Notes
to Unaudited Condensed Consolidated Financial Statements
Nine
Months Ended September 30, 2019
Business
Corbus
Pharmaceuticals Holdings, Inc. (the “Company”) is a clinical stage pharmaceutical company, focused on the development
and commercialization of novel therapeutics to treat rare, chronic, and serious inflammatory and fibrotic diseases. Since its
inception, the Company has devoted substantially all of its efforts to business planning, research and development, recruiting
management and technical staff, acquiring operating assets and raising capital. The Company’s business is subject to significant
risks and uncertainties and the Company will be dependent on raising substantial additional capital before it becomes profitable
and it may never achieve profitability.
The
condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant
intercompany transactions and accounts have been eliminated in consolidation. In the opinion of management of the Company, the
accompanying unaudited condensed consolidated interim financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly, in all material respects, the consolidated financial position of the Company
as of September 30, 2019, the results of its operations and changes in stockholders’ equity for the three months and nine
months ended September 30, 2019 and 2018 and its cash flows for the nine months ended September 30, 2019 and 2018. The December
31, 2018 condensed consolidated balance sheet was derived from audited financial statements. The Company prepared the condensed
consolidated financial statements following the requirements of the SEC for interim reporting. Accordingly, certain information
and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction
with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2018, filed on March 12, 2019. The results of operations for such interim periods are not necessarily indicative
of the operating results for the full fiscal year.
2.
|
LIQUIDITY
AND GOING CONCERN
|
The accompanying consolidated financial
statements have been prepared assuming the Company will continue as a going concern, which contemplates continuity of operations,
realization of assets and the satisfaction of liabilities and commitments in the normal course of business. Although the Company
had operating income for the second quarter of 2019, the Company has incurred recurring losses since inception and as of September
30, 2019, had an accumulated deficit of $166,243,197. The Company anticipates operating losses to continue for the foreseeable
future due to, among other things, costs related to research funding, development of its product candidates and its preclinical
and clinical programs, strategic alliances and the development of its administrative organization. The Company expects the cash
and cash equivalents of $54,849,365 at September 30, 2019 may not be sufficient to meet its operating and capital requirements
at least 12 months from the filing of this 10-Q.
Should
the Company be unable to raise sufficient additional capital, the Company may be required to undertake cost-cutting measures including
delaying or discontinuing certain clinical activities. The Company will need to raise significant additional capital to continue
to fund the clinical trials for lenabasum and CRB-4001 (see Note 5). The Company may seek to sell common or preferred equity or
convertible debt securities, enter into a credit facility or another form of third-party funding, or seek other debt financing.
The sale of equity and convertible debt securities may result in dilution to the Company’s stockholders and certain of those
securities may have rights senior to those of the Company’s common shares. If the Company raises additional funds through
the issuance of preferred stock, convertible debt securities or other debt financing, these securities or other debt could contain
covenants that would restrict the Company’s operations. Any other third-party funding arrangement could require the Company
to relinquish valuable rights.
The
source, timing and availability of any future financing will depend principally upon market conditions, and, more specifically,
on the progress of the Company’s clinical development programs. Funding may not be available when needed, at all, or on
terms acceptable to the Company. Lack of necessary funds may require the Company, among other things, to delay, scale back or
eliminate some or all of the Company’s planned clinical trials. These factors among others cause management to conclude
there is a substantial doubt about the Company’s ability to continue as a going concern. There have been no adjustments
made to these consolidated financial statements as a result of these uncertainties.
3.
|
SIGNIFICANT
ACCOUNTING POLICIES
|
A
summary of the significant accounting policies followed by the Company in the preparation of the financial statements is as follows:
Use
of Estimates
The
process of preparing financial statements in conformity with accounting principles generally accepted in the United States of
America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates and changes in estimates may occur.
The most significant estimates are related to stock-based compensation, the accrual of research, product development and clinical
obligations, the recognition of revenue under the Investment Agreement (See Note 8), and the valuation of the CFF Warrant (See
Note 11).
Cash
and Cash Equivalents
The
Company considers only those investments which are highly liquid, readily convertible to cash, and that mature within three months
from date of purchase to be cash equivalents. Marketable investments are those with original maturities in excess of three months.
At September 30, 2019 and December 31, 2018, cash equivalents were comprised of money market funds. The Company had no marketable
investments at September 30, 2019 and December 31, 2018.
Cash
and cash equivalents consists of the following:
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
Cash
|
|
$
|
5,184,555
|
|
|
$
|
808,943
|
|
Money market fund
|
|
|
49,664,810
|
|
|
|
40,939,525
|
|
Total cash and cash equivalents
|
|
$
|
54,849,365
|
|
|
$
|
41,748,468
|
|
As
of September 30, 2019, all of the Company’s cash and cash equivalents was held in the United States, except for approximately
$4,928,000 of cash which was held principally in our subsidiary in the United Kingdom. As of December 31, 2018, all of the Company’s
cash was held in the United States, except for approximately $702,000 of cash which was held in our subsidiary in the United Kingdom.
Financial
Instruments
The
carrying amounts reported in the consolidated balance sheet for cash and cash equivalents, receivables, accounts payable and accrued
expenses approximate their fair value based on the short-term nature of these instruments. The carrying values of the notes payable
approximate their fair value due to the fact that they are at market terms.
Property
and Equipment
The
estimated life for the Company’s property and equipment is as follows: three years for computer hardware and software and
three to five years for office furniture and equipment. The Company’s leasehold improvements and assets under capital lease
are amortized over the shorter of their useful lives or the respective leases. See Note 4 for details of property and equipment
and Note 5 for operating and capital lease commitments.
Research
and Development Expenses
Costs
incurred for research and development are expensed as incurred.
Nonrefundable
advance payments for goods or services that have the characteristics that will be used or rendered for future research and development
activities pursuant to executory contractual arrangements with third party research organizations are deferred and recognized
as an expense as the related goods are delivered or the related services are performed.
Accruals
for Research and Development Expenses and Clinical Trials
As
part of the process of preparing its financial statements, the Company is required to estimate its expenses resulting from its
obligations under contracts with vendors, clinical research organizations and consultants and under clinical site agreements in
connection with conducting clinical trials. The financial terms of these contracts are subject to negotiations, which vary from
contract to contract and may result in payment terms that do not match the periods over which materials or services are provided
under such contracts. The Company’s objective is to reflect the appropriate expenses in its financial statements by matching
those expenses with the period in which services are performed and efforts are expended. The Company accounts for these expenses
according to the timing of various aspects of the expenses. The Company determines accrual estimates by taking into account discussion
with applicable personnel and outside service providers as to the progress of clinical trials, or the services completed. During
the course of a clinical trial, the Company adjusts its clinical expense recognition if actual results differ from its estimates.
