NOTES
TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(tabular
dollars and shares in thousands, except per share data)
1.
DESCRIPTON OF BUSINESS AND BASIS OF PRESENTATION
Business
Provention
Bio, Inc. (the “Company”) was incorporated on October 4, 2016 under the laws of the State of Delaware. The Company
is a clinical stage biopharmaceutical company, focused on the development and commercialization of novel therapeutics and innovative
approaches to intercept and prevent immune-mediated diseases. Since its inception, the Company has devoted substantially all of
its efforts to business planning, research and development, recruiting management and technical staff, acquiring operating assets
and raising capital. The Company’s business is subject to significant risks and uncertainties and will be dependent on raising
substantial additional capital before it becomes profitable and it may never achieve profitability.
Basis
of Presentation
The
accompanying unaudited financial information as of March 31, 2019 and for the three months ended March 31, 2019 and 2018 has been
prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain
information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted
accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The December
31, 2018 Balance Sheet was derived from the Company’s audited financial statements. These interim financial statements should
be read in conjunction with the notes to the financial statements contained in the Company’s Annual Report on Form 10-K
(“Annual Report”) for 2018, as filed with the SEC on March 19, 2019.
In
the opinion of management, the unaudited financial information as of March 31, 2019 and for the three months ended March 31, 2019
and 2018, reflects all adjustments, which are normal recurring adjustments, necessary to present a fair statement of the financial
position, results of operations and cash flows of the Company. The results of operations for the three months ended March 31,
2019 and 2018 are not necessarily indicative of the operating results for the full fiscal year or any future period.
2.
LIQUIDITY
The
accompanying financial statements have been prepared assuming the Company will continue as a going concern, which contemplates
continuity of operations, realization of assets and the satisfaction of liabilities and commitments in the normal course of business.
The Company has incurred recurring losses since inception and as of March 31, 2019, the Company had an accumulated deficit of
$46.7 million
.
To date, the Company has not generated any revenues and has financed its operations primarily through a
private offering of Series A Convertible Redeemable Preferred Stock in April 2017 and its initial public offering (“IPO”)
in July 2018.
In
April 2017, the Company completed its private placement of Series A Convertible Redeemable Preferred Stock. The Company issued
an aggregate 11,381,999 shares of Series A Convertible Redeemable Preferred Stock at $2.50 per share. The Company received net
proceeds of $26.7 million.
In
July 2018, the Company issued and sold an aggregate of 15,969,563 shares of common stock in its IPO at a public offering price
of $4.00 per share. In connection with the IPO, the Company issued to MDB Capital Group, LLC (“MDB”), the underwriter
in the IPO, and its designees warrants to purchase 1,596,956 shares of Common Stock at an exercise price of $5.00 per share. The
Company received net proceeds from the IPO of $59.3 million, after deducting underwriting discounts and commissions of approximately
$3.7 million and other offering expenses of approximately $0.8 million. Upon the closing of the IPO, all of the Company’s
shares of redeemable convertible preferred stock outstanding at the time of the offering were automatically converted into 11,381,999
shares of common stock. In addition, the warrants issued in connection with the Series A Convertible Redeemable Preferred Stock
also converted to warrants for the purchase of 558,740 shares of the Company’s common stock.
The
Company has devoted substantially all of its financial resources and efforts to research and development and expects to continue
to incur significant expenses and increasing operating losses over the next several years due to, among other things, costs related
to research funding, development of its product candidates and its preclinical programs, strategic alliances and the development
of its administrative organization
.
The Company’s net losses may fluctuate significantly from quarter to quarter
and year to year.
The
Company will require substantial additional financing to fund its operations and to continue to execute its strategy. The Company
intends to raise capital through public or private equity financings. The sale of equity and other securities may result in dilution
to the Company’s stockholders and certain of those securities may have rights senior to those of the Company’s existing
shares. If the Company raises additional funds through the issuance of preferred stock, convertible debt securities or other debt
financing, these securities or other debt could contain covenants that would restrict the Company’s operations. Any other
third-party funding arrangement could require the Company to relinquish valuable rights. The source, timing and availability of
any future financing will depend principally upon market conditions, and, more specifically, on the progress of the Company’s
clinical development programs. Funding may not be available when needed, at all, or on terms acceptable to the Company. Lack of
necessary funds may require the Company, among other things, to delay, scale back or eliminate some or all of the Company’s
planned operations.
Based
on the Company’s business plans, management believes that it has sufficient cash on hand to meet the Company’s obligations
for at least the next twelve months from the issuance date of these financial statements.
3.
SIGNIFICANT ACCOUNTING POLICIES
A
summary of the significant accounting policies followed by the Company in the preparation of the financial statements is as follows:
Use
of estimates
The
process of preparing financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of assets and liabilities at the date of financial statements and
the reported amounts of expenses during the reporting period. Actual results could differ from those estimates and changes in
estimates may occur.
Segment
and geographic information
Operating
segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the
chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance.
The Company views its operations and manages its business in one operating and reporting segment.
Cash,
cash equivalents and concentration of credit risk
The
Company considers only those investments which are highly liquid, readily convertible to cash, or that mature within three months
from date of purchase to be cash equivalents. Marketable investments are those with original maturities in excess of three months.
