toca-10q_20190930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

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: 001-38052

 

TOCAGEN INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

26 - 1243872

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

 

 

4242 Campus Point Court, Suite 500, San Diego, CA

92121

(Address of principal executive offices)

(Zip Code)

 

Registrant's telephone number, including area code: (858) 412-8400

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.001 per share

 

TOCA

 

The Nasdaq Global Select Market

 

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, 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 filer

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 November 1, 2019, the registrant had 23,897,771 shares of common stock, par value $0.001 per share, outstanding.

 

 

 

 

 


 

TOCAGEN INC.

TABLE OF CONTENTS

 

 

 

 

 

Page No.

PART I

 

FINANCIAL INFORMATION

 

1

ITEM 1.

 

FINANCIAL STATEMENTS

 

1

 

 

Condensed Balance Sheets as of September 30, 2019 (unaudited) and December 31, 2018

 

1

 

 

Condensed Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2019 and 2018 (unaudited)

 

2

 

 

Condensed Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended September 30, 2019 and 2018 (unaudited)

 

3

 

 

Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018 (unaudited)

 

4

 

 

Notes to Condensed Financial Statements (unaudited)

 

5

ITEM 2.

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

15

ITEM 3.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

21

ITEM 4.

 

CONTROLS AND PROCEDURES

 

21

PART II

 

OTHER INFORMATION

 

22

ITEM 1.

 

LEGAL PROCEEDINGS

 

22

ITEM 1A.

 

RISK FACTORS

 

22

ITEM 6.

 

EXHIBITS

 

54

SIGNATURES

 

55

 

 

 


 

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

TOCAGEN INC.

CONDENSED BALANCE SHEETS

(in thousands, except share and par value data)

 

 

 

September 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

25,580

 

 

$

40,813

 

Marketable securities

 

 

29,762

 

 

 

55,273

 

Prepaid expenses and other current assets

 

 

4,201

 

 

 

1,662

 

Total current assets

 

 

59,543

 

 

 

97,748

 

Property and equipment, net

 

 

3,604

 

 

 

3,973

 

Operating lease right-of-use asset

 

 

7,597

 

 

 

 

Other assets

 

 

5

 

 

 

1,360

 

Total assets

 

$

70,749

 

 

$

103,081

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,293

 

 

$

3,404

 

Accrued liabilities

 

 

11,601

 

 

 

13,094

 

Notes payable, current portion

 

 

27,843

 

 

 

 

Deferred license revenue

 

 

9

 

 

 

36

 

Total current liabilities

 

 

41,746

 

 

 

16,534

 

Operating lease liability, net of current portion

 

 

9,122

 

 

 

 

Notes payable, net of current portion

 

 

 

 

 

26,201

 

Deferred rent, net of current portion

 

 

 

 

 

2,201

 

Other long term liabilities

 

 

81

 

 

 

 

Total liabilities

 

 

50,949

 

 

 

44,936

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock, $0.001 par value; 200,000,000 shares authorized

   at September 30, 2019 and December 31, 2018; 23,897,711 and

   23,000,151 shares issued and outstanding at September 30, 2019 and

   December 31, 2018, respectively

 

 

23

 

 

 

23

 

Additional paid-in capital

 

 

288,551

 

 

 

274,029

 

Accumulated deficit

 

 

(268,817

)

 

 

(215,884

)

Accumulated other comprehensive income (loss)

 

 

43

 

 

 

(23

)

Total stockholders’ equity

 

 

19,800

 

 

 

58,145

 

Total liabilities and stockholders’ equity

 

$

70,749

 

 

$

103,081

 

 

See accompanying notes to these unaudited condensed financial statements.

 

 

1


 

TOCAGEN INC.

CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(in thousands, except share and per share data)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

(unaudited)

 

 

(unaudited)

 

License revenue

 

$

9

 

 

$

18,009

 

 

$

27

 

 

$

18,027

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

13,295

 

 

 

12,262

 

 

 

37,703

 

 

 

35,461

 

General and administrative

 

 

3,837

 

 

 

4,320

 

 

 

13,133

 

 

 

9,311

 

Total operating expenses

 

 

17,132

 

 

 

16,582

 

 

 

50,836

 

 

 

44,772

 

(Loss) Income from operations

 

 

(17,123

)

 

 

1,427

 

 

 

(50,809

)

 

 

(26,745

)

Other income (expense), net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

361

 

 

 

441

 

 

 

1,367

 

 

 

1,087

 

Interest expense

 

 

(1,973

)

 

 

(742

)

 

 

(3,490

)

 

 

(2,184

)

Total other expense, net

 

 

(1,612

)

 

 

(301

)

 

 

(2,123

)

 

 

(1,097

)

(Loss) Income before income taxes

 

 

(18,735

)

 

 

1,126

 

 

 

(52,932

)

 

 

(27,842

)

Income tax expense

 

 

 

 

 

(1,509

)

 

 

(1

)

 

 

(1,510

)

Net loss

 

$

(18,735

)

 

$

(383

)

 

$

(52,933

)

 

$

(29,352

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized (loss) gain on investments

 

 

(13

)

 

 

31

 

 

 

66

 

 

 

11

 

Comprehensive loss

 

$

(18,748

)

 

$

(352

)

 

$

(52,867

)

 

$

(29,341

)

Net loss per common share, basic and diluted

 

$

(0.78

)

 

$

(0.02

)

 

$

(2.25

)

 

$

(1.47

)

Weighted-average number of common shares outstanding,

   basic and diluted

 

 

23,897,243

 

 

 

19,951,262

 

 

 

23,540,222

 

 

 

19,926,662

 

 

See accompanying notes to these unaudited condensed financial statements.

 

 

2


 

TOCAGEN INC.

CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands, except share data)

Unaudited

 

 

 

For the Three Months ended September 30, 2019

 

 

 

Common Stock

 

 

Additional Paid-

 

 

Accumulated

 

 

Accumulated Other Comprehensive

 

 

Total Stockholders'

 

 

 

Shares

 

 

Amount

 

 

In Capital

 

 

Deficit

 

 

Income (Loss)

 

 

Equity

 

Balance at June 30, 2019

 

 

23,895,742

 

 

$

23

 

 

$

286,489

 

 

$

(250,082

)

 

$

56

 

 

$

36,486

 

Exercise of stock options

 

 

434

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock, net of offering costs

 

 

1,535

 

 

 

 

 

 

9

 

 

 

 

 

 

 

 

 

9

 

Stock-based compensation

 

 

 

 

 

 

 

 

2,053

 

 

 

 

 

 

 

 

 

2,053

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13

)

 

 

(13

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(18,735

)

 

 

 

 

 

(18,735

)

Balance at September 30, 2019

 

 

23,897,711

 

 

$

23

 

 

$

288,551

 

 

$

(268,817

)

 

$

43

 

 

$

19,800

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months ended September 30, 2019

 

 

 

Common Stock

 

 

Additional Paid-

 

 

Accumulated

 

 

Accumulated Other Comprehensive

 

 

Total Stockholders'

 

 

 

Shares

 

 

Amount

 

 

In Capital

 

 

Deficit

 

 

Income (Loss)

 

 

Equity

 

Balance at December 31, 2018

 

 

23,000,151

 

 

$

23

 

 

$

274,029

 

 

$

(215,884

)

 

$

(23

)

 

$

58,145

 

Exercise of stock options

 

 

69,697

 

 

 

 

 

 

252

 

 

 

 

 

 

 

 

 

252

 

Issuance of common stock pursuant to employee stock purchase

   plan

 

 

67,774

 

 

 

 

 

 

298

 

 

 

 

 

 

 

 

 

298

 

Issuance of common stock, net of offering costs

 

 

760,089

 

 

 

 

 

 

7,575

 

 

 

 

 

 

 

 

 

7,575

 

Stock-based compensation

 

 

 

 

 

 

 

 

6,397

 

 

 

 

 

 

 

 

 

6,397

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

66

 

 

 

66

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(52,933

)

 

 

 

 

 

(52,933

)

Balance at September 30, 2019

 

 

23,897,711

 

 

$

23

 

 

$

288,551

 

 

$

(268,817

)

 

$

43

 

 

$

19,800

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months ended September 30, 2018

 

 

 

Common Stock

 

 

Additional Paid-

 

 

Accumulated

 

 

Accumulated Other Comprehensive

 

 

Total Stockholders'

 

 

 

