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 SynCon
®
DNA immunotherapies and vaccines focused on preventing and treating cancers and infectious diseases. Inovio’s DNA-based immunotherapies, in combination with its proprietary CELLECTRA
®
delivery devices, are intended to generate optimal antigen production
in vivo,
in particular functional CD8+ killer T cell and antibody responses, to fight target diseases. Inovio’s synthetic products are based on its SynCon
®
immunotherapy design. The Company and its collaborators are currently conducting or planning clinical programs of its proprietary SynCon
®
immunotherapies for HPV-caused pre-cancers and cancers; prostate, breast, lung and pancreatic cancers; bladder cancer; glioblastoma multiforme ("GBM"); hepatitis B virus ("HBV"); HIV; Ebola; Lassa fever; Middle East Respiratory Syndrome ("MERS"); and Zika virus.
The Company's partners and collaborators include MedImmune, LLC, The Wistar Institute, University of Pennsylvania, GeneOne Life Science Inc. ("GeneOne"), ApolloBio Corporation, Regeneron Pharmaceuticals, Inc., Genentech, Inc., Plumbline Life Sciences, Inc., Drexel University, National Institute of Allergy and Infectious Diseases (“NIAID”), United States Military HIV Research Program, U.S. Army Medical Research Institute of Infectious Diseases, National Institutes of Health, HIV Vaccines Trial Network, Defense Advanced Research Projects Agency (“DARPA”), Parker Institute for Cancer Immunotherapy, and Coalition for Epidemic Preparedness Innovations (“CEPI”).
Inovio was incorporated in Delaware in June 2001 and has its principal executive offices in Plymouth Meeting, Pennsylvania.
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”) as contained in the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 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
September 30, 2018
, the condensed consolidated statements of operations and condensed consolidated statements of comprehensive loss for the
three and nine months ended September 30, 2018
and
2017
and the condensed consolidated statements of cash flows for the
nine months ended September 30, 2018
and
2017
are unaudited, but include all adjustments (consisting of normal recurring adjustments) that the Company considers necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. The results of operations for the
three and nine months ended September 30, 2018
shown herein are not necessarily indicative of the results that may be expected for the year ending December 31,
2018
, or for any other period. These unaudited financial statements, and notes thereto, should be read in conjunction with the audited consolidated financial statements for the year ended December 31,
2017
, included in the Company's Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on March 14, 2018. The balance sheet at December 31,
2017
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
September 30, 2018
through the date it filed these unaudited condensed consolidated financial statements with the SEC.
These unaudited condensed consolidated financial statements include the accounts of Inovio Pharmaceuticals, Inc. and its subsidiaries. The Company consolidates its wholly-owned subsidiaries Genetronics, Inc., VGX Pharmaceuticals, Inc. ("VGX") and GENEOS Therapeutics, Inc., and records a non-controlling interest for
15%
of VGX Animal Health, Inc., a subsidiary of VGX. All intercompany accounts and transactions have been eliminated upon consolidation.
The Company has incurred losses in each year since its inception and expects to continue to incur significant expenses and operating losses for the foreseeable future in connection with the research and preclinical and clinical development of its product candidates. The Company’s cash, cash equivalents and short-term investments of
$85.5 million
and long-term investments of
$12.7 million
are sufficient to support the Company's operations for a period of at least 12 months from the date of the quarterly report containing these condensed consolidated financial statements. In addition, the Company could sell up to an additional
$86.4 million
in shares of its common stock under its At-the-Market Equity Offering Sales Agreement (the “Sales Agreement”). In order to continue to fund future research and development activities, the Company will need to seek additional capital. This may occur through strategic alliance and licensing arrangements and/or future public or private debt or equity financings including use of its Sales Agreement. Although the Company has a history of equity financings including the receipt of net proceeds of
$14.9 million
under the current and prior Sales Agreement during the nine months ended September 30, 2018 and net proceeds of
$94.3 million
from an underwritten public offering and a previous at-the-market sales facility during the year ended December 31, 2017, sufficient funding may not be available, or if available, may be on terms that
significantly dilute or otherwise adversely affect the rights of existing stockholders. If adequate funds are not available in the future, the Company may need to delay, reduce the scope of or put on hold one or more of its clinical and/or preclinical programs.
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
Effective January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09,
Revenue from Contracts with Customers
(“Topic 606”)
using the modified retrospective method which consisted of applying and recognizing the cumulative effect of Topic 606 at the date of initial application. Topic 606 supersedes the revenue recognition requirements in Accounting Standards Codification (“ASC”) Topic 605,
Revenue Recognition
(“Topic 605”), including most industry-specific revenue recognition guidance throughout the Industry Topics of the ASC. All periods prior to the adoption date of Topic 606 have not been restated to reflect the impact of the adoption of Topic 606, but continue to be accounted for and presented under Topic 605.
The following paragraphs in this section describe the Company's revenue recognition accounting policies under Topic 606 upon adoption on January 1, 2018. Refer to Note 2 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017 for revenue recognition accounting policies under Topic 605.
The Company recognizes revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. To determine revenue recognition for contracts with customers, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies its performance obligations. At contract inception, the Company assesses the goods or services agreed upon within each contract and assess whether each good or service is distinct and determine those that are
performance obligations. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
Collaborative Arrangements
The Company enters into collaborative arrangements with partners that typically include payment of one or more of the following: (i) license fees; (ii) milestone payments related to the achievement of developmental, regulatory, or commercial goals; and (iii) royalties on net sales of licensed products. Where a portion of non-refundable, upfront fees or other payments received are allocated to continuing performance obligations under the terms of a collaborative arrangement, they are recorded as deferred revenue and recognized as revenue when (or as) the underlying performance obligation is satisfied.
As part of the accounting for these arrangements, the Company must develop estimates and assumptions that require judgment of management to determine the underlying stand-alone selling price for each performance obligation which determines how the transaction price is allocated among the performance obligation. The standalone selling price may include items such as forecasted revenues, development timelines, discount rates and probabilities of technical and regulatory success. The Company evaluates each performance obligation to determine if it can be satisfied at a point in time or over time. In addition, variable consideration must be evaluated to determine if it is constrained and, therefore, excluded from the transaction price.
License Fees
If a license to intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company will recognize revenues from non-refundable, upfront fees allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses that are bundled with other promises, the Company will utilize judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.
Milestone Payments
At the inception of each arrangement that includes milestone payments (variable consideration), the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the Company's or its collaboration partner’s control, such as regulatory approvals, are generally not considered probable of being achieved until those approvals are received. The transaction price is then allocated to each performance obligation on a relative stand-alone selling price basis, for which the Company recognizes revenue as or when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, the Company re-evaluates the probability of achieving such milestones and any related constraint, and if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect license, collaboration or other revenues and earnings in the period of adjustment.
Royalties
For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and for which the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, the Company has not recognized any royalty revenue resulting from any of its collaborative arrangements.
Under certain collaborative arrangements, the Company has been reimbursed for a portion of its research and development ("R&D") expenses, including costs of drug supplies. When these R&D services are performed under a reimbursement or cost sharing model with its collaboration partner, the Company records these reimbursements as a reduction of R&D expense in its condensed consolidated statements of operations.
