Dynavax Technologies Corporation
DYNAVAX TECHNOLOGIES CORP (Form: 10-Q, Received: 05/05/2014 16:31:38)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

x

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

For the quarterly period ended March 31, 2014

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  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 registration was required to submit and post such files). Yes  x  No  ¨

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

 

x

 

 

 

 

Non-accelerated filer

 

¨

  

Smaller reporting company

 

¨

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

As of April 30, 2014 , the registrant had outstanding 262,855,958 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, 2014 and December 31, 2013

4

 

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2014 and 2013

5

 

Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended
March 31, 2014 and 2013

6

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2014 and 2013

7

 

Notes to Condensed Consolidated Financial Statements

8

Item 2.

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

18

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

22

Item 4.

Controls and Procedures

23

 

PART II OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

24

Item 1A.

Risk Factors

24

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

37

Item 5.

Other Information

37

Item 6.

Exhibits

38

 

SIGNATURES

40

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.

 

 

 

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. Forward-looking statements are based on our beliefs and assumptions and on information currently available to our management. In some cases, you can identify forward-looking statements by terms such as “may”, “will”, “should”, “could”, “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “potential,” “future,” “intend,” “certain,” and similar expressions intended to identify forward-looking statements. Our forward-looking statements include discussions regarding our business and financing strategies, research and development, preclinical and clinical product development efforts, intellectual property rights and ability to commercialize our product candidates, as well as the timing of the clinical development and potential regulatory approval of our products, the effect of GAAP accounting pronouncements, the potential for entry into collaborative arrangements, uncertainty regarding our future operating results and prospects for profitability, anticipated sources of funds as well as our plans, objectives, expectations and intentions. Our actual results may vary materially from those in such forward-looking statements as a result of various factors that are identified in “Item 1A. Risk Factors” and elsewhere in this document. All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. We assume no obligation to update any forward-looking statements.

 

 

 

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,

 

 

2014

 

 

2013

 

 

(unaudited)

 

 

(Note 1)

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

26,750

 

 

$

23,122

 

Marketable securities available-for-sale

 

150,929

 

 

 

166,254

 

Accounts receivable

 

1,730

 

 

 

1,627

 

Prepaid expenses and other current assets

 

2,323

 

 

 

1,375

 

Total current assets

 

181,732

 

 

 

192,378

 

Property and equipment, net

 

8,584

 

 

 

8,706

 

Goodwill

 

2,576

 

 

 

2,579

 

Restricted cash

 

662

 

 

 

662

 

Other assets

 

31

 

 

 

297

 

Total assets

$

193,585

 

 

$

204,622

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

1,863

 

 

$

1,901

 

Accrued liabilities

 

6,608

 

 

 

8,166

 

Deferred revenues

 

7,511

 

 

 

6,125

 

Total current liabilities

 

15,982

 

 

 

16,192

 

Deferred revenues, net of current portion

 

2,823

 

 

 

1,173

 

Other long-term liabilities

 

927

 

 

 

963

 

Total liabilities

 

19,732

 

 

 

18,328

 

Commitments and contingencies (Note 4)

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock: $0.001 par value:

 

 

 

 

 

 

 

Authorized: 5,000 shares; Issued and outstanding:

 

-

 

 

 

-

 

Series B Convertible Preferred Stock — 43 shares at March 31, 2014 and December 31, 2013

-

 

 

 

-

 

Common stock: $0.001 par value;

 

 

 

 

 

 

 

   Authorized: 350,000 shares

 

 

 

 

 

 

 

Issued and outstanding: 262,856 shares at March 31, 2014 and 262,796 shares at December 31, 2013

 

263

 

 

 

263

 

Additional paid-in capital

 

689,729

 

 

 

688,390

 

Total accumulated other comprehensive loss

 

(88

)

 

 

(148

)

Accumulated deficit

 

(516,051

)

 

 

(502,211

)

Total stockholders’ equity

 

173,853

 

 

 

186,294

 

Total liabilities and stockholders’ equity

$

193,585

 

 

$

204,622

 

 

 

 

 

 

 

See accompanying notes.

