advm-10q_20170930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 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, 2017

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: 001-36579

 

Adverum Biotechnologies, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

 

 

Delaware

 

20-5258327

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1035 O’Brien Drive,

Menlo Park, CA

(Address of principal executive offices)

94025

(Zip Code)

(650) 272-6269

(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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 definitions of “large accelerated filer,” “accelerated filer,”  “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

 

 

 

 

 

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

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, 2017 there were 45,041,468 shares of the registrant’s common stock, par value $0.0001 per share, outstanding.

 

 

 

 

 

 


 

Adverum Biotechnologies, Inc.

 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

PART I—FINANCIAL INFORMATION

  

3

 

 

 

Item 1. Financial Statements

  

3

Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016

  

3

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2017 and 2016

  

4

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016

  

5

Notes to Condensed Consolidated Financial Statements

  

6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation

  

21

Item 3. Quantitative and Qualitative Disclosures About Market Risk

  

27

Item 4. Controls and Procedures

  

27

 

 

 

PART II—OTHER INFORMATION

  

29

 

 

 

Item 1. Legal Proceedings

  

29

Item 1A. Risk Factors

  

29

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

  

29

Item 3. Defaults Upon Senior Securities

  

30

Item 4. Mine Safety Disclosures

  

30

Item 5. Other Information

  

30

Item 6. Exhibits

  

30

 

 

 

SIGNATURES

  

32

 

 

 

 

2


 

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

Adverum Biotechnologies, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands except share and per share data)

 

 

September 30,

 

 

December 31,

 

 

2017

 

 

2016

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

31,713

 

 

$

222,170

 

Short-term investments

 

154,929

 

 

 

 

Receivable from collaborative partner

 

 

 

 

886

 

Prepaid expenses and other current assets

 

2,881

 

 

 

2,218

 

Total current assets

 

189,523

 

 

 

225,274

 

Property and equipment, net

 

3,347

 

 

 

4,169

 

Deposit and other non-current assets

 

340

 

 

 

140

 

Intangible assets

 

5,000

 

 

 

5,000

 

Total assets

$

198,210

 

 

$

234,583

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

1,580

 

 

$

1,474

 

Restructuring liabilities

 

 

 

 

25

 

Accrued expenses and other current liabilities

 

6,062

 

 

 

6,451

 

Deferred rent, current portion

 

121

 

 

 

96

 

Deferred revenue, current portion

 

1,850

 

 

 

1,850

 

Total current liabilities

 

9,613

 

 

 

9,896

 

Long-term liabilities:

 

 

 

 

 

 

 

Deferred rent, net of current portion

 

257

 

 

 

352

 

Deferred revenue, net of current portion

 

5,711

 

 

 

7,099

 

Deferred tax liability

 

1,250

 

 

 

1,250

 

Other non-current liabilities

 

387

 

 

 

386

 

Total liabilities

 

17,218

 

 

 

18,983

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value, 5,000,000 shares authorized; no shares issued

   and outstanding

 

 

 

 

 

Common stock, $0.0001 par value, 300,000,000 shares authorized at September 30,

   2017 and December 31, 2016; 43,517,412 and 41,805,009 shares issued and

   outstanding at September 30, 2017 and December 31, 2016, respectively

 

5

 

 

 

4

 

Additional paid-in capital

 

420,811

 

 

 

413,518

 

Accumulated other comprehensive loss

 

(551

)

 

 

(7

)

Accumulated deficit

 

(239,273

)

 

 

(197,915

)

Total stockholders’ equity

 

180,992

 

 

 

215,600

 

Total liabilities and stockholders’ equity

$

198,210

 

 

$

234,583

 

 

See accompanying notes to condensed consolidated financial statements

 

 

 

3


 

Adverum Biotechnologies, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

(In thousands except per share data)

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

(Unaudited)

 

Collaboration revenue

$

463

 

 

$

395

 

 

$

1,388

 

 

$

967

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

10,272

 

 

 

8,362

 

 

 

27,825

 

 

 

23,772

 

General and administrative

 

4,762

 

 

 

6,146

 

 

 

16,815

 

 

 

19,578

 

Goodwill impairment charge

 

 

 

 

394

 

 

 

 

 

 

49,514

 

Total operating expenses

 

15,034

 

 

 

14,902

 

 

 

44,640

 

 

 

92,864

 

Operating loss

 

(14,571

)

 

 

(14,507

)

 

 

(43,252

)

 

 

(91,897

)

Other income, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income, net

 

742

 

 

 

206

 

 

 

1,894

 

 

 

544

 

Total other income, net

 

742

 

 

 

206

 

 

 

1,894

 

 

 

544

 

Net loss

$

(13,829

)

 

$

(14,301

)

 

$

(41,358

)

 

$

(91,353

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized (loss) gain on marketable securities

 

35

 

 

 

(6

)

 

 

(102

)

 

 

 

Foreign currency translation adjustment

 

(183

)

 

 

(23

)

 

 

(442

)

 

 

(13

)

Comprehensive loss

$

(13,977

)

 

$

(14,330

)

 

$

(41,902

)

 

$

(91,366

)

Net loss per share attributable to common stockholders-basic and diluted

$

(0.32

)

 

$

(0.35

)

 

$

(0.97

)

 

$

(2.66

)

Weighted-average common shares outstanding-basic and diluted

 

43,381

 

 

 

41,416

 

 

 

42,849

 

 

 

34,382

 

 

See accompanying notes to condensed consolidated financial statements

 

 

 

4


 

Adverum Biotechnologies, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

 

Nine Months Ended September 30,

 

 

2017

 

 

2016

 

 

(Unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

$

(41,358

)

 

$

(91,353

)

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

 

 

 

 

 

 

 

Depreciation and amortization

 

1,592

 

 

 

1,116

 

Stock-based compensation expense

 

6,839

 

 

 

9,852

 

Goodwill impairment charge

 

 

 

 

49,514

 

Amortization of premium and accrued interest on marketable securities

 

419

 

 

 

 

Non-cash research and development expense

 

60

 

 

 

24

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Receivable from collaborative partner

 

886

 

 

 

(532

)

Prepaid expenses and other current assets

 

(136

)

 

 

(1,317

)

Accounts payable

 

166

 

 

 

817

 

Accrued expenses and other current liabilities

 

(208

)

 

 

(46

)

Restructuring liabilities

 

(25

)

 

 

(988

)

Deferred revenue

 

(1,388

)

 

 

2,936

 

Deferred rent

 

(70

)

 

 

(47

)

Net cash used in operating activities

 

(33,223

)

 

 

(30,024

)

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of investments

 

(201,038

)

 

 

 

Maturities of investments

 

45,061

 

 

 

37,738

 

Purchases of property and equipment

 

(918

)

 

 

(1,488

)

Cash acquired in business acquisition

 

 

 

 

3,449

 

Net cash provided by (used in) investing activities

 

(156,895

)

 

 

39,699

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from issuance of common stock pursuant to option exercises

 

312

 

 

 

633

 

Taxes paid related to net share settlement of restricted stock units

 

(292

)

 

 

(493

)

Proceeds from employee stock purchase plan

 

83

 

 

 

113

 

Proceeds from financing arrangement

 

 

 

 

100

 

Net cash provided by financing activities

 

103

 

 

 

353

 

Effect of foreign currency exchange rate on cash and cash equivalents

 

(442

)

 

 

(105

)

Net increase (decrease) in cash and cash equivalents

 

(190,457

)

 

 

9,923

 

Cash and cash equivalents at beginning of period

 

222,170

 

 

 

221,348

 

Cash and cash equivalents at end of period

$

31,713

 

 

$

231,271

 

Supplemental schedule of noncash investing and financing information

 

 

 

 

 

 

 

Unpaid deferred offering costs in accounts payable and accrued expenses

$

200

 

 

$

 

Issuance of common stock and exchange of stock options for business combination

$

 

 

$

64,845

 

Fixed assets in accounts payable, accrued expenses and other current liabilities

$

148

 

 

$

771

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

5


 

Adverum Biotechnologies, Inc.

