dvax-10q_20180331.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

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

For the quarterly period ended March 31, 2018

or

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

For the transition period from           to           .

Commission file number: 001-34207

 

Dynavax Technologies Corporation

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

33-0728374

(State or other jurisdiction of
incorporation or organization)

 

(IRS Employer
Identification No.)

2929 Seventh Street, Suite 100

Berkeley, CA 94710-2753

(510) 848-5100

(Address, including Zip Code, and telephone number, including area code, of the registrant’s principal executive offices)

 

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

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

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

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

 

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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

As of May 4, 2018, the registrant had outstanding 62,274,096 shares of common stock.

 

 

 


INDEX

DYNAVAX TECHNOLOGIES CORPORATION

 

 

Page No.

PART I FINANCIAL INFORMATION

 

 

Item 1.

Financial Statements (unaudited)

4

 

Condensed Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017

4

 

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2018 and 2017

5

 

Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2018 and 2017

5

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017

6

 

Notes to Condensed Consolidated Financial Statements

7

Item 2.

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

20

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

27

Item 4.

Controls and Procedures

27

 

PART II OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

28

Item 1A.

Risk Factors

29

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

45

Item 5.

Other Information

45

Item 6.

Exhibits

46

 

SIGNATURES

48

 

2


FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains 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, which are subject to a number of risks and uncertainties. All statements that are not historical facts are forward-looking statements, including statements about our ability to successfully commercialize HEPLISAV-B®, our ability to successfully develop and timely obtain regulatory approval of SD-101 and DV281, and our other early stage compounds, our business, collaboration and regulatory strategy, our intellectual property position, our product development efforts, our ability to manufacture commercial supply and meet regulatory requirements, the timing of the introduction of our products, uncertainty regarding our capital needs and future operating results and profitability, anticipated sources of funds as well as our plans, objectives, strategies, expectations and intentions. These statements appear throughout this Quarterly Report on Form 10-Q and can be identified by the use of forward-looking language such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “future,” or “intend,” or the negative of these terms or other variations or comparable terminology.

Actual results may vary materially from those in our forward-looking statements as a result of various factors that are identified in “Item 1A—Risk Factors” and “Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this document. No assurance can be given that the risk factors described in this Quarterly Report on Form 10-Q are all of the factors that could cause actual results to vary materially from the forward-looking statements. All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. Readers should not place undue reliance on these forward-looking statements and are cautioned that any such forward-looking statements are not guarantees of future performance. We assume no obligation to update any forward-looking statements.

This Quarterly Report on Form 10-Q includes trademarks and registered trademarks of Dynavax Technologies Corporation. Products or service names of other companies mentioned in this Quarterly Report on Form 10-Q may be trademarks or registered trademarks of their respective owners. References herein to “we,” “our,” “us,” “Dynavax” or the “Company” refer to Dynavax Technologies Corporation and its subsidiary.

 

 

 

3


PART I. FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

Dynavax Technologies Corporation

Condensed Consolidated Balance Sheets

(In thousands, except per share amounts)

 

 

March 31,

 

 

December 31,

 

 

2018

 

 

2017

 

 

(unaudited)

 

 

(Note 1)

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

36,067

 

 

$

26,584

 

Marketable securities available-for-sale

 

214,713

 

 

 

165,270

 

Accounts and other receivables

 

763

 

 

 

854

 

Inventories

 

550

 

 

 

312

 

Intangible assets, net

 

-

 

 

 

1,306

 

Prepaid expenses and other current assets

 

3,303

 

 

 

3,697

 

Total current assets

 

255,396

 

 

 

198,023

 

Property and equipment, net

 

17,064

 

 

 

16,619

 

Intangible assets, net

 

18,662

 

 

 

-

 

Goodwill

 

2,309

 

 

 

2,244

 

Restricted cash

 

635

 

 

 

629

 

Other assets

 

1,267

 

 

 

1,270

 

Total assets

$

295,333

 

 

$

218,785

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

2,279

 

 

$

4,539

 

Accrued research and development

 

4,443

 

 

 

4,359

 

Accrued liabilities

 

9,820

 

 

 

9,695

 

Other current liabilities

 

7,000

 

 

 

-

 

Total current liabilities

 

23,542

 

 

 

18,593

 

Long-term debt, net

 

99,232

 

 

 

-

 

Other long-term liabilities

 

6,672

 

 

 

643

 

Total liabilities

 

129,446

 

 

 

19,236

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock: $0.001 par value; 5,000 shares authorized at March 31, 2018 and

December 31, 2017; no shares issued and outstanding at March 31, 2018 and

  December 31, 2017

 

-

 

 

 

-

 

Common stock: $0.001 par value; 139,000 shares authorized at

  March 31, 2018 and December 31, 2017; 62,254 and 61,533 shares

issued and outstanding at March 31, 2018 and December 31, 2017, respectively

 

62

 

 

 

62

 

Additional paid-in capital

 

1,112,321

 

 

 

1,107,693

 

Accumulated other comprehensive loss

 

(213

)

 

 

(881

)

Accumulated deficit

 

(946,283

)

 

 

(907,325

)

Total stockholders’ equity

 

165,887

 

 

 

199,549

 

Total liabilities and stockholders’ equity

$

295,333

 

 

$

218,785

 

 

See accompanying notes.