Grants
The Company has determined that as of January 1, 2018, accounting for the Company’s various grant agreements falls under the contributions guidance under Subtopic 958-605
,
Not-for-Profit Entities-Revenue Recognition
,
which is outside the scope of Topic 606, as the government agencies granting the Company funds are not receiving reciprocal value for their contributions. Beginning on January 1, 2018, all contributions received from current grant agreements are recorded as a contra-expense as opposed to revenue on the condensed consolidated statement of operations.
Valuation of Intangible Assets and Goodwill
Intangible assets are amortized over their estimated useful lives ranging from
two
to
18
years. Acquired intangible assets are continuously being developed for the future economic viability contemplated at the time of acquisition. The Company is concurrently conducting preclinical studies and clinical trials using the acquired intangibles and has entered into licensing agreements for the use of these acquired intangibles.
Historically, the Company has recorded patents at cost and amortized these costs using the straight-line method over the expected useful lives of the patents or
17
years, whichever is less. Patent cost consists of the consideration paid for patents and related legal costs. Effective as of the acquisition of VGX in 2009, all new patent costs are expensed as incurred, with patent costs capitalized as of that date continuing to be amortized over the expected life of the patent. License costs are recorded based on the fair value of consideration paid and are amortized using the straight-line method over the shorter of the expected useful life of the underlying patents or the term of the related license agreement to the extent the license has an alternative future use. As of
September 30, 2018
and
December 31, 2017
, the Company’s intangible assets resulting from the acquisition of VGX, as well as the acquisitions of two other companies, Inovio AS and Bioject Medical Technologies, Inc. ("Bioject"), and additional intangibles including previously capitalized patent costs and license costs, net of accumulated amortization, totaled
$5.0 million
and
$6.0 million
, respectively.
The determination of the value of intangible assets requires management to make estimates and assumptions that affect the Company’s consolidated financial statements. The Company assesses potential impairments to intangible assets when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. The Company’s judgments regarding the existence of impairment indicators and future cash flows related to intangible assets are based on operational performance of its acquired businesses, market conditions and other factors. If impairment is indicated, the Company will reduce the carrying value of the intangible asset to fair value. While current and historical operating and cash flow losses are potential indicators of impairment, the Company believes the future cash flows to be received from its intangible assets will exceed the intangible assets’ carrying value, and accordingly, the Company has not recognized any impairment losses through
September 30, 2018
.
Goodwill represents the excess of acquisition cost over the fair value of the net assets of acquired businesses. Goodwill is reviewed for impairment at least annually at November 30, or more frequently if an event occurs indicating the potential for impairment. During its goodwill impairment review, the Company may 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, the Company determines 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, the Company proceeds to perform the two-step test for goodwill impairment. The first step involves comparing the estimated fair value of the reporting unit with its carrying value, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, the Company performs the second step of the goodwill impairment test to determine the amount of loss, which involves comparing the implied fair value of the goodwill to the carrying value of the goodwill. The Company may also elect to bypass the qualitative assessment in a period and elect to proceed to perform the first step of the goodwill impairment test. The Company performed its annual assessment for goodwill impairment as of November 30, 2017, identifying no impairment.
Although there are inherent uncertainties in this assessment process, the estimates and assumptions the Company is using are consistent with its internal planning. If these estimates or their related assumptions change in the future, the Company may be required to record an impairment charge on all or a portion of its goodwill and intangible assets. Furthermore, the Company cannot predict the occurrence of future impairment triggering events nor the impact such events might have on its reported asset values. Future events could cause the Company to conclude that impairment indicators exist and that goodwill or other intangible assets associated with its acquired businesses are impaired. Any resulting impairment loss could have an adverse impact on the Company’s results of operations. See Note 8 for further discussion of the Company’s goodwill and intangible assets.
Research and Development Expenses
The Company’s activities have largely consisted of research and development efforts related to developing electroporation delivery technologies and DNA immunotherapies and 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 trial 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 trial 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. Impact of Recently Issued Accounting Standards
The recent accounting pronouncements below may have a significant effect on the Company's financial statements. Recent accounting 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.
ASU No. 2014-09.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
("Topic 606”), which amended the existing accounting standards for revenue recognition, 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 will require a company to use more judgment and make more estimates than under the current guidance. The Company adopted this new standard effective January 1, 2018, using the modified retrospective transition method. The impact of adoption of Topic 606 on the Company's existing agreements was as follows:
Collaboration Agreement with MedImmune
The Company has determined that no cumulative catch-up adjustment was required.
Grant Agreements
The Company has determined that as of January 1, 2018, accounting for the Company’s various grant agreements falls under the contributions guidance under Subtopic 958-605
,
Not-for-Profit Entities-Revenue Recognition
,
which is outside the scope of Topic 606, as the government agencies granting the Company funds are not receiving reciprocal value for their contributions. Beginning on January 1, 2018, all contributions received from current grant agreements have been recorded as a contra-expense as opposed to revenue on the consolidated statement of operations. For the
three and nine months ended
September 30, 2018
,
$2.6 million
and
$6.7 million
, respectively, would have been recorded as grant revenue but under the new guidance was instead recorded as a reduction to research and development expense.
The following table illustrates the impact that adopting Topic 606 has had on the Company's reported results in the condensed consolidated statement of operations for the
three months ended September 30, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances Without Adoption of Topic 606 for the Three Months Ended September 30, 2018
|
|
Impact of Adopting Topic 606
|
|
As Reported for the Three Months Ended September 30, 2018
|
|
Revenues:
|
|
|
|
|
|
|
Revenue under collaborative research and development arrangements
|
$
|
1,813,287
|
|
|
$
|
—
|
|
|
$
|
1,813,287
|
|
|
Revenue under collaborative research and development arrangements with affiliated entities
|
184,990
|
|
|
—
|
|
|
184,990
|
|
|
Grants and miscellaneous revenue
|
1,628,433
|
|
|
(1,625,842
|
)
|
|
2,591
|
|
|
Grants and miscellaneous revenue from affiliated entity
|
951,884
|
|
|
(951,884
|
)
|
|
—
|
|
|
Total revenues
|
4,578,594
|
|
|
(2,577,726
|
)
|
|
2,000,868
|
|
|
Operating expenses:
|
|
|
|
|
|
|
Research and development
|
24,429,584
|
|
|
(2,577,726
|
)
|
|
21,851,858
|
|
|
General and administrative
|
6,791,693
|
|
|
—
|
|
|
6,791,693
|
|
|
Total operating expenses
|
$
|
31,221,277
|
|
|
$
|
(2,577,726
|
)
|
|
$
|
28,643,551
|
|
The following table illustrates the impact that adopting Topic 606 has had on the Company's reported results in the condensed consolidated statement of operations for the
nine months ended September 30, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances Without Adoption of Topic 606 for the Nine Months Ended September 30, 2018
|
|
Impact of Adopting Topic 606
|
|
As Reported for the Nine Months Ended September 30, 2018
|
|
Revenues:
|
|
|
|
|
|
|
Revenue under collaborative research and development arrangements
|
$
|
27,488,185
|
|
|
$
|
—
|
|
|
$
|
27,488,185
|
|
|
Revenue under collaborative research and development arrangements with affiliated entities
|
393,317
|
|
|
—
|
|
|
393,317
|
|
|
Grants and miscellaneous revenue
|
3,645,107
|
|
|
(3,547,336
|
)
|
|
97,771
|
|
|
Grants and miscellaneous revenue from affiliated entity
|
3,164,454
|
|
|
(3,164,454
|
)
|
|
—
|
|
|
Total revenues
|
34,691,063
|
|
|
(6,711,790
|
)
|
|
27,979,273
|
|
|
Operating expenses:
|
|
|
|
|
|
|
Research and development
|
75,604,019
|
|
|
(6,711,790
|
)
|
|
68,892,229
|
|
|
General and administrative
|
23,679,018
|
|
|
—
|
|
|
23,679,018
|
|
|
Total operating expenses
|
$
|
99,283,037
|
|
|
$
|
(6,711,790
|
)
|
|
$
|
92,571,247
|
|
ASU No. 2016-01.
