adro-10q_20150630.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

x

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

For the quarterly period ended June 30, 2015

OR

o

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

For the transition period from              to             

Commission File Number: 001-37345

 

ADURO BIOTECH, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

94-3348934

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

626 Bancroft Way, 3C

Berkeley, California  94710

(Address of principal executive offices including zip code)

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

 

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

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

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

 

Large accelerated filer

 

¨

  

Accelerated filer

 

¨

 

 

 

 

Non-accelerated filer

 

x  (do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

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

As of August 6, 2015, the registrant had 62,275,894 shares of common stock, $0.0001 par value per share, outstanding.

 

 

 


 

Aduro Biotech, Inc.

Quarterly Report on Form 10-Q

For the Quarter Ended June 30, 2015

INDEX

 

 

Page

PART I. – FINANCIAL INFORMATION

 

 

Item 1.

 

 

Condensed Consolidated Financial Statements

3

 

 

Notes to Condensed Consolidated Financial Statements

7

 

Item 2.

 

 

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

17

 

Item 3.

 

 

Quantitative and Qualitative Disclosures About Market Risk

24

 

Item 4.

 

 

Controls and Procedures

24

 

PART II.  OTHER INFORMATION

 

 

Item 1.

 

 

Legal Proceedings

25

 

Item 1A.

 

 

Risk Factors

25

 

Item 2.

 

 

Unregistered Sales of Equity Securities and Use of Proceeds

57

 

Item 3.

 

 

Defaults Upon Senior Securities

58

 

Item 4.

 

 

Mine Safety Disclosures

58

 

Item 5.

 

 

Other Information

58

 

Item 6.

 

 

Exhibits

59

 

SIGNATURES

61

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

 

 

 

 

2


 

PART I. – FINANCIAL INFORMATION

Item 1. Financial Statements

 

ADURO BIOTECH, INC.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

June 30,

 

 

December 31,

 

 

 

2015

 

 

2014

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

465,867

 

 

$

119,456

 

Accounts receivable

 

 

1,214

 

 

 

3,153

 

Prepaid expenses and other current assets

 

 

2,515

 

 

 

2,612

 

Total current assets

 

 

469,596

 

 

 

125,221

 

Property and equipment, net

 

 

2,122

 

 

 

1,053

 

Other assets

 

 

833

 

 

 

188

 

Total assets

 

$

472,551

 

 

$

126,462

 

Liabilities, Convertible Preferred Stock and Stockholders’ Equity (Deficit)

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,961

 

 

$

5,030

 

Accrued clinical trial and manufacturing expenses

 

 

4,181

 

 

 

3,350

 

Accrued expenses and other liabilities

 

 

5,967

 

 

 

2,408

 

Deferred revenue

 

 

17,754

 

 

 

33,427

 

Total current liabilities

 

 

31,863

 

 

 

44,215

 

Deferred consideration from Novartis collaboration (Note 5)

 

 

200,000

 

 

 

-

 

Deferred revenue

 

 

 

 

 

2,592

 

Convertible preferred stock warrant liability

 

 

 

 

 

100

 

Common stock warrant liability

 

 

 

 

 

889

 

Total liabilities

 

 

231,863

 

 

 

47,796

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

 

Convertible preferred stock; $0.0001 par value, 0 and 69,716,345

   shares authorized at June 30, 2015 and December 31, 2014; 0 and

   69,608,339 shares issued and outstanding at June 30, 2015 and December 31,

   2014, respectively

 

 

 

 

 

139,963

 

Stockholders’ equity (deficit):

 

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value; 10,000,000 and 0 shares

   authorized at June 30, 2015 and December 31, 2014; 0 shares

   issued and outstanding at June 30, 2015 and December 31, 2014, respectively

 

 

 

 

 

 

Common stock, $0.0001 par value; 300,000,000 and 85,000,000 shares

   authorized at June 30, 2015 and December 31, 2014; 62,262,615 and 361,997 shares

   issued and outstanding at June 30, 2015 and December 31, 2014, respectively

 

 

6

 

 

 

 

Additional paid-in capital

 

 

345,201

 

 

 

346

 

Accumulated deficit

 

 

(104,519

)

 

 

(61,643

)

Total stockholders’ equity (deficit)

 

 

240,688

 

 

 

(61,297

)

Total liabilities, convertible preferred stock and stockholders’ equity (deficit)

 

$

472,551

 

 

$

126,462

 

 

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

 

 

 

 

3


 

ADURO BIOTECH, INC.

Condensed Consolidated Statements of Operations

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collaboration and license revenue

 

$

9,623

 

 

$

883

 

 

$

18,861

 

 

$

883

 

Grant revenue

 

 

260

 

 

 

102

 

 

 

596

 

 

 

127

 

Total revenue

 

 

9,883

 

 

 

985

 

 

 

19,457

 

 

 

1,010

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

13,533

 

 

 

5,403

 

 

 

24,179

 

 

 

10,132

 

General and administrative

 

 

5,882

 

 

 

2,134

 

 

 

12,092

 

 

 

3,518

 

Total operating expenses

 

 

19,415

 

 

 

7,537

 

 

 

36,271

 

 

 

13,650

 

Loss from operations

 

 

(9,532

)

 

 

(6,552

)

 

 

(16,814

)

 

 

(12,640

)

(Loss) Gain from remeasurement of fair value of warrants

 

 

(16,735

)

 

 

25

 

 

 

(26,077

)

 

 

(125

)

Gain on extinguishment of convertible promissory notes

 

 

 

 

 

3,553

 

 

 

 

 

 

3,553

 

Interest expense

 

 

 

 

 

(996

)

 

 

 

 

 

(2,350

)

Other income, net

 

 

7

 

 

 

344

 

 

 

15

 

 

 

152

 

Net loss

 

$

(26,260

)

 

$

(3,626

)

 

$

(42,876

)

 

$

(11,410

)

Net loss per common share, basic and diluted

 

$

(0.50

)

 

$

(12.27

)

 

$

(1.61

)

 

$

(38.61

)

Weighted average common shares outstanding, basic and diluted

 

 

52,653,344

 

 

 

295,498

 

 

 

26,678,848

 

 

 

295,498

 

 

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

 

 

 

4


 

ADURO BIOTECH, INC.

Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)

(In thousands, except share amounts)

(Unaudited)

 

 

 

Convertible

Preferred Stock

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Deficit

 

Balance at January 1, 2015

 

 

69,608,339

 

 

$

139,963

 

 

 

 

361,997

 

 

$

 

 

$

346

 

 

$

(61,643

)

 

$

(61,297

)

Issuance of Series E convertible preferred

   stock for cash, net of issuance costs

   (Note 7)

 

 

2,361,029

 

 

 

24,992

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of convertible preferred stock upon exercise of

   preferred stock warrants

 

 

6,668

 

 

 

9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of convertible preferred stock to common stock

 

 

(71,976,036

)

 

 

(164,964

)

 

 

 

51,822,659

 

 

 

5

 

 

 

164,959

 

 

 

 

 

 

164,964

 

Issuance of common stock in initial public offering, net of offering costs

 

 

 

 

 

 

 

 

 

8,050,000

 

 

 

1

 

 

 

124,192

 

 

 

 

 

 

124,193

 

Issuance of common stock in private placement (Note 7)

 

 

 

 

 

 

 

 

 

1,470,588

 

 

 

 

 

 

 

25,000

 

 

 

 

 

 

25,000

 

Reclassification of convertible preferred stock and common stock warrant liability to additional paid-in capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

27,066

 

 

 

 

 

 

27,066

 

Issuance of common stock upon exercise of

   stock options and grant of restricted stock

 

 

 

 

 

 

 

 

 

298,687

 

 

 

 

 

 

299

 

 

 

 

 

 

299

 

Issuance of common stock upon exercise of

   warrants

 

 

 

 

 

 

 

 

 

258,684

 

 

 

 

 

 

116

 

 

 

 

 

 

116

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,223

 

 

 

 

 

 

3,223

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(42,876

)

 

 

(42,876

)

Balance at June 30, 2015

 

 

-

 

 

$

-

 

 

 

 

62,262,615

 

 

$

6

 

 

$

345,201

 

 

$

(104,519

)

 

$

240,688

 

 

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

 

 

 

 

5


 

ADURO BIOTECH, INC.

Condensed Consolidated Statement of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Six Months Ended

June 30,

 

 

 

2015

 

 

2014

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

Net loss

 

$

(42,876

)

 

$

(11,410

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

219

 

 

 

94

 

Stock-based compensation

 

 

3,345

 

 

 

204

 

Loss from remeasurement of fair value of warrants

 

 

26,077

 

 

 

125

 

Gain from changes in the fair value of preferred stock derivative liability

 

 

 

 

 

(147

)

Gain on extinguishment of convertible promissory notes

 

 

 

 

 

(3,553

)

Non-cash interest expense related to convertible promissory notes payable

 

 

 

 

 

2,350

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

2,092

 

 

 

244

 

Prepaid expenses and other assets

 

 

(1,962

)

 

 

(12

)

Accounts payable

 

 

893

 

 

 

2,633

 

Deferred consideration from Novartis collaboration

 

 

200,000

 

 

 

-

 

Deferred revenue

 

 

(18,264

)

 

 

12,116

 

Accrued clinical trial and manufacturing expenses

 

 

831

 

 

 

677

 

Accrued expenses and other liabilities

 

 

3,370

 

 

 

640

 

Net cash provided by operating activities

 

 

173,725

 

 

 

3,961

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(1,165

)

 

 

(267

)

Net cash used in investing activities

 

 

(1,165

)

 

 

(267

)

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock, net of offering costs

 

 

151,027

 

 

 

 

Proceeds from issuance of convertible preferred stock, net of issuance costs

 

 

22,522

 

 

 

26,905

 

Proceeds from issuance of convertible promissory note payable to related parties

 

 

 

 

 

308

 

Proceeds from exercise of stock options and warrants

 

 

302

 

 

 

 

Net cash provided by financing activities

 

 

173,851

 

 

 

27,213

 

Net increase in cash and cash equivalents

 

 

346,411

 

 

 

30,907

 

Cash and cash equivalents at beginning of period

 

 

119,456

 

 

 

8,532

 

Cash and cash equivalents at end of period

 

$

465,867

 

 

$

39,439

 

Supplemental Disclosure of Non-Cash Investing and Financing Activities

 

 

 

 

 

 

 

 

Conversion of convertible preferred stock to common stock

 

$

164,964

 

 

$

 

Reclassification of warrant liabilities to additional paid-in capital

 

$

27,066

 

 

$

 

Accrued offering costs

 

$

742

 

 

$

 

Purchase of property and equipment in accounts payable

 

$

123

 

 

$

107

 

Issuance of Series C convertible preferred stock to a related party and other investors in connection with conversion of convertible promissory notes and accrued interest

 

$

-

 

 

$

13,452

 

Issuance of Series B convertible preferred stock to a related party in connection with conversion of convertible promissory notes

 

$

-

 

 

$

2,088

 

Reclassification of liability classified warrants to additional paid-in capital

 

$

-

 

 

$

784

 

 

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

 

 

 

 

6


 

ADURO BIOTECH, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

 

1. Nature of Business

Aduro Biotech, Inc., or the Company, is a clinical-stage immuno-oncology company located in Berkeley, California. The Company was founded in 2000 under the name Oncologic, Inc., later merged with Triton BioSystems, Inc. in 2008, and subsequently changed its name to Aduro Biotech, Inc. in 2009. The Company is focused on the development of technology platforms designed to stimulate robust and durable immune responses against cancer. The Company operates in one business segment.

