The operations presented in the interim consolidated financial statements and accompanying notes (A) for the three and nine months ended September 30, 2018 and that include the period from July 19, 2017 to September 30, 2017 represent the operations of the Company following the Cerulean/Private Daré stock purchase transaction, and (B) that include the period from January 1, 2017 to July 18, 2017 represent the operations of the Company when it was private, making a comparison between periods difficult. See Note 4, “Acquisitions – Cerulean/Private Daré Stock Purchase Transaction,” of the Notes to the Interim Consolidated Financial Statements (Unaudited) appearing in this report for a discussion of the Cerulean/Private Daré stock purchase transaction.
Notes to
Consolidated Financial Statements (Unaudited)
1.
ORGANIZATION AND DESCRIPTION OF THE BUSINESS
Daré Bioscience, Inc., is a clinical-stage biopharmaceutical company committed to the advancement of innovative products for women’s reproductive health. Daré Bioscience, Inc. and its wholly owned subsidiaries, Daré Bioscience Operations, Inc., Daré Bioscience Australia Pty LTD, and Pear Tree Pharmaceuticals, Inc., operate in one segment. In this report, the “Company” refers collectively to Daré Bioscience, Inc. and its wholly owned subsidiaries, unless otherwise stated or the context otherwise requires.
The Company is driven by a mission to identify, develop and bring to market a diverse portfolio of differentiated therapies that expand treatment options, improve outcomes and facilitate convenience for women, primarily in the areas of contraception, vaginal health, sexual health and fertility. The Company’s
business strategy is to license or otherwise acquire the rights to differentiated reproductive health product candidates, some of which have existing clinical proof-of-concept data, and to take those candidates through advanced stages of clinical development or regulatory approval.
The Company has assembled a portfolio of clinical-stage and preclinical-stage candidates addressing unmet needs in women’s reproductive health. The Company’s two clinical-stage assets—Ovaprene
®
and Sildenafil Cream, 3.6%—were obtained through product license and development agreements. Ovaprene,
a non-hormonal monthly contraceptive candidate
was licensed in July of 2017 and
Sildenafil Cream, 3.6%, a potential treatment for Female Sexual Arousal Disorder
was
licensed
in February of 2018. In March of 2018, the Company entered into a collaboration and option agreement covering new injectable contraceptive product candidates; in April of 2018, the Company licensed the worldwide rights to a portfolio of preclinical intravaginal rings; in May of 2018, the Company acquired a company that owns the rights to a
proprietary vaginal tamoxifen tablet to treat vulvar and vaginal atrophy; and in July of 2018, the Company acquired certain assets
related to a novel target for non-hormonal contraceptives for both men and women.
The Company’s primary operations have consisted of, and are expected to continue to consist of, product research and development and advancing its portfolio of product candidates through late-stage clinical development or regulatory approval.
The Company has not generated any revenue related to its primary business purpose to date and is subject to several risks common to clinical-stage biopharmaceutical companies, including dependence on key individuals, competition from other companies, the need to develop commercially viable products in a timely and cost-effective manner, and the need to obtain adequate additional capital to fund the development of product candidates. The Company is also subject to several risks common to other companies in the industry, including rapid technology change, regulatory approval of products, uncertainty of market acceptance of products, competition from substitute products and larger companies, compliance with government regulations, protection of proprietary technology, dependence on third parties, and product liability.
2.
LIQUIDITY
The Company has a history of losses from operations and anticipates that it will continue to incur losses for at least the next several years. For the nine months ended September 30, 2018, the Company incurred a net loss of $13.8 million. At September 30, 2018, the Company had an accumulated deficit of approximately $26.1 million and had cash and cash equivalents of approximately $9.5 million. The Company also had negative cash flow from operations of approximately $7.6 million during the nine months ended September 30, 2018.
During the first quarter of 2018, the Company received gross proceeds of approximately $11.3 million, resulting in net proceeds of approximately $10.1 million, from sales of its securities in registered offerings (see Note 7). During the third quarter, the Company received approximately $144,000 from a federal grant.
4
The Company is focused primarily on the
development and commercialization of innovative products in women’s reproductive health
. T
he Company
will
continue
to
incur significant research and development and other expenses related to th
ese
activities
. If the clinical trials for
any of
the Company’s product candidates fail to produce successful results
such that
those product candidates do not advance in clinical development, then the Company’s business and prospects may suffer. Even if t
he product candidates advance in clinical development, they may fail to gain regulatory approval. Even if the product candidates are approved, they may fail to achieve market acceptance, and the Company may never become profitable. Even if the Company beco
mes profitable, it may not sustain profitability.
As of
the date of
this report and based on
current
business plan estimates, the Company believes it has sufficient cash to fund its operating expenses over at least the next twelve months from the date of issuance of these consolidated financial statements.
Although the Company has cash and cash equivalents of approximately $9.5 million at September 30, 2018, the Company will need to raise additional capital through financings, government or other grant funding, collaborations and strategic alliances or other similar types of arrangements to cover its operating expenses, including the development of its product candidates and any future product candidates it may license or otherwise acquire. The Company cannot be sure that capital will be available when needed or that, if available, it will be obtained on terms favorable to the Company or its stockholders. The interim consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
3.
Summary of Significant Accounting Policies
The Company’s significant accounting policies are described in Note 1 to the interim consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission, or SEC on March 28, 2018. Since the date of those financial statements, there have been no material changes to the Company’s significant accounting policies, except as described below.
Basis of Presentation
The accompanying interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP, as defined by the Financial Accounting Standards Board, or FASB, for interim financial information and the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In management’s opinion, the accompanying interim consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the results of the interim periods presented.
Interim financial results are not necessarily indicative of results anticipated for any other interim period or for the full year. The accompanying interim consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
Reverse Stock Split
On July 20, 2017, the Company effected
a
1-for-10 reverse stock split
of its
common stock.
