NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Operations
Inovio Pharmaceuticals, Inc. (the “Company” or “Inovio”), a clinical stage biopharmaceutical company, develops active DNA immunotherapies and vaccines in combination with proprietary electroporation delivery devices to prevent and treat cancers and infectious diseases. Inovio’s synthetic products are based on the Company’s SynCon
®
design. The Company has completed, current or planned clinical programs of its proprietary SynCon
®
products for HPV-caused pre-cancers and cancers, influenza, prostate cancer, breast/lung/pancreatic cancer, hepatitis C virus (HCV), hepatitis B virus (HBV), HIV, Ebola, Middle East Respiratory Syndrome (MERS) and Zika virus. The Company's partners and collaborators include MedImmune, LLC, F. Hoffmann-La Roche Ltd and Hoffmann-La Roche Inc. (“Roche”), The Wistar Institute, University of Pennsylvania, GeneOne Life Science Inc. ("GeneOne"), Drexel University, National Microbiology Laboratory of the Public Health Agency of Canada, National Institute of Allergy and Infectious Diseases (“NIAID”), United States Military HIV Research Program (“USMHRP”), U.S. Army Medical Research Institute of Infectious Diseases (“USAMRIID”), HIV Vaccines Trial Network (“HVTN”), and Defense Advanced Research Projects Agency (“DARPA”). Inovio is incorporated in Delaware.
2. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Inovio have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The condensed consolidated balance sheet as of
June 30, 2016
, condensed consolidated statements of operations for the
three and six months ended June 30, 2016
and
2015
, condensed consolidated statements of comprehensive loss for the
three and six months ended June 30, 2016
and
2015
and the condensed consolidated statements of cash flows for the
six months ended June 30, 2016
and
2015
, are unaudited, but include all adjustments (consisting of normal recurring adjustments) that the Company considers necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. The results of operations for the
three and six months ended June 30, 2016
shown herein are not necessarily indicative of the results that may be expected for the year ending December 31,
2016
, or for any other period. These financial statements, and notes thereto, should be read in conjunction with the audited consolidated financial statements for the year ended December 31,
2015
, included in the Company's Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on March 11, 2016. The balance sheet at December 31,
2015
has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The Company has evaluated subsequent events after the balance sheet date of
June 30, 2016
through the date it filed these unaudited condensed consolidated financial statements with the SEC.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
3. Critical Accounting Policies
Revenue Recognition.
The Company recognizes revenues when all four of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery of the products and/or services has occurred; (3) the selling price is fixed or determinable; and (4) collectability is reasonably assured.
Grant revenue
The Company receives non-refundable grants under available government programs. Government grants towards current expenditures are recorded as revenue when there is reasonable assurance that the Company has complied with all conditions necessary to receive the grants, collectability is reasonably assured, and as the expenditures are incurred.
License fee and milestone revenue
The Company has adopted a strategy of co-developing or licensing its gene delivery technology for specific genes or specific medical indications. Accordingly, the Company has entered into collaborative research and development agreements and has received funding for pre-clinical research and clinical trials. Agreements that contain multiple elements are analyzed to determine whether the deliverables within the agreement can be separated or whether they must be accounted for as a single
unit of accounting in accordance with the Financial Accounting Standards Board's (“FASB”) Accounting Standards Update (“ASU”) No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements. Analyzing the arrangement to identify deliverables requires the use of judgment, and each deliverable may be an obligation to deliver services, a right or license to use an asset, or another performance obligation. The delivered item(s) were considered a separate unit of accounting if all of the following criteria were met: (1) the delivered item(s) has value to the customer on a standalone basis; (2) there is objective and reliable evidence of the fair value of the undelivered item(s); and (3) if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item(s) is considered probable and substantially in our control. If these criteria were not met, the deliverable was combined with other deliverables in the arrangement and accounted for as a combined unit of accounting.
Arrangement consideration is allocated at the inception of the agreement to all identified units of accounting based on their relative selling price. The relative selling price for each deliverable is determined using vendor specific objective evidence (“VSOE”), of selling price or third-party evidence of selling price if VSOE does not exist. If neither VSOE nor third-party evidence of selling price exists, we use our best estimate of the selling price for the deliverable. The amount of allocable arrangement consideration is limited to amounts that are fixed or determinable. The consideration received is allocated among the separate units of accounting, and the applicable revenue recognition criteria are applied to each of the separate units. Changes in the allocation of the sales price between delivered and undelivered elements can impact revenue recognition but do not change the total revenue recognized under any agreement.
Upfront license fee payments are recognized upon delivery of the license if facts and circumstances dictate that the license has standalone value from the undelivered items, the relative selling price allocation of the license is equal to or exceeds the upfront license fee, persuasive evidence of an arrangement exists, our price to the collaborator is fixed or determinable, and collectability is reasonably assured. Upfront license fee payments are deferred if facts and circumstances dictate that the license does not have standalone value. The determination of the length of the period over which to defer revenue is subject to judgment and estimation and can have an impact on the amount of revenue recognized in a given period.
The Company applies ASU No. 2010-17, Revenue Recognition (Topic 605): Milestone Method of Revenue Recognition
(“Milestone Method”). Under the Milestone Method, the Company will recognize consideration that is contingent upon the achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved only if the milestone is substantive in its entirety. A milestone is considered substantive when it meets all of the following criteria:
|
|
1.
|
The consideration is commensurate with either the entity's performance to achieve the milestone or the enhancement of the value of the delivered item(s) as a result of a specific outcome resulting from the entity's performance to achieve the milestone,
|
|
|
2.
|
The consideration relates solely to past performance, and
|
|
|
3.
|
The consideration is reasonable relative to all of the deliverables and payment terms within the arrangement.
|
A milestone is defined as an event (i) that can only be achieved based in whole or in part on either the entity's performance or on the occurrence of a specific outcome resulting from the entity's performance, (ii) for which there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved and (iii) that would result in additional payments being due to the Company.
Business Combinations.
The cost of an acquired business is assigned to the tangible and identifiable intangible assets acquired and liabilities assumed on the basis of the estimated fair values at the date of acquisition. We assess fair value, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, using a variety of methods including, but not limited to, an income approach and a market approach such as the estimation of future cash flows of acquired business and current selling prices of similar assets. Fair value of the assets acquired and liabilities assumed, including intangible assets, are measured based on the assumptions and estimations with regards to the variable factors such as the amount and timing of future cash flows for the asset or liability being measured, appropriate risk-adjusted discount rates, nonperformance risk, or other factors that market participants would consider. Upon acquisition, we determine the estimated economic lives of the acquired intangible assets for amortization purposes, which are based on the underlying expected cash flows of such assets. Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that is not individually identified and separately recognized. Actual results may vary from projected results and assumptions used in the fair value assessments.
Research and Development Expenses.
Since the Company's inception, most of its activities have consisted of research and development efforts related to developing electroporation technologies and DNA vaccines. Research and development expenses consist of expenses incurred in performing research and development activities including salaries and benefits, facilities and other overhead expenses, clinical trials, contract services and other outside expenses. Research and development expenses are charged to operations as they are incurred. These expenses result from the Company's independent research and development efforts as well as efforts associated with collaborations and licensing arrangements. The Company reviews and
accrues clinical trials expense based on work performed, which relies on estimates of total costs incurred based on patient enrollment, completion of studies and other events. The Company follows this method since reasonably dependable estimates of the costs applicable to various stages of a research agreement or clinical trial can be made. Accrued clinical costs are subject to revisions as trials progress. Revisions are charged to expense in the period in which the facts that give rise to the revision become known. Historically, revisions have not resulted in material changes to research and development expense; however a modification in the protocol of a clinical trial or cancellation of a trial could result in a charge to the Company's results of operations.
