advm-10q_20180930.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, 2018

or

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

For the transition period from                      to                     

Commission File Number: 001-36579

 

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, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

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

 

 

 

 

 

 

 

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

  

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company  

 

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

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

As of October 31, 2018 there were 62,868,379 shares of the registrant’s common stock, par value $0.0001 per share, outstanding.

 

 

 

 

 

 


Table of Contents

 

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, 2018 and December 31, 2017

  

3

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2018 and 2017

  

4

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017

  

5

Notes to Condensed Consolidated Financial Statements

  

6

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

  

13

Item 3. Quantitative and Qualitative Disclosures About Market Risk

  

20

Item 4. Controls and Procedures

  

21

 

 

 

PART II—OTHER INFORMATION

  

22

 

 

 

Item 1. Legal Proceedings

  

22

Item 1A. Risk Factors

  

22

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

  

52

Item 3. Defaults Upon Senior Securities

  

53

Item 4. Mine Safety Disclosures

  

53

Item 5. Other Information

  

53

Item 6. Exhibits

  

53

 

 

 

SIGNATURES

  

55

 

 

 

 

 

 

 

2


Table of Contents

 

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

Adverum Biotechnologies, Inc.

Condensed Consolidated Balance Sheets

(In thousands except share and per share data)

 

 

September 30,

 

 

December 31,

 

 

2018

 

 

2017

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

159,673

 

 

$

70,519

 

Short-term investments

 

58,209

 

 

 

119,966

 

Prepaid expenses and other current assets

 

4,292

 

 

 

3,256

 

Total current assets

 

222,174

 

 

 

193,741

 

Property and equipment, net

 

2,594

 

 

 

3,024

 

Restricted cash

 

999

 

 

 

 

Deposit and other long-term assets

 

140

 

 

 

140

 

Intangible asset

 

 

 

 

5,000

 

Total assets

$

225,907

 

 

$

201,905

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

1,736

 

 

$

1,731

 

Accrued expenses and other current liabilities

 

7,777

 

 

 

6,964

 

Deferred rent, current portion

 

482

 

 

 

129

 

Deferred revenue, current portion

 

70

 

 

 

1,850

 

Total current liabilities

 

10,065

 

 

 

10,674

 

Deferred rent, net of current portion

 

102

 

 

 

222

 

Deferred revenue, net of current portion

 

 

 

 

5,250

 

Deferred tax liability

 

 

 

 

1,250

 

Other noncurrent liabilities

 

187

 

 

 

481

 

Total liabilities

 

10,354

 

 

 

17,877

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

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,

   2018 and December 31, 2017; 62,826,416 and 49,015,339 shares issued and

   outstanding at September 30, 2018 and December 31, 2017, respectively

 

6

 

 

 

5

 

Additional paid-in capital

 

521,285

 

 

 

439,048

 

Accumulated other comprehensive loss

 

(854

)

 

 

(963

)

Accumulated deficit

 

(304,884

)

 

 

(254,062

)

Total stockholders’ equity

 

215,553

 

 

 

184,028

 

Total liabilities and stockholders' equity

$

225,907

 

 

$

201,905

 

 

See accompanying notes to condensed consolidated financial statements

 

 

 

3


Table of Contents

 

Adverum Biotechnologies, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(In thousands except per share data)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(Unaudited)

 

Collaboration and license revenue

 

$

833

 

 

$

463

 

 

$

1,542

 

 

$

1,388

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

14,480

 

 

 

10,272

 

 

 

38,491

 

 

 

27,825

 

General and administrative

 

 

4,826

 

 

 

4,762

 

 

 

19,373

 

 

 

16,815

 

Impairment of intangible asset

 

 

5,000

 

 

 

 

 

 

5,000

 

 

 

 

Total operating expenses

 

 

24,306

 

 

 

15,034

 

 

 

62,864

 

 

 

44,640

 

Operating loss

 

 

(23,473

)

 

 

(14,571

)

 

 

(61,322

)

 

 

(43,252

)

Other income, net

 

 

1,265

 

 

 

742

 

 

 

3,104

 

 

 

1,894

 

Net loss before income tax benefit

 

 

(22,208

)

 

 

(13,829

)

 

 

(58,218

)

 

 

(41,358

)

Income tax benefit

 

 

1,250

 

 

 

 

 

 

1,250

 

 

 

 

Net loss

 

 

(20,958

)

 

 

(13,829

)

 

 

(56,968

)

 

 

(41,358

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized (loss) gain on marketable securities

 

 

53

 

 

 

35

 

 

 

129

 

 

 

(102

)

Foreign currency translation adjustment

 

 

 

 

 

(183

)

 

 

(21

)

 

 

(442

)

Comprehensive loss

 

$

(20,905

)

 

$

(13,977

)

 

$

(56,860

)

 

$

(41,902

)

Net loss per share -basic and diluted

 

$

(0.34

)

 

$

(0.32

)

 

$

(0.94

)

 

$

(0.97

)

Weighted-average common shares used to compute net loss per share - basic and diluted

 

 

62,454

 

 

 

43,381

 

 

 

60,856

 

 

 

42,849

 

 

See accompanying notes to condensed consolidated financial statements

 

 

 

4


Table of Contents

 

Adverum Biotechnologies, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

 

 

Nine Months Ended September 30,

 

 

2018

 

 

2017

 

 

(Unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

$

(56,968

)

 

$

(41,358

)

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

 

 

 

 

 

 

 

Depreciation and amortization

 

1,361

 

 

 

1,592

 

Stock-based compensation expense

 

12,250

 

 

 

6,839

 

Amortization of premium and accrued interest on marketable securities

 

199

 

 

 

419

 

Impairment of intangible asset

 

5,000

 

 

 

 

Other

 

(15

)

 

 

60

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable, net

 

 

 

 

886

 

Prepaid expenses and other current assets

 

(1,518

)

 

 

(136

)

Accounts payable

 

5

 

 

 

166

 

Accrued expenses and other current liabilities

 

353

 

 

 

(208

)

Restructuring liabilities

 

 

 

 

(25

)

Deferred revenue

 

(884

)

 

 

(1,388

)

Deferred rent

 

233

 

 

 

(70

)

Deferred tax liability

 

(1,250

)

 

 

 

Net cash used in operating activities

 

(41,234

)

 

 

(33,223

)

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of marketable securities

 

(55,924

)

 

 

(201,038

)

Maturities of marketable securities

 

117,993

 

 

 

45,061

 

Purchases of property and equipment

 

(652

)

 

 

(918

)

Net cash provided by (used in) investing activities

 

61,417

 

 

 

(156,895

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from offerings of common stock, net of issuance costs

 

70,189

 

 

 

 

