NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
(Unaudited)
|
1.
|
Nature of Business, Basis of Presentation and Liquidity
|
Nature of Business
Leap Therapeutics, Inc. was incorporated in
the state of Delaware on January 3, 2011. During 2015, HealthCare Pharmaceuticals Pty Ltd. (“HCP Australia”) was formed
and is a wholly owned subsidiary of the Company.
The Company is a biopharmaceutical company acquiring
and developing novel therapeutics at the leading edge of cancer biology. The Company’s approach is designed to target compelling
tumor-promoting and immuno-oncology pathways to generate durable clinical benefit and enhanced outcomes for patients. The Company’s
programs are monoclonal antibodies that target key cellular pathways that enable cancer to grow and spread and specific mechanisms that
activate the body’s immune system to identify and attack cancer.
Basis of Presentation
The accompanying condensed
consolidated financial statements as of March 31, 2021 and for the three months ended March 31, 2021 and 2020 have been prepared
by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim
financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant
to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented
not misleading. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated
financial statements and the notes thereto for the year ended December 31, 2020 included in the Company’s Annual Report on
Form 10-K filed with the SEC on March 12, 2021.
The condensed consolidated financial statements
have been prepared on the same basis as the audited consolidated financial statements. In the opinion of management, the accompanying
condensed consolidated financial statements contain all adjustments which are necessary for the fair presentation of the Company’s
financial position as of March 31, 2021, statements of operations and statements of comprehensive loss for the three months ended
March 31, 2021 and 2020 and statements of cash flows for the three months ended March 31, 2021 and 2020. Such adjustments are
of a normal and recurring nature. The results of operations for the three months ended March 31, 2021 are not necessarily indicative
of the results of operations that may be expected for the year ending December 31, 2021.
Liquidity
Since inception, the Company has been engaged in
organizational activities, including raising capital, and research and development activities. The Company does not yet have a product
that has been approved by the Food and Drug Administration (the “FDA”), has not generated any product sales revenues and has
not yet achieved profitable operations, nor has it ever generated positive cash flows from operations. There is no assurance that profitable
operations, if achieved, could be sustained on a continuing basis. Further, the Company’s future operations are dependent on the
success of the Company’s efforts to raise additional capital, its research and commercialization efforts, regulatory approval, and,
ultimately, the market acceptance of the Company’s products.
In accordance with Accounting
Standards Codification (“ASC”) 205-40, Going Concern, the Company has evaluated whether there are conditions and events, considered
in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for a period of at least
one year after the date that the condensed consolidated financial statements are issued. As of March 31, 2021, the Company had cash
and cash equivalents of $43,491. Additionally, the Company had an accumulated deficit of $232,119 at March 31, 2021, and during the
three months ended March 31, 2021, the Company incurred a net loss of $9,134. The Company expects to continue to generate operating
losses for the foreseeable future. The Company believes that its cash and cash equivalents of $43,491 as of March 31, 2021 will be
sufficient to fund its operating expenses for at least the next 12 months from issuance of these financial statements.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying condensed consolidated financial
statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions are eliminated
upon consolidation.
Use of Estimates
The presentation of condensed consolidated 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 contingent assets and liabilities at the date of the condensed consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Research and development incentive income and receivable
The Company recognizes other income from Australian
research and development incentives when there is reasonable assurance that the income will be received, the relevant expenditure has
been incurred, and the consideration can be reliably measured. The research and development incentive is one of the key elements of the
Australian Government’s support for Australia’s innovation system and is supported by legislative law primarily in the form
of the Australian Income Tax Assessment Act 1997, as long as eligibility criteria are met.
Management has assessed the
Company’s research and development activities and expenditures to determine which activities and expenditures are likely to be eligible
under the research and development incentive regime described above. At each period end, management estimates the refundable tax offset
available to the Company based on available information at the time.
Under the program, a percentage of eligible research
and development expenses incurred by the Company through its subsidiary in Australia are reimbursed. The percentage was 43.5% for the
year ended December 31, 2020 and for the three months ended March 31, 2021.
The research and development incentive receivable
represents an amount due in connection with the above program. The Company has recorded a research and development incentive receivable
of $92 and $73 as of March 31, 2021 and December 31, 2020, respectively, in the condensed consolidated balance sheets and other
income from Australian research and development incentives of $71 and $85, respectively, for the three months ended March 31, 2021
and 2020.
The following table shows the change in the research
and development incentive receivable from January 1, 2020 to March 31, 2021 (in thousands):
The following table shows the change in the research and development incentive receivable from January 1, 2020 to March 31, 2021:
Balance at January 1, 2020
|
|
|
185
|
|
Australian research and development incentive income, net
|
|
|
231
|
|
Cash received for 2019 eligible expenses
|
|
|
(331
|
)
|
Foreign currency translation
|
|
|
(12
|
)
|
Balance at December 31, 2020
|
|
$
|
73
|
|
Australian research and development incentive income, net
|
|
|
71
|
|
Cash received for eligible expenses
|
|
|
(51
|
)
|
Foreign currency translation
|
|
|
(1
|
)
|
Balance at March 31, 2021
|
|
$
|
92
|
|
Foreign Currency Translation
The financial statements of the
Company’s Australian subsidiary are measured using the local currency as the functional currency. Assets and liabilities of
this subsidiary are translated into U.S. dollars at an exchange rate as of the consolidated balance sheet date. Equity is translated
at historical exchange rates. Revenues and expenses are translated into U.S. dollars at average rates of exchange in effect during
the period. The resulting cumulative translation adjustments have been recorded as a separate component of stockholders’
equity. Realized foreign currency transaction gains and losses are included in the results of operations.
