ecyt_Current_Folio_10Q

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

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

 

For the quarterly period ended September 30, 2018

 

OR

 

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

For the transition period from            to            

 

Commission file number 001-35050   

 

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

 

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

 

 

 

 

 

 

 

 

 

Large accelerated filer ◻

    

Accelerated filer ☑

    

Non-accelerated filer ◻

    

Smaller reporting company ◻

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 October 26, 2018: 82,088,638

 

 


 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

ENDOCYTE, INC.

 

CONDENSED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

 

 

December 31, 

 

September 30, 

 

 

    

2017

    

2018

 

Assets

 

 

 

 

 

(unaudited)

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

18,559,130

 

$

67,268,340

 

Short-term investments

 

 

78,912,297

 

 

276,942,151

 

Receivables

 

 

273,044

 

 

48,164

 

Prepaid expenses

 

 

751,255

 

 

1,552,085

 

Other assets

 

 

77,077

 

 

5,500,614

 

Total current assets

 

 

98,572,803

 

 

351,311,354

 

Property and equipment, net

 

 

2,182,399

 

 

1,556,314

 

Other noncurrent assets

 

 

7,067

 

 

2,336,637

 

Total assets

 

$

100,762,269

 

$

355,204,305

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

376,394

 

$

1,095,064

 

Accrued wages and benefits

 

 

2,533,133

 

 

2,884,474

 

Accrued clinical trial expenses

 

 

689,985

 

 

1,512,346

 

Accrued expenses and other liabilities

 

 

946,668

 

 

2,182,883

 

Total current liabilities

 

 

4,546,180

 

 

7,674,767

 

Deferred revenue, net of current portion

 

 

731,944

 

 

332,945

 

Total liabilities

 

 

5,278,124

 

 

8,007,712

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock: $0.001 par value, 100,000,000 shares authorized; 48,203,529 and 81,323,300 shares issued and outstanding at December 31, 2017 and September 30, 2018

 

 

48,204

 

 

81,323

 

Additional paid-in capital

 

 

404,454,909

 

 

688,527,897

 

Accumulated other comprehensive loss

 

 

(64,433)

 

 

(22,684)

 

Retained deficit

 

 

(308,954,535)

 

 

(341,389,943)

 

Total stockholders’ equity

 

 

95,484,145

 

 

347,196,593

 

Total liabilities and stockholders’ equity

 

$

100,762,269

 

$

355,204,305

 

 

See accompanying notes.

 

 

2


 

 

ENDOCYTE, INC.

 

CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

 

 

2017

 

2018

 

2017

 

2018

 

 

 

(unaudited)

 

(unaudited)

 

Revenue:

    

 

 

    

 

 

    

 

 

    

 

 

    

Collaboration revenue

 

$

32,500

 

$

85,855

 

$

57,500

 

$

116,175

 

Total revenue

 

 

32,500

 

 

85,855

 

 

57,500

 

 

116,175

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

4,089,677

 

 

8,856,028

 

 

20,739,170

 

 

21,735,588

 

General and administrative

 

 

3,011,176

 

 

4,788,918

 

 

10,061,722

 

 

13,198,445

 

Acquired in-process research and development

 

 

16,493,132

 

 

 —

 

 

16,493,132

 

 

 —

 

Total operating expenses

 

 

23,593,985

 

 

13,644,946

 

 

47,294,024

 

 

34,934,033

 

Loss from operations

 

 

(23,561,485)

 

 

(13,559,091)

 

 

(47,236,524)

 

 

(34,817,858)

 

Other income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income, net

 

 

264,932

 

 

959,092

 

 

734,065

 

 

2,092,397

 

Other income (expense), net

 

 

29,735

 

 

(7,526)

 

 

2,328

 

 

(49,353)

 

Net loss

 

 

(23,266,818)

 

 

(12,607,525)

 

 

(46,500,131)

 

 

(32,774,814)

 

Net loss per share – basic and diluted

 

$

(0.55)

 

$

(0.17)

 

$

(1.09)

 

$

(0.50)

 

Items included in other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on available-for-sale securities

 

 

30,303

 

 

11,640

 

 

36,636

 

 

41,749

 

Other comprehensive income

 

 

30,303

 

 

11,640

 

 

36,636

 

 

41,749

 

Comprehensive loss

 

$

(23,236,515)

 

$

(12,595,885)

 

$

(46,463,495)

 

$

(32,733,065)

 

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

 

 

42,636,567

 

 

72,043,113

 

 

42,525,693

 

 

65,648,006

 

 

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, 2017

 

48,203,529

 

$

48,204

 

$

404,454,909

 

$

(64,433)

 

$

(308,954,535)

 

$

95,484,145

 

Cumulative effect of adoption of ASC 606 (See Note 3)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

339,406

 

 

339,406

 

Balances at January 1, 2018

 

48,203,529

 

$

48,204

 

$

404,454,909

 

$

(64,433)

 

$

(308,615,129)

 

$

95,823,551

 

Exercise of stock options

 

1,516,796

 

 

1,517

 

 

9,837,268

 

 

 —

 

 

 —

 

 

9,838,785

 

Issuance of common stock in connection with equity offerings

 

31,414,093

 

 

31,414

 

 

269,794,204

 

 

 —

 

 

 —

 

 

269,825,618

 

Stock-based compensation

 

163,530

 

 

163

 

 

4,346,471

 

 

 —

 

 

 —

 

 

4,346,634

 

Employee stock purchase plan

 

25,352

 

 

25

 

 

95,045

 

 

 —

 

 

 —

 

 

95,070

 

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(32,774,814)

 

 

(32,774,814)

 

Unrealized gain on securities

 

 —

 

 

 —

 

 

 —

 

 

41,749

 

 

 —

 

 

41,749

 

Balances September 30, 2018

 

81,323,300

 

$

81,323

 

$

688,527,897

 

$

(22,684)

 

$

(341,389,943)

 

$

347,196,593

 

 

See accompanying notes.