Proceeds from issuance of common stock pursuant to option exercises

 

687

 

 

 

312

 

Taxes paid related to net share settlement of restricted stock units

 

(1,037

)

 

 

(292

)

Proceeds from employee stock purchase plan

 

149

 

 

 

83

 

Proceeds from a financing arrangement

 

100

 

 

 

 

Repayment of loan

 

(118

)

 

 

 

Net cash provided by financing activities

 

69,970

 

 

 

103

 

Effect of foreign currency exchange rate on cash and cash equivalents

 

 

 

 

(442

)

Net increase (decrease) in cash and cash equivalents and restricted cash

 

90,153

 

 

 

(190,457

)

Cash and cash equivalents and restricted cash at beginning of period

 

70,519

 

 

 

222,170

 

Cash and cash equivalents and restricted cash at end of period

$

160,672

 

 

$

31,713

 

Supplemental schedule of noncash investing and financing information

 

 

 

 

 

 

 

Unpaid deferred offering costs in accounts payable and accrued expenses

$

 

 

$

200

 

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

$

278

 

 

$

148

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

5


Table of Contents

 

Adverum Biotechnologies, Inc.

September 30, 2018

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1. Organization and Basis of Presentation

Adverum Biotechnologies, Inc. (the “Company”) 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 ophthalmology and rare 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 $304.9 million as of September 30, 2018. 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 operations at least through the first half of 2020.

Follow-on Offerings— In February 2018, the Company completed an underwritten public offering for the sale of 10,222,235 shares of its common stock and raised total net proceeds of $64.5 million, after discounts and other issuance costs.  

In August 2017, the Company entered into an at-the-market sales agreement with an agent for the sales of its common stock at market price (the “2017 stock offering agreement”). In January 2018, the Company issued and sold a total of 1,419,893 shares of its common stock at market prices under the 2017 stock offering agreement and raised total net proceeds of $5.7 million, after issuance costs. Since then, during the nine months ended September 30, 2018, no additional shares were issued and sold under the 2017 stock offering agreement.

Basis of Presentation—The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“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 can be 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, 2018, 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, 2017 is derived from the 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, 2017 filed with the SEC.

2. Summary of Significant Accounting Policies

Use of Estimates— The accompanying consolidated financial statements have been prepared in accordance with U.S. GAAP. The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities and the reported amounts of expenses in the consolidated financial statements and the accompanying notes. On an ongoing basis, management evaluates its estimates, including those related to clinical trial accruals, fair value of assets and liabilities, income taxes, and stock-based compensation. Management bases its estimates on historical experience and on various other market-specific and relevant assumptions that management believes to be reasonable under the circumstances. Actual results could differ from those estimates.

 

6


Table of Contents

 

Accounting Standard Updates Recently Adopted

Accounting Standard Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“Topic 606”), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. Effective January 1, 2018, the Company adopted the new revenue standards under Topic 606 using the modified retrospective approach. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period results are not adjusted and continue to be reported in accordance with the revenue standards under Topic 605. Under Topic 606, the Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services.  To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

The Company’s license and collaboration arrangements with Regeneron Pharmaceuticals, Inc. (“Regeneron”), Editas Medicine, Inc. (“Editas”), and GenSight Biologics (“GenSight”) are within the scope of Topic 606.

Upon the adoption of Topic 606, the Company recorded a net decrease of $6.1 million to its deferred revenue and opening accumulated deficit as of January 1, 2018 for the cumulative effect of the adoption. The effect of the adoption is summarized for the Company’s license and collaboration agreements as follows:

Collaboration Agreement with Regeneron Under Topic 606, the transaction price at contract inception was determined to be $8.0 million, which was related to the non-refundable upfront payment for license and research services. The arrangement also provides for additional payments to the Company when certain development and regulatory milestones are achieved. Because these milestone payments are not within the control of the Company and are not considered probable of being achieved until the events occur, the Company did not include them in the transaction price at contract inception.  The transaction price of $8.0 million at contract inception was allocated to two performance obligations. The Company’s deferred revenue associated with its Regeneron collaboration agreement as of December 31, 2017 under Topic 605 was $6.5 million. As a result of adopting Topic 606, the Company recorded a $6.5 million reduction to its deferred revenue and opening accumulated deficit during the three months ended March 31, 2018 as the performance obligations associated with the Regeneron deferred revenue were satisfied as of January 1, 2018. There was no outstanding deferred revenue associated with Regeneron as of March 31, 2018 or September 30, 2018.

Collaboration Agreement with Editas Under Topic 606, the transaction price at contract inception was determined to be $1.0 million, which was related to the non-refundable upfront payment for license and research services. The arrangement provides for additional payments to the Company when certain development and regulatory milestones are achieved. Because these milestone payments are not within the control of the Company and are not considered probable of being achieved until the events occur, the Company did not include them in the transaction price at contract inception.  The transaction price of $1.0 million at contract inception was allocated to a single performance obligation. The Company’s deferred revenue associated with its Editas collaboration agreement as of December 31, 2017 under Topic 605 was $0.5 million. As a result of adopting Topic 606, the Company recorded an increase of $0.4 million to its deferred revenue and opening accumulated deficit during the three months ended March 31, 2018 due to differences in the timing of recognition under Topic 606.

During the three and nine months ended September 30, 2018, the Company recognized revenue of $0.6 million and $1.3 million, respectively, associated with the Editas collaboration agreement. The Company’s deferred revenue balance of $0.1 million as of September 30, 2018 was associated with Editas and is expected to be recognized over a period of one month as the research and development services are performed.

License Agreement with GenSight— On February 2014, the Company entered into an agreement with GenSight, where the Company granted GenSight a non-exclusive license to its proprietary AAV.7m8 vector. Under the agreement, the Company is eligible to receive development, regulatory and commercial milestones. Also, the Company is eligible to receive low to mid-single digit royalties on sales of GenSight’s licensed products.

During the three months ended September 30, 2018, GenSight achieved a clinical development milestone pursuant to the agreement. This milestone was previously constrained under Topic 606. The Company earned a $0.2 million milestone payment, which was recognized as revenue in the condensed consolidated statement of operations and comprehensive loss for the three months ended September 30, 2018.

Under Topic 605, the Company’s revenue for the three and nine months ended September 30, 2018 would have been $0.5 million and $1.6 million, respectively.

 

7


Table of Contents

 

Recently Issued and Not Yet Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“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. The Company will adopt the new standard using the modified retrospective approach as of January 1, 2019 and will recognize a right of use asset and lease liability on the adoption date.  The Company has identified the population of lease agreements and is currently assessing the impact of other arrangements for embedded leases. While the Company continues to evaluate the effect of the standard, the Company anticipates that the adoption will result in a material increase in assets and liabilities on its consolidated balance sheet and will not have a material impact on the consolidated statement of operations or statement of cash flows.

