The accompanying notes are an integral part
of these condensed interim unaudited financial statements.
The accompanying notes are an integral part
of these condensed interim unaudited financial statements.
The accompanying notes are an integral part
of these condensed interim unaudited financial statements.
The accompanying notes are an integral part
of these condensed interim unaudited financial statements.
The accompanying notes are an integral part
of these condensed interim unaudited financial statements.
NOTES TO UNAUDITED CONDENSED FINANCIAL
STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE
DATA)
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
We are a biopharmaceutical company engaged
in the research and development of innovative therapeutics to treat cancers and rare diseases. Our mission is to discover, develop
and commercialize novel small molecule drugs in areas of high unmet need that will dramatically extend and improve the lives of
our patients. These product candidates target biological pathways implicated in a wide range of cancers and certain non-oncology
indications. Our discovery and development efforts are guided, when possible, by an understanding of the role of biomarkers, which
are indicators of a particular biological condition or process and may predict the clinical benefit of our compounds in defined
patient populations. Our clinical-stage pipeline consists of four product candidates, all of which are in targeted patient populations,
making ArQule a leader among companies our size in precision medicine.
ArQule has a long history of kinase drug
discovery and development, having discovered and introduced ten kinase inhibitors into clinical trials. Our drug discovery efforts
have been informed by our historical expertise in chemistry, our work in rational drug design and by our insight into kinase binding
and regulation. We have applied this knowledge to produce significant chemical matter for a number of kinase targets and to build
an extensive library of proprietary compounds with the potential to target multiple kinases in oncology and other therapeutic areas,
such as rare diseases. We may bring further preclinical programs forward and interrogate our library against new targets beyond
kinases either directly or with collaborators.
Our proprietary pipeline of orally bioavailable
product candidates is directed toward molecular targets and biological processes with demonstrated roles in the development of
both human cancers and rare, non-oncology diseases. All of these programs are being developed in targeted, biomarker-defined patient
populations. By seeking out subgroups of patients that are most likely to respond to our product candidates, we seek to identify
small, often orphan, indications that allow for focused and efficient development. At the same time, in addition to pursuing these
potentially fast-to-market strategies, we also pursue development in other indications that could allow us to expand the utility
of the product candidates if approved. Our clinical pipeline includes the following product candidates:
|
•
|
ARQ
531 is a potent and reversible dual inhibitor of both wild type and C481S-mutant Bruton’s tyrosine kinase (BTK) that is
in Phase 1/2 clinical development for B-cell malignancies refractory to other therapeutic options;
|
|
•
|
Miransertib (ARQ 092) is a potent and selective inhibitor of protein kinase B (AKT), a serine/threonine kinase that is in a registrational clinical trial for the treatment of Proteus syndrome and PIK3CA-Related Overgrowth Syndromes (PROS);
|
|
•
|
ARQ 751 is a
next-generation, highly potent and selective inhibitor of AKT that is in Phase 1 clinical development for solid tumors
harboring AKT, phosphoinositide 3-kinase (PI3K) or phosphatase and tensin homolog (PTEN) loss mutations or that are PTEN null;
and
|
|
•
|
Derazantinib (ARQ 087) is a multi-kinase inhibitor designed to preferentially inhibit the fibroblast growth factor receptor (FGFR) family of kinases that is in a registrational clinical trial in intrahepatic cholangiocarcinoma (iCCA) in patients with FGFR2 fusions. Derazantinib was exclusively licensed to Basilea Pharmaceutica Limited (Basilea) in April 2018 in the United States, European Union, Japan and the rest of the world, excluding the People’s Republic of China, Hong Kong, Macau, and Taiwan (collectively, Greater China) where derazantinib was exclusively licensed to Sinovant Sciences Ltd., a subsidiary of Roivant Sciences Ltd. (Sinovant) in February 2018.
|
Our uses of cash for operating activities
have primarily consisted of salaries and wages for our employees, facility and facility-related costs for our offices and laboratories,
fees paid in connection with preclinical and clinical studies, laboratory supplies and materials, and professional fees. The sources
of our cash flow from operating activities have historically consisted primarily of upfront and other payments received from our
collaborators in connection with license agreements. In the nine months ended September 30, 2019 and 2018, our net use of cash
was primarily driven by payments for operating expenses which resulted in net cash outflows of $24.2 million and $7.8 million,
respectively.
Our cash requirements may vary materially
from those now planned depending on the results of our drug discovery and development strategies, our ability to enter into additional
corporate collaborations and the terms of such collaborations, results of research and development, unanticipated required capital
expenditures, competitive and technological advances, acquisitions and other factors. We cannot guarantee that we will be able
to develop any of our product candidates into a commercial product.
In January 2017, we entered into a loan
and security agreement with Oxford Finance, LLC (the “Loan Agreement”) with an initial principal balance of $15
million (see Note 8). The terms of the Loan Agreement, which was amended in February 2018, required only payments of interest on
a monthly basis through August 2019. As of September 2019, we are required to make payments of principal and interest on a monthly
basis through the maturity date of the loan on August 1, 2022.
