Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
1—Nature of Operations and Basis of Presentation
The
Company is a biotechnology company focused on designing, developing and commercializing innovative therapies and proprietary medical
approaches to stimulate and guide an anti-tumor immune response for the treatment of cancer. Its core platform technology, ImmunoPulse®,
is a drug-device therapeutic modality comprised of a proprietary intratumoral electroporation delivery device. The ImmunoPulse®
platform is designed to deliver plasmid DNA-encoded drugs directly into a solid tumor and promote an immunological response against
cancer. The ImmunoPulse® device can be adapted to treat different tumor types, and consists of an electrical pulse generator,
a reusable handle and disposable applicators. The Company’s lead product candidate is a DNA-encoded interleukin-12 (“IL-12”),
called tavokinogene telseplasmid (“TAVO”). The ImmunoPulse® electroporation platform is used to deliver TAVO intratumorally,
with the aim of reversing the immunosuppressive microenvironment in the treated tumor. The activation of the appropriate inflammatory
response can drive a systemic anti-tumor response against untreated tumors in other parts of the body. In February 2017, the Company
received Fast Track designation from the U.S. Food and Drug Administration (“FDA”) for TAVO in metastatic melanoma,
which could qualify TAVO for expedited FDA review, a rolling Biologics License Application review and certain other benefits.
The
Company’s current focus is to pursue its study of TAVO in combination with KEYTRUDA® (pembrolizumab) in both Melanoma
and triple negative breast cancer (“TNBC”).
KEYNOTE-695
targets melanoma patients who are definitive anti-PD-1 non-responders. In May 2017, the Company entered into a clinical trial
collaboration and supply agreement with a subsidiary of Merck & Co., Inc. (“Merck”) in connection with the KEYNOTE-695
study. Pursuant to the terms of the agreement, both companies will bear their own costs related to manufacturing and supply of
their product, as well as be responsible for their own internal costs. The Company will sponsor the study and be responsible for
external costs. The KEYNOTE-695 study is currently enrolling and treating patients and the Company provided a topline preliminary
data update at The Society for Immunotherapy of Cancer (“SITC”) in November of 2018. This study is a registrational-directed,
Phase 2b open-label, single-arm, multicenter study in the United States, Canada and Australia.
On
May 8, 2018, the Company entered into a second clinical trial collaboration and supply agreement with Merck with respect to a
Phase 2 study of TAVO in combination with KEYTRUDA® to evaluate the safety and efficacy of the combination in patients with
inoperable locally advanced or metastatic TNBC, who have previously failed at least one systemic chemotherapy or immunotherapy.
This study is referred to as KEYNOTE-890. Pursuant to the terms of the agreement, both companies will bear their own costs related
to manufacturing and supply of their product, as well as be responsible for their own internal costs. The Company will sponsor
the study and be responsible for external costs. The KEYNOTE-890 study is currently enrolling and treating patients. The
study is a Phase 2 open-label, single-arm, multicenter study in the United States and Australia.
The
Company intends to continue to pursue other ongoing or potential new trials and studies related to TAVO, in various tumor types.
In addition, the Company is also developing its next-generation electroporation device and applicator, including advancements
toward prototypes, pursuing discovery research to identify other product candidates that, in addition to IL-12, can be encoded
into propriety plasmid-DNA, delivered intratumorally using electroporation. Using the Company’s next-generation technology,
its goal is to reverse the immunosuppressive mechanisms of a tumor, as well as to expand its ImmunoPulse® pipeline. The Company
believes that the flexibility of its propriety plasmid-DNA technology allows it to deliver other immunologically relevant molecules
into the tumor microenvironment in addition to the delivery of plasmid-DNA encoding for IL-12. These other immunologically relevant
molecules may compliment IL-12’s activity by limiting or enhancing key pathways associated with tumor immune subversion.
Basis
of Presentation
In
October 2016, the Company created an Australian corporation as its wholly-owned subsidiary. This corporation’s functional
currency, the Australian dollar, is also its reporting currency, and its financial statements are translated to U.S. dollars,
the Company’s reporting currency, prior to consolidation. The accompanying condensed consolidated financial statements include
the accounts of the Company and its subsidiary, and all intercompany accounts and transactions have been eliminated in consolidation.
Unaudited
Interim Financial Information
The
accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally
accepted accounting principles (“U.S. GAAP”) for interim financial information and with instructions to Form 10-Q
and Article 8 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by U.S. GAAP for
complete financial statements. The condensed consolidated balance sheet as of October 31, 2018, and condensed consolidated statements
of operations, condensed consolidated statements of comprehensive loss, and condensed consolidated statements of cash flows for
the three months ended October 31, 2018 and 2017, are unaudited, but include all adjustments (consisting of normal recurring adjustments)
that the Company considers necessary for a fair presentation of the Company’s financial position, results of operations
and cash flows for the periods presented. The condensed consolidated results of operations for the three months ended October
31, 2018 shown herein are not necessarily indicative of the consolidated results that may be expected for the year ending July
31, 2019, or for any other period. These condensed consolidated financial statements, and notes thereto, should be read in conjunction
with the audited consolidated financial statements for the fiscal year ended July 31, 2018, included in the Company’s Annual
Report on Form 10-K (the “Annual Report”) filed with the U.S. Securities and Exchange Commission (“SEC”)
on October 19, 2018. The consolidated balance sheet at July 31, 2018 has been derived from the audited financial statements at
that date but does not include all the information and footnotes required by U.S. GAAP for complete financial statements.
Reclassifications
Certain
amounts in the accompanying condensed cash flow statement for the three months ended October 31, 2017 have been reclassified to
conform to an interim presentation, but there was no effect on net loss for the three months ended October 31, 2017.
Note
2—Significant Accounting Policies
Use
of Estimates
The
accompanying condensed consolidated financial statements have been prepared in conformity with U.S. GAAP, which requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Such
estimates include stock-based compensation, accounting for long-lived assets and accounting for income taxes, including the related
valuation allowance on the deferred tax asset and uncertain tax positions. The Company bases its estimates on historical experience
and on various other assumptions that it believes are reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. On
an ongoing basis, the Company reviews its estimates to ensure that they appropriately reflect changes in the business or as new
information becomes available. Actual results could differ materially from these estimates.
Segment
Reporting
The
Company operates in a single industry segment—the discovery and development of novel immunotherapeutic product candidates
to improve treatment options for patients and physicians, intended to treat a wide range of oncology indications.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments that are readily convertible into cash and have an original maturity of three
months or less at the time of purchase to be considered cash equivalents.
Concentrations
and Credit Risk
The
Company maintains cash balances at a small number of financial institutions and such balances commonly exceed the $250,000 amount
insured by the Federal Deposit Insurance Corporation. The Company has not experienced any losses in such accounts and management
believes that the Company does not have significant credit risk with respect to such cash and cash equivalents.
