10-Q 1 bold-10q_20180930.htm 10-Q bold-10q_20180930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2018

OR

 

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                      to                      .

Commission File Number: 001-37833

 

Audentes Therapeutics, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

46-1606174

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

600 California Street, 17th Floor

San Francisco, California 94108

(Address of principal executive offices and zip code)

 

(415) 818-1001  

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:    Yes      No  

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

Emerging growth company

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of October 31, 2018, there were 42,689,894 shares of the Registrant’s Common Stock, $0.00001 par value per share, outstanding.

 

 

 


TABLE OF CONTENTS

 

 

 

 

Page

 

Part I. Financial Information

 

 

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements (unaudited)

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2018 (unaudited) and December 31, 2017

 

2

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2018 and 2017 (unaudited)

 

3

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017 (unaudited)

 

4

 

Notes to Unaudited Interim Condensed Consolidated Financial Statements

 

5

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

14

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

24

Item 4.

Controls and Procedures

 

24

 

 

 

 

 

Part II. Other Information

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

25

Item 1A.

Risk Factors

 

25

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

60

Item 3.

Defaults Upon Senior Securities

 

60

Item 4.

Mine Safety Disclosures

 

60

Item 5.

Other Information

 

60

Item 6.

Exhibits

 

60

Signatures

 

61

 

 

 

1


PART I

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

AUDENTES THERAPEUTICS, INC.

Condensed Consolidated Balance Sheets

(in thousands, except shares and per share amounts)

 

 

 

September 30, 2018

 

 

December 31, 2017

 

Assets

 

(Unaudited)

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

104,339

 

 

$

38,967

 

Short-term investments

 

 

176,347

 

 

 

94,638

 

Restricted cash

 

 

 

 

 

90

 

Prepaid expenses and other current assets

 

 

4,642

 

 

 

3,315

 

Total current assets

 

 

285,328

 

 

 

137,010

 

Restricted cash - long-term

 

 

3,604

 

 

 

3,604

 

Long-term investments

 

 

1,252

 

 

 

 

Property and equipment, net

 

 

30,653

 

 

 

24,372

 

Goodwill

 

 

3,631

 

 

 

3,631

 

Intangible assets

 

 

8,000

 

 

 

8,000

 

Other assets

 

 

5,305

 

 

 

2,045

 

Total assets

 

$

337,773

 

 

$

178,662

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,224

 

 

$

3,853

 

Accrued liabilities

 

 

15,580

 

 

 

8,832

 

Contingent acquisition consideration payable

 

 

 

 

 

4,643

 

Deferred rent

 

 

442

 

 

 

384

 

Total current liabilities

 

 

19,246

 

 

 

17,712

 

Deferred rent and asset retirement obligation - long-term

 

 

4,590

 

 

 

3,278

 

Contingent acquisition consideration payable - long-term

 

 

2,316

 

 

 

-

 

Other long-term liabilities

 

 

52

 

 

 

60

 

Deferred tax liability, net

 

 

1,014

 

 

 

1,014

 

Total liabilities

 

 

27,218

 

 

 

22,064

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.00001 par value, 10,000,000 shares authorized as of

   September 30, 2018 and December 31, 2017; 0 shares issued and

   outstanding as of September 30, 2018 and December 31, 2017,

   respectively

 

 

 

 

 

 

Common stock, $0.00001 par value, 300,000,000 shares authorized as of

   September 30, 2018 and December 31, 2017; 37,453,129 and 29,901,368

   shares issued and outstanding as of September 30, 2018 and

   December 31, 2017, respectively

 

 

 

 

 

 

Additional paid-in capital

 

 

594,480

 

 

 

347,327

 

Accumulated deficit

 

 

(283,878

)

 

 

(190,649

)

Accumulated other comprehensive loss

 

 

(47

)

 

 

(80

)

Total stockholders' equity

 

 

310,555

 

 

 

156,598

 

Total liabilities and stockholders' equity

 

$

337,773

 

 

$

178,662

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited interim condensed consolidated financial statements.

