UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended MarchDecember 31, 2018
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number:001-36370
APPLIED GENETIC
TECHNOLOGIES CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
| ||
Delaware | 59-3553710 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
14193 NW 119th Terrace
Suite 10
Alachua, Florida 32615
(Address of Principal Executive Offices, Including Zip Code)
(386)462-2204
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically, and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 ofRegulation 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, anon-accelerated filer, or a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” inRule 12b-2 of the Exchange Act.
Large accelerated filer |
| ☐ | Accelerated filer | ☒ | ||
Non-accelerated filer |
| ☐ | Smaller reporting company | ☒ | ||
Emerging |
| ☒ |
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 inRule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares of the registrant’s common stock outstanding as of May 2, 2018February 7, 2019 was 18,110,536.18,165,054.
APPLIED GENETIC TECHNOLOGIES CORPORATION
FORM10-Q
FOR THE QUARTER ENDED MarchDECEMBER 31, 2018
TABLE OF CONTENTS
| ||||||||||
Pages | ||||||||||
ITEM 1. | 3 | |||||||||
Condensed Balance Sheets | 3 | |||||||||
4 | ||||||||||
Condensed Statements of Stockholders’ Equity for the six months ended December 31, 2018 and 2017 | 5 | |||||||||
| 6 | |||||||||
| 7 | |||||||||
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
| 23 | |||||||
ITEM 3. |
| 32 | ||||||||
ITEM 4. |
| 32 | ||||||||
ITEM 1. |
| 33 | ||||||||
ITEM 1A. |
| 33 | ||||||||
ITEM 2. |
| 36 | ||||||||
ITEM 6. |
| 36 | ||||||||
SIGNATURES | ||||||||||
|
2
PARTPART I. FINANCIAL INFORMATION
ITEM 1. |
APPLIED GENETIC TECHNOLOGIES CORPORATION
(Unaudited)
|
| March 31, |
|
| June 30, |
| ||
In thousands, except per share data |
| 2018 |
|
| 2017 |
| ||
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 47,633 |
|
| $ | 30,706 |
|
Investments |
|
| 64,167 |
|
|
| 95,994 |
|
Grants receivable |
|
| 133 |
|
|
| 174 |
|
Prepaid and other current assets |
|
| 3,968 |
|
|
| 3,361 |
|
Total current assets |
|
| 115,901 |
|
|
| 130,235 |
|
Investments, net of current portion |
|
| — |
|
|
| 11,749 |
|
Property and equipment, net |
|
| 5,526 |
|
|
| 2,661 |
|
Investment in Bionic Sight |
|
| 1,995 |
|
|
| 2,000 |
|
Other assets |
|
| 2,025 |
|
|
| 1,278 |
|
Total assets |
| $ | 125,447 |
|
| $ | 147,923 |
|
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
| $ | 1,322 |
|
| $ | 998 |
|
Accrued and other liabilities |
|
| 8,035 |
|
|
| 6,162 |
|
Deferred revenue |
|
| 8,188 |
|
|
| 20,996 |
|
Total current liabilities |
|
| 17,545 |
|
|
| 28,156 |
|
Deferred revenue, net of current portion |
|
| 912 |
|
|
| 4,438 |
|
Other liabilities |
|
| 2,294 |
|
| — |
| |
Total liabilities |
|
| 20,751 |
|
|
| 32,594 |
|
Stockholders' equity: |
|
|
|
|
|
|
|
|
Common stock—par value $.001 per share; shares authorized: 150,000; |
|
|
|
|
|
|
|
|
shares issued and outstanding: 18,121 and 18,088 |
|
|
|
|
|
|
|
|
at March 31, 2018 and June 30, 2017, respectively |
|
| 18 |
|
|
| 18 |
|
Additional paid-in capital |
|
| 209,015 |
|
|
| 204,937 |
|
Shares held in treasury of: 6 and 0 at March 31, 2018 and June 30, 2017 respectively |
|
| (23 | ) |
| — |
| |
Accumulated deficit |
|
| (104,314 | ) |
|
| (89,626 | ) |
Total stockholders' equity |
|
| 104,696 |
|
|
| 115,329 |
|
Total liabilities and stockholders' equity |
| $ | 125,447 |
|
| $ | 147,923 |
|
In thousands, except per share data | December 31, 2018 | June 30, 2018 | ||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 23,978 | $ | 31,065 | ||||
Investments | 72,097 | 73,840 | ||||||
Grants receivable | 116 | 210 | ||||||
Prepaid and other current assets | 2,959 | 4,009 | ||||||
|
|
|
| |||||
Total current assets | 99,150 | 109,124 | ||||||
|
|
|
| |||||
Property and equipment, net | 4,778 | 5,254 | ||||||
Intangible assets, net | 954 | 968 | ||||||
Investment in Bionic Sight | 1,961 | 1,980 | ||||||
Other assets | 1,260 | 1,206 | ||||||
|
|
|
| |||||
Total assets | $ | 108,103 | $ | 118,532 | ||||
|
|
|
| |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 1,664 | $ | 945 | ||||
Accrued and other liabilities | 5,823 | 7,155 | ||||||
Deferred revenue | 12,701 | 6,295 | ||||||
|
|
|
| |||||
Total current liabilities | 20,188 | 14,395 | ||||||
|
|
|
| |||||
Deferred revenue, net of current portion | 7,731 | 610 | ||||||
Other liabilities | 4,209 | 4,345 | ||||||
|
|
|
| |||||
Total liabilities | 32,128 | 19,350 | ||||||
|
|
|
| |||||
Stockholders’ equity: | ||||||||
Preferred stock, par value $.001 per share, 5,000 shares authorized, no shares issued and outstanding | — | — | ||||||
Common stock—par value $.001 per share; 150,000 shares authorized; 18,179 and 18,137 share issued; 18,164 and 18,126 shares outstanding at December 31, and June 30, 2018, respectively | 18 | 18 | ||||||
Additionalpaid-in capital | 212,550 | 210,139 | ||||||
Shares held in treasury of 15 and 11 at December 31, 2018 and June 30, 2018, respectively | (70 | ) | (49 | ) | ||||
Accumulated deficit | (136,523 | ) | (110,926 | ) | ||||
|
|
|
| |||||
Total stockholders’ equity | 75,975 | 99,182 | ||||||
|
|
|
| |||||
Total liabilities and stockholders’ equity | $ | 108,103 | $ | 118,532 | ||||
|
|
|
|
The accompanying notes are an integral part of the financial statements.
these Unaudited Condensed Financial Statements.
3
APPLIED GENETIC TECHNOLOGIES CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
|
| For the Three Months Ended March 31, |
|
| For the Nine Months Ended March 31, |
| ||||||||||
|
|
|
|
|
| 2017 |
|
|
|
|
|
| 2017 |
| ||
In thousands, except per share amounts |
| 2018 |
|
| (as adjusted) |
|
| 2018 |
|
| (as adjusted) |
| ||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collaboration revenue |
| $ | 3,588 |
|
| $ | 8,297 |
|
| $ | 18,727 |
|
| $ | 30,959 |
|
Grant and other revenue |
|
| 15 |
|
|
| 91 |
|
|
| 43 |
|
|
| 169 |
|
Total revenue |
|
| 3,603 |
|
|
| 8,388 |
|
|
| 18,770 |
|
|
| 31,128 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
| 7,353 |
|
|
| 6,303 |
|
|
| 23,355 |
|
|
| 17,916 |
|
General and administrative and other |
|
| 3,946 |
|
|
| 2,921 |
|
|
| 11,020 |
|
|
| 8,507 |
|
Total operating expenses |
|
| 11,299 |
|
|
| 9,224 |
|
|
| 34,375 |
|
|
| 26,423 |
|
Income (loss) from operations |
|
| (7,696 | ) |
|
| (836 | ) |
|
| (15,605 | ) |
|
| 4,705 |
|
Other income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, net |
|
| 325 |
|
|
| 236 |
|
|
| 866 |
|
|
| 700 |
|
Other expense |
|
| — |
|
| — |
|
|
| (10 | ) |
| — |
| ||
Total other income, net |
|
| 325 |
|
|
| 236 |
|
|
| 856 |
|
|
| 700 |
|
Income (loss) before provision for income taxes and equity in net earnings (losses) of affiliate |
|
| (7,371 | ) |
|
| (600 | ) |
|
| (14,749 | ) |
|
| 5,405 |
|
Provision (benefit) for income taxes |
|
| 725 |
|
|
| 600 |
|
|
| (66 | ) |
|
| 1,800 |
|
Income (loss) before equity in net losses of affiliate |
|
| (8,096 | ) |
|
| (1,200 | ) |
|
| (14,683 | ) |
|
| 3,605 |
|
Equity in net losses of affiliate |
|
| (5 | ) |
| — |
|
|
| (5 | ) |
|
| — |
| |
Net income (loss) |
| $ | (8,101 | ) |
| $ | (1,200 | ) |
| $ | (14,688 | ) |
| $ | 3,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares Outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding – basic |
|
| 18,112 |
|
|
| 18,081 |
|
|
| 18,098 |
|
|
| 18,068 |
|
Weighted average shares outstanding – diluted |
|
| 18,112 |
|
|
| 18,081 |
|
|
| 18,098 |
|
|
| 18,408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share, basic |
| $ | (0.45 | ) |
| $ | (0.07 | ) |
| $ | (0.81 | ) |
| $ | 0.20 |
|
Net income (loss) per share, diluted |
| $ | (0.45 | ) |
| $ | (0.07 | ) |
| $ | (0.81 | ) |
| $ | 0.20 |
|
For the Three Months Ended December 31, | For the Six Months Ended December 31, | |||||||||||||||
In thousands, except per share amounts | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Revenue: | ||||||||||||||||
Collaboration revenue | $ | 5,895 | $ | 4,831 | $ | 19,920 | $ | 15,139 | ||||||||
Grant and other revenue | 39 | 21 | 48 | 28 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total revenue | 5,934 | 4,852 | 19,968 | 15,167 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Operating expenses: | ||||||||||||||||
Research and development | 7,583 | 7,726 | 17,648 | 16,002 | ||||||||||||
General and administrative and other | 3,022 | 3,368 | 6,235 | 7,074 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total operating expenses | 10,605 | 11,094 | 23,883 | 23,076 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Loss from operations | (4,671 | ) | (6,242 | ) | (3,915 | ) | (7,909 | ) | ||||||||
Other income: | ||||||||||||||||
Investment income, net | 520 | 271 | 991 | 541 | ||||||||||||
Other expense | — | (10 | ) | — | (10 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total other income, net | 520 | 261 | 991 | 531 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Loss before provision for income taxes | (4,151 | ) | (5,981 | ) | (2,924 | ) | (7,378 | ) | ||||||||
Provision (benefit) for income taxes | 19 | (791 | ) | 38 | (791 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Loss before equity in net losses of affiliate | (4,170 | ) | (5,190 | ) | (2,962 | ) | (6,587 | ) | ||||||||
Equity in net losses of affiliate | (11 | ) | — | (19 | ) | — | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Net loss | $ | (4,181 | ) | $ | (5,190 | ) | $ | (2,981 | ) | $ | (6,587 | ) | ||||
|
|
|
|
|
|
|
| |||||||||
Weighted Average Shares Outstanding | ||||||||||||||||
Weighted average shares outstanding—basic | 18,151 | 18,094 | 18,140 | 18,091 | ||||||||||||
Weighted average shares outstanding—diluted | 18,151 | 18,094 | 18,140 | 18,091 | ||||||||||||
Net loss per common share | ||||||||||||||||
Net loss per share, basic | $ | (0.23 | ) | $ | (0.29 | ) | $ | (0.16 | ) | $ | (0.36 | ) | ||||
Net loss per share, diluted | $ | (0.23 | ) | $ | (0.29 | ) | $ | (0.16 | ) | $ | (0.36 | ) |
The accompanying notes are an integral part of the financial statements.these Unaudited Condensed Financial Statements.
4
APPLIED GENETIC TECHNOLOGIES CORPORATION
CONDENSED STATEMENTSSTATEMENT OF CASH FLOWSSTOCKHOLDERS’ EQUITY
(Unaudited)
|
| For the Nine Months Ended March 31, |
| |||||
|
|
|
|
|
| 2017 |
| |
In thousands |
| 2018 |
|
| (as adjusted) |
| ||
Cash flows from operating activities |
|
|
|
|
|
|
|
|
Net income (loss) |
| $ | (14,688 | ) |
| $ | 3,605 |
|
Adjustments to reconcile net income (loss) to net cash (used in) operating activities: |
|
|
|
|
|
|
|
|
Share-based compensation expense |
|
| 4,072 |
|
|
| 4,161 |
|
Depreciation and amortization |
|
| 821 |
|
|
| 657 |
|
Provision for uncollectible accounts |
|
| 369 |
|
|
| — |
|
Investment premium accretion |
|
| 174 |
|
|
| 320 |
|
Loss on disposal of property and equipment |
|
| 20 |
|
|
| — |
|
Equity in net losses of affiliate |
|
| 5 |
|
|
| — |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Grants receivable |
|
| 41 |
|
|
| 785 |
|
Prepaid and other assets |
|
| (1,946 | ) |
|
| (725 | ) |
Deferred revenues |
|
| (16,334 | ) |
|
| (30,435 | ) |
Accounts payable |
|
| 324 |
|
|
| (514 | ) |
Accrued and other liabilities |
|
| 1,365 |
|
|
| 1,139 |
|
Net cash (used in) operating activities |
|
| (25,777 | ) |
|
| (21,007 | ) |
Cash flows from investing activities |
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
| (654 | ) |
|
| (560 | ) |
Purchase of and capitalized costs related to intangible assets |
|
| — |
|
|
| (132 | ) |
Investment in Bionic Sight |
|
| — |
|
|
| (2,000 | ) |
Maturities of investments |
|
| 88,183 |
|
|
| 80,821 |
|
Purchases of investments |
|
| (44,779 | ) |
|
| (50,517 | ) |
Net cash provided by investing activities |
|
| 42,750 |
|
|
| 27,612 |
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
Proceeds from exercise of common stock options |
|
| (17 | ) |
|
| 27 |
|
Payments made toward capital lease obligations |
|
| (29 | ) |
| — |
| |
Net cash (used in) provided by financing activities |
|
| (46 | ) |
|
| 27 |
|
Net change in cash and cash equivalents |
|
| 16,927 |
|
|
| 6,632 |
|
Cash and cash equivalents, beginning of period |
|
| 30,706 |
|
|
| 28,868 |
|
Cash and cash equivalents, end of period |
| $ | 47,633 |
|
| $ | 35,500 |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash financing activities |
|
|
|
|
|
|
|
|
Capital lease obligation related to the purchase of equipment |
|
| 240 |
|
|
| — |
|
Lease incentive obligation related to the purchase of leasehold improvements |
|
| 2,588 |
|
|
| — |
|
Issuance of restricted stock for no consideration |
|
| 25 |
|
|
| — |
|
Common Stock | Treasury Stock | Additional Paid-in Capital | Accumulated Deficit | Total | ||||||||||||||||||||||||
In thousands | Outstanding Shares | Amount | Outstanding Shares | Amount | ||||||||||||||||||||||||
Balance, June 30, 2017 | 18,088 | $ | 18 | — | $ | — | $ | 204,937 | $ | (89,626 | ) | $ | 115,329 | |||||||||||||||
Share based compensation expense | — | — | — | — | 1,469 | — | 1,469 | |||||||||||||||||||||
Shares issued under employee plans | 5 | — | — | — | 2 | — | 2 | |||||||||||||||||||||
Net loss | — | — | — | — | — | (1,397 | ) | (1,397 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Balance, September 30, 2017 | 18,093 | $ | 18 | — | $ | — | $ | 206,408 | $ | (91,023 | ) | $ | 115,403 | |||||||||||||||
Share based compensation expense | — | — | — | — | 1,331 | — | 1,331 | |||||||||||||||||||||
Shares issued under employee plans | 12 | — | — | — | 39 | — | 39 | |||||||||||||||||||||
Net loss | — | — | — | — | — | (5,190 | ) | (5,190 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Balance, December 31, 2017 | 18,105 | $ | 18 | — | $ | — | $ | 207,778 | $ | (96,213 | ) | $ | 111,583 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Balance, June 30, 2018 | 18,126 | $ | 18 | 11 | $ | (49 | ) | $ | 210,139 | $ | (110,926 | ) | $ | 99,182 | ||||||||||||||
Cumulative impact of adopting Topic 606 on July 1, 2018 | — | — | — | — | — | (22,616 | ) | (22,616 | ) | |||||||||||||||||||
Share based compensation expense | — | — | — | — | 1,181 | — | 1,181 | |||||||||||||||||||||
Shares issued under employee plans | 4 | — | 2 | (8 | ) | — | — | (8 | ) | |||||||||||||||||||
Net income | — | — | — | — | — | 1,200 | 1,200 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Balance, September 30, 2018 | 18,130 | $ | 18 | 13 | $ | (57 | ) | $ | 211,320 | $ | (132,342 | ) | $ | 78,939 | ||||||||||||||
Share based compensation expense | — | — | — | — | 1,094 | — | 1,094 | |||||||||||||||||||||
Shares issued under employee plans | 34 | — | 2 | (13 | ) | 136 | — | 123 | ||||||||||||||||||||
Net loss | — | — | — | — | — | (4,181 | ) | (4,181 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Balance, December 31, 2018 | 18,164 | $ | 18 | 15 | $ | (70 | ) | $ | 212,550 | $ | (136,523 | ) | $ | 75,975 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the financial statements.these Unaudited Condensed Financial Statements.
