Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
1—Nature of Operations and Basis of Presentation
We are a biotechnology
company focused on designing, developing and commercializing innovative therapies and proprietary medical approaches to stimulate
and guide an anti-tumor immune response for the treatment of cancer. Our core platform technology, ImmunoPulse®, is a drug-device
therapeutic modality comprised of a proprietary intratumoral electroporation delivery device. The ImmunoPulse® platform is
designed to deliver plasmid DNA-encoded drugs directly into a solid tumor and promote an immunological response against cancer.
The ImmunoPulse® device can be adapted to treat different tumor types, and consists of an electrical pulse generator, a reusable
handle and disposable applicators. Our lead product candidate is a DNA-encoded interleukin-12 (“IL-12”), called tavokinogene
telseplasmid (“TAVO”). The ImmunoPulse® electroporation platform is used to deliver TAVO intratumorally, with
the aim of reversing the immunosuppressive microenvironment in the treated tumor. The activation of the appropriate inflammatory
response can drive a systemic anti-tumor response against untreated tumors in other parts of the body. In 2017, we received Fast
Track designation and Orphan Drug Designation from the U.S. Food and Drug Administration (“FDA”) for TAVO in
metastatic melanoma, which could qualify TAVO for expedited FDA review, a rolling Biologics License Application review and certain
other benefits.
Our
current focus is to pursue our study of TAVO in combination with KEYTRUDA® (pembrolizumab) in melanoma, triple negative breast
cancer (“TNBC”), squamous cell head and neck (“SCCHN”), and cervical cancer.
KEYNOTE-695 targets melanoma
patients who are definitive anti-PD-1 non-responders. In May 2017, we entered into a clinical trial collaboration and supply agreement
with a subsidiary of Merck & Co., Inc. (“Merck”) in connection with the KEYNOTE-695 study. Pursuant to the terms
of the agreement, both companies will bear their own costs related to manufacturing and supply of their product, as well as be
responsible for their own internal costs. We are the study sponsor and are responsible for external costs. The
KEYNOTE-695 study is currently enrolling and treating patients and we provided topline preliminary data updates at
The Society for Immunotherapy of Cancer in November of 2018 and at our Business Outlook in February 2019. This study is a registration-directed,
Phase 2b open-label, single-arm, multicenter study in the United States, Canada, Australia and Europe.
In May 2018, we entered
into a second clinical trial collaboration and supply agreement with Merck with respect to a Phase 2 study of TAVO in combination
with KEYTRUDA® to evaluate the safety and efficacy of the combination in patients with inoperable locally advanced or metastatic
TNBC, who have previously failed at least one systemic chemotherapy or immunotherapy. This study is referred to as KEYNOTE-890.
Pursuant to the terms of the agreement, both companies will bear their own costs related to manufacturing and supply of their
product, as well as be responsible for their own internal costs. We are the study sponsor and are responsible for
external costs. The KEYNOTE-890 study is currently enrolling and treating patients, and in May 2019, we provided topline
preliminary data. The study is a Phase 2 open-label, single-arm, multicenter study in the United States and Australia.
OMS-131
is an investigator-initiated clinical trial conducted by the University of California San Francisco Helen Diller Family Comprehensive
Cancer Center. This study targets patients with SCCHN and is a single-arm open-label clinical trial in which 35 evaluable patients
will receive TAVO, KEYTRUDA® and epacadostat. OMS-131 is currently enrolling and treating patients.
OMS-150
targets women with recurrent/persistent cervical cancer. In December 2018, we entered into a collaboration with the Gynecologic
Oncology Group Foundation, the world-renowned, non-profit organization with the purpose of conducting clinical research for the
prevention and treatment of all gynecologic cancers, including cervical cancer. OMS-150 will evaluate the combination of TAVO
and commercially available KEYTRUDA®.
We
intend to continue to pursue other ongoing or potential new trials and studies related to TAVO, in various tumor types. In addition,
we are also developing our next-generation electroporation device and applicator, including advancements toward prototypes, pursuing
discovery research to identify other product candidates that, in addition to IL-12, can be encoded into propriety plasmid-DNA,
delivered intratumorally using electroporation. Specifically, we are developing a new, propriety technology to potentially
treat pancreatic, liver and other difficult to treat visceral lesions through the direct delivery of plasmid-based IL-12 with
a new Visceral Lesions Applicator (“VLA”). The VLA has been designed to work with our recently announced generator,
APOLLO
, to leverage plasmid-optimized electroporation (“EP”), enhancing the depth and frequency of transfection
of immunologically relevant genes into cells located in deep visceral lesions. Using our next-generation technology, our goal
is to reverse the immunosuppressive mechanisms of a tumor, as well as to expand our ImmunoPulse® pipeline. We believe that
the flexibility of our propriety plasmid-DNA technology allows us to deliver other immunologically relevant molecules into the
tumor microenvironment in addition to the delivery of plasmid-DNA encoding for IL-12. In March 2019, the Company had a poster
presentation at the 2019 America Association for Cancer Research (“AACR”) where it presented pre-clinical data regarding
its new anti-tumor product candidate, which will amplify the power of intratumoral IL-12 through the addition of both CXCL9, a
critical T cell chemokine, and anti-CD3, a membrane bound pan T cell stimulator. These other immunologically relevant molecules
may complement IL-12’s activity by limiting or enhancing key pathways associated with tumor immune subversion.
We have established
a collaboration with Emerge Health Pty (“Emerge”), the leading Australian company providing full registration, reimbursement,
sales, marketing and distribution services of therapeutic products in Australia and New Zealand, to commercialize OncoSec’s
proprietary TAVO (enhanced IL-12 DNA-plasmid) and plan to make it available under Australia’s Special Access Scheme (“SAS”)
in 2019. As a specialized Australian pharmaceutical company focused on the marketing and sales of high-quality medicines to the
hospital sector, Emerge has previously made numerous other products successfully available under Australia’s SAS.
We continue to enhance our intellectual property portfolio. In May 2019, we were
granted exclusive worldwide rights to Gaeta Therapeutics’ broad portfolio of patents and applications covering the combination
use of IL-12 DNA and various checkpoint inhibitor therapies, including anti-CTLA-4 and anti-PD-1 compounds, in key global markets.
Under this license, we secured exclusive global rights to a suite of issued patents and pending patent applications which not
only supplement our current patent holdings, but also cover other uses of IL-12 DNA in combination with various checkpoint inhibitors
in several key territories.
Reverse
Stock Split
On
May 20, 2019, the Company effected a one-for-ten reverse stock split of our authorized and outstanding common stock.
All share and per share information has been retroactively adjusted to reflect the reverse stock split. The par value was not
adjusted as a result of the reverse stock split.
Basis
of Presentation
In
October 2016, the Company created an Australian corporation as its wholly-owned subsidiary. This corporation’s functional
currency, the Australian dollar, is also its reporting currency, and its financial statements are translated to U.S. dollars,
the Company’s reporting currency, prior to consolidation. The accompanying condensed consolidated financial statements include
the accounts of the Company and its subsidiary, and all intercompany accounts and transactions have been eliminated in consolidation.
Unaudited
Interim Financial Information
The
accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally
accepted accounting principles (“U.S. GAAP”) for interim financial information and with instructions to Form 10-Q
and Article 8 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by U.S. GAAP for
complete financial statements. The condensed consolidated balance sheet as of April 30, 2019, the condensed consolidated statements
of operations, the condensed consolidated statements of comprehensive loss and the condensed consolidated statements of stockholders’
equity for the three and nine months ended April 30, 2019 and 2018, and the condensed consolidated statements of cash flows for
the nine months ended April 30, 2019 and 2018, are unaudited, but include all adjustments (consisting of normal recurring adjustments)
that the Company considers necessary for a fair presentation of the Company’s financial position, results of operations
and cash flows for the periods presented. The condensed consolidated results of operations for the three and nine months ended
April 30, 2019 shown herein are not necessarily indicative of the consolidated results that may be expected for the year ending
July 31, 2019, or for any other period. These condensed consolidated financial statements, and notes thereto, should be read in
conjunction with the audited consolidated financial statements for the fiscal year ended July 31, 2018, included in the Company’s
Annual Report on Form 10-K (the “Annual Report”) filed with the U.S. Securities and Exchange Commission (“SEC”)
on October 19, 2018. The condensed consolidated balance sheet at July 31, 2018 has been derived from the audited financial statements
at that date but does not include all the information and footnotes required by U.S. GAAP for complete financial statements.