The Company’s more advanced technology platform is its proprietary Live, Attenuated, Double-Deleted, or LADD, method of engineering Listeria monocytogenes bacteria into therapeutic agents that stimulate both an immediate innate immune response and a targeted adaptive immune response to specific tumor antigens. The Company’s earlier-stage technology platform is based on cyclic dinucleotides, or CDNs, novel small molecules that activate the intracellular Stimulator of Interferon Genes, or STING, receptor, a central mediator of the innate immune response. The Company’s pipeline of product candidates has the potential to be applicable to a variety of cancers and to be combinable with a range of conventional and emerging cancer therapies, including cellular vaccines, chemotherapy, radiotherapy and checkpoint inhibitors, among others.

 

 

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

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, and following the requirements of the Securities and Exchange Commission, or the SEC, for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP have been condensed or omitted, and accordingly the balance sheet as of December 31, 2014 has been derived from audited consolidated financial statements at that date but does not include all of the information required by U.S. GAAP for complete financial statements. These financial statements have been prepared on the same basis as our annual financial statements and, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair presentation of our financial information. The results of operations for the period ended June 30, 2015 are not necessarily indicative of the results to be expected for the year ending December 31, 2015 or for any other interim period or for any other future year.

The accompanying condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto for the year ended December 31, 2014 included in our Registration Statement on Form S-1 filed with the SEC.

Use of Estimates

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

Initial Public Offering

On April 20, 2015, the Company closed its initial public offering, or IPO and sold 8,050,000 shares of its common stock (inclusive of 1,050,000 shares of common stock pursuant to the full exercise of the underwriters’ option to purchase additional shares) at a price to the public of $17.00 per share. The Company received aggregate net proceeds of $124.2 million, net of underwriting discounts and offering expenses. The Company also sold to Novartis Institutes for BioMedical Research, Inc., or NIBR, in a concurrent private placement 1,470,588 shares of common stock at a price of $17.00 per share for proceeds of $25.0 million (See Note 7). Upon the closing of the IPO, all then-outstanding shares of convertible preferred stock converted by their terms into 51,822,659 shares of common stock. Additionally, the Company amended and restated its certificate of incorporation effective April 14, 2015 to, among other things, change the authorized number of shares of common stock to 300,000,000 shares and the authorized number of shares of preferred stock to 10,000,000 shares.

 

7


ADURO BIOTECH, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Reverse Stock Split

On April 1, 2015, the Company effected a 0.72-for-1 reverse split of its common stock. Upon the effectiveness of the reverse stock split, (i) every 1 share of outstanding common stock was combined into 0.72 of a share of common stock, (ii) the number of shares of common stock for which each outstanding option or warrant to purchase common stock is exercisable was proportionally decreased on a 0.72-for-1 basis, (iii) the exercise price of each outstanding option or warrant to purchase common stock was proportionately increased on a 0.72-for-1 basis, and (iv) the conversion ratio for each share of preferred stock which was convertible into the Company’s common stock was proportionately reduced on a 0.72-for-1 basis. All of the outstanding common stock share numbers, warrants to purchase common stock, common stock share prices, common stock exercise prices and per share amounts have been adjusted, on a retroactive basis, to reflect this 0.72-for-1 reverse stock split for all periods presented. The par value per share, authorized number of shares of common stock, preferred stock and preferred stock warrants were not adjusted as a result of the reverse stock split.

Offering Costs

Offering costs represent underwriting, legal, accounting and other direct costs related to the Company’s IPO.  These costs were deferred until completion of the IPO, at which time they were reclassified to additional paid-in capital as a reduction of the proceeds.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board, or FASB, issued Auditing Standards Update, or ASU, No. 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU affects any entity that either enters into contracts with customers to transfer goods and services or enters into contracts for the transfer of nonfinancial assets. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under the currently effective guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In July 2015, the FASB voted to defer the effective date of the ASU by one year to December 15, 2017 for fiscal years, and interim periods within those periods, beginning after that date. Entities are permitted to adopt in accordance with the original effective date of December 15, 2016 if they choose. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

 

 

3. Fair Value Measurements

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

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

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

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

 

8


ADURO BIOTECH, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

 

The Company’s financial instruments consist of Level 1 assets and Level 3 liabilities. Where quoted prices are available in an active market, securities are classified as Level 1. Level 1 assets consist of highly liquid money market funds that are included in cash equivalents.

In certain cases where there is limited activity or less transparency around the inputs to valuation, securities are classified as Level 3. Level 3 liabilities consist of common and preferred stock warrant liabilities. The determination of the fair value of the warrants is discussed in Note 8. Increases or decreases in the fair value of the underlying convertible preferred stock or common stock warrants are accounted for as (loss) gain from remeasurement of fair value of warrants in the accompanying condensed consolidated statements of operations.