September 30, 2017

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1. Organization and Basis of Presentation

Adverum Biotechnologies, Inc. (the “Company”, “we” or “us”) was incorporated in Delaware on July 17, 2006 as Avalanche Biotechnologies, Inc. and changed its name to Adverum Biotechnologies, Inc. on May 11, 2016. The Company is headquartered in Menlo Park, California. The Company is a gene therapy company targeting unmet medical needs in serious rare and ocular diseases. Since the Company’s inception, it has devoted its efforts principally to performing research and development activities, including conducting preclinical studies and, early clinical trials, filing patent applications, obtaining regulatory agreements, hiring personnel, and raising capital to support these activities.

The Company has not generated any revenue from the sale of products since its inception. The Company has experienced net losses since its inception and had an accumulated deficit of $239.3 million as of September 30, 2017. The Company expects to incur losses and have negative net cash flows from operating activities as it engages in further research and development activities. The Company believes that it has sufficient funds to continue its operations through the end of 2019.

On May 11, 2016, the Company completed the acquisition of all the outstanding shares of Annapurna Therapeutics SAS, a French simplified joint stock company (“Annapurna”). As a result, Annapurna is now a wholly owned subsidiary of the Company.

 

Upon completion of the acquisition of Annapurna, the Company changed its name to “Adverum Biotechnologies, Inc.”. The Company’s shares of common stock listed on The NASDAQ Global Market, previously trading through the close of business on Wednesday, May 11, 2016 under the ticker symbol “AAVL,” commenced trading on The NASDAQ Global Market under the ticker symbol “ADVM” on May 12, 2016.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and follow the requirements of the Securities and Exchange Commission (“SEC”) for interim 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. These unaudited condensed consolidated financial statements have been prepared on the same basis as the Company’s annual consolidated financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair statement of the Company’s consolidated financial information. The results of operations for the three and nine months ended September 30, 2017, are not necessarily indicative of the results to be expected for the full year or any other future period. The balance sheet as of December 31, 2016 has been derived from the Company’s audited consolidated financial statements at that date but does not include all of the information required by U.S. GAAP for complete consolidated financial statements.

The accompanying unaudited condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC.

 

2. Summary of Significant Accounting Policies

The accounting policies followed in the preparation of the interim condensed consolidated financial statements are consistent in all material respects with those presented in Note 2 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

Recently-Issued and Not Yet Adopted Accounting Pronouncements In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. This ASU is based on the principle that revenue is recognized to depict the transfer of 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. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing U.S. GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is required to be adopted, using either of two methods: (i) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (ii) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures. In July 2015, the FASB voted to approve a one-year deferral of the

 

6


 

effective date to December 15, 2017 for interim and annual reporting periods beginning after that date and permitted early adoption of the standard, but not before the original effective date of December 15, 2016. The FASB issued supplemental adoption guidance and clarification to ASU 2014-09 in March 2016, April 2016, May 2016 and December 2016 within ASU 2016-08 Revenue From Contracts With Customers: Principal vs. Agent Considerations, ASU 2016-10 Revenue From Contracts with Customers: Identifying Performance Obligations and Licensing, ASU 2016-12 Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients and ASU 2016-20 Technical Corrections and Improvement to Topic 606 – Revenue from Contracts with Customers, respectively. The ASU will be effective for the Company in the first quarter of 2018. The Company has commenced its implementation activities related to the adoption of ASU 2014-09 and is in the process of applying the five-step model of the new standard to its various revenue related arrangements. The Company has completed step 1 (Identify the contract(s) with a customer) and concluded that its collaboration agreements with Regeneron Pharmaceuticals, Inc. and Editas Medicine, Inc. will be impacted by the adoption of the new revenue standards. The Company is in the process of completing step 2 (Identify the performance obligations in the contract) and has not yet reached a conclusion on whether the distinct criteria evaluated under ASC 605-25 for each performance obligation would result in a similar conclusion under the new revenue standards. Preliminarily, the Company intends to adopt the new standard in the first quarter of 2018 using the retrospective approach noted in (ii) above. The Company is currently evaluating the impact of the adoption of this standard on its condensed consolidated financial statements and related disclosures.

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which amends the current guidance on the classification and measurement of financial instruments. Although this ASU retains many current requirements, it significantly revises an entity’s accounting related to (i) the classification and measurement of investments in equity securities and (ii) the presentation of certain fair value changes for financial liabilities measured at fair value. This ASU also amends certain disclosure requirements associated with the fair value of financial instruments. The new standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2017, with early adoption permitted for certain changes. This ASU will be effective for the Company in the first quarter of 2018 and must be adopted using a modified retrospective approach, with certain exceptions. The adoption of this standard is not expected to have a significant impact on the Company’s condensed consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU No. 2016-2, Leases, which amends the current guidance on leasing activities to provide more transparency and comparability, and requires that all leases be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability, which are currently accounted for as operating leases. The new standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2018, with early adoption permitted. This ASU will be effective for the Company in the first quarter of 2019 and must be adopted using a modified retrospective transition approach. The Company has not yet determined whether it will elect early adoption and is currently evaluating the impact of the adoption of this standard on its condensed consolidated financial statements and related disclosures.

In June 2016, the FASB issued ASU No. 2016-13 Measurement of Credit Losses on Financial Instruments. This ASU requires measurement and recognition of expected credit losses for financial assets held. The new standard is effective for fiscal years beginning after December 15, 2020 and interim periods beginning after December 15, 2021 with early adoption permitted beginning in the first quarter of 2019. This ASU will be effective for the Company in the first quarter of 2021 and must be adopted using a modified retrospective approach, with certain exceptions. The Company has not yet determined whether it will elect early adoption and is currently evaluating the impact of the adoption of this standard on its condensed consolidated financial statements and related disclosures.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which clarifies the presentation and classification of certain cash receipts and cash payments in the statement of cash flows. This ASU is effective for annual reporting periods beginning after December 15, 2017, and interim periods within that reporting period. Early adoption is permitted. This ASU will be effective for the Company in the first quarter of 2018. The Company has not yet determined whether it will elect early adoption and is currently evaluating the impact of the adoption of this standard on its condensed consolidated financial statements and related disclosures.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which provides amendments to current guidance to address the classification and presentation of changes in restricted cash in the statement of cash flows. This ASU is effective for annual reporting periods beginning after December 15, 2017, and interim periods within that reporting period. Early adoption is permitted. This ASU will be effective for the Company in the first quarter of 2018. The Company has not yet determined whether it will elect early adoption and is currently evaluating the impact of the adoption of these standards on its condensed consolidated financial statements and related disclosures.