 

 

 

2


 

AUDENTES THERAPEUTICS, INC.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except shares and per share amounts)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Operating expenses:

 

Unaudited

 

Research and development

 

$

29,918

 

 

$

20,868

 

 

$

76,157

 

 

$

54,231

 

General and administrative

 

 

7,817

 

 

 

4,342

 

 

 

20,617

 

 

 

12,065

 

Total operating expenses

 

 

37,735

 

 

 

25,210

 

 

 

96,774

 

 

 

66,296

 

Loss from operations

 

 

(37,735

)

 

 

(25,210

)

 

 

(96,774

)

 

 

(66,296

)

Interest income, net

 

 

1,509

 

 

 

221

 

 

 

3,662

 

 

 

483

 

Other expense, net

 

 

(65

)

 

 

(20

)

 

 

(117

)

 

 

(50

)

Net loss

 

 

(36,291

)

 

 

(25,009

)

 

 

(93,229

)

 

 

(65,863

)

Unrealized (losses) gains on short-term

   investments

 

 

(4

)

 

 

20

 

 

 

33

 

 

 

12

 

Comprehensive loss

 

$

(36,295

)

 

$

(24,989

)

 

$

(93,196

)

 

$

(65,851

)

Net loss per share, basic and diluted

 

$

(0.97

)

 

$

(0.88

)

 

$

(2.57

)

 

$

(2.59

)

Weighted-average number of shares used in

   computing net loss per share, basic and diluted

 

 

37,359,877

 

 

 

28,388,145

 

 

 

36,302,803

 

 

 

25,476,261

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited interim condensed consolidated financial statements.

 

 

 

3


AUDENTES THERAPEUTICS, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

Unaudited

 

Net loss

 

$

(93,229

)

 

$

(65,863

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

3,948

 

 

 

2,410

 

Stock-based compensation

 

 

12,115

 

 

 

4,053

 

Accretion of discount on marketable securities

 

 

(856

)

 

 

(174

)

Change in fair value of contingent acquisition consideration payable

 

 

(2,327

)

 

 

160

 

Other

 

 

83

 

 

 

272

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

(1,212

)

 

 

(976

)

Other assets

 

 

(3,260

)

 

 

(2,000

)

Accounts payable

 

 

(724

)

 

 

1,211

 

Accrued liabilities

 

 

4,635

 

 

 

(1,547

)

Deferred rent and asset retirement obligation

 

 

1,332

 

 

 

1,187

 

Net cash used in operating activities

 

 

(79,495

)

 

 

(61,267

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(8,074

)

 

 

(5,031

)

Proceeds from maturities of marketable securities

 

 

127,880

 

 

 

83,528

 

Purchases of marketable securities

 

 

(209,952

)

 

 

(117,374

)

Net cash used in investing activities

 

 

(90,146

)

 

 

(38,877

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from exercise of stock options

 

 

3,199

 

 

 

643

 

Proceeds from issuance of common stock, net of offering costs

 

 

231,724

 

 

 

117,023

 

Net cash provided by financing activities

 

 

234,923

 

 

 

117,666

 

Net increase in cash, cash equivalents and restricted cash

 

 

65,282

 

 

 

17,522

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

42,661

 

 

 

40,109

 

Cash, cash equivalents and restricted cash at end of period

 

$

107,943

 

 

$

57,631

 

Noncash investing and financing activities:

 

 

 

 

 

 

 

 

Change in accounts payable, accrued liabilities and facility lease obligations related

   to property and equipment purchases

 

$

2,200

 

 

$

1,158

 

Deferred financing costs for follow-on offering

 

$

115

 

 

$

 

Issuance of common stock warrant related to debt financing facility

 

$

 

 

$

83

 

 

See accompanying notes to unaudited interim condensed consolidated financial statements.

 

 

 

4


 

AUDENTES THERAPEUTICS, INC.

Notes to Unaudited Interim Condensed Consolidated Financial Statements

1.

