See the accompanying notes to these unaudited condensed financial statements.
See the accompanying notes to these unaudited condensed financial statements.
See the accompanying notes to these unaudited condensed financial statements.
Notes to Unaudited
Condensed Financial Statements
1. ORGANIZATION
Organization and Nature of Operations
Ignyta, Inc. (“Ignyta” or the “Company”) is incorporated in the state of Delaware and was founded in 2011 (with the name “NexDx, Inc.”). The Company changed its name to “Ignyta, Inc.” on October 8, 2012. The Company is focused on precision medicine in oncology. Its goal is not just to shrink tumors, but to eradicate residual disease – the source of cancer relapse and recurrence – in precisely defined patient populations. The Company is pursuing an integrated therapeutic (“Rx”) and companion diagnostic (“Dx”) strategy for treating patients with cancer. Its Rx efforts are focused on in-licensing or acquiring, then developing and commercializing molecularly targeted therapies that, sequentially or in combination, are foundational for eradicating residual disease. Its Dx efforts aim to pair these product candidates with biomarker-based companion diagnostics that are designed to precisely identify, at the molecular level, the patients who are most likely to benefit from the therapies it develops.
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker in making decisions regarding resource allocation and assessing performance. The Company views its operations and manages its business as one operating segment.
Liquidity
The Company had negative cash flow from operations of approximately $47.5 million during the first six months of 2017 and, as of June 30, 2017, had an accumulated deficit of approximately $320.1 million. The Company is focused primarily on its development programs, and management believes such activities will result in the continued incurrence of significant research and development and other expenses related to those programs. The Company expects that it will need additional capital to further fund development of, and seek regulatory approvals for, its product candidates, and begin to commercialize any approved products. If the clinical trials for any of the Company’s products fail or produce unsuccessful results and those product candidates do not gain regulatory approval, or if any of its product candidates, if approved, fails to achieve market acceptance, the Company may never become profitable. Even if the Company achieves profitability in the future, it may not be able to sustain profitability in subsequent periods. The Company intends to cover its future operating expenses through cash on hand and through additional financing from existing and prospective investors. The Company cannot be sure that additional financing will be available when needed or that, if available, financing will be obtained on terms favorable to the Company or to its stockholders.
As of June 30, 2017, the Company had cash, cash equivalents and investment securities totaling approximately $169.4 million. While the Company expects that its existing cash, cash equivalents and investment securities will enable it to fund its operations and capital expenditure requirements for at least the next twelve months, having insufficient funds may require the Company to delay, reduce, limit or terminate some or all of its development programs or future commercialization efforts or grant rights to develop and market product candidates that it would otherwise prefer to develop and market on its own. Failure to obtain adequate financing could eventually adversely affect the Company’s ability to operate as a going concern. If the Company raises additional funds from the issuance of equity securities, substantial dilution to its existing stockholders would likely result. If the Company raises additional funds by incurring debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and specific financial ratios that may restrict its ability to operate its business.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information, the instructions to Form 10-Q and related SEC rules and regulations. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In management’s opinion, the accompanying unaudited condensed financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the results for the interim periods presented. Interim financial results are not necessarily indicative of results anticipated for the full year. These unaudited condensed financial statements should be read in conjunction with the Company’s audited financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, as filed with the SEC.
4
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Significant estimates used in preparing the financial statements include those assumed in estimating expenses for the Company’s pre-clinical studies and clinical trials, computing the valuation allowance on deferred tax assets, calculating stock-based compensation expense. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of 90 days or less when purchased to be cash equivalents. Cash equivalents primarily represent amounts invested in money market funds whose cost equals market value.
Investment Securities
Investment securities consist of government and government agency obligations, corporate notes and bonds and commercial paper. The Company classifies its investment securities as available-for-sale at the time of purchase. All investment securities are recorded at estimated fair value. Unrealized gains and losses for available-for-sale investment securities are included in accumulated other comprehensive income or loss, a component of stockholders’ equity.