Investment
Securities
Securities
available for sale are recorded at fair value and unrealized gains and losses are reported, net of taxes, in accumulated other
comprehensive income (loss) included in stockholders’ equity. Securities held to maturity are recorded at amortized cost
based on the Company’s positive intent and ability to hold these securities to maturity. Realized gains and losses from
sales of securities available for sale are determined on a specific identification basis and are included in other revenue –
net.
Management
evaluates whether securities available for sale and securities held to maturity are other-than-temporarily impaired (“OTTI”)
on a quarterly basis. Debt securities with unrealized losses are considered OTTI if the Company intends to sell the security or
if it is more likely than not that the Company will be required to sell such security prior to any anticipated recovery. If management
determines that a security is OTTI under these circumstances, the impairment recognized in earnings is measured as the entire
difference between the amortized cost and the then-current fair value.
Property
and Equipment
The
Company’s capitalization threshold is $5,000 for property and equipment. The cost of property and equipment is depreciated
on a straight-line basis over the estimated useful lives of the related assets. The useful lives of property and equipment for
the purpose of computing depreciation are as follows:
Computers
and equipment:
|
|
3
to 10 years
|
Computer
software:
|
|
1
to 3 years
|
Leasehold
improvements:
|
|
Shorter
of lease period or useful life
|
Impairment
of Long-Lived Assets
The
Company periodically assesses the carrying value of intangible and other long-lived assets, and whenever events or changes in
circumstances indicate that the carrying amount of an asset might not be recoverable. The assets are considered to be impaired
if the Company determines that the carrying value may not be recoverable based upon its assessment, which includes consideration
of the following events or changes in circumstances:
|
●
|
the
asset’s ability to continue to generate income from operations and positive cash flow in future periods;
|
|
|
|
|
●
|
loss
of legal ownership or title to the asset;
|
|
|
|
|
●
|
significant
changes in the Company’s strategic business objectives and utilization of the asset(s); and
|
|
|
|
|
●
|
the
impact of significant negative industry or economic trends.
|
If
the assets are considered to be impaired, the impairment recognized is the amount by which the carrying value of the assets exceeds
the fair value of the assets. Fair value is determined by the application of discounted cash flow models to project cash flows
from the asset. In addition, the Company bases estimates of the useful lives and related amortization or depreciation expense
on its subjective estimate of the period the assets will generate revenue or otherwise be used by it. Assets to be disposed of
are reported at the lower of the carrying amount or fair value, less selling costs. The Company also periodically reviews the
lives assigned to long-lived assets to ensure that the initial estimates do not exceed any revised estimated periods from which
the Company expects to realize cash flows from its assets.
Fair
Value of Financial Instruments
The
carrying amounts for cash, prepaid expenses, accounts payable and accrued expenses approximate fair value due to the short-term
nature of these instruments. It is management’s opinion that the Company is not exposed to significant interest, currency,
or credit risks arising from its other financial instruments and that their fair values approximate their carrying values except
where expressly disclosed.
The
accounting standard for fair value measurements provides a framework for measuring fair value and requires disclosures regarding
fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date, based on the Company’s principal or, in absence
of a principal, most advantageous market for the specific asset or liability.
The
Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a
recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their
initial measurement. The hierarchy requires the Company to use observable inputs when available, and to minimize the use of unobservable
inputs, when determining fair value.
The
three tiers are defined as follows:
|
●
|
Level
1—Observable inputs that reflect quoted market prices (unadjusted) for identical assets or liabilities in active markets
at the measurement date. Since valuations are based on quoted prices that are readily and regularly available in an active
market, valuation of these products does not entail a significant degree of judgment. The Company’s Level 1 assets consist
of bank deposits and money market funds.
|
|
|
|
|
●
|
Level
2—Observable inputs other than quoted prices in active markets that are observable either directly or indirectly in
the marketplace for identical or similar assets and liabilities. The Company’s Level 2 assets consist of U.S. government
sponsored securities.
|
|
|
|
|
●
|
Level
3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
|
The
development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the
responsibility of the Company’s Chief Financial Officer.
Changes
in fair value measurements categorized within Level 3 of the fair value hierarchy are analyzed each period based on changes in
estimates or assumptions and recorded as appropriate.
No
such items existed as of October 31, 2018 and July 31, 2018.
Financial
Instruments Not Recorded at Fair Value
Descriptions
of the valuation methodologies and assumptions used to estimate the fair value of financial instruments not recorded at fair value
are described below. The Company’s financial instruments not recorded at fair value but for which fair value can be approximated
and disclosed include:
Securities
Held to Maturity
–
The fair values of securities held to maturity are obtained using an independent third-party financial
institution.
Warrants
The
Company assesses its warrants as either equity or a liability based upon the characteristics and provisions of each instrument.
Warrants classified as equity are recorded at fair value as of the date of issuance on the Company’s balance sheet and no
further adjustments to their valuation are made. Warrants classified as derivative liabilities and other derivative financial
instruments that require separate accounting as liabilities are recorded on the Company’s balance sheet at their fair value
on the date of issuance and are re-measured on each subsequent balance sheet date until such instruments are exercised or expire,
with any changes in the fair value between reporting periods recorded as other income or expense. Management estimates the fair
value of these liabilities using option pricing models and assumptions that are based on the individual characteristics of the
warrants or other instruments on the valuation date, as well as assumptions for future financings, expected volatility, expected
life, yield and risk-free interest rate. As of October 31, 2018 and July 31, 2018, all outstanding warrants issued by the Company
were classified as equity.
Net
Loss Per Share
The
Company computes basic net loss per common share by dividing the applicable net loss by the weighted-average number of common
shares outstanding during the period. Diluted earnings per share is computed by dividing the applicable net loss by the weighted-average
number of common shares outstanding during the period plus additional shares to account for the dilutive effect of potential future
issuances of common stock relating to stock options and other potentially dilutive securities using the treasury stock method.
The
Company did not include shares underlying stock options, restricted stock units and warrants issued and outstanding during any
of the periods presented in the computation of net loss per share, as the effect would have been anti-dilutive. The following
potentially dilutive outstanding securities were excluded from diluted net loss per share because of their anti-dilutive effect:
|
|
October 31, 2018
|
|
|
October 31, 2017
|
|
Stock options
|
|
|
7,525,203
|
|
|
|
3,947,709
|
|
Restricted stock units
|
|
|
518,020
|
|
|
|
1,100,000
|
|
Warrants
|
|
|
8,928,905
|
|
|
|
12,526,340
|
|
Total
|
|
|
16,972,128
|
|
|
|
17,574,049
|
|
Stock-Based
Compensation
The
Company grants equity-based awards (typically stock options or restricted stock units) under our stock-based compensation plan
and outside of our stock-based compensation plan, with terms generally similar to the terms under our stock-based compensation
plan. The Company estimates the fair value of stock option awards using the Black-Scholes option valuation model. For employees,
directors and consultants, the fair value of the award is measured on the grant date. Prior to the adoption of ASU 2018-07 on
August 1, 2018, the fair value of the award for non-employees was generally re-measured on vesting dates and interim financial
reporting dates until the service period was complete. The fair value amount is then recognized over the period during which services
are required to be provided in exchange for the award, usually the vesting period. The Black-Scholes option valuation model requires
the input of subjective assumptions, including price volatility of the underlying stock, risk-free interest rate, dividend yield,
and expected life of the option. The Company estimates the fair value of restricted stock unit awards based on the closing price
of the Company’s common stock on the date of issuance. Changes in assumptions used under the Black-Scholes option valuation
model could materially affect the Company’s net loss and net loss per share.