In November 2017, we entered into definitive
securities purchase agreements with certain institutional investors. In conjunction with this stock offering we raised net proceeds
of $9.5 million through the sale of 8,370 shares of series A convertible preferred stock (Series A Preferred) and warrants
to purchase 2,259 shares of Series A Preferred (Warrants). Each share of Series A Preferred converted into 1,000 shares of
common stock and each associated Warrant converted into 1,000 common stock warrants in May 2018. In September 2019, holders of
the common stock warrants exercised warrants covering 114,286 shares of common stock, resulting in net proceeds of $0.2 million.
The remaining common stock warrants have a post-conversion exercise price of $1.75 per share, are exercisable immediately
and expire in May 2022.
In February 2018, we entered into a License
Agreement with Sinovant pursuant to which we granted Sinovant an exclusive license to develop and commercialize derazantinib in
Greater China. The agreement provided for an upfront payment to ArQule of $3 million and a $2.5 million development milestone
that was paid in the first quarter of 2019. We are also eligible for up to an additional $12.0 million in regulatory milestone
payments and $70.0 million in commercial milestone payments. Upon commercialization, we are entitled to receive double digit royalties
in the low teens from Sinovant on net sales of derazantinib in Greater China. Sinovant will be responsible for all costs and expenses
of development, manufacture and commercialization in Greater China. In the three and nine months ended September 30, 2019, we recognized
revenue of $0.2 million and $1.6 million, respectively, for providing certain Manufacturing Services (as defined in Note 2) to
Sinovant. During the three and nine months ended September 30, 2018, we recognized revenue of $2.9 million and $5.9 million, respectively,
related primarily to the transfer of the license to Sinovant and the expected achievement of a development milestone that was ultimately
paid in the first quarter of 2019.
In April 2018, we entered into a License
Agreement with Basilea pursuant to which we granted Basilea an exclusive license to develop and commercialize derazantinib in the
United States, European Union, Japan and the rest of the world, excluding Greater China. Under the terms of the agreement, we received
an upfront payment of $10 million and are eligible for up to $63.0 million in development and regulatory milestone payments
and up to $262.5 million in commercial milestone payments. Upon commercialization, we are entitled to receive tiered royalties
on future net sales of derazantinib ranging from the high-single digits to the mid-teens on direct sales and mid-single digits
to low-double digits on indirect sales. Basilea will be responsible for all costs and expenses of development, manufacture and
commercialization in its territory. Under certain circumstances, we may have the opportunity to promote derazantinib in the United
States directly. In the three and nine months ended September 30, 2019, we recognized revenue of zero and $0.2 million, respectively,
for providing R&D Services (as defined in Note 2) to Basilea, recognized as revenue on a “cost-to-cost method”.
In the three and nine months ended September 30, 2018 we recognized revenue of $2.0 million and $15.7 million, respectively, related
to providing R&D Services to Basilea as well as the transfer of the Basilea License.
In July 2018, we sold 12,650,000 shares
of common stock at $5.50 per share for aggregate net proceeds of approximately $64.6 million after commissions and other offering
expenses.
In June 2019, we sold 10,637,500 shares
of common stock at $9.75 per share for aggregate net proceeds of approximately $97.3 million after commissions and other offering
expenses.
We anticipate that our cash, cash equivalents
and marketable securities on hand at September 30, 2019 will be sufficient to finance our operations for at least 12 months from
the issuance date of these financial statements. We expect that we will need to raise additional capital or incur indebtedness
to continue to fund our operations in the future. Our ability to raise additional funds will depend on financial, economic and
market conditions, and due to global capital and credit market conditions or for other reasons, we may be unable to raise capital
when needed, or on terms favorable to us. If necessary funds are not available, we may have to delay, reduce the scope of, or eliminate
some of our development programs, potentially delaying the time to market for any of our product candidates.
2. COLLABORATIONS AND ALLIANCES
Basilea Agreement
In April 2018, we entered into a License
Agreement with Basilea (the “Basilea Agreement”) pursuant to which we granted Basilea an exclusive license to develop
and commercialize derazantinib in the United States, European Union, Japan and the rest of the world, excluding Greater China
(the “Basilea Territory”). Under the terms of the Basilea Agreement, we received an upfront payment of $10.0 million.
In addition, we are eligible to receive up to $63.0 million in development and regulatory milestone payments across multiple indications
in the United States, European Union and Japan, none of which exceed $12.0 million on an individual basis, and up to $262.5 million
in commercial milestone payments based upon the attainment of specified calendar year net sales levels for all indications in
the Basilea Territory. Upon commercialization, we are entitled to receive tiered royalties on future net sales of derazantinib
ranging from the high-single digits to the mid-teens on direct sales in the Basilea Territory and mid-single digits to low-double
digits on indirect sales in the Basilea Territory. Basilea is responsible for all costs and expenses of development, manufacture
and commercialization in its territory. Under certain circumstances, we may have the opportunity to promote derazantinib in the
United States directly.
We evaluated the Basilea Agreement in accordance
with ASC 606, Revenue from Contracts with Customers . We concluded there were two performance obligations under the Basilea
Agreement at contract inception: (1) the grant of the exclusive license (the “Basilea License”) to derazantinib in
the Basilea Territory and (2) the provision of specified research and development services to Basilea (the “R&D Services”).