5
APPLIED GENETIC TECHNOLOGIES CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months Ended December 31, | ||||||||
In thousands | 2018 | 2017 | ||||||
Cash flows from operating activities | ||||||||
Net loss | $ | (2,981 | ) | $ | (6,587 | ) | ||
Adjustments to reconcile net loss to net cash (used in) operating activities: | ||||||||
Share-based compensation expense | 2,275 | 2,800 | ||||||
Depreciation and amortization | 639 | 544 | ||||||
Recovery of bad debts | (258 | ) | — | |||||
Investment (discount accretion) premium amortization | (353 | ) | 143 | |||||
Equity in net losses of affiliate | 19 | — | ||||||
Changes in operating assets and liabilities: | ||||||||
Grants receivable | (17 | ) | (29 | ) | ||||
Prepaid and other assets | 291 | (1,747 | ) | |||||
Deferred revenues | (7,960 | ) | (13,489 | ) | ||||
Accounts payable | 719 | 38 | ||||||
Accrued and other liabilities | (1,350 | ) | (173 | ) | ||||
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Net cash (used in) operating activities | (8,976 | ) | (18,500 | ) | ||||
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Cash flows from investing activities | ||||||||
Purchase of property and equipment | (81 | ) | (134 | ) | ||||
Purchase of and capitalized costs related to intangible assets | (68 | ) | — | |||||
Maturity of investments | 46,619 | 58,288 | ||||||
Purchase of investments | (44,523 | ) | — | |||||
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Net cash provided by investing activities | 1,947 | 58,154 | ||||||
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Cash flows from financing activities | ||||||||
Proceeds from exercise of common stock options | 136 | 3 | ||||||
Deferred offering costs | (168 | ) | — | |||||
Payments made toward capital lease obligations | (26 | ) | (18 | ) | ||||
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Net cash (used in) financing activities | (58 | ) | (15 | ) | ||||
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Net change in cash and cash equivalents | (7,087 | ) | 39,639 | |||||
Cash and cash equivalents, beginning of period | 31,065 | 30,706 | ||||||
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Cash and cash equivalents, end of period | $ | 23,978 | $ | 70,345 | ||||
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Supplemental disclosure of cash flow | ||||||||
Cash paid during the period for income taxes | $ | — | $ | 670 | ||||
Non cash flow information | ||||||||
Capital lease obligation related to the purchase of equipment | $ | — | $ | 209 | ||||
Lease incentive obligation related to the purchase of leasehold improvements | $ | — | $ | 627 | ||||
Shares issued for no consideration | $ | 21 | $ | 38 |
The accompanying notes are an integral part of these Unaudited Condensed Financial Statements.
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APPLIED GENETIC TECHNOLOGIES CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
| Organization and Operations: |
Applied Genetic Technologies Corporation (the “Company” or “AGTC”) was incorporated as a Florida corporation on January 19, 1999 and reincorporated as a Delaware corporation on October 24, 2003. The Company is a clinical-stage biotechnology company that uses a proprietary gene therapy platform to develop transformational genetic therapies for patients suffering from rare and debilitating diseases.
In July 2015, the Company entered into a collaboration agreement (the “Collaboration Agreement”) with Biogen MA, Inc., a wholly owned subsidiary of Biogen Inc. (“Biogen”), pursuant to which the Company and Biogen will collaborate to develop, seek regulatory approval for and commercialize gene therapy products to treatX-linked retinoschisis (“XLRS”),X-linked retinitis pigmentosa (“XLRP”), and discovery programs targeting three indications based on the Company’s adeno-associated virus vector technologies. The Collaboration Agreement became effective in August 2015. On December 7, 2018, the Company received notice from Biogen that it had elected to terminate the Collaboration Agreement effective as of March 8, 2019. The Collaboration Agreement and other transactions with Biogen are discussed further in Note 6 to these financial statements.Unaudited Condensed Financial Statements.
The Company has devoted substantially all of its efforts to research and development, including clinical trials. The Company has not completed the development of any products. The Company has generated revenue from collaboration agreements, sponsored research payments and grants, but has not generated product revenue to date and is subject to a number of risks similar to those of other early stage companies in the biotechnology industry, including dependence on key individuals, the difficulties inherent in the development of commercially viable products, the need to obtain additional capital necessary to fund the development of its products, development by the Company or its competitors of technological innovations, risks of failure of clinical studies, protection of proprietary technology, compliance with government regulations and ability to transition to large-scale production of products. As of MarchDecember 31, 2018, the Company had an accumulated deficit of $104.3$136.5 million. While the Company expects to continue to generate some revenue from partnering, including under the collaboration with Biogen, the Company expects to incur losses for the foreseeable future. The Company has funded its operations to date primarily through public offerings of its common stock, private placements of its preferred stock, and collaborations. At MarchDecember 31, 2018, the Company had cash and cash equivalents and liquid investments of $111.8$96.1 million.
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2. | Summary of Significant Accounting Policies: |
Basis of presentation
The accompanying unaudited condensed financial statementsUnaudited Condensed Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and, in the opinion of management, include all adjustments necessary for a fair presentation of the Company’s financial position, results of operations, stockholders’ equity and cash flows for each periodthe periods presented.
The adjustments referred to above are of a normal and recurring nature. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to U.S. Securities and Exchange Commission (“SEC”) rules and regulations for interim reporting.
See Note 7 for a discussion of a revision of prior financial results presented related to the recording of our income tax provision for fiscal year 2017.
The Condensed Balance Sheet as of June 30, 20172018 was derived from audited financial statements, but does not include all disclosures required by GAAP. These Unaudited Condensed Financial Statements should be read in conjunction with the audited financial statements included in the Company’s 20172018 Annual Report onForm 10-K as amended, (“June 30, 2017 2018Form 10-K”). Results of operations for the three and ninesix months ended MarchDecember 31, 2018 are not necessarily indicative of the results to be expected for the full year or any other interim period.
Segment reporting
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker in making decisions regarding resource allocation and assessing performance. To date, we have viewed our operations and managed our business as one segment.
The preparation of financial statements in conformity with GAAP and SEC regulations, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting periods.period. Actual results could differ from those estimates.
Cash and cash equivalents
Cash consists of funds held in bank accounts. Cash equivalents consist of short-term, highly liquid investments with original maturities of 90 days or less at the time of purchase and generally include money market accounts.
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Investments
The Company’s investments consist of certificates of deposit and debt securities classified asheld-to maturity. Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Debt securities are classified asheld-to-maturity when the Company has the positive intent and ability to hold the securities to maturity.Held-to-maturity securities are stated at amortized cost, adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion is included in investment income. Interest on securities classified asheld-to-maturity is included in investment income.
The Company uses the specific identification method to determine the cost basis of securities sold.
Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary. The Company evaluates an investment for impairment by considering the length of time and extent to which market value has been less than cost or amortized cost, the financial condition and near-term prospects of the issuer as well as specific events or circumstances that may influence the operations of the issuer and the Company’s intent to sell the security or the likelihood that it will be required to sell the security before recovery of the entire amortized cost. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded to investment income (expense) and a new cost basis in the investment is established.
Fair value of financial instruments
The Company is required to disclose information on all assets and liabilities reported at fair value that enables an assessment of the inputs used in determining the reported fair values. The Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 820,Fair Value Measurements and Disclosures, establishes a hierarchy of inputs used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability, and are developed based on the best information available in the circumstances. The fair value hierarchy applies only to the valuation inputs used in determining the reported fair value of financial instruments and is not a measure of the investment credit quality. The three levels of the fair value hierarchy are described below:
Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2—Valuations based on quoted prices for similar assets or liabilities in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
Level 3—Valuations that require inputs that reflect the Company’s own assumptions that are both significant to the fair value measurement and unobservable.
To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
Effective July 1, 2018, the Company adopted the provisions of ASC Topic 606,Revenue from Contracts with Customers,(“Topic 606”), using the modified retrospective transition method. Under this method, the Company recorded the cumulative effect of initially applying the new standard to all contracts in process as of the date of adoption. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards.
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The adoption of the new revenue recognition guidance resulted in an increase of $22.6 million in deferred revenue and accumulated deficit as of July 1, 2018. For the six months ended December 31, 2018, revenue increased by $5.0 million, net income increased by $5.0 million and basic and diluted net income per share increased by $0.28 per share based on revenue recognition under Topic 606 as compared to the Company’s prior revenue recognition methodology under ASC 605,Revenue Recognition. These changes were primarily caused by the differences in determining and allocating transaction price and recognizing revenue on a proportional performance basis under Topic 606.
The Company has primarily generated revenue throughmay enter into collaboration agreements sponsored research arrangements with nonprofit organizations forwhich are within the developmentscope of Topic 606, under which the Company licenses rights to its technology and commercializationcertain of the Company’s product candidates and revenues from federalperforms research and development grant programs.services for third parties. The terms of these arrangements typically may include payment of one or more of the following:non-refundable,up-front fees; reimbursement of research and development costs; development, regulatory and commercial milestone payments; and royalties on net sales of licensed products.
Under Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine the appropriate amount of revenue to be recognized for arrangements determined to be within the scope of Topic 606, the Company performs the following five steps: (i) identification of the contract; (ii) determination of whether the promised goods or services are performance obligations; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect consideration it is entitled to in exchange for the goods or services it transfers to the customer.
Performance obligations are promises to transfer distinct goods or services to the customer. Promised goods or services are considered distinct when (i) the customer can benefit from the good or service on its own or together with other readily available resources and (ii) the promised good or service is separately identifiable from other promises in the contract. In assessing whether promised good or services are distinct, the Company considers factors such as the stage of development of the underlying intellectual property, the capabilities of the customer to develop the intellectual property on their own or whether the required expertise is readily available.
The Company estimates the transaction price based on the amount expected to be received for transferring the promised goods or services in the contract. The consideration may include both fixed consideration or variable consideration. At the inception of an arrangement that includes variable consideration and at each reporting period, the Company evaluates the amount of potential payment and the likelihood that the payments will be received. The Company utilizes either the most likely amount method or expected amount method to estimate the amount to be received based on which method better predicts the amount expected to be received. If it is probable that a significant revenue reversal would not occur, the variable consideration is included in the transaction price. The Company will assess its revenue generating arrangements in order to determine whether a significant financing component exists and conclude that a significant financing component does not exist in any of its arrangements if: (a) the promised consideration approximates the cash selling price of the promised goods and services or any significant difference is due to factors other than financing; and (b) timing of payment approximates the transfer of goods and services and performance is over a relatively short period of time within the context of the entire term of the contract.
The Company’s contracts will often include development and regulatory milestone payments. At contract inception and at each reporting period, the Company evaluates whether the milestones are considered probable of being reached 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 associated milestone value is included in the transaction price. Milestone payments that are not within the Company’s control or the customer’s control, such as regulatory approvals, are not included in the transaction price. At the end of each subsequent reporting period, the Companyre-evaluates the probability of achievement of such development milestones and any related constraint, and if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulativecatch-up basis, which would affect collaboration revenues and earnings in the period of adjustment.
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For arrangements that may 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 when amounts are realized or realizable and earned. Revenue is considered realizable and earnedat the later of (i) when the following criteria are met: (i) persuasive evidence of an arrangement exists;related sales occur, or (ii) delivery has occurredwhen the performance obligation to which some or services have been rendered; (iii) the price is fixed or determinable; and (iv) collectionall of the royalty has been allocated has been satisfied (or partially satisfied). To date, the Company has not recognized any royalty revenue resulting from any of the Company’s collaboration arrangements.
The Company allocates the transaction price based on the estimated standalone selling price of the underlying performance obligations or in the case of certain variable consideration to one or more performance obligations. The Company must develop assumptions that require judgment to determine the stand-alone selling price for each performance obligation identified in the contract. The Company utilizes key assumptions to determine the stand-alone selling price, which may include other comparable transactions, pricing considered in negotiating the transaction and the estimated costs to complete the respective performance obligation. Certain variable consideration is allocated specifically to one or more performance obligations in a contract when the terms of the variable consideration relate to the satisfaction of the performance obligation and the resulting amounts dueallocated to each performance obligation are reasonably assured.consistent with the amounts the Company would expect to receive for each performance obligation.
Amounts received priorFor performance obligations consisting of licenses and other promises, the Company utilizes judgment to satisfyingassess 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 recognition criteriafromnon-refundable,up-front fees. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition. 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 will recognize revenue fromnon-refundable,up-front fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license.
The Company receives payments from its customers based on billing terms established in each contract. Such billings generally have30-day payment terms. Upfront payments and fees are recorded as deferred revenue in the Company’s balance sheets. Amounts expected to be recognized as revenue within the 12 months following the balance sheet date are classified as current liabilities. The Company recognizes revenue for reimbursements of research and development costs under collaboration agreements as the services are performed. The Company records these reimbursements as revenue and not as a reduction of research and development expenses, asupon receipt or when due until the Company has the risks and rewardsperforms its obligations under these arrangements. Amounts are recorded as the principal in the research and development activities.
The Company evaluates the terms of sponsored research agreement grants and federal grants to assess the Company’s obligations and if the Company’s obligations are satisfied by the passage of time, revenue is recognized on a straight-line basis. In situations where the performance of the Company’s obligations has been satisfiedaccounts receivable when the grant is received, revenue is recognized upon receipt of the grant. Certain grants contain refund provisions. The Company reviews those refund provisionsright to determine the likelihood of repayment. If the likelihood of repayment of the grant is determined to be remote, the grant is recognized as revenue. If the probability of repayment is determined to be more than remote, the Company records the grant as a deferred revenue liability, until such time that the grant requirements have been satisfied.
Collaboration revenue
On July 1, 2015, the Company entered into a Collaboration Agreement with Biogen. This collaboration is discussed further in Note 6 to the financial statements. The terms of the Collaboration Agreement and other potential collaboration or commercialization agreements the Company may enter into generally contain multiple elements, or deliverables, which may include, among others, (i) licenses, or options to obtain licenses, to its technology, and (ii) research and development activities to be performed on behalf of the collaborative partner. Payments made under such arrangements typically include one or more of the following: non-refundable, up-front license fees; option exercise fees; funding of research and/or development efforts; milestone payments; and royalties on future product sales.
Multiple element arrangements are analyzed to determine whether the deliverables within the agreement can be separated or whether they must be accounted for as a single unit of accounting. Deliverables under an agreement are required to be accounted for as separate units of accounting provided that (i) a delivered item has value to the customer on a stand-alone basis; and (ii) if the agreement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item is considered probable and substantially in the control of the vendor. The allocation of consideration amongst the deliverables under the agreement is derived using a “best estimate of selling price” if vendor specific objective evidence and third-party evidence of fair value is not available. If the delivered element does not have stand-alone value or if the fair value of any of the undelivered elements cannot be determined, the arrangement is then accounted for as a single unit of accounting, and the Company recognizes the consideration received under the arrangement as revenue on a straight-line basis over the estimated period of performance.
The Company determines the estimated selling price for deliverables within each agreement using vendor-specific objective evidence, or VSOE, of selling price, if available, third-party evidence, or TPE, of selling price if VSOE is not available, or best estimate of selling price, or BESP, if neither VSOE nor TPE are available. Determining the best estimate of selling price for a deliverable requires significant judgment. The Company uses BESP to estimate the selling price related to licenses to its proprietary technology, since it often does not have VSOE or TPE of selling price for these deliverables. In those circumstances where it utilizes BESP to determine the estimated selling price of a license to our proprietary technology, the Company considers market conditions as well as entity-specific factors, including those factors contemplated in negotiating the agreements as well as internally developed models that include assumptions related to the market opportunity, estimated development costs, probability of success and the time needed to commercialize a product candidate pursuant to the license. In validating its best estimate of selling price, the Company evaluates whether changes in the key assumptions used to determine the best estimate of selling price will have a significant effect on the allocation of arrangement consideration among multiple deliverables.
If the delivered element does not have stand-alone value, the arrangement is then accounted for as a single unit of accounting and the Company recognizes the consideration received under the arrangement as revenue on a straight-line basis over its estimated period of performance. The Company’s anticipated periods of performance, typically the terms of its research and development obligations, are subject to estimates by management and may change over the course of the collaboration agreement. Such changes could have a material impact on the amount of revenue recorded in future periods.
Milestone revenue
The Company applies the milestone method of accounting to recognize revenue from milestone payments when earned, as evidenced by written acknowledgement from the collaborator or other persuasive evidence that the milestone has been achieved and the payment is non-refundable, provided that the milestone event is substantive. A milestone event is defined as an event (i) that can only be achieved based in whole or in part on either the Company’s performance or on the occurrence of a specific outcome resulting from the Company’s performance; (ii) for which there is substantive uncertainty at the inception of the arrangement that the event will be achieved; and (iii) that would result in additional payments being due to the Company. Events for which the occurrence is either contingent solely upon the passage of time or the result of a counterparty’s performance are not considered to be milestone events. A milestone event is substantive if all of the following conditions are met: (i) the consideration is commensurate with either the Company’s performance to achieve the milestone, or the enhancement of the value to the delivered item(s) as a result of a specific outcome resulting from the Company’s performance to achieve the milestone; (ii) the consideration relates solely to past performance; and (iii) the consideration is reasonable relative to all the deliverables and payment terms (including other potential milestone consideration) within the arrangement. The Company assesses whether a milestone is substantive at the inception of the arrangement. If a milestone is deemed non-substantive, the Company accounts for that milestone payment in accordance with the multiple element arrangements guidance and recognizes revenue consistent with the related units of accounting for the arrangement over the related performance period.unconditional.
No milestone revenues were recognized during the three and nine month periods ended March 31, 2018 and March 31, 2017.
Income taxes
The Company uses the asset and liability method for accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases. Deferred tax assets and liabilities are measured using enacted rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The Tax CutsCut and Jobs Act of 2017(the “Tax Act”) was signed into lawenacted on December 22, 2017. The law includes significant changes toTax Act contains several key provisions including, among other things, reducing the U.S. federal corporate income tax system, including a Federal corporate rate reduction from 35% to 21%. In December 2017,addition, federal net operating losses (“NOLs”) will be carried forward indefinitely, but will be subject to an 80% utilization against taxable income. The Company has enacted the reduction in tax rate effective January 1, 2018, which resulted in a decrease to the deferred tax asset and a decrease to the valuation allowance. During the second quarter of fiscal 2019, the measurement period provided by SEC staff issued SABStaff Accounting Bulletin 118 which providesclosed and the Company did not make any other adjustments to the provisional estimates recorded in prior periods. Although the measurement period has closed, further technical guidance related to the Tax Act, including final regulations on accounting fora broad range of topics, is expected to be issued. In accordance with Accounting Standards Codification (ASC) 740, the taxCompany will recognize any effects of the Tax Act. SAB 118 provides for a measurementguidance in the period of up to one year from the enactment date for companies to complete the accounting for the initial income tax effects of the Tax Act. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accountingthat such guidance is complete and provide a provisional estimate (where determinable) of the income tax effects of the Tax Act where the accounting is incomplete. The provisional estimate is required to be updated throughout the measurement period. During the quarter ending December 31, 2017, the Company recorded an income tax benefit of $791,000 relating to the Company’s minimum tax credit carryforward, which becomes refundable under the new law.issued.