Employee
Stock Purchase Plan
Employees
may elect to participate in the Company’s stockholder approved employee stock purchase plan. The stock purchase plan allows
for the purchase of the Company’s common stock at not less than 85% of the lesser of (i) the fair market value of a share
of common stock on the beginning date of the offering period or (ii) the fair market value of a share of common stock on the purchase
date of the offering period, subject to a share and dollar limit as defined in the plan and subject to the applicable legal requirements.
There are two six-month offering periods during each fiscal year, ending on January 31 and July 31.
In
accordance with applicable accounting guidance, the fair value of awards under the stock purchase plan is calculated at the beginning
of each offering period. The Company estimates the fair value of the awards using the Black-Scholes option valuation model. The
Black-Scholes option valuation model requires the input of subjective assumptions, including price volatility of the underlying
stock, risk-free interest rate, dividend yield, and the offering period. This fair value is then amortized at the beginning of
the offering period. Stock-based compensation expense is based on awards expected to be purchased at the beginning of the offering
period, and therefore is reduced when participants withdraw during the offering period.
Deferred
Rent
Rent
expense from leases is recorded on a straight-line basis over the lease period. The net excess of rent expense over the actual
cash paid is recorded as deferred rent.
Foreign
Currency Translation
We
use the U.S. Dollar as the reporting currency for our financial statements. Functional currency is the currency of the primary
economic environment in which an entity operates. The functional currency of our wholly owned subsidiary is the Australian dollar.
Transactions
in currencies other than the functional currency of a specific entity are recorded at exchange rates prevailing on the dates of
the transactions. At the end of each reporting period, the monetary assets and liabilities of the entity denominated in foreign
currencies are translated at the rate of exchange at the financial reporting date while non-monetary assets and liabilities are
translated at historical rates. Revenues and expenses are translated at the exchange rates approximating those in effect on the
date of the transactions. Exchange gains and losses arising on translation are included in the statements of profit or loss.
The
financial statements of entities that have a functional currency different from that of the Companies (“foreign operations”)
are translated into United States dollars as follows: assets and liabilities – at the closing rate at the date of the statement
of financial position, and income and expenses – at the average rate of the period (as this is considered a reasonable approximation
to actual rates). All resulting changes are recognized in other comprehensive income as currency translation differences and taken
into a separate component of equity.
Accumulated
Other Comprehensive Income (Loss)
Accumulated
other comprehensive income (loss) includes foreign currency translation adjustments related to the Company’s subsidiary
in Australia and is excluded from the accompanying condensed consolidated statements of operations.
Australia
Research and Development Tax Credit
The Company’s wholly-owned
Australian subsidiary incurs research and development expenses, primarily in the course of conducting clinical trials. The Company’s
Australian research and development activities qualify for the Australian government’s tax credit program, which provides
a 41.0 percent credit for qualifying research and development expenses. The tax credit does not depend on the Company’s
generation of future taxable income or ongoing tax status or position. Accordingly, the credit is not considered an element of
income tax accounting under ASC 740 and is recorded against qualifying research and development expenses.
Tax
Reform
The
Tax Cuts and Jobs Act (the “Act”) was enacted in December 2017. Among other things, the Act reduced the U.S. federal
corporate tax rate from 34 percent to 21 percent as of January 1, 2018 and eliminated the alternative minimum tax (“AMT”)
for corporations. Since the deferred tax assets are expected to reverse in a future year, it has been tax effected using the 21%
federal corporate tax rate. As a result of the reduction in the corporate tax rate, the Company decreased its gross deferred tax
assets by approximately $12.4 million which was offset by a corresponding decrease to the valuation allowance as of July 31, 2018,
which has no impact on the Company’s consolidated financial statements for the year ended July 31, 2018. The Company will
continue to analyze the Tax Act to assess its full effects on the Company’s financial results, including disclosures, for
the Company’s fiscal year ending July 31, 2019, but the Company does not expect the Tax Act to have a material impact on
the Company’s unaudited condensed consolidated financial statements.
On
December 22, 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin 118, which allows a measurement period,
not to exceed one year, to finalize the accounting for the income tax effects of the Act. Until the accounting for the income
tax effects of the Act is complete, the reported amounts are based on reasonable estimates, are disclosed as provisional and reflect
any adjustments in subsequent periods as estimates are refined or the accounting of the tax effects are completed.
Recent
Accounting Pronouncements
In January 2016, the
Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016-01,
Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
(“ASU 2016-01”)
, which addresses certain aspects of recognition, measurement, presentation, and disclosure of
financial instruments. ASU 2016-01 is effective for annual reporting periods beginning after December 15, 2017 and interim periods
within those annual periods, and earlier adoption is not permitted except for certain provisions. The Company adopted this standard
on August 1, 2018. The adoption of this standard did not have a material impact on the Company’s unaudited condensed consolidated
financial statements and related disclosures.
In August 2016, the
FASB issued ASU No. 2016-15,
Statement of Cash Flows
(“ASU 2016-15”), to reduce diversity in practice of how
certain transactions are classified in the statement of cash flows. The effective date for ASU 2016-15 is for annual periods beginning
after December 15, 2017, and interim periods within those fiscal years. The Company adopted this standard on August 1, 2018. The
adoption of this standard did not have a material impact on the Company’s unaudited condensed consolidated financial statements
and related disclosures.
In January 2017, the
FASB issued guidance codified in ASU 2017-04,
Intangibles—Goodwill and Other (Topic 350) Simplifying the Test for Goodwill
Impairment (“ASU 2017-04”).
Under this guidance, an entity will no longer determine goodwill impairment by calculating
the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if
that reporting unit had been acquired in a business combination. Instead, an entity will compare the fair value of a reporting
unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting
unit’s fair value. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods
therein, with early adoption permitted. The Company adopted this standard on August 1, 2018. The adoption of this standard did
not have a material impact on the Company’s unaudited condensed consolidated financial statements and related disclosures.
The Company does not currently have any intangible or goodwill balances.