Organization and Basis of Presentation

Audentes Therapeutics, Inc., or the Company, was incorporated in the State of Delaware on November 13, 2012. The Company is a clinical stage biotechnology company focused on developing and commercializing innovative gene therapy products for patients living with serious, life-threatening rare diseases caused by single gene defects. The Company operates in one business segment, with its corporate headquarters located in San Francisco, California and its manufacturing and research operations located in South San Francisco, California.

The accompanying consolidated financial statements include the accounts of Audentes Therapeutics, Inc., and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. 

Equity Offerings

On January 29, 2018, the Company completed an underwritten public offering of 6,612,500 shares of common stock (inclusive of 862,500 shares of common stock pursuant to the underwriters’ option to purchase additional shares) at a price of $35.00 per share. The aggregate net proceeds received by the Company were $217.2 million, net of underwriting discounts, commissions and offering costs.

On March 29, 2018, the Company filed an automatic universal shelf registration statement. Pursuant to the registration statement, the Company entered into an “at-the-market” program and sales agreement, or ATM, with Cowen and Company, LLC., or Cowen, under which the Company may, from time to time, offer and sell common stock having an aggregate offering value of up to $150.0 million. During the nine months ended September 30, 2018, the Company sold 400,024 shares of common stock under the ATM for aggregate net proceeds of $14.6 million.

Liquidity

In the course of its development activities, the Company has sustained operating losses and expects such losses to continue over the next several years. The Company’s ultimate success largely depends on the outcome of its research and development activities. The Company has incurred net losses from operations since inception and as of September 30, 2018 had an accumulated deficit of $283.9 million. The Company intends to raise additional capital through the issuance of additional equity, borrowing under debt arrangements, or potentially through strategic alliances with partner companies. If additional financing is not available at adequate levels or on acceptable terms, the Company may need to reevaluate its operating plans. Management believes its currently available resources will provide sufficient funds to enable the Company to meet its operating plans for at least the next twelve months. However, if the Company’s anticipated operating results are not achieved in future periods, planned expenditures may need to be reduced in order to extend the time period over which the then-available resources would be able to fund the Company’s operations.

2.

Summary of Significant Accounting Policies

There were no significant changes to the accounting policies during the nine months ended September 30, 2018, from the significant accounting policies described in Note 2 of the “Notes to Consolidated Financial Statements” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

Basis of Preparation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP, and applicable rules and regulations of the SEC regarding interim financial reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP have been condensed or omitted, and accordingly the balance sheet as of December 31, 2017 has been derived from audited financial statements at that date but does not include all of the information required by U.S. GAAP for complete financial statements. These unaudited interim condensed consolidated financial statements have been prepared on the same basis as the Company’s annual financial statements and, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair presentation of the Company’s financial information. The results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2018 or for any other interim period or for any other future year.

The accompanying unaudited interim condensed consolidated financial statements and related financial information should be read in conjunction with the audited financial statements and the related notes thereto for the year ended December 31, 2017 included in the Company’s audited financial statements filed in its Annual Report on Form 10-K for the year ended December 31, 2017.

5


 

Use of Estimates

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities, as of the date of the financial statements, and the reported amounts of any expenses during the reporting period. On an ongoing basis, management evaluates its estimates, including those related to accrued liabilities, acquisition contingent consideration, income taxes, and stock-based compensation. Management bases its estimates on historical experience, and on various other market-specific relevant assumptions that management believes to be reasonable, under the circumstances. Actual results may differ from those estimates.

Concentration of Manufacturing and Third-Party Services Risk

The Company is subject to certain risks with respect to sources of supply of manufactured materials and drug product for use in its preclinical and clinical studies. Due to the technical aspects of manufacturing drug product for gene therapies, there exist few alternative sources of manufacturing. The Company is reliant upon its own internal manufacturing capability and a small number of third-party vendors to produce drug product in sufficient quantities and quality to conduct its research and development activities.