For the three and nine months ended March 31, 2017, the Company recorded an income tax provision of $0.6 million and $1.8 million respectively, related to the Company’s federal alternative minimum taxable income (“AMTI”) and state income tax in multiple states where the Company is doing business. The Company calculates its AMTI using the alternative minimum tax (“AMT”) system. The Company’s federal income tax liability is the greater of the tax computed using the regular tax system or the tax under the AMT system. Corporations are exempt from the AMT for all years in which their annual gross receipts for the 3-year period ending before the current tax year did not exceed $7.5 million. As of June 30, 2017, the Company no longer qualifies for the small company exclusion. The AMT system limits the use of net operating losses used by the taxpayer to offset taxable income.
As required by U.S. GAAP, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting themore-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. Any interest and penalties related
to uncertain tax positions will be reflected in income tax expense. The
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Company is subject to examination of its income tax returns in the federal and state income tax jurisdictions in which it operates.
At On December 28, 2015, the United States Internal Revenue Service, or IRS, notified the Company of an income tax audit for the tax period ending June 30, 2014. As of June 30, 2017, the total amount of unrecognizedIRS audit was closed and the Company incurred no penalties or payment liabilities for its income tax benefits recorded onpositions.
For the Company’s balance sheet was approximately $1.0 million. During the three and ninesix months ended MarchDecember 31, 2018, the Company recognizedCompany’s tax expense included an increase in unrecognizedthe uncertain tax benefits as a resultposition liability of $38,000 related to interest on the uncertain tax positions taken during a prior period in the amount of $0.7 million, resulting in an ending accrued balance $1.7 million at March 31,2018.position. The Company recorded potential interest and penalties on unrecognizeduncertain tax benefits in the amount of $0.4 million during the three months ended March 31, 2018.
The Company’s deferred tax asset, net of liabilities, decreased by $7.5 million, primarily due to a re-measurement of deferred tax assets and liabilities to the revised statutory tax rate under the Tax Act. The deferred tax asset, net of liabilities, is completely offset by valuation allowances established because realization of the deferred tax benefits are not considered more likely than notposition liability as of March 31, 2018.
For the three month and nine month periods ended MarchDecember 31, 2018 the Company recorded an income tax provision (benefit) of $0.7 million and ($66,000), respectively. The income tax expense for the three months ended March 31,June 30, 2018 was primarily driven by the apportionment of income to certain state jurisdictions where the Company had not generated net operating losses (NOL’s). The income tax benefit for the nine months ended March 31, 2018 was primarily due to certain tax credit carryforwards becoming refundable under The Tax Cuts$1,997,000 and Jobs Act of 2017, offset by income tax expense for the three months ended March 31, 2018.$1,959,000, respectively.
Research and development
Research and development costs include costs incurred in identifying, developing and testing product candidates and generally comprise compensation and related benefits andnon-cash share-based compensation to research related employees; laboratory costs; animal and laboratory maintenance and supplies; rent; utilities; clinical andpre-clinical expenses; and payments for sponsored research, scientific and regulatory consulting fees and testing.
As part of the process of preparing its financial statements, the Company is required to estimate its accrued expenses. This process involves reviewing quotations and contracts, identifying services that have been performed on its behalf and estimating the level of service performed and the associated cost incurred for services for which the Company has not yet been invoiced or otherwise notified of the actual cost. The majority of the Company’s service providers invoice the Company monthly in arrears for services performed or when contractual milestones are met. The Company makes estimates of its accrued expenses as of each balance sheet date in its financial statements based on facts and circumstances known to it at that time. The significant estimates in the Company’s accrued research and development expenses are related to expenses incurred with respect to academic research centers, contract research organizations, and other vendors in connection with research and development activities for which it has not yet been invoiced.
There may be instances in which the Company’s service providers require advance payments at the inception of a contract or in which payments made to these vendors will exceed the level of services provided, resulting in a prepayment of the research and development expense. Such prepayments are charged to research and development expense as and when the service is provided or when a specific milestone outlined in the contract is reached.
Prepayments related to research and development activities were $1.2$1.3 million and $1.5$1.0 million at MarchDecember 31, 2018 and June 30, 2017,2018, respectively, and are included within the prepaid and other current assets line item on the unaudited condensed balance sheets. Unaudited Condensed Balance Sheets.
Share-based compensation
The Company accounts for share-based awards issued to employees in accordance with ASC Topic 718,Compensation—Stock Compensation and generally recognizes share-based compensation expense on a straight-line basis over the periods during which the employees are required to provide service in exchange for the award. In addition, the Company issues stock options and restricted shares of common stock tonon-employees in exchange for consulting services and accounts for these in accordance with the provisions of ASCSubtopic 505-50,Equity-Based Payments toNon-employees (“(“ASC 505-50”). UnderASC 505-50, share-based awards tonon-employees are subject to periodic fair valuere-measurement over their vesting terms.
For purposes of calculating stock-based compensation, the Company estimates the fair value of stock options using a Black-Scholes option-pricing model. The determination of the fair value of share-based payment awards utilizing the Black-Scholes model is affected by the Company’s stock price and a number of assumptions, including expected volatility, expected life, risk-free interest rate and expected dividends. TheHistorically, the expected volatility iswas primarily based on the historical volatility of peer company data. For the three and six months ended December 31, 2018, the expected volatility is based on the historical volatility of the company stock price. If the Company had used peer company data whilefor the three and six months ended December 31, 2018, share-based compensation expense for the reporting period would have differed by an insignificant amount. The expected life of the stock options is based on historical and other economic data trended into the future. The risk-free interest rate assumption is based on observed interest rates appropriate for the expected terms of the Company’s stock options. The dividend yield
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assumption is based on the Company’s history and expectation of no dividend payouts. If factors change and the Company employs different assumptions, stock-based compensation expense may differ significantly from what has been recorded in the past. If there is a difference between the assumptions used in determining stock-based compensation expense and the actual factors which become known over time, specifically with respect to anticipated forfeitures, the Company may change the input factors used in determining stock-based compensation costs for future grants. These changes, if any, may materially impact the Company’s results of operations in the period such changes are made.
Net income (loss)loss per share
Basic net earnings (loss)loss per share is calculated by dividing net earnings (loss)loss by the weighted average shares outstanding during the period, without consideration for common stock equivalents. Diluted net earnings (loss)loss per share is calculated by adjusting weighted average shares outstanding for the dilutive effect of common stock equivalents outstanding for the period, determined using the treasury-stock method. For purposes of the diluted net earnings (loss)loss per share calculation, stock options and warrants are considered to be common stock equivalents if they are dilutive. Forequivalents. The dilutive impact of stock options and warrants for the three and nine monthssix month periods ended MarchDecember 31, 2018 and 2017 totaled 0.2 million shares. The dilutive impact of stock options and warrants have been excluded from the calculation of diluted net loss per share for the for the three and six months ended MarchDecember 31, 2018 and December 31, 2017, as their effect would be anti-dilutive. Therefore, for the three and six months ended December 31, 2018 and December 31, 2017, basic and diluted net loss per share are the same due to stock options and warrants being considered anti-dilutive. If stock options and warrants had been dilutive, their impact would have increased common stock equivalents outstanding for the three and nine- month periods ended March 31, 2018 by 0.2 million shares and by 0.3 million shares for the three months ended March 31, 2017. Stock options and warrants were dilutive for the nine months ended March 31, 2017 and increased common stock equivalents outstanding by 0.4 million shares.same.
Comprehensive income or loss
Comprehensive income or loss(loss) consists of net income or loss(loss) and changes in equity during a period from transactions and other equity and circumstances generated fromnon-owner sources. The Company’s net income or loss equals comprehensive income or loss for all periods presented.
New accounting pronouncements
Adopted in the current period
Revenue recognition
In May 2017, the FASB issued Accounting Standards Update (“ASU”) No. 2017-09, Scope of Modification Accounting, which amends ASC2014, Topic 718, Compensation – Stock Compensation. The amendments in this Update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The amendments are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption of this standard on its financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends Accounting Standards Codification (“ASC”) Topic 718, Compensation – Stock Compensation. The amendments simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, forfeitures, and classification on the statement of cash flows. The amendments are effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years and early adoption is permitted. The Company has adopted this standard for its 2018 fiscal year and it did not have a material effect on its balance sheets, results of operations or cash flows.
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases previously classified as operating leases under GAAP. The standard requires, in most instances, a lessee to recognize on its balance sheet a liability to make lease payments (the lease liability) and also a right-of-use asset representing its right to use the underlying asset for the lease term. The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those periods, using a modified retrospective approach and early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption of this standard on its financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606),606, which replaces the existing accounting standards for revenue recognition with a single comprehensive five-step model. The core principle is to recognize revenue upon the transfer of goods or services to customers at an amount that reflects the consideration expected to be received. It also requires enhanced disclosures about revenue, provides guidance for transactions that were not previously addressed comprehensively, and improves guidance for multiple-element arrangements. The guidance applies to any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. Since its issuance, the FASB has amended several aspects of the new guidance, including provisions that address revenue recognition associated with the licensing of intellectual property. In July 2015, the FASB delayed the effective date of this guidance by one year. The guidance iswas effective for public companies for annual periods beginning after December 15, 2017 as well as interim periods within those annual periods using either the full retrospective approach or modified retrospective approach. The Company is working through an adoption plan which will include a review of collaboration agreements, applying the five-step model ofadopted the new standard and comparing the results to the Company’s current accounting. As part of this, the Company is evaluating the method of adoption and assessing changes that might be necessary to its processes, internal controls and address changes in financial reporting. Effectiveeffective July 1, 2018 using the modified retrospective approach. Refer to Note 6 for the impact of adoption.
Share-Based Compensation
In May 2017, the FASB issued Accounting Standards Update (“ASU”)No. 2017-09,Scope of Modification Accounting, which amends ASC Topic 718,Compensation—Stock Compensation. The amendments in this Update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The amendments are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and early adoption is permitted. The Company willhas adopted this standard in the first quarter of fiscal 2019 and it did not have a material effect on its financial statements.
13
To be revisingadopted in future periods
Leases
In February 2016, the FASB issued ASUNo. 2016-02,Leases (Topic 842)in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases previously classified as operating leases under GAAP. The standard requires, in most instances, a lessee to recognize on its revenue recognition accounting policybalance sheet a liability to make lease payments (the lease liability) and expanding revenue disclosuresalso aright-of-use asset representing its right to reflectuse the requirements ofunderlying asset for the amended revenue recognition guidance. Because of the nature of the work that remains, at this time thelease term. The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those periods, using a modified retrospective approach and early adoption is permitted. The Company is unable to reasonably estimatecurrently in the process of evaluating the impact of adoption of this standard on its financial statements.
Share-Based Compensation
In June 2018, the FASB issued ASUNo. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The new standard aligns the measurement and classification guidance for share-based payments to nonemployees with the guidance for share-based payments to employees, with certain exceptions. Under the guidance, the measurement of equity-classified nonemployee awards will be fixed at the grant date, which may lower their cost and reduce volatility in the income statement. The standard will be effective for the Company on July 1, 2020. Early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption of this standard on its financial statements.
Fair Value Measurement
In August 2018, the FASB issued ASUNo. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The new standard eliminates, adds and modifies certain disclosure requirements for fair value measurement as part of its disclosure framework project. The amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy will no longer be required to be disclosed, but public companies will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. This standard will be effective for the Company on July 1, 2020. Early adoption is permitted. The adoption of this guidance is not expected to have a significant impact on the Company’s financial statements.
14
3. | Share-based Compensation Plans: |
The Company uses stock options and awards of restricted stock to provide long-term incentives for its employees,non-employee directors and certain consultants. The Company has two equity compensation plans under which awards are currently authorized for issuance, the 2013 Employee Stock Purchase Plan and the 2013 Equity and Incentive Plan. No awards have been issued to date under the 2013 Employee Stock Purchase Plan and all of the 128,571 shares previously authorized under this plan remain available for issuance. A summary of the stock option and restricted stock activity for the ninesix months ended MarchDecember 31, 2018 and 2017 is as follows:
|
| For the Nine Months Ended March 31, |
| |||||||||||||
|
| 2018 |
|
| 2017 |
| ||||||||||
|
|
|
|
|
| Weighted |
|
|
|
|
|
| Weighted |
| ||
|
|
|
|
|
| Average |
|
|
|
|
|
| Average |
| ||
|
|
|
|
|
| Exercise |
|
|
|
|
|
| Exercise |
| ||
(In thousands, except per share amounts) |
| Shares |
|
| Price |
|
| Shares |
|
| Price |
| ||||
Outstanding at June 30, |
|
| 2,714 |
|
| $ | 12.96 |
|
|
| 2,037 |
|
| $ | 13.71 |
|
Granted |
|
| 819 |
|
|
| 4.75 |
|
|
| 831 |
|
|
| 11.00 |
|
Exercised |
|
| (18 | ) |
|
| 0.35 |
|
|
| (31 | ) |
|
| 0.90 |
|
Forfeited |
|
| (401 | ) |
|
| 9.89 |
|
|
| (93 | ) |
|
| 13.98 |
|
Expired |
|
| (18 | ) |
|
| 15.81 |
|
|
| (29 | ) |
|
| 17.07 |
|
Outstanding at March 31, |
|
| 3,096 |
|
| $ | 11.24 |
|
|
| 2,715 |
|
| $ | 12.98 |
|
Exercisable at March 31, |
|
| 1,862 |
|
|
|
|
|
|
| 1,392 |
|
|
|
|
|
Weighted average fair value of options granted during the period |
| $ | 3.43 |
|
|
|
|
|
| $ | 7.53 |
|
|
|
|
|
For the Six Months Ended December 31, | ||||||||||||||||
2018 | 2017 | |||||||||||||||
(In thousands, except per share amounts) | Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | ||||||||||||
Outstanding at June 30, | 3,107 | $ | 10.93 | 2,714 | $ | 12.96 | ||||||||||
Granted | 983 | 4.59 | 746 | 4.83 | ||||||||||||
Exercised | (29 | ) | 4.52 | (7 | ) | 0.35 | ||||||||||
Forfeited | (213 | ) | 7.41 | (309 | ) | 9.76 | ||||||||||
Expired | (184 | ) | 13.40 | (15 | ) | 15.35 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Outstanding at December 31, | 3,664 | $ | 9.37 | 3,129 | $ | 11.35 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Exercisable at December 31, | 2,034 | 1,694 | ||||||||||||||
|
|
|
| |||||||||||||
Weighted average fair value of options granted during the period | $ | 2.38 | $ | 3.49 | ||||||||||||
|
|
|
|
For the three and ninesix months ended MarchDecember 31, 2018, share-based compensation expense related to stock options and restricted stock awarded to employees,non-employee directors and consultants amounted to approximately $1.2$1.1 million and $3.9$2.3 million, respectively, compared to $1.2$1.3 million and $4.2$2.8 million, respectively, for the three and ninesix months ended MarchDecember 31, 2017.
As of MarchDecember 31, 2018, there was $7.5$6.3 million of unrecognized compensation expense related tonon-vested stock options.options and restricted stock. During the ninesix months ended MarchDecember 31, 2018, 819,468987,000 stock options and restricted stock awards were granted to the Company’s employees andnon-employee directors under the 2013 Equity and Incentive Plan. The fair value of each option granted is estimated on the grant date using the Black-Scholes stock option pricing model. The following assumptions were made in estimating fair value:
Assumption |
| |
Dividend yield | 0.00% | |
Expected term | 6.00 – 6.25 years | |
Risk-free interest rate |
| |
Expected Volatility | 69.22% |
15
4. |
|
|
|
Cash in excess of immediate requirements is invested in accordance with the Company’s investment policy that primarily seeks to maintain adequate liquidity and preserve capital.