4


Dynavax Technologies Corporation

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 

 

 

 

2018

 

 

2017

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Product revenue, net

 

 

 

 

$

165

 

 

$

-

 

Grant revenue

 

 

 

 

 

-

 

 

 

148

 

Total revenues

 

 

 

 

 

165

 

 

 

148

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Cost of sales - product

 

 

 

 

 

205

 

 

 

-

 

Cost of sales - amortization of intangible assets

 

 

 

 

 

2,417

 

 

 

-

 

Research and development

 

 

 

 

 

18,966

 

 

 

16,345

 

Selling, general and administrative

 

 

 

 

 

16,891

 

 

 

6,472

 

Restructuring

 

 

 

 

 

-

 

 

 

2,783

 

Total operating expenses

 

 

 

 

 

38,479

 

 

 

25,600

 

Loss from operations

 

 

 

 

 

(38,314

)

 

 

(25,452

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

 

 

 

740

 

 

 

145

 

Interest expense

 

 

 

 

 

(1,161

)

 

 

-

 

Other (expense) income, net

 

 

 

 

 

(223

)

 

 

20

 

Net loss

 

 

 

 

$

(38,958

)

 

$

(25,287

)

Basic and diluted net loss per share

 

 

 

 

$

(0.63

)

 

$

(0.60

)

Weighted average shares used to compute basic and diluted net loss

  per share

 

 

 

 

 

61,744

 

 

 

41,830

 

 

 

 

Condensed Consolidated Statements of Comprehensive Loss

(In thousands)

(Unaudited)

 

 

 

 

Three Months Ended March 31,

 

 

 

 

 

 

2018

 

 

2017

 

Net loss

 

 

 

 

$

(38,958

)

 

$

(25,287

)

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss on marketable securities

  available-for-sale

 

 

 

 

 

(22

)

 

 

(29

)

Cumulative foreign currency translation adjustments

 

 

 

 

 

690

 

 

 

303

 

Total other comprehensive income

 

 

 

 

 

668

 

 

 

274

 

Total comprehensive loss

 

 

 

 

$

(38,290

)

 

$

(25,013

)

 

See accompanying notes.

5


Dynavax Technologies Corporation

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

Three Months Ended March 31,

 

 

2018

 

 

2017

(As Adjusted)

 

Operating activities

 

 

 

 

 

 

 

Net loss

$

(38,958

)

 

$

(25,287

)

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

 

 

 

 

 

 

 

Depreciation and amortization

 

823

 

 

 

789

 

Gain on disposal of property and equipment

 

-

 

 

 

(21

)

Accretion of discounts on marketable securities

 

(176

)

 

 

(10

)

Stock compensation expense

 

4,799

 

 

 

3,821

 

Cost of sales - amortization of intangible assets

 

2,417

 

 

 

-

 

Non-cash interest expense

 

348

 

 

 

-

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts and other receivables

 

91

 

 

 

(123

)

Inventories

 

(238

)

 

 

-

 

Prepaid expenses and other current assets

 

394

 

 

 

(39

)

Other assets

 

3

 

 

 

(907

)

Accounts payable

 

349

 

 

 

(2,110

)

Accrued liabilities and other long term liabilities

 

276

 

 

 

(1,363

)

Net cash used in operating activities

 

(29,872

)

 

 

(25,250

)

Investing activities

 

 

 

 

 

 

 

Acquisition of technology licenses

 

(9,500

)

 

 

-

 

Purchases of marketable securities

 

(141,103

)

 

 

(44,652

)

Proceeds from maturities of marketable securities

 

91,815

 

 

 

37,875

 

Purchases of property and equipment, net

 

(897

)

 

 

(234

)

Net cash used in investing activities

 

(59,685

)

 

 

(7,011

)

Financing activities

 

 

 

 

 

 

 

Proceeds from long-term debt, net

 

99,000

 

 

 

-

 

Proceeds from issuance of common stock, net

 

-

 

 

 

29,535

 

Tax withholding from exercise of stock options and restricted stock awards, net

 

(426

)

 

 

(303

)

Proceeds from Employee Stock Purchase Plan

 

255

 

 

 

155

 

Net cash provided by financing activities

 

98,829

 

 

 

29,387

 

Effect of exchange rate changes on cash, cash equivalents and restricted cash

 

217

 

 

 

60

 

Net increase (decrease) in cash, cash equivalents and restricted cash

 

9,489

 

 

 

(2,814

)

Cash, cash equivalents and restricted cash at beginning of period

 

27,213

 

 

 

24,891

 

Cash, cash equivalents and restricted cash at end of period

$

36,702

 

 

$

22,077

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

Cash paid during the period for interest

$

813

 

 

$

-

 

Release of accrual for litigation settlement and insurance recovery (Note 6)

$

-

 

 

$

4,050

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

Disposal of fully depreciated property and equipment

$

37

 

 

$

-

 

Non-cash acquisition of technology license

$

12,773

 

 

$

-

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

 

 

6


Dynavax Technologies Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1. Organization and Summary of Significant Accounting Policies

Dynavax Technologies Corporation (“we,” “our,” “us,” “Dynavax” or the “Company”), is a fully-integrated biopharmaceutical company focused on leveraging the power of the body’s innate and adaptive immune responses through toll-like receptor (“TLR”) stimulation. Our first commercial product, HEPLISAV-B® (Hepatitis B Vaccine (Recombinant), Adjuvanted), was approved by the United States Food and Drug Administration (“FDA”) in November 2017 for prevention of infection caused by all known subtypes of hepatitis B virus in adults age 18 years and older. We commenced commercial shipments of HEPLISAV-B in January 2018 and deployed our field sales force in late February 2018. Our development efforts are primarily focused on stimulating the innate immune response to treat cancer in combination with other immunomodulatory agents. Our lead investigational immuno-oncology products are SD-101, currently being evaluated in Phase 2 clinical studies, and DV281, in a Phase 1 safety study. We were incorporated in California in August 1996 under the name Double Helix Corporation, and we changed our name to Dynavax Technologies Corporation in September 1996. We reincorporated in Delaware in 2000.

Basis of Presentation

Our accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X. In our opinion, these unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, which we consider necessary to present fairly our financial position and the results of our operations and cash flows. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP have been condensed or omitted. Interim-period results are not necessarily indicative of results of operations or cash flows to be expected for a full-year period or any other interim-period. The condensed consolidated balance sheet at December 31, 2017 has been derived from audited financial statements at that date, but excludes disclosures required by GAAP for complete financial statements.

The unaudited condensed consolidated financial statements and these notes should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the Securities and Exchange Commission (the “SEC”).