Shares

 

 

Amount

 

 

In Capital

 

 

Deficit

 

 

Income (Loss)

 

 

Equity

 

Balance at June 30, 2018

 

 

19,951,158

 

 

$

20

 

 

$

242,021

 

 

$

(195,898

)

 

$

(54

)

 

$

46,089

 

Exercise of stock options

 

 

1,851

 

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

3

 

Stock-based compensation

 

 

 

 

 

 

 

 

1,927

 

 

 

 

 

 

 

 

 

1,927

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31

 

 

 

31

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(383

)

 

 

 

 

 

(383

)

Balance at September 30, 2018

 

 

19,953,009

 

 

$

20

 

 

$

243,951

 

 

$

(196,281

)

 

$

(23

)

 

$

47,667

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months ended September 30, 2018

 

 

 

Common Stock

 

 

Additional Paid-

 

 

Accumulated

 

 

Accumulated Other Comprehensive

 

 

Total Stockholders'

 

 

 

Shares

 

 

Amount

 

 

In Capital

 

 

Deficit

 

 

Income (Loss)

 

 

Equity

 

Balance at December 31, 2017

 

 

19,882,551

 

 

$

20

 

 

$

238,025

 

 

$

(166,929

)

 

$

(34

)

 

$

71,082

 

Exercise of stock options

 

 

35,093

 

 

 

 

 

 

37

 

 

 

 

 

 

 

 

 

37

 

Issuance of common stock pursuant to employee stock purchase

   plan

 

 

35,365

 

 

 

 

 

 

290

 

 

 

 

 

 

 

 

 

290

 

Stock-based compensation

 

 

 

 

 

 

 

 

5,120

 

 

 

 

 

 

 

 

 

5,120

 

Issuance of common stock warrants

 

 

 

 

 

 

 

 

479

 

 

 

 

 

 

 

 

 

479

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11

 

 

 

11

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(29,352

)

 

 

 

 

 

(29,352

)

Balance at September 30, 2018

 

 

19,953,009

 

 

$

20

 

 

$

243,951

 

 

$

(196,281

)

 

$

(23

)

 

$

47,667

 

 

 

See accompanying notes to these unaudited condensed financial statements.

3


 

TOCAGEN INC.

CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

 

Nine Months Ended

September 30,

 

 

 

2019

 

 

2018

 

 

 

(unaudited)

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net loss

 

$

(52,933

)

 

$

(29,352

)

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

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

6,397

 

 

 

5,120

 

Depreciation

 

 

657

 

 

 

421

 

Noncash interest expense

 

 

1,641

 

 

 

1,016

 

Amortization of premium (discount) on investments, net

 

 

102

 

 

 

(114

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other assets

 

 

(611

)

 

 

(3,780

)

Accounts payable

 

 

(983

)

 

 

2,367

 

Accrued liabilities

 

 

(3,049

)

 

 

1,062

 

Deferred license revenue

 

 

(27

)

 

 

(27

)

Other

 

 

280

 

 

 

761

 

Net cash used in operating activities

 

 

(48,526

)

 

 

(22,526

)

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Proceeds from the sale/maturity of marketable securities

 

 

76,638

 

 

 

49,186

 

Purchases of marketable securities

 

 

(51,163

)

 

 

(52,636

)

Purchases of property and equipment

 

 

(428

)

 

 

(1,496

)

Net cash provided by (used in) investing activities

 

 

25,047

 

 

 

(4,946

)

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock

 

 

550

 

 

 

327

 

Proceeds from offering of common stock, net of issuance costs

 

 

7,696

 

 

 

 

Proceeds from issuance of notes payable, net of issuance costs

 

 

 

 

 

26,325

 

Cash paid on extinguishment of debt

 

 

 

 

 

(8,631

)

Principal payments on notes payable

 

 

 

 

 

(3,000

)

Net cash provided by financing activities

 

 

8,246

 

 

 

15,021

 

Net decrease in cash and cash equivalents

 

 

(15,233

)

 

 

(12,451

)

Cash and cash equivalents, beginning of period

 

 

40,813

 

 

 

35,933

 

Cash and cash equivalents, end of period

 

$

25,580

 

 

$

23,482

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

1,856

 

 

$

1,013

 

NONCASH INVESTING AND FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Property and equipment purchases included in accounts payable and accrued liabilities

 

$

37

 

 

$

506

 

Tenant improvement allowance

 

$

-

 

 

$

1,243

 

Fair value of common stock warrants issued in connection with notes payable

 

$

-

 

 

$

479

 

 

See accompanying notes to these unaudited condensed financial statements.