Deferred Costs
The Company capitalizes certain legal, professional,
accounting and other third-party fees that are directly associated with in-process equity financings as deferred costs until such financings
are consummated. After consummation of the equity financing, these costs are recorded in stockholders' equity (deficiency) as a reduction
of additional paid-in capital generated as a result of the offering.
The Company also capitalizes
certain contract acquisition costs. During the three months ended March 31, 2020, the Company incurred contract acquisition costs
which were capitalized under ASC 340-40 as incremental costs of obtaining the contract with BeiGene. This cost is amortized on a straight-line
basis over the performance period of the research and development services.
As of March 31, 2021 and December 31, 2020 there
was $311 and $345, respectively, of deferred costs.
Deposits
As of March 31, 2021 and December 31,
2020, $980 of deposits made by the Company with certain service providers that are to be applied to future payments due under the service
agreements or returned to the Company if not utilized were recorded in the condensed consolidated balance sheets.
Warrants
The Company will recognize on a prospective basis
the value of the effect of the down round feature in the 2017 Warrants when it is triggered (i.e., when the exercise price is adjusted
downward). This value is measured as the difference between (1) the financial instrument’s fair value (without the down round
feature) using the pre-trigger exercise price and (2) the financial instrument’s fair value (with the down round feature) using
the reduced exercise price. The value of the effect of the down round feature will be treated as a dividend and a reduction to income
available to common stockholders in the basic EPS calculation. In connection with the private placement of common stock completed in January 2020
(the “January 2020 Private Placement”), when the 2017 Warrants were repriced from $1.75 to $1.055 as a result of a down
round, the Company recorded a dividend of $303 during the three months ended March 31, 2020.
Fair Value of Financial Instruments
Certain assets and liabilities are carried at fair
value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an
exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants
on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use
of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following
three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:
|
·
|
Level 1—Quoted prices in active markets for identical assets or liabilities.
|
|
·
|
Level 2—Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or
liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable
or can be corroborated by observable market data.
|
|
·
|
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair
value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.
|
During the periods presented, the Company has not
changed the manner in which it values assets and liabilities that are measured at fair value using Level 3 inputs. There were no transfers
within the hierarchy during the three months ended March 31, 2021 or the year ended December 31, 2020.
A summary of the assets and liabilities carried at fair value
in accordance with the hierarchy defined above is as follows (in thousands):
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
March 31, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
42,506
|
|
|
$
|
42,506
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total assets
|
|
$
|
42,506
|
|
|
$
|
42,506
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
51,116
|
|
|
$
|
51,116
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total assets
|
|
$
|
51,116
|
|
|
$
|
51,116
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock liability
|
|
$
|
204
|
|
|
$
|
-
|
|
|
$
|
204
|
|
|
$
|
-
|
|
Total liabilities
|
|
$
|
204
|
|
|
$
|
-
|
|
|
$
|
204
|
|
|
$
|
-
|
|
Cash equivalents of $42,506 and $51,116 as of March 31,
2021 and December 31, 2020, respectively, consisted of overnight investments and money market funds and are classified within Level
1 of the fair value hierarchy because they are valued using quoted market prices in active markets.
The carrying values of the research and development
incentive receivable, accounts payable and accrued liabilities approximate their fair value due to the short-term nature of these assets
and liabilities.
Leases
The Company accounts for leases in accordance with
Accounting Standards Codification, or ASC, Topic 842, Leases.
At the inception of an arrangement, the Company
determines whether the arrangement is or contains a lease based on the unique facts and circumstances present. Most leases with a term
greater than one year are recognized on the balance sheet as right-of-use assets, lease liabilities and, if applicable, long-term lease
liabilities. The Company has elected not to recognize on the balance sheet leases with terms of one year or less. Operating lease liabilities
and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected remaining lease
term. The Company has determined that the rate implicit in the lease is not determinable and the Company does not have borrowings with
similar terms and collateral. Therefore, the Company considered a variety of factors, including observable debt yields from comparable
companies and the volatility in the debt market for securities with similar terms, in determining that 8% was reasonable to use as the
incremental borrowing rate for purposes of the calculation of lease liabilities.
In accordance with the guidance in Topic 842, components
of a lease should be split into three categories: lease components (e.g. land, building, etc.), non-lease components (e.g. common
area maintenance, maintenance, consumables, etc.), and non-components (e.g. property taxes, insurance, etc.). Then the fixed
and in-substance fixed contract consideration (including any related to non-components) must be allocated based on fair values to the
lease components and non-lease components.
Although separation of lease and non-lease components
is required, certain practical expedients are available. Entities may elect the practical expedient to not separate lease and non-lease
components. Rather, they would account for each lease component and the related non-lease component together as a single component. The
Company has elected to account for the lease and non-lease components of each of its operating leases as a single lease component and
allocate all of the contract consideration to the lease component only. The lease component results in an operating right-of-use asset
being recorded on the consolidated balance sheets and amortized such that lease expense is recorded on a straight line basis over the
term of the lease.
Revenue Recognition
The Company records revenue in accordance with
ASC Topic 606, Revenue From Contracts with Customers. This standard applies to all contracts with customers, except for contracts
that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. Under Topic
606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration
that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an
entity determines are within the scope of Topic 606, the entity performs the following five steps: (i) identify the contract(s) with
a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate
the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies
a performance obligation. The Company only applies the five step model to contracts when it is probable that the entity will collect the
consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract
is determined to be within the scope of Topic 606, the Company assesses the goods or services promised within each contract and determines
those that are performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as
revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation
is satisfied.
