The accompanying notes are an integral part
of these interim unaudited financial statements.
The accompanying notes are an integral part
of these interim unaudited financial statements.
The accompanying notes are an integral part
of these interim unaudited financial statements.
NOTES TO UNAUDITED CONDENSED FINANCIAL
STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE
DATA)
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
We are a biopharmaceutical company engaged
in the research and development of innovative therapeutics to treat cancers and rare diseases. Our mission is to discover, develop
and commercialize novel small molecule drugs in areas of high unmet need that will dramatically extend and improve the lives of
our patients. These drugs target biological pathways implicated in a wide range of cancers and certain non-oncology indications.
Our discovery and development efforts are guided, when possible, by an understanding of the role of biomarkers, which are indicators
of a particular biological condition or process and may predict the clinical benefit of our compounds in defined patient populations.
Our clinical-stage pipeline consists of five drug candidates, all of which are in targeted patient populations, making ArQule a
leader among companies our size in precision medicine.
ArQule has a long history of kinase drug
discovery and development, having discovered and introduced ten kinase inhibitors into clinical trials. Our drug discovery
efforts have been informed by our historical expertise in chemistry, our work in rational drug design and by our insight into
kinase binding and regulation. We have applied this knowledge to produce significant chemical matter for a number of kinase targets
and to build an extensive library of proprietary compounds with the potential to target multiple kinases in oncology and other
therapeutic areas, such as rare diseases. We expect to bring further preclinical programs forward and to interrogate our library
against new targets beyond kinases either directly or with collaborators.
Our proprietary pipeline of product candidates
is directed toward molecular targets and biological processes with demonstrated roles in the development of both human cancers
and rare, non-oncology diseases. All of these programs are being developed in targeted, biomarker-defined patient populations.
By seeking out subgroups of patients that are most likely to respond to our drugs, we intend to identify small, often orphan, indications
that allow for focused and efficient development. At the same time, in addition to pursuing these potentially fast-to-market strategies,
we also pursue development in other indications that could allow us to expand the utility of the drugs if approved. The pipeline
includes the following wholly-owned compounds:
|
•
|
Derazantinib (ARQ 087), a multi-kinase inhibitor designed
to preferentially inhibit the FGFR family of kinases, in a registrational trial in
intrahepatic cholangiocarcinoma (iCCA) patients with FGFR2 fusions;
|
|
•
|
Miransertib (ARQ 092), a selective inhibitor of the AKT serine/threonine kinase, in Phase1/2 in rare Overgrowth Disease and
in Phase 1 for multiple oncology indications and in the rare disease, Proteus syndrome, in partnership with the National Institutes
of Health (NIH);
|
|
•
|
ARQ 751, a next-generation inhibitor of AKT, in Phase
1 for solid tumors harboring the AKT1 or PI3K mutations;
|
|
•
|
ARQ 531, an investigational, orally bioavailable, potent and reversible inhibitor of both wild type and C481S-mutant BTK,
in Phase 1 for B-cell malignancies refractory to other therapeutic options; and
|
|
•
|
ARQ 761, a ß-lapachone analog being evaluated as a promoter of NQO1-mediated programmed cancer cell death, in Phase 1/2
in multiple oncology indications in partnership with The University of Texas Southwest Medical Center.
|
Tivantinib (ARQ 197), an orally administered,
small molecule inhibitor of the c-Met receptor tyrosine kinase (“MET”) and its biological pathway is no longer being
developed. We licensed commercial rights to tivantinib for human cancer indications to Daiichi Sankyo Co., Ltd. (“Daiichi
Sankyo”) in the U.S., Europe, South America and the rest of the world, excluding Japan and certain other Asian countries,
where we have licensed commercial rights to Kyowa Hakko Kirin Co., Ltd. (“Kyowa Hakko Kirin”).
