adro-10q_20170630.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended June 30, 2017

OR

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

For the transition period from              to             

Commission File Number 001-37345

 

ADURO BIOTECH, INC.

(Exact name of Registrant as specified in its Charter)

 

 

Delaware

 

94-3348934

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

740 Heinz Avenue

Berkeley, California 94710

(Address of principal executive offices including zip code)

Registrant’s telephone number, including area code: (510) 848-4400

 

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES      NO  

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    YES      NO  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 small reporting company)

  

Small 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  

The number of shares of Registrant’s Common Stock outstanding as of July 26, 2017 was 74,612,449.

 

 

 

 


 

Table of Contents

 

 

 

 

Page

 

 

PART I—FINANCIAL INFORMATION

 

Item 1.

 

Condensed Consolidated Financial Statements (unaudited)

3

 

 

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

3

 

 

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2017 and 2016

4

 

 

Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2017 and 2016

5

 

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016

6

 

 

Notes to the Condensed Consolidated Financial Statements

7

Item 2.

 

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

21

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

29

Item 4.

 

Controls and Procedures

29

 

 

 

 

 

 

PART II—OTHER INFORMATION

 

Item 1.

 

Legal Proceedings

30

Item 1A.

 

Risk Factors

30

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

62

Item 3.

 

Defaults Upon Senior Securities

62

Item 4.

 

Mine Safety Disclosures

62

Item 5.

 

Other Information

62

Item 6.

 

Exhibits

63

SIGNATURES

64

EXHIBIT INDEX

65

 

In this Quarterly Report on Form 10-Q, “we,” “our,” “us,” “Aduro,” and “the Company” refer to Aduro Biotech, Inc. and its consolidated subsidiaries. Aduro, Aduro Biotech, the Aduro logo and other trade names, trademarks or service marks of Aduro are the property of Aduro Biotech, Inc. This report contains references to our trademarks and to trademarks belonging to other entities. Trade names, trademarks and service marks of other companies appearing in this report are the property of their respective holders. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

 

2


 

PART I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

 

ADURO BIOTECH, INC.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

June 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

183,815

 

 

$

74,932

 

Short-term marketable securities

 

 

193,428

 

 

 

272,500

 

Accounts receivable

 

 

3,434

 

 

 

1,138

 

Prepaid expenses and other current assets

 

 

4,278

 

 

 

6,194

 

Total current assets

 

 

384,955

 

 

 

354,764

 

Long-term marketable securities

 

 

 

 

14,474

 

Property and equipment, net

 

 

26,360

 

 

 

26,384

 

Goodwill

 

 

8,318

 

 

 

7,658

 

Intangible assets, net

 

 

29,946

 

 

 

27,827

 

Restricted cash

 

 

468

 

 

 

468

 

Deferred tax assets

 

 

5,047

 

 

 

6,319

 

Other assets

 

 

8,465

 

 

 

717

 

Total assets

 

$

463,559

 

 

$

438,611

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,813

 

 

$

2,206

 

Accrued clinical trial and manufacturing expenses

 

 

4,048

 

 

 

4,777

 

Accrued expenses and other liabilities

 

 

7,073

 

 

 

8,597

 

Deferred revenue

 

 

14,945

 

 

 

15,052

 

Total current liabilities

 

 

28,879

 

 

 

30,632

 

Deferred rent

 

 

7,778

 

 

 

6,786

 

Contingent consideration

 

 

6,044

 

 

 

4,032

 

Deferred revenue

 

 

155,556

 

 

 

162,963

 

Deferred tax liabilities

 

 

6,307

 

 

 

5,869

 

Other long term liabilities

 

 

1,255

 

 

 

1,109

 

Total liabilities

 

 

205,819

 

 

 

211,391

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value; 10,000,000 shares authorized at

   June 30, 2017 and December 31, 2016; and zero shares issued

   and outstanding at June 30, 2017 and December 31, 2016

 

