NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. Basis of Presentation and Recently Issued Accounting Standards
Basis of Presentation
The accompanying unaudited interim consolidated financial statements of MacroGenics, Inc. (the Company) have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information. The financial statements include all adjustments (consisting only of normal recurring adjustments) that the management of the Company believes are necessary for a fair presentation of the periods presented. These interim financial results are not necessarily indicative of results expected for the full fiscal year or for any subsequent interim period.
The accompanying unaudited interim consolidated financial statements include the accounts of MacroGenics, Inc. and its wholly owned subsidiary, MacroGenics UK Limited. All intercompany accounts and transactions have been eliminated in consolidation. These consolidated financial statements and related notes should be read in conjunction with the financial statements and notes thereto included in the Company's
2016
Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on February 28, 2017.
There have been no material changes to the significant accounting policies previously disclosed in the Company's
2016
Annual Report on Form 10-K other than the adoption of ASU No. 2015-17,
Improvements to Employee Share-Based Payment Accounting,
as disclosed in the Recently Issued Accounting Standards section below.
Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
(ASU 2014-09). ASU 2014-09 will eliminate transaction- and industry-specific revenue recognition guidance under current GAAP and replace it with a principle-based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017 and interim periods therein, with early adoption permitted for interim and annual reporting periods beginning after December 15, 2016. ASU 2014-09 may be adopted either retrospectively or on a modified retrospective basis whereby ASU 2014-09 would be applied to new contracts and existing contracts with remaining performance obligations as of the effective date, with a cumulative catch-up adjustment recorded to beginning retained earnings at the effective date for existing contracts with remaining performance obligations. In 2016, the FASB issued ASU 2016-08,
Revenue from Contracts with Customers: Principal versus Agent Considerations
, ASU 2016-10,
Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing
, and ASU 2016-12,
Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients
to provide supplemental adoption guidance and clarification to ASU 2014-09. The effective date for these new standards is the same as the effective date and transition requirements for ASU 2014-09. Management has begun an initial review of each of the Company's collaboration and license agreements and is performing an assessment of the potential effects of the standard on the Company's consolidated financial statements, accounting policies, and internal controls over financial reporting. The Company anticipates that the adoption of the new revenue recognition standard will have primarily two impacts on its contract revenues generated by its collaborative research and license agreements:
(i) Changes in the model for distinct licenses of functional intellectual property which may result in a timing difference of revenue recognition. Whereas revenue from these arrangements was previously recognized over a period of time pursuant to revenue recognition guidance that was in place for the arrangements at the time such arrangements commenced, revenue from these arrangements may now be recognized at point in time under the new guidance.
(ii) Assessments of milestone payments, which are linked to events that are in the Company’s control, will result in variable consideration that may be recognized at an earlier point in time under the new guidance, when it is probable that the milestone will be achieved without a significant future reversal of cumulative revenue expected.
The Company plans to adopt the new standard effective January 1, 2018 using the modified retrospective method with the cumulative effective of initially applying the new standard recognized in retained earnings at the date of initial adoption.
The Company has begun to analyze its existing revenue agreements to evaluate the impact of adoption.
In February 2016, FASB issued ASU No. 2016-02,
Leases
(ASU 2016-02) that provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. ASU 2016-02 requires a lessee to recognize
assets and liabilities on the balance sheet for operating leases and changes many key definitions, including the definition of a lease. ASU 2016-02 includes a short-term lease exception for leases with a term of 12 months or less, in which a lessee can make an accounting policy election not to recognize lease assets and lease liabilities. Lessees will continue to differentiate between finance leases (previously referred to as capital leases) and operating leases, using classification criteria that are substantially similar to the previous guidance. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with earlier application permitted. The Company is currently evaluating the effect of the standard on its consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU 2016-09,
Improvements
to Employee Share-Based Payment Accounting
(ASU 2016-09). This amendment addresses several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within that year.
The Company adopted ASU 2016-09 effective January 1, 2017 and has elected to continue to estimate the number of stock-based awards expected to vest, as permitted by ASU 2016-09, rather than electing to account for forfeitures as they occur.
The adoption of this standard did not have a material impact on the Company's financial statements or related disclosures.