 

7


 

In May 2017, the FASB issued ASU No. 2017-09, Scope of Modification Accounting, which provides amendments to the current guidance for modification accounting. This ASU clarifies that an entity should account for the effects of a modification unless all the following criteria are met: (1) the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified, (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified, and (3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. This ASU is effective for annual reporting periods beginning after December 15, 2017, and interim periods within that reporting period. Early adoption is permitted. This ASU will be effective for the Company in the first quarter of 2018. The Company has not yet determined whether it will elect early adoption and is currently evaluating the impact of the adoption of these standards on its condensed consolidated financial statements and related disclosures.

 

The Company has reviewed other recent accounting pronouncements and concluded they are either not applicable to the business or no material effect is expected on the consolidated financial statements as a result of future adoption.

 

3. Acquisition of Annapurna

 

 

(a)

Purchase Price Allocation

 

On May 11, 2016, the Company completed the acquisition of all outstanding equity interests of Annapurna. Annapurna was a privately held French limited liability company with two wholly-owned subsidiaries, Annapurna, Inc. in the U.S. and Annapurna Therapeutics Limited in Ireland. Annapurna is a biopharmaceutical company focused on discovering and developing novel gene therapy products for people living with severe rare diseases. The primary reasons for the acquisition were to expand the technology platforms within the Company’s research and development portfolio and to apply the Company’s resources and expertise in gene vectors development to advance Annapurna’s programs through development and clinical trials. Annapurna’s results of operations and fair value of assets acquired and liabilities assumed are included in the Company’s condensed consolidated financial statements from the date of acquisition.

 

The purchase price consideration was $64.8 million, which was based on the Company’s common stock closing price on NASDAQ on the acquisition closing date of $4.14 per share. A total of 14,087,246 shares of the Company’s common stock were issued to shareholders of Annapurna in exchange for all common and preferred stock outstanding at the closing date. Annapurna stockholders did not receive any fractional shares of the Company’s common stock in connection with the acquisition. Instead of receiving any fractional shares, each Annapurna stockholder was paid an amount in cash (without interest) equal to such fraction amount multiplied by the average 10 business days sale price of the Company’s common stock on NASDAQ from the acquisition date. Annapurna Series O preferred shares issued to founders were canceled prior to the acquisition date and were not included in the purchase price consideration. Vesting of certain of Annapurna’s options and unvested common stock shares was accelerated at the closing date. The fair value of awards related to the accelerated vesting of options and shares of $0.9 million was excluded from the purchase price consideration and included in the Company’s operating expenses post acquisition.

A portion of the purchase price was attributed to the exchange of Annapurna’s options and other rights to purchase capital stock outstanding at the acquisition closing date for corresponding common stock options of the Company at an exchange ratio of 9.54655.

The Company reserved 3,673,940 shares for the future exercise of the Company’s stock options. The total fair value of assumed Annapurna stock options and stock-based awards was estimated at $14.7 million on the acquisition date, using the Black-Scholes pricing model, assuming no dividends, expected volatilities of 80% and 89%, risk-free interest rates of 1.4% and 1.1%, and expected lives of six and ten years for employees and non-employees awards, respectively. Of the total fair value, $7.4 million was attributed as pre-combination service and included as part of the total purchase price consideration. The post-combination attribution of $7.2 million was recognized as compensation expense over the remaining requisite service period. The Company included $0.9 million in stock-based compensation expense related to the vesting of exchanged stock options and day-one post combination compensation expenses related to the accelerated vesting of options and shares in its condensed consolidated statement of operations during the second quarter of 2016.

 

8


 

Total purchase price consideration was estimated as follows (in thousands):

 

Fair value of common shares issued

 

$

58,321

 

Fair value of the Company's common share options

   exchanged for Annapurna stock options and other awards

   attributable to pre-combination services

 

 

7,422

 

Less: value of common stock and options accelerated

   vesting at the closing date

 

 

(898

)

Total purchase price consideration

 

$

64,845

 

 

The transaction was accounted for using the acquisition method based on ASC 805, Business Combinations, with Adverum identified as the acquirer, based on the existence of a controlling financial interest of the combined entities. Under the acquisition method, assets acquired and liabilities assumed were recorded at their estimated fair values as of May 11, 2016. Goodwill, as well as intangible assets that do not qualify for separate recognition, is measured as of the acquisition date as the excess of consideration transferred, which is also measured at fair value, and the net of the fair values of the assets acquired and the liabilities assumed as of the acquisition closing date. Goodwill represented expected synergies of two combined companies. Acquisition costs were expensed as incurred and recorded as general and administrative expenses. The Company recorded zero and $2.5 million of acquisition costs for the three-months and nine-months ended September 30, 2016, respectively. No acquisition costs were incurred during the three and nine months ended September 30, 2017.

The allocation of total purchase price consideration is as follows (in thousands):

 

 

Cash

 

$

3,449

 

Prepaid expenses and other assets

 

 

865

 

Property and equipment

 

 

185

 

Acquired intangible assets

 

 

16,200

 

Goodwill

 

 

49,514

 

Accounts payable

 

 

(1,118

)

Accrued liabilities

 

 

(1,848

)

Other noncurrent liabilities

 

 

(377

)

Deferred tax liabilities

 

 

(2,025

)

Total purchase price allocation

 

$

64,845

 

 

The identifiable intangible assets acquired consist of IPR&D assets related to products in development, as summarized in the table below (in thousands):

 

IPR&D - Alpha-1 antitrypsin deficiency

 

$

11,700

 

IPR&D - Hereditary angioedema

 

 

4,500

 

Total acquired intangible assets

 

$

16,200

 

 

The fair value of each IPR&D asset is estimated using the income approach and calculated using cash flow projections adjusted for inherent risks regarding regulatory approval, promotion, and distribution, discounted at a rate of approximately 11.0%. The Company acquired two additional intangible assets relating to the Friedreich’s Ataxia (“FA”) and severe allergy programs, but the fair value of each of these assets was determined to be nominal and is not included in the total acquired intangible assets. All IPR&D intangible assets acquired are currently classified as indefinite-lived and are not currently being amortized. During the year ended December 31, 2016, the Company recorded $11.2 million of IPR&D impairment charge related to these intangible assets.

Goodwill, which represents the excess of the purchase price over the fair values assigned to the net assets acquired, was estimated in the amount of $49.5 million on the acquisition date. The full amount of the preliminary value of goodwill has been assigned to the entire Company, since management has determined that the Company has only one reporting unit. The goodwill is not deductible for tax purposes. As of September 30, 2016, goodwill was fully impaired.

