieves global sales or annual sales of a specified amount. Sales milestones are typically achieved when an approved pharmaceutical product exceed net sales
as defined in each agreement.
For revenues from research, development, and sales milestone payments, if the milestones are deemed substantive and the
milestone payments are nonrefundable, such amounts are recognized entirely upon successful accomplishment of the milestones. Milestones that are not considered substantive are accounted for as license payments and recognized on a straight-line basis
over the period of performance. Revenues from commercial milestone payments are accounted for as royalties and are recorded as revenue upon achievement of the milestone, assuming all other revenue recognition criteria are met. Royalty payments are
recognized in revenues based on the timing of royalty payments earned in accordance with the agreements, which typically is the period when the relevant sales occur, assuming all other revenue recognition criteria are met.
3. Revenues
General
Pieris has not generated revenues from product sales to date. Pieris has generated revenues from: (i) license and collaboration agreements, which include
upfront payments for licenses or options to obtain licenses, payments for research and development services and milestone payments and (ii) government grants.
F.Hoffmann-La
Roche Ltd. and Hoffmann- La Roche Inc.
In December 2015, the Company entered into a Research Collaboration and License Agreement (the Roche Agreement) with F.Hoffmann- La Roche Ltd.
and Hoffmann- La Roche Inc., (Roche), for the research, development, and commercialization of Anticalin
®
-based drug candidates against a predefined, undisclosed target in cancer
immune therapy. The parties will jointly pursue a preclinical research program with respect to the identification and generation of Anticalin proteins that bind to a specific target for an initial period of 20 months, which may be extended by Roche
for up to an additional 12 months. Roche has the ability to continue certain exclusivity rights for up to an additional 5 years following the end of the research program. Both Roche and the Company will participate in a joint research committee in
connection with this agreement. Following the research program, Roche will be responsible for subsequent
pre-clinical
and clinical development of any product developed through the research plan and will have
worldwide commercialization rights to any such product.
Roche has paid $6.5 million of an upfront payment for the research collaboration.
Additionally, Roche will pay Pieris for research services provided by Pieris in conjunction with the research program. Roche will also pay Pieris for certain milestones relating to development, regulatory, and sales milestones as they are achieved.
As of March 31, 2017 and March 31, 2016, deferred revenue, related to Roche collaboration, is $3.1 million and $6.0 million, respectively.
Pieris recorded $1.0 million and $1.2 million in revenue for the three months ended March 31, 2017 and March 31, 2016, respectively, related to
the recognition of the upfront payment associated with the portion of the research services performed during the period as well as the value of research services provided by Pieris in connection with the ongoing research program.
7
The Company identified the research and commercial licenses, performance of R&D services, and participation
in the joint research committee as deliverables under the Roche Agreement. For revenue recognition purposes, management has determined that there are two units of accounting at the inception of the agreement representing (i) the research and
commercial licenses and the performance of R&D services which do not have standalone value, and (ii) the participation in the joint research committee.
In addition to the upfront payment, under the Roche Agreement, the Company is eligible to receive research funding, development and regulatory, and sales
based milestone payments up to approximately $406.5 million, plus royalties on future sales of any commercial products. The total potential milestones are categorized as follows: development and regulatory milestones$282.7 million;
and sales milestones$119.9 million. Management has determined that the development milestones are not substantive because they do not relate solely to past performance of the Company and the Companys involvement in the achievement
is limited to progress reports and other updates.
Non-substantive
milestones will be recognized when achieved to the extent the Company has no remaining performance obligations under the arrangement.
Les Laboratoires Servier and Institut de Recherches Internationales Servier
On January 4, 2017, Pieris entered into a License and Collaboration Agreement (Collaboration Agreement), and
Non-Exclusive
Anticalin Platform Technology Agreement (the License Agreement and together with the Collaboration Agreement, the Agreements) with Les Laboratoires Servier and Institut de
Recherches Internationales Servier (collectively Servier) pursuant to which Pieris and Servier will initially pursue five bispecific therapeutic programs, led by the
PRS-332
program (the Lead
Product), a
PD-1-targeting
bispecific checkpoint inhibitor. Pieris and Servier will jointly develop
PRS-332
and split
commercial rights geographically, with Pieris retaining all commercial rights in the United States and Servier having commercial rights in the rest of the world. Each party is responsible for an agreed upon percentage of shared costs, as set forth
in the budget for the joint development plan, and as further discussed below.