2. Fair Value of Financial Instruments
The Company's financial instruments consist of cash and cash equivalents, marketable securities, accounts receivable, accounts payable and accrued expenses.
The carrying amount of accounts receivable, accounts payable and accrued expenses are generally considered to be representative of their respective fair values because of their short-term nature.
The Company accounts for recurring and non-recurring fair value measurements in accordance with FASB Accounting Standards Codification (ASC) 820,
Fair Value Measurements and Disclosures
(ASC 820). ASC 820 defines fair value, establishes a fair value hierarchy for assets and liabilities measured at fair value, and requires expanded disclosures about fair value measurements. The ASC 820 hierarchy ranks the quality of reliability of inputs, or assumptions, used in the determination of fair value and requires assets and liabilities carried at fair value to be classified and disclosed in one of the following three categories:
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•
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Level 1 - Fair value is determined by using unadjusted quoted prices that are available in active markets for identical assets and liabilities.
|
|
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•
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Level 2 - Fair value is determined by using inputs other than Level 1 quoted prices that are directly or indirectly observable. Inputs can include quoted prices for similar assets and liabilities in active markets or quoted prices for identical assets and liabilities in inactive markets. Related inputs can also include those used in valuation or other pricing models, such as interest rates and yield curves that can be corroborated by observable market data.
|
|
|
•
|
Level 3 - Fair value is determined by inputs that are unobservable and not corroborated by market data. Use of these inputs involves significant and subjective judgments to be made by a reporting entity - e.g., determining an appropriate adjustment to a discount factor for illiquidity associated with a given security.
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The Company evaluates financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level at which to classify them each reporting period. This determination requires the Company to make subjective judgments as to the significance of inputs used in determining fair value and where such inputs lie within the ASC 820 hierarchy.
Financial assets measured at fair value on a recurring basis were as follows (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at June 30, 2017
|
|
|
|
Quoted Prices in Active Markets for Identical Assets
|
|
Significant Other Observable Inputs
|
|
Significant Unobservable Inputs
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
Money market funds
|
$
|
92,815
|
|
|
$
|
92,815
|
|
|
$
|
—
|
|
|
$
|
—
|
|
U.S. Treasury securities
|
13,782
|
|
|
—
|
|
|
13,782
|
|
|
—
|
|
Government-sponsored enterprises
|
26,129
|
|
|
—
|
|
|
26,129
|
|
|
—
|
|
Corporate debt securities
|
87,122
|
|
|
—
|
|
|
87,122
|
|
|
—
|
|
Total assets measured at fair value
(a)
|
$
|
219,848
|
|
|
$
|
92,815
|
|
|
$
|
127,033
|
|
|
$
|
—
|
|
(a) Total assets measured at fair value at
June 30, 2017
includes approximately
$92.8 million
reported in cash and cash equivalents on the balance sheet.
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|
|
|
|
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|
|
|
|
|
|
|
|
|
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Fair Value Measurements at December 31, 2016
|
|
|
|
Quoted Prices in Active Markets for Identical Assets
|
|
Significant Other Observable Inputs
|
|
Significant Unobservable Inputs
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
Money market funds
|
$
|
46,781
|
|
|
$
|
46,781
|
|
|
$
|
—
|
|
|
$
|
—
|
|
U.S. Treasury securities
|
8,826
|
|
|
—
|
|
|
8,826
|
|
|
—
|
|
Government-sponsored enterprises
|
29,759
|
|
|
—
|
|
|
29,759
|
|
|
—
|
|
Corporate debt securities
|
166,300
|
|
|
—
|
|
|
166,300
|
|
|
—
|
|
Total assets measured at fair value
(a)
|
$
|
251,666
|
|
|
$
|
46,781
|
|
|
$
|
204,885
|
|
|
$
|
—
|
|
(a) Total assets measured at fair value at
December 31, 2016
includes approximately
$50.8 million
reported in cash and cash equivalents on the balance sheet.
The fair value of Level 2 securities is determined from market pricing and other observable market inputs for similar securities obtained from various third-party data providers. These inputs either represent quoted prices for similar assets in active markets or have been derived from observable market data.
There were no transfers between Level 1 and Level 2 investments during the periods presented.