The Company evaluates its investment securities as of each balance sheet date to assess whether those with unrealized loss positions are other-than-temporarily impaired. Impairments are considered to be other-than-temporary if they are related to deterioration in credit risk or if it is likely that the Company will sell the securities before the recovery of its cost basis. Realized gains and losses and declines in value judged to be other-than-temporary are determined based on the specific identification method. No other-than-temporary impairment charges have been recognized since inception.
Fair Value of Financial Instruments
Financial assets and liabilities are measured at fair value, which is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.
The Company’s financial instruments consist of cash and cash equivalents, investment securities, prepaid expenses and other assets, accounts payable, accrued expenses, and its term loan facility with Silicon Valley Bank, as collateral agent (“SVB”), and Oxford Finance LLC (“Oxford” and collectively with SVB, the “Lenders”). The valuation of assets and liabilities is subject to fair value measurements using a three-tiered approach, and fair value measurement is classified and disclosed in one of the following categories:
|
Level 1:
|
Quoted prices in active markets for identical assets or liabilities;
|
|
Level 2:
|
Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or
|
|
Level 3:
|
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
Fair value estimates of these instruments at a specific point in time are made based on relevant market information. These estimates may be subjective in nature and involve uncertainties and matters of judgment and therefore cannot be determined with precision.
The Company reports its investment securities at their estimated fair values based on quoted market prices for identical or similar instruments. The book values of cash and cash equivalents, prepaid expenses and other assets, accounts payable, accrued expenses, notes payable and other liabilities are reasonable estimates of fair value because of the short-term nature of these items.
5
Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist of cash, cash equivalents, investment securities and the term loan. The Company maintains its cash and cash equivalents with financial institutions in amounts that typically exceed the amount of federal insurance provided on such deposits. With respect to the Company’s investment securities and its term loan, the primary exposure to market risk is the risk that prevailing interest rates may change, causing the value of these investments and the value of the term loan to fluctuate. The Company has not experienced any significant losses on its cash, cash equivalents, investment securities or its term loan. The Company’s credit risk exposure is up to the extent of the value of its cash, cash equivalents and investment securities recorded on the Company’s balance sheet.
Research and Development
Costs incurred in connection with research and development activities are expensed as incurred. Research and development expenses consist of (i) external research and development expenses incurred under arrangements with third parties, such as contract research organizations, investigational sites and consultants; (ii) employee-related expenses, including salaries, benefits, travel and stock compensation expense; (iii) the cost of acquiring, developing and manufacturing clinical study materials; (iv) facilities and other expenses, which include direct and allocated expenses for rent and maintenance of facilities and laboratory and other supplies, and (v) license fees and other expenses relating to the acquisition of rights to our development programs.
The Company enters into consulting, research and other agreements with commercial firms, researchers, universities and others for the provision of goods and services. Under such agreements, the Company may pay for services on a monthly, quarterly, project or other basis. Such arrangements are generally cancellable upon reasonable notice and payment of costs incurred. Costs are considered incurred based on an evaluation of the progress to completion of specific tasks under each contract using information and data provided to the Company by its clinical sites and vendors and other information. These costs consist of direct and indirect costs associated with specific projects, as well as fees paid to various entities that perform certain research on behalf of the Company.
In certain circumstances, the Company is required to make advance payments to vendors for goods or services that will be received in the future for use in research and development activities. In such circumstances, the advance payments are deferred and are expensed when the activity has been performed or when the goods have been received.
Clinical Trial and Pre-Clinical Study Accruals
Accrued expenses for pre-clinical studies and clinical trials are based on estimates of costs incurred and fees that may be associated with services provided by contract research organizations, clinical trial investigational sites, and other related vendors as of each balance sheet date. Payments under certain contracts with such parties depend on factors such as successful enrollment of patients, site initiation and the completion of milestones. In accruing service fees, management estimates the time period over which services will be performed and the level of effort to be expended in each period. If possible, the Company obtains information regarding unbilled services directly from these service providers. However, the Company may be required to estimate these services based on other information available to it. If the Company underestimates or overestimates the activity or fees associated with a study or service at a given point in time, adjustments to research and development expenses may be necessary in future periods. Historically, estimated accrued liabilities have approximated actual expense incurred. Subsequent changes in estimates may result in a material change in the Company’s accruals.