 

 

 

 

 

Common stock, $0.0001 par value; 300,000,000 shares authorized

   June 30, 2017 and December 31, 2016; and 73,676,295

   and 67,918,246 shares issued and outstanding at June 30, 2017 and

   December 31, 2016

 

 

7

 

 

 

7

 

Additional paid-in capital

 

 

490,336

 

 

 

420,897

 

Accumulated other comprehensive benefit (loss)

 

 

608

 

 

 

(1,684

)

Accumulated deficit

 

 

(233,211

)

 

 

(192,000

)

Total stockholders’ equity

 

 

257,740

 

 

 

227,220

 

Total liabilities and stockholders’ equity

 

$

463,559

 

 

$

438,611

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

3


 

ADURO BIOTECH, INC.

Condensed Consolidated Statements of Operations

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collaboration and license revenue

 

$

5,876

 

 

$

38,938

 

 

$

9,648

 

 

$

42,921

 

Grant revenue

 

 

41

 

 

 

41

 

 

 

41

 

 

 

88

 

Total revenue

 

 

5,917

 

 

 

38,979

 

 

 

9,689

 

 

 

43,009

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

21,440

 

 

 

26,882

 

 

 

42,011

 

 

 

47,809

 

General and administrative

 

 

8,245

 

 

 

8,700

 

 

 

16,523

 

 

 

17,699

 

Amortization of intangible assets

 

 

136

 

 

 

140

 

 

 

268

 

 

 

277

 

Total operating expenses

 

 

29,821

 

 

 

35,722

 

 

 

58,802

 

 

 

65,785

 

(Loss) income from operations

 

 

(23,904

)

 

 

3,257

 

 

 

(49,113

)

 

 

(22,776

)

Interest income, net

 

 

780

 

 

 

520

 

 

 

1,430

 

 

 

974

 

Other loss, net

 

 

(64

)

 

 

(9

)

 

 

(68

)

 

 

(31

)

(Loss) income before income tax

 

 

(23,188

)

 

 

3,768

 

 

 

(47,751

)

 

 

(21,833

)

Income tax (benefit) provision

 

 

(3,788

)

 

 

1,472

 

 

 

(6,540

)

 

 

4,698

 

Net (loss) income

 

$

(19,400

)

 

$

2,296

 

 

$

(41,211

)

 

$

(26,531

)

Net (loss) income per common share, basic

 

$

(0.27

)

 

$

0.04

 

 

$

(0.59

)

 

$

(0.41

)

Net (loss) income per common share, diluted

 

$

(0.27

)

 

$

0.03

 

 

$

(0.59

)

 

$

(0.41

)

Shares used in computing net loss per common share, basic

 

 

71,101,336

 

 

 

64,434,903

 

 

 

69,679,746

 

 

 

64,138,737

 

Shares used in computing net loss per common share, diluted

 

 

71,101,336

 

 

 

71,473,807

 

 

 

69,679,746

 

 

 

64,138,737

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

4


 

ADURO BIOTECH, INC.

Condensed Consolidated Statements of Comprehensive Loss

(In thousands)

(Unaudited)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net (loss) income

 

$

(19,400

)

 

$

2,296

 

 

$

(41,211

)

 

$

(26,531

)

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on marketable securities

 

 

25

 

 

 

69

 

 

 

2

 

 

 

220

 

Foreign currency translation adjustments

 

 

1,925

 

 

 

(619

)

 

 

2,290

 

 

 

511

 

Comprehensive (loss) income

 

$

(17,450

)

 

$

1,746

 

 

$

(38,919

)

 

$

(25,800

)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

5


 

ADURO BIOTECH, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

Net loss

 

$

(41,211

)

 

$

(26,531

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,659

 

 

 

739

 

Amortization of intangible assets

 

 

268

 

 

 

277

 

Accretion of discounts and amortization of premiums on marketable securities

 

 

497

 

 

 

1,045

 