Our METIV-HCC trial was a pivotal Phase 3
randomized, double-blind, controlled study of tivantinib as single-agent therapy in previously treated patients with MET diagnostic-high,
inoperable HCC conducted by Daiichi Sankyo and us. The primary endpoint was overall survival (OS) in the intent-to-treat (ITT)
population, and the secondary endpoint was progression-free survival (PFS) in the same population. On February 17, 2017, we
and Daiichi Sankyo announced that the METIV-HCC trial did not meet its primary endpoint of improving OS.
Our JET-HCC trial was a second pivotal Phase
3 randomized, double-blind, controlled study of tivantinib as single-agent therapy in previously treated patients with MET diagnostic-high,
inoperable HCC conducted by Kyowa Hakko Kirin. The primary endpoint was PFS. On March 27, 2017, we reported that Kyowa Hakko Kirin,
announced top-line results of the JET-HCC Phase 3 trial of tivantinib in Japan and that the trial did not meet its primary endpoint
of improving PFS.
Our uses of cash for operating activities
have primarily consisted of salaries and wages for our employees, facility and facility-related costs for our offices and laboratories,
fees paid in connection with preclinical and clinical studies, laboratory supplies and materials, and professional fees. The sources
of our cash flow from operating activities have consisted primarily of payments received from our collaborators for services performed
or upfront payments for future services. In the nine months ended September 30, 2017 and 2016, our net use of cash was primarily
driven by payments for operating expenses which resulted in net cash outflows of $20.5 million and $16.4 million, respectively.
Our cash requirements may
vary materially from those now planned depending upon the results of our drug discovery and development strategies, our
ability to enter into additional corporate collaborations and the terms of such collaborations, results of research and
development, unanticipated required capital expenditures, competitive and technological advances, acquisitions and other
factors. We cannot guarantee that we will be able to develop any of our drug candidates into a commercial product. On January
6, 2017, we entered into a loan and security agreement (the “Loan Agreement”) with a principal balance of
$15 million (see Note 8). The terms of the Loan Agreement require payments of interest on a monthly basis through September
2018 and payments of interest and principal from October 2018 to August 2021. On September 11, 2017, we sold 2.0 million
shares of common stock through an at-the-market (ATM) offering and raised proceeds of $2.3 million. In October 2017,
we entered into definitive stock purchase agreements with certain institutional investors. In conjunction with this stock
offering we issued 13,938,651 shares of our common stock and warrants for 3,123,674 shares of our common stock for aggregate
net proceeds of $15.5 million. Each warrant is exercisable for $1.75 per share and expires in four years from the date of
issuance. In November 2017 we entered into definitive securities purchase agreements with certain
institutional investors. In conjunction with this stock offering the Company raised gross proceeds of $9.5 million through
the sale of 8,370 shares of series A convertible preferred stock (Series A Preferred) and warrants covering 2,260 shares of
Series A Preferred (Warrants). Each share of Series A Preferred together with the associated Warrant is priced at $1,135 and
will automatically convert into 1,000 shares of common stock upon the adoption of an amendment to the Company’s
restated certificate of incorporation to increase the number of authorized shares of common stock thereunder. ArQule estimates the net
proceeds from this offering will be approximately $9.3 million. The Warrants have a pre-conversion exercise price of $1,750
per share of Series A Preferred (post-conversion price of $1.75 per share of common stock), are exercisable immediately
and expire approximately four years from the date of the adoption of the amendment to the Company’s restated
certificate of incorporation. We anticipate that our cash, cash equivalents and marketable securities on hand at
September 30, 2017, and the additional funds raised during the October 2017 common stock offering and the November
2017 preferred stock offering will be sufficient to finance our operations for at least 12 months from the issuance date
of these financial statements. We expect that we will need to raise additional capital or incur indebtedness to continue to
fund our operations in the future. Our ability to raise additional funds will depend on financial, economic and market
conditions, and due to global capital and credit market conditions or for other reasons, we may be unable to raise capital
when needed, or on terms favorable to us. If necessary funds are not available, we may have to delay, reduce the scope of, or
eliminate some of our development programs, potentially delaying the time to market for any of our product candidates.
We have prepared the accompanying condensed
financial statements pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”).
Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to these rules and regulations. These condensed financial statements
should be read in conjunction with our audited financial statements and footnotes related thereto for the year ended December 31,
2016 included in our annual report on Form 10-K filed with the SEC on March 9, 2017.
In our opinion, the accompanying unaudited
condensed financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement
of its financial position as of September 30, 2017, and its results of operations and cash flows for the three and nine months
ended September 30, 2017 and September 30, 2016. The results of operations for such interim periods are not necessarily indicative
of the results to be achieved for the full year. The condensed balance sheet at December 31, 2016, was derived from audited annual
financial statements, but does not contain all of the footnote disclosures from the annual financial statements
2. COLLABORATIONS AND ALLIANCES
Daiichi Sankyo Tivantinib Agreement
As previously reported, on December 18,
2008, we entered into a license, co-development and co-commercialization agreement with Daiichi Sankyo to conduct research, clinical
trials and the commercialization of tivantinib in human cancer indications in the U.S., Europe, South America and the rest of the
world, excluding Japan, China (including Hong Kong), South Korea and Taiwan, where Kyowa Hakko Kirin had exclusive rights for development
and commercialization.
Under the terms of our tivantinib collaboration
agreement with Daiichi Sankyo we shared development costs equally with our share of Phase 3 costs funded solely from milestones
and royalties. In each quarter the tivantinib collaboration costs we incurred were compared with those of Daiichi Sankyo. If our
costs for the quarter exceeded Daiichi Sankyo’s, we recognized revenue on the amounts due to us under the contingency adjusted
performance model. Revenue was calculated on a pro-rata basis using the time elapsed from inception of the agreement over the estimated
duration of the development period under the agreement. If our costs for the quarter were less than those of Daiichi Sankyo, we
reported the amount due to Daiichi Sankyo as contra-revenue in that quarter. To the extent that our share of Phase 3 collaboration
costs exceeded the amount of milestones and royalties received, that excess was netted against milestones and royalties earned
and was not reported as contra-revenue.
Our cumulative share of the Daiichi Sankyo
Phase 3 costs through September 30, 2017 totaled $110.3 million. Our cumulative share of Phase 3 collaboration costs
has exceeded the amount of milestones received through September 30, 2017 by $70.3 million which are not required to
be repaid upon expiration our agreement.
Revenue for this agreement was
recognized using the contingency-adjusted performance model with an estimated development period through December 31,
2016. On February 17, 2017, we and Daiichi Sankyo announced that the METIV-HCC trial did not meet its primary end point of
improving OS. Our joint development of tivantinib has subsequently been discontinued. As a result, we do not anticipate
receiving further royalties or milestones in connection with the agreement.
For the three months and nine months ended
September 30, 2017, no revenue was recognized.. For the three months and nine months ended September 30, 2016, $0.8 million
and $2.1 million, respectively, were recognized as revenue.
Kyowa Hakko Kirin Licensing Agreement
As previously reported, on April 27,
2007, we entered into an exclusive license agreement with Kyowa Hakko Kirin to develop and commercialize tivantinib in Japan and
parts of Asia. Revenue for this agreement was recognized using the contingency-adjusted performance model with an estimated development
period through December 31, 2016. On March 27, 2017, we reported that Kyowa Hakko Kirin, announced top-line results of the
JET-HCC Phase 3 trial of tivantinib in Japan, and that the trial did not meet its primary endpoint of improving PFS. Our
joint development of tivantinib has subsequently been discontinued. As a result, we do not anticipate receiving further
royalties or milestones in connection with the agreement.
For the three months and nine months ended
September 30, 2017, no revenue was recognized. For the three months and nine months ended September 30, 2016, $0.5 million and
$1.4 million, respectively, were recognized as revenue.