Stock-Based Compensation
Stock-based compensation cost for equity awards to employees and members of the Company’s board of directors is measured at the grant date, based on the calculated fair value of the award using the Black-Scholes option-pricing model, and is recognized as an expense, under the straight-line method, over the requisite service period (generally the vesting period of the equity grant). Stock options issued to non-employees are accounted for at their estimated fair values determined using the Black-Scholes option-pricing model. The fair value of options granted to non-employees is re-measured as they vest, and the resulting change in value, if any, is recognized as an expense during the period the related services are rendered. Restricted stock issued to non-employees is accounted for at its estimated fair value as it vests.
Net Loss per Share
Basic and diluted loss per share are computed by dividing the losses applicable to common stock by the weighted average number of common shares outstanding. The Company’s basic and fully diluted loss per share calculations are the same since the increased number of shares that would be included in the diluted calculation from the assumed exercise of stock equivalents would be anti-dilutive to the net loss in each of the years presented in the financial statements.
6
The calculations of net loss per share excluded potentially dilutive securities (consisting of outstanding options, warrants, restricted stock and restricted stock units) of approximately 6.1 million and 5.6 milli
on shares as of June 30, 2017 and 2016, respectively.
Recently Adopted Accounting Standards
In March 2016, the FASB issued ASU 2016-09,
Compensation–Stock Compensation:
Improvements to Employee Share-Based Payment Accounting
, which amended previous guidance on employee share-based payment accounting. This update involves several aspects of the accounting for share-based payment transactions, including income tax effects, forfeitures and classifications on the statement of cash flows. The Company adopted this standard on January 1, 2017. Adoption did not have a material impact on the Company’s financial position or results of operations.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02,
Leases
, which is intended to increase the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. To meet that objective, the new standard requires recognition of the assets and liabilities that arise from leases. A lessee will be required to recognize on the balance sheet the assets and liabilities for leases with lease terms of more than 12 months. This new standard is effective for the Company’s fiscal year beginning January 1, 2019, and early adoption is permitted. The Company is evaluating the potential impact of this guidance on its financial statements and related financial statement disclosures.
In May 2017, the FASB issued ASU 2017-09,
Stock Compensation (Topic 718), Scope of Modification Accounting
. This ASU clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The guidance clarifies that modification accounting will be applied if the value, vesting conditions or classification of the award changes. This ASU will be effective for the Company’s fiscal year beginning January 1, 2018, and is expected to impact modifications meeting the clarified criteria prospectively thereafter.
3. INVESTMENT SECURITIES
Following is a summary of the available-for-sale investment securities held by the Company as of the dates below (
in thousands
):
|
|
As of June 30, 2017
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Fair
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Market
|
|
|
|
Gross
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Available-for-sale investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
42,810
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
42,810
|
|
Corporate debt securities
|
|
|
32,492
|
|
|
|
-
|
|
|
|
(16
|
)
|
|
|
32,476
|
|
U.S. government and agency obligations
|
|
|
33,019
|
|
|
|
-
|
|
|
|
(74
|
)
|
|
|
32,945
|
|
Total
|
|
$
|
108,321
|
|
|
$
|
-
|
|
|
$
|
(90
|
)
|
|
$
|
108,231
|
|
|
|
As of December 31, 2016
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Fair
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Market
|
|
|
|
Gross
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Available-for-sale investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
8,996
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,996
|
|
Corporate debt securities
|
|
|
49,179
|
|
|
|
1
|
|
|
|
(55
|
)
|
|
|
49,125
|
|
U.S. government and agency obligations
|
|
|
50,568
|
|
|
|
1
|
|
|
|
(70
|
)
|
|
|
50,499
|
|
Total
|
|
$
|
108,743
|
|
|
$
|
2
|
|
|
$
|
(125
|
)
|
|
$
|
108,620
|
|
All of the Company’s available-for-sale investment securities held at June 30, 2017, had maturity dates of less than 24 months. The Company determines the appropriate designation of investment securities at the time of purchase and reevaluates such designation as of each balance sheet date. Securities classified as short-term investment securities have maturity dates of less than one year from the balance sheet date, while those classified as long-term investment securities have maturity dates of greater than one year from the balance sheet date. The cost of securities sold is based on the specific identification method. The Company has not realized any significant gains or losses on sales of available-for-sale investment securities during any of the periods presented. Amortization of premiums, accretion of discounts, interest, dividend income, and realized gains and losses are included in investment income.