Recent Accounting Pronouncements

In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting, which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost. This pronouncement will become effective for the Company beginning January 1, 2019, with earlier adoption permitted, although no earlier than the adoption date of Topic 606. It is the Company’s expectation that adoption of this pronouncement will not have a material impact to its consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates Step 2 from the goodwill impairment test. In addition, ASU 2017-04 eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact that the standard will have on its consolidated financial statements and related disclosures. It is the Company’s expectation that adoption of this pronouncement will not have a material impact to its consolidated financial statements and related disclosures.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The amendments in this update require that amounts generally described as restricted cash and restricted cash equivalents to be included within cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 became effective January 1, 2018. As a result of adopting ASU 2016-18, the Company includes its restricted cash balance in the cash and cash equivalents reconciliation of operating, investing and financing activities.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Under the new guidance, (with the exception of leases with terms of 12 months or less) at the commencement date, lessees will be required to recognize a lease liability and a right-of-use asset. Lessees will no longer be provided with a source of off-balance sheet financing. Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. This pronouncement will become effective for the Company beginning January 1, 2019. Early adoption is permitted. The pronouncement requires lessees and lessors to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. During March 2018, the FASB approved amendments to create an optional transition method that will provide an option to use the effective date of Topic 842 as the date of initial application of the transition.  The Company established an implementation team that has been reassessing business processes, drafting an internal policy to address the new standard, determining a process to identify and update the Company’s incremental borrowing rate and understanding the impact on disclosures. The team is also determining which practical expedients to elect. The Company is still finalizing its evaluation of the impact of the new lease standard on its consolidated financial statements and related disclosures.


6


 

3.Investments

Investments consist of available-for-sale securities as follows:

 

 

September 30, 2018

 

 

 

Amortized

Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

 

(in thousands)

 

Commercial paper

 

$

56,137

 

 

$

 

 

$

 

 

$

56,137

 

Corporate securities

 

 

36,488

 

 

 

1

 

 

 

(17

)

 

 

36,472

 

U.S. treasury bills

 

 

42,251

 

 

 

 

 

 

(12

)

 

 

42,239

 

U.S. government agency securities

 

 

26,178

 

 

 

 

 

 

(6

)

 

 

26,172

 

U.S. agency bonds

 

 

13,601

 

 

 

 

 

 

(11

)

 

 

13,590

 

U.S. agency discount securities

 

 

2,989

 

 

 

 

 

 

-

 

 

 

2,989

 

Total available-for-sale securities

 

$

177,644

 

 

$

1

 

 

$

(46

)

 

$

177,599

 

 

 

 

December 31, 2017

 

 

 

Amortized

Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

 

(in thousands)

 

Commercial paper

 

$

38,552

 

 

$

 

 

$

 

 

$

38,552

 

Corporate securities

 

 

23,812

 

 

 

 

 

 

(40

)

 

 

23,772

 

U.S. treasury bills

 

 

17,875

 

 

 

 

 

 

(24

)

 

 

17,851

 

U.S. government agency securities

 

 

14,479

 

 

 

 

 

 

(16

)

 

 

14,463

 

Total available-for-sale securities

 

$

94,718

 

 

$

 

 

$

(80

)

 

$

94,638

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Company’s long-term investments as of September 30, 2018 consist of U.S. agency bonds.

4.Fair Value Measurements

Fair value accounting is applied for all financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Financial instruments include cash and cash equivalents, restricted cash, accounts payable and accrued liabilities that approximate fair value due to their relatively short maturities.

Assets and liabilities recorded at fair value on a recurring basis in the balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined as the exchange price that would be received for an asset or an exit price that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows:

Level 1 – Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

Level 2 – Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and

Level 3 – Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.


7


 

Assets Measured at Fair Value

Financial assets subject to fair value measurements on a recurring basis and the level of inputs used in such measurements are as follows:

 

 

September 30, 2018

 

 

 

Fair Value Measurements Using

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(in thousands)

 

Money market funds

 

$

45,061

 

 

$

45,061

 

 

$

 

 

$

 

Commercial paper

 

 

86,537

 

 

 

 

 

 

86,537

 

 

 

 

Corporate securities

 

 

41,174

 

 

 

 

 

 

41,174

 

 

 

 

U.S. treasury bills

 

 

42,239

 

 

 

 

 

 

42,239

 

 

 

 

U.S. government agency securities

 

 

36,168

 

 

 