3. MARKETABLE SECURITIES AND FAIR VALUE MEASUREMENTS
We generally classify our marketable securities
as available-for-sale at the time of purchase and re-evaluate such designation as of each balance sheet date. Since we generally
intend to convert them into cash as necessary to meet our liquidity requirements, our marketable securities are classified as cash
equivalents if the original maturity, from the date of purchase, is ninety days or less and as short-term investments if the original
maturity, from the date of purchase, is in excess of ninety days but less than one year. Our marketable securities are classified
as long-term investments if the maturity date is in excess of one year of the balance sheet date.
We report available-for-sale investments
at fair value as of each balance sheet date and include any unrealized gains and, to the extent deemed temporary, unrealized losses
in stockholders’ equity. Realized gains and losses are determined using the specific identification method and are included
in other income (expense) in the statement of operations and comprehensive loss.
We conduct quarterly reviews to determine
the fair value of our investment portfolio and to identify and evaluate each investment that has an unrealized loss, in accordance
with the meaning of other-than-temporary impairment and its application to certain investments. An unrealized loss exists when
the current fair value of an individual security is less than its amortized cost basis. In the event that the cost basis of a security
exceeds its fair value, we evaluate, among other factors, the duration of the period that, and extent to which, the fair value
is less than cost basis, the financial health of and business outlook for the issuer, including industry and sector performance,
and operational and financing cash flow factors, overall market conditions and trends, our intent to sell the investment and if
it is more likely than not that we would be required to sell the investment before its anticipated recovery. Unrealized losses
on available-for-sale securities that are determined to be temporary, and not related to credit loss, are recorded in accumulated
other comprehensive income (loss).
For available-for-sale debt securities
with unrealized losses, we perform an analysis to assess whether we intend to sell or whether we would more likely than not be
required to sell the security before the expected recovery of the amortized cost basis. Where we intend to sell a security, or
may be required to do so, the security’s decline in fair value is deemed to be other-than-temporary and the full amount of
the unrealized loss is reflected in the statement of operations and comprehensive loss as an impairment loss.
Regardless of our intent to sell a security,
we perform additional analysis on all securities with unrealized losses to evaluate losses associated with the creditworthiness
of the security. Credit losses are identified where we do not expect to receive cash flows sufficient to recover the amortized
cost basis of a security.
The following is a summary of the fair
value of available-for-sale marketable securities we held at September 30, 2017 and December 31, 2016:
September 30, 2017
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
Security type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities-short term
|
|
$
|
15,897
|
|
|
$
|
1
|
|
|
$
|
(2
|
)
|
|
$
|
15,896
|
|
Total available-for-sale marketable securities
|
|
$
|
15.897
|
|
|
$
|
1
|
|
|
$
|
(2
|
)
|
|
$
|
15,896
|
|
December 31, 2016
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
Security type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities-short term
|
|
$
|
15,857
|
|
|
$
|
7
|
|
|
$
|
(5
|
)
|
|
$
|
15,859
|
|
Total available-for-sale marketable securities
|
|
$
|
15,857
|
|
|
$
|
7
|
|
|
$
|
(5
|
)
|
|
$
|
15,859
|
|
Our available-for-sale marketable securities
in a loss position at September 30, 2017, and December 31, 2016 were in a continuous unrealized loss position for less than 12
months.
The following tables present information
about our assets that are measured at fair value on a recurring basis for the periods presented and indicates the fair value hierarchy
of the valuation techniques we utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize
quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize
data points that are observable such as quoted prices, interest rates and yield curves. We value our level 2 investments using
quoted prices for identical assets in the markets where they are traded, although such trades may not occur daily. These quoted
prices are based on observable inputs, primarily interest rates. Fair values determined by Level 3 inputs are unobservable data
points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.