7
None of the Company’s available-for-sale investment securities were in a material unrealized loss posi
tion at June 30, 2017. The Company reviewed its investment holdings as of June 30, 2017, and determined that its unrealized losses were not considered to be other-than-temporary based upon (i) the financial strength of the issuing institution and (ii) the
fact that no securities have been in an unrealized loss position for twelve months or more. As such, the Company has not recognized any impairment in its financial statements related to its available-for-sale investment securities.
4. FAIR VALUE MEASUREMENTS
The Company holds investment securities that consist of highly liquid, investment grade debt securities. The Company determines the fair value of its investment securities based upon one or more valuations reported by its investment accounting and reporting service provider. The investment service provider values the securities using a hierarchical security pricing model that relies primarily on valuations provided by an industry-recognized valuation service. Such valuations may be based on trade prices in active markets for identical assets or liabilities (Level 1 inputs) or valuation models using inputs that are observable either directly or indirectly (Level 2 inputs), such as quoted prices for similar assets or liabilities, yield curves, volatility factors, credit spreads, default rates, loss severity, current market and contractual prices for the underlying instruments or debt, and broker and dealer quotes, as well as other relevant economic measures. The Company’s financial assets measured at fair value on a recurring basis were as follows (
in thousands
):
|
|
As of June 30, 2017
|
|
|
As of December 31, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
-
|
|
|
$
|
42,810
|
|
|
$
|
—
|
|
|
$
|
42,810
|
|
|
$
|
-
|
|
|
$
|
8,996
|
|
|
$
|
—
|
|
|
$
|
8,996
|
|
Corporate debt securities
|
|
|
—
|
|
|
|
32,476
|
|
|
|
—
|
|
|
|
32,476
|
|
|
|
—
|
|
|
|
49,125
|
|
|
|
—
|
|
|
|
49,125
|
|
U.S. government and agency obligations
|
|
|
32,945
|
|
|
|
—
|
|
|
|
—
|
|
|
|
32,945
|
|
|
|
50,499
|
|
|
|
—
|
|
|
|
—
|
|
|
|
50,499
|
|
Total assets at fair value
|
|
$
|
32,945
|
|
|
$
|
75,286
|
|
|
$
|
—
|
|
|
$
|
108,231
|
|
|
$
|
50,499
|
|
|
$
|
58,121
|
|
|
$
|
—
|
|
|
$
|
108,620
|
|
5. BALANCE SHEET DETAILS
Property and Equipment
Property and equipment consisted of the following (
in thousands
):
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
Lab and manufacturing equipment
|
|
$
|
6,333
|
|
|
$
|
7,656
|
|
Office and computer equipment
|
|
|
2,078
|
|
|
|
1,762
|
|
Leasehold improvements
|
|
|
275
|
|
|
|
374
|
|
Property and equipment at cost
|
|
|
8,686
|
|
|
|
9,792
|
|
Accumulated depreciation and amortization
|
|
|
(4,011
|
)
|
|
|
(3,522
|
)
|
Property and equipment, net
|
|
$
|
4,675
|
|
|
$
|
6,270
|
|
Other Long-Term Liabilities
Other long-term liabilities consisted of the following (
in thousands
):
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
Obligation due to licensor (note 7)
|
|
$
|
6,387
|
|
|
$
|
—
|
|
Deferred rent
|
|
|
3,641
|
|
|
|
1,510
|
|
Final loan fee obligation to lender (note 6)
|
|
|
1,600
|
|
|
|
1,600
|
|
Other long-term liabilities
|
|
$
|
11,628
|
|
|
$
|
3,110
|
|
6. TERM LOAN FACILITY
In June 2016, the Company entered into a loan and security agreement (the “Loan Agreement”) with the Lenders. Under the Loan Agreement, the Company received initial funding of $32.0 million, substantially all of which was used to repay the Company’s prior loan with SVB. The Company considered authoritative literature which states that modifications or exchanges are considered extinguishments with gains or losses recognized in current earnings if the terms of the new debt and original instrument are substantially different. The Company determined that for SVB’s portion of the new facility, the terms are not substantially different from the prior loan and should be accounted for as a debt modification with previously deferred financing costs amortized as an adjustment of interest expense over the remaining term of the modified debt using the interest method. The Company determined that
8
the portion of the old facility with SVB that was not assumed by SVB under the new facility should be accounted for as a debt extinguishment with fees paid to the lender and previously deferred financing costs included in the ca
lculation of loss on debt extinguishment. The Company recorded a loss on debt extinguishment of $0.7 million during the second quarter of fiscal 2016. Borrowings under the new facility will bear interest at a rate equal to the Prime Rate plus 4.35% (8.35%
at June 30, 2017) and have interest only payments for thirty months, followed by a principal amortization period of thirty months.
