Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Organization and operations
The Company
Genocea Biosciences, Inc. (the “Company”) is a biopharmaceutical company that was incorporated in Delaware on August 16, 2006 and has a principal place of business in Cambridge, Massachusetts. The Company seeks to discover and develop novel cancer vaccines and immunotherapies through its AnTigen Lead Acquisition System ("ATLAS"
TM
) proprietary discovery platform. The ATLAS platform is designed to identify tumor antigens of CD4+ and CD8+ T cell immune responses for inclusion in vaccines and immunotherapies that are designed to act through T cell (or cellular) immune responses. The Company believes that using ATLAS to identify neoantigens and antigens could lead to more immunogenic and efficacious cancer vaccines and immunotherapies.
The Company's most advanced program in active development is its immuno-oncology program, GEN-009, a neoantigen cancer vaccine, for which Genocea is conducting a Phase 1/2a clinical trial. The GEN-009 program uses ATLAS to identify patient neoantigens, or newly formed antigens unique to each patient, that are associated with that individual's tumor. The Company is also exploring GEN-010, a next-generation neoantigen vaccine program, and GEN-011, a neoantigen adoptive T cell therapy program, and has identified candidate T cell antigens for cancer vaccines targeting tumor-associated antigens and cancers caused by Epstein-Barr Virus ("EBV").
The Company has one non-active Phase 3-ready product candidate, GEN-003, an investigational immunotherapy for the treatment of genital herpes, for which it is continuing to explore strategic opportunities.
The Company is devoting substantially all its efforts to product research and development, initial market development, and raising capital. To date, the Company has not generated any product revenue related to its primary business purpose and is subject to a number of risks similar to those of other preclinical stage companies, including dependence on key individuals, competition from other companies, the need and related uncertainty associated with the development of commercially viable products, and the need to obtain adequate additional financing to fund the development of its product candidates. The Company is also subject to a number of risks similar to other companies in the life sciences industry, including the uncertainty of success of its preclinical and clinical trials, regulatory approval of products, competition from substitute products, compliance with government regulations, protection of proprietary technology, and dependence on third parties. The Company has historical losses from operations and anticipates that it will continue to incur significant operating losses for the next several years as it continues to develop its product candidates.
Operating Capital Requirements
Under ASU, 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40) (“ASC 205-40”), the Company has the responsibility to evaluate whether conditions and/or events raise substantial doubt about its ability to meet its future financial obligations as they become due within one year after the date that the financial statements are issued. As required by ASC 205-40, this evaluation shall initially not take into consideration the potential mitigating effects of plans that have not been fully implemented as of the date the financial statements are issued. Management has assessed the Company’s ability to continue as a going concern in accordance with the requirement of ASC 205-40.
As reflected in the condensed consolidated financial statements, the Company had available cash and cash equivalents of
$34.5 million
at
September 30, 2018
. In addition, the Company had a loss from operations of approximately
$30.6 million
and cash used in operating activities of
$33.1 million
for the nine months ended September 30, 2018. As determined under ASC 205-40, these factors, combined with expected cash required to fund future operations, raise substantial doubt about the Company’s ability to continue as a going concern for twelve months from the date this report is issued.
The Company plans to continue to fund its operations through strategic transactions, proceeds from sales of its common stock under its at-the-market equity offering program, public or private equity offerings, its loan and security agreement with Hercules Capital, Inc. ("Hercules"), or by other means. However, adequate additional financing may not be available to the Company on acceptable terms, or at all. If the Company is unable to raise capital when needed, or on attractive terms, it may be forced to implement further cost reduction strategies, including ceasing development of GEN-009 and corporate activities.
The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.
2. Summary of significant accounting policies
Basis of presentation and use of estimates
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions of Form 10-Q and Article 10 of Regulation S-X. Any reference in these notes to applicable guidance is meant to refer to GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”). Certain information and footnote disclosures normally included in the Company’s annual financial statements have been condensed or omitted. These interim condensed financial statements, in the opinion of management, reflect all normal recurring adjustments necessary for a fair presentation of the Company’s financial position as of
September 30, 2018
and results of operations for the
three and nine
months ended
September 30, 2018
and
2017
, respectively.
The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full fiscal year. These interim financial statements should be read in conjunction with the audited financial statements as of and for the year ended
December 31, 2017
and the notes thereto which are included in the Company’s Annual Report on Form 10-K, as filed with the SEC on February 16, 2018.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, the Company’s management evaluates its estimates, which include, but are not limited to, estimates related to prepaid and accrued research and development expenses, stock-based compensation expense, contingencies, tax valuation reserves, fair value measurements, and reported amounts of expenses during the reporting periods. The Company bases its estimates on historical experience and other market-specific or other relevant assumptions that it believes to be reasonable under the circumstances. Actual results may differ from those estimates or assumptions.
There were no changes to significant accounting policies during the
nine months ended
September 30, 2018
, as compared to the those identified in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2017
.