 

9


 

The following pro forma financial information combines the results of operations of Adverum and Annapurna as though the businesses had been combined as of the beginning of fiscal year 2016. The pro forma financial information is presented for informational purposes only, and is not indicative of the results of operations that would have been achieved in the current or any future periods. The following table presents the unaudited pro forma results for the nine months ended September 30, 2016 (in thousands, except per share data).

 

 

 

Nine Months

Ended

September 30,

 

 

 

2016

 

Pro forma information

 

 

 

 

Collaboration revenue

 

$

967

 

Net loss

 

$

(95,167

)

Basic and diluted loss per share

 

$

(2.31

)

Weighted-average common shares outstanding - basic and

   diluted

 

 

41,118

 

 

Pro-forma adjustments included the following:

 

 

Actual acquisition-related transaction costs of $2.5 million were excluded from pro forma results above as these expenses were incurred prior to the closing of the acquisition.  

 

Stock-based compensation expense of $0.9 million related to accelerated vesting associated with the acquisition was excluded from the pro forma results above.

 

Stock-based compensation expense related to options granted to executives upon the acquisition closing of $0.2 million was included in pro forma results above.

 

Interest expense of $1.0 million related to convertible notes and changes in fair value of preferred stock warrants was excluded from the pro-forma results above, as the convertible notes and warrants were settled prior to the acquisition closing.

 

$0.4 million of bonuses paid in connection with the closing of the acquisition in May 2016 were excluded from the pro forma results above.

The unaudited condensed pro forma information does not include any anticipated synergies that may be achievable subsequent to the date of acquisition.

 

4. Cash Equivalents and Short-Term Investments

The following is a summary of the Company’s available-for-sale securities as of September 30, 2017 (in thousands):  

 

 

 

September 30, 2017

 

 

 

Amortized

Cost Basis

 

 

Unrealized

Losses

 

 

Unrealized

Gains

 

 

Estimated

Fair Value

 

Money market funds

 

$

1,763

 

 

$

 

 

$

 

 

$

1,763

 

Certificates of deposit

 

 

9,978

 

 

 

 

 

 

 

 

 

9,978

 

Commercial paper

 

 

32,295

 

 

 

 

 

 

 

 

 

32,295

 

U.S. government agency

 

 

72,756

 

 

 

(70

)

 

 

1

 

 

 

72,687

 

Corporate bonds

 

 

63,105

 

 

 

(33

)

 

 

 

 

 

63,072

 

Total cash equivalents and

   short-term investments

 

 

179,897

 

 

 

(103

)

 

 

1

 

 

 

179,795

 

Less: cash equivalents

 

 

(24,866

)

 

 

 

 

 

 

 

 

(24,866

)

Total short-term investments

 

$

155,031

 

 

$

(103

)

 

$

1

 

 

$

154,929

 

 

 

10


 

The following table is a summary of the cost and estimated fair value of the Company’s available-for-sale securities based on stated effective maturities as of September 30, 2017 (in thousands):

 

 

 

September 30, 2017

 

 

 

Amortized

Cost Basis

 

 

Estimated Fair Value

 

Mature within one year

 

$

151,769

 

 

$

151,725

 

Mature after one year to three years

 

 

28,128

 

 

 

28,070

 

Total cash equivalents and short-term

   investments

 

$

179,897

 

 

$

179,795

 

 

As of December 31, 2016, all of the Company’s investments were held in money market funds and were treated as cash equivalents. Management determined that the gross unrealized losses of $0.1 million on the Company’s available-for-sale securities as of September 30, 2017 were temporary in nature. Therefore, none of the Company’s available-for-sale securities were other-than-temporarily impaired as of September 30, 2017.

 

 

5. Fair Value Measurements and Fair Value of Financial Instruments

The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows:

Level 1: Quoted prices in active markets for identical assets or liabilities.

Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability.

The fair value of Level 1 securities are determined using quoted prices in active markets for identical assets. Level 1 securities consist of highly liquid money market funds. Financial assets and liabilities are considered Level 2 when their fair values are determined using inputs that are observable in the market or can be derived principally from or corroborated by observable market data such as pricing for similar securities, recently executed transactions, cash flow models with yield curves, and benchmark securities. In addition, Level 2 financial instruments are valued using comparisons to like-kind financial instruments and models that use readily observable market data as their basis. U.S. government and agency securities, commercial paper, corporate bonds and certificate of deposit are valued primarily using market prices of comparable securities, bid/ask quotes, interest rate yields and prepayment spreads and are included in Level 2.

In certain cases where there is limited activity or less transparency around inputs to valuation, securities are classified as Level 3 within the valuation hierarchy. Level 3 liabilities that were measured at estimated fair value on a recurring basis consist of a financing arrangement entered into during the year ended December 31, 2016.

During the periods presented, the Company has not changed the manner in which it values liabilities that are measured at estimated fair value using Level 3 inputs. There were no transfers within the hierarchy during the three and nine months ended September 30, 2017.

 

11


 

The following table summarizes, for assets recorded at fair value on a recurring basis, the respective fair value and the classification by level of input within the fair value hierarchy as described above (in thousands):

 

 

 

 

 

 

 

Quoted Prices

 

 

Significant Other

 

 

Significant

 

 

 

Total

 

 

In Active

Markets

 

 

Observable

Inputs

 

 

Unobservable

Inputs

 

 

 

Carrying Value

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

1,763

 

 

$

1,763

 

 

$

 

 

$

 

Certificates of deposit

 

 

9,978

 

 

 

 

 

 

9,978

 

 

 

 

Commercial paper

 

 

32,295

 

 

 

 

 

 

32,295

 

 

 

 

U.S. government agency

 

 

72,687

 

 

 

 

 

 

72,687

 

 

 

 

Corporate bonds

 

 

63,072

 

 

 

 

 

 

63,072

 

 

 

 

Total cash equivalents and short

   term investments

 

$

179,795

 

 

$

1,763

 

 

$

178,032

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other noncurrent liability:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing arrangement

 

$

74

 

 

$

 

 

$

 

 

$

74

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

215,916

 

 

$

215,916

 

 

$

 

 

$

 

Total cash equivalents

 

$

215,916

 

 

$

215,916

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other noncurrent liability:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing arrangement

 

$

74

 

 

$

 

 

$

 

 

$

74

 

 

Non-financial assets such as intangible assets, property, plant, and equipment are evaluated for impairment and adjusted to their fair value using Level 3 inputs, only when impairment is recognized. Fair values are considered Level 3 when management makes significant assumptions in developing a discounted cash flow model based upon a number of considerations including projections of revenues, earnings and a discount rate.

 

6. Significant Agreements

University of California— In May 2010, the Company entered into a license agreement with the Regents of University of California (“Regents”), as amended in September 2013. Under the license agreement, the Regents have granted to the Company an exclusive (even as to the Regents) license, with the right to grant sublicenses, under the Regents’ undivided interest in patent rights covering a method of using recombinant gene delivery vectors for treating or preventing diseases of the eye, to develop, make, have made, use offer for sale, import, export and sell products covered by such patent rights in all fields of use in the United States. The licensed patent rights are jointly owned by the Regents and Chiron Corporation, but the Company’s license extends only to the Regents’ interest in such patent rights.