 

 

 

4


Dynavax Technologies Corporation

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

 

 

Three Months Ended

 

 

March 31,

 

 

2014

 

 

2013

 

Revenues:

 

 

 

 

 

 

 

Collaboration revenue

$

2,373

 

 

$

883

 

Grant revenue

 

1,125

 

 

 

760

 

Service and license revenue

 

-

 

 

 

442

 

Total revenues

 

3,498

 

 

 

2,085

 

Operating expenses:

 

 

 

 

 

 

 

Research and development

 

13,231

 

 

 

14,164

 

General and administrative

 

4,157

 

 

 

8,800

 

Unoccupied facility expense

 

77

 

 

 

-

 

Total operating expenses

 

17,465

 

 

 

22,964

 

Loss from operations

 

(13,967

)

 

 

(20,879

)

Other income (expense):

 

 

 

 

 

 

 

Interest income

 

65

 

 

 

72

 

Interest expense

 

-

 

 

 

(32

)

Other income

 

62

 

 

 

14

 

Net loss

$

(13,840

)

 

$

(20,825

)

Basic and diluted net loss per share

$

(0.05

)

 

$

(0.11

)

Weighted average number of shares used to compute basic and diluted net loss per share

 

262,826

 

 

 

182,847

 

 

5


Dynavax Technologies Corporation

Condensed Consolidated Statements of Comprehensive Loss

(In thousands)

(Unaudited)

 

 

Three Months Ended

 

 

March 31,

 

 

2014

 

 

2013

 

Net loss

$

(13,840

)

 

$

(20,825

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

Unrealized gain (loss) on marketable securities available-for-sale

 

69

 

 

 

(8

)

Cumulative foreign currency translation adjustment

 

(9

)

 

 

(347

)

Total other comprehensive gain (loss)

 

60

 

 

 

(355

)

Total comprehensive loss

$

(13,780

)

 

$

(21,180

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

 

 

6


Dynavax Technologies Corporation

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

Three Months Ended

 

 

March 31,

 

 

2014

 

 

2013

 

Operating activities

 

 

 

 

 

 

 

Net loss

$

(13,840

)

 

$

(20,825

)

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

 

 

 

 

 

 

 

Depreciation and amortization

 

339

 

 

 

319

 

Gain on disposal of property and equipment

 

(20

)

 

 

-

 

Accretion of discounts and amortization of premiums of marketable securities

 

264

 

 

 

280

 

Unoccupied facility expense

 

77

 

 

 

-

 

Stock-based compensation expense

 

1,270

 

 

 

4,266

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

(103

)

 

 

(542

)

Prepaid expenses and other current assets

 

(948

)

 

 

835

 

Restricted cash and other assets

 

266

 

 

 

13

 

Accounts payable

 

154

 

 

 

(439

)

Accrued liabilities and other long term liabilities

 

(1,671

)

 

 

(1,905

)

Deferred revenues

 

3,036

 

 

 

(888

)

Net cash used in operating activities

 

(11,176

)

 

 

(18,886

)

Investing activities

 

 

 

 

 

 

 

Purchases of marketable securities

 

(13,819

)

 

 

(13,454

)

Proceeds from maturities of marketable securities

 

28,949

 

 

 

50,340

 

Purchases of property and equipment, net of proceeds from asset disposals

 

(398

)

 

 

(535

)

Net cash provided by investing activities

 

14,732

 

 

 

36,351

 

Financing activities

 

 

 

 

 

 

 

Proceeds from issuances of common stock and warrants, net of issuance costs

 

-

 

 

 

(142

)

Proceeds from exercise of stock options and restricted stock awards

 

-

 

 

 

10

 

Proceeds from employee stock purchase plan

 

69

 

 

 

147

 

Net cash provided by financing activities

 

69

 

 

 

15

 

Effect of exchange rate changes on cash and cash equivalents

 

3

 

 

 

(63

)