3. Marketable Securities
Available-for-sale marketable securities as of
June 30, 2017
and
December 31, 2016
were as follows (in thousands):
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|
|
|
|
|
|
June 30, 2017
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
U.S. Treasury securities
|
$
|
13,802
|
|
|
$
|
—
|
|
|
$
|
(20
|
)
|
|
$
|
13,782
|
|
Government-sponsored enterprises
|
26,159
|
|
|
—
|
|
|
(30
|
)
|
|
26,129
|
|
Corporate debt securities
|
87,152
|
|
|
5
|
|
|
(35
|
)
|
|
87,122
|
|
Total
|
$
|
127,113
|
|
|
$
|
5
|
|
|
$
|
(85
|
)
|
|
$
|
127,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
U.S. Treasury securities
|
$
|
4,826
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
4,825
|
|
Government-sponsored enterprises
|
29,764
|
|
|
5
|
|
|
(10
|
)
|
|
29,759
|
|
Corporate debt securities
|
166,376
|
|
|
51
|
|
|
(127
|
)
|
|
166,300
|
|
Total
|
$
|
200,966
|
|
|
$
|
56
|
|
|
$
|
(138
|
)
|
|
$
|
200,884
|
|
All available-for-sale marketable securities held as of
June 30, 2017
had contractual maturities of less than one year. All of the Company's available-for-sale marketable securities in an unrealized loss position as of
June 30, 2017
and
December 31, 2016
were in a loss position for less than twelve months. There were
no
unrealized losses at
June 30, 2017
or
December 31, 2016
that the Company determined to be other-than-temporary.
4. Lease Exit Liability
In 2008, the Company acquired Raven Biotechnologies, Inc. (Raven), a private South San Francisco-based company focused on the development of monoclonal antibody therapeutics for treating cancer. The Company undertook restructuring activities related to the acquisition of Raven. In connection with these restructuring activities, as part of the cost of acquisition, the Company established a restructuring liability attributed to an existing operating lease. During the year ended December 31, 2016, the Company entered into an agreement to sublease a portion of the space subject to this operating lease. The Company will receive approximately
$1.3 million
in sublease payments over its term, which ends at the same time as the original lease in February 2018. No sublease income was contemplated when the restructuring liability was recorded in 2008; therefore, the Company adjusted the liability to reflect the future sublease income during the year ended December 31, 2016 and recorded an offset to research and development expenses of approximately
$1.3 million
in the same period.
Changes in the lease exit liability are as follows (in thousands):
|
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|
|
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Accrual balance at December 31, 2016
|
$
|
1,891
|
|
Principal payments
|
(771
|
)
|
Accrual balance at June 30, 2017
|
$
|
1,120
|
|
5. Stockholders' Equity
On April 26, 2017, the Company entered into a definitive agreement with an institutional healthcare investor to purchase
1,100,000
shares of its common stock at a purchase price of
$21.50
per share in a registered direct offering. Gross proceeds to the Company, before deducting estimated offering expenses, were
$23.7 million
. The shares were offered pursuant to the Company’s shelf registration
on Form S-3 that was filed with the SEC on November 2, 2016
.
On May 3, 2017, the Company entered into a sales agreement with an agent to sell, from time to time, shares of its common stock having an aggregate sales price of up to
$75.0 million
through an “at the market offering” (ATM Offering) as defined in Rule 415 under the Securities Act of 1933, as amended. The shares that may be sold under the sales agreement would be issued and sold pursuant to the Company's shelf registration statement on Form S-3 that was filed with the SEC on November 2, 2016. Through June 30, 2017, the Company sold
536,942
shares of common stock under the sales agreement, resulting in net proceeds of
$9.7 million
related to the ATM Offering.
6. Collaboration and Other Agreements
Janssen Biotech, Inc.
In
December 2014
, the Company entered into a collaboration and license agreement with Janssen Biotech, Inc. (Janssen) for the development and commercialization of MGD011 (also known as duvortuxizumab), a product candidate that incorporates the Company's proprietary DART® technology to simultaneously target CD19 and CD3 for the potential treatment of B-cell hematological malignancies (MGD011 Agreement). The Company contemporaneously entered into an agreement with Johnson & Johnson Innovation - JJDC, Inc. (JJDC) under which JJDC agreed to purchase
1,923,077
new shares of the Company's common stock for proceeds of
$75.0 million
. Upon closing the transaction in January 2015, the Company received a
$50.0 million
upfront payment from Janssen as well as the
$75.0 million
investment in the Company's common stock.