The
Company has no significant off-balance-sheet concentration of credit risk such as foreign exchange contracts, option contracts
or other hedging arrangements. The Company holds cash and cash equivalents in banks in excess of FDIC insurance limits. However,
the Company believes risk of loss is minimal as the cash and cash equivalents are held by large, highly-rated financial institutions.
Financial
instruments
Cash
and cash equivalents are reflected in the accompanying financial statements at fair value. The carrying amount of accounts payable
and accrued expenses, including accrued research and development expenses, approximates fair value due to the short-term nature
of those instruments.
Net
loss per common share
Net
loss per share information is determined using the two-class method, which includes the weighted-average number of shares of common
stock outstanding during the period and other securities that participate in dividends (a participating security). The Company
considered the Series A Preferred Stock, all of which were automatically converted to common stock upon the Company’s IPO,
to be participating securities because they included rights to participate in dividends, if any, with the common stock.
Under
the two-class method, basic net loss per share attributable to common stockholders is computed by dividing the net income attributable
to common stockholders by the weighted-average number of shares of common stock outstanding during the period. The net loss attributable
to common stockholders is calculated by adjusting the net loss of the Company for the accretion on the Preferred Stock. Net losses
are not allocated to preferred stockholders as they do not have an obligation to share in the Company’s net losses. In periods
with net income attributable to common stockholders, the Company would allocate net income first to preferred stockholders based
on dividend rights under the Company’s certificate of incorporation and then to preferred and common stockholders based
on ownership interests. Diluted net loss per share attributable to common stockholders is computed using the more dilutive of
(1) the two-class method or (2) the if-converted method.
Diluted
net loss per share attributable to common stockholders is the same as basic net loss per share attributable to common stockholders
for all periods presented since the effect of potentially dilutive securities are anti-dilutive given the net loss of the Company.
Foreign
Currency Translation
The
Company considers the U.S. dollar to be its functional currency. Expenses denominated in foreign currencies are translated at
the exchange rate on the date the expense is incurred. The effect of exchange rate fluctuations on translating foreign currency
assets and liabilities into U.S. dollars is included in the Statements of Operations. Foreign exchange transaction gains and losses
are included in the results of operations and are not material in the Company’s financial statements.
Research
and development expenses
Research
and development expenses primarily consist of costs associated with the preclinical and clinical development of our product candidate
portfolio, including the following:
|
●
|
external
research and development expenses incurred under arrangements with third parties, such
as contract research organizations (CROs) and other vendors and contract manufacturing
organizations (CMOs) for the production of drug substance and drug product; and
|
|
●
|
employee-related
expenses, including salaries, benefits and share-based compensation expense.
|
Research
and development expenses also include costs of acquired product licenses and related technology rights where there is no alternative
future use, costs of prototypes used in research and development, consultant fees and amounts paid to certain of our collaborative
partners.
All
research and development expenses are charged to operations as incurred in accordance with Financial Accounting Standards Board
Accounting Standards Codification Topic, or ASC, 730, Research and Development. The Company accounts for non-refundable advance
payments for goods and services that will be used in future research and development activities as expenses when the service has
been performed or when the goods have been received, rather than when the payment is made.
Accrued
Research and Development Expenses
As
part of the process of preparing our financial statements, the Company is required to estimate its accrued expenses. This process
involves reviewing quotations and contracts, identifying services that have been performed on the Company’s behalf and estimating
the level of service performed and the associated cost incurred for the service when the Company has not yet been invoiced or
otherwise notified of the actual cost. The majority of the Company’s service providers invoice the Company monthly in arrears
for services performed or when contractual milestones are met. The Company makes estimates of its accrued expenses as of each
balance sheet date in our financial statements based on facts and circumstances known to the Company at that time. The Company
periodically confirms the accuracy of its estimates with the service providers and make adjustments if necessary. The significant
estimates in the Company’s accrued research and development expenses are related to expenses incurred with respect to CROs,
CMOs and other vendors in connection with research and development and manufacturing activities.
The
Company bases its expense related to CROs and CMOs on its estimates of the services received and efforts expended pursuant to
quotations and contracts with such vendors that conduct research and development and manufacturing activities on our behalf. The
financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment
flows. There may be instances in which payments made to the Company’s vendors will exceed the level of services provided
and result in a prepayment of the applicable research and development or manufacturing expense. In accruing service fees, the
Company estimates the time period over which services will be performed and the level of effort to be expended in each period.
If the actual timing of the performance of services or the level of effort varies from its estimate, the Company adjusts
the accrual or prepaid expense accordingly. Although the Company does not expect its estimates to be materially different from
amounts actually incurred, the Company’s understanding of the status and timing of services performed relative to the actual
status and timing of services performed may vary and could result in us reporting amounts that are too high or too low in any
particular period. There have been no material changes in estimates for the periods presented.
Stock-based
compensation expense
The
Company follows the provisions of ASC 718, Compensation—Stock Compensation, which requires the measurement and recognition
of compensation expense for all share-based payment awards made to employees and non-employees, including stock options. Stock-based
compensation expense is based on the grant date fair value estimated in accordance with the provisions of ASC 718 and is generally
recognized as an expense over the requisite service period. For grants containing performance-based vesting provisions, the grant-date
fair value of the performance-based stock options is recognized as compensation expense once it is probable that the performance
condition will be achieved. The Company accounts for actual forfeitures in the period the forfeiture occurs.