Note
2—Significant Accounting Policies
Use
of Estimates
The
accompanying condensed consolidated financial statements have been prepared in conformity with U.S. GAAP, which 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 financial statements and the reported amounts of expenses during the reporting period. Such
estimates include stock-based compensation, accounting for long-lived assets and accounting for income taxes, including the related
valuation allowance on the deferred tax asset and uncertain tax positions. The Company bases its estimates on historical experience
and on various other assumptions that it believes are reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. On
an ongoing basis, the Company reviews its estimates to ensure that they appropriately reflect changes in the business or as new
information becomes available. Actual results could differ materially from these estimates.
Segment
Reporting
The Company operates
in a single industry segment – The discovery and development of novel immunotherapeutic product candidates to
improve treatment options for patients and physicians, intended to treat a wide range of oncology indications.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments that are readily convertible into cash and have an original maturity of three
months or less at the time of purchase to be considered cash equivalents.
Concentrations
and Credit Risk
The
Company maintains cash balances at a small number of financial institutions and such balances commonly exceed the $250,000 amount
insured by the Federal Deposit Insurance Corporation. The Company has not experienced any losses in such accounts and management
believes that the Company does not have significant credit risk with respect to such cash and cash equivalents.
Investment
Securities
Securities
held to maturity are recorded at amortized cost based on the Company’s positive intent and ability to hold these securities
to maturity.
Management
evaluates whether securities held to maturity are other-than-temporarily impaired (“OTTI”) on a quarterly basis. Debt
securities with unrealized losses are considered OTTI if the Company intends to sell the security or if it is more likely than
not that the Company will be required to sell such security prior to any anticipated recovery. If management determines that a
security is OTTI under these circumstances, the impairment recognized in earnings is measured as the entire difference between
the amortized cost and the then-current fair value.
Property
and Equipment
The
Company’s capitalization threshold is $5,000 for property and equipment. The cost of property and equipment is depreciated
on a straight-line basis over the estimated useful lives of the related assets. The useful lives of property and equipment for
the purpose of computing depreciation are as follows:
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Computers
and equipment:
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3
to 10 years
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Computer
software:
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1
to 3 years
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Leasehold
improvements:
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Shorter
of lease period or useful life
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Impairment
of Long-Lived Assets
The
Company periodically assesses the carrying value of intangible and other long-lived assets, and whenever events or changes in
circumstances indicate that the carrying amount of an asset might not be recoverable. The assets are considered to be impaired
if the Company determines that the carrying value may not be recoverable based upon its assessment, which includes consideration
of the following events or changes in circumstances:
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the
asset’s ability to continue to generate income from operations and positive cash flow in future periods;
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●
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loss
of legal ownership or title to the asset;
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●
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significant
changes in the Company’s strategic business objectives and utilization of the asset(s); and
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●
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the
impact of significant negative industry or economic trends.
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If
the assets are considered to be impaired, the impairment recognized is the amount by which the carrying value of the assets exceeds
the fair value of the assets. Fair value is determined by the application of discounted cash flow models to project cash flows
from the asset. In addition, the Company bases estimates of the useful lives and related amortization or depreciation expense
on its subjective estimate of the period the assets will generate revenue or otherwise be used by it. Assets to be disposed of
are reported at the lower of the carrying amount or fair value, less selling costs. The Company also periodically reviews the
lives assigned to long-lived assets to ensure that the initial estimates do not exceed any revised estimated periods from which
the Company expects to realize cash flows from its assets.
Fair
Value of Financial Instruments
The
carrying amounts for cash, prepaid expenses, accounts payable and accrued expenses and notes payable approximate fair
value due to the short-term nature of these instruments. It is management’s opinion that the Company is not exposed to significant
interest, currency, or credit risks arising from its other financial instruments and that their fair values approximate their
carrying values except where expressly disclosed.
The
accounting standard for fair value measurements provides a framework for measuring fair value and requires disclosures regarding
fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date, based on the Company’s principal or, in absence
of a principal, most advantageous market for the specific asset or liability.
The
Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a
recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their
initial measurement. The hierarchy requires the Company to use observable inputs when available, and to minimize the use of unobservable
inputs, when determining fair value.
The
three tiers are defined as follows:
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Level
1—Observable inputs that reflect quoted market prices (unadjusted) for identical assets or liabilities in active markets
at the measurement date. Since valuations are based on quoted prices that are readily and regularly available in an active
market, valuation of these products does not entail a significant degree of judgment. The Company’s Level 1 assets consist
of bank deposits and money market funds.
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Level
2—Observable inputs other than quoted prices in active markets that are observable either directly or indirectly in
the marketplace for identical or similar assets and liabilities. The Company’s Level 2 assets consist of U.S. government
sponsored securities.
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Level
3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
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The
development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the
responsibility of the Company’s Chief Financial Officer.
Changes
in fair value measurements categorized within Level 3 of the fair value hierarchy are analyzed each period based on changes in
estimates or assumptions and recorded as appropriate.
No
such items existed as of April 30, 2019 and July 31, 2018.
Financial
Instruments Not Recorded at Fair Value
Descriptions
of the valuation methodologies and assumptions used to estimate the fair value of financial instruments not recorded at fair value
are described below. The Company’s financial instruments not recorded at fair value but for which fair value can be approximated
and disclosed include:
Securities
Held to Maturity
–
The fair values of securities held to maturity are obtained using an independent third-party financial
institution.
Warrants
The
Company assesses its warrants as either equity or a liability based upon the characteristics and provisions of each instrument.
Warrants classified as equity are recorded at fair value as of the date of issuance on the Company’s condensed balance
sheet and no further adjustments to their valuation are made. Warrants classified as derivative liabilities and other derivative
financial instruments that require separate accounting as liabilities are recorded on the Company’s condensed balance
sheet at their fair value on the date of issuance and are re-measured on each subsequent balance sheet date until such instruments
are exercised or expire, with any changes in the fair value between reporting periods recorded as other income or expense. Management
estimates the fair value of these liabilities using option pricing models and assumptions that are based on the individual characteristics
of the warrants or other instruments on the valuation date, as well as assumptions for future financings, expected volatility,
expected life, yield and risk-free interest rate. As of April 30, 2019, and July 31, 2018, all outstanding warrants issued by
the Company were classified as equity.
Net
Loss Per Share
The
Company computes basic net loss per common share by dividing the applicable net loss by the weighted-average number of common
shares outstanding during the period. Diluted earnings per share is computed by dividing the applicable net loss by the weighted-average
number of common shares outstanding during the period plus additional shares to account for the dilutive effect of potential future
issuances of common stock relating to stock options and other potentially dilutive securities using the treasury stock method.
The
Company did not include shares underlying stock options, restricted stock units and warrants issued and outstanding during any
of the periods presented in the computation of net loss per share, as the effect would have been anti-dilutive. The following
potentially dilutive outstanding securities were excluded from diluted net loss per share because of their anti-dilutive effect:
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For
the Three and Nine Months Ended
April
30, 2019
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For
the Three and Nine Months Ended
April
30, 2018
|
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Stock
options
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915,278
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848,857
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Restricted
stock units
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88,114
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|
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141,200
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Warrants
|
|
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892,890
|
|
|
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895,805
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Total
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|
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1,896,282
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1,885,862
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Subsequent
to April 30, 2019, the Company issued shares of common stock that will impact earnings per share in the future. (See Note 12)
Stock-Based
Compensation
The
Company grants equity-based awards (typically stock options or restricted stock units) under our stock-based compensation plan
and outside of our stock-based compensation plan, with terms generally similar to the terms under our stock-based compensation
plan. The Company estimates the fair value of stock option awards using the Black-Scholes option valuation model. For employees,
directors and consultants, the fair value of the award is measured on the grant date. Prior to the adoption of ASU 2018-07 on
August 1, 2018, the fair value of the award for non-employees was generally re-measured on vesting dates and interim financial
reporting dates until the service period was complete. The fair value amount is then recognized over the period during which services
are required to be provided in exchange for the award, usually the vesting period. The Black-Scholes option valuation model requires
the input of subjective assumptions, including price volatility of the underlying stock, risk-free interest rate, dividend yield,
and expected life of the option. The Company estimates the fair value of restricted stock unit awards based on the closing price
of the Company’s common stock on the date of issuance. Changes in assumptions used under the Black-Scholes option valuation
model could materially affect the Company’s net loss and net loss per share.