The unaudited condensed consolidated financial statements include the accounts of Dynavax and our wholly-owned subsidiary, Dynavax GmbH. All significant intercompany accounts and transactions among these entities have been eliminated from the condensed consolidated financial statements. We operate in one business segment: the discovery, development and commercialization of biopharmaceutical products.

Liquidity and Financial Condition

As of March 31, 2018, we had cash, cash equivalents and marketable securities of $250.8 million. On February 20, 2018, we entered into a $175.0 million term loan agreement (“Loan Agreement”) with CRG Servicing LLC. The Loan Agreement provides for a $175.0 million term loan facility, $100.0 million of which was borrowed at closing and, subject to the satisfaction of certain market capitalization and other borrowing conditions, up to an additional $75.0 million is available for borrowing at our option on or before July 17, 2019. During the three months ended March 31, 2018, we used $29.9 million of cash in operating activities and paid $9.5 million in fees under patent license agreements relating to HEPLISAV-B.

We have incurred significant operating losses and negative cash flows from our operations since our inception and we expect to incur significant expenses and operating losses for the foreseeable future as we continue to invest in commercialization of HEPLISAV-B, clinical trials and other development, manufacturing and regulatory activities for our immuno-oncology product candidates and discovery research and development. Until we can generate a sufficient amount of revenue from product sales, we will need to finance our operations through strategic alliance and licensing arrangements and/or future public or private debt and equity financings. Adequate financing may not be available to us on acceptable terms, or at all. If adequate funds are not available when needed, we may need to delay, reduce the scope of or put on hold one or more programs while we seek strategic alternatives, which could have an adverse impact on our ability to achieve our intended business objectives.

Our ability to raise additional capital in the equity and debt markets, should we choose to do so, is dependent on a number of factors, including, but not limited to, the market demand for our common stock, which itself is subject to a number of development and business risks and uncertainties, our creditworthiness and the uncertainty that we would be able to raise such additional capital at a price or on terms that are favorable to us.

7


Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make informed estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Management’s estimates are based on historical information available as of the date of the condensed consolidated financial statements and various other assumptions we believe are reasonable under the circumstances. Actual results could differ materially from these estimates.

Summary of Significant Accounting Policies

Revenue Recognition

On January 1, 2018, we adopted Accounting Standards Codification, (“ASC”) 606, Revenue from Contracts with Customers, using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Under the modified retrospective method, results for the reporting period beginning January 1, 2018 are presented under ASC 606, while the cumulative effect of initially applying the guidance is reflected as an adjustment to the opening balance of retained earnings at January 1, 2018. Adoption of this ASU did not have a material impact on our consolidated financial statements as there were no remaining performance obligations under our license and collaboration agreements as of the adoption date.

While results for reporting periods beginning after January 1, 2018 are presented under ASC 606, prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period. The accounting policy for revenue recognition for periods prior to January 1, 2018 is described in Note 1 of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2017.

Under ASC 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 revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract and determine those that are performance obligations, and assess whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

Product Revenue, Net

We sell our product to a limited number of wholesalers and specialty distributors in the U.S. (collectively, our “Customers”). Revenues from product sales are recognized when we have satisfied our performance obligation, which is the transfer of control of our product upon delivery to the Customer. The timing between the recognition of revenue for product sales and the receipt of payment is not significant. Because our standard credit terms are short-term and we expect to receive payment in less than one-year, there is no financing component on the related receivables. Overall, product revenue, net, reflects our best estimates of the amount of consideration to which we are entitled based on the terms of the contract. The amount of variable consideration is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. If our estimates differ significantly from actuals, we will record adjustments that would affect product revenue, net in the period of adjustment.

Reserves for Variable Consideration

Revenues from product sales are recorded at the net sales price, which includes estimates of variable consideration such as product returns, chargebacks, discounts and other fees that are offered within contracts between us and our Customers, health care providers, and others relating to our product sales. We estimate variable consideration using either the most likely amount method or the expected value method, depending on the type of variable consideration and what method better predicts the amount of consideration we expect to receive. We take into consideration relevant factors such as industry data, current contractual terms, available information about Customers’ inventory, resale and chargeback data and forecasted customer buying and payment patterns, in estimating each variable consideration. The variable consideration is recorded at the time product sales is recognized, resulting in a reduction in product revenue and a reduction in accounts receivable (if the amount is due to the Customer) or as an accrued liability (if the amount is payable to a party other than a Customer). Variable consideration requires significant estimates, judgment andinformation obtained from external sources. The amount of variable consideration is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. If our estimates differ significantly from actuals, we will record adjustments that would affect product revenue, net in the period of adjustment.

8


Product Returns: Consistent with industry practice, we offer our Customers a limited right of return based on the product’s expiration date for product that has been purchased from us. We estimate the amount of our product sales that may be returned by our Customers and record this estimate as a reduction of revenue in the period the related product revenue is recognized. We consider several factors in the estimation of potential product returns including expiration dates of the product shipped, the limited product return rights, available information about Customers’ inventory, shelf life of the product and other relevant factors.

Chargebacks: Our Customers subsequently resell our product to health care providers. In addition to distribution agreements with Customers, we enter into arrangements with health care providers that provide for chargebacks and discounts with respect to the purchase of our product. Chargebacks represent the estimated obligations resulting from contractual commitments to sell product to qualified healthcare providers at prices lower than the list prices charged to Customers who directly purchase the product from us. Customers charge us for the difference between what they pay for the product and the ultimate selling price to the qualified healthcare providers. These reserves are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue and accounts receivable. Chargeback amounts are generally determined at the time of resale to the qualified healthcare provider by Customers, and we issue credits for such amounts generally within a few weeks of the Customer’s notification to us of the resale. Reserves for chargebacks consists of credits that we expect to issue for units that remain in the distribution channel inventories at each reporting period end that we expect will be sold to qualified healthcare providers, and chargebacks that Customers have claimed but for which we have not yet issued credit.

Trade Discounts and Allowances: We provide our Customers with discounts which include early payment incentives that are explicitly stated in our contracts, and are recorded as a reduction of revenue in the period the related product revenue is recognized.