4


 

 

ENDOCYTE, INC.

 

CONDENSED STATEMENTS OF CASH FLOWS

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

 

    

2017

    

2018

    

 

 

(unaudited)

 

Operating activities

 

 

 

 

 

 

 

Net loss

 

$

(46,500,131)

 

$

(32,774,814)

 

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

 

 

 

 

 

 

 

Depreciation

 

 

701,133

 

 

597,557

 

Stock-based compensation

 

 

2,680,873

 

 

4,451,096

 

Acquired in-process research and development

 

 

16,493,132

 

 

 —

 

Loss (gain) on disposal of property and equipment

 

 

114,042

 

 

(6,029)

 

Accretion of bond premium (discount)

 

 

1,399

 

 

(1,282,175)

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

Receivables

 

 

157,805

 

 

224,880

 

Prepaid expenses and other assets

 

 

770,892

 

 

(8,398,316)

 

Accounts payable

 

 

(1,160,801)

 

 

557,027

 

Accrued wages, benefits and other liabilities

 

 

(633,288)

 

 

2,391,338

 

Deferred revenue

 

 

(37,500)

 

 

(47,565)

 

Net cash used in operating activities

 

 

(27,412,444)

 

 

(34,287,001)

 

Investing activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(46,833)

 

 

(43,094)

 

Proceeds from disposal of property and equipment

 

 

 —

 

 

90,161

 

Purchases of investments

 

 

(51,318,003)

 

 

(308,005,868)

 

Purchase of acquired in-process research and development

 

 

(12,322,349)

 

 

 —

 

Proceeds from sale and maturities of investments

 

 

102,430,000

 

 

111,300,000

 

Net cash provided by (used in) investing activities

 

 

38,742,815

 

 

(196,658,801)

 

Financing activities

 

 

 

 

 

 

 

Stock repurchase

 

 

(94,627)

 

 

(104,461)

 

Proceeds from exercise of warrant to purchase common stock

 

 

4,556,420

 

 

 —

 

Proceeds from issuance of common stock in connection with equity offerings

 

 

 —

 

 

269,825,618

 

Proceeds from the exercise of stock options

 

 

109,742

 

 

9,838,785

 

Proceeds from stock purchases under employee stock purchase plan

 

 

48,407

 

 

95,070

 

Net cash provided by financing activities

 

 

4,619,942

 

 

279,655,012

 

Net increase in cash and cash equivalents

 

 

15,950,313

 

 

48,709,210

 

Cash and cash equivalents at beginning of period

 

 

31,228,192

 

 

18,559,130

 

Cash and cash equivalents at end of period

 

$

47,178,505

 

$

67,268,340

 

 

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 and leader in developing targeted therapies for the treatment of cancer. The Company uses drug conjugation technology to create novel therapeutics and companion imaging agents for personalized targeted therapies. The agents actively target receptors that are over-expressed on diseased cells relative to healthy cells, such as prostate specific membrane antigen (“PSMA”) in prostate cancer. This targeted approach is designed to safely enable the delivery of highly potent drug payloads. The companion imaging agents are designed to identify patients whose disease over-expresses the target of the therapy and who are therefore more likely to benefit from treatment.  

 

On October 17, 2018, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Novartis AG (“Novartis”) and Edinburgh Merger Corporation, a wholly owned subsidiary of Novartis (“Merger Sub”), subject to the terms and conditions of which the Company will be acquired by Novartis for $24.00 per share in cash through the merger of Merger Sub with and into the Company, with the Company continuing as the surviving corporation and a wholly-owned subsidiary of Novartis (the “Merger”).  The consummation of the Merger is subject to certain closing conditions, including the requisite approval of our stockholders and the receipt of certain antitrust and regulatory approvals. See Note 13 – Subsequent Event of the Notes to Condensed Financial Statements contained herein for additional information regarding the Merger, and see “Risk Factors” in Part II, Item 1A herein for important information regarding certain risks associated with the Merger Agreement and the Merger.

 

In September 2017, the Company entered into a Development and License Agreement (the “License Agreement”) with ABX advanced biochemical compounds – Biomedizinische Forschungsreagenzien GmbH (“ABX”), pursuant to which the Company acquired exclusive worldwide rights to develop and commercialize PSMA-617 agents, including the product candidate known as 177Lu-PSMA-617, a radioligand therapeutic (“RLT”). Following a successful End of Phase 2 meeting with the U.S. Food and Drug Administration (the “FDA”), in early 2018, the Company finalized the initial phase 3 VISION trial design and registration plan for 177Lu-PSMA-617.