3. Fair Value Measurements and Fair Value of Financial Instruments

The authoritative guidance on the fair value hierarchy for disclosure of fair value measurements is 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.

The fair value of Level 1 securities is 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 bond and certificates 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.

The following is a summary of the Company’s cash equivalents and short-term investments:  

 

 

 

September 30, 2018

 

 

 

Amortized

Cost Basis

 

 

Unrealized

Gains

 

 

Unrealized

Loses

 

 

Estimated

Fair Value

 

 

 

(In thousands)

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

125

 

 

$

 

 

$

 

 

$

125

 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

 

26,402

 

 

 

 

 

 

(41

)

 

 

26,361

 

Commercial paper

 

 

166,264

 

 

 

 

 

 

 

 

 

166,264

 

Corporate bonds

 

 

19,844

 

 

 

 

 

 

(11

)

 

 

19,833

 

Certificates of deposit

 

 

3,994

 

 

 

 

 

 

 

 

 

3,994

 

Total cash equivalents and

   short-term investments

 

 

216,629

 

 

 

 

 

 

(52

)

 

 

216,577

 

Less: cash equivalents

 

 

(158,368

)

 

 

 

 

 

 

 

 

(158,368

)

Total short-term investments

 

$

58,261

 

 

$

 

 

$

(52

)

 

$

58,209

 

 

 

8


Table of Contents

 

 

 

December 31, 2017

 

 

 

Amortized

Cost Basis

 

 

Unrealized

Gains

 

 

Unrealized

Loses

 

 

Estimated

Fair Value

 

 

 

(In thousands)

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

65

 

 

$

 

 

$

 

 

$

65

 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

 

58,351

 

 

 

 

 

 

(145

)

 

 

58,206

 

Commercial paper

 

 

71,427

 

 

 

 

 

 

 

 

 

71,427

 

Corporate bonds

 

 

38,354

 

 

 

1

 

 

 

(38

)

 

 

38,317

 

Certificates of deposit

 

 

9,731

 

 

 

 

 

 

 

 

 

9,731

 

Total cash equivalents and

   short-term investments

 

 

177,928

 

 

 

1

 

 

 

(183

)

 

 

177,746

 

Less: cash equivalents

 

 

(57,780

)

 

 

 

 

 

 

 

 

(57,780

)

Total short-term investments

 

$

120,148

 

 

$

1

 

 

$

(183

)

 

$

119,966

 

As of September 30, 2018, the fair value of the Company’s financing liability related to The Alpha-1 Project, Inc. (the “TAP financing”) was zero. As of December 31, 2017, the fair value of TAP financing was $0.2 million, which was classified within Level 3 in the fair value hierarchy. The Company elected the fair value option to account for this financing arrangement. The fair value of the financing arrangement was determined based on the expected value approach and is classified as Level 3 within the fair value hierarchy. The key unobservable inputs in the valuation model include timing of milestones, probability of achievement of development and commercial milestones, and a discount factor.

There were no transfers within the hierarchy during the three and nine months ended September 30, 2018.

The Company’s marketable securities as of September 30, 2018 mature within one year. Management regularly reviews all of the Company’s investments for other-than-temporary declines in estimated fair value. Management’s review includes the consideration of the cause of the impairment, including the creditworthiness of the security issuers, the number of securities in an unrealized loss position, the severity and duration of the unrealized losses, whether management has the intent to sell the securities and whether it is more likely than not that the Company will be required to sell the securities before the recovery of their amortized cost basis. Management determined that the gross unrealized losses of $0.1 million on the Company’s marketable securities as of September 30, 2018 were temporary in nature. Therefore, none of the Company’s marketable securities were other-than-temporarily impaired as of September 30, 2018.

4. Significant Agreements

Editas— In January 2018, the Company entered into an agreement to amend its collaboration, option and license agreement with Editas.  The Company originally entered into an agreement with Editas in August 2016 pursuant to which the Company and Editas collaborate on certain studies using AAV vectors in connection with Editas’ genome editing technology and the Company grants to Editas an exclusive option to obtain certain exclusive rights to use the Company’s proprietary vectors in up to five ophthalmic indications. In January 2018, the Company and Editas extended the research collaboration, option and license agreement. In consideration for extending the agreement, Editas made a one-time, non-refundable cash payment of $0.5 million to the Company in February 2018. In June 2018, the Company and Editas entered into a subsequent amendment to the agreement to extend the Research Period and First Option Exercise Date (each as defined in the collaboration, option, and license agreement with Editas, as amended).

Under the terms of the agreement, as amended, Editas may exercise the option with respect to a designated initial indication until November 16, 2018. With respect to the four other indications, Editas may exercise the option until August 8, 2020, provided that the option will expire on August 8, 2019 if Editas has not exercised the option with respect to the initial indication or any other indication by such date. Upon Editas’ timely exercise of the option with respect to the designated initial indication, Editas will pay the Company a $1.3 million fee. For the first additional indication for which Editas timely exercises its option, Editas will pay the Company a $1.5 million fee. Upon each subsequent 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 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

 

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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.

Under Topic 606, the transaction price is $1.5 million related to the $1.0 million non-refundable upfront payment for license and research services at contract inception and the one-time, non-refundable cash payment of $0.5 million made by Editas in February 2018 in consideration for extending the agreement. The arrangement provides for additional payments to the Company when certain development and regulatory milestones are achieved. Because these milestone payments are not within the control of the Company and are not considered probable of being achieved until the events occur, the Company did not include them in the transaction price.  The transaction price of $1.5 million was allocated to a single performance obligation, research and development.

During the three and nine months ended September 30, 2018, the Company recognized revenue of $0.6 million and $1.3 million, respectively, associated with the Editas collaboration agreement. The Company’s deferred revenue balance of $0.1 million as of September 30, 2018 was associated with Editas and is expected to be recognized over a period of one month as the research and development services are performed.

 

5. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following:

 

 

 

September 30, 2018

 

 

December 31, 2017

 

 

 

(In thousands)

 

Accrued professional services

 

$

2,359

 

 

$

2,295

 

Employee compensation

 

 

2,852

 

 

 

2,259

 

Accrued preclinical, clinical and process development costs

 

 

1,973

 

 

 

2,165

 

Other

 

 

593

 

 

 

245

 

Total accrued expenses and other current liabilities

 

$

7,777

 

 

$

6,964

 

 

6. Commitments and Contingencies

Leases

On June 28, 2018, the Company entered into a lease on a new facility with office, laboratory, and manufacturing space, which will serve as the Company’s new corporate headquarters. The term of the lease is ten years and also provides for two options to extend the lease term for a period of seven years each.  The Company is obligated to make lease payments totaling approximately $49.3 million over the initial term of the lease.