There were no transfers in or out of Level 1 or Level 2 measurements for the periods presented:
|
|
September 30,
2017
|
|
|
Quoted
Prices in
Active
Markets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Cash equivalents
|
|
$
|
8,461
|
|
|
$
|
8,461
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate debt securities-short term
|
|
|
15,896
|
|
|
|
—
|
|
|
|
15,896
|
|
|
|
—
|
|
Total
|
|
$
|
24,357
|
|
|
$
|
8,461
|
|
|
$
|
15,896
|
|
|
$
|
—
|
|
|
|
December 31,
2016
|
|
|
Quoted
Prices in
Active
Markets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Cash equivalents
|
|
$
|
12,923
|
|
|
$
|
12,923
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate debt securities-short term
|
|
|
15,859
|
|
|
|
—
|
|
|
|
15,859
|
|
|
|
—
|
|
Total
|
|
$
|
28,782
|
|
|
$
|
12,923
|
|
|
$
|
15,859
|
|
|
$
|
—
|
|
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses
include the following at September 30, 2017 and December 31, 2016:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Accounts payable
|
|
$
|
605
|
|
|
$
|
710
|
|
Accrued payroll
|
|
|
1,434
|
|
|
|
1,856
|
|
Accrued outsourced pre-clinical and clinical fees
|
|
|
4,762
|
|
|
|
5,461
|
|
Accrued professional fees
|
|
|
564
|
|
|
|
363
|
|
Other accrued expenses
|
|
|
300
|
|
|
|
310
|
|
|
|
$
|
7,665
|
|
|
$
|
8,700
|
|
5. NET LOSS PER SHARE
Net loss per share is computed using the
weighted average number of common shares outstanding. Basic and diluted net loss per share amounts are equivalent for the periods
presented as the inclusion of potential common shares in the number of shares used for the diluted computation would be anti-dilutive
to loss per share. Potential common shares, for the three and nine months ended September 30, 2017, include 10,746,449 shares that
would be issued upon the exercise of outstanding employee and Board of Director stock options and 354,330 shares that would be
issued upon the exercise of the warrants issued in conjunction with our January 6, 2017 loan agreement. Potential common shares,
for the three and nine months ended September 30, 2016, include 9,187,698 shares that would be issued upon the exercise of outstanding
employee and Board of Director stock options.
6. STOCK-BASED COMPENSATION AND STOCK PLANS
Our stock-based compensation cost is measured
at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employees’ requisite
service period (generally the vesting period of the equity grant). We estimate the fair value of stock options using the Black-Scholes
valuation model. Key input assumptions used to estimate the fair value of stock options include the exercise price of the award,
expected option term, expected volatility of our stock over the option’s expected term, risk-free interest rate over the
option’s expected term, and the expected annual dividend yield. We believe that the valuation technique and approach utilized
to develop the underlying assumptions are appropriate in calculating the fair values of our stock options granted in the nine months
ended September 30, 2017 and 2016.
The following table presents stock-based
compensation expense included in our Condensed Statements of Operations and Comprehensive Loss:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Research and development
|
|
$
|
80
|
|
|
$
|
107
|
|
|
$
|
284
|
|
|
$
|
407
|
|
General and administrative
|
|
|
233
|
|
|
|
322
|
|
|
|
858
|
|
|
|
1,037
|
|
Total stock-based compensation expense
|
|
$
|
313
|
|
|
$
|
429
|
|
|
$
|
1,142
|
|
|
$
|
1,444
|
|
In the three and nine months ended September
30, 2017 and 2016, no stock-based compensation expense was capitalized and there were no recognized tax benefits associated with
the stock-based compensation expense.
Option activity under our stock plans for the nine
months ended September 30, 2017 was as follows:
Stock Options
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding as of December 31, 2016
|
|
|
8,715,048
|
|
|
$
|
3.71
|
|
Granted
|
|
|
2,542,500
|
|
|
|
1.19
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Cancelled
|
|
|
(511,099
|
)
|
|
|
4.93
|
|
Outstanding as of September 30, 2017
|
|
|
10,746,449
|
|
|
$
|
3.05
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of September 30, 2017
|
|
|
6,467,316
|
|
|
$
|
4.15
|
|
In April 2017, the Company amended
its chief executive officer’s (the “CEO’s”) employment agreement to grant the CEO a maximum of 600,000
performance-based stock options that vest upon the achievement of certain performance and market based targets. In April 2017,
the Company amended its chief operating officer’s (the “COO’s”) employment agreement to grant the COO 300,000
performance-based stock units that vest upon the achievement of certain performance and market based targets. In April 2017,
the Company amended its chief medical officer’s (the “CMO’s”) employment agreement to grant the CMO 260,000
performance-based stock options that vest upon the achievement of certain performance based targets. In April 2017, certain other
employees were granted a total of 270,000 performance-based stock options that vest upon the achievement of certain performance
based targets. Through September 30, 2017 no expense has been recorded for any performance-based stock options granted to the CEO,
COO, CMO, or to any other employees.