In the three months ended June 30, 2018, the Company initiated enrollment of the VISION trial, an international, prospective, open-label, multicenter, randomized phase 3 study of 177Lu-PSMA-617 enrolling up to 750 patients with progressive PSMA-positive metastatic castration-resistant prostate cancer (“mCRPC”). 177Lu-PSMA-617 utilizes a high affinity targeting ligand to direct potent radiotherapy to prostate cancer cells. The specific targeting of this therapy comes from the "ligand" portion of the RLT, which is a small molecule designed to bind to PSMA, a protein highly expressed on the cell surface of most prostate cancer cells but absent on most normal cells. The PSMA targeting ligand in 177Lu-PSMA-617 is chemically attached to a therapeutic radioactive atom called Lutetium-177 (177Lu), which releases an energetic beta particle designed to precisely deliver cell-killing radiation to the site of disease. Unlike traditional external beam radiotherapy, 177Lu-PSMA-617, which is administered as a systemic injection, has been designed to directly target multiple sites of PSMA-positive prostate cancer throughout the body, including the bone and soft tissue, while bypassing the PSMA-negative cells. Prior to treatment with 177Lu-PSMA-617, the patient's expression of PSMA can be determined using imaging technology, allowing for personalization of treatment so that the optimum course of therapy might be selected. As highlighted in roughly 20 peer reviewed publications of trials in the post-chemotherapy compassionate use setting, 177Lu-PSMA-617 demonstrated a prostate-specific antigen (“PSA”) response (defined as greater than 50% decline from baseline) in 40% to 60% of patients, and a Response Evaluation Criteria in Solid Tumors (“RECIST”) response rate in soft tissue disease of between 40% and 50%.

On September 10, 2018, the Company announced that, following a meeting with the FDA, it was determined that radiographic progression free survival (“rPFS”) is an appropriate efficacy endpoint in the ongoing phase 3 VISION trial to support the submission of a New Drug Application (“NDA”) for full FDA approval of 177Lu-PSMA-617 for the treatment of mCRPC. The updated trial protocol will reflect this determination on rPFS while retaining the final, fully powered overall survival (“OS”) analysis.

6


 

 

Under the updated VISION trial design, the two interim assessments previously planned at 50% and 70% of OS events will be replaced with a single assessment of rPFS. This assessment is expected to occur at approximately the same time that the first interim OS assessment would have occurred under the prior trial design and shortly after the time the trial is fully enrolled. If 177Lu-PSMA-617 meets the primary endpoint in the rPFS assessment, no unexpected safety issues arise, and it demonstrates no detriment in OS relative to the control arm, the Company intends to submit an NDA to seek full approval in the United States. The rPFS analysis will include approximately 450 rPFS events. Regardless of the outcome of the rPFS assessment, the Company intends to continue to follow patients in the VISION trial in order to assess the final OS alternative primary endpoint. An efficacy analysis of OS will be conducted at approximately 490 events. Other aspects of the VISION trial design, including patient treatment and assessments, study size, overall duration, and follow up remain unchanged. Secondary endpoints include RECIST response and time to first symptomatic skeletal event.

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 and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2018 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, 2017. 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 (the “SEC”).

 

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 a maturity of three months or less at the date of purchase to be cash equivalents. Cash equivalents consist primarily of money market instruments, U.S. government treasury obligations, U.S. government agency obligations, corporate obligations and repurchase agreements that are maintained by an investment manager.

 

7


 

 

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 (loss). Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in other income (expense). 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 expensed over the term of the security.

 

Revenue Recognition

 

Commencing with reporting periods beginning January 1, 2018, the Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers. The Company’s contract revenues consist of revenues from license and collaboration agreements. License and collaboration revenue is primarily generated through agreements with strategic partners for the development and potential commercialization of our product candidates. The terms of the agreement typically include non-refundable upfront fees, funding of research and development activities, payments based upon achievement of milestones and potential royalties on net product sales. Non-refundable upfront fees and funding of research and development activities are considered fixed consideration, while milestone payments and royalties are identified as variable consideration.

 

The Company recognizes revenues from license and collaboration agreements to depict the transfer of promised goods or services in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. In order to determine the appropriate amount of revenue to be recognized as the Company fulfills its obligations under a contract, the Company follows the following steps for in-scope transactions: 1) identification of the contract with a customer, 2) identification of the separate performance obligations in the contract, 3) determination of the transaction price, 4) allocation of the transaction price to the separate performance obligations in the contract, and 5) recognition of revenue when or as the Company satisfies a performance obligation.

 

The Company’s performance obligations may include license rights, research and development services, services associated with regulatory submission and approval processes and services related to potential commercialization processes. Significant judgment may be required to determine the level of effort required under an arrangement and the period over which the Company expects to satisfy its performance obligations under the arrangement. If the Company cannot reasonably estimate when its performance obligations either are satisfied or become inconsequential, then revenue recognition is deferred until the Company can reasonably make such estimates. Revenue is then recognized over the remaining estimated period of performance using the cumulative catch-up method.

 

License Agreements

 

If the license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenue from non-refundable, upfront fees allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses that may be bundled with other promises, the Company will utilize judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, upfront fees. Because the drug development process is lengthy and the Company’s collaboration agreements typically cover activities over several years, this approach may result in the deferral of significant amounts of revenue into future periods. Each reporting period, the Company evaluates the measure of progress and, if necessary, adjusts the measure of performance and related revenue recognition.

 

8


 

 

Milestone Payments

 

At the inception of each arrangement that includes milestone payments, the Company evaluates whether the milestones are considered probable of being achieved and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the value of the associated milestone (such as a regulatory submission by the Company) is included in the transaction price. Milestone payments that are not within the control of the Company, such as approvals from regulators, are not considered probable of being achieved until those approvals are received. When the Company’s assessment of probability of achievement changes and variable consideration becomes probable, any additional estimated consideration is allocated to each performance obligation based on the estimated relative standalone selling prices of the promised good or service underlying each performance obligation and recorded in license, collaboration, and other revenues based upon when the customer obtains control of each element.

 

Royalty Payments

 

For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (a) when the related sales occur, or (b) when the performance obligation to which some or all of the royalty has been allocated has been satisfied. To date, none of the Company’s products have been approved and therefore the Company has not earned any royalty revenue from product sales.