Under the lease, the Company will receive a tenant improvement allowance for the costs associated with the design, development and construction of tenant improvements for the leased facility. The Company has provided the landlord with a letter of credit in the amount of $1.0 million. The security for the letter of credit of $1.0 million is classified as restricted cash under long term assets on the balance sheet.

As of September 30, 2018, the aggregate future minimum payments under the Company’s leases are as follows:

Year ending December 31,

 

Future Commitments

 

 

 

(In thousands)

 

2018 (remaining 3 months)

 

$

294

 

2019

 

 

3,344

 

2020

 

 

4,221

 

2021

 

 

4,683

 

2022

 

 

4,846

 

Thereafter

 

 

33,853

 

Total minimum lease payments

 

$

51,241

 

 

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

 

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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.

There have been no material changes from the legal proceedings described in our quarterly report on Form 10-Q for the period ended June 30, 2018.

7. Equity Incentive Awards   

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

 

 

Number of

Options

(in thousands)

 

 

Weighted-

Average

Exercise Price

 

 

Weighted-

Average

Remaining

Contractual Life

(in years)

 

 

Aggregate

Intrinsic Value

(in thousands)

 

Balance at December 31, 2017

 

6,695

 

 

$

4.51

 

 

 

 

 

 

 

 

 

Options granted

 

1,709

 

 

 

6.29

 

 

 

 

 

 

 

 

 

Options exercised

 

(1,596

)

 

 

0.43

 

 

 

 

 

 

 

 

 

Options cancelled

 

(520

)

 

 

6.05

 

 

 

 

 

 

 

 

 

Balance at September 30, 2018

 

6,288

 

 

$

5.90

 

 

 

7.8

 

 

$

13,001

 

Exercisable as of September 30, 2018

 

3,016

 

 

$

6.83

 

 

 

7.0

 

 

$

7,745

 

 

Restricted Stock Units (“RSUs”)

The following table summarizes the Company’s RSUs activity and related information:

 

 

 

Number of Units

(in thousands)

 

 

Weighted-

Average Grant-

Date Fair Value

 

 

Weighted-

Average

Remaining

Contractual

Term (in years)

 

Outstanding at December 31, 2017

 

 

2,515

 

 

$

3.24

 

 

 

1.6

 

Granted

 

 

1,331

 

 

 

6.00

 

 

 

 

 

Vested and released

 

 

(672

)

 

 

3.38

 

 

 

 

 

Forfeited

 

 

(517

)

 

 

8.01

 

 

 

 

 

Outstanding at September 30, 2018

 

 

2,657

 

 

$

3.66

 

 

 

1.7

 

Stock-Based Compensation Expense

The following table presents, by operating expense, the Company’s stock-based compensation expense:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

(In thousands)

 

Research and development

$

1,693

 

 

$

1,698

 

 

$

4,892

 

 

$

4,335

 

General and administrative

 

1,303

 

 

 

1,002

 

 

 

7,358

 

 

 

2,504

 

Total stock-based compensation expense

$

2,996

 

 

$

2,700

 

 

$

12,250

 

 

$

6,839

 

 

 

During the nine months ended September 30, 2018, the Company recorded approximately $4.1 million of stock-based compensation expense as a result of the modification of the vesting and exercisability of stock awards associated with the departure of two of its executives.

 

8. Net Loss per Share

Basic net loss per share is calculated by dividing the net loss by the weighted-average number of shares of common stock outstanding for the period. Diluted net loss per share is computed by giving effect to all potential dilutive common stock equivalents outstanding for the period using the treasury stock method. Outstanding stock options, RSUs, employee stock purchase plan (“ESPP”) and

 

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warrants are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share when their effect is dilutive.  

The Company excluded approximately 9.1 million and 10.0 million shares of potentially dilutive securities as of September 30, 2018 and 2017, respectively, from the computations of diluted weighted-shares outstanding because their effect would be anti-dilutive.

 

9. Impairment of Intangible Asset

The Company recorded In-process Research and Development ("IPR&D") intangible assets upon the acquisition of Annapurna in May 2016. The carrying value of the IPR&D intangible asset was $5.0 million as of June 30, 2018. The Company evaluates indefinite lived intangible assets for impairment on an annual basis or more frequently if indicators of impairment exist.  During the three months ended September 30, 2018, the Company identified an impairment indicator related to the intangible asset and performed an impairment analysis. On October 30, 2018, the Company decided to discontinue the development of ADVM-043. The Company recorded an impairment charge of $5.0 million on IPR&D assets related to the Company’s intangible asset for ADVM-043.  This amount was recorded in Impairment of intangible assets on the Company’s condensed consolidated statements of operations and comprehensive loss.

In connection with this impairment charge, the Company derecognized $1.3 million of the deferred tax liability related to the intangible asset for ADVM-043.  This amount was recorded as income tax benefit on the Company’s condensed consolidated statements of operations and comprehensive loss.

 

 

 

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Item 2.

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

The interim financial statements included in this Quarterly Report on Form 10-Q and this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2017, and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in our Annual Report on Form 10-K, as filed with the U.S. Securities and Exchange Commission (SEC) on March 6, 2018. In addition to historical information, this discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act). These forward-looking statements are subject to risks and uncertainties, including those discussed in the section titled “Risk Factors,” set forth in Part II – Other Information, Item 1A below and elsewhere in this report that could cause actual results to differ materially from historical results or anticipated results.

Overview

Adverum is a clinical-stage gene therapy company targeting unmet medical needs in ophthalmology and rare diseases. We develop gene therapy product candidates designed to provide durable efficacy by inducing sustained expression of a therapeutic protein. Our core capabilities include clinical development, novel vector discovery, and in-house manufacturing expertise, specifically in scalable process development, assay development, and current Good Manufacturing Practices (“cGMP”) quality control.  Our leadership team has significant drug development and gene therapy expertise.

We are advancing our gene therapy product candidate ADVM-022, AAV.7m8-aflibercept, for the treatment of wet age-related macular degeneration (“AMD”). ADVM-022 for the treatment of wet AMD utilizes a proprietary vector capsid (AAV.7m8) carrying an aflibercept coding sequence under the control of a proprietary expression cassette and is administered as a single intravitreal (“IVT”) injection. Excess Vascular Endothelial Growth Factor (“VEGF”) activity can lead to disease progression and vision loss. Current standard-of-care anti-VEGF therapies, such as aflibercept in EYLEA®, need to be administered frequently to patients (every 4-12 weeks). Reduced compliance with this regimen is associated with decrease in visual acuity. Administered as a single IVT injection, ADVM-022 for the treatment of wet AMD is designed to provide sustained therapeutic levels of aflibercept and to minimize the burden of frequent anti-VEGF injections. In September 2018, we received Fast Track designation for ADVM-022 for the treatment of wet AMD from the U.S. Food and Drug Administration (“FDA”).