Four additional committed programs have been defined, which may combine
antibodies from the Servier portfolio with one or more Anticalin proteins based on Pieris proprietary platform to generate innovative immuno-oncology bispecific drug candidates. The collaboration may be expanded by up to three additional
therapeutic programs. Pieris has the option to
co-develop
and retain commercial rights in the United States for up to three programs beyond
PRS-332
(Co-Development
Collaboration Products), while Servier will be responsible for development and commercialization of the other programs worldwide (Servier Worldwide Collaboration Products).
Each party is responsible for an agreed upon percentage of shared costs, as set forth in the budget for the collaboration plan, and further discussed below.
Co-Development
Collaboration Products may be jointly developed, according to a collaboration plan, through marketing
approval from the FDA or EMA. Servier Worldwide Collaboration Products may be jointly developed, according to a collaboration plan, through specified preclinical activities, at which point Servier becomes responsible for the further development of
the collaboration product.
At inception, Servier is granted the following licenses: (i) development license for the Lead Product,
(ii) commercial license for the Lead Product, (iii) individual research licenses for each of the four collaboration programs, and (iv) individual
non-exclusive
platform technology licenses for
each of the Lead Product and four collaboration programs. Upon achievement of certain development activities, specified by the collaboration for each Collaboration Product, Servier will be granted a development license and a commercial license. For
the Lead Product and
Co-Development
Collaboration Products, the licenses granted are with respect to the entire world except for the United States. For Servier Worldwide Collaboration Products, the licenses
granted are with respect to the entire world.
The Agreements will be managed on an overall basis by a joint executive committee (JEC) formed
by an equal number of members from the Company and Servier. Decisions by the JEC will be made by consensus, however, in the event of a disagreement, each party will have final-decision making authority as it relates to the applicable territory in
which such party has commercialization rights for the applicable product. In addition to the JEC, the Collaboration Agreement, also requires the participation of both parties on: (i) a joint steering committee (JSC), (ii) a joint
development committee (JDC), (iii) a joint intellectual property committee (JIPC), and (iv) a joint research committee (JRC). The responsibilities of these committees vary, depending on the stage of
development and commercialization of each of the Lead Product and collaboration programs.
For the Lead Product and
Co-Development
Collaboration Products, Pieris and Servier are responsible for an undisclosed amount of the shared costs required to develop the products through commercialization. In the event that Pieris
fails to exercise their option to
co-develop
the Co-Development Collaboration Products, and Servier has the right to continue with development alone.
8
Under the Agreements, the Company received an upfront,
non-refundable
payment of 30.0 million (approximately $32.0 million). In addition, the Company is eligible to receive development and regulatory and sales-based milestone payments. The total potential milestones are categorized as follows: development
and regulatory milestones up to 569.0 million; and sales milestones up to 515.0 million. The initial research collaboration term, as it relates to the collaboration programs, shall continue for three years from the
effective date, and may be mutually extended for two
one-year
terms consecutively applied. The term of the Agreements ends upon the expiration of all Serviers payment obligations under such Agreement.
The Company accounted for the Agreements, as a multiple element arrangement under ASC
605-25.
The arrangement
with Servier contains the following initial deliverables: (i) five
non-exclusive
platform technology licenses, (ii) development license for the Lead Product, (iii) commercial license for the
Lead Product, (iv) research and development services for the Lead Product, (v) participation on each of the committees, (vi) four research licenses for collaboration programs, and (vii) research and development services for the
collaboration programs. Additionally, as the development and commercial licenses on the collaboration programs may be granted at discount in the future, the Company determined that discounts should be included as an element of the arrangement at
inception.
Management considered whether any of the deliverables could be considered separate units of accounting. The Company determined that the
licenses granted at the inception of the arrangement did not have standalone value from the research and development services to be provided for the Lead Product and collaboration programs, over the term of the Agreements, due to the specific nature
of the intellectual property and knowledge required to perform the services. The Company determined that the participation on the various committees did have standalone value as the services could be performed by an outside party.