Under the license agreement, the Company is required to diligently proceed with the development, manufacture and sale of licensed products, which includes obligations to meet certain development-stage milestones within specified periods of time, and to market the resulting licensed products in sufficient quantity to meet market demand. The Company has the right and option to extend the date by which it must meet any milestone by six-months up to two times by paying an extension fee for each such extension.

The Company has paid the Regents a license fee of $100,000. The Company is also obligated to make milestone payments totaling up to $900,000 upon reaching certain stages of development of the licensed products for one indication, and totaling up to $500,000 for each subsequent indication for which licensed products are developed, for up to a maximum of two additional indications. Through September 30, 2017, none of these goals had been achieved, and no milestones were payable. The Company must pay the Regents a low single-digit royalty on net sales of the licensed products by the Company or its sublicensees, subject to a minimum annual royalty payment of $50,000 beginning in the calendar year after the first commercial sale of a licensed product, until the patent rights upon which such royalties are based expire or are held invalid, which is currently expected to occur in 2020, subject to any potential patent term extensions. The Company is obligated to reimburse the Regents for expenses associated with the prosecution and maintenance of the licensed patents. Finally, the Company is obligated to pay the Regents a mid-teen percentage of non-royalty licensing revenue that the Company receives from sublicensees.

 

12


 

The Company’s license agreement with the Regents continues in effect for the life of the last-to-expire patent. The Company may terminate this agreement without cause at any time upon 30 days’ prior written notice to the Regents. The Regents may terminate this agreement for a breach by the Company that remains uncured for 60 days, if the Company becomes insolvent, if the Company directly or through a third party files a claim that a licensed patent right is invalid or unenforceable or if the Company fails to meet or extend the date for meeting certain diligence milestones.

Regeneron—In May 2014, the Company entered into a research collaboration and license agreement with Regeneron Pharmaceuticals, Inc. (“Regeneron”) to discover, develop and commercialize novel gene therapy products for the treatment of ophthalmologic diseases. The collaboration covers up to eight distinct therapeutic targets (“collaboration targets”). The Company and Regeneron collaborate during the initial research period of three years that can be extended by Regeneron for up to an additional five years. During the research period, Regeneron has the option to obtain an exclusive worldwide license for a collaboration target’s further development by giving written notice to the Company and paying $2.0 million per target. If Regeneron exercises its option, it will be responsible for all further development and commercialization of the target. The Company is then eligible to receive contingent payments of up to $80.0 million upon achievement of certain development and regulatory milestones for product candidates directed toward each collaboration target, for a combined total of up to $640.0 million in potential milestone payments for product candidates directed toward all eight collaboration targets, plus a royalty in the low- to mid-single-digits on worldwide net sales of collaboration products.

For any two collaboration targets, the Company has an option to share up to 35% of the worldwide product candidate development costs and profits. If the Company exercises this option, the Company will not be eligible for milestone and royalty payments as discussed above but rather the Company will share development costs and profits with Regeneron.

The agreement will expire with respect to each collaboration target upon the earlier of the (a) expiration of the research term if the option right has not been triggered by the end of the research term or (b) expiration of the option right if the option right has not been exercised by Regeneron. If the option right has been exercised, the agreement in connection with each collaboration target will expire upon expiration of all payment obligations by Regeneron. In addition, the agreement, or Regeneron’s rights to any target development under the agreement, may terminate early under the following situations:

 

Regeneron may terminate the agreement for convenience at any time on a target by target basis or in totality upon a 30-day notice.

 

Each party can terminate the agreement if another party commits a material breach or material default in performance of its obligations and such breach or default is not cured within 60 days.

 

The agreement is automatically terminated upon initiation of any bankruptcy proceedings, reorganization or dissolution of either party.

 

The Company can terminate the agreement upon 30-day notice if Regeneron challenges the validity, scope or enforceability of any Company patent.

On February 23, 2017, Regeneron notified Adverum that, pursuant to the terms of the research collaboration and license agreement, it extended the research term of the collaboration for an additional three years, through May 1, 2020.

Under the Company’s research, collaboration and license agreement with Regeneron, the Company is required to have a mutually agreed-on research plan with Regeneron in order to invoice Regeneron for services performed. The Company does not currently have a research plan in place, and, consequently, we are not currently receiving any reimbursements from Regeneron.

 

Editas—In August 2016, the Company entered into a collaboration, option and license agreement with Editas Medicine, Inc. (“Editas”) pursuant to which the Company and Editas will collaborate on certain studies using adeno-associated viral (“AAV”) vectors in connection with Editas’ genome editing technology and the Company will grant to Editas an exclusive option to obtain certain exclusive rights to use the Company’s proprietary vectors in up to five ophthalmic indications (“Indications”). The Company received a $1.0 million non-refundable upfront payment during the year ended December 31, 2016, with $0.5 million of such payment to be credited against Editas’ obligation to fund research and development costs. Under the terms of the agreement, both the Company and Editas will be subject to exclusivity obligations.

Under the terms of the agreement, Editas may exercise the option, with respect to a designated initial Indication, until the first anniversary of the effective date of the agreement. With respect to the four other Indications, Editas may exercise the option until the third anniversary of the effective date, provided that the option will expire on the second anniversary of the effective date if Editas has not exercised the option with respect to the initial Indication or any other Indication by such date. Upon each exercise of the option, Editas will pay the Company a $1.0 million fee per Indication. If Editas elects to develop a product using certain of the Company’s proprietary vectors, the Company will be eligible to receive up to $15.5 million in development and commercialization milestone

 

13


 

payments for such product, and tiered royalties between the mid-single digits and low teens on net sales of such product, subject to certain adjustments.

Unless earlier terminated, the agreement will be in effect until the later of the expiration of the option exercise period or the expiration of the royalty term of the last product. At any time after the option is first exercised, Editas may terminate the agreement for convenience in its entirety or on an indication-by indication or country-by-country basis, upon prior written notice to the Company. The Company may also terminate the agreement if Editas challenges the Company’s patents relating to its proprietary vectors and does not withdraw such challenge within a defined period of time. In addition, either party may terminate the agreement with written notice upon a bankruptcy of the other party or upon an uncured material breach by the other party.

 

Cornell University—The Company had been a party to a master service agreement (“MSA”) with Cornell University (“Cornell”) originally established in August 2014 and amended in December 2015. In December 2016, the Company informed Cornell that the Company decided to terminate the MSA for material breach, effective January 6, 2017. Subsequently, Cornell informed the Company that it disputes the validity of the Company’s termination of the MSA. Although the Company intends to defend the validity of its termination of the MSA, the Company recorded $2.0 million of estimated costs associated with the termination of the MSA as of September 30, 2017. This MSA included services relating to the Company’s gene therapy programs ADVM-043, ADVM-053 and severe allergy. The Company’s three licensing agreements with Cornell for these programs remain unchanged.