Fair value of financial instruments
The Company is required to disclose information on all assets and liabilities reported at fair value that enables an assessment of the inputs used in determining the reported fair values. ASC Topic 820,
Fair Value Measurement and Disclosures
, established a hierarchy of inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the financial instrument based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the financial instrument and are developed based on the best information available under the circumstances. The fair value hierarchy applies only to the valuation inputs used in determining the reported or disclosed fair value of the financial instruments and is not a measure of the investment credit quality. Fair value measurements are classified and disclosed in one of the following three categories:
|
|
•
|
Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
|
|
|
•
|
Level 2—Valuations based on quoted prices for similar assets or liabilities in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
|
|
|
•
|
Level 3—Valuations that require inputs that reflect the Company’s own assumptions that are both significant to the fair value measurement and unobservable.
|
To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
Financial instruments measured at fair value on a recurring basis include cash equivalents (Note 3) and liability-classified common stock warrants (Note 7). The Company is also required to disclose the fair value of financial instruments not carried at fair value. The fair value of the Company’s debt (Note 5) is determined using current applicable rates for similar instruments as of the balance sheet dates and an assessment of the credit rating of the Company. The carrying value of the Company’s debt approximates fair value because the Company’s interest rate yield is near current market rates for comparable debt instruments. The Company’s debt is considered a Level 3 liability within the fair value hierarchy.
For the
nine months ended
September 30, 2018
, there were no transfers among Level 1, Level 2, or Level 3 categories. Additionally, there were no changes to the valuation methods utilized by the Company during the
nine months ended
September 30, 2018
, other than those related to the liability-classified common stock warrants described in Note 7.
Recently adopted accounting standards
|
|
|
|
|
|
Standard
|
|
Description
|
|
Effect on the financial statements
|
ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
|
|
In May 2014, the FASB issued new revenue guidance under ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606).
The standard replaces existing revenue recognition standards and significantly expand the disclosure requirements for revenue arrangements. It may be adopted either retrospectively or on a modified retrospective basis to new contracts and existing contracts with remaining performance obligations as of the effective date.
ASU No. 2014-09 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2017.
|
|
The Company adopted ASU No. 2014-09 as of January 1, 2018. The adoption of ASU No. 2014-09 did not impact the Company's financial statements as the Company does not currently have any contracts with customers.
|
ASU No. 2016-15,
Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments
|
|
In August 2016 the FASB issued ASU No. 2016-15,
Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments
(“ASU No. 2016-15”). This guidance addresses the presentation and classification of certain cash receipts and cash payments in the statement of cash flows.
The standard is effective for annual periods beginning after December 15, 2017 and for interim periods within those fiscal years. Early adoption is permitted.
|
|
The Company adopted ASU No. 2016-15 effective January 1, 2018. The adoption of ASU No. 2016-15 did not have a material impact on the Company’s financial statements.
|
ASU No. 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
|
|
In November 2016, the FASB issued ASU 2016-18, which requires additional disclosures related to restricted cash. The new standard requires that amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows.
ASU No. 2016-18 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017.
|
|
The Company adopted the standard on January 1, 2018 and reclassified $0.3 million of restricted cash to be included with cash and cash equivalents on the statement of cash flows.
|
ASU No. 2017-09,
Compensation-Stock Compensation (Topic 718)
|
|
In May 2017, the FASB issued ASU No. 2017-09,
Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting
(“ASU No. 2017-09”). This update clarifies the changes to terms or conditions of a share-based payment award that require an entity to apply modification accounting.
ASU No. 2017-09 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2017. Early application is permitted, and prospective application is required.
|
|
The Company adopted ASU No. 2017-09 effective January 1, 2018. The adoption of ASU No. 2017-09 did not have a material impact on the Company’s financial statements.
|
Recently issued accounting standards
|
|
|
|
|
|
Standard
|
|
Description
|
|
Effect on the financial statements
|
ASU No. 2016-02,
Leases (Topic 842)
|
|
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842),
which replaces the existing lease accounting standards. The new standard requires a dual approach for lessee accounting under which a lessee would account for leases as finance (also referred to as capital) leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use asset and corresponding lease liability. For finance leases the lessee would recognize interest expense and amortization of the right-of-use asset and for operating leases the lessee would recognize straight-line total lease expense.
ASU No. 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018.
|
|
The Company generally does not finance purchases of equipment but it does lease office and lab facilities. The Company is in the process of evaluating the effect that this ASU will have on its consolidated financial statements and related disclosures, but expects the adoption will result in an increase in assets and liabilities on its consolidated balance sheets.
|
ASU No. 2018-07,
Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting
|
|
In June 2018, the FASB issued ASU No. 2018-07,
Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.
The new standard largely aligns the accounting for share-based payment awards issued to employees and nonemployees by expanding the scope of ASC 718 to apply to nonemployee share-based transactions, as long as the transaction is not effectively a form of financing.
The new guidance will be effective for the Company on January 1, 2019.
|
|
The Company is currently evaluating the potential impact that this guidance may have on its consolidated financial statements.
|
ASU 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement
|
|
In August 2018, the FASB issued ASU 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement
which requires public entities to disclose certain new information and modifies some disclosure requirements.
The new guidance will be effective for fiscal years beginning after 15 December 2019 and for interim periods within those fiscal years.
|
|
The Company is currently evaluating the potential impact that this guidance may have on its consolidated financial statements.
|
ASU 2018-15,
Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.
|
|
In August 2018, the FASB issued ASU 2018-15,
Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.
ASU 2018-15 requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Accounting Standards Codification 350-40 to determine which implementation costs to defer and recognize as an asset.
