NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dynavax Technologies Corporation (“we,” “our,” “us,” “Dynavax” or the “Company”), is a commercial stage biopharmaceutical company developing and commercializing novel vaccines. We launched our first product, HEPLISAV-B® [Hepatitis B Vaccine (Recombinant), Adjuvanted], in February 2018, following United States Food and Drug Administration (“FDA”) approval for prevention of infection caused by all known subtypes of hepatitis B virus in adults age 18 years and older. We were incorporated in California in August 1996 under the name Double Helix Corporation, and we changed our name to Dynavax Technologies Corporation in September 1996. We reincorporated in Delaware in 2000.
2.
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Summary of Significant Accounting Policies
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Basis of Presentation and Principles of Consolidation
The consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and include our accounts and those of our wholly-owned subsidiary, Dynavax GmbH located in Düsseldorf, Germany. All significant intercompany accounts and transactions among the entities have been eliminated from the consolidated financial statements. We operate in one business segment: discovery, development and commercialization of novel vaccines.
Liquidity and Financial Condition
As of December 31, 2019, we had cash, cash equivalents and marketable securities of $151.1 million.
The Company has incurred losses and negative cash flows from operations since its inception and expects to incur operating losses for the foreseeable future as we continue to invest in commercialization of HEPLISAV-B. If we cannot generate a sufficient amount of revenue from product sales, we will need to finance our operations through strategic alliance and licensing arrangements and/or future public or private debt and equity financings. Adequate financing may not be available to us on acceptable terms, or at all.
We currently anticipate that our cash, cash equivalents and short-term marketable securities as of December 31, 2019, and anticipated revenues from HEPLISAV-B will be sufficient to fund our operations for at least the next 12 months from the date of this filing.
Our ability to raise additional capital in the equity and debt markets, should we choose to do so, is dependent on a number of factors, including, but not limited to, the market demand for our common stock, which itself is subject to a number of development and business risks and uncertainties, our creditworthiness and the uncertainty that we would be able to raise such additional capital at a price or on terms that are favorable to us. Raising additional funds through the issuance of equity or debt securities could result in dilution to our existing stockholders, increased fixed payment obligations, or both. In addition, these securities may have rights senior to those of our common stock and could include covenants that would restrict our operations.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make informed estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Management’s estimates are based on historical information available as of the date of the consolidated financial statements and various other assumptions we believe are reasonable under the circumstances. Actual results could differ materially from these estimates.
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Foreign Currency Translation
We consider the local currency to be the functional currency for our international subsidiary, Dynavax GmbH. Accordingly, assets and liabilities denominated in this foreign currency are translated into U.S. dollars using the exchange rate in effect on the balance sheet date. Revenues and expenses are translated at average exchange rates prevailing during the year. Currency translation adjustments arising from period to period are charged or credited to accumulated other comprehensive income (loss) in stockholders’ equity. For the years ended December 31, 2019, 2018 and 2017, we reported an unrealized (loss) gain of $(0.5) million, $(1.1) million and $2.8 million, respectively. Realized gains and losses resulting from currency transactions are included in other income (expense) in the consolidated statements of operations. For the years ended December 31, 2019, 2018 and 2017, we reported a gain (loss) of $0.2 million, $0.3 million and $(0.6) million, respectively, resulting from currency transactions in our consolidated statements of operations.
Cash, Cash Equivalents and Marketable Securities
We consider all liquid investments purchased with an original maturity of three months or less and that can be liquidated without prior notice or penalty to be cash equivalents. Management determines the appropriate classification of marketable securities at the time of purchase. In accordance with our investment policy, we invest in short-term money market funds, U.S. treasuries, U.S. government agency securities and corporate debt securities. We believe these types of investments are subject to minimal credit and market risk.
We have classified our entire investment portfolio as available-for-sale and available for use in current operations and accordingly have classified all investments as short-term. Available-for-sale securities are carried at fair value based on inputs that are observable, either directly or indirectly, such as quoted market prices for similar securities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the securities, with unrealized gains and losses included in accumulated other comprehensive loss in stockholders’ equity. Realized gains and losses and declines in value, if any, judged to be other than temporary on available-for-sale securities are included in interest income or expense. The cost of securities sold is based on the specific identification method. Management assesses whether declines in the fair value of investment securities are other than temporary. In determining whether a decline is other than temporary, management considers the following factors:
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whether the investment has been in a continuous realized loss position for over 12 months;
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the duration to maturity of our investments;
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our intention and ability to hold the investment to maturity and if it is not more likely than not that we will be required to sell the investment before recovery of the amortized cost bases;
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the credit rating, financial condition and near-term prospects of the issuer; and
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the type of investments made.
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To date, there have been no declines in fair value that have been identified as other than temporary.
Concentration of Credit Risk and Other Risks and Uncertainties
Financial instruments that are subject to concentration of credit risk consist primarily of cash equivalents, marketable securities and accounts receivable.
Our policy is to invest cash in institutional money market funds and marketable securities of the U.S. government and corporate issuers with high credit quality to limit the amount of credit exposure. We currently maintain a portfolio of cash equivalents and marketable securities in a variety of securities, including short-term money market funds, U.S. treasuries, U.S. government agency securities and corporate debt securities. We have not experienced any losses on our cash equivalents and marketable securities.
Our accounts receivable balance consists, primarily, of amounts due from product sales. Accounts receivable are recorded net of reserves for chargebacks, distribution fees, trade discounts and doubtful accounts. We estimate our allowance for doubtful accounts based on an evaluation of the aging of our receivables. Accounts receivable balances are written off against the allowance when it is probable that the receivable will not be collected. To date, we have not recorded any allowance for doubtful accounts.
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Our product candidates will require approval from the FDA and foreign regulatory agencies before commercial sales can commence. There can be no assurance that our products will receive any of these required approvals. The denial or delay of such approvals may have a material adverse impact on our business and may impact our business in the future. In addition, after the approval of HEPLISAV-B by the FDA, there is still an ongoing risk of adverse events that did not appear during the drug approval process.
We are subject to risks common to companies in the biopharmaceutical industry, including, but not limited to, new technological innovations, clinical development risk, establishment of appropriate commercial partnerships, protection of proprietary technology, compliance with government and environmental regulations, uncertainty of market acceptance of product candidates, product liability, the volatility of our stock price and the need to obtain additional financing.
During the year ended December 31, 2019, 2018 and 2017, 100%, 83% and 90%, respectively, of our revenues were earned in the United States. As of December 31, 2019 and 2018, 62% and 24%, respectively, of our long-lived assets were located in the United States and the remaining long-lived assets were located in Germany.
Our source of product revenue consists of sales of HEPLISAV-B. We have entered into distribution agreements with a limited number of wholesalers and specialty distributors in the U.S. All of our product revenue is from these customers. For the year ended December 31, 2019 and 2018, our three largest customers collectively represented approximately 62% and 68% of our product revenue, respectively. As of December 31, 2019 and 2018, our three largest customers collectively represented approximately 76% and 71% of our trade receivable balance.
Inventories
Inventory is stated at the lower of cost or estimated net realizable value, on a first-in, first-out, or FIFO, basis. We primarily use actual costs to determine our cost basis for inventories. Our assessment of market value requires the use of estimates regarding the net realizable value of our inventory balances, including an assessment of excess or obsolete inventory. We determine excess or obsolete inventory based on multiple factors, including an estimate of the future demand for our products, product expiration dates and current sales levels. Our assumptions of future demand for our products are inherently uncertain and if we were to change any of these judgments or estimates, it could cause a material increase or decrease in the amount of inventory reserves that we report in a particular period.
We consider regulatory approval of product candidates to be uncertain and product manufactured prior to regulatory approval may not be sold unless regulatory approval is obtained. As such, the manufacturing costs for product candidates incurred prior to regulatory approval are not capitalized as inventory but are expensed as research and development costs. We begin capitalization of these inventory related costs once regulatory approval is obtained.
HEPLISAV-B was approved by the FDA on November 9, 2017, at which time we began to capitalize inventory costs associated with the vial presentation of HEPLISAV-B. In March 2018, we received regulatory approval of the pre-filled syringe (“PFS”) presentation of HEPLISAV-B. Prior to FDA approval of HEPLISAV-B, all costs related to the manufacturing of HEPLISAV-B that could potentially be available to support the commercial launch of our products, were charged to research and development expense in the period incurred as there was no alternative future use. Prior to regulatory approval of PFS, costs associated with resuming operating activities at the Düsseldorf manufacturing facility were also included in research and development expense. Subsequent to regulatory approval of PFS, costs associated with resuming manufacturing activities at the Düsseldorf facility were included in cost of sales – product, until commercial production resumed in mid-2018 at which time these costs were recorded as raw materials inventory.
Intangible Assets
We record definite-lived intangible assets related to certain capitalized milestone and sublicense payments. After determining that the pattern of future cash flows associated with intangible asset could not be reliably estimated with a high level of precision, these assets are amortized on a straight-line basis over their remaining useful lives, which are estimated to be the remaining patent life. We assess our intangible assets for impairment if indicators are present or changes in circumstance suggest that impairment may exist. No impairment has been identified during the years presented.
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Long-Lived Assets
Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets. Additions, major renewals and improvements are capitalized and repair and maintenance costs are charged to expense as incurred. Leasehold improvements are amortized over the remaining life of the initial lease term or the estimated useful lives of the assets, whichever is shorter.
We evaluate the carrying value of long-lived assets, whenever events or changes in business circumstances or our planned use of long-lived assets indicate, based on undiscounted future operating cash flows, that their carrying amounts may not be fully recoverable or that their useful lives are no longer appropriate. When an indicator of impairment exists, undiscounted future operating cash flows of long-lived assets are compared to their respective carrying value. If the carrying value is greater than the undiscounted future operating cash flows of long-lived assets, the long-lived assets are written down to their respective fair values and an impairment loss is recorded. Fair value is determined primarily using the discounted cash flows expected to be generated from the use of assets. Significant management judgment is required in the forecast of future operating results that are used in the preparation of expected cash flows. In the third quarter of 2019, we recorded accelerated depreciation of $3.0 million related to certain long-lived assets. See Note 17.