All share and per share amounts of common stock, options and warrants in these notes and those amounts included in the accompanying interim consolidated financial statements, have been restated for all periods to give retroactive effect to the reverse stock split.
5
Use of Estimates
Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the fair value of stock-based compensation, goodwill impairment and purchase accounting. Actual results could differ from those estimates and could materially affect the reported amounts of assets, liabilities and future operating results.
Principles of Consolidation
The interim consolidated financial statements of the Company are stated in U.S. dollars and are prepared using GAAP. These financial statements include the accounts of the Company and its wholly owned subsidiaries, Daré Bioscience Operations, Inc., Daré Bioscience Australia Pty LTD, and Pear Tree Pharmaceuticals, Inc. The financial statements of the Company’s wholly owned subsidiaries are recorded in their functional currency and translated into the reporting currency. The cumulative effect of changes in exchange rates between the foreign entity’s functional currency and the reporting currency is reported in accumulated other comprehensive loss in the interim consolidated balance sheets. All significant intercompany transactions and accounts have been eliminated in consolidation.
Grant Funding
The Company receives certain research and development funding through a grant issued by a division of the National Institutes of Health. The funding is recognized in the statement of operations as a reduction to research and development expense as the related costs are incurred to meet those obligations over the grant period. The Company adopted this policy in 2018. During the three and nine months ended September 30, 2018, the Company recognized approximately $213,000 in the statement of operations as a reduction to research and development expense.
Fair Value Measurements
GAAP defines fair value as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date, and also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available. The three-level hierarchy of valuation techniques established to measure fair value is defined as follows:
|
•
|
Level 1: inputs are unadjusted quoted prices in active markets for identical assets or liabilities.
|
|
•
|
Level 2: inputs other than level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of assets or liabilities.
|
|
•
|
Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
Cash and cash equivalents of $9.5 million and $7.6 million measured at fair value as of September 30, 2018 and December 31, 2017, respectively, are classified within Level 1 of the fair value hierarchy. Other receivables are financial assets with carrying values that approximate fair value due to the short-term nature of these assets. Accounts payable and accrued expenses and other liabilities are financial liabilities with carrying values that approximate fair value due to the short-term nature of these liabilities.
6
Recent Pronouncements
Not Yet Adopted
In February 2016, FASB issued ASU 2016-02,
Leases (Topic 842)
, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The new standard is effective for public companies for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is still in the process of evaluating the effect of adoption on its financial statements and expects to adopt the standard on January 1, 2019. The adoption is expected to lead to an increase in the assets and liabilities recorded on the Company’s balance sheets due to the lease agreement attributable to leased office space.
Recently Adopted Accounting Standards
In May 2014, FASB issued Accounting Standards Update, or ASU, 2014-09,
Revenue from Contracts with Customers
, which impacts the way in which some entities recognize revenue for certain types of transactions. The new standard became effective beginning in 2018 for public companies. Because the Company does not currently have any contracts with customers, the Company’s adoption of this accounting standard did not impact the Company’s interim consolidated financial statements.
In August 2016, FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
, which intended to add or clarify guidance on the classification of certain cash receipts and payments on the statement of cash flows. The new guidance addresses cash flows related to: debt prepayment or extinguishment costs, settlement of zero-coupon bonds, 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 and bank-owned life insurance policies, distributions received from equity method investees, beneficial interest in securitization transactions, and the application of predominance principle to separately identifiable cash flows. The standard became effective on January 1, 2018. The Company’s adoption of this standard on January 1, 2018 did not have a material impact on the Company’s interim consolidated financial statements.
In January 2017, FASB issued ASU 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
, which intended to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The standard became effective for the Company on January 1, 2018. The Company’s early adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
In January 2017, FASB issued ASU 2017-04,
Simplifying the Test for Goodwill Impairment (Topic 350)
. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance should be adopted on a prospective basis for the annual or any interim goodwill impairment tests beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company’s adoption of this standard on September 30, 2017 did not have a material impact on the Company’s consolidated financial statements.
7
In May 2017, FASB issued ASU 2017-09,
Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting
, which intended to provide clarity when to account for a chan
ge to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes
as a result of the change in terms or conditions. The standard
became
effective for the
Company
on
January 1, 2018
. The Company’s adoption of this standard did not have a material impact on the Company’s
consolidated
financial statements.
In July 2017, FASB issued ASU 2017-11,
Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815): (I) Accounting for Certain Financial Instruments with Down Round Features, (II) Replacement for the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception.
This update was issued to provide additional clarity related to accounting for certain financial instruments that have characteristics of both liabilities and equity. In particular, this update addresses freestanding and embedded financial instruments with down round features and whether they should be treated as a liability or equity instrument. Part II simply replaces the indefinite deferral for certain mandatorily redeemable non-controlling interests and mandatorily redeemable financial instruments of nonpublic entities contained within the ASC Topic 480 with a scope exception and does not impact the accounting for these mandatorily redeemable instruments. For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company has early adopted ASU 2017-11. As a result, the Company has not recognized the fair value of the warrants containing down round features that were issued in the underwritten offering in February 2018 (see Note 7) as liabilities.
4.
Acquisitions
Cerulean/Private Dare Stock Purchase Transaction
On July 19, 2017, the Company completed its business combination with Daré Bioscience Operations, Inc., a privately held Delaware corporation, or Private Daré, in accordance with the terms of the Stock Purchase Agreement dated as of March 19, 2017, or the Daré Stock Purchase Agreement, by and among the Company, Private Daré and the holders of capital stock and securities convertible into capital stock of Private Daré named therein, or the Private Daré Stockholders. Pursuant to the Daré Stock Purchase Agreement, each Private Daré Stockholder sold their shares of capital stock in Private Daré to the Company in exchange for newly issued shares of the Company’s common stock, and as a result, Private Daré became a wholly owned subsidiary of the Company and the Private Daré Stockholders became majority stockholders of the Company. In connection with the closing of that transaction, the Company changed its name from “Cerulean Pharma Inc.” to “Daré Bioscience, Inc.” In this report, that transaction is referred to as the Cerulean/Private Daré stock purchase transaction and “Cerulean” refers to Cerulean Pharma Inc. before that transaction closed.