 

4


 

TOCAGEN INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

1.

Organization and Basis of Presentation

Tocagen Inc. (Tocagen or the Company) is a clinical-stage, cancer-selective gene therapy company focused on developing first-in-class, broadly-applicable product candidates designed to activate a patient’s immune system against their own cancer. The Company’s cancer-selective gene therapy platform is built on retroviral replicating vectors which are designed to selectively deliver therapeutic genes into the DNA of cancer cells. Tocagen’s gene therapy approach is designed to fight cancer through immunotherapeutic mechanisms of action without the autoimmune toxicities commonly experienced with other immunotherapies. The Company views its operations and manages its business in one operating segment.

From inception through September 30, 2019, the Company has devoted substantially all of its efforts to developing its gene therapy platform and its lead product candidate, Toca 511 & Toca FC, as well as raising capital and building its infrastructure. The Company has not generated revenues from its principal operations.

The accompanying unaudited condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In management’s opinion, the accompanying financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the results for the interim periods presented. Interim financial results are not necessarily indicative of results anticipated for the full year. These unaudited condensed financial statements should be read in conjunction with the audited financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, from which the balance sheet information herein was derived.

Liquidity

The accompanying financial statements have been prepared on a basis which assumes the Company is a going concern, and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from any uncertainty related to the Company’s ability to continue as a going concern. The Company has experienced net losses and negative cash flows from operating activities since its inception. As of September 30, 2019, the Company had an accumulated deficit of $268.8 million and working capital of $17.8 million available to fund future operations.

Based on the Company’s operating plans, cash, cash equivalents and marketable securities may not be sufficient to fund operations for the next 12 months. As a result, there is substantial doubt about the Company’s ability to continue as a going concern. All amounts due under the Term Loans (see note 5) have been classified as a current liability as of September 30, 2019 due to the considerations discussed above and the assessment that a material adverse change clause under the Term Loans is not within the Company’s control. On October 31, 2019, the Company entered into an amendment (the Second Amendment) to its Amended and Restated Loan and Security Agreement with the two lenders, dated May 18, 2018, which was further amended on August 3, 2018 (the Loan Agreement), and made a prepayment of $23.3 million, which amount was used to prepay i) a portion equal to $21.5 million of the outstanding principal of the Term Loans plus all accrued and unpaid interest thereon through the prepayment date, ii) prorated portion of the final payment with respect to the portion of such Term Loans being prepaid, plus iii) all outstanding lenders’ expenses as of the date of the Second Amendment (see note 9). The Company has not been notified of an event of default by the lenders as of the date of the filing of this Form 10-Q.

The Company will seek to fund its losses from operations and capital needs through debt and equity financing, or through collaborations or partnerships with other entities which may not be available on a timely basis on terms acceptable to the Company, or at all.  If the Company is unable to raise additional capital when required or on acceptable terms, the Company may be required to scale back or discontinue the advancement of product candidates, further reduce headcount, reorganize, merge with another entity, file for bankruptcy, or cease operations.

As of September 30, 2019, the Company had cash, cash equivalents and marketable securities of $55.3 million.

Use of Estimates

The Company’s financial statements are prepared in accordance with GAAP, which requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities in the financial statements and accompanying notes. Significant estimates in the Company’s financial statements relate to clinical trial accruals, the valuation of equity awards, and the development period used for license revenue recognition. Estimates are

5


 

periodically reviewed in light of changes in circumstances, facts and experience. Actual results may differ from these estimates under different assumptions or conditions.

2.

Summary of Significant Accounting Policies  

Clinical Trial Accruals

Expenses related to clinical studies are based on estimates of the services received and efforts expended pursuant to the Company’s contract arrangements. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to the Company’s service providers will temporarily exceed the level of services provided and result in a prepayment of the clinical expense. Payments under some of these contracts depend on factors such as the successful enrollment of patients, site initiation and the completion of clinical milestones. The Company makes estimates of its accrued expenses as of each balance sheet date in its financial statements based on facts and circumstances known at that time. In accruing service fees, the Company estimates the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from its estimate, the Company adjusts the accrual or prepaid expense balance accordingly. Historically, the Company’s estimated accrued liabilities have materially approximated actual expense incurred.