The total transaction price for the Basilea
Agreement at contract inception was determined to be $19.8 million, which was comprised of the $10.0 million upfront payment and
an estimated $9.8 million of variable consideration to be received for the R&D Services. As of June 30, 2019, the R&D Services
performance obligation was substantially complete. At contract inception, the variable consideration associated with development
and regulatory milestone payments was excluded from the transaction price, and as of September 30, 2019 continued to be excluded
from the transaction price, as achievement of the milestones is contingent upon future events and is not considered the most-likely
outcome. We update our estimates for development and regulatory milestone variable consideration at each reporting date and will
recognize revenue associated with a particular milestone when achieving the milestone is considered the most-likely outcome and
it is probable that a significant reversal of cumulative revenue under the contract will not occur. The commercial milestone and
royalty consideration were excluded from the transaction price because the Basilea License was determined to be the predominant
item in the contract. As a result, we will recognize revenue associated with the commercial milestones and royalties at the later
of when (i) the related sales occur or (ii) the performance obligation to which some or all of the applicable commercial milestone
and/or royalty has been allocated has been satisfied (or partially satisfied). As of September 30, 2019, we have not recognized
any commercial milestone or royalty revenue under the Basilea Agreement.
The total transaction price was allocated
to the two performance obligations based on the relative standalone selling price of each performance obligation at contract inception.
The standalone selling price for the Basilea License was determined on a discounted cash flow basis. At contract inception, $10.3
million of the total transaction price was allocated to the Basilea License and was recognized when control of the Basilea License
was transferred and the license period began. The standalone selling price for the R&D Services was determined based upon a
cost-plus margin approach. At contract inception, $9.5 million of the transaction price was allocated to the R&D Services.
Revenue related to the R&D Services is recognized on a “cost-to-cost” percentage of completion basis as the services
are performed.
For the three and nine months ended September
30, 2019, we recognized revenue of zero and $0.2 million, respectively, under the Basilea Agreement related to R&D Services
provided to Basilea. For the three and nine months ended September 30, 2018, we recognized revenue of $2.0 million and $15.7 million,
respectively, related to providing R&D Services to Basilea as well as the transfer of the Basilea License.
Sinovant Agreement
In February 2018, we entered into a License
Agreement with Sinovant (the “Sinovant Agreement”) pursuant to which we granted Sinovant an exclusive license to develop,
manufacture and commercialize derazantinib in Greater China. Under the terms of the Sinovant Agreement, we have received an upfront
payment of $3.0 million and recognized a $2.5 million regulatory milestone payment in the third quarter of 2018. We are also eligible
to receive up to an additional $12.0 million in regulatory milestone payments across multiple indications in Greater China and
$70.0 million in commercial milestone payments based upon the attainment of specified calendar year net sales levels for all indications
in Greater China. Upon commercialization, we are entitled to receive double digit royalties in the low teens from Sinovant on net
sales of derazantinib in Greater China. Sinovant will be responsible for all costs and expenses of development, manufacture and
commercialization in Greater China.
We evaluated the Sinovant Agreement in
accordance with ASC 606, Revenue from Contracts with Customers. We concluded that the only performance obligation under
the Sinovant Agreement at contract inception was the grant of the exclusive license (the “Sinovant License”) to derazantinib
in Greater China. The Sinovant Agreement also contemplated that we might provide certain manufacturing services (the “Manufacturing
Services”), which we concluded was not a separate performance obligation at contract inception.
The total transaction price for the Sinovant
Agreement at contract inception was determined to be $3.0 million, which was equal to the upfront payment under the Sinovant Agreement.
The $3.0 million was fully allocable to the Sinovant License and was recognized as revenue when control was transferred and the
license period began. Our right to receive regulatory milestone payments is considered variable consideration. At contract inception,
the variable consideration associated with regulatory milestone payments was excluded from the transaction price as achievement
of the milestones was contingent upon future events and achievement of the milestones is not considered the most-likely outcome.
We update our estimates for regulatory milestones at each reporting date and will recognize revenue associated with a particular
milestone when we determine that achieving the milestone is the most-likely outcome and it is probable that a significant reversal
of cumulative revenue under the contract will not occur. Based on the above analysis, we recognized $2.5 million in revenue associated
with a regulatory milestone in the third quarter of 2018. The commercial milestones and royalty consideration were excluded from
the transaction price because the Sinovant License is the only performance obligation and therefore considered the predominant
item under the contract. As a result, we recognize revenue associated with the commercial milestones and royalties at the later
of when (i) the related sales occur or (ii) the performance obligation to which some or all of the applicable commercial milestone
and/or royalty has been allocated has been satisfied (or partially satisfied). As of September 30, 2019, we have not recognized
any commercial milestone or royalty revenue under the Sinovant Agreement.
In December 2018, we entered into a Supply
Agreement with Sinovant where we agreed to provide the Manufacturing Services to Sinovant beyond the term contemplated for those
services under the Sinovant Agreement. The Manufacturing Services are the only performance obligation under the Supply agreement
and revenue related to the Supply Agreement is recognized on a “cost-to-cost” percentage of completion basis as the
services are performed.
For the three and nine months ended September
30, 2019, we recognized revenue of $0.2 million and $1.6 million, respectively, under the Sinovant Agreement related to
the Manufacturing Services that we provided. For the three and nine months ended September 30, 2018, we recognized revenue of $2.9
million and $5.9 million, respectively, related primarily to the transfer of the Sinovant License and the achievement of a regulatory
milestone discussed above.