In January 2016, the FASB issued ASU No. 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities
. The amended guidance requires the Company to measure and record equity investments, except those accounted for under the equity method of accounting that have a readily determinable fair value, at fair value and for the Company to recognize the changes in fair value in its consolidated statements of operations, instead of recognizing unrealized gains and losses through accumulated other comprehensive income (loss), as done under the previous guidance. The amended guidance also changes several disclosure requirements for financial instruments, including the methods and significant assumptions used to estimate fair value. The standard was effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods. The Company adopted this guidance on January 1, 2018 and recorded a
$231,000
cumulative effect adjustment to reclassify the cumulative unrealized gain, net of tax effect, from its investment in Plumbline Life Sciences, Inc. ("PLS") from accumulated other comprehensive loss to accumulated deficit. After the adoption of ASU No. 2016-01, the Company recorded a gain on investment in affiliated entity related to PLS of
$531,000
and
$873,000
on the condensed consolidated statement of operations for the
three and nine months ended September 30, 2018
, respectively.
The cumulative effect of the changes made to the Company's condensed consolidated balance sheet as of January 1, 2018 for the adoption of ASU No. 2016-01 are included in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity:
|
Balance at December 31, 2017
|
|
Adjustments due to ASU No. 2016-01
|
|
Balance at January 1, 2018
|
|
Accumulated deficit
|
$
|
(523,356,317
|
)
|
|
$
|
231,366
|
|
|
$
|
(523,124,951
|
)
|
|
Accumulated other comprehensive loss
|
$
|
(117,005
|
)
|
|
$
|
(231,366
|
)
|
|
$
|
(348,371
|
)
|
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. The Company currently has
three
operating leases for its office and laboratory spaces in San Diego, California and Plymouth Meeting, Pennsylvania that it expects to be impacted by the new accounting standard that will result in the present values of the future lease payments being presented as right-to-use assets, with a corresponding lease liability at the date of adoption.
5. Revenue Recognition
On January 1, 2018, the Company adopted Topic 606 using the modified retrospective method. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historical accounting under Topic 605.
For additional details about Topic 606, refer to Note 3 above.
The following table summarizes changes in the Company’s contract assets and liabilities for the
nine months ended September 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2018
|
|
Additions
|
|
Deductions
|
|
Balance at September 30, 2018
|
|
Contract assets
|
|
|
|
|
|
|
|
|
Accounts receivable from MedImmune
|
$
|
1,693,530
|
|
|
$
|
3,865,641
|
|
|
$
|
(3,206,848
|
)
|
|
$
|
2,352,323
|
|
|
Contract liabilities
|
|
|
|
|
|
|
|
|
Deferred revenue - MedImmune
|
1,145,500
|
|
|
732,200
|
|
|
(1,582,167
|
)
|
|
295,533
|
|
|
Deferred revenue - ApolloBio
|
—
|
|
|
23,000,000
|
|
|
(23,000,000
|
)
|
|
—
|
|
|
Deferred revenue - Other
|
$
|
271,894
|
|
|
$
|
93,750
|
|
|
$
|
(208,291
|
)
|
|
$
|
157,353
|
|
During the
three and nine months ended September 30, 2018
, the Company recognized total revenue under collaborative research and development and other agreements of
$0
and
$23.0 million
, respectively, from ApolloBio;
$1.8 million
and
$4.5 million
, respectively, from MedImmune;
$155,000
and
$305,000
, respectively, from its affiliated entity GeneOne Life Science Inc. ("GeneOne"); and
$33,000
and
$186,000
, respectively, from various other contracts. Of the total revenue recognized during the
three and nine months ended September 30, 2018
,
$316,000
and
$1.3
million, respectively, was in deferred revenue as of December 31, 2017. All revenues recognized during the
three and nine months ended September 30, 2018
are attributed to the United States.
6. Investments
Investments at
September 30, 2018
consisted of mutual funds and United States corporate debt securities. Investments at
December 31, 2017
consisted of mutual funds, United States corporate debt securities and an equity investment in the Company's affiliated entity PLS. Investments are recorded at fair value, based on current market valuations. After the adoption of ASU No. 2016-01 on January 1, 2018, unrealized gains and losses on the Company's equity securities are reported in the condensed consolidated statement of operations as non-operating other income (expense). Unrealized gains and losses on the Company's debt securities will continue to be excluded from earnings and are reported as a separate component of other comprehensive 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 nine months ended September 30, 2018
,
$184,000
and
$558,000
, respectively, of net realized loss on investments was recorded. During the
three and nine months ended September 30, 2017
,
$11,000
and
$78,000
, respectively, 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
September 30, 2018
, the Company had
15
available-for-sale securities in a gross unrealized loss position, of which
10
with an aggregate total unrealized loss of
$167,000
were in such position for longer than
12 months
.
The following is a summary of available-for-sale securities as of
September 30, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2018
|
|
|
Contractual
Maturity (in years)
|
Cost
|
|
Gross Unrealized
Gains
|
|
Gross Unrealized
Losses
|
|
Fair Market Value
|
|
Mutual funds
|
---
|
|
$
|
65,154,422
|
|
|
$
|
680
|
|
|
$
|
(280,113
|
)
|
|
$
|
64,874,989
|
|
|
US corporate debt securities
|
Less than 2
|
|
1,223,906
|
|
|
—
|
|
|
(2,328
|
)
|
|
1,221,578
|
|
|
Total investments
|
|
|
$
|
66,378,328
|
|
|
$
|
680
|
|
|
$
|
(282,441
|
)
|
|
$
|
66,096,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
|
Contractual
Maturity (in years)
|
Cost
|
|
Gross Unrealized
Gains
|
|
Gross Unrealized
Losses
|
|
Fair Market Value
|
|
Mutual funds
|
---
|
|
$
|
68,776,165
|
|
|
$
|
42,097
|
|
|
$
|
(252,373
|
)
|
|
$
|
68,565,889
|
|
|
US corporate debt securities
|
Less than 2
|
|
35,210,121
|
|
|
3,032
|
|
|
(140,198
|
)
|
|
35,072,955
|
|
|
Investment in affiliated entity (PLS)
|
---
|
|
—
|
|
|
2,325,079
|
|
|
—
|
|
|
2,325,079
|
|
|
Total investments
|
|
|
$
|
103,986,286
|
|
|
$
|
2,370,208
|
|
|
$
|
(392,571
|
)
|
|
$
|
105,963,923
|
|
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
nine months ended September 30, 2018
or
2017
.