Distribution fees: Distribution fees include fees paid to certain Customers for sales order management, data and distribution services. Distribution fees are recorded as a reduction of revenue in the period the related product revenue is recognized.

Inventories

Inventory is stated at the lower of cost or estimated net realizable value. We consider regulatory approval of product candidates to be uncertain and product manufactured prior to regulatory approval may not be sold unless regulatory approval is obtained. As such, the manufacturing costs for product candidates incurred prior to regulatory approval are not capitalized as inventory but are expensed as research and development costs. We begin capitalization of these inventory related costs once regulatory approval is obtained.

HEPLISAV-B was approved by the FDA on November 9, 2017, at which time we began to capitalize inventory costs associated with HEPLISAV-B. Prior to FDA approval of HEPLISAV-B, all costs related to the manufacturing of HEPLISAV-B that could potentially be available to support the commercial launch of our products, were charged to research and development expense in the period incurred as there was no alternative future use. We periodically analyze our inventory levels, and will write down inventory that has become obsolete, inventory that has a cost basis in excess of its estimated realizable value and inventory in excess of expected sales requirements. Expired inventory will be disposed of and the related costs written off.

Intangible Assets

We record definite-lived intangible assets related to certain capitalized milestone and license payments. After determining that the pattern of future cash flows associated with intangible asset could not be reliably estimated with a high level of precision, these assets are amortized on a straight-line basis over their remaining useful lives, which are estimated to be the remaining patent life. If our estimate of HEPLISAV-B’s useful life is shorter than the remaining patent life, then the shorter period is used. We assess our intangible assets for impairment if indicators are present or changes in circumstance suggest that impairment may exist. No impairment of intangible assets has been identified during the three months ended March 31, 2018.

Research and Development Expenses and Accruals

Research and development expenses include personnel and facility-related expenses, outside contracted services including clinical trial costs, manufacturing and process development costs, research costs and other consulting services and non-cash stock-based compensation. Research and development costs are expensed as incurred. Amounts due under contracts with third parties may be either fixed fee or fee for service, and may include upfront payments, monthly payments and payments upon the completion of milestones or receipt of deliverables. Non-refundable advance payments under agreements are capitalized and expensed as the related goods are delivered or services are performed.

9


We contract with third parties to perform various clinical trial activities in the on-going development of potential products. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows to our vendors. Payments under the contracts depend on factors such as the achievement of certain events, successful enrollment of patients, and completion of portions of the clinical trial or similar conditions. Our accrual for clinical trials is based on estimates of the services received and efforts expended pursuant to contracts with clinical trial centers and clinical research organizations. We may terminate these contracts upon written notice and we are generally only liable for actual effort expended by the organizations to the date of termination, although in certain instances we may be further responsible for termination fees and penalties. We estimate our research and development expenses and the related accrual as of each balance sheet date based on the facts and circumstances known to us at that time. There have been no material adjustments to the prior period accrued estimates for clinical trial activities through March 31, 2018.

Restructuring

Restructuring costs are comprised of severance costs related to workforce reductions. We recognize restructuring charges when the liability is incurred. Employee termination benefits are accrued at the date management has committed to a plan of termination and employees have been notified of their termination dates and expected severance payments.

Income Taxes

We account for income taxes using the asset and liability method, under which deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Tax law and rate changes are reflected in income in the period such changes are enacted. The Company includes interest and penalties related to income taxes, including unrecognized tax benefits, within income tax expense.

On December 22, 2017, President Trump signed U.S. tax reform legislation, commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”), which became effective January 1, 2018. The Tax Act significantly changes the fundamentals of U.S. corporate income taxation by, among many other things, reducing the U.S. federal corporate income tax rate to 21%, converting to a territorial tax system, and creating various income inclusion and expense limitation provisions. We have performed a review of the Tax Act, and based on information available at March 31, 2018, recorded certain provisional amounts related to the revaluation of our deferred taxes and the realization of certain tax credit carryforwards. The accounting for these provisional amounts is expected to be completed within the one year measurement period allowed under Staff Accounting Bulletin 118. Due to insufficient guidance on certain aspects of the Tax Act, such as officer’s compensation, as well as uncertainty around the GAAP treatment associated with many other parts of the Tax Act, such as the implementation of certain international provisions, we cannot be certain that all deferred tax assets and liabilities have been established for the future effects of the legislation. Therefore, the final accounting for these provisions is subject to change as further information becomes available and further analysis is complete. Additionally, given the uncertainty and complexity of these new international tax regimes, we are continuing to evaluate how these provisions will be accounted for under U.S. generally accepted accounting principles; therefore, we have not yet adopted an accounting policy for treating the effects of these provisions as either a component of income tax expense in the period the tax arises, or through adjusting our deferred tax assets and liabilities to account for the estimated future impact of the special international tax regimes.

Recent Accounting Pronouncements

Accounting Standards Update 2016-02

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) which outlines a comprehensive lease accounting model and supersedes the current lease guidance. The ASU requires companies to recognize lease right-of-use assets and lease liabilities by lessees for all operating leases with lease terms greater than 12 months. It also changes the definition of a lease and expands the disclosure requirements of lease arrangements. The ASU is effective for annual periods beginning after December 15, 2018 and interim periods therein on a modified retrospective basis with early adoption permitted. We are currently evaluating the impact this guidance will have on our consolidated financial statements and believe the adoption will modify our analyses and disclosures of lease agreements considering operating leases are a significant portion of the Company’s total lease commitments.

Accounting Standards Update 2017-04

In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350), which simplifies the test for goodwill impairment by eliminating a previous requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. The ASU is effective for annual periods beginning after December 15, 2019 with early adoption permitted. The adoption is not expected to have a material impact on our consolidated financial statements.