Employee
Stock Purchase Plan
Employees
may elect to participate in the Company’s stockholder approved employee stock purchase plan. The stock purchase plan allows
for the purchase of the Company’s common stock at not less than 85% of the lesser of (i) the fair market value of a share
of common stock on the beginning date of the offering period or (ii) the fair market value of a share of common stock on the purchase
date of the offering period, subject to a share and dollar limit as defined in the plan and subject to the applicable legal requirements.
There are two six-month offering periods during each fiscal year, ending on January 31 and July 31.
In
accordance with applicable accounting guidance, the fair value of awards under the stock purchase plan is calculated at the beginning
of each offering period. The Company estimates the fair value of the awards using the Black-Scholes option valuation model. The
Black-Scholes option valuation model requires the input of subjective assumptions, including price volatility of the underlying
stock, risk-free interest rate, dividend yield, and the offering period. This fair value is then amortized at the beginning of
the offering period. Stock-based compensation expense is based on awards expected to be purchased at the beginning of the offering
period, and therefore is reduced when participants withdraw during the offering period.
Deferred
Rent
Rent
expense from leases is recorded on a straight-line basis over the lease period. The net excess of rent expense over the actual
cash paid is recorded as deferred rent.
Foreign
Currency Translation
We
use the U.S. Dollar as the reporting currency for our financial statements. Functional currency is the currency of the primary
economic environment in which an entity operates. The functional currency of our wholly owned subsidiary is the Australian dollar.
Assets
and liabilities of our subsidiary are translated into U.S. Dollars at period-end foreign exchange rates, and revenues and expenses
are translated at average rates prevailing throughout the period. Translation adjustments are included in “Accumulated other
comprehensive income (loss),” a separate component of stockholders’ equity, and in the “Effect of exchange rate
changes on cash and cash equivalents,” on our condensed consolidated statements of cash flows. Transaction gains and losses
including intercompany transactions denominated in a currency other than the functional currency of the entity involved are included
in “Foreign currency exchange gain (loss), net” on our condensed consolidated statements of operations.
Accumulated
Other Comprehensive Income (Loss)
Accumulated
other comprehensive income (loss) includes foreign currency translation adjustments related to the Company’s subsidiary
in Australia and is excluded from the accompanying condensed consolidated statements of operations.
Australia
Research and Development Tax Credit
The
Company’s wholly-owned Australian subsidiary incurs research and development expenses, primarily in the course of conducting
clinical trials. The Company’s Australian research and development activities qualify for the Australian government’s
tax credit program, which provides a 41.0 percent credit for qualifying research and development expenses. The tax credit does
not depend on the Company’s generation of future taxable income or ongoing tax status or position. Accordingly, the credit
is not considered an element of income tax accounting under ASC 740 and is recorded against qualifying research and development
expenses.
Tax
Reform
The
Tax Cuts and Jobs Act (the “Act”) was enacted in December 2017. Among other things, the Act reduced the U.S. federal
corporate tax rate from 34 percent to 21 percent as of January 1, 2018 and eliminated the alternative minimum tax (“AMT”)
for corporations. Since the deferred tax assets are expected to reverse in a future year, it has been tax effected using the 21%
federal corporate tax rate. As a result of the reduction in the corporate tax rate, the Company decreased its gross deferred tax
assets by approximately $12.4 million which was offset by a corresponding decrease to the valuation allowance as of July 31, 2018,
which had no impact on the Company’s consolidated financial statements for the year ended July 31, 2018. The effects of
the 2017 Tax Act did not have a significant impact on the Company’s unaudited condensed consolidated financial statements
for the three and nine months ended April 30, 2019.
Recent
Accounting Pronouncements
In May 2014, the Financial
Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2014-09,
Revenue
from Contracts with Customers (“ASU 2014-09”)
, to supersede previous revenue recognition guidance under current
U.S. GAAP. The guidance presents a single five-step model for comprehensive revenue recognition that requires an entity to recognize
revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which
the entity expects to be entitled in exchange for those goods or services. Two options are available for implementation of the
standard which is either the retrospective approach or cumulative effect adjustment approach. The guidance becomes effective for
annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, with early
adoption permitted. The Company adopted this standard on August 1, 2018 using the modified retrospective transition method. The
adoption of this standard did not have a material impact on the Company’s unaudited condensed consolidated financial statements
and related disclosures.
In
January 2016, the FASB issued ASU
2016-01,
Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial
Liabilities (“ASU 2016-01”)
, which addresses certain aspects of recognition, measurement, presentation, and disclosure
of financial instruments. ASU 2016-01 is effective for annual reporting periods beginning after December 15, 2017 and interim
periods within those annual periods, and earlier adoption is not permitted except for certain provisions. The Company adopted
this standard on August 1, 2018. The adoption of this standard did not have a material impact on the Company’s unaudited
condensed consolidated financial statements and related disclosures.
In
August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows
(“ASU 2016-15”)
, to reduce diversity
in practice of how certain transactions are classified in the statement of cash flows. The effective date for ASU 2016-15 is for
annual periods beginning after December 15, 2017, and interim periods within those fiscal years. The Company adopted this standard
on August 1, 2018. The adoption of this standard did not have a material impact on the Company’s unaudited condensed consolidated
financial statements and related disclosures.
In
January 2017, the FASB issued guidance codified in ASU 2017-04,
Intangibles—Goodwill and Other (Topic 350) Simplifying
the Test for Goodwill Impairment (“ASU 2017-04”).
Under this guidance, an entity will no longer determine goodwill
impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets
and liabilities as if that reporting unit had been acquired in a business combination. Instead, an entity will compare the fair
value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount
exceeds the reporting unit’s fair value. The guidance is effective for fiscal years beginning after December 15, 2019, including
interim periods therein, with early adoption permitted. The Company adopted this standard on August 1, 2018. The adoption of this
standard did not have a material impact on the Company’s unaudited condensed consolidated financial statements and related
disclosures. The Company does not currently have any intangible or goodwill balances.
In
May 2017, the FASB issued ASU 2017-09,
Compensation—Stock Compensation (Topic 718) (“ASU 2017-09”),
which
provides further guidance as to what constitutes a modification to the terms of share-based compensation, in order to create consistency
in practice among all entities. ASU 2017-09 becomes effective for annual reporting periods beginning after December 15, 2017,
including interim periods thereafter; early adoption is permitted. The Company adopted this standard on August 1, 2018. The adoption
of this standard did not have a material impact on the Company’s unaudited condensed consolidated financial statements and
related disclosures.
In
July 2017, the FASB issued ASU 2017-11,
Earnings Per Share (Topic 260), Distinguishing Equity from Liabilities (Topic 480)
and Derivatives and Hedging (Topic 815) (“ASU 2017-11”),
which addresses the complexity of accounting for certain
financial instruments with down-round features and finalizes pending guidance related to mandatorily redeemable noncontrolling
interests. Under ASU 2017-11, when determining whether certain financial instruments should be classified as liabilities or equity
instruments, a down-round feature no longer precludes equity classification when assessing whether the instrument is indexed to
an entity’s own stock. ASU 2017-11 becomes effective for annual reporting periods beginning after December 15, 2018, including
interim periods thereafter; early adoption is permitted. The Company adopted this standard on August 1, 2018. The adoption of
this standard did not have a material impact on the Company’s unaudited condensed consolidated financial statements and
related disclosures.
In June 2018, the FASB
issued ASU 2018-07,
Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting
(“ASU 2018-07”)
, which expands the scope of Topic 718 to include all share-based payment transactions
for acquiring goods and services from nonemployees. ASU 2018-07 specifies that Topic 718 applies to all share-based payment transactions
in which the grantor acquires goods and services to be used or consumed in its own operations by issuing share-based payment awards.