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

 

 

 

June 30, 2015

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

463,515

 

 

$

 

 

$

 

 

$

463,515

 

 

 

 

 

December 31, 2014

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

110,001

 

 

$

 

 

$

 

 

$

110,001

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible preferred stock warrant liability

 

$

 

 

$

 

 

$

100

 

 

$

100

 

Common stock warrant liability

 

 

 

 

 

 

 

 

889

 

 

 

889

 

Total

 

$

 

 

$

 

 

$

989

 

 

$

989

 

 

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

 

 

 

Convertible Preferred

Stock

Warrant

Liability

 

 

Common

Stock

Warrant

Liability

 

Balance at December 31, 2014

 

$

100

 

 

$

889

 

Net increase in fair value upon remeasurement

 

 

1,108

 

 

 

24,969

 

Reclassification to additional paid-in capital

 

 

(1,208

)

 

 

(25,858

)

Balance at June 30, 2015

 

$

-

 

 

$

-

 

 

 

4. Balance Sheet Components

Property and Equipment, Net

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

 

 

 

June 30,

 

 

December 31,

 

 

 

2015

 

 

2014

 

Lab equipment

 

$

2,051

 

 

$

1,165

 

Computer and office equipment

 

 

601

 

 

 

520

 

Furniture and fixtures

 

 

170

 

 

 

87

 

Leasehold improvements

 

 

542

 

 

 

304

 

Total property and equipment

 

 

3,364

 

 

 

2,076

 

Less: accumulated depreciation and amortization

 

 

(1,242

)

 

 

(1,023

)

Property and equipment, net

 

$

2,122

 

 

$

1,053

 

 

 

9


ADURO BIOTECH, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Depreciation and amortization expense was $126,000 and $51,000 for the three months ended June 30, 2015 and 2014, respectively and was $219,000 and $94,000, for the six months ended June 30, 2015 and 2014, respectively.

Accrued Expenses and Other Liabilities

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

 

 

 

June 30,

 

 

December 31,

 

 

 

2015

 

 

2014

 

Licensing fees

 

$

3,349

 

 

$

160

 

Compensation and related benefits

 

 

1,402

 

 

 

1,276

 

Professional and consulting services

 

 

1,021

 

 

 

961

 

Other

 

 

195

 

 

 

11

 

Total accrued expenses and other liabilities

 

$

5,967

 

 

$

2,408

 

 

 

5. Collaboration Agreements

Novartis Agreement

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

Under the Novartis Agreement, the Company received an upfront payment of $200 million in April 2015. The Company is also eligible to receive up to an additional $250 million in development milestones and up to an additional $250 million in regulatory approval milestones.

The Company is responsible for 38% of the joint development costs worldwide and Novartis is responsible for the remaining 62% of the joint development costs worldwide. The Company will also receive 50% of all profits for any products commercialized pursuant to this collaboration in the United States and 45% of all profits for specified European countries and Japan. For each of these profit share countries, each party will be responsible for its respective commercial sharing percentage of all joint commercialization costs incurred in that country. For all other countries where the Company is not sharing profits, Novartis will be responsible for all commercialization costs and will pay the Company a royalty in the mid-teens on all net sales of product sold by Novartis, its affiliates and sublicensees, with such percentage subject to reduction post patent and data exclusivity expiration and subject to reduction, capped at a specified percentage, for royalties payable to third party licensors. Novartis’ royalty obligation will run on a country-by-country basis until the later of expiration of the last valid claim covering the product, expiration of data exclusivity for the product or 12 years after first commercial sale of the product in such country.

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

The Company recognizes revenue from collaboration, license or research arrangements when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable and collection is reasonably assured. As of June 30, 2015, the Company and Novartis had not yet completed activities to provide persuasive evidence of an arrangement, primarily the Joint Steering Committee’s approval of the research and development plan. As a result, the Company did not recognize any revenue pursuant to the Novartis collaboration for the quarter ended June 30, 2015. The Company recorded the $200 million upfront payment as deferred consideration from Novartis collaboration in the condensed consolidated balance sheet.

 

10


ADURO BIOTECH, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Janssen ADU-741 and GVAX Prostate Agreements

In May 2014, the Company entered into a Research and License Agreement, or Janssen ADU-741 Agreement, and a GVAX Prostate License Agreement, or Janssen GVAX Prostate Agreement, with Janssen Biotech, Inc., or Janssen, a wholly-owned subsidiary of Johnson & Johnson Development Corporation, to collaborate on the development of a drug for the treatment of prostate cancer. Under the terms of the Janssen ADU-741 Agreement, the Company granted Janssen an exclusive, worldwide license to research, develop, manufacture, use, sell and otherwise exploit products containing ADU-741 for any and all uses. The Company is responsible for certain research and development activities from the effective date of the agreement until approval of an investigational new drug application, or IND. Since the inception of the Janssen ADU-741 Agreement, the Company received an upfront payment of $12.0 million and non-substantive and substantive milestone payments of $6.5 million upon completion of certain development activities. Under the terms of the Janssen ADU-741 Agreement, the Company may receive future nonrefundable milestone payments up to a total of $1.0 million after completion of various stages of the research and development activities, and the Company is eligible to receive future contingent payments up to a total of $345.5 million comprised of development milestones through completion of all Phase 3 clinical trials, as well as launch, commercialization and sales milestones. The contingent payments are triggered upon the activities expected to be undertaken by Janssen. The Company is eligible to receive royalties on net sales of licensed products by Janssen, its affiliates and sublicensees at a rate ranging from mid-single digits to low teens based on aggregate annual net sales and based on the country of sale.