As a result, management concluded that there were fourteen units of accounting at the inception of the agreement: (i) combined unit of accounting
representing a
non-exclusive
platform technology license, commercial license, development license and research and development services for the Lead Product, (ii) four units of accounting each
representing a combined
non-exclusive
platform technology license, research license, and research and development services for each collaboration program, (iii) one unit of accounting representing the
participation of the various governance committees, and (iv) four units of accounting representing the discounts on the development and commercial licenses granted for the collaboration programs upon the achievement of specified preclinical
activities.
The Company determined that neither VSOE nor TPE is available for any of the units of accounting identified at the inception of the
arrangement. Accordingly, the selling price of each unit of accounting was developed using managements BESP. The Company developed their best estimate of selling price for licenses by applying a risk adjusted, net present value, of estimate of
future potential cash flow approach, which included the cost of obtaining research and development services at arms length from a third-party provider, as well as internal full time equivalent costs to support these services.
The Company developed the BESP for committee participation by using managements best estimate of the anticipated participation hours multiplied by a
market rate for comparable participants.
9
The Company developed the best estimate of selling price for the discounts granted on the licenses by probability
weighting multiple cash flow scenarios using the income approach.
Allocable arrangement consideration at inception is comprised of the upfront fee of
30.0 million (approximately $32.0 million) and was allocated among the separate units of accounting using the relative selling price method as follows (i) combined unit of accounting for the Lead Product: (ii) four units of
accounting for the collaboration programs, (iii) one unit of accounting representing participation in each of the committees, and (iv) four units of accounting representing the discount on development and commercial licenses granted in the
future.
The amounts allocated to the combined unit of accounting for the Lead Product and four units of accounting for the collaboration programs will be
recognized on a proportional performance basis as the activities are conducted over the life of the arrangement. The term of the performance at inception of the agreement for the Lead Product and each of the
co-developed
collaboration programs may be through approval of certain regulatory bodies; a period which could be many years. The term of the performance at inception of the agreement for each of the other
collaboration programs for which Servier obtained world-wide rights is approximately two to three years. The amounts allocated to the participation on each of the committees will be recognized ratably over the anticipated performance period over the
entirety of the arrangement with Servier. The amounts allocated to the discounts of the development and commercial licenses granted in the future will be recognized upon delivery of each of the licenses assuming no other performance obligations.
Additionally, the Company evaluated payments required to be made between both parties as a result of the shared development costs of the Lead Product and
Co-Development
Collaboration Products. The Company will classify payments made as research and development expenses and will classify payments received as a reduction in research and development expenses, in
the period they are incurred.
Under the agreement the Company is eligible to receive various development and regulatory and sales milestones. Management
determined that certain of the development and regulatory milestones which may be received under the Servier Agreements are substantive when the Company is involved in the development and commercialization of the applicable product. Payments related
to the achievement of such milestones, if any, will be recognized as revenue when the milestone is achieved. Total potential substantive development and regulatory milestones are up to 163.0 million. Development and regulatory milestones are
deemed non-substantive if they are based solely on the performance of another party. Non-substantive milestones will be treated as contingent revenue and will be recognized when achieved to the extent the Company has no remaining performance
obligations under the arrangement. Milestone payments earned upon the achievement of sales events will be recognized when earned. Total potential non-substantive development and regulatory milestones are up to 406.0 million and sales
milestones are up to 515.0 million.
The Company will recognize royalty revenue in the period of sale of the related product(s), based on the
underlying contract terms, provided that the reported sales are reliably measurable and the Company has no remaining performance obligations, assuming all other revenue recognition criteria are met.
Pieris recorded $0.3 million in revenue for the three months ended March 31, 2017, with respect to the Agreements with Servier. Research and
development expense incurred by the Company in relation to its performance under the agreement for the three months ended March, 31, 2017 was $0.5 million. As of March 31, 2017, there is $2.9 million and $28.9 million of deferred
revenue and
non-current
deferred revenue, respectively, related to the Companys collaboration with Servier.
ASKA Pharmaceutical Co. Ltd.