 

 

 

36,168

 

 

 

 

Agency bond instruments

 

 

17,941

 

 

 

 

 

 

17,941

 

 

 

 

Agency discount instruments

 

 

5,482

 

 

 

 

 

 

5,482

 

 

 

 

Total financial assets

 

$

274,602

 

 

$

45,061

 

 

$

229,541

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

Fair Value Measurements Using

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(in thousands)

 

Money market funds

 

$

16,075

 

 

$

16,075

 

 

$

 

 

$

 

Commercial paper

 

 

46,423

 

 

 

 

 

 

46,423

 

 

 

 

Corporate securities

 

 

23,772

 

 

 

 

 

 

23,772

 

 

 

 

U.S. treasury bills

 

 

17,851

 

 

 

 

 

 

17,851

 

 

 

 

U.S. government agency securities

 

 

14,463

 

 

 

 

 

 

14,463

 

 

 

 

Total financial assets

 

$

118,584

 

 

$

16,075

 

 

$

102,509

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The financial assets listed above do not include cash held in the Company’s primary operating bank accounts of $7.3 million and $15.0 million as of September 30, 2018 and December 31, 2017, respectively.

Liabilities Measured at Fair Value

The Company’s contingent acquisition consideration payable, resulting from the acquisition of Cardiogen Sciences, Inc., or Cardiogen, in August 2015, is estimated using a probability-based income approach utilizing an appropriate discount rate. Key assumptions used by management to estimate the fair value of contingent acquisition consideration payable include estimated probability of occurrence, the estimated timing of when the milestone may be attained and assumed discount period and discount rate, which are Level 3 inputs. Changes in the fair value of the contingent acquisition consideration payable, resulting from management’s revision of key assumptions are recorded in research and development expense in the consolidated statement of operations and comprehensive loss. The probability-based income approach used by management to estimate the fair value of the contingent acquisition consideration is most sensitive to changes in the estimated probability of occurrence. The Company revised its estimated probability and the timing for triggering a milestone payment pursuant to the Cardiogen acquisition agreement in the first and second quarter of 2018, respectively, that resulted in a $2.3 million decrease to the estimated fair value of the contingent liability and a corresponding $2.3 million reduction of research and development expenses. The change in estimate was attributable to the Company’s assessment of various factors related to the CPVT program, including an evaluation of ongoing patient identification efforts, and how those efforts may affect the timing and decisions regarding resource allocation among the Company’s various product development candidates.

In conjunction with this assessment, the Company also considered the potential impact on the valuation of the indefinite lived intangible asset associated with the intellectual property and determined that there was no impairment. 

8


 

The following is a summary of the contingent acquisition consideration payable recorded in the accompanying consolidated balance sheets:

 

 

 

 

Amount

 

 

 

 

 

(in thousands)

 

Balance, December 31, 2017

 

 

 

$

4,643

 

Change in fair value of contingent acquisition consideration payable

 

 

(2,327

)

Balance, September 30, 2018

 

 

 

$

2,316

 

 

5.

Balance Sheet Components

Property and Equipment, Net

Property and equipment, net, consist of the following:

 

 

September 30, 2018

 

 

December 31, 2017

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

Furniture and office equipment

 

$

1,398

 

 

$

1,049

 

Computer equipment

 

 

918

 

 

 

160

 

Software

 

 

495

 

 

 

305

 

Leasehold improvements

 

 

19,944

 

 

 

13,368

 

Laboratory equipment

 

 

8,262

 

 

 

5,698

 

Manufacturing equipment

 

 

6,405

 

 

 

5,996

 

Construction in progress and deposits on equipment

 

 

2,229

 

 

 

2,899

 

Total property and equipment

 

 

39,651

 

 

 

29,475

 

Less accumulated depreciation and amortization

 

 

(8,998

)

 

 

(5,103

)

Property and equipment, net

 

$

30,653

 

 

$

24,372

 

 

 

 

 

 

 

 

 

 

Property and equipment depreciation and amortization expense for the three months ended September 30, 2018 and 2017 was $1.5 million and $0.9 million, respectively. Property and equipment depreciation and amortization expense for the nine months ended September 30, 2018 and 2017 was $3.9 million and $2.4 million, respectively.