The new guidance will be effective for annual periods, and interim periods within those annual periods, beginning after 15 December 2019.
|
|
The Company is currently evaluating the potential impact that this guidance may have on its consolidated financial statements.
|
3. Fair value of financial instruments
The following table presents the Company's financial instruments that were measured at fair value on a recurring basis by level in accordance with the hierarchy defined in Note 2 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted prices in active markets
|
|
Significant other observable inputs
|
|
Significant unobservable inputs
|
|
Total
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
September 30, 2018
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
Money market funds, included in cash equivalents
|
$
|
34,262
|
|
|
$
|
34,262
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total assets
|
$
|
34,262
|
|
|
$
|
34,262
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Common stock warrant liabilities
|
$
|
13,021
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13,021
|
|
Total liabilities
|
$
|
13,021
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13,021
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
Money market funds, included in cash equivalents
|
$
|
11,528
|
|
|
$
|
11,528
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total assets
|
$
|
11,528
|
|
|
$
|
11,528
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Cash equivalents were initially valued at the transaction price, and subsequently revalued at the end of each reporting period, utilizing third-party pricing services or other market observable data. The pricing services utilize industry standard valuation models, including both income and market-based approaches and observable market inputs to determine value. The Company validates the prices provided by its third-party pricing services by reviewing their pricing methods and obtaining market values from other pricing sources. After completing its validation procedures, the Company did not adjust any fair value measurements provided by the pricing services as of
September 30, 2018
and
December 31, 2017
.
As of
September 30, 2018
and
December 31, 2017
, cash and cash equivalents were comprised of funds in depository and money market accounts.
In connection with an underwritten public offering of common and preferred stock in January 2018 (see Note 7), the Company issued Class A warrants (the “Warrants”) to purchase shares of the Company’s common stock, classified as liabilities in the condensed consolidated balance sheets. The Warrants were recorded at their fair value on the date of issuance and are remeasured as of any Warrant exercise date and at the end of each reporting period, with changes in fair value recognized as income (decrease in fair value) or expense (increase in fair value) in change in fair value of warrant liability in the statements of operations.
As of the issuance dates of the Warrants, as well as at
September 30, 2018
, the Company utilized an option-based methodology to value the Warrants combined with a multi-scenario model, specifically a Monte Carlo simulation, to model the future movement of the stock price throughout the term of the Warrants. In addition, the valuation model considers the probability of the Company being acquired during each annual period within the Warrant term, as an acquisition event can potentially impact the settlement of the Warrants.
The assumptions used in calculating the estimated fair value of the Warrants represent the Company’s best estimates and include probabilities of settlement scenarios, future changes in the Company’s stock price, risk-free interest rates and volatility. The estimates are based, in part, on subjective assumptions and could differ materially in the future.
The following table details the assumptions used in the Monte Carlo simulation models used to estimate the fair value of the Warrants at issuance and as of
September 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
Issuance Date
|
|
September 30, 2018
|
Stock price
|
|
$
|
0.89
|
|
|
$
|
0.78
|
|
Volatility
|
|
111.5
|
%
|
|
105.7
|
%
|
Remaining term (years)
|
|
5
|
|
|
4.3
|
|
Expected dividend yield
|
|
—
|
%
|
|
—
|
%
|
Risk-free rate
|
|
2.4% - 2.5%
|
|
|
2.9
|
%
|
Range of annual acquisition event probability
|
|
0.0% - 30.0%
|
|
|
0.0% - 30.0%
|
|
The following table reflects the change in the Company’s Level 3 Warrants from issuance through
September 30, 2018
|
|
|
|
|
|
|
|
Common Stock Warrant Liabilities
|
Issuance of Warrants
|
|
$
|
18,231
|
|
Change in fair value
|
|
(5,208
|
)
|
Warrants exercised
|
|
(2
|
)
|
Balance at September 30, 2018
|
|
$
|
13,021
|
|
In connection with the underwritten public offering, the Company also granted the underwriters a 30-day option to purchase additional shares of common stock and/or additional Warrants (the "Overallotment Option"). The Company’s Overallotment Option is also a Level 3 liability. The assumptions used to determine the fair value are described in Note 7.
The following table reflects the change in the fair value of the Overallotment Option liability from issuance through the date of expiration:
|
|
|
|
|
|
|
|
Overallotment Option Liability
|
Issuance of Overallotment Option
|
|
$
|
2,441
|
|
Change in fair value
|
|
194
|
|
Exercise of Overallotment Option
|
|
(877
|
)
|
Expiration of Overallotment Option in March 2018
|
|
(1,758
|
)
|
Balance at September 30, 2018
|
|
$
|
—
|
|
4. Accrued expenses and other current liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
2018
|
|
2017
|
Research and development costs
|
$
|
764
|
|
|
$
|
2,886
|
|
Payroll and employee-related costs
|
1,791
|
|
|
1,830
|
|
Other current liabilities
|
1,678
|
|
|
844
|
|
Restructuring costs
|
—
|
|
|
44
|
|
Total
|
$
|
4,233
|
|
|
$
|
5,604
|
|
5. Long-term debt
On April 24, 2018 (the “Closing Date”), the Company entered into an amended and restated loan and security agreement (the “2018 Loan Agreement”) with Hercules Capital, Inc. (f/k/a Hercules Technology Growth Capital, Inc.) (“Hercules”), which provided up to
$14.0 million
in debt financing in the form of a term loan funded on the Closing Date (the “2018 Term Loan”). The 2018 Loan Agreement amended and restated the Company’s loan and security agreement (as amended, the “2014 Loan Agreement”) with Hercules, which had provided up to
$27.0 million
in debt financing (the “2014 Term Loan”). The Company accounted for the amendment as a modification to the loan.