On February 27,
2017 the Company entered into an Exclusive Option Agreement (the Agreement) with ASKA Pharmaceutical Co., Ltd. (ASKA) to grant ASKA an option to acquire (1) a
non-exclusive
license
to certain intellectual property rights associated with the Pieris Anticalin platform (Licensed Platform IP) and (2) an exclusive license to certain intellectual property rights specifically related to Pieris PRS-080
Anticalin protein (Licensed Product IP) in order to develop, manufacture, import, sale, export, and offer for sale and export any pharmaceutical formulation containing
PRS-080,
the Companys
pegylated Anticalin protein targeting hepcidin (Licensed Product) in Japan and certain other Asian territories (Licensed Territory).
ASKA has paid $2.75 million of an upfront option payment. Pieris is obliged to use commercially reasonable efforts to complete the Phase 2a Study for
PRS-080
and to submit to ASKA in writing the final results of the study when available. Upon receipt, ASKA will have 60 days to evaluate the results of the Phase 2a Study (Evaluation Period). ASKA agreed
to notify Pieris in writing its decision to exercise its option to acquire rights to the Licensed Product. In consideration of the licenses granted as part of the Agreement, ASKA will pay an undisclosed license fee. If the Phase 2a Study meets the
applicable success criteria and ASKA fails to provide notification that it will exercise its option, ASKA shall pay the Company an undisclosed fee within thirty days of the end of the Evaluation Period (the
Break-Up
Fee). If ASKA exercises the option, ASKA and the Company will enter into a definitive arrangement governing the future development and commercialization activities.
Pieris has an obligation to use all reasonable commercial efforts to complete the Phase 2a Study for the Licensed Product and to submit to ASKA in writing the
final results of said study. Failure to do so would result in a significant contractual penalty. The completed Phase 2a Study represents a deliverable under the arrangement. As the arrangement only contains one deliverable, there is only one unit of
accounting to be considered at the inception of the contract. The total allocable arrangement consideration at
10
inception is $2.75 million and this is allocated to the single unit of accounting. The Company noted that while the completion of the Phase 2a trial requires the completion of a number of
actions, the finalization of the data and evaluation of results is of such significance that the value of the Phase 2a Study Results is realized at this point. As a result, the Company will recognize revenue for this unit of accounting upon delivery
of the Phase 2a Study Results to ASKA. Therefore, no revenue in connection with this arrangement was recognized in the three months ended March 31, 2017. As of March 31, 2017, there is $2.75 million of non-current deferred revenue related to
the Companys option agreement with ASKA.
4. Net Loss per Share
Basic net loss per share was determined by dividing net loss by the weighted average shares outstanding during the period. Diluted net loss per share was
determined by dividing net loss by diluted weighted average shares outstanding. Diluted weighted average shares reflect the dilutive effect, if any, of common stock options based on the treasury stock method.
For all financial statement periods presented the number of basic and diluted weighted average shares outstanding remained the same as an increase in the
number of shares of common stock equivalents for the periods presented would be antidilutive.
For the three months ended March 31, 2017 and 2016,
approximately 11.2 million and 3.5 million weighted average shares, subject to stock options and warrants, respectively, as calculated using the treasury stock method, were excluded from the calculation of diluted weighted average shares
outstanding as their effect was antidilutive.
5. Fair Value Measurement
ASC Topic 820
Fair Value Measurement
defines fair value as the price that would be received to sell an asset or be paid to transfer a liability in an
orderly transaction between market participants at the measurement date. Pieris applies the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy
upon the lowest level of input that is available and significant to the fair value measurement:
Level 1 inputs are quoted prices in
active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 utilizes quoted market prices in markets that are not active, broker or dealer quotations, or alternative pricing sources with
reasonable levels of price transparency.
Level 3 inputs are unobservable inputs for the asset or liability in which there is little,
if any, market activity for the asset or liability at the measurement date.
For the periods presented in these interim financial statements, Pieris has
no cash equivalents and debt instruments as of each balance sheet date presented.
All other current assets and current liabilities on our consolidated
balance sheets approximate their respective carrying amounts.
