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 product candidates 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 product 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 may bring further preclinical programs forward and interrogate our library against new targets beyond
kinases either directly or with collaborators.
Our 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 compounds all of which are wholly-owned, except derazantinib, which is partnered with Basilea Pharmaceutic Ltd. in
all parts of the world except the People’s Republic of China, Hong Kong, Macau and Taiwan (“Greater China”),
where it is partnered with Sinovant Sciences Ltd., a subsidiary of Roivant Sciences Ltd.:
|
•
|
ARQ 531, a potent and reversible inhibitor of both wild type and C481S-mutant BTK, in Phase 1 for B-cell malignancies refractory to other therapeutic options;
|
|
•
|
Miransertib (ARQ 092), a selective inhibitor of AKT, a serine/threonine kinase, in Phase 1/2 in rare Overgrowth Diseases and in Phase 1 for the rare disease, Proteus syndrome, in partnership with the National Institutes of Health (NIH); also in Phase 1b in oncology in combination with the hormonal therapy, anastrozole, in endometrial cancer;
|
|
•
|
ARQ 751, a next-generation inhibitor of AKT, in Phase 1 for solid tumors harboring the AKT1 or PI3K mutation;
|
|
•
|
Derazantinib (ARQ 087), a multi-kinase inhibitor designed to preferentially inhibit the FGFR family of kinases, in a registrational trial in intrahepatic cholangiocarcinoma (iCCA) in patients with FGFR 2 fusions; 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.
|
In February 2018, we entered into a License
Agreement (the “Agreement”) with Sinovant Sciences Ltd. (“Sinovant”) and Roivant Sciences Ltd., the parent
of Sinovant, pursuant to which ArQule granted Sinovant a license to develop, manufacture and exclusively commercialize its FGFR
inhibitor, derazantinib (ARQ 087), in Greater China. The Agreement provides for an upfront payment to ArQule of $3 million and
a guaranteed $2.5 million development milestone within the first year. ArQule is also eligible for an additional $82 million in
regulatory and sales milestones. Upon commercialization, ArQule is entitled to receive double digit royalties in the low teens
from Sinovant on net sales of derazantinib in the Greater China territory. Sinovant will be responsible for all costs and expenses
of development, manufacture and commercialization in its territory. For the three months and nine months ended September 30, 2018
we recognized revenue of $2.9 million and $5.9 million, respectively, for completing our performance obligations under this licensing
agreement.
In April 2018, we entered into a License
Agreement (the “Basilea Agreement”) with Basilea Pharmaceutica Ltd. (“Basilea”) pursuant to which ArQule
granted Basilea an exclusive license to develop, manufacture and commercialize its FGFR inhibitor, derazantinib (ARQ 087), in the
United States, EU, Japan and the rest of the world, excluding Greater China. Under the terms of the Basilea Agreement, ArQule
received an upfront payment of $10 million and is eligible for up to $326 million in regulatory and commercial milestones.
Upon commercialization, ArQule is entitled to receive staggered royalties on future net sales of derazantinib ranging from the
high-single digits to the mid-teens on direct sales and mid-single digits to low-double digits on indirect sales. Basilea will
be responsible for all costs and expenses of development, manufacture and commercialization in its territory. Under certain circumstances,
ArQule may have the opportunity to promote derazantinib in the US directly.
Revenue in the three months ended September
30, 2018 totaled $2.0 million for providing certain research and development services to Basilea, recognized as revenue on a cost-to-cost
method. Revenue in the nine months ended September 30, 2018 totaled $15.7 million for providing the technology license as well
as certain research and development services to Basilea, recognized as revenue on a cost-to-cost method. The adoption of Accounting
Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers on January 1, 2018 did not have a material effect on
the amount of revenue recognized under this agreement.
Tivantinib (ARQ 197), an orally administered,
small molecule inhibitor of the c-Met receptor tyrosine kinase 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 had licensed
commercial rights to Kyowa Hakko Kirin Co., Ltd. (“Kyowa Hakko Kirin”).
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 license agreements or future services. In the nine months ended September 30, 2018, our net use of cash
was primarily driven by the difference between cash received from our collaborations and payments for operating expenses which
resulted in net cash outflows of $7.8 million. In the nine months ended 2017, our net use of cash was primarily driven by payments
for operating expenses which resulted in net cash outflows of $20.5 million.