The Company makes estimates of its accrued expenses as of each balance sheet date based on the facts and circumstances known to
it at that time. The Company’s clinical trial accruals are dependent upon the timely and accurate reporting of contract
research organizations and other third-party vendors. Although the Company does not expect its estimates to be materially different
from amounts actually incurred, its understanding of the status and timing of services performed relative to the actual status
and timing of services performed may vary and may result in it reporting amounts that are too high or too low for any particular
period. For the three and nine months ended September 30, 2019 and 2018, there were no material adjustments to the Company’s
prior period estimates of accrued expenses for clinical trials.
Leases
The
Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”)
assets, other current liabilities and operating lease liabilities in the Company’s consolidated balance sheets.
ROU
assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation
to make lease payments arising from the lease. ROU assets and liabilities are recognized at commencement date based on the present
value of lease payments over the lease term. As the Company’s leases do not provide an implicit rate, the Company uses an
incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.
This is the rate the Company would have to pay if borrowing on a collateralized basis over a similar term to each lease. The ROU
asset also includes any lease payments made and excludes lease incentives. Lease expense for lease payments is recognized on a
straight-line basis over the lease term.
Concentrations
of Credit Risk
The
Company has no significant off-balance-sheet concentration of credit risk such as foreign exchange contracts, option contracts
or other hedging arrangements. The Company may from time to time have cash in banks in excess of Federal Deposit Insurance Corporation
insurance limits. However, the Company believes the risk of loss is minimal as these banks are large financial institutions.
Segment
Information
Operating
segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation
by the chief operating decision maker, or decision making group, in making decisions regarding resource allocation and assessing
performance. To date, the Company has viewed its operations and manages its business as principally one operating segment, which
is developing and commercializing therapeutics to treat rare life-threatening, inflammatory fibrotic diseases. As of September
30, 2019, all of the Company’s assets were located in the United States, except for approximately $4,928,000 of cash, $1,481,000
of prepaid expenses and other current assets, $36,000 of other assets, and $59,000 of property and equipment, net which were held
outside of the United States, principally in our subsidiary in the United Kingdom. As of December 31, 2018, all of the Company’s
assets were located in the United States, except for approximately $702,000 of cash, $1,183,000 of prepaid expenses and other
current assets, $28,000 of other assets, and $54,000 of property and equipment, net which were held in our subsidiary in the United
Kingdom.
Income
Taxes
For
federal and state income taxes, deferred tax assets and liabilities are recognized based upon temporary differences between the
financial statement and the tax basis of assets and liabilities. Deferred income taxes are based upon prescribed rates and enacted
laws applicable to periods in which differences are expected to reverse. A valuation allowance is recorded to reduce a net deferred
tax benefit when it is not more likely than not that the tax benefit from the deferred tax assets will be realized. Accordingly,
given the cumulative losses since inception, the Company has provided a valuation allowance equal to 100% of the deferred tax
assets in order to eliminate the deferred tax assets amounts.
Tax
positions taken or expected to be taken in the course of preparing the Company’s tax returns are required to be evaluated
to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority.
Tax positions not deemed to meet a more-likely-than-not threshold, as well as accrued interest and penalties, if any, would be
recorded as a tax expense in the current year. There were no uncertain tax positions that require accrual or disclosure to the
financial statements as of September 30, 2019 or December 31, 2018.
In
the three months ended September 30, 2019, the Company received from a foreign taxing authority, an aggregate $4.1 million of
cash payments for refundable research and development tax credits that were earned on certain research and development expenses
incurred outside of the United States. The Company recorded the $4.1 million in other income in the accompanying statements of
operations for the three and nine months ended September 30, 2019.
Impairment
of Long-lived Assets
The
Company continually monitors events and changes in circumstances that could indicate that carrying amounts of long-lived assets
may not be recoverable. An impairment loss is recognized when expected undiscounted cash flows of an asset are less than an asset’s
carrying value. Accordingly, when indicators of impairment are present, the Company evaluates the carrying value of such assets
in relation to the operating performance and future undiscounted cash flows of the underlying assets. An impairment loss equal
to the excess of the fair value of the asset over its carrying amount, is recorded when it is determined that the carrying value
of the asset may not be recoverable. No impairment charges were recorded during the three and nine months ended September 30,
2019 and 2018.
Stock-based
Payments
The
Company recognizes compensation costs resulting from the issuance of stock-based awards to employees, non-employees and directors
as an expense in the statement of operations over the service period based on a measurement of fair value for each stock-based
award. The fair value of each option grant is estimated as of the date of grant using the Black-Scholes option-pricing model.
The fair value is amortized as compensation cost on a straight-line basis over the requisite service period of the awards, which
is generally the vesting period. Prior to the Company’s adoption of ASU 2018-07, (see Recent Accounting Pronouncements
section to follow), stock options granted to non-employee consultants were revalued at the end of each reporting period until
vested using the Black-Scholes option-pricing model and the changes in their fair value were recorded as adjustments to expense
over the related vesting period.
Foreign
Currency
Transaction
gains and losses arising from currency exchange rate fluctuations on transactions denominated in a currency other than the U.S.
Dollar functional currency are recorded in the Company’s statement of operations. Such transaction gains and losses may
be realized or unrealized depending upon whether the transaction settled during the period or remains outstanding at the balance
sheet date. The functional currency for the Company’s foreign affiliates is the U.S. Dollar, therefore no foreign currency
translation adjustments have been recorded as other comprehensive income.
Net
Loss Per Common Share
Net
loss per share was computed as follows:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Basic and diluted net loss per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(20,790,801
|
)
|
|
$
|
(14,601,211
|
)
|
|
$
|
(44,872,957
|
)
|
|
$
|
(38,365,947
|
)
|
Weighted average shares of common stock outstanding
|
|
|
64,660,017
|
|
|
|
57,218,832
|
|
|
|
63,638,447
|
|
|
|
56,917,897
|
|
Net loss per share of common stock-basic and diluted
|
|
$
|
(0.32
|
)
|
|
$
|
(0.26
|
)
|
|
$
|
(0.71
|
)
|
|
$
|
(0.67
|
)
|
The
impact of the following potentially dilutive securities outstanding as of September 30, 2019 and 2018 have been excluded from
the computation of dilutive weighted average shares outstanding as the inclusion would be anti-dilutive.
