Endocyte, Inc.
ENDOCYTE INC (Form: 10-Q, Received: 05/10/2017 13:03:06)

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

Form 10-Q

 

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

 

For the quarterly period ended March 31, 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 001-35050   

 

ENDOCYTE, INC.

(Exact name of Registrant as specified in its charter)


Delaware

35-1969-140

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification Number)

 

3000 Kent Avenue, Suite A1-100

West Lafayette, IN 47906

(Address of Registrant’s principal executive offices)

Registrant’s telephone number, including area code: (765) 463-7175

 

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 Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T 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 the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

 

 

 

Large accelerated filer ◻

    

Accelerated filer ☑

    

Non-accelerated filer ◻
(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 ☑

 

Number of shares of the registrant’s Common Stock, $0.001 par value, outstanding on April 28, 2017: 42,470,874

 

 


 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

ENDOCYTE, INC.

 

CONDENSED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

 

 

December 31, 

 

March 31, 

 

 

    

2016

    

2017

 

Assets

 

 

 

 

 

(unaudited)

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

31,228,192

 

$

33,660,918

 

Short-term investments

 

 

106,979,224

 

 

93,901,236

 

Receivables

 

 

55,074

 

 

5,125

 

Prepaid expenses

 

 

1,737,308

 

 

1,526,171

 

Other assets

 

 

255,912

 

 

283,426

 

Total current assets

 

 

140,255,710

 

 

129,376,876

 

Property and equipment, net

 

 

3,205,077

 

 

2,982,871

 

Other noncurrent assets

 

 

33,567

 

 

27,067

 

Total assets

 

$

143,494,354

 

$

132,386,814

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

1,381,545

 

$

1,546,612

 

Accrued wages and benefits

 

 

2,705,475

 

 

1,143,822

 

Accrued clinical trial expenses

 

 

861,293

 

 

1,207,887

 

Accrued expenses and other liabilities

 

 

613,861

 

 

1,017,072

 

Total current liabilities

 

 

5,562,174

 

 

4,915,393

 

Other liabilities, net of current portion

 

 

2,873

 

 

 —

 

Deferred revenue, net of current portion

 

 

781,944

 

 

769,444

 

Total liabilities

 

 

6,346,991

 

 

5,684,837

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock: $0.001 par value, 100,000,000 shares authorized; 42,377,522 and 42,470,874 shares issued and outstanding at December 31, 2016 and March 31, 2017

 

 

42,378

 

 

42,471

 

Additional paid-in capital

 

 

390,768,742

 

 

392,092,353

 

Accumulated other comprehensive loss

 

 

(41,196)

 

 

(53,877)

 

Retained deficit

 

 

(253,622,561)

 

 

(265,378,970)

 

Total stockholders’ equity

 

 

137,147,363

 

 

126,701,977

 

Total liabilities and stockholders’ equity

 

$

143,494,354

 

$

132,386,814

 

 

See accompanying notes.

 

 

2


 

 

ENDOCYTE, INC.

 

CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

 

2016

 

2017

 

 

 

(unaudited)

 

Revenue:

    

 

 

    

 

 

    

Collaboration revenue

 

$

12,500

 

$

12,500

 

Total revenue

 

 

12,500

 

 

12,500

 

Operating expenses:

 

 

 

 

 

 

 

Research and development

 

 

6,531,553

 

 

7,994,472

 

General and administrative

 

 

3,819,758

 

 

3,745,262

 

Total operating expenses

 

 

10,351,311

 

 

11,739,734

 

Loss from operations

 

 

(10,338,811)

 

 

(11,727,234)

 

Other income (expense), net:

 

 

 

 

 

 

 

Interest income, net

 

 

189,535

 

 

235,451

 

Other income (expense), net

 

 

(3,464)

 

 

3,198

 

Net loss

 

 

(10,152,740)

 

 

(11,488,585)

 

Net loss per share – basic and diluted

 

$

(0.24)

 

$

(0.27)

 

Items included in other comprehensive income (loss):

 

 

 

 

 

 

 

Unrealized gain (loss) and amounts reclassified to net loss on available-for-sale securities

 

 

110,136

 

 

(12,681)

 

Other comprehensive income (loss)

 

 

110,136

 

 

(12,681)

 

Comprehensive loss

 

$

(10,042,604)

 

$

(11,501,266)

 

Weighted-average number of common shares used in net loss per share calculation – basic and diluted

 

 

42,109,828

 

 

42,434,709

 

 

See accompanying notes.

3


 

 

ENDOCYTE, INC.

 

CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Other

 

 

 

 

 

 

 

 

Common Stock

 

Paid-In

 

Comprehensive

 

Retained

 

 

 

 

 

    

Shares

    

Amount

    

Capital

    

Income (Loss)

    

Deficit

    

Total

 

Balances December 31, 2016

 

42,377,522

 

$

42,378

 

$

390,768,742

 

$

(41,196)

 

$

(253,622,561)

 

$

137,147,363

 

Reclassification of impact of ASU 2016-09 (See Note 3)

 

 —

 

 

 —

 

 

267,824

 

 

 —

 

 

(267,824)

 

 

 —

 

Balances at January 1, 2017

 

42,377,522

 

$

42,378

 

$

391,036,566

 

$

(41,196)

 

$

(253,890,385)

 

$

137,147,363

 

Exercise of stock options

 

7,757

 

 

 8

 

 

16,282

 

 

 —

 

 

 —

 

 

16,290

 

Stock-based compensation

 

85,595

 

 

85

 

 

1,039,505

 

 

 —

 

 

 —

 

 

1,039,590

 

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(11,488,585)

 

 

(11,488,585)

 

Unrealized loss on securities

 

 —

 

 

 —

 

 

 —

 

 

(12,681)

 

 

 —

 

 

(12,681)

 

Balances March 31, 2017

 

42,470,874

 

$

42,471

 

$

392,092,353

 

$

(53,877)

 

$

(265,378,970)

 

$

126,701,977

 

 

See accompanying notes.

4


 

 

ENDOCYTE, INC.

 

CONDENSED STATEMENTS OF CASH FLOWS

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

    

2016

    

2017

    

 

 

(unaudited)

 

Operating activities

 

 

 

 

 

 

 

Net loss

 

$

(10,152,740)

 

$

(11,488,585)

 

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

 

 

 

 

 

 

 

Depreciation

 

 

217,252

 

 

238,347

 

Stock-based compensation

 

 

2,084,198

 

 

1,132,519

 

Loss on disposal of property and equipment

 

 

 —

 

 

2,222

 

Accretion of bond premium

 

 

195,962

 

 

43,001

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

Receivables

 

 

8,678

 

 

22,435

 

Prepaid expenses and other assets

 

 

(95,744)

 

 

396,962

 

Accounts payable

 

 

(546,342)

 

 

(3,085)

 

Accrued wages, benefits and other liabilities

 

 

(1,835,004)

 

 

(814,721)

 

Deferred revenue

 

 

(12,500)

 

 

(12,500)

 

Net cash used in operating activities

 

 

(10,136,240)

 

 

(10,483,405)

 

Investing activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(35,898)

 

 

(29,536)

 

Purchases of investments

 

 

(41,852,513)

 

 

(14,977,694)

 

Proceeds from sale and maturities of investments

 

 

76,765,000

 

 

28,000,000

 

Net cash provided by investing activities

 

 

34,876,589

 

 

12,992,770

 

Financing activities

 

 

 

 

 

 

 

Stock repurchase

 

 

(108,501)

 

 

(92,929)

 

Proceeds from the exercise of stock options

 

 

93,477

 

 

16,290

 

Net cash used in financing activities

 

 

(15,024)

 

 

(76,639)

 

Net increase in cash and cash equivalents

 

 

24,725,325

 

 

2,432,726

 

Cash and cash equivalents at beginning of period

 

 

15,431,622

 

 

31,228,192

 

Cash and cash equivalents at end of period

 

$

40,156,947

 

$

33,660,918

 

 

See accompanying notes.