 

Research and Development Expenses

 

Research and development expenses represent costs associated with the ongoing development of novel therapeutics and companion imaging agents for personalized targeted therapies 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 and close out the trial pursuant to ASC Topic 420, Exit or Disposal Cost Obligations, as a terminated trial does not provide any future economic benefit to the Company. See Note 11 – Restructuring Costs of the Notes to Condensed Financial Statements contained herein for amounts paid during the three and nine months ended September 30, 2018 related to the Company’s restructuring activities.

 

Upfront payments made in connection with business collaborations and research and development arrangements are evaluated under ASC Subtopic 730-20, Research and Development Arrangements. Amounts related to future research and development, including clinical drug supply, are capitalized as prepaid research and development and are expensed over the service period based upon the level of services provided. As of September 30, 2018, the Company had approximately $7.8 million of capitalized research and development costs included in prepaid expenses, other assets and other noncurrent assets.

 

Acquired In-Process Research and Development Expense

 

The Company has acquired and may continue to acquire the rights to develop and commercialize new drug candidates. In accordance with ASC Subtopic 730-25, Accounting for Research and Development Costs, the upfront payments to acquire a new drug compound, as well as future milestone payments when paid or payable, are immediately expensed as acquired in-process research and development (“IPR&D”) in transactions other than a business combination provided that the drug has not achieved regulatory approval for marketing and, absent obtaining such approval, has no alternative future use. Upon obtaining regulatory approval for marketing, any related milestone payments may be capitalized and amortized over the life of the asset.

 

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 (loss). 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”) and

9


 

 

shares available for purchase under the Company’s 2010 Employee Stock Purchase Plan (“ESPP”). For RSUs and stock options issued by the Company, stock-based compensation expense is recognized ratably over the service period and forfeitures are accounted for as they occur. 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, 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.

 

Common stock equivalents  

 

As of September 30, 2017 and 2018, the following number of potential common stock equivalents were outstanding:

 

 

 

 

 

 

 

 

 

As of September 30, 

 

 

    

2017

    

2018

    

Outstanding common stock options

 

6,265,333

 

5,309,344

 

Outstanding warrants

 

756,647

 

722,000

 

Outstanding RSUs

 

478,087

 

1,510,460

 

Shares to be purchased under the ESPP

 

18,323

 

11,410

 

Total

 

7,518,390

 

7,553,214

 

 

These common stock equivalents were excluded from the determination of diluted net loss per share in the three and nine month periods ended September 30, 2017 and 2018 due to their anti-dilutive effect on earnings. For additional information on the outstanding warrants, see Note 8 – Warrants of the Notes to Condensed Financial Statements contained herein.

 

 

10


 

 

3. New Accounting Pronouncements

 

Recently Issued Accounting Standards

 

In February 2016, the FASB issued Accounting Standards Update (“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. The Company does not expect the adoption of this guidance to have a material impact on its financial statements.

 

Recently Adopted Accounting Standards

 

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 as subsequently amended and clarified (“ASC 606”), 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. ASC 606 was effective for the Company for interim and annual reporting periods beginning January 1, 2018. The Company adopted ASC 606 in the nine months ended September 30, 2018 using the modified retrospective method by recognizing the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained deficit. The cumulative effect related to the adoption of ASC 606 was a $0.3 million decrease to the opening balance of retained deficit at January 1, 2018. The Company had deferred revenue related to its agreement with Nihon Medi-Physic Co., LTD. (“NMP”) of approximately $0.4 million at September 30, 2018 and will continue to record the revenue on a straight-line basis over the remaining estimated performance obligation period of approximately six years. The Company currently has a limited number of contracts with customers and only one revenue stream, which relates to collaboration and licensing arrangements, and which represents all of the revenue earned in the three and nine months ended September 30, 2018. The adoption of ASC 606 did not have a material impact on the Company’s financial statements and is not expected to have a material impact on the Company’s financial statements on an ongoing basis.

 

 

11


 

 

4. Other Comprehensive Income

 

The following tables summarize the accumulated balances related to each component of other comprehensive income for the three months ended September 30, 2017 and 2018:

 

 

 

 

 

 

 

 

 

    

 

 

    

Accumulated

 

 

 

Unrealized Net

 

Other

 

 

 

Gains (Losses)

 

Comprehensive

 

 

 

on Securities

 

Gains (Losses)

 

Balance at June 30, 2017

 

$

(34,863)

 

$

(34,863)

 

Unrealized gain

 

 

30,303

 

 

30,303

 

Other comprehensive income

 

 

30,303

 

 

30,303

 

Balance at September 30, 2017

 

$

(4,560)

 

$

(4,560)

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Accumulated

 

 

 

Unrealized Net

 

Other

 

 

 

Gains (Losses)

 

Comprehensive

 

 

 

on Securities

 

Gains (Losses)

 

Balance at June 30, 2018

 

$

(34,324)

 

$

(34,324)

 

Unrealized gain

 

 

11,640

 

 

11,640

 

Other comprehensive income

 

 

11,640

 

 

11,640

 

Balance at September 30, 2018

 

$

(22,684)

 

$

(22,684)

 

 

 

 

The following tables summarize the accumulated balances related to each component of other comprehensive income for the nine months ended September 30, 2017 and 2018:

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Accumulated

 

 

 

Unrealized Net

 

Other

 

 

 

Gains (Losses)

 

Comprehensive

 

 

 

on Securities

 

Gains (Losses)

 

Balance at December 31, 2016

 

$

(41,196)

 

$

(41,196)

 

Unrealized gain

 

 

36,636

 

 

36,636

 

Other comprehensive income

 

 

36,636

 

 

36,636

 

Balance at September 30, 2017

 

$

(4,560)

 

$

(4,560)

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Accumulated

 

 

 

Unrealized Net

 

Other

 

 

 

Gains (Losses)

 

Comprehensive

 

 

 

on Securities

 

Gains (Losses)

 

Balance at December 31, 2017

 

$

(64,433)

 

$

(64,433)

 

Unrealized gain

 

 

41,749

 

 

41,749

 

Other comprehensive income

 

 

41,749

 

 

41,749

 

Balance at September 30, 2018

 

$

(22,684)

 

$

(22,684)

 

 

 

 

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 maturities greater than three months, but no longer than 24 months, when purchased.