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Warrants
|
|
|
1,000,000
|
|
|
|
2,283,500
|
|
Stock options
|
|
|
12,830,887
|
|
|
|
9,434,241
|
|
Total
|
|
|
13,830,887
|
|
|
|
11,717,741
|
|
Recent
Accounting Pronouncements
The
Company considers applicability and impact of all Accounting Standard Updates (“ASUs”). ASUs not discussed below were
assessed and determined to be either not applicable or are expected to have minimal impact on the Company’s balance sheets
or statements of operations.
Accounting
for Leases
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), as amended (“ASU 2016-02”). Under
ASU 2016-02, a lessee is required to recognize assets and liabilities for all leases with lease terms of more than 12 months.
ASU 2016-02 requires both financing and operating types of leases to be recognized on the balance sheet. ASU 2016-02 is effective
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. ASU 2016-02 required a modified
retrospective transition approach, which initially required application of the new guidance for all periods presented in the Company’s
financial statements (“comparative method”). In July 2018, the FASB released ASU 2018-11, offering a second option
which provides further relief in the transition to ASC 842. Companies are allowed to follow the cumulative-effect adjustment transition
approach (“effective date method”), which releases companies from presenting comparative periods and related disclosures
according to ASC 842. Instead, companies electing to utilize the effective date method will recognize a one-time adjustment to
retained earnings on the transition date without the additional burden of presenting the comparative periods under the new guidance.
The Company adopted ASU 2016-02 using the effective date method as of January 1, 2019 and recorded an operating lease liability
of approximately $3.8 million, and an operating lease right-of-use asset of approximately $2.4 million, with no operations adjustment
to the accumulated deficit (See Note 5).
Nonemployee
Share-Based Payment Accounting
In
June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based
Payment Accounting (“ASU 2018-07”). ASU 2018-07 expands the scope of Topic 718 to include share-based payment
transactions for acquiring goods and services from nonemployees. Under ASU 2018-07, consistent with the accounting requirement
for employee share-based payment awards, nonemployee share-based payment awards within the scope of Topic 718 are to be measured
at the grant-date fair value of the equity instruments that an entity is obligated to issue when the good has been delivered or
the service has been rendered and any other conditions necessary to earn the right to benefit from the instruments have been satisfied.
Equity-classified nonemployee share-based payment awards are to be measured at the grant date. The definition of the term grant
date is amended to generally state the date at which a grantor and a grantee reach a mutual understanding of the key terms and
conditions of a share-based payment award. ASU 2018-07 specifies that Topic 718 applies to all share-based payment transactions
in which a grantor acquires goods or 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 public business entities for fiscal years beginning after December 15, 2018, including
interim periods within that fiscal year. The Company’s adoption of ASU 2018-07 on January 1, 2019 had no impact on the Company’s
financial statements and related disclosures.
Collaborative
Arrangements
In
November 2018, the FASB issued ASU 2018-08, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic
808 and Topic 606 (“ASU 2018-08”).
ASU 2018-08 clarifies the interaction between the accounting guidance for collaborative arrangements and revenue from contracts
with customers. ASU 2018-08 is effective for public business entities for fiscal years beginning after December 15, 2019,
including interim periods within that fiscal year. Early adoption, including adoption in
any interim period, is permitted. The Company is currently evaluating the timing of the adoption of ASU 2018-08 and the
expected impact it could have on the Company’s financial statements and related disclosures.
4.
|
PROPERTY
AND EQUIPMENT
|
Property
and equipment consisted of the following:
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Computer hardware and software
|
|
$
|
634,181
|
|
|
$
|
431,637
|
|
Office furniture and equipment
|
|
|
1,338,490
|
|
|
|
914,742
|
|
Leasehold improvements
|
|
|
3,051,598
|
|
|
|
2,025,410
|
|
Construction in progress
|
|
|
999,481
|
|
|
|
—
|
|
Property and equipment, gross
|
|
|
6,023,750
|
|
|
|
3,371,789
|
|
Less: accumulated depreciation
|
|
|
(1,132,687
|
)
|
|
|
(666,583
|
)
|
Property and equipment, net
|
|
$
|
4,891,063
|
|
|
$
|
2,705,206
|
|
Depreciation
expense was $157,773 and $132,337 for the three months ended September 30, 2019 and 2018, respectively and $466,104 and $338,651
for the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019, the construction in progress costs
in the table above are related to the Company’s build out its office space related to the New Premises discussed in Note
5.
5.
|
COMMITMENTS
AND CONTINGENCIES
|
Operating
Lease Commitment
On
August 21, 2017, the Company entered into a lease agreement (“August 2017 Lease Agreement”) for commercial lease of
office space, pursuant to which the Company agreed to lease 32,733 square feet of office space (“Leased Premises”).
The initial term of the August 2017 Lease Agreement was for a period of seven years which began with the Company’s occupancy
of the Leased Premises in February 2018. The base rent for the Leased Premises ranged from approximately $470,000 for the first
year to approximately $908,000 for the seventh year. Per the terms of the August 2017 Lease Agreement, the landlord agreed to
reimburse the Company for $1,080,189 of leasehold improvements. The reimbursements had been deferred and were to be recognized
as a reduction of rent expense over the term of the lease. Additionally, the August 2017 Lease Agreement required a standby irrevocable
letter of credit of $400,000, which was to be reduced, if the Company is not in default under the August 2017 Lease Agreement,
to $300,000 and $200,000 on the third and fourth anniversary of the commencement date, respectively, The Company entered into
an unsecured letter of credit for $400,000 in connection with the August 2017 Lease Agreement for which it incurred interest expense
of $8,987 and $612 for the three months ended September 30, 2019 and 2018, and $15,538 and $4,161 for the nine months ended September
30, 2019 and 2018.
The
Company adopted ASU 2016-02 using the effective date method as of January 1, 2019 and recorded a lease liability of approximately
$3.8 million, and a right-of-use asset of approximately $2.4 million, with no operations adjustment to the accumulated deficit
related to the Leased Premises. Operating leases are included in operating lease right-of-use assets, operating lease liabilities,
current and operating lease liabilities, noncurrent in the Company’s consolidated balance sheets.
ROU
assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation
to make lease payments arising from the lease. ROU assets and liabilities are recognized at commencement date based on the present
value of lease payments over the lease term. As the Company’s leases do not provide an implicit rate, the Company uses an
incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments,
which was 9%. This is the rate the Company would have to pay if borrowing on a collateralized basis over a similar term to each
lease. The ROU asset also includes any lease payments made and excludes lease incentives. Lease expense for lease payments is
recognized on a straight-line basis over the lease term.