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. In
January 2017, we entered into a loan and security agreement (the “Loan Agreement”) with a principal balance
of $15 million and amended the Loan Agreement in February 2018 (see Note 8). The terms of the Loan Agreement require
payments of interest on a monthly basis through August 2019 and payments of interest and principal from September 1, 2019. The current maturity date of the loan is
August 1, 2022.
In September 2017, we sold 2.0 million
shares of common stock through an at-the-market (ATM) offering and raised net 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 to purchase 3,123,674 shares of our common stock for aggregate net
proceeds of $15.6 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 net proceeds of $9.5 million through the sale of 8,370 shares of
series A convertible preferred stock (Series A Preferred) and warrants to purchase 2,259 shares of Series A Preferred
(Warrants). Each share of Series A Preferred together with the associated Warrant was priced at $1,135 and automatically converted
into 1,000 shares of common stock upon the effectiveness on May 8, 2018 of an amendment to the Company’s restated certificate
of incorporation to increase the number of authorized shares of common stock thereunder. The Warrants had 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.
In
July 2018, we sold 12,650,000 shares of common stock at $5.50 per share for aggregate net proceeds of approximately $64.6 million
after commissions and other estimated offering expenses.
We anticipate that our cash, cash equivalents
and marketable securities on hand at September 30, 2018, and financial support from our licensing agreements 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.
Adoption and Impact of the New Revenue Standard
The Company adopted Accounting Standards
Codification Topic 606—Revenue from Contracts with Customers, or Topic 606, on January 1, 2018, resulting in a change to
its accounting policy for revenue recognition. Results for reporting periods beginning after January 1, 2018 are presented under
the new standard, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect
for the prior period. We recorded a net increase to opening equity of $1.5 million as of January 1, 2018 due to the cumulative
impact of adopting this new standard. Without applying the new revenue standard, the disclosed research and development revenue
would have been $1.4 million higher than currently disclosed for the first nine months of 2018. Contract receivables were $6.4
million at September 30, 2018. The adoption of the new revenue standard did not have a material impact on any other balances within
the condensed financial statements as of and for the nine months ended September 30, 2018.
Under the new revenue standards, we recognize
revenues when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we
expect to receive in exchange for those goods or services. We recognize revenues following the five step model prescribed under
Topic 606: (i) identify 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 revenues
when (or as) we satisfy the performance obligation. The Company only applies the five-step model to contracts when it is probable
that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer.
At contract inception, the Company assesses the goods or services promised within each contract, and determines those that are
performance obligations. Revenue is recognized when each distinct performance obligation is satisfied.
For certain performance obligations that
are satisfied over time the Company recognizes revenue using the cost-to-cost method.
Under the cost-to-cost method, the extent of progress towards
completion is measured based on the ratio of actual costs incurred to the total estimated costs expected upon satisfying the identified
performance obligation. Under this method, revenue will be recorded as a percentage of the estimated transaction price based on
the extent of progress towards completion.
The Company has collaboration and license
agreements with drug development and pharmaceutical companies. The Company’s proprietary technology and intellectual property
is the basis for many of these collaboration and license agreements and generally include contractual milestone events that coincide
with the progression of development, regulatory and commercialization milestones. At the inception of each collaboration that includes
developmental, regulatory or commercial milestone payments, the Company evaluates whether achieving the milestones is considered
probable 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 value of the associated milestone is included in the transaction price.
Milestone payments that are not within the control of the Company, such as approvals from regulators or where attainment of the
specified event is dependent on the development activities of a third-party, are not considered probable of being achieved until
those approvals are received or the specified event occurs. Revenue is recognized from the satisfaction of performance obligations
in the amount billable to the customer.