License
revenue. The Company’s performance obligations under its license agreements may include providing intellectual property
licenses, performing technology transfer, performing research and development consulting services and notifying the customer of any enhancements
to licensed technology or new technology that it discovers, among others. The Company determined that its performance obligations under
its license agreements as evaluated at contract inception were not distinct and represented a single performance obligation. Upfront payments
are amortized to revenue on a straight-line basis over the performance period. Upfront payment contract liabilities resulting from the
Company’s license agreements do not represent a financing component as the payment is not financing the transfer of goods or services,
and the technology underlying the licenses granted reflects research and development expenses already incurred by the Company. Generally,
all amounts received or due other than sales-based milestones and royalties are classified as license revenues. Sales-based milestones
and royalties under the Company’s license agreements will be recognized as royalty revenue in the period the related sale occurred.
The Company generally invoices its licensees upon the completion of the effort or achievement of a milestone, based on the terms of each
agreement. Deferred revenue arises from amounts received in advance of the culmination of the earnings process and is recognized as revenue
in future periods as performance obligations are satisfied. Deferred revenue expected to be recognized within the next twelve months is
classified as a current liability.
Research
and Development Services. The promises under the Company’s license agreements may include research and development services
to be performed by the Company on behalf of the customer. Payments or reimbursements resulting from the Company’s research and development
efforts are recognized as the services are performed and presented on a gross basis because the Company is the principal for such efforts.
Customer
Options. If an arrangement is determined to contain customer options that allow the customer to acquire additional goods or
services, the goods and services underlying the customer options that are not determined to be material rights are not considered to be
performance obligations at the outset of the arrangement, as they are contingent upon option exercise. The Company evaluates the customer
options for material rights, or options to acquire additional goods or services for free or at a discount. If the customer options are
determined to represent a material right, the material right is recognized as a separate performance obligation at the outset of the arrangement.
The Company allocates the transaction price to material rights based on the relative standalone selling price, which is determined based
on the identified discount and the probability that the customer will exercise the option. Amounts allocated to a material right are not
recognized as revenue until (1) the option is exercised and the additional goods or services are transferred or (2) the option
expires.
Milestone
Payments. At the inception of each arrangement that includes research or development milestone payments, the Company evaluates
whether the milestones are considered probable of being achieved and estimates the amount to be included in the transaction price using
the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is
included in the transaction price. Milestone payments that are not within the control of the Company or the licensee, such as regulatory
approvals, are not considered probable of being achieved until those approvals are received. The Company evaluates factors such as the
scientific, clinical, regulatory, commercial, and other risks that must be overcome to achieve the particular milestone in making this
assessment. There is considerable judgment involved in determining whether it is probable that a significant revenue reversal would not
occur. At the end of each subsequent reporting period, the Company reevaluates the probability of achievement of all milestones subject
to constraint and, if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative
catch-up basis, which would affect revenues and earnings in the period of adjustment.
Royalties.
For arrangements that include sales-based royalties, including milestone payments upon first commercial sales and milestone payments based
on a level of sales, which are the result of a customer-vendor relationship and for which the license is deemed to be the predominant
item to which the royalties relate, the Company recognizes revenue at the later of (i) when the related sales occur, or (ii) when
the performance obligation to which some or all of the royalty has been allocated has been satisfied or partially satisfied. To date,
the Company has not recognized any royalty revenue resulting from any of its licensing arrangements.
Collaborative Arrangements
The Company analyzes its collaboration arrangements
to assess whether such arrangements involve joint operating activities performed by parties that are both active participants in the activities
and exposed to significant risks and rewards dependent on the commercial success of such activities and therefore within the scope of
ASC Topic 808, Collaborative Arrangements (ASC 808). This assessment is performed throughout the life of the arrangement based on changes
in the responsibilities of all parties in the arrangement. For collaboration arrangements within the scope of ASC 808 that contain multiple
elements, the Company first determines which elements of the collaboration are deemed to be within the scope of ASC 808 and which elements
of the collaboration are more reflective of a vendor-customer relationship and therefore within the scope of ASC 606. For elements of
collaboration arrangements that are accounted for pursuant to ASC 808, an appropriate recognition method is determined and applied consistently,
generally by analogy to ASC 606. Amounts that are owed to collaboration partners are recognized as an offset to collaboration revenues
as such amounts are incurred by the collaboration partner. Where amounts owed to a collaboration partner exceed the Company’s collaboration
revenues in each quarterly period, such amounts are classified as research and development expense. Reimbursements from and payments to
the customer that are the result of a collaborative relationship with a partner, instead of a customer relationship, such as co-development
activities, are recorded as a reduction to research and development expense. For those elements of the arrangement that are accounted
for pursuant to ASC 606, the Company applies the five-step model described above under ASC 606.
See Note 3 for a complete discussion of the revenue recognition
for the Company’s license agreement.
Net Loss per Share
Basic net loss per share is
computed using the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed using
the weighted average number of common shares outstanding during the period and, if dilutive, the weighted average number of potential
shares of common stock, including the assumed exercise of stock options and warrants.
Subsequent Events
The Company considers events or transactions that
occur after the balance sheet date but prior to the issuance of the financial statements to provide additional evidence for certain estimates
or to identify matters that require additional disclosure. Subsequent events have been evaluated as required.
Recent Accounting Pronouncements
The Company’s significant accounting policies
are described in Note 2, “Summary of Significant Accounting Policies”, in the Company’s previously filed Annual Report
on Form 10-K for the year ended December 31, 2020.