Other Licensing Agreements
In October 2017, we granted a third party
a non-exclusive license to certain of our library compounds. The licensed compounds were delivered and were accepted by the third
party in 2018. Accordingly, revenue for the three and nine months ended September 30, 2019 was zero. For the three and nine months
ended September 30, 2018, we recorded revenue of $0.1 million and $1.3 million, based upon the achievement of the quality and acceptance
testing.
3. MARKETABLE SECURITIES AND FAIR VALUE MEASUREMENTS
We generally classify our marketable securities
as available-for-sale at the time of purchase and re-evaluate such designation as of each balance sheet date. Since we generally
intend to convert them into cash as necessary to meet our liquidity requirements our marketable securities are classified as cash
equivalents if the original maturity, from the date of purchase, is ninety days or less and as short-term investments if the original
maturity, from the date of purchase, is in excess of ninety days but less than or equal to one year. Our marketable securities
are classified as long-term investments if the maturity date is in excess of one year of the balance sheet date.
We report available-for-sale debt securities
at fair value as of each balance sheet date and include any unrealized gains and, to the extent deemed temporary, unrealized losses
in stockholders’ equity. Realized gains and losses are determined using the specific identification method and are included
in other income (expense) in the statements of operations and comprehensive loss.
We conduct quarterly reviews to determine
the fair value of our investment portfolio and to identify and evaluate each investment that has an unrealized loss, in accordance
with the meaning of other-than-temporary impairment and its application to certain investments. An unrealized loss exists when
the current fair value of an individual security is less than its amortized cost basis. In the event that the cost basis of a security
exceeds its fair value, we evaluate, among other factors, the duration of the period that, and extent to which, the fair value
is less than cost basis, the financial health of and business outlook for the issuer, including industry and sector performance,
and operational and financing cash flow factors, overall market conditions and trends, our intent to sell the investment and if
it is more likely than not that we would be required to sell the investment before its anticipated recovery. Unrealized losses
on available-for-sale securities that are determined to be temporary, and not related to credit loss, are recorded in accumulated
other comprehensive income (loss).
For available-for-sale debt securities
with unrealized losses, we perform an analysis to assess whether we intend to sell or whether we would more likely than not be
required to sell the security before the expected recovery of the amortized cost basis. Where we intend to sell an available-for-sale
debt security, or may be required to do so, the security’s decline in fair value is deemed to be other-than-temporary and
the full amount of the unrealized loss is reflected in the statements of operations and comprehensive loss as an impairment loss.
Regardless of our intent to sell a security,
we perform additional analysis on all securities with unrealized losses to evaluate losses associated with the creditworthiness
of the security. Credit losses are identified where we do not expect to receive cash flows sufficient to recover the amortized
cost basis of a security.
We invest our available cash primarily
in commercial paper, money market funds, and U.S. Treasury bill funds that have investment grade ratings.
The following is a
summary of the fair value of available-for-sale marketable securities we held at September 30, 2019 and December 31, 2018 (in thousands):
September 30, 2019
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
Security type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities-short term
|
|
$
|
82,929
|
|
|
$
|
89
|
|
|
$
|
(4
|
)
|
|
$
|
83,014
|
|
Corporate debt securities-long term
|
|
|
48,857
|
|
|
|
50
|
|
|
|
(7
|
)
|
|
|
48,900
|
|
Total available-for-sale marketable securities
|
|
$
|
131,786
|
|
|
$
|
139
|
|
|
$
|
(11
|
)
|
|
$
|
131,914
|
|
December 31, 2018
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
Security type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities-short term
|
|
$
|
80,417
|
|
|
$
|
2
|
|
|
$
|
(97
|
)
|
|
$
|
80,322
|
|
Total available-for-sale marketable securities
|
|
$
|
80,417
|
|
|
$
|
2
|
|
|
$
|
(97
|
)
|
|
$
|
80,322
|
|
None of our available-for-sale
marketable securities were in a continuous unrealized loss position for more than 12 months at September 30, 2019 or December
31, 2018.