 

12


 

 

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.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

    

Fair Value

 

Description

 

Cost

 

Level 1

 

Level 2

 

(Carrying Value)

 

Cash

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

2,544,972

 

$

2,544,972

 

$

 —

 

$

2,544,972

 

Cash equivalents (maturity of 3 months or less)

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase agreements

 

 

10,000,000

 

 

 —

 

 

10,000,000

 

 

10,000,000

 

Money market funds

 

 

6,014,158

 

 

6,014,158

 

 

 

 

6,014,158

 

Cash and cash equivalents

 

$

18,559,130

 

$

8,559,130

 

$

10,000,000

 

$

18,559,130

 

Short-term investments (due within 1 year)

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government treasury obligations

 

$

63,034,548

 

$

62,970,115

 

$

 —

 

$

62,970,115

 

Corporate obligations

 

 

15,942,182

 

 

 —

 

 

15,942,182

 

 

15,942,182

 

Total short-term investments

 

$

78,976,730

 

$

62,970,115

 

$

15,942,182

 

$

78,912,297

 

 

 

The following table summarizes the fair value of cash and cash equivalents and investments as of September 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

    

Fair Value

 

Description

 

Cost

 

Level 1

 

Level 2

 

(Carrying Value)

 

Cash

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

7,280,004

 

$

7,280,004

 

$

 —

 

$

7,280,004

 

Cash equivalents (maturity of 3 months or less)

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase agreements

 

 

10,000,000

 

 

 —

 

 

10,000,000

 

 

10,000,000

 

Money market funds

 

 

35,004,236

 

 

35,004,236

 

 

 —

 

 

35,004,236

 

U.S. government agency obligations

 

 

14,984,175

 

 

 —

 

 

14,984,100

 

 

14,984,100

 

Cash and cash equivalents

 

$

67,268,415

 

$

42,284,240

 

$

24,984,100

 

$

67,268,340

 

Short-term investments (due within 1 year)

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government treasury obligations

 

$

187,315,613

 

$

187,297,850

 

$

 —

 

$

187,297,850

 

Corporate obligations

 

 

89,649,086

 

 

 —

 

 

89,644,301

 

 

89,644,301

 

Total short-term investments

 

$

276,964,699

 

$

187,297,850

 

$

89,644,301

 

$

276,942,151

 

 

 

All securities held at December 31, 2017 and September 30, 2018, were classified as available-for-sale as defined by ASC 320.

 

13


 

 

Total unrealized gross gains were $2,464 at September 30, 2018.  There were no unrealized gross gains as of December 31, 2017.  Total unrealized gross losses were $64,433 and $25,148 as of December 31, 2017 and September 30, 2018, 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 or nine months ended September 30, 2017 and 2018.

 

6. Collaboration and Other Arrangements

 

Isotope Technologies Garching GmbH Global Supply Agreement

 

In July 2018, the Company entered into a Global Supply Agreement (the “Supply Agreement”) with ITG Isotope Technologies Garching GmbH (“ITG”). The Supply Agreement supersedes the clinical supply agreement for the same product that the Company announced on February 26, 2018. Under the Supply Agreement, ITG agrees to supply the Company with, and the Company agrees to purchase, 100% of the no-carrier-added lutetium-177 (the “Product”), which is the therapeutic radioactive atom portion of 177Lu-PSMA-617, required for the Company’s phase 3 VISION trial.  The Company also agrees to purchase, and ITG agrees to supply, at least 50%, and up to 100% at the Company’s request, of the Company’s Product needs for 177Lu-PSMA-617 during the commercial phase, which begins upon the first commercial country launch of 177Lu-PSMA-617 following receipt of a full marketing authorization allowing sale of such product in that first country.

 

The Supply Agreement also sets forth various terms relating to the manufacture, ordering, supply and payment regarding the Product.  The Supply Agreement also includes provisions relating to, among others, delivery, inspection procedures, warranties, quality management, compliance, forecasts, intellectual property rights, indemnification, and confidentiality.

 

The initial term of the Supply Agreement continues until December 31, 2035, subject to earlier termination as described below. After the initial term, the Supply Agreement will automatically be extended for successive periods of two years each unless either party terminates the Supply Agreement by giving prior written notice. Either party may terminate the Supply Agreement for cause if the other party: (i) becomes insolvent or has a receiver or liquidator appointed or enters into a composition or bankruptcy with its creditors; (ii) materially breaches its material obligations under the Supply Agreement and fails to commence to cure such breach within a specified time following receiving notice of breach; (iii) fails to pay any insurance premium or any amount under the Supply Agreement when due and fails to cure such breach within a specified time after becoming aware of such failure to pay; or (iv) fails to perform its obligations under the Supply Agreement by reason of Force Majeure for more than a specified time period. In addition, the Supply Agreement contains other termination provisions that may apply if certain restrictive conditions are met.