Our Investigational New Drug (“IND”) application for ADVM-022 for the treatment of wet AMD became active in August 2018.We plan to initiate the Phase 1 OPTIC clinical trial for ADVM-022 in patients with wet AMD in the fourth quarter of 2018. The OPTIC clinical trial is designed to be a multi-center, open-label, Phase 1, dose-escalation safety study in patients with wet AMD who have demonstrated responsiveness to anti-VEGF treatment. A number of leading retinal centers across the United States are expected to participate in this trial. The OPTIC trial is expected to enroll 18 patients to evaluate three doses of ADVM-022 administered as a single IVT injection: first dose (6E11 vg/eye), second dose (2E12 vg/eye), and third dose (6E12 vg/eye). Patients will be administered a tapering prophylactic corticosteroid regimen beginning three days prior to dosing until 10 days post-dosing. The primary endpoint of the OPTIC trial is the safety and tolerability of ADVM-022 at 24 weeks after IVT injection. Secondary endpoints include changes in best-corrected visual acuity (BCVA) at 24 weeks, measurement of central retinal thickness (CRT), mean number of anti-VEGF rescue  injections, and percent of patients needing anti-VEGF rescue injections. Each patient enrolled will be followed for a total of two years.

In October 2018, we presented long-term preclinical efficacy data on ADVM-022 for the treatment of wet AMD at the European Society of Gene and Cell Therapy 26th Annual Congress.  Preclinical data demonstrated that a single IVT administration of ADVM-022  provided robust expression of aflibercept, sustained for approximately two years post-dose in non-human primates (NHPs). Additionally, a single intravitreal administration of ADVM-022 in NHPs at dose ranges of 2 x 1011 vg/eye to 2 x 1012 vg/eye provided stable intraocular expression of aflibercept at levels comparable with the levels measured in aflibercept recombinant protein-injected eyes approximately 3 to 4 weeks post-dose in all of the following: vitreous humor, aqueous humor, retina and choroid.

Previously, in May 2018, we presented long-term preclinical efficacy data on ADVM-022 for the treatment of wet AMD at the American Society of Gene & Cell Therapy 21st Annual Meeting. In this preclinical study in non-human primate models of wet AMD, the efficacy of ADVM-022 at 13 months post-administration was consistent with earlier reported data, demonstrating that a single IVT injection of ADVM-022 was well-tolerated and statistically significant (p<0.0001) in preventing the development of Grade IV lesions compared to the untreated vehicle control group. ADVM-022 induced long-term efficacy that was comparable to positive control aflibercept injected eyes. In this preclinical study, ADVM-022 for the treatment of wet AMD was well-tolerated, with no serious adverse events.

For A1AT deficiency, in November 2018, we announced our decision to discontinue the development of ADVM-043, an investigational AAVrh.10-based gene therapy construct for the treatment of A1AT deficiency. Based on the review of the ADVANCE Phase 1/2 study (the “ADVANCE study”), preliminary M-specific A1AT protein measurements did not reach clinically meaningful levels of expression and the data did not demonstrate the potential to reach M-protein threshold levels of 11µM.

 

 

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We are reviewing the learnings from the ADVANCE study, notably on the AAVrh.10 capsid, in order to inform further development of gene therapy candidates for the treatment of systemic rare diseases. We plan to conduct additional preclinical studies to determine the best candidates to advance forward in development. We plan to provide an update on the rare disease programs in the first half of 2019 and will not submit an IND application for ADVM-053 for the treatment of hereditary angioedema (HAE) in the fourth quarter of 2018.  

Our partnered programs include vectors we are developing under collaboration agreements. Under an agreement with Editas Medicine, Inc. (“Editas”) we are leveraging our AAV-vectors for use with Editas’ leading CRISPR-based genome editing technologies to treat up to five inherited retinal diseases. Our agreement with Regeneron Pharmaceuticals, Inc. (“Regeneron”) provides for development of up to eight distinct ocular therapeutic targets, four of which are already identified, including AVA-311 for the treatment of juvenile X-Linked Retinoschisis.

In June 2018 we signed a lease with an initial 10-year term for a new facility in Redwood City, California which we plan to occupy in the second half of 2019. This facility will serve as our new corporate headquarters and will include over 80,000 square feet of office, laboratory, and manufacturing space. We believe this facility will enable us to expand our manufacturing process development activities at the 2000-liter scale, as well as offer the opportunity for future cGMP manufacturing of our clinical trial material.

Financial Overview

Summary

We have not generated positive cash flow or net income from operations since our inception and, as of September 30, 2018, we had an accumulated deficit of $304.9 million. We expect to incur substantial expenses and increasing losses from operations in the foreseeable future as we continue our research and development efforts, advance our product candidates through preclinical and clinical development, manufacture clinical study materials, seek regulatory approval, and prepare for and, if approved, proceed to commercialization. We are at an early stage of development and may never be successful in developing or commercializing our product candidates. Based on our decisions to discontinue the development of ADVM-043 and our plan to conduct additional preclinical studies on our rare disease programs, we are currently assessing the financial impact of these decisions.

While we may in the future generate revenue from a variety of sources, including license fees, milestone and research and development payments in connection with strategic partnerships, and potentially revenue from product sales if any of our product candidates are approved, to date we have not generated any revenue from product sales.

We entered into collaboration and license arrangements with Regeneron in May 2014 and Editas in August 2016, which are revenue-generating arrangements. We currently have no operational clinical or commercial manufacturing facilities, and all of our clinical manufacturing activities are currently contracted out to third parties. Additionally, we use third-party clinical research organizations (“CROs”) to carry out our clinical development and we do not have a sales organization.

We expect to incur substantial and increasing expenditures in the foreseeable future for the development and potential commercialization of our product candidates. We will need substantial additional funding in the future to support our operating activities as we advance our product candidates through preclinical and clinical development, seek regulatory approval and prepare for and, if approved, proceed to commercialization. Adequate funding may not be available to us on acceptable terms, or at all. If we are unable to raise capital, or to do so on acceptable terms, when needed, or to form additional collaboration partnerships to support our efforts, we could be forced to delay, reduce or eliminate our research and development programs or potential commercialization efforts.