2. COLLABORATIONS AND ALLIANCES
Roivant Sciences Licensing Agreement
In February 2018, we entered into a License
Agreement (the “Agreement”) with Sinovant Sciences Ltd. (“Sinovant”) and Roivant Sciences Ltd., the parent
of Sinovant, pursuant to which ArQule granted Sinovant a license to develop, manufacture and exclusively commercialize its FGFR
inhibitor, derazantinib (ARQ 087), in Greater China. The Agreement provides for an upfront payment to ArQule of $3 million and
a guaranteed $2.5 million development milestone within the first year. ArQule is also eligible for an additional $82 million in
regulatory and sales milestones. Upon commercialization, ArQule is entitled to receive double digit royalties in the low teens
from Sinovant on net sales of derazantinib in the Greater China territory. Sinovant will be responsible for all costs and expenses
of development, manufacture and commercialization in its territory. For the three months and nine months ended September 30, 2018
we recognized revenue of $2.9 million and $5.9 million, respectively, for completing our performance obligations under this licensing
agreement.
Basilea Licensing Agreement
In April 2018, we entered into a License
Agreement (the “Basilea Agreement”) with Basilea Pharmaceutica Ltd. (“Basilea”) pursuant to which ArQule
granted Basilea an exclusive license to develop, manufacture and commercialize its FGFR inhibitor, derazantinib (ARQ 087), in the
United States, EU, Japan and the rest of the world, excluding Greater China. Under the terms of the Basilea Agreement, ArQule
received an upfront payment of $10 million and is eligible for up to $326 million in regulatory and commercial milestones.
Upon commercialization, ArQule is entitled to receive staggered royalties on future net sales of derazantinib ranging from the
high-single digits to the mid-teens on direct sales and mid-single digits to low-double digits on indirect sales. Basilea will
be responsible for all costs and expenses of development, manufacture and commercialization in its territory. Under certain circumstances,
ArQule may have the opportunity to promote derazantinib in the US directly.
Revenue in the three months ended September
30, 2018 totaled $2.0 million for providing certain research and development services to Basilea, recognized as revenue on a cost-to-cost
method. Revenue in the nine months ended September 30, 2018 totaled $15.7 million for providing the technology license as well
as certain research and development services to Basilea, recognized as revenue on a cost-to-cost method. The adoption of Accounting
Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers on January 1, 2018 did not have a material effect on
the amount of revenue recognized under this agreement.
Other Licensing Agreements
In October 2017, we entered into a
non-exclusive license agreement for certain library compounds. The licensed compounds were delivered and are subject to quality
and acceptance testing. In 2017, we recorded deferred revenue of $1.5 million related to this licensing agreement which was
recorded as an opening retained earnings adjustment upon the adoption of Accounting Standards Update (ASU) No. 2014-09, Revenue
from Contracts with Customers on January 1, 2018. For the three and nine months ended September 30, 2018, we recorded revenue of
$0.1 million and $1.3 million, respectively, based upon the achievement of the quality and acceptance testing for the period.
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.
We invest our available cash primarily
in commercial paper, money market funds, and U.S. Treasury bill funds that have investment grade ratings.
The following is a summary of the fair
value of available-for-sale marketable securities we held at September 30, 2018 and December 31, 2017:
September 30, 2018
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
Security type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities-short term
|
|
$
|
84,035
|
|
|
$
|
1
|
|
|
$
|
(33
|
)
|
|
$
|
84,003
|
|
Corporate debt securities-long term
|
|
$
|
4,907
|
|
|
$
|
1
|
|
|
$
|
(1
|
)
|
|
$
|
4,907
|
|
Total available-for-sale marketable securities
|
|
$
|
88,942
|
|
|
$
|
2
|
|
|
$
|
(34
|
)
|
|
$
|
88,910
|
|
December 31, 2017
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
Security type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities-short term
|
|
$
|
27,823
|
|
|
$
|
1
|
|
|
$
|
(17
|
)
|
|
$
|
27,807
|
|
Total available-for-sale marketable securities
|
|
$
|
27,823
|
|
|
$
|
1
|
|
|
$
|
(17
|
)
|
|
$
|
27,807
|
|
None of our available-for-sale
marketable securities were in a continuous unrealized loss position for more than 12 months at September 30, 2018 or December
31, 2017.