Upon the maturity date, the Company must make a final lump-sum payment of 5.0% of the full amount of the loan funded ($1.6 million). The fair value of the final payment has been recorded as a debt discount which is being amortized to interest expense over the term of the Loan Agreement. The Company may elect to prepay all amounts owed prior to the maturity date provided that a prepayment fee is also paid, equal to 2% of the amount prepaid if the prepayment occurs on or prior to June 30, 2017, or 1% of the amount prepaid if the prepayment occurs thereafter. Under the facility, the Company also has a conditional option to receive an additional $10.0 million loan tranche (the “Second Tranche”). The Second Tranche may be drawn down by the Company at any time from April 7, 2017, to August 31, 2017, provided that the Company has received certain clinical trial data and subject to other customary conditions for funding.
Future minimum principal payments of approximately $1.1 million commence in February 2019 and are due monthly through June 2021 as follows (
in thousands
):
Year ending December 31,
|
|
Minimum
Principal
Payments
|
|
2017 (6 months) and 2018
|
|
$
|
—
|
|
2019
|
|
|
11,733
|
|
2020
|
|
|
12,800
|
|
2021
|
|
|
7,467
|
|
Total
|
|
$
|
32,000
|
|
The Company is bound by certain affirmative and negative covenants setting forth actions that it must and must not take during the term of the Loan Agreement, including a prohibition on the payment of dividends. Under the Loan Agreement, the Company must also maintain the majority of its cash in accounts at SVB. Upon the occurrence of an event of default, subject to cure periods for certain events of default, all amounts owed by the Company thereunder shall begin to bear interest at a rate that is 3% higher than the rate that is otherwise applicable and may be declared immediately due and payable by the Lenders. The Company has granted SVB, as collateral agent for the ratable benefit of the Lenders, a security interest in substantially all of its personal property, rights and assets, other than intellectual property, to secure the payment of all amounts owed under this agreement. The Company has also agreed not to encumber any of its intellectual property without the required lenders’ prior written consent.
The Loan Agreement also contains customary indemnification obligations and customary events of default, including, among other things, our failure to fulfill certain obligations of the Company under the Loan Agreement and the occurrence of a material adverse change which is defined as a material adverse change in the Company’s business, operations, or condition (financial or otherwise), a material impairment of the prospect of repayment of any portion of the loan, or a material impairment in the perfection or priority of lender’s lien in the collateral or in the value of such collateral. In the event of default by the Company under the Loan Agreement, the lender would be entitled to exercise its remedies thereunder, including the right to accelerate the debt, upon which the Company may be required to repay all amounts then outstanding under the Loan Agreement, which could harm the Company’s financial condition. The Company was in compliance with all of the covenants under the Loan Agreement as of June 30, 2017, and there had been no material adverse change.
7. LICENSE AGREEMENTS
Entrectinib
The Company entered into a license agreement with Nerviano Medical Sciences S.r.l. (“NMS”) on October 10, 2013, which was amended on October 25, 2013, became effective on November 6, 2013, and was later amended on December 12, 2014. The license grants the Company exclusive global rights to develop and commercialize entrectinib. The Company’s development rights under the license are exclusive for the term of the agreement with respect to entrectinib and also, as to NMS, are exclusive for a five-year period with respect to any product candidate with activity against the target proteins of entrectinib, and include the right to grant sublicenses.