 

In August 2018, the Company paid ITG a one-time, non-refundable upfront payment under the Supply Agreement, which was $5.8 million. Under ASC Subtopic 730-20, Research and Development Arrangements, the Company capitalized the payment as other current and noncurrent assets and will be recognizing the expense over the service period, which is considered to be delivery of the Product, during the phase 3 VISION trial. The balance of other current and noncurrent assets related to the upfront payment under the Supply Agreement as of September 30, 2018 was $5.3 million and $0.5 million, respectively.

14


 

 

 

ABX Development and License Agreement

 

In September 2017, the Company entered into the License Agreement with ABX that grants the Company exclusive worldwide rights to develop and commercialize PSMA-617 agents. Under the terms of the License Agreement, the Company will be responsible for, and bear the future costs of, worldwide development and commercialization of PSMA-617. As consideration for the exclusive license, the Company made an upfront cash payment on September 29, 2017 of approximately $11.9 million to ABX, consisting of $12.0 million less an immaterial expense reimbursement amount, and issued to ABX 2,000,000 shares of the Company’s common stock (see Note 7 – Stockholders’ Equity (Deficit) of the Notes to Condensed Financial Statements for additional information regarding this issuance) and two warrants to purchase, in the aggregate, 4,000,000 shares of the Company’s common stock (see Note 8 – Warrants of the Notes to Condensed Financial Statements for additional information regarding the warrants). The License Agreement also obligates the Company to pay ABX regulatory milestone payments of up to $25.0 million, sales milestone payments of up to $135.0 million, and tiered royalties, beginning in the mid-teens and not to exceed the mid-twenties, based on percentages of net sales.  

 

In addition, under a three-party agreement, entered into in October 2017, among the Company, the University of Sydney (the “University”) and ANZUP, a cooperative cancer trials group operating in Australia and New Zealand pursuing research in genito-urinary malignancies, ANZUP sponsors jointly with the University a randomized phase 2 multi-center TheraP trial of 177Lu-PSMA-617 versus cabazitaxel in 200 mCRPC patients. The TheraP trial commenced enrollment in the first quarter of 2018. Under the three-party agreement, the Company provides product and financial support for the trial. The Company will have access to data generated from the trial, which is a potentially important supportive trial for future regulatory submissions. The primary financial obligations of the trial, along with labeling PSMA-617 with Lutetium-177, will be the responsibility of the University and ANZUP.

 

NMP License and Commercialization Agreement

 

In August 2013, the Company entered into a license and commercialization agreement with NMP that grants NMP the right to develop and commercialize etarfolatide in Japan for use in connection with any folate receptor-targeted therapeutic drug 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 historically viewed the agreement with NMP as a multiple element arrangement upon execution of the agreement in 2013. The Company’s deliverables were accounted for as a single unit of account, therefore the non-refundable upfront payment was being recognized on a straight-line basis over the performance period which had been determined to continue through the estimated termination date of the contract, or through the end of 2033. In the nine months ended September 30, 2018, the Company adopted ASC 606 and therefore analyzed the agreement with NMP using the five-step process as described in Note 3 – New Accounting Pronouncements of the Notes to Condensed Financial Statements contained herein. The Company determined that the upfront payment of $1.0 million relates to one performance obligation, which was determined to be the successful development and commercialization of etarfolatide in connection with a related folate receptor-targeted therapeutic drug in Japan, and should be allocated over the performance period that the Company estimates will be required to satisfy the combined performance obligation rather than the period over which the final undelivered item was estimated to be delivered, which was the life of the contract, under the previous standard. Under the modified retrospective method of adoption of ASC 606, the Company recorded a cumulative effect adjustment to reduce deferred revenue by $0.3 million and to decrease its retained deficit at January 1, 2018. The Company had deferred revenue related to the agreement with NMP of approximately $0.4 million at September 30, 2018 and will continue to record the revenue on a straight-line basis over the remaining estimated performance obligation period of approximately six years. The adoption of ASC 606 did not have a material effect on the Company’s financial statements.

 

15


 

 

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 should be excluded from the transaction price due to substantial performance risk. In order for the milestones to be reached, the Company must complete additional clinical trials which show a positive outcome or receive approval from a regulatory authority. To date, the products have not been approved in Japan and no revenue has been recognized related to the regulatory milestones or royalties.

 

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 any folate receptor-targeted therapeutic drug 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)

 

Public Offerings of Common Stock

 

On September 14, 2018, the Company closed an underwritten registered public offering of 10,878,379 shares of its common stock, which included the underwriters’ exercise in full of their option to purchase additional shares. The shares were sold at a public offering price of $18.50 per share. In the nine months ended September 30, 2018, the Company received aggregate net proceeds from this offering of approximately $188.9 million, after deducting underwriting discounts and commissions of $12.1 million and offering expenses paid by the Company of $0.3 million.

 

On March 2, 2018, the Company closed an underwritten registered public offering of 20,535,714 shares of its common stock, which included the underwriters’ exercise in full of their option to purchase additional shares. The shares were sold at a public offering price of $4.20 per share. In the nine months ended September 30, 2018, the Company received aggregate net proceeds from this offering of approximately $80.9 million, after deducting underwriting discounts and commissions of $5.2 million and offering expenses paid by the Company of $0.1 million.

 

Issuances Related to the License Agreement

 

In connection with the License Agreement, the Company issued to ABX on September 29, 2017, 2,000,000 unregistered shares of the Company’s common stock and two warrants to purchase up to 4,000,000 shares of the Company’s common stock. Pursuant to a Registration Rights Agreement entered into with ABX, the Company registered for resale these 6,000,000 shares of the Company’s common stock with the SEC on a Form S-3 Registration Statement that was declared effective on October 24, 2017. One of the warrants to purchase 3,278,000 shares of the Company’s common stock was exercised on September 29, 2017, resulting in one outstanding warrant to purchase 722,000 shares of the Company’s common stock being outstanding on September 30, 2018. On October 19, 2018 the remaining outstanding warrant was exercised in part, with respect to 280,000 shares of the Company’s common stock, resulting in 442,000 shares of the Company’s common stock remaining subject to issuance under the outstanding warrant. See Note 8 – Warrants of the Notes to Condensed Financial Statements contained herein for additional information. 