4. Principles of Consolidation
These unaudited condensed consolidated financial statements include the accounts of Inovio Pharmaceuticals, Inc. and its subsidiaries. In conjunction with the acquisition in June 2009 of VGX Pharmaceuticals (the “Merger”), the Company acquired a majority interest in VGX Animal Health and certain shares in GeneOne (a publicly-traded company in South Korea). The Company consolidates Genetronics, Inc. (a wholly-owned subsidiary of Inovio Pharmaceuticals, Inc.), VGX Pharmaceuticals and its subsidiary VGX Animal Health and records a non-controlling interest for the
15%
of VGX Animal Health it does not own as of
June 30, 2016
and
December 31, 2015
. The Company's investment in GeneOne, which is recorded as investment in affiliated entity within the condensed consolidated balance sheets is accounted for at fair value on a recurring basis, with changes in fair value recorded on the condensed consolidated statements of operations within gain (loss) on investment in affiliated entity. All intercompany accounts and transactions have been eliminated upon consolidation.
Variable Interest Entities
The FASB issued authoritative guidance that requires companies to perform a qualitative analysis to determine whether a variable interest in another entity represents a controlling financial interest in a variable interest entity. A controlling financial interest in a variable interest entity is characterized by having both the power to direct the most significant activities of the entity and the obligation to absorb losses or the right to receive benefits of the entity. This guidance requires on-going reassessments of variable interests based on changes in facts and circumstances. The Company determined that none of the entities with which the Company currently conducts business and collaborations are variable interest entities except VGXI (a wholly-owned subsidiary of GeneOne). The Company determined that they are not the primary beneficiary as they do not have voting control or other forms of control over the operations and decision making and therefore are not required to consolidate VGXI. The Company continues to assess its variable interests and has determined that no significant changes have occurred as of
June 30, 2016
.
5. Impact of Recently Issued Accounting Standards
The recent pronouncements below may have a significant effect on the Company's financial statements. Recent pronouncements that are not anticipated to have an impact on or are unrelated to the Company's financial condition, results of operations, or related disclosures are not discussed.
Accounting Standards Update (“ASU”), No. 2016-09-
In March 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2016-09, Compensation-Stock Compensation. The new guidance simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in this standard are effective for the Company's annual year and first fiscal quarter beginning on January 1, 2017 with early adoption permitted. The Company is currently evaluating the impact of the application of this accounting standard update on its financial statements and related disclosures.
ASU, No. 2016-02-
In February 2016, the FASB issued ASU No. 2016-02, Leases. Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (a) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (b) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The ASU will be effective for the Company beginning January 1, 2019 with early adoption permitted. The Company is currently evaluating the impact of the application of this accounting standard update on its financial statements and related disclosures.
ASU, No. 2014-15-
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements Going Concern, which intends to define management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related disclosure. ASU 2014-15 defines the term substantial doubt and requires an assessment for a period of one year after the date of the issuance of the financial statements. It requires certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans and requires an express statement and other disclosures when substantial doubt is not alleviated. The guidance becomes effective for reporting periods
beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the impact the adoption of this guidance will have on its financial statements and related disclosures.
ASU, No. 2014-09-
In May 2014, the FASB amended the existing accounting standards for revenue recognition, which outlines a comprehensive revenue recognition model and supersedes most current revenue recognition guidance. The new standard requires a company to recognize revenue upon transfer of goods or services to a customer at an amount that reflects the expected consideration to be received in exchange for those goods or services. The amended guidance defines a five-step approach for recognizing revenue, which may require a company to use more judgment and make more estimates than under the current guidance. The amended guidance as currently issued will be effective for the Company starting in 2018. The new standard allows for two methods of adoption: (a) full retrospective adoption, meaning the standard is applied to all periods presented, or (b) modified retrospective adoption, meaning the cumulative effect of applying the new standard is recognized as an adjustment to the opening retained earnings balance. The Company is in the process of determining the adoption method it will implement, as well as the effects the adoption will have on its financial statements and related disclosures.
6. Investments
Investments consist of mutual funds, United States corporate debt securities, municipal bonds and an equity investment in the Company's affiliated entity Plumbline Life Sciences, Inc. ("PLS") at
June 30, 2016
and
December 31, 2015
. The Company classifies all investments as available-for-sale, as the sale of such investments may be required prior to maturity to implement management strategies. Available-for-sale securities are recorded at fair value, based on current market valuations. Unrealized gains and losses on available-for-sale securities are excluded from earnings and are reported as a separate component of other comprehensive income (loss) until realized. Realized gains and losses are included in non-operating other income (expense) on the condensed consolidated statement of operations and are derived using the specific identification method for determining the cost of the securities sold. During the
three and six months ended June 30, 2016
and 2015, a minimal amount of net realized loss on investments was recorded. The Company assessed each of its investments on an individual basis to determine if any decline in fair value was other-than-temporary. Interest and dividends on investments classified as available-for-sale are included in interest and other income, net, in the condensed consolidated statements of operations. As of
June 30, 2016
, the Company had
41
available-for-sale securities in a gross unrealized loss position of which
23
with a total unrealized loss of
$18,000
were in such position for longer than 12 months.
The following is a summary of available-for-sale securities as of
June 30, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2016
|
|
Contractual
Maturity (in years)
|
Cost
|
|
Gross Unrealized
Gains
|
|
Gross Unrealized
Losses
|
|
Fair Market Value
|
Mutual funds
|
---
|
|
$
|
78,205,874
|
|
|
$
|
309,613
|
|
|
$
|
(16,791
|
)
|
|
$
|
78,498,696
|
|
US corporate debt securities
|
Less than 2
|
|
27,574,475
|
|
|
31,248
|
|
|
(21,430
|
)
|
|
27,584,293
|
|
Investment in affiliated entity (PLS)
|
---
|
|
—
|
|
|
5,309,488
|
|
|
—
|
|
|
5,309,488
|
|
Total investments
|
|
|
$
|
105,780,349
|
|
|
$
|
5,650,349
|
|
|
$
|
(38,221
|
)
|
|
$
|
111,392,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015
|
|
Contractual
Maturity (in years)
|
Cost
|
|
Gross Unrealized
Gains
|
|
Gross Unrealized
Losses
|
|
Fair Market Value
|
Mutual funds
|
---
|
|
$
|
78,571,294
|
|
|
$
|
435
|
|
|
$
|
(185,737
|
)
|
|
$
|
78,385,992
|
|
US corporate debt securities
|
Less than 2
|
|
26,923,855
|
|
|
—
|
|
|
(54,452
|
)
|
|
26,869,403
|
|
Municipal bonds
|
Less than 1
|
|
101,936
|
|
|
—
|
|
|
(54
|
)
|
|
101,882
|
|
Investment in affiliated entity (PLS)
|
---
|
|
—
|
|
|
5,045,915
|
|
|
—
|
|
|
5,045,915
|
|
Total investments
|
|
|
$
|
105,597,085
|
|
|
$
|
5,046,350
|
|
|
$
|
(240,243
|
)
|
|
$
|
110,403,192
|
|
7. Marketable Securities and Fair Value Measurements
The guidance regarding fair value measurements establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets that are accessible at the measurement date; Level 2, defined as inputs other than quoted prices in active markets that are either
directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. The Company reviews 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 securities within the fair value hierarchy. The Company did not have any transfer of assets and liabilities between Level 1, Level 2 and Level 3 of the fair value hierarchy during the
six months ended June 30, 2016
or
2015
.