The following tables present information
about our assets and liabilities that are measured at fair value on a recurring basis for the periods presented and indicates the
fair value hierarchy of the valuation techniques we utilized to determine such fair value. There were no transfers in or out of
Level 1 or Level 2 measurements for the periods presented (in thousands):
|
|
September 30,
2019
|
|
|
Quoted
Prices in
Active
Markets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Cash equivalents
|
|
$
|
40,662
|
|
|
$
|
40,662
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate debt securities-short term
|
|
|
83,014
|
|
|
|
—
|
|
|
|
83,014
|
|
|
|
—
|
|
Corporate debt securities-long term
|
|
|
48,900
|
|
|
|
—
|
|
|
|
48,900
|
|
|
|
—
|
|
Total
|
|
$
|
172,576
|
|
|
$
|
40,662
|
|
|
$
|
131,914
|
|
|
$
|
—
|
|
|
|
December 31,
2018
|
|
|
Quoted
Prices in
Active
Markets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Cash equivalents
|
|
$
|
14,444
|
|
|
$
|
14,444
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate debt securities-short term
|
|
|
80,322
|
|
|
|
—
|
|
|
|
80,322
|
|
|
|
—
|
|
Total
|
|
$
|
94,766
|
|
|
$
|
14,444
|
|
|
$
|
80,322
|
|
|
$
|
—
|
|
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses include
the following at September 30, 2019 and December 31, 2018 (in thousands):
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
Accrued outsourced preclinical and clinical fees
|
|
$
|
5,748
|
|
|
$
|
8,497
|
|
Accrued payroll
|
|
|
2,154
|
|
|
|
1,971
|
|
Accrued professional fees
|
|
|
905
|
|
|
|
666
|
|
Accounts payable
|
|
|
801
|
|
|
|
1,329
|
|
Other accrued expenses
|
|
|
325
|
|
|
|
485
|
|
|
|
$
|
9,933
|
|
|
$
|
12,948
|
|
5. NET LOSS PER SHARE
Net loss per share is computed using the
weighted average number of common shares outstanding. Basic and diluted net loss per share amounts are equivalent for the periods
presented as the inclusion of potential common shares in the number of shares used for the diluted computation would be anti-dilutive
to loss per share. Potential common shares, for the three and nine months ended September 30, 2019, include 12,376,291 shares that
would be issued upon the exercise of outstanding employee and Board of Director stock options, 93,168 shares that would be issued
upon the exercise of the warrants from our February 2018 amendment to our loan agreement, 3,123,674 shares that would be issued
upon the exercise of the warrants from our October 2017 common stock offering and 2,144,714 common shares that would be issued
upon the exercise of the warrants from our November 2017 preferred stock offering. Potential common shares, for the three
and nine months ended September 30, 2018, include 10,720,022 shares that would be issued upon the exercise of outstanding employee
and Board of Director stock options, 93,168 shares that would be issued upon the exercise of the warrants from our February 2018
amendment to our loan agreement, 3,123,674 shares that would be issued upon the exercise of the warrants from our October 2017
common stock offering and 2,259,000 common shares that would be issued upon the exercise of the warrants from our November 2017
preferred stock offering. The preferred shares and warrants from our November 2017 preferred stock offering were converted to common
stock and common stock warrants in May 2018.
6. STOCK-BASED COMPENSATION AND STOCK PLANS
Our stock-based compensation cost is measured
at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employees’ requisite
service period (generally the vesting period of the equity grant). We estimate the fair value of stock options using the Black-Scholes
valuation model. Key input assumptions used to estimate the fair value of stock options include the exercise price of the award,
expected option term, expected volatility of our stock over the option’s expected term, risk-free interest rate over the
option’s expected term, and the expected annual dividend yield. We believe that the valuation technique and approach utilized
to develop the underlying assumptions are appropriate in calculating the fair values of our stock options granted in the three
and nine months ended September 30, 2019 and 2018.
The following table presents stock-based
compensation expense included in our condensed statements of operations and comprehensive loss (in thousands):
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Research and development
|
|
$
|
223
|
|
|
$
|
84
|
|
|
$
|
741
|
|
|
$
|
269
|
|
General and administrative
|
|
|
785
|
|
|
|
279
|
|
|
|
3,308
|
|
|
|
831
|
|
Total stock-based compensation expense
|
|
$
|
1,008
|
|
|
$
|
363
|
|
|
$
|
4,049
|
|
|
$
|
1,100
|
|
In the nine months ended September 30,
2019, we recorded stock-based compensation expense of $1.0 million related to the modification of awards to our former Chief Financial
Officer in connection with his retirement in March 2019. In the three and nine months ended September 30, 2019 and 2018, no stock-based
compensation expense was capitalized and there were no recognized tax benefits associated with the stock-based compensation expense.
Option activity under our stock plans for
the nine months ended September 30, 2019 was as follows:
Stock Options
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding as of December 31, 2018
|
|
|
10,748,157
|
|
|
$
|
2.90
|
|
Granted
|
|
|
2,666,510
|
|
|
|
4.07
|
|
Exercised
|
|
|
(880,868
|
)
|
|
|
2.70
|
|
Cancelled
|
|
|
(157,508
|
)
|
|
|
2.44
|
|
Outstanding as of September 30, 2019
|
|
|
12,376,291
|
|
|
$
|
3.17
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of September 30, 2019
|
|
|
7,207,088
|
|
|
$
|
3.26
|
|
The aggregate intrinsic value of options
outstanding at September 30, 2019 was $50.1 million, including $28.7 million related to exercisable options. The weighted average
fair value of options granted in the nine months ended September 30, 2019 and 2018 was $2.54 and $1.70 per share, respectively.
The intrinsic value of options exercised in the nine months ended September 30, 2019 was $3.9 million.
|
|
Shares
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term (in years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Vested and unvested expected to vest at September 30, 2019
|
|
|
12,218,754
|
|
|
$
|
3.17
|
|
|
|
6.1
|
|
|
$
|
49,485
|
|
Exercisable at September 30, 2019
|
|
|
7,207,088
|
|
|
$
|
3.26
|
|
|
|
4.4
|
|
|
$
|
28,730
|
|
The total compensation cost not yet recognized
as of September 30, 2019 related to non-vested option awards was $7.2 million, which will be recognized over a weighted-average
period of 2.6 years. During the nine months ended September 30, 2019, 28,350 shares expired and 129,158 shares were forfeited.
The weighted average remaining contractual life for options exercisable at September 30, 2019 was 4.37 years.
7. COMMON STOCK OFFERINGS
In June 2019, we sold 10,637,500 shares
of common stock at $9.75 per share for aggregate net proceeds of approximately $97.3 million after commissions and other offering
expenses.