 

Stock-Based Compensation Plans

 

The Company had equity awards outstanding under two stock-based compensation plans at September 30, 2018. The awards made under the plan adopted in 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, performance-based RSUs 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 11,850,563 and 13,296,563 shares of common stock authorized and reserved under these plans at December 31, 2017 and September 30, 2018, respectively.

 

16


 

 

Stock Options

 

Under the various plans, employees have been granted both incentive and non-qualified 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 2007 plan 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 the remaining options vesting monthly over the remainder of the four-year period. Options granted under the 2007 plan 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 historical volatility, risk-free interest rate, employee exercise behavior and dividend yield.

 

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, the volatility is calculated based on volatility of the Company’s daily stock prices since the initial public offering over 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 and nine months ended September 30, 2017 and 2018 were determined using the following assumptions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

 

 

    

2017

    

2018

    

    

2017

    

2018

    

    

Expected volatility

 

0.0

%  

90.6

%  

 

92.7

%  

100.4

%

 

Risk-free interest rate

 

0.00

%  

2.78

%  

 

2.15

%  

2.71

%

 

Weighted-average expected life (in years)

 

0.0

 

6.3

 

 

6.9

 

6.9

 

 

Dividend yield

 

0.00

%  

0.00

%  

 

0.00

%  

0.00

%

 

 

17


 

 

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, 2018

 

5,878,660

 

$

5.93

 

 

 

 

 

 

Granted during period

 

688,192

 

 

3.07

 

 

 

 

 

 

Exercised during period

 

(561,088)

 

 

4.10

 

 

 

 

 

 

Expired during period

 

(8,993)

 

 

3.06

 

 

 

 

 

 

Outstanding at March 31, 2018

 

5,996,771

 

$

5.78

 

6.18

 

$

22,125,418

 

Exercisable at March 31, 2018

 

4,290,445

 

$

6.92

 

5.02

 

$

11,551,954

 

Outstanding at April 1, 2018

 

5,996,771

 

 

5.78

 

 

 

 

 

 

Granted during period

 

242,400

 

 

10.86

 

 

 

 

 

 

Exercised during period

 

(512,795)

 

 

8.16

 

 

 

 

 

 

Forfeited during period

 

(5,869)

 

 

2.82

 

 

 

 

 

 

Outstanding at June 30, 2018

 

5,720,507

 

$

5.79

 

6.28

 

$

45,908,925

 

Exercisable at June 30, 2018

 

3,970,287

 

$

6.56

 

5.09

 

$

28,812,888

 

Outstanding at July 1, 2018

 

5,720,507

 

 

5.79

 

 

 

 

 

 

Granted during period

 

48,700

 

 

16.74

 

 

 

 

 

 

Exercised during period

 

(442,913)

 

 

7.57

 

 

 

 

 

 

Forfeited during period

 

(16,950)

 

 

4.77

 

 

 

 

 

 

Outstanding at September 30, 2018

 

5,309,344

 

$

5.74

 

6.14

 

$

63,541,222

 

Exercisable at September 30, 2018

 

3,550,137

 

$

6.42

 

4.84

 

$

40,064,166

 

 

As of September 30, 2018, the total remaining unrecognized compensation cost related to stock options granted was $4.9 million, which is expected to be recognized over a weighted average period of approximately 1.7 years.

 

Restricted Stock Units

 

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 two, three or four equal annual installments beginning on the first anniversary of the date of grant of an RSU. As of September 30, 2018, the Company had 1,510,460 RSU awards outstanding. As of September 30, 2018, the total remaining unrecognized compensation cost related to RSUs was $4.6 million, which is expected to be recognized over a weighted average period of approximately 1.4 years.

 

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

 

 

 

 

 

 

 

 

 

    

Restricted

    

Weighted-Average

 

 

 

Stock

 

Grant 

 

 

 

 Units

 

Date Fair Value

 

Outstanding at January 1, 2018

 

1,383,770

 

$

5.05

 

Granted during period

 

301,958

 

 

3.02

 

Vested during period

 

(161,147)

 

 

4.27

 

Outstanding at March 31, 2018

 

1,524,581

 

$

4.73

 

Outstanding at April 1, 2018

 

1,524,581

 

$

4.73

 

Granted during period

 

56,150

 

 

12.19

 

Vested during period

 

(30,150)

 

 

2.47

 

Forfeited during period

 

(29,683)

 

 

5.35

 

Outstanding at June 30, 2018

 

1,520,898

 

$

5.04

 

Outstanding at July 1, 2018

 

1,520,898

 

$

5.04

 

Granted during period

 

3,000

 

 

13.60

 

Vested during period

 

(5,938)

 

 

4.85

 

Forfeited during period

 

(7,500)

 

 

5.01

 

Outstanding at September 30, 2018

 

1,510,460

 

$

5.06

 

 

Employee Stock Purchase Plan

 

At January 1, 2018, 769,542 common shares were available for issuance under the ESPP. Shares may be issued under the ESPP twice a year. In the nine months ended September 30, 2018, plan participants purchased 25,352 shares of common stock under the ESPP at an average purchase price of $3.75 per share. At September 30, 2018, there were 744,190 common shares available for issuance under the ESPP.