Under the MGD011 Agreement, the Company granted an exclusive license to Janssen to develop and commercialize duvortuxizumab. Following the Company's submission of the Investigational New Drug (IND) application, Janssen became fully responsible for the development and commercialization of duvortuxizumab. Assuming successful development and commercialization, the agreement entitles the Company to receive up to
$205.0 million
in development milestone payments,
$220.0 million
in regulatory milestone payments and
$150.0 million
in sales milestone payments. The Company determined that each potential future clinical and regulatory milestone is substantive. Although the sales milestones are not considered substantive, they will be recognized upon achievement of the milestone (assuming all other revenue recognition criteria have been met) because there are no undelivered elements that would preclude revenue recognition at that time. The Company may elect to fund a portion of late-stage clinical development in exchange for a profit share with Janssen in the U.S. and Canada. If commercialized, the Company would be eligible to receive low double-digit royalties on any global net sales and has the option to co-promote the molecule with Janssen in the United States.
The Company evaluated the MGD011 Agreement and determined that it is a revenue arrangement with multiple deliverables, or performance obligations. The Company's substantive performance obligations under the collaboration and license agreement include the delivery of an exclusive license and research and development services during the preclinical research period (through the filing of the IND application for duvortuxizumab). The Company evaluated the MGD011 Agreement and determined that the license and preclinical research and development activities each represented separate deliverables and were accounted for as separate units of accounting. The Company concluded that the license had standalone value to Janssen and was separable from the research and development services because the license was sublicensable, there were no restrictions as to Janssen's use of the license and Janssen or other third parties have significant research capabilities in this field. Thus, the total arrangement consideration for these two deliverables was allocated using the relative best estimate of selling price method to each deliverable. The best estimate of selling price for the exclusive license was determined using a discounted cash flow model that includes Level 3 fair value measurements. The best estimate of selling price for the research and development services was determined using other similar research and development arrangements, which are Level 2 fair value measurements.
The Company evaluated the stock purchase agreement and the collaboration and license agreement as one arrangement and determined that the stock purchase price of
$39.00
per share exceeded the fair value of the common stock by
$12.3 million
. This excess was recognized in the same manner as the upfront payment allocated to the license and preclinical research and development activities. Of the total arrangement consideration of
$125.0 million
, the Company allocated
$62.7 million
to equity (representing the fair value of common stock purchased),
$62.3 million
to the license and preclinical research and development activities, and a de minimis amount to the ongoing research and development activities. The Company submitted the IND application and therefore met its performance obligation during the year ended December 31, 2015.
There was
no
revenue recognized under the MGD011 Agreement during any of the
three or six
-month periods ended
June 30, 2017
or
2016
.
In
May 2016
, the Company entered into a separate collaboration and license agreement with Janssen, a related party through ownership of the Company's common stock, for the development and commercialization of MGD015 (also known as JNJ-9383), a product candidate that incorporates the Company's proprietary DART technology to simultaneously target CD3 and an undisclosed tumor target for the potential treatment of various hematological malignancies and solid tumors (MGD015 Agreement). The transaction closed in June 2016, and the Company received the
$75.0 million
upfront payment from Janssen in July 2016.
Under the MGD015 Agreement, the Company granted an exclusive license to Janssen to develop and commercialize MGD015. Janssen will complete the IND-enabling activities and will be fully responsible for the future clinical development and commercialization of MGD015. Assuming successful development and commercialization, the agreement entitles the Company to receive up to
$100.0 million
in development milestone payments,
$265.0 million
in regulatory milestone payments and
$300.0 million
in sales milestone payments. The Company determined that each potential future clinical and regulatory
milestone is substantive. Although the sales milestones are not considered substantive, they will be recognized upon achievement of the milestone (assuming all other revenue recognition criteria have been met) because there are no undelivered elements that would preclude revenue recognition at that time. The Company may elect to fund a portion of late-stage clinical development in exchange for a profit share with Janssen in the U.S. and Canada. If commercialized, the Company would be eligible to receive low double-digit royalties on any global net sales and has the option to co-promote the molecule with Janssen in the United States.