8
The
Cerulean/Private Daré stock purchase transaction
was accounted for as a reverse merger under the acquisition method of accounting whereby Private Daré was considered to have acquired Cerulean for financial reporting purposes because immediately upon completion of the
transaction
, Private Daré stockholder
s held a majority of the voting interest of the combined company. Pursuant to business combination accounting, the Company applied the acquisition method, which requires the assets acquired and liabilities assumed be recorded at fair value with limited exc
eptions. The excess of the purchase price over the assets acquired and liabilities assumed represents goodwill. The goodwill is primarily attributable to the cash and cash equivalents at closing of
the transaction of
approximately $9.9 million and the impa
ct of the unamortized fair value of stock options
granted by Cerulean that were
out
standing immediately before
the transaction
closed
of approximately
$3.7 million
. The unamortized fair value of
such
stock options relates to an option modification approved
on March 19, 2017 that provided for an acceleration of vesting
of such options
upon a change in control event. Such modification became effective upon the
closing
of the
Cerulean/Private Daré stock purchase transaction
. Hence, the unamortized fair value o
f such
stock
options is deemed to be part of total purchase consideration and goodwill. Transaction costs associated with the
Cerulean/Private Daré stock purchase transaction
of $
0.96 million
are included in general and administrative expense. The total pu
rchase price consideration of approximately
$24.3 million
represents the fair value of the shares of Cerulean stock issued in connection with the
Cerulean/Private Daré stock purchase transaction
and the unamortized fair value of
the stock
options
described
above
,
which was allocated as follows:
Purchase Consideration
|
|
(in thousands)
|
|
Fair value of shares issued
|
|
$
|
20,625
|
|
Unamortized fair value of Cerulean options
|
|
|
3,654
|
|
Fair value of total consideration
|
|
$
|
24,279
|
|
Assets acquired and liabilities assumed
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
9,918
|
|
Prepaid expense and other current assets
|
|
|
1,915
|
|
Accounts payable
|
|
|
(233
|
)
|
Total assets acquired and liabilities assumed
|
|
|
11,600
|
|
Goodwill
|
|
$
|
12,679
|
|
The final allocation of the purchase price depended on finalizing the valuation of the fair value of assets acquired and liabilities assumed. The Company retrospectively recorded purchase price adjustments at the acquisition date to increase current liabilities and current assets by $23,609 and $225,778, respectively, which reduced the original goodwill amount of $12.9 million by $202,169.
The Company tests its goodwill for impairment at least annually as of December 31 and between annual tests if it becomes aware of an event or change in circumstance that would indicate the carrying value may be impaired. The Company tests goodwill for impairment at the entity level because it operates on the basis of a single reporting unit. A goodwill impairment is the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. When impaired, the carrying value of goodwill is written down to fair value. Any excess of the reporting unit goodwill carrying value over the fair value is recognized as impairment loss.
The Company assessed goodwill at December 31, 2017. The Company determined there was an impairment and recognized an impairment charge of approximately $7.5 million in the consolidated statement of operations and comprehensive loss for the year ended December 31, 2017 and reduced the goodwill carrying value from approximately $12.7 million to $5.2 million on its consolidated balance sheet as of December 31, 2017.
The Company assessed goodwill at March 31, 2018, determined there was an impairment and recognized an impairment charge of approximately $5.2 million in the interim consolidated statement of operations and comprehensive loss for the three months ended March 31, 2018. As of March 31, 2018, the goodwill carrying value on the Company’s consolidated balance sheet was written off in its entirety.
9
Pear
Tree
Merger
On April 30, 2018, the Company entered into an Agreement and Plan of Merger, the Merger Agreement, with Pear Tree Pharmaceuticals, Inc., or Pear Tree, Daré Merger Sub, Inc., a wholly-owned subsidiary of the Company, or Merger Sub, and two individuals in their respective capacities as Pear Tree stockholders’ representatives. The transactions contemplated by the Merger Agreement closed on May 16, 2018, and as a result, Pear Tree became the Company’s wholly owned subsidiary. The Company acquired Pear Tree to secure the rights to develop DARE-VVA1, a proprietary vaginal formulation of tamoxifen, as a potential treatment for vulvar and vaginal atrophy.
The Company determined that the acquisition of Pear Tree should be accounted for as an asset acquisition instead of a business combination because substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, and therefore, the asset is not considered a business. Transaction costs of approximately $452,000 associated with the merger are included in the Company’s research and development expense.
In accordance with the terms of the Merger Agreement, because the Negative Consideration Amount (as defined below) exceeded the Positive Consideration Amount (as defined below), at the time of the closing of the merger, the excess amount (approximately $132,000) will be offset against future payments otherwise due under the Merger Agreement to certain former and continuing Pear Tree service providers and former holders of Pear Tree’s capital stock, or the Holders, including the potential
$75,000 payment due on the one-year anniversary of the closing of the merger. Positive Consideration Amount means the sum of $75,000, and the cash and cash equivalents held by Pear Tr
ee at closing, and Negative Consideration Amount means the sum of (i) certain Pear Tree
indebtedness and transaction expenses, (ii) transaction expenses of the stockholders’ representatives,
and (iii) amounts payable under Pear Tree’s management incentive plan.