The following tables present
information about our assets and liabilities 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. There were no
transfers in or out of Level 1 or Level 2 measurements for the periods presented:
|
|
September 30,
2018
|
|
|
Quoted
Prices in
Active
Markets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Cash equivalents
|
|
$
|
14,326
|
|
|
$
|
14,326
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate debt securities-short term
|
|
|
84,003
|
|
|
|
—
|
|
|
|
84,003
|
|
|
|
—
|
|
Corporate debt securities-long term
|
|
|
4,907
|
|
|
|
—
|
|
|
|
4,907
|
|
|
|
—
|
|
Total
|
|
$
|
103,236
|
|
|
$
|
14,326
|
|
|
$
|
88,910
|
|
|
$
|
—
|
|
|
|
December 31,
2017
|
|
|
Quoted
Prices in
Active
Markets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Cash equivalents
|
|
$
|
19,889
|
|
|
$
|
19,889
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Corporate debt securities-short term
|
|
|
27,807
|
|
|
|
—
|
|
|
|
27,807
|
|
|
|
—
|
|
Total
|
|
$
|
47,696
|
|
|
$
|
19,889
|
|
|
$
|
27,807
|
|
|
$
|
—
|
|
|
|
December 31,
2017
|
|
|
Quoted Prices in
Active Markets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Warrant liability
|
|
$
|
1,512
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,512
|
|
Due to the lack of market quotes relating
to our preferred stock warrants, the fair value of the preferred stock warrants was determined at December 31, 2017 using
the Black-Scholes model, which is based on Level 3 inputs. The inputs used in the Black-Scholes model are presented below.
Based on the Black-Scholes model, the Company recorded a preferred stock warrant liability of $1,512 at December 31, 2017.
Upon conversion of the Series A Preferred to common stock on May 8, 2018 the warrant liability of $3,064 was extinguished
with an offsetting amount included as additional paid-in capital in stockholders’ equity.
The following are the Black-Scholes inputs
to the warrant liability valuation for December 31, 2017:
|
|
December 31,
|
|
|
|
2017
|
|
Warrant stock price
|
|
$
|
1.75
|
|
Exercise price
|
|
|
1.65
|
|
Expected volatility
|
|
|
53.3
|
%
|
Risk-free interest
|
|
|
2.07
|
%
|
Expected term
|
|
|
3.85 years
|
|
Dividends
|
|
|
none
|
|
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses include
the following at September 30, 2018 and December 31, 2017:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Accounts payable
|
|
$
|
1,071
|
|
|
$
|
537
|
|
Accrued payroll
|
|
|
1,589
|
|
|
|
1,448
|
|
Accrued outsourced pre-clinical and clinical fees
|
|
|
6,845
|
|
|
|
5,409
|
|
Accrued professional fees
|
|
|
635
|
|
|
|
492
|
|
Other accrued expenses
|
|
|
631
|
|
|
|
373
|
|
|
|
$
|
10,771
|
|
|
$
|
8,259
|
|
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 months ended September 30, 2018, include 10,720,022 shares that would
be issued upon the exercise of outstanding employee and Board of Director stock options, 93,168 shares that would be issued upon
the exercise of the warrants from our February 2018 amendment to our loan agreement, 3,123,674 shares that would be issued upon
the exercise of the warrants from our October 2017 common stock offering and 2,259,000 common shares that would be issued
upon the exercise of the warrants from our November 2017 preferred stock offering. Potential common shares, for the nine months
ended September 30, 2018, include 10,720,022 shares that would be issued upon the exercise of outstanding employee and Board of
Director stock options, 93,168 shares that would be issued upon the exercise of the warrants from our February 2018 amendment to
our loan agreement, 3,123,674 shares that would be issued upon the exercise of the warrants from our October 2017 common stock
offering, 8,370,000 common shares that would be issued upon the conversion in May 2018 of the shares from our November 2017
preferred stock offering and 2,259,000 common shares that would be issued upon the exercise of the warrants from our November 2017
preferred stock offering. The shares and warrants from our November 2017 preferred stock offering were converted on May 8, 2018
to common shares and warrants. 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.
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 three
and nine months ended September 30, 2018 and 2017.