5


 

 

ENDOCYTE, INC.

 

NOTES TO CONDENSED FINANCIAL STATEMENTS

 

1. Nature of Business and Organization

 

Endocyte, Inc. (the “Company”) is a biopharmaceutical company developing targeted therapies for the treatment of cancer and inflammatory diseases. The Company uses its proprietary technology to create novel small molecule drug conjugates (“SMDCs”), and companion imaging agents. The SMDCs actively target receptors that are over-expressed on diseased cells, relative to healthy cells. This targeted approach is designed to enable the treatment of patients with a highly active drug at greater doses, delivered more frequently, and over longer periods of time than would be possible with the untargeted drug alone. The Company is also developing companion imaging agents for each of its SMDCs that are designed to identify the patients whose disease over-expresses the target of the therapy and who are therefore most likely to benefit from treatment.

 

2. Significant Accounting Policies

 

Basis of Presentation

 

The accompanying condensed financial statements are prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals and revisions of estimates, considered necessary for a fair presentation of the accompanying condensed financial statements have been included. Interim results for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2017 or any other future period. These condensed financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. Subsequent events have been evaluated through the date of issuance, which is the same as the date this Form 10-Q is filed with the Securities and Exchange Commission.

 

Segment Information

 

Operating segments are defined as components of an enterprise engaging in business activities for which discrete financial information is available and regularly reviewed by the chief operating decision maker in deciding how to allocate resources and in assessing performance. All long-lived assets are held in the U.S. The Company views its operations and manages its business in one operating segment.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires the Company’s management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual amounts may differ from those estimates.

 

Cash and Cash Equivalents

 

The Company considers cash and all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents. Cash equivalents consist primarily of FDIC insured deposits with multiple banks and money market instruments that are maintained by an investment manager.

 

Investments

 

Investments consist primarily of investments in U.S. Treasuries and corporate debt securities, which could also include commercial paper, that are maintained by an investment manager. Management determines the appropriate classification of marketable securities at the time of purchase and reevaluates such classification as of each balance sheet date. Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in other comprehensive income. Realized gains and losses and declines in value judged to be other-than-temporary on available-

6


 

 

for-sale securities are included in other income. The Company considers and accounts for other-than-temporary impairments according to the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 320, Investments — Debt and Equity Securities (“ASC 320”). The cost of securities sold is based on the specific-identification method. Discounts and premiums on debt securities are amortized to interest income and expense over the term of the security.

 

Revenue Recognition

 

The Company recognizes revenues from license and collaboration agreements when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee is fixed or determinable, and there is reasonable assurance that the related amounts are collectible in accordance with ASC Topic 605, Revenue Recognition (“ASC 605”). The Company’s license and collaboration agreements may contain multiple elements, including grants of licenses to intellectual property rights, agreement to provide research and development services and other deliverables. The deliverables under such arrangements are evaluated under ASC Subtopic 605-25, Multiple-Element Arrangements (“ASC 605-25”). Under ASC 605-25, each required deliverable is evaluated to determine whether it qualifies as a separate unit of accounting based on whether the deliverable has “stand-alone value” to the customer. The arrangement’s consideration that is fixed or determinable, excluding contingent milestone payments, is then allocated to each separate unit of accounting based on the relative selling price of each deliverable. In general, the consideration allocated to each unit of accounting is recognized as the related goods or services are delivered, limited to the consideration that is not contingent upon future deliverables.

 

Upfront payments for licensing the Company’s intellectual property are evaluated to determine if the licensee can obtain stand-alone value from the license separate from the value of the research and development services and other deliverables in the arrangement to be provided by the Company. If at the inception of an arrangement the Company determines that the license does not have stand-alone value separate from the research and development services or other deliverables, the license, services and other deliverables are combined as one unit of account and upfront payments are recorded as deferred revenue on the balance sheet and are recognized in a manner consistent with the final deliverable. Subsequent to the inception of an arrangement, the Company evaluates the remaining deliverables for separation as items in the arrangement are delivered. When stand-alone value is identified, the related consideration is recorded as revenue in the period in which the license or other intellectual property rights are delivered.

 

In those circumstances where research and development services or other deliverables are combined with the license, and multiple services are being performed such that a common output measure to determine a pattern of performance cannot be discerned, the Company recognizes amounts received on a straight line basis over the performance period. Such amounts are recorded as collaboration revenue. Any subsequent reimbursement payments, which are contingent upon the Company’s future research and development expenditures, will be recorded as collaboration revenue and will be recognized on a straight-line basis over the performance period using the cumulative catch up method. The costs associated with these activities are reflected as a component of research and development expense in the statements of operations in the period incurred. In the event of an early termination of a collaboration agreement, any deferred revenue is recognized in the period in which all obligations of the Company under the agreement have been fulfilled.

 

Milestone payments under collaborative arrangements are triggered either by the results of the Company’s research and development efforts, achievement of regulatory goals or by specified sales results by a third-party collaborator. Milestones related to the Company’s development-based activities may include initiation of various phases of clinical trials and applications and acceptance for product approvals by regulatory agencies. Due to the uncertainty involved in meeting these development-based milestones, the determination is made at the inception of the collaboration agreement whether the development-based milestones are considered to be substantive (i.e. not just achieved through passage of time). In addition, the amounts of the payments assigned thereto are considered to be commensurate with the enhancement of the value of the delivered intellectual property as a result of the Company’s performance. Because the Company’s involvement is necessary to the achievement of development-based milestones, the Company would account for development-based milestones as revenue upon achievement of the substantive milestone events. Milestones related to sales-based activities may be triggered upon events such as first commercial sale of a product or when sales first achieve a defined level. Since these sales-based milestones would be achieved after the completion of the Company’s development activities, the Company would account for the sales-based milestones in the same manner as royalties, with revenue recognized upon achievement of the milestone. Royalties based on reported sales of licensed products will be recognized based on contract terms when reported sales are reliably measurable and collectability is reasonably assured.

7


 

 

To date, none of the Company’s products have been approved and therefore the Company has not earned any royalty revenue from product sales. In territories where the Company and a collaborator may share profit, the revenue would be recorded in the period earned.

 

The Company often is required to make estimates regarding drug development and commercialization timelines for compounds being developed pursuant to a collaboration agreement. Because the drug development process is lengthy and the Company’s collaboration agreements typically cover activities over several years, this approach often results in the deferral of significant amounts of revenue into future periods. In addition, because of the many risks and uncertainties associated with the development of drug candidates, the Company’s estimates regarding the period of performance may change in the future. Any change in the Company’s estimates or a termination of the arrangement could result in substantial changes to the period over which the revenues are recognized.

 

Research and Development Expenses

 

Research and development expenses represent costs associated with the ongoing development of SMDCs and companion imaging agents and include salaries and employee benefits, supplies, facility costs related to research activities, and expenses for clinical trials. The Company records accruals for clinical trial expenses based on the estimated amount of work completed. The Company monitors patient enrollment levels and related activities to the extent possible through internal reviews, correspondence, and discussions with research organizations. In the event that a clinical trial is terminated early, the Company records, in the period of termination, an accrual for the estimated remaining costs to complete the trial.