Under the Merger Agreement, the Holders will be eligible to receive, subject to certain offsets, tiered royalties, including customary provisions permitting royalty reductions and offset, based on percentages of annual net sales of certain products subject to license agreements the Company assumed and a percentage of sublicense revenue. The Company must also make contingent payments to the Holders that are based on achieving certain clinical, regulatory and commercial milestones, which may be paid, in the Company’s sole discretion, in cash or shares of the Company’s common stock.
5.
Convertible Promissory Notes
Prior to the Cerulean/Private Daré stock purchase transaction, Private Daré financed its operations through the sale of convertible promissory notes that entitled the holder to accrued interest at an annual rate of 8%. In the event of a preferred stock financing by Private Daré, all outstanding principal and unpaid interest under the convertible promissory notes would have converted into the shares of Private Daré’s preferred stock issued in such financing at the price per share paid by the purchasers of such shares and an additional number of shares equal to, depending on the time of purchase, 20% to 40% of the outstanding principal and unpaid interest, or the conversion benefit. Private Daré issued a convertible promissory note in the principal amount of $100,000 in February 2017 and issued additional convertible promissory notes in the aggregate principal amount of $55,000 between April 1, 2017 and June 6, 2017.
In connection with the Cerulean/Private Daré stock purchase transaction, all outstanding convertible promissory notes were amended to provide that their principal amount plus accrued interest and taking into account their conversion benefit, would convert into shares of Private Daré common stock immediately prior to the closing of the Cerulean/Private Daré stock purchase transaction. The number of shares of Private Daré common stock issued upon conversion of the convertible promissory notes issued before March 31, 2017 was equal to (i) their outstanding principal amount plus accrued interest through March 31, 2017 multiplied by the respective conversion benefit, which ranged from 125% to 140%, divided by (ii) $0.18727. The number of shares of Private Daré common stock issued upon conversion of the convertible promissory notes issued after March 31, 2017 was equal to (i) 120% of their outstanding principal amount, divided by (ii) $0.38.
10
In connection with
the closing of the
Cerulean/Private Daré stock purchase transaction
, all the
outstanding
shares of
Private Daré
common stock
,
including the shares issued upon conversion of the above described convertible promissory notes,
were exchanged for shares of
the Company’s common stock
at
the exchange ratio
specified
in the
Daré
Stock Purchase Agreement.
The Company recognized interest expense of $0 and $316,804 at September 30, 2018 and September 30, 2017, respectively, relating to the convertible promissory notes.
6.
Stock-based Compensation
The 2015 Employee, Director and Consultant Equity Incentive Plan
Prior to the Cerulean/Private Daré stock purchase transaction, the 2015 Employee, Director and Consultant Equity Incentive Plan of Private Daré, or the 2015 Private Daré Plan, governed the issuance of equity awards to Private Daré employees, officers, non-employee directors and consultants. Options granted under the 2015 Private Daré Plan have terms of ten years from the date of grant unless earlier terminated and generally vest over a three-year period. Upon closing of the Cerulean/Private Daré stock purchase transaction, the Company assumed the 2015 Private Daré Plan and each outstanding option to acquire Private Daré stock that was not exercised prior to the closing. Options to purchase 50,000 shares of Private Daré stock were assumed. Such options were assumed on the same terms as were applicable to them under the 2015 Private Daré Plan and became an option to purchase such number of shares of the Company’s common stock equal to the number of Private Daré shares subject to such option multiplied by the exchange ratio specified in the Daré Stock Purchase Agreement, at a correspondingly adjusted exercise price. Based on the exchange ratio and after giving effect to the reverse stock split effected in connection with the closing of the Cerulean/Private Daré stock purchase transaction, such options were replaced with options to purchase 10,149 shares of the Company’s common stock, all of which were outstanding as of September 30, 2018.
Private Daré issued 900,000 and 200,000 shares of fully vested restricted stock to non-employees under the 2015 Private Daré Plan during 2015 and 2016, respectively. In connection with the closing of the Cerulean/Private Daré stock purchase transaction, the Company assumed these shares and replaced them with 223,295 restricted shares of the Company’s common stock (after giving effect to the reverse stock split effected in connection with the closing of the Cerulean/Private Daré stock purchase transaction).
No further awards may be granted under the 2015 Private Daré Plan following the closing of the Cerulean/Private Daré stock purchase transaction.
2014 Employee Stock Purchase Plan
In March 2014, the Company’s board of directors adopted, and its stockholders approved the 2014 Employee Stock Purchase Plan, or the ESPP, which became effective in April 2014. The ESPP permits eligible employees to enroll in a six-month offering period whereby participants may purchase shares of the Company’s common stock, through payroll deductions, at a price equal to 85% of the closing price of the common stock on the first day of the offering period or on the last day of the offering period, whichever is lower. Purchase dates under the ESPP occur on or about June 30 and December 31 each year. The Company’s board of directors decided not to initiate a new offering period beginning January 1, 2017 and no offering period has been initiated since then. There was no stock-based compensation related to the ESPP for the nine months ended September 30, 2018 or September 30, 2017.
Amended and Restated 2014 Stock Incentive Plan
The Company maintains
the Amended and Restated 2014 Plan, or the Amended 2014 Plan, which was
approved by the Company’s stockholders on July 10, 2018. The Amended 2014 Plan was an amendment and
restatement of the Company’s 2014 Stock Incentive Plan, or the 2014 Plan.
11
The number of shares authorized for issuance under the Amended 2014 Plan is
2,046,885, which is the sum of (a) 1,509,463 shares of common stock plus (b) 537,422 shares of common st
ock subject to awards granted under the 2014 Plan.
The number of authorized shares will increase annually
on the first day of each fiscal year until, and including, the fiscal year ending December 31, 2024
by the least of (i) 2,000,000
, (ii) 4% of the numb
er of outstanding shares of common stock on such date
,
or (iii) an amount determined by the Company’s board of directors.