6. Accrued expenses
The Company has recorded the following accrued expenses as of March 31, 2017 and December 31, 2016, respectively:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Accrued expenses
|
|
|
|
|
|
|
|
|
Accrued compensation expense
|
|
$
|
844,786
|
|
|
$
|
1,198,448
|
|
Accrued professional fees
|
|
|
782,203
|
|
|
|
867,969
|
|
Accrued R&D fees
|
|
|
777,573
|
|
|
|
1,040,321
|
|
Accrued audit and tax fees
|
|
|
374,548
|
|
|
|
454,931
|
|
Accrued other
|
|
|
179,767
|
|
|
|
157,788
|
|
|
|
|
|
|
|
|
|
|
Total accrued expenses
|
|
$
|
2,958,877
|
|
|
$
|
3,719,457
|
|
|
|
|
|
|
|
|
|
|
11
7. Stock-based compensation
2014 Stock Plan
Pieris granted 1,068,881 options to employees,
consultants, and directors under its 2014 Employee, Director, and Consultant Equity Incentive Plan, (the 2014 Plan) during the three months ended March 31, 2016. The 2014 Plan was terminated on June 28, 2016 when the Company
adopted its 2016 Employee, Director and Consultant Equity Incentive Plan, (the 2016 Plan). Therefore, no options were granted for the three months ended March 31, 2017 under the 2014 Plan.
2016 Stock Plan
In June 2016, the Company adopted the 2016 Plan
which provides for the grant of stock options, restricted and unrestricted stock awards, and other stock-based awards to employees of the Company,
non-employee
directors of the Company, and certain other
consultants performing services for the Company as designated by the Compensation Committee of the Board of Directors or the Board of Directors. The vesting periods of equity incentives issued under the 2016 Plan are determined by the Compensation
Committee of the Companys Board of Directors, with stock options generally vesting over a four-year period.
The Company granted 1,140,338 options
to employees and directors under the 2016 Plan during the three months ended March 31, 2017. No options were granted under the 2016 Plan during the three months ended March 31, 2016. As of March 31, 2017, there were 2,201,828 shares
available for future grant under the 2016 Plan. The shares available for future grant under the 2016 Plan include 217,530 shares which were forfeited under the 2016 Plan and 90,000 shares which were forfeited under the 2014 Plan. These forfeited
shares were added back to the 2016 Plan.
Stock-based compensation expense was $0.8 million and $0.4 million for the three months ended
March 31, 2017 and 2016, respectively.
Total stock-based compensation expense was recorded to operating expenses based upon the functional
responsibilities of the individuals holding the respective options as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Research and development
|
|
$
|
166,611
|
|
|
$
|
126,441
|
|
General and administrative
|
|
|
585,581
|
|
|
|
241,942
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
752,193
|
|
|
$
|
368,383
|
|
There were no options exercised during the three months ended March 31, 2017 and 2016, respectively.
The Company uses the Black-Scholes option pricing model to determine the estimated fair value for stock-based awards. Option-pricing models require the input
of various subjective assumptions, including the options expected life, expected dividend yield, price volatility, risk free interest rate, and forfeitures of the underlying stock. Accordingly, the weighted-average fair value of the options
granted was $1.31 and $1.00 for the three months ended March 31, 2017 and 2016, respectively. The calculation was based on the following assumptions:
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
2017
|
|
2016
|
Risk free interest rate
|
|
2.04%-2.16%
|
|
1.35%-1.61%
|
Expected term
|
|
5.0 5.7 years
|
|
5.0 5.7 years
|
Dividend yield
|
|
|
|
|
Expected volatility
|
|
75.09%-75.13%
|
|
75.53%-76.00%
|
Option-pricing models require the input of various subjective assumptions, including the option´s expected life and the
price volatility of the underlying stock. Pieris estimated expected stock price volatility is based on the average volatilities of other guideline companies in the same industry. Pieris expected term of options granted during the three
months ended March 31, 2017 and 2016, respectively was derived using the SECs simplified method. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
12
The Companys stock options have a maximum term of ten years from the date of grant. Stock options granted
under the 2016 Plan may be either incentive stock options (ISOs), or nonqualified stock options (NQSOs). The exercise price of stock options granted under the 2016 Plan must be at least equal to the fair market value of the
common stock on the date of grant.