9
The Company is obligated under the license agreement to use commercially reasonable efforts to develop and commercia
lize a product based on entrectinib at its expense. When and if commercial sales of a product begin, the Company will be obligated to pay NMS tiered royalties ranging from a mid-single digit percentage to a low double digit percentage (between 10% and 15%)
of net sales, depending on the amount of net sales, with standard provisions for royalty offsets to the extent it obtains any rights from third parties to commercialize the product. The license agreement also requires that the Company make development and
regulatory milestone payments to NMS of up to $105.0 million in the aggregate if specified clinical study initiations and regulatory approvals are achieved across multiple products or indications. Life-to-date payments to NMS in connection with this agree
ment totaled $17.0 million as of June 30, 2017, and included an up-front payment of $7.0 million (paid in November 2013) and an initial milestone payment of $10.0 million (paid in December 2014). All payments under this agreement have been expensed as rese
arch and development (as no future benefit was determined to exist at the time of payment).
RXDX-105 and RXDX-106
In connection with its March 2015 asset acquisition from Cephalon, the Company assumed all rights and obligations under the collaboration agreement dated November 3, 2006, as amended April 17, 2009, between Cephalon, Inc. and Daiichi Sankyo Company, Limited (“Daiichi Sankyo”), as successor-in-interest to Ambit Biosciences Corporation. The collaboration portion of the agreement ended in November 2009, but the agreement remains in effect on a product-by-product, country-by-country basis until all royalty obligations expire. Both parties have a right to terminate the agreement if the other party enters bankruptcy or upon an uncured breach by the other party. The Company may also terminate the agreement in its discretion upon 90 days’ written notice to Daiichi Sankyo. The Company is solely responsible for worldwide clinical development and commercialization of collaboration compounds, subject to the option of Daiichi Sankyo, exercisable during certain periods following completion of the first proof-of-concept study in humans and only with the consent of the Company, to co-develop and co-promote RXDX-105. If the Company decides to discontinue development of the RXDX-105 program, it must give written notice to Daiichi Sankyo, which will have the right to assume control of that program, subject to diligence obligations and payment of the milestones and royalties to the Company that would otherwise have been paid to Daiichi Sankyo had the Company maintained responsibility for the program.
The agreement requires the Company to make development, regulatory and sales milestone payments to Daiichi Sankyo of up to $44.5 million in the aggregate for RXDX-105, and up to $47.5 million in payments upon the achievement of development, regulatory and sales milestones for RXDX-106. When and if commercial sales of a product based on either of RXDX-105 or RXDX-106 begin, the Company will be obligated to pay Daiichi Sankyo tiered royalties ranging from a mid-single digit percentage to a low double digit percentage of net sales, depending on annual amounts of net sales, with standard provisions for royalty offsets to the extent it is required to obtain any rights from third parties to commercialize either RXDX-105 or RXDX-106. Royalties are payable to Daiichi Sankyo on a product-by-product, country-by-country basis beginning on the date of the first commercial sale in a country and ending on the later of 10 years after the date of such sale in that country or the expiration date of the last to expire licensed patent covering the product in that country.
Taladegib
The Company entered into a license, development and commercialization agreement with Eli Lilly and Company (“Lilly”) in November 2015, under which the Company received exclusive, global rights to develop and commercialize pharmaceutical products under the licensed technology (“Licensed Products”), including Lilly’s product candidate taladegib. Taladegib is an orally bioavailable, small molecule hedgehog/smoothened antagonist that has achieved clinical proof-of-concept and a recommended Phase 2 dose in a Phase 1 dose escalation trial. The Company granted back to Lilly an exclusive license to develop and commercialize pharmaceutical products comprising taladegib in combination with certain other molecules (“Combination Products”). The Company also licensed the exclusive worldwide rights to the topical formulation of taladegib, which is a late preclinical development program for the potential treatment of patients with superficial and nodular basal cell carcinoma.