In May 2017, the FASB
issued ASU 2017-09,
Compensation—Stock Compensation (Topic 718) (“ASU 2017-09”),
which provides further
guidance as to what constitutes a modification to the terms of share-based compensation, in order to create consistency in practice
among all entities. ASU 2017-09 becomes effective for annual reporting periods beginning after December 15, 2017, including interim
periods thereafter; early adoption is permitted. The Company adopted this standard on
August 1, 2018. The adoption of this standard did not have a material impact on the Company’s unaudited condensed consolidated
financial statements and related disclosures.
In July 2017, the FASB
issued ASU 2017-11,
Earnings Per Share (Topic 260), Distinguishing Equity from Liabilities (Topic 480) and Derivatives and
Hedging (Topic 815) (“ASU 2017-11”),
which addresses the complexity of accounting for certain financial instruments
with down-round features and finalizes pending guidance related to mandatorily redeemable noncontrolling interests. Under ASU
2017-11, when determining whether certain financial instruments should be classified as liabilities or equity instruments, a down-round
feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock.
ASU 2017-11 becomes effective for annual reporting periods beginning after December 15, 2018, including interim periods thereafter;
early adoption is permitted. The Company adopted this standard on August 1, 2018. The
adoption of this standard did not have a material impact on the Company’s unaudited condensed consolidated financial statements
and related disclosures.
In
June 2018, the FASB issued ASU 2018-07,
“Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee
Share-Based Payment Accounting” (ASU 2018-07)
, which expands the scope of Topic 718 to include all share-based
payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 specifies that Topic 718 applies to all share-based
payment transactions in which the grantor acquires goods and services to be used or consumed in its own operations by issuing
share-based payment awards. ASU 2018-07 also clarifies that Topic 718 does not apply to share-based payments used to effectively
provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of
a contract accounted for under ASC 606. ASU 2018-07 is effective for fiscal years beginning after December 15, 2018, including
interim periods within those fiscal years, with early adoption permitted, but no earlier than our adoption of ASC 606. The Company
chose to early adopt ASU 2018-07 on August 1, 2018. The adoption of this standard did not have a material impact on the Company’s
unaudited condensed consolidated financial statements and related disclosures.
There
were no accounting pronouncements during the three months ended October 31, 2018 that the Company anticipates will have a material
impact on the Company’s financial condition, results of operations or related disclosures. See Note 2 to the Annual Report
for a discussion of certain recent accounting pronouncements not yet adopted by the Company.
Note
3—Liquidity and Financial Condition
The
Company has sustained losses in all reporting periods since inception, with an inception-to date-loss of $141.7 million as of
October 31, 2018, which raises substantial doubt. Further, the Company has never generated any cash from its operations and does
not expect to generate such cash in the near term. Consequently, the Company will need additional capital to continue operating
its business and fund its planned operations, including research and development, clinical trials and, if regulatory approval
is obtained, commercialization of its product candidates. In addition, the Company will require additional financing if it desires
to in-license or acquire new assets, research and develop new compounds or new technologies and pursue related patent protection,
or obtain any other intellectual property rights or other assets.
As
of October 31, 2018, the Company had a cash, cash equivalents and investment securities of $28.5 million. The Company had cash
of $9.6 million and cash equivalents of $9.4 million for a total cash and cash equivalent balance of $19.0 million. In addition,
the Company had short-term investment securities of $9.5 million. Cash flows from financing activities continued to provide the
primary source of our liquidity. Net cash provided by financing activities was $8.3 million during the three months ended October
31, 2018, which was primarily attributable to the net proceeds received from the first tranche in the Alpha Holdings agreement
and the exercise of certain stock options (See Note 6 & Note 7).
Additionally,
subsequent to October 31, 2018, the Company received additional gross proceeds of $7.0 million from the funding of the second
tranche in the Alpha Holdings agreement (see Note 11). As of December 6, 2018, the Company had cash, cash equivalents and investment
securities of approximately $33.3 million. The Company is anticipating raising additional capital but there can be no assurance
that it will be able to do so or if the terms will be favorable.
The
above financing activities substantially increased the Company’s cash position. As a result, as of the date of the issuance
of these condensed consolidated financial statements, the Company believes its current cash position as a result of the Company’s
financing activities during the three months ended October 31, 2018 and through December 2018 has alleviated substantial doubt
about its ability to sustain operations through at least the next 12 months from the issuance date of the condensed consolidated
financial statements.
Note
4—Investment Securities
The
amortized cost, gross unrealized losses, and fair value of securities held to maturity are as follows
as
of October 31, 2018
:
Description
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Loss
|
|
|
Fair
Value
|
|
Investment
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
treasury securities with maturities of one year or less
|
|
$
|
9,458,814
|
|
|
$
|
(7,911
|
)
|
|
$
|
9,450,903
|
|
Total
|
|
$
|
9,458,814
|
|
|
$
|
(7,911
|
)
|
|
$
|
9,450,903
|
|
The
fair values of held to maturity securities, excluding U.S. treasury securities, were obtained
using
an independent third-party financial institution
. Management made no adjustments to the fair value quotes that were provided
by the
third-party financial institution
. The fair values of U.S. treasury securities
were determined using quoted, active market prices for identical securities.
During the three months
ended October 31, 2018, the Company sold investments, categorized as held to maturity, with a net carrying amount of $5,989,928
for gross proceeds of $5,977,794 and realized a loss of $12,134. The sale of the securities was suggested by the Company’s
investment advisors and the event is isolated.
Note
5—Balance Sheet Details
Property
and Equipment
Property
and equipment, net, is comprised of the following:
|
|
October 31, 2018
|
|
|
July 31, 2018
|
|
Equipment and furniture
|
|
$
|
1,873,880
|
|
|
$
|
1,873,880
|
|
Computer software
|
|
|
109,242
|
|
|
|
109,242
|
|
Leasehold improvements
|
|
|
12,054
|
|
|
|
12,054
|
|
Property and equipment, gross
|
|
|
1,995,176
|
|
|
|
1,995,176
|
|
Accumulated depreciation and amortization
|
|
|
(790,385
|
)
|
|
|
(729,514
|
)
|
Total
|
|
$
|
1,204,791
|
|
|
$
|
1,265,662
|
|
Depreciation
and amortization expense recorded for the three months ended October 31, 2018 and 2017 was approximately $61,000 and $96,000,
respectively.