The 2018 Term Loan will mature on May 1, 2021 and accrues interest at a floating rate per annum equal to the greater of (i)
7.75%
or (ii) the sum of
7.75%
plus the prime rate minus
5.0%
. The 2018 Loan Agreement provides for interest-only payments until June 1, 2019, which may be extended to December 1, 2019 if certain performance milestones are met before May 31, 2019 and no event of default has occurred or is continuing. Interest-only payments may be further extended to June 1, 2020 if certain additional performance milestones are met before November 30, 2019. Thereafter, amortization payments will be payable monthly in equal installments of principal and interest (subject to recalculation upon a change in prime rates) upon expiration of the interest only period through maturity.
The 2018 Term Loan may be prepaid in whole or in part upon
seven
business days’ prior written notice to Hercules, subject to a prepayment charge of
3.0%
, if such advance is prepaid in any of the first twelve months following the Closing Date,
2.0%
, if such advance is prepaid after twelve months following the Closing Date but on or prior to 24 months following the Closing Date, and
1.0%
thereafter. The Company is also obligated to pay an end-of-term charge in connection with the 2014 Loan Agreement of
4.95%
of the term loan advances under the 2014 Loan Agreement on January 1, 2019 and an additional end of term charge of
6.70%
of the Term Loan when the Term Loan is repaid (the “End of Term Charges”).
The 2018 Term Loan is secured by a lien on substantially all assets of the Company, other than intellectual property, provided that such lien on substantially all assets includes any rights to payments and proceeds from the sale, licensing or disposition of intellectual property. The Loan Agreement contains non-financial covenants and representations, including a financial reporting covenant, and limitations on dividends, indebtedness, collateral, investments, distributions, transfers, mergers or acquisitions, taxes, corporate changes, deposit accounts, and subsidiaries. There are no financial covenants.
Under the provisions of the 2014 Loan Agreement and the 2018 Loan Agreement, the Company has also entered into account control agreements ("ACAs") with Hercules and certain of the Company's financial institutions in which cash, cash equivalents, and investments are held. These ACAs grant Hercules a perfected first-priority security interest in the subject accounts. The ACAs do not restrict the Company's ability to utilize cash, cash equivalents, or investments to fund operations and capital expenditures unless there is an event of default and Hercules activates its rights under the ACAs.
The 2018 Loan Agreement contains a material adverse effect ("Material Adverse Effect") provision that requires all material adverse effects to be reported under the financial reporting covenant. Loan advances are subject to a representation that no event that has had, or could reasonably be expected to have, a Material Adverse Effect has occurred and is continuing. Under the Loan Agreement, a Material Adverse Effect means a material adverse effect upon: (i) the business, operations, properties, assets or condition (financial or otherwise) of the Company; or (ii) the ability of the Company to perform the secured obligations in accordance with the terms of the loan documents, or the ability of agent or lender to enforce any of its rights or remedies with respect to the secured obligations; or (iii) the collateral or agent’s liens on the collateral or the priority of such liens. Any event that has a Material Adverse Effect or would reasonably be expected to have a Material Adverse Effect is an event of default under the Loan Agreement and repayment of amounts due under the Loan Agreement may be accelerated by Hercules under the same terms as an event of default.
Events of default under the Loan Agreement include failure to make any payments of principal or interest as due on any outstanding indebtedness, breach of any covenant, any false or misleading representations or warranties, insolvency or bankruptcy, any attachment or judgment on the Company’s assets of at least
$100 thousand
, or the occurrence of any material default of the Company involving indebtedness in excess of
$100 thousand
. If an event of default occurs, repayment of all amounts due under the Loan Agreement may be accelerated by Hercules, including the applicable prepayment charge.
The 2018 Term Loan is automatically redeemable upon a change in control. The Company must prepay the outstanding principal and any accrued and unpaid interest through the prepayment date and the applicable prepayment charge. If a change in control occurs, repayment of amounts due under the Loan Agreement may be accelerated by Hercules. The Company believes acceleration of the repayment of amounts outstanding under the loan is remote, and therefore the debt balance is classified according to the contractual payment terms at
September 30, 2018
.
In connection with the 2014 Term Loan, the Company issued a common stock warrant to Hercules on November 20, 2014 (the “First Warrant”). The First Warrant is exercisable for
73,725
shares of the Company’s Common Stock (equal to
$607,500
divided by the exercise price of
$8.24
). The exercise price and the number of shares are subject to adjustment upon a merger event, reclassification of the shares of Common Stock, subdivision or combination of the shares of Common Stock or certain dividends payments. The First Warrant is exercisable until November 20, 2019 and will be exercised automatically on a net issuance basis if not exercised prior to the expiration date and if the then-current fair market value of one share of Common Stock is greater than the exercise price then in effect. The First Warrant has been classified as equity for all periods it has been outstanding.
In connection with the 2018 Loan Agreement, the Company issued a common stock warrant to Hercules on April 24, 2018 (the "Second Warrant" and together with the First Warrant, the “Warrants”). The Second Warrant is exercisable for
329,411
shares of the Company’s common stock at an initial excise price of
$0.85
per share. The exercise price and the number of shares are subject to adjustment upon a merger event, reclassification of the shares of common stock, subdivision or combination of the shares of common stock or certain dividends payments. The Second Warrant is exercisable until April 24, 2023 and will be exercised automatically on a net issuance basis if not exercised prior to the expiration date and if the then-current fair market value of one share of common stock is greater than the exercise price then in effect.