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During the first quarter of 2017, the Company agreed to amend and restate the license, development and commercialization agreement (the “A&R License Agreement
”) with Lilly. Under the A&R License Agreement, the Company is obligated to pay to Lilly $15.0 million in four timing-based milestones, the first $3.0 million of which was paid in the first quarter of 2017. The remaining payments are payable in the first q
uarter of the subsequent three calendar years, subject to offsetting adjustment if the Company shall have received cash consideration in connection with an assignment, sale of the Licensed Products to a third party (other than in connection with the sale o
f substantially all of the assets of the Company), or grant of a sublicense prior to March 31, 2020. The Company recorded a charge of $12.8 million to research and development expense in the first quarter of 2017, which represented the net present value of
the Company’s obligation under the A&R License Agreement discounted at its incremental borrowing rate of 10.1%. The discount (of $2.2 million) will be accreted to research and development expense over 36 months.
The Company is obligated under the A&R License Agreement to use commercially reasonably efforts to develop the Licensed Products at its expense, provided, however, that if the Company is not actively developing the Licensed Products as of December 31, 2018, then the A&R License Agreement shall immediately terminate and the licenses granted to the Company shall terminate. The Company’s timing-based milestone payment obligations under this amendment survive any such termination. When and if commercial sales of Licensed Products begin, the Company will be further obligated to pay Lilly a mid-single digit royalty of net sales of Licensed Products. When and if commercial sales of Combination Products begin, Lilly will be obligated to pay the Company a mid-single digit royalty of net sales of Combination Products. Both parties’ royalty obligations are subject to standard provisions for royalty offsets to the extent a party is required to obtain any rights from third parties to commercialize the applicable products, or in the event of loss of exclusivity or generic competition. The A&R License Agreement also requires the Company to make sales-based milestone payments to Lilly of up to $20.0 million.
8. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office and laboratory space and certain lab equipment under operating leases that expire through 2026. Certain of the facility leases contain periodic rent increases that result in the Company recording deferred rent over the term of these leases. Future minimum lease payments under the non-cancellable portion of operating leases totaled $25.2 million as of June 30, 2017.
Clinical Trial Study Agreement Commitments
The Company has entered into agreements with several contract research organizations for clinical studies to be conducted both within and outside the United States for its product candidates. The contracted cost under these arrangements totaled approximately $72.9 million as of June 30, 2017, of which approximately $38.9 million has been incurred to date. These agreements run through various dates, with the longest term expected to run through 2020. These contracts can be terminated at any time with no more than 60 days’ notice, at which point the Company would be obligated to pay for costs incurred though the termination date.
Other matters
Although the Company is currently not a party to any material legal proceedings, in the normal course of business, the Company has been, and will likely continue to be, subject to claims, administrative proceedings or litigation incidental to its business that are either judged to be not material or that arise in the ordinary course of business from time to time, such as claims related to customer disputes, employment practices, wage and hour disputes, professional liability, licensure restrictions or denials, and patent infringement. Responding to such matters, regardless of whether they have merit, can be expensive and disruptive to normal business operations. Due to the uncertainties inherent in legal proceedings and litigation, the Company is not able to predict the timing or outcome of these matters. The Company could in the future incur judgments or enter into settlements of claims that could have an adverse effect on its results of operations in any particular period.
9. STOCKHOLDERS’ EQUITY
Authorized Shares
The Company is authorized to issue 150,000,000 shares of common stock and 10,000,000 shares of preferred stock, with the preferred stock having the rights, preferences and privileges that the Board of Directors may determine from time to time. Each share of the Company’s common stock is entitled to one vote, and all shares rank equally as to voting and other matters.
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Stock Offerings
In May 2017, the Company completed a public offering of an aggregate of 14,375,000 shares of its common stock for net proceeds of approximately $82.8 million (net of transaction costs of approximately $5.7 million).
In May 2016, the Company completed a public offering of an aggregate of 9,200,000 shares of its common stock for net proceeds of approximately $53.9 million (net of transaction costs of approximately $3.6 million).