Net increase in cash and cash equivalents

 

3,628

 

 

 

17,417

 

Cash and cash equivalents at beginning of period

 

23,122

 

 

 

7,599

 

Cash and cash equivalents at end of period

$

26,750

 

 

$

25,016

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

Disposal of fully depreciated property and equipment

$

274

 

 

$

1

 

Net change in unrealized gain (loss) on marketable securities

$

69

 

 

$

(8

)

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

 

 

7


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”), a clinical-stage biopharmaceutical company, develops products to prevent and treat infectious and inflammatory diseases and cancer based on Toll-like Receptor (“TLR”) biology and its ability to modulate the innate immune system. Our lead product candidate is HEPLISAV-B TM (also known as “HEPLISAV”), an investigational adult hepatitis B vaccine in Phase 3 clinical development.

In addition to HEPLISAV-B , we are conducting clinical and preclinical programs that utilize our expertise in TLR biology. Our product candidates include both TLR agonists and TLR inhibitors. Our clinical stage programs include our autoimmune program partnered with GlaxoSmithKline (“GSK”), our asthma therapeutic program partnered with AstraZeneca AB (“AstraZeneca”), and our cancer immunotherapy program. We also are advancing preclinical development programs in adjuvant technology and TLR 7, 8 and 9 inhibition. We compete with pharmaceutical companies, biotechnology companies, academic institutions and research organizations in developing therapies to prevent or treat infectious and inflammatory diseases and cancer. 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 adjustmen ts, consisting only of normal recurring adjustments, which we consider necessary to fairly state 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 can be condensed or omitted. Interim-period results are not necessarily indicative of results of operations or cash flows expected for a full-year period or any other interim-period. The condensed consolidated balance sheet at December 31, 2013, 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, 2013, 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 subsidiaries, Rhein Biotech GmbH (“Rhein” or “Dynavax Europe”) and Dynavax International, B.V. All significant intercompany accounts and transactions, among consolidated entities, have been eliminated. We operate in one business segment, which is de dicated to the discovery and development of biopharmaceutical products.

Liquidity and Financial Condition

We have incurred significant operating losses and negative cash flows from operations since our inception. As of March 31, 2014 , we had cash, cash equivalents and marketable securities of $177.7 million. We currently estimate that we have sufficient cash resources to meet our anticipated cash needs through at least the next 12 months based on cash, cash equivalents and marketable securities on hand as of March 31, 2014 and anticipated revenues and funding from existing agreements.

We expect to continue to spend substantial funds in connection with the development and manufacturing of our product candidates, particularly HEPLISAV-B, human clinical trials for our product candidates and additional applications and advancement of our technology. In order to continue these activities, we may need to raise additional funds. This may occur through strategic alliance and licensing arrangements and/or future public or private financings. Sufficient additional funding may not be available on acceptable terms, or at all. If adequate funds are not available in the future, we may need to delay, reduce the scope of or put on hold the HEPLISAV-B program or our other development programs while we seek strategic alternatives.

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 consolidated financial statements and accompanying notes. Actual results may differ materially from these estimates and assumptions.

8


Summary of Significant Accounting Policies

There have been no significant changes in our significant accounting policies during the three months ended March 31, 2014, as compared with those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013.

Revenue Recognition

Our revenues consist of amounts earned from collaborations, grants and fees from services and licenses. We enter into license and manufacturing agreements and collaborative research and development arrangements with pharmaceutical and biotechnology partners that may involve multiple deliverables. Our arrangements may include one or more of the foll owing elements: upfront license payments, cost reimbursement for the performance of research and development activities, milestone payments, other contingent payments, contract manufacturing service fees, royalties and license fees. Each deliverable in the arrangement is evaluated to determine whether it meets the criteria to be accounted for as a separate unit of accounting or whether it should be combined with other deliverables. In order to account for the multiple-element arrangements, the Company identifies the deliverables included within the arrangement and evaluates which deliverables represent separate units of accounting. Analyzing the arrangement to identify deliverables requires the use of judgment, and each deliverable may be an obligation to deliver services, a right or license to use an asset, or another performance obligation. We recognize revenue when there is persuasive evidence that an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable and collectability is reasonably assured.