The following table presents the Company’s assets that are measured at fair value on a recurring basis, and are determined using the following inputs as of
September 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
|
|
|
September 30, 2018
|
|
|
Total
|
|
Quoted Prices
in Active Markets
(Level 1)
|
|
Significant
Other Unobservable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
Money market funds
|
$
|
1,780,138
|
|
|
$
|
1,780,138
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Mutual funds
|
64,874,989
|
|
|
—
|
|
|
64,874,989
|
|
|
—
|
|
|
US corporate debt securities
|
1,221,578
|
|
|
—
|
|
|
1,221,578
|
|
|
—
|
|
|
Investment in affiliated entities
|
12,699,654
|
|
|
12,699,654
|
|
|
—
|
|
|
—
|
|
|
Total Assets
|
$
|
80,576,359
|
|
|
$
|
14,479,792
|
|
|
$
|
66,096,567
|
|
|
$
|
—
|
|
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,
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
|
|
|
December 31, 2017
|
|
|
Total
|
|
Quoted Prices
in Active Markets
(Level 1)
|
|
Significant
Other Unobservable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
Money market funds
|
$
|
9,843,482
|
|
|
$
|
9,843,482
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Mutual funds
|
68,565,889
|
|
|
—
|
|
|
68,565,889
|
|
|
—
|
|
|
US corporate debt securities
|
35,072,955
|
|
|
—
|
|
|
35,072,955
|
|
|
—
|
|
|
Investment in affiliated entities
|
11,394,480
|
|
|
11,394,480
|
|
|
—
|
|
|
—
|
|
|
Total Assets
|
$
|
124,876,806
|
|
|
$
|
21,237,962
|
|
|
$
|
103,638,844
|
|
|
$
|
—
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Common stock warrants
|
$
|
360,795
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
360,795
|
|
|
Total Liabilities
|
$
|
360,795
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
360,795
|
|
Level 1 assets at
September 30, 2018
consisted of money market funds held by the Company that are valued at quoted market prices, as well as the Company’s investments in affiliates, GeneOne and PLS. The Company accounts for its investment in
1,644,155
common shares of GeneOne based on the closing price of the shares on the Korean Stock Exchange on the applicable balance sheet date. The Company accounts for its investment in
395,758
common shares of PLS as an equity investment with a fair value based on the closing price of the shares on the Korea New Exchange (KONEX) Market on the applicable balance sheet date. 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. After the adoption of ASU No. 2016-01 on January 1, 2018, unrealized gains and losses on the Company's equity securities are reported in the condensed consolidated statement of operations as a gain (loss) on investment in affiliated entities, as discussed in Note 4.
Level 2 assets at
September 30, 2018
consisted of U.S. 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 the service's 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.
There were no Level 3 assets held as of
September 30, 2018
.
There were no Level 3 liabilities held as of
September 30, 2018
. Level 3 liabilities at September 30, 2017 consisted of common stock warrant liabilities associated with warrants to purchase the Company's common stock issued in March 2013. During the three months ended
September 30, 2018
, all of the remaining
284,091
warrants were exercised for net proceeds to the Company of
$902,000
. During the three and nine months ended September 30, 2017,
no
ne of these warrants were exercised.
Prior to exercise, the Company would reassess 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 recorded a decrease in fair value of
$229,000
and
$361,000
for the
three and nine months ended September 30, 2018
, respectively, and a decrease in fair value of
$423,000
and
$227,000
for the
three and nine months ended September 30, 2017
, respectively. The change in fair value of common stock warrants is reflected in the Company's condensed consolidated statements of operations.
8. Goodwill and Intangible Assets
The following sets forth the goodwill and intangible assets by major asset class:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
|
Useful
Life
(Yrs)
|
Gross
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
|
Indefinite lived:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill(a)
|
|
|
$
|
10,513,371
|
|
|
$
|
—
|
|
|
$
|
10,513,371
|
|
|
$
|
10,513,371
|
|
|
$
|
—
|
|
|
$
|
10,513,371
|
|
|
Definite lived:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
8 – 17
|
|
5,802,528
|
|
|
(5,726,978
|
)
|
|
75,550
|
|
|
5,802,528
|
|
|
(5,681,673
|
)
|
|
120,855
|
|
|
Licenses
|
8 – 17
|
|
1,323,761
|
|
|
(1,212,170
|
)
|
|
111,591
|
|
|
1,323,761
|
|
|
(1,190,609
|
)
|
|
133,152
|
|
|
CELLECTRA
®
(b)
|
5 – 11
|
|
8,106,270
|
|
|
(7,572,419
|
)
|
|
533,851
|
|
|
8,106,270
|
|
|
(7,252,108
|
)
|
|
854,162
|
|
|
GHRH(b)
|
11
|
|
335,314
|
|
|
(295,709
|
)
|
|
39,605
|
|
|
335,314
|
|
|
(271,948
|
)
|
|
63,366
|
|
|
Bioject(c)
|
2 – 15
|
|
5,100,000
|
|
|
(1,808,889
|
)
|
|
3,291,111
|
|
|
5,100,000
|
|
|
(1,405,556
|
)
|
|
3,694,444
|
|
|
Other(d)
|
18
|
|
4,050,000
|
|
|
(3,075,000
|
)
|
|
975,000
|
|
|
4,050,000
|
|
|
(2,906,250
|
)
|
|
1,143,750
|
|
|
Total intangible assets
|
|
|
24,717,873
|
|
|
(19,691,165
|
)
|
|
5,026,708
|
|
|
24,717,873
|
|
|
(18,708,144
|
)
|
|
6,009,729
|
|
|
Total goodwill and intangible assets
|
|
|
$
|
35,231,244
|
|
|
$
|
(19,691,165
|
)
|
|
$
|
15,540,079
|
|
|
$
|
35,231,244
|
|
|
$
|
(18,708,144
|
)
|
|
$
|
16,523,100
|
|
|
|
|
|
(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 estimated fair value of developed technology and intellectual property which were recorded from the Bioject asset acquisition.
|
|
|
|
|
(d)
|
Other intangible assets represent the estimated fair value of acquired intellectual property from the Inovio AS acquisition.
|
Aggregate amortization expense on intangible assets for the
three and nine months ended September 30, 2018
was
$267,000
and
$983,000
, respectively. Aggregate amortization expense on intangible assets for the
three and nine months ended September 30, 2017
was
$404,000
and
$1.2
million, respectively. Estimated aggregate amortization expense is $
267,000
for the remainder of fiscal year
2018
,
$1.1 million
for
2019
, $
547,000
for
2020
, $
520,000
for
2021
, $
493,000
for
2022
and $
2.1 million
for
2023
and subsequent years combined.