The aggregate intrinsic value of options
outstanding at September 30, 2017 was $229 including $0 related to exercisable options. The weighted average fair value of options
granted in the nine months ended September 30, 2017 and 2016 was $0.72 and $1.10 per share, respectively. No options were exercised
in the nine months ended September 30, 2017.
Shares vested, expected to vest and exercisable
at September 30, 2017 are as follows:
|
|
Shares
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term (in years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Vested and unvested expected to vest at September 30, 2017
|
|
|
10,539,275
|
|
|
$
|
3.05
|
|
|
|
5.9
|
|
|
$
|
221
|
|
Exercisable at September 30, 2017
|
|
|
6,467,316
|
|
|
$
|
4.15
|
|
|
|
4.1
|
|
|
$
|
0
|
|
The total compensation cost not yet recognized
as of September 30, 2017 related to non-vested option awards was $1.8million, which will be recognized over a weighted-average
period of 2.5 years. During the three months ended September 30, 2017, 342,149 shares expired and 168,950 shares were forfeited.
The weighted average remaining contractual life for options exercisable at September 30, 2017 was 4.1 years.
7. STOCK OFFERINGS
On February 26, 2016, we entered into
definitive stock purchase agreements with certain institutional and accredited investors. In conjunction with this stock offering
we issued 8,027,900 shares of our common stock and non-transferable options for 3,567,956 shares of our common stock for aggregate
net proceeds of $15.2 million. Each option was exercisable for $2.50 per share and they all expired on March 22, 2017.
On September 11, 2017, we sold 2.0 million
shares of common stock through an at-the-market (“ATM”) offering and raised proceeds of approximately $2.3 million.
In October 2017, we entered
into definitive securities purchase agreements with certain institutional investors. In conjunction with this stock offering we
issued 13,938,651 shares of our common stock and warrants for 3,123,674 shares of our common stock for aggregate net proceeds
of $15.5 million. Each warrant is exercisable for $1.75 per share and expires in four years from the date of issuance.
In November 2017, we entered
into definitive securities purchase agreements with certain institutional investors. In conjunction with this stock offering
the Company raised gross proceeds of $9.5 million through the sale of 8,370 shares of series A convertible preferred stock
(Series A Preferred) and warrants covering 2,260 shares of Series A Preferred (Warrants). Each share of Series A Preferred
together with the associated Warrant is priced at $1,135 and will automatically convert into 1,000 shares of common stock
upon the adoption of an amendment to the Company’s restated certificate of incorporation to increase the number of
authorized shares of common stock thereunder. ArQule estimates the net proceeds from this offering will be approximately $9.3 million.
The Warrants have a pre-conversion exercise price of $1,750 per share of Series A Preferred (post-conversion price of $1.75
per share of common stock), are exercisable immediately and expire approximately four years from the date of the adoption of
the amendment to the Company’s restated certificate of incorporation.
8. LOAN AGREEMENT
On January 6, 2017, Oxford Finance LLC,
as collateral agent and a lender (the “Lender”), and any additional lenders that may become parties thereto, entered
into a loan and security agreement with us (the “Loan Agreement”).
Pursuant to the terms of the Loan Agreement,
the Lender issued us a loan in the principal amount of $15.0 million. The loan will bear interest at the rate equal to
(a) the greater of (i) the 30 day U.S. LIBOR rate reported in the Wall Street Journal on the date occurring on the
last business day of the month that immediately precedes the month in which the interest will accrue or (ii) 0.65% (b) plus 6.85%.