Accrued Liabilities

Accrued liabilities consist of the following:

 

 

 

September 30, 2018

 

 

December 31, 2017

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

Accrued payroll and related expenses

 

$

6,508

 

 

$

5,460

 

Accrued research and development expenses

 

 

6,074

 

 

 

2,590

 

Accrued property and equipment

 

 

2,105

 

 

 

540

 

Accrued professional services

 

 

700

 

 

 

162

 

Other

 

 

193

 

 

 

80

 

Total accrued liabilities

 

$

15,580

 

 

$

8,832

 

 

 

 

 

 

 

 

 

 

Facility Lease Obligations

Long-term deferred rent and asset retirement obligations consist of the following:

 

 

 

September 30, 2018

 

 

December 31, 2017

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

Deferred rent

 

$

4,078

 

 

$

2,535

 

Asset retirement obligation

 

 

512

 

 

 

743

 

 

 

$

4,590

 

 

$

3,278

 

 

 

 

 

 

 

 

 

 

 

9


 

6.

License and Collaboration Agreements

During the three months ended March 31, 2018, the Company paid a $0.4 million milestone that was triggered by the first clinical dosing of a patient for the Crigler-Najjar program. There were no further milestone payments during the nine months ended September 30, 2018. For more information regarding the Company’s material license and collaboration agreements, see Note 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

7.Stock Compensation and Employee Benefit Plans

Stock-based compensation expense by category was as follows for the three and nine months ended September 30, 2018 and 2017:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

Research and development

 

$

2,611

 

 

$

956

 

 

$

6,930

 

 

$

2,321

 

General and administrative

 

 

2,022

 

 

 

574

 

 

 

5,185

 

 

 

1,732

 

Total stock-based compensation expense

 

$

4,633

 

 

$

1,530

 

 

$

12,115

 

 

$

4,053

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employees

 

$

4,285

 

 

$

1,492

 

 

$

11,656

 

 

$

3,951

 

Non-employees

 

 

348

 

 

 

38

 

 

 

459

 

 

 

102

 

Total stock-based compensation expense

 

$

4,633

 

 

$

1,530

 

 

$

12,115

 

 

$

4,053

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity Incentive Plans

Under the Company’s 2012 Equity Incentive Plan, or the 2012 Plan, a total of 3,107,517 shares were reserved for issuance. In July 2016, the Company ceased granting awards under the 2012 Plan and rolled the remaining 705,862 shares available for grant into the 2016 Equity Incentive Plan, or 2016 Plan, which was adopted on July 18, 2016. Under the terms of the 2012 Plan, options were granted at an exercise price not less than fair market value. For employees holding more than 10% of the voting rights of all classes of stock, the exercise prices for incentive and non-statutory stock options were not to be less than 110% of fair market value, as determined by the board of directors. The terms of options granted under the 2012 Plan do not exceed ten years. As options from the 2012 Plan are forfeited or canceled, they are rolled into the 2016 Plan.

A total of 1,500,000 shares were reserved for issuance under the 2016 Plan in addition to the 705,862 shares rolled into the 2016 Plan from the 2012 Plan. At September 30, 2018, 1,208,258 shares were available for future grant. The number of shares reserved for issuance under the 2016 Plan will increase automatically on January 1 of each calendar year continuing through the tenth calendar year during the term of the 2016 Plan by a number of shares equal to 5% of the total outstanding shares of the Company’s common stock as of the immediately preceding December 31. However, the board of directors at its discretion may reduce the amount of increase in any particular year. On January 1, 2018, 1,495,068 additional shares were added to the 2016 Plan reserve for issuance per this provision. Under the terms of the 2016 Plan, in general, options vest over a four-year period. However, options may vest based on time or achievement of performance conditions. The term of options granted under the 2016 Plan is limited to ten years.