3. BeiGene Exclusive Option and License Agreement
Terms of Agreement
On January 3, 2020, the Company entered into
an exclusive option and license agreement (the “BeiGene Agreement”) with BeiGene, Ltd. (“BeiGene”) for the
clinical development and commercialization of DKN-01, in Asia (excluding Japan), Australia, and New Zealand. The Company retains exclusive
rights for the development, manufacturing, and commercialization of DKN-01 for the rest of the world.
Pursuant to the BeiGene Agreement, the Company
received an upfront cash payment of $3,000 from BeiGene in exchange for granting BeiGene an option to an exclusive license to develop
and commercialize DKN-01 in Asia (excluding Japan), Australia, and New Zealand. The Company is eligible to receive up to $132,000 in future
option exercise and milestone payments, based upon the achievement of certain development, regulatory, and sales milestones, as well as
tiered royalties on any product sales of DKN-01 in the licensed territory.
The Company is responsible for conducting development
activities prior to the exercise of the option. After the option is exercised, BeiGene is solely responsible for the development and
commercialization of DKN-01 in the territory. The BeiGene Agreement continues in effect until the earlier of:
(i)
120 days after the end of the option period, if BeiGene has not exercised the option by such date; and (ii) on a country-by
country and Licensed Product-by-Licensed Product (as defined in the BeiGene Agreement) basis, the expiration of the Royalty Term (as
defined in the BeiGene Agreement) applicable to such licensed product in such country. At any time, BeiGene may terminate the
agreement by providing at least 60 days written notice of termination to the Company. Upon termination of the License Agreement, all
rights granted by the Company to BeiGene terminate.
Revenue Recognition
The Company evaluated the BeiGene Agreement to
determine whether it is a collaborative arrangement for purposes of ASC 808. The Company concluded that because both parties were active
participants and were exposed to the risks and rewards of the BeiGene Agreement, that such activities are under the scope of ASC 808.
The Company concluded that BeiGene was a customer with regard to the combined license and research and development activities and as such
the contract should be evaluated under ASC 606.
In determining the appropriate amount of revenue
to be recognized under ASC 606 as the Company fulfills its obligations under the BeiGene Agreement, the Company performs the following
steps: (i) identifies the promised goods or services in the contract; (ii) determines whether the promised goods or services
are performance obligations including whether they are distinct in the context of the contract; (iii) measures the transaction price,
including any constraints on variable consideration; (iv) allocates the transaction price to the performance obligations; and (v) recognizes
revenue when (or as) the Company satisfies each performance obligation.
The Company identified the following material promises
under the BeiGene Agreement: (1) option to an exclusive license to develop and commercialize DKN-01 in Asia (excluding Japan), Australia,
and New Zealand, (2) participation in a joint development committee, (3) technology transfer services and (4) pre-option
research and development services. The Company determined that the option to an exclusive license in the territory does not represent
a material right. Additionally, the Company determined that the participation in the joint development committee, research and development
services and technology transfer services are not distinct from each other, as each has limited value without the other. As such, for
the purposes of ASC 606, the Company determined that these four material promises, described above, should be combined into a single performance
obligation.
The Company determined the transaction price is
equal to the up-front fee of $3,000. The transaction price was fully allocated to the single performance obligation and is recognized
as revenue on a straight-line basis over the performance period of the research and development services. During each of the three months
ended March 31, 2021 and 2020, the Company recognized $375 of license revenue related to the up-front fee received from BeiGene.
Cost of contract acquisition
The Company incurred contract acquisition costs
of $270 which were capitalized under ASC 340-40 as incremental costs of obtaining the contract with BeiGene. This cost is amortized on
a straight-line basis over the performance period of the research and development services. The total amount of amortization expense during
the three months ended March 31, 2021 and 2020 was $34 and the closing balance recorded in deferred costs as of March 31, 2021
was $101.
Royalties
As the license is deemed to be the predominant
item to which sales-based royalties relate, the Company will recognize revenue when the related sales occur. No royalty revenue was recognized
during the three months ended March 31, 2021 and 2020.
The following table presents a summary of the activity
in the Company's contract liabilities, related to the upfront cash payment received of $3,000, from January 1, 2020 through March 31,
2021 (in thousands):
Contract Liabilities:
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2020
|
|
$
|
-
|
|
Additions
|
|
|
3,000
|
|
Deductions
|
|
|
(1,500
|
)
|
Balance at December 31, 2020
|
|
$
|
1,500
|
|
Deductions
|
|
|
(375
|
)
|
Balance at March 31, 2021
|
|
$
|
1,125
|
|
4. Accrued Expenses
Accrued expenses consist of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Clinical trials
|
|
$
|
1,676
|
|
|
$
|
795
|
|
Professional fees
|
|
|
117
|
|
|
|
255
|
|
Payroll and related expenses
|
|
|
542
|
|
|
|
1,697
|
|
Accrued expenses
|
|
$
|
2,335
|
|
|
$
|
2,747
|
|
5. Leases
The Company has operating leases for real
estate in the United States and does not have any finance leases. The Company’s leases may contain options to renew and extend
lease terms and options to terminate leases early. Reflected in the right-of-use asset and lease liability on the Company’s
consolidated balance sheets are the periods provided by renewal and extension options that the Company is reasonably certain to
exercise, as well as the periods provided by termination options that the Company is reasonably certain to not exercise.
The Company has existing leases that include variable
lease and non-lease components that are not included in the right-of-use asset and lease liability and are reflected as an expense in
the period incurred. Such payments primarily include common area maintenance charges and increases in rent payments that are driven by
factors such as future changes in an index (e.g., the Consumer Price Index).