Under the Janssen GVAX Prostate Agreement, the Company granted Janssen an exclusive worldwide license to research, develop, manufacture, use, sell and otherwise exploit products containing GVAX Prostate for any and all uses. The Company received an upfront payment of $500,000 in May 2014 and may receive an additional $2.0 million on the achievement of a specified commercial milestone. In addition, the Company is eligible to receive royalties in the high single digits based on net sales of the product.

The development activities being conducted by the Company are based on a combination of the technology licensed under both agreements. Accordingly, the Company has accounted for the Janssen ADU-741 Agreement and Janssen GVAX Prostate Agreement as one arrangement and has identified the deliverables within the arrangement as a license to the technology and research and development activities through IND regulatory approval. The Company has determined that the licenses and development services under the license and research agreements represent a single unit of accounting. The licenses do not have stand-alone value to Janssen, separable from the development services to be performed under the agreement, as Janssen is unable to use the licenses for their intended purpose without the Company’s performance of the research and development services. As a result, the Company recognizes revenue from the upfront payments ratably over the term of its estimated period of performance under the agreement. Changes in the estimated period of performance will be accounted for prospectively as a change in estimate. The upfront fees received totaling $12.5 million are being recognized on a straight-line basis from the effective date of the agreements to September 2015, the Company’s estimated performance period. The Company will recognize non-substantive milestone payments on a straight-line basis through September 2015, the Company’s estimated performance period.

Janssen ADU-214 Agreement

In November 2014, the Company entered into a Research and License Agreement with Janssen, or Janssen ADU-214 Agreement, to develop a drug for the treatment of lung cancer. Under the terms of the Janssen ADU-214 Agreement, the Company granted Janssen an exclusive, worldwide license to research, develop, manufacture, use, sell and otherwise exploit products containing ADU-214 for any and all uses. The Company is responsible for certain research and development activities from the effective date of the agreement until IND regulatory approval. In November 2014, the Company received an upfront license fee of $30.0 million, which is being recognized as revenue on a straight-line basis from the effective date of the Janssen ADU-214 Agreement to February 2016, the Company’s estimated performance period. Changes in the estimated period of performance will be accounted for prospectively as a change in estimate. Under the terms of the Janssen ADU-214 Agreement, the Company may receive future nonrefundable milestone payments up to a total of $11.0 million after completion of various stages of the research and development activities, and the Company is eligible to receive future contingent payments up to a total of $776.0 million comprised of development milestones through completion of all Phase 3 clinical trials, as well as regulatory and commercial milestones. The contingent payments are triggered upon the activities expected to be undertaken by Janssen. The Company is eligible to receive royalties on any net sales of licensed products by Janssen, its affiliates and sublicensees at a rate ranging from high-single digits to low teens based on the aggregate annual net sales of licensed products worldwide and based on the country of sale.

For the three months and six months ended June 30, 2015, the Company recognized revenue from its Janssen ADU-741 Agreement and Janssen ADU-214 Agreement totaling $9.1 million and $18.2 million, respectively, related to amortization of the upfront fees and development-related non-substantive milestones. The remaining balance of the payments received of $17.8 million is included in deferred revenue at June 30, 2015.

 

11


ADURO BIOTECH, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

 

6. Commitments and Contingencies

Leases

The Company leases its office and research and development facility in Berkeley, California, under a non-cancelable operating lease. In February 2015, the Company amended its office lease agreement to increase the total square footage to approximately 25,000 square feet and extended the term of the lease to expire on December 31, 2018. The lease also contains an option to extend the lease for an additional two years. Rent expense was $0.2 million and $0.1 million during the three months ended June 30, 2015 and 2014, respectively and was $0.3 million and $0.2 million for the six months ended June 30, 2015 and 2014, respectively.

Indemnifications

In the ordinary course of business, the Company enters into agreements that may include indemnification provisions. Pursuant to such agreements, the Company may indemnify, hold harmless and defend an indemnified party for losses suffered or incurred by the indemnified party. Some of the provisions will limit losses to those arising from third party actions. In some cases, the indemnification will continue after the termination of the agreement. The maximum potential amount of future payments the Company could be required to make under these provisions is not determinable. The Company has never incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. The Company has also entered into indemnification agreements with its directors, officers and key employees that may require the Company to indemnify such individuals against liabilities that may arise by reason of their status or service as directors, officers or key employees to the fullest extent permitted by Delaware corporate law. The Company currently has directors’ and officers’ insurance.

Legal

During the normal course of business, the Company may be a party to legal claims that may not be covered by insurance. Management does not believe that any such claims would have a material impact on the Company’s financial statements.

Other Commitments

The Company has various manufacturing, clinical, research and other contracts with vendors in the conduct of the normal course of its business. All contracts are terminable, with varying provisions regarding termination. If a contract with a specific vendor were to be terminated, the Company would only be obligated for the products or services that the Company had received at the time the termination became effective as well as non-cancelable and non-refundable payment obligations incurred by the vendor for products or services before the termination became effective. In the case of terminating a clinical trial agreement at a particular site, the Company would also be obligated to provide continued support for appropriate medical procedures at that site until completion or termination.

 

 

7. Convertible Preferred Stock

Novartis Stock Purchase

Concurrent with the March 2015 entry into the Novartis Agreement (See Note 5), the Company and NIBR, entered into a stock purchase agreement to purchase 2,361,029 shares of the Company’s Series E Convertible Preferred Stock (or 1,699,940 shares of common stock on an as-converted basis) for $25.0 million. Upon the closing of the IPO, these preferred shares converted into common stock. Under the stock purchase agreement, NIBR purchased an additional $25.0 million of the Company’s common stock concurrent with the completion of the Company’s April 2015 IPO at the initial price per share offered to the public.