The applicable interest rate on the loan at September 30, 2017 was 8.08%. We will have interest-only payments for 18 months, followed
by an amortization period of 36 months. The maturity date of the loan is August 1, 2021.
The expected
remaining repayment of the $15 million loan principal is as follows:
2018
|
|
$
|
1,667
|
|
2019
|
|
|
5,000
|
|
2020
|
|
|
5,000
|
|
2021
|
|
|
3,333
|
|
|
|
$
|
15,000
|
|
Upon the earlier of prepayment or the maturity
date, we will pay to the Lender a final payment of 6% of the full principal amount of the loan. We may elect to prepay all amounts
owed prior to the maturity date, provided that a prepayment fee also is paid equal to (i) 3% of the outstanding principal balance
if prepayment occurs in months 1-12 following the closing, (ii) 2.0% of the outstanding principal balance in months 13-24 following
the closing, and (iii) 1% thereafter.
We paid the Lender an upfront facility
fee of $75,000.
Pursuant to the terms of the Loan Agreement,
we are bound by certain affirmative covenants setting forth actions that are required during the term of the Loan Agreement, including,
without limitation, certain information delivery requirements, obligations to maintain certain insurance, and certain notice requirements.
Additionally, we are bound by certain negative covenants setting forth actions that are not permitted to be taken during the term
of the Loan Agreement without consent, including, without limitation, incurring certain additional indebtedness, entering into
certain mergers, acquisitions or other business combination transactions, or incurring any non-permitted lien or other encumbrance
on our assets. We are in compliance with the loan covenants at September 30, 2017.
Upon the occurrence of an event of
default under the Loan Agreement (subject to cure periods for certain events of default), all amounts owed by us thereunder will
begin to bear interest at a rate that is 5% higher than the rate that is otherwise applicable and may be declared immediately
due and payable by the Lender. Events of default under the Loan Agreement include, among other things, the following: the occurrence
of certain bankruptcy events; the failure to make payments under the Loan Agreement when due; the occurrence of a material adverse
change in our business, operations or financial condition ; the rendering of certain types of fines or judgments against us; any
breach by us of any covenant (subject to cure for certain covenants only) made in the Loan Agreement; and the failure of any representation
or warranty made by us in connection with the Loan Agreement to be correct in all material respects when made.
We have granted Lender, a security interest
in substantially all of our personal property, rights and assets, other than intellectual property, to secure the payment of all
amounts owed to the Lender under the Loan Agreement. We have also agreed not to encumber any of our intellectual property without
required lenders’ prior written consent.
In connection with entering into the Loan
Agreement, we issued to the Lender warrants to purchase an aggregate of 354,330 shares of our common stock (the “Lender Warrants”).
The warrants are exercisable immediately, have a per-share exercise price of $1.27 and have a term of ten years. We have
recorded the relative fair value of the warrants as a discount to the carrying value of the notes payable with a corresponding
increase to additional paid in capital.
9. RECENT ACCOUNTING PRONOUNCEMENTS
From time to time, new accounting pronouncements
are issued by the Financial Accounting Standards Board (“FASB”) or other standard setting bodies that are adopted by
us as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued standards that
are not yet effective will not have a material impact on our financial position or results of operations upon adoption.
In
May 2017 the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. This new
standard provides clarity and reduces both (1) diversity in practice and (2) cost and complexity when applying the guidance in
Topic 718, Compensation-Stock Compensation, to a change to the terms or conditions of a share-based payment award. This new standard
will be effective for us on January 1, 2018, however early adoption is permitted. As of September 30, 2017, the adoption of
this standard is not expected to have a material impact on our financial position or results of operations.
In March 2016, the FASB issued ASU No.
2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The new standard
involves 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. We adopted this ASU in 2017 and it
will not have a material impact on our financial position, results of operations or statement of cash flows.