8. Liquidity and Going Concern
The Company believes its cash of $55.2 million as of March 31, 2017 and the $57.5 million to be received from the AstraZeneca subsequent to
March 31, 2017 will be sufficient to fund the Companys current operating plan for at least twelve months from the date of filing. The Company may need to raise additional funds in order to execute the current operating plan in the future.
There can be no assurance that the Company will be able to obtain future additional debt, equity financing, or generate product revenue or revenues from collaborative partners, on terms acceptable to the Company, on a timely basis or at all. The
failure of the Company to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on the Companys business, results of operations, and financial condition.
9. Recent Accounting Pronouncements
Adopted standards
for current period
In August 2014, the Financial Accounting Standards Board (FASB) issued ASU
No. 2014-15,
Disclosure of Uncertainties about an Entitys Ability to Continue as a Going Concern which is intended to define managements responsibility to evaluate whether there is
substantial doubt about an organizations ability to continue as a going concern and to provide related footnote disclosures. Substantial doubt about an entitys ability to continue as a going concern exists when relevant conditions
and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its financial obligations as they become due within one year after the date that the financial statements are issued (or are available to be
issued). ASU
No. 2014-15
provides guidance to an organizations management, with principles and definitions intended to reduce diversity in the timing and content of disclosures commonly
provided by organizations in the footnotes of their financial statements. ASU
No. 2014-15
is effective for annual reporting periods ending after December 15, 2016, and for annual and interim
periods thereafter. Early adoption is permitted. This standard has been adopted as of March 31, 2017, and the Company does not believe it is required to make any additional disclosures.
Standards not yet adopted
In May 2014, the FASB issued
ASU
No. 2014-09,
Revenue from Contracts with Customers (Topic 606) (ASU
2014-09).
Subsequently, the FASB also issued ASU
2015-14,
Revenue from Contracts with Customers (Topic 606) , which adjusted the effective date of ASU
2014-09;
ASU
No. 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which amends the principal-versus-agent implementation guidance
and illustrations in ASU
2014-09;
ASU
No. 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which
clarifies identifying performance obligation and licensing implementation guidance and illustrations in ASU
2014-09;
and ASU
No. 2016-12,
Revenue from Contracts
with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients , which addresses implementation issues and is intended to reduce the cost and complexity of applying the new revenue standard in ASU
2014-09
(collectively, the Revenue ASUs).
13
The Revenue ASUs provide an accounting standard for a single comprehensive model for use in accounting for
revenue arising from contracts with customers and supersedes most current revenue recognition guidance. The accounting standard is effective for interim and annual periods beginning after December 15, 2017, with an option to early adopt for
interim and annual periods beginning after December 15, 2016. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (the full retrospective method), or retrospectively with the cumulative effect
of initially applying the guidance recognized at the date of initial application (the modified retrospective method). We currently anticipate adoption of the new standard effective January 1, 2018 under the modified retrospective method. The
Company is in the process of determining the impact of the Revenue Recognition ASUs on its financial statements.
In February 2016, the FASB issued ASU
No. 2016-02, Leases (Topic 842). Under the amendments in ASU 2016-02 lessees will be required to recognize (i) a lease liability, which is a lessees obligation to make lease payments arising from a lease, measured on a discounted
basis; and (ii) a right-of-use asset, which is an asset that represents the lessees right to use, or control the use of, a specified asset for the lease term for all leases (with the exception of short-term leases) at the commencement date.
This guidance is effective for fiscal years beginning after December 15, 2019 including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the potential impact the adoption of this standard
will have on its financial statements and related disclosures.
Pieris has considered other recent accounting pronouncements and concluded that they are
either not applicable to the business, or that the effect is not expected to be material to the unaudited condensed consolidated financial statements as a result of future adoption.
10. Subsequent Events
License and Collaboration
Agreement and Non-Exclusive Anticalin Platform Technology License Agreement with AstraZeneca
On May 2, 2017, the Company and wholly-owned
subsidiaries Pieris Pharmaceuticals GmbH and Pieris Australia Pty Ltd. entered into a License and Collaboration Agreement (the AstraZeneca Collaboration Agreement) and a
Non-Exclusive
Anticalin
®
Platform Technology License Agreement (the License Agreement and together with the AstraZeneca Collaboration Agreement, the Agreements) with AstraZeneca AB
(AstraZeneca), pursuant to which the parties will advance several novel inhaled biologic molecules leveraging the unique properties of Pieris Anticalin
®
proteins, including
Pieris lead inhaled drug
candidate, PRS-060.