 

8. Warrants

 

In connection with the License Agreement, the Company issued to ABX on September 29, 2017, two warrants to purchase up to 4,000,000 shares of the Company’s common stock, at a per share exercise price of $1.39, which was equal to the average closing price of the Company’s common stock during the 30 calendar days prior to September 29, 2017. The Company accounted for the warrants at fair value in stockholders’ equity. Immediately upon issuance, ABX assigned the warrants to an affiliate and certain related parties, which exercised a warrant for 3,278,000 shares of the Company’s common stock on September 29, 2017, resulting in proceeds to the Company in the amount of approximately $4.6 million. The remaining outstanding warrant, covering an aggregate of 722,000 shares of the Company’s common stock, remained outstanding as of September 30, 2018, is exercisable until September 29, 2027, and is subject to restrictions on transfer. This outstanding warrant was valued as of September 30, 2018 using the Black-Scholes model utilizing a ten-year term, the Company’s historic volatility of 91.1%, and an interest rate of 2.28% which is the risk-free interest rate of a treasury bond with the same term as the outstanding warrant, of which inputs are level 2 fair value measurements. There were no other outstanding warrants as of September 30, 2018.

 

On October 19, 2018, the remaining outstanding warrant was exercised in part, with respect to 280,000 shares of the Company’s common stock, resulting in 442,000 shares of the Company’s common stock remaining subject to issuance under that outstanding warrant. The outstanding warrant contains a conversion feature in the case of certain mergers or consolidations by the Company. Pursuant to the terms of the Merger Agreement and the terms of the outstanding warrant, if the Merger is consummated, the outstanding warrant will be deemed to be automatically exercised immediately prior to the effective time of the Merger, and the holder of the outstanding warrant will participate in the Merger as a holder of the Company’s common stock on the same terms as other holders of the Company’s common stock, but the holder’s aggregate consideration received in the Merger will be reduced by the aggregate exercise price then in effect for the shares of the Company’s common stock purchasable under the outstanding warrant. 

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9. 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 (the “Code”) in August 2011. As a result, the future use of its net operating losses and credit equivalents, after giving effect to net unrealized built-in gains, was previously limited, but the limitations associated with the change in ownership in August 2011 ended as of December 31, 2017. All amounts are available for use if the Company generates future taxable income prior to expiration of the net operating losses, which will begin in 2021. 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 subsequent to August 2011, resulting in a limitation on the amounts that could be utilized in any given period under Section 382 of the Code.

 

On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the “2017 Tax Act”) which, among other provisions, reduced the corporate income tax rate from 35% to 21% effective January 1, 2018. During the fourth quarter of 2017, the Company revalued its net deferred tax assets using the newly enacted rate, resulting in a reduction of its net deferred tax assets of $33.1 million. The Company also reduced its valuation allowance by $33.1 million, resulting in no income tax expense being recognized as a result of the revaluation. The Company’s estimate of the impacts of the 2017 Tax Act are provisional and are based upon its analysis and interpretations of currently available information. Uncertainties remain regarding the impact of the 2017 Tax Act due to future regulatory and rulemaking processes, prospects of additional corrective or supplemental legislation, and potential trade or other litigation. These uncertainties, along with the Company’s completion of the calculations and potential changes in its initial assumptions as new information becomes available, could cause the actual charge to ultimately differ from the provisional amount recorded in 2017 related to the enactment of the 2017 Tax Act. All provisional amounts recorded by the Company are fully reserved. There were no adjustments in the nine months ended September 30, 2018 to the provisional amount recorded in the fourth quarter of 2017. 

 

10. Commitments and Contingencies

 

On November 6, 2018, a lawsuit captioned Elaine Wang v. Endocyte, Inc., et al., Civil Action No. 4:18-cv-00085, was filed by a purported stockholder of the Company in the United States District Court, Northern District of Indiana, against the Company and the members of the Company’s Board of Directors. The complaint alleges, among other things, that the preliminary proxy statement filed by the Company with the SEC on October 31, 2018 related to the special meeting of the Company’s stockholders to be held in connection with the Merger, contained untrue statements of fact and/or omitted material facts necessary to make the statements made in such preliminary proxy statement not misleading, and that therefore the Company and the members of the Company’s Board of Directors violated Section 14(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 14a-9 thereunder. The lawsuit further alleges that the members of the Company’s Board of Directors violated Section 20(a) of the Exchange Act. The lawsuit seeks, among other things, injunctive relief: (i) enjoining the consummation of the Merger unless and until material information that was allegedly omitted from the Company’s preliminary proxy statement is disclosed; (ii) rescinding, to the extent already implemented, the Merger Agreement or any of the terms thereof, or granting plaintiff rescissory damages; and (iii) awarding plaintiff the costs and disbursements of the action, including reasonable attorneys’ and expert fees and expenses. The Company and the members of the Company’s Board of Directors believe the lawsuit is without merit and intend to vigorously defend against it.

 

11. Restructuring Costs

 

In June 2017, the Company refocused its clinical development efforts and aligned its resources to focus on the Company’s highest value opportunities while maintaining key capabilities. The Company’s restructuring activities included a reduction of its workforce by approximately 40%, as well as stopping enrollment in its EC1456 phase 1b trial as the assessment of trial data did not yield the level of clinical activity necessary to support continued advancement of EC1456. In December 2017, the Company stopped enrollment in its EC1456 ovarian cancer surgical trial. Pursuant to ASC Topic 420, Exit or Disposal Cost Obligations, the Company recorded $2.3 million of restructuring expenses in the nine months ended September 30, 2017 as follows:

 

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