ASU 2018-07 also clarifies that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to
the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for
under ASC 606. ASU 2018-07 is effective for fiscal years beginning after December 15, 2018, including interim periods within those
fiscal years, with early adoption permitted, but no earlier than our adoption of ASC 606. The Company chose to early adopt ASU
2018-07 on August 1, 2018. The adoption of this standard did not have a material impact on the Company’s unaudited condensed
consolidated financial statements and related disclosures.
There
were no accounting pronouncements during the nine months ended April 30, 2019 that the Company anticipates will have a material
impact on the Company’s financial condition, results of operations or related disclosures. See Note 2 to the Annual Report
for a discussion of certain recent accounting pronouncements not yet adopted by the Company.
Note
3—Liquidity and Financial Condition
The
Company has sustained losses in all reporting periods since inception, with an inception-to-date loss of $156.9 million
as of April 30, 2019, which raises substantial doubt. Further, the Company has never generated any cash from its operations and
does not expect to generate meaningful cash in the near term. Consequently, the Company will need additional capital to
continue operating its business and fund its planned operations, including research and development, clinical trials and, if regulatory
approval is obtained, commercialization of its product candidates. In addition, the Company will require additional financing
if it desires to in-license or acquire new assets, research and develop new compounds or new technologies and pursue related patent
protection, or obtain any other intellectual property rights or other assets.
As
of April 30, 2019, the Company had cash, cash equivalents and investment securities of $23.3 million. The Company had cash of
$4.2 million and cash equivalents of $18.1 million for a total cash and cash equivalents balance of $22.3 million. In addition,
the Company had short-term investment securities of $1.0 million. Cash flows from financing activities continued to provide the
primary source of our liquidity. Net cash provided by financing activities was $17.2 million during the nine months ended April
30, 2019, which was primarily attributable to the net proceeds received from the Alpha Holdings agreement, Aspire Capital agreement
and the exercise of certain stock options (See Note 7).
Additionally,
subsequent to April 30, 2019, the Company received gross proceeds of approximately $11.0 million from the sale of our common stock
and warrants. (see Note 12). As of May 28, 2019, the Company had cash, cash equivalents and investment securities of approximately
$31.4 million.
The
above financing activities substantially increased the Company’s cash position. As a result, as of the date of the issuance
of these condensed consolidated financial statements, the Company believes its current cash position as a result of the Company’s
financing activities during the nine months ended April 30, 2018 and through June 2019 has alleviated substantial doubt about
its ability to sustain operations through at least the next 12 months from the issuance date of the condensed consolidated financial
statements. The Company is anticipating raising additional capital but there can be no assurance that it will be able to do
so or if the terms will be favorable.
Note
4—Investment Securities
The
amortized cost, gross unrealized losses, and fair value of securities held to maturity are as follows
as
of April 30, 2019
:
|
Description
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Investment
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
treasury securities with maturities of one year or less
|
|
$
|
998,938
|
|
|
$
|
-
|
|
|
$
|
(188
|
)
|
|
$
|
998,750
|
|
|
Total
|
|
$
|
998,938
|
|
|
$
|
-
|
|
|
$
|
(188
|
)
|
|
$
|
998,750
|
|
The
fair values of held to maturity securities, excluding U.S. treasury securities, were obtained
using
an independent third-party financial institution
. Management made no adjustments to the fair value quotes that were provided
by the
third-party financial institution
. The fair values of U.S. treasury securities
were determined using quoted, active market prices for identical securities.
During
the nine months ended April 30, 2019, the Company sold investments, categorized as held to maturity, with a net carrying amount
of $5,989,928 for gross proceeds of $5,977,794 and realized a loss of $0 and $12,134 during the three and nine months ended April
30, 2019, respectively. The sale of the securities was suggested by the Company’s investment advisors and the event is isolated.
Note
5—Balance Sheet Details
Property
and Equipment
Property
and equipment, net, is comprised of the following:
|
|
|
April
30, 2019
|
|
|
July
31, 2018
|
|
|
Equipment
and furniture
|
|
$
|
1,873,880
|
|
|
$
|
1,873,880
|
|
|
Computer
software
|
|
|
109,242
|
|
|
|
109,242
|
|
|
Leasehold
improvements
|
|
|
21,936
|
|
|
|
12,054
|
|
|
Property
and equipment, gross
|
|
|
2,005,058
|
|
|
|
1,995,176
|
|
|
Accumulated
depreciation and amortization
|
|
|
(912,949
|
)
|
|
|
(729,514
|
)
|
|
Total
|
|
$
|
1,092,109
|
|
|
$
|
1,265,662
|
|
Depreciation
and amortization expense recorded for the three and nine months ended April 30, 2019 was approximately $61,000 and $183,000, respectively.
Depreciation and amortization expense recorded for the three and nine months ended April 30, 2018 was approximately $82,000 and
$273,000, respectively.
Accounts
Payable and Accrued Liabilities
Accounts
payable and accrued liabilities are comprised of the following:
|
|
|
April
30, 2019
|
|
|
July
31, 2018
|
|
|
Research
and development costs
|
|
$
|
2,507,622
|
|
|
$
|
3,801,211
|
|
|
Professional
services fees
|
|
|
1,084,678
|
|
|
|
770,853
|
|
|
Other
|
|
|
243,980
|
|
|
|
206,828
|
|
|
Total
|
|
$
|
3,836,280
|
|
|
$
|
4,778,892
|
|
Accrued
Compensation and Related
Accrued
compensation is comprised of the following:
|
|
|
April
30, 2019
|
|
|
July
31, 2018
|
|
|
Separation
costs
|
|
$
|
808,915
|
|
|
$
|
840,320
|
|
|
Accrued
payroll
|
|
|
252,160
|
|
|
|
215,937
|
|
|
401K
payable
|
|
|
-
|
|
|
|
14,487
|
|
|
Total
|
|
$
|
1,061,075
|
|
|
$
|
1,070,744
|
|
Other
Long-Term Liabilities
Other
long-term liabilities are comprised of the following:
|
|
|
April
30, 2019
|
|
|
July
31, 2018
|
|
|
Deferred
rent
|
|
$
|
752,393
|
|
|
$
|
1,101,222
|
|
|
Separation
costs
|
|
|
-
|
|
|
|
371,408
|
|
|
Total
|
|
$
|
752,393
|
|
|
$
|
1,472,630
|
|
Note
6—Note Payable
On
March 22, 2019, the Company entered into a finance agreement with First Insurance Funding (“FIF”). Pursuant to the
terms of the agreement, FIF loaned the Company the principal amount of $185,990, which would accrue interest at 6.250% per annum,
to partially fund the payment of the premium of the Company’s D&O insurance. The agreement requires the Company to make
nine monthly payments of $21,207, including interest starting on April 18, 2019. At April 30, 2019, the outstanding balance
related to this finance agreement was $165,768.
Note
7—Stockholders’ Equity
Aspire
Capital
On March 29, 2019, the
Company entered into a common stock purchase agreement (the “Purchase Agreement”) with Aspire Capital
Fund, LLC, (“Aspire Capital”) pursuant to which the Company agreed to issue and sell to Aspire Capital shares of its
common stock equal to an aggregate amount of up to $20.0 million at the Company’s request from time to time during a 30-month
period. The Company has filed with the Securities and Exchange Commission a prospectus supplement to the Company’s effective
shelf registration statement on Form S-3 registering all the shares of common stock that may be offered to Aspire Capital from
time to time. In consideration for entering into the Purchase Agreement the Company issued to Aspire Capital 120,201
shares of the Company’s common stock which represented 3% of the aggregate commitment.
Under the Purchase
Agreement, on any trading day selected by the Company, the Company has the right, in its sole discretion, to present Aspire
Capital with a purchase notice, directing Aspire Capital to purchase up to 30,000 shares of the Company’s common stock per
business day, up to $20.0 million of the Company’s common stock in the aggregate at a per share price equal to the lesser
of:
|
|
●
|
the
lowest sale price of the Company’s common stock on the purchase date; or
|
|
|
|
|
|
|
●
|
the
arithmetic average of the three (3) lowest closing sale prices for the Company’s common stock during the ten (10) consecutive
trading days ending on the trading day immediately preceding the purchase date.
|
Upon execution of the
Purchase Agreement, the Company agreed to sell to Aspire Capital 400,674 shares of common stock for total proceeds, before
expenses, of $2,000,000. Additionally, in April 2019, the Company sold a total of 90,000 shares of its common stock to Aspire
Capital resulting in the Company receiving total proceeds, before expenses, of approximately $520,000 in cash. There were no underwriting
or placement agent fees associated with the offering.