In connection with the 2018 Loan Agreement, on April 24, 2018, the Company also entered into an amendment to the equity rights letter agreement, dated November 20, 2014 (the “Amended Equity Rights Letter Agreement”). Pursuant to the Amended Equity Rights Letter Agreement, the Company had already issued to Hercules
223,463
shares (the “Shares”) of the Company’s Common Stock for an aggregate purchase price of approximately
$2.0 million
on November 20, 2014 at a price per share equal to the closing price of the Company’s Common Stock as reported on The Nasdaq Global Market on November 19, 2014. The Shares were issued pursuant to an exemption provided by Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”). Accordingly, the Shares will be subject to resale limitations and may be resold only pursuant to an effective registration statement or an exemption from registration.
Additionally, under the Amended Equity Rights Letter Agreement, Hercules has the right to participate in any one or more subsequent private placement equity financings of up to
$2.0 million
on the same terms and conditions as purchases by the other investors in each subsequent equity financing. The Amended Equity Rights Letter Agreement, and all rights and obligations thereunder, will terminate upon the earlier of (1) such time when Hercules has purchased
$2.0 million
of subsequent equity financing securities in the aggregate, and (2) the later of (a) the repayment of all indebtedness under the Loan Agreement, or (b) the expiration or termination of the exercise period for the warrant issued in connection with the Loan Agreement. The Company allocated
$36 thousand
of financing costs to additional paid-in capital for issuance fees that were reimbursed to Hercules.
The Company accounted for the April 2018 amendment to the Term Loan as a modification pursuant to ASC 470-50. The remaining balance of unamortized debt financing costs of
$0.3 million
and
$0.1 million
of fees associated with the 2018 Term Loan that met the criteria to be capitalized are being amortized through the maturity date of the 2018 Term Loan, accordingly. The End of Term Charges from the 2014 Term Loan and the 2018 Term Loan are being amortized to interest expense over the life of the 2018 Term Loan using the effective interest method. At
September 30, 2018
the 2018 Term Loan bears an effective interest rate of
12.0%
.
As of
September 30, 2018
, the Company had outstanding borrowings under the 2018 Loan Agreement of
$14.6 million
. At
December 31, 2017
, the Company had outstanding borrowings under the 2014 Term Loan of
$14.3 million
. Interest expense was
$0.4 million
and
$0.4 million
for the three months ended
September 30, 2018
and
2017
, respectively, and
$1.2 million
and
$1.3 million
for the
nine months ended
September 30, 2018
and
2017
, respectively.
Future principal payments, including the End of Term Charges, are as follows (in thousands):
|
|
|
|
|
|
September 30, 2018
|
2019
|
$
|
4,693
|
|
2020
|
7,030
|
|
2021
|
4,057
|
|
Total
|
$
|
15,780
|
|
6. Commitments and contingencies
Lease commitments
In May 2016, the Company entered into a lease amendment (the "2016 Lease") for office and laboratory space occupied under an original lease that commenced in March 2014 and was set to expire in February 2017 (the "2014 Lease"). The 2016 Lease extended the 2014 Lease
to February 2020. In June 2015, the Company signed a second operating lease (the "2015 Lease") for office space in the same building as the 2014 Lease. In August 2016, the Company exercised a
three
-year renewal option extending the 2015 Lease to February 2020.
The combined minimum future lease payments under both the 2016 Lease and the 2015 Lease are as follows (in thousands):
|
|
|
|
|
|
September 30, 2018
|
2018
|
$
|
403
|
|
2019
|
1,637
|
|
2020
|
274
|
|
Total
|
$
|
2,314
|
|
At
September 30, 2018
and
December 31, 2017
, the Company has an outstanding letter of credit of
$0.3 million
with a financial institution related to a security deposit for the 2016 Lease, which is secured by cash on deposit and expires on February 29, 2020. An additional unsecured deposit was required for the 2015 Lease.
Litigation
From time-to-time the Company may be subject to legal proceedings and claims which arise in the ordinary course of its business. The Company records a liability in its consolidated financial statements for these matters when a loss is known or considered probable and the amount can be reasonably estimated to the extent necessary to make the consolidated financial statements not misleading. If a loss is not probable or cannot be reasonably estimated, a liability is not recorded in its consolidated financial statements.
Beginning on October 31, 2017, three putative class action complaints were filed in the U.S. District Court for the District of Massachusetts, naming the Company, Chief Executive Officer William D. Clark, and former Chief Financial Officer Jonathan Poole as defendants. Each complaint alleged violations of the Securities Exchange Act of 1934 and Rule 10b-5 in connection with disclosures from March 31, 2016 to September 25, 2017 concerning Genocea’s development of GEN-003, the Company’s proprietary HSV-2 vaccine. The court consolidated the three actions into one case, captioned
Emerson et al. v. Genocea Biosciences, Inc., et al.
, Civil Action No. 17-cv-12137-PBS (D. Mass.), and appointed the Genocea Investor Group (a group of five purported shareholders) as lead plaintiff. On March 29, 2018, counsel for the lead plaintiff filed an amended complaint in the District of Massachusetts that alleges the same causes of action and seeks the same relief as the original complaints. The amended complaint adds Seth V. Hetherington, former Chief Medical Officer, to the original named defendants. The defendants filed a motion to dismiss on May 14, 2018. Plaintiffs filed an opposition to defendants’ motion to dismiss on June 28, 2018, as well as a motion to strike exhibits referenced in defendants’ motion to dismiss, on June 29, 2018. The Company and the other named defendants filed a reply brief to plaintiffs’ opposition to defendants’ motion to dismiss, and an opposition brief to plaintiffs’ motion to strike, on July 30, 2018. The court held oral argument on the motion to dismiss and motion to strike on September 25, 2018, and took each motion under advisement.