In July 2018, we sold 12,650,000 shares
of common stock at $5.50 per share for aggregate net proceeds of approximately $64.6 million after commissions and other offering
expenses.
8. LOAN AGREEMENT
In January 2017, we entered into a
loan and security agreement (the “Loan Agreement”) with Oxford Finance LLC, as collateral agent and a lender (the “Lender”),
and any additional lenders that may become parties thereto.
Pursuant to the terms of the Loan Agreement,
the Lender issued us a loan with an initial principal amount of $15.0 million. The loan bears interest at the rate equal to
(a) the greater of (i) the 30 day U.S. LIBOR rate reported in the Wall Street Journal on the date occurring on the last
business day of the month that immediately precedes the month in which the interest will accrue or (ii) 0.65% (b) plus 6.85%.
The applicable interest rate on the loan at September 30, 2019 was 8.94%. The Loan Agreement required interest-only payments through
August 2019, followed by an amortization period of monthly principal and interest payments of 36 months. The original maturity
date of the loan was August 1, 2021 and in February 2018 we signed an amendment with the Lender which extended the maturity
date by one year to August 1, 2022.
The expected remaining repayment of the
$14.583 million loan principal at September 30, 2019 is as follows (in thousands):
2019
|
|
|
$
|
1,250
|
|
2020
|
|
|
|
5,000
|
|
2021
|
|
|
|
5,000
|
|
2022
|
|
|
|
3,333
|
|
|
|
|
$
|
14,583
|
|
Upon prepayment of the loan or on the maturity
date, we will pay to the Lender a final payment of 6% of the full principal amount of the loan. We may elect to prepay all amounts
owed prior to the maturity date, provided that a prepayment fee also is paid equal to 1% of the outstanding principal balance.
Pursuant to the terms of the Loan Agreement,
we are bound by certain affirmative covenants setting forth actions that are required during the term of the Loan Agreement, including,
without limitation, certain information delivery requirements, obligations to maintain certain insurance, and certain notice requirements.
Additionally, we are bound by certain negative covenants setting forth actions that are not permitted to be taken during the term
of the Loan Agreement without consent, including, without limitation, incurring certain additional indebtedness, entering into
certain mergers, acquisitions or other business combination transactions, or incurring any non-permitted lien or other encumbrance
on our assets. We were in compliance with the loan covenants at September 30, 2019.
Upon the occurrence of an event of default
under the Loan Agreement (subject to cure periods for certain events of default), all amounts owed by us thereunder will begin
to bear interest at a rate that is 5% higher than the rate that is otherwise applicable and may be declared immediately due and
payable by the Lender. Events of default under the Loan Agreement include, among other things, the following: the occurrence of
certain bankruptcy events; the failure to make payments under the Loan Agreement when due; the occurrence of a material adverse
change in our business, operations or financial condition; the rendering of certain types of fines or judgments against us; any
breach by us of any covenant (subject to cure for certain covenants only) made in the Loan Agreement; and the failure of any representation
or warranty made by us in connection with the Loan Agreement to be correct in all material respects when made.
We have granted the Lender, a security
interest in substantially all of our personal property, rights and assets, other than intellectual property, to secure the payment
of all amounts owed to the Lender under the Loan Agreement. We have also agreed not to encumber any of our intellectual property
without the Lender’s prior written consent.
In February 2018, the Loan Agreement
was amended to extend the maturity date and to require payments of interest on a monthly basis through August 2019 and payments
of interest and principal from September 2019 to August 2022. In connection with entering into the amendment we issued
to the Lender warrants to purchase an aggregate of 93,168 shares of our common stock. The warrants are exercisable immediately,
have a per-share exercise price of $1.61 and have a term of ten years. The amendment was determined to be a modification of
debt in accordance with ASC 470 Debt. We have recorded the relative fair value of the additional warrants as a discount to the
carrying value of the notes payable with a corresponding increase to additional paid in capital.
9. PREFERRED STOCK AND WARRANT LIABILITY
Our Restated Certificate of Incorporation,
as amended, authorizes the issuance of up to 1 million shares of $0.01 par value preferred stock.
In November 2017, we entered into
definitive securities purchase agreements with certain institutional investors. In conjunction with this stock offering we raised
net proceeds of $9.5 million through the sale of 8,370 shares of series A convertible preferred stock (Series A Preferred)
and warrants covering 2,259 shares of Series A Preferred (Warrants). Each share of Series A Preferred converted into 1,000
shares of common stock and each associated Warrant converted into 1,000 common stock warrants in May 2018.
The terms of the Series A Preferred
for which the warrants were exercisable required that the fair value allocated to the warrants at the date of issuance be recorded
as a liability on our balance sheet. The warrant liability was marked to market value through the statement of operations and comprehensive
loss as a non-cash gain or loss at each reporting period until the conversion of the Series A Preferred to common stock in
May 2018. Upon conversion, the warrant liability of $3.1 million was extinguished with an offsetting amount included as additional
paid-in capital in stockholders’ equity. Accordingly, at each of December 31, 2018 and September 30, 2019, the warrant liability
was zero. In the three and nine months ended September 30, 2018, we recognized a non-cash expense of zero and $1.5 million, respectively,
recorded in other expense on the statement of operations and comprehensive loss related to the change in the fair value of the
warrant liability.