In calculating the present value of future lease
payments, the Company utilized its incremental borrowing rate based on the remaining lease term at the date of adoption. The Company has
elected to account for each lease component and its associated non-lease components as a single lease component and has allocated all
of the contract consideration across lease components only. This will potentially result in the initial and subsequent measurement of
the balances of the right-of-use asset and lease liability for leases being greater than if the policy election was not applied. The Company
has existing net leases in which the non-lease components (e.g. common area maintenance, maintenance, consumables, etc.) are paid
separately from rent based on actual costs incurred and therefore are not included in the right-of-use asset and lease liability and are
reflected as an expense in the period incurred. As of March 31, 2021, a right-of-use asset of $433 and lease liability of $454 are
reflected on the condensed consolidated balance sheets. The Company recorded rent expense of $105 and $198, respectively, during the three
months ended March 31, 2021 and 2020.
Future lease payments under non-cancelable operating leases
as of March 31, 2021 are detailed as follows:
Future Operating Lease Payments
|
|
|
|
|
|
|
|
2021
|
|
$
|
327
|
|
2022
|
|
|
146
|
|
Total Lease Payments
|
|
|
473
|
|
Less: imputed interest
|
|
|
(19
|
)
|
Total operating lease liabilities
|
|
$
|
454
|
|
6. Warrants
As of March 31, 2021, outstanding warrants
to purchase common stock, all of which are classified as equity warrants, consisted of the following:
March 31, 2021
|
|
|
|
Description
|
|
Number of Shares
Issuable
|
|
|
Exercise Price
|
|
Expiration Date
|
|
1/23/2017
|
|
|
54,516
|
|
|
$
|
0.01
|
|
Upon M&A event
|
|
2017 Warrants
|
|
|
2,539,409
|
|
|
$
|
1.055
|
|
November 2024
|
|
2019 Warrants
|
|
|
7,489,893
|
|
|
$
|
1.95
|
|
February 2026
|
|
March 2020
|
|
|
14,413,902
|
|
|
$
|
0.001
|
|
March 2027
|
|
March 2020
|
|
|
25,945,035
|
|
|
$
|
2.11
|
|
March 2027
|
|
June 2020
|
|
|
2,250,000
|
|
|
$
|
0.001
|
|
June 2027
|
|
|
|
|
52,692,755
|
|
|
|
|
|
|
|
2017 Warrants
The 2017 Warrants contain full ratchet anti-dilution
protection provisions. The Company will recognize on a prospective basis the value of the effect of the down round feature in the 2017
Warrants when it is triggered (i.e., when the exercise price is adjusted downward). This value is measured as the difference between (1) the
financial instrument’s fair value (without the down round feature) using the pre-trigger exercise price and (2) the financial
instrument’s fair value (with the down round feature) using the reduced exercise price. The value of the effect of the down round
feature will be treated as a dividend and a reduction to income available to common stockholders in the basic EPS calculation. In connection
with the January 2020 Private Placement, when the 2017 Warrants were repriced from $1.75 to $1.055, the Company recorded a dividend
of $303 during the three months ended March 31, 2020.
2019 Warrants
On February 5, 2019,
in connection with the 2019 Public Offering, the Company issued immediately exercisable warrants (the “2019 Warrants”) to
purchase 7,557,142 shares of common stock to investors. The 2019 Warrants have an exercise price of $1.95 per share and expire on February 5,
2026. The 2019 Warrants qualify for equity classification.
March 2020 Warrants
On January 3, 2020, the Company entered into
a Securities Purchase Agreement with investors, providing for a private placement transaction exempt from the Securities Act of 1933,
as amended, pursuant to which the Company issued and sold 1,421,801 shares of its Series A Preferred Stock, at a purchase price of
$10.54 per share, and 1,137,442 shares of its Series B Preferred Stock at a purchase price of $10.55 per share, and one (1) share
of the Company's Special Voting Stock entitling the purchaser of Series A Preferred Stock to elect one member of the Company's board
of directors.
On March 5, 2020, the Company’s stockholders
approved the conversion of the Series A Preferred Stock into a pre-funded warrant to purchase 14,413,902 shares of common stock at
an exercise price of $0.001 (the “March 2020 Pre-funded Warrants”) and the conversion of the Series B Preferred
Stock into 11,531,133 shares of common stock. Each investor also received a warrant to purchase an equal number of shares of common stock
at an exercise price of $2.11 per share (the “Coverage Warrants”). The March 2020 Pre-funded Warrants and the Coverage
Warrants expire on March 5, 2027 and qualify for equity classification.
June 2020 Warrants
On June 22, 2020, the Company completed a
public offering (“the 2020 Public Offering”) whereby the Company issued 20,250,000 shares of its common stock, at $2.00 per
share and, in lieu of common stock, offered pre-funded warrants (the “June 2020 Pre-funded Warrants”) to purchase up
to 2,250,000 shares of its common stock to certain investors. The June 2020 Pre-funded Warrants have an exercise price of $0.001
per share, expire on June 22, 2027 and qualify for equity classification.
7. Common Stock
Each share of common stock entitles the holder
to one vote on all matters submitted to a vote of the Company’s stockholders. Common stockholders are entitled to receive dividends,
as may be declared by the board of directors, if any, subject to the preferential dividend rights of the preferred stockholders. Through
March 31, 2021, no dividends have been declared for shares of common stock.