The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis, and are determined using the following inputs as of
June 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
|
|
June 30, 2016
|
|
Total
|
|
Quoted Prices
in Active Markets
(Level 1)
|
|
Significant
Other Unobservable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
Money market funds
|
$
|
22,940,492
|
|
|
$
|
22,940,492
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Mutual funds
|
78,498,696
|
|
|
—
|
|
|
78,498,696
|
|
|
—
|
|
US corporate debt securities
|
27,584,293
|
|
|
—
|
|
|
27,584,293
|
|
|
—
|
|
Investments in affiliated entities
|
27,026,216
|
|
|
27,026,216
|
|
|
—
|
|
|
—
|
|
Total Assets
|
$
|
156,049,697
|
|
|
$
|
49,966,708
|
|
|
$
|
106,082,989
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
Common stock warrants
|
$
|
1,815,343
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
1,815,343
|
|
Total Liabilities
|
$
|
1,815,343
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,815,343
|
|
The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis, and are determined using the following inputs as of December 31,
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
|
|
December 31, 2015
|
|
Total
|
|
Quoted Prices
in Active Markets
(Level 1)
|
|
Significant
Other Unobservable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
Money market funds
|
$
|
54,474,609
|
|
|
$
|
54,474,609
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Mutual funds
|
78,385,992
|
|
|
—
|
|
|
78,385,992
|
|
|
—
|
|
US corporate debt securities
|
26,869,403
|
|
|
—
|
|
|
26,869,403
|
|
|
—
|
|
Municipal bonds
|
101,882
|
|
|
—
|
|
|
101,882
|
|
|
—
|
|
Investment in affiliated entities
|
19,987,192
|
|
|
19,987,192
|
|
|
—
|
|
|
—
|
|
Common stock warrants
|
5,970
|
|
|
—
|
|
|
—
|
|
|
5,970
|
|
Total Assets
|
$
|
179,825,048
|
|
|
$
|
74,461,801
|
|
|
$
|
105,357,277
|
|
|
$
|
5,970
|
|
Liabilities:
|
|
|
|
|
|
|
|
Common stock warrants
|
$
|
1,301,138
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,301,138
|
|
Total Liabilities
|
$
|
1,301,138
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,301,138
|
|
Level 1 assets include money market funds held by the Company that are valued at quoted market prices, as well as the Company’s investments in GeneOne and PLS. The Company accounts for its investment in GeneOne at fair value on a recurring basis by which the fair value is based on the market value of
1,644,155
common shares on
June 30, 2016
and December 31,
2015
, listed on the Korean Stock Exchange. The Company accounts for its investment in PLS as an available-for sale security by which the fair value is based on the market value of
395,758
common shares on
June 30, 2016
, listed on the
Korea New Exchange (KONEX) Market. The Company elected the fair value option in conjunction with the investment in GeneOne at the inception of the investment therefore changes in the fair value of the investment are reflected as other income (expense) in the condensed consolidated statements of operations. The Company did not elect the fair value option for the investment in PLS at the inception of the investment, but rather recorded the investment under the equity method until its ownership interest dropped below
20%
in June 2015 and accordingly began recording the investment under the cost method using the carryover basis from the equity method of
zero
. Once shares of PLS began trading on the KONEX, the Company classified the investment as available-for-sale and began recording the investment at fair value with changes in fair value reflected in other comprehensive income (loss).
Level 2 assets at
June 30, 2016
include US corporate debt securities and mutual funds held by the Company that are initially valued at the transaction price and subsequently valued, at the end of each reporting period, typically utilizing market observable data. The Company obtains the fair value of its Level 2 assets from a professional pricing service, which may use quoted market prices for identical or comparable instruments, or inputs other than quoted prices that are observable either directly or indirectly. The professional pricing service gathers quoted market prices and observable inputs from a variety of industry data providers. The valuation techniques used to measure the fair value of the Company's Level 2 financial instruments were derived from non-binding market consensus prices that are corroborated by observable market data, quoted market prices for similar instruments, or pricing models such as discounted cash flow techniques. The Company validates the quoted market prices provided by the primary pricing service by comparing their assessment of the fair values of the Company's investment portfolio balance against the fair values of the Company's investment portfolio balance obtained from an independent source.
Level 3 assets held as of
June 30, 2016
include
two
warrants received by the Company to purchase shares of common stock of OncoSec Medical Incorporated (“OncoSec”), in connection with the first and second amendments to the Asset Purchase Agreement between the Company and OncoSec signed in September 2011 and March 2012, respectively. The first warrant to purchase
50,000
shares of common stock of OncoSec has a contractual life of
five
years with an exercise price of
$24.00
per share. The second warrant to purchase
150,000
shares of common stock of OncoSec has a contractual life of
five
years with an exercise price of
$20.00
per share.
The Company reassesses the fair value of the OncoSec warrants at each reporting date utilizing a Black-Scholes pricing model. Inputs used in the pricing model include estimates of OncoSec stock price volatility, expected warrant life and risk-free interest rate. The Company develops its estimates based on publicly available historical data and knowledge of OncoSec. The Company reassesses the fair value of the warrants at each reporting date. The assumptions used to estimate the fair values of the OncoSec common stock warrants at
June 30, 2016
are presented below:
|
|
|
Risk-free interest rate
|
0.39-0.45%
|
Expected volatility
|
88%
|
Expected life in years
|
0.25-0.75
|
Dividend yield
|
—
|
As a result of these calculations, the Company recorded a decrease in fair value of the two warrants of
$(3,000)
and
$(6,000)
for the
three and six months ended June 30, 2016
, respectively and
$(73,000)
and
$(364,000)
for the three and six months ended June 30, 2015, respectively. The change in fair value is reflected in the Company's condensed consolidated statements of operations as a component of change in fair value of common stock warrants.
The following table presents a summary of changes in fair value of the Company’s total Level 3 financial assets for the
six months ended June 30, 2016
:
|
|
|
|
|
Balance at January 1, 2016
|
$
|
5,970
|
|
Decrease in fair value included in change in fair value of common stock warrants
|
(5,970
|
)
|
Balance at June 30, 2016
|
$
|
—
|
|
Level 3 liabilities held as of
June 30, 2016
consist of common stock warrant liabilities associated with warrants to purchase the Company's common stock issued in March 2013. If unexercised, the warrants will expire in
September 2018
. During the three months ended
June 30, 2016
and 2015,
no
ne of these warrants were exercised.
As of
June 30, 2016
the Company has a
$1.8 million
common stock warrant liability. The Company reassesses the fair value of the common stock warrants at each reporting date utilizing a Black-Scholes pricing model. Inputs used in the pricing model include estimates of stock price volatility, expected warrant life and risk-free interest rate. The Company develops its estimates based on historical data. The assumptions used to estimate the fair value of common stock warrants at
June 30, 2016
are presented below:
|
|
|
Risk-free interest rate
|
0.58%
|
Expected volatility
|
63%
|
Expected life in years
|
2.2
|
Dividend yield
|
—
|
Changes in these assumptions as well as in the Company's stock price on the valuation date can have a significant impact on the fair value of the common stock warrant liability. As a result of these calculations, the Company recorded an increase in fair value of
$108,000
and
$514,000
for the
three and six months ended June 30, 2016
, respectively, and a decrease in fair value of
$23,000
and
$313,000
for the three and six months ended June 30, 2015, respectively. The change in fair value is reflected in the Company's condensed consolidated statements of operations as a component of change in fair value of common stock warrants.
The following table presents the changes in fair value of the Company’s total Level 3 financial liabilities for the
six months ended June 30, 2016
:
|
|
|
|
|
Balance at January 1, 2016
|
$
|
1,301,138
|
|
Increase in fair value included in change in fair value of common stock warrants
|
514,204
|
|
Balance at June 30, 2016
|
$
|
1,815,342
|
|
8. Business Combination
On April 29, 2016, the Company acquired all of Bioject Medical Technologies Inc.’s ("Bioject") assets including needle-free injection technology, products and intellectual property. The transaction, which was accounted for as a business combination, provides the Company with further opportunities in device development. The Company paid Bioject
$4.3 million
in the Company's stock and
$1.2 million
in cash upon closing.