10. RECENT ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting Pronouncements
In February 2016 the Financial Accounting
Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2016-02, Leases (Topic 842). This
standard established a right-of-use model that requires all lessees to recognize right-of-use assets and liabilities on their balance
sheet that arise from leases with terms longer than 12 months as well as provide disclosures with respect to certain qualitative
and quantitative information related to their leasing arrangements. This standard became effective for us on January 1, 2019 (“the
Effective Date”).
The FASB has subsequently issued the following
amendments to ASU 2016-02, which also became effective on January 1, 2019, and which we collectively refer to as the new leasing
standards:
|
•
|
ASU No. 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842, which permits an entity to elect an optional transition practical expedient to not evaluate under Topic 842 land easements that exist or expired prior to adoption of Topic 842 and that were not previously accounted for as leases under the prior standard, ASC 840, Leases.
|
|
•
|
ASU No. 2018-10, Codification Improvements to Topic 842, Leases, which amends certain narrow aspects of the guidance issued in ASU 2016-02.
|
|
•
|
ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which allows for a transition approach to initially apply ASU 2016-02 at the adoption date and recognize a cumulative-effect adjustment to the opening balance of accumulated deficit in the period of adoption as well as an additional practical expedient for lessors to not separate non-lease components from the associated lease component.
|
|
•
|
ASU No. 2018-20, Narrow-Scope Improvements for Lessors, which contains certain narrow scope improvements to the guidance issued in ASU 2016-02.
|
We adopted
the new lease accounting standard on January 1, 2019, using a modified retrospective transition approach of applying the new standard
to all leases existing as of, or entered into after, the Effective Date and with remaining terms of 12 months or more. Our
assessment included the lease of our headquarters in Burlington, MA which commenced in May 2015 and, prior to our October 2019
amendment discussed below, was scheduled to expire in July 2020 and our laboratory space in Woburn, MA which commenced in March
2019 and expires in April 2024.
The adoption
of the new standard on January 1, 2019 resulted in the recording of a right-of-use asset and lease liability of $0.7 million related
to the lease of our headquarters in Burlington, MA that existed on the Effective Date. The lease liability is based on the
present value of the remaining minimum lease payments, discounted using our secured incremental borrowing rate at the Effective
Date. As permitted under ASC 842, we elected several practical expedients and therefore did not reassess at the Effective Date
(1) whether any existing contract is or contains a lease, (2) the classification of existing leases, and (3) whether previously
capitalized costs continue to qualify as initial indirect costs. We also elected the practical expedient to not separate lease
and non-lease components. The application of the practical expedients did not have a significant impact on the measurement of the
operating lease liability. In addition, we implemented internal controls to enable the preparation of financial information on
adoption. The adoption did not have a material impact on our condensed financial statements related to the existing lease of our
headquarters in Burlington, MA for the three and nine months ended September 30, 2019. As a result, there was no cumulative-effect
adjustment.
For contracts entered into on or after
the Effective Date, at the inception of a contract we assess whether the contract is, or contains, a lease. Our assessment is based
on: (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially
all the economic benefit from the use of the asset throughout the period, and (3) whether we have the right to direct the use of
the asset. At inception of a lease, we allocate the consideration in the contract to each lease component based on its relative
stand-alone price to determine the lease payments.
Leases are classified as either finance
leases or operating leases. A lease is classified as a finance lease if any one of the following criteria are met: (1) the lease
transfers ownership of the asset by the end of the lease term, (2) the lease contains an option to purchase the asset that is reasonably
certain to be exercised, (3) the lease term is for a major part of the remaining useful life of the asset or (4) the present value
of the lease payments equals or exceeds substantially all of the fair value of the asset. A lease is classified as an operating
lease if it does not meet any one of these criteria. Our leases are comprised of operating leases related to our headquarters in
Burlington, MA and laboratory space in Woburn, MA.
For all leases at the lease commencement
date, a right-of-use asset and a lease liability are recognized. The right-of-use asset represents the right to use the leased
asset for the lease term. The lease liability represents the present value of the lease payments under the lease.
The right-of-use asset is initially measured
at cost, which primarily comprises the initial amount of the lease liability, plus any initial direct costs incurred, consisting
mainly of brokerage commissions, less any lease incentives received. All right-of-use assets are reviewed for impairment. The lease
liability is initially measured at the present value of the lease payments, discounted using the interest rate implicit in the
lease or, if that rate cannot be readily determined, the secured incremental borrowing rate. For our operating leases, we use our
secured incremental borrowing rate if the implicit lease rate cannot be determined.
Lease payments included in the measurement
of the lease liability comprise the following: the fixed noncancelable lease payments, payments for optional renewal periods where
it is reasonably certain the renewal period will be exercised, and payments for early termination options unless it is reasonably
certain the lease will not be terminated early.
Lease expense for operating leases consists
of the lease payments plus any initial direct costs and is recognized on a straight-line basis over the lease term. Certain leases
contain rent escalation clauses and variable lease payments that require additional rental payments in later years of the term,
including payments based on an index or inflation rate. Payments based on the change in an index or inflation rate, or payments
based on a change in our portion of the operating expenses, including real estate taxes and insurance, are not included in the
initial lease liability and are recorded as a period expense when incurred. Our operating leases may include an option to renew
the lease term for various renewal periods and/or to terminate the leases early. As an option to exercise the renewal or early
termination of our operating leases were either non-existent or not reasonably certain as of the ASC 842 Effective Date for our
headquarters in Burlington, MA and the lease commencement date of our laboratory space in Woburn, MA, we did not include such options
in our initial lease liability. Subsequent to the Effective Date and during the quarter ending September 30, 2019, the option to
renew the lease term of our headquarters in Burlington, MA became reasonably certain. This resulted in
a $1.98 million increase of our right-of-use asset and lease liability of as of September 30, 2019.