Accounts
Payable and Accrued Liabilities
Accounts
payable and accrued liabilities are comprised of the following:
|
|
October 31, 2018
|
|
|
July 31, 2018
|
|
Research and development costs
|
|
$
|
2,690,707
|
|
|
$
|
3,801,211
|
|
Professional services fees
|
|
|
1,234,226
|
|
|
|
770,853
|
|
Other
|
|
|
244,864
|
|
|
|
206,828
|
|
Total
|
|
$
|
4,169,797
|
|
|
$
|
4,778,892
|
|
Accrued
Compensation
Accrued
compensation is comprised of the following:
|
|
October 31, 2018
|
|
|
July 31, 2018
|
|
Separation costs
|
|
$
|
1,260,671
|
|
|
$
|
840,320
|
|
Accrued payroll
|
|
|
224,193
|
|
|
|
215,937
|
|
401K payable
|
|
|
2,715
|
|
|
|
14,487
|
|
Total
|
|
$
|
1,487,579
|
|
|
$
|
1,070,744
|
|
Other
Long-Term Liabilities
Other
long-term liabilities are comprised of the following:
|
|
October 31, 2018
|
|
|
July 31, 2018
|
|
Deferred rent
|
|
$
|
1,068,292
|
|
|
$
|
1,101,222
|
|
Separation costs
|
|
|
253,719
|
|
|
|
371,408
|
|
Total
|
|
$
|
1,322,011
|
|
|
$
|
1,472,630
|
|
Note
6—Stockholders’ Equity
A
summary of the changes in stockholders’ equity for the three months ended October 31, 2018 and 2017 is presented below:
|
|
October 31, 2018
|
|
|
October 31, 2017
|
|
Stockholders’ equity at beginning of period
|
|
$
|
22,924,206
|
|
|
$
|
10,695,982
|
|
Net loss
|
|
|
(7,575,615
|
)
|
|
|
(5,900,452
|
)
|
Stock-based compensation
|
|
|
1,391,656
|
|
|
|
554,575
|
|
Common stock issued for services
|
|
|
239,824
|
|
|
|
109,000
|
|
Modification of equity award
|
|
|
135,425
|
|
|
|
-
|
|
Issuance of common stock through employee stock purchase plan
|
|
|
12,671
|
|
|
|
19,048
|
|
Equity offerings, net of costs
|
|
|
7,446,811
|
|
|
|
8,058,733
|
|
Accumulated other comprehensive income (loss)
|
|
|
107,900
|
|
|
|
(6,744
|
)
|
Exercise of common stock warrants
|
|
|
-
|
|
|
|
9,000
|
|
Exercise of common stock options
|
|
|
539,719
|
|
|
|
-
|
|
Tax withholdings paid on equity awards
|
|
|
(15,185
|
)
|
|
|
-
|
|
Tax shares sold to pay for tax withholdings on equity awards
|
|
|
14,649
|
|
|
|
-
|
|
Tax withholdings paid related to net share settlement of equity awards
|
|
|
(24,340
|
)
|
|
|
-
|
|
Stockholders’ equity at end of period
|
|
$
|
25,197,721
|
|
|
$
|
13,539,142
|
|
Alpha
Holdings
On
August 31, 2018, the Company entered into a stock purchase agreement with Alpha Holdings, Inc. (“Alpha Holdings”),
pursuant to which the Company agreed to issue and sell to Alpha Holdings shares of its common stock equal to an aggregate amount
of up to $15.0 million at a market purchase price of $1.50 per share, which was the closing price of the Company’s common
stock the day immediately before the agreement was executed by the parties.
On
October 9, 2018, the Company received total proceeds, before expenses, of $8.0 million in cash from the offering and issued Alpha
Holdings 5,333,333 shares of common stock. There were no underwriting or placement agent fees associated with the offering. See
Note 11 for details regarding the second closing that took place on December 6, 2018.
Common
Stock Option Exercise
During
the three months ended October 31, 2018, shares of common stock issued related to option exercises totaled 406,882. The Company
realized proceeds of $539,719 from the stock option exercises.
First
October 2017 Offering
On
October 25, 2017, the Company completed an offer and sale to certain accredited investors of, in a registered public offering,
5,270,934 shares of its common stock and, in a concurrent private placement offering, warrants to purchase an aggregate of up
to 3,953,200 shares of its common stock, all at a purchase price of $1.34375 per share. The warrants have an initial exercise
price of $1.25 per share, became exercisable on October 25, 2017 and expire on April 25, 2022. The gross proceeds of the offering
were $7.1 million and the net proceeds, after deducting the placement agent’s fee and other offering fees and expenses paid
or payable by the Company (and excluding the proceeds, if any, from any cash exercise of the warrants), were approximately $6.2
million. In connection with the offering, the Company paid the placement agent (i) a cash fee equal to 5.5% of the gross proceeds
of the offering, as well as offering expenses in a nonaccountable sum of $60,000, and (ii) warrants to purchase up to an aggregate
of 316,256 shares of its common stock. The warrants issued to the placement agent are exercisable at an exercise price of $1.68
per share, became exercisable on their original issuance date and expire on October 21, 2022.
The
fair value of the warrants issued to the purchasers in the offerings, based on their fair value relative to the common stock issued,
was approximately $2.4 million (based on the Black-Scholes option valuation model assuming no dividend yield, a 5.5-year life,
volatility of 75.55% and a risk-free interest rate of 2.12%). The fair value of the warrants issued to the placement agent in
the offerings was $0.2 million (based on the Black-Scholes option valuation model assuming no dividend yield, a 5.0-year life,
volatility of 73.25% and a risk-free interest rate of 2.06%). The Company completed an evaluation of these warrants and determined
they should be classified as equity within the accompanying condensed consolidated balance sheets.
Second
October 2017 Offering
On
October 25, 2017, the Company completed an offer and sale to one accredited investor of 800,000 shares of its common stock and
warrants to purchase up to 600,000 shares of its common stock, all at a purchase price of $1.34375 per share and associated warrant.
The warrants have an initial exercise price of $1.25 per share, become exercisable on April 27, 2018 and expire on April 27, 2022.
The gross proceeds of the offering were $1.1 million and the net proceeds, after deducting the placement agent’s fee and
other offering fees and expenses paid or payable by the Company (and excluding the proceeds, if any, from any cash exercise of
the warrants), were approximately $1.0 million. In connection with the offering, the Company paid the placement agent (i) a cash
fee equal to 5.5% of the gross proceeds of the offering, as well as offering expenses in a non-accountable sum of $15,000, and
(ii) warrants to purchase up to an aggregate of 48,000 shares of its common stock. The warrants issued to the placement agent
are exercisable at an exercise price of $1.68 per share, became exercisable on their original issuance date and expire on October
25, 2022.
The
fair value of the warrants issued to the purchasers in the offering, based on their fair value relative to the common stock issued,
was approximately $0.4 million (based on the Black-Scholes option valuation model assuming no dividend yield, a 5.5-year life,
volatility of 75.51% and a risk-free interest rate of 2.12%). The fair value of the warrants issued to the placement agent in
the offering was $31,000 (based on the Black-Scholes option valuation model assuming no dividend yield, a 5.0-year life, volatility
of 73.22% and a risk-free interest rate of 2.06%). The Company completed an evaluation of these warrants and determined they should
be classified as equity within the accompanying condensed consolidated balance sheets.