Leases
On January 1, 2019, we adopted ASC 842, Leases, using the modified retrospective approach. Prior period amounts continue to be reported in accordance with our historic accounting under previous lease guidance, ASC 840, Leases. We elected the package of practical expedients which, among other things, allowed us to carry forward the historical lease classification of leases in place as of January 1, 2019. We have also elected the practical expedient to not separate lease components from non-lease components. As a result of adopting ASC 842, we recognized right-of-use asset and lease liabilities for operating leases of $34.8 million and $37.1 million, respectively on January 1, 2019. There was no adjustment to the opening balance of accumulated deficit as a result of the adoption of ASC 842.
We determine if an arrangement includes a lease at inception. Operating leases are included in operating lease right-of-use assets, other current liabilities and long-term portion of lease liabilities in our consolidated balance sheets. Right-of-use assets represent our right to use an underlying asset during the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. In determining the net present value of lease payments, we use our incremental borrowing rate which represents an estimated rate of interest that we would have to pay to borrow equivalent funds on a collateralized basis at the lease commencement date.
Our leases may include options to extend or terminate the lease which are included in the lease term when it is reasonably certain that we will exercise any such options. Lease expense is recognized on a straight-line basis over the expected lease term. We have elected not to apply the recognition requirements of ASC 842 for short-term leases.
As lessors, we determine if an arrangement includes a lease at inception. We elected the practical expedient to not separate lease components from non-lease components. Sublease income is recognized on a straight-line basis over the expected lease term and is included in other income (expense) in our consolidated statements of operations.
Goodwill
Our goodwill balance relates to our April 2006 acquisition of Dynavax GmbH. Goodwill represents the excess purchase price over the fair value of tangible and intangible assets acquired and liabilities assumed. Goodwill is not amortized but is subject to an annual impairment test. In performing its goodwill impairment review, we assess qualitative factors to determine whether it is more likely than not that the fair value of its reporting unit is less than its carrying amount, including goodwill. The qualitative factors include, but are not limited to macroeconomic conditions, industry and market considerations, and the overall financial performance of the Company. If after assessing the totality of these qualitative factors, we determine that it is not more likely than not that the fair value of its reporting unit is less than its carrying amount, then no additional assessment is deemed necessary. Otherwise, we will proceed to perform a test for goodwill impairment. The first step involves comparing the estimated fair value of the related reporting unit against its carrying amount including goodwill. If the carrying amount exceeds the fair value, impairment is calculated and recorded as a charge in the consolidated statements of operations. We determined that we have only one operating segment and there are no components of that operating segment that are deemed to be separate reporting units such that we have one reporting unit for purposes of our goodwill impairment testing. We evaluate goodwill for impairment on an annual basis and on an interim basis if events or changes in circumstances between annual impairment tests indicate that the asset might be impaired. No impairment has been identified for the years presented.
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Revenue Recognition
We recognize revenue when the customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. To determine revenue recognition for arrangements that we determine are within the scope of Accounting Standards Codification (“ASC”) 606, we perform 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) we satisfy a performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract and determine those that are performance obligations, and assess whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
Product Revenue, Net
We sell our product to a limited number of wholesalers and specialty distributors in the U.S. (collectively, our “Customers”). Revenues from product sales are recognized when we have satisfied our performance obligation, which is the transfer of control of our product upon delivery to the Customer. The timing between the recognition of revenue for product sales and the receipt of payment is not significant. Because our standard credit terms are short-term and we expect to receive payment in less than one-year, there is no financing component on the related receivables. Taxes collected from Customers relating to product sales and remitted to governmental authorities are excluded from revenues.
Overall, product revenue, net, reflects our best estimates of the amount of consideration to which we are entitled based on the terms of the contract. The amount of variable consideration is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. If our estimates differ significantly from actuals, we will record adjustments that would affect product revenue, net in the period of adjustment.
Reserves for Variable Consideration
Revenues from product sales are recorded at the net sales price, which includes estimates of variable consideration such as product returns, chargebacks, discounts, rebates and other fees that are offered within contracts between us and our Customers, healthcare providers, pharmacies and others relating to our product sales. We estimate variable consideration using either the most likely amount method or the expected value method, depending on the type of variable consideration and what method better predicts the amount of consideration we expect to receive. We take into consideration relevant factors such as industry data, current contractual terms, available information about Customers’ inventory, resale and chargeback data and forecasted customer buying and payment patterns, in estimating each variable consideration. The variable consideration is recorded at the time product sales is recognized, resulting in a reduction in product revenue and a reduction in accounts receivable (if the Customer offsets the amount against its accounts receivable) or as an accrued liability (if we pay the amount through our accounts payable process). Variable consideration requires significant estimates, judgment and information obtained from external sources. The amount of variable consideration is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. If our estimates differ significantly from actuals, we will record adjustments that would affect product revenue, net in the period of adjustment. If we were to change any of these judgments or estimates, it could cause a material increase or decrease in the amount of revenue that we report in a particular period. There have been no material adjustments to these estimates for the years ended December 31, 2019 and 2018.
Product Returns: Consistent with industry practice, we offer our Customers a limited right of return based on the product’s expiration date for product that has been purchased from us. We estimate the amount of our product sales that may be returned by our Customers and record this estimate as a reduction of revenue in the period the related product revenue is recognized. We consider several factors in the estimation of potential product returns including expiration dates of the product shipped, the limited product return rights, available information about Customers’ inventory, shelf life of the product and other relevant factors.
Chargebacks: Our Customers subsequently resell our product to healthcare providers, pharmacies and others. In addition to distribution agreements with Customers, we enter into arrangements with qualified healthcare providers that provide for chargebacks and discounts with respect to the purchase of our product. Chargebacks represent the estimated obligations resulting from contractual commitments to sell product to qualified healthcare providers at prices lower than the list prices charged to Customers who directly purchase the product from us. Customers charge us for the difference between what they pay for the product and the ultimate selling price to the qualified healthcare providers. These reserves are
60
established in the same period that the related revenue is recognized, resulting in a reduction of product revenue and accounts receivable. Chargeback amounts are determined at the time of resale to the qualified healthcare providers by Customers, and we issue credits for such amounts generally within a few weeks of the Customer’s notification to us of the resale. Reserves for chargebacks consists of credits that we expect to issue for units that remain in the distribution channel inventories at each reporting period end that we expect will be sold to the qualified healthcare providers, and chargebacks for units that our Customers have sold to the qualified healthcare providers, but for which credits have not been issued.
Trade Discounts and Allowances: We provide our Customers with discounts which include early payment incentives that are explicitly stated in our contracts, and are recorded as a reduction of revenue in the period the related product revenue is recognized.
Distribution Fees: Distribution fees include fees paid to certain Customers for sales order management, data and distribution services. Distribution fees are recorded as a reduction of revenue in the period the related product revenue is recognized.
Rebates: Under certain contracts, customers may obtain rebates for purchasing minimum volumes of our product. We estimate these rebates based upon the expected purchases and the contractual rebate rate and record this estimate as a reduction in revenue in the period the related revenue is recognized.
Collaboration and Manufacturing Service Revenue
We have entered into collaborative arrangements and arrangements to provide manufacturing services to other companies. Such arrangements may include promises to customers which, if capable of being distinct, are accounted for as separate performance obligations. For agreements with multiple performance obligations, we allocate estimated revenue to each performance obligation at contract inception based on the estimated transaction price of each performance obligation. Revenue allocated to each performance obligation is then recognized when we satisfy the performance obligation by transferring control of the promised good or service to the customer. Manufacturing service revenue is included in other revenue in our consolidated statements of operations.
Research and Development Expenses and Accruals
Research and development expenses include personnel and facility-related expenses, outside contracted services including clinical trial costs, manufacturing and process development costs, research costs and other consulting services and non-cash stock-based compensation. Research and development costs are expensed as incurred. Amounts due under contracts with third parties may be either fixed fee or fee for service, and may include upfront payments, monthly payments and payments upon the completion of milestones or receipt of deliverables. Non-refundable advance payments under agreements are capitalized and expensed as the related goods are delivered or services are performed.
We contract with third parties to perform various clinical trial activities in the on-going development of potential products. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows to our vendors. Payments under the contracts depend on factors such as the achievement of certain events, successful enrollment of patients, and completion of portions of the clinical trial or similar conditions. Our accrual for clinical trials is based on estimates of the services received and efforts expended pursuant to contracts with clinical trial centers and clinical research organizations. We may terminate these contracts upon written notice and we are generally only liable for actual effort expended by the organizations to the date of termination, although in certain instances we may be further responsible for termination fees and penalties. We estimate research and development expenses and the related accrual as of each balance sheet date based on the facts and circumstances known to us at that time. There have been no material adjustments to the prior period accrued estimates for clinical trial activities during the years presented.
Stock-Based Compensation
Stock-based compensation expense for restricted stock units and stock options is estimated at the grant date based on the award’s estimated fair value and is recognized on a straight-line basis over the award’s requisite service period, assuming estimated forfeiture rates. Fair value of restricted stock units is determined at the date of grant using the Company’s closing stock price. Our determination of the fair value of stock options on the date of grant using an option-pricing model is affected by our stock price, as well as assumptions regarding a number of subjective variables. We selected the Black-Scholes option pricing model as the most appropriate method for determining the estimated fair value-based measurement of our stock options. The Black-Scholes model requires the use of subjective assumptions which determine the fair value-based measurement of stock options. These assumptions include, but are not limited to, our expected stock price volatility over the
61
term of the awards, and projected employee stock option exercise behaviors. In the future, as additional empirical evidence regarding these input estimates becomes available, we may change or refine our approach of deriving these input estimates. These changes could impact our fair value of stock options granted in the future. Changes in the fair value of stock awards could materially impact our operating results.