Non-refundable upfront fees received for license and collaborative agreements entered into prior to January 1, 2011 and other payments under collaboration agreements where we have continuing performance obligations related to the payments are deferred and recognized over our expected performance period. Revenue is recognized on a ratable basis, unless we determine that another method is more appropriate, through the date at which our performance obligations are completed. Management makes its best estimate of the period over which we expect to fulfill our performance obligations, which may include clinical development activities. Given the uncertainties of research and development collaborations, significant judgment is required to determine the duration of the performance period. We recognize cost reimbursement revenue under collaborative agreements as the related research and development costs are incurred, as provided for under the terms of these agreements.

Contingent consideration received for the achievement of a substantive milestone is recognized in its entirety in the period in which the milestone is achieved. A milestone is defined as an event having all of the following characteristics: (i) there is sub stantive uncertainty at the date the arrangement is entered into that the event will be achieved, (ii) the event can only be achieved based in whole or in part on either the entity’s performance or a specific outcome resulting from the entity’s performance and (iii) if achieved, the event would result in additional payments being due to the entity.

Our license and collaboration agreements with our partners provide for payments to be paid to us upon the achievement of development milestones. Given the challenges inherent in developing biologic products, there is substantial uncertainty whether any such milestones will be achieved at the time we entered into these agreements. In addition, we evaluate whether the development milestones meet the criteria to be considered substantive. The conditions include: (i) the development work is contingent on either of the following: (a) the vendor’s performance to achieve the milestone or (b) the enhancement of the value of the deliverable item or items as a result of a specific outcome resulting from the vendor’s performance to achieve the milestone; (ii) it relates solely to past performance and (iii) it is reasonable relative to all the deliverable and payment terms within the arrangement. As a result of our analysis, we consider our development milestones to be substantive and, accordingly, we expect to recognize as revenue future payments received from such milestones as we achieve each milestone.

Milestone payments that are contingent upon the achievement of substantive at-risk performance criteria are recognized in full upon achievement of those milestone events in accordance with the terms of the agreement and assuming all other revenue recognition criteria have been met. All revenue recognized to date under our collaborative agreements has been nonrefundable.

Our license and collaboration agreements with certain partners also provide for contingent payments to be paid to us based solely upon the performance of our partner. For such contingent payments we expect to recognize the payments as revenue upon receipt, provided that collection is reasonably assured and the other revenue recognition criteria have been satisfied.

Revenues from manufacturing services are recognized upon meeting the criteria for substantial performance and acceptance by the customer.

Revenue from royalty payments is contingent on future sales activities by our licensees. As a result, we recognize royalty revenue when all revenue recognition criteria have been satisfied.

Revenue from government and private agency grants are recognized as the related research expenses are incurred and to the extent that funding is approved. Additionally, we recognize revenue based on the facilities and administrative cost rate reimbursable per the terms of the grant awards.

9


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 such arrangements may be eithe r 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.

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, completion of portions of the clinical trial or similar conditio ns. Our accruals for clinical trials are 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. The Company makes estimates of its accrued expenses as of each balance sheet date based on the facts and circumstances known to the Company at that time. There have been no material adjustments to the Company’s prior period accrued estimates for clinical trial activities through March 31, 2014.

Recent Accounting Pronouncements

We believe that there have been no significant changes in our significant accounting policies during the three months ended March 31, 2014, as compared with those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013.

 

2. Fair Value Measurements

The Company defines 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 assumptions.

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

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, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

25,196

 

 

$

-

 

 

$

-

 

 

$

25,196

 

U.S. government agency securities

 

-

 

 

 

150,929

 

 

 

-

 

 

 

150,929

 

Total

$

25,196

 

 

$

150,929

 

 

$

-

 

 

$

176,125

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

20,013

 

 

$

-

 

 

$

-

 

 

$

20,013

 

U.S. government agency securities

 

-

 

 

 

167,597

 

 

 

-

 

 

 

167,597

 

Total

$

20,013

 

 

$

167,597

 

 

$

-

 

 

$

187,610

 

10


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. Government agency 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 market s 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, 2014 or December 31, 2013.