 

Upfront payments made in connection with business collaborations and research and development arrangements are evaluated under ASC Subtopic 730-20, Research and Development Arrangements . Upfront payments made in connection with business development collaborations are expensed as research and development costs, as the assets acquired do not have alternative future use. Amounts related to future research and development are capitalized as prepaid research and development and are expensed over the service period based upon the level of services provided. As of March 31, 2017, the Company had approximately $0.6 million of capitalized research and development costs included in prepaid expenses.

 

Stock-Based Compensation

 

The Company accounts for its stock-based compensation pursuant to ASC Topic 718, Compensation —  Stock Compensation (“ASC 718”), which requires the recognition of the fair value of stock-based compensation in net income. Stock-based compensation consists of stock options, which are granted at exercise prices at or above the fair market value of the Company’s common stock on the dates of grant, service-based restricted stock units (“RSUs”), performance-based RSUs (“PRSUs”), and shares available for purchase under the Company’s 2010 Employee Stock Purchase Plan (“ESPP”). For PRSUs issued by the Company, stock-based compensation expense would be recognized if and when the Company determines that it is probable that the performance conditions will be achieved. For RSUs and stock options issued by the Company, stock-based compensation expense is recognized ratably over the service period. The Company recognizes compensation cost based on the grant-date fair value estimated in accordance with the provisions of ASC 718.

 

Net Loss Per Share

 

Basic net loss per share is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration for common stock equivalents. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common share equivalents outstanding for the period determined using the treasury-stock method and the if-converted method. For purposes of this calculation, stock options, warrants, PRSUs, RSUs and shares to be purchased under the ESPP 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.

 

8


 

 

Common stock equivalents   

 

As of March 31, 2016 and 2017, the following number of potential common stock equivalents were outstanding:

 

 

 

 

 

 

 

 

 

As of March 31, 

 

 

    

2016

    

2017

    

Outstanding common stock options

 

6,479,347

 

6,860,968

 

Outstanding warrants

 

34,647

 

34,647

 

Outstanding PRSUs

 

213,758

 

 —

 

Outstanding RSUs

 

469,705

 

616,912

 

Shares to be purchased under the ESPP

 

29,651

 

30,121

 

Total

 

7,227,108

 

7,542,648

 

 

These common stock equivalents were excluded from the determination of diluted net loss per share due to their anti-dilutive effect on earnings.

 

3. New Accounting Pronouncements

 

Recently Issued Accounting Standards

 

In March 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-09, Improvements to Employee Share-Based Payment Accounting , an update to ASC Topic 718, Stock Compensation . This guidance involves improving several aspects of the accounting for share-based payment transactions, including classification of awards as either equity or liabilities, classification on the statement of cash flows, the method of accounting for forfeitures and requiring entities to recognize all income tax effects of awards in the income statement when the awards vest or are settled. This update was effective for the Company for interim and annual reporting periods beginning January 1, 2017. In the three months ended March 31, 2017, the Company adopted this guidance using the modified retrospective method. As a result, the Company has elected to account for forfeitures as they occur and no longer estimates the number of awards expected to be forfeited. The cumulative effect related to the change in accounting for forfeitures was a $0.3 million increase to the opening balance of retained deficit at January 1, 2017. Additionally, as a result of the adoption, the Company recognized the excess tax benefits of awards that have vested or settled that had previously not been recognized as the related tax deduction had increased the Company’s net operating loss carryforward. The Company determined, consistent with its accounting for existing net operating losses, that a full valuation allowance was required for the excess tax benefits. As such, the Company recognized an increase in its net operating loss carryforward deferred tax asset of $1.7 million and the valuation allowance against the net operating loss carryforward was also increased by $1.7 million, which resulted in no impact to the financial statements. The adoption of this guidance did not have a material impact on the Company’s financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases , an update to ASC Topic 842, Leases . This guidance requires lessees to recognize leases as assets and liabilities on their balance sheets but recognize expenses on their income statements in a manner similar to the current accounting guidance. For lessors, the guidance also modifies the classification criteria and the accounting for sales-type and direct finance leases. This update is effective for the Company for interim and annual reporting periods beginning January 1, 2019 unless it elects early adoption. The Company is currently evaluating the impact, if any, the adoption of this guidance will have on its financial statements.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), to clarify the principles used to recognize revenue for all entities. Under ASU 2014-09, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In order to do so, an entity would follow the five-step process for in-scope transactions: 1) identify the contract with a customer, 2) identify the separate performance obligations in the contract, 3) determine the transaction price, 4) allocate the transaction price to the separate performance obligations in the contract, and 5) recognize revenue when (or as) the entity satisfies a performance obligation. In August 2015, the FASB issued ASU 2015-14, which defers the effective date of ASU 2014-09 by one year. Therefore, ASU 2014-09 will become effective for the Company for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, but not any earlier than the original effective date of December 15, 2016. An entity can apply the new revenue standard retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial

9


 

 

application in retained earnings. In April 2016, the FASB issued ASU 2016-10, an update to Topic 606, which clarifies how entities should identify performance obligations and evaluate licensing. In May 2016, the FASB issued ASU 2016-12, an update to Topic 606, which clarifies guidance on transition, collectability, noncash consideration and the presentation of sales and other similar taxes. In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which affects narrow aspects of the guidance issued in ASU 2014-09. The Company is currently evaluating the impact, if any, the adoption of this guidance will have on its financial statements.

 

4. Other Comprehensive Income (Loss)

 

The following tables summarize the accumulated balances related to each component of other comprehensive income (loss) for the three months ended March 31, 2016 and 2017:

 

 

 

 

 

 

 

 

 

 

 

    

    

 

 

    

Accumulated

 

 

 

 

Unrealized Net

 

Other

 

 

 

 

Gains (Losses)

 

Comprehensive

 

 

 

 

on Securities

 

Gains (Losses)

 

Balance at December 31, 2015

 

 

$

(79,399)

 

$

(79,399)

 

Unrealized gain

 

 

 

110,136

 

 

110,136

 

Net amount reclassified to net loss

 

 

 

 —

 

 

 —

 

Other comprehensive income

 

 

 

110,136

 

 

110,136

 

Balance at March 31, 2016

 

 

$

30,737

 

$

30,737

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

 

 

    

Accumulated

 

 

 

 

Unrealized Net

 

Other

 

 

 

 

Losses on

 

Comprehensive

 

 

 

 

Securities

 

Losses

 

Balance at December 31, 2016

 

 

$

(41,196)

 

$

(41,196)

 

Unrealized loss

 

 

 

(12,681)

 

 

(12,681)

 

Net amount reclassified to net loss

 

 

 

 —

 

 

 —

 

Other comprehensive loss

 

 

 

(12,681)

 

 

(12,681)

 

Balance at March 31, 2017

 

 

$

(53,877)

 

$

(53,877)

 

 

 

 

5. Investments

 

The Company applies the fair value measurement and disclosure provisions of ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820, which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. Investments consist primarily of investments with original maturities greater than three months, but no longer than 24 months when purchased.

 

ASC 820 establishes a three-level valuation hierarchy for fair value measurements. These valuation techniques are based upon the transparency of inputs (observable and unobservable) to the valuation of an asset or liability as of the measurement date. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs create the following fair value hierarchy:

 

Level 1 — Valuation is based on quoted prices for identical assets or liabilities in active markets.