On
February 26, 2019, the Company amended its lease (“February 2019 Lease Agreement”) pursuant to which an additional
30,023 square feet of office space (“New Premises”) will be leased by the Company in the same building for an aggregate
total of 62,756 square feet of leased office space (“Total Premises”). Per ASC 842, the February 2019 Lease Agreement
constitutes a modification as it extends the original lease term and increases the scope of the lease (additional space provided
under the amendment), which requires evaluation of the remeasurement of the lease liability and corresponding ROU asset. Per ASC
842, an extension of the lease term does not constitute a separate contract. Accordingly, the Company reassessed the classification
of the Leased Premises and remeasured the lease liability on the basis of the extended lease term using the 20 additional monthly
rent payments and the incremental borrowing rate at the effective date of the modification of 9%. The remeasurement for the modification
resulted in an increase to the lease liability and the ROU asset of approximately $855,000. The Company determined that the New
Premises will be treated as a new standalone lease under ASC 842 and recorded a lease liability and a right-of-use asset of approximately
$2.7 million for the modification.
On
October 25, 2019, the Company amended its lease (“October 2019 Lease Amendment”) pursuant to which an additional 500
square feet of office space will be leased by the Company in the same building for an aggregate total of 63,256 square feet of
leased office space (“Amended Total Premises”). Per ASC 842, the October 2019 Lease Amendment constitutes a modification
as it extends the original lease term and increases the scope of the lease (additional space provided under the amendment), which
requires evaluation of the remeasurement of the lease liability and corresponding ROU asset. Per ASC 842, an extension of the
lease term does not constitute a separate contract. Accordingly, the Company reassessed the classification of the Amended Leased
Premises and remeasured the lease liability on the basis of the extended lease term using the additional monthly rent payments
and the incremental borrowing rate at the effective date of the modification of 8%. The remeasurement for the modification resulted
in an increase to the lease liability and the ROU asset of approximately $466,000 to be recorded in the fourth quarter of 2019.
Per
the terms of the February 2019 Lease Agreement, the landlord agreed to reimburse the Company for $990,759 of leasehold improvements.
The reimbursements have been deferred and will be recognized as a reduction of rent expense over the term of the lease. Additionally,
the February 2019 Lease Agreement required a standby irrevocable letter of credit of $369,900, which may be reduced, if the Company
is not in default under the February 2019 Lease Agreement, to $277,425 and $184,950 on the third and fourth anniversary of the
commencement date, respectively.
The
following table summarizes the Company’s maturities of operating lease liabilities as of September 30, 2019:
2019 (remainder of year, net of $990,759 reimbursement of leasehold improvements)
|
|
$
|
218,216
|
|
2020
|
|
|
1,287,522
|
|
2021
|
|
|
1,592,434
|
|
2022
|
|
|
1,639,501
|
|
2023
|
|
|
1,686,568
|
|
Thereafter
|
|
|
5,036,169
|
|
Total lease payments
|
|
$
|
11,460,410
|
|
|
|
|
|
|
Less: present value discount
|
|
|
(3,133,509
|
)
|
Total
|
|
$
|
8,326,901
|
|
Total
lease expense for the three months ended September 30, 2019 and 2018 was $307,183 and $146,229, respectively. Total lease expense
for the nine months ended September 30, 2019 and 2018 was $814,527 and $440,972, respectively.
Capital
Lease Commitment
The
lease payments under the capital lease agreement for the copier machine commenced when the machine was placed in service in January
2016. The lease was for a three-year term that concluded in January 2019 and included a bargain purchase option at the end of
the term.
Jenrin
License Agreement
The
Company, entered into a License Agreement (the “Jenrin Agreement”) with Jenrin Discovery, LLC, a privately-held Delaware
limited liability company (“Jenrin”), effective September 20, 2018. Pursuant to the Jenrin Agreement, Jenrin granted
the Company exclusive worldwide rights to develop and commercialize the Licensed Products (as defined in the Jenrin Agreement)
which includes the Jenrin library of over 600 compounds and multiple issued and pending patent filings. The compounds are designed
to treat inflammatory and fibrotic diseases by targeting the endocannabinoid system. The lead product candidate is CRB-4001, a
peripherally-restricted CB-1 inverse agonist targeting fibrotic liver, lung, heart and kidney diseases. The Company plans to commence
a Phase 1 clinical trial of CRB-4001 in 2020.
In
consideration of the license and other rights granted by Jenrin, the Company paid Jenrin a $250,000 upfront cash payment and is
obligated to pay potential milestone payments to Jenrin totaling up to $18.4 million for each compound it elects to develop based
upon the achievement of specified development and regulatory milestones. In addition, Corbus is obligated to pay Jenrin royalties
in the mid, single digits based on net sales of any Licensed Products, subject to specified reductions. As of September 30, 2019,
there have been no milestone or royalty payments made to Jenrin.
In
January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU
2017-01”) which clarifies the definition of a business and determines when an integrated set of assets and activities is
not a business. ASU 2017-01 requires that if substantially all of the fair value of gross assets acquired or disposed of is concentrated
in a single asset or group of similar identifiable assets, the assets would not represent a business. The Company determined that
substantially all of the fair value of the Jenrin Agreement was attributable to a single in-process research and development asset,
CRB-4001, which did not constitute a business. The Company concluded that it did not have any alternative future use for the acquired
in-process research and development asset. Thus, the Company recorded the $250,000 upfront payment to research and development
expenses in the third quarter of 2018. The Company will account for the $18.4 million of development and regulatory milestone
payments in the period that the relevant milestones are achieved as either research and development expense or as an intangible
asset as applicable.
In
November 2017, the Company entered into a loan agreement with a financing company for $415,265 to finance one of the Company’s
insurance policies. The terms of the loan stipulate equal monthly payments of principal and interest payments of $41,975 over
a ten-month period. Interest accrued on this loan at an annual rate of 2.35%. This loan was fully repaid in August 2018.
In
November 2018, the Company entered into a loan agreement with a financing company for $491,629 to finance one of the Company’s
insurance policies. The terms of the loan stipulate equal monthly payments of principal and interest payments of $49,857 over
a ten-month period. Interest accrued on this loan at an annual rate of 3.07%. This loan was fully repaid in August 2019. Prepaid
expenses as of September 30, 2019 and December 31, 2018, included $35,000 and $441,875, respectively, related to this insurance
policy.