On January 31, 2018, a putative shareholder derivative action was filed in the U.S. District Court for the District of Delaware, naming certain of the Company’s directors and officers as defendants (including certain former directors and officers), and naming the Company as a nominal defendant. On June 20, 2018, a second putative shareholder derivative action was filed in the U.S. District Court for the District of Delaware, naming certain of the Company’s officers and directors (including a former officer), and naming the Company as a nominal defendant. On August 24, 2018, the court consolidated the two actions into one case, captioned
In re Genocea Biosciences, Inc. Derivative Litigation
, Civil Action No. 18-cv-00186-MN (D. Del.). The operative complaint in the now-consolidated action alleges violations of the Securities Exchange Act of 1934 and Rule 14a-9 in connection with disclosures made in the Company’s Schedule 14A Proxy Statement, filed with the SEC on April 21, 2017. The complaint also alleges claims for breach of fiduciary duty, unjust enrichment, and waste of corporate assets. On August 10, 2018, the parties filed a joint stipulation and proposed order agreeing to stay the consolidated action until,
inter alia
, the entry of an order granting or denying any motion to dismiss the action in the District of Massachusetts, and on August 24, 2018, the court entered the joint stipulation agreeing to stay the consolidated action.
The Company is unable at this time to determine whether the outcome of any of the litigation would have a material impact on its results of operations, financial condition or cash flows. The Company does not have contingency reserves established for any litigation liabilities.
7. Stockholders' equity
As of
September 30, 2018
, the Company has authorized
250,000,000
shares of common stock at
$0.001
par value per share and
25,000,000
shares of preferred stock at
$0.001
par value per share. As of
September 30, 2018
,
86,625,975
shares of common stock and
1,635
shares of preferred stock were issued and outstanding. As of
December 31, 2017
,
28,734,898
shares of common stock were issued and outstanding and no shares of preferred stock were issued and outstanding.
Underwritten public offering
On January 17, 2018, the Company entered into two underwriting agreements, the first relating to the underwritten public offering of
53,365,000
shares of the Company’s common stock, par value
$0.001
per share, and accompanying Warrants to purchase up to
26,682,500
shares of common stock, at a combined price to the public of
$1.00
per share, for gross proceeds of approximately
$53.4 million
(the “Common Stock Offering”) and the second relating to the underwritten public offering of
1,635
shares of the Company’s Series A convertible preferred stock, par value
$0.001
per share, which are convertible into
1,635,000
shares of common stock, and accompanying warrants to purchase up to
817,500
shares of common stock for gross proceeds of approximately
$1.6 million
(the “Preferred Stock Offering,” and together with the Common Stock Offering, the “January 2018 Financing”).
Under the terms of the underwriting agreement for the Common Stock Offering, the Company also granted the underwriters the Overallotment Option to purchase up to an additional
8,004,750
shares of common stock and/or additional warrants to purchase up to
4,002,375
shares of common stock. On January 19, 2018, the underwriters exercised their Overallotment Option to acquire additional warrants to purchase up to
1,438,050
shares of common stock. On February 21, 2018, the underwriters exercised their Overallotment Option to acquire an additional
957,745
shares of common stock. The Company received approximately
$1.0 million
in gross proceeds from the underwriter’s exercise of the Overallotment Option. The remainder of the Overallotment Options expired unexercised.
Preferred Stock
Each share of preferred stock is convertible at any time at the option of the holder, provided that the holder will be prohibited from converting the preferred stock into shares of common stock if, as a result of such conversion, the holder, together with its affiliates, would own more than
9.99%
of the total number of shares of common stock then issued and outstanding. Each share of preferred stock is initially convertible into
1,000
shares of common stock, subject to certain adjustments upon stock dividends and stock splits.
The preferred stock ranks pari passu on an as-converted to common stock basis with the common stock as to distributions of assets upon the Company’s liquidation, dissolution or winding up, whether voluntarily or involuntarily, or a “Fundamental Transaction,” as defined in the Certificate of Designation.
Shares of preferred stock have no voting rights, except as required by law and except that the consent of the holders of a majority of the outstanding preferred stock is required to amend the terms of the preferred stock.
The holders of preferred stock shall be entitled to receive dividends in the same form as dividends actually paid on shares of common stock when, as and if such dividends are declared and paid on shares of the common stock, on an as-if-converted-to-common stock basis.
Warrants
The Warrants are exercisable at any time, or from time-to-time during the period beginning on the date of issuance and expiring on the five-year anniversary of such issuance date, at an exercise price of
$1.20
per share.
In the event of an “Acquisition,” defined generally to include a merger or consolidation resulting in the sale of 50% or more of the voting securities of the Company, the sale of all, or substantially all, of the assets or voting securities of the Company, or other change of control transaction, as defined in the Warrants, the Company will be obligated to use its best efforts to ensure that the holders of the Warrants receive new warrants from the surviving or acquiring entity (the “Acquirer”). The new warrants to purchase shares in the Acquirer shall have the same expiration date as the Warrants and a strike price that is based on the proportion of the value of the Acquirer’s stock to the Company’s common stock. If the Company is unable, despite its best efforts, to cause the Acquirer to issue new warrants in the Acquisition as described above, then, if the Company’s stockholders are to receive cash in the Acquisition, the Company will settle the Warrants in cash and if the Company’s stockholders are to receive stock in the Acquisition, the Company will issue shares of its common stock to each Warrant holder.