On May 27, 2019, the
Company terminated the Purchase Agreement.
Alpha
Holdings
On August 31, 2018, the
Company entered into a stock purchase agreement (the “Agreement”) with Alpha Holdings, Inc. (“Alpha Holdings”),
pursuant to which the Company agreed to issue and sell to Alpha Holdings shares of its common stock equal to an aggregate amount
of up to $15.0 million at a market purchase price of $15.00 per share, which was the closing price of the Company’s common
stock the day immediately before the Agreement was executed by the parties.
On
October 9, 2018, the Company received total proceeds, before expenses, of $8.0 million in cash from the offering and issued
Alpha Holdings 533,333 shares of common stock at a purchase price of $15.00 per share. There were no underwriting or placement
agent fees associated with the offering.
On
December 6, 2018, the Company received total proceeds, before expenses, of $7.0 million in cash from the offering and issued Alpha
Holdings 466,666 shares of common stock at a purchase price of $15.00 per share. There were no underwriting or placement agent
fees associated with the offering.
Controlled
Equity Offering Sales Agreement
On
November 2, 2018, the Company entered into a controlled equity offering sales agreement (“Sales Agreement”) with Cantor
Fitzgerald & Co, regarding an at-the-market offering, pursuant to which the Company may, from time to time, issue and sell
shares of common stock having an aggregate offering price of up to $30.0 million. The Company is not obligated to make any sales
of shares under the Sales Agreement. To date, the Company has not made any sales of shares under the Sales Agreement.
On
May 27, 2019, the Company terminated the Sales Agreement.
Common
Stock Option Exercise
During
the nine months ended April 30, 2019, shares of common stock issued related to option exercises totaled 43,029. The Company realized
proceeds of $0.6 million from the stock option exercises.
February
2018 Offering
On
February 6, 2018, the Company completed a follow-on public offering, selling 1,333,333 shares at an offering price of $15.00 per
share. Additionally, the underwriters exercised in full their over-allotment option to purchase an additional 200,000 shares
at an offering price of $15.00 per share. Aggregate gross proceeds from this follow-on public offering, including the exercise
of the over-allotment option, were approximately $23.0 million, and net proceeds received, after underwriting fees of approximately
$1.7 million and offering expenses of approximately $0.5 million, were approximately $20.8 million.
November
2017 Warrant Exercise Inducement Offering
On
November 13, 2017, the Company entered into a warrant exercise agreement with certain holders of outstanding warrants (the “Original
Warrants”) to purchase up to an aggregate of 550,964 shares of the Company’s common stock at an exercise price of
$16.90 per share. Pursuant to the terms of the warrant exercise agreement, each holder agreed to exercise, from time to time and
in accordance with the terms of the Original Warrants, including certain beneficial ownership limitations set forth therein, all
Original Warrants held by it for cash. As a result of the exercise of all of the Original Warrants, the Company received gross
proceeds of approximately $9.3 million and net proceeds, after deducting estimated expenses paid or payable by the Company, of
approximately $9.1 million.
Pursuant
to the terms of the warrant exercise agreement, and in order to induce each holder to exercise its Original Warrants, the Company
issued 137,741 new warrants to purchase a number of shares of its common stock which is equal to 25% of the number of shares of
common stock received by such holders upon the cash exercise of its Original Warrants. The terms of the inducement warrants are
substantially similar to the terms of the Original Warrants, except that the inducement warrants: (i) have an initial exercise
price of $22.60 per share; (ii) become exercisable on May 13, 2018 and expire on November 13, 2019; and, (iii) contain certain
additional transfer restrictions and limitations due to their offer and sale in a private placement offering.
Also
on November 13, 2017, and in connection with its entry into the warrant exercise agreement, the Company agreed to issue warrants
to purchase up to an aggregate of 113,830 shares of its common stock to the accredited investors that participated in the Company’s
offerings completed in October 2017, in consideration for such investors agreement to waive certain covenants made by the Company
to such investors and as an inducement to such investors to exercise certain other warrants to purchase the Company’s common
stock. The terms of the October 2017 investor warrants are substantially similar to the terms of the new warrants, except that
the October 2017 investor warrants will become exercisable only if and when each October 2017 investor exercises in full and for
cash the warrants to purchase the Company’s common stock that were sold to such investors in the Company’s offerings
completed in October 2017.
The
warrants issued in connection with the warrant exercise agreement were considered inducement warrants and are classified in equity.
The fair value of the warrants issued was approximately $2.5 million (based on the Black-Scholes option valuation model assuming
no dividend yield, a 2.0-year life, volatility of 73.12% and a risk-free interest rate of 1.7%). The fair value of the inducement
warrants of $2.5 million was expensed as warrant inducement expense in the accompanying condensed consolidated statement of operations
for the three and nine months ended April 30, 2018.
First
October 2017 Offering
On
October 25, 2017, the Company completed an offer and sale to certain accredited investors of, in a registered public offering,
527,093 shares of its common stock and, in a concurrent private placement offering, warrants to purchase an aggregate of up to
395,320 shares of its common stock, all at a purchase price of $13.4375 per share. The warrants have an initial exercise price
of $12.50 per share, became exercisable on October 25, 2017 and expire on April 25, 2022. The gross proceeds of the offering were
$7.1 million and the net proceeds, after deducting the placement agent’s fee and other offering fees and expenses paid or
payable by the Company (and excluding the proceeds, if any, from any cash exercise of the warrants), were approximately $6.2 million.
In connection with the offering, the Company paid the placement agent (i) a cash fee equal to 5.5% of the gross proceeds of the
offering, as well as offering expenses in a nonaccountable sum of $60,000, and (ii) warrants to purchase up to an aggregate of
31,625 shares of its common stock. The warrants issued to the placement agent are exercisable at an exercise price of $16.80 per
share, became exercisable on their original issuance date and expire on October 21, 2022.
The
fair value of the warrants issued to the purchasers in the offerings, based on their fair value relative to the common stock issued,
was approximately $2.4 million (based on the Black-Scholes option valuation model assuming no dividend yield, a 5.5-year life,
volatility of 75.55% and a risk-free interest rate of 2.12%). The fair value of the warrants issued to the placement agent in
the offerings was $0.2 million (based on the Black-Scholes option valuation model assuming no dividend yield, a 5.0-year life,
volatility of 73.25% and a risk-free interest rate of 2.06%). The Company completed an evaluation of these warrants and determined
they should be classified as equity within the accompanying condensed consolidated balance sheets.
Second
October 2017 Offering
On October 25, 2017, the
Company completed an offer and sale to one accredited investor of 80,000 shares of its common stock and warrants to purchase up
to 60,000 shares of its common stock, all at a purchase price of $13.4375 per share and associated warrant. The warrants have
an initial exercise price of $12.50 per share, became exercisable on April 27, 2018 and will expire on April 27,
2022. The gross proceeds of the offering were $1.1 million and the net proceeds, after deducting the placement agent’s fee
and other offering fees and expenses paid or payable by the Company (and excluding the proceeds, if any, from any cash exercise
of the warrants), were approximately $1.0 million. In connection with the offering, the Company paid the placement agent (i) a
cash fee equal to 5.5% of the gross proceeds of the offering, as well as offering expenses in a non-accountable sum of $15,000,
and (ii) warrants to purchase up to an aggregate of 4,800 shares of its common stock. The warrants issued to the placement agent
are exercisable at an exercise price of $16.80 per share, became exercisable on their original issuance date and expire on October
25, 2022.
The
fair value of the warrants issued to the purchasers in the offering, based on their fair value relative to the common stock issued,
was approximately $0.4 million (based on the Black-Scholes option valuation model assuming no dividend yield, a 5.5-year life,
volatility of 75.51% and a risk-free interest rate of 2.12%). The fair value of the warrants issued to the placement agent in
the offering was $31,000 (based on the Black-Scholes option valuation model assuming no dividend yield, a 5.0-year life, volatility
of 73.22% and a risk-free interest rate of 2.06%). The Company completed an evaluation of these warrants and determined they should
be classified as equity within the accompanying condensed consolidated balance sheets.