In
November 2019, the Company entered into a loan agreement with a financing company for $963,514 to finance one of the Company’s
insurance policies. The terms of the loan stipulate equal monthly payments of principal and interest payments of $109,413 over
a nine-month period. Interest accrues on this loan at an annual rate of 5.25%.
Interest
expense for notes payable for the three months ended September 30, 2019 and 2018 totaled $381 and $213, respectively. Interest
expense for notes payable for the nine months ended September 30, 2019 and 2018 totaled $3,747 and $2,777, respectively.
Accrued
expenses consisted of the following:
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Accrued clinical operations and trials costs
|
|
$
|
11,810,266
|
|
|
$
|
4,914,881
|
|
Accrued product development costs
|
|
|
6,740,406
|
|
|
|
2,222,093
|
|
Accrued compensation
|
|
|
3,891,456
|
|
|
|
2,253,621
|
|
Accrued other
|
|
|
1,527,175
|
|
|
|
460,596
|
|
Total
|
|
$
|
23,969,303
|
|
|
$
|
9,851,191
|
|
8.
|
DEVELOPMENT
AWARDS AND DEFERRED REVENUE
|
Collaboration
with Kaken
On
January 3, 2019, Corbus Pharmaceuticals Holdings, Inc. the Company entered into a Collaboration and License Agreement (the “Agreement”)
with Kaken Pharmaceutical Co., Ltd., a company organized under the laws of Japan (“Kaken”). Pursuant to the Agreement,
Corbus granted Kaken an exclusive license to commercialize pharmaceutical preparations containing lenabasum (the “Licensed
Products”) for the prevention or treatment of dermatomyositis and systemic sclerosis (together, the “Initial Indications”)
in Japan (the “Territory”).
Pursuant
to the terms of the Agreement, Corbus will bear the cost of, and be responsible for, among other things, conducting the clinical
studies and other developmental activities for the Licensed Products in the Initial Indications in the Territory, and Kaken will
bear the cost of, and be responsible for, among other things, preparing and filing applications for regulatory approval in the
Territory and for commercializing Licensed Products in the Territory, and will use commercially reasonable efforts to commercialize
Licensed Products and obtain pricing approval for Licensed Products in the Territory.
In
consideration of the license and other rights granted by Corbus, Kaken paid to Corbus in March 2019 a $27,000,000 upfront cash
payment and is obligated to pay potential milestone payments to Corbus totaling up to approximately $173,000,000 for the achievement
of certain development, sales and regulatory milestones, with part of the milestone payments being calculated in Japanese Yen,
and therefore subject to change based on the conversion rate to U.S. Dollars in effect at the time of payment. In addition, during
the Royalty Term (as defined below), Kaken is obligated to pay Corbus royalties on sales of Licensed Products in the Territory,
under certain conditions, in the double digits, which royalty shall be reduced in certain circumstances. In particular, for so
long as Corbus supplies Licensed Products to Kaken pursuant to a supply agreement to be entered into by the parties, royalty payments
shall be payable for each unit of Licensed Product that Corbus supplies as a percentage of the Japanese National Health Insurance
price of the Licensed Product. During any time in which a supply agreement is not in effect, royalty payments shall be changed
to a rate to be agreed upon by the parties in good faith.
The
Agreement will remain in effect on a Licensed Product-by-Licensed product basis and will expire upon the expiration of the Royalty
Term for the final Licensed Product. The “Royalty Term” means the period beginning on the date of the first commercial
sale of the Licensed Product in Japan and ends on the latest of (i) the expiration of the last valid claim of the royalty patents
covering such Licensed Product in Japan, (ii) the expiration of regulatory exclusivity for such Licensed Product for such Initial
Indication in Japan, or (iii) ten (10) years after the first commercial sale of such Licensed Product for such Initial Indication
in Japan. The Agreement may be terminated by either party for material breach, upon a party’s insolvency or bankruptcy or
upon a challenge by one party of any patents of the other party, and Kaken may terminate in specified situations, including for
a safety concern or clinical failure, or at its convenience following the second anniversary of the first commercial sale of a
Licensed Product in either of the Initial Indications in the Territory, with 180 days’ notice.
Pursuant
to the Agreement, the parties agreed to develop a joint steering committee to provide strategic oversight of the parties’
activities under the Agreement, as well as a joint development committee to coordinate the development of Licensed Products in
Japan. Additionally, the parties will establish a joint commercialization committee to review and confirm commercialization activities
with respect to Licensed Products in Japan upon regulatory approval of such Licensed Product.
The
Agreement also contains customary representations, warranties and covenants by both parties, as well as customary provisions relating
to indemnification, confidentiality and other matters.
The
Company assessed this arrangement in accordance with ASC 606 and concluded that the contract counterparty, Kaken, is a customer.
The Company identified the following material promises under the arrangement: (1) the exclusive license to commercialize lenabasum;
(2) the product’s initial know-how transfer; (3) election to use the product trademarks; (4) the sharing of data gathered
through the execution of the Global Development Plan for the Initial Indications; and (5) Japanese Pharmaceuticals and Medical
Devices Agency (“PMDA”)-required supplemental studies. The Company identified two performance obligations; (1) the
combined performance obligation of the License, initial know-how transfer and license to the Company’s product trademarks;
and (2) the sharing of data gathered through the execution of the Global Development Plan (as defined in the Agreement) for the
Initial Indications. The Company determined that the license and initial know-how transfer were not distinct from another in the
context of the contract, as initial know-how transfer is highly interrelated to the license and Kaken would incur significant
costs to re-create the know-how of the Company. The Company determined that the election to use the product trademarks license
contributes to the exclusivity of the license and, therefore, is combined with the license. The PMDA-required supplemental study
is a contingent promise although not a performance obligation as the promise does not provide Kaken with a material right.
Under
the Agreement, in order to evaluate the appropriate transaction price, the Company determined that the upfront amount of $27,000,000
constituted the entirety of the consideration to be included in the transaction price at the outset of the arrangement, which
was allocated to the two performance obligations. The potential milestone payments that the Company is eligible to receive were
excluded from the transaction price, as all milestone payments are fully constrained based on the probability of achievement.
The Company will reevaluate the transaction price at the end of each reporting period and as uncertain events are resolved or
other changes in circumstances occur, and, if necessary, adjust its estimate of the transaction price.