 

Level 2 — Valuation is based on quoted prices for similar assets or liabilities in active markets, or other inputs that are observable for the asset or liability, either directly or indirectly, for the full term of the financial instrument.

 

Level 3 — Valuation is based upon other unobservable inputs that are significant to the fair value measurement.

 

The fair value of the Company’s fixed income securities is based on a market approach using quoted market values.

 

10


 

 

The following table summarizes the fair value of cash and cash equivalents and investments as of December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

    

Fair Value

 

Description

 

Cost

 

Level 1

 

Level 2

 

(Carrying Value)

 

Cash

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

6,249,703

 

$

6,249,703

 

$

 —

 

$

6,249,703

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

FDIC insured deposits and money market funds

 

 

24,978,489

 

 

24,978,489

 

 

 —

 

 

24,978,489

 

Cash and cash equivalents

 

$

31,228,192

 

$

31,228,192

 

$

 —

 

$

31,228,192

 

Short-term investments (due within 1 year)

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government treasury obligations

 

$

86,078,622

 

$

86,053,755

 

$

 —

 

$

86,053,755

 

Corporate obligations

 

 

20,941,799

 

 

 —

 

 

20,925,469

 

 

20,925,469

 

Total short-term investments

 

$

107,020,420

 

$

86,053,755

 

$

20,925,469

 

$

106,979,224

 

 

 

The following table summarizes the fair value of cash and cash equivalents and investments as of March 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

    

Fair Value

 

Description

 

Cost

 

Level 1

 

Level 2

 

(Carrying Value)

 

Cash

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

4,947,113

 

$

4,947,113

 

$

 —

 

$

4,947,113

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

FDIC insured deposits and money market funds

 

 

28,713,805

 

 

28,713,805

 

 

 —

 

 

28,713,805

 

Cash and cash equivalents

 

$

33,660,918

 

$

33,660,918

 

$

 —

 

$

33,660,918

 

Short-term investments (due within 1 year)

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government treasury obligations

 

$

70,047,072

 

$

69,996,135

 

$

 —

 

$

69,996,135

 

Corporate obligations

 

 

23,908,041

 

 

 —

 

 

23,905,101

 

 

23,905,101

 

Total short-term investments

 

$

93,955,113

 

$

69,996,135

 

$

23,905,101

 

$

93,901,236

 

 

 

All securities held at December 31, 2016 and March 31, 2017, were classified as available-for-sale as defined by ASC 320.

 

Total unrealized gross gains were $8,257 and $805 as of December 31, 2016 and March 31, 2017, respectively. Total unrealized gross losses were $49,453 and $54,682 as of December 31, 2016 and March 31, 2017, respectively. The Company does not consider any of the unrealized losses to be other-than-temporary impairments because the Company has the intent and ability to hold investments until they recover in value. There were no total realized gross gains or total realized gross losses for the three months ended March 31, 2016 or March 31, 2017.

 

6. Collaborations

 

NMP License and Commercialization Agreement

 

In August 2013, the Company entered into a license and commercialization agreement with Nihon Medi-Physic Co., LTD. (“NMP”) that grants NMP the right to develop and commercialize etarfolatide in Japan for use in connection with vintafolide in Japan. The Company received a $1.0 million non-refundable upfront payment, is eligible for up to $4.5 million based on the successful achievement of regulatory goals for etarfolatide in five different cancer indications and is eligible to receive double-digit percentage royalties on sales of etarfolatide in Japan.

 

For revenue recognition purposes, the Company viewed the agreement with NMP as a multiple element arrangement. Multiple element arrangements are analyzed to determine whether the various performance obligations, or elements, can be separated or whether they must be accounted for as a single unit of accounting. The Company has identified the deliverables related to the collaboration with NMP, which include the license granted to NMP, as well as the obligation to provide pre-clinical and clinical supply of etarfolatide, to provide rights to NMP if a product is developed that replaces etarfolatide, the obligation for the Company to provide clinical data to NMP during the contract

11


 

 

period and the coordination of development and commercialization efforts between the Company for vintafolide and NMP for etarfolatide in Japan. The Company’s deliverables will be accounted for as a single unit of account, therefore the non-refundable upfront payment is being recognized on a straight-line basis over the performance period. This determination was made because the successful development of etarfolatide in Japan requires the ongoing participation by the Company, including the development of the related therapeutic drug, vintafolide. The performance period over which the revenue will be recognized continues from the date of execution of the agreement through the end of 2033, the estimated termination date of the contract which is when the Company’s performance obligations will be completed. Any significant changes in the timing of the performance period could result in a change in the revenue recognition period. The Company had deferred revenue related to the agreement of approximately $0.8 million at March 31, 2017. Subsequent to the inception of the NMP arrangement, the Company evaluates the remaining deliverables for separation as items in the arrangement are delivered.

 

The arrangement with NMP includes milestone payments of up to approximately $4.5 million and the milestones are based on the commencement of clinical trials in Japan for specific and non-specific indications and filing for approval in Japan for specific and non-specific indications. The Company evaluated each of these milestone payments and believes that all of the milestones are substantive as there is substantial performance risk that must occur in order for them to be met because the Company must complete additional clinical trials which show a positive outcome or receive approval from a regulatory authority and would be commensurate with the enhancement of value of the underlying intellectual property. To date, the products have not been approved in Japan and no revenue has been recognized related to the regulatory milestones or royalties as continued development of vintafolide is still an opportunity that the Company could pursue in the future.

 

NMP has the right to terminate the collaboration agreement on 90 days notice prior to the first commercial sale in Japan and six months notice after the first commercial sale in Japan. NMP also has the right to terminate the agreement on six months notice if the Company fails to launch vintafolide after receiving regulatory approval in Japan. NMP and the Company each have the right to terminate the agreement due to the material breach or insolvency of the other party. Upon termination of the agreement depending on the circumstances, the parties have varying rights and obligations with respect to licensing and related regulatory materials and data.

 

7. Stockholders’ Equity (Deficit)

 

Stock-Based Compensation Plans

 

The Company has had stock-based compensation plans since 1997. The awards made under the plans adopted in 1997 and 2007 consisted of stock options. The 2010 Equity Incentive Plan (the “2010 Plan”), which is the only plan under which awards may currently be made, authorizes awards in the form of stock options, stock appreciation rights, restricted stock, RSUs, PRSUs and performance units and performance shares. Awards under the 2010 Plan may be made to employees, directors and certain consultants as determined by the compensation committee of the board of directors. There were 11,003,563 and 11,850,563 shares of common stock authorized and reserved under these plans at December 31, 2016 and March 31, 2017, respectively.

 

Stock Options

 

Under the various plans, employees have been granted incentive stock options, while directors and consultants have been granted non-qualified options. The plans allow the holder of an option to purchase common stock at the exercise price, which was at or above the fair value of the Company’s common stock on the date of grant.

 

Generally, options granted under the 1997 and 2007 plans in connection with an employee’s commencement of employment vested over a four-year period with one-half of the shares subject to the grant vesting after two years of employment and remaining options vesting monthly over the remainder of the four-year period. Options granted under the 1997 and 2007 plans for performance or promotions vested monthly over a four-year period. Generally, options granted under the 2010 Plan vest annually over a three-year or four-year period. Unexercised stock options terminate on the tenth anniversary date after the date of grant. The Company recognizes stock-based compensation expense over the requisite service period of the individual grantees, which generally equals the vesting period. The Company utilizes a Black-Scholes option-pricing model to estimate the value of stock options. The Black-Scholes model allows the use of a range of assumptions related to volatility, risk-free interest rate, employee exercise behavior and dividend yield.