Stock
Options
The
Company estimates the fair value of stock options on the date of grant using the Black-Scholes option-pricing model. Due to the
lack of trading history, the Company’s computation of stock-price volatility is based on the volatility rates of comparable
publicly held companies over a period equal to the expected term of the options granted by the Company. The Company’s computation
of expected term is determined using the “simplified” method, which is the midpoint between the vesting date and the
end of the contractual term. The Company believes that it does not have sufficient reliable exercise data in order to justify
the use of a method other than the “simplified” method of estimating the expected exercise term of employee stock
option grants. The Company utilizes a dividend yield of zero based on the fact that the Company has never paid cash dividends
to stockholders and has no current intentions to pay cash dividends. The risk-free interest rate is based on the zero-coupon U.S.
Treasury yield at the date of grant for a term equivalent to the expected term of the option.
In
June 2018, the FASB issued ASU No. 2018-07,
Improvements to Nonemployee Share-Based Payment Accounting,
(“ASU 2018-07”)
which supersedes ASC 505-50 and expands the scope of ASC 718 to include all share-based payments arrangements related to the acquisition
of goods and services from both employees and nonemployees. During the third quarter of 2018, the Company early adopted ASU 2018-07.
After the adoption of ASU 2018-07, the measurement date for non-employee awards is the date of grant. Compensation expense for
non-employees is recognized, without changes to the fair value of the award, over the requisite service period, which is the vesting
period of the respective award. The adoption of ASU 2018-07 did not have a material impact the Company’s financial statements
or footnote disclosures.
Prior
to the third quarter of 2018, the Company accounted for awards of equity instruments issued to non-employees in accordance with
ASC Topic 505-50,
Equity-Based Payment to Non-Employees,
(“ASC 505-50”) and accordingly the value of the stock
compensation to non-employees was based upon the measurement date as determined at either a) the date at which a performance commitment
was reached, or b) at the date at which the necessary performance to earn the equity instruments was completed, which was normally
the end of the vesting period. At the end of each financial reporting period prior to completion of the service, the fair value
of these awards was remeasured using updated assumption inputs in the Black-Scholes option-pricing model.
Stock-based
compensation expense is included in both research and development expenses and general and administrative expenses in the Statements
of Operations.
Warrant
liability
In
April 2017, the Company issued warrants to purchase shares of Series A Convertible Redeemable Preferred Stock in connection with
the issuance of the Series A Preferred Stock. The Company accounted for these warrants as a liability in the financial statements
because the underlying instrument into which the warrants were exercisable contained redemption provisions that were outside the
Company’s control.
Upon
the completion of the IPO in July 2018, the warrants issued in connection with the Series A Convertible Redeemable Preferred Stock
converted to warrants for the purchase of 558,740 shares of our common stock and the warrants no longer contain redemption provisions
that are outside the Company’s control. The liability associated with these warrants was revalued just prior to the completion
of the IPO, with the change in the fair value of the warrant liability charged to earnings. The warrant liability was then reclassified
to additional paid-in capital upon the completion of the IPO in July 2018.
The
fair value of the warrants was determined using the Black-Scholes option-pricing model and were re-measured to fair value at each
financial reporting period date with any changes in fair value recognized in the statements of operations. See Note 8 to our financial
statements for further information.
Income
taxes
The
Company utilizes the liability method of accounting for deferred income taxes, as set forth in ASC 740,
Income Taxes.
Under
this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences
between the carrying amounts and the tax basis of assets and liabilities. A valuation allowance is established against deferred
tax assets when, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets
will not be realized. The Company’s policy is to record interest and penalties on uncertain tax positions as income tax
expense.
Recent
Accounting Pronouncements
In
February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
(“ASU 2016-02”)
,
which requires lessees
to recognize assets and liabilities for the rights and obligations created by most leases on their balance sheet. Effective January
1, 2019, the Company adopted ASU 2016-02. The adoption had no impact on the Company’s financial statements and related disclosures
as the Company does not currently have any lease agreements.
In
August 2018, the FASB issued ASU No. 2018-13,
Fair Value Measurement (Topic 820)
, which modifies the disclosure requirements
on fair value measurements in Topic 820, Fair Value Measurement, including, among other changes, the consideration of costs and
benefits when evaluating disclosure requirements. For public companies, the amendments are effective for annual reporting periods
beginning after December 15, 2019, including interim periods within those annual periods. Early adoption is permitted. The Company
is currently assessing the impact that adopting this new accounting guidance will have on its financial statements and footnote
disclosures.
In
August 2018, the FASB issued ASU No. 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
(a consensus of the FASB Emerging Issues Task Force). ASU 2018-15 aligns the requirements for capitalizing implementation costs
incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred
to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This guidance
is effective for fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years, with early
adoption permitted. The Company is currently assessing the impact that adopting this new accounting guidance will have on its
financial statements and footnote disclosures.