Accounting for the January 2018 Financing Transaction
In assessing the accounting for the January 2018 Financing, the Company first determined that the common and preferred stock and the Warrants represented separable freestanding financial instruments.
Next, the Company determined that the Warrants should be liability classified in accordance with ASC 480,
Distinguishing Liabilities from Equity
(“ASC 480”), given the ability for the holders of the Warrants to redeem the Warrants for cash in certain Acquisition scenarios, as described above. As such, the Company allocated proceeds from the Common Stock Offering and Preferred Stock Offering in order to record the related Warrants at their fair value as of the date of issuance. In addition, the Company recorded the Warrants issued to the underwriters as part of the exercise of their Overallotment Option at their fair value as of the date of issuance. As the Warrants are liability-classified, the Company remeasures the fair value of the Warrants at each reporting date. The Company recorded the Warrants issued in the January 2018 Financing at their estimated fair value of approximately
$18.2 million
as of the issuance date. The Company recorded expense of approximately
$3.2 million
in the quarter ended March 31, 2018, income of approximately
$5.5 million
in the quarter ended June 30, 2018, and income of approximately
$2.9 million
in the quarter ended September 30, 2018, in the condensed consolidated statement of operations associated with the remeasurement of the Warrants to fair value. The fair value of the warrant liability is approximately
$13.0 million
as of
September 30, 2018
(see Note 3).
In assessing the preferred stock, the Company determined that it was more equity-like in nature, which served as the basis for evaluating the other embedded features within the preferred stock. The Company determined that the conversion feature, redemption feature and other embedded features of the preferred stock did not meet the definition of derivatives and did not require separate accounting. The Company determined that the preferred stock should be classified as permanent equity as its redemption, dividends, covenants, liquidation and conversion features are more equity-like than debt-like. The Company further assessed the conversion feature of the preferred stock to determine if it was beneficial to the holder at issuance. Given the value allocated from the preferred stock to the Warrants issued in the Preferred Stock Offering, the Company determined that the effective conversion price was in the money at issuance and calculated the intrinsic value of the beneficial conversion of approximately
$0.3 million
. The Company recorded this amount to additional paid-in capital upon the issuance of the preferred stock.
The Company determined that the Overallotment Option should be classified as a liability in accordance with ASC 480 on the basis that the Overallotment Option was exercisable for Warrants that are classified as liabilities under ASC 480. As the Overallotment Option is a traditional overallotment option that remained with the underwriters, no proceeds from the January 2018 Financing were allocated. Given the short-term duration of the Overallotment Option, the Company estimated its fair value was representative of the intrinsic value of the related Warrants, based on the estimated fair value of the Warrants at issuance and the exercise price of the Overallotment Option. The Company estimated the fair value of the Overallotment Option at the issuance to be approximately
$2.4 million
. Upon the partial exercise of the Overallotment Option by the underwriters, the Company reclassified a proportional amount of the Overallotment Option liability of
$0.9 million
to the Warrant liability, to reflect the fair value of the Warrants issued to the underwriters. Upon expiration of the Overallotment Option, the Company recognized the
$1.8 million
liability balance as expense.
In connection with the January 2018 Financing, the Company incurred approximately
$4.0 million
of issuance costs. The Company allocated approximately
$2.6 million
of the issuance costs to the common and preferred stock, and recorded these amounts against the proceeds received, and approximately
$1.4 million
of the issuance costs to the Warrants, based on the relative values assigned. As the Warrants were classified as liabilities, the Company immediately expensed the issuance costs allocated to the Warrants.
At-the-market equity offering program
On March 2, 2015, the Company entered into a Sales Agreement with Cowen and Company, LLC (the "Sales Agreement") to establish an at-the-market equity offering program (“ATM”) pursuant to which it was able to offer and sell up to
$40 million
of its common stock at prevailing market prices from time to time. On May 8, 2015, the Sales Agreement was amended to increase the offering amount under the ATM to
$50 million
of its common stock. Through
November 1, 2018
, the Company sold an aggregate of approximately
3.7 million
shares under the ATM and received approximately
$4.0 million
in net proceeds after deducting commissions.
Warrants
As of
September 30, 2018
and
December 31, 2017
, the Company had warrants outstanding that represent the right to acquire
29,342,564
and
77,603
shares of common stock, respectively. As of
September 30, 2018
, the common stock underlying the warrants consist of
28,935,550
shares of common stock reserved for issuance upon the exercise of the Warrants,
403,136
shares of common stock reserved for issuance upon the exercise of warrants issued to Hercules and
3,878
shares of common stock reserved for issuance upon the exercise of warrants issued in periods prior to the Company's initial public offering ("IPO").