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,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Research and development
|
|
$
|
84
|
|
|
$
|
80
|
|
|
$
|
269
|
|
|
$
|
284
|
|
General and administrative
|
|
|
279
|
|
|
|
233
|
|
|
|
831
|
|
|
|
858
|
|
Total stock-based compensation expense
|
|
$
|
363
|
|
|
$
|
313
|
|
|
$
|
1,100
|
|
|
$
|
1,142
|
|
In the three and nine months ended September
30, 2018 and 2017, 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, 2018 was as follows:
Stock Options
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding as of December 31, 2017
|
|
|
10,622,455
|
|
|
$
|
3.01
|
|
Granted
|
|
|
1,776,770
|
|
|
|
2.68
|
|
Exercised
|
|
|
(1,094,616
|
)
|
|
|
3.24
|
|
Cancelled
|
|
|
(584,587
|
)
|
|
|
3.22
|
|
Outstanding as of September 30, 2018
|
|
|
10,720,022
|
|
|
$
|
2.92
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of September 30, 2018
|
|
|
6,059,248
|
|
|
$
|
3.77
|
|
The aggregate intrinsic value of options
outstanding at September 30, 2018 was $32,180 including $14,259 related to exercisable options. The weighted average fair value
of options granted in the nine months ended September 30, 2018 and 2017 was $1.70 and $0.72 per share, respectively. The intrinsic
value of options exercised in the nine months ended September 30, 2018 was $2,305.
|
|
Shares
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term (in years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Vested and unvested expected to vest at September 30, 2018
|
|
|
10,544,445
|
|
|
$
|
2.92
|
|
|
|
6.2
|
|
|
$
|
31,531
|
|
Exercisable at September 30, 2018
|
|
|
6,059,248
|
|
|
$
|
3.77
|
|
|
|
4.4
|
|
|
$
|
14,259
|
|
The total compensation cost not yet recognized
as of September 30, 2018 related to non-vested option awards was $4.1 million, which will be recognized over a weighted-average
period of 2.7 years. During the nine months ended September 30, 2018, 344,587 shares expired and 240,000 shares were forfeited.
The weighted average remaining contractual life for options exercisable at September 30, 2018 was 4.4 years.
7. COMMON STOCK OFFERINGS
In
July 2018, we sold 12,650,000 shares of common stock at $5.50 per share for aggregate net proceeds of approximately $64.6 million
after commissions and other estimated offering expenses.
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 $15.6 million.
Each warrant is exercisable for $1.75 per share and expires in four years from the date of issuance.
In September 2017, we sold 2.0 million
shares of common stock through an at-the-market (“ATM”) offering and raised net proceeds of approximately $2.3 million.
In February 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 in March 2017.
8. LOAN AGREEMENT
In January 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 bears 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, 2018 was 8.96%. The Loan Agreement required interest-only payments for 18 months,
followed by an amortization period of 36 months. The original maturity date of the loan was August 1, 2021 and in February 2018
we signed an amendment with the Lender which extended the maturity date by one year to August 1, 2022 with principal payments
commencing on September 1, 2019.
The expected remaining repayment of the $15 million
loan principal at September 30, 2018 is as follows:
2019
|
|
$
|
1,667
|
|
2020
|
|
|
5,000
|
|
2021
|
|
|
5,000
|
|
2022
|
|
|
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.
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 were in compliance with the loan covenants at September 30, 2018.
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 the 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 February 2018, the Loan Agreement
was amended requiring payments of interest on a monthly basis through August 2019 and payments of interest and principal from
September 2019 to August 2022. In connection with entering into the amendment we issued to the Lender warrants to purchase
an aggregate of 93,168 shares of our common stock. The warrants are exercisable immediately, have a per-share exercise price of
$1.61 and have a term of ten years. The amendment was determined to be a modification of debt in accordance with ASC 470 Debt.
We have recorded the relative fair value of the additional warrants as a discount to the carrying value of the notes payable with
a corresponding increase to additional paid in capital.
9. PREFERRED STOCK AND WARRANT LIABILITY
Our amended Certificate of Incorporation
authorizes the issuance of up to 1 million shares of $0.01 par value preferred stock.