Revenue Recognition

Revenue generally consists of license revenue with upfront payments and development milestones considered probable of achievement.

Revenue is recognized when control of the promised goods or services is transferred to the Company’s customers in an amount that reflects the consideration the Company expects to receive from its customers in exchange for those goods and services. This process involves identifying the contract with a customer, determining the performance obligations in the contract, determining the transaction price, allocating the contract price to the distinct performance obligations in the contract, and recognizing revenue when or as the Company satisfies the performance obligation(s).

At contract inception, the Company assesses the goods and services promised within each contract and assesses whether each promised good or service is distinct and determines that those are performance obligations. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. The Company considers factors such as the research, manufacturing and commercialization capabilities of the collaboration partner and the availability of the associated expertise in the general marketplace. The Company considers a performance obligation satisfied once the Company has transferred control of a good or service to the customer, meaning the customer has the ability to use and obtain the benefit of the good or service. The Company recognizes revenue for satisfied performance obligations only when the Company determines there are no uncertainties regarding payment terms or transfer of control.

Collaborative Arrangements

The Company enters into collaborative arrangements with partners that may include payment to the Company of one or more of the following: (i) license fees; (ii) payments related to the achievement of developmental, regulatory, or commercial milestones; and (iii) royalties on net sales of licensed products.  Where a portion of non‑refundable upfront fees or other payments received are allocated to continuing performance obligations under the terms of a collaborative arrangement, they are recorded as contract liabilities and recognized as revenue when (or as) the underlying performance obligation is satisfied.  

As part of the accounting for these arrangements, the Company must develop estimates and assumptions that require judgment to determine the underlying stand-alone selling price for each performance obligation which determines how the transaction price is allocated among the performance obligation(s). The stand-alone selling price may include items such as forecasted revenues, development timelines, discount rates, and probabilities of technical and regulatory success. The Company evaluates each performance obligation to determine if it can be satisfied at a point in time or over time. In addition, variable consideration must be evaluated to determine if it is constrained and, therefore, excluded from the transaction price.

License Fees

If a license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues from non-refundable, upfront fees allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses that are bundled with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue. The Company evaluates the measure of progress each reporting period and, if

6


 

necessary, adjusts the measure of performance and related revenue recognition. Any such adjustments are recorded on a cumulative catch-up basis, which would affect license, collaboration or other revenues and earnings in the period of adjustment.

Milestone Payments

At the inception of each arrangement that includes milestone payments (variable consideration), the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price. If it is probable that a milestone event would occur at the inception of the arrangement, the associated milestone value is included in the transaction price. Milestone payments that are not within the Company’s control, such as regulatory approvals, are generally not considered probable of being achieved until those approvals are received. The transaction price is then allocated to each performance obligation on a relative stand-alone selling price basis, for which the Company recognizes revenue as or when the performance obligations under the contract are satisfied. At the end of each reporting period, the Company evaluates the probability of achievement of such milestones and any related constraint(s), and if necessary, may adjust the Company’s estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect license, collaboration or other revenues and earnings in the period of adjustment.

Royalties

For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and for which the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, the Company has not recognized any royalty revenue resulting from its collaborative arrangements.

Stock-Based Compensation

Stock-based compensation expense represents the cost of the grant date fair value of stock awards, including stock options, and stock purchase rights granted to employees and members of the Company’s board of directors. For awards with time-based vesting provisions, the Company estimates the fair value of stock options on the date of grant using the Black-Scholes option pricing model and recognizes the expense over the requisite service period of the awards, which is generally the vesting period, on a straight-line basis. For awards with performance-based vesting provisions, the Company estimates the fair value of stock option grants on the date of grant, or the date when all of the terms of the grant have been agreed to, if later, and recognizes the expense based on the probability of the occurrence of the individual milestones at each reporting period. The expense is recognized over the implicit service period that commences once management believes the performance criteria are probable of being met.  For purchase rights, the Company estimates the fair value of the purchase as of the plan enrollment date and recognizes expense on a straight-line basis over the applicable offering period.  The Company accounts for forfeitures when they occur and reverses any compensation cost previously recognized for awards for which the requisite service has not been completed, in the period that the award is forfeited.