In March 2017, the Company’s board of directors approved two modifications to outstanding stock options granted under the 2014 Plan to participants providing services to the Company as of that date. One modification extended the exercise period of such stock options to two years after such participant’s termination date, unless the exercise period absent such modification would be longer. The other modification provided for accelerated vesting of such stock options upon a change in control event. These modifications resulted in unamortized fair value expense of approximately $3.7 million and was recorded as part of the total consideration in the Cerulean/Private Daré stock purchase transaction (see Note 4).
The two modifications resulted in certain options remaining outstanding that would have otherwise expired.
At September 30, 2018, 451,244 shares of common stock were reserved for future issuance under the Amended 2014 Plan, and options to purchase 1,605,790 shares of the Company’s common stock granted under the Amended 2014 Plan were outstanding.
Summary of Stock Option Activity
The table below summarizes stock option activity under the Amended 2014 Plan, and related information for the nine months ended September 30, 2018. The exercise price of all options granted during the nine months ended September 30, 2018 was equal to the market value of the Company’s common stock on the date of the grant. As of September 30, 2018, unamortized stock-based compensation expense of $1,089,491 will be amortized over a weighted average period of 3.6 years.
|
|
Number of Shares
|
|
|
Weighted Average
Exercise Price
|
|
Outstanding at December 31, 2017
(1)
|
|
|
539,896
|
|
|
$
|
31.40
|
|
Granted
|
|
|
1,066,050
|
|
|
|
1.09
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Cancelled/expired
|
|
|
(156
|
)
|
|
|
59.48
|
|
Outstanding at September 30, 2018 (unaudited)
|
|
|
1,605,790
|
|
|
$
|
11.27
|
|
Exercisable at September 30, 2018 (unaudited)
|
|
|
535,031
|
|
|
$
|
31.62
|
|
|
(1)
|
Includes 10,149 shares subject to options granted under the 2015 Private Daré Plan assumed in connection with the Cerulean/Private Daré stock purchase transaction.
|
Compensation Expense
Total stock-based compensation expense related to stock options granted to employees and directors recognized in the consolidated statement of operations is as follows:
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
September 30,
|
|
|
September 30,
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Research and development
|
$
|
5,494
|
|
|
$
|
—
|
|
|
$
|
5,994
|
|
|
$
|
—
|
|
General and administrative
|
|
34,497
|
|
|
|
6,947
|
|
|
|
52,544
|
|
|
|
6,953
|
|
Total
|
$
|
39,991
|
|
|
$
|
6,947
|
|
|
$
|
58,538
|
|
|
$
|
6,953
|
|
12
The assumptions used in the Black-Scholes option-pricing model
for stock options granted to employees and to directors in respect of
board services during the
three and n
ine
months ended
September 30, 2018
are as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2018
|
|
|
September 30, 2018
|
|
Expected life in years
|
|
|
10.0
|
|
|
|
10.0
|
|
Risk-free interest rate
|
|
2.90%
|
|
|
2.90%
|
|
Expected volatility
|
|
123%
|
|
|
123%
|
|
Forfeiture rate
|
|
0.0%
|
|
|
0.0%
|
|
Dividend yield
|
|
0.0%
|
|
|
0.0%
|
|
Weighted-average fair value of options granted
|
|
$
|
1.03
|
|
|
$
|
1.04
|
|
Restricted Stock After the Cerulean/Private Daré Stock Purchase Transaction
The 3.14 million shares of common stock issued in connection with the Cerulean/Private Daré stock purchase transaction to the Private Daré stockholders were not registered with the SEC and may only be sold if registered under the Securities Act of 1933, as amended, or pursuant to an exemption from the registration requirements thereunder. The shares held by non-affiliates became eligible for sale
under Rule 144 beginning
six months after the closing of the Cerulean/Private Daré stock purchase transaction
.
7.
Stockholders’ Equity
ATM Sales Agreement
In January 2018, the Company entered into a common stock sales agreement under which the Company may sell up to an aggregate of $10 million in gross proceeds through the sale of shares of common stock from time to time in “at-the-market” equity offerings (as defined in Rule 415 promulgated under the Securities Act of 1933, as amended), including in sales made directly on the Nasdaq Capital Market, or Nasdaq, to or through a market maker or, subject to our prior approval, in negotiated transactions. The Company agreed to pay a commission of up to 3% of the gross proceeds of any common stock sold under this agreement plus certain legal expenses. The common stock sales agreement was amended in August 2018 to refer to the Company’s shelf registration statement on Form S-3 (File No. 333-227019) that was filed to replace the Company’s shelf registration statement on Form S-3 (File No. 333-206396) that expired on August 28, 2018.
During the nine months ended September 30, 2018, the Company issued and sold 375,000 shares under the common stock sales agreement for gross proceeds of approximately $1.0 million and incurred offering expenses of approximately $336,000. All such shares were sold during January and February 2018.
Underwritten Public Offering
In February 2018, the Company closed an underwritten public offering of 5.0 million shares of its common stock and warrants to purchase up to 3.5 million shares of its common stock. Each share of common stock was sold with a warrant to purchase up to 0.70 of a share of the Company’s common stock. The Company granted the underwrit
er a 30-day overallotment option to purchase up to an additional 750,000 shares of common stock and/or warrants to purchase
up to 525,000 shares of common stock
. The underwriter exercised the
option with respect to
warrants to purchase 220,500 shares of common stock. The Company received gross proceeds of $10.3 million, including the proceeds from the sale of the warrants upon exercise of the underwriter’s overallotment option, and net proceeds of approximately $9.4 million.
13
Common Stock Warrants
The warrants issued in the February 2018 underwritten offering have an exercise price of $3.00 per share and
are exercisable immediately and for five years from issuance.