The acquisition consideration was preliminarily allocated to the estimated fair vales of the assets acquired as follows:
|
|
|
|
|
Developed technology
|
$
|
3,800,000
|
|
Customer-related intangible
|
1,000,000
|
|
Trademarks
|
200,000
|
|
Covenants not-to-compete
|
100,000
|
|
Goodwill
|
400,000
|
|
Total purchase consideration
|
$
|
5,500,000
|
|
The fair value of the acquired intangible assets was based on the discounted cash flow method that estimated the present value of a revenue stream derived from the licensing of the Bioject technology. These projected cash flows were discounted to present value using a discount rate of
14%
. The fair value of the developed technology is being amortized on a straight-line basis over the estimated useful life of
15 years
. The fair value of the remaining intangible assets acquired is being amortized on a straight-line basis over the estimated useful life of between
2
-
5
years. The excess of the acquisition date consideration over the fair values assigned to the assets acquired was recorded as goodwill. The goodwill resulting from the acquisition consists primarily of the synergies expected from combining the
technologies and know-how
of Bioject with our existing business. This includes synergies expected from combining Bioject's needle-free injection technology with the Company's existing electroporation delivery devices.
The purchase price allocation was prepared on a preliminary basis and is subject to change as additional information becomes available concerning the fair value and tax basis of the assets acquired. Any measurement period adjustments to the purchase price allocation will be made as soon as practicable but no later than one year from the date of acquisition.
9. Goodwill and Intangible Assets
The following sets forth the goodwill and intangible assets by major asset class:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
|
Useful
Life
(Yrs)
|
Gross
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
Non-Amortizing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill(a)
|
|
|
$
|
10,513,371
|
|
|
$
|
—
|
|
|
$
|
10,513,371
|
|
|
$
|
10,113,371
|
|
|
$
|
—
|
|
|
$
|
10,113,371
|
|
Amortizing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
8 – 17
|
|
5,802,528
|
|
|
(5,575,864
|
)
|
|
226,664
|
|
|
5,802,528
|
|
|
(5,516,122
|
)
|
|
286,406
|
|
Licenses
|
8 – 17
|
|
1,323,761
|
|
|
(1,147,487
|
)
|
|
176,274
|
|
|
1,323,761
|
|
|
(1,133,113
|
)
|
|
190,648
|
|
CELLECTRA
®
(b)
|
5 – 11
|
|
8,106,270
|
|
|
(6,611,487
|
)
|
|
1,494,783
|
|
|
8,106,270
|
|
|
(6,397,947
|
)
|
|
1,708,323
|
|
GHRH(b)
|
11
|
|
335,314
|
|
|
(224,423
|
)
|
|
110,891
|
|
|
335,314
|
|
|
(208,581
|
)
|
|
126,733
|
|
Bioject (c)
|
2 – 15
|
|
5,100,000
|
|
|
(140,556
|
)
|
|
4,959,444
|
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
Other(d)
|
18
|
|
4,050,000
|
|
|
(2,568,750
|
)
|
|
1,481,250
|
|
|
4,050,000
|
|
|
(2,456,250
|
)
|
|
1,593,750
|
|
Total intangible assets
|
|
|
24,717,873
|
|
|
(16,268,567
|
)
|
|
8,449,306
|
|
|
19,617,873
|
|
|
(15,712,013
|
)
|
|
3,905,860
|
|
Total goodwill and intangible assets
|
|
|
$
|
35,231,244
|
|
|
$
|
(16,268,567
|
)
|
|
$
|
18,962,677
|
|
|
$
|
29,731,244
|
|
|
$
|
(15,712,013
|
)
|
|
$
|
14,019,231
|
|
|
|
(a)
|
Goodwill was recorded from the Inovio AS acquisition in January 2005, the acquisition of VGX in June 2009 and the acquisition of Bioject in April 2016 for
$3.9 million
,
$6.2 million
and
$400,000
, respectively.
|
|
|
(b)
|
CELLECTRA
®
and GHRH are developed technologies which were recorded from the acquisition of VGX.
|
|
|
(c)
|
Bioject intangible assets represent the fair value of developed technology and intellectual property which were recorded from the acquisition of Bioject in April 2016.
|
|
|
(d)
|
Other intangible assets represent the fair value of acquired intellectual property from the Inovio AS acquisition.
|
Aggregate amortization expense on intangible assets for the
three and six months ended June 30, 2016
was
$347,000
and
$557,000
, respectively. Aggregate amortization expense on intangible assets for the
three and six months ended June 30, 2015
was
$219,000
and
$443,000
, respectively. Estimated aggregate amortization expense for each of the five succeeding fiscal years is $
821,000
for the remainder of fiscal year 2016,
$1.6 million
for 2017, $
1.3 million
for 2018, $
1.1 million
for 2019, $
547,000
for 2020 and $
3.1 million
for 2021 and the years thereafter.
10. Stockholders’ Equity
The following is a summary of the Company's authorized and issued common and preferred stock as of
June 30, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of
|
|
Authorized
|
|
Issued
|
|
June 30,
2016
|
|
December 31, 2015
|
Common Stock, par $0.001
|
600,000,000
|
|
|
73,482,859
|
|
|
73,482,859
|
|
|
72,217,965
|
|
Series A Preferred Stock, par $0.001
|
1,000
|
|
|
817
|
|
|
—
|
|
|
—
|
|
Series B Preferred Stock, par $0.001
|
1,000
|
|
|
750
|
|
|
—
|
|
|
—
|
|
Series C Preferred Stock, par $0.001
|
1,091
|
|
|
1,091
|
|
|
23
|
|
|
23
|
|
Series D Preferred Stock, par $0.001
|
1,966,292
|
|
|
1,966,292
|
|
|
—
|
|
|
—
|
|
Common Stock
In June 2016, the Company entered into an At-the-Market Equity Offering Sales Agreement (the “Sales Agreement”) with an outside placement agent (the “Placement Agent”) to sell shares of its common stock with aggregate gross proceeds of up to
$50.0 million
, from time to time, through an “at-the-market” equity offering program under which the Placement Agent will act as sales agent. Under the Sales Agreement, the Company will set the parameters for the sale of shares, including the number of shares to be issued, the time period during which sales are requested to be made, limitation on the number of shares that may be sold in any one trading day and any minimum price below which sales may not be made. The Sales Agreement provides that the Placement Agent will be entitled to compensation for its services in an amount equal to
2.0%
of the gross
proceeds from the sales of shares sold through the Placement Agent under the Sales Agreement. The Company has no obligation to sell any shares under the Sales Agreement, and may at any time suspend solicitation and offers under the Sales Agreement.
During the
three and six months ended June 30, 2016
, the Company sold a total of
119,400
shares of common stock under the Sales Agreement. The sales were made at a weighted average price of $
11.12
per share with net proceeds to the Company of $
1.3
million.
On May 5, 2015, the Company closed an underwritten public offering of
10,925,000
shares of the Company's common stock, including
1,425,000
shares of common stock issued pursuant to the underwriter’s exercise of its overallotment option, at the public offering price of
$8.00
per share. The net proceeds, after deducting the underwriter’s discounts and commission and other estimated offering expenses, were approximately $
81.9
million.
Warrants
The Company accounts for registered common stock warrants issued in March 2013 under the authoritative guidance on accounting for derivative financial instruments indexed to, and potentially settled in, a company’s own stock, on the understanding that in compliance with applicable securities laws, the registered warrants require the issuance of registered securities upon exercise and do not sufficiently preclude an implied right to net cash settlement. The Company classifies registered warrants on the condensed consolidated balance sheet as a current liability which is revalued at each balance sheet date subsequent to the initial issuance. Determining the appropriate fair-value model and calculating the fair value of registered warrants requires considerable judgment, including estimating stock price volatility and expected warrant life. The Company develops its estimates based on historical data. A small change in the estimates used may have a relatively large change in the estimated valuation. The Company uses the Black-Scholes pricing model to value the registered warrants. Changes in the fair market value of the warrants are reflected in the condensed consolidated statement of operations as “Change in fair value of common stock warrants.”