Net Loss Per Share

Basic and diluted net loss per common share for the periods presented is computed by dividing net loss by the weighted-average number of common shares outstanding during the respective periods, without consideration of common stock equivalents as they are anti-dilutive. Common stock equivalents that could potentially dilute earnings in the future are comprised of options to purchase shares of common stock outstanding under the Company’s equity incentive plan and warrants for the purchase of shares of common stock. For all periods presented, there is no difference in the number of shares used to calculate basic and diluted shares outstanding due to the Company’s net loss position.

Common stock equivalents from potentially dilutive securities that are not included in the calculation of diluted net loss per share, because to do so would be anti-dilutive, are as follows:

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Common stock options

 

 

4,395,696

 

 

 

3,637,502

 

 

 

4,395,696

 

 

 

3,637,502

 

Common stock warrants

 

 

66,514

 

 

 

67,238

 

 

 

66,514

 

 

 

67,238

 

Total

 

 

4,462,210

 

 

 

3,704,740

 

 

 

4,462,210

 

 

 

3,704,740

 

 

7


 

Recently Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, Leases (Topic 842). The new standard is aimed at making leasing activities more transparent and comparable.  Under the new guidance, lessees are required to recognize substantially all leases on their balance sheet as a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The Company adopted Topic 842 on January 1, 2019 using the modified retrospective approach with a cumulative-effect adjustment as of January 1, 2019. The Company recognized a right-of-use asset and a lease liability on the condensed balance sheet for the discounted value of future lease payments from the date of adoption. The impact on the condensed balance sheet as of the date of adoption was as follows (in thousands):

 

 

 

ASC 840

 

 

ASC 842

 

 

Impact of

 

 

 

January 1, 2019

 

 

January 1, 2019

 

 

Adoption

 

Balance Sheet

 

 

 

 

 

 

 

 

 

 

 

 

Accrued liabilities

 

$

154

 

 

$

645

 

 

$

491

 

Deferred rent, net of current portion

 

 

2,201

 

 

 

 

 

 

(2,201

)

Operating lease right-of-use asset

 

 

 

 

 

8,060

 

 

 

8,060

 

Operating lease liability, net of current portion

 

 

 

 

 

9,770

 

 

 

9,770

 

 

Operating lease assets and liabilities were recorded in the Company’s condensed balance sheet as of September 30, 2019 (in thousands):

 

 

 

 

 

September 30, 2019

 

Operating lease right-of-use asset

 

 

 

$

7,597

 

Accrued liabilities

 

 

 

 

876

 

Operating lease liability, net of current portion

 

 

 

 

9,122

 

 

In June 2018, the FASB issued ASU 2018-07, Compensation- Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting. This new standard is intended to simplify aspects of share-based compensation issued to non-employees by aligning the accounting for share-based payment awards issued to employees and non-employees as it relates to the measurement date and impact of performance conditions. The new standard became effective January 1, 2019 and did not have a material impact to the overall financial statements of the Company.

3.

Fair Value of Financial Instruments

Fair Values of Assets Measured on a Recurring Basis

The following tables summarize the Company’s assets that require fair value measurements on a recurring basis and their respective input levels based on the fair value hierarchy (in thousands):

 

 

 

 

 

 

 

Fair Value Measurements at End of Period Using:

 

 

 

Total

 

 

Quoted Market

Prices for

Identical Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

2,494

 

 

$

 

 

$

2,494

 

 

$

 

 

 

$

2,494

 

 

$

 

 

$

2,494

 

 

$

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

11,687

 

 

$

 

 

$

11,687

 

 

$

 

Commercial paper

 

 

12,478

 

 

 

 

 

 

12,478

 

 

 

 

Asset-backed securities

 

 

5,597

 

 

 

 

 

 

5,597

 

 

 

 

 

 

$

29,762

 

 

$

 

 

$

29,762

 

 

$

 

8


 

 

 

 

 

 

 

 

Fair Value Measurements at End of Period Using:

 

 

 

Total

 

 

Quoted Market

Prices for

Identical Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

4,783