The warrants include a price-based anti-dilution provision, which provides that, subject to certain limited exceptions, the exercise price of the warrants will be adjusted downward if the Company issues or sells (or is deemed to issue or sell) securities at a price that is less than the exercise price in effect immediately prior to such issuance or sale (or deemed issuance or sale). In that case, the exercise price of the warrants will be adjusted to equal the price at which the new securities are issued or sold (or are deemed to have been issued or sold). In addition, subject to certain exceptions, if the Company issues, sells or enters into any agreement to issue or sell securities at a price which varies or may vary with the market price of the shares of the Company’s common stock, the warrant holders have the right to substitute such variable price for the exercise price of the warrant then in effect. The warrants are exercisable only for cash, unless a registration statement covering the shares issued upon exercise of the warrants is not effective, in which case the warrants may be exercised on a cashless basis.
The Company has estimated the fair value of the warrants as of February 15, 2018 to be approximately $3.0 million which has been recorded in equity as of the grant date. The Company early adopted ASU 2017-11 and as a result has recorded the fair value of the warrants as equity (see Note 3).
No warrants were exercised during the nine months ended September 30, 2018 or 2017. During the nine months ended September 30, 2018, warrants to purchase 170 shares of the Company’s common stock expired. As of September 30, 2018, the Company had these warrants outstanding:
Shares Underlying
Outstanding Warrants
|
|
|
Exercise Price
|
|
|
Expiration Date
|
|
2,906
|
|
|
$
|
120.40
|
|
|
December 1, 2021
|
|
3,737
|
|
|
$
|
120.40
|
|
|
December 6, 2021
|
|
17,190
|
|
|
$
|
60.50
|
|
|
January 8, 2020
|
|
6,500
|
|
|
$
|
10.00
|
|
|
April 4, 2026
|
|
3,720,500
|
|
|
$
|
3.00
|
|
|
February 15, 2023
|
|
3,750,833
|
|
|
|
|
|
|
|
8.
Commitments and Contingencies
License and Research Agreements
ADVA-Tec License Agreement
In March 2017, the Company entered into a license agreement, or the ADVA-Tec Agreement, with ADVA-Tec, Inc., or ADVA-Tec, under which the Company was granted the exclusive right to develop and commercialize Ovaprene for human contraceptive use worldwide. ADVA-Tec and its affiliates own issued patents or patent applications covering Ovaprene and control proprietary trade secrets covering the manufacture of Ovaprene. As of the date of this report, this patent portfolio includes 12 issued patents worldwide and 8 patent applications, all of which are exclusively licensed to the Company for the human contraceptive use of Ovaprene under the terms of the ADVA-Tec Agreement. The license continues on a country-by-country basis until the later of the life of the licensed patents or the Company’s last commercial sale of Ovaprene. The Company also has a right of first refusal to license these patents and patent applications for additional indications for Ovaprene.
The following is a summary of certain terms of the ADVA-Tec Agreement:
•
Research and Development.
ADVA-Tec will conduct certain research and development work as necessary to allow the Company to seek a Premarket Approval, or PMA, from the United States Food and Drug Administration, or the FDA, and will supply the Company
with its requirements of Ovaprene for clinical and commercial use on commercially reasonable terms.
The Company must use commercially reasonable efforts to develop and commercialize Ovaprene, and must meet certain
14
minimum spending amounts per year, such a
mounts totaling $5.0 million in the aggregate over the first three years, to cover such activities until a final PMA is filed, or until the first commercial sale of Ovaprene, whichever occurs first.
•
Milestone Payments.
The Company must make payments of up to $14.6 million in the aggregate to ADVA-Tec based on the achievement of specified development and regulatory milestones, which include the completion of a successful Postcoital Clinical Trial Study (as defined in the ADVA-Tec Agreement); approval by the FDA to commence the Phase 3 pivotal human clinical trial; successful completion of the Phase 3 pivotal human clinical trial; the FDA’s acceptance of the filing of a PMA for Ovaprene; the FDA’s approval of the PMA for Ovaprene; obtaining Conformité Européenne Marking of Ovaprene in at least three designated European countries; obtaining regulatory approval in at least three designated European countries; and obtaining regulatory approval in Japan. The Company is also required to make up to $20 million in the aggregate in commercial milestone payments to ADVA-Tec upon reaching certain worldwide net sales milestones. Because these milestone payments depend upon the successful progress of the Company’s product development programs, the Company cannot estimate with certainty when these payments will occur, if ever.
•
Royalty Payments.
After the commercial launch of Ovaprene, the Company is required to make royalty payments to ADVA-Tec based on aggregate annual net sales of Ovaprene in specified regions, which percentage royalty rate will vary between 1% and 10% and will increase based on various net sales thresholds.
•
Termination Rights.
The ADVA-Tec Agreement includes customary termination rights for both parties and provides the Company the right to terminate with or without cause in whole or on a country-by-country basis upon 60 days prior written notice. ADVA-Tec may terminate the agreement if the Company fails to do any of the following: (i) satisfy the annual spending obligation described above, (ii) use commercially reasonable efforts to complete all necessary pre-clinical and clinical studies required to support and submit a PMA, (iii) conduct clinical trials as set forth in the development plan that is agreed by the Company and ADVA-Tec, and as may be modified by a joint research committee, where such failure is not caused by events outside of the Company’s reasonable control, or (iv) enroll a patient in the first non-significant risk medical device study or clinical trial as allowed by an institutional review board within six months of the production and release of Ovaprene, where non-enrollment is not caused by events outside of its reasonable control. In addition, ADVA-Tec may terminate the ADVA-Tec Agreement if the Company develops or commercializes any non-hormonal ring-based vaginal contraceptive device deemed competitive to Ovaprene or, in certain limited circumstances, if the Company fails to commercialize Ovaprene in certain design
ated countries within three years of the first commercial sale of Ovaprene.