In
November 2018, the FASB issued ASU No. 2018-18,
Collaborative Arrangements (Topic 808)
, which clarifies the interaction
between the guidance for collaborative arrangements (Topic 808) and the new revenue recognition standard (Topic 606). For public
companies, the amendments are effective for annual reporting periods beginning after December 15, 2019, including interim periods
within those annual periods. Early adoption is permitted. The Company is currently assessing the impact that adopting this new
accounting guidance will have on its financial statements and footnote disclosures.
4.
CAPITALIZATION
As
of March 31, 2019, the Company had authorized 100,000,000 shares of Common Stock, $0.0001 par value per share, of which 37,361,562
shares were issued and outstanding. In addition, as of March 31, 2019, the Company had authorized 25,000,000 shares of Preferred
Stock, $0.0001 par value per share, of which, none were issued and outstanding.
5.
LICENSE AND OTHER AGREEMENTS
In
April 2017, the Company entered into a License Agreement with Vactech Ltd. (the “Vactech License Agreement”), pursuant
to which Vactech Ltd. (“Vactech”) granted the Company exclusive global rights for the purpose of developing and commercializing
the group B coxsackie virus vaccine (CVB) platform technology. In consideration of the licenses and other rights granted by Vactech,
the Company issued two million shares of its common stock to Vactech. The Company recorded the issuance of the shares at their
estimated fair value of approximately $1.70 per share for a total of $3.4 million as a license fee expense included as part of
Research & Development Expense for the year ended December 31, 2017. Provention paid Vactech a total of approximately $0.5
million for transition and advisory services during the first 18 months of the term of the agreement. In addition, Provention
may be obligated to make a series of contingent milestone payments to Vactech totaling up to an additional $24.5 million upon
the achievement of certain clinical development and regulatory filing milestones. In addition, the Company has agreed to pay Vactech
tiered single-digit royalties on net sales of any approved product based on the CVB platform technology and three additional payments
totaling $19.0 million upon the achievement of certain annual net sales levels. The Vactech Agreement may be terminated by the
Company on a country by country basis without cause (in which case the exclusive global rights to the technology will transfer
back to Vactech) and by either party upon a material breach or insolvency of the other party. If the Company terminates the agreement
with respect to two or more specified European countries, the agreement will be deemed terminated with respect to all of the EU,
and if the Company terminates the agreement with respect to the United States, the agreement will be deemed terminated with respect
to all of North America. The agreement expires upon the expiration of the Company’s last obligation to make royalty payments
to Vactech. As of March 31, 2019, the Company has not achieved any milestones that would trigger payments to Vactech.
In
April 2017, the Company entered into a License, Development and Commercialization Agreement with Janssen Pharmaceutica NV (the
“CSF-1R License Agreement”), pursuant to which Janssen Pharmaceutica NV granted the Company exclusive global rights
for the purpose of developing and commercializing JNJ-40346527 (renamed PRV-6527), a colony stimulating factor 1 receptor (CSF-1R)
inhibitor for inflammatory bowel diseases including Crohn’s Disease and ulcerative colitis (UC). The Company is obligated
to conduct a single Phase 2a proof-of-mechanism and proof-of-concept clinical trial for the Crohn’s Disease indication.
Janssen will supply product for the clinical trial. At the conclusion of the Phase 2a study, Janssen will have an option to buy
back the rights for future development for a one-time payment of $50.0 million and future single-digit royalties on future net
sales for a period of 10 years from first sale or expiration of the intellectual property, whichever is shorter. If Janssen does
not exercise its option to buy-back the rights, all rights will remain with the Company and it will be obligated to make contingent
milestone payments to Janssen totaling $35.0 million upon the achievement of certain clinical and regulatory milestones for the
first indication and an additional $20.0 million upon the achievement of certain clinical and regulatory milestones for a second
indication. In addition, Provention has agreed to pay Janssen tiered single-digit royalties on net sales of any approved product
based on the CSF-1R technology and three additional payments totaling $100.0 million upon the achievement of certain annual net
sales levels. The CSF-1R License Agreement may be terminated by Provention without cause (in which case the exclusive global rights
to the technology will transfer back to Janssen) and by either party upon a material breach and expires upon the expiration of
Provention’s last obligation to make royalty payments to Janssen. As of March 31, 2019, the Company has not achieved any
milestones that would trigger payments to Janssen.
In
April 2017, the Company entered into a License, Development and Commercialization Agreement with Janssen Sciences Ireland UC (the
“TLR3 License Agreement”), pursuant to which Janssen Sciences Ireland UC granted the Company exclusive global rights
for the purpose of developing and commercializing JNJ-42915925 (renamed PRV-300), an anti-Toll-Like Receptor 3 (TLR3) antibody.