In August 2017, we entered into an at-the-market sales agreement with an agent for the sales of our common stock at market price (the “2017 stock offering agreement”). Under the terms and conditions of the 2017 stock offering agreement, we may offer to sell our common stock for an aggregate offering price of up to $50.0 million through the agent from time to time. In January 2018, we sold a total of 1,419,893 shares of our common stock at market prices under the 2017 stock offering agreement and raised total net proceeds of $5.7 million, after issuance costs. Since then, during the nine months ended September 30, 2018, no additional shares were issued and sold under the 2017 stock offering agreement. Under the 2017 stock offering agreement, we have sold a total of 6,550,232 shares of our common stock at market prices, raising total net proceeds of $22.5 million, after issuance costs.

In February 2018, we completed an underwritten public offering for the sale of 10,222,235 shares of our common stock and raised total net proceeds of $64.5 million, after discounts and other issuance costs.

As of September 30, 2018, we had $217.9 million in cash, cash equivalents and short-term investments. We believe that we have sufficient funds to continue our operations at least through the first half of 2020.

 

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Revenue

To date we have not generated any revenue from the sale of our products. We generate revenue through research, collaboration and license arrangements with our strategic partners.

Research and Development Expenses

Conducting a significant amount of research and development is central to our business model. Research and development expenses primarily include personnel-related costs, stock-based compensation expense, laboratory supplies, consulting costs, external contract research and development expenses, including expenses incurred under agreements with CROs, the cost of acquiring, developing and manufacturing clinical study materials, and overhead expenses, such as rent, equipment depreciation, insurance and utilities.

We expense research and development costs as incurred. We defer and expense advance payments for goods or services for future research and development activities as the goods are delivered or the related services are performed.

We estimate preclinical study and clinical trial expenses based on the services performed pursuant to contracts with research institutions and CROs that conduct and manage preclinical studies and clinical trials on our behalf. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. We estimate the amounts incurred through communications with third party service providers and our estimates of accrued expenses as of each balance sheet date are based on information available at the time. If the actual timing of the performance of services or the level of effort varies from the estimate, we will adjust the accrual accordingly.

At this time, we cannot reasonably estimate the nature, timing or aggregate costs of the efforts that will be necessary to complete the development of any of our product candidates. The successful development and commercialization of a product candidate is highly uncertain, and clinical development timelines, the probability of success, and development and commercialization costs can differ materially from expectations.

General and Administrative Expenses

General and administrative expenses primarily include personnel-related costs, stock-based compensation, professional fees for legal, consulting, audit and tax services, overhead expenses, such as rent, equipment depreciation, insurance and utilities, and other general operating expenses not otherwise included in research and development expenses. Our general and administrative expenses may increase in future periods if and to the extent we elect to increase our investment in infrastructure to support continued research and development activities and potential commercialization of our product candidates. We will continue to evaluate the need for such investment in conjunction with our ongoing consideration of our pipeline of product candidates. We anticipate increased expenses related to audit, legal and regulatory functions, as well as director and officer insurance premiums and investor relations costs.

Other Income, Net

Other income, net primarily consists of interest income on our cash equivalents and investments in marketable securities.

Income Taxes

On December 22, 2017, the U.S. government enacted comprehensive tax legislation, commonly known as the Tax Cuts and Jobs Act of 2017 (the “Act”), which significantly reforms the Internal Revenue Code of 1986, as amended. The Act contains broad and complex changes to corporate taxation, including in part reduction of the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously considered permanently reinvested, and creates new taxes on certain foreign sourced earnings.  On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. Because we are still in the process of analyzing certain provisions of the Act including the application of new executive compensation limitation provisions under Internal Revenue Section 162(m) in accordance with SAB 118, we determined that the adjustment to our deferred taxes was a provisional amount.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP.  The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we evaluate our critical accounting policies and estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other

 

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sources.  Actual results may differ from these estimates under different assumptions and conditions.  Except as noted below, there have been no material changes to our critical accounting policies from those described in our Annual Report on Form 10-K (Annual Report) as filed with the SEC, on March 6, 2018.

Revenue

To date we have not generated any revenue from the sale of our products. We generate revenue through research, collaboration and license arrangements with our strategic partners.

Effective January 1, 2018, we adopted accounting Standard Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“Topic 606”) using the modified retrospective approach. Our collaboration agreements with Regeneron, Editas and GenSight were impacted by the adoption of the new revenue standards under Topic 606. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period results are not adjusted and continue to be reported in accordance with the revenue standards under Topic 605.

Upon adoption of Topic 606, we recorded a net decrease of $6.1 million to our deferred revenue and opening accumulated deficit as of January 1, 2018 for the cumulative effect of the adoption. The effect of the adoption is summarized for our license and collaboration agreements as follows:

Collaboration Agreement with Regeneron Under Topic 606, the transaction price at contract inception was determined to be $8.0 million, which was related to the non-refundable upfront payment for license and research services. The arrangement also provides for additional payments to us when certain development and regulatory milestones are achieved. Because these milestone payments are not within our control and are not considered probable of being achieved until the events occur, we did not include them in the transaction price at contract inception.  The transaction price of $8.0 million at contract inception was allocated to two performance obligations. Our deferred revenue associated with Regeneron collaboration agreement as of December 31, 2017 under Topic 605 was $6.5 million. As a result of adopting Topic 606, we recorded a $6.5 million reduction to our deferred revenue and opening accumulated deficit during the three months ended March 31, 2018 as the performance obligations associated with the Regeneron deferred revenue were satisfied as of January 1, 2018. There was no outstanding deferred revenue associated with Regeneron as of September 30, 2018.

Collaboration Agreement with Editas Under Topic 606, the transaction price is $1.5 million related to the $1.0 million non-refundable upfront payment for license and research services at contract inception and the one-time, non-refundable cash payment of $0.5 million made by Editas in February 2018 in consideration for extending the agreement. The arrangement provides for additional payments to us when certain development and regulatory milestones are achieved. Because these milestone payments are not within our control and are not considered probable of being achieved until the events occur, we did not include them in the transaction price. The transaction price of $1.5 million was allocated to a single performance obligation, research and development. Our deferred revenue associated with Editas collaboration agreement as of December 31, 2017 under Topic 605 was $0.5 million. As a result of adopting Topic 606, we recorded an increase of $0.4 million to our deferred revenue and opening accumulated deficit during the three months ended March 31, 2018 due to differences in the timing of recognition under Topic 606.

During the three and nine months ended September 30, 2018, we recognized revenue of $0.6 million and $1.3 million, respectively, associated with the Editas collaboration agreement. Our deferred revenue balance of $0.1 million as of September 30, 2018 was associated with Editas and is expected to be recognized over a period of one month as the research and development services are performed.