SST License and Collaboration Agreement
In February 2018, the Company entered into a license and collaboration agreement, or the SST License Agreement, with Strategic Science & Technologies-D, LLC and Strategic Science & Technologies, LLC, referred to collectively as SST. Under the SST License Agreement, the Company was required to secure an investment of at least $10 million by March 31, 2018, which it did. The SST License Agreement provides the Company with an exclusive, royalty-bearing, sublicensable license to develop and commercialize, in all countries and geographic territories of the world, for all indications for women related to female sexual dysfunction and/or female reproductive health, including treatment of female sexual arousal disorder, or the Field of Use, SST’s topical formulation of Sildenafil Cream, 3.6% as it exists as of the effective date of the SST License Agreement, or any other topically applied pharmaceutical product containing sildenafil or a salt thereof as a pharmaceutically active ingredient, alone or with other active ingredients, but specifically excluding any product containing ibuprofen or any salt derivative of ibuprofen, or the Licensed Products.
15
The following is a summary of certain
terms of the SST License Agreement
:
•
Invention Ownership.
The Company retains rights to inventions made by its employees, SST retains rights to inventions made by its employees, and each party shall own a 50% undivided
interest in all joint inventions.
•
Joint Development Committee
. The parties will collaborate through a joint development committee that will determine
the strategic objectives for, and generally oversee, the development efforts of both parties under the SST License Agreement.
•
Development.
The Company must use commercially reasonable efforts to develop the Licensed Products in the Field of Use in accordance with a development plan in the SST License Agreement, and to commercialize the Licensed Products in the Field of Use. The Company is responsible for all reasonable internal and external costs and expenses incurred by SST in its performance of the development activities it must perform under the SST License Agreement.
•
Royalty Payments.
SST will be eligible to receive tiered royalties based on percentages of annual net sales of Licensed Products in the single digits to the mid double digits, subject to customary royalty reductions and offsets, and a percentage of sublicense revenue.
•
Milestone Payments.
SST will be eligible to receive payments ranging from $0.5 million to $18.0 million on achieving certain clinical and regulatory milestones in the U.S. and worldwide, and an additional $10.0 million to $100 million upon achieving certain commercial milestones. If the Company enters into strategic development or distribution partnerships related to the Licensed Products, additional milestone payments would be due to SST.
•
License Term.
The Company’s license received under the SST License Agreement continues on a country-by-country basis until the later of 10 years from the date of the first commercial sale of such Licensed Product or the expiration of the last valid claim of patent rights covering the Licensed Product in the Field of Use. Upon expiration (but not termination) of the SST License Agreement in a particular country, the Company will have a fully paid-up license under the licensed intellectual property to develop and commercialize the applicable Licensed Products in the applicable country on a non-exclusive basis.
•
Termination.
Each party has customary rights to terminate the SST License Agreement in the event of material uncured breach by the other party. In addition: (1) prior to receipt of approval by a regulatory authority necessary for commercialization of a Licensed Product in the corresponding jurisdiction, including New Drug Application Approval, or NDA Approval, the Company may terminate the SST License Agreement without cause upon 90 days prior written notice to SST; (2) following receipt of approval by a regulatory authority necessary for commercialization of a Licensed Product in the corresponding jurisdiction, including NDA Approval, the Company may terminate the SST License Agreement without cause upon one 180 days prior written notice; and (3) SST may terminate the SST License Agreement with respect to the applicable Licensed Product(s) in the applicable country(ies) upon 30 days’ notice to the Company if the Company fails to use commercially reasonable efforts to perform development activities in substantial accordance with the development plan and does not cure such failure within 60 days of receipt of SST’s notice thereof.
Orbis Development and Option Agreement
In March 2018, the Company entered into an exclusive development and option agreement, or the Orbis Agreement, with Orbis Biosciences, or Orbis, for the development of long-acting injectable etonogestrel contraceptive with 6- and 12-month durations (ORB-204 and ORB-214, respectively). The Company agreed to pay Orbis $300,000 to conduct the first stage of development work, Stage 1, as follows: $150,000 upon signing the Orbis Agreement, $75,000 at the 50% completion point, not later than 6 months following the date the Orbis Agreement was signed, and $75,000 upon delivery by Orbis of the 6-month batch, not later than 11 months following the date the Orbis Agreement was signed. Upon Orbis successfully completing Stage 1 of the development program and achieving the predetermined target
16
milestones for Stage 1, the Company will have 90 days to instruct Orbis whether to commence the second stage of development work, Stage 2. Should the Company execute its option t
o proceed
to Stage 2, it will have
to provide additional funding to Orbis for such activities.
Pre-clinical studies for the 6- and 12-month formulations have been completed, including establishing pharmacokinetics and pharmacodynamics profiles. The collaboration with Orbis will continue to advance the program through formulation optimization with the goal of achieving sustained release over the target time period.
The Orbis Agreement provides the Company with an option to enter into a license agreement for
ORB-204 and ORB-214 should development efforts be successful.
Juniper Pharmaceuticals - License Agreement
In April 2018, the Company entered into an Exclusive License Agreement, or the Juniper License Agreement, with Juniper Pharmaceuticals, Inc., or Juniper, under which Juniper granted the Company (a) an exclusive, royalty-bearing worldwide license under certain patent rights, either owned by or exclusively licensed to Juniper, to make, have made, use, have used, sell, have sold, import and have imported products and processes; and (b) a non-exclusive, royalty-bearing worldwide license to use certain technological information owned by Juniper to make, have made, use, have used, sell, have sold, import and have imported products and processes. The Company is entitled to sublicense the rights granted to it under the Juniper License Agreement.