Under the Agreements, Pieris and AstraZeneca will pursue
up to five therapeutic programs, including
PRS-060,
a
first-in-class
inhaled
IL-4R
a
receptor antagonist for the treatment of asthma. Pieris will receive $57.5 million in
up-front and
near-term milestone payments, including $45 million of
up-front
payments and $12.5 million for the initiation of the
PRS-060
Phase 1 trial. Pieris may receive development, regulatory and sales-based milestone payments
not exceeding $2.1 billion if all five programs are successfully commercialized. In addition, Pieris will be entitled to receive tiered royalties up to the
mid-teens,
depending on the product, on sales of
products commercialized by AstraZeneca or royalties up to the high teens or a gross margin share on worldwide sales, determined by the level of investment to which Pieris commits, for any
co-developed
programs. For
co-developed
programs, the milestone payments are structured to provide Pieris with income in stages in order to contribute to the ensuing phases of development.
Pieris will be responsible for advancing
PRS-060
into clinical trials in the second half of 2017 and will conduct a
Phase 1 trial, with clinical development costs covered by AstraZeneca. The parties will collaborate thereafter to conduct a Phase 2a clinical trial in asthma patients, with AstraZeneca continuing to fund development costs. After completion of the
Phase 2a trial, Pieris has the option to
co-develop
and subsequently
co-commercialize
the program in the United States with AstraZeneca. For the other four programs,
Pieris will be responsible for the initial discovery of novel Anticalin proteins, after which AstraZeneca will take the lead on continued development. Pieris has the option to
co-develop
two of these programs
beginning at a
pre-defined
preclinical stage and would also have the option to
co-commercialize
these programs in the United States, while AstraZeneca will be
responsible for development and commercialization of the other programs worldwide.
The term of each Agreement ends upon the expiration of all of
AstraZenecas payment obligations under such Agreement. The AstraZeneca Collaboration Agreement may be terminated by AstraZeneca in its entirety for convenience beginning 12 months after its effective date upon 90 days notice or, if
Pieris has obtained marketing approval for the marketing and sale of a product, 180 days notice. Each program may be terminated at AstraZenecas option; if any program is terminated by AstraZeneca, Pieris will have full rights to such
program. The AstraZeneca Collaboration Agreement may also be terminated by AstraZeneca or Pieris for material breach upon 180 days notice of a material breach (or 30 days with respect to payment breach), provided that the applicable party has
not cured such breach by the permitted cure period (including an additional 180 days if the breach is not susceptible to cure during the initial
180-day
period) and dispute resolution procedures specified in
the applicable Agreement have been followed. The AstraZeneca Collaboration Agreement may also be terminated due to the other partys insolvency and may in certain instances be terminated on a
product-by-product
and/or
country-by-country
basis. Each party may also terminate the agreement if the other party challenges
the validity of patents related to certain intellectual property licensed under the Agreements, subject to certain exceptions for infringement suits, acquisitions and newly-acquired licenses. The License Agreement will terminate upon termination of
the AstraZeneca Collaboration Agreement, on a
product-by-product
and/or
country-by-country
basis.
The Agreements are conditioned upon the
expiration or early termination of the applicable waiting period (and any extension thereof) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.
Pieris Collaboration Agreement with Daiichi Sankyo.
In May 2011, the Company entered into a definitive collaboration research and technology licensing agreement with Daiichi Sankyo, under which we agreed to use
our proprietary Anticalin
®
scaffold technologies to discover novel drug candidates against two targets chosen by Daiichi Sankyo under two separate collaboration projects.
The first therapeutic comprises an Anticalin protein targeting PCSK9, DS-9001a. Daiichi Sankyo completed a Phase 1 single dose study in healthy subjects for
DS-9001a in December 2016. Due to strategic and commercial reasons related to the market for PCSK9 inhibitors, Daiichi Sankyo provided notice to Pieris on May 8, 2017 of its termination of the DS-9001a program.
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