10


Accounting Standards Update 2016-18

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force). This ASU requires that the reconciliation of the beginning-of-period and end-of-period amounts shown in the statement of cash flows include cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. The amendments in this update is applied using a retrospective transition method to each period presented. The ASU is effective for annual periods beginning after December 15, 2017. We adopted ASU 2016-18 on January 1, 2018 and have presented comparable prior period cash, cash equivalents and restricted cash balances in the consolidated statements of cash flows reflecting the retrospective impact of this ASU. See Note 3.

 

2. Fair Value Measurements

We measure fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The accounting standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:

 

Level 1—Observable inputs, such as quoted prices in active markets for identical assets or liabilities;

 

Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices 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 assets or liabilities; and

 

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities; therefore, requiring an entity to develop its own valuation techniques and assumptions.

Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. We review the fair value hierarchy classification on a quarterly basis. Changes in the ability to observe valuation inputs may result in a reclassification of levels for certain assets or liabilities within the fair value hierarchy.

The carrying amounts of cash equivalents, accounts and other receivables, accounts payable and accrued liabilities are considered reasonable estimates of their respective fair value because of their short-term nature.

As of March 31, 2018, we measured the fair value of our $7.0 million payment to Merck Sharpe & Dohme Corp., which is due in the first quarter of 2020, based on Level 3 inputs due to the use of unobservable inputs that cannot be corroborated by observable market data. We estimated the fair value of the liability using a discounted cash flow technique using the effective interest rate on our term loan. The liability had a fair value of $5.8 million as of March 31, 2018.

Recurring Fair Value Measurements

The following table represents the fair value hierarchy for our financial assets (cash equivalents and marketable securities) measured at fair value on a recurring basis (in thousands):

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

25,923

 

 

$

-

 

 

$

-

 

 

$

25,923

 

U.S. treasuries

 

-

 

 

 

49,206

 

 

 

-

 

 

 

49,206

 

U.S. government agency securities

 

-

 

 

 

54,644

 

 

 

-

 

 

 

54,644

 

Corporate debt securities

 

-

 

 

 

119,099

 

 

 

-

 

 

 

119,099

 

Total

$

25,923

 

 

$

222,949

 

 

$

-

 

 

$

248,872

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

22,543

 

 

$

-

 

 

$

-

 

 

$

22,543

 

U.S. treasuries

 

-

 

 

 

45,534

 

 

 

-

 

 

 

45,534

 

U.S. government agency securities

 

-

 

 

 

86,820

 

 

 

-

 

 

 

86,820

 

Corporate debt securities

 

-

 

 

 

32,916

 

 

 

-

 

 

 

32,916

 

Total

$

22,543

 

 

$

165,270

 

 

$

-

 

 

$

187,813

 

11


Money market funds are highly liquid investments and are actively traded. The pricing information on these investment instruments is readily available and can be independently validated as of the measurement date. This approach results in the classification of these securities as Level 1 of the fair value hierarchy.

U.S. treasuries, U.S. government agency securities and corporate debt securities are measured at fair value using Level 2 inputs. We review trading activity and pricing for these investments as of each measurement date. When sufficient quoted pricing for identical securities is not available, we use market pricing and other observable market inputs for similar securities obtained from various third party data providers. These inputs represent quoted prices for similar assets in active markets or these inputs have been derived from observable market data. This approach results in the classification of these securities as Level 2 of the fair value hierarchy.

There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2018.

 

3. Cash, Cash Equivalents, Restricted Cash and Marketable Securities

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheet that sum to the total of the same amounts shown in the condensed consolidated statements of cash flows:

 

 

March 31, 2018

 

 

December 31, 2017

 

Cash and cash equivalents

 

$

36,067

 

 

$

26,584

 

Restricted cash

 

 

635

 

 

 

629

 

Total cash, cash equivalents and restricted cash shown in the condensed consolidated

  statements of cash flows

 

$

36,702

 

 

$

27,213

 

Due to the adoption of ASU 2016-18, we have presented below, comparable prior period cash, cash equivalents and restricted cash balances as presented in the condensed consolidated statement of cash flows:

 

 

March 31, 2017

 

 

December 31, 2016

 

Cash and cash equivalents

 

$

21,472

 

 

$

24,289

 

Restricted cash

 

 

605

 

 

 

602

 

Total cash, cash equivalents and restricted cash shown in the condensed consolidated

  statements of cash flows

 

$

22,077

 

 

$

24,891

 

Restricted cash balances relate to certificates of deposit issued as collateral to certain letters of credit issued as security to our lease arrangements. See Note 6.

12


Cash, cash equivalents and marketable securities consist of the following (in thousands):

 

 

Amortized

Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Estimated

Fair Value

 

March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

$

1,908

 

 

$

-

 

 

$

-

 

 

$

1,908

 

Money market funds

 

25,923

 

 

 

-

 

 

 

-

 

 

 

25,923

 

U.S. treasuries

 

4,000

 

 

 

-

 

 

 

-

 

 

 

4,000

 

Corporate debt securities

 

4,236

 

 

 

-

 

 

 

-

 

 

 

4,236

 

Total cash and cash equivalents

 

36,067

 

 

 

-

 

 

 

-

 

 

 

36,067

 

Marketable securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

45,218

 

 

 

-

 

 

 

(12

)

 

 

45,206

 

U.S. government agency securities

 

54,665

 

 

 

1

 

 

 

(22

)

 

 

54,644

 

Corporate debt securities

 

114,931

 

 

 

5

 

 

 

(73

)

 

 

114,863

 

Total marketable securities available-for-sale

 

214,814

 

 

 

6

 

 

 

(107

)

 

 

214,713

 

Total cash, cash equivalents and marketable securities

$

250,881

 

 

$

6

 

 

$

(107

)

 

$

250,780

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

$

4,041

 

 

$

-

 

 

$

-

 

 

$

4,041

 

Money market funds

 

22,543

 

 

 

-

 

 

 

-

 

 

 

22,543

 

Total cash and cash equivalents

 

26,584

 

 

 

-

 

 

 

-

 

 

 

26,584

 

Marketable securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

45,559

 

 

 

-

 

 

 

(25

)

 

 

45,534

 