10


 

The following table summarizes option activity for the nine months ended September 30, 2018:

 

 

 

Shares

Available

for Grant

 

 

Number of

Options

Outstanding

 

 

Weighted-

Average

Exercise Price

Per Option

 

 

Weighted-

Average

Remaining

Contract Term

(Years)

 

 

Aggregate

Intrinsic

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Balance, December 31, 2017

 

 

202,547

 

 

 

5,073,132

 

 

$

15.03

 

 

 

8.53

 

 

$

82,271

 

Increase to authorized shares

 

 

1,495,068

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options granted

 

 

(703,000

)

 

 

703,000

 

 

$

35.72

 

 

 

 

 

 

 

 

 

Options exercised

 

 

 

 

 

(533,437

)

 

$

6.00

 

 

 

 

 

 

 

 

 

Options forfeited

 

 

213,417

 

 

 

(213,417

)

 

$

19.54

 

 

 

 

 

 

 

 

 

Options cancelled

 

 

226

 

 

 

(226

)

 

$

27.39

 

 

 

 

 

 

 

 

 

Balance, September 30, 2018

 

 

1,208,258

 

 

 

5,029,052

 

 

$

18.69

 

 

 

8.25

 

 

$

105,220

 

Exercisable, September 30, 2018

 

 

 

 

 

 

2,020,481

 

 

$

11.43

 

 

 

7.47

 

 

$

56,902

 

Vested and expected to vest, September 30, 2018

 

 

 

 

 

 

4,708,937

 

 

$

18.14

 

 

 

8.20

 

 

$

101,092

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The aggregate intrinsic values of options outstanding, exercisable, vested and expected to vest were calculated as the difference between the exercise price of the options and the fair value of the Company’s common stock as of September 30, 2018. During the nine months ended September 30, 2018, options to purchase 533,437 shares of common stock with an intrinsic value of approximately $16.3 million were exercised, generating approximately $3.2 million of cash received.

The weighted average grant date fair value of employee options granted during the three months ended September 30, 2018 and 2017 was $24.20 and $15.49 per share, respectively. The weighted average grant date fair value of employee options granted during the nine months ended September 30, 2018 and 2017 was $23.61 and $11.48 per share, respectively.  As of September 30, 2018, the total unrecognized compensation expense related to unvested employee options, net of estimated forfeitures, was approximately $37.7 million, which the Company expects to recognize over an estimated weighted average period of 2.61 years. To the extent the actual forfeiture rate is different from what the Company has estimated, stock-based compensation related to these awards will be different from its expectations.

The fair value of stock options granted to employees was estimated using a Black-Scholes option pricing model with the following assumptions:

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

2018

 

 

2017

 

2018

 

2017

Expected term (in years)

 

 

6.1

 

 

6.0-6.1

 

5.5-6.1

 

5.8-6.1

Expected volatility

 

70%

 

 

76-77%

 

70-76%

 

76-78%

Risk-free interest rate

 

2.8-3.0%

 

 

1.9-2.0%

 

2.3-3.0%

 

1.9-2.2%

Expected dividend yield

 

0%

 

 

0%

 

0%

 

0%

 

 

 

 

 

 

 

 

 

 

 

There were no non-employee options granted during the three and nine months ended September 30, 2018 and 2017. Options and awards to non-employees are recorded at fair value and remeasured at the end of each period. As of September 30, 2018, the total unrecognized compensation expense related to unvested non-employee options was approximately $1.5 million, which the Company expects to recognize over an estimated weighted average period of 2.00 years. To the extent the actual forfeiture rate is different from what the Company has estimated, stock-based compensation related to these awards will be different from its expectations.