9. Stockholders’ Equity
The following is a summary of the Company's authorized and issued common and preferred stock as of
September 30, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of
|
|
|
Authorized
|
|
Issued
|
|
September 30, 2018
|
|
December 31, 2017
|
|
Common Stock, par value $0.001 per share
|
600,000,000
|
|
|
94,472,389
|
|
|
94,472,389
|
|
|
90,357,644
|
|
|
Series C Preferred Stock, par value $0.001 per share
|
1,091
|
|
|
1,091
|
|
|
23
|
|
|
23
|
|
Common Stock
In May 2018, 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
$100.0 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 up to
3.0%
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
nine months ended September 30, 2018
, the Company sold a total of
2,652,530
shares of common stock under the Sales Agreement. The sales were made at a weighted average price of
$5.14
per share resulting in aggregate net proceeds of
$13.4 million
. The Company may sell up to an additional
$86.4 million
in shares of its common stock under the Sales Agreement. The registration statement that registered with the SEC the shares that may be sold under the Sales Agreement expires on June 8, 2021.
In June 2016, the Company entered into an At-the-Market Equity Offering Sales Agreement (the “Prior Sales Agreement”) with the same placement agent. The registration statement that registered with the SEC the shares sold under the Prior Sales Agreement expired on June 5, 2018, and no further sales will be made under the Prior Sales Agreement. The Company sold an aggregate of
3,911,104
shares of common stock under the Prior Sales Agreement resulting in aggregate net proceeds of
$32.1 million
. During the period beginning January 1 and ending June 5, 2018, the Company sold a total of
314,950
shares of common stock under the Prior Sales Agreement. The sales were made at a weighted average price of
$5.07
per share resulting in aggregate net proceeds of
$1.6 million
. During the nine months ended September 30, 2017, the Company sold a total of
2,937,406
shares of common stock under the Prior Sales Agreement. The sales were made at a weighted average price of
$8.41
per share resulting in aggregate net proceeds of
$24.2 million
.
On July 25, 2017, the Company closed an underwritten public offering of
12,500,000
shares of common stock at a public offering price of
$6.00
per share. The net proceeds to the Company, after deducting the underwriters' discounts and commissions and other offering expenses, were
$70.1
million.
Warrants
During the three and nine months ended September 30, 2018, warrants to purchase
284,091
shares of the Company's common stock which were issued in connection with an underwritten public offering of common stock and warrants in March 2013 were exercised, with net proceeds to the Company of
$902,000
.
No
common stock warrants were exercised during the three and nine months ended September 30, 2017.
As of September 30, 2018,
no
common stock warrants were outstanding. Previously, the Company accounted for the 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 required the issuance of registered securities upon exercise and did not sufficiently preclude an implied right to net cash settlement. The Company classified registered warrants on the condensed consolidated balance sheet as a current liability which was revalued at each balance sheet date subsequent to the initial issuance. Changes in the fair market value of the warrants were reflected in the condensed consolidated statement of operations as change in fair value of common stock warrants.
Stock Options
The Company has a stock-based incentive plan, the 2016 Omnibus Incentive Plan (the "2016 Incentive Plan"), pursuant to which the Company may grant stock options, restricted stock awards, restricted stock units and other stock-based awards or short-term cash incentive awards to employees, directors and consultants.
The 2016 Incentive Plan was approved by the Company's 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 January 1, 2018, such maximum number of shares shall be increased by
2,000,000
shares of common stock unless the Board determines, prior to January 1 for any such calendar year, to increase such maximum amount by a fewer number of shares or not to increase the maximum amount at all for such year. On January 1, 2018, the maximum number of shares to be issued was increased by
2,000,000
. At
September 30, 2018
, there were
8,000,000
shares of common stock reserved for issuance upon exercise of incentive awards granted and to be granted at future dates under the 2016 Incentive Plan. At
September 30, 2018
, the Company had
2,993,654
shares of common stock available for future grant under the 2016 Incentive Plan,
1,534,883
shares underlying outstanding but unvested restricted stock units and options outstanding to purchase
3,104,397
shares of common stock under the 2016 Incentive Plan. The awards granted and available for future grant under the 2016 Incentive Plan generally vest over
three
years and have a maximum contractual term of
ten
years. The 2016 Incentive Plan terminates by its terms on March 9, 2026.
The Amended and Restated 2007 Omnibus Incentive Plan (the "2007 Incentive Plan") was adopted on March 31, 2007 and terminated by its terms on March 31, 2017. At
September 30, 2018
, the Company had
176,330
shares underlying outstanding but unvested restricted stock units and options outstanding to purchase
5,840,878
shares of common stock under the 2007 Incentive Plan. The awards granted under the 2007 Incentive Plan generally vest over
three
years and have a maximum contractual term of
ten
years.
10. 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 net 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 net 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 options, warrants or other securities and the presumed exercise of such securities are dilutive to net 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 such securities 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 net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
Numerator
|
|
|
|
|
Net loss (numerator for use in basic net loss per share)
|
$
|
(25,015,672
|
)
|
|
$
|
(34,134,570
|
)
|
|
Adjustment for decrease in fair value of warrant liability
|
—
|
|
|
(423,296
|
)
|
|
Numerator for use in diluted net loss per share
|
$
|
(25,015,672
|
)
|
|
$
|
(34,557,866
|
)
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
Weighted average number of common shares outstanding (denominator for use in basic net loss per share)
|
92,423,122
|
|
|
86,952,024
|
|
|
Effect of dilutive potential common shares
|
—
|
|
|
138,659
|
|
|
Denominator for use in diluted net loss per share
|
92,423,122
|
|
|
87,090,683
|
|
|
|
|
|
|
|
Net loss per share, diluted
|
$
|
(0.27
|
)
|
|
$
|
(0.40
|
)
|
|
|
|
|
|
|
Net loss per share, basic
|
$
|
(0.27
|
)
|
|
$
|
(0.39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
Numerator
|
|
|
|
|
Net loss (numerator for use in basic net loss per share)
|
$
|
(64,005,625
|
)
|
|
$
|
(66,699,593
|
)
|
|
Adjustment for decrease in fair value of warrant liability
|
—
|
|
|
(227,273
|
)
|
|
Numerator for use in diluted net loss per share
|
$
|
(64,005,625
|
)
|
|
$
|
(66,926,866
|
)
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
Weighted average number of common shares outstanding (denominator for use in basic net loss per share)
|
91,350,117
|
|
|
78,894,881
|
|
|
Effect of dilutive potential common shares
|
—
|
|
|
148,599
|
|
|
Denominator for use in diluted net loss per share
|
91,350,117
|
|
|
79,043,480
|
|
|
|
|
|
|
|
Net loss per share, diluted
|
$
|
(0.70
|
)
|
|
$
|
(0.85
|
)
|
|
|
|
|
|
|
Net loss per share, basic
|
$
|
(0.70
|
)
|
|
$
|
(0.85
|
)
|
The following table summarizes potential shares of common stock that were excluded from the diluted net loss per share calculation because of their anti-dilutive effect for the
three and nine months ended September 30, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Equivalents
|
2018
|
|
2017
|
|
Options to purchase common stock
|
8,945,275
|
|
|
7,811,387
|
|
|
Restricted stock units
|
1,711,213
|
|
|
1,324,410
|
|
|
Convertible preferred stock
|
8,456
|
|
|
8,456
|
|
|
Total
|
10,664,944
|
|
|
9,144,253
|
|
11. 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 price of the Company's common stock reported on the Nasdaq Global Select Market 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 on a straight-line basis over the requisite vesting 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 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. Upon adoption of ASU 2016-09 on January 1, 2017, the Company elected to remove the forfeiture rate from the calculation and recorded a cumulative catch-up adjustment to accumulated deficit with a corresponding offset to additional paid-in-capital of
$312,000
. Previously, the forfeiture rate was based on historical data and the Company recorded stock-based compensation expense only for those awards that were expected to vest.