The Company evaluated the MGD015 Agreement and determined that it is a revenue arrangement with multiple deliverables, or performance obligations. The Company's substantive performance obligations under the MGD015 Agreement include the delivery of an exclusive license and research and development services during the preclinical research period. The Company evaluated the MGD015 Agreement and determined that the license and preclinical research and development activities each represented separate deliverables and were accounted for as two separate units of accounting. The Company concluded that the license had standalone value to Janssen and was separable from the research and development services because the license was sublicensable, there were no restrictions as to Janssen's use of the license and Janssen or other third parties have significant research capabilities in this field. Thus, the total arrangement consideration for these two deliverables was allocated using the best estimate of relative selling price method to each deliverable. The best estimate of selling price for the exclusive license was determined using information from the previous collaboration and license agreement with Janssen as well as other third party collaboration and license agreements, which are Level 2 fair value measurements. The best estimate of selling price for the research and development services was determined using other similar research and development arrangements, which are also Level 2 fair value measurements.
The company recognized
$0.2 million
and
$0.3 million
of revenue under the MGD015 Agreement during the
three and six
months ended
June 30, 2017
, respectively.
No
revenue was recognized under the MGD015 Agreement during the
three and six
months ended
June 30, 2016
.
Les Laboratoires Servier
In
September 2012
, the Company entered into a right-to-develop collaboration agreement with Les Laboratoires Servier and Institut de Recherches Servier (collectively, Servier) and granted it options to obtain three separate exclusive licenses to develop and commercialize DART molecules, consisting of those designated by the Company as flotetuzumab (also known as MGD006 or S80880) and MGD007, as well as a third DART molecule, in all countries other than the United States, Canada, Mexico, Japan, South Korea and India. During 2014, Servier exercised its exclusive option to develop and commercialize flotetuzumab, and during 2016 Servier notified the Company that it did not intend to exercise the option for the third DART molecule. Servier retains the option to obtain a license for MGD007.
Upon execution of the agreement, Servier made a nonrefundable payment of
$20.0 million
to the Company. In addition, the Company will be eligible to receive up to
$40.0 million
in license fees,
$63.0 million
in clinical milestone payments,
$188.0 million
in regulatory milestone payments and
$420.0 million
in sales milestone payments if Servier exercises the remaining available options and successfully develops, obtains regulatory approval for, and commercializes a product under each license. In addition to these milestones, the Company and Servier will share Phase 2 and Phase 3 development costs. The Company has determined that each potential future clinical and regulatory milestone is substantive. Although sales milestones are not considered substantive, they are still recognized upon achievement of the milestone (assuming all other revenue recognition criteria have been met) because there are no undelivered elements that would preclude revenue recognition at that time. Under this agreement, Servier would be obligated to pay the Company from low double-digit to mid-teen royalties on net product sales in its territories.
The Company evaluated the research collaboration agreement with Servier and determined that it is a revenue arrangement with multiple deliverables, or performance obligations. The Company concluded that each option is substantive and that the license fees for each option are not deliverables at the inception of the arrangement and were not issued with a substantial discount. The Company's substantive performance obligations under this research collaboration include an exclusivity clause to its technology, technical, scientific and intellectual property support to the research plan and participation on an executive committee and a research and development committee. The Company determined that the performance obligations with respect to the preclinical development represent a single unit of accounting, since the license does not have stand-alone value to Servier without the Company's technical expertise and committee participation. As such, the initial upfront license payment was deferred and initially recognized ratably over a
29
-month period, which represented the expected development period. During 2014, the Company and Servier further refined the research plan related to the three DART molecules and as such, the development period was extended. Based on this revised development period, the Company prospectively adjusted its period of recognition of the upfront payment to a
75
-month period. The impact of this change in accounting estimate reduced revenue that would have been recognized in 2014 by
$3.7 million
.