The following is a summary of certain terms of the Juniper License Agreement:
•
Upfront Fee.
The Company paid a $250,000 non-creditable upfront license fee to Juniper in connection with the execution of the Juniper License Agreement.
•
Annual Maintenance Fee
. The Company will pay an annual license maintenance fee to Juniper on each anniversary of the date of the Juniper License Agreement, the amount of which will be $50,000 for the first two years and $100,000 thereafter, and which will be creditable against royalties and other payments due to Juniper in the same calendar year but may not be carried forward to any other year.
•
Milestone Payments.
The Company must make potential future development and sales milestone payments of up to $43.8 million (up to $13.5 million in clinical and regulatory milestones and up to $30.3 million in sales milestones) for each product or process covered by the licenses granted under the Juniper License Agreement.
•
Royalty Payments
. During the royalty term, the Company will pay Juniper mid-single-digit to low double-digit royalties based on worldwide net sales of products and processes covered by the licenses granted under the Juniper
License
Agreement. In lieu of such royalty payments, the Company will pay Juniper a low double-digit percentage of all sublicense income that the Company receives for the sublicense of rights under the Juniper License Agreement to a third party. The royalty term, which is determined on a country-by-country basis and product-by-product basis (or process-by-process basis), begins with the first commercial sale of a product or process in a country and terminates on the latest of (1) the expiration date of the last valid claim within the licensed patent rights with respect to such product or process in such country, (2) 10 years following the first commercial sale of such product or process in such country, and (3) when one or more generic products for such product or process are commercially available in such country, except that if there is no such generic product by the 10th year following the first commercial sale in such country, then the royalty term will terminate on the 10-year anniversary of the first commercial sale in such country.
•
Efforts
. The Company must use commercially reasonable efforts to develop and make at least one product or process available to the public, which efforts include achieving specific diligence requirements by specific dates specified in the Juniper License Agreement.
17
•
Term
. Unless earlier terminated, the term of the Juniper License Agreement will continue on a country-by-country basis until the
later of (1) the expiration date of the last valid claim within such country, or (2) 10 years from the date of first commercial sale of a product or process in such country. Upon expiration (but not early termination) of the Juniper License Agreement, the
licenses granted thereunder will convert automatically to fully-paid irrevocable licenses. Juniper may terminate the Juniper License Agreement (1) upon 30 days’ notice for the Company’s uncured breach of any payment obligation under the Juniper License Ag
reement, (2) if the Company fails to maintain required insurance, (3) immediately upon the Company’s insolvency or the making of an assignment for the benefit of the Company’s creditors or if a bankruptcy petition is filed for or against the Company, which
petition is not dismissed within 90 days, or (4) upon 60 days’ notice for any uncured material breach by the Company of any of its other obligations under the Juniper License Agreement. The Company may terminate the Juniper License Agreement on a country-
by-country basis for any reason by giving 180 days’ notice (or 90 days’ notice if such termination occurs prior to receipt of marketing approval in the United States). If Juniper terminates the Juniper License Agreement for the reason described in clause (
4) above or if the Company terminates the Juniper License Agreement, Juniper will have full access including the right to use and reference all product data generated during the term of the Juniper License Agreement that is owned by the Company.
Pear Tree Acquisition
The Company may be required to make certain royalty and milestone payments under the Merger Agreement (see Note 4).
Operating Lease
The Company entered into a facility lease agreement that commenced on July 1, 2018 for 3,169 square feet of office space for its corporate headquarters. The term of the lease is 37 months and terminates on July 31, 2021. The Company has the option to extend the term of the lease for one year. The gross monthly base rent is $8,873, which will increase approximately 4% per year, subject to certain future adjustments. The base rent was abated during the second month of the lease. Future minimum lease payments at September 30, 2018 total $315,727. The Company recognizes rent expense by the straight-line method over the lease term. As of September 30, 2018, deferred rent totaled $9,292.
9.
Grant
Award
In April 2018, the Company received a Notice of Award for the first $224,665 of the anticipated $1.9 million in grant funding from the Eunice Kennedy Shriver National Institute of Child Health and Human Development, a division of the National Institutes of Health. The award will be applied to clinical development efforts supporting Ovaprene. The balance of the award is contingent upon, among other matters, assessment of the results of the first phase of the research and availability of funds. The Company must incur and track expenses eligible for reimbursement under the award and submit a detailed accounting of such expenses to receive payment. As of September 30, 2018, the Company has received payments totaling approximately $144,000. The funding is recognized in the statement of operations as a reduction to research and development activities as the related costs are incurred to meet those obligations over the period. At September 30, 2018, the Company has recorded a receivable of approximately $69,000 for expenses believed to be eligible for reimbursement incurred through September 30, 2018.
18
10
.
Net L
oss Per Share
The Company computes basic net loss per share using the weighted average number of common shares outstanding during the period. Diluted net income per share is based upon the weighted average number of common shares and potentially dilutive securities (common share equivalents) outstanding during the period. Common share equivalents outstanding, determined using the treasury stock method, are comprised of shares that may be issued under outstanding options and warrants to purchase shares of the Company’s common stock. Common share equivalents are excluded from the diluted net loss per share calculation if their effect is anti-dilutive.
The following potentially dilutive outstanding securities were excluded from diluted net loss per common share for the period indicated because of their anti-dilutive effect:
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Stock options
|
|
|
1,605,790
|
|
|
|
545,640
|
|
|
|
1,605,790
|
|
|
|
545,640
|
|
Warrants
|
|
|
3,750,833
|
|
|
|
30,502
|
|
|
|
3,750,833
|
|
|
|
30,502
|
|
Total
|
|
|
5,356,623
|
|
|
|
576,142
|
|
|
|
5,356,623
|
|
|
|
576,142
|
|
19