8. Stock and employee benefit plans
Stock-based compensation expense
Total stock-based compensation expense is recognized for stock options and restricted stock awards granted to employees and non-employees and has been reported in the Company’s statements of operations as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
2018
|
|
2017
|
Research and development
|
$
|
156
|
|
|
$
|
322
|
|
$
|
456
|
|
|
$
|
1,060
|
|
General and administrative
|
310
|
|
|
771
|
|
1,246
|
|
|
2,208
|
|
Total
|
$
|
466
|
|
|
$
|
1,093
|
|
$
|
1,702
|
|
|
$
|
3,268
|
|
Stock options
The following table summarizes stock option activity for employees and non-employees (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term (years)
|
|
Aggregate
Intrinsic
Value
|
Outstanding at December 31, 2017
|
4,129
|
|
|
$
|
5.48
|
|
|
7.07
|
|
$
|
—
|
|
Granted
|
3,805
|
|
|
$
|
0.95
|
|
|
|
|
|
|
Exercised
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
Canceled
|
(2,242
|
)
|
|
$
|
4.64
|
|
|
|
|
|
|
Outstanding at September 30, 2018
|
5,692
|
|
|
$
|
2.78
|
|
|
7.51
|
|
$
|
75,535
|
|
Exercisable at September, 2018
|
2,378
|
|
|
$
|
4.40
|
|
|
5.26
|
|
$
|
—
|
|
Restricted stock
In May 2017, the Company granted one of its officer's
47,620
units of restricted stock ("RSUs") in accordance with the 2014 Equity Incentive Plan and subject to a Restricted Stock Unit Award Agreement with the Company. On the date of grant,
7,937
RSUs vested immediately and another
23,810
RSUs were to vest on the eighteen-month anniversary of the grant date, subject to the continued employment of the officer. The remaining
15,873
RSUs, which contained a performance condition of completing a material financing event on or before September 30, 2017, were canceled as the performance criterion was not achieved. Upon the resignation of the officer in March 2018, the remaining
23,810
RSUs were forfeited.
Performance-based awards
The Company granted stock awards to certain employees, executive officers and consultants, which contain performance-based vesting criteria. Milestone events are specific to the Company’s corporate goals, which include, but are not limited to, certain clinical development milestones, business development agreements, and capital fundraising events. Stock-based compensation expense associated with these performance-based stock options is recognized if the performance conditions are considered probable of being achieved, using management’s best estimates. The Company determined that none of the performance-based milestones were probable of achievement during the
three and nine
months ended
September 30, 2018
, respectively, and did not recognize stock-based compensation expense for these periods. As of
September 30, 2018
, there were
56,336
performance-based common stock awards outstanding for which the probability of achievement was not deemed probable.
Employee stock purchase plan
On February 10, 2014, the Company’s board of directors adopted the 2014 Employee Stock Purchase Plan (the “2014 ESPP”). The 2014 ESPP authorizes the initial issuance of up to
200,776
shares of common stock to participating eligible employees. The 2014 ESPP provides for six-month option periods commencing on January 1 and ending June 30 and commencing July 1 and ending December 31 of each calendar year.
In June of 2018,
2,500,000
additional shares were authorized under the 2014 ESPP and
42,132
shares were issued. As of
September 30, 2018
,
2,457,875
shares remain available for future issuance. The Company incurred stock-based compensation expense related to the 2014 ESPP of
$10 thousand
and
$32 thousand
the
three and nine
months ended
September 30, 2018
, respectively, and
$23 thousand
and
$99 thousand
for the
three and nine
months ended
September 30, 2017
, respectively.
9. Net loss per share
The Company computes basic and diluted earnings (loss) per share using a methodology that gives effect to the impact of outstanding participating securities (the “two-class method”). For both the
three and nine
-month periods ended
September 30, 2018
and
2017
, respectively, there is no income allocation required under the two-class method or dilution attributed to weighted average shares outstanding in the calculation of diluted loss per share.
The following common stock equivalents, presented on an as converted basis, were excluded from the calculation of net loss per share for the periods presented, due to their anti-dilutive effect (in thousands):
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
Stock options
|
5,692
|
|
|
4,400
|
|
Restricted stock units
|
—
|
|
|
24
|
|
Warrants
|
29,343
|
|
|
78
|
|
Outstanding ESPP
|
82
|
|
|
31
|
|
Total
|
35,117
|
|
|
4,533
|
|
10. Restructuring costs
On September 25, 2017, the Company announced a strategic shift to immuno-oncology and a focus on the development of neoantigen cancer vaccines, including GEN-009. The Company also announced that it is exploring strategic alternatives for GEN-003, its Phase 3-ready investigational immunotherapy for the treatment of genital herpes. Consequently, substantially all GEN-003 spending and activities were ceased, and the Company reduced its workforce by approximately
40 percent
as of the quarter ended September 30, 2017. Pursuant to ASC 420,
Exit or Disposal Cost Obligations
, charges for employee severance, employee benefits, and contract terminations were recorded in the year ended December 31, 2017. Asset impairment charges, pursuant to ASC 360,
Property, Plant, and Equipment
, were also recorded in the year ended December 31, 2017 and primarily related to fixed assets specific to GEN-003 research and development activities.
The following table summarizes the impact of the September 2017 restructuring activities for the year ended December 31, 2017 and three months ended March 31, 2018, along with the current liability recorded in the balance sheet as of December 31, 2017 and
September 30, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Charges incurred during the year ended December 31, 2017
|
|
Amount paid through December 31, 2017
|
|
Less non-cash charges during the year ended December 31, 2017
|
|
Remaining liability at December 31, 2017
|
|
Amount paid during Q1 2018
|
|
Remaining liability at September 30, 2018
|
Employee severance, benefits and related costs
|
$
|
1,064
|
|
|
$
|
(1,050
|
)
|
|
$
|
—
|
|
|
$
|
14
|
|
|
$
|
(14
|
)
|
|
$
|
—
|
|
Contract terminations
|
526
|
|
|
—
|
|
|
—
|
|
|
526
|
|
|
(526
|
)
|
|
—
|
|
Asset impairments
|
1,028
|
|
|
—
|
|
|
(1,028
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
2,618
|
|
|
$
|
(1,050
|
)
|
|
$
|
(1,028
|
)
|
|
$
|
540
|
|
|
$
|
(540
|
)
|
|
$
|
—
|
|