As a result of Servier exercising its option in 2014, the Company received a
$15.0 million
payment from Servier for its license to develop and commercialize flotetuzumab in its territories. Upon exercise of the option, the Company evaluated its performance obligations with respect to the license for flotetuzumab. The Company's substantive performance obligations under this research collaboration include an exclusive license to its technology, technical, scientific and intellectual property support to the research plan and participation on an executive committee and a research and development committee. The Company determined that the performance obligations with respect to the clinical development represent a single unit of accounting, since the license does not have stand-alone value to Servier without the Company's technical expertise and committee participation. As such, the
$15.0 million
license fee was deferred and was being recognized ratably over a period of
82
months, which represented the expected development period for flotetuzumab. During the three months ended June 30, 2017, the Company and Servier determined that the expected development period should be extended to
124
months. The impact of this change in accounting estimate reduced revenue that would have been recognized in 2017 by
$0.8 million
. In accordance with the agreement, the Company and Servier will share costs incurred to develop flotetuzumab. Reimbursement of research and development expenses received in connection with this collaborative cost-sharing agreement is recorded as a reduction to research and development expense. During the
three months ended June 30, 2017
and 2016, the Company recorded approximately
$0.4 million
and
$0.7 million
as an offset to research and development costs under this collaboration agreement, respectively. During the
six months ended June 30, 2017
and
2016
, the Company recorded approximately
$0.9 million
and
$1.1 million
as an offset to research and development costs under this collaboration agreement, respectively.
The Company recognized revenue under this agreement of
$0.6 million
and
$0.8 million
during the
three months ended June 30, 2017
and
2016
, respectively. The Company recognized revenue under this agreement of
$1.4 million
and
$1.7 million
during the
six months ended June 30, 2017
and
2016
, respectively. At
June 30, 2017
,
$9.7 million
of revenue was deferred under this agreement,
$2.3 million
of which was current and
$7.4 million
of which was non-current. At
December 31, 2016
,
$11.1 million
of revenue was deferred under this agreement,
$3.3 million
of which was current and
$7.8 million
of which was non-current.
NIAID Contract
The Company entered into a contract with the National Institute of Allergy and Infectious Diseases (NIAID), effective as of September 15, 2015, to perform product development and to advance up to
two
DART molecules, including MGD014. Under this contract, the Company will develop these product candidates for Phase 1/2 clinical trials as therapeutic agents, in combination with latency reversing treatments, to deplete cells infected with human immunodeficiency virus (HIV) infection. This contract includes a base period of
$7.5 million
to support development of MGD014 through IND application submission with the FDA, as well as up to
$17.0 million
in additional development funding via NIAID options. Should NIAID fully exercise such options, the Company could receive total payments of up to
$24.5 million
. The total potential period of performance under the award is from
September 15, 2015
through
September 14, 2022
. The Company recognized
$0.4 million
and
$2.1 million
in revenue under this contract during the
three months ended June 30, 2017
and
2016
, respectively. The Company recognized
$1.0 million
and
$3.1 million
in revenue under this contract during the
six months ended June 30, 2017
and
2016
, respectively.
7. Stock-Based Compensation
Employee Stock Purchase Plan
In May 2017, the Company’s stockholders approved the 2016 Employee Stock Purchase Plan (the 2016 ESPP). The 2016 ESPP is structured as a qualified employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986, as amended, and is not subject to the provisions of the Employee Retirement Income Security Act of 1974. The Company reserved
800,000
shares of common stock for issuance under the 2016 ESPP. The 2016 ESPP allows eligible employees to purchase shares of the Company’s common stock at a discount through payroll deductions of up to
10%
of their eligible compensation, subject to any plan limitations. The 2016 ESPP provides for six-month offering periods ending on May 31 and November 30 of each year. At the end of each offering period, employees are able to purchase shares at
85%
of the fair market value of the Company’s common stock on the last day of the offering period. During the
three and six
months ended
June 30, 2017
, employees purchased
19,351
shares of common stock under the ESPP plan for net proceeds to the Company of approximately
$0.3 million
.
Employee Stock Option Plans
Effective February 2003, the Company implemented the 2003 Equity Incentive Plan (2003 Plan), and it was amended and approved by the Company's stockholders in 2005. The 2003 Plan originally allowed for the grant of awards in respect of an aggregate of
2,051,644
shares of the Company's common stock. Between 2006 and 2012, the maximum number of shares of
common stock authorized to be issued by the Company under the 2003 Plan was increased to
4,336,730
. Stock options granted under the 2003 Plan may be either incentive stock options as defined by the Internal Revenue Code (IRC), or non-qualified stock options.