Our current estimate of volatility is based on the historical volatility of our stock price. To the extent volatility in our stock price increases in the future, our estimates of the fair value of options granted in the future could increase, thereby increasing stock-based compensation cost recognized in future periods. We derive the expected term assumption primarily based on our historical settlement experience, while giving consideration to options that have not yet completed a full life cycle. Stock-based compensation cost is recognized only for awards ultimately expected to vest. Our estimate of the forfeiture rate is based primarily on our historical experience. To the extent we revise this estimate in the future, our share-based compensation cost could be materially impacted in the period of revision. There have been no material adjustments to these estimates during the years presented.
Income Taxes
The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Tax law and rate changes are reflected in income in the period such changes are enacted. We include interest and penalties related to income taxes, including unrecognized tax benefits, within income tax expense.
Our income tax returns are based on calculations and assumptions that are subject to examination by the Internal Revenue Service and other tax authorities. In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. While we believe we have appropriate support for the positions taken on our tax returns, we regularly assess the potential outcomes of examinations by tax authorities in determining the adequacy of our provision for income taxes. We continually assess the likelihood and amount of potential adjustments and adjust the income tax provision, income taxes payable and deferred taxes in the period in which the facts that give rise to a revision become known.
Significant judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and the valuation allowance recorded against our net deferred tax assets. Deferred tax assets and liabilities are determined using the enacted tax rates in effect for the years in which those tax assets are expected to be realized. A valuation allowance is established when it is more likely than not the future realization of all or some of the deferred tax assets will not be achieved. The evaluation of the need for a valuation allowance is performed on a jurisdiction-by-jurisdiction basis, and includes a review of all available positive and negative evidence. Factors reviewed include projections of pre-tax book income for the foreseeable future, determination of cumulative pre-tax book income after permanent differences, earnings history, and reliability of forecasting.
Based on our review, we concluded that it was more likely than not that we would not be able to realize the benefit of our domestic and foreign deferred tax assets in the future. This conclusion was based on historical and projected operating performance, as well as our expectation that our operations will not generate sufficient taxable income in future periods to realize the tax benefits associated with the deferred tax assets within the statutory carryover periods. Therefore, we have maintained a full valuation allowance on our deferred tax assets as of December 31, 2019 and 2018. We will continue to assess the need for a valuation allowance on our deferred tax assets by evaluating both positive and negative evidence that may exist. Any adjustment to the net deferred tax asset valuation allowance would be recorded in the statement of operations for the period that the adjustment is determined to be required.
Restructuring
Restructuring costs are comprised of severance, other termination benefit costs, stock-based compensation expense for stock award and stock option modifications related to workforce reductions and accelerated depreciation. We recognize restructuring charges when the liability is probable and the amount is estimable. Employee termination benefits are accrued at the date management has committed to a plan of termination and affected employees have been notified of their termination date and expected severance benefits.
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Recent Accounting Pronouncements
Accounting Standards Update 2016-13
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments. The standard changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. As a smaller reporting company, this ASU and its subsequent updates, is effective for fiscal years beginning after December 15, 2022. We are currently evaluating the impact this standard will have on our consolidated financial statements.
Accounting Standards Update 2017-04
In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350), which simplifies the test for goodwill impairment by eliminating a previous requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. We adopted this ASU on January 1, 2020 and the adoption of this standard did not have a material impact on our consolidated financial statements.
Accounting Standards Update 2018-13
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), that eliminates, adds and modifies certain disclosure requirements of fair value measurements. Entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but public companies will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. We adopted this ASU on January 1, 2020 and the adoption of this standard did not have a material impact on our consolidated financial statements.
Accounting Standards Update 2018-15
In August 2018, the FASB issued ASU No. 2018-15, Intangibles – Goodwill and Other –Internal-Use Software (Subtopic 350-40). This ASU requires a customer in a cloud computing arrangement (i.e. hosting arrangement) that is a service contract to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets or expense as incurred. ASC 350-40 requires that certain costs incurred during the application development stage be capitalized and other costs incurred during the preliminary project and post-implementation stages be expensed as incurred. We adopted this ASU on January 1, 2020 and the adoption of this standard did not have a material impact on our consolidated financial statements.
Accounting Standards Update 2019-12
In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). This ASU simplifies the accounting for income taxes by removing certain exceptions and improving consistent application in certain areas of Topic 740. The ASU is effective for annual periods beginning after December 15, 2020 with early adoption permitted. We are currently evaluating the impact this standard will have on our consolidated financial statements.
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Fair Value Measurements
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We measure fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The accounting standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:
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•
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Level 1—Observable inputs, such as quoted prices in active markets for identical assets or liabilities;
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•
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Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
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•
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Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities; therefore, requiring an entity to develop its own valuation techniques and assumptions.
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Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. We review the fair value hierarchy classification on a quarterly basis. Changes in the ability to observe valuation inputs may result in a reclassification of levels for certain assets or liabilities within the fair value hierarchy. There were no transfers between Level 1, 2 and 3 during the years ended December 31, 2019 and 2018.
The carrying amounts of cash equivalents, accounts and other receivables, accounts payable and accrued liabilities are considered reasonable estimates of their respective fair value because of their short-term nature.
Recurring Fair Value Measurements
The following table represents the fair value hierarchy for our financial assets (cash equivalents and marketable securities) and liabilities measured at fair value on a recurring basis (in thousands):
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Level 1
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Level 2
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Level 3
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Total
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December 31, 2019
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|
|
|
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|
|
|
|
|
|
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|
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|
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Assets
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
$
|
27,854
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|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
27,854
|
|
U.S. treasuries
|
|
-
|
|
|
|
6,517
|
|
|
|
-
|
|
|
|
6,517
|
|
U.S. government agency securities
|
|
-
|
|
|
|
51,273
|
|
|
|
-
|
|
|
|
51,273
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|
Corporate debt securities
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|
-
|
|
|
|
61,373
|
|
|
|
-
|
|
|
|
61,373
|
|
Total assets
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$
|
27,854
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|
|
$
|
119,163
|
|
|
$
|
-
|
|
|
$
|
147,017
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
14,860
|
|
|
$
|
14,860
|
|
Sublicense liability
|
|
-
|
|
|
|
-
|
|
|
|
6,948
|
|
|
|
6,948
|
|
Total liabilities
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
21,808
|
|
|
$
|
21,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
$
|
44,002
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
44,002
|
|
U.S. treasuries
|
|
-
|
|
|
|
14,724
|
|
|
|
-
|
|
|
|
14,724
|
|
U.S. government agency securities
|
|
-
|
|
|
|
42,372
|
|
|
|
-
|
|
|
|
42,372
|
|
Corporate debt securities
|
|
-
|
|
|
|
41,291
|
|
|
|
-
|
|
|
|
41,291
|
|
Total assets
|
$
|
44,002
|
|
|
$
|
98,387
|
|
|
$
|
-
|
|
|
$
|
142,389
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sublicense liability
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,320
|
|
|
$
|
6,320
|
|
Money market funds are highly liquid investments and are actively traded. The pricing information on these investment instruments is readily available and can be independently validated as of the measurement date. This approach results in the classification of these securities as Level 1 of the fair value hierarchy.
U.S. treasuries, U.S. government agency securities and corporate debt securities are measured at fair value using Level 2 inputs. We review trading activity and pricing for these investments as of each measurement date. When sufficient quoted pricing for identical securities is not available, we use market pricing and other observable market inputs for similar securities obtained from various third-party data providers. These inputs represent quoted prices for similar assets in active markets or these inputs have been derived from observable market data. This approach results in the classification of these securities as Level 2 of the fair value hierarchy.
Warrants were issued in connection with the underwritten public offering in August 2019 and are accounted for as a derivative liability at fair value. See Note 14. The fair value of the warrant liability is estimated using the Black-Scholes model which requires assumptions such as expected term, expected volatility and risk-free interest rate. These assumptions are subjective and require judgement to develop. Expected term is estimated using the full remaining contractual term of the warrants. We determine expected volatility based on our historical common stock price volatility. The warrant liability is classified as a Level 3 instrument as its value is based on unobservable inputs that are supported by little or no market activity.
64
As of December 31, 2019, we used the following key assumptions to estimate the fair value of warrant liability:
Number of shares
|
|
|
5,841,250
|
|
Expected term
|
|
2.1 years
|
|
Expected volatility
|
|
|
0.6
|
|
Risk-free interest rate
|
|
|
1.6
|
%
|
Dividend yield
|
|
|
0
|
%
|
The following table provides a summary of changes in the fair value warrant liability for year ended December 31, 2019 (in thousands):
Balance at December 31, 2018
|
|
$
|
-
|
|
Fair value of warrant liability at issuance date
|
|
|
7,360
|
|
Increase in estimated fair value of warrant liability upon revaluation
|
|
|
7,500
|
|
Balance at December 31, 2019
|
|
$
|
14,860
|
|
As of December 31, 2019, we measured the fair value of our $7.0 million payment to Merck, Sharpe & Dohme Corp. (“Merck”), which is due in the first quarter of 2020, based on Level 3 inputs due to the use of unobservable inputs that cannot be corroborated by observable market data. We estimated the fair value of the liability using a discounted cash flow technique using the effective interest rate on our term loan. The liability had a fair value of $6.9 million as of December 31, 2019.
4.
|
Cash, Cash Equivalents, Restricted Cash and Marketable Securities
|
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same amounts shown in the consolidated statements of cash flows:
|
|
December 31
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Cash and cash equivalents
|
|
$
|
39,884
|
|
|
$
|
49,348
|
|
|
$
|
26,584
|
|
Restricted cash
|
|
|
216
|
|
|
|
619
|
|
|
|
629
|
|
Total cash, cash equivalents and restricted cash shown in the
consolidated statements of cash flows
|
|
$
|
40,100
|
|
|
$
|
49,967
|
|
|
$
|
27,213
|
|
65
Restricted cash balances relate to certificates of deposit issued as collateral to certain letters of credit issued as security to our lease arrangements. See Note 9.