The decision to terminate the MSA was due to Cornell’s failure to deliver therapeutic material of ADVM-043 suitable for use in human patients. As a result of this decision, the Company has contracted with large-scale contract manufacturing organizations that comply with current good manufacturing practice industry standards and can produce product quantities for both the Company’s planned clinical trials and potential commercial supply. This is part of the Company’s upgrade of the manufacturing process for ADVM-043, implementing its proprietary, highly-scalable baculovirus-based production system, in advance of the Company’s plans to begin patient enrollment in a Phase 1/2 clinical trial in the fourth quarter of 2017.

Under the MSA, Cornell provided assistance in regulatory affairs, overall project management, and parameter development. The MSA, as amended, provided for Annapurna to pay Cornell $13.3 million ratably over 4 years for these services as services were performed.

In December 2015, Annapurna entered into three licensing agreements with Cornell, pursuant to which Annapurna will advance its gene therapy programs ADVM-043, ADVM-053, and severe allergy, which originally were initiated at the Department of Genetic Medicine at Weill Cornell.

A1AT Deficiency License Agreement: Under this agreement, Annapurna holds an exclusive license to certain technology related to alpha-1 antitrypsin (A1AT) deficiency and rights to an Investigational New Drug (IND) application to initiate clinical studies of gene therapy for A1AT.

HAE License Agreement: Under this agreement, Annapurna holds an exclusive license to certain technology related to hereditary angioedema (HAE) and a non-exclusive license to certain other intellectual property related to the HAE program.

Allergy License Agreement: Under this agreement, Annapurna holds an exclusive license to certain patents related to allergens and a non-exclusive license to certain other technology related to allergens.

Across these three license agreements, Cornell is entitled to receive aggregate annual maintenance fees ranging from $30,000 to $300,000 per year, up to $16.0 million in aggregate milestone payments and royalties on sales in the low single-digits, subject to adjustments and minimum thresholds. For the nine months ended September 30, 2017, annual maintenance fees were immaterial. No milestone payments were probable to achieve and none were recorded as of September 30, 2017.

Annapurna may terminate any of these license agreements for convenience upon ninety days written notice. Cornell may terminate any of the license agreements for material breach if such breach is not cured within a specified number of days. Cornell may also terminate the HAE License Agreement and/or the Allergy License Agreement if Annapurna commences any action and files a written claim asserting that any portion of the licensed patent rights is invalid or unenforceable.

Ronald Crystal, M.D., Chairman, Department of Genetic Medicine, the Bruce Webster Professor of Internal Medicine and a Professor of Genetic Medicine and of Medicine at Weill Cornell Medicine, served as a consultant to Annapurna since inception and continues to provide services to the Company for the annual compensation of up to $0.3 million.

 

REGENXBIO—A1AT Deficiency/Allergy License Agreement: In October 2015, Annapurna entered into an exclusive worldwide license to certain intellectual property in order to make, have made, use, import, sell and offer for sale certain licensed products for the treatment of A1AT deficiency. Also, under this agreement, Annapurna has an option to be granted an exclusive worldwide license to

 

14


 

certain intellectual property related to the treatment of severe allergies, which option expired in October 2016. Under this license agreement, REGENXBIO, Inc. (REGENXBIO) is eligible to receive annual maintenance fees, up to approximately $20.0 million in combined milestone payments and royalties in the mid-to-high single digits.

Unless earlier terminated, this license agreement will be in effect on a country-by-country, licensed product-by-licensed product basis until the expiration, lapse, abandonment, or invalidation of the last claim of the licensed intellectual property to expire, lapse, or become abandoned or unenforceable for the applicable licensed product. Annapurna may terminate this license agreement for any reason upon six months’ prior written notice. REGENXBIO may terminate this license agreement if Annapurna is a specified number of days late in paying money due under the license agreement, or if Annapurna, its affiliates, or any sublicensees become insolvent or, effective immediately, if they commence any action against REGENEXBIO or its licensors to declare or render any claim of the licensed patent rights invalid or unenforceable. Either party may terminate this license agreement for material breach if such breach is not cured within a specified number of days.

In April 2017, the Company notified REGENXBIO that Annapurna exercised its right to terminate the license agreement for any reason upon six months’ prior written notice. The termination is effective in October 2017.

Friedreich’s Ataxia License Agreement: In April 2014, Annapurna entered into an exclusive worldwide license to certain intellectual property related to the FA program to make, have made, use, import, sell and offer for sale licensed products using AAVrh10 for FA where the vector is administered by any route except directly to the central nervous system (“FA Systemic”). Under the terms of this license agreement, Annapurna also had an option to obtain a non-exclusive worldwide license to make, have made, use, import, sell and offer for sale licensed products using a single vector for each of FA where the vector is administered directly to the central nervous system (“FA CNS”) and FA Systemic. Under this license agreement, REGENXBIO is eligible to receive annual maintenance fees, up to $13.85 million in combined milestone fees and royalties in the mid-to-high single digits. The option to obtain a non-exclusive license to FA Systemic expired in April 2015 and the option to obtain a non-exclusive license for FA CNS expired in April 2016. Annapurna is obligated to achieve certain development milestones with respect to each licensed disease indication, including the filing of an IND application for each licensed disease indication within a specified time period, which Annapurna may extend for additional time for a specified number of extensions upon the payment of a fee.

Unless earlier terminated, this license agreement expires upon the expiration, lapse, abandonment, or invalidation of the last claim of the licensed intellectual property to expire, lapse, or become abandoned or unenforceable in all the countries of the world. Annapurna Therapeutics Limited may terminate this license agreement upon six months’ prior written notice. REGENXBIO may terminate this license agreement if Annapurna Therapeutics Limited is a specified number of days late in paying money due under the license agreement, or if Annapurna Therapeutics Limited, its affiliates, or any sublicensees become insolvent or, effective immediately, if they commence any action against REGENXBIO or its licensors to declare or render any claim of the licensed patent rights invalid or unenforceable. Either party may terminate this license agreement for material breach if such breach is not cured within a specified number of days.

During the nine months ended September 30, 2017, expenses associated with the REGENXBIO agreements were $0.2 million.

Inserm Transfert—In July 2014, Annapurna entered into an agreement with Inserm Transfert (Inserm) whereby Annapurna holds an exclusive license to certain patents to develop, make, have made, use, import, offer for sale and sell or otherwise distribute products for the treatment of FA and a non-exclusive license to certain other intellectual property related to the FA program. The agreement was amended in October 2015 to increase the scope of the intellectual property under the licenses. Under this agreement, Inserm is entitled to receive certain de minimis license payments, certain development milestone payments of up to approximately €2.0 million in the aggregate and royalties on sales in the low single-digits, subject to adjustments. No milestone payments were probable to achieve and none were recorded as of September 30, 2017.