12


 

 

Expected volatilities used in the model beginning in 2015 were based on historical volatility of the Company’s stock prices.

 

The Company is using the “simplified” method for “plain vanilla” options to estimate the expected term of the stock option grants. Under this approach, the weighted-average expected life is presumed to be the average of the vesting term and the contractual term of the option. The risk-free interest rate assumption is derived from the weighted-average yield of a U.S. Treasury security with the same term as the expected life of the options, and the dividend yield assumption is based on historical experience and the Company’s estimate of future dividend yields.

 

The weighted-average value of the individual options granted during the three months ended March 31, 2016 and 2017 were determined using the following assumptions:

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

 

    

2016

    

2017

    

    

Expected volatility

 

99.37

%  

93.02

%

 

Risk-free interest rate

 

1.46

%  

2.12

%

 

Weighted-average expected life (in years)

 

6.3

 

6.3

 

 

Dividend yield

 

0.00

%  

0.00

%

 

 

The Company’s stock option activity and related information are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-Average

 

 

 

 

 

 

 

 

 

 

 

Remaining

 

 

 

 

 

 

 

 

Weighted-Average

 

Contractual Term

 

Aggregate

 

 

    

Options

    

Exercise Price

    

(In Years)

    

Intrinsic Value

 

Outstanding at January 1, 2017

 

6,447,594

 

$

6.41

 

 

 

 

 

 

Granted during period

 

653,842

 

 

2.17

 

 

 

 

 

 

Exercised during period

 

(7,757)

 

 

2.10

 

 

 

 

 

 

Expired during period

 

(163,836)

 

 

8.82

 

 

 

 

 

 

Forfeited during period

 

(68,875)

 

 

5.59

 

 

 

 

 

 

Outstanding at March 31, 2017

 

6,860,968

 

$

5.96

 

6.27

 

$

282,786

 

Exercisable at March 31, 2017

 

5,085,833

 

$

6.72

 

5.33

 

$

29,895

 

 

As of March 31, 2017, the total remaining unrecognized compensation cost related to stock options granted was $4.4 million, which is expected to be recognized over a weighted average period of approximately 1.6 years.

 

Restricted Stock Units

 

In May 2011, the Company adopted and granted awards under a performance-based RSU program (the “2011 PRSU Program”) under the 2010 Plan. All PRSU awards expired in the second quarter of 2016 when the performance deadline of May 26, 2016 passed.

 

RSUs are service-based awards that will vest and be paid in the form of one share of the Company’s common stock for each RSU, generally in three or four equal annual installments beginning on the first anniversary of the date of grant of an RSU. As of March 31, 2017, the Company had 616,912 RSU awards outstanding. As of March 31, 2017, the total remaining unrecognized compensation cost related to RSUs was $1.7 million, which is expected to be recognized over a weighted average period of approximately 1.8 years.

 

The following table sets forth the number of RSUs that were granted, vested and forfeited in the period indicated:

 

 

 

 

 

 

 

 

 

    

Restricted

    

Weighted-Average

 

 

 

Stock

 

Grant 

 

 

 

 Units

 

Date Fair Value

 

Outstanding at January 1, 2017

 

394,132

 

$

4.96

 

Granted during period

 

367,985

 

 

2.17

 

Vested during period

 

(128,225)

 

 

5.77

 

Forfeited during period

 

(16,980)

 

 

3.50

 

Outstanding at March 31, 2017

 

616,912

 

$

3.17

 

13


 

 

 

Employee Stock Purchase Plan

 

At January 1, 2017, 825,154 common shares were available for issuance under the ESPP. Shares may be issued under the ESPP twice a year. There were no purchases in the three months ended March 31, 2017. At March 31, 2017, there were 825,154 common shares available for issuance under the ESPP.

 

8. Income Taxes

 

The Company accounts for income taxes under the liability method in accordance with the provisions of ASC Topic 740, Income Taxes . The Company recognizes future tax benefits, such as net operating losses, to the extent those benefits are expected to be realized in future periods. Due to uncertainty surrounding the realization of its deferred tax assets, the Company has recorded a valuation allowance against its net deferred tax assets. The Company experienced a change in ownership as defined under Section 382 of the U.S. Internal Revenue Code in August 2011. As a result, the future use of its net operating losses and credit equivalents is currently limited to approximately $218.7 million for 2017. Any available but unused amounts will become available for use in all successive years, subject to certain limitations. Utilization of these net operating loss carryforwards would require the Company to generate future taxable income prior to their expiration. Furthermore, the utilization of the net operating loss carryforwards could be limited beyond the Company's generation of taxable income if an additional change in the underlying ownership of the Company's common stock has occurred, resulting in a limitation on the amounts that could be utilized in any given period under Section 382 of the Code.

 

 

14


 

 

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

 

This quarterly report on Form 10-Q contains certain statements that are forward-looking statements within the meaning of federal securities laws. When used in this report, the words “may,” “will,” “should,” “could,” “would,” “anticipate,” “estimate,” “expect,” “plan,” “believe,” “predict,” “potential,” “project,” “target,” “forecast,” “intend” and similar expressions are intended to identify forward-looking statements. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include the important risks and uncertainties that may affect our future operations as discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and any other filings made with the Securities and Exchange Commission. Readers of this report are cautioned not to place undue reliance on these forward-looking statements. While we believe the assumptions on which the forward-looking statements are based are reasonable, there can be no assurance that these forward-looking statements will prove to be accurate. This cautionary statement is applicable to all forward-looking statements contained in this report.

 

Overview

 

We are a biopharmaceutical company developing targeted therapies for the treatment of cancer and inflammatory diseases. We use our proprietary technology to create novel small molecule drug conjugates, or SMDCs, and companion imaging agents. Our SMDCs actively target receptors that are over-expressed on diseased cells, relative to healthy cells. This targeted approach is designed to enable the treatment of patients with highly active drugs at greater doses, delivered more frequently, and over longer periods of time than would be possible with the untargeted drug alone. We are also developing companion imaging agents for each of our SMDCs that are designed to identify the patients whose disease over-expresses the target of the therapy and who are therefore most likely to benefit from treatment. This combination of an SMDC with a companion imaging agent is designed to personalize the treatment of patients by delivering effective therapy, selectively to diseased cells, in the patients most likely to benefit. This approach is designed to yield multiple drug candidates that could treat disease through the following multiple mechanisms: by direct and targeted killing of diseased cells, by killing tumor-associated macrophages, or TAMs, which otherwise inhibit the immune system, or by activating the immune system directly by combining SMDCs with checkpoint inhibitors or our chimeric antigen receptor T-cell (CAR T-cell) immunotherapy approach.

 

For the three months ended March 31, 2017, we had a net loss of $11.5 million compared to a net loss of $10.2 million for the three months ended March 31, 2016. We had a retained deficit of $265.4 million at March 31, 2017. We expect to continue to incur significant operating losses for the next several years as we pursue the advancement of our SMDCs and companion imaging agents through the research, development, regulatory and commercialization processes. Our operating costs were higher for the three months ended March 31, 2017 compared to the three months ended March 31, 2016 primarily as a result of increases in trial and manufacturing expense for EC1169, research and development expenses related to the development of EC2629, our folate-pro pyrrolobenzodiazepine, or pro-PBD, DNA crosslinker drug and other pre-clinical work and general research, and trial expense for EC1456, which were partially offset by a decrease in compensation expense.