License Agreement with GenSight— On February 2014, we entered into an agreement with GenSight, where we granted GenSight a non-exclusive license to our proprietary AAV.7m8 vector. Under the agreement, we are eligible to receive development, regulatory and commercial milestones. Also, we are eligible to receive low to mid-single digit royalties on sales of GenSight’s licensed products.

During the three months ended September 30, 2018, GenSight achieved a clinical development milestone pursuant to the agreement. This milestone was previously constrained under Topic 606. We earned a $0.2 million milestone payment, which was recognized as revenue in the consolidated statement of operations and comprehensive loss for the three months ended September 30, 2018.

Under Topic 605, our revenue for the three and nine months September 30, 2018 would have been $0.5 and $1.6 million, respectively.

 

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Results of Operations

Comparison of the Three and Nine Months Ended September 30, 2018 and 2017

 

 

 

Three Months Ended

September 30,

 

 

 

 

 

 

Nine Months Ended

September 30,

 

 

 

 

 

 

 

2018

 

 

2017

 

 

Change

 

 

2018

 

 

2017

 

 

Change

 

 

 

(In thousands)

 

Collaboration and license revenue

 

$

833

 

 

$

463

 

 

$

370

 

 

$

1,542

 

 

$

1,388

 

 

$

154

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

14,480

 

 

 

10,272

 

 

 

4,208

 

 

 

38,491

 

 

 

27,825

 

 

 

10,666

 

General and administrative

 

 

4,826

 

 

 

4,762

 

 

 

64

 

 

 

19,373

 

 

 

16,815

 

 

 

2,558

 

Impairment of intangible asset

 

 

5,000

 

 

 

 

 

 

5,000

 

 

 

5,000

 

 

 

 

 

 

5,000

 

Total operating expenses

 

 

24,306

 

 

 

15,034

 

 

 

9,272

 

 

 

62,864

 

 

 

44,640

 

 

 

18,224

 

Operating loss

 

 

(23,473

)

 

 

(14,571

)

 

 

(8,902

)

 

 

(61,322

)

 

 

(43,252

)

 

 

(18,070

)

Other income, net

 

 

1,265

 

 

 

742

 

 

 

523

 

 

 

3,104

 

 

 

1,894

 

 

 

1,210

 

Net loss before income tax benefit

 

 

(22,208

)

 

 

(13,829

)

 

 

(8,379

)

 

 

(58,218

)

 

 

(41,358

)

 

 

(16,860

)

Income tax benefit

 

 

1,250

 

 

 

 

 

 

1,250

 

 

 

1,250

 

 

 

 

 

 

1,250

 

Net loss

 

$

(20,958

)

 

$

(13,829

)

 

$

(7,129

)

 

$

(56,968

)

 

$

(41,358

)

 

$

(15,610

)

Revenue

Our revenue for the three and nine months ended September 30, 2018 was related to research services under our collaboration agreement with Editas and milestone payment under the license agreement with GenSight while our revenue for the three and nine months ended September 30, 2017 was related to license and research services under our collaboration agreements with Regeneron and Editas. We recognized our collaboration and license revenue for the three and nine months ended September 30, 2018 under Topic 606, which we adopted effective January 1, 2018. We recognized our collaboration and license revenue for the three and nine months ended September 30, 2017 under Topic 605.  Under Topic 605, our revenue for the three and nine months September 30, 2018 would have been $0.5 million and $1.6 million, respectively.

Research and Development Expense

Research and development expense increased to $14.5 million for the three months ended September 30, 2018, from $10.3 million for the three months ended September 30, 2017. This increase was primarily due to an overall increase in research and development activity, including $1.5 million of higher costs associated with our ADVANCE study for ADVM-043 for A1AT deficiency and start-up activities for our planned OPTIC Phase 1 clinical trial for ADVM-022 for the treatment of wet AMD, $0.6 million of higher material production costs related to our wet AMD and rare disease programs to support our plans to initiate clinical trials, $0.6 million of higher outside research and development services and $1.6 million in higher compensation and benefits.

Research and development expense increased to $38.5 million for the nine months ended September 30, 2018, from $27.8 million for the nine months ended September 30, 2017. This increase was primarily due to an overall increase in research and development activity, including $4.1 million of higher compensation and benefits, $3.3 million of higher material production costs related to our wet AMD and rare disease programs to support our plans to initiate clinical trials, $2.5 million of higher costs associated with our ADVANCE study for ADVM-043 for A1AT deficiency and start-up activities for our planned OPTIC Phase1 clinical trial for ADVM-022 for the treatment of wet AMD, and $1.8 million of higher outside research and development services, offset in part by $0.9 million decrease in consulting costs.

For the periods presented, our research and development activities are attributable to our rare disease and wet AMD programs and earlier-stage research programs. We expect that research and development expenses will increase in future periods as we continue to invest in advancing our gene therapy programs and earlier-stage research programs.

 

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General and Administrative Expense

General and administrative expense remained relatively flat at $4.8 million for the three months ended September 30, 2018 and for the three months ended September 30, 2017.

General and administrative expense increased to $19.4 million for the nine months ended September 30, 2018, from $16.8 million for the nine months ended September 30, 2017. The increase in general and administrative expense was primarily due to $5.0 million in severance-related expenses, predominantly stock-based compensation expenses as a result of the modification of the vesting and exercisability of stock awards associated with the departure of our previous chief executive officer, and $0.4 million in increased compensation costs, partially offset by lower legal expenses as the nine months ended September 30, 2017 included settlement costs associated with the securities class action lawsuit and $2.0 million for the termination of our master service agreement with Cornell.

We expect that general and administrative expenses will increase in future periods as we continue to support advancing our gene therapy programs. We anticipate increased expenses related to audit, legal and regulatory functions, as well as director and officer insurance premiums and investor relations costs associated with being a public reporting company.

Impairment of Intangible Assets

During the three and nine months ended September 30, 2018, the Company identified an impairment indicator related to the intangible asset for ADVM-043 and performed an impairment analysis.  On October 30, 2018, the Company decided to discontinue the development of ADVM-043.  The Company recorded an impairment charge of $5.0 million on IPR&D assets related to the Company’s intangible asset for ADVM-043. There were no impairment charges during the three and nine months ended September 30, 2017.

Other Income, Net

The increase in other income, net was primarily due to higher interest income from our investments in marketable securities as we invested in higher yield securities, as well as higher average invested balances.

Income Tax Benefit

In connection with this impairment charge, the Company derecognized a deferred tax liability of $1.3 million related to the intangible asset for ADVM-043. There was no income tax benefit during the three and nine months ended September 30, 2017.