Stock-based compensation

 

 

7,985

 

 

 

7,068

 

Excess tax benefit from stock-based compensation

 

 

 

 

 

(2,185

)

Gain from remeasurement of fair value of contingent consideration

 

 

1,636

 

 

 

(317

)

Loss on disposal of property and equipment

 

 

5

 

 

 

 

Deferred income tax

 

 

1,272

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(2,238

)

 

 

3,462

 

Prepaid expenses and other assets

 

 

(5,832

)

 

 

(9,074

)

Restricted cash

 

 

 

 

 

(468

)

Accounts payable

 

 

607

 

 

 

(2,814

)

Deferred revenue

 

 

(7,514

)

 

 

(7,542

)

Accrued clinical trial and manufacturing expenses

 

 

(576

)

 

 

8,356

 

Accrued expenses and other liabilities

 

 

(670

)

 

 

2,094

 

Net cash used in operating activities

 

 

(44,112

)

 

 

(25,890

)

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

Purchase of marketable securities

 

 

(140,626

)

 

 

(244,250

)

Proceeds from maturities of marketable securities

 

 

233,678

 

 

 

233,108

 

Purchase of property and equipment

 

 

(1,453

)

 

 

(10,536

)

Net cash provided by (used in) investing activities

 

 

91,599

 

 

 

(21,678

)

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

Proceeds from employee stock purchase plan

 

 

494

 

 

 

514

 

Excess tax benefit from stock-based compensation

 

 

 

 

 

2,185

 

Proceeds from exercise of stock options and warrants

 

 

435

 

 

 

351

 

Proceeds from issuance of common stock, net of offering costs

 

 

60,467

 

 

 

 

Net cash provided by financing activities

 

 

61,396

 

 

 

3,050

 

Net increase (decrease) in cash and cash equivalents

 

 

108,883

 

 

 

(44,518

)

Cash and cash equivalents at beginning of period

 

 

74,932

 

 

 

150,456

 

Cash and cash equivalents at end of period

 

$

183,815

 

 

$

105,938

 

Supplemental Disclosure of Cash Flow Information

 

 

 

 

 

 

 

 

Cash paid for taxes

 

$

850

 

 

$

8,600

 

Supplemental Disclosure of Non-Cash Investing and Financing Activities

 

 

 

 

 

 

 

 

Purchase of property and equipment in accounts payable and accrued liabilities

 

$

219

 

 

$

4,135

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

6


 

ADURO BIOTECH, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

1. Organization and Nature of Business

Aduro Biotech, Inc., and its wholly-owned subsidiaries, or the Company, is an immunotherapy company focused on the discovery, development and commercialization of therapies that transform the treatment of challenging diseases, including cancer. The Company is located in Berkeley, California and its wholly-owned subsidiary, Aduro Biotech Holdings, Europe B.V., or Aduro Biotech Europe, is based in the Netherlands. The Company operates in one business segment.

The Company believes its three technology platforms are uniquely positioned to recruit and direct the immune system by activating cancer-fighting immune cells and inhibiting immune suppressive cells known to allow tumor growth. Product candidates from the Company’s LADD, or Live, Attenuated, Double-Deleted Listeria monocytogenes, STING Pathway Activator, and B-select monoclonal antibody platforms are designed to stimulate and/or regulate innate and adaptive immune responses, either as single agents or in combination with conventional therapies (chemotherapy and radiation) as well as other novel immunotherapies. The Company’s diverse technology platforms have led to a strong pipeline of clinical and preclinical candidates, which are being developed for a number of cancer indications. Additionally, Aduro’s platforms have the potential to generate product candidates that address other therapeutic areas, such as autoimmune and infectious diseases. The Company is also collaborating with leading global pharmaceutical companies to expand its products and technology platforms.