The
Company estimated the stand-alone selling price of each performance obligation using a market approach and allocated the transaction
price on a relative basis. This allocation resulted in a de minimis value attributable the obligation to sharing of data gathered
through the execution of the Global Development Plan for the Initial Indications and effectively all of the value to the combined
license, initial know-how transfer and license to product trademarks. Therefore, the full upfront payment of $27,000,000 is allocated
to the combined performance obligation of the license, initial technology transfer and license to the product trademarks.
The
Company received the upfront payment of $27,000,000 in March 2019 and, as the performance obligations were not yet satisfied at
that time, the payment was recorded in deferred revenue as of March 31, 2019. The Company satisfied the combined performance obligation
by June 30, 2019, upon which the Company recognized the $27,000,000 upfront payment as revenue in the second quarter of 2019.
The
Company was required to make a $2,700,000 royalty payment to CFF within 60 days of receipt of the upfront cash payment from Kaken
pursuant to the 2018 CFF Award. This obligation was paid by the Company to CFF in May 2019.
2018
CFF Award
On
January 26, 2018, the Company entered into the Cystic Fibrosis Program Related Investment Agreement with the CFF (“Investment
Agreement”), a non-profit drug discovery and development corporation, pursuant to which the Company received an award for
up to $25 million in funding (the “2018 CFF Award”) to support a Phase 2b Clinical Trial (the “Phase 2b Clinical
Trial”) of lenabasum in patients with cystic fibrosis, of which the Company has received $17.5 million in the aggregate
through June 30, 2019 upon the Company’s achievement of milestones related to the progress of the Phase 2b Clinical Trial,
as set forth in the Investment Agreement. In April 2019, the Company became entitled to receive $5 million upon its achievement
of a milestone related to the progress of the Phase 2b Clinical Trial, as set forth in the Investment Agreement. The Company received
payment from the CFF for this milestone achievement in May 2019. The Company expects that the remainder of the 2018 CFF Award
will be paid incrementally upon the Company’s achievement of the remaining milestones related to the progress of the Phase
2b Clinical Trial, as set forth in the Investment Agreement.
Pursuant
to the terms of the Investment Agreement, the Company is obligated to make certain royalty payments to CFF, including a royalty
payment of one and one-half times the amount of the 2018 CFF Award, payable in cash within sixty days upon the first receipt of
approval of lenabasum in the United States and a second royalty payment of one and one-half times the amount of the 2018 CFF Award
upon approval in another major market, as set forth in the Investment Agreement (the “Approval Royalty”). At the Company’s
election, the Company may satisfy the first of the two Approval Royalties in registered shares of the Company’s common stock.
Additionally,
the Company is obligated to make (i) royalty payments to CFF of two and one-half percent of net sales from lenabasum due within
sixty days after any quarter in which such net sales occur in the Field, as defined in the Investment Agreement, (ii) royalty
payments to CFF of one percent of net sales of Non-Field Products, as defined in the Investment Agreement due within sixty days
after any quarter in which such net sales occur, and (iii) royalty payments to CFF of ten percent of any amount the Company and
its stockholders receive in connection with the license, sale, or other transfer to a third party of lenabasum, if indicated for
the treatment or prevention of CF, or a change of control transaction, except that such payment shall not exceed five times the
amount of the 2018 CFF Award, with such payments to be credited against any other net sales royalty payments due. Accordingly,
the Company will owe to CFF a royalty payment equal to 10% of any amounts the Company receives as payment under the collaboration
agreement with Kaken, provided that the total royalties that the Company will be required to pay under the Investment Agreement
resulting from income from licenses or sales subject to the Investment Agreement are capped at five times the total amount of
the 2018 CFF Award, and the Company may credit such royalties against any royalties on net sales otherwise owed to CFF under the
Investment Agreement. Accordingly, the Company was required to pay CFF $2,700,000 in May 2019 as a result of its receipt of the
$27,000,000 upfront cash payment from Kaken.
Either
CFF or the Company may terminate the Investment Agreement for cause, which includes the Company’s material failure to achieve
certain commercialization and development milestones. The Company’s payment obligations survive the termination of the Investment
Agreement.
Pursuant
to the terms of the Investment Agreement, the Company issued a warrant to CFF to purchase an aggregate of 1,000,000 shares of
the Company’s common stock (the “CFF Warrant”). The CFF Warrant is exercisable at a price equal to $13.20 per
share and is immediately exercisable for 500,000 shares of the Company’s common stock. Upon completion of the final milestone
set forth in the Investment Agreement and receipt of the final payment from CFF to the Company pursuant to the Investment Agreement,
the CFF Warrant will be exercisable for the remaining 500,000 shares of the Company’s common stock. The CFF Warrant expires
on January 26, 2025. Any shares of the Company’s common stock issued upon exercise of the CFF Warrant will be unregistered
and subject to a one-year lock-up.
Under
the Investment Agreement, the Company recorded $2,589,783 and $1,090,878 of revenue during the three months ended September 30,
2019 and 2018 and $6,570,048 and $2,894,966 of revenue during the nine months ended September 30, 2019 and 2018. The Company assessed
the 2018 CFF Award for accounting under ASC 606, which it adopted in the first quarter of 2018 (Note 3). To determine revenue
recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following five
steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine
the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue
when (or as) the entity satisfies a performance obligation.
The
Company assessed this arrangement in accordance with ASC 606 and concluded that the contract counterparty, CFF, is a customer.
The Company identified the following material promise under the arrangement: research and development activities and related services
under the Phase 2b Clinical Trial. Based on these assessments, the Company identified one performance obligation at the outset
of the Investment Agreement, which consists of: Phase 2b Clinical Trial research and development activities and related services.
To
determine the transaction price, the Company included the total aggregate payments under the Investment Agreement which amount
to $25 million and reduced the revenue to be recognized by the payment to the customer of $6,215,225 in the form of the CFF Warrant
representing its fair value, leaving the remaining $18,784,775 as the transaction price as of the outset of the arrangement, which
will be recognized as revenue over the performance period as discussed below. The $6,215,225 fair value of the warrant was also
recorded as an increase to additional paid in capital. The Company billed and collected $17,500,000 in milestone payments during
the year ended December 31, 2018 which was recorded as an increase to deferred revenue. A roll forward of deferred revenue related
to the Investment Agreement for the nine months ended September 30, 2019 is presented below.
|
|
September 30, 2019
|
|
Beginning balance, December 31, 2018
|
|
$
|
1,462,503
|
|
Billing to CFF upon achievement of milestones
|
|
|
5,000,000
|
|
Recognition of revenue
|
|
|
(6,570,048
|
)
|
Reclassification to contract asset
|
|
|
107,545
|
|
Ending balance, September 30, 2019
|
|
$
|
—
|
|
The
CFF Warrant is accounted for as a payment to the customer under ASC 606. See Note 11 for further information related to the CFF
Warrant. The Company notes that the Investment Agreement contains an initial payment that was received upon contract execution
and subsequent milestone payments, which are a form of variable consideration that require evaluation for constraint considerations.