The following table summarizes the Company’s investments by category as of MarchDecember 31, 2018 and June 30, 2017:2018:
|
| March 31, |
|
| June 30, |
| ||
In thousands |
| 2018 |
|
| 2017 |
| ||
Investments - Current: |
|
|
|
|
|
|
|
|
Certificates of deposit |
| $ | 2,819 |
|
| $ | 3,500 |
|
Debt securities - held-to-maturity |
|
| 61,348 |
|
|
| 92,494 |
|
Total investments – current |
| $ | 64,167 |
|
| $ | 95,994 |
|
Investments - Noncurrent: |
|
|
|
|
|
|
|
|
Certificates of deposit |
|
| — |
|
|
| 2,111 |
|
Debt securities - held-to-maturity |
|
| — |
|
|
| 9,638 |
|
Total investments - non-current |
| $ | — |
|
| $ | 11,749 |
|
In thousands | December 31, 2018 | June 30, 2018 | ||||||
Investments—Current: | ||||||||
Certificates of deposit | $ | — | $ | 2,106 | ||||
Debtsecurities—held-to-maturity | 72,097 | 71,734 | ||||||
|
|
|
| |||||
Total investments—current | $ | 72,097 | $ | 73,840 | ||||
|
|
|
|
A summary of the Company’s debt securities classified asheld-to-maturity is as follows:
|
| At March 31, 2018 |
| |||||||||||||
|
|
|
|
|
| Gross |
|
| Gross |
|
|
|
|
| ||
|
| Amortized |
|
| Unrealized |
|
| Unrealized |
|
| Fair |
| ||||
In thousands |
| Cost |
|
| Gains |
|
| Losses |
|
| Value |
| ||||
Investments - Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency obligations |
| $ | 62,143 |
|
| $ | — |
|
| $ | (80 | ) |
| $ | 62,063 |
|
Corporate obligations |
|
| 2,024 |
|
|
| — |
|
|
| (7 | ) |
|
| 2,017 |
|
Total investments - current |
| $ | 64,167 |
|
| $ | — |
|
| $ | (87 | ) |
| $ | 64,080 |
|
At December 31, 2018 | ||||||||||||||||
In thousands | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
Investments—Current: | ||||||||||||||||
U.S. government and agency obligations | $ | 72,097 | $ | — | $ | (41 | ) | $ | 72,056 | |||||||
|
|
|
|
|
|
|
| |||||||||
Total investments—current | $ | 72,097 | $ | — | $ | (41 | ) | $ | 72,056 | |||||||
|
|
|
|
|
|
|
|
At June 30, 2018 | ||||||||||||||||
In thousands | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
Investments—Current: | ||||||||||||||||
U.S. government and agency obligations | $ | 69,731 | $ | — | $ | (60 | ) | $ | 69,671 | |||||||
Corporate obligations | 2,003 | — | (1 | ) | 2,002 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
$ | 71,734 | $ | — | $ | (61 | ) | $ | 71,673 | ||||||||
|
|
|
|
|
|
|
|
16
|
| At June 30, 2017 |
| |||||||||||||
|
|
|
|
|
| Gross |
|
| Gross |
|
|
|
|
| ||
|
| Amortized |
|
| Unrealized |
|
| Unrealized |
|
| Fair |
| ||||
In thousands |
| Cost |
|
| Gains |
|
| Losses |
|
| Value |
| ||||
Investments - Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency obligations |
| $ | 92,494 |
|
| $ | — |
|
| $ | (147 | ) |
| $ | 92,347 |
|
Corporate obligations |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| $ | 92,494 |
|
| $ | — |
|
| $ | (147 | ) |
| $ | 92,347 |
|
Investments - Noncurrent: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency obligations |
| $ | 7,552 |
|
| $ | — |
|
| $ | (52 | ) |
| $ | 7,500 |
|
Corporate obligations |
|
| 2,086 |
|
|
| — |
|
|
| (12 | ) |
|
| 2,074 |
|
|
| $ | 9,638 |
|
| $ | — |
|
| $ | (64 | ) |
| $ | 9,574 |
|
The amortized cost and fair value ofheld-to-maturity debt securities as of MarchDecember 31, 2018, by contractual maturity, were as follows:
In thousands |
| Amortized Cost |
|
| Fair Value |
| Amortized Cost | Fair Value | ||||||||
Due in one year or less |
| $ | 64,167 |
|
| $ | 64,080 |
| $ | 72,097 | $ | 72,056 | ||||
|
| $ | 64,167 |
|
| $ | 64,080 |
|
|
| ||||||
$ | 72,097 | $ | 72,056 | |||||||||||||
|
|
The Company believes that the unrealized losses disclosed above were primarily driven by interest rate changes rather than by unfavorable changes in the credit ratings associated with these securities and as a result, the Company continues to expect to collect the principal and interest due on its debt securities that have an amortized cost in excess of fair value. At each reporting period, the Company evaluates securities for impairment when the fair value of the investment is less than its amortized cost. The Company evaluated the underlying credit quality and credit ratings of the issuers, noting neither a significant deterioration since purchase nor other factors leading to an other-than-temporary impairment. Therefore, the Company believes these losses to be temporary. As of MarchDecember 31, 2018, the Company did not have the intent to sell any of the securities that were in an unrealized loss position at that date.
5. | Fair Value of Financial Instruments and Investments: |
Certain assets and liabilities are measured at fair value in the Company’s financial statements or have fair values disclosed in the notes to the financial statements. These assets and liabilities are classified into one of three levels of a hierarchy defined by GAAP. The Company’s assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.
The following methods and assumptions were used to estimate the fair value and determine the fair value hierarchy classification of each class of financial instrument included in the table below.
Cash and Cash Equivalents. The carrying value of cash and cash equivalents approximates fair value as maturities are less than three months.
Certificates of Deposit. The Company’s certificates of deposit are placed through an account registry service. The fair value measurement of the Company’s certificates of deposit is considered Level 2 of the fair value hierarchy as the inputs are based on rates currently offeredquoted prices for deposits of similar remaining maturities. identical assets in markets that are not active. The carrying amounts of the Company’s certificates of deposit reported in the unaudited condensed balance sheetsUnaudited Condensed Balance Sheets approximate fair value.
Debt securities – securities—held-to-maturity. The Company’s investments in debt securities classified asheld-to-maturity generally include U.S. Treasury Securities, government agency obligations, and corporate obligations. U.S. Treasury Securities are valued using quoted market prices. Valuation adjustments are not applied. Accordingly, U.S. Treasury Securities are considered Level 1 of the fair value hierarchy. The fair values of U.S. government agency obligations and corporate obligations are generally determined using recently executed transactions, broker quotes, market price quotations where these are available or other observable market inputs for the same or similar securities. As such, the Company classifies its investments in U.S. government agency obligations and corporate obligations within Level 1 or Level 2 of the hierarchy. hierarchy, depending on the information used to determine the fair values.
17
The following fair value hierarchy table presents information about each major category of the Company’s financial assets and liabilities measured at fair value on a recurring basis:
|
| Quoted prices |
|
| Significant |
|
| Significant |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
|
| in active |
|
| other observable |
|
| unobservable |
|
|
|
|
|
| Total |
| ||||||||||||||||||||||||
|
| markets |
|
| inputs |
|
| inputs |
|
| Total Fair |
|
| Carrying |
| |||||||||||||||||||||||||
In thousands |
| (Level 1) |
|
| (Level 2) |
|
| (Level 3) |
|
| Value |
|
| Value |
| Quoted prices in active markets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Total Fair Value | Total Carrying Value | ||||||||||||||||||||
March 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
December 31, 2018 | ||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 23,978 | $ | — | $ | — | $ | 23,978 | $ | 23,978 | ||||||||||||||||||||||||||||||
Held-to-maturity investments: | ||||||||||||||||||||||||||||||||||||||||
U.S. government and agency obligations | 72,056 | — | — | 72,056 | 72,097 | |||||||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Total assets | $ | 96,034 | $ | — | $ | — | $ | 96,034 | $ | 96,075 | ||||||||||||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
June 30, 2018 | ||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents |
| $ | 47,633 |
|
| $ | — |
|
| $ | — |
|
| $ | 47,633 |
|
| $ | 47,633 |
| $ | 31,065 | $ | — | $ | — | $ | 31,065 | $ | 31,065 | ||||||||||
Certificates of deposit |
|
| — |
|
|
| 2,811 |
|
|
| — |
|
| $ | 2,811 |
|
|
| 2,819 |
| — | 2,100 | — | 2,100 | 2,106 | |||||||||||||||
Held-to-maturity investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Corporate obligations |
|
| — |
|
|
| 2,017 |
|
|
| — |
|
|
| 2,017 |
|
|
| 2,024 |
| — | 2,002 | — | 2,002 | 2,003 | |||||||||||||||
U.S. government and agency obligations |
|
| 57,256 |
|
|
| 1,996 |
|
|
| — |
|
|
| 59,252 |
|
|
| 59,324 |
| 69,671 | — | — | 69,671 | 69,731 | |||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Total assets |
| $ | 104,889 |
|
| $ | 6,824 |
|
| $ | — |
|
| $ | 111,713 |
|
| $ | 111,800 |
| $ | 100,736 | $ | 4,102 | $ | — | $ | 104,838 | $ | 104,905 | ||||||||||
June 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Cash and cash equivalents |
| $ | 30,706 |
|
| $ | — |
|
| $ | — |
|
| $ | 30,706 |
|
| $ | 30,706 |
| ||||||||||||||||||||
Certificates of deposit |
|
| — |
|
|
| 5,611 |
|
|
| — |
|
|
| 5,611 |
|
|
| 5,611 |
| ||||||||||||||||||||
Held-to-maturity investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Corporate obligations |
|
| — |
|
|
| 2,074 |
|
|
| — |
|
|
| 2,074 |
|
|
| 2,086 |
| ||||||||||||||||||||
U.S. government and agency obligations |
|
| 79,476 |
|
|
| 20,372 |
|
|
| — |
|
|
| 99,847 |
|
|
| 100,046 |
| ||||||||||||||||||||
Total assets |
| $ | 110,182 |
|
| $ | 28,057 |
|
| $ | — |
|
| $ | 138,238 |
|
| $ | 138,449 |
| ||||||||||||||||||||
|
|
|
|
|
Biogen
On July 1, 2015, the Company entered into a Collaboration Agreement (the “Collaboration Agreement”), a Manufacturing License and Technology Transfer Agreement (the “Manufacturing Agreement”), and the Common Stock Purchase Agreement (the “Equity Agreement”) with Biogen (collectively, the “Biogen Agreement”), pursuant to which the Company and Biogen will collaborate to develop, seek regulatory approval for and commercialize gene therapy products to treat XLRS, XLRP, and discovery programs targeting three indications based on the Company’s adeno-associated virus vector technologies. The Collaboration Agreement became effective on August 14, 2015.
Under the Collaboration Agreement, the Company will conduct all development activities through regulatory approval in the United States for the XLRS program (with activities through Phase 1/2 completion being pre-funded under the agreement and any further activities subject to incremental consideration), and all development activities through the completion of the first in human clinical trial for the XLRP program (with activities through filing the IND being pre-funded under the agreement and any further activities subject to incremental consideration). In addition, the Collaboration Agreement provides for discovery programs targeting three indications whereby the Company will conduct discovery, research and development activities for those additional drug candidates through the stage of clinical candidate designation, after which, Biogen may exercise an option to continue to develop, seek regulatory approval for and commercialize the designated clinical candidate. In February 2016, the Company announced Biogen’s selection of adrenoleukodystrophy as the non-ophthalmic indication of the discovery programs. Under the terms of the Collaboration Agreement, the Company, in part through its participation in joint committees with Biogen, will participate in overseeing the development and commercialization of these specific programs.
The Company has granted to Biogen with respect to the XLRS and XLRP programs, and upon exercise of the option for the applicable discovery program, an exclusive, royalty-bearing license, with the right to grant sublicenses, to use adeno-associated virus vector technology and other technology controlled by the Company for the licensed products or discovery programs developed under the Collaboration Agreement.Agreements. Biogen and the Company have also granted each other worldwide licenses, with the right to grant sublicenses, of their respective interests in other intellectual property developed under the collaboration outside of the licensed products or discovery programs.
Activities under Biogen haspre-funded the Collaboration Agreement were evaluated under ASC 605-25, Revenue Recognition—Multiple Element Arrangements, as amended by ASU 2009-13, Revenue Recognition ("ASC 605-25"),Company to determine if they representedconduct all development activities through the completion of a multiple element revenue arrangement. The Collaboration Agreement includes the following significant deliverables:
(1)first in human trial for each of the XLRS program and all development activities through the date that the Investigational New Drug Application (“IND”) becomes effective and the completion of a natural history study for the XLRP programs, exclusive, royalty-bearing licenses, with the right to grant sublicenses, to use adeno-associated virus vector technology and other technology controlled byprogram. In addition, Biogen haspre-funded the Company to conduct discovery, research and development activities for additional drug candidates through the purposestage of researching, developing, manufacturing and commercializing licensed products developed under the arrangement (the “License Deliverables”);
(2)clinical candidate designation for each of the discovery programs exercisable optionstargeting three indications (of which one indication has two development plans at contract inception), after which, Biogen may exercise an option to obtain exclusive licensescontinue to develop, seek regulatory approval for and commercialize any of the designated clinical candidates under such discovery programs (the “Option Deliverables”); and
(3) the performance obligations to conductcandidate. Thepre-funded research and development activities through (a) regulatory approval in the United States, in the case of the XLRS program; (b) completion of the first in human clinical trial, in the case of the XLRP program; and (c) the stage of clinical candidate designation, in the case of each of the discovery programs (the “R&D Activity Deliverables”).
The R&D Activity Deliverables for each program are further segmented by those that are “Pre-Funded Activities” and those that are “Post-Funding Developmentreferred to as“Pre-Funded Activities”. Pre-Funded Activities are those R&D activities for whichBiogen will reimburse the Company has primary responsibility and the considerationon an FTE basis for any additional expenses related to be received under the agreement was received at the inception of the arrangement. Post-Funding Development Activities (referred to as “development services” throughout these financial statements) are thosedevelopment activities that may occur after the Pre-Funded Activities and for which the Company is entitled to additional compensation underincurs (“Post-Funded Activities”).
18
In February 2016, the agreement from Biogen. Post Funding Development activities have commenced onCompany announced Biogen’s selection of adrenoleukodystrophy as the XLRP program and revenue is being generated. Biogen has final decision-making authority for all matters related to the conduct of the Post-Funding Development Activities. Because Biogen is not contractually obligated to continue the programs beyond the Pre-Funded Activities, and due to the uncertain outcomenon-ophthalmic indication of the discovery research and development activities,programs. Under the Post-Funding Development Activities are not considered deliverables at the inceptionterms of the arrangement and the associated fees and milestones are not included in the allocable arrangement consideration. The Company has determined that the additional fees it could receive under the arrangement for Post-Funding Development Activities are not priced at a significant and incremental discount.
The Company determined that both the License Deliverables and Option Deliverables do not have stand-alone value and do not meet the criteria to be accounted for as separate units of accounting under ASC 605-25. The factors considered byCollaboration Agreement, the Company, in making this determination included, among other things, the unique and specialized nature ofpart through its proprietary technology and intellectual property, andparticipation in joint committees with Biogen, will participate in overseeing the development stagesand commercialization of each ofthese specific programs.
Pursuant to the XLRS, XLRPManufacturing Agreement, Biogen may elect an option to receive a manufacturing license for up to six genes for a fixed fee per gene elected. If exercised, the Company becomes eligible to receive certain event milestones and the discovery programs targeting three indications. Accordingly, the License Deliverables under each of the XLRS and XLRP programs and the Option Deliverables under each of the discovery programs have been combined with the initial, Pre-Funded Activities deliverables associated with each related program and as a result, the Company’s separate units of accounting under its collaboration with Biogen, comprise the XLRS program, the XLRP program, and each of the discovery programs.royalties.
Under the Collaboration Agreement, the Company received a non-refundablewas paid an upfront paymentnonrefundable fee of $94.0 million in August 2015of which it recorded as deferred revenue. This upfront payment of $94.0$58.4 million was allocated amongcontractually described as relating to the separate unitsPre-Funded Activities(“Pre-Funded Amounts”) and $35.6 million was contractually described as relating to the access of accounting discussed above using the relative selling price method.licenses. In addition, to the Collaboration Agreement, on July 1, 2015, the Company also entered into an equity agreement with Biogen. Underunder the terms of this equity agreement,the Equity Agreement, Biogen purchased 1,453,957 shares of the Company’s common stock at a purchase price equal toof $20.63 per share, for an aggregate cash purchase price of $30.0 million of which $10.8 million was considered to be allocated consideration as part of the Company also received in August 2015.Collaboration Agreement. The shares issued to Biogen represented approximately 8.1% of the Company’s outstanding common stock on a post-issuance basis, calculated on the number of shares that were outstanding at June 30, 2015, and constitute restricted securities that may not be resold by Biogen other than in a transaction registered under, or pursuant to an exemption from the registration requirements of, the Securities Act of 1933, as amended.
Accounting standards for multiple element arrangements contain a presumption that separate contracts negotiated or entered into at or near to the same time with the same entity were likely negotiated as a package and should be evaluated as a single agreement. The Company determined that the price of $20.63 paid by Biogen included a premium of $7.45 per share over the fair value of the Company’s stock price, calculated based upon the stock price on the date of close of the agreement and adjusted for lack of marketability due to restrictions. Accordingly, the total premium of $10.8 million was also recorded as deferred revenue and, together with the $94.0 million, allocated to the separate units of accounting identified above using the relative selling price method as discussed in Note 2 to these financial statements. The Company records revenue based on the revenue recognition criteria applicable to each separate unit of accounting. For amounts received up-front and initially deferred, the Company recognizes the deferred revenue on a straight-line basis over the estimated service periods in which it is required to perform the research and development activities associated with each unit of accounting. At the inception of the Collaboration Agreement, the Company initially estimated the service periods to range between 2 and 3 years. However, due to certain delays which have extended the Company’s estimated period of performance, the estimated service periods are currently anticipated to be between 2 and 5 years from inception of the Collaboration Agreement.
The Company recognized collaboration revenue of $3.6 million and $8.3 million during the three months ended March 31, 2018 and 2017, respectively, and $18.7 million and $31.0 million during the nine months ended March 31, 2018 and 2017, respectively, from its collaboration with Biogen. Below is a summary of the components of the collaboration revenue:
|
| For the Three Months Ended March 31, |
|
| For the Nine Months Ended March 31, |
| ||||||||||
|
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| ||||
|
| (dollars in thousands) |
| |||||||||||||
Amortization of non-refundable upfront fees |
| $ | 2,844 |
|
| $ | 7,907 |
|
| $ | 16,333 |
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| $ | 30,435 |
|
Development services |
|
| 744 |
|
|
| 390 |
|
|
| 2,394 |
|
|
| 524 |
|
Total collaboration revenue |
| $ | 3,588 |
|
| $ | 8,297 |
|
| $ | 18,727 |
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| $ | 30,959 |
|
As a result of the upfront payment of $94.0 million made by Biogen and the achievement of a $5.0 million milestone in fiscal year 2016, upon dosing the first XLRS patient, the Company became liable to various research partner institutions for sub-license and other payments under existing agreements with such institutions. These agreements obligate the Company to pay to each research partner institution a portion of certain proceeds received from collaboration and other arrangements, including any milestone payments received under such arrangements. Accordingly, the Company recorded total collaboration costs of approximately $12.0 million associated with such obligations, including $636,000 of expense that was settled during fiscal year 2016 by the issuance of 40,000 shares of the Company’s common stock to a research partner institution, pursuant to the terms of the existing agreement with that institution. The remainder of these sub-license and milestone fees were fully paid in cash during the fiscal year ended June 30, 2016.