The Company evaluated PRV-300 for UC in a recently completed Phase 1b trial (the PULSE study). See Note 13 – Subsequent
Events for the announcement of top-line results of the PULSE study. Under the TLR3 License Agreement, the Company is obligated
to make contingent milestone payments to Janssen totaling $31.0 million upon the achievement of certain clinical and regulatory
milestones for the first indication and an additional $17.0 million upon the achievement of certain clinical and regulatory milestones
for a second indication. In addition, Provention has agreed to pay Janssen a single-digit royalty on net sales of any approved
product based on the TLR3 technology and three additional payments totaling $60.0 million upon the achievement of certain annual
net sales levels. Provention is obligated to use commercially reasonable efforts to develop and market TLR3. The TLR3 License
Agreement may be terminated by the Company without cause (in which case the exclusive global rights to the technology will transfer
back to Janssen) and by either party upon a material breach or insolvency of the other party and expires upon the expiration of
the Company’s last obligation to make royalty payments to Janssen. As of March 31, 2019, the Company has not achieved any
milestones that would trigger payments to Janssen.
In
March 2018, the Company entered into a Development Services Agreement with The Institute of Translational Vaccinology (the “Intravacc
Development Services Agreement”), pursuant to which The Institute of Translational Vaccinology (“Intravacc”)
will provide services related to process development, non-GMP and GMP manufacturing of the Company’s polyvalent coxsackie
virus B vaccine (CVB), including providing proprietary technology for manufacturing purposes. The Company will pay Intravacc approximately
10 million euros for their services over the development and manufacturing period which we expect will last for approximately
18 to 24 months. Each party retains its existing intellectual property and will share newly developed intellectual property via
a fully-paid non-exclusive license between the parties for all development work through phase 1 clinical trials. Any future use,
including commercial use, of Intravacc’s technology will be subject to a separate nonexclusive license agreement. The Intravacc
Development Services Agreement may be terminated by us with ninety days’ notice without cause and by either party upon a
material breach or insolvency of the other party. As of March 31, 2019, the Company had paid Intravacc a total of approximately
5.0 million euros, or approximately $6.0 million, for services provided by Intravacc under the Intravacc Development Services
Agreement.
In
May 2018, the Company entered into a License Agreement with MacroGenics, Inc. (the “MacroGenics License Agreement”),
pursuant to which MacroGenics, Inc. (“MacroGenics”) granted the Company exclusive global rights for the purpose of
developing and commercializing MGD010 (renamed PRV-3279), a humanized protein and a potential treatment for systemic lupus erythematosus
(SLE) and other similar diseases. As partial consideration for the MacroGenics License Agreement, the Company granted MacroGenics
a warrant to purchase 270,299 shares of the Company’s common stock at an exercise price of $2.50 per share (See Note 11).
The Company is obligated to make contingent milestone payments to MacroGenics totaling $42.5 million upon the achievement of certain
developmental and approval milestones for the first indication, and an additional $22.5 million upon the achievement of certain
regulatory approvals for a second indication. In addition, the Company is obligated to make contingent milestone payments to MacroGenics
totaling $225.0 million upon the achievement of certain sales milestones. The Company has also agreed to pay MacroGenics a single-digit
royalty on net sales of the product. Further, the Company is required to pay MacroGenics a low double-digit percentage of certain
consideration to the extent received in connection with a future grant of rights to PRV-3279 by the Company to a third party.
The Company is obligated to use commercially reasonable efforts to develop and seek regulatory approval for PRV-3279. The license
agreement may be terminated by either party upon a material breach or bankruptcy of the other party, by Provention without cause
upon prior notice to MacroGenics, and by MacroGenics in the event that the Company challenges the validity of any licensed patent
under the agreement, but only with respect to the challenged patent.
In
May 2018, the Company entered into an Asset Purchase Agreement with MacroGenics (the “MacroGenics Asset Purchase Agreement”)
pursuant to which the Company acquired MacroGenics’ interest in teplizumab (renamed PRV-031), a humanized mAb for the treatment
of Type 1 Diabetes (T1D). As partial consideration for the MacroGenics Asset Purchase Agreement, the Company granted MacroGenics
a warrant to purchase 2,162,389 shares of the Company’s common stock at an exercise price of $2.50 per share (See Note 11).
The Company is obligated to pay MacroGenics contingent milestone payments totaling $170.0 million upon the achievement of certain
regulatory approval milestones. In addition, the Company is obligated to make contingent milestone payments to MacroGenics totaling
$225.0 million upon the achievement of certain sales milestones. The Company has also agreed to pay MacroGenics a single-digit
royalty on net sales of the product. We have also agreed pay third-party obligations, including low single-digit royalties, a
portion of which is creditable against royalties payable to MacroGenics, aggregate milestone payments of up to approximately $1.3
million and other consideration, for certain third-party intellectual property under agreements the Company is assuming pursuant
to the MacroGenics Asset Purchase Agreement. Further, the Company is required to pay MacroGenics a low double-digit percentage
of certain consideration to the extent it is received in connection with a future grant of rights to PRV-031 by the Company to
a third party. The Company is obligated to use reasonable commercial efforts to develop and seek regulatory approval for PRV-031.
As
of March 31, 2019, the Company has not achieved any milestones that would trigger payments to MacroGenics.
The
Company recorded the warrants issued under MacroGenics License Agreement and the MacroGenics Asset Purchase Agreement at an estimated
fair value of $1.64 per share, approximately $4.0 million in the aggregate, as license fee expense included as part of Research
& Development Expense during the second quarter of 2018. See Note 11 of these condensed financial statements for further
details of the warrants issued to MacroGenics.