The following table summarizes the warrants outstanding as of
June 30, 2016
and December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2016
|
|
As of December 31, 2015
|
Issued in Connection With:
|
|
Exercise
Price
|
|
Expiration
Date
|
|
Number of
Warrants
|
|
Common Stock
Warrant Liability
|
|
Number of
Warrants
|
|
Common Stock
Warrant Liability
|
March 2013 financing
|
|
$
|
3.17
|
|
|
September 12, 2018
|
|
284,091
|
|
|
$
|
1,815,343
|
|
|
284,091
|
|
|
$
|
1,301,138
|
|
Warrants assumed in June 2009 Merger
|
|
$4.08-$5.08
|
|
|
April 28, 2016
|
|
—
|
|
|
—
|
|
|
276,813
|
|
|
—
|
|
Total
|
|
|
|
|
|
284,091
|
|
|
$
|
1,815,343
|
|
|
560,904
|
|
|
$
|
1,301,138
|
|
Stock Options
The Company has
two
active stock-based incentive plans, the Amended and Restated 2007 Omnibus Incentive Plan (the “Incentive Plan”), pursuant to which the Company has granted stock options and restricted stock awards to executive officers, directors and employees, and the 2016 Omnibus Incentive Plan (the "2016 Incentive Plan").
The 2007 Incentive Plan was adopted on March 31, 2007, approved by the stockholders on May 4, 2007, approved by the stockholders as amended on May 2, 2008, and approved by the stockholders as amended and restated on August 25, 2009, May 14, 2010, May 22, 2014 and May 8, 2015. On May 14, 2010 the stockholders approved to increase the aggregate number of shares available for grant under the Incentive Plan by
500,000
and to provide that the aggregate number of shares available for grant under the Incentive Plan will be increased on January 1 of each year beginning in 2011 by a number of shares equal to the lesser of
513,833
or such lesser number of shares as may be determined by the Board. On May 22, 2014 and May 8, 2015, the stockholders approved to increase the aggregate number of shares available for grant under the Incentive Plan by
1,250,000
and
2,000,000
, respectively. At
June 30, 2016
, there were
7,770,497
shares of common stock reserved for issuance upon exercise of incentive awards granted and to be granted at future dates under the Incentive Plan. At
June 30, 2016
, the Company had
433,858
shares of common stock available for future grant under the Incentive Plan,
749,335
shares of unvested restricted stock units and options to purchase
5,823,697
shares of common stock outstanding under the Incentive Plan. The awards granted and available for future grant under the Incentive Plan generally vest over
three
years and have a maximum contractual term of
ten
years. The Incentive Plan terminates by its terms on March 31, 2017.
The Incentive Plan supersedes all of the Company’s previous stock option plans, which include the Amended 2000 Stock Option Plan and the VGX Equity Compensation Plan, under which the Company had options to purchase
100,627
and
770,154
shares of common stock outstanding at
June 30, 2016
, respectively. The terms and conditions of the options outstanding under these plans remain unchanged.
The 2016 Incentive Plan was approved by stockholders on May 13, 2016. The maximum number of shares of the Company’s common stock available for issuance over the term of the 2016 Incentive Plan may not exceed
6,000,000
shares, provided that commencing with the first business day of each calendar year beginning with January 1, 2018, such maximum number of shares shall be increased by
2,000,000
shares of common stock unless the Board determines, for any such calendar year, to increase such maximum amount by a fewer number of shares. As of June 30, 2016,
no
awards have been granted under the 2016 Incentive Plan.
11. Net Loss Per Share
Basic net loss per share is computed by dividing the net loss for the year by the weighted average number of common shares outstanding during the year. Diluted loss per share is calculated in accordance with the treasury stock method and reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted to common stock. The calculation of diluted loss per share requires that, to the extent the average market price of the underlying shares for the reporting period exceeds the exercise price of the warrants and the presumed exercise of such securities are dilutive to loss per share for the period, an adjustment to net loss used in the calculation is required to remove the change in fair value of the warrants from the numerator for the period. Likewise, an adjustment to the denominator is required to reflect the related dilutive shares, if any, under the treasury stock method.
The following tables reconcile the components of the numerator and denominator included in the calculations of diluted loss per share:
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
2016
|
|
2015
|
Numerator
|
|
|
|
Net loss attributable to Inovio Pharmaceuticals, Inc.
|
$
|
(18,704,711
|
)
|
|
$
|
(6,248,250
|
)
|
Reflect adjustment for decrease in fair value of warrant liability
|
—
|
|
|
(22,727
|
)
|
Numerator for use in diluted loss per share
|
$
|
(18,704,711
|
)
|
|
$
|
(6,270,977
|
)
|
|
|
|
|
Denominator
|
|
|
|
Weighted average number of common shares outstanding
|
72,957,159
|
|
|
67,655,975
|
|
Effect of dilutive potential common shares
|
—
|
|
|
182,763
|
|
Denominator for use in diluted loss per share
|
72,957,159
|
|
|
67,838,738
|
|
|
|
|
|
Net loss per share, diluted
|
$
|
(0.26
|
)
|
|
$
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2016
|
|
2015
|
Numerator
|
|
|
|
Net loss attributable to Inovio Pharmaceuticals, Inc.
|
$
|
(26,747,531
|
)
|
|
$
|
(16,830,029
|
)
|
Reflect adjustment for decrease in fair value of warrant liability
|
—
|
|
|
(312,500
|
)
|
Numerator for use in diluted loss per share
|
$
|
(26,747,531
|
)
|
|
$
|
(17,142,529
|
)
|
|
|
|
|
Denominator
|
|
|
|
Weighted average number of common shares outstanding
|
72,591,986
|
|
|
64,198,528
|
|
Effect of dilutive potential common shares
|
—
|
|
|
177,995
|
|
Denominator for use in diluted loss per share
|
72,591,986
|
|
|
64,376,523
|
|
|
|
|
|
Net loss per share, diluted
|
$
|
(0.37
|
)
|
|
$
|
(0.27
|
)
|
The following table summarizes potential common shares that were excluded from the diluted net loss per share calculation because of their anti-dilutive effect for the three and six months ended
June 30, 2016
and 2015:
|
|
|
|
|
|
|
|
|
Common Stock Equivalents
|
2016
|
|
2015
|
Options to purchase common stock
|
6,694,478
|
|
|
5,987,210
|
|
Warrants to purchase common stock
|
284,091
|
|
|
627,969
|
|
Restricted stock units
|
749,335
|
|
|
230,000
|
|
Convertible preferred stock
|
8,456
|
|
|
8,456
|
|
Total
|
7,736,360
|
|
|
6,853,635
|
|
12. Stock-Based Compensation
The Company incurs stock-based compensation expense related to restricted stock units and stock options. The fair value of restricted stock is determined by the closing market price of the Company's common stock on the date of grant. The Company estimates the fair value of stock options granted using the Black-Scholes option pricing model. The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility and expected option life. The Company amortizes the fair value of the awards expected to vest on a straight-line basis over the requisite service period of the awards. Expected volatility is based on historical volatility. The expected life of options granted is based on historical expected life. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant. The forfeiture rate is based on historical data, and the Company records stock-based compensation expense only for those awards that are expected to vest. The dividend yield is based on the fact that no dividends have been paid historically and none are currently expected to be paid in the foreseeable future.