The fair value of stock options for non-employees was estimated using a Black-Scholes option pricing model with the following assumptions:

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

2018

 

2017

 

2018

 

2017

Expected term (in years)

 

6.5-9.2

 

7.8-8.6

 

6.5-9.2

 

6.7-9.1

Expected volatility

 

69-71%

 

76-90%

 

69-75%

 

76-91%

Risk-free interest rate

 

2.8-3.1%

 

2.0-2.2%

 

2.3-3.1%

 

2.0-2.4%

Expected dividend yield

 

0%

 

0%

 

0%

 

0%

 

 

 

 

 

 

 

 

 

11


 

2016 Employee Stock Purchase Plan

 

On July 19, 2016, the 2016 Employee Stock Purchase Plan, or the 2016 ESPP was adopted.  The Company initially reserved 210,000 shares of common stock for issuance under the 2016 ESPP. The number of shares reserved for issuance under the 2016 ESPP will increase automatically on January 1 of each calendar year beginning after the first offering date and continuing through the first ten calendar years by the number of shares equal to 1% of the total outstanding shares of the Company’s common stock as of the immediately preceding December 31.

The 2016 ESPP commenced on May 1, 2018. Under the 2016 ESPP, employees may purchase common stock through payroll deductions at a price equal to 85% of the lower of the fair market value at the beginning of the offering period or at the end of each applicable purchase period. The 2016 ESPP generally provides for offering periods of six months in duration with purchase periods ending on either May 15 or November 15. Contributions under the 2016 ESPP are limited to a maximum of 15% of an employee’s eligible compensation and purchases are settled with common stock from the ESPP’s previously authorized and available pool of shares. The expense for the three and nine months ended September 30, 2018 was based on the fair value of rights granted upon the commencement of an offering and calculated using the following assumptions: expected term in years is 0.5; volatility is 63.5%; the risk-free interest rate is 2.09%; and no dividend yield.

Employee Benefit Plan

 

Defined Contribution Plans – The Company sponsors a defined contribution Section 401(k) plan for its employees. The plan provides for the elective deferral of employee compensation under Section 401(k) of the Internal Revenue Code of 1986, as amended (“Section 401(k)”), and a Company discretionary matching contribution. The discretionary matching contribution was implemented by the Company during the first quarter of 2018. Direct costs related to this defined contribution plan were $0.2 million and $1.0 million for the three and nine months ended September 30, 2018. There were no direct costs for the three and nine months ended September 30, 2017.

 

 

Common Stock Warrants

During the nine months ended September 30, 2018, 9,914 common stock warrants, previously granted pursuant to a committed debt arrangement, with an exercise price of $15.13, were exercised on a cashless basis at a fair market value of $36.47 per share, resulting in the issuance of 5,800 shares of common stock.

8.

Income Taxes

The Company did not record a federal or state income tax provision or benefit for the nine months ended September 30, 2018 and 2017 as it has incurred net losses since inception. In addition, the net deferred tax assets generated from net operating losses have been fully reserved as the Company believes it is not more likely than not that the benefit will be realized.

9.

Commitments and Contingencies

In August 2018, the Company entered into a lease agreement for approximately 37,071 square feet of research and development office and warehouse space in South San Francisco, California, that commences in May 2019 for an eight-year term with minimum aggregate lease payments of $7.9 million.

In April 2016, the Company entered into a sublease agreement for approximately 8,983 square feet of research and development laboratory space in South San Francisco, California with an initial term that expired in January 2018. In July 2017, the Company executed a long-term lease agreement for this space, plus an additional 17,570 square feet for an aggregate space of 26,553 square feet, that commenced in February 2018 for an eight-year term with minimum aggregate lease payments of $13.5 million.

12


 

10.Net Loss per Share

Basic net loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding during the period and excludes any potential dilutive effects of common stock equivalents. Diluted net loss per share is computed giving effect to all potential dilutive common shares, including common stock issuable upon exercise of stock options, convertible preferred stock, and unvested restricted common stock. As the Company had net losses for the three and nine months ended September 30, 2018 and 2017, all potential common shares were determined to be anti-dilutive and were therefore excluded from the calculation of diluted net loss per share.

The following table sets forth the computation of basic and diluted net loss per share of common stock during the nine months ended September 30, 2018 and 2017:

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(36,291

)

 

$

(25,009

)

 

$

(93,229

)

 

$

(65,863

)

Weighted-average number of shares used in

   computing net loss per share

 

 

37,359,877

 

 

 

28,388,145

 

 

 

36,302,803

 

 

 

25,476,261

 

Net loss per share, basic and diluted

 

$

(0.97

)