 

 

8. Warrant Liabilities

 

In April 2011, the Company issued warrants to purchase 24,235 shares of Series A-1 convertible preferred stock, or Series A-1 warrants, and 83,771 warrants to purchase shares of Series B convertible preferred stock, or Series B warrants.  The Series A-1 warrants and Series B warrants were immediately exercisable and expire, if not exercised, in April 2021 and April 2016, respectively.  As the shares into which the warrants were exercisable were contingently redeemable, the Company recognized a liability for the fair value of the warrants on the condensed consolidated balance sheet.

 

12


ADURO BIOTECH, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

At the date of the IPO, the Series A-1 warrants and Series B warrants became exercisable for common stock and were no longer contingently redeemable. At the IPO, the ending fair value of these warrants of $1.2 million was reclassified to additional paid-in capital, and the change in fair value of $1.1 million was recognized as loss from remeasurement of fair value of warrants in the condensed consolidated statements of operations.

 

In April, June, and October 2011, the Company issued warrants to purchase 615,658 shares of common stock.  The common stock warrants were exercisable beginning in April 2015 and would have terminated in whole or part, if the Company had obtained certain levels of government grant funds by April 15, 2015.  The warrants expire, if not exercised, in April 2021.  As the warrants were subject to performance conditions which may result in the issuance of a variable number of shares, the Company recognized a liability for the fair value of the common stock warrants on the condensed consolidated balance sheet.

 

At April 15, 2015, the Company did not obtain the specified levels of government grant funds and the performance conditions expired and the number of common shares issuable was fixed. On April 15, 2015, the ending fair value of the common stock warrants of $25.9 million was reclassified to additional paid-in capital, and the change in fair value of $25.0 million was recognized as loss from remeasurement of fair value of warrants in the condensed consolidated statements of operations.

The key assumptions used in the Black-Scholes option-pricing model for the valuation of the convertible preferred stock warrants were as follows:

 

 

 

Six Months Ended June 30,

 

 

2015

 

2014

Expected term (in years)

 

1.00 - 6.04

 

1.79 - 7.04

Fair value of underlying shares

 

$10.80 - $12.24

 

$0.67 - $1.56

Volatility

 

79.2% -111.1%

 

63.1% - 80.8%

Risk-free interest rate

 

0.23% - 1.54%

 

0.38% - 2.30%

Dividend yield

 

—%

 

—%

 

The key assumptions used in the Black-Scholes option-pricing model for the valuation of the common stock warrants were as follows:

 

 

 

Six Months Ended June 30,

 

 

2015

 

2014

Expected term (in years)

 

6.00 - 6.58

 

6.79 - 7.58

Fair value of underlying shares

 

$15.00 - $42.00

 

$1.03 - $1.07

Volatility

 

82.0% - 82.6%

 

76.3% - 80.4%

Risk-free interest rate

 

1.51% - 1.63%

 

2.13% - 2.41%

Dividend yield

 

—%

 

—%

 

 

 

9. Stock-Based Compensation Plans

2015 Stock Option Plan

In March 2015, the Company’s board of directors adopted and in April 2015 the Company’s stockholders approved the 2015 Equity Incentive Plan, or the 2015 Plan, which became effective upon the IPO and provides for the granting of incentive stock options, nonstatutory stock options, and other forms of stock awards to its employees, directors and consultants.

The 2015 Plan is administered by the Board of Directors or a committee appointed by the Board of Directors, which determines the types of awards to be granted, including the number of shares subject to the awards, the exercise price and the vesting schedule. The exercise price of incentive stock options and nonqualified stock options will be no less than 100% of the fair value per share of the Company’s common stock on the date of grant. If an individual owns capital stock representing more than 10% of the voting shares, the price of each share will be at least 110% of the fair value on the date of grant. Options expire after 10 years (five years for stockholders owning greater than 10% of the voting stock). Shares of common stock reserved for issuance under the 2015 Plan is 6,134,292 shares with automatic annual increase to the shares issuable under the 2015 Plan to the lower of (i) 4% of the total number of shares of common stock outstanding on December 31 of the preceding calendar year, or (ii) a lower number determined by the Board of Directors.

 

13


ADURO BIOTECH, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

2009 Stock Incentive Plan

The Company’s 2009 Stock Incentive Plan, or the 2009 Plan, terminated on the date the 2015 Plan was adopted. Options granted or shares issued under the 2009 Plan that were outstanding on the date the 2015 Plan became effective will remain subject to the terms of its plan.  Prior to the 2009 Plan termination, the number of options available for grant was increased by 360,000 shares.  At June 30, 2015, 8,777,668 options under the 2009 Plan remained outstanding.