The Company is also eligible to receive total payments of up to $467.5$472.5 million based on the successful achievement of future milestones under its XLRS and XLRP programs. For XLRS, the Company is eligible to receive up to: (i) $40$45.0 million in milestone payments based upon the successful achievement of clinical milestones (relating to dosing in specified trials), (ii)
$155 $155.0 million in milestone payments based upon the achievement of regulatory approvals and first commercial sale in specified territories and (iii) $65$65.0 million in milestone payments based upon the achievement of worldwide sales targets. For the XLRS program, the Company has an option to share development costs and profits after the initial clinical trial data are available instead of receiving milestone payments. For XLRP, the Company is eligible to receive up to: (i) $42.5 million in milestone payments based upon successful achievement of clinical milestones (relating to dosing in specified trials), (ii) $102.5 million in milestone payments based upon the achievement of regulatory approvals and first commercial sale in specified territories and (iii) $62.5 million in milestone payments based upon the achievement of worldwide sales targets. For the XLRP program, the Company has an option to share development costs and profits after the initial clinical trial data are available instead of receiving milestone payments. In addition, the Company is eligible to receive payments of up to $592.5 million based on the exercise of the option for and the successful achievement of future milestones under its discovery programs. Each discovery program is categorized as Category A, Category B or Category C depending on the nature of the indication it seeks to address. For Category A, the Company is eligible to receive payments of up to: (i) $20$20.0 million based upon the successful achievement of clinical milestones (relating to dosing in specified trials) and (ii) $70$70.0 million in milestone payments based upon the achievement of regulatory approvals and first commercial sale in specified territories. For Category B, the Company is eligible to receive payments of up to: (i) $27.5 million based upon the successful achievement of clinical milestones (relating to dosing in specified trials) and (ii) $105$105.0 million in milestone payments based upon the achievement of regulatory approvals and first commercial sale in specified territories. For Category C, the Company is eligible to receive payments of up to: (i) $40$40.0 million based upon the successful achievement of clinical milestones (relating to dosing in specified trials) and (ii) $140$140.0 million in milestone payments based upon the achievement of regulatory approvals and first commercial sale in specified territories. Under certain limited circumstances, if there are discovery products from more than one discovery program in any of Category A, Category B or Category C, then the milestone payments under the applicable category shall be payable for the applicable discovery product from each such discovery program to achieve the specified milestones.
Biogen will also pay revenue-based royalties for each licensed product at tiered rates ranging from high singlehigh-single digit tomid-teen percentages of annual net sales of the XLRS or XLRP products and at rates ranging frommid-single digit tolow-teen percentages of annual net sales for the discovery products. The
Prior to 2018, the Company hasreceived a $5.0 million milestone payment related to initial dosing of a XLRS patient. In April 2018, the Company triggered a $2.5 million milestone payment related to the initial dosing of a XLRP patient. In July 2018, the Company triggered a $10.0 million milestone payment related to the treatment of a first patient of second cohort in a Phase 1/2 Clinical XLRP Study.
19
On December 7, 2018, the Company received notice from Biogen that Biogen had elected to apply the guidance in ASC 605-28 to the milestones. These milestones, if achieved, are substantive as they relate solely to past performance, are commensurate with estimated enhancement of value associated with the achievement of each milestone as a result of the Company’s performance and are reasonable when compared to other consideration amounts payable underterminate the Collaboration Agreement; however, there can be no assurance thatAgreement effective as of March 8, 2019. While the Company will achieve the milestones orrecognize additional revenue as it continues to perform under that the Company will receive the related revenue. Dueagreement prior to the uncertainty surrounding the achievementeffective date of the future milestones, such payments were not considered fixed or determinable at the inceptiontermination of the Collaboration Agreement, and accordingly,the Company will not receive any milestone-based or royalty payments under that agreement after its termination.
Accounting Analysis
For the periods prior to July 1, 2018, the Company applied the provisions of ASC 605 in accounting for this arrangement. Refer to the Company’s Annual Report onForm 10-K for the year ended June 30, 2018, filed with the Securities and Exchange Commission on September 11, 2018, for the accounting analysis under these provisions.
Under ASC 605 and Topic 606, the Company has concluded that the Collaboration Agreement, the Manufacturing Agreement and the Equity Agreement should be recognizedaccounted for as revenue unlessone arrangement as the agreements were with the same party and until they become earned.were negotiated and executed contemporaneously.
The performance obligations and the allocated transaction price as of the date of initial application of Topic 606 are as follows (in thousands):
Performance Obligations: | Allocated Transaction Price | |||
XLRS License andPre-Funded Activities | $ | 52,060 | ||
XLRP License andPre-Funded Activities | 43,570 | |||
Pre-Funded Activities associated with the Discovery Programs | 16,700 | |||
|
| |||
$ | 112,330 | |||
|
|
ThePre-Funded Activities associated with the Discovery Programs amount is comprised of four distinct performance obligations based on the separate development plans for discovery candidates at contract inception. The Company concluded that the delivered license was not distinct from thePre-Funded Activities as Biogen cannot obtain the benefit of the license without the related services. Further, each of the license and relatedPre-Funded Activities performance obligation is considered a distinct performance obligation as each development plan is pursued independent of every other development plan.
The Company concluded that Post-Funded Activities represent customer options that are not ablematerial rights as any services requested by Biogen and provided by the Company are reimbursed at a rate that reflects the estimated standalone selling price for the services. As such, the Company will recognize revenue related to reasonably predictPost-Funded Activities as the services are provided. Through the date of adoption of ASC 606, the Company has recognized revenue of $4.7 million for Post-Funded Activities. The Company recorded revenue of $0.9 million and $2.0 million in the three and six months period ended December 31, 2018 related to Post-Funded Activities.
The Company concluded that the option to receive i) commercial licenses for the Discovery Programs that achieve clinical candidate designation, as defined in the Collaboration Agreement and ii) manufacturing licenses for up to six genes pursuant to the Manufacturing Agreement represent customer options that are not material rights as the exercise price for such options reflects the estimated standalone selling price for such option. As such, the Company will account for such option if and when the remainingoptions are exercised.
As of the date of the initial application of Topic 606, the total transaction price for the Biogen Agreement was $112.3 million which included a $5.0 million milestone payment for initiation of dosing of XLRS and a $2.5 million milestone payment for initiation of dosing of XLRP. The Company used the most-likely method to determine the amount of variable consideration in the Biogen Agreement. The Company believes that any estimated amount of variable consideration related to clinical and regulatory milestone payments should be fully constrained as the achievement of such milestones is highly susceptible to factors outside of the Company’s control. The Company has determined that the commercial
20
milestones and sales-based royalties will be achieved. recognized when the related sales occur as they were deemed to relate predominately to the license granted and therefore have also been excluded from the transaction price. The Company willre-evaluate the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur.
In the quarter ended September 30, 2018, the Company received a $10.0 million milestone payment related to XLRP which increased the transaction price. Based on an understanding between the parties in the quarter ended September 30, 2018, the Company also reallocated $1.1 million ofPre-Funded Amounts to cover Post-Funded Activities which resulted in a decrease to the transaction price and deferred revenue of $1.1 million in the quarter ended September 30, 2018. Additionally, the Company reallocated $1.8 million of variable consideration betweenPre-Funded Activities associated with Discovery program performance obligations based on changes to the underlying development plans of the product candidates. The total transaction price did not change in the quarter ended December 31, 2018.
Bionic SightThe reallocation between Discovery Programs generated an insignificant cumulative catch up adjustment to revenue in the quarter ended September 30, 2018. The cumulativecatch-up adjustment to revenue that relate to changes or reallocations of the transaction price are further discussed in theSummary of Contract Assets and Liabilitiessection below.
On February 2,The transaction price was allocated to the performance obligations based on the relative estimated standalone selling price of each performance obligation or, in the case of certain variable consideration, to one or more performance obligations. The estimated standalone selling prices for performance obligations, that include a license andPre-Funded Activities, were developed using the estimated selling price of the license and an estimate of the overall effort to perform thePre-Funded Activities. The estimated selling price of the licenses were determined using a discounted cash flow valuation utilizing forecasted revenues and costs for the Company’s product candidate licenses.
The Company will recognize revenue related to the performance obligations which include a license andPre-Funded Activities over the estimated period of the research and development services using a proportional performance model. The Company measures proportional performance based on the costs incurred relative to the total costs expected to be incurred to satisfy the performance obligation. Management believes that recognizing revenue on a proportional performance basis based on costs incurred faithfully depicts the transfer of goods and services to the customer because the customer consumes the Company’s services as such services are performed. The Company will account for the termination of the Collaboration Agreement upon the effective date of the termination. The Company updated its total costs estimated to be incurred to satisfy the performance obligations as of December 31, 2018; however, such estimates do not include any impact of the termination which is expected to occur in the three-month period ended March 31, 2019.
During the three and six months ended December 31, 2018 and 2017, the Company entered into a strategic researchrecorded revenue of $5.9 million and development collaboration agreement$19.9 million, and $4.8 million and $15.1 million, respectively, related to its efforts under the Biogen Agreement. The Company has net accounts receivable balances with Bionic Sight, LLC (“Bionic Sight”), to develop therapies for patients with visual deficitsBiogen as of December 31, 2018 and blindness due to retinal disease. Through the AGTC-Bionic Sight collaboration, the companies seek to develop a new optogenetic therapy that leverages AGTC’s deep experience in gene therapyJune 30, 2018 of $0.9 million and ophthalmology and Bionic Sight’s innovative neuro-prosthetic device and algorithm for retinal coding.
Under the agreement, AGTC made an initial $2.0$1.7 million, payment to Bionic Sight for an equity interest in that company. This initial investment represents an approximate 5% equity interest in Bionic Sight. In additionrespectively, related to the initial investment, AGTC will contributeBiogen Agreement. As of December 31, 2018, the Company had recorded $20.4 million in deferred revenue related to ongoing research and development support costs through additional payments or other in-kind contributions (AGTC Ongoing R&D Support). The AGTC Ongoing R&D Support payments and in-kind contributionsthe Biogen Agreement that will be maderecognized over time, upthe remaining performance period. Absent the termination of the Collaboration Agreement, the Company expects to satisfy its remaining performance obligations under the Biogen Agreement within the next three years. If the Collaboration Agreement is terminated effective March 8, 2019, any remaining deferred revenue will be recognized as revenue.
21
The company’s revenue is comprised of the following related to the dateBiogen Agreement:
For the Three Months Ended December 31, | For the Six Months Ended December 31, | |||||||||||||||
In thousands, | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Collaboration revenue | ||||||||||||||||
Licenses and related services | $ | 4,362 | $ | 3,735 | $ | 8,981 | $ | 13,489 | ||||||||
Development services | 903 | 1,096 | 1,961 | 1,650 | ||||||||||||
Milestone revenue | 630 | — | 8,978 | — | ||||||||||||
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| |||||||||
Total collaboration revenue | $ | 5,895 | $ | 4,831 | 19,920 | $ | 15,139 | |||||||||
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License and related services revenue is comprised of revenue related to the Company’s completion of performance obligations that Bionic Sight hascontain the delivery of licenses andPre-Funded Activities. Development services revenue relates to the delivery of Post Funded Activities. Milestone revenue relates to the portion of milestone payments received both IND clearance fromthat are recognized as revenue based on the FDAproportional performance of the underlying performance obligation.
Summary of Contract Assets and receiptLiabilities
The following table presents changes in the balances of written approval from an internal review board to conduct clinical trials from at least one clinical site for that product (the “IND Trigger”.) Forour contract assets and liabilities during the three and ninesix months ended MarchDecember 31, 2018 payments(in thousands):
Balance at Beginning of Period | Additions | Deductions | Balance at End of Period | |||||||||||||
Three months ended December 31, 2018 | ||||||||||||||||
Contract assets | $ | — | $ | — | $ | — | $ | — | ||||||||
Contract liabilities: | ||||||||||||||||
Deferred revenue | $ | 25,425 | $ | — | $ | 4,993 | $ | 20,432 |
Balance at Beginning of Period | Additions | Deductions | Balance at End of Period | |||||||||||||
Six months ended December 31, 2018 | ||||||||||||||||
Contract assets | $ | — | $ | — | $ | — | $ | — | ||||||||
Contract liabilities: | ||||||||||||||||
Deferred revenue | $ | 29,521 | $ | 10,000 | $ | 19,089 | $ | 20,432 |
The Company recorded an entry to increase deferred revenue and in-kind contributions were approximately $0.2accumulated deficit for $22.6 million and $0.8as of July 1, 2018 related to the adoption of Topic 606. The impact of the adoption of Topic 606 is reflected within the beginning of period balance for the six months ended December 31, 2018. Additions for the six months ended December 31, 2018 include the $10 million respectively.
Ifmilestone payment received associated with the IND Trigger is attained, AGTC will receive additional equity, based onXLRP program. Deductions from deferred revenue for the valuation in placethree months ended December 31, 2018 represent revenue recognized related to the deferred revenue balance at the beginning of the agreement,period. Deductions from deferred revenue for the AGTC Ongoing R&D Support payments and in-kind contributions, and will be obligated to purchase additional equity in Bionic Sight for $4.0 million, at a pre-determined valuation. Duesix months ended December 31, 2018 include revenue recognized related to the uncertaintydeferred revenue balance of achieving the IND Trigger, the Company is expensing the AGTC Ongoing R&D Support payments$9.6 million, revenue recognized related to additions to deferred revenue of $8.3 million (of which $7.8 million relates to performance in prior quarters) and in-kind contributions made under the collaboration agreement. Such amounts are included as a component$1.1 million of research and development expenses in the Company’s financial statements.
The Company recorded its initial $2.0 million investment in Bionic Sight using the equity method of accounting for investments, which is recorded as its own line item on the Company’s balance sheet. During the three-month period ending March 31, 2018, the Company recorded a reduction of its investment in Bionic Sight of $5,061 and an investment loss on the
statement of operations to reflect its equity interest in the net loss of this affiliate. The ongoing research and development costs and contributions will be recorded as a periodic cost until such time when or if the IND Trigger is achieved.
The collaboration agreement grants to AGTC, subject to achievement by Bionic Sight of certain development milestones, an option to exclusively negotiate for a limited period of time to acquire (i) a majority equity interest in Bionic Sight, (ii) the Bionic Sight assets to which the collaboration agreement relates, or (iii) an exclusive license with respect to the product to which the collaboration agreement relates.
In the fourth quarter of fiscal 2017, the Company became aware of an immaterial error regarding the calculation of the income tax provision for the first three quarters of fiscal 2017. An assessment concludedvariable consideration that the error was not material to any prior period financial statements. As such, in accordance with ASC 250 (SAB No. 108, Considering Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements), the prior period financial statements have been revised (the "Revision") in the applicable financial statements. Periods not presented herein will be revised, as applicable, in future filings. Although management has determined that the error was not material to prior periods, the financial statements for the three and nine months ended March 31, 2017, included herein, have been revised to correct for the impact of this item. Unless otherwise indicated, the financial information as of and for the three and nine months ended March 31, 2017 presented in this Quarterly Report on Form 10-Q reflects this revision.constrained.
The following table summarize the effect of the Revision on the Statement of Operations for the three and nine months ended March 31, 2017:
22
|
| For the Three Months Ended March 31, 2017 |
| |||||||||
In thousands |
| 2017 |
|
| Adjustment |
|
| 2017 Adjusted |
| |||
Loss before provision for income taxes |
| $ | (600 | ) |
|
|
|
|
| $ | (600 | ) |
Provision for Income Taxes |
|
| 221 |
|
|
| 379 |
|
|
| 600 |
|
Net loss |
| $ | (821 | ) |
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|
|
|
| $ | (1,200 | ) |
Net loss per share, basic |
| $ | (0.05 | ) |
|
|
|
|
| $ | (0.07 | ) |
Net loss per share, diluted |
| $ | (0.05 | ) |
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|
|
|
| $ | (0.07 | ) |
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| For the Nine Months Ended March 31, 2017 |
| |||||||||
In thousands |
| 2017 |
|
| Adjustment |
|
| 2017 Adjusted |
| |||
Income before provision for income taxes |
| $ | 5,405 |
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|
| $ | 5,405 |
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Provision for Income Taxes |
|
| 519 |
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| 1,281 |
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| 1,800 |
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Net income |
| $ | 4,886 |
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| $ | 3,605 |
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Net earnings per share, basic |
| $ | 0.27 |
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| $ | 0.20 |
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Net earnings per share, diluted |
| $ | 0.27 |
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| $ | 0.20 |
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The following table summarize the effect of the Revision on the Statement of Cash Flows for the nine months ended March 31, 2017:
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| For the Nine Months Ended March 31, 2017 |
| |||||||||
In thousands |
| 2017 |
|
| Adjustment |
|
| 2017 Adjusted |
| |||
Net income |
| $ | 4,886 |
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|
| (1,281 | ) |
| $ | 3,605 |
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Changes in operating assets and liabilities |
|
|
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|
|
|
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|
|
|
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|
Accrued and other liabilities |
|
| (142 | ) |
|
| 1,281 |
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|
| 1,139 |
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Net cash (used in) operating activities |
| $ | (21,007 | ) |
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| $ | (21,007 | ) |
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In April 2018, the Company earned a $2.5 million milestone payment from Biogen due to dosing of the first patient in the XLRP Phase 1/2 clinical trial. The company owes sublicensing fees of approximately 23% to certain collaborators associated with this milestone payment.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides an overview of our financial condition as of MarchDecember 31, 2018, and results of operations for the three and ninesix months ended MarchDecember 31, 2018 and 2017. This discussion should be read in conjunction with the accompanying Unaudited Condensed Financial Statements and accompanying notes, as well as our Annual Report onForm 10-K for the year ended June 30, 2017, as amended,2018, (“June 2017 2018Form 10-K”). In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, assumptions and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report as well as those set forth in Part I, Item 1A, “Risk Factors” of the June 2017 2018Form 10-K. Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies and operations, financing plans, potential growth opportunities, potential market opportunities and the effects of competition. Forward-looking statements include all statements that are not historical facts and can be identified by terms such as “anticipates,” “believes,” “could,” “seeks,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would” or similar expressions and the negatives of those terms. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s plans, estimates, assumptions and beliefs only as of the date of this report. Except as required by law, we assume no obligation to update these forward-looking statements publicly or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.
As used herein, except as otherwise indicated by context, references to “we,” “us,” “our,” or the “Company” refer to Applied Genetic Technologies Corporation.
Overview
We are a clinical-stage biotechnology company that uses a proprietary gene therapy platform to develop transformational genetic therapies for patients suffering from rare and debilitating diseases. Our initial focus is in the field of ophthalmology, where we have active clinical programs inX-linked retinoschisis (XLRS), achromatopsia (ACHM) andX-linked retinitis pigmentosa (XLRP), and a preclinical program in optogenetics. In addition to ophthalmology, we have recently initiatedhaveinitiated preclinical programs in adrenoleukodystrophy (ALD) and otology. With a number of important clinical milestones on the horizon, we believe we are well positioned to advance multiple programs towards pivotal studies. In addition to our product pipeline, we have also developed broad technological capabilities through our collaborations with 4D Molecular Therapeutics (4DMT), Synpromics Limited (Synpromics), and the University of Florida, which provide us with expertise in vector design and manufacturing as well as synthetic promoter development and optimization. Finally, our partnership with Biogen, which includes our clinical XLRS and XLRP programs, our discovery program in ALD and two ophthalmology programs, validates our approach and technology.