The weighted average assumptions used in the Black-Scholes model for option grants to employees and directors are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Risk-free interest rate
|
2.86%
|
|
1.96%
|
|
2.73%
|
|
2.21%
|
|
Expected volatility
|
71%
|
|
73%
|
|
72%
|
|
73%
|
|
Expected life in years
|
6.1
|
|
6.1
|
|
6.2
|
|
6.0
|
|
Dividend yield
|
—
|
|
—
|
|
—
|
|
—
|
Total employee and director stock-based compensation expense recognized in the condensed consolidated statements of operations for the
three and nine months ended September 30, 2018
was $
2.2 million
and $
8.0 million
, respectively, of which $
1.2 million
and $
4.7 million
, respectively, were included in research and development expenses, and $
1.0 million
and $
3.3 million
, respectively, were included in general and administrative expenses.
Total employee and director stock-based compensation expense recognized in the condensed consolidated statements of operations for the
three and nine months ended September 30, 2017
was
$2.4 million
and
$10.1 million
, respectively, of which
$1.2 million
and
$4.7 million
, respectively, were included in research and development expenses, and
$1.2 million
and
$5.4 million
, respectively, were included in general and administrative expenses.
At
September 30, 2018
, there was
$6.3 million
of total unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted-average period of
1.9 years
.
The weighted average grant date fair value per share, calculated using the Black-Scholes option pricing model, was
$2.96
and $
2.85
for employee and director stock options granted during the
three and nine months ended September 30, 2018
, respectively, and $
3.95
and $
4.38
for employee and director stock options granted during the
three and nine months ended September 30, 2017
, respectively.
At
September 30, 2018
, there was
$6.2 million
of total unrecognized compensation expense related to unvested restricted stock units, which is expected to be recognized over a weighted-average period of
1.9
years.
The weighted average grant date fair value per share was
$4.31
for restricted stock units granted during the nine months ended September 30, 2018. There were
no
restricted stock units granted during the three months ended September 30, 2018. The weighted average grant date fair value per share was
$5.63
and
$6.68
for restricted stock units granted during the
three and nine months ended September 30, 2017
, respectively.
The fair value of stock options granted to non-employees at the measurement dates were estimated using the Black-Scholes pricing model. Total stock-based compensation expense for stock options and restricted stock units granted to non-employees for the
three and nine months ended September 30, 2018
was
$160,000
and
$334,000
, respectively. Total stock-based compensation expense for stock options and restricted stock units granted to non-employees for the
three and nine months ended September 30, 2017
was
$23,000
and
$272,000
, respectively.
12. Related Party Transactions
GeneOne Life Sciences
The Company owns
1,644,155
shares of common stock in GeneOne as of
September 30, 2018
; one of the Company's directors, Dr. David B. Weiner, acts as a consultant to GeneOne.
In 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 the Company'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 an upfront payment of
$3.0 million
, and is entitled to receive research support, annual license maintenance fees and royalties on net Product sales. The GeneOne Agreement also provides the Company 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.
In 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 “Hep 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 1 and 2 clinical studies with respect to the Hep Products. The Company will receive from GeneOne payments based on the achievement of clinical milestones and royalties based on sales of the Hep Products in the licensed territories, retaining all commercial rights to the Hep Products in all other territories. In 2013, the Company amended the Hep Agreement to grant back to the Company the SynCon
®
therapeutic vaccines targeting hepatitis B, along with all associated rights, from the collaboration in return for certain remuneration including a percentage of license fees. In 2013, the Company further amended the Hep Agreement to in part provide exclusive patent rights to IL-28 technology for use with the Hep 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.
In May 2015, the Company entered into a Collaborative Development Agreement with GeneOne to co-develop a DNA vaccine for MERS through Phase 1 clinical trials. Under the terms of the agreement, GeneOne will be responsible for funding all preclinical and clinical studies through Phase 1. In return, GeneOne will receive up to a
35%
milestone-based ownership interest in the MERS immunotherapy upon achievement of the last milestone event of completion of the Phase 1 safety and immunogenicity study. The collaborative research program shall terminate upon the completion of activities under the development plan, unless sooner terminated.
In January 2016, the Company and GeneOne amended the Collaborative Development Agreement for MERS to expand the agreement to test and advance the Company's DNA-based vaccine for preventing and treating Zika virus. GeneOne will be responsible for funding all preclinical and clinical studies through Phase 1. In return, GeneOne will receive up to a
35%
milestone-based ownership interest in the Zika immunotherapy upon achievement of the last milestone event of the completion of the Phase 1 safety and immunogenicity study. All other agreement terms remain the same.
In December 2017, the Company completed the sale of certain assets related to its compound VGX-1027 to GeneOne for a purchase price of
$1.0 million
.
Revenue recognized from GeneOne consisted of licensing and other fees from the influenza and Zika collaborations. For the
three and nine months ended September 30, 2018
, the Company recognized revenue from GeneOne of
$155,000
and
$305,000
, respectively, and
$104,000
and
$426,000
for the
three and nine months ended September 30, 2017
, respectively.
Operating expenses recorded from transactions with GeneOne relate primarily to biologics manufacturing. Operating expenses from GeneOne for the
three and nine months ended September 30, 2018
were
$1.9 million
and
$4.7 million
, respectively, and
$704,000
and
$1.9 million
for the
three and nine months ended September 30, 2017
, respectively.
At
September 30, 2018
and
December 31, 2017
, the Company had an accounts receivable balance of
$74,000
and
$0
, respectively, and an accounts payable and accrued liability balance of
$310,000
and
$107,000
, respectively, related to GeneOne and its subsidiaries. At
September 30, 2018
and
December 31, 2017
,
$312,000
and
$331,000
, respectively, of prepayments made to GeneOne were classified as long-term other assets on the Company's condensed consolidated balance sheet.
Plumbline Life Sciences, Inc.
The Company owns
395,758
shares of common stock in Plumbline Life Sciences, Inc. ("PLS") as of
September 30, 2018
; one of the Company's directors, Dr. David B. Weiner, acts as a consultant to PLS.
In August 2016, the Company licensed a veterinary vaccine for foot and mouth disease ("FMD") to PLS. PLS will fund all development activities for this FMD vaccine. The Company will receive milestone payments as well as royalties on product sales from PLS for commercial rights to this FMD synthetic vaccine in Asia, excluding Japan.
For the
three and nine months ended September 30, 2018
, the Company recognized revenue from PLS of
$30,000
and
$88,000
, respectively, and
$25,000
and
$113,000
for the
three and nine months ended September 30, 2017
, respectively. At
September 30, 2018
and
December 31, 2017
, the Company had an accounts receivable balance of
$459,000
and
$370,000
, respectively, related to PLS.
The Wistar Institute
One of the Company's directors, Dr. David B. Weiner, is the Executive Vice President and Director of the Vaccine Center of The Wistar Institute ("Wistar").