 

Research and development expenses relating to EC1169, our first non-folate SMDC, increased in the three months ended March 31, 2017 compared to the three months ended March 31, 2016, as we continued to enroll patients in a phase 1b trial to evaluate EC1169 in up to 100 taxane-exposed and taxane-naïve metastatic castration-resistant prostate cancer, or mCRPC, patients at a maximum clinical once per week dose of 6.5 mg/m 2 . We have developed a companion imaging agent, EC0652, to scan patients prior to therapy to identify the presence of prostate-specific membrane antigen, or PSMA. Patients are scanned with EC0652, and while we are not limiting enrollment based on the results of the scan, the primary endpoints of the trial are to be assessed in PSMA-positive patients. To date, EC0652 has shown the presence of PSMA in at least one lesion in all prostate cancer patients scanned, but variability in the intensity of PSMA presence allows for selection criteria designed to enrich the patient population. The primary endpoint of this expansion phase is radiographic progression-free survival, or rPFS, with a target of five months for taxane-naïve mCRPC patients and three months for taxane-exposed mCRPC patients, and the secondary endpoints, which will provide earlier insight into drug activity, include overall response rates as measured by Response Evaluation Criteria in Solid Tumors, or RECIST, 1.1 and prostate-specific antigen, or PSA. We expect to provide safety and efficacy data updates regarding the phase 1b trial in the second quarter of 2017. Enrollment in an EC1169 receptor occupancy study is expected to begin in 2017 which is designed to provide insight into the drug’s interaction with the target receptor. Data regarding the EC1169 receptor occupancy study is expected in the second half of 2017.

 

15


 

 

Research and development expenses relating to EC1456, our second generation SMDC, were slightly higher for the three months ended March 31, 2017 compared to the three months ended March 31, 2016 as we continued to enroll select folate receptor positive, or FR-positive, patients as determined by an etarfolatide scan in a phase 1b trial to evaluate EC1456 in up to 40 patients with non-small cell lung cancer, or NSCLC, at the maximum clinical dose of 6.0 mg/m 2 for a twice per week dosing schedule. Patients included in this expansion phase of the trial will have received first-line chemotherapy and may have also been treated with anti-programmed cell death-1 receptor, or anti-PD-1, therapy. We have also recently completed enrollment of a more frequent dosing schedule, four times per week, in indications that are typically FR-positive, such as ovarian and endometrial cancers. EC1456 has progressed in the phase 1 trial to a dose that exceeds the dose of vintafolide delivered in trials to date. In the phase 1b trial, we will evaluate single agent tumor response in NSCLC, which will inform future development. We expect to provide safety and efficacy data updates for EC1456 in the second quarter of 2017. We are also currently conducting an ovarian cancer surgical study to characterize EC1456 at the tumor level through a multifaceted analysis of collected tissue samples after administration of the drug.

 

As of March 31, 2017, our cash, cash equivalents and investments were $127.6 million. We believe that our current cash balance will be sufficient to fund our current operating plan, including the advancement of our pipeline.

 

Critical Accounting Policies

 

Our significant accounting policies are described in more detail in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. Other than the adoption of ASU 2016-09 effective January 1, 2017 as discussed in Note 3 – New Accounting Pronouncements of the Notes to Condensed Financial Statements contained in Part I, Item 1 herein, there were no changes in the three months ended March 31, 2017 to the application of the accounting policies that are critical to the judgments and estimates used in the preparation of our condensed financial statements.

16


 

 

 

Results of Operations

 

Comparison of Three Months Ended March 31, 2016 to Three Months Ended March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

Increase/

   

%   Increase/

 

 

 

 

2016

 

2017

 

(Decrease)

 

(Decrease)

 

 

 

 

(In thousands)

 

 

Statement of operations data:

    

 

 

    

 

  

    

 

  

 

    

  

 

    

Collaboration revenue

 

$

12

 

$

12

 

$

 —

 

 

 —

 

 

Operating expenses:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

Research and development

 

 

6,531

 

 

7,994

 

 

1,463

 

 

22

%

 

General and administrative

 

 

3,820

 

 

3,745

 

 

(75)

 

 

(2)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

 

10,351

 

 

11,739

 

 

1,388

 

 

13

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(10,339)

 

 

(11,727)

 

 

(1,388)

 

 

(13)

%

 

Interest income, net

 

 

189

 

 

235

 

 

46

 

 

24

%

 

Other income (expense), net

 

 

(3)

 

 

 3

 

 

 6

 

 

200

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(10,153)

 

$

(11,489)

 

$

(1,336)

 

 

(13)

%

 

 

 

Revenue

 

Our revenue of $12,500 in the three months ended March 31, 2017 and the three months ended March 31, 2016 related to the amortization of the $1.0 million non-refundable upfront payment from Nihon Medi-Physic Co., LTD, or NMP.

 

Research and Development

 

The increase in research and development expenses for the three months ended March 31, 2017 compared to the three months ended March 31, 2016 was primarily attributable to an increase of $1.0 million related to the phase 1 trial and manufacturing expense for EC1169, an increase of $0.5 million related to the development of EC2629, an increase of $0.5 million related to other pre-clinical work and general research, and an increase of $0.2 million related to the phase 1 trial expense for EC1456, which were partially offset by a decrease of $0.7 million related to non-cash stock-based compensation expense.

 

Included in research and development expenses were stock-based compensation charges of $1.4 million and $0.7 million for the three months ended March 31, 2016 and 2017, respectively.

 

Research and development expenses included expenses of $0.3 million for each of three months ended March 31, 2016 and 2017, for company-funded research at Purdue University, the primary employer of our Chief Science Officer.

 

General and Administrative

 

General and administrative expenses decreased slightly in the three months ended March 31, 2017 compared to the three months ended March 31, 2016 primarily due to a $0.4 million decrease in compensation expense, of which $0.3 million related to stock-based compensation, which was partially offset by an increase of $0.3 million in professional fees.

 

Included in general and administrative expenses were stock-based compensation charges of $0.7 million and $0.4 million for the three months ended March 31, 2016 and 2017, respectively.

 

17


 

 

Interest Income, Net

 

The increase in interest income, net in the three months ended March 31, 2017 compared to the three months ended March 31, 2016 resulted from an increase of $101,000 in the interest rate yield during the three months ended March 31, 2017 as compared to the three months ended March 31, 2016, partially offset by a decrease of $55,000 due to the lower average short-term investment balances. There were no long-term investment balances at March 31, 2016 or 2017.

 

Liquidity and Capital Resources

 

We have funded our operations principally through sales of equity and debt securities, revenue from strategic collaborations, grants, and loans. As of March 31, 2017, we had cash, cash equivalents and investments of $127.6 million. The following table sets forth the primary sources and uses of cash for each of the periods set forth below:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

 

2016

 

2017

 

 

 

 

(in thousands)

 

Net cash used in operating activities

    

$

(10,136)

    

$

(10,483)

    

Net cash provided by investing activities

 

 

34,876

 

 

12,993

 

Net cash used in financing activities

 

 

(15)

 

 

(77)

 

Net increase in cash and cash equivalents

 

$

24,725

 

$

2,433

 

 

Operating Activities

 

The cash used in operating activities for the three months ended March 31, 2016 and 2017 primarily resulted from our net loss adjusted for non-cash items and changes in operating assets and liabilities.

 

Investing Activities

 

The cash provided by investing activities during each of the three months ended March 31, 2016 and 2017 was due to the net result of maturities and purchases of investments, which was partially offset by capital expenditures for equipment of $36,000 and $30,000, respectively.