ATM
Program
On
July 25, 2017, the Company entered into an equity distribution agreement with Oppenheimer & Co. Inc. (“Oppenheimer”)
to commence an “at the market” offering program (the “ATM Program”), under which the Company was permitted
to offer and sell, from time to time through or to Oppenheimer, acting as sales agent or principal, shares of the Company’s
common stock having an aggregate gross sales price of up to $8.4 million. An aggregate of 897,311 shares of the Company’s
common stock were sold in the ATM Program during the three months ended October 31, 2017, for net proceeds to the Company, after
deducting Oppenheimer’s commissions and other expenses paid or payable by the Company, of $1.1 million. Effective as of
October 22, 2017, the Company terminated the ATM Program. As a result of such termination, no further offers or sales of the Company’s
common stock will be made in the ATM Program.
Outstanding
Warrants
At
October 31, 2018, the Company had outstanding warrants to purchase 8,928,905 shares of its common stock, with exercise prices
ranging from $1.25 to $18.00, all of which were classified as equity instruments. These warrants expire at various dates between
May 2019 and May 2025.
Note
7—Stock-Based Compensation
The
OncoSec Medical Incorporated 2011 Stock Incentive Plan (as amended and approved by the Company’s stockholders (the “2011
Plan”), authorizes the Company’s Board of Directors to grant equity awards, including stock options and restricted
stock units, to employees, directors and consultants. The 2011 Plan authorizes a total of 7,500,000 for issuance thereunder, and
includes an automatic increase of the number of shares of common stock reserved thereunder on the first business day of each calendar
year by the lesser of: (i) 3% of the shares of the Company’s common stock outstanding as of the last day of the immediately
preceding calendar year; (ii) 1,000,000 shares; or (iii) such lesser number of shares as determined by the Company’s Board
of Directors. As of October 31, 2018, there were an aggregate of 8,500,000 shares of the Company’s common stock authorized
for issuance pursuant to awards granted under the 2011 Plan. The 2011 Plan allows for an annual fiscal year per individual grant
of up to 500,000 shares of its common stock. Under the 2011 Plan, incentive stock options are to be granted at a price that is
no less than 100% of the fair value of the Company’s common stock at the date of grant. Stock options vest over a period
specified in the individual option agreements entered into with grantees, and are exercisable for a maximum period of 10 years
after the date of grant. Stock options granted to stockholders who own more than 10% of the outstanding stock of the Company at
the time of grant must be issued at an exercise price of no less than 110% of the fair value of the Company’s common stock
on the date of grant.
Modification
of Award
On August 22, 2018,
the Company entered into a stock option cancellation agreement with an individual. As per the terms of the agreement, 300,000
fully vested stock options were cancelled. On August 22, 2018, the Company issued 175,000 shares of restricted common stock. Upon
modification, it is required under ASC 718 to analyze the fair value of the instruments, before and after the modification, recognizing
the increase as a charge to the statement of operations. The Company computed the fair value of the cancelled award and compared
the fair value to that of the restricted stock award. The Company recorded the excess of the fair value of the restricted stock
award over the fair value of the cancelled award, or $135,425, to compensation costs with an offsetting entry to common stock
and additional paid in capital on the date of the modification.
Cancellation
of Award
On
October 23, 2018, the Company entered into stock option cancellation agreements with two consultants. As per the terms of the
agreements, an aggregate of 535,000 stock options were cancelled. The consultants were not issued replacement awards under the
cancellation agreements. Under ASC 718, a cancellation of an award that is not accompanied by the concurrent grant of (or offer
to grant) a replacement award or other valuable consideration shall be accounted for as a repurchase for no consideration. Accordingly,
any previously unrecognized compensation cost shall be recognized at the cancellation date. The Company recorded unrecognized
compensation of the cancelled awards, or $377,278, to compensation costs with an offsetting entry to additional paid in capital
on the date of the cancellation.
Stock
Options
During
the three months ended October 31, 2018, the Company granted options to purchase 111,000 shares of its common stock to employees
under the 2011 Plan. The stock options issued to employees have a ten-year term, vest over three years, and have exercise prices
ranging from $1.32 to $1.58.
During
the three months ended October 31, 2018, the Company granted options to purchase 200,000 and 250,000 shares of its common stock
to employees and consultants outside the 2011 Plan. The stock options issued to employees have a ten-year term, vest over three
years, and have an exercise price of $1.64. The stock options issued to consultants have ten-year terms, vest in accordance with
the terms of the applicable consulting agreement, and have an exercise price of $1.43.
During
the three months ended October 31, 2017, the Company granted options to purchase 163,500, 200,000 and 50,000 shares of its common
stock to employees, directors and consultants under the 2011 Plan, respectively. The stock options issued to employees have a
10-year term, vest over three years and have exercise prices ranging from $0.92 and $0.96. The stock options issued to directors
have a 10-year term, vest over one year and have exercise prices ranging from $0.979 and $1.08. The stock options issued to consultants
have a 10-year term, vest in accordance with the terms of the applicable consulting agreement and have an exercise price of $1.00
per share.
Stock-based
compensation expense recognized in the accompanying consolidated statements of operations is based on awards ultimately expected
to vest, reduced for estimated forfeitures. The service period is generally the vesting period, with the exception of stock options
granted pursuant to a consulting agreement, in which case the stock option vesting period and the service period are defined pursuant
to the terms of the consulting agreement. Stock-based compensation expense related to stock options granted to consultants in
which the options are not entirely vested at the grant date are generally re-measured each month.
The
following assumptions were used for the Black-Scholes calculation of the fair value of stock-based compensation related to stock
options granted during the periods presented:
|
|
Three
Months Ended
October 31, 2018
|
|
|
Three
Months Ended
October 31, 2017
|
|
Expected term (years)
|
|
|
5.00
– 6.5 years
|
|
|
|
5.00
– 6.5 years
|
|
Risk-free interest rate
|
|
|
2.68
– 3.08
|
%
|
|
|
1.66
– 1.99
|
%
|
Volatility
|
|
|
72.88
– 81.80
|
%
|
|
|
74.87
–91.80
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
The
Company’s expected volatility is derived from the historical daily change in the market price of its common stock since
its stock became available for trading, as well as the historical daily changes in the market price of its peer group, based on
weighting, as determined by the Company. The Company uses the simplified method to calculate the expected term of options issued
to employees, non-employees and directors. Prior to the adoption of ASU 2018-07, the Company’s estimation of the expected
term for stock options granted to parties other than employees or directors was the contractual term of the option award. The
risk-free interest rate used in the Black-Scholes calculation is based on the prevailing U.S. Treasury yield in effect at the
time of grant, commensurate with the expected term. For the expected dividend yield used in the Black-Scholes calculation, the
Company has never paid any dividends on its common stock and does not anticipate paying dividends on its common stock in the foreseeable
future.