U.S. government agency securities

 

86,860

 

 

 

-

 

 

 

(40

)

 

 

86,820

 

Corporate debt securities

 

32,931

 

 

 

-

 

 

 

(15

)

 

 

32,916

 

Total marketable securities available-for-sale

 

165,350

 

 

 

-

 

 

 

(80

)

 

 

165,270

 

Total cash, cash equivalents and marketable securities

$

191,934

 

 

$

-

 

 

$

(80

)

 

$

191,854

 

The maturities of our marketable securities available-for-sale are as follows (in thousands):

 

 

 

March 31, 2018

 

 

 

Amortized Cost

 

 

Estimated

Fair Value

 

Mature in one year or less

 

$

188,963

 

 

$

188,869

 

Mature after one year through two years

 

 

25,851

 

 

 

25,844

 

 

 

$

214,814

 

 

$

214,713

 

 

There were no realized gains or losses from the sale of marketable securities during the three months ended March 31, 2018 and 2017.

We have classified our entire investment portfolio as available-for-sale and available for use in current operations and accordingly have classified all investments as short-term. Available-for-sale securities are carried at fair value based on inputs that are observable, either directly or indirectly, such as quoted market prices for similar securities; quoted prices 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 securities, with unrealized gains and losses included in accumulated other comprehensive loss in stockholders’ equity. Realized gains and losses and declines in value, if any, judged to be other than temporary on available-for-sale securities are included in interest income or expense. The cost of securities sold is based on the specific identification method. Management assesses whether declines in the fair value of investment securities are other than temporary. In determining whether a decline is other than temporary, management considers the following factors:

 

Whether the investment has been in a continuous realized loss position for over 12 months;

 

the duration to maturity of our investments;

 

our intention and ability to hold the investment to maturity and if it is not more likely than not that we will be required to sell the investment before recovery of the amortized cost bases;

13


 

the credit rating, financial condition and near-term prospects of the issuer; and

 

the type of investments made.

To date, there have been no declines in fair value that have been identified as other than temporary.

 

4.

Inventories

The following table presents inventories (in thousands):

 

 

 

March 31, 2018

 

 

December 31, 2017

 

Work-in-process

 

$

-

 

 

$

312

 

Finished goods

 

 

550

 

 

 

-

 

Total

 

$

550

 

 

$

312

 

 

5.

Intangible Assets

Intangible assets are related to certain capitalized milestone and sublicense payments. The following table presents intangible assets (in thousands):

 

 

March 31, 2018

 

 

December 31, 2017

 

Intangible assets

 

$

22,273

 

 

$

2,500

 

Less accumulated amortization

 

 

(3,611

)

 

 

(1,194

)

Total

 

$

18,662

 

 

$

1,306

 

 

We recorded $2.4 million as cost of sales – amortization of intangible assets for the three months ended March 31, 2018. See Note 7.

 

6. Commitments and Contingencies

We lease our facilities in Berkeley, California (“Berkeley Lease”) and Düsseldorf, Germany (“Düsseldorf Lease”) under operating leases that expire in December 2025 and March 2023, respectively. The Berkeley Lease provides for periods of escalating rent. The total cash payments over the life of the Berkeley Lease and Dusseldorf Lease are divided by the total number of months in the lease period and the average rent is charged to expense each month during the lease period.

Total rent expense related to our operating leases for the three month periods ended March 31, 2018 and 2017, was $0.7 million and $0.6 million, respectively. Deferred rent was $0.8 million and $0.6 million as of March 31, 2018 and December 31, 2017, respectively.

In February 2018, we entered into a $175.0 million term loan agreement. Borrowings under the term loan agreement in the amount of $100.2 million is payable at maturity on December 31, 2023, unless earlier prepaid. See Note 8.

In February 2018, we entered into a sublicense agreement with Merck Sharpe & Dohme Corp. Under the agreement, we are required to make future payments of $7.0 million each in both 2019 and 2020. See Note 7.

We have entered into material long-term commitments with commercial manufacturers for the supply of HEPLISAV-B and SD-101. To the extent these long-term commitments are non-cancelable, they are reflected in the table below.

14


Future payments under the term loan agreement, sublicense agreement, minimum payments under the non-cancelable portion of our operating leases and non-cancelable purchase commitments at March 31, 2018, are as follows (in thousands):

 

Years ending December 31,

 

 

 

 

2018 (remaining)

 

$

13,442

 

2019

 

 

9,693

 

2020

 

 

9,754

 

2021

 

 

2,567

 

2022

 

 

2,558

 

Thereafter

 

 

109,816

 

Total

 

$

147,830

 

 

In addition to the non-cancelable commitments included above, we have entered into contractual arrangements that obligate us to make payments to the contractual counterparties upon the occurrence of future events. In addition, in the normal course of operations, we have entered into license and other agreements and intend to continue to seek additional rights relating to compounds or technologies in connection with our discovery, manufacturing and development programs. Under the terms of the agreements, we may be required to pay future up-front fees, milestones and royalties on net sales of products originating from the licensed technologies, if any, or other payments contingent upon the occurrence of future events that cannot reasonably be estimated.

We rely on and have entered into agreements with research institutions, contract research organizations and clinical investigators as well as clinical and commercial material manufacturers. These agreements are terminable by us upon written notice. Generally, we are liable only for actual effort expended by the organizations at any point in time during the contract through the notice period.

From time to time, we may be involved in claims, suits, and proceedings arising from the ordinary course of our business, including actions with respect to intellectual property claims, commercial claims, and other matters. Such claims, suits, and proceedings are inherently uncertain and their results cannot be predicted with certainty. Regardless of the outcome, such legal proceedings can have an adverse impact on us because of legal costs, diversion of management resources, and other factors. In addition, it is possible that a resolution of one or more such proceedings could result in substantial damages, fines, penalties or orders requiring a change in our business practices, which could in the future materially and adversely affect our financial position, financial statements, results of operations, or cash flows in a particular period.