 

Financing Activities

 

The cash used in financing activities during the three months ended March 31, 2016 and 2017 consisted of stock repurchases for RSUs that vested during the period, which was partially offset by proceeds from the exercise of stock options.

 

Operating Capital Requirements

 

We anticipate that we will continue to incur significant operating losses for the next several years as we pursue the advancement of our SMDCs and companion imaging agents through the research, development, regulatory and, potentially, the commercialization processes.

 

As of March 31, 2017, our cash, cash equivalents and investments were $127.6 million. We believe that our current cash balance will be sufficient to fund our current operating plan, including the advancement of our pipeline.

 

Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical products, we are unable to estimate the exact amounts of our working capital requirements. Our future funding requirements will depend on many factors, including but not limited to:

 

·

the number and characteristics of the SMDCs and companion imaging diagnostics we pursue;

 

·

the scope, progress, results and costs of researching and developing our SMDCs and companion imaging diagnostics and conducting pre-clinical and clinical trials;

18


 

 

 

·

the timing of, and the costs involved in, obtaining regulatory approvals for our SMDCs and companion imaging diagnostics;

 

·

the cost of commercialization activities if any of our SMDCs and companion imaging diagnostics are approved for sale, including marketing sales and distribution costs;

 

·

the cost of manufacturing any SMDCs and companion imaging diagnostics we successfully commercialize;

 

·

the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims, including litigation costs and the outcome of such litigation; and

 

·

the timing, receipt and amount of sales of, or royalties on, our SMDCs and companion imaging diagnostics, if any.

 

If our available cash, cash equivalents and investments are insufficient to satisfy our liquidity requirements, or if we develop additional opportunities to pursue, we may seek to sell additional equity or debt securities or obtain new loans or credit facilities. The sale of additional equity securities may result in additional dilution to our stockholders. If we raise additional funds through the issuance of debt securities or convertible preferred stock, these securities may have rights senior to those of our common stock and could contain covenants that would restrict our operations. We may require additional capital beyond our currently forecasted amounts. Any such required additional capital may not be available on reasonable terms, if at all. If we were unable to obtain additional financing, we may be required to reduce the scope of, delay or eliminate some or all of our planned research, development and commercialization activities, which could harm our business.

 

Contractual Obligations and Commitments

 

There have been no significant changes during the three months ended March 31, 2017 to the items that we disclosed as our contractual obligations and commitments in our Form 10-K for the year ended December 31, 2016.

 

Off-Balance Sheet Arrangements

 

None.

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

 

We are exposed to market risk related to changes in interest rates. As of March 31, 2017, we had cash, cash equivalents and investments of $127.6 million. The investments consisted of U.S. government money market funds, U.S. Treasuries, U.S. corporate debt securities and cash equivalents. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates. Our short-term investments are subject to interest rate risk and will fall in value if market interest rates increase. Due to the short-term duration of our investment portfolio and the low risk profile of our investments, an immediate 10 percent change in interest rates would not have a material effect on the fair market value of our portfolio. We have the ability to hold our short-term investments until maturity, and therefore we do not expect that our results of operations or cash flows would be adversely affected by any change in market interest rates on our investments. We carry our investments based on publicly available information. We do not currently have any investment securities for which a market is not readily available or active.

 

We do not believe that any credit risk is likely to have a material impact on the value of our assets and liabilities.

 

Item 4.  Controls and Procedures

 

Conclusion Regarding Effectiveness of Disclosure Controls and Procedures

 

Our management, with the participation of our principal executive officer and principal financial officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures. Based on that evaluation, our principal executive officer and principal financial officer concluded that

19


 

 

our disclosure controls and procedures as of such date are effective at the reasonable assurance level in ensuring that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting

 

There has been no change in our internal control over financial reporting during the three months ended March 31, 2017, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

20


 

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

None.

 

Item 1A. Risk Factors

 

You should carefully consider the risks and uncertainties we describe in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 before deciding to invest in, or retain, shares of our common stock. Additional risks and uncertainties not presently known to us or that are currently not believed to be significant to our business may also affect our actual results and could harm our business, financial condition, results of operations, cash flows or stock price. If any of these risks or uncertainties actually occurs, our business, financial condition, results of operations, cash flows or stock price could be materially and adversely affected. There have been no material changes to the risk factors discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

 

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

 

Unregistered Sales of Securities

 

None.

 

Item 6. Exhibits

 

See the Exhibit Index following the signature page to this Quarterly Report on Form 10-Q.

21


 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

 

 

 

 

 

ENDOCYTE, INC.

 

 

 

 

 

 

Date: May 10, 2017

By:

 /s/ Michael A. Sherman

 

 

Michael A. Sherman

 

 

President and Chief Executive Officer

 

 

(Principal Executive Officer)

 

 

 

Date: May 10, 2017

By:

 /s/ Michael T. Andriole

 

 

Michael T. Andriole

 

 

Chief Financial Officer

 

 

(Principal Financial Officer)

 

Date: May 10, 2017

By:

 /s/ Beth A. Taylor

 

 

Beth A. Taylor

 

 

Vice President of Finance and Chief Accounting Officer

 

 

 

(Principal Accounting Officer)

 

 

 

 

22


 

 

EXHIBIT INDEX

 

 

 

 

Exhibit

 

 

Number

    

Description

 

 

 

3.1

 

 

 

Amended and Restated Certificate of Incorporation of Endocyte, Inc. (incorporated by reference from Exhibit 3.1 to Annual Report on Form 10-K for the year ended December 31, 2010 filed March 18, 2011).

 

3.2

 

Amended and Restated Bylaws of Endocyte, Inc. (incorporated by reference to Exhibit 3.2 to Annual Report on Form 10-K for the year ended December 31, 2010 filed March 18, 2011).

 

10.1

*

Amendments #14 through #19 to the Amended and Restated Exclusive License Agreement dated October 21, 1998 between Endocyte, Inc. and Purdue Research Foundation, as amended.

10.2

 

Second amendment to the Exclusive License Agreement effective March 1, 2010 between Endocyte, Inc. and Purdue Research Foundation, as amended.

10.3

*

Amendments #1 through #8 to the Master License Agreement effective July 1, 2013 between Endocyte, Inc. and Purdue Research Foundation, as amended.

31.1

 

Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934 of the Chief Executive Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2

 

Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934 of the Chief Financial Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1

 

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101

 

The following materials from Endocyte, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, formatted in Extensible Business Reporting Language (XBRL) includes: (i) Condensed Balance Sheets at December 31, 2016 and March 31, 2017, (ii) Condensed Statements of Operations and Comprehensive Loss for the three months ended March 31, 2016 and 2017, (iii) Condensed Statement of Stockholders’ Equity (Deficit) for the three months ended March 31, 2017, (iv) Condensed Statements of Cash Flows for the three months ended March 31, 2016 and 2017 and (v) Notes to Condensed Financial Statements.

 

* Application has been made to the Securities and Exchange Commission to seek confidential treatment of certain provisions of this exhibit. Omitted material for which confidential treatment has been requested has been filed separately with the Securities and Exchange Commission.

 

 

23


Exhibit 10.1

 

CONFIDENTIAL TREATMENT REQUESTED

Portions of this Exhibit have been redacted pursuant to a request for confidential treatment under Rule 24b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended. Omitted information, marked “[*]” in this Exhibit, has been filed separately with the Securities and Exchange Commission together with such request for confidential treatment.