In March 2016, the Company entered into collaborative research agreements with Wistar for preventive and therapeutic DNA-based immunotherapy applications and products developed by Dr. Weiner and Wistar for the treatment of cancers and infectious diseases. Under the terms of the agreement, 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 under the agreement.
In December 2016, the Company received a
$6.1 million
sub-grant through Wistar to develop a DNA-based monoclonal antibody against the Zika infection.
The Company is also a collaborator with Wistar on an Integrated Preclinical/Clinical AIDS Vaccine Development grant from the NIAID, awarded in 2015.
Deferred grant funding recognized from Wistar and recorded as contra-research and development expense, which would have been classified as grant revenue in the prior year, is related to work performed by the Company on the research sub-contract agreements. For the
three and nine months ended September 30, 2018
, the Company recorded
$952,000
and
$3.2 million
, respectively, as contra-research and development expense from Wistar. For the
three and nine months ended September 30, 2017
, the Company recognized revenue from Wistar of
$708,000
and
$2.4 million
, respectively.
Research and development expenses recorded from Wistar relate primarily to the collaborative research agreements and sub-contract agreements related to the DARPA Ebola grant (see Note 14). Research and development expenses recorded from Wistar for the
three and nine months ended September 30, 2018
were
$615,000
and
$1.4 million
, respectively. Research and development expenses recorded from Wistar for the
three and nine months ended September 30, 2017
were
$596,000
and
$1.6 million
, respectively. At
September 30, 2018
and
December 31, 2017
, the Company had an accounts receivable balance of
$1.0 million
and
$117,000
, respectively, and an accounts payable and accrued liability balance of
$381,000
and
$820,000
, respectively, related to Wistar.
13. Commitments and Contingencies
San Diego Leases
In April 2013, the Company entered into a lease for office space located in San Diego, California (the "San Diego Lease"). The term of the San Diego Lease commenced on December 1, 2013. The initial term of the San Diego Lease is
ten
years, with a right to terminate on December 1, 2019, subject to specified conditions. In June 2015, the Company amended the San Diego Lease to increase the total leased space and occupy the entire building. The commencement of the amended San Diego Lease was in January 2016 and increased monthly lease payments to range from
zero
to
$99,000
. The Company has capitalized
$3.4 million
of total tenant improvements within fixed assets on the condensed consolidated balance sheet related to the entire building and has recorded a corresponding increase to deferred rent.
In October 2016, the Company entered into an office lease (the “new Lease”) for a second property located in San Diego, California. The total space under the new Lease is approximately
51,000
square feet. The Company is using the facility for office, manufacturing and research and development purposes. The term of the new Lease commenced on June 1, 2017. The initial term of the new Lease is
ten
years, with a right to terminate on November 30, 2023, subject to specified conditions.
The base rent adjusts periodically throughout the term of the new Lease, with monthly payments ranging from
zero
to
$95,000
, with a portion of the rent abated for certain periods during the first
two
years of the initial term. In addition, the Company is obligated to reimburse the landlord its share of operating and other expenses, and has paid a security deposit of
$95,000
. The Company has capitalized
$2.3
million of reimbursable tenant improvements to the new office which has been recorded as a leasehold improvement within fixed assets on the condensed consolidated balance sheet, offset by a corresponding amount recorded in deferred rent.
Plymouth Meeting Lease
In March 2014, the Company entered into a lease (the "Lease") for office space located in Plymouth Meeting, Pennsylvania. The Company occupied the space in June 2014. The initial term of the Lease is
11.5
years.
The base rent adjusts periodically throughout the term of the Lease, with monthly payments ranging from
zero
to
$58,000
. In addition, the Company is obligated to reimburse the landlord its share of operating and other expenses and a property management fee, and has paid a security deposit of
$49,000
. In July 2015 and June 2016, the Company amended the Lease to increase the total leased space. The commencement of the amended Lease in July 2015 was in the first quarter of 2016 and increased monthly lease payments to range from
zero
to
$80,000
. The commencement of the amended lease in June 2016 was October 1, 2017 and increased monthly lease payments to range from
$75,000
to
$90,000
.
In June 2017, the Company entered into another amendment to the Lease to extend the lease term through December 31, 2029. In connection with this amendment, the Company paid the landlord an additional security deposit of
$75,000
. Total monthly rent payments for the additional term will range between
$173,000
and
$179,000
. The future monthly lease payments for all the Plymouth Meeting office space will range from
zero
to
$179,000
. The Company has capitalized
$2.6 million
of tenant improvements to the Plymouth Meeting office within fixed assets on the condensed consolidated balance sheet, offset by a corresponding amount recorded in deferred rent.
The Company's future minimum lease payments under all non-cancelable operating leases as of
September 30, 2018
are as follows:
|
|
|
|
|
|
|
|
Remainder of 2018
|
$
|
831,000
|
|
|
2019
|
3,756,000
|
|
|
2020
|
3,891,000
|
|
|
2021
|
3,979,000
|
|
|
2022
|
4,052,000
|
|
|
Thereafter
|
19,975,000
|
|
|
Total
|
$
|
36,484,000
|
|
In the normal course of business, the Company is a party to a variety of agreements pursuant to which it 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 the Company's 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 the Company's business, consolidated results of operations or financial condition.
14. Collaborative Agreements
ApolloBio Corporation
On December 29, 2017, the Company entered into an Amended and Restated License and Collaboration Agreement (the "ApolloBio Agreement"),
with ApolloBio Corporation ("ApolloBio"), with an effective date of March 20, 2018. Under the terms of the ApolloBio Agreement, the Company has granted to ApolloBio the exclusive right to develop and commercialize VGX-3100, its DNA immunotherapy product designed to treat pre-cancers caused by HPV, within the territories of China, Hong Kong, Macao, Taiwan, and may include Korea in the event that no patent covering VGX-3100 is issued in China within the
three
years following the effective date of the ApolloBio Agreement.
Under the ApolloBio Agreement, the Company received proceeds of
$19.4 million
in March 2018 which comprised the
upfront payment of
$23.0 million
less
$2.2 million
in foreign income taxes and
$1.4 million
in certain foreign non-income taxes. The foreign income taxes were recorded as a provision for income taxes and the foreign non-income taxes were recorded as a general and administrative expense, on the condensed consolidated statement of operations during the quarter ended March 31, 2018. The Company also incurred advisory fees of
$960,000
in connection with receiving the upfront payment from ApolloBio. These fees were determined to be incremental costs of obtaining the contract. The Company applied the practical expedient that permits a company to expense incremental costs to obtain a contract when the expected amortization period is one year or less and recorded the fees in general and administrative expense during the quarter ended March 31, 2018. No additional advisory fees are due related to the ApolloBio Agreement.
In addition to the upfront payment, the Company is entitled to receive up to an aggregate of
$20.0 million
, less required income, withholding or other taxes, upon the achievement of specified milestones related to the regulatory approval of VGX-3100 in the United States, China and Korea. In the event that VGX-3100 is approved for marketing, the Company will be entitled to receive royalty payments based on a tiered percentage of annual net sales, with such percentage being in the low- to mid-teens, subject to reduction in the event of generic competition in a particular territory. ApolloBio’s obligation to pay royalties will continue for
10 years
after the first commercial sale in a particular territory or, if later, until the expiration of the last-to-expire patent covering the licensed products in the specified territory.