The Company concluded that the related performance milestones are generally within the Company’s control and as result are
considered probable. Revenue associated with the performance obligation is being recognized as revenue as the research and development
services are provided using an input method, according to the costs incurred as related to the research and development activities
on each program and the costs expected to be incurred in the future to satisfy the performance obligation. The transfer of control
occurs over this time period and, in management’s judgment, is the best measure of progress towards satisfying the performance
obligation. The research and development services related to this performance obligation are expected to be performed over approximately
2.75 years and is expected to be completed in the third quarter of 2020. The amounts received that have not yet been recognized
as revenue are recorded in deferred revenue and the amounts recognized as revenue, but not yet received or invoiced are generally
recognized as contract assets on the Company’s condensed consolidated balance sheet.
2015
CFFT Award
On
April 20, 2015, the Company entered into an award agreement (the “2015 CFFT Award Agreement “) with the Cystic Fibrosis
Foundation Therapeutics, Inc (“CFFT”), a non-profit drug discovery and development affiliate of the Cystic Fibrosis
Foundation (“CFF”) pursuant to which the Company received a development award (the “2015 CFFT Award”)
for up to $5 million in funding. The funding from the 2015 CFFT Award supported a first-in-patient Phase 2 clinical trial of the
Company’s oral anti-inflammatory drug lenabasum in adults with cystic fibrosis (“CF”). The Company received
$5.0 million in payments under the 2015 CFFT Award. The payments received under the 2015 CFFT Award were recorded as deferred
revenue when the triggering event to receive those amounts had occurred and were amortized on a straight-line basis over the expected
duration of the remaining performance period under the 2015 CFFT Award which concluded in the third quarter of 2017.
In
accordance with ASC 605, the Company recorded $2,440,195 of revenue during the year ended December 31, 2017 under the 2015 CFFT
Award Agreement. No revenue was recorded under the 2015 CFFT Award Agreement during the year ended December 31, 2018 as the final
performance period concluded in the third quarter of 2017. Under ASC 605, milestone payments were initially recognized only in
the period that the payment-triggering event occurred or was achieved. Effective January 1, 2018, ASC 605 was superseded by Accounting
Standards Codification 606 Revenue Recognition — Revenue from Contracts with Customers (“ASC 606”). The
Company adopted ASC 606 in the first quarter of 2018 using the modified retrospective method according to which the cumulative
effect of initially applying ASC 606 is recognized at the date of initial application. Since the Company concluded its performance
obligations and completed recognizing revenue under the 2015 CFFT Award Agreement in the third quarter of 2017, there was no cumulative
effect to record at the date of the Company’s adoption of ASC 606.
Pursuant
to the terms of the 2015 CFFT Award Agreement, the Company is obligated to make royalty payments to CFFT contingent upon commercialization
of lenabasum in the Field of Use (as defined in the 2015 CFFT Award Agreement) as follows: (i) a royalty payment equal to five
times the amount the Company receives under the 2015 CFFT Award Agreement, up to $25 million, payable in three equal annual installments
following the first commercial sale of lenabasum, the first of which is due within 90 days following the first commercial sale
of lenabasum, (ii) a royalty payment to CFFT equal to the amount the Company receives under the 2015 CFFT Award Agreement, up
to $5 million, due in the first calendar year in which the aggregate cumulative net sales of lenabasum in the Field of Use exceed
$500 million, and (iii) royalty payment(s) to CFFT of up to approximately $15 million if the Company transfers, sells or licenses
lenabasum in the Field of Use other than for certain clinical or development purposes, or if the Company enters into a change
of control transaction, with such payment(s) to be credited against the royalty payments due upon commercialization. The Field
of Use is defined in the 2015 CFFT Award as the treatment in humans of CF, asbestosis, bronchiectasis, byssinosis, chronic bronchitis/COPD
hypersensitivity pneumonitis, pneumoconiosis, primary ciliary dyskinesis, sarcoidosis and silicosis.
Either
CFFT or the Company may terminate the agreement for cause, which includes the Company’s material failure to achieve certain
commercialization and development milestones. The Company’s payment obligations, if any, would survive the termination of
the 2015 CFFT Award Agreement.
On
January 5, 2018, the Company entered into a sales agreement with Cantor Fitzgerald under which the Company had the ability to
direct Cantor Fitzgerald as its sales agent to sell common stock up to an aggregate offering of up to $50 million under an “At
the Market Offering” (“January 2018 Sales Agreement”). Sales of common stock under the January 2018 Sales Agreement
were made pursuant to an effective registration statement for an aggregate offering of up to $50 million. During the first quarter
of 2018, the Company sold 1,500,000 shares of its common stock to an institutional investor under the January 2018 Sales Agreement
for which the Company received net proceeds of approximately $11.2 million. The Company did not sell any shares under the January
2018 Sales Agreement in the remainder of 2018 and through February 8, 2019, the effective date of the Company’s termination
of the January 2018 Sales Agreement.
On
January 30, 2019, the Company consummated an underwritten public offering of shares of its common stock pursuant to which the
Company sold an aggregate of 6,198,500 shares of its common stock, including 808,500 shares sold pursuant to the full exercise
of the underwriters’ option to purchase additional shares, at a purchase price of $6.50 per share with gross proceeds to
the Company totaling approximately $40.3 million, less issuance costs incurred of approximately $2.6 million.
During
the three and nine months ended September 30, 2019, the Company issued 28,800 and 107,029 shares of common stock upon the exercise
of stock options to purchase common stock and the Company received proceeds of $80,100 and $386,811 from these exercises, respectively.
During the three and nine months ended September 30, 2018, the Company issued 40,000 and 129,069 shares of common stock upon the
exercise of stock options to purchase common stock and the Company received proceeds of $34,378 and $337,645 from
these exercises, respectively.
During
the nine months ended September 30, 2019, warrants to purchase 1,283,500 shares of common stock were exercised on a cashless basis
resulting in the issuance of 1,119,868 shares of common stock. No warrants were exercised during the three months ended September
30, 2019. During the three and nine months ended September 30, 2018, warrants to purchase 5,000 shares were exercised for proceeds
of $5,000.