On September 7, 2016, we entered into a Stipulation of Settlement to settle the case entitled In re Dynavax Technologies Securities Litigation filed in 2013. The settlement, which was approved by the U.S. District Court for the Northern District of California on February 6, 2017, provided for a payment of $4.1 million by us and results in a dismissal and release of all claims against all defendants, including us. The settlement was paid by our insurers in February 2017.

In conjunction with a financing arrangement with Symphony Dynamo, Inc. and Symphony Dynamo Holdings LLC (“Holdings”) in November 2009, we agreed to make contingent cash payments to Holdings equal to 50% of the first $50 million from any upfront, pre-commercialization milestone or similar payments received by us from any agreement with any third party with respect to the development and/or commercialization of cancer and hepatitis C therapies originally licensed to Symphony Dynamo, Inc., including SD-101. We have made no payments and have not recorded a liability as of March 31, 2018.

7. Collaborative Research, Development and License Agreements

AstraZeneca

Pursuant to a research collaboration and license agreement with AstraZeneca AB (“AstraZeneca”), as amended, we discovered and performed initial clinical development of AZD1419, a TLR9 agonist product candidate for the treatment of asthma. In June 2016, all of our remaining performance obligations under our agreement with AstraZeneca were completed.

Under the terms of the agreement, as amended, we are eligible to receive up to approximately $100 million in additional milestone payments, based on the achievement of certain development and regulatory objectives. Additionally, upon commercialization of AZD1419, we are eligible to receive tiered royalties ranging from the mid to high single-digits based on product sales of any products originating from the collaboration. We have the option to co-promote in the United States products arising from the collaboration, if any. AstraZeneca has the right to sublicense its rights upon our prior consent.

Absent early termination, the agreement will expire when all of AstraZeneca’s payment obligations expire. AstraZeneca has the right to terminate the agreement at any time upon prior written notice and either party may terminate the agreement early upon written notice if the other party commits an uncured material breach of the agreement.

15


Merck, Sharp & Dohme Corp.

In February 2018, we entered into a Sublicense Agreement (the “Sublicense Agreement”) with Merck Sharpe & Dohme Corp. (the “Sublicensor”). The Sublicense Agreement grants us, under certain non-exclusive U.S. patent rights controlled by the Sublicensor which relate to recombinant production of Hepatitis B surface antigen, the right to manufacture, use, offer for sale, sell and import HEPLISAV-B, adult Hepatitis B Vaccine, to prevent hepatitis B and diseases caused by hepatitis B in the United States and includes the right to grant further sublicenses. Under the terms of the Sublicense Agreement, we are obligated to pay $21.0 million in three installments. The first installment of $7.0 million was paid in February 2018 and the remaining two payments of $7.0 million each are due in the first quarter of each of 2019 and 2020. The payments in 2019 and 2020 are classified on the condensed consolidated balance sheets as other current liabilities and other long-term liabilities, respectively. We recorded $19.8 million as an intangible asset on the condensed consolidated balance sheets, which reflects the present value of the long-term portion of the liability. See Note 5. The agreement continues in effect through April 2020, at which time the license becomes perpetual, irrevocable, fully paid-up and royalty free license.

Coley Pharmaceutical Group, Inc.

In June 2007, we entered into a license agreement with Coley Pharmaceutical Group, Inc. (“Coley”), under which Coley granted us a non-exclusive, royalty bearing license to patents, with the right to grant sublicenses for HEPLISAV-B. We met one of the regulatory milestones upon FDA approval of HEPLISAV-B in November 2017 and paid $2.5 million in January 2018 to Coley which is recorded as an intangible asset on the condensed consolidated balance sheets. See Note 5. The agreement terminated in February 2018, at which time the license became a perpetual, irrevocable, fully paid-up and royalty free license. As of March 31, 2018, the $2.5 million intangible asset has been fully amortized.

8. Long-Term Debt

 

On February 20, 2018, we entered into a $175.0 million term loan agreement (“Loan Agreement”) with CRG Servicing LLC. The Loan Agreement provides for a $175.0 million term loan facility, $100.0 million of which was borrowed at closing (“Initial Term Loan”) and, subject to the satisfaction of certain market capitalization and other borrowing conditions, up to an additional $75.0 million is available for borrowing at our option on or before July 17, 2019 (together with the Initial Term Loan, the “Term Loans”). Net proceeds from the Initial Term Loan were $99.0 million. The Term Loans under the Loan Agreement bear interest at a rate equal to 9.5% per annum. At March 31, 2018, the effective interest rate was 10.1%. At our option, until September 30, 2023, a portion of the interest payments may be paid in kind, and thereby added to the principal. In March 2018, a portion of our interest was paid in kind, which increased the principal amount of the Term Loans to $100.2 million. The Term Loans have a maturity date of December 31, 2023, unless earlier prepaid. The Term Loans will be entirely payable at maturity.

The obligations under the Loan Agreement are secured, subject to customary permitted liens and other agreed upon exceptions, by a perfected security interest in (i) all tangible and intangible assets of the Company and any future subsidiary guarantors, except for certain customary excluded property, and (ii) all of the capital stock owned by the Company and such future subsidiary guarantors (limited, in the case of the stock of certain non-U.S. subsidiaries of the Company and certain U.S. subsidiaries substantially all of whose assets consist of equity interests in non-U.S. subsidiaries, to 65% of the capital stock of such subsidiaries, subject to certain exceptions). The obligations under the Loan Agreement will be guaranteed by each of the Company’s future direct and indirect subsidiaries (other than certain non-U.S. subsidiaries of the Company and certain U.S. subsidiaries substantially all of whose assets consist of equity interests in non-U.S. subsidiaries, subject to certain exceptions). The Loan Agreement contains customary covenants and requires us to comply with a $15.0 million daily minimum combined cash and investment balance covenant and an annual revenue requirement starting in 2019 for sales of HEPLISAV-B.

The Term Loans may be prepaid by us at any time. If the Term Loans are prepaid prior to the second anniversary of the initial borrowing date, we are subject to a repayment premium of up to 7.0% of the principal amount prepaid, depending on the date of prepayment.