The Company evaluated the terms of the ApolloBio Agreement under Topic 606, and the license to VGX-3100 in the territories was identified as the only distinct performance obligation on a standalone basis as of the inception of the agreement. The Company concluded that the license was distinct from potential future manufacturing and supply obligations. The Company further determined that the transaction price under the agreement consisted of the
$23.0 million
upfront payment. The future potential milestone amounts were not included in the transaction price, as they were all determined to be fully constrained. As part of the evaluation of the development and regulatory milestones constraint, the Company determined that the achievement of such milestones is contingent upon success in future clinical trials and regulatory approvals, each of which is uncertain at this time. Future potential milestone amounts may be recognized as revenue under the ApolloBio Agreement, as well as under other collaborative research and development arrangements, if unconstrained. Reimbursable program costs will be recognized proportionately with the performance of the underlying services or delivery of drug supply and are excluded from the transaction price.
The ApolloBio Agreement will continue in force until ApolloBio has no remaining royalty obligations. Either party may terminate the ApolloBio Agreement in the event the other party shall materially breach or default in the performance of its material obligations thereunder and such default continues for a specified period after written notice thereof. In addition, ApolloBio may terminate the ApolloBio Agreement at any time beginning
one
year after the effective date for any reason upon
90
days written notice to the Company.
Under Topic 606, the entire transaction price of
$23.0 million
was allocated to the license performance obligation. The Company determined that during the quarter ended June 30, 2018, the transfer of technology occurred and accordingly, the performance obligation was fully satisfied. The Company has recorded the gross upfront payment received from ApolloBio of
$23.0 million
as revenue under collaborative research and development arrangements on the condensed consolidated statement of operations during the three months ended June 30, 2018.
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, renamed as MEDI0457, which targets cancers caused by human papillomavirus (HPV) types 16 and 18, with the ability to sublicense those license rights. MedImmune made an upfront payment of
$27.5 million
to the Company in September 2015 and has agreed to make potential future development and regulatory event-based payments totaling up to
$355 million
and potential future commercial event-based payments totaling up to
$345 million
, in each case upon the achievement of specified milestones set forth in the license and collaboration agreement. 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, at MedImmune’s discretion, MedImmune and the Company will 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. These additional development services would be provided by the Company at an industry standard full-time-equivalent rate. Under the agreement, MedImmune can also request the Company to provide certain clinical manufacturing at an agreed upon price. The Company determined these options did not represent material rights at the inception of the agreement.
As of December 31, 2017, the Company had recognized all of the
$27.5 million
upfront payment as revenue, as all identified material performance obligations had been met with respect to that payment. In December 2017, the Company received and recognized as revenue a
$7.0 million
milestone payment from MedImmune triggered by MedImmune’s initiation of the Phase 2 portion of an ongoing clinical trial under the agreement.
During the
three and nine months ended September 30, 2018
, the Company recognized revenues of
$1.8 million
and
$4.5 million
, respectively, from MedImmune primarily for
manufacturing services. As of
September 30, 2018
, the Company had deferred revenue and accounts receivable related to MedImmune of
$296,000
and
$2.4 million
, respectively. The deferred revenue relates to advanced payments made by the Company to a third-party biologics manufacturer for which MedImmune is obligated to reimburse.
Prior to January 1, 2018 the Company accounted for the arrangement under Topic 605, which resulted in revenue of
$344,000
and
$14.9 million
from MedImmune for the
three and nine months ended September 30, 2017
, respectively.
Roche
In September 2013, the Company entered into a Collaborative, License, and Option Agreement with F. Hoffmann-La Roche Ltd. and Hoffmann-La Roche Inc. (together, “Roche”) and received an upfront payment of
$10.0 million
. The parties agreed to co-develop multi-antigen DNA immunotherapies targeting prostate cancer and hepatitis B.
On November 14, 2014, Roche provided notice to the Company that it would be partially terminating the agreement with respect to the development of the Company’s DNA immunotherapy targeting prostate cancer. The termination was effective in February 2015. All of Roche’s rights to the Company’s DNA immunotherapy targeting prostate cancer, including the right to license the product to other parties, have been returned to the Company.
On July 28, 2016, Roche provided notice to the Company that it would be discontinuing the agreement and its development of INO-1800, the Company’s DNA immunotherapy against the hepatitis B virus. The termination was effective in October 2016. All of Roche’s rights to INO-1800, including the right to license the product to other parties, have been returned to the Company. In February 2017, the Company received full payment of
$8.5 million
from Roche for its past and future obligations which were completed during the quarter ended June 30, 2017, associated with the termination of the agreement. During the
three and nine months ended September 30, 2018
, the Company recognized
no
revenues from Roche. During the
three and nine months ended September 30, 2017
, the Company recognized revenues of
$0
and
$6.1 million
, respectively, from Roche.
Coalition for Epidemic Preparedness Innovations
On April 11, 2018, the Company announced that it has entered into agreements with the Coalition for Epidemic Preparedness Innovations ("CEPI"), pursuant to which the Company intends to develop vaccine candidates against Lassa fever and MERS. The goal of the collaboration between the Company and CEPI is to conduct research and development so that investigational stockpiles will be ready for clinical efficacy trial testing during potential disease outbreaks. The agreements with CEPI contemplate preclinical studies, as well as Phase 1 and Phase 2 clinical trials, occurring over the next few years. As part of the arrangement between the parties, CEPI has agreed to fund up to an aggregate of
$56 million
of costs over a
five
-year period for preclinical studies, as well as planned Phase 1 and Phase 2 clinical trials, to be conducted by the Company and collaborators, with funding from CEPI based on the achievement of identified milestones. The Company's vaccine candidate for Lassa fever is known as INO-4500 and its vaccine candidate for MERS is known as INO-4700. During the
three and nine months ended September 30, 2018
, the Company received funding of
$1.2 million
and
$2.0 million
, respectively, related to the CEPI grant and recorded it as contra-research and development expense. As of
September 30, 2018
, the Company had a deferred grant funding balance related to the CEPI grant of
$1.3
million recorded as deferred grant funding on the condensed consolidated balance sheet.
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 consortium, led by the Company, 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 1 clinical study costs. The initial funding period covers a base award of
$19.6 million
and an option award of
$24.6 million
, which was exercised in September 2015. During the
three and nine months ended September 30, 2018
, the Company received funding of
$140,000
and
$1.0 million
, respectively, related to the DARPA Ebola grant and recorded it as contra-research and development expense. During the
three and nine months ended September 30, 2017
, the Company recognized revenues of
$1.4 million
and
$9.1 million
, respectively, from the DARPA Ebola grant. As of
September 30, 2018
, the Company has received total funding of
$43.7
million related to the DARPA Ebola grant. As of
September 30, 2018
, the Company had a deferred grant funding balance and accounts receivable balance of
$99,000
and
$379,000
, respectively, related to the DARPA Ebola grant.
15. Subsequent Events
Subsequent to September 30, 2018, the Company sold
1,059,591
shares of common stock under its Sales Agreement for net proceeds of
$5.7 million
. The sales were made at a weighted average price of
$5.49
per share.