Lincoln Park Purchase Agreement
On July 10, 2019, the Company entered into
a Commitment Purchase Agreement and a Registration Rights Agreement with Lincoln Park, pursuant to which the Company has the right to
sell to Lincoln Park up to $20,000 in shares of its common stock, subject to certain limitations and conditions set forth in the Commitment
Purchase Agreement. The Lincoln Park Purchase Agreement expires in July 2021. As consideration for Lincoln Park’s commitment
to purchase shares of common stock pursuant to the Commitment Purchase Agreement, the Company issued to Lincoln Park 330,000 shares of
common stock. The Company did not receive any cash proceeds from the issuance of such shares. During the three months ended March 31,
2021 and 2020, the Company did not issue any shares under the Commitment Purchase Agreement.
January 2020 Private Placement
On January 3, 2020, the Company issued and
sold 1,421,801 shares of its Series A Preferred Stock at a purchase price of $10.54 per share, and 1,137,442 shares of its Series B
Preferred Stock at a purchase price of $10.55 per share, and one (1) share of its Special Voting Stock, entitling the purchaser of
Series A Preferred Stock to elect one member of the Company’s board of directors, for aggregate net proceeds to the Company
of approximately $25,322.
On March 5, 2020, the Company’s stockholders
approved the conversion of the Series A Preferred Stock into a pre-funded warrant to purchase 14,413,902 shares of common stock at
an exercise price of $0.001 per share and the conversion of the Series B Preferred Stock into 11,531,133 shares of its common stock,
par value $0.001 per share. Each investor also received the Coverage Warrants to purchase an equal number of shares at an exercise price
of $2.11 per share.
In connection with the January 2020 Private
Placement, Series A Preferred Stock holders and Series B Preferred Stock holders were entitled to cash dividends at fixed cumulative
percentage of 8% per annum plus any dividends declared on outstanding common stock on an as-converted basis, effective on the issuance
date of the Series A Preferred Stock and Series B Preferred Stock. The cash dividends were converted to shares of common stock
upon the conversion of the Series A Preferred Stock to pre-funded warrants and Series B Preferred Stock to common stock. During
the three months ended March 31, 2020, the Company recorded $372 of Series A Preferred Stock and Series B Preferred Stock
dividends, which qualify as cumulative dividends, and in the calculation of EPS are subtracted from net income in arriving at income attributable
to common stockholders.
The Company determined that the embedded conversion
features of the Series A Preferred Stock and Series B Preferred Stock to receive the Coverage Warrants each met the definition
of a contingent beneficial conversion feature and should be accounted for separately as a derivative. The recognition of the beneficial
conversion feature occurred upon the conversion of the Series A Preferred Stock into pre-funded warrants and Series B Preferred
Stock into common stock and the issuance of the Coverage Warrants. The Company measured the contingent beneficial conversion features’
intrinsic values on January 3, 2020 and determined that the beneficial conversion features were valued at $5,226 for Series A
and $4,173 for Series B, respectively. Upon conversion, the discount originated by the contingent beneficial conversion feature,
at its intrinsic value for Series A Preferred Stock and Series B Preferred Stock, was immediately recognized as a dividend.
The dividend is reflected as an adjustment to basic and diluted net loss per share attributable to common stockholders.
Public Offering of Common Stock — June 2020
On June 22, 2020, the Company completed the
2020 Public Offering, whereby the Company issued 20,250,000 shares of its common stock at $2.00 per share and, in lieu of common stock,
issued certain investors 2,250,000 of its June 2020 Pre-funded Warrants. The June 2020 Pre-funded Warrants have an exercise
price of $0.001 per share, expire on June 22, 2027 and qualify for equity classification.
On June 25, 2020, the underwriters exercised
their right to purchase 3,375,000 additional shares of the Company’s common stock at the public offering price per share of common
stock, less underwriting discounts and commissions. The aggregate net proceeds received by the Company from the 2020 Public Offering were
approximately $48,276, net of underwriting discounts and commissions and estimated offering expenses payable by the Company.
8. Equity Incentive Plans
Equity Incentive Plans
In September 2012, the Company adopted the
2012 Equity Incentive Plan, as amended, which provides designated employees of the Company and its affiliates, certain consultants and
advisors who perform services for the Company and its affiliates, and nonemployee members of the board of directors of the Company and
its affiliates with the opportunity to receive grants of incentive stock options, nonqualified stock options and stock awards.
On January 20, 2017, the Company’s
stockholders approved the 2016 Equity Incentive Plan (the “2016 Plan”). Beginning on January 1, 2018, the number of shares
of common stock authorized for issuance pursuant to the 2016 Plan was increased each January 1 by an amount equal to four percent
(4%) of the Company’s outstanding common stock as of the end of the immediately preceding calendar year or such other amount as
determined by the compensation committee of the Company’s board of directors.
As of March 31, 2021, there were 1,094,999 shares available
for grant under the Company’s equity incentive plans.