In
November 2018, the Company entered into a License and Collaboration Agreement (the “Amgen Agreement”) with Amgen,
Inc. (“Amgen”) for PRV-015 (formerly AMG 714), a novel anti-IL-15 monoclonal antibody being developed for the treatment
of gluten-free diet non-responsive celiac disease (NRCD). Under the terms of the agreement, the Company will conduct and fund
a Phase 2b trial in NRCD and lead the development and regulatory activities for the program. Amgen has agreed to make an equity
investment of up to $20.0 million in the Company, subject to certain terms and conditions set forth in the agreement. The equity
investment will coincide with the Company’s future financing events or receipt of non-dilutive milestone payment from a
third party including but not limited to Janssen related to the Company’s CSF-1R program. Amgen is also responsible for
the manufacturing of PRV-015. Upon completion of the Phase 2b trial, a $150.0 million milestone payment is due from Amgen to the
Company, plus an additional regulatory milestone payment, and single digit royalties on future sales. If Amgen elects not to pay
the $150.0 million milestone, AMG 714 rights will be transferred to Company pursuant to a termination license agreement from Amgen
and the Company. The Company will be obligated to make certain contingent milestone payments to Amgen and other third parties
totaling up to $70.0 million upon the achievement of certain clinical and regulatory milestones and a low double-digit royalty
on net sales of any approved product based on the IL-15 technology. The agreement may be terminated by the Company without cause
(in which case the exclusive global rights to the technology will transfer back to Amgen) and by either party upon a material
breach. The agreement expires upon the expiration of Amgen’s last obligation to make royalty payments to Provention (or,
the Company’s last obligation to make royalty payments to Amgen, if the program rights are transferred to the Company.)
6.
NET LOSS PER SHARE OF COMMON STOCK
The
following table sets forth the computation of basic and diluted loss per share for the three months ended March 31, 2019 and 2018:
|
|
Three
Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Net loss, basic
|
|
$
|
(10,972
|
)
|
|
$
|
(5,063
|
)
|
Accretion
of Series A Convertible Redeemable Preferred Stock
|
|
|
—
|
|
|
|
(125
|
)
|
Net loss attributable
to common stockholders
|
|
$
|
(10,972
|
)
|
|
$
|
(5,188
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding,
basic and diluted
|
|
|
37,362
|
|
|
|
10,000
|
|
Net loss per common share, basic
and diluted
|
|
$
|
(0.29
|
)
|
|
$
|
(0.52
|
)
|
The
following potentially dilutive securities have been excluded from the computation of diluted weighted average shares outstanding
as they would be antidilutive:
|
|
Three
Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Series A Convertible Redeemable
Preferred Stock
|
|
|
—
|
|
|
|
11,382
|
|
Warrants
|
|
|
4,588
|
|
|
|
559
|
|
Stock options
|
|
|
3,975
|
|
|
|
2,656
|
|
7.
ACCRUED EXPENSES
Accrued
expenses consisted of the following:
|
|
March
31, 2019
|
|
|
December
31, 2018
|
|
|
|
|
|
|
|
|
Accrued
research and development costs
|
|
$
|
2,036
|
|
|
$
|
1,023
|
|
Other accrued liabilities
|
|
|
93
|
|
|
|
154
|
|
Accrued
professional fees
|
|
|
66
|
|
|
|
126
|
|
Total accrued
expenses
|
|
$
|
2,195
|
|
|
$
|
1,303
|
|
8.
FAIR VALUE OF ASSETS AND LIABILITIES
The
carrying amounts reported in the balance sheet for cash and cash equivalents, accounts payable and accrued expenses approximate
fair value based on the short-term nature of these items.
The
Company groups its assets and liabilities generally measured at fair value in three levels, based on the markets in which the
assets and liabilities are traded and the reliability of the assumptions used to determine fair value.
Level
1 – Valuation is based on quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities
generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily
available pricing sources for market transactions involving identical assets or liabilities.
Level
2 – Valuation is based on observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities;
quoted prices 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 the assets or liabilities.
Level
3 – Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant
to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined
using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination
of fair value requires significant management judgment or estimation.
The
Company had no assets or liabilities classified as Level 1 or Level 2 as of March 31, 2019 or December 31, 2018. Liability
classified warrants issued in April 2017 to the placement agent in conjunction with the Series A Preferred Stock offering (see
Note 9) were previously classified as Level 3. During the three months ended March 31, 2018, the Company recorded $0.1 million
of expense related to the change in the fair value (an increase) of the Series A Preferred Stock warrant liability. Upon the completion
of the IPO in July 2018, these warrants converted to warrants for the purchase of 558,740 shares of our common stock and no longer
contain redemption provisions outside the Company’s control. The liability associated with these warrants was revalued just
prior to the completion of the IPO, with the change in the fair value of the warrant liability charged to earnings. The warrant
liability was then reclassified to additional paid-in capital upon the completion of the IPO in July 2018.
There
were no recurring or non-recurring measurements of fair value as of March 31, 2019, as of December 31, 2018 or during the three
months ended March 31, 2019 with respect to assets and liabilities.
9.