ATM
Program
On
July 25, 2017, the Company entered into an equity distribution agreement with Oppenheimer & Co. Inc. (“Oppenheimer”)
to commence an “at the market” offering program (the “ATM Program”), under which the Company was permitted
to offer and sell, from time to time through or to Oppenheimer, acting as sales agent or principal, shares of the Company’s
common stock having an aggregate gross sales price of up to $8.4 million. An aggregate of 89,731 shares of the Company’s
common stock were sold in the ATM Program during the nine months ended April 30, 2018, for net proceeds to the Company, after
deducting Oppenheimer’s commissions and other expenses paid or payable by the Company, of $1.1 million. Effective as of
October 22, 2017, the Company terminated the ATM Program. As a result of such termination, no further offers or sales of the Company’s
common stock will be made in the ATM Program.
Outstanding
Warrants
At
April 30, 2019, the Company had outstanding warrants to purchase 892,890 shares of its common stock, with exercise prices ranging
from $12.50 to $180.00, all of which were classified as equity instruments. These warrants expire at various dates between May
2019 and April 2023.
Note
8—Stock-Based Compensation
The
OncoSec Medical Incorporated 2011 Stock Incentive Plan (as amended and approved by the Company’s stockholders (the “2011
Plan”)), authorizes the Company’s Board of Directors to grant equity awards, including stock options and restricted
stock units, to employees, directors and consultants. The 2011 Plan authorizes a total of 750,000 for issuance thereunder, and
includes an automatic increase of the number of shares of common stock reserved thereunder on the first business day of each calendar
year by the lesser of: (i) 3% of the shares of the Company’s common stock outstanding as of the last day of the immediately
preceding calendar year; (ii) 100,000 shares; or (iii) such lesser number of shares as determined by the Company’s Board
of Directors. As of April 30, 2019, there were an aggregate of 950,000 shares of the Company’s common stock authorized for
issuance pursuant to awards granted under the 2011 Plan. The 2011 Plan allows for an annual fiscal year per individual grant of
up to 50,000 shares of its common stock. Under the 2011 Plan, incentive stock options are to be granted at a price that is no
less than 100% of the fair value of the Company’s common stock at the date of grant. Stock options vest over a period specified
in the individual option agreements entered into with grantees, and are exercisable for a maximum period of 10 years after the
date of grant. Stock options granted to stockholders who own more than 10% of the outstanding stock of the Company at the time
of grant must be issued at an exercise price of no less than 110% of the fair value of the Company’s common stock on the
date of grant.
Modification
of Award
On
August 22, 2018, the Company entered into a stock option cancellation agreement with an individual. As per the terms of the agreement,
30,000 fully vested stock options were cancelled. On August 22, 2018, the Company issued 17,500 shares of restricted common stock.
Upon modification, it is required under ASC 718 to analyze the fair value of the instruments, before and after the modification,
recognizing the increase as a charge to the statement of operations. The Company computed the fair value of the cancelled award
and compared the fair value to that of the restricted stock award. The Company recorded the excess of the fair value of the restricted
stock award over the fair value of the cancelled award, or $135,425, to compensation costs with an offsetting entry to common
stock and additional paid in capital on the date of the modification.
Cancellation
of Award
On
October 23, 2018, the Company entered into stock option cancellation agreements with two consultants. As per the terms of the
agreements, an aggregate of 53,500 stock options were cancelled. The consultants were not issued replacement awards under the
cancellation agreements. Under ASC 718, a cancellation of an award that is not accompanied by the concurrent grant of (or offer
to grant) a replacement award or other valuable consideration shall be accounted for as a repurchase for no consideration. Accordingly,
any previously unrecognized compensation cost shall be recognized at the cancellation date. The Company recorded unrecognized
compensation of the cancelled awards, or $377,278, to compensation costs with an offsetting entry to additional paid in capital
on the date of the cancellation.
Stock
Options
During
the nine months ended April 30, 2019, the Company granted options to purchase 125,350, 77,500 and 1,000 shares of its common stock
to employees, directors and consultants under the 2011 Plan, respectively. The stock options issued to employees have a ten-year
term, vest over three years, and have exercise prices ranging from $6.001 to $15.80. The stock options issued to directors have
a 10-year term, vest over a period ranging from one to three years and have exercise prices ranging from $5.80 and $8.412. The
stock options issued to consultants have ten-year terms, vest in accordance with the terms of the applicable consulting agreement
and have an exercise price of $6.254.
During
the nine months ended April 30, 2019, the Company granted options to purchase 20,000 and 50,000 shares of its common stock to
employees and consultants outside the 2011 Plan. The stock options issued to employees have a ten-year term, vest over three years,
and have an exercise price of $16.40. The stock options issued to consultants have ten-year terms, vest in accordance with the
terms of the applicable consulting agreement and have exercise prices ranging from $8.461 and $14.30.
During
the nine months ended April 30, 2018, the Company granted options to purchase 125,900, 115,000 and 70,500 shares of its common
stock to employees, directors and consultants under the 2011 Plan, respectively. The stock options issued to employees have a
10-year term, vest over three years and have exercise prices ranging from $9.20 and $18.60. The stock options issued to directors
have a 10-year term, vest over one year and have exercise prices ranging from $9.79 and $19.40. The stock options issued to consultants
have a 10-year term, vest in accordance with the terms of the applicable consulting agreement and have exercise prices ranging
from $10.00 and $18.80.
During
the nine months ended April 30, 2018, the Company granted its President and Chief Executive Officer, Mr. Daniel J. O’Connor,
options to purchase 250,000 shares of the Company’s common stock outside of the 2011 Plan. This grant was approved by stockholders
at the Company’s annual meeting on January 12, 2018. Of the total grant, options on 100,000 shares vested upon stockholder
approval and options on 100,000 shares will vest over a two-year period from the date of grant. Mr. O’Connor also received
a performance stock option award to purchase up to 50,000 shares of the Company’s common stock, which is subject to vesting
as to options on 25,000 shares on the date of the Company’s achievement of 100% enrollment in the first cohort of its PISCES/KEYNOTE-695
study and as to the remaining options on 25,000 shares in one installment on the one-year anniversary of the date of achievement
of such enrollment.
The
Company accounts for stock-based compensation based on the fair value of the stock-based awards granted and records forfeitures
as they occur. As such, the Company recognizes stock-based compensation cost only for those stock-based awards that vest over
their requisite service period, based on the vesting provisions of the individual grants. The service period is generally the
vesting period, with the exception of stock options granted pursuant to a consulting agreement, in which case the stock option
vesting period and the service period are defined pursuant to the terms of the consulting agreement. Prior to the adoption of
ASU 2018-07, stock-based compensation expense related to stock options granted to consultants in which the options were not entirely
vested at the grant date were generally re-measured each month.
The
following assumptions were used for the Black-Scholes calculation of the fair value of stock-based compensation related to stock
options granted during the periods presented:
|
|
|
Nine
Months Ended
April 30, 2019
|
|
|
Nine
Months Ended
April 30, 2018
|
|
|
Expected
term (years)
|
|
|
5.00
– 6.5 years
|
|
|
|
5.00
– 6.5 years
|
|
|
Risk-free
interest rate
|
|
|
2.31
– 3.09
|
%
|
|
|
1.66
– 2.81
|
%
|
|
Volatility
|
|
|
72.88
– 82.77
|
%
|
|
|
73.30
–92.0
|
%
|
|
Dividend
yield
|
|
|
0
|
%
|
|
|
0
|
%
|
The
Company’s expected volatility is derived from the historical daily change in the market price of its common stock since
its stock became available for trading, as well as the historical daily changes in the market price of its peer group, based on
weighting, as determined by the Company. The Company uses the simplified method to calculate the expected term of options issued
to employees, non-employees and directors. Prior to the adoption of ASU 2018-07, the Company’s estimation of the expected
term for stock options granted to parties other than employees or directors was the contractual term of the option award. The
risk-free interest rate used in the Black-Scholes calculation is based on the prevailing U.S. Treasury yield in effect at the
time of grant, commensurate with the expected term. For the expected dividend yield used in the Black-Scholes calculation, the
Company has never paid any dividends on its common stock and does not anticipate paying dividends on its common stock in the foreseeable
future.