In February 2016, the FASB issued ASU
No. 2016-02, Leases (Topic 842). The new standard requires that all lessees recognize the assets and liabilities that arise from
leases on the balance sheet and disclose qualitative and quantitative information about its leasing arrangements. The new standard
will be effective for us on January 1, 2019. We are currently evaluating the potential impact that this standard may have on our
financial position and results of operations.
In
March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customer Topic 606s, Principal
versus Agent Considerations, which clarifies the implementation guidance on principal versus agent considerations. In April 2016,
the FASB issued ASU 2016-10, Revenue from Contracts with Customers Topic 606, Identifying Performance Obligations and Licensing,
which clarifies certain aspects of identifying performance obligations and licensing implementation guidance. In May 2016, the
FASB issued ASU 2016-12, Revenue from Contracts with Customers Topic 606, Narrow-Scope Improvements and Practical Expedients, related
to disclosures of remaining performance obligations, as well as other amendments to guidance on collectability, non-cash consideration
and the presentation of sales and other similar taxes collected from customers. In December 2016, the FASB issued ASU No. 2016-20, Technical
Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which amends certain narrow aspects of the guidance
issued in ASU 2014-09
, “Revenue from Contracts with Customers” (Topic 606). ASU 2014-09 superseded all existing
revenue recognition requirements, including most industry-specific guidance. The new standard requires a company to recognize revenue
when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive
for those goods or services. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic
606): Deferral of the Effective Date, which delayed the effective date of the new standard from January 1, 2017 to January 1,
2018. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. We evaluated this
ASU and determined that it will not have a material impact on our financial position or results of operations.
10. INCOME TAXES
As of December 31, 2016, we had federal
NOL, state NOL, and research and development credit carryforwards of approximately $382,781, $202,137 and $27,779 respectively,
which expire at various dates through 2036. Approximately $15,080 of our federal NOL and $929 of our state NOL were generated from
excess tax deductions from share-based awards.
The Company adopted ASU No. 2016-09 in
the first quarter of 2017. The recognition of the excess tax benefits from share-based payments mentioned above increased deferred
tax assets and retained earnings accordingly. As the company doesn’t expect taxable income in the foreseeable future, we
reserved the full amount at the time of the recognition and there was no impact on the net positions of deferred tax assets and
retained earnings. The amount of excess tax benefits or deficiencies will fluctuate from period to period based on the price of
our stock, the volume of share-based instruments settled or vested, and the value assigned to employee equity awards under U.S.
GAAP and these fluctuations did not affect our net deferred tax position in the first nine months of 2017.
At September 30, 2017 and December 31,
2016, we had no unrecognized tax benefits. We do not expect that the total amount of unrecognized tax benefits will significantly
increase in the next twelve months. Our policy is to recognize interest and penalties related to uncertain tax positions in income
tax expense. As of September 30, 2017 and December 31, 2016, we had no accrued interest or penalties related to uncertain tax positions.
Our U.S. federal tax returns for the tax years 2013 through 2016 and our state tax returns for the tax years 2013 through 2016
remain open to examination. Prior tax years remain open to the extent of net operating loss and tax credit carryforwards.
Utilization of NOL and research and development
credit carryforwards may be subject to a substantial annual limitation in the event of an ownership change that has occurred previously
or could occur in the future pursuant to Section 382 and 383 of the Internal Revenue Code of 1986, as amended, as well as similar
state provisions. An ownership change may limit the amount of NOL and research and development credit carryforwards that can be
utilized annually to offset future taxable income, and may, in turn, result in the expiration of a portion of those carryforwards
before utilization. In general, an ownership change, as defined by Section 382, results from transactions that increase the ownership
of certain stockholders or public groups in the stock of a corporation by more than 50 percentage points over a three year period.
We undertook a detailed study of our NOL and research and development credit carryforwards through January 31, 2017, to determine
whether such amounts are likely to be limited by Sections 382 or 383. As a result of this analysis, we currently do not believe
any Sections 382 or 383 limitations will significantly impact our ability to offset income with available NOL and research and
development credit carryforwards. However, future ownership changes under Section 382 may limit our ability to fully utilize these
tax benefits.