Unless earlier terminated, this agreement will be in effect on a country-by-country, licensed product-by-licensed product basis until the later of the expiration of the last claim of the licensed intellectual property which cover the manufacture, use or sale of such product in such country or 10 years after the first commercial sale of such product in such country in which such product is sold. Upon a country-by-country and product-by-product basis, Annapurna will have a fully paid up, perpetual, irrevocable license with respect to such product in such country under the licensed intellectual property following expiration of this agreement with respect to such product in the applicable country. Annapurna may terminate this agreement upon 60 days’ prior written notice. Inserm may terminate this license agreement if Annapurna becomes the subject of a voluntary or involuntary petition in bankruptcy or fails to meet development milestones and such failure is not cured within a specified number of days. Inserm may also terminate the license granted to Annapurna in a given country if Annapurna (i) before regulatory approval of a product in any country, has ceased conducting any development of products in all countries for 12 consecutive months or (ii) after regulatory approval of a product in a given country, has ceased marketing such product in such country for 12 consecutive months.

 

15


 

Pursuant to the terms of the agreement with Inserm, the Company’s acquisition of Annapurna triggered a one-time payment to Inserm of €250,000, which was recorded to research and development expense in the Company’s consolidated statement of operations during the year ended December 31, 2016.

 

During the nine months ended September 30, 2017, expenses associated with the Inserm Transfert agreements were $0.3 million.

 

 

7. Property and Equipment, Net

Property and equipment, net consists of the following (in thousands):

 

 

 

September 30, 2017

 

 

December 31, 2016

 

Computer equipment and software

 

$

480

 

 

$

300

 

Laboratory equipment

 

 

4,933

 

 

 

4,285

 

Furniture and fixtures

 

 

552

 

 

 

552

 

Leasehold improvements

 

 

1,541

 

 

 

1,522

 

Construction in progress

 

 

16

 

 

 

104

 

Total property and equipment

 

 

7,522

 

 

 

6,763

 

Less accumulated depreciation and amortization

 

 

(4,175

)

 

 

(2,594

)

Property and equipment, net

 

$

3,347

 

 

$

4,169

 

 

Depreciation and amortization expense related to property and equipment for the three months ended September 30, 2017 and 2016 was $0.5 million and $0.4 million, respectively. Depreciation and amortization expense related to property and equipment for the nine months ended September 30, 2017 and 2016 was $1.6 million and $1.1 million, respectively.

 

 

8. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following (in thousands):

 

 

 

September 30, 2017

 

 

December 31, 2016

 

Employees’ compensation expenses

 

$

1,628

 

 

$

2,570

 

Accrued preclinical costs

 

 

805

 

 

 

1,683

 

Accrued clinical and process development costs

 

 

669

 

 

 

1,142

 

Accrued professional services

 

 

725

 

 

 

894

 

Accrued contract settlement

 

 

2,000

 

 

 

 

Other

 

 

235

 

 

 

162

 

Total accrued expenses and other current liabilities

 

$

6,062

 

 

$

6,451

 

 

 

9. Other Non-current Liabilities

 

In August 2015, Banque Publique d’Investissement (“BPI France”) granted Annapurna a €0.5 million interest free conditional advance. Payments are scheduled in equal quarterly amounts of €25,000 from September 30, 2017 to June 30, 2022. This payment schedule will be modified if the Company receives revenue from license or product sales before advances are paid in full. The Company calculated 7% imputed interest expense on these advances that was recorded as a discount at the issuance date. The discount is amortized as an interest expense over the life of the advances. As of September 30, 2017, the carrying value of this interest-free conditional advance, which approximates its fair value, was $0.4 million, of which $0.3 million is recorded within other non-current liabilities and $0.1 million within accrued expenses and other current liabilities in the Company’s condensed consolidated balance sheets. Interest expense for this interest-free conditional advance was immaterial for the three and nine months ended September 30, 2017.

 

In July 2016, the Company entered into a sponsored research agreement with The Alpha-1 Project, Inc. (“TAP”) to fund the Company’s A1AT research activities of up to $0.3 million, of which $0.1 million was received during the year ended December 31, 2016 (“TAP financing arrangement”). The Company may repay up to 4.5 times the received amount if and when certain product approval and sales milestones are achieved. As of September 30, 2017, the estimated fair value of the TAP financing arrangement was $0.1 million, which was recorded within other noncurrent liabilities in the Company’s condensed consolidated balance sheets.

 

 

16


 

 

10. Commitments and Contingencies

Facility Lease Agreement

The Company leases its office building under a non-cancelable lease agreement, which expires on May 8, 2020. The Company may extend this lease for up to four years. The lease agreement provides for an escalation of rent payments each year. The Company records rent expense on a straight-line basis over the term of the lease.

Rent expense recognized under the operating lease, including additional rent charges for utilities, parking, maintenance, and real estate taxes was $1.4 million and $1.3 million for the nine months ended September 30, 2017 and 2016, respectively.

Collaborations and License Agreements

 

The Company is a party to various agreements, principally relating to licensed technology that requires payment of annual maintenance fees and future payments relating to milestones or royalties on future sales of specified products. The Company expenses the annual maintenance fees on a straight-line basis and accrues the aggregate balances until invoiced or paid. Through September 30, 2017, none of the goals had been achieved under the license agreements and no cash milestones were accrued or payable. Since the achievement of these milestones is not fixed and determinable, such commitments have not been included in the Company’s condensed consolidated balance sheets.

Guarantees and Indemnifications

In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and provide for indemnification for certain liabilities. The exposure under these agreements is unknown because it involves claims that may be made against the Company in the future but have not yet been made. To date, the Company has not paid any claims or been required to defend any action related to its indemnification obligations. However, the Company may record charges in the future as a result of these indemnification obligations. The Company also has indemnification obligations to its directors and executive officers for specified events or occurrences, subject to some limits, while they are serving at the Company’s request in such capacities. There have been no claims to date and the Company believes the fair value of these indemnification agreements is minimal. Accordingly, the Company has not recorded any liabilities for these agreements as of September 30, 2017.

Legal Proceedings

From time to time, the Company may become involved in litigation and other legal actions. The Company estimates the range of liability related to any pending litigation where the amount and range of loss can be estimated. The Company records its best estimate of a loss when the loss is considered probable. Where a liability is probable and there is a range of estimated loss with no best estimate in the range, the Company records a charge equal to at least the minimum estimated liability for a loss contingency when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that a liability had been incurred at the date of the financial statements and (ii) the range of loss can be reasonably estimated.

In July 2015, three securities class action lawsuits were filed against the Company and certain of its officers in the United States District Court for the Northern District of California, each on behalf of a purported class of persons and entities who purchased or otherwise acquired the Company’s publicly traded securities between July 31, 2014 and June 15, 2015. The lawsuits assert claims under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Securities Act of 1933, as amended (the “Securities Act”) and allege that the defendants made materially false and misleading statements and omitted allegedly material information related to, among other things, the Phase 2a clinical trial for AVA-101, a product candidate which is no longer being developed, and the prospects of AVA-101. The complaints seek unspecified damages, attorneys’ fees and other costs.