The
following is a summary of the Company’s 2011 Plan and non-Plan stock option activity for the nine months ended April 30,
2019:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
Options
|
|
|
Price
|
|
|
Outstanding
- July 31, 2018
|
|
|
891,272
|
|
|
$
|
15.00
|
|
|
Granted
|
|
|
273,850
|
|
|
$
|
8.40
|
|
|
Exercised
|
|
|
(43,029
|
)
|
|
$
|
13.20
|
|
|
Forfeited/Cancelled
|
|
|
(206,115
|
)
|
|
$
|
15.50
|
|
|
Expired
|
|
|
(700
|
)
|
|
$
|
57.60
|
|
|
Outstanding
– April 30, 2019
|
|
|
915,278
|
|
|
$
|
13.00
|
|
|
Exercisable
– April 30, 2019
|
|
|
592,209
|
|
|
$
|
14.60
|
|
As
of April 30, 2019, the total intrinsic value of options outstanding and exercisable was approximately $0 and $0, respectively.
As of April 30, 2019, the Company has approximately $2.5 million in unrecognized stock-based compensation expense attributable
to the outstanding options, which will be amortized over a period of approximately 1.40 years.
Stock-based
compensation expense recorded in the Company’s condensed consolidated statements of operations for the three and nine months
ended April 30, 2019 resulting from stock options awarded to the Company’s employees, directors and consultants was approximately
$0.6 million and $2.6 million, respectively. Of this balance, $0.2 million and $1.1 million, respectively, was recorded to research
and development and $0.4 million and $1.5 million, respectively, was recorded in general and administrative in the Company’s
condensed consolidated statements of operations for the three and nine months ended April 30, 2019.
Stock-based
compensation expense recorded in the Company’s condensed consolidated statements of operations for the three and nine months
ended April 30, 2018 resulting from stock options awarded to the Company’s employees, directors and consultants was approximately
$1.9 million and $4.5 million, respectively. Of this balance, $0.4 million and $0.7 million, respectively, was recorded to research
and development and $1.5 million and $3.8 million, respectively, was recorded in general and administrative in the Company’s
condensed consolidated statements of operations for the three and nine months ended April 30, 2018.
The
weighted-average grant date fair value of stock options granted during the three and nine months ended April 30, 2019 was
$4.00 and $5.70, respectively. The weighted-average grant date fair value of stock options granted during the three and nine months
ended April 30, 2018 was $11.00 and $12.40, respectively.
Restricted
Stock Units
In
December 2018, the Company granted its President and Chief Executive Officer 75,000 restricted stock unit awards (“RSUs”).
The units vest as follows: 6,250 units vested on April 30, 2019, and the remaining 68,750 units vest in equal quarterly installments
of 6,250 units beginning on April 30, 2019 and ending on October 31, 2021. The closing price of the Company’s common stock
on the date of grant was $6.00 per share, which is the fair market value per unit of the RSUs.
In
October 2018, the Company granted 5,000 RSUs to an employee. The units vest as follows: 1,250 units vested on October 29, 2018,
and the remaining 3,750 units vest according to the following vesting schedule: 1,250 units on October 29, 2019, 1,250 units on
October 29, 2020 and 1,250 units on October 29, 2021. The closing price of the Company’s common stock on the date of grant
was $16.40 per share, which is the fair market value per unit of the RSUs.
On
October 26, 2018, in accordance with a severance agreement with an employee, the Company’s Board of Directors approved the
accelerated vesting of 25% of the outstanding RSUs held by the employee. The RSUs, which originally vest on the third anniversary
of the grant date, or March 29, 2020, were accelerated to vest on October 26, 2018. As per ASC 718, on the date of the modification
the Company reversed the previously accrued expense on the unvested RSUs of $63,278 and recognized the fair value of the modified
grant of $44,250 on the date of the modification.
For
the three and nine months ended April 30, 2019, the Company recorded $0.1 million and $0.5 million in stock-based compensation
related to RSUs, which is reflected in the condensed consolidated statement of operations.
As
of April 30, 2019, there were 88,114 RSUs outstanding.
On
February 8, 2018, the Company’s Board of Directors approved the accelerated vesting of outstanding restricted stock units
(RSUs) held by certain executives and board members. The RSUs, the majority of which vested on the third anniversary of the grant
date, were accelerated to vest on June 15, 2018, resulting in stock compensation expense of $1.1 million for the three months
ended April 30, 2018.
For
the three and nine months ended April 30, 2018, the Company recorded $1.1 million and $1.4 million, respectively, in stock-based
compensation related to RSUs, which is reflected in the condensed consolidated statement of operations.
Shares
Issued to Consultants
During
the three and nine months ended April 30, 2019, 15,300 and 48,000 shares of common stock valued at $212,910 and $669,240, respectively,
were issued to consultants for services. The common stock share values were based on the dates the shares were granted. The Company
recorded compensation expense relating to the share issuances of $211,893 and $657,504, respectively, during the three and nine
months ended April 30, 2019.
During
the three and nine months ended April 30, 2018, 32,357 and 79,859 shares of common stock valued at $600,400 and $1,443,650,
respectively, were issued to consultants for services. The common stock share values were based on the dates the shares vested.
The Company recorded compensation expense relating to the share issuances of $600,400 and $1,443,650, respectively, during the
three and nine months ended April 30, 2018.
2015
Employee Stock Purchase Plan
Under
the Company’s 2015 Employee Stock Purchase Plan (“ESPP”), the Company is authorized to issue 50,000 shares of
the Company’s common stock. The first offering period under the ESPP ended on July 31, 2016, with 1,778 shares purchased
and distributed to employees. The second offering period under the ESPP ended on January 31, 2017, with 1,863 shares purchased
and distributed to employees, and the third offering period under the ESPP ended on July 31, 2017, with 2,164 shares purchased
and distributed to employees. The fourth offering period under the ESPP ended on January 31, 2018, with 1,896 shares purchased
and distributed to employees, and the fifth offering period under the ESPP ended on July 31, 2018, with 1,207 shares purchased
and distributed to employees. The sixth offering period under the ESPP ended on January 31, 2019, with 1,428 shares purchased
and distributed to employees. At April 30, 2019, there were 39,661 shares remaining available for issuance under the ESPP.
The
ESPP is considered a Type B plan under FASB ASC Topic 718 because the number of shares a participant is permitted to purchase
is not fixed based on the stock price at the beginning of the offering period and the expected withholdings. The ESPP enables
the participant to “buy-up” to the plan’s share limit, if the stock price is lower on the purchase date. As
a result, the fair value of the awards granted under the ESPP is calculated at the beginning of each offering period as the sum
of:
|
|
●
|
15%
of the share price of an unvested share at the beginning of the offering period,
|
|
|
●
|
85%
of the fair market value of a six-month call on the unvested share aforementioned, and
|
|
|
●
|
15%
of the fair market value of a six-month put on the unvested share aforementioned.
|
The
fair market value of the six-month call and six-month put are based on the Black-Scholes option valuation model. For the six-month
offering period ended January 31, 2019, the following assumptions were used: six-month maturity, 2.22% risk free interest, 61.83%
volatility, 0% forfeitures and $0 dividends.
For
the six-month offering period ended January 31, 2018, the following assumptions were used: six-month maturity, 1.15% risk free
interest, 62.6% volatility, 0% forfeitures and $0 dividends.
Approximately
$13,200 and $16,300 was recorded as stock-based compensation during the nine months ended April 30, 2019 and 2018, respectively.
Common
Stock Reserved for Future Issuance
The
following table summarizes all common stock reserved for future issuance at April 30, 2019:
|
Common
Stock options outstanding (within the 2011 Plan and outside of the terms of the 2011 Plan)
|
|
|
915,278
|
|
|
Common
Stock reserved for restricted stock unit release
|
|
|
88,114
|
|
|
Common
Stock authorized for future grant under the 2011 Plan
|
|
|
99,464
|
|
|
Common
Stock reserved for warrant exercise
|
|
|
892,890
|
|
|
Common
Stock reserved for future ESPP issuance
|
|
|
39,661
|
|
|
Total
Common Stock reserved for future issuance
|
|
|
2,035,407
|
|
Note
9—Commitments and Contingencies
Contingencies
In
the ordinary course of business, the Company may become a party to lawsuits involving various matters. The Company is not currently
a party, and its properties are not currently subject, to any legal proceedings that, in the opinion of management, are expected
to have a material adverse effect on the Company’s business, financial condition or results of operations.