The weighted average assumptions used in the Black-Scholes model for employees and directors are presented below:
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Risk-free interest rate
|
0.95%
|
|
1.00%
|
|
0.91%
|
|
0.99%
|
Expected volatility
|
76%
|
|
75%
|
|
76%
|
|
74%
|
Expected life in years
|
5.0
|
|
5.0
|
|
5.0
|
|
5.0
|
Dividend yield
|
—
|
|
—
|
|
—
|
|
—
|
Forfeiture rate
|
7%
|
|
7%
|
|
7%
|
|
8%
|
Total employee and director compensation cost for the Company's stock plan recognized in the condensed consolidated statements of operations for the
three and six months ended June 30, 2016
was $
2.0 million
and $
4.9 million
, respectively, of which $
1.0 million
and $
2.7 million
were included in research and development expenses and $
973,000
and $
2.2 million
were included in general and administrative expenses, respectively.
Total employee and director compensation cost for the Company's stock plan recognized in the condensed consolidated statements of operations for the
three and six months ended June 30, 2015
was
$1.3 million
and
$3.5 million
, respectively, of which
$649,000
and
$2.0 million
were included in research and development expenses and
$612,000
and
$1.5 million
were included in general and administrative expenses, respectively.
At
June 30, 2016
, there was
$7.8 million
of total unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted-average period of
2.1 years
.
The weighted average grant date fair value per share was
$6.07
and $
4.47
for employee and director stock options granted during the
three and six months ended June 30, 2016
, respectively, and
$5.02
and
$4.62
for employee and director stock options granted during the
three and six months ended June 30, 2015
, respectively.
At
June 30, 2016
, there was
$4.8 million
of total unrecognized compensation cost related to unvested restricted stock units, which is expected to be recognized over a weighted-average period of
2.4
years.
The weighted average grant date fair value per share was $
9.33
and
$7.28
for restricted stock units granted during the
three and six months ended June 30, 2016
, respectively, and
$8.01
and
$7.76
for restricted stock units granted during the
three and six months ended June 30, 2015
, respectively.
The fair value of options granted to non-employees at the measurement dates were estimated using the Black-Scholes pricing model. Total stock-based compensation for options granted to non-employees for the
three and six months ended June 30, 2016
was
$103,000
and
$300,000
, respectively. Total stock-based compensation for options granted to non-employees for the
three and six months ended June 30, 2015
was
$101,000
and
$270,000
, respectively.
13. Related Party Transactions
GeneOne Life Sciences
In January 2016, the Company and GeneOne announced the initiation of a collaborative research program to test and advance the Company's DNA-based vaccine for preventing and treating Zika virus. Under the terms of the agreement, GeneOne will be responsible for funding all preclinical and clinical studies through Phase I. In return, GeneOne will receive milestone-based co-ownership of the immunotherapy. The collaborative research program shall terminate upon the completion of activities under the development plan, unless sooner terminated.
On May 26, 2015, the Company entered into a Collaborative Development Agreement with GeneOne to co-develop a DNA vaccine for MERS (Middle East Respiratory Syndrome) through phase I clinical trials. Under the terms of the agreement, GeneOne will be responsible for funding all preclinical and clinical studies through Phase I. In return, GeneOne will receive milestone-based co-ownership of the immunotherapy. The collaborative research program shall terminate upon the completion of activities under the development plan, unless sooner terminated.
On September 23, 2014, the Company entered into a Collaborative Development Agreement with GeneOne to co-develop an Ebola vaccine through phase I clinical trials. In July 2015, the Company amended the Agreement with an effective date of April 2015 to change control of development in return for the Company’s payment of certain development fees.
On October 7, 2011, the Company entered into a Collaborative Development and License Agreement (the “Hep Agreement”) with GeneOne. Under the Hep Agreement, as originally executed, the Company and GeneOne agreed to co-develop the Company’s SynCon
®
therapeutic vaccines for hepatitis B and C infections (the “Products”). Under the terms of the Hep Agreement, GeneOne will receive marketing rights for the Products in Asia, excluding Japan, and in return will fully fund IND-enabling and initial Phase I and II clinical studies with respect to the Products. The Company will receive from GeneOne payments based on the achievement of clinical milestones and royalties based on sales of the Products in the licensed territories, retaining all commercial rights to the Products in all other territories. On August 21, 2013, the Company amended the Hep Agreement to grant back to the Company hepatitis B, along with all associated rights, from the collaboration in return for certain remuneration including a percentage of license fees. On October 7, 2013, the Company further amended the Hep Agreement to in part provide exclusive patent rights to IL-28 technology for use with the Products in Asia, excluding Japan. The Hep Agreement shall terminate upon the later of the expiration or abandonment of the last patent that is a component of the rights or
20
years after the effective date.
On March 24, 2010, the Company entered into a Collaboration and License Agreement (the “GeneOne Agreement”) with GeneOne. Under the GeneOne Agreement, the Company granted GeneOne an exclusive license to Inovio’s SynCon
®
universal influenza vaccine delivered with electroporation to be developed in certain countries in Asia (the “Product”). As consideration for the license granted to GeneOne, the Company received payment of
$3.0 million
, and will receive research support, annual license maintenance fees and royalties on net Product sales. The Company recorded the
$3.0 million
as deferred revenue from affiliated entity, and will recognize it as revenue over the
eight
year expected period of the Company’s performance obligation. In addition, contingent upon achievement of clinical and regulatory milestones, the Company will receive development payments over the term of the GeneOne Agreement. The GeneOne Agreement also provides Inovio with exclusive rights to supply devices for clinical and commercial purposes (including single use components) to GeneOne for use in the Product. The term of the GeneOne Agreement commenced upon execution and will extend on a country by country basis until the last to expire of all Royalty Periods for the territory (as such term is defined in the GeneOne Agreement) for any Product in that country, unless the GeneOne Agreement is terminated earlier in accordance with its provisions as a result of breach, by mutual agreement, or by GeneOne's right to terminate without cause upon prior written notice.
For the
three and six months ended June 30, 2016
, the Company recognized revenue from GeneOne of $
463,000
and $
576,000
, respectively, which consisted of licensing and other fees from the influenza and Zika collaborations. Operating expenses recorded from transactions with GeneOne for the
three and six months ended June 30, 2016
include $
1.1 million
and $
1.3 million
, respectively, related to biologics manufacturing. For the
three and six months ended June 30, 2015
, the Company recognized revenue from GeneOne of
$113,000
and
$225,000
, respectively, which consisted of licensing and other fees. Operating expenses related to GeneOne for the
three and six months ended June 30, 2015
include
$5.3 million
and
$5.4 million
, respectively, related to biologics manufacturing. At
June 30, 2016
and
December 31, 2015
, the Company had an
accounts receivable balance of $
345,000
and $
4,000
, respectively, and an accounts payable and accrued liability balance of
$424,000
and
$165,000
, respectively, related to GeneOne and its subsidiaries. At
June 30, 2016
and
December 31, 2015
,
$488,000
and
$373,000
of prepayments made to GeneOne were classified as long-term other assets on the condensed consolidated balance sheet, respectively.
OncoSec Medical Incorporated
The Company's non-executive Chairman, Dr. Avtar Dhillon, is also the non-executive Chairman of OncoSec.
On September 28, 2011, the Company signed an amended agreement with OncoSec extending the term of the second payment owed to the Company from the Asset Purchase Agreement in exchange for a warrant to purchase
50,000
shares of common stock of OncoSec. The warrant received was a
five
-year warrant with an exercise price of
$24.00
per share. (See Note 7 for further discussion.)
On March 24, 2012, the Company signed a second amended agreement with OncoSec further extending the term of the payments owed to the Company from the Asset Purchase Agreement in exchange for a warrant to purchase
150,000
shares of common stock of OncoSec. The warrant received was a
five
-year warrant with an exercise price of
$20.00
per share. (See Note 7 for further discussion.)
Plumbline Life Sciences, Inc.