In 2013, the 2003 Plan was terminated, and no further awards may be issued under the plan. Any shares of common stock subject to awards under the 2003 Plan that expire, terminate, or are otherwise surrendered, canceled, forfeited or repurchased without having been fully exercised, or resulting in any common stock being issued, will become available for issuance under the Company's 2013 Stock Incentive Plan (2013 Plan), up to a specified number of shares. As of
June 30, 2017
, under the 2003 Plan, there were options to purchase an aggregate of
1,053,487
shares of common stock outstanding at a weighted average exercise price of
$1.85
per share.
Under the provisions of the 2013 Plan, the number of shares of common stock reserved for issuance will automatically increase on January 1 of each year from January 1, 2014 through and including January 1, 2023, by the lesser of (a)
1,960,168
shares, (b)
4.0%
of the total number of shares of common stock outstanding on December 31 of the preceding calendar year, or (c) the number of shares of common stock determined by the Board of Directors. During the
six
months ended
June 30, 2017
, the maximum number of shares of common stock authorized to be issued by the Company under the 2013 Plan was increased to
6,769,888
. As of
June 30, 2017
, there were options to purchase an aggregate of
3,567,521
shares of common stock outstanding at a weighted average exercise price of
$24.88
per share under the 2013 Plan.
The following table shows stock-based compensation expense for stock options, RSUs and ESPP (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Research and development
|
$
|
1,833
|
|
|
$
|
1,445
|
|
|
$
|
3,506
|
|
|
$
|
2,841
|
|
General and administrative
|
1,769
|
|
|
1,678
|
|
|
3,557
|
|
|
3,283
|
|
Total stock-based compensation expense
|
$
|
3,602
|
|
|
$
|
3,123
|
|
|
$
|
7,063
|
|
|
$
|
6,124
|
|
The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model using the assumptions in the following table for options issued during the period indicated:
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
Expected dividend yield
|
0%
|
|
0%
|
Expected volatility
|
66.7% - 67.7%
|
|
63.7% - 65.4%
|
Risk-free interest rate
|
2.0% - 2.3%
|
|
1.3% - 2.1%
|
Expected term
|
6.25 years
|
|
6.25 years
|
The following table summarizes stock option and restricted stock unit (RSU) activity during the
six
months ended
June 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-
Average
Exercise Price
|
|
Weighted-Average
Remaining
Contractual Term
(Years)
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
Outstanding, December 31, 2016
|
3,838,060
|
|
|
$
|
18.93
|
|
|
7.0
|
|
|
Granted
|
1,120,950
|
|
|
20.38
|
|
|
|
|
|
Exercised
|
(155,484
|
)
|
|
2.36
|
|
|
|
|
|
Forfeited or expired
|
(182,518
|
)
|
|
24.13
|
|
|
|
|
|
Outstanding, June 30, 2017
|
4,621,008
|
|
|
19.63
|
|
|
7.2
|
|
$
|
17,581
|
|
As of June 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
Exercisable
|
2,534,628
|
|
|
15.86
|
|
|
5.8
|
|
16,784
|
|
Vested and expected to vest
|
4,407,535
|
|
|
19.37
|
|
|
7.1
|
|
17,489
|
|
The weighted-average grant-date fair value of options granted for the
six
months ended
June 30, 2017
was
$12.73
. The total intrinsic value of options exercised during the
six
months ended
June 30, 2017
was approximately
$2.6 million
, and the total cash received for options exercised was approximately
$0.3 million
. The total fair value of shares vested in the
six
months ended
June 30, 2017
was approximately
$6.1 million
. As of
June 30, 2017
, the total unrecognized compensation expense related to non-vested stock options, net of related forfeiture estimates, was approximately
$26.5 million
, which the Company expects to recognize over a weighted-average period of approximately
2.6
years.