 

 

2. Basis of Presentation, Use of Estimates and Recent Accounting Pronouncements

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, and follow the requirements of the Securities and Exchange Commission, or the SEC, for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP have been condensed or omitted, and accordingly the balance sheet as of December 31, 2016 has been derived from audited consolidated financial statements at that date but does not include all of the information required by U.S. GAAP for complete financial statements. These financial statements have been prepared on the same basis as our annual financial statements and, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair presentation of our financial information. The results of operations for the three and six months ended June 30, 2017 are not necessarily indicative of the results to be expected for the year ending December 31, 2017 or for any other interim period or for any other future year.

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

The consolidated financial statements include the accounts of Aduro Biotech, Inc. and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated.

Use of Estimates

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

 

 

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board, or FASB, issued Auditing Standards Update, or ASU, No. 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU affects any entity that either enters into contracts with customers to transfer goods and services or enters into contracts for the transfer of nonfinancial assets. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates

7


 

than under the currently effective guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which reduces the complexity when applying the guidance for identifying performance obligations and improves the operability and understandability of the license implementation guidance. In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which amends the guidance on transition, collectability, noncash consideration and the presentation of sales and other similar taxes. The new standard permits adoption either by using (i) a full retrospective approach for all periods presented in the period of adoption or (ii) a modified retrospective approach with the cumulative effect of initially applying the new standard recognized at the date of initial application and providing certain additional disclosures. The new standard is effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted for annual reporting periods beginning after December 15, 2016. The Company plans to adopt the new standard effective January 1, 2018 and has not made the decision as to which adoption method it will utilize. The Company’s final determination will depend on the significance of the impact of the new standard on the Company’s financial results. The Company has completed the initial evaluation of the adoption of the new standard. This included the determination of whether the counterparty in its existing collaboration agreements met the definition of a customer and whether such agreements would be within the scope of the new standard. As a result, certain of the Company’s collaboration agreements are in scope and the Company is currently determining the impact that these agreements may have on its financial results.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments--Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Changes to the current guidance primarily affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption, an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. The Company has evaluated the impact of this guidance and has concluded that adoption of the standard will not have a material impact on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which establishes a comprehensive new lease accounting model. The new standard: (a) clarifies the definition of a lease; (b) requires a dual approach to lease classification similar to current lease classifications; and, (c) causes lessees to recognize leases on the balance sheet as a lease liability with a corresponding right-of-use asset for leases with a lease-term of more than twelve months. The new standard is effective for fiscal years and interim periods beginning after December 15, 2018 and requires modified retrospective application. Early adoption is permitted. The Company is currently evaluating the impact that the standard will have on its consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326). The standard changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses. The standard is effective for fiscal years and interim periods beginning after December 15, 2019. Early adoption is permitted for all periods beginning after December 15, 2018. The Company is currently evaluating the impact that the standard will have on its consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 identifies how certain cash receipts and cash payments are presented and classified in the Statement of Cash Flows. The standard is effective for fiscal years and interim periods beginning after December 15, 2017. The standard should be applied retrospectively and early adoption is permitted, including adoption in an interim period. The Company has evaluated the impact of this guidance and has concluded that the adoption of the standard will not have a material impact on its Consolidated Statement of Cash Flows.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. ASU 2016-18 requires that the statement of cash flows explains the change during the period in the total cash, cash equivalents, and restricted cash. The standard is effective for fiscal years beginning after December 15, 2017, and interim periods within those years. This standard should be applied retrospectively and early adoption is permitted, including adoption in an interim period. The Company plans to adopt this standard on January 1, 2018 utilizing the required retrospective transition method. The adoption of ASU 2016-18 on January 1, 2018 will change the presentation and classification of restricted cash in our Consolidated Statement of Cash Flows.

8


 

In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 provides clarity and reduces the complexity of applying the guidance in Topic 718, Compensation – Stock Compensation, to a change to the terms or conditions of a share-based payment award. This standard is effective for annual periods beginning after December 15, 2017. The Company is currently in the process of evaluating the impact that the standard will have on its consolidated financial statements.