In November 2017, we entered into
definitive securities purchase agreements with certain institutional investors. In conjunction with this stock offering the Company
raised net proceeds of $9.5 million through the sale of 8,370 shares of series A convertible preferred stock (Series A
Preferred) and warrants covering 2,259 shares of Series A Preferred (Warrants). Each share of Series A Preferred together
with the associated Warrant was priced at $1,135 and automatically converted into 1,000 shares of common stock upon the effectiveness
on May 8, 2018, of an amendment to the Company’s restated certificate of incorporation to increase the number of authorized
shares of common stock thereunder. The amount reported as
preferred stock at September 30,
2018 is zero and
at December 31, 2017 is $8.8 million.
The terms of the Series A Preferred,
specifically the terms of the liquidation preference, required the classification of the preferred stock as temporary equity, which
is reflected in our balance sheet as of December 31, 2017. In addition, the terms of the Series A Preferred for which
the warrants are exercisable require that the fair value allocated to the warrants at the date of issuance be recorded as a liability.
The warrant liability was marked to market value through the income statement as a non-cash gain or loss at each reporting period
until the conversion of the preferred stock to common stock on May 8, 2018. The Warrants had 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), were exercisable immediately
with an expiration date approximately four years from the date of the adoption of the amendment to the Company’s restated
certificate of incorporation. Upon conversion of the Series A Preferred common on May 8, 2018, the warrant liability of $3,064
was extinguished with an offsetting amount included as additional paid-in capital in stockholders’ equity. In the nine months
ended September 30, 2018 the fair value of the warrant liability increased by $1,552 and non-cash expense was recorded in other
expense. At September 30, 2018 the warrant liability was zero.
If declared by the board, the Series A
Preferred were eligible for a dividend on an as-converted basis. If the Company’s restated certificate of incorporation had
not been adopted by July 1, 2018, the Series A Preferred would have obtained a dividend in kind until such time as the
restated certificate of incorporation was adopted. In the case of a liquidation event or deemed liquidation event defined by the
definitive securities purchase agreements the holders of Series A Preferred Stock had a liquidation preference on the greater
of the Series A Preferred Stock stated value or the consideration that would have been paid on such Series A Preferred
Stock in the applicable liquidation event.
10. 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 Accounting
Standard Update (“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 became effective for us on January 1, 2018. The adoption of this standard did not have a material impact
on our financial position or results of operations.
In August 2016, the FASB issued ASU
No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This new standard
clarifies certain aspects of the statement of cash flows, including the classification of debt prepayment or debt extinguishment
costs or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of
the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims,
proceeds from the settlement of corporate-owned life insurance policies, distributions received from equity method investees and
beneficial interests in securitization transactions. This new standard also clarifies that an entity should determine each separately
identifiable source of use within the cash receipts and payments on the basis of the nature of the underlying cash flows. In situations
in which cash receipts and payments have aspects of more than one class of cash flows and cannot be separated by source or use,
the appropriate classification should depend on the activity that is likely to be the predominant source or use of cash flows for
the item. This new standard became effective for us on January 1, 2018. The adoption of this standard did not have a material
impact on our statements of cash flows upon adoption.
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. The Company does not expect the adoption of this standard to have a
material impact on its financial statements.
In May 2014 the FASB issued Accounting
Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes all existing revenue recognition
requirements, including most industry specific guidance. This 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. The FASB subsequently issued amendments to ASU No. 2014-09 that have the same effective date and transition date.
These new standards became effective for us on January 1, 2018, and we adopted them using the modified retrospective method
through a $1.5 million cumulative-effect adjustment directly to retained earnings as of that date. The adoption of these new
standards may result in a change in the timing of revenue recognition related to certain of our licensing activities.
11. INCOME TAXES
As of December 31, 2017, we had federal
NOL, state NOL, and research and development credit carryforwards of approximately $409,409, $228,565 and $28,253 respectively,
which expire at various dates through 2037. We recorded a deferred tax asset for previously unrecognized excess tax benefit, offset
by valuation allowance upon the adoption in 2017 of ASU 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements
to Employee Share-Based Payment Accounting.”
As of September 30, 2018 and December 31,
2017 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, 2018 and December 31, 2017, we had no accrued interest or penalties related to uncertain
tax positions. Our U.S. federal tax returns for the tax years 2013 through 2017 and our state tax returns for the tax years
2013 through 2017 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,
2018, 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.