At-The-Market Issuance Sales Agreement
In December 2015, the Company entered into an “at-the-market” issuance sales agreement (the “Sales Agreement”) with Cantor Fitzgerald & Co. (“Cantor”) pursuant to which the Company may issue and sell shares of its common stock from time to time, at the Company’s option, through Cantor as its sales agent. The Company is not obligated to make any sales of its common stock under the Sales Agreement, and it may terminate its agreement with Cantor at any time. Any shares sold will be sold pursuant to an effective shelf registration statement on Form S-3. The Company will pay Cantor a commission of 3.0% of the gross proceeds of any such sales. The Company has reserved up to $33.0 million under its shelf registration statement for shares that may be issued under the Sales Agreement. Through June 30, 2017, the Company has not made any sales of shares in connection with this arrangement.
Common Stock Warrants
Warrants to purchase an aggregate of 153,472 shares of the Company’s common stock were outstanding at June 30, 2017. These warrants have a weighted average exercise price of $5.75 per share and expire at various dates through June 2023.
10. EQUITY AWARDS
Equity Incentive Plans
The Company may issue equity awards to either employees or non-employees under its Amended and Restated 2014 Incentive Award Plan (the “2014 Plan”). The 2014 Plan provides for the issuance of up to 6,000,000 shares, plus one additional share for each option share granted under the Company’s 2011 Incentive Award Plan (the “2011 Plan”) that expires, is forfeited or is settled in cash subsequent to June 11, 2014. Options granted under the 2014 Plan may be subject to vesting and expire no more than ten years from their date of grant. The Company also has outstanding equity awards that were granted under certain predecessor plans. No additional equity grants may be made by the Company under any of these predecessor plans.
A summary of the Company’s option activity and other related information is as follows:
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Value
|
|
|
|
Outstanding
|
|
|
Price
|
|
|
Term
|
|
|
(000’s)
|
|
Balance at December 31, 2016
|
|
|
5,109,285
|
|
|
$
|
8.86
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
996,769
|
|
|
$
|
5.76
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(197,136
|
)
|
|
$
|
7.67
|
|
|
|
|
|
|
|
|
|
Forfeited and expired
|
|
|
(176,699
|
)
|
|
$
|
14.12
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2017
|
|
|
5,732,219
|
|
|
$
|
8.20
|
|
|
|
7.9
|
|
|
$
|
14,830
|
|
Exercisable at June 30, 2017
|
|
|
2,769,424
|
|
|
$
|
8.25
|
|
|
|
7.1
|
|
|
$
|
7,156
|
|
As of June 30, 2017, an aggregate of 2,565,595 shares remain available for grant under the Company’s equity incentive plans.
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Fair Value of Equity Awards
The Company utilizes the Black Scholes option pricing model to value its equity awards. The fair value of options granted during the first six months of 2017 and 2016 was $3.94 and $5.62 per share, respectively, and was estimated using the following weighted-average assumptions:
|
|
Fiscal
|
|
|
Fiscal
|
|
|
|
2017
|
|
|
2016
|
|
Expected life of option
|
|
6.2. years
|
|
|
5.9 years
|
|
Volatility
|
|
|
78%
|
|
|
|
72%
|
|
Risk free interest rate
|
|
|
2.0%
|
|
|
|
1.4%
|
|
Dividend yield
|
|
—%
|
|
|
—%
|
|
Stock-Based Compensation
The following table summarizes stock-based compensation expense during the periods presented for all equity awards issued to employees and non-employees (
in thousands
):
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Included in research and development
|
|
$
|
1,608
|
|
|
$
|
805
|
|
|
$
|
2,638
|
|
|
$
|
1,621
|
|
Included in general and administrative
|
|
|
684
|
|
|
|
894
|
|
|
|
1,583
|
|
|
|
1,778
|
|
Total
|
|
$
|
2,292
|
|
|
$
|
1,699
|
|
|
$
|
4,221
|
|
|
$
|
3,399
|
|
Unrecognized stock-based compensation expense related to unvested awards granted under the Company’s equity incentive plans totaled $13.7 million as of June 30, 2017, and is expected to be recognized over a weighted-average period of 2.4 years.
Restricted Stock Units
Under the provisions of its equity incentive plan, the Company may issue restricted stock units to members of its board of directors or its employee team. As of June 30, 2017, an aggregate of 231,520 restricted stock units were outstanding and subject to vesting through January 2021.
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