Liquidity and Capital Resources and Plan of Operations

We have not generated positive cash flow or net income from operations since our inception and as of September 30, 2018, we had an accumulated deficit of $304.9 million. As of September 30, 2018, we had $217.9 million in cash, cash equivalents and short-term investments compared to $190.5 million as of December 31, 2017. We believe that our existing cash and cash equivalents as of September 30, 2018 will be sufficient to fund our operations at least through the first half of 2020.

In August 2017, we entered into the 2017 stock offering agreement. Under the terms and conditions of the 2017 stock offering agreement, we may offer to sell our common stock for an aggregate offering price of up to $50.0 million through the agent from time to time. In January 2018, we sold a total of 1,419,893 shares of our common stock at market prices under the 2017 stock offering agreement and raised total net proceeds of $5.7 million, after issuance costs. Since then, during the nine months ended September 30, 2018, we have sold no additional shares under the 2017 stock offering agreement. We have sold a total of 6,550,232 million shares of our common stock at market prices pursuant to the 2017 stock offering agreement, raising total net proceeds of $22.5 million, after issuance costs.

In February 2018, we completed an underwritten public offering for the sale of 10,222,235 shares of our common stock and raised total net proceeds of $64.5 million, after discounts and other issuance costs.

In June 2018, we entered into a lease for a facility located in Redwood City, California, that will serve as our new corporate headquarters and will include over 80,000 square feet of office, manufacturing, and laboratory space. We believe this facility will enable us to expand our manufacturing process development activities at the 2000-liter scale, as well as offer the opportunity for future cGMP manufacturing of our clinical trial material.

We expect to incur substantial expenditures in the foreseeable future for the development and potential commercialization of our product candidates and ongoing internal research and development programs, and expenses to build out our new facility. At this time, we cannot reasonably estimate the nature, timing or aggregate amount of costs for our development, potential commercialization, and internal research and development programs. However, in order to complete our planned preclinical trials and current and future clinical trials, and to complete the process of obtaining regulatory approval for our product candidates, as well as to build the sales, marketing and distribution infrastructure that we believe will be necessary to commercialize our product candidates, if approved, we will require substantial additional funding in the future.

 

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If and when we seek additional funding, we will do so through equity or debt financings, collaborative or other arrangements with corporate sources or through other sources of financing. Adequate additional funding may not be available to us on acceptable terms or at all. Our failure to raise capital in the future could have a negative impact on our financial condition and our ability to pursue our business strategies. To complete development and commercialization of any of our product candidates, we anticipate that we will need to raise substantial additional capital, the requirements of which will depend on many factors, including:

 

the initiation, progress, timing, costs and results of preclinical studies and any clinical trials for our product candidates;

 

the outcome, timing of and costs involved in, seeking and obtaining approvals from the FDA and other regulatory authorities, including the potential for the FDA and other regulatory authorities to require that we perform more studies than those that we currently expect;

 

the ability of our product candidates to progress through clinical development activities successfully;

 

our need to expand our research and development activities;

 

the rate of progress and cost of our commercialization of our products;

 

the cost of preparing to manufacture our products on a larger scale;

 

the costs of commercialization activities including product sales, marketing, manufacturing and distribution;

 

the degree and rate of market acceptance of any products launched by us or future partners;

 

the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;

 

our need to implement additional infrastructure and internal systems;

 

our ability to hire additional personnel;

 

our ability to enter into additional collaboration, licensing, commercialization or other arrangements and the terms and timing of such arrangements, and;

 

the emergence of competing technologies or other adverse market developments.

If we are unable to raise additional funds when needed, we may be required to delay, reduce, or terminate some or all of our development programs and clinical trials. We may also be required to sell or license other technologies or clinical product candidates or programs that we would prefer to develop and commercialize ourselves.

Cash Flows

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

Net cash used in operating activities

 

$

(41,234

)

 

$

(33,223

)

Net cash provided by (used in) investing activities

 

 

61,417

 

 

 

(156,895

)

Net cash provided by financing activities

 

 

69,970

 

 

 

103

 

Effect of foreign currency exchange rate

 

 

 

 

 

(442

)

Net increase (decrease)  in cash and cash equivalents and restricted cash

 

$

90,153

 

 

$

(190,457

)

Cash Used in Operating Activities

During the nine months ended September 30, 2018, net cash used in operating activities was $41.2 million, primarily as a result of the net loss of $57.0 million, partially offset by $18.8 million of non-cash charges mainly related to stock-based compensation expense, impairment of intangible asset and depreciation and amortization expense, and $3.1 million of net decrease in operating assets and liabilities.

During the nine months ended September 30, 2017, net cash used in operating activities was $33.2 million, primarily as a result of the net loss of $41.4 million and $0.7 million of net decrease in operating assets and liabilities, partially offset by $8.9 million of non-cash charges mainly related to stock-based compensation expense and depreciation and amortization expense.

Cash Provided by (Used in) Investing Activities

Net cash provided by investing activities for the nine months ended September 30, 2018 consisted of $118.0 million resulting from the maturities of marketable securities, partially offset by $55.9 million of purchases of marketable securities and $0.7 million of purchases of property and equipment.

Net cash used in investing activities for the nine months ended September 30, 2017, was $156.9 million, primarily due to $201.0 million of purchases of marketable securities and $0.9 million of purchases of property and equipment, partially offset by $45.1 million of maturities of marketable securities.

 

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Purchases of property and equipment primarily consisted of the acquisition of laboratory equipment to support our research and development activities.

Cash Provided by Financing Activities

Net cash provided by financing activities for nine months ended September 30, 2018 consisted of  $70.2 million of the net proceeds from the sales of our common stock, $0.8 million of the proceeds from the exercises of stock options and employee stock purchases and $0.1 million of the proceeds from our financing arrangement with the Alpha-1 Project, Inc., partially offset by $1.0 million in taxes paid relating to net share settlement of restricted stock units and $0.1 million repayment of our Banque Publique d’Investissement (“BPI France”) loan.

Net cash provided by financing activities of $0.1 million for the nine months ended September 30, 2017 was a result of the proceeds from exercises of stock options, partially offset by taxes paid related to net share settlement of restricted stock units.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations as of September 30, 2018:

 

 

 

Payment Due by Period

 

 

 

Less Than 1 Year

 

 

1 to 3 Years

 

 

3 to 5 Years

 

 

More than 5 Years

 

 

Total

 

 

 

(in thousands)

 

Operating lease obligations

 

$

2,495

 

 

$

13,674

 

 

$

10,121

 

 

$

24,951

 

 

$

51,241

 

Master service agreement with Cornell (1)

 

 

2,000

 

 

 

 

 

 

 

 

 

 

 

 

2,000

 

BPI financing

 

 

117

 

 

 

215

 

 

 

 

 

 

 

 

 

332

 

Contractual obligations (2)

 

 

4,120