Stock option activity under the Company’s 2015 plan and 2009 plan was as follows:

 

 

 

 

 

 

 

Options Outstanding

 

 

 

Shares Available for Grant

 

 

Number of Options

 

 

Weighted-

Average

Exercise

Price

 

 

Aggregate

Intrinsic

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

Balance – December 31, 2014

 

 

3,154,755

 

 

 

5,970,382

 

 

$

0.80

 

 

 

 

 

Authorized

 

 

6,494,292

 

 

 

 

 

 

 

 

 

 

 

 

Granted

 

 

(3,998,747

)

 

 

3,998,747

 

 

$

6.00

 

 

 

 

 

Exercised

 

 

 

 

 

(291,487

)

 

$

0.61

 

 

 

 

 

Canceled

 

 

96,474

 

 

 

(96,474

)

 

$

1.74

 

 

 

 

 

Balance – June 30, 2015

 

 

5,746,774

 

 

 

9,581,168

 

 

$

2.97

 

 

$

263,162

 

Options exercisable – June 30, 2015

 

 

 

 

 

 

4,115,134

 

 

$

1.01

 

 

$

120,716

 

Options vested and expected to vest – June 30, 2015

 

 

 

 

 

 

9,101,589

 

 

$

2.92

 

 

$

250,400

 

 

2015 Employee Stock Purchase Plan

In March 2015, the Company’s board of directors adopted and in April 2015 the Company’s stockholders approved the 2015 Employee Stock Purchase Plan, or 2015 ESPP, which became effective upon the IPO. The 2015 ESPP is intended to qualify as an employee stock purchase plan under Section 423 of the Code, and administered by the Company’s board of directors and the Compensation Committee of the board of directors.

Stock-based Compensation Expense

Total stock-based compensation expense recognized was as follows (in thousands):

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Research and development

 

$

606

 

 

$

37

 

 

$

751

 

 

$

81

 

General and administrative

 

 

2,159

 

 

 

58

 

 

 

2,594

 

 

 

123

 

Total stock-based compensation expense

 

$

2,765

 

 

$

95

 

 

$

3,345

 

 

$

204

 

 

In determining the fair value of the stock-based awards, the Company uses the Black-Scholes option- pricing model. The fair value of stock-based awards granted to employees during the six months ended June 30, 2015 was estimated at the date of grant using the following assumptions:

 

 

 

 

 

 

2015 Plan

2015 ESPP

Expected term (in years)

 

5.3 - 6.2

0.5

Volatility

 

70.2% - 85.2%

71.7%

Risk-free interest rate

 

0.80% - 2.05%

0.1%

Dividend yield

 

—%

—%

 

No options were granted to employees during the six months ended June 30, 2014.

 

 

14


ADURO BIOTECH, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

 

10. Income Taxes

The Company did not record a provision or benefit for income taxes during the three and six months ended June 30, 2015 and 2014. The Company continues to maintain a full valuation allowance for its net U.S. federal and state deferred tax assets.

The Company accounts for uncertain tax positions in accordance with ASC 740, Accounting for Income Taxes.  As of June 30, 2015 and 2014, the total amount of unrecognized tax benefits was $0.7 million and $0.4 million, respectively. As of June 30, 2015 and 2014, no amount of the unrecognized tax benefits, if recognized, would reduce the Company’s annual effective tax rate because the benefits are in the form of deferred tax assets for which a full valuation allowance has been recorded.

The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits in income tax expense. As of June 30, 2015 and 2014, the Company accrued no interest and penalties in the statement of financial position. Total interest and penalties included in the statements of operations for the three and six months ended June 30, 2015 and 2014 are each zero. The Company does not expect the amount of existing unrecognized tax benefits to change significantly within the next 12 months.

The Company is subject to taxation for U.S. federal and the state of California purposes only. The Company’s federal and California tax returns are open by statute for tax years 2011 and 2010 forward, respectively, and could be subject to examination by the tax authorities.

 

 

11. Net Loss per Common Share

Since the Company was in a loss position for all periods presented, basic net loss per common share is the same as diluted net loss per common share for all periods presented as the inclusion of all potential common shares outstanding would have been anti-dilutive. Potentially dilutive securities that were not included in the diluted per common share calculations because they would be anti-dilutive were as follows:

 

 

 

June 30,

 

 

 

2015

 

 

2014

 

Convertible preferred stock

 

 

 

 

 

42,125,585

 

Options to purchase common stock

 

 

9,581,168

 

 

 

4,029,019

 

Convertible preferred stock warrants

 

 

 

 

 

108,006

 

Common stock warrants

 

 

968,541

 

 

 

1,154,270

 

Convertible notes

 

 

 

 

 

1,121,860

 

Total

 

 

10,549,709

 

 

 

48,538,740

 

 

 

 

 

 

 

15


 

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this report and with our audited financial statements and related notes thereto for the year ended December 31, 2014, included in our prospectus dated April 14, 2015, filed with the Securities and Exchange Commission pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended, or the Prospectus. This discussion and other parts of this report contain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section of this report titled “Risk factors.”

Forward-Looking Statements

This discussion contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are identified by words such as “believe,” “will,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “predict,” “could,” “potentially” or the negative of these terms or similar expressions. You should read these statements carefully because they discuss future expectations, contain projections of future results of operations or financial condition, or state other “forward-looking” information. These statements relate to our future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in this report in Part II, Item 1A — “Risk Factors,” and elsewhere in this report. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. These statements, like all statements in this report, speak only as of their date, and we undertake no obligation to update or revise these statements in light of future developments. We caution investors that our business and financial performance are subject to substantial risks and uncertainties.

Overview

We are a clinical-stage immuno-oncology company focused on the development of first-in-class technology platforms designed to stimulate robust and durable immune responses against cancer, and our lead product candidate is in a randomized controlled Phase 2b clinical trial in metastatic pancreatic cancer. Immuno-oncology encompasses a class of therapies that leverage the patient’s immune system to slow the growth and spread of, or eliminate, tumor cells. We believe a critical distinguishing factor in our approach to immuno-oncology is that our novel therapies initiate powerful innate immune responses and drive targeted, durable adaptive immune responses. The immunotherapy field is rapidly advancing with new immuno-oncology combinations that focus on strengthening therapeutic efficacy in a wide range of cancers. We intend to pursue a broad strategy of combining our technology platforms with conventional and novel immuno-oncology therapies, based on their mechanisms of action, safety profiles and versatility.