8. Commitments and Contingencies
Operating Leases
The Company leases manufacturing, office and laboratory space in Rockville, Maryland under
five
leases that have terms that expire between
2018
and
2023
unless renewed. During the three months ended June 30, 2017,
one
of these leases was renewed for an additional
five
years. The Rockville leases include a
seven
-year lease executed in
July 2015
for additional space that the Company intends to use as mixed-use office, laboratory and manufacturing space. Under the terms of the lease, which commenced on
January 1, 2016
, the Company received an assignment fee from the former tenant and a tenant improvement allowance from the landlord totaling
$5.1 million
, which has been recorded as deferred rent and will be recognized over the lease term. The Company also leases office and laboratory space in South San Francisco under a lease that expires on
February 28, 2018
. During the year ended
December 31, 2016
, the Company entered into a sublease agreement for a portion of the South San Francisco space (see Note 4). As of
June 30, 2017
, future payments to be received by the Company under this sublease total approximately
$0.5 million
. In
April 2017
, the Company entered into a
72
-month lease commencing
December 1, 2017
for office and laboratory space which will be occupied upon the termination of the current South San Francisco lease.
All of the leases contain rent escalation clauses and certain leases contain rent abatements. For financial reporting purposes, rent expense is charged to operations on a straight-line basis over the term of the lease.
Future minimum lease payments under noncancelable operating leases as of
June 30, 2017
are as follows (in thousands):
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
$
|
6,391
|
|
2018
|
5,346
|
|
2019
|
5,077
|
|
2020
|
3,454
|
|
2021
|
3,926
|
|
Thereafter
|
5,129
|
|
|
$
|
29,323
|
|
Contingencies
From time to time, the Company may be subject to various litigation and related matters arising in the ordinary course of business. The Company does not believe it is currently subject to any material matters where there is at least a reasonable possibility that a material loss may be incurred.
9. Net Income (Loss) Per Share
Basic income (loss) per common share is determined by dividing income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration of common stock equivalents. Diluted income (loss) per share is computed by dividing the income (loss) attributable to common stockholders by the weighted-average number of common stock equivalents outstanding for the period. The treasury stock method is used to determine the dilutive effect of the Company's stock option grants.
4,621,008
stock options (common stock equivalents) were excluded from the calculation of diluted loss per share for the
three and six
months ended
June 30, 2017
, respectively, because their inclusion would have been anti-dilutive.
257,678
and
114,148
stock options were excluded from the calculation of diluted loss per share for the
three and six
months ended
June 30, 2016
, respectively, because their inclusion would have been anti-dilutive.
Basic and diluted income (loss) per common share is computed as follows (in thousands except share and per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
2017
|
|
2016
|
Numerator:
|
|
|
|
|
|
|
Net income (loss) used for calculation of basic and diluted EPS
|
$
|
(40,654
|
)
|
|
$
|
40,464
|
|
$
|
(78,310
|
)
|
|
$
|
10,101
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
Weighted average shares outstanding, basic
|
35,784,804
|
|
|
34,616,197
|
|
35,373,799
|
|
|
34,560,021
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
Stock options and restricted stock units
|
—
|
|
|
1,401,214
|
|
—
|
|
|
1,406,966
|
|
Weighted average shares outstanding, diluted
|
35,784,804
|
|
|
36,017,411
|
|
35,373,799
|
|
|
35,966,987
|
|
|
|
|
|
|
|
|
Net income (loss) per share, basic
|
$
|
(1.14
|
)
|
|
$
|
1.17
|
|
$
|
(2.21
|
)
|
|
$
|
0.29
|
|
Net income (loss) per share, diluted
|
$
|
(1.14
|
)
|
|
$
|
1.12
|
|
$
|
(2.21
|
)
|
|
$
|
0.28
|
|
10. Subsequent Events
On July 6, 2017, the Company entered into an agreement to sublease a portion of the space it leases in Rockville, MD. Under the terms of the sublease, which commences August 1, 2017, the Company will receive a total of
$2.4 million
over the
30
month term.
On July 21, 2017, the Company executed a lease amendment for its headquarters building in Rockville, MD. This amendment extends the term of the lease to August 2027, restructures the rent due under the lease, and provides for an additional tenant improvement allowance from the landlord of
$7.5 million
. Future rent payments under the amended lease will increase by
$23.5 million
, which is not reflected in the future minimum lease payments table in Note 8.