The
following is a summary of the Company’s 2011 Plan and non-Plan stock option activity for the three months ended October
31, 2018:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Price
|
|
Outstanding - July 31, 2018
|
|
|
8,912,720
|
|
|
$
|
1.50
|
|
Granted
|
|
|
568,500
|
|
|
$
|
1.53
|
|
Exercised
|
|
|
(410,476
|
)
|
|
$
|
1.31
|
|
Forfeited/Cancelled
|
|
|
(1,538,541
|
)
|
|
$
|
1.58
|
|
Expired
|
|
|
(7,000
|
)
|
|
$
|
5.76
|
|
Outstanding – October 31, 2018
|
|
|
7,525,203
|
|
|
$
|
1.49
|
|
Exercisable – October 31, 2018
|
|
|
5,305,608
|
|
|
$
|
1.53
|
|
As
of October 31, 2018, the total intrinsic value of options outstanding and exercisable was approximately $2.4 million and $1.6
million, respectively. As of October 31, 2018, the Company has approximately $2.8 million in unrecognized stock-based compensation
expense attributable to the outstanding options, which will be amortized over a period of approximately 1.45 years.
Stock-based
compensation expense recorded in the Company’s condensed consolidated statements of operations for the three months ended
October 31, 2018 resulting from stock options awarded to the Company’s employees, directors and consultants was approximately
$1.3 million. Of this balance, $738,000 was recorded to research and development and $527,000 million was recorded in general
and administrative in the Company’s condensed consolidated statements of operations for the three months ended October 31,
2018.
Stock-based
compensation expense recorded in the Company’s condensed consolidated statements of operations for the three months ended
October 31, 2017 resulting from stock options awarded to the Company’s employees, directors and consultants was approximately
$0.6 million. Of this balance, $0.2 million was recorded to research and development and $0.4 million was recorded in general
and administrative in the Company’s condensed consolidated statement of operations for the three months ended October 31,
2017.
The
weighted-average grant date fair value of stock options granted during the three months ended October 31, 2018 was $0.99. The
weighted-average grant date fair value of stock options granted during the three months ended October 31, 2017 was $0.67.
Restricted
Stock Units
In
October 2018, the Company granted 50,000 restricted stock unit awards (“RSUs”) to an employee. The units vest as follows:
12,500 units vested on October 29, 2018, and the remaining 37,500 units vest according to the following vesting schedule: 12,500
units on October 29, 2019, 12,500 units on October 29, 2020 and 12,500 units on October 29, 2021. The closing price of the Company’s
common stock on the date of grant was $1.64 per share, which is the fair market value per unit of the RSUs.
On
October 26, 2018, in accordance with a severance agreement with an employee, the Company’s Board of Directors approved the
accelerated vesting of 25% of the outstanding restricted stock units (RSUs) held by the employee. The RSUs, which originally vest
on the third anniversary of the grant date, or March 29, 2020, were accelerated to vest on October 26, 2018. As per ASC 718, on
the date of the modification the Company reversed the previously accrued expense on the unvested RSUs of $63,278 and recognized
the fair value of the modified grant of $44,250 on the date of the modification.
For
the three months ended October 31, 2018, the Company recorded $0.15 million in stock-based compensation related to RSUs, which
is reflected in the condensed consolidated statement of operations.
As
of October 31, 2018, there were 518,020 RSUs outstanding.
For
the three months ended October 31, 2017, the Company recorded $0.1 million in stock-based compensation related to RSUs, which
is reflected in the condensed consolidated statement of operations.
Shares
issued to Consultants
During
the three months ended October 31, 2018, 184,000 shares of Common Stock valued at $251,560 were issued to consultants for services.
The common stock share values were based on the dates the shares were granted. The Company recorded compensation expense relating
to the share issuances of $239,824 during the three months October 31, 2018.
During
the three months ended October 31, 2017, 100,000 shares of Common Stock valued at $109,000 were issued to consultants for services.
The common stock share values were based on the dates the shares vested. The Company recorded compensation expense relating to
the share issuances of $109,000 during the three months October 31, 2017.
2015
Employee Stock Purchase Plan
Under
the Company’s 2015 Employee Stock Purchase Plan (“ESPP”), the Company is authorized to issue 500,000 shares
of the Company’s common stock. The first offering period under the ESPP ended on July 31, 2016, with 17,789 shares purchased
and distributed to employees. The second offering period under the ESPP ended on January 31, 2017, with 18,631 shares purchased
and distributed to employees, and the third offering period under the ESPP ended on July 31, 2017, with 21,646 shares purchased
and distributed to employees. The fourth offering period under the ESPP ended on January 31, 2018, with 18,960 shares purchased
and distributed to employees, and the fifth offering period under the ESPP ended on July 31, 2018, with 12,071 shares purchased
and distributed to employees. At October 31, 2018, there were 410,903 shares remaining available for issuance under the ESPP.
The
ESPP is considered a Type B plan under FASB ASC Topic 718 because the number of shares a participant is permitted to purchase
is not fixed based on the stock price at the beginning of the offering period and the expected withholdings. The ESPP enables
the participant to “buy-up” to the plan’s share limit, if the stock price is lower on the purchase date. As
a result, the fair value of the awards granted under the ESPP is calculated at the beginning of each offering period as the sum
of:
|
●
|
15%
of the share price of an unvested share at the beginning of the offering period,
|
|
●
|
85%
of the fair market value of a six-month call on the unvested share aforementioned, and
|
|
●
|
15%
of the fair market value of a six-month put on the unvested share aforementioned.
|
The
fair market value of the six-month call and six-month put are based on the Black-Scholes option valuation model. For the six-month
offering period ended January 31, 2019, the following assumptions were used: six-month maturity, 2.22% risk free interest, 61.83%
volatility, 0% forfeitures and $0 dividends.
For
the six-month offering period ended January 31, 2018, the following assumptions were used: six-month maturity, 1.15% risk free
interest, 62.6% volatility, 0% forfeitures and $0 dividends.
Approximately
$6,600 and $7,000 was recorded as stock-based compensation during the three months ended October 31, 2018 and 2017, respectively.
Common
Stock Reserved for Future Issuance
The
following table summarizes all common stock reserved for future issuance at October 31, 2018:
Common Stock options outstanding (within the 2011 Plan and outside of the terms of the 2011 Plan)
|
|
|
7,525,203
|
|
Common Stock reserved for restricted stock unit release
|
|
|
518,020
|
|
Common Stock authorized for future grant under the 2011 Plan
|
|
|
2,200,176
|
|
Common Stock reserved for warrant exercise
|
|
|
8,928,905
|
|
Commons Stock reserved for future ESPP issuance
|
|
|
410,903
|
|
Total common stock reserved for future issuance
|
|
|
19,583,207
|
|
Note
8—Commitments and Contingencies
Contingencies
In
the ordinary course of business, the Company may become a party to lawsuits involving various matters. The Company is not currently
a party, and its properties are not currently subject, to any legal proceedings that, in the opinion of management, are expected
to have a material adverse effect on the Company’s business, financial condition or results of operations.