Our pipeline of immuno-oncology product candidates is derived from two proprietary technology platforms: Live, Attenuated, Double-Deleted, or LADD, Listeria monocytogenes and cyclic dinucleotides, or CDNs. Our lead LADD product candidate, CRS-207, is currently being developed in metastatic pancreatic cancer and unresectable malignant pleural mesothelioma. Our lead immuno-oncology regimen of CRS-207 and GVAX Pancreas was granted Breakthrough Therapy designation by the U.S. Food and Drug Administration, or FDA, and we have obtained orphan drug designations from the FDA for CRS-207 and GVAX Pancreas for the treatment of pancreatic cancer and for CRS-207 for the treatment of mesothelioma. We are developing a pipeline of proprietary product candidates, including two product candidates in collaboration with Janssen Biotech, Inc., or Janssen, targeting prostate and lung cancers. In addition, we established a worldwide collaboration with Novartis Pharmaceuticals Corporation, or Novartis, in March 2015 for CDN product candidates in oncology.

Financial Operations Overview

Revenue

We have not generated any revenue from product sales. Our revenue to date has been primarily derived from research and development grants from the U.S. government and two separate research and license agreements we entered into with Janssen, which became effective in May 2014 and in November 2014. We recognize revenue related to research and development grants when the related research expenses are incurred and our specific performance obligations under the terms of the respective contracts are satisfied. We recognize revenue from upfront payments under our collaboration agreements ratably over the term of our estimated period of performance under the agreement. In addition to receiving upfront payments, we may also be entitled to milestone and other contingent payments upon achieving predefined objectives. Revenue from milestones, if they are nonrefundable and deemed

 

16


 

substantive, are recognized upon successful accomplishment of the milestones. To the extent that non-substantive milestones are achieved and we have remaining performance obligations, milestones are deferred and recognized as revenue over the estimated remaining period of performance.

We expect that any revenue we generate from our collaboration with Novartis, research and license agreements with Janssen, government research and development grants, and any future collaboration partners will fluctuate from year to year as a result of the timing and amount of milestones and other payments.

Research and Development Expenses

The largest component of our total operating expenses has historically been our investment in research and development activities, including the clinical development and manufacturing of our product candidates. Research and development expenses represent costs incurred to conduct research, such as the discovery and development of our product candidates, as well as the development of product candidates pursuant to our collaboration with Novartis and research and license agreement with Janssen. We recognize all research and development costs as they are incurred. Clinical trial costs, contract manufacturing and other development costs incurred by third parties are expensed as the contracted work is performed.

We expect our research and development expenses to increase in absolute dollars in the future as we advance our product candidates into and through clinical trials and pursue regulatory approval of our product candidates. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming. The actual probability of success for our product candidates and technology platforms may be affected by a variety of factors including: the quality of our product candidates, early clinical data, investment in our clinical program, competition, manufacturing capability and commercial viability. We may never succeed in achieving regulatory approval for any of our product candidates. As a result of the uncertainties discussed above, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will generate revenue from the commercialization and sale of our product candidates.

General and Administrative Expenses

General and administrative expenses include personnel costs, expenses for outside professional services and other allocated expenses. Personnel costs consist of salaries, bonuses and benefits. Outside professional services consist of legal, accounting and audit services and other consulting fees. Allocated expenses consist of rent expense related to our office and research and development facility. We expect to incur additional expenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the Securities and Exchange Commission, and those of any national securities exchange on which our securities are traded, additional insurance expenses, investor relations activities and other administrative and professional services.

(Loss) Gain from Remeasurement of Fair Value of Warrants

(Loss) Gain from remeasurement of fair value of warrants consists of gains and losses from the remeasurement of the fair value of our liabilities related to our convertible preferred stock warrants and common stock warrants.

Interest Expense

Interest expense consists of amortization of debt discount associated with convertible promissory note warrants, issuance of the equity component of a convertible promissory note and beneficial conversion features associated with certain convertible promissory notes, as well as stated interest costs associated with our borrowings.

Other Income, Net

Other income, net, consists of gains and losses from the change in the fair value of the convertible promissory note warrants, and interest income earned on our cash and cash equivalents.

 

17


 

Results of Operations

Comparison of the Three Months Ended June 30, 2015 and 2014

 

 

 

Three Months Ended

June 30,

 

 

Change

 

 

 

2015

 

 

2014

 

 

$

 

 

 

(in thousands)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Collaboration and license revenue

 

$

9,623

 

 

$

883

 

 

$

8,740

 

Grant revenue

 

 

260

 

 

 

102

 

 

 

158

 

Total revenue

 

 

9,883

 

 

 

985

 

 

 

8,898

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

13,533

 

 

 

5,403

 

 

 

8,130

 

General and administrative

 

 

5,882

 

 

 

2,134

 

 

 

3,748

 

Total operating expenses

 

 

19,415

 

 

 

7,537

 

 

 

11,878

 

Loss from operations

 

 

(9,532

)

 

 

(6,552

)

 

 

(2,980

)

(Loss) Gain from remeasurement of fair value of warrants

 

 

(16,735

)

 

 

25

 

 

 

(16,760

)

Gain on extinguishment of convertible promissory notes

 

 

 

 

 

3,553

 

 

 

(3,553

)

Interest expense