A summary of stock option activity under the Equity Plans is as follows:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise Price
|
|
|
Average Remaining
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Per Share
|
|
|
Life in Years
|
|
|
Value
|
|
Outstanding at December 31, 2020
|
|
|
6,393,853
|
|
|
$
|
5.29
|
|
|
|
7.96
|
|
|
$
|
1,961
|
|
Granted
|
|
|
1,556,500
|
|
|
$
|
2.50
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(200,046
|
)
|
|
$
|
2.57
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2021
|
|
|
7,750,307
|
|
|
$
|
4.80
|
|
|
|
7.99
|
|
|
$
|
912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at March 31, 2021
|
|
|
3,907,038
|
|
|
$
|
7.25
|
|
|
|
6.81
|
|
|
$
|
456
|
|
Options vested and expected to vest at March 31, 2021
|
|
|
7,750,307
|
|
|
$
|
4.80
|
|
|
|
7.99
|
|
|
$
|
912
|
|
The grant date fair value of the options granted
during the three months ended March 31, 2021 and 2020 was estimated at the date of grant using the
Black-Scholes option valuation model. The expected life was estimated using the “simplified” method as defined by the SEC’s
Staff Accounting Bulletin 107, Share-Based Payment. The expected volatility was based on the historical volatility of comparable public
companies from a representative peer group selected based on industry and market capitalization data. The risk-free interest rate was
based on the continuous rates provided by the U.S. Treasury with a term approximating the expected life of the option. The expected dividend
yield was 0% because the Company does not expect to pay any dividends for the foreseeable future. The Company elected the straight-line
attribution method in recognizing the grant date fair value of options issued over the requisite service periods of the awards, which
are generally the vesting periods.
The weighted average grant date fair value for the stock options granted during the three months ended March 31, 2021 and 2020 was $1.57
and $1.48 per share, respectively.
The assumptions that the Company
used to determine the grant-date fair value of stock options granted to employees and directors during the three months ended March 31,
2021 and 2020 were as follows, presented on a weighted average basis:
|
|
Three Months
|
|
|
Three Months Ended
|
|
|
|
Ended March 31,
|
|
|
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Expected volatility
|
|
|
66.94
|
%
|
|
|
66.94
|
%
|
Weighted average risk-free interest rate
|
|
|
0.66
|
%
|
|
|
0.89
|
%
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected term (in years)
|
|
|
6.86
|
|
|
|
6.81
|
|
Stock options generally vest
over a three or four year period, as determined by the compensation committee of the board of directors at the time of grant. The options
expire ten years from the grant date. As of March 31, 2021, there was approximately $5,340 of unrecognized compensation cost related
to non-vested stock options, which is expected to be recognized over a remaining weighted-average period of approximately 2.24 years.
The Company recognized stock-based compensation
expense related to the issuance of stock option awards to employees and non-employees in the condensed consolidated statements of operations
as follows:
|
|
Three Months Ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Research and development
|
|
$
|
330
|
|
|
$
|
189
|
|
General and administrative
|
|
|
384
|
|
|
|
368
|
|
Total
|
|
$
|
714
|
|
|
$
|
557
|
|
Restricted Stock Units
During the year ended December 31, 2020, the
Company issued 92,500 restricted stock units (“RSUs”) to employees under the 2016 Plan. Upon vesting of the RSUs, the Company
has the option to settle the award by either issuing shares of the Company's common stock or paying an amount of cash equal to the fair
value of the Company's common stock on the settlement date. In January 2021, the Company cash settled 92,500 RSUs. As of December 31,
2020, these RSUs are classified as restricted stock liability in the condensed consolidated balance sheets of $204, as they contain a
cash settlement option.
During the three months ended March 31, 2021
and 2020, the Company granted 275,000 and 660,606, respectively, of RSUs to executive officers that will cliff vest and will be settled
after three years of continuous service, or upon a change of control of the Company, whichever is earlier, pursuant to the 2016 Plan.
During the three months ended March 31, 2021 and 2020, the Company recognized $119 and $13, respectively, of stock based compensation
expense related to equity classified RSUs, as they do not contain a cash settlement option.
The following table presents a summary of outstanding RSUs
under the 2016 Plan as of March 31, 2021:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average Grant
|
|
|
|
Number of Shares
|
|
|
Date Fair Value
|
|
Outstanding at December 31, 2020
|
|
|
753,106
|
|
|
$
|
1.52
|
|
Awarded
|
|
|
275,000
|
|
|
$
|
2.57
|
|
Settled in cash
|
|
|
(92,500
|
)
|
|
$
|
1.97
|
|
Outstanding at March 31, 2021
|
|
|
935,606
|
|
|
$
|
1.76
|
|
As of March 31, 2021,
there were 935,606 shares outstanding covered by RSUs that are expected to vest and the weighted average grant date fair value of these
shares of restricted stock was $1.76 per share and the aggregate grant date fair value of these shares of restricted stock was approximately
$1,645. As of March 31, 2021, there was approximately $1,278 of unrecognized compensation costs related to RSUs granted to employees,
which are expected to be recognized as expense over a remaining weighted average period of 2.41 years.
9. Net Loss Per Share
Basic and diluted net loss per share for the three
months ended March 31, 2021 and 2020 was calculated as follows (in thousands except share and per share amounts).
|
|
Three Months Ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(9,134
|
)
|
|
$
|
(7,231
|
)
|
Dividend attributable to down round feature of warrants
|
|
|
-
|
|
|
|
(303
|
)
|
Dividend attributable to Series A & B convertible preferred stock
|
|
|
-
|
|
|
|
(372
|
)
|
Series A & B convertible preferred stock - beneficial conversion feature
|
|
|
-
|
|
|
|
(9,399
|
)
|
Net loss attributable to common stockholders for basic and diluted loss per share
|
|
$
|
(9,134
|
)
|
|
$
|
(17,305
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding - basic and diluted
|
|
|
76,378,569
|
|
|
|
31,632,213
|
|
Net loss per share attributable to common stockholders - basic and diluted
|
|
$
|
(0.12
|
)
|
|
$
|
(0.55
|
)
|
Included within weighted average common shares
outstanding are 16,718,418 common shares issuable upon the exercise of the pre-funded warrants as the warrants are exercisable at any
time for nominal consideration, and as such, the shares are considered outstanding for the purpose of calculating basic and diluted net
loss per share attributable to common stockholders.