Cash, cash equivalents and marketable securities consist of the following (in thousands):
|
|
Amortized
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Estimated
Fair Value
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
4,038
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,038
|
|
Money market funds
|
|
|
27,854
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27,854
|
|
Corporate debt securities
|
|
|
7,992
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,992
|
|
Total cash and cash equivalents
|
|
|
39,884
|
|
|
|
-
|
|
|
|
-
|
|
|
|
39,884
|
|
Marketable securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasuries
|
|
|
6,511
|
|
|
|
6
|
|
|
|
-
|
|
|
|
6,517
|
|
U.S. government agency securities
|
|
|
51,235
|
|
|
|
50
|
|
|
|
(12
|
)
|
|
|
51,273
|
|
Corporate debt securities
|
|
|
53,353
|
|
|
|
28
|
|
|
|
-
|
|
|
|
53,381
|
|
Total marketable securities available-for-sale
|
|
|
111,099
|
|
|
|
84
|
|
|
|
(12
|
)
|
|
|
111,171
|
|
Total cash, cash equivalents and marketable securities
|
|
$
|
150,983
|
|
|
$
|
84
|
|
|
$
|
(12
|
)
|
|
$
|
151,055
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
3,147
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,147
|
|
Money market funds
|
|
|
44,002
|
|
|
|
-
|
|
|
|
-
|
|
|
|
44,002
|
|
Corporate debt securities
|
|
|
2,199
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,199
|
|
Total cash and cash equivalents
|
|
|
49,348
|
|
|
|
-
|
|
|
|
-
|
|
|
|
49,348
|
|
Marketable securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasuries
|
|
|
14,732
|
|
|
|
-
|
|
|
|
(8
|
)
|
|
|
14,724
|
|
U.S. government agency securities
|
|
|
42,416
|
|
|
|
-
|
|
|
|
(44
|
)
|
|
|
42,372
|
|
Corporate debt securities
|
|
|
39,108
|
|
|
|
-
|
|
|
|
(16
|
)
|
|
|
39,092
|
|
Total marketable securities available-for-sale
|
|
|
96,256
|
|
|
|
-
|
|
|
|
(68
|
)
|
|
|
96,188
|
|
Total cash, cash equivalents and marketable securities
|
|
$
|
145,604
|
|
|
$
|
-
|
|
|
$
|
(68
|
)
|
|
$
|
145,536
|
|
The maturities of our marketable securities available-for-sale are as follows (in thousands):
.
|
|
December 31, 2019
|
|
|
|
Amortized
Cost
|
|
|
Estimated
Fair Value
|
|
Mature in one year or less
|
|
$
|
97,585
|
|
|
$
|
97,662
|
|
Mature after one year through two years
|
|
|
13,514
|
|
|
|
13,509
|
|
|
|
$
|
111,099
|
|
|
$
|
111,171
|
|
There were no realized gains or losses from the sale of marketable securities in the years ended December 31, 2019, 2018 and 2017. All of our investments are classified as short-term and available-for-sale, as we consider them available to fund current operations and may not hold our investments until maturity.
The following table presents inventories, net (in thousands):
|
|
December 31
|
|
|
|
2019
|
|
|
2018
|
|
Raw materials
|
|
$
|
15,198
|
|
|
$
|
12,111
|
|
Work-in-process
|
|
|
22,890
|
|
|
|
6,562
|
|
Finished goods
|
|
|
3,244
|
|
|
|
349
|
|
Total
|
|
$
|
41,332
|
|
|
$
|
19,022
|
|
66
6.
|
Intangible Assets, net
|
Intangible assets are related to certain capitalized milestone and sublicense payments. The following table presents intangible assets (in thousands):
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Intangible assets
|
|
$
|
19,773
|
|
|
$
|
19,773
|
|
Less accumulated amortization
|
|
|
(17,273
|
)
|
|
|
(8,056
|
)
|
Total
|
|
$
|
2,500
|
|
|
$
|
11,717
|
|
We recorded cost of sales - amortization of intangible assets related to capitalized milestone and sublicense payments to Merck, GlaxoSmithKline Biologicals SA (“GSK”) and Coley Pharmaceutical Group, Inc. (“Coley”) that we capitalized upon or after FDA approval of HEPLISAV-B in November 2017. See Note 10. In 2019, cost of sales – amortization of intangible assets of $9.2 million was related to capitalized Merck payments. In 2018, cost of sales – amortization of intangible assets of $8.1 million, $1.5 million and $1.3 million, were related to capitalized Merck, GSK and Coley payments, respectively. In 2017, cost of sales – amortization of intangible assets of $1.2 million was related to capitalized Coley payment.
At December 31, 2018, intangible assets related to GSK and Coley have been fully-amortized. The remaining intangible asset related to Merck will be fully amortized by April 2020. No impairment of intangible assets has been identified during the years presented.
7.
|
Property and Equipment, net
|
Property and equipment consist of the following (in thousands):
|
Estimated Useful
|
|
December 31,
|
|
|
Life
(In years)
|
|
2019
|
|
|
2018
|
|
Manufacturing equipment
|
5-14
|
|
$
|
11,484
|
|
|
$
|
12,029
|
|
Lab equipment
|
5-13
|
|
|
2,522
|
|
|
|
6,938
|
|
Computer equipment
|
3
|
|
|
5,009
|
|
|
|
5,465
|
|
Furniture and fixtures
|
3-13
|
|
|
1,934
|
|
|
|
1,809
|
|
Leasehold improvements
|
2-12
|
|
|
24,724
|
|
|
|
11,367
|
|
Assets in progress
|
|
|
|
4,336
|
|
|
|
2,605
|
|
|
|
|
|
50,009
|
|
|
|
40,213
|
|
Less accumulated depreciation and amortization
|
|
|
|
(17,987
|
)
|
|
|
(23,149
|
)
|
Total
|
|
|
$
|
32,022
|
|
|
$
|
17,064
|
|
Depreciation and amortization expense on property and equipment was $8.9 million, $3.6 million and $3.2 million for the years ended December 31, 2019, 2018 and 2017, respectively. Included in depreciation and amortization expense for the year ended December 31, 2019 was accelerated depreciation of $3.0 million related to certain long-lived assets. See Note 17.
67
8.
|
Current Accrued Liabilities and Accrued Research and Development
|
Current accrued liabilities and accrued research and development consist of the following (in thousands):
|
December 31,
|
|
|
2019
|
|
|
2018
|
|
Payroll and related expenses
|
$
|
6,653
|
|
|
$
|
8,058
|
|
Revenue reserve accruals
|
|
3,893
|
|
|
|
1,033
|
|
Third party research expenses
|
|
2,308
|
|
|
|
7,819
|
|
Third party development expenses
|
|
505
|
|
|
|
1,377
|
|
Restructuring liability
|
|
675
|
|
|
|
-
|
|
Other accrued liabilities
|
|
4,888
|
|
|
|
7,468
|
|
Total
|
$
|
18,922
|
|
|
$
|
25,755
|
|
9.
|
Commitments and Contingencies
|
Leases
As described in Note 2, we adopted ASC 842 as of January 1, 2019. We evaluated our contracts and have determined that, effective upon the adoption of ASC 842, our operating leases included equipment, office/laboratory and manufacturing facility leases.
We lease our facilities in Emeryville, California and Düsseldorf, Germany.
In July 2019, we entered into a sublease for office space located at 2100 Powell Street, Emeryville, California (the “Powell Street Sublease”) and the lease for our former corporate headquarters at 2929 Seventh Street, Berkeley, California was terminated effective August 31, 2019. Under the terms of the Powell Street Sublease, we are leasing 23,976 square feet at the rate of $3.90 per square foot, paid on a monthly basis. Rent is subject to scheduled annual increases and we are responsible for certain operating expenses and taxes throughout the life of the Powell Street Sublease. The Powell Street Sublease will continue until June 30, 2022. There is no option to extend the sublease term.
On September 17, 2018, we entered into a lease (“Horton Street Master Lease”) for office and laboratory space located at 5959 Horton Street, Emeryville, California (“Horton Street Premises”). Under the terms of the Horton Street Master Lease, we are leasing 75,662 square feet at the rate of $4.75 per square foot, paid on a monthly basis, starting on April 1, 2019 (“Commencement Date”). Rent is subject to scheduled annual increases, and we are also responsible for certain operating expenses and taxes throughout the life of Horton Street Master Lease. In connection with the Horton Street Master Lease, we are entitled to a tenant improvement allowance of up to $8.3 million, of which $7.0 million was received through December 31, 2019. The Horton Street Master Lease has an initial term of 12 years, following the Commencement Date with an option to extend the lease for two successive five-year terms. The optional periods were not included in the lease term used in determining the right-of-use asset or the lease liability as we did not consider it reasonably certain that we would exercise the options. The operating lease right-of-use assets and liabilities on our December 31, 2019 consolidated balance sheets primarily relate to the Horton Street Master Lease.
In connection with the organizational restructuring in May 2019 (see Note 17), we did not occupy the Horton Street Premises and in July 2019, we entered into an agreement to sublease the Horton Street Premises to a third party (“Horton Street Sublease”). Under the terms of the Horton Street Sublease, we are subleasing the entire 75,662 rentable square feet at the rate of $5.50 per square foot, paid on a monthly basis. Rent is subject to scheduled annual increases and the subtenant (“Subtenant”) is responsible for certain operating expenses and taxes throughout the life of the Horton Street Sublease. The Horton Street Sublease will continue until March 31, 2031, unless earlier terminated, concurrent with the term of our Horton Street Master Lease. The Subtenant has no option to extend the sublease term. For the year ended December 31, 2019, we recognized $2.6 million of sublease income included in other income (expense) in our consolidated statements of operations.
Under the terms of the Horton Street Master Lease, rent received from the Subtenant in excess of rent paid to the landlord is shared by paying the landlord 50% of the excess rent. The excess rent is considered a variable lease payment and the total estimated payments are being recognized as additional rent expense on a straight-line basis.
Our lease expense comprises of the following (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Operating lease expense
|
|
$
|
6,886
|
|
|
$
|
3,953
|
|
|
$
|
2,386
|
|
68
Cash paid for amounts included in the measurement of lease liabilities for the year ended December 31, 2019 was $5.5 million and was included in operating cash flows in our consolidated statement of cash flows.