As of September 30, 2019, we recognized
right-of-use assets related to our headquarters in Burlington, MA and laboratory space in Woburn, MA of $2.7 million and the related
net lease liabilities of $2.7 million, which represents the net present value of the remaining lease payments of approximately
$3.7 million, discounted using the Company’s incremental borrowing rate of 8.87%. We have included the right-of-use assets
and lease liabilities in the condensed balance sheet as of September 30, 2019.
The following table summarizes future minimum
lease payments for our operating leases as of September 30, 2019 (in thousands):
Year Ending December 31,
|
|
|
|
2019 (three months ending December 31, 2019)
|
|
$
|
152
|
|
2020
|
|
|
619
|
|
2021
|
|
|
642
|
|
2022
|
|
|
657
|
|
2023
|
|
|
672
|
|
Thereafter
|
|
|
963
|
|
Total minimum lease payments
|
|
$
|
3,705
|
|
In October 2019, we entered into an amendment
to the lease of our headquarters in Burlington, MA that increased the amount of space subject to the lease and extended the term
of the lease until July 2025.
As previously disclosed in our 2018 Annual
Report on Form 10-K and under the previous lease accounting standard, ASC 840, Leases , the total commitment for our non-cancelable
operating lease was $0.8 million as of December 31, 2018 (in thousands):
Year Ending December 31,
|
|
|
|
2019
|
|
$
|
523
|
|
2020
|
|
|
296
|
|
Thereafter
|
|
|
—
|
|
Total minimum lease payments
|
|
$
|
819
|
|
Recently Issued Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement,
(“ASU 2018-13”). The new standard removes certain disclosures, modifies certain disclosures and adds additional disclosures
related to fair value measurement. The new standard will be effective beginning January 1, 2020. We are currently evaluating the
impact that the adoption of ASU 2018-13 will have on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15,
Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred
in a Cloud Computing Arrangement That Is a Service Contract, (“ASU 2018-15”). The amendments in this update align the
requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements
for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include
an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is
not affected by the amendments in this update. The new standard will be effective beginning January 1, 2020. The amendments in
this update should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption.
We are currently evaluating the impact that the adoption of ASU 2018-15 will have on our consolidated financial statements.
In
June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments”. This ASU will require that credit losses be reported using an expected
losses model rather than the incurred losses model that is currently used, and establishes additional disclosures related to
credit risks. For available-for-sale debt securities with unrealized losses, this standard will require allowances to be
recorded instead of reducing the amortized cost of the investment. ASU 2016-13 will limit the amount of credit losses to be
recognized for available-for-sale debt securities to the amount by which the carrying value exceeds the fair value and
requires the reversal of previously recognized credit losses if fair value increases. ASU 2016-13 will be
effective for fiscal years beginning after December 15, 2019 with early adoption permitted, and
requires adoption using a modified retrospective approach, with certain exceptions. Based on the composition of the
Company’s investment portfolio, current market conditions and historical credit loss activity, we are currently
evaluating the impact of the adoption of this standard on the Company’s financial statements.
11. INCOME TAXES
As of December 31, 2018, we had federal
net operating losses (“NOL”), state NOL, and research and development credit carryforwards of approximately $422,045,
$240,916 and $28,378 respectively, which expire at various dates through 2037.
As of September 30, 2019, and December
31, 2018 we had no unrecognized tax benefits. We do not expect that the total amount of unrecognized tax benefits will significantly
increase in the next twelve months. Our policy is to recognize interest and penalties related to uncertain tax positions in
income tax expense. As of September 30, 2019, and December 31, 2018, we had no accrued interest or penalties related to uncertain
tax positions. Our U.S. federal tax returns for the tax years 2015 through 2018 and our state tax returns for the tax years
2015 through 2018 remain open to examination. Prior tax years remain open to the extent of NOL and tax credit carryforwards.
Utilization of NOL and research and development
credit carryforwards may be subject to a substantial annual limitation in the event of an ownership change that has occurred previously
or could occur in the future pursuant to Section 382 and 383 of the Internal Revenue Code of 1986, as amended, as well as
similar state provisions. An ownership change may limit the amount of NOL and research and development credit carryforwards that
can be utilized annually to offset future taxable income, and may, in turn, result in the expiration of a portion of those carryforwards
before utilization. In general, an ownership change, as defined by Section 382, results from transactions that increase the
ownership of certain stockholders or public groups in the stock of a corporation by more than 50 percentage points over a
three-year period. We undertook a detailed study of our NOL and research and development credit carryforwards through January 31,
2019, to determine whether such amounts are likely to be limited by Sections 382 or 383. As a result of this analysis, we
currently do not believe any Sections 382 or 383 limitations will significantly impact our ability to offset income with available
NOL and research and development credit carryforwards. However, future ownership changes under Section 382 may limit our ability
to fully utilize these tax benefits.