SERIES A CONVERTIBLE REDEEMABLE PREFERRED STOCK
In
April 2017, the Company issued 11,381,999 shares of Series A Convertible Redeemable Preferred Stock for $2.50 per share which
raised gross proceeds of $28.5 million and net cash proceeds of $26.7 million after deducting certain issuance costs including
warrants. The Company classified the Series A Convertible Redeemable Preferred Stock outside of permanent equity based upon the
terms of the instrument. See Note 11 for a description of the warrants issued to the placement agent in connection with this transaction.
In
connection with the closing of the Company’s IPO in July 2018, all of the Company’s shares of redeemable convertible
preferred stock outstanding at the time of the offering were automatically converted into 11,381,999 shares of common stock.
10.
STOCK OPTIONS
In
2017, the Company adopted the Provention Bio, Inc. 2017 Equity Incentive Plan (the “2017 Plan”). Pursuant to the 2017
Plan, the Company’s Board of Directors may grant incentive stock options, nonqualified stock options, and restricted stock
to employees, officers, directors, consultants and advisors. As of March 31, 2019, there were options to purchase an aggregate
of 3,975,099 shares of Common Stock outstanding under the 2017 Plan. Options issued under the 2017 Plan are exercisable for up
to 10 years from the date of issuance.
In
connection with the completion of its IPO, the Company amended and restated its 2017 Plan to, among other things, include an evergreen
provision, which would automatically increase the number of shares available for issuance under the 2017 Plan in an amount equal
to (1) the difference between (x) 18% of the total shares of the Company’s common stock outstanding, on a fully diluted
basis, on December 31st of the preceding calendar year, and (y) the total number of shares of the Company’s common stock
reserved under the 2017 Plan on December 31st of such preceding calendar year or (2) an amount less than this calculated increase
as determined by the board of directors.
In
connection with the evergreen provisions of the 2017 Plan, the number of shares available for issuance under the 2017 Plan was
increased by 3,050,893 shares, as determined by the board of directors under the provisions described above, effective as of January
1, 2019. As of March 31, 2019, there were 2,935,218 shares available for future grants.
Stock-based
compensation
Total
stock-based compensation expense recognized for both employees and non-employees was as follows:
|
|
Three
Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
100
|
|
|
$
|
54
|
|
General and administrative
|
|
|
144
|
|
|
|
44
|
|
Total share-based
compensation expense
|
|
$
|
244
|
|
|
$
|
98
|
|
Option
activity
The
Company grants options with a service-based vesting requirement and also granted options with a performance-based vesting requirement.
The service-based component vests over a four-year period in multiple tranches. Each tranche of the performance-based component
vests upon the achievement of a specific milestone. These milestones are related to the Company’s clinical trials, completion
of the Company’s IPO, and certain other performance metrics.
A
summary of option activity for the three months ended March 31, 2019 are presented below:
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
|
|
Underlying
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
Stock Option Awards
|
|
Shares
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
3,476
|
|
|
$
|
2.85
|
|
|
|
8.8 years
|
|
|
$
|
—
|
|
Granted
|
|
|
499
|
|
|
$
|
2.26
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Outstanding at Match 31, 2019
|
|
|
3,975
|
|
|
$
|
2.78
|
|
|
|
8.7 years
|
|
|
$
|
34
|
|
Exercisable at March 31, 2019
|
|
|
1,076
|
|
|
$
|
2.56
|
|
|
|
8.3
years
|
|
|
$
|
—
|
|
The
weighted average grant-date fair value of options granted during the three months ended March 31, 2019 was $1.42 per share. As
of March 31, 2019, there were approximately 903,000 unvested options subject to performance-based vesting criteria with
approximately $1.3 million of unrecognized compensation expense. This expense will be recognized when each milestone becomes probable
of occurring. In addition, as of March 31, 2019, there were approximately 1,996,000 unvested options outstanding subject
to time-based vesting with approximately $2.9 million of unrecognized compensation expense which will be recognized over a period
of 2.1 years.
The
Company uses the Black-Scholes option-pricing model to estimate the fair value of option awards with the following weighted-average
assumptions for the period indicated:
|
|
Three
months ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Exercise Price
|
|
$
|
2.26
|
|
|
$
|
2.50
|
|
Expected volatility
|
|
|
66
|
%
|
|
|
62
|
%
|
Expected dividends
|
|
|
—
|
|
|
|
—
|
|
Expected term (in years)
|
|
|
6.6
|
|
|
|
5.7
|
|
Risk-free interest rate
|
|
|
2.41
|
%
|
|
|
2.60
|
%
|
The
weighted-average valuation assumptions were determined as follows:
|
●
|
Risk-free
interest rate: The Company bases the risk-free interest rate on the interest rate payable on U.S. Treasury securities in effect
at the time of grant for a period that is commensurate with the assumed expected option term.
|
|
|
|
|
●
|
Expected
annual dividends: The estimate for annual dividends is 0%, because the Company has not historically paid, and does not expect
for the foreseeable future to pay, a dividend.
|
|
|
|
|
●
|
Expected
stock price volatility: The expected volatility used is based on historical volatilities of similar entities within the Company’s
industry which were commensurate with the Company’s expected term assumption.
|
|
|
|
|
●
|
Expected
term of options: The expected term of options represents the period of time options are expected to be outstanding. The expected
term of the options granted to employees is derived from the “simplified” method as described in Staff Accounting
Bulletin 107 relating to stock-based compensation, whereby the expected term is an average between the vesting period and
contractual period due to the limited operating history. The expected term for options granted to non-employees is equal to
the contractual term of the awards.
|
11.