The Company’s potentially
dilutive securities include RSUs, stock options and warrants. These securities were excluded from the computations of diluted net loss
per share for the three months ended March 31, 2021 and 2020, as the effect would be to reduce the net loss per share. The following
table includes the potential shares of common stock, presented based on amounts outstanding at each period end, that were excluded from
the computation of diluted net loss per share attributable to common stockholders for the periods indicated because including them would
have had an anti-dilutive effect:
|
|
Three Months Ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Restricted stock units to purchase common stock
|
|
|
935,606
|
|
|
|
660,606
|
|
Options to purchase common stock
|
|
|
7,750,307
|
|
|
|
5,091,209
|
|
Warrants to purchase common stock
|
|
|
35,974,337
|
|
|
|
36,249,087
|
|
|
|
|
44,660,250
|
|
|
|
42,000,902
|
|
10. Commitments and Contingencies
Manufacturing
Agreements—The Company is party to manufacturing agreements with vendors to manufacture DKN-01, its lead product candidate,
for use in clinical trials. As of March 31, 2021, there were $2,030 noncancelable commitments under these agreements.
License
and Service Agreement—On January 3, 2011, the Company entered into a license agreement with Eli Lilly and Company
(“Lilly”), a shareholder, to grant a license to the Company for certain intellectual property rights relating to pharmaceutically
active compounds that may be useful in the treatment of bone healing, cancer and, potentially, other medical conditions. As defined in
the license agreement, the Company would be required to pay royalties to Lilly based upon a percentage in the low single digits of net
sales of developed products, if and when achieved. However, there can be no assurance that clinical or commercialization success of developed
products will occur, and no royalties have been paid or accrued through March 31, 2021.
License
Agreement—On May 28, 2015, the Company entered into a license agreement with Lonza Sales AG (“Lonza”),
pursuant to which Lonza granted the Company a world-wide, non-exclusive license for certain intellectual property relating to a gene expression
system for manufacturing DKN-01. As defined in the license agreement, the Company would be required to pay royalties to Lonza based on
a percentage in the low single digits of net sales of DKN-01, if and when achieved. However, there can be no assurance that clinical or
commercialization success will occur, and no royalties have been paid or accrued through March 31, 2021.
Legal
Proceedings—At each reporting date, the Company evaluates whether or not a potential loss amount or a potential range
of loss is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies.
The Company expenses as incurred the costs related to its legal proceedings.
A
patent covering the TRX518 antibody and its uses in methods of inducing or enhancing an immune response in a subject was granted
in 2013 to the Company by the European Patent Office (EPO). Three notices of opposition to this patent were filed: two by major pharmaceutical
companies and a third by an individual, possibly on behalf of a major pharmaceutical company. At the conclusion of the opposition proceedings
before the Opposition Division of the EPO, the Opposition Division issued a decision indicating that the Company’s patent was maintained
with modified claims that differ from the claims as originally granted. These narrowed claims cover the TRX518 antibody and uses of the
TRX518 antibody in methods of inducing or enhancing an immune response in a subject. The Company filed an appeal of the decision of the
Opposition Division seeking to obtain broader claims that more closely reflect the claims as granted in the patent. A hearing before the
EPO Boards of Appeal took place on September 16, 2020, which resulted in the Boards of Appeal dismissing the appeal and maintaining
the Decision of the Opposition Division. A written Decision by the Boards of Appeal was issued on September 25, 2020.
In
2016, a patent covering the use of the TRX518 antibody in combination with a chemotherapeutic agent for treating cancer was granted
to the Company by the EPO. In March 2017, notices of opposition to this patent were filed at the EPO by ten different entities, including
several major pharmaceutical companies. Oral proceedings at the EPO took place on December 4 and 5, 2018. At the conclusion of the
oral proceedings, the Opposition Division decided that the patent should be revoked in its entirety on the ground that the claims as granted
contained added matter. Subsequently, the Opposition Division issued an interlocutory decision restating its conclusion that the claims
as granted contained added matter and revoking the patent. The Company has filed an appeal of the decision of the Opposition Division
seeking to obtain a reversal of the Opposition Division’s decision on added matter. The EPO Board of Appeal has not yet scheduled
the appeal hearing.
In
December of 2019, a patent covering the use of the TRX518 antibody in combination with the chemotherapeutic agent, gemcitabine,
for treating a colon tumor or adenocarcinoma of the colon, was granted to the Company by the EPO. A Notice of Opposition was filed against
the patent by a single opponent, Sanofi, on September 25, 2020. The EPO issued a Communication on October 9, 2020 setting a
deadline of February 9, 2021 for the Patentee to file a response to the Notice of Opposition. The Company filed a timely reply to
the opponent’s Notice of Opposition on February 9, 2021. Oral proceedings at the EPO have not yet been scheduled.
Indemnification
Agreements—In the ordinary course of business, the Company may provide indemnification of varying scope and terms to
vendors, lessors, business partners and other parties with respect to certain matters including, but not limited to, losses arising out
of breach of such agreements or from intellectual property infringement claims made by third parties. In addition, the Company has entered
into indemnification agreements with members of its board of directors that will require the Company, among other things, to indemnify
them against certain liabilities that may arise by reason of their status or service as directors or officers. The maximum potential amount
of future payments the Company could be required to make under these indemnification agreements is, in many cases, unlimited. To date,
the Company has not incurred any material costs as a result of such indemnifications. The Company is not aware of any claims under indemnification
arrangements, and it has not accrued any liabilities related to such obligations in its condensed consolidated financial statements as
of March 31, 2021 or December 31, 2020.