Employment
Agreements
The
Company has entered into employment agreements with each of its executive officers and certain other key employees. Generally,
the terms of these agreements provide that, if the Company terminates the officer or employee other than for cause, death or disability,
or if the officer terminates his or her employment with the Company for good cause, the officer shall be entitled to receive certain
severance compensation and benefits as described in each such agreement.
On
October 26, 2018, the Company and an employee entered into a separation and release agreement in connection with the employee’s
termination of employment with the Company. Pursuant to the agreement, the Company will pay the former employee severance compensation
of $415,000, less applicable withholdings, in the form of salary and bonus continuation in accordance with the Company’s
customary payroll practices. In addition, the Company agreed to pay the cost of health insurance for 12 months from the date of
separation and accelerate the vesting of 25,000 RSUs. On October 26, 2018, the Company recorded a liability of $451,112 on its
consolidated balance sheet, and the offsetting charge was recorded in general and administrative expense as salary expense. As
of October 31, 2018, the Company made no payments against the liability.
Lease
Agreements
On
February 14, 2018, the Company entered into a lease agreement for approximately 3,100 rentable square feet located at 24 N. Main
Street, Pennington, New Jersey, which serves as the Company’s New Jersey corporate headquarters. The term of the lease commenced
on March 1, 2018 and expires on April 30, 2020. Base rent under the lease agreement is $3,079 per month for each of the first
five months, $6,158 per month for each of the sixth through twelfth months and $6,286 per month for each of the thirteenth through
twenty-sixth months. The lease agreement also requires the Company to share in certain monthly operating expenses of the premises,
and required the Company to pay a security deposit of $12,316 in February 2018 upon entering into the lease agreement.
In
March 2018, the Company entered into a lease assignment agreement (the “Lease Assignment Agreement”) with Vividion
Therapeutics, Inc. (“Vividion”) for the Company’s 34,054 square foot location at 5820 Nancy Ridge Drive, San
Diego, California, 92121 (“NR Premises”), whereby the Company assigned its lease agreement with ARE-SD Region No.
18, LLC (the “Landlord”) to Vividion. Under the Lease Assignment Agreement, Vividion pays directly to Landlord the
base rent of $101,500 per month (based upon $2.98 per rentable square foot of the NR Premises) plus operating expenses and property
management fees attributable to the NR Premises currently estimated at $43,500 per month (including an estimate for utilities)
during the term of the Lease Assignment Agreement, which is the remaining term of the lease through October 2025.
While
the lease and all of the related obligations were assigned to Vividion, the Company could ultimately have an obligation on the
Lease Assignment Agreement if Vividion defaulted on their obligation to the Landlord after all remedies were exhausted by the
Landlord with regard to Vividion’s obligations. Such an event is not considered probable and no obligation has been recorded
as of October 31, 2018 and July 31, 2018, respectively.
In
conjunction with the Lease Assignment Agreement, the Company and Vividion also entered into a sublease (the “Sublease”),
with respect to the 12,442 square-foot location at 3565 General Atomics Court, Suite 100, San Diego, CA, 92121 leased by Vividion
from Landlord which serves as the Company’s California office (the “Sublease Premise”). Under the Sublease,
the Company shall pay to Vividion base rent of $49,768 per month subject to an annual 3% increase, (based upon $4.00 per rentable
square foot of the Sublease Premises) plus operating expenses and property management fees attributable to the Sublease Premises
currently estimated at $30,400 per month during the term of the Sublease, which extends through September 2020. The Company moved
to the new location in April 2018.
At
the time of the lease agreements noted above, the Company had a deferred rent liability recorded on the condensed consolidated
balance sheet of $1.1 million, which is being amortized on a straight-line basis over the term of the Sublease.
We
have also entered into lease arrangements for vivarium space in San Diego, California to support our research and development
department.
Total
rent expense for the three months ended October 31, 2018 and 2017 was approximately $171,000 and $422,000, respectively.
We
believe our current facilities are adequate to meet our current operating needs and will remain adequate for the foreseeable future.
Should we need additional space, we currently do not foresee significant difficulties in obtaining additional facilities.
Note
9—401(k) Plan
Effective
May 15, 2012, the Company adopted a defined contribution savings plan pursuant to Section 401(k) of the Code. The plan is for
the benefit of all qualifying employees and permits voluntary contributions by employees of up to 100% of eligible compensation,
subject to the maximum limits imposed by Internal Revenue Service. The terms of the plan allow for discretionary employer contributions
and the Company currently matches 100% of its employees’ contributions, up to 3% of their annual compensation. The Company’s
contributions are recorded as expense in the accompanying condensed consolidated statements of operations and totaled approximately
$27,000 and $25,000 for the three months ended October 31, 2018 and 2017, respectively.
Note
10—Related Party Transactions
The
Company subleased a portion of its office space to another company beginning April 1, 2017 and ending March 31, 2018. The Company’s
former President and two other members of the Company’s Board of Directors held positions as directors and/or officers of
the sublessee. The Company received payments totaling $0 and $10,500 related to the sublease during the three months ended October
31, 2018 and 2017, respectively.
Note
11—Subsequent Events
Controlled
Equity Offering Sales Agreement
In
November 2018, the Company entered into a Controlled Equity Offering Sales Agreement, pursuant to which the Company may, from
time to time, issue and sell shares of common stock having an aggregate offering price of up to $30.0 million. The Company is
not obligated to make any sales of shares under the Sales Agreement. To date, the Company has not made any sales of shares under
the Sales Agreement.
Alpha
Holdings
On
December 6, 2018, the Company received total proceeds, before expenses, of $7.0 million in cash from the offering and issued Alpha
Holdings 4,666,667 shares of common stock. There were no underwriting or placement agent fees associated with the offering.
Subsequent
to October 31, 2018, shares of common stock issued to executives and employees related to vested RSU’s totaled 60,437.
Subsequent
to October 31, 2018, shares of common stock issued to consultants for services totaled 82,000.
Subsequent
to October 31, 2018, the Company issued 250,000 stock options to a consultant as per the terms of an amendment to a consulting
agreement.
Subsequent
to October 31, 2018, shares of common stock issued related to option exercises totaled 23,411.
Subsequent
to October 31, 2018, the Company issued 100,000 stock options to a Director.
In
November 2018, the Company entered into an amended lease agreement for the addition of approximately 2,800 rentable square feet
located at 24 N. Main Street, Pennington, New Jersey, which serves as the Company’s New Jersey corporate headquarters. The
term of the amended lease commences on January 15, 2019 and expires on December 31, 2020. Base rent under the amended lease agreement
is $11,686 per month for each of the first two months, $11,929 per month for each of the third through fifteenth months and $12,173
per month for each of the sixteenth through twenty-three months.