Recently Adopted Accounting Pronouncements

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification of awards as either equity or liabilities, classification on the statement of cash flows and forfeitures. Formerly, these excess tax benefits were recognized in additional paid-in capital and tax deficiencies (to the extent there were previous tax benefits) were recognized as an offset to accumulated excess tax benefits. If no previous tax benefit existed, the deficiencies were recognized in the income statement as an increase to income tax expense. The changes require all excess tax benefits and tax deficiencies related to share-based payments be recognized as income tax expense or benefit in the income statement. Gross excess tax benefits in the cash flow statement have also changed from the prior presentation as a financing activity to being classified as an operating activity. The excess tax benefits are no longer included in the assumed proceeds of the diluted EPS calculation, which results in stock-based awards being more dilutive. Lastly, the Company elected to continue to estimate forfeitures based on historical data and recognizes forfeiture compensation expense over the vesting period of the award. This standard is effective prospectively for annual reporting periods, and interim periods therein, beginning after December 15, 2016. The Company adopted this ASU on January 1, 2017 which resulted in the recognition of excess tax benefits within the Condensed Consolidated Statements of Operations rather than paid-in capital of $1.8 million for the six months ended June 30, 2017.

 

 

3. Fair Value Measurements

The carrying amounts of certain of the Company’s financial instruments, including cash equivalents, accounts receivable and accounts payable approximate their fair values due to their short maturities. Assets and liabilities recorded at fair value on a recurring basis in the balance sheets, as well as assets and liabilities measured at fair value on a non-recurring basis or disclosed at fair value, are categorized based upon the level of judgment associated with inputs used to measure their fair values. The accounting guidance for fair value provides a framework for measuring fair value, and requires certain disclosures about how fair value is determined. Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The accounting guidance also establishes a three-level valuation hierarchy that prioritizes the inputs to valuation techniques used to measure fair value based upon whether such inputs are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions made by the reporting entity. The three-level hierarchy for the inputs to valuation techniques is briefly summarized as follows:

Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

Level 2—Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and

Level 3—Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.

The Company’s cash equivalents, which include money market funds, are classified as Level 1 because they are valued using quoted market prices. The Company’s marketable securities consist of available-for-sale securities and are generally classified as Level 2 because their value is based on valuations using significant inputs derived from or corroborated by observable market data.

In certain cases where there is limited activity or less transparency around the inputs to valuation, securities are classified as Level 3. Level 3 liabilities consist of the contingent consideration liability.

9


 

The following table sets forth the Company’s financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands):

 

 

 

June 30, 2017

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

52,650

 

 

$

 

 

$

 

 

$

52,650

 

U.S. government and agency securities

 

 

 

 

 

116,114

 

 

 

 

 

 

116,114

 

Corporate debt securities

 

 

 

 

 

71,222

 

 

 

 

 

 

71,222

 

Commercial paper

 

 

 

 

 

124,235

 

 

 

 

 

 

124,235

 

Total

 

$

52,650

 

 

$

311,571

 

 

$

 

 

$

364,221

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration related to acquisition

 

$

 

 

$

 

 

$

6,044

 

 

$

6,044

 

Total

 

$

 

 

$

 

 

$

6,044

 

 

$

6,044

 

 

 

 

December 31, 2016

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

54,318

 

 

$

 

 

$

 

 

$

54,318

 

U.S. government and agency securities

 

 

 

 

 

166,800

 

 

 

 

 

 

166,800

 

Corporate debt securities

 

 

 

 

 

77,880

 

 

 

 

 

 

77,880

 

Commercial paper

 

 

 

 

 

49,643

 

 

 

 

 

 

49,643

 

Total

 

$

54,318

 

 

$

294,323

 

 

$

 

 

$

348,641

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration related to acquisition

 

$

 

 

$

 

 

$

4,032

 

 

$

4,032

 

Total

 

$

 

 

$

 

 

$

4,032

 

 

$

4,032

 

 

The acquisition-date fair value of the contingent consideration liability represents the future consideration that is contingent upon the achievement of specified development milestones for a product candidate. The fair value of the contingent consideration is based on the Company’s probability-weighted discounted cash flow assessment that considers probability and timing of future payments. The fair value measurement is based on significant Level 3 inputs such as anticipated timelines and probability of achieving development milestones. Changes in the fair value of the liability for contingent consideration, except for the impact of foreign currency, will be recognized as research and development expense in the condensed consolidated statements of operations until settlement.