Since our inception in 1999, we have devoted substantially all of our resources to development efforts relating to ourproof-of-concept programs in ophthalmology andalpha-1 antitrypsin deficiency, or AAT deficiency, an inherited orphan lung disease, including activities to manufacture product in compliance with good manufacturing practices, preparing to conduct and conducting clinical trials of our product candidates, providing general and administrative support for these operations and protecting our intellectual property. We do not have any products approved for sale and have not generated any revenue from product sales. To date, weWe have funded our operations to date primarily through thepublic offering of our common stock, private placement of preferred stock, common stock, convertible notes and warrants to purchase preferred stock, through our public offerings consummated in April 2014 and July/August 2014, and through development services, upfront and milestone payments from our partners.collaborations. We have also been the recipient, either independently or with our collaborators, of grant funding administered through federal, state, and local governments and agencies, including the United States Food and Drug Administration, or FDA, and by patient advocacy groups such as The Foundation Fighting Blindness, or FFB, and theAlpha-1 Foundation.
Although we recorded income from operations of $1.9 million for the year ended June 30, 2017 due in part to the amortization of revenue associated with our collaboration agreement with Biogen, weWe have incurred losses from operations in each other year since inception.inception except for fiscal 2017. Our net incomeloss for thesix-month period ended December 31, 2018 was $3.0 million while the net loss for the fiscal year ended June 30, 20172018 was $0.4$21.3 million, compared to net lossesincome of $1.4$0.4 million and $24.3net loss of $1.4 million for each of the fiscal years ended June 30, 20162017 and 2015,2016, respectively. Substantially all our net losses resulted from costs incurred in connection with our research and development programs and from general and administrative costs associated with our operations. We expect to continue to incur significant operating expenses for at least the next several years and anticipate that such expenses will increase substantially in connection with our ongoing activities, as we:
conduct preclinical studies and clinical trials for our XLRS, ACHM and XLRP product candidates;
23
continue our research and development efforts, including exploration through early preclinical studies of potential applications of our gene therapy platform in:
orphan ophthalmology indications;
non-orphan ophthalmology indications including wet AMD and other inherited retinal diseases; and
other inherited diseases, such as otology and CNS indications.
manufacture clinical trial materials and develop larger-scale manufacturing capabilities;
seek regulatory approval for our product candidates;
further develop our gene therapy platform;
add personnel to support our collaboration, product development and commercialization efforts; and
continue to operate as a public company.
As of MarchDecember 31, 2018, we had cash and cash equivalents and investments totaling $111.8$96.1 million.
We do not expect to generate revenue from product sales unless and until we successfully complete development and obtain regulatory approval for one or more of our product candidates, which we expect will take a number of years and which we believe is subject to significant uncertainty. We believe that our existing cash and cash equivalents and investments at MarchDecember 31, 2018, will be sufficient to allow us to generate data from our ongoing clinical programs, to move ourpre-clinical optogenetic program in collaboration with Bionic Sight into the clinic and to fund our currently planned research and discovery programs for at least the next two years. In order to complete the process of obtaining regulatory approval for our lead product candidates and to build the sales, marketing and distribution infrastructure that we believe will be necessary to commercialize our lead product candidates, if approved, we will require substantial additional funding. Also, our current operating plan may change as a result of many factors currently unknown to us, and we may need to seek additional funds sooner than planned, through public or private equity or debt financings, government or other third-party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements or a combination of these approaches. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. Our failure to raise capital or enter into such other arrangements as and when needed would have a negative impact on our financial condition and our ability to develop our products.
On December 7, 2018, we received written notice from Biogen MA Inc. (Biogen), a wholly owned subsidiary of Biogen Inc., that Biogen has elected to terminate the Collaboration and License Agreement between Biogen and us effective as of March 8, 2019. Upon expected termination of the Collaboration Agreement, we will receive back the exclusive license rights to develop, manufacture and commercialize the product candidates for all of our partnered programs including our XLRP program, XLRS program and our three discovery programs. As we reported on December 12, 2018, based on topline interimsix-month data from our Phase 1/2 clinical trial of our XLRS product candidate that showed no clinical activity atsix-months, we will complete patient monitoring activities on the XLRS program according to the clinical protocol, but we will not further develop our XLRS product candidate. We plan to continue to advance our XLRP and ACHM product candidates, as we believe the general safety and tolerability of our gene delivery platform is supported by our XLRS clinical data, and we are evaluating next steps for our discovery programs.
Critical Accounting Policies
Our management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities in our financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses and share-based compensation. We base our estimates on historical experience, known trends and events, and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
For a description of our accounting policies that, in our opinion, involve the most significant application of judgment or involve complex estimation and which could, if different judgments or estimates were made, materially affect our reported results of operations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our June 2017 2018Form 10-K. 10-K, for the year ended June 30, 2018.
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The Company adopted Topic 606 on July 1, 2018. See Note 2 to these Unaudited Condensed Financial Statements included in this Quarterly Report onForm 10-Q for a description of our revenue recognition accounting policies.
New Accounting Pronouncements
Refer to Note 2 to the condensed financial statementsthese Unaudited Condensed Financial Statements included in this quarterly report for further information on recently issued accounting standards.
Financial operations review
Revenue
We primarily generate revenue through collaboration agreements, sponsored research arrangements with nonprofit organizations for the development and commercialization of product candidates and from federal research and development grant programs. On December 7, 2018, the Company received a letter from Biogen that served as notice that Biogen had elected to terminate the Collaboration Agreement in its entirety effective as of March 8, 2019. We will account for the termination of the Collaboration Agreement upon the effective date of the termination. If the Collaboration Agreement is terminated effective March 8, 2019, deferred revenue as of December 31, 2018 of $20.4 million will be recognized as revenue in the three month period ending March 31, 2019. Thereafter, no more collaboration revenue related to the Collaboration Agreement will be recognized. In the future, we may generate revenue from a combination of:of product sales, license fees, milestone payments, development services, research and development grants, and from collaboration and royalty payments for the sales of products developed under licenses of our intellectual property.
We expect that any revenue we generate will fluctuate from quarter to quarter as a result of the timing and amount of license fees, research and development programs, manufacturing efforts and reimbursements, collaboration milestone payments, and the sale of our products, to the extent any are successfully commercialized. We do not expect to generate revenue from product sales for the foreseeable future, if at all. If we or our collaborators fail to complete the development of our product candidates in a timely manner or obtain regulatory approval for them, our ability to generate future revenue, our results of operations and financial position would be materially adversely affected.
We expect in fiscal year 2018 that revenues from our Biogen collaboration associated with amortization of non-refundable upfront fees will decrease approximately $20.0 million compared to fiscal year 2017. This decrease is primarily due to reaching the end of the XLRP service period in the first quarter of fiscal year 2018, and to a lesser extent, due to changes in estimates associated with the period of performance under the XLRS and preclinical programs. We expect that milestone revenue recognized under the Biogen collaboration will increase in the near term. In April 2018, the first patient was dosed in the XLRP Phase 1/2 clinical trial and the Company earned a $2.5 million milestone payment. Upon dosing of the fourth patient in the XLRP Phase 1/2 clinical trial, we expect to receive milestone payment of $10.0 million. We expect developmental services revenues from the Biogen collaboration will increase by approximately $2.0 million in fiscal year 2018 due to the initiation of the XLRP Phase 1/2 clinical trial.
Research and development expenses
Research and development expenses consist primarily of costs incurred for the development of our product candidates, which include:
employee-related expenses, including salaries, benefits, travel and share-based compensation expense;
expenses incurred under agreements with academic research centers, contract research organizations, or CROs, and investigative sites that conduct our clinical trials;
license and sublicense fees and collaboration expenses;
the cost of acquiring, developing, and manufacturing clinical trial materials; and
facilities, depreciation, and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance, and other supplies.
Research and development costs are expensed as incurred. Costs for certain development activities are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors and our clinical sites.
We cannot determine with certainty the duration and completion costs of the current or future clinical trials of our product candidates or if, when, or to what extent we will generate revenues from the commercialization and sale of any of our product candidates that obtain regulatory approval. We may never succeed in achieving regulatory approval for any of our product candidates. The duration, costs, and timing of clinical trials and development of our product candidates will depend on a variety of factors, including:
the scope, rate of progress, and expense of our ongoing as well as any additional clinical trials and other research and development activities;
our ability to enter into partnership or collaboration agreements with third parties;
the timing and level of activity as determined by us or jointly with our partners;
the level of funding received from our partners;
25
whether or not we elect to cost share with our partners;
the countries in which trials are conducted;
future clinical trial results;
uncertainties in clinical trial enrollment rates ordrop-out or discontinuation rates of patients;
potential additional safety monitoring or other studies requested by regulatory agencies or elected as best practice by us;
increased cost and delay associated with manufacturing or testing issues, including ongoing quality assurance, qualifying new vendors and developingin-house capabilities;
significant and changing government regulation; and
the timing and receipt of any regulatory approvals.
A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA, or another regulatory authority were to require us to conduct clinical trials beyond those that we currently anticipate will be required for the completion of clinical development of a product candidate or if we experience significant delays in enrollment in or execution of any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development.
From inception through MarchDecember 31, 2018, we have incurred approximately $160.4$186.9 million in research and development expenses. We expect our research and development expenses to increase for the foreseeable future as we continue the development of our product candidates and explore potential applications of our gene therapy platform in other indications. Additionally, we expect sublicensing fees to increase in the fourth quarter of fiscal 2018, due to earning a $2.5 milestone payment from Biogen associated with dosing the first patient in the XLRP trial. We expect sublicensing fees to increase during fiscal 2019 upon receipt of the $10.0 million milestone payment from Biogen associated with the dosing of the fourth patient in the XLRP trial. We expect sublicensing fees to be approximately 23% of the two Biogen milestone payments.
General and administrative expenses
General and administrative expenses consist primarily of salaries and related costs for personnel, including share-based compensation and travel expenses for our employees in executive, operational, legal, business development, finance and human resource functions. Other general and administrative expenses include costs to support employee training and development, board of directors’ costs, depreciation, insurance expenses, facility-related costs not otherwise included in research and development expense, professional fees for legal services, including patent-related expenses, and accounting, investor relations, corporate communications and information technology services. We anticipate that our general and administrative expenses will continue to increase in the future as we hire additional employees to support our continued research and development efforts, collaboration arrangements, and the potential commercialization of our product candidates. Additionally, if and when we believe a regulatory approval of the first product candidate appears likely, we anticipate an increase in payroll and related expenses as a result of our preparation for commercial operations, especially as it relates to the sales and marketing of our product candidates.
Other income (expense), net
Other income and expense consists primarily of interest earned on cash and cash equivalents and ourheld-to-maturity investments.
Provision for income taxes
Income tax expense (benefit) for the three and ninesix months ended MarchDecember 31, 2018 was $0.7 million$19,000 and ($66,000),$38,000, respectively, which was an increase in income tax expense of $0.1 millioncompared to ($791,000) for both the three and a decrease of $1.9 million, respectively for the same time periods insix months ended December 31, 2017. The income tax expense for the three and six months ended MarchDecember 31, 2018, was primarily driven by interest expense related to the apportionment of income to certain state jurisdictions where the Company had not generated net operating losses (NOL’s). The incomeCompany’s uncertain tax benefit for the nine months ended March 31, 2018 was primarily due to certain tax credit carryforwards becoming refundable under The Tax Cuts and Jobs Act of 2017, offset by income tax expense for the three months ended March 31, 2018.position.
26
Comparison of the three months ended MarchDecember 31, 2018 to the three months ended MarchDecember 31, 2017
Revenue
|
| For the Three Months Ended March 31, |
|
| Increase |
|
| % Increase |
|
| For the Three Months Ended December 31, | Increase | % Increase | ||||||||||||||||||||
|
| 2018 |
|
| 2017 |
|
| (Decrease) |
|
| (Decrease) |
|
| 2018 | 2017 | (Decrease) | (Decrease) | ||||||||||||||||
|
| (dollars in thousands) |
|
| (dollars in thousands) | ||||||||||||||||||||||||||||
Collaboration revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Amortization of upfront fees |
| $ | 2,844 |
|
| $ | 7,907 |
|
| $ | (5,063 | ) |
|
| (64 | ) | % | ||||||||||||||||
License and related services | $ | 4,362 | $ | 3,735 | $ | 627 | 17 | % | |||||||||||||||||||||||||
Development services |
|
| 744 |
|
|
| 390 |
|
|
| 354 |
|
|
| 91 |
| % | 903 | 1,096 | (193 | ) | (18 | )% | ||||||||||
Milestone revenue | 630 | — | 630 | nm | % | ||||||||||||||||||||||||||||
|
|
|
| ||||||||||||||||||||||||||||||
Total collaboration revenue |
|
| 3,588 |
|
| $ | 8,297 |
|
| $ | (4,709 | ) |
|
| (57 | ) | % | 5,895 | 4,831 | 1,064 | 22 | % | |||||||||||
Grant revenue |
|
| 15 |
|
|
| 91 |
|
|
| (76 | ) |
|
| (84 | ) | % | 39 | 21 | 18 | 86 | % | |||||||||||
|
|
|
| ||||||||||||||||||||||||||||||
Total revenue |
| $ | 3,603 |
|
| $ | 8,388 |
|
| $ | (4,785 | ) |
|
| (57 | ) | % | $ | 5,934 | $ | 4,852 | $ | 1,082 | 22 | % | ||||||||
|
|
|
|
Total revenue for the three months ended MarchDecember 31, 2018 was $3.6$5.9 million, compared to $8.4$4.9 million generated duringfor the same periodthree months ended December 31, 2017. The increase was primarily due to increased license and related services revenue of $0.6 million and an increase in 2017. Non-refundable upfront fees receivedmilestone revenue of $0.6 million, partially offset by decreased development services revenue of $0.2 million. Effective July 1, 2018, the Company adopted Topic 606. Based on the Company’s Topic 606 revenue recognition methodology, milestone payments are recognized based on the proportional performance of the underlying performance obligation for which the milestone payment relates. The decrease in development services revenue was primarily due to timing of Phase 1/2 study activities related to the Company’s XLRP program. The increase in license and related service revenue was due to the Company’s revised pattern of revenue recognition under our collaborationTopic 606. For the three months ended December 31, 2018, license and related services, which includes thePre-Funded Activities associated with each program under the Biogen Collaboration, are amortized to collaborationrecognized on a proportional performance basis under Topic 606. For the three months ended December 31, 2017, license and related services revenue was recognized based on a straight-line basis over the estimated service period. Development services revenue primarily consists of reimbursement of Post-Funding Development Activitiesperiod under the Biogen Collaboration. AmortizationCompany’s prior revenue decreased $5.1 million for the three months ended March 31, 2018 compared to the same period in 2017 primarily due to reaching the end of the XLRP service period in the first quarter of fiscal year 2018, and to a lesser extent, due to changes in estimates associated with the period of performance under the XLRS and preclinical programs. Development services revenue increased $0.4 million for the three months ended March 31, 2018 compared to the same period in 2017 primarily due to activities associated with preparing to conduct a Phase 1/2 clinical trial for XLRP. Grant revenue decreased $76,000 during the three months ended March 31, 2018 compared to the same period in 2017, largely attributable to reduced research and development activities on grant-funded projects. recognition methodology.
Research and development expense
The following table summarizes our research and development expenses by product candidate or program for the three months ended MarchDecember 31, 2018 and 2017:
|
| For the Three Months Ended March 31, |
|
| Increase |
|
| % Increase |
|
| For the Three Months Ended December 31, | Increase | % Increase | ||||||||||||||||||||
|
| 2018 |
|
| 2017 |
|
| (Decrease) |
|
| (Decrease) |
|
| 2018 | 2017 | (Decrease) | (Decrease) | ||||||||||||||||
|
| (dollars in thousands) |
|
| (dollars in thousands) | ||||||||||||||||||||||||||||
External research and development expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
ACHM |
| $ | 872 |
|
| $ | 817 |
|
| $ | 55 |
|
|
| 7 |
| % | $ | 955 | $ | 675 | $ | 280 | 41 | % | ||||||||
XLRS |
|
| 669 |
|
|
| 798 |
|
|
| (129 | ) |
|
| (16 | ) | % | 433 | 520 | (87 | ) | (17 | )% | ||||||||||
XLRP |
|
| 457 |
|
|
| 524 |
|
|
| (67 | ) |
|
| (13 | ) | % | 336 | 547 | (211 | ) | (39 | )% | ||||||||||
Research and discovery programs |
|
| 1,020 |
|
|
| 414 |
|
|
| 606 |
|
|
| 146 |
| % | 1,158 | 1,969 | (811 | ) | (41 | )% | ||||||||||
|
|
|
| ||||||||||||||||||||||||||||||
Total external research and development expenses |
|
| 3,018 |
|
|
| 2,553 |
|
|
| 465 |
|
|
| 18 |
| % | 2,882 | 3,711 | (829 | ) | (22 | )% | ||||||||||
|
|
|
| ||||||||||||||||||||||||||||||
Internal research and development expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Employee-related costs |
|
| 2,296 |
|
|
| 2,127 |
|
|
| 169 |
|
|
| 8 |
| % | 2,624 | 2,092 | 532 | 25 | % | |||||||||||
Share-based compensation |
|
| 661 |
|
|
| 574 |
|
|
| 87 |
|
|
| 15 |
| % | 541 | 647 | (106 | ) | (16 | )% | ||||||||||
Other |
|
| 1,378 |
|
|
| 1,049 |
|
|
| 329 |
|
|
| 31 |
| % | 1,536 | 1,276 | 260 | 20 | % | |||||||||||
|
|
|
| ||||||||||||||||||||||||||||||
Total internal research and development expenses |
|
| 4,335 |
|
|
| 3,750 |
|
|
| 585 |
|
|
| 16 |
| % | 4,701 | 4,015 | 686 | 17 | % | |||||||||||
|
|
|
| ||||||||||||||||||||||||||||||
Total research and development expense |
| $ | 7,353 |
|
| $ | 6,303 |
|
| $ | 1,050 |
|
|
| 17 |
| % | $ | 7,583 | $ | 7,726 | $ | (143 | ) | (2 | )% | |||||||
|
|
|
|
27
External research and development costs consist of collaboration, licensing, manufacturing, testing, and other miscellaneous expenses that are directly attributable to our most advanced product candidates and discovery programs. We do not allocate personnel-related costs, including stock-based compensation, costs associated with broad technology platform improvements or other indirect costs, to specific programs, as they are deployed across multiple projects under development and, as such, are separately classified as internal research and development expenses in the table above.