The balance sheet classification of our operating lease liabilities was as follows (in thousands):
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
Operating lease liabilities:
|
|
|
|
|
|
|
|
|
Current portion of lease liabilities (included in other current liabilities)
|
|
$
|
3,039
|
|
|
$
|
-
|
|
Long-term portion of lease liabilities
|
|
|
37,845
|
|
|
|
-
|
|
Total operating lease liabilities
|
|
$
|
40,884
|
|
|
$
|
-
|
|
At December 31, 2019, the maturities of our sublease income and operating lease liabilities were as follows (in thousands):
Years ending December 31,
|
|
Sublease Income
|
|
|
Operating Lease
Liabilities
|
|
2020
|
|
$
|
4,446
|
|
|
$
|
7,023
|
|
2021
|
|
|
5,202
|
|
|
|
6,952
|
|
2022
|
|
|
5,358
|
|
|
|
6,201
|
|
2023
|
|
|
5,519
|
|
|
|
4,950
|
|
2024
|
|
|
5,684
|
|
|
|
4,963
|
|
Thereafter
|
|
|
39,600
|
|
|
|
34,560
|
|
Total
|
|
$
|
65,809
|
|
|
|
64,649
|
|
Less:
|
|
|
|
|
|
|
|
|
Present value adjustment
|
|
|
|
|
|
|
(23,765
|
)
|
Total
|
|
|
|
|
|
$
|
40,884
|
|
As of December 31, 2019, the weighted average remaining lease term is 9.7 years and the weighted average discount rate used to determine the operating lease liability was 10.1%.
Commitments
On February 20, 2018, we entered into a $175.0 million term loan agreement (“Loan Agreement”) with CRG Servicing LLC. We borrowed $100.0 million under the Loan Agreement at closing and the remaining $75.0 million in March 2019 (collectively, “Term Loans”). At our option, until September 30, 2023, a portion of the interest payments may be paid in kind, and thereby added to the principal. Through December 31, 2019, a portion of our interest was paid in kind, which increased the principal amount of the Term Loans to $178.6 million, net of debt discount of $1.4 million. Included in our total contractual obligations of $187.2 million is the principal amount of $175.0 million, paid-in-kind interest of $5.0 million and the backend facility fee of $7.2 million. The Term Loans have a maturity date of December 31, 2023, unless earlier prepaid. See Note 11.
In February 2018, we entered into a sublicense agreement with Merck. Under the agreement, we paid the third and last installment of $7.0 million in February 2020. See Note 10.
As of December 31, 2019, our material non-cancelable purchase and other commitments, for the supply of HEPLISAV-B, totaled $7.6 million.
During 2004, we also established a letter of credit with Deutsche Bank as security for our Düsseldorf Lease in the amount of 0.2 million Euros. The letter of credit remained outstanding through December 31, 2019 and is collateralized by a certificate of deposit for 0.2 million Euros, which has been included in restricted cash in the consolidated balance sheets as of December 31, 2019 and 2018.
69
In addition to the non-cancelable commitments included above, we have entered into contractual arrangements that obligate us to make payments to the contractual counterparties upon the occurrence of future events. In addition, in the normal course of operations, we have entered into license and other agreements and intend to continue to seek additional rights relating to compounds or technologies in connection with our discovery, manufacturing and development programs. Under the terms of the agreements, we may be required to pay future up-front fees, milestones and royalties on net sales of products originating from the licensed technologies, if any, or other payments contingent upon the occurrence of future events that cannot reasonably be estimated.
We also rely on and have entered into agreements with research institutions, contract research organizations and clinical investigators. These agreements are terminable by us upon written notice. Generally, we are liable only for actual effort expended by the organizations at any point in time during the contract through the notice period.
In conjunction with a financing arrangement with Symphony Dynamo, Inc. and Symphony Dynamo Holdings LLC (“Holdings”) in November 2009, we agreed to make contingent cash payments to Holdings equal to 50% of the first $50 million from any upfront, pre-commercialization milestone or similar payments received by us from any agreement with any third party with respect to the development and/or commercialization of cancer and hepatitis C therapies originally licensed to Symphony Dynamo, Inc., including SD-101. We have made no payments and have not recorded a liability as of December 31, 2019 and 2018.
Contingencies
From time to time, we may be involved in claims, suits, and proceedings arising from the ordinary course of our business, including actions with respect to intellectual property claims, commercial claims, and other matters. Such claims, suits, and proceedings are inherently uncertain and their results cannot be predicted with certainty. Regardless of the outcome, such legal proceedings can have an adverse impact on us because of legal costs, diversion of management resources, and other factors. In addition, it is possible that a resolution of one or more such proceedings could result in substantial damages, fines, penalties or orders requiring a change in our business practices, which could in the future materially and adversely affect our financial position, financial statements, results of operations, or cash flows in a particular period.
10.
|
Collaborative Research, Development and License Agreements
|
Serum Institute of India Pvt. Ltd.
In June 2017, we entered into an agreement to provide Serum Institute of India Pvt. Ltd. (“SIIPL”) with technical support. In consideration, SIIPL agreed to pay us at an agreed upon hourly rate for services and reimburse certain out-of-pocket expenses. In addition, we have rights to commercialization of certain potential products manufactured at the SIIPL facility. For the year ended December 31, 2019 and 2018, we recognized collaboration revenue of $0.1 million and $1.4 million, respectively. No collaborative revenue was recognized prior to 2018.
Merck, Sharp & Dohme Corp.
In February 2018, we entered into a Sublicense Agreement (the “Sublicense Agreement”) with Merck. The Sublicense Agreement grants us, under certain non-exclusive U.S. patent rights controlled by Merck which relate to recombinant production of hepatitis B surface antigen, the right to manufacture, use, offer for sale, sell and import HEPLISAV-B in the United States and includes the right to grant further sublicenses. Under the terms of the Sublicense Agreement, we are obligated to pay $21.0 million in three installments. The first, second and third installment of $7.0 million each was paid in February 2018, 2019 and 2020, respectively. The payment in 2020 is classified on the consolidated balance sheets as other current liabilities. In February 2018, we recorded $19.8 million as an intangible asset. At December 31, 2019, the intangible asset, net balance was $2.5 million. See Note 6. The Sublicense Agreement continues to be in effect through April 2020, at which time the license becomes perpetual, irrevocable, fully paid-up and royalty free.
GlaxoSmithKline Biologicals SA
On July 12, 2018, we entered into a sublicense agreement with GSK. The GSK sublicense agreement grants us, under certain non-exclusive U.S. patent rights controlled by GSK, the right to manufacture, use, offer to sell, sell and import HEPLISAV-B in the United States and includes the right to grant further sublicenses. In consideration, we paid a $1.5 million license fee to GSK in July 2018 and recorded this payment as an intangible asset. At December 31, 2018, the intangible asset has been fully amortized. See Note 6. In addition, we were obligated to pay GSK, royalties of 13% of net sales of HEPLISAV-B from December 1, 2017 through July 31, 2018. For the year ended December 31, 2018, we recorded $0.2 million of royalties in cost of sales – product in the consolidated statements of operations.
70
Coley Pharmaceutical Group, Inc.
In June 2007, we entered into a license agreement with Coley, under which Coley granted us a non-exclusive, royalty bearing license to patents, with the right to grant sublicenses for HEPLISAV-B (the “Coley Agreement). We met one of the regulatory milestones upon FDA approval of HEPLISAV-B in November 2017 and paid $2.5 million in January 2018 to Coley which was recorded as an intangible asset on the consolidated balance sheets. See Note 6. The Coley Agreement terminated in February 2018, at which time the license became a perpetual, irrevocable, fully paid-up and royalty free license. As of December 31, 2018, the $2.5 million intangible asset has been fully amortized.
Long-Term Debt
On February 20, 2018, we entered into a $175.0 million Loan Agreement with CRG Servicing LLC. Net proceeds under the Loan Agreement were $173.3 million. The Term Loans under the Loan Agreement bear interest at a rate equal to 9.5% per annum. At December 31, 2019, the effective interest rate was 10.3%. At our option, until September 30, 2023, a portion of the interest payments may be paid in kind, and thereby added to the principal. Through December 31, 2019, a portion of our interest was paid in kind, which increased the principal amount of the Term Loans to $178.6 million, net of debt discount of $1.4 million. The Term Loans have a maturity date of December 31, 2023, unless earlier prepaid. The Term Loans and paid-in-kind interest will be entirely payable at maturity.
In August 2019, we entered into a second amendment to the Loan Agreement (the “Second Amendment”). The Second Amendment amended the annual net sales threshold for sales of HEPLISAV-B, revising the twelve-month measurement periods from beginning on January 1 of each year to beginning on July 1 of each year (including 2019) and ending on June 30, 2023. The Second Amendment also revised the fee payable upon partial prepayment or at maturity of the Term Loans from 3% to 4% of the aggregate principal amounts.
The obligations under the Loan Agreement are secured, subject to customary permitted liens and other agreed upon exceptions, by a perfected security interest in (i) all tangible and intangible assets of the Company and any future subsidiary guarantors, except for certain customary excluded property, and (ii) all of the capital stock owned by the Company and such future subsidiary guarantors (limited, in the case of the stock of certain non-U.S. subsidiaries of the Company and certain U.S. subsidiaries substantially all of whose assets consist of equity interests in non-U.S. subsidiaries, to 65% of the capital stock of such subsidiaries, subject to certain exceptions). The obligations under the Loan Agreement will be guaranteed by each of the Company’s future direct and indirect subsidiaries (other than certain non-U.S. subsidiaries of the Company and certain U.S. subsidiaries substantially all of whose assets consist of equity interests in non-U.S. subsidiaries, subject to certain exceptions). The Loan Agreement contains customary covenants and requires us to comply with a $15.0 million daily minimum combined cash and investment balance covenant and a twelve-month period revenue requirement starting on July 1, 2019 for sales of HEPLISAV-B.
The Term Loans may be prepaid by us at any time. If the Term Loans are prepaid prior to the second anniversary of the initial borrowing date, we are subject to a repayment premium of up to 7.0% of the principal amount prepaid, depending on the date of prepayment.