In
April 2014, the Company adopted the Corbus Pharmaceuticals Holdings, Inc. 2014 Equity Incentive Plan (the “2014 Plan”).
Pursuant to the 2014 Plan, the Company’s Board of Directors may grant incentive and nonqualified stock options and restricted
stock to employees, officers, directors, consultants and advisors. Options issued under the 2014 Plan generally vest over 4 years
from the date of grant in multiple tranches and are exercisable for up to 10 years from the date of issuance.
Pursuant
to the terms of an annual evergreen provision in the 2014 Plan, the number of shares of common stock available for issuance under
the 2014 Plan shall automatically increase on January 1 of each year by at least seven percent (7%) of the total number of shares
of common stock outstanding on December 31st of the preceding calendar year, or, pursuant to the terms of the 2014 Plan, in any
year, the Board of Directors may determine that such increase will provide for a lesser number of shares.
In
accordance with the terms of the 2014 Plan, effective as of January 1, 2018, the number of shares of common stock available for
issuance under the 2014 Plan increased by 2,500,000 shares, such amount being less than seven percent (7%) of the outstanding
shares of common stock on December 31, 2017. As of December 31, 2018, the 2014 Plan had a total reserve of 15,543,739 shares and
there were 5,072,241 shares available for future grants.
In
accordance with the terms of the 2014 Plan, effective as of January 1, 2019, the number of shares of common stock available for
issuance under the 2014 Plan increased by 3,000,000 shares, which was less than seven percent (7%) of the outstanding shares of
common stock on December 31, 2018. As of January 1, 2019, the 2014 Plan had a total reserve of 18,543,739 shares and there were
8,072,241 shares available for future grants. As of September 30, 2019, there were 4,728,315 shares available for future grants.
Stock-based
Compensation
For
stock options issued and outstanding for the three months ended September 30, 2019 and 2018, respectively, the Company recorded
non-cash, stock-based compensation expense of $2,977,574 and $1,958,917, net of estimated forfeitures. For stock options issued
and outstanding for the nine months ended September 30, 2019 and 2018, respectively, the Company recorded non-cash, stock-based
compensation expense of $8,884,001 and $5,659,928, respectively, net of estimated forfeitures.
The
fair value of each option award for employees is estimated on the date of grant using the Black-Scholes option pricing model that
uses the assumptions noted in the following table. Due to its limited operating history, the Company estimates its volatility
including the volatility of comparable public companies and its own common stock, taking into account the expected life of the
option. The Company uses historical data, as well as subsequent events occurring prior to the issuance of the financial statements,
to estimate option exercises and employee terminations in order to estimate its forfeiture rate. The expected term of options
granted under the 2014 Plan, all of which qualify as “plain vanilla” per SEC Staff Accounting Bulletin 107, is determined
based on the simplified method due to the Company’s limited operating history, and is 6.25 years based on the average between
the vesting period and the contractual life of the option. For non-employee options, the expected term is the contractual term.
The risk-free rate is based on the yield of a U.S. Treasury security with a term consistent with the option.
The
weighted average assumptions used principally in determining the fair value of options granted to employees were as follows:
|
|
Nine Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Risk free interest rate
|
|
|
2.41
|
%
|
|
|
2.48
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected term in years
|
|
|
6.25
|
|
|
|
6.25
|
|
Expected volatility
|
|
|
87.3
|
%
|
|
|
87.6
|
%
|
A
summary of option activity for the nine months ended September 30, 2019 and is presented below:
Options
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term in
Years
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 31, 2018
|
|
|
9,593,990
|
|
|
$
|
4.51
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
3,640,800
|
|
|
|
7.15
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(107,029
|
)
|
|
|
3.61
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(296,874
|
)
|
|
|
7.38
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2019
|
|
|
12,830,887
|
|
|
$
|
5.20
|
|
|
|
7.17
|
|
|
$
|
17,431,614
|
|
Vested and expected to vest at September 30, 2019
|
|
|
7,421,312
|
|
|
$
|
3.68
|
|
|
|
5.94
|
|
|
$
|
17,048,757
|
|
The
weighted average grant-date fair value of options granted during the nine months ended September 30, 2019 and 2018 was $5.21 and
$5.67 per share, respectively. The aggregate intrinsic value of options exercised during the nine months ended September 30, 2019
and 2018 was approximately $324,567 and $494,360, respectively. The total fair value of options that were vested as of September
30, 2019 and 2018 was $21,108,706 and $12,359,043, respectively. As of September 30, 2019, there was approximately $23,563,971
of total unrecognized compensation expense, related to non-vested share-based option compensation arrangements. The unrecognized
compensation expense is estimated to be recognized over a period of 2.69 years as of September 30, 2019.
During
the nine months ended September 30, 2019, warrants to purchase 1,283,500 shares of common stock were exercised on a cashless basis
resulting in the issuance of 1,119,868 shares of common stock. No warrants were exercised during the three months ended September
30, 2019. During the three and nine months ended September 30, 2018, warrants to purchase 5,000 shares were exercised for proceeds
of $5,000.
At
September 30, 2019, there were warrants outstanding to purchase 1,000,000 shares of common stock with a weighted average exercise
price of $13.20 and a weighted average remaining life of 5.33 years, related only to the warrant issued to CFF pursuant to the
terms of the Investment Agreement (Note 8). The Company issued a warrant to CFF to purchase an aggregate of 1,000,000 shares of
the Company’s common stock (the “CFF Warrant”). The CFF Warrant is exercisable at a price equal to $13.20 per
share and is immediately exercisable for 500,000 shares of the Company’s common stock. Upon completion of the final milestone
set forth in the Investment Agreement and receipt of the final payment from CFF to the Company pursuant to the Investment Agreement,
the CFF Warrant will be exercisable for the remaining 500,000 shares of the Company’s common stock. The CFF Warrant expires
on January 26, 2025. Any shares of the Company’s common stock issued upon exercise of the CFF Warrant will be unregistered
and subject to a one-year lock-up. The CFF Warrant is classified as equity as it meets all the conditions under GAAP for equity
classification. In accordance with GAAP, the Company has calculated the fair value of the warrant for initial measurement and
will reassess whether equity classification for the warrant is appropriate upon any changes to the warrants or capital structure,
at each balance sheet date. The weighted average assumptions used in determining the $6,215,225 fair value of the CFF Warrant
were as follows:
Risk free interest rate
|
|
|
2.60
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
Expected term in years
|
|
|
7.00
|
|
Expected volatility
|
|
|
83.5
|
%
|