The Company did not have any financial assets and liabilities measured at fair value on a non-recurring basis as of June 30, 2017 and December 31, 2016. There were no transfers between the fair value measurement category levels during any of the periods presented.

The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial liabilities (in thousands):

 

 

 

Contingent

Consideration

 

Balance at December 31, 2016

 

$

4,032

 

Net change in fair value upon remeasurement

 

 

1,636

 

Foreign currency impact on contingent consideration

 

 

376

 

Balance at June 30, 2017

 

$

6,044

 

 

10


 

The following tables summarize the estimated value of the Company’s cash, cash equivalents and marketable securities and the gross unrealized holding gains and losses (in thousands):

 

 

 

June 30, 2017

 

 

 

Amortized

cost

 

 

Unrealized

gains

 

 

Unrealized

losses

 

 

Estimated

Fair Value

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

13,022

 

 

$

 

 

$

 

 

$

13,022

 

Money market funds

 

 

52,650

 

 

 

 

 

 

 

 

 

52,650

 

U.S. government and agency securities

 

 

40,735

 

 

 

1

 

 

 

(1

)

 

 

40,735

 

Commercial paper

 

 

77,408

 

 

 

 

 

 

 

 

 

77,408

 

Total cash and cash equivalents

 

$

183,815

 

 

$

1

 

 

$

(1

)

 

$

183,815

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

$

75,457

 

 

$

 

 

$

(78

)

 

$

75,379

 

Corporate debt securities

 

 

71,284

 

 

 

 

 

 

(62

)

 

 

71,222

 

Commercial paper

 

 

46,827

 

 

 

 

 

 

 

 

 

46,827

 

Total marketable securities

 

$

193,568

 

 

$

 

 

$

(140

)

 

$

193,428

 

 

 

 

December 31, 2016

 

 

 

Amortized

cost

 

 

Unrealized

gains

 

 

Unrealized

losses

 

 

Estimated

Fair Value

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

13,265

 

 

$

 

 

$

 

 

$

13,265

 

Money market funds

 

 

54,318

 

 

 

 

 

 

 

 

 

54,318

 

Commercial paper

 

 

7,349

 

 

 

 

 

 

 

 

 

7,349

 

Total cash and cash equivalents

 

$

74,932

 

 

$

 

 

$

 

 

$

74,932

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

$

166,854

 

 

$

7

 

 

$

(61

)

 

$

166,800

 

Corporate debt securities

 

 

77,967

 

 

 

 

 

 

(87

)

 

 

77,880

 

Commercial paper

 

 

42,294

 

 

 

 

 

 

 

 

 

 

42,294

 

Total marketable securities

 

$

287,115

 

 

$

7

 

 

$

(148

)

 

$

286,974

 

 

The amortized cost and estimated fair value of the Company’s available-for-sale marketable securities by contractual maturity are summarized below as of June 30, 2017 (in thousands):

 

 

 

Amortized cost

 

 

Estimated Fair Value

 

Mature in one year or less

 

$

193,568

 

 

$

193,428

 

Total available-for-sale marketable securities

 

$

193,568

 

 

$

193,428

 

 

 

4. Balance Sheet Components

Property and Equipment, Net

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

 

 

 

June 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Lab equipment

 

$

6,571

 

 

$

5,379

 

Computer and office equipment

 

 

1,816

 