We recorded $16.5 million and $8.8 million of interest expense related to the Term Loans during the year ended December 31, 2019 and 2018, respectively.
71
Our source of product revenue consists of sales of HEPLISAV-B in the U.S. The following table summarizes balances and activity in each of the product revenue allowance and reserve categories for the year ended December 31, 2019 and 2018 (in thousands):
|
|
Balance at
Beginning of
Period
|
|
|
Provisions
related to current
period sales
|
|
|
Credit or payments
made during
the period
|
|
|
Balance
at End of
Period
|
|
Year ended December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable reserves(1)
|
|
$
|
1,272
|
|
|
$
|
11,042
|
|
|
$
|
(9,613
|
)
|
|
$
|
2,701
|
|
Revenue reserve accruals(2)
|
|
$
|
1,033
|
|
|
$
|
6,632
|
|
|
$
|
(3,772
|
)
|
|
$
|
3,893
|
|
Year ended December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable reserves(1)
|
|
$
|
-
|
|
|
$
|
3,274
|
|
|
$
|
(2,002
|
)
|
|
$
|
1,272
|
|
Revenue reserve accruals(2)
|
|
$
|
-
|
|
|
$
|
1,308
|
|
|
$
|
(275
|
)
|
|
$
|
1,033
|
|
(1)
|
Reserves are for chargebacks, discounts and other fees.
|
(2)
|
Accruals are for returns, rebates and other fees
|
Basic net loss per share is calculated by dividing the net loss by the weighted-average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss by the weighted-average number of common shares outstanding during the period and giving effect to all potentially dilutive common shares using the treasury-stock method. For purposes of this calculation, outstanding stock options and stock awards are considered to be potentially dilutive common shares and are only included in the calculation of diluted net loss per share when their effect is dilutive.
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Basic and diluted net loss per share (in thousands, except per
share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(152,600
|
)
|
|
$
|
(158,899
|
)
|
|
$
|
(95,154
|
)
|
Preferred stock deemed dividend
|
|
|
(3,267
|
)
|
|
|
-
|
|
|
|
-
|
|
Net loss allocable to common stockholders
|
|
$
|
(155,867
|
)
|
|
$
|
(158,899
|
)
|
|
$
|
(95,154
|
)
|
Denominator for basic and diluted net loss per share allocable to
common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
72,024
|
|
|
|
62,362
|
|
|
|
52,613
|
|
Basic and diluted net loss per share allocable to common stockholders
|
|
$
|
(2.16
|
)
|
|
$
|
(2.55
|
)
|
|
$
|
(1.81
|
)
|
Outstanding stock options and stock awards were excluded from the calculation of net loss per share allocable to common stockholders as the effect of their inclusion would have been anti-dilutive.
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Outstanding securities not included in diluted net loss per
share calculation (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and stock awards
|
|
|
9,789
|
|
|
|
7,344
|
|
|
|
5,981
|
|
Series B Convertible Preferred Stock (as converted to common stock)
|
|
|
4,840
|
|
|
|
-
|
|
|
|
-
|
|
Warrants
|
|
|
5,841
|
|
|
|
-
|
|
|
|
-
|
|
72
Common Stock Outstanding
As of December 31, 2019, there were 83,871,119 shares of our common stock outstanding.
In August 2019, we sold (i) 18,525,000 shares of our common stock, par value $0.001 per share, (ii) 4,840 shares of our Series B Preferred Stock, par value $0.001 per share (“Series B Preferred Stock”) and (iii) warrants to purchase up to an aggregate of 5,841,250 shares of our common stock in an underwritten public offering (the “Offering”). Each share of common stock was sold together with a warrant to purchase 0.25 shares of common stock, at a combined price of $3.00 per share of common stock and the accompanying warrant. Each share of Series B Preferred Stock was sold together with a warrant to purchase 250 shares of common stock, at a combined price of $3,000 per share and the accompanying warrant. Proceeds from the Offering were approximately $65.6 million, net of issuance costs of $4.5 million.
Investment funds associated with Bain Capital Life Sciences Investors, LLC, or Bain Capital Life Sciences, have purchased approximately $35.0 million of common stock, Series B Preferred Stock and warrants in this Offering at the public offering price. Pursuant to the Offering, (i) Bain Capital Life Sciences Fund, L.P. purchased 6,826,266 shares of common stock, 3,756 shares of Series B Preferred Stock and warrants to purchase 2,645,566 shares of common stock for a total purchase price of approximately $31.7 million and (ii) BCIP Life Sciences Associates, L.P. purchased 698,734 shares of common stock, 384 shares of Series B Preferred Stock and warrants to purchase 270,684 shares of common stock for a total purchase price of approximately $3.2 million. Bain Capital Life Sciences Investors, LLC is the general partner of Bain Life Sciences. The participation by these investors was on the same terms as the other investors in the Offering.
Following the offering, Andrew A. F. Hack, M.D., Ph.D and Managing Director of Bain Capital Life Sciences (a related party), was appointed to our board of directors.
On November 3, 2017, we entered into an At Market Sales Agreement (“2017 ATM Agreement”) with Cowen and Company, LLC (“Cowen”) under which we may offer and sell from time to time at our sole discretion, shares of our common stock having an aggregate offering price up to $150 million through Cowen as our sales agent. We pay Cowen a commission of up to 3% of the gross sales proceeds of any common stock sold through Cowen under the 2017 ATM Agreement. For the year ended December 31, 2019, we received net cash proceeds of $13.9 million resulting from sales of 1,386,906 shares of our common stock. As of December 31, 2019, we have $118.6 million remaining under the 2017 ATM Agreement. Subsequent to December 31, 2019 and through March 11, 2020, we sold 2,180,266 shares of common stock for net proceeds of $11.7 million under the 2017 ATM Agreement.
Preferred Stock Outstanding
As of December 31, 2019, there were 4,840 shares of Series B Preferred Stock outstanding.
Each share of Series B Preferred Stock is convertible into 1,000 shares of common stock at any time at the holder’s option. However, the holder is prohibited from converting the Series B Preferred Stock into shares of common stock if, as a result of such conversion, the holder and its affiliates would own more than 4.99% of the total number of shares of common stock then issued and outstanding, which percentage may be changed at the holders’ election to a higher or lower percentage (not to exceed 19.99%) upon 61 days’ notice to the Company. In the event of liquidation, dissolution, or winding up, the holder of Series B Preferred Stock will receive payment on shares of Series B Preferred Stock (determined on an as-converted to common stock basis) equal to the amount that would be paid on our common stock. Shares of Series B Preferred Stock generally have no voting rights, except as required by law and except that the consent of holders of a majority of the outstanding Series B Preferred Stock is required to amend the terms of the Series B Preferred Stock. Holders of Series B Preferred Stock are not entitled to receive any dividends, unless and until specifically declared by our board of directors. The Series B Preferred Stock ranks on parity with our common stock as to distributions of assets upon liquidation, dissolution or winding up. The Series B Preferred Stock may rank senior to, on parity with or junior to any class or series of capital stock created in the future depending upon the specific terms of such future stock issuance.
The fair value of the common stock into which the Series B Preferred Stock is convertible exceeded the allocated purchase price of the Series B Preferred Stock by $3.3 million on the date of issuance, for which we recorded a deemed dividend. We recognized a deemed dividend equal to the number of common stock into which the Series B Preferred Stock is convertible multiplied by the difference between the value of the common stock and the Series B Preferred Stock conversion price per share on the date of issuance, which is the date the stock first became convertible. The dividend was reflected as a one-time, non-cash, deemed dividend to the holders of Series B Preferred Stock on the date of issuance.
73
Warrants
As of December 31, 2019, the following common stock warrants were outstanding:
Warrants Issuance Date
|
|
Shares Issuable
(in thousands)
|
|
|
Expiration Date
|
|
Exercise Price
per Share
|
|
|
Outstanding as of
December 31, 2019
(in thousands)
|
|
August 12, 2019
|
|
|
5,841
|
|
|
February 12, 2022
|
|
$
|
4.50
|
|
|
|
5,841
|
|
Warrants were exercisable upon issuance. The holder is prohibited from exercising these warrants if, as a result of such exercise, the holder and its affiliates, would own more than 4.99% of the total number of shares of common stock then issued and outstanding, which percentage may be changed at the holders’ election to a higher or lower percentage (not to exceed 19.99%) upon 61 days’ notice to the Company.
The warrants contain provisions that may obligate us to repurchase them for an amount that does not represent fair value in the event of a change of control. Due to this provision, the warrants do not meet the criteria to be considered indexed to our own stock. Accordingly, we recorded the warrants as a derivative liability at fair value of $7.4 million on the issuance date, which was estimated using the Black-Scholes model.
The warrants will be revalued at each reporting period using the Black-Scholes model and the change in the fair value of the warrants will recognized as other income (expense) in the consolidated statements of operations. At December 31, 2019, the estimated fair value of warrant liability was $14.9 million. For year ended December 31, 2019, we recognized the $7.5 million increase in the estimated fair value as a loss on warrant liability in other income (expense), net in our consolidated statements of operations.
15.
|
Equity Plans and Stock-Based Compensation
|
Equity Plans
Our 2018 Equity Incentive Plan (the “2018 EIP”) is intended to be the successor to and continuation of the Dynavax Technologies Corporation 2011 Equity Incentive Plan (the “2011 EIP”). The aggregate number of shares of our common stock that may be issued under the 2018 EIP (subject to adjustment for certain changes in capitalization) is comprised of the sum of (i) 5,000,000 newly reserved shares of common stock, (ii) 140,250 unallocated shares of common stock remaining available for grant under the 2011 EIP as of May 31, 2018, and (iii) 7,477,619 shares subject to outstanding stock awards granted under the 2011 EIP and the Dynavax Technologies Corporation 2017 Inducement Award Plan that may become available from time to time as set forth in the 2018 EIP. The 2018 EIP provides for the issuance of up to 12,617,869 shares of our common stock to our employees and directors.