In December 2015, a putative securities class action lawsuit was filed against the Company, the Company’s board of directors, underwriters of the Company’s January 13, 2015, follow-on public stock offering, and two of the Company’s institutional stockholders, in the Superior Court of the State of California for the County of San Mateo. The complaint alleges that, in connection with the Company’s follow-on stock offering, the defendants violated the Securities Act by allegedly making materially false and misleading statements and by allegedly omitting material information related to the Phase 2a clinical trial for AVA-101 and the prospects of AVA-101. The complaint seeks unspecified compensatory and rescissory damages, attorneys’ fees and other costs. The plaintiff has dismissed the two institutional stockholder defendants.

 

 

17


 

On March 16, 2017, the Company reached an agreement to settle the asserted actions. The proposed aggregate amount of the settlement is $13.0 million, of which $1.0 million would be contributed by the Company to cover its indemnification obligations to the underwriters, and the remainder would be contributed by the Company’s insurers. The settlement is subject to definitive documentation, shareholder notice and court approval. The Company and the defendants have denied and continue to deny each and all of the claims alleged in the actions, and the settlement does not assign or reflect any admission of fault, wrongdoing or liability as to any defendant. If final court approval is not obtained with respect to the settlement or the settlement otherwise does not become effective and litigation resumes, adverse outcomes in the actions could result in substantial damages. The Company recorded $1.0 million as general and administrative expense during the three months ended March 31, 2017, when the amount and time of settlement became estimable and probable.

 

 

11. Stock Plans

The Company’s  2014 Equity Incentive Award Plan (“2014 Plan”) permits the issuance of stock options (“options”), restricted stock units (RSUs) and other types of awards to employees, directors, and consultants.

As of September 30, 2017, a total of 14,834,856 shares of common stock were authorized for issuance and 1,631,908 shares were available for future grants under the 2014 Plan.

In July 2014, the Company’s board of directors and its stockholders approved the establishment of the 2014 Employee Stock Purchase Plan (“2014 ESPP”).  During the nine months ended September 30, 2017 and 2016, 35,954 shares and 52,002 shares, respectively, were issued under the 2014 ESPP.  A total of 1,000,783 shares of common stock were reserved for issuance under the 2014 ESPP and were available for issuance under the 2014 ESPP as of September 30, 2017.

The following table summarizes option activity under the Company’s stock plans and related information:

 

 

 

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

Number

 

 

Weighted-

 

 

Average Remaining

 

 

Aggregate

 

 

of Options

 

 

Average Exercise

 

 

Contractual Life

 

 

Intrinsic Value (a)

 

 

(in thousands)

 

 

Price

 

 

(In years)

 

 

(in thousands)

 

Balance at December 31, 2016

 

7,449

 

 

$

4.46

 

 

 

 

 

 

 

 

 

Options granted

 

1,897

 

 

 

2.80

 

 

 

 

 

 

 

 

 

Options exercised

 

(1,491

)

 

 

0.21

 

 

 

 

 

 

 

 

 

Options cancelled

 

(485

)

 

 

10.08

 

 

 

 

 

 

 

 

 

Balance at September 30, 2017

 

7,370

 

 

$

4.52

 

 

 

7.8

 

 

$

11,518

 

Vested and expected to vest as of September 30, 2017

 

7,370

 

 

$

4.52

 

 

 

7.8

 

 

$

11,518

 

Exercisable as of September 30, 2017

 

3,459

 

 

$

4.91

 

 

 

6.8

 

 

$

7,227

 

 

(a)

The aggregate intrinsic value is calculated as the difference between the option exercise price and the closing price of common stock of $3.65 per share as of September 30, 2017.

The options granted during 2016, included stock options for 3,673,940 shares of the Company’s common stock granted in exchange for Annapurna stock options at $0.21 exercise price per share. A total of 1,428,000 shares of stock options granted outside of the 2014 Plan in June 2016 and December 2015 were not included in the table above.

The weighted-average fair values of options granted during the nine months ended September 30, 2017 and 2016 were $1.95 and $1.27, respectively. The total intrinsic value of options exercised during the nine months ended September 30, 2017 and 2016 were $3.7 million and $7.1 million, respectively.

The Company has recorded aggregate stock-based compensation expense related to the issuance of stock awards to employees and nonemployees in the condensed consolidated statement of operations and comprehensive loss as follows (in thousands):

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Research and development

$

1,698

 

 

$

1,608

 

 

$

4,335

 

 

$

5,748

 

General and administrative

 

1,002

 

 

 

1,334

 

 

 

2,504

 

 

 

4,104

 

Total share-based compensation

$

2,700

 

 

$

2,942

 

 

$

6,839

 

 

$

9,852

 

 

 

18


 

During the three and nine months ended September 30, 2016, respectively, stock-based compensation expense included additional charges related to stock modifications in connection with the separation agreements for certain of the Company’s executive officers. For the three months ended September 30, 2016, an additional charge of $0.5 million was recorded within general and administrative expense. For the nine months ended September 30, 2016, an additional charge of $1.4 million was recorded within research and development expense and $1.5 million was recorded within general and administrative expense.

As of September 30, 2017, unrecognized compensation cost related to unvested employee options was $10.5 million, which is expected to be recognized over a weighted-average remaining period of 2.4 years.

Restricted Stock Units

RSUs are share awards that entitle the holder to receive freely tradable shares of the Company’s common stock upon vesting. The fair value of RSUs is based upon the closing sales price of the Company’s common stock on the grant date. RSUs granted to employees generally vest over a two to four year period.

The following table summarizes the RSU activity under the Company’s stock plans and related information:

 

 

 

 

 

 

 

Weighted-Average

 

 

Weighted-Average

 

 

 

Number of

 

 

Grant-Date

 

 

Remaining

 

 

 

Units

(in thousands)

 

 

Fair Value

(in dollars)

 

 

Contractual Term

(in years)

 

Outstanding at December 31, 2016

 

 

1,049

 

 

$

5.47

 

 

 

1.7

 

Granted

 

 

2,246

 

 

 

2.72

 

 

 

 

 

Vested and released

 

 

(290

)

 

 

6.64

 

 

 

 

 

Forfeited

 

 

(537

)

 

 

3.90

 

 

 

 

 

Outstanding at September 30, 2017

 

 

2,468

 

 

$

3.17

 

 

 

1.8

 

 

The total fair value of RSUs that vested during the nine months ended September 30, 2017 and 2016 was $1.9 million and $4.0 million, respectively. As of September 30, 2017, unrecognized compensation cost related to unvested RSUs was $6.5 million, which is expected to be recognized over a weighted-average remaining period of 3.1 years.

Stock Options Granted to Employees

The fair value of each option issued to employees was estimated at the date of grant using the Black-Scholes valuation model with the following weighted-average assumptions:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Option grants:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expected volatility

 

84

%

 

 

81

%

 

 

81

%

 

 

81

%

Expected term (in years)

 

5.8

 

 

 

6.0

 

 

 

6.0

 

 

 

5.9

 

Expected dividend yield

 

 

 

 

 

 

 

 

 

 

 

Risk-free interest rate

 

1.8

%

 

 

1.4

%

 

 

1.9

%