Research and development expenses for the three months ended MarchDecember 31, 2018 were $7.4$7.6 million, compared to $6.3$7.7 million for the three months ended MarchDecember 31, 2017, a decrease of $0.1 million, or 2%. This decrease was primarily due to decreased external spending of $0.8 million, partially offset by increased internal spending of $0.7 million. The decrease in external spending was primarily due to decreased research and discovery spending associated with ourpre-clinical otology and ophthalmology programs. The increase in internal spending was primarily due to hiring of additional employees to support clinical trial execution and research and development activities.
General and administrative expense
For the Three Months Ended December 31, | Increase | % Increase | ||||||||||||||
2018 | 2017 | (Decrease) | (Decrease) | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Employee-related costs | $ | 1,046 | $ | 1,388 | $ | (342 | ) | (25 | )% | |||||||
Share-based compensation | 553 | 685 | (132 | ) | (19 | )% | ||||||||||
Legal and professional fees | 82 | 73 | 9 | 12 | % | |||||||||||
Other | 1,341 | 1,222 | 119 | 10 | % | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total general and administrative expense | $ | 3,022 | $ | 3,368 | $ | (346 | ) | (10 | )% | |||||||
|
|
|
|
|
|
|
|
General and administrative expense for the three months ended December 31, 2018 decreased by $0.3 million to $3.0 million compared to the same period in 2017. The decrease was primarily driven by $0.5 million in lower employee-related costs and share-based based compensation. The decreases were partially offset by $0.1 million increase in other general and administrative expenses during the three months ended December 31, 2018 compared to the three months ended December 31, 2017.
Comparison of six months ended December 31, 2018 to the six months ended December 31, 2017
Revenue
For the Six Months Ended December 31, | Increase | % Increase | ||||||||||||||
2018 | 2017 | (Decrease) | (Decrease) | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Collaboration revenue | ||||||||||||||||
License and related services | $ | 8,981 | $ | 13,489 | $ | (4,508 | ) | (33 | )% | |||||||
Development services | 1,961 | 1,650 | 311 | 19 | % | |||||||||||
Milestone revenue | 8,978 | — | 8,978 | nm | % | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total collaboration revenue | 19,920 | 15,139 | 4,781 | 32 | % | |||||||||||
Grant revenue | 48 | 28 | 20 | 71 | % | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total revenue | $ | 19,968 | $ | 15,167 | $ | 4,801 | 32 | % | ||||||||
|
|
|
|
|
|
|
|
Total revenue for the six months ended December 31, 2018 was $20.0 million, compared to $15.2 million for the six months ended December 31, 2017. The increase was primarily due to increased milestone revenue of $9.0 million and increased development services revenue of $0.3 million, partially offset by decreased license and related services revenue of $4.5 million. The increase in milestone revenue was primarily due to recognizing revenue of $8.3 million associated with the receipt of a $10.0 million milestone payment from Biogen. Effective July 1, 2018, the Company adopted Topic 606. Based on the Company’s Topic 606 revenue recognition methodology, milestone payments are recognized based on the proportional performance of the underlying performance obligation for which the milestone payment relates. The increase in development services revenue was primarily due to additional Phase 1/2 study activities related to the Company’s XLRP program. The decrease in license and related service revenue was due to decreasedPre-Funded XLRP activities and due to the Company’s revised pattern of revenue recognition under Topic 606. For the six months ended December 31, 2018, license and related services, which includes thePre-Funded Activities associated with each program under the Biogen Collaboration, are recognized on a proportional performance basis under Topic 606. For the six months ended December 31, 2017, license and related services revenue was recognized based on a straight-line basis over the estimated service period under the Company’s prior revenue recognition methodology.
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Research and development expense
For the Six Months Ended December 31, | Increase | % Increase | ||||||||||||||
2018 | 2017 | (Decrease) | (Decrease) | |||||||||||||
(dollars in thousands) | ||||||||||||||||
External research and development expenses | ||||||||||||||||
ACHM | $ | 1,997 | $ | 1,754 | $ | 243 | 14 | % | ||||||||
XLRS | 864 | 1,338 | (474 | ) | (35 | )% | ||||||||||
XLRP | 3,095 | 1,247 | 1,848 | 148 | % | |||||||||||
Research and discovery programs | 2,035 | 3,732 | (1,697 | ) | (45 | )% | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total external research and development expenses | 7,991 | 8,071 | (80 | ) | (1 | )% | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Internal research and development expenses | ||||||||||||||||
Employee-related costs | 5,213 | 4,184 | 1,029 | 25 | % | |||||||||||
Share-based compensation | 1,025 | 1,189 | (164 | ) | (14 | )% | ||||||||||
Other | 3,419 | 2,558 | 861 | 34 | % | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total internal research and development expenses | 9,657 | 7,931 | 1,726 | 22 | % | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total research and development expense | $ | 17,648 | $ | 16,002 | $ | 1,646 | 10 | % | ||||||||
|
|
|
|
|
|
|
|
Research and development expenses for the six months ended December 31, 2018 were $17.6 million, compared to $16.0 million for the six months ended December 31, 2017, an increase of $1.1$1.6 million, or 17%10%. This increase was primarily attributable to:
$0.21.8 million of increased external spending related to XLRP primarily due to incurring sublicense expenses associated with receiving a $10.0 million XLRP milestone payment from Biogen;
$1.0 million of increased employee-related expenses associated with the hiring of additional employees to support clinical trial execution and research and development activities.activities; and
$0.30.8 million of increased general research and development expenses including training fees, equipment rental fees, dues and conference fees.
These increases were partially offset by:
$1.7 million of decreased research and discovery spending primarily due to decreased otology andpre-clinical opthamology activities; and
$0.5 million of decreased external XLRS expenses primarily due to reaching full enrollment on the Phase 1/2 clinical trial.
General and administrative expense
|
| For the Three Months Ended March 31, |
|
| Increase |
|
| % Increase |
|
| |||||||
|
| 2018 |
|
| 2017 |
|
| (Decrease) |
|
| (Decrease) |
|
| ||||
|
| (dollars in thousands) |
|
| |||||||||||||
Employee-related costs |
| $ | 1,397 |
|
| $ | 1,123 |
|
| $ | 274 |
|
|
| 24 |
| % |
Share-based compensation |
|
| 607 |
|
|
| 675 |
|
|
| (68 | ) |
|
| (10 | ) | % |
Legal and professional fees |
|
| 47 |
|
|
| 215 |
|
|
| (168 | ) |
|
| (78 | ) | % |
Other |
|
| 1,895 |
|
|
| 908 |
|
|
| 987 |
|
|
| 109 |
| % |
Total general and administrative expense |
| $ | 3,946 |
|
| $ | 2,921 |
|
| $ | 1,025 |
|
|
| 35 |
| % |
For the Six Months Ended December 31, | Increase | % Increase | ||||||||||||||
2018 | 2017 | (Decrease) | (Decrease) | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Employee-related costs | $ | 2,323 | $ | 2,770 | $ | (447 | ) | (16 | )% | |||||||
Share-based compensation | 1,250 | 1,612 | (362 | ) | (22 | )% | ||||||||||
Legal and professional fees | 241 | 337 | (96 | ) | (28 | )% | ||||||||||
Other | 2,421 | 2,355 | 66 | 3 | % | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total general and administrative expense | $ | 6,235 | $ | 7,074 | $ | (839 | ) | (12 | )% | |||||||
|
|
|
|
|
|
|
|
General and administrative expense for the threesix months ended MarchDecember 31, 2018 increaseddecreased by $1.0$0.8 million to $3.9$6.2 million compared to the same period in 2017. The increasedecrease was primarily driven by higher$0.8 million in lower employee-related costs and other expenses which resulted from hiring additional employees to support our continued expansion. The increase in other expenses of $1.0 million includes increases in the provision for uncollectible accounts and state taxes. The increased expenses were partially offset by lower share-based compensation expenses and legalshare based compensation. Legal and professional fees also decreased by $0.1 million during the threesix months ended MarchDecember 31, 2018 compared to the threesix months ended MarchDecember 31, 2017.
Comparison of nine months ended March 31, 2018 to the nine months ended March 31, 2017
Revenue29
|
| For the Nine Months Ended March 31, |
|
| Increase |
|
| % Increase |
|
| |||||||
|
| 2018 |
|
| 2017 |
|
| (Decrease) |
|
| (Decrease) |
|
| ||||
|
| (dollars in thousands) |
|
| |||||||||||||
Collaboration revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of upfront fees |
| $ | 16,333 |
|
| $ | 30,436 |
|
| $ | (14,103 | ) |
|
| (46 | ) | % |
Development services |
|
| 2,394 |
|
|
| 523 |
|
|
| 1,871 |
|
|
| 358 |
| % |
Total collaboration revenue |
|
| 18,727 |
|
|
| 30,959 |
|
|
| (12,232 | ) |
|
| (40 | ) | % |
Grant revenue |
|
| 43 |
|
|
| 169 |
|
|
| (126 | ) |
|
| (75 | ) | % |
Total revenue |
| $ | 18,770 |
|
| $ | 31,128 |
|
| $ | (12,358 | ) |
|
| (40 | ) | % |
Total revenue for the nine months ended March 31, 2018 was $18.8 million compared to $31.1 million generated during the same period in 2017. Non-refundable upfront fees received under our collaboration with Biogen are amortized to collaboration revenue on a straight-line basis over the estimated service period. Development services revenue primarily consists of reimbursement of Post-Funding Development Activities under the Biogen Collaboration. Amortization revenue decreased $14.1 million for the nine months ended March 31, 2018 compared to the same period in 2017 primarily due to reaching the end of the XLRP service period in the first quarter of fiscal year 2018, and to a lesser extent, due to changes in estimates associated with the period of performance under the XLRS and preclinical programs. Development services revenue increased $1.9 million for the nine months ended March 31, 2018 compared to the same period in 2017 primarily due to activities associated with preparing to conduct a Phase 1/2 clinical trial for XLRP. Grant revenue decreased $126,000 during the nine months ended March 31, 2018 compared to the same period in 2017, largely attributable to reduced research and development activities on grant-funded projects.
Research and development expense
|
| For the Nine Months Ended March 31, |
|
| Increase |
|
| % Increase |
|
| |||||||
|
| 2018 |
|
| 2017 |
|
| (Decrease) |
|
| (Decrease) |
|
| ||||
|
| (dollars in thousands) |
|
| |||||||||||||
External research and development expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACHM |
| $ | 2,626 |
|
| $ | 2,198 |
|
| $ | 428 |
|
|
| 19 |
| % |
XLRS |
|
| 2,007 |
|
|
| 1,768 |
|
|
| 239 |
|
|
| 14 |
| % |
XLRP |
|
| 1,704 |
|
|
| 1,277 |
|
|
| 427 |
|
|
| 33 |
| % |
Research and discovery programs |
|
| 4,752 |
|
|
| 1,936 |
|
|
| 2,816 |
|
|
| 145 |
| % |
Total external research and development expenses |
|
| 11,089 |
|
|
| 7,179 |
|
|
| 3,910 |
|
|
| 54 |
| % |
Internal research and development expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee-related costs |
|
| 6,479 |
|
|
| 5,646 |
|
|
| 833 |
|
|
| 15 |
| % |
Share-based compensation |
|
| 1,850 |
|
|
| 1,855 |
|
|
| (5 | ) |
|
| (0 | ) | % |
Other |
|
| 3,937 |
|
|
| 3,236 |
|
|
| 701 |
|
|
| 22 |
| % |
Total internal research and development expenses |
|
| 12,266 |
|
|
| 10,737 |
|
|
| 1,529 |
|
|
| 14 |
| % |
Total research and development expense |
| $ | 23,355 |
|
| $ | 17,916 |
|
| $ | 5,439 |
|
|
| 30 |
| % |
Research and development expenses for the nine months ended March 31, 2018 were $23.4 million, compared to $17.9 million for the nine months ended March 31, 2017, an increase of $5.4 million, or 30%. This increase was primarily attributable to:
$2.8 million of increased external spending on general research and discovery programs primarily due to increased spending on the optogenetics, otology, and adrenoleukodystrophy (ALD) preclinical programs and increased spending on general research activities in ophthalmology to support ongoing clinical programs;
$0.8 million of increased employee-related expenses associated with the hiring of additional employees to support clinical trial execution and research and development activities;
$0.4 million of increased external spending on the XLRP program primarily associated with filing an Investigational New Drug application with the U.S. Food and Drug Administration in August 2017 and activities associated with preparing to conduct a Phase1/2 clinical trial;
$0.4 million of increased external spending on the ACHM programs primarily due to activities associated with the ongoing Phase1/2 clinical trials;
$0.2 million of increased external spending on the XLRS program primarily related to increased patient enrollment in the ongoing Phase 1/2 clinical trial.
General and administrative expense
|
| For the Nine Months Ended March 31, |
|
| Increase |
|
| % Increase |
|
| |||||||
|
| 2018 |
|
| 2017 |
|
| (Decrease) |
|
| (Decrease) |
|
| ||||
|
| (dollars in thousands) |
|
| |||||||||||||
Employee-related costs |
| $ | 4,166 |
|
| $ | 3,098 |
|
| $ | 1,068 |
|
|
| 34 |
| % |
Share-based compensation |
|
| 2,219 |
|
|
| 2,307 |
|
|
| (88 | ) |
|
| (4 | ) | % |
Legal and professional fees |
|
| 384 |
|
|
| 701 |
|
|
| (317 | ) |
|
| (45 | ) | % |
Other |
|
| 4,251 |
|
|
| 2,401 |
|
|
| 1,850 |
|
|
| 77 |
| % |
Total general and administrative expense |
| $ | 11,020 |
|
| $ | 8,507 |
|
| $ | 2,513 |
|
|
| 30 |
| % |
General and administrative expense for the nine months ended March 31, 2018 increased by $2.5 million to $11.0 million compared to the same period in 2017. The increase was primarily driven by increased corporate infrastructure and employee-related costs which resulted from hiring additional employees to support our continued expansion, partially offset by lower legal and professional fees. The increase in other general and administrative expenses includes increases in the provision for uncollectible accounts and state taxes.
Liquidity and capital resources
We have incurred cumulative losses and negative cash flows from operations since our inception in 1999, and as of MarchDecember 31, 2018, we had an accumulated deficit of $104.3$136.5 million. It will be several years, if ever, before we have a product candidate ready for commercialization. WeAs noted above, our collaboration agreement with Biogen will terminate effective as of March 8, 2019 and we will not receive any milestone-based or royalty payments under that agreement following its expected termination. Accordingly, we expect that our research and development and general and administrative expenses will continue to increase and as a result, we anticipate that we will require additional capital to fund our operations, which we may raise through a combination of equity offerings, debt financings, other third-party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements.
As of MarchDecember 31, 2018, we had cash, cash equivalents, and investments totaling $111.8$96.1 million. In connection with Bionic Sight’s expected IND filing for its optogenetic product in the first half of calendar year 2019, we will be obligated to purchase $4.0 million of additional equity in Bionic Sight, upon IND and Institutional Review Board clearance. We believe that our existing cash, cash equivalents, and investments at MarchDecember 31, 2018 will be sufficient to enable us to advance planned preclinical studies and clinical trials for our lead product candidates and currently planned discovery programs for at least the next two years.
Cash in excess of immediate requirements is invested in accordance with our investment policy which primarily seeks to maintain adequate liquidity and preserve capital by generally limiting investments to certificates of deposit and investment-grade debt securities that mature within 24 months. As of MarchDecember 31, 2018, our cash and cash equivalents were held in bank accounts and money market funds, while our investments consisted of certificates of deposit and corporate and government bonds, none of which mature more than 2412 months after the balance sheet date, consistent with our investment policy that seeks to maintain adequate liquidity and preserve capital.
Cash flows
The following table sets forth the primary sources and uses of cash for each of the periods set forth below:
|
| For the Nine Months Ended March 31, |
|
| Increase |
|
| % Increase |
|
| For the Six Months Ended December 31, | Increase | % Increase | ||||||||||||||||||||
|
| 2018 |
|
| 2017 |
|
| (Decrease) |
|
| (Decrease) |
|
| 2018 | 2017 | (Decrease) | (Decrease) | ||||||||||||||||
|
| (dollars in thousands) |
|
| (dollars in thousands) | ||||||||||||||||||||||||||||
Net cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Operating activities |
| $ | (25,777 | ) |
| $ | (21,007 | ) |
| $ | (4,770 | ) |
|
| 23 |
| % | $ | (8,976 | ) | $ | (18,500 | ) | $ | 9,524 | 51 | % | ||||||
Investing activities |
|
| 42,750 |
|
|
| 27,612 |
|
|
| 15,138 |
|
|
| 55 |
| % | 1,947 | 58,154 | (56,207 | ) | (97 | )% | ||||||||||
Financing activities |
|
| (46 | ) |
|
| 27 |
|
|
| (73 | ) |
|
| (270 | ) | % | (58 | ) | (15 | ) | (43 | ) | 287 | % | ||||||||
Net increase in cash and cash equivalents: |
| $ | 16,927 |
|
| $ | 6,632 |
|
| $ | 10,295 |
|
|
| 155 |
| % | ||||||||||||||||
|
|
|
| ||||||||||||||||||||||||||||||
Net (decrease) increase in cash and cash equivalents | $ | (7,087 | ) | $ | 39,639 | $ | (46,726 | ) | (118 | )% | |||||||||||||||||||||||
|
|
|
|
Operating activities.For the ninesix months ended MarchDecember 31, 2018 and 2017, net cash used in operating activities was primarily the result of cash received from the collaboration with Biogen, offset by the impact of operating losses which included research and development and general and administrative expenses incurred in conducting normal business operation cash payments made for normal business operations and the impact of changes in our working capital accounts.
Investing activities. activities. Net cash provided by investing activities for the ninesix months ended MarchDecember 31, 2018 consisted primarily of cash proceeds of $88.2$46.6 million from the maturity of investments, net of investment repurchases of $44.8$44.5 million. For the ninesix months ended MarchDecember 31, 2017, net cashcashed provided by investing activities consisted primarily of cash proceeds of $80.8$58.3 million from the maturity of investments, net of investment repurchases of $50.5 million.investments.