 

 

1,755

 

Furniture and fixtures

 

 

1,731

 

 

 

1,479

 

Leasehold improvements

 

 

17,968

 

 

 

17,473

 

Construction in progress

 

 

3,588

 

 

 

3,930

 

Total property and equipment

 

 

31,674

 

 

 

30,016

 

Less: accumulated depreciation and amortization

 

 

(5,314

)

 

 

(3,632

)

Property and equipment, net

 

$

26,360

 

 

$

26,384

 

 

11


 

Depreciation and amortization expense was $833,000 and $382,000 for the three months ended June 30, 2017 and 2016, respectively, and $1.7 million and $739,000 for the six months ended June 30, 2017 and 2016, respectively.

Accrued Expenses and Other Liabilities

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

 

 

 

June 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Compensation and related benefits

 

$

3,101

 

 

$

4,228

 

Professional and consulting services

 

 

1,586

 

 

 

1,168

 

Deferred rent, current portion

 

 

421

 

 

 

331

 

Accrued research expense

 

 

775

 

 

 

489

 

Income tax payable

 

 

 

 

 

806

 

Other

 

 

1,190

 

 

 

1,575

 

Total accrued expenses and other liabilities

 

$

7,073

 

 

$

8,597

 

 

 

 

5. Goodwill and Intangible Assets

Goodwill

The gross carrying amount of goodwill was as follows (in thousands):

 

Balance at December 31, 2016

 

$

7,658

 

Foreign currency translation adjustment

 

 

660

 

Balance at June 30, 2017

 

$

8,318

 

 

Intangible assets

The gross carrying amounts and net book value of our intangible assets were as follows (in thousands):

 

 

 

June 30, 2017

 

 

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net Book Value

 

Intangible assets with finite lives:

 

 

 

 

 

 

 

 

 

 

 

 

License agreement

 

$

11,297

 

 

$

941

 

 

$

10,356

 

Total intangible assets with finite lives

 

 

11,297

 

 

 

941

 

 

 

10,356

 

Acquired IPR&D assets

 

 

19,590

 

 

 

 

 

 

19,590

 

Total intangible assets

 

$

30,887

 

 

$

941

 

 

$

29,946

 

 

 

 

December 31, 2016

 

 

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net Book Value

 

Intangible assets with finite lives:

 

 

 

 

 

 

 

 

 

 

 

 

License agreement

 

$

10,400

 

 

$

607

 

 

$

9,793

 

Total intangible assets with finite lives

 

 

10,400

 

 

 

607

 

 

 

9,793

 

Acquired IPR&D assets

 

 

18,034

 

 

 

 

 

 

18,034

 

Total intangible assets

 

$

28,434

 

 

$

607

 

 

$

27,827

 

 

Intangible assets are carried at cost less accumulated amortization. The license agreement is being amortized over a period of 20 years and the amortization expense is recorded in operating expenses. The increase in the gross carrying amount of intangible assets as of June 30, 2017 compared to December 31, 2016 reflected a positive impact of foreign currency exchange which was primarily due to the strengthening of the Euro against the U.S. dollar.

12


 

Amortization expense was $136,000 and $140,000 for the three months ended June 30, 2017 and 2016, respectively and $268,000 and $277,000 for the six months ended June 30, 2017 and 2016, respectively. Based on finite-lived intangible assets recorded as of June 30, 2017, the estimated future amortization expense is as follows (in thousands):

 

Year Ending December 31,

 

Estimated

Amortization

Expense

 

2017 (remaining six months)

 

$

282

 

2018

 

 

565

 

2019

 

 

565

 

2020

 

 

565

 

2021

 

 

565

 

 

 

6. Collaboration Agreements

Novartis Agreement

In March 2015, the Company entered into a collaboration and license agreement with Novartis Pharmaceuticals Corporation, or Novartis, pursuant to which the Company is collaborating worldwide with Novartis regarding the development and potential commercialization of product candidates containing an agonist of the molecular target known as STING in the field of oncology, including immuno-oncology and cancer vaccines. Under this agreement, or the Novartis Agreement, the Company granted Novartis a co-exclusive license to develop such products worldwide, an exclusive license to commercialize such products outside the United States and a non-exclusive license to support the Company in commercializing such products in the United States if it requests such support. The collaboration is guided by a joint steering committee with each party having final decision making authority regarding specified areas of development or commercialization.