WARRANTS
In
connection with the April 2017 sale of Series A Convertible Redeemable Preferred Stock, the Company issued warrants to MDB, the
Placement Agent, and its designees to purchase 558,740 shares of Series A Convertible Redeemable Preferred Stock with an exercise
price of $2.50 per share with a seven-year term. The underlying instrument into which the warrants are exercisable contained redemption
provisions that were outside the Company’s control. Accordingly, these warrants were considered liabilities and at issuance,
the fair value of $0.9 million was recorded as a warrant liability against a reduction to the proceeds from the issuance of the
Series A Convertible Redeemable Preferred Stock. Upon completion of the IPO in July 2018, the warrants automatically became warrants
for the purchase of 558,740 shares of the Company’s common stock and because the warrants no longer contain redemption provisions
outside the Company’s control, the Company determined that equity classification was appropriate. See Note 8 for further
information.
In
May 2018, in connection with the MacroGenics License Agreement and the MacroGenics Asset Purchase Agreement, the Company issued
warrants to MacroGenics to purchase 2,432,688 shares of the Company’s common stock at an exercise price of $2.50 per share.
These warrants have a seven-year term. The Company recorded the warrants issued under MacroGenics License Agreement and the MacroGenics
Asset Purchase Agreement at an estimated fair value of $1.64 per share, approximately $4.0 million in the aggregate, as license
fee expense included as part of Research & Development Expense during the second quarter of 2018.
The
Company uses valuation methods and assumptions that consider, among other factors, the fair value of the underlying stock, risk-free
interest rate, volatility, expected life and dividend rates in estimating fair value for the warrants issued to MacroGenics. The
fair values of these instruments are determined using models based on inputs that require management judgment and estimates.
The
fair value of the warrants issued to MacroGenics were measured at issuance on May 7, 2018 using the Black-Scholes option pricing
model based on the following assumptions:
Equity value upon issuance on May 7, 2018
|
|
$
|
2.58
|
|
Exercise Price
|
|
$
|
2.50
|
|
Expected volatility
|
|
|
62.0
|
%
|
Expected dividends
|
|
|
—
|
|
Contractual term (in years)
|
|
|
7.0
|
|
Risk-free interest rate
|
|
|
2.86
|
%
|
The
MacroGenics warrants were evaluated
under ASC 480,
Distinguishing Liabilities from Equity,
(“ASC 480”) and ASC 815,
Derivatives and Hedging
, (“ASC 815) and the Company determined that equity
classification was appropriate.
In
July 2018, in connection with the Company’s completion of IPO, the Company issued to MDB, the underwriter in the IPO, and
its designees warrants to purchase 1,596,956 shares of the Company’s common stock at an exercise price of $5.00 per share.
These warrants have a five-year term.
The
Company uses valuation methods and assumptions that consider, among other factors, the fair value of the underlying stock, risk-free
interest rate, volatility, expected life and dividend rates in estimating fair value for the warrants. The fair values of these
instruments are determined using models based on inputs that require management judgment and estimates.
The
fair value of the warrants issued to MDB were measured at issuance on July 19, 2018 using the Black-Scholes option pricing model
based on the following assumptions:
Equity value upon issuance on July 19, 2018
|
|
$
|
4.00
|
|
Exercise Price
|
|
$
|
5.00
|
|
Expected volatility
|
|
|
60.0
|
%
|
Expected dividends
|
|
|
—
|
|
Contractual term (in years)
|
|
|
5.0
|
|
Risk-free interest rate
|
|
|
2.74
|
%
|
The
Company estimated the fair value of the warrants issued to MDB to be $1.90 per share, approximately $3.0 million in the aggregate,
which was recorded as a cost of the IPO. The MDB warrants were evaluated
under ASC 480 and
ASC 815 and the Company determined that equity classification was appropriate.
12.
RELATED PARTY TRANSACTIONS
The
Company paid transition service fees to Vactech of approximately $0.1 million during the three months ended March 31, 2018. The
Company did not make any payments to Vactech during the three months ended March 31, 2019.
13.
SUBEQUENT EVENTS
On
May 8, 2019, the Company announced preliminary top-line results from its Phase 1b clinical trial (the PULSE study), which evaluated
PRV-300, an anti-TLR3 (toll-like receptor 3) monoclonal antibody in 37 patients with active, moderate-to-severe UC.
PRV-300
met the primary safety and tolerability endpoint over the twelve-week study period and also demonstrated TLR3 target engagement
and proof-of-mechanism. However, improvements in secondary and exploratory clinical, endoscopic, histologic and other UC-related
efficacy endpoints were not observed over background medication, suggesting that elevated TLR3 gene signatures previously observed
in UC patients, as well as in PULSE, are downstream or circumstantial effects that do not contribute significantly to causal pathology.
Therefore, while PRV-300 is a safe, pharmacologically active drug, it appears as that TLR3 may not be a useful target in UC.