Financing activities. activities. Net cash provided byused in financing activities during the ninesix months ended MarchDecember 31, 2018 and 2017 was associated withconsisted primarily of payments for deferred offering costs, partially offset by proceeds from the exercise of common stock options and restrictedoptions. Net cash used in financing activities during the six months ended December 31, 2017 was primarily associated with payments toward capital lease obligations, with a minor offset resulting from the exercise of common stock awards.options.
30
Operating capital requirements
To date, we have not generated any revenue from product sales. We do not know when, or if, we will generate any revenue from product sales. We do not expect to generate significant revenue from product sales unless and until we obtain regulatory approval of and commercialize one of our current or future product candidates. We anticipate that we will continue to generate losses for the foreseeable future as we continue the development of, and seek regulatory approvals for, our product candidates, and begin to commercialize any approved products. We are subject to all of the risks incident in the development of new gene therapy products, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business.
We believe that our existing cash and cash equivalents and investments at MarchDecember 31, 2018, will be will be sufficient to allow us to generate data from our ongoing clinical programs, to move ourpre-clinical optogenetic program in collaboration with Bionic Sight into the
clinic and to fund our currently planned research and discovery programs for at least the next two years. In order to complete the process of obtaining regulatory approval for our lead product candidates and to build the sales, marketing and distribution infrastructure that we believe will be necessary to commercialize our lead product candidates, if approved, we will require substantial additional funding.
31
ITEM 3. |
|
Refer to Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report onForm 10-K for the year ended June 30, 2017,2018, which is incorporated by reference herein, for a description of our market risks.
ITEM 4. |
a) Conclusions Regarding the Effectiveness of Disclosure Controls and Procedures
An evaluation was performed under the supervision andOur management, with the participation of our management, including the Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the effectivenessdesign and operation of our disclosure controls and procedures (as defined inRules 13a—15(e)13a-15e and 15d-15(c)15d-15e under the Securities and Exchange Act of 1934, as amended (the “Exchange Act") as of the end of the period covered by this report to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the SEC‘s rules and forms and to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.quarterly report). Based on and as of the time of suchthis evaluation our management, including the Chief Executive Officer and Chief Financial Officer concluded that ourthese disclosure controls and procedures were notare effective as a result ofand designed to ensure that the material weakness identified by management as initiallyinformation required to be disclosed under “Item 9A—Controls and Procedures" in our Annual Report on Form 10-K forreports filed or submitted under the year ended June 30, 2017.Exchange Act is recorded, summarized and reported within the requisite time periods.
As discussedb) Changes in our Annual Report on Form 10-K for the year ended June 30, 2017, our management has determined that we have a material weaknessInternal Control over Financial Reporting
There were no changes in our internal control over financial reporting which relates to(as defined inRules 13a-15f and15d-15f under the design and operation of our closing and financial reporting processes. Refer to Part II, Item 9A, “Controls and Procedures,” in our Annual Report on Form 10-K for the year ended June 30, 2017 for a discussion of the actions that we have previously undertaken to remediate this material weakness. During the period covered by this Quarterly Report on Form 10-Q, we continued to: (a) provide functional and system training to employees and to prepare detailed documentation to clearly define key tasks and actions; (b) document and formalize our accounting policies and internal control processes and to help strengthen supervisory reviews by our management; (c) hire additional employees to provide further support to our finance and accounting team; and (d) design and implement monthly manual controls to manage our financial reporting close processes and to help ensure an adequate level of segregation of duties within our finance and accounting function. Although we had not fully remediated this material weakness as of March 31, 2018, we continue to actively engage in the implementation of these and other remediation efforts to address this material weakness.
As a result of these efforts, as of the date of this filing management believes we have made progress toward remediating the underlying causes of the material weakness. Although we believe our remediation efforts will be effective in remediating the material weakness, there can be no assurance as to when the remediation plan will be fully implemented, or that the plan, as currently designed, will adequately remediate the material weakness. The material weakness will not be considered fully addressed until the enhanced policies and procedures over documentation evidencing certain controls involving our Closing and Financial Report Process have been in operation for a sufficient period of time for our management to conclude that the material weakness has been fully remediated. We will continue to work on implementing and testing the enhanced documentation policies and procedures in order to make this final determination.
Changes in Internal Control over Financial Reporting
As described under “Material Weakness in Internal Control over Financial reporting,” above, during the period covered by this Quarterly Report on Form 10-Q we took and are continuing to take remedial actions intended to correct material weaknesses in our system of internal controls over financial reporting, which remedial actions have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. Except for those remedial actions, there was no change in our internal control over financial reportingExchange Act) identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurredour internal control performed during the period covered by this reportlast fiscal quarter that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.
32
ITEM 1. |
We are not a party to any pending legal proceedings. However, because of the nature of our business, we may be subject at any particular time to lawsuits or other claims arising in the ordinary course of our business, and we expect that this will continue to be the case in the future.
ITEM 1A. |
Refer to Part I, Item 1A, “Risk Factors,” in our Annual Report onForm 10-K for the year ended June 30, 20172018 for a listing of our risk factors. There has been no material change in suchMaterial changes to those risk factors since June 30, 2017.2018 are noted below.
As a result of the expected termination of the Biogen Collaboration Agreement, we will not receive any future milestone-based or royalty payments under the agreement after March 8, 2019.
On December 7, 2018, Biogen provided us with notice that it was unilaterally terminating the Biogen Collaboration Agreement in its entirety. The expected termination will become effective on March 8, 2019. Under the terms of the Collaboration Agreement, we agreed to collaborate with Biogen to develop, seek regulatory approval for and commercialize gene therapy products totreat X-linked juvenile retinoschisis (“XLRS”)and X-linked retinitis pigmentosa (“XLRP”) based on our adeno-associated virus (“AAV”) vector technologies. The Collaboration Agreement also provided for discovery programs targeting three indications using our AAV technology whereby we would conduct discovery, research and development activities for those additional drug candidates through the stage of clinical candidate designation, after which, Biogen would have been eligible to exercise an option to continue to develop, seek regulatory approval for and commercialize the designated clinical candidate. We also granted Biogen: (i) an exclusive, royalty-bearing license, with the right to grant sublicenses, to use adeno-associated virus vector technology and other technology controlled by us for the purpose of researching, developing, manufacturing and commercializing licensed products developed under the agreement and (ii) anon-exclusive, worldwide, royalty-free, fully paid license, with the right to grant sublicenses, of our interest in other intellectual property developed pursuant to the agreement. Upon the expected termination of the Collaboration Agreement, we will receive back the exclusive license rights to develop, manufacture or commercialize XLRP, XLRS and the three discovery programs. However, as a result of the expected termination of the Collaboration Agreement, we will not receive any future milestone-based or royalty payments under that agreement after March 8, 2019.
In order to obtain regulatory approval for and commercialize our product candidates, we will need to raise additional funding in the future, which may not be available on acceptable terms, or at all. Failure to obtain necessary capital when needed may force us to delay, limit or terminate our product development efforts or other operations.
Other than our product candidates for the treatment of XLRS, XLRP, ACHM CNGB3 and ACHM CNGA3, all of our lead programs in orphan ophthalmology and otology are currently in preclinical development. Developing gene therapy products is expensive, and we expect our research and development expenses to increase substantially as we advance our current product candidates in clinical trials and as we undertake preclinical studies of new product candidates.
Our operations have consumed substantial amounts of cash since inception. As of December 31, 2018, and 2017, our cash and cash equivalents and investments amounted to $96.1 million and $119.7 million, respectively. Our research and development expenses were $32.2 million, $26.2 million and $39.4 million for the fiscal years ended June 30, 2018, 2017 and 2016, respectively. We believe that our existing cash and cash equivalents at December 31, 2018 will be sufficient to enable us to advance planned preclinical studies and clinical trials for our lead product candidates for at least the next two years. In order to complete the process of obtaining regulatory approval for our lead product candidates and to build the sales, marketing and distribution infrastructure that we believe will be necessary to commercialize our lead product candidates, if approved, we will require substantial additional funding. Also, our current operating plan may change as a result of many factors currently unknown to us, and we may need to seek additional funds sooner than planned, through public or private equity or debt financings, government or other third-party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements, or a combination of these approaches.
33
Any such fundraising efforts may divert our management from theirday-to-day activities, which may adversely affect our ability to develop and commercialize our product candidates. In addition, financing may not be available to us in the future in sufficient amounts or on terms acceptable to us, if at all. Moreover, the terms of any financing may adversely affect the holdings or the rights of our stockholders and the issuance of additional securities, whether equity or debt, by us, or the possibility of such issuance, may cause the market price of our shares to decline. The sale of additional equity or convertible securities would dilute all of our stockholders. The incurrence of indebtedness would result in increased fixed payment obligations and a portion of our operating cash flows, if any, being dedicated to the payment of principal and interest on such indebtedness, and we may be required to agree to certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. We could also be required to seek funds through arrangements with collaborative partners or otherwise at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available, and we may be required to relinquish or license on unfavorable terms rights to some of our technologies or product candidates or otherwise agree to terms unfavorable to us, any of which may have a material adverse effect on our business, financial condition, results of operations and prospects and cause the price of our common stock to decline.
As a result of the expected termination of the Biogen Collaboration Agreement, we will not receive any future milestone-based or royalty payments under that agreement after March 8, 2019 which will make it more likely that we will need to seek additional funds sooner than planned, through public or private equity or debt financings, government or other third-party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements, or a combination of these approaches. If we are unable to obtain needed funding on a timely basis, we may be required to significantly curtail, delay or discontinue one or more of our research or development programs or the commercialization of any product candidates or be unable to expand our operations or otherwise capitalize on our business opportunities, as desired, which could materially affect our business, financial condition, results of operations, cash flows and prospects and cause the price of our common stock to decline.
Collaborations with third parties may be important to our business. If these collaborations are not successful, our business could be adversely affected.
In addition to our current collaborations with Biogen, Synpromics, the University of Florida and Bionic Sight, we may in the future seek third-party collaborators for the development and commercialization of product candidates based on our gene therapy platform. If we enter into such collaborations, we will have limited control over the amount and timing of resources that our collaborators will dedicate to the development or commercialization of our product candidates. Our ability to generate revenues from any future collaboration or license agreement will depend on the collaborators’ abilities to successfully perform the functions assigned to them in these arrangements. In addition, any collaborators may have the right to abandon research or development projects and terminate applicable agreements, including any funding obligations, prior to or upon the expiration of the agreed upon terms. For example, on December 7, 2018, we received notice from Biogen that our collaboration agreement with them would be terminated effective March 8, 2019. As a result of the expected termination, we will not receive any future milestone-based or royalty payments under the Collaboration Agreement after March 8, 2019.
Our current collaborations or any collaboration we enter into in the future, may also pose a number of risks, including the following:
collaborators have significant discretion in determining the efforts and resources that they will apply to these collaborations;
collaborators may not perform their obligations as expected;
exclusivity rights we negotiate with our collaborators may be unenforceable in certain jurisdictions;
collaborators may not pursue development and commercialization of any product candidates that achieve regulatory approval or may elect not to continue or renew development or commercialization programs based on clinical trial results, changes in the collaborators’ strategic focus or available funding, or external factors, such as an acquisition, that divert resources or create competing priorities;
collaborators may delay clinical trials, provide insufficient funding for a clinical trial program, stop a clinical trial or abandon a product candidate, repeat or conduct new clinical trials or require a new formulation of a product candidate for clinical testing;
collaborators may decide not to continue the development of collaboration products and could independently develop, or develop with third parties, products that compete directly or indirectly with our products or product candidates if the collaborators believe that competitive products are more likely to be successfully developed or can be commercialized under terms that are more economically attractive than ours;
34
product candidates discovered in collaboration with us may be viewed by our collaborators as competitive with their own product candidates or products, which may cause collaborators to cease to devote resources to the commercialization of our product candidates;
take-over orstep-in rights granted to a collaborator with respect to one or more of our product candidates, may cause us to have limited control over future development activities and/or realize diminished economic or other benefits upon the ultimate commercialization of that product candidate;
a collaborator with marketing, distribution and commercialization rights to one or more of our product candidates that achieve regulatory approval may not commit sufficient resources to the marketing and distribution of any such product candidate;
if we fail to obtain orphan product designation for a partnered product, we may realize diminished economic benefit upon the ultimate commercialization of that product candidate;
restrictions and commitments contained in collaborations may have the effect of preventing us from independently undertaking development and other efforts that may appear to be attractive to us;
disagreements with collaborators, including disagreements over proprietary rights, contract interpretation or the preferred course of development of any product candidates, might cause delays or termination of the research, development or commercialization of such product candidates, might lead to additional responsibilities for us with respect to such product candidates, or might result in litigation or arbitration, any of which would be time-consuming and expensive;
collaborators may not properly maintain or defend our intellectual property rights or may use our proprietary information in such a way as to invite litigation that could jeopardize or invalidate our intellectual property or proprietary information or expose us to potential litigation;
collaborators may infringe the intellectual property rights of third parties, which may expose us to litigation and potential liability;
collaborations may be terminated at the convenience of the collaborator or for a material breach by either party, and, if a collaboration is terminated, we could be required to make payments to the collaborator or have our potential payments under the collaboration reduced; and
in the event of the termination of a collaboration, like the expected termination of the Biogen Collaboration Agreement effective as of March 8, 2019, we could be required to raise additional capital to pursue further development or commercialization of the product candidates returned to us by our former collaborator.
If our collaborations do not result in the successful development and commercialization of products or if one of our collaborators terminates its agreement with us, we may not receive any future research funding or milestone or royalty payments under the collaboration. If we do not receive the funding we expect under these agreements, our development of our gene therapy platform and product candidates could be delayed and we may need additional resources to develop product candidates and gene therapy platform. As a result of these or other factors, we may not receive the benefits that we expect from our collaborations.
Additionally, subject to its contractual obligations to us, if one of our collaborators is involved in a business combination, the collaborator might deemphasize or terminate the development or commercialization of any product candidate licensed to it by us. If one of our collaborators terminates its agreement with us, we may find it more difficult to attract new collaborators and our perception in the business and financial communities could be adversely affected.
We may in the future determine to collaborate with other pharmaceutical and biotechnology companies for development and potential commercialization of product candidates. These relationships or those like them may require us to incurnon-recurring and other charges, increase our near- and long-term expenditures, issue securities that dilute our existing stockholders or disrupt our management and business. In addition, we could face significant competition in seeking appropriate collaborators and the negotiation process is time-consuming and complex. Our ability to reach a definitive collaboration agreement with any such new party will depend, among other things, upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration and the proposed collaborator’s evaluation of a number of factors. Moreover, we may not be successful in our efforts to establish a strategic partnership or other alternative arrangements for our product candidates because our research and development pipeline may be insufficient, our product candidates may be deemed to be at too early of a stage of development for collaborative effort and third parties may not view our product candidates as having the requisite potential to demonstrate safety and efficacy. If we license product candidates, we may not be able to realize the benefit of such transactions if we are unable to successfully integrate them with our existing operations and company culture. We cannot be certain that, following a strategic transaction or license, we will achieve the revenues or specific net income that justifies such transaction.
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If we are unable to reach agreements with suitable collaborators on a timely basis, on acceptable terms, or at all, we may have to curtail the development of a product candidate, reduce or delay its development program or one or more of our other development programs, delay its potential commercialization or reduce the scope of any sales or marketing activities, or increase our expenditures and undertake development or commercialization activities at our own expense. If we elect to fund and undertake development or commercialization activities on our own, we may need to obtain additional expertise and additional capital, which may not be available to us on acceptable terms or at all. If we fail to enter into collaborations and do not have sufficient funds or expertise to undertake the necessary development and commercialization activities, we may not be able to further develop our product candidates or bring them to market or continue to develop our gene therapy platform and our business may be materially and adversely affected.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
The following table provides certain information with respect to our purchases of shares of the Company’s common stock during the thirdsecond fiscal quarter of 2018:
2019:
Issuer Purchases of Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Period |
| Total Number of Shares Purchased(a) |
|
| Average Price Paid per Share(a) |
|
| Total Number of Shares Purchased as Part of Publicly Announced Plan |
|
| Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plan |
| |||||
January 1, 2018 through January 31, 2018 |
| 791 |
|
| $ | 4.30 |
|
| — |
|
| $ | — |
| |||
February 1, 2018 through February 28, 2018 |
| 733 |
|
| $ | 3.95 |
|
| — |
|
| $ | — |
| |||
March 1, 2018 through March 31, 2018 |
| 667 |
|
| $ | 4.30 |
|
| — |
|
| $ | — |
| |||
Total |
| 2,191 |
|
| $ | 4.18 |
|
| — |
|
|
| |||||
(a) | These columns reflect the surrender to the Company of an aggregate of 2,191 shares of common stock to satisfy tax withholding obligations in connection with the vesting of restricted stock issued to an employee during the third fiscal quarter of 2018. |
Period | Total Number of Shares Purchased(a) | Average Price Paid per Share (a) | Total Number of Shares Purchased as Part of Publicly Announced Plan | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plan | ||||||||||||
October 1, 2018 through October 31, 2018 | 612 | $ | 6.46 | — | $ | — | ||||||||||
November 1, 2018 through November 30, 2018 | 685 | $ | 7.05 | — | $ | — | ||||||||||
December 1, 2018 through December 31, 2018 | 611 | $ | 6.11 | — | $ | — | ||||||||||
|
|
|
| |||||||||||||
Total | 1,908 | $ | 6.56 | — | ||||||||||||
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|
|
|
|
|
|
|
(a) | These columns reflect the surrender to the Company of an aggregate of 1,908 shares of common stock to satisfy tax withholding obligations in connection with the vesting of restricted stock issued to an employee during the second fiscal quarter of 2019. |
ITEM 6. | EXHIBITS |
Exhibit Number | Description | ||
3.1 | |||
3.2 | |||
31.1* | |||
31.2* | |||
32.1** | |||
101* | Interactive Data Files pursuant to Rule 405 ofRegulation S-T (XBRL) |
* | Filed herewith. |
** | Furnished herewith. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
APPLIED GENETIC TECHNOLOGIES CORPORATION (Registrant) | ||
By: | /s/ William Sullivan | |
William Sullivan, Chief Financial Officer | ||
Date: |
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