We recorded $1.1 million of interest expense during the three months ended March 31, 2018.

16


9. Revenue Recognition

Our source of product revenue for three months ended March 31, 2018, consists of sales of HEPLISAV-B in the U.S. The following table summarizes balances and activity in each of the product revenue allowance and reserve categories for the three months ended March 31, 2018 (in thousands):

 

 

Chargebacks, discounts and other fees

 

 

Returns

 

 

Total

 

Balance at December 31, 2017

 

$

-

 

 

$

-

 

 

$

-

 

Provision related to current period sales

 

 

73

 

 

 

13

 

 

 

86

 

Credit or payments made during the period

 

 

(1

)

 

 

-

 

 

 

(1

)

Balance at March 31, 2018

 

$

72

 

 

$

13

 

 

$

85

 

 

At March 31, 2018, $66,000 of these reserves were classified as reductions of accounts receivable on the condensed consolidated balance sheets and $19,000 were classified as accrued liabilities.

 

10. Net Loss Per Share

Basic net loss per share is calculated by dividing the net loss by the weighted-average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss by the weighted-average number of common shares outstanding during the period and giving effect to all potentially dilutive common shares using the treasury-stock method. For purposes of this calculation, outstanding options and stock awards are considered to be potentially dilutive common shares and are only included in the calculation of diluted net loss per share when their effect is dilutive. Stock options and stock awards totaling approximately 8,394,000 and 5,670,000 shares of common stock as of March 31, 2018 and 2017, respectively, were excluded from the calculation of diluted net loss per share for the three months ended March 31, 2018 and 2017, because the effect of their inclusion would have been anti-dilutive. For periods in which we have a net loss and no instruments are determined to be dilutive, such as the three months ended March 31, 2018 and 2017, basic and diluted net loss per share are the same.

 

11. Common Stock

Common Stock Outstanding

As of March 31, 2018, there were 62,254,091 shares of our common stock outstanding.

12. Equity Plans and Stock-Based Compensation

Option activity under our stock-based compensation plans during the three months ended March 31, 2018 was as follows (in thousands except per share amounts):

 

 

 

Shares Underlying

Outstanding Options

(in thousands)

 

 

Weighted-Average

Exercise

Price Per Share

 

 

Weighted-Average

Remaining

Contractual Term

(years)

 

 

Aggregate Intrinsic

Value

(in thousands)

 

Balance at December 31, 2017

 

 

3,555

 

 

$

19.56

 

 

 

 

 

 

 

 

 

Options granted

 

 

1,807

 

 

 

16.81

 

 

 

 

 

 

 

 

 

Options exercised

 

 

(25

)

 

 

14.67

 

 

 

 

 

 

 

 

 

Options cancelled:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options forfeited (unvested)

 

 

(2

)

 

 

21.00

 

 

 

 

 

 

 

 

 

Options cancelled (vested)

 

 

(28

)

 

 

50.70

 

 

 

 

 

 

 

 

 

Balance at March 31, 2018

 

 

5,307

 

 

$

18.47

 

 

 

6.18

 

 

$

15,064

 

Vested and expected to vest at

  March 31, 2018

 

 

5,030

 

 

$

18.56

 

 

 

6.12

 

 

$

14,156

 

Exercisable at March 31, 2018

 

 

2,462

 

 

$

20.55

 

 

 

5.61

 

 

$

4,985

 

17


Restricted stock unit activity under our stock-based compensation plans during the three months ended March 31, 2018 was as follows (in thousands except per share amounts):

 

 

Number of Shares

(In thousands)

 

 

Weighted-Average

Grant-Date Fair Value

 

Non-vested as of December 31, 2017

 

2,443

 

 

$

6.01

 

Granted

 

433

 

 

 

16.12

 

Vested

 

(681

)

 

 

5.33

 

Forfeited

 

-

 

 

 

-

 

Non-vested as of March 31, 2018

 

2,195

 

 

$

8.21

 

 

The aggregate intrinsic value of the restricted stock units outstanding as of March 31, 2018, based on our stock price on that date, was $43.6 million. Fair value of restricted stock units is determined at the date of grant using our closing stock price.

As of March 31, 2018, approximately 151,000 shares underlying stock options and approximately 14,500 restricted stock unit awards with performance-based vesting criteria were outstanding. Vesting criteria for 11,000 of the awards with performance-based vesting criteria were not probable as of March 31, 2018.

 

Under our stock-based compensation plans, option awards generally vest over a three or four-year period contingent upon continuous service, and expire seven to ten years from the date of grant (or earlier upon termination of continuous service). The fair value-based measurement of each option is estimated on the date of grant using the Black-Scholes option valuation model.

The fair value-based measurements and weighted-average assumptions used in the calculations of these measurements are as follows:

 

 

 

 

Stock Options

 

 

Employee Stock Purchase Plan

 

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

 

March 31,

 

 

March 31,

 

 

 

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Weighted-average fair value

 

 

 

 

$

10.84

 

 

$

4.31

 

 

$

10.39

 

 

$

2.34

 

Risk-free interest rate

 

 

 

 

 

2.6

%

 

 

2.0

%

 

 

2.1

%

 

 

0.9

%

Expected life (in years)

 

 

 

 

 

4.5

 

 

 

4.5

 

 

 

1.3

 

 

 

1.3

 

Volatility

 

 

 

 

 

0.8

 

 

 

0.9

 

 

 

1.1

 

 

 

1.0

 

 

Compensation expense is based on awards ultimately expected to vest and reflects estimated forfeitures. The components of stock-based compensation expense were (in thousands):

 

 

 

 

Three Months Ended

 

 

 

 

March 31,

 

 

 

 

 

 

2018

 

 

2017

 

Research and development

 

 

 

 

$

2,187

 

 

$

1,963

 

Selling, general and administrative

 

 

 

 

 

2,589

 

 

 

1,858

 

Cost of sales - product

 

 

 

 

 

23