Employment
Agreements
The
Company has entered into employment agreements with each of its executive officers and certain other key employees. Generally,
the terms of these agreements provide that, if the Company terminates the officer or employee other than for cause, death or disability,
or if the officer terminates his or her employment with the Company for good cause, the officer shall be entitled to receive certain
severance compensation and benefits as described in each such agreement.
On
October 26, 2018, the Company and an employee entered into a separation and release agreement in connection with the employee’s
termination of employment with the Company. Pursuant to the agreement, the Company will pay the former employee severance compensation
of $415,000, less applicable withholdings, in the form of salary and bonus continuation in accordance with the Company’s
customary payroll practices. In addition, the Company agreed to pay the cost of health insurance for 12 months from the date of
separation and accelerate the vesting of 2,500 RSUs. On October 26, 2018, the Company recorded a liability of $451,112 on its
condensed consolidated balance sheet, and the offsetting charge was recorded in research and development expense as salary expense.
Lease
Agreements
On
February 14, 2018, the Company entered into a lease agreement with MawIt Inc., for approximately 3,100 rentable square feet located
at 24 N. Main Street, Pennington, New Jersey, which serves as the Company’s New Jersey corporate headquarters. The term
of the lease commenced on March 1, 2018 and was to expire on April 30, 2020. In November 2018, the Company entered into an amended
lease agreement for the addition of approximately 2,800 rentable square feet. The term of the amended lease commenced on January
15, 2019 and expires on December 31, 2020. Base rent under the amended lease agreement is $11,686 per month for each of the first
two months, $11,929 per month for each of the third through fifteenth months and $12,173 per month for each of the sixteenth through
twenty-three months. The Company prepaid rent of approximately $60,000 as per the terms of the amended agreement. The lease agreement
also requires the Company to share in certain monthly operating expenses of the premises and required the Company to pay a security
deposit of $23,372.
In
March 2018, the Company entered into a lease assignment agreement (the “Lease Assignment Agreement”) with Vividion
Therapeutics, Inc. (“Vividion”) for the Company’s 34,054 square foot location at 5820 Nancy Ridge Drive, San
Diego, California, 92121 (“NR Premises”), whereby the Company assigned its lease agreement with ARE-SD Region No.
18, LLC (the “Landlord”) to Vividion. Under the Lease Assignment Agreement, Vividion pays directly to Landlord the
base rent of $101,500 per month (based upon $2.98 per rentable square foot of the NR Premises) plus operating expenses and property
management fees attributable to the NR Premises currently estimated at $43,500 per month (including an estimate for utilities)
during the term of the Lease Assignment Agreement, which is the remaining term of the lease through October 2025.
While
the lease and all of the related obligations were assigned to Vividion, the Company could ultimately have an obligation on the
Lease Assignment Agreement if Vividion defaulted on their obligation to the Landlord after all remedies were exhausted by the
Landlord with regard to Vividion’s obligations. Such an event is not considered probable and no obligation has been recorded
as of April 30, 2019 and July 31, 2018.
In
conjunction with the Lease Assignment Agreement, the Company and Vividion also entered into a sublease (the “Sublease”),
with respect to the 12,442 square-foot location at 3565 General Atomics Court, Suite 100, San Diego, CA, 92121 leased by Vividion
from Landlord which serves as the Company’s California office (the “Sublease Premise”). Under the Sublease,
the Company shall pay to Vividion base rent of $49,768 per month subject to an annual 3% increase, (based upon $4.00 per rentable
square foot of the Sublease Premises) plus operating expenses and property management fees attributable to the Sublease Premises
currently estimated at $30,400 per month during the term of the Sublease, which extends through September 2020. The Company moved
to the new location in April 2018.
At
the time of the lease agreements noted above, the Company had a deferred rent liability recorded on the condensed consolidated
balance sheet of $1.1 million, which is being amortized on a straight-line basis over the term of the Sublease.
We
have also entered into lease arrangements for vivarium space in San Diego, California to support our research and development
department.
Total
rent expense for the three months ended April 30, 2019 and 2018 was approximately $177,000 and $379,000, respectively. Total rent
expense for the nine months ended April 30, 2019 and 2018 was approximately $547,000 and $1,213,000, respectively.
We
believe our current facilities are adequate to meet our current operating needs and will remain adequate for the foreseeable future.
Should we need additional space, we currently do not foresee significant difficulties in obtaining additional facilities.
Note
10—401(k) Plan
Effective
May 15, 2012, the Company adopted a defined contribution savings plan pursuant to Section 401(k) of the Code. The plan is for
the benefit of all qualifying employees and permits voluntary contributions by employees of up to 100% of eligible compensation,
subject to the maximum limits imposed by Internal Revenue Service. The terms of the plan allow for discretionary employer contributions
and the Company currently matches 100% of its employees’ contributions, up to 3% of their annual compensation. The Company’s
contributions are recorded as expense in the accompanying condensed consolidated statements of operations and totaled approximately
$7,000 and $52,000 for the three and nine months ended April 30, 2019, respectively. The Company’s contributions totaled
approximately $25,000 and $74,000 for the three and nine months ended April 30, 2018, respectively.
Note
11—Related Party Transactions
The
Company subleased a portion of its office space to another company beginning April 1, 2017 and ending March 31, 2018. The Company’s
former President and two other members of the Company’s Board of Directors held positions as directors and/or officers of
the sublessee. The Company received payments totaling $7,700 and $27,200 related to the sublease during the three and nine months
ended April 30, 2018, respectively.
Note
12—Subsequent Events
On May 20, 2019, the Company
effected a one-for-ten reverse stock split of our authorized and outstanding common stock. Under Nevada law, and in
accordance with NRS Section 78.207, the split was approved by the Board of Directors of the Company and shareholder approval was
not required. Pursuant to this reverse stock split, the total number of authorized common shares was reduced to 16,000,000
shares and the number of common shares outstanding was reduced from 71,216,082 shares to 7,121,594 shares (which reflects adjustments
for fractional share settlements). The par value was not adjusted as a result of the reverse stock split. All applicable
share and per share information contained in these condensed consolidated financial statements has been retroactively adjusted
to reflect the reverse stock split.
On
May 24, 2019, we completed our offer and sale of an aggregate of 3,492,063 shares of our common stock, together with 3,492,063
accompanying warrants to purchase an aggregate of 2,619,047 shares of our common stock, at a combined purchase price of $3.15
per share of common stock and warrant. The warrants have an exercise price of $3.45 per full share, became exercisable on May
24, 2019 and expire on May 24, 2024. The gross proceeds of the offering were approximately $11.0 million, and the net proceeds,
after deducting the placement agent’s fee and other offering fees and expenses paid by us, were approximately $10.1 million.
In connection with the offering, we paid the placement agent (i) a cash fee equal to 6.5% of the gross proceeds of the offering,
as well as legal and other expenses equal to $90,000. In addition, pursuant to the underwriting agreement, the Company granted
the underwriters an option, exercisable for 45 days, to purchase up to an additional 523,809 shares of our common stock (the “Option
Shares”) and/or warrants to purchase up to 392,857 shares of common stock (the “Option Warrants”). On May 24,
2019, the underwriters partially exercised their option and purchased 238,095 Option Warrants to purchase an aggregate
of 178,571 shares of our common stock, at a purchase price of $0.01 per warrant before underwriting discounts, or $2,381.
The Option Warrants have an exercise price of $3.45 per full share, became exercisable on May 24, 2019 and expire on May 24, 2024.
On June 5, 2019, we
received written confirmation from the Staff of Nasdaq notifying us that we have now met the minimum bid price requirement and
have regained compliance under Listing Rule 5810(c)(3)(A) following ten consecutive trading days where the Company’s common
stock closed at prices above $1.00, and that Nasdaq considers the matter closed.
On June 10, 2019, we announced the board adopted a Change in
Control Plan, which began effective on June 7, 2019.
Subsequent
to April 30, 2019, shares of common stock issued to executives and employees related to vested RSU’s totaled 6,541.
Subsequent
to April 30, 2019, shares of common stock issued to consultants for services totaled 8,200.