On May 30, 2019, our stockholders approved an amendment to 2018 Equity Incentive Plan (the “Amended 2018 EIP”) to, among other things, increase the aggregate number of shares of common stock authorized for issuance by 2,300,000. Under the Amended 2018 EIP, the aggregate number of shares of our common stock that may be issued to employees and directors (subject to adjustment for certain changes in capitalization) is 14,917,869.
The Amended 2018 EIP is administered by our Board of Directors, or a designated committee of the Board of Directors, and awards granted under the Amended 2018 EIP have a term of 7 years unless earlier terminated by the Board of Directors. As of December 31, 2019, there were 3,308,216 shares of common stock reserved for issuance under the Amended 2018 EIP.
74
Activity under our stock plans is set forth below:
|
|
Shares Underlying
Outstanding Options
(in thousands)
|
|
|
Weighted-Average Exercise
Price Per Share
|
|
|
Weighted-Average
Remaining
Contractual Term
(years)
|
|
|
Aggregate
Intrinsic Value
(in thousands)
|
|
Balance at December 31, 2018
|
|
|
5,750
|
|
|
$
|
18.20
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
3,747
|
|
|
|
6.88
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(10
|
)
|
|
|
5.75
|
|
|
|
|
|
|
|
|
|
Options cancelled:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options forfeited (unvested)
|
|
|
(1,278
|
)
|
|
|
12.54
|
|
|
|
|
|
|
|
|
|
Options expired (vested)
|
|
|
(203
|
)
|
|
|
16.52
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019
|
|
|
8,006
|
|
|
$
|
13.86
|
|
|
|
4.47
|
|
|
$
|
2,125
|
|
Vested and expected to vest at
December 31, 2019
|
|
|
7,729
|
|
|
$
|
14.11
|
|
|
|
4.40
|
|
|
$
|
1,954
|
|
Exercisable at December 31, 2019
|
|
|
4,531
|
|
|
$
|
18.37
|
|
|
|
3.09
|
|
|
$
|
3
|
|
The total intrinsic value of stock options exercised during the years ended December 31, 2019, 2018 and 2017 was $26,000, $0.2 million and $0.9 million, respectively. The total intrinsic value of exercised stock options is calculated based on the difference between the exercise price and the quoted market price of our common stock as of the close of the exercise date.
The total fair value of stock options vested during the years ended December 31, 2019, 2018 and 2017 was $19.5 million, $8.1 million and $13.0 million, respectively.
Our non-vested stock awards are comprised of restricted stock units granted with performance and time-based vesting criteria. A summary of the status of non-vested restricted stock units as of December 31, 2019, and activities during 2019 are summarized as follows:
|
Number of Shares
(In thousands)
|
|
|
Weighted-Average
Grant-Date Fair Value
|
|
Non-vested as of December 31, 2018
|
|
1,594
|
|
|
$
|
8.82
|
|
Granted
|
|
1,823
|
|
|
|
8.80
|
|
Vested
|
|
(970
|
)
|
|
|
6.79
|
|
Forfeited
|
|
(663
|
)
|
|
|
10.81
|
|
Non-vested as of December 31, 2019
|
|
1,784
|
|
|
$
|
9.16
|
|
Stock-based compensation expense related to restricted stock units was approximately $9.1 million for the year ended December 31, 2019. The aggregate intrinsic value of the restricted stock units outstanding as of December 31, 2019, based on our stock price on that date, was $10.2 million.
The total fair value of restricted stock units vested during the years ended December 31, 2019, 2018 and 2017 was $7.9 million, $19.4 million and $1.2 million, respectively.
Stock-Based Compensation
Under our stock-based compensation plans, option awards generally vest over a three-year or four-year period contingent upon continuous service and unless exercised, expire seven or ten years from the date of grant (or earlier upon termination of continuous service). The Company has also granted performance-based equity awards to certain of our employees. As of December 31, 2019, approximately 155,000 shares underlying stock options and approximately 89,000 restricted stock unit awards with performance-based vesting criteria were outstanding. All of the awards with performance-based vesting criteria were deemed probable as of December 31, 2019. We recognized stock-based compensation expense for awards with performance-based vesting criteria during the years ended December 31, 2019, 2018 and 2017 of $0.5 million, $1.9 million and $0.3 million, respectively.
75
The fair value of each option is estimated on the date of grant using the Black-Scholes option valuation model and the following weighted-average assumptions:
|
|
Stock Options
|
|
|
Employee Stock Purchase Plan
|
|
|
|
Year Ended December 31,
|
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Weighted-average fair value
|
|
$
|
4.58
|
|
|
$
|
10.75
|
|
|
$
|
8.27
|
|
|
$
|
2.72
|
|
|
$
|
8.30
|
|
|
$
|
3.05
|
|
Risk-free interest rate
|
|
|
2.1
|
%
|
|
|
2.5
|
%
|
|
|
1.9
|
%
|
|
|
1.9
|
%
|
|
|
2.4
|
%
|
|
|
1.0
|
%
|
Expected life (in years)
|
|
|
4.5
|
|
|
|
4.2
|
|
|
|
4.5
|
|
|
|
1.2
|
|
|
|
1.3
|
|
|
|
1.2
|
|
Expected Volatility
|
|
|
0.9
|
|
|
|
0.8
|
|
|
|
0.9
|
|
|
|
0.7
|
|
|
|
1.1
|
|
|
|
1.0
|
|
Expected volatility is based on historical volatility of our stock price. The expected life of options granted is estimated based on historical option exercise and employee termination data. Our senior management, who hold a majority of the options outstanding, and other employees were grouped and considered separately for valuation purposes. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Forfeiture estimates are based on historical employee turnover. The dividend yield is zero percent for all years and is based on our history and expectation of dividend payouts.
Compensation expense is based on awards ultimately expected to vest and reflects estimated forfeitures. For equity awards with time-based vesting, the fair value is amortized to expense on a straight-line basis over the vesting periods. For equity awards with performance-based vesting criteria, the fair value is amortized to expense when the achievement of the vesting criteria becomes probable. Stock-based compensation cost for the year ended December 31, 2019 includes incremental cost of $4.1 million for accelerated vesting of stock awards and extension of exercise period of stock options in connection with the retirement of our Chief Executive Officer. See Note 17.
We recognized the following amounts of stock-based compensation expense (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Employees and directors stock-based compensation expense
|
|
$
|
25,456
|
|
|
$
|
23,478
|
|
|
$
|
14,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Research and development
|
|
$
|
8,058
|
|
|
$
|
9,604
|
|
|
$
|
7,827
|
|
Selling, general and administrative
|
|
|
10,224
|
|
|
|
11,761
|
|
|
|
7,090
|
|
Cost of sales - product
|
|
|
1,088
|
|
|
|
1,354
|
|
|
|
-
|
|
Inventory
|
|
|
1,964
|
|
|
|
759
|
|
|
|
-
|
|
Restructuring
|
|
|
4,122
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
25,456
|
|
|
$
|
23,478
|
|
|
$
|
14,917
|
|
As of December 31, 2019, the total unrecognized compensation cost related to non-vested stock options and awards deemed probable of vesting, including all stock options with time-based vesting, net of estimated forfeitures, amounted to $28.0 million, which is expected to be recognized over the remaining weighted-average vesting period of 1.7 years. Additionally, as of December 31, 2019, the total unrecognized compensation cost related to equity awards with performance-based vesting criteria amounted to $0.1 million.
Employee Stock Purchase Plan
The Amended and Restated 2014 Employee Stock Purchase Plan (the “Purchase Plan”) provides for the purchase of common stock by eligible employees and became effective on May 28, 2014. On May 31, 2018, our stockholders approved an amendment to the Purchase Plan to increase the aggregate number of shares of common stock authorized for issuance by 600,000 shares. The purchase price per share is the lesser of (i) 85% of the fair market value of the common stock on the commencement of the two-year offer period (generally, the sixteenth day in February or August) or (ii) 85% of the fair market value of the common stock on the exercise date, which is the last day of a purchase period (generally, the fifteenth day in February or August). For the year ended December 31, 2019, employees have acquired 122,117 shares of our common stock under the Purchase Plan and 450,917 shares of our common stock remained available for future purchases under the Purchase Plan.
76
As of December 31, 2019, the total unrecognized compensation cost related to shares of our common stock under the Purchase Plan amounted to $0.4 million, which is expected to be recognized over the remaining weighted-average vesting period of 1.4 years.
16.
|
Employee Benefit Plan
|
We maintain a 401(k) Plan, which qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the 401(k) Plan, participating employees may defer a portion of their pretax earnings. We may, at our discretion, contribute for the benefit of eligible employees. The Company’s contribution to the 401(k) Plan was approximately $0.3 million for the year ended December 31, 2019 and approximately $0.2 million for each of the years ended December 31, 2018 and 2017.
On May 23, 2019, we implemented a strategic organizational restructuring, principally to align our operations around our vaccine business and significantly curtail further investment in our immuno-oncology business. In connection with the restructuring, we reduced our workforce by approximately 80 positions, or approximately 36%, of U.S.-based personnel. Also, in connection with the restructuring, our Chief Executive Officer, also a member of the Board of Directors (the “Board”), submitted notice of his retirement from the Company and the Board, effective August 1, 2019. As of December 31, 2019, we have completed our restructuring activities and all costs have been incurred.