 

AMENDMENT #14

TO LICENSE AGREEMENT ID LA0003Endocyte

Between Purdue Research Foundation and Endocyte Corporation

 

THIS AMENDMENT, made and entered into this 30'" day of January, 20 I 5 ("Amendment Effective Date") amends the Amended and Restated License Agreement executed on October 21 st , 1998, and all subsequent Amendments (hereinafter AGREEMENT) between Purdue Research Foundation (hereinafter known as PRF) and Endocyte Corporation (hereinafter known as LICENSEE) with respect to the matters addressed in this Agreement.

 

NOW THEREFORE, the patties hereto do hereby agree as follows:

 

1.   The technology, "Folate-Based Chimeric Antigen Receptor (CAR) T-Cells as Anti-Cancer Therapeutics" PRF Reference No. 66212 is added to Append ix A of the AGREEMENT.

 

2.   The following Patents are added to Appendix A of the Agreement:

 

/

 

 

 

 

 

 

PRF Ref.

No.

Application #

Status

Type

Filing Date

Funding

66212-01

61/740,384

Converted

Provisional

12/20/2012

Endocyte

66212-02

PCT/US2013/076986

Published

PCT

12/20/2013

Endocyte

 

 

 

All other terms and conditions of the original agreement remain unchanged and in effect.

 

 

IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written.

 

 

 

Purdue Research Foundation Endocyte Corporation

 

[*] = Indicates confidential information omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

 


 

  By: __ /s/ Frank Razavi ____ By: __ /s/ P. Ron Ellis _____

 

 

  Frank Razavi P. Ron Ellis

  Acting Director, Corporate & New Ventures President/CEO

  OTC

 

 

  Date: _ 2-17-2015 _________ Date: _ 11 Feb 2015 ________

[*] = Indicates confidential information omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

 


 

 

 

 

AMENDMENT #15

TO LICENSE AGREEMENT ID LA0003Endocyte

 

Between Purdue Research Foundation and Endocyte Corporation

 

 

THIS AMENDMENT, made and entered into this 20 th day of May, 2015 ("Amendment Effective Date") amends the Amended and Restated License Agreement executed on October 21 st  , 1998, and all subsequent Amendments (hereinafter AGREEMENT) between Purdue Research Foundation (hereinafter known as PRF) and Endocyte Corporation (hereinafter known as LICENSEE) with respect to the matters addressed in this Agreement.

 

NOW THEREFORE, the parties hereto do hereby agree as follows:

 

l. The Eligible Disclosure, "Discovery of Synergy Between Folate-hapten Mediated

Immunotherapy and Receptor Tyrosine Kinase (rtk) Inhibitors for the Treatment of Cancers" PRF Reference No. 66939 is added to Appendix A of the AGREEMENT.

 

 

 

All other terms and conditions of the original agreement remain unchanged and in effect.

 

 

 

IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written.

 

 

 

Purdue Research Foundation Endocyte Corporation

 

 

By: ___ /s/ Chad A. Pittman __            By: __ /s/ P. Ron Ellis ________

 

 

Chad A. Pittman P. Ron Ellis

Vice President President/CEO

 

 

 

[*] = Indicates confidential information omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

 


 

 

Date: ___ 1 June 2015 ______ Date: ___ 29 May 2015 ______

[*] = Indicates confidential information omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

 


 

 

AMENDMENT #16

TO LICENSE AGREEMENT ID LA0003Endocyte

 

Between Purdue Research Foundation and Endocyte Corporation

 

THIS AMENDMENT, made and  entered  into thi 4 th  day of June, 2015 ("Amendment Effective Date")   amends  the Amended and Restated License Agreement executed on October 21 st ,  1998, and all subsequent  amendments (hereinafter AGREEMENT) between Purdue Research Foundation (hereinafter known as PRF) and Endocyte, Incorporated (hereinafter known as LICENSEE) with respect  to the  matters addressed in this agreement.

 

NOW THEREFORE, the parties hereto do hereby agree as follows:

 

1.   The Eligible Disclosures, "Endosomal Escape" PRF Reference No. 65668 and PRF Ref. No.

67126  "A  New Mechanism for Release of Endosomal Contents: Osmotic Disruption of Endosomes Via Nigericin-Mediated Potassium-Hydrogen Ion Exchange" have been combined and filed in US 62/159,659 and are added to Appendix A of  the  AGREEMENT.

 

 

 

 

All other terms and conditions of the original agreement  r emain  unchanged and in effect.

 

 

IN WITNESS WHEREOF,  the  parties hereto have executed this Amendment as of the date first above written.

 

 

 

Purdue Research Foundation Endocyte, Incorporated

 

    By: ___ /s/ Chad A. Pittman     By: ____ P. Ron Ellis ____

 

 

  Chad A. Pittman P. Ron Ellis

   Vice President President/CEO

 

 

   Date: __ July 28, 2015 _____ Date: ___ June 17, 2015 ______

[*] = Indicates confidential information omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

 


 

 

AMENDMENT #17

TO LICENSE AGREEMENT ID LA0003Endocyte

 

Between Purdue Research Foundation and Endocyte Corporation

 

THIS AMENDMENT,  made and en t ered into this 24 th   day of June, 2016  ("Amendment Effective  Date ")  amends  the  Amended and  Restated Lice n se  Agreement executed on October 21 s t,  1998 and  all  subsequent   Amendments  (herei n after  AGREEMENT)   between  Purdue Research  Foundation (hereinafter known as PRF) and Endocyte, Inc. (hereinafter known  as  LICENSEE)  with respect  to the  matters addressed in this Agreement.

 

NOW THEREFORE,  the parties hereto do hereby agree  as  fo ll ows:

 

1.    The following  Eligib l e D i sclosure  i added to  A ppendix  of the AGREEMENT:

 

 

 

Title of Eligib l e Disclosure:

[*]  

PRF Reference  N umb er for Elig i b l e Disclosure:

[*]

Contributors  of  the  Eligible  Disclosure:

[*]

 

 

2.   The following Licensed  Patents  are added  to  Appendix A of the Agreement:

 

 

 

 

 

 

 

 

 

 

PRF

Reference

No.

Title of App li cat i on

Seria Nu m ber

Invento r s

F ill ing Da t e

Count r y

Status

[*]

[*]  

[*]

[*]

[*]

[*]

[*]

[*] = Indicates confidential information omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

 


 

 

 

 

A ll  other terms  and  conditions of  t h e original agreement  r e main unchanged  and  in  effect.

 

 

 

 

 

 

IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the Amendment Effective Date.

 

 

Purdue  Research  Foundation Endocyte,  Inc.

 

 

By: ____ /s/ Emily G. Najem ____ By: __ /s/ Mike Sherman _______________

 

Name: _____ Emily G. Najem __________               Name: ___ Mike Sherman _______

 

Title: ______ Corporate Counsel _________ Title: ___ CEO ____

 

 

[*] = Indicates confidential information omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

 


 

 

AMENDMENT #18

TO LICENSE AGREEMENT ID LA0003Endocyte

 

Between Purdue Research Foundation and Endocyte Corporation

 

THIS AMENDMENT,  made  and entered into this 24th day of  June 20  1 ("Ame ndment  Effective Date")   amends the Amended and Restated License Agreement executed on October 21, 1 998, and all   subsequent Amendments (here i nafter AGREEMENT) between  Purdue  Research  Found ati on  (hereinafter known as  PRF)  and Endocyte,  Inc. (here i nafter known as  LICENSEE)  with  respect to  the  matt e r addressed  in thi Agreement.