In May 2014, the Company's
85%
owned subsidiary VGX Animal Health entered into an agreement for the sale of its animal health assets to PLS of Korea. The assets transferred included an exclusive license with Inovio for animal applications of its growth hormone-releasing hormone ("GHRH") technology and animal DNA vaccines plus a non-exclusive license to Inovio electroporation delivery systems. In May 2016, VGX Animal Health received the second and final payment of
$1.0 million
from PLS. The first
$1.0 million
payment was received in May 2015.
VGX Animal Health received
20%
of the outstanding shares of PLS and received additional shares to maintain its
20%
equity ownership position in PLS until equity fund-raising by PLS reached
$10.0 million
in June 2015. In July 2015 the Company's ownership in VGX Animal Health decreased from
91%
to
85%
. After the Company’s ownership changed, VGX Animal Health distributed its
465,364
shares of PLS to its shareholders in a pro-rata distribution. After the distribution, the Company held
395,758
shares, or approximately
16.9%
of PLS common stock.
As of
June 30, 2016
the Company accounts for its ownership interest in PLS under the accounting guidance for investments considered available-for-sale (Accounting Standards Codification (ASC) 320). The original carrying value of the Company's investment in PLS was
$0
. On July 28, 2015, PLS registered on the Korea New Exchange (KONEX) Market. The total carrying value of the Company's investment in PLS was
$5.3 million
as of
June 30, 2016
. The fair value is based on the market value of the
395,758
common shares owned, listed on the KONEX. The changes in carrying value of PLS are recorded in the condensed consolidated statements of comprehensive income (loss) as an unrealized gain (loss) on investment in affiliated entity.
The Wistar Institute
The Company's director, Dr. David B Weiner, is the Executive Vice President and Director of the Vaccine Center of The Wistar Institute ("Wistar").
On March 16, 2016, the Company entered into collaborative research agreements with Wistar for preventive and therapeutic DNA-based immunotherapy applications and products for cancers and infectious diseases developed by Dr. Weiner and his Wistar laboratory. The Company will reimburse Wistar for all direct and indirect costs incurred in the conduct of the collaborative research not to exceed
$3.1 million
during the
five
-year term of the agreement. The Company will have the exclusive right to in-license new intellectual property developed in this collaboration. Operating expenses recorded from the collaborative research agreements with Wistar for the
three and six months ended June 30, 2016
were
$80,000
.
14. Commitments and Contingencies
In March 2014, the Company entered into an office lease (the "Lease") with a publicly owned real estate investment trust, located in Plymouth Meeting, Pennsylvania. The Company occupied the new space in June 2014. The initial term of the Lease is
11.5
years and the Company plans to use the facility for office purposes.
The base rent adjusts periodically throughout the
11.5
year term of the Lease, with monthly payments ranging from
$0
to
$58,000
. In addition, the Company will pay the landlord its share of operating expenses and a property management fee and has paid a security deposit of
$49,000
. In July 2015, the Company amended the lease to increase the total leased space. The commencement of the amended lease was in the first quarter of 2016 and increased monthly lease payments by approximately
$
16,000
. The Company has capitalized
$1.1
million of tenant improvements to the Plymouth Meeting headquarters within fixed assets on the condensed consolidated balance sheet, offset by a corresponding amount recorded in deferred rent.
In June 2015, the Company amended the lease for its corporate office in San Diego, California to increase the total leased space and occupy the entire building. The commencement of the amended lease was in January 2016 and increased monthly lease payments by approximately
$13,000
. The Company has capitalized
$773,000
of tenant improvements within fixed assets on the condensed consolidated balance sheet related to this additional space, and has recorded a corresponding increase to deferred rent.
The Company's future minimum lease payments under all non-cancelable operating leases as of
June 30, 2016
are as follows:
|
|
|
|
|
Remainder of 2016
|
$
|
861,000
|
|
2017
|
1,696,000
|
|
2018
|
1,668,000
|
|
2019
|
1,897,000
|
|
2020
|
1,939,000
|
|
Thereafter
|
9,762,000
|
|
Total
|
$
|
17,823,000
|
|
In the normal course of business, the Company is a party to a variety of agreements pursuant to which they may be obligated to indemnify the other party. It is not possible to predict the maximum potential amount of future payments under these types of agreements due to the conditional nature of our obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by us under these types of agreements have not had a material effect on our business, consolidated results of operations or financial condition.
15. Collaborative Agreements
MedImmune
On August 7, 2015, the Company entered into a license and collaboration agreement with MedImmune, the global biologics research and development arm of AstraZeneca. Under the agreement, MedImmune acquired exclusive rights to the Company's INO-3112 immunotherapy, which targets cancers caused by human papillomavirus (HPV) types 16 and 18. MedImmune made an upfront payment of
$27.5 million
to the Company in September 2015 and has agreed to make additional future development, regulatory and commercial event-based payments totaling up to
$700 million
. MedImmune will fund all development costs associated with INO-3112 immunotherapy. The Company is entitled to receive up to mid-single to double-digit tiered royalties on INO-3112 product sales. Within the broader collaboration, the Company and MedImunne will attempt to develop up to
two
additional DNA-based cancer vaccine products not included in the Company's current product pipeline, which MedImmune will have the exclusive rights to develop and commercialize. The Company expects that it will receive potential development, regulatory and commercialization event-based payments and will be eligible to receive royalties on worldwide net sales for these additional cancer vaccine products. The Company has assessed event-based payments under the authoritative guidance for research and development milestones and determined that none of the event-based payments represent a milestone under the milestone method of accounting.
The Company identified the deliverables at the inception of the agreement. The Company has determined that the license to INO-3112, the license for the research collaboration products with related research and development services and the product development services for INO-3112 individually represent separate units of accounting because each deliverable has standalone basis. The Company considered the provisions of the multiple-element arrangement guidance in determining whether the deliverables outlined above have standalone basis and thus should be treated as separate units of accounting. The Company determined that the license for INO-3112, the license for the research collaboration products with related research and development services, and the product development services for INO-3112 have standalone basis and represent separate units of accounting because the rights conveyed permit MedImmune to perform all efforts necessary to complete development, commercialize and begin selling the product upon regulatory approval. In addition, MedImmune has the appropriate development, regulatory and commercial expertise with products similar to the product licensed under the agreement and has the ability to engage third parties to manufacture the product allowing MedImmune to realize the value of the license without receiving any of the remaining deliverables. MedImmune can also sublicense its license rights to third parties. Also, the Company determined that the product development services for INO-3112 represents an individual unit of accounting as MedImmune could perform such services and/or could acquire these on a separate basis. The best estimated selling prices for
these units of accounting were determined based on market conditions, the terms of comparable collaborative agreements for similar technology in the pharmaceutical and biotechnology industry, the Company's pricing practices and pricing objectives and the nature of the research and development services to be provided. While market data and the cost-to-recreate method under the cost approach were considered throughout the valuation process, ultimately, the estimated selling prices of the licenses were determined utilizing
two
forms of the relief from royalty method under the income approach. The arrangement consideration was allocated to the deliverables based on the relative selling price method.