Under the Novartis Agreement, the Company received an upfront payment of $200.0 million in April 2015. During the second quarter of 2016, the Company earned a $35.0 million development milestone upon initiation of a Phase 1 trial for the first STING product candidate, ADU-S100, and recognized the payment as revenue in the period. The Company is also eligible to receive up to an additional $215.0 million in development milestones and up to an additional $250.0 million in regulatory approval milestones.

The Company is responsible for 38% of the joint development costs worldwide and Novartis is responsible for the remaining 62% of the joint development costs worldwide.

The Company will also receive 50% of gross profits on sales of any products commercialized pursuant to this collaboration in the United States and 45% of gross profits for specified European countries and Japan. For each of these profit share countries, each party will be responsible for its respective commercial sharing percentage of all joint commercialization costs incurred in that country.

For all other countries where the Company is not sharing profits, Novartis will be responsible for all commercialization costs and will pay the Company a royalty in the mid-teens on all net sales of product sold by Novartis, its affiliates and sublicensees, with such percentage subject to reduction post patent and data exclusivity expiration and subject to reduction, capped at a specified percentage, for royalties payable to third party licensors. Novartis’ royalty obligation will run on a country-by-country basis until the later of expiration of the last valid claim covering the product, expiration of data exclusivity for the product or 12 years after first commercial sale of the product in such country.

With respect to the United States, specified European countries and/or Japan, the Company may elect for such region to either reduce by 50% or to eliminate in full the Company’s development and commercialization cost sharing obligation. If the Company elects to reduce its cost sharing percentage by 50% in any such region, then its profit share in such region will also be reduced by 50%. If the Company elects to eliminate its development cost sharing obligation, then such region will be removed from the profit share, and instead Novartis will owe the Company royalties on any net sales of product for such region, as described above.

The Company recognizes revenue from collaboration, license or research arrangements when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable and collection is reasonably assured. The Company has determined that the license does not have stand-alone value separable from the co-development services to be performed under the agreement, with the Company participating in the research and development services. As a result, the Company recognizes revenue from the $200.0 million upfront fee received on a straight-line basis over its estimated performance period of 13.5 years, commencing in July 2015, the date of the Joint Steering Committee’s approval of the research and development plan. Changes in the estimated period of performance will be accounted for prospectively as a change in estimate. The Company will recognize substantive milestone payments in their entirety in the period in which the milestone is achieved. Non-substantive milestone payments

13


 

will be recognized on a straight-line basis over the remaining performance period. Costs associated with co-development activities performed under the agreement are included in research and development expenses in the accompanying condensed consolidated statements of operations. Reimbursement of research and development costs by Novartis is included in collaboration and license revenue. The Company will recognize revenue from the sale of any products commercialized pursuant to this collaboration in the United States, will retain 50% of the gross profits from such sales, and will pay the remaining 50% of the gross profits to Novartis. The Company will receive from Novartis 45% of gross profits for specified European countries and Japan. Profit sharing payments made to or received from Novartis are aggregated by product by territory and are reported as expenses or revenues, as applicable.

For the three months ended June 30, 2017 and 2016, the Company recognized $3.8 million and $3.7 million, respectively, and for the six months ended June 30, 2017 and 2016, the Company recognized $7.5 million and $7.4 million, respectively, in revenue from its collaboration with Novartis primarily related to amortization of the upfront fee. The remaining balance of the upfront fees of $170.4 million is included in deferred revenue at June 30, 2017.