The major components of our restructuring costs are summarized as follows (in thousands):
Components of Restructuring Costs
|
|
Total Restructuring
Costs Expected to
be Incurred
|
|
|
Restructuring Costs
Incurred for the
Year Ended
December 31, 2019
|
|
|
Remaining to be Incurred
|
|
Severance and other termination benefits
|
|
$
|
6,277
|
|
|
$
|
6,277
|
|
|
$
|
-
|
|
Stock-based compensation expense (a)
|
|
|
4,122
|
|
|
|
4,122
|
|
|
|
-
|
|
Accelerated depreciation
|
|
|
2,957
|
|
|
|
2,957
|
|
|
|
-
|
|
Total restructuring cost
|
|
$
|
13,356
|
|
|
$
|
13,356
|
|
|
$
|
-
|
|
|
(a)
|
As a result of accelerated vesting of stock awards and the extension of exercise period of stock options
|
The outstanding restructuring liabilities are included in accrued liabilities on the consolidated balance sheets. As of December 31, 2019, the components of the restructuring liabilities were as follows (in thousands):
|
Severance and Other
Termination Benefits
|
|
Balance at December 31, 2018
|
$
|
-
|
|
Severance and other termination benefits
|
|
6,277
|
|
Cash payments or settlements
|
|
(5,602
|
)
|
Balance at December 31, 2019
|
$
|
675
|
|
In January 2017, we implemented organizational restructuring and cost reduction plans to align around our immuno-oncology business while allowing us to advance HEPLISAV-B through the FDA review and approval process. To achieve these cost reductions, we suspended manufacturing activities, commercial preparations and other long term investment related to HEPLISAV-B and reduced our global workforce by approximately 40 percent. In the first quarter of 2017 we recorded charges of $2.8 million related to severance, other termination benefits and outplacement services. All of the $2.8 million was paid in 2017.
77
Consolidated (loss) income before provision for income taxes consisted of the following (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
U.S.
|
|
$
|
(154,605
|
)
|
|
$
|
(160,032
|
)
|
|
$
|
(95,898
|
)
|
Non U.S.
|
|
|
2,005
|
|
|
|
1,133
|
|
|
|
744
|
|
Total
|
|
$
|
(152,600
|
)
|
|
$
|
(158,899
|
)
|
|
$
|
(95,154
|
)
|
No income tax expense was recorded for the years ended December 31, 2019, 2018 and 2017 due to our full valuation allowance position. The difference between the consolidated income tax benefit and the amount computed by applying the federal statutory income tax rate to the consolidated loss before income taxes was as follows (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Income tax benefit at federal statutory rate
|
|
$
|
(32,046
|
)
|
|
$
|
(33,366
|
)
|
|
$
|
(32,352
|
)
|
State tax
|
|
|
(3,153
|
)
|
|
|
(5,591
|
)
|
|
|
(4,482
|
)
|
Business credits
|
|
|
(1,757
|
)
|
|
|
(3,065
|
)
|
|
|
(1,960
|
)
|
Uncertain tax positions
|
|
|
5,426
|
|
|
|
-
|
|
|
|
-
|
|
Deferred compensation charges
|
|
|
4,600
|
|
|
|
(1,165
|
)
|
|
|
3,823
|
|
Change in valuation allowance
|
|
|
22,715
|
|
|
|
43,134
|
|
|
|
(109,165
|
)
|
Rate change
|
|
|
-
|
|
|
|
-
|
|
|
|
86,943
|
|
Net operating loss and tax credit limitation
|
|
|
-
|
|
|
|
-
|
|
|
|
56,962
|
|
Section 162(m) limitation
|
|
|
2,439
|
|
|
|
-
|
|
|
|
-
|
|
Mark-to-market of warrants
|
|
|
1,575
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
201
|
|
|
|
53
|
|
|
|
231
|
|
Total income tax expense
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred tax assets and liabilities consisted of the following (in thousands):
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carry forwards
|
|
$
|
207,385
|
|
|
$
|
178,730
|
|
Research tax credit carry forwards
|
|
|
27,883
|
|
|
|
34,064
|
|
Accruals and reserves
|
|
|
17,312
|
|
|
|
10,137
|
|
Capitalized research costs
|
|
|
256
|
|
|
|
943
|
|
Other
|
|
|
2,437
|
|
|
|
1,147
|
|
Total deferred tax assets
|
|
|
255,273
|
|
|
|
225,021
|
|
Less valuation allowance
|
|
|
(247,092
|
)
|
|
|
(224,746
|
)
|
Net deferred tax assets
|
|
|
8,181
|
|
|
|
275
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Fixed assets
|
|
|
(275
|
)
|
|
|
(275
|
)
|
Operating lease right-of-use assets
|
|
|
(7,906
|
)
|
|
|
-
|
|
Total deferred tax liabilities
|
|
|
(8,181
|
)
|
|
|
(275
|
)
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
The tax benefit of net operating losses, temporary differences and credit carryforwards is required to be recorded as an asset to the extent that management assesses that realization is “more likely than not.” Realization of the future tax benefits is dependent on our ability to generate sufficient taxable income within the carryforward period. Because of our recent history of operating losses, management believes that recognition of the deferred tax assets arising from the above-mentioned future tax benefits is currently not likely to be realized and, accordingly, has provided a full valuation allowance. The valuation allowance increased by $22.3 million and $40.4 million for the years ended December 31, 2019 and 2018, respectively, due to an increase in our deferred tax assets.
78
As of December 31, 2019, we had federal net operating loss carryforwards of approximately $887.3 million, which will begin to expire in the year 2020 and federal research and development tax credits of approximately $21.7 million, which expire in the years 2020 through 2039.
As of December 31, 2019, we had net operating loss carryforwards for California and other states for income tax purposes of approximately $318.3 million, which expire in the years 2020 through 2039, and California state research and development tax credits of approximately $19.6 million, which do not expire.
As of December 31, 2019, we had net operating loss carryforwards for foreign income tax purposes of approximately $9.0 million, which do not expire.
Uncertain Income Tax positions
The total amount of unrecognized tax benefits was $10.3 million and $1.2 million as of December 31, 2019 and 2018, respectively. If recognized, none of the unrecognized tax benefits would affect the effective tax rate.
The following table summarizes the activity related to our unrecognized tax benefits:
Balance at December 31, 2018
|
|
$
|
(1,229
|
)
|
Tax positions related to the current year
|
|
|
|
|
Additions
|
|
|
(439
|
)
|
Reductions
|
|
|
-
|
|
Tax positions related to the prior year
|
|
|
|
|
Additions
|
|
|
(8,654
|
)
|
Reductions
|
|
|
-
|
|
Balance at December 31, 2019
|
|
$
|
(10,322
|
)
|
Our policy is to account for interest and penalties as income tax expense. As of December 31, 2019, there was no interest related to unrecognized tax benefits. No amounts of penalties related to unrecognized tax benefits were recognized in the provision for income taxes. We do not anticipate any significant change within 12 months of this reporting date of its uncertain tax positions.
The Tax Reform Act of 1986 limits the annual use of net operating loss and tax credit carryforwards in certain situations where changes occur in stock ownership of a company. In the event there is a change in ownership, as defined, the annual utilization of such carryforwards could be limited. Based on an analysis under Section 382 of the Internal Revenue Code, completed through December 31, 2018, we experienced ownership changes in 2008, 2009 and 2012 which limit the future use of its pre-change federal net operating loss carryforwards and federal research and development tax credits. We excluded these federal net operating loss carryforwards and federal research and development tax credits that will expire as a result of the annual limitations in the deferred tax assets as of December 31, 2019. A limitation calculation has not been performed with respect to the California net operating loss carryforwards and research and development tax credits and we believe that our ability to use these California net operating loss carryforwards and research and development tax credits in the future may be limited. We have not completed an analysis and a limitation calculation has not been performed subsequent to the period ending December 31, 2018. Due to equity issuances in 2019 and changes in ownership of our common stock, we believe that our net operating losses and tax credits in the future may be further limited.
We are subject to income tax examinations for U.S. federal and state income taxes from 2000 forward. We are subject to tax examination in Germany from 2017 forward and in India from 2018 forward.
79
19.
|
Selected Quarterly Financial Data (Unaudited; in thousands, except per share amounts)
|
|
|
Year Ended December 31, 2019
|
|
|
|
Q1
|
|
|
Q2
|
|
|
Q3
|
|
|
Q4
|
|
Total revenues
|
|
$
|
5,773
|
|
|
$
|
8,301
|
|
|
$
|
10,575
|
|
|
$
|
10,570
|
|
Net loss
|
|
$
|
(39,672
|
)
|
|
$
|
(42,713
|
)
|
|
$
|
(33,459
|
)
|
|
$
|
(36,756
|
)
|
Net loss allocable to common stockholders
|
|
$
|
(39,672
|
)
|
|
$
|
(42,713
|
)
|
|
$
|
(36,726
|
)
|
|
$
|
(36,756
|
)
|
Net loss per share allocable to common stockholders - basic
and diluted
|
|
$
|
(0.62
|
)
|
|
$
|
(0.66
|
)
|
|
$
|
(0.49
|
)
|
|
$
|
(0.44
|
)
|
Weighted average shares used to compute basic and diluted
net loss per share allocable to common stockholders
|
|
|
63,778
|
|
|
|
65,088
|
|
|
|
75,106
|
|
|
|
83,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
|
|
Q1
|
|
|
Q2
|
|
|
Q3
|
|
|
Q4
|
|
Total revenues
|
|
$
|
165
|
|
|
$
|
1,254
|
|
|
$
|
1,461
|
|
|
$
|
5,318
|
|
Net loss
|
|
$
|
(38,958
|
)
|
|
$
|
(39,444
|
)
|
|
$
|
(40,528
|
)
|
|
$
|
(39,969
|
)
|
Net loss per share - basic and diluted
|
|
$
|
(0.63
|
)
|
|
$
|
(0.63
|
)
|
|
$
|
(0.65
|
)
|
|
$
|
(0.64
|
)
|
Weighted average shares used to compute basic and diluted
net loss per share
|
|
|
61,744
|
|
|
|
62,346
|
|
|
|
62,650
|
|
|
|
62,694
|
|
On March 11, 2020, we entered into a warrant exchange agreement with Bain Capital Life Sciences Fund, L.P. and BCIP Life Sciences Associates, L.P. (together, “Bain Life Sciences”) pursuant to which we agreed that we would, upon future notice from Bain Life Sciences, to exchange all or a portion of the common stock warrants held by Bain Life Sciences for warrants to purchase a new Series C convertible preferred stock. Each share of Series C convertible preferred stock would be convertible into 1,000 shares of common stock, with a conversion price of $4.50 and would have substantially identical rights to, our Series B Convertible Preferred Stock.
80