The amount allocable to the delivered unit or units of accounting is limited to the amount that is considered fixed and determinable and is not contingent upon the delivery of additional items or meeting other specified performance conditions. Based on the results of the Company's analysis, the
$27.5 million
up-front payment was allocated as follows:
$15.0 million
to the product license to INO-3112 and
$12.5 million
for the license to the research collaboration products and related research and developments services. The amount allocated to the license for INO-3112 was recognized as revenue under collaborative research and development arrangements during the year ended December 31, 2015 as this was determined to be earned upon the granting of the license and delivery of the related knowledge and data. The remaining amount related to the research collaboration products and related research and development services is classified as short-term deferred revenue as of
June 30, 2016
. The Company believes that no substantive value related to the research collaboration products license and research services has been transferred to MedImmune prior to their selection of the first research collaboration product since there is no economic benefit from the research unless such product candidate is selected. Furthermore, if MedImmune decides to not proceed with the selection of the product candidate, the research collaboration product license would be terminated. Therefore, the Company believes the license for the research collaboration products is not delivered until the research services are completed and the selection of the product candidate is made by MedImmune (i.e. exercise of an option). The Company has classified the amount allocated to this deliverable as short-term deferred revenue as it is expected that MedImmune will select a product candidate within the next
six
months. The Company will recognize revenues associated with the product development services for INO-3112 as revenues under collaborative arrangements as the related services are performed and according to the relative selling price method of the allocable arrangement consideration. During the
three and six months ended June 30, 2016
, the Company recognized revenues of
$307,000
and
$697,000
from MedImmune, respectively. As of
June 30, 2016
, the Company has a deferred revenue and accounts receivable balance of
$13.3 million
and
$886,000
, respectively, related to the Agreement.
Roche
In September 2013, the Company entered into a Collaborative, License, and Option Agreement (the “Agreement”) with Roche. The companies agreed to co-develop multi-antigen DNA immunotherapies targeting prostate cancer and hepatitis B.
On July 28, 2016, Roche provided notice that they would be discontinuing its Agreement with the Company and its development of INO-1800, the Company’s DNA immunotherapy against the hepatitis B virus. The termination will be effective
90
days after the date of notice. All of Roche’s rights to INO-1800, including the right to license the product to other parties, will be returned to the Company.
On November 14, 2014, Roche provided notice that they would be partially terminating the Agreement with respect to the development of INO-5150, the Company’s DNA immunotherapy targeting prostate cancer, as well as the research collaboration in prostate cancer under the Agreement. The termination was effective in February 2015,
90
days after the date of notice. All of Roche’s rights to INO-5150, including the right to license the product to other parties, have been returned to the Company.
Under the original agreement, Roche acquired an exclusive worldwide license for the Company's DNA-based vaccines INO-5150 (targeting prostate cancer) and INO-1800 (targeting hepatitis B) as well as the use of the Company's CELLECTRA
®
electroporation technology for delivery of the vaccines. Roche also obtained an option to license additional vaccines in connection with a collaborative research program in prostate cancer.
Under the terms of the agreement, Roche made an upfront payment of
$10.0 million
and agreed to make additional development, regulatory and commercial event-based payments. These potential future event-based payments have been reduced significantly due to the partial termination of the Agreement. The Company has assessed event-based payments under the authoritative guidance for research and development milestones and determined that
$3.0 million
related to INO-1800 represents a milestone under the milestone method of accounting.
The Company is entitled to receive up to mid-single to double-digit tiered royalties on product sales. Unless terminated earlier in accordance with its terms, the Agreement continues in effect until the date when no royalty or other payment obligations under the Agreement are or will become due, i.e., a royalty term ending on the later of the date that is (a)
ten years
after the date of the first commercial sale of the product that is subject to the agreement or (b) the expiration of the last to expire of the patent rights that are subject to the agreement. Under the terms of the agreement the Company also agreed to perform research and development services, which include preclinical and clinical costs, and manufacturing and supply services, at Roche's expense.
The Company identified the deliverables at the inception of the agreement. The Company has determined that the license
to INO-5150 and INO-1800, the option right to license additional vaccines, research and development services, manufacturing and drug supply, and participation in the joint steering committee individually represent separate units of accounting because each deliverable has standalone value. The Company considered the provisions of the multiple-element arrangement guidance in determining whether the deliverables outlined above have standalone value and thus should be treated as separate units of accounting. The Company determined that the licenses and option right to license additional vaccines have standalone value and represent separate units of accounting because the rights conveyed permit Roche to perform all efforts necessary to complete development, commercialize and begin selling the product upon regulatory approval. In addition, Roche has the appropriate development, regulatory and commercial expertise with products similar to the product licensed under the agreement and has the ability to engage third parties to manufacture the product allowing Roche to realize the value of the license without receiving any of the remaining deliverables. Roche can also sublicense its license rights to third parties. Also, the Company determined that the research services, committee participation and manufacturing services each represent individual units of accounting as Roche could perform such services and/or could acquire these on a separate basis. The best estimated selling prices for these units of accounting were determined based on market conditions, the terms of comparable collaborative agreements for similar technology in the pharmaceutical and biotechnology industry, the Company's pricing practices and pricing objectives and the nature of the research and development services to be provided. While market data and the cost-to-recreate method under the cost approach were considered throughout the valuation process, ultimately, the selling prices of the licenses and option right were determined utilizing
two
forms of the relief from royalty method under the income approach. The arrangement consideration was allocated to the deliverables based on the relative selling price method.
The amount allocable to the delivered unit or units of accounting is limited to the amount that is considered fixed and determinable and is not contingent upon the delivery of additional items or meeting other specified performance conditions. Based on the results of the Company's analysis, the
$10.0 million
up-front payment was allocated as follows:
$5.0 million
and
$3.4 million
to the license to INO-5150 and INO-1800, respectively,
$1.5 million
to the option right and
$155,000
to the joint steering committee obligation. The amounts allocated to the licenses for INO-5150 and INO-1800 were recognized as revenue under collaborative research and development arrangements during the year ended December 31, 2013 as these were determined to be earned upon the granting of the license and delivery of the related knowledge and data. Due to the Company's continuing involvement obligations, the remaining amounts were classified as deferred revenue as of December 31, 2013. The Company will recognize revenues associated with research and development services and manufacturing and drug supply as revenues under collaborative arrangements as the related services are performed and according to the relative selling price method of the allocable arrangement consideration. During the
three and six months ended June 30, 2016
, the Company recognized revenues of $
1.6 million
and
$3.0 million
from Roche, respectively. During the
three and six months ended June 30, 2015
, the Company recognized revenues of
$4.3 million
and
$8.6 million
from Roche, respectively, of which
$3.0 million
related to a milestone earned during the period. Of the revenue recognized during the six-month period ended June 30, 2015,
$3.0 million
related to previously deferred revenue that was recognized based on the partial termination of the Agreement in February 2015. As of
June 30, 2016
, the Company has a deferred revenue and accounts receivable balance of
$130,000
and
$4.0 million
, respectively, related to the Agreement.
DARPA- Ebola
In April 2015, the Company received a grant from the Defense Advanced Research Projects Agency ("DARPA") to lead a collaborative team to develop multiple treatment and prevention approaches against Ebola. The Inovio-led consortium is taking a multi-faceted approach to develop products to prevent and treat Ebola infection. The award covers pre-clinical development costs as well as good manufacturing practice manufacturing costs and the phase I clinical study costs. The funding period is over
two
years and covers a base award of
$19.6 million
and an option award of
$24.6 million
, which was exercised in September 2015. The development proposal includes a second option of
$11.1 million
to support additional product supply and clinical development activities. The options are contingent upon the successful completion of certain pre-clinical development milestones. During the
three and six months ended June 30, 2016
, the Company recognized revenues of
$3.7 million
and
$8.2 million
, respectively, from DARPA related to the grant. During the
three and six months ended June 30, 2015
, the Company recognized
no
revenues from DARPA related to the grant due to its execution in July 2015. As of
June 30, 2016
, the Company has a deferred revenue and accounts receivable balance of
$1.3
million and
$5.0 million
, respectively, related to the DARPA grant.
16. Subsequent Events
On July 28, 2016, Roche provided notice that they would be discontinuing its collaboration with the Company and its development of INO-1800, the Company’s DNA immunotherapy against the hepatitis B virus. The termination will be effective
90
days after the date of notice. All of Roche’s rights to INO-1800, including the right to license the product to other parties, will be returned to the Company.
Between July 1, 2016 and July 28, 2016, the Company sold
64,076
shares of common stock under its Sales Agreement for net proceeds of
$605,000
.