 

3. Cash, cash equivalents and marketable securities

The following is a summary of cash, cash equivalents and marketable securities available-for-sale as of March 31, 2014 and December 31, 2013 (in thousands):

 

 

Amortized Cost

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

Estimated Fair Value

 

March 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

$

1,554

 

 

$

-

 

 

$

-

 

 

$

1,554

 

Money market funds

 

25,196

 

 

 

-

 

 

 

-

 

 

 

25,196

 

Total cash and cash equivalents

 

26,750

 

 

 

-

 

 

 

-

 

 

 

26,750

 

Marketable securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency securities

 

150,891

 

 

 

47

 

 

 

(9

)

 

 

150,929

 

Total marketable securities available-for-sale

 

150,891

 

 

 

47

 

 

 

(9

)

 

 

150,929

 

Total cash, cash equivalents and marketable securities

$

177,641

 

 

$

47

 

 

$

(9

)

 

$

177,679

 

December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

$

1,766

 

 

$

-

 

 

$

-

 

 

$

1,766

 

Money market funds

 

20,013

 

 

 

-

 

 

 

-

 

 

 

20,013

 

U.S. government agency securities

 

1,343

 

 

 

-

 

 

 

-

 

 

 

1,343

 

Total cash and cash equivalents

 

23,122

 

 

 

-

 

 

 

-

 

 

 

23,122

 

Marketable securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency securities

 

166,285

 

 

 

16

 

 

 

(47

)

 

 

166,254

 

Total marketable securities available-for-sale

 

166,285

 

 

 

16

 

 

 

(47

)

 

 

166,254

 

Total cash, cash equivalents and marketable securities

$

189,407

 

 

$

16

 

 

$

(47

)

 

$

189,376

 

 

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

 

 

 

March 31, 2014

 

 

 

Amortized Cost

 

 

Estimated Fair Value

 

Mature in one year or less

 

$

86,050

 

 

$

86,070

 

Mature after one year through two years

 

 

64,841

 

 

 

64,859

 

 

 

$

150,891

 

 

$

150,929

 

 

We have classified our entire investment portfolio as available-for-sale a nd 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 income (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;

11


·

the duration to maturity of our investments;

·

our intention and ability to hold the investments 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;

·

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 iden tified as other than temporary.

 

 

 

4. Commitments and Contingencies

We lease our facilities in Berkeley, California (“Berkeley Lease”) and Düsseldorf, Germany (“Düsseldorf Lease”) under operating leases that expire in June 2018 and March 2023, respectively. The Berkeley Lease provides for periods of escalating rent. The total cash payments over the life of the lease are divided by the total number of months in the lease period and the average rent is charged to expense each month during th e lease period. We entered into sublease agreements under the Düsseldorf Lease for a certain portion of the leased space. The sublease income is offset against our rent expense.

During September 2013, we decided not to occupy a portion of our facility in Berkeley, California. As a result, we recorded an estimated unoccupied facility expense of $0.9 million in the third quarter of 2013, representing the present value of the rent payments and other costs associated with the lease, net of estimated sublease i ncome, for the remaining life of the operating lease. During March 2014, we reassessed our timing and ability to sublet a portion of our facility and recorded an additional unoccupied facility expense of $0.1 million as of March 31, 2014.  

Total net rent expense related to our operating leases for both three month periods ended March 31, 2014 and 2013, was $0.4 million. Deferred rent was $0.6 million as of both March 31, 2014 and December 31, 2013.  

Future minimum payments under the non-cancelable portion of our operating leases at March 31, 2014, excluding payments from sublease agreements, are as follows (in thousands):

 

Years ending December 31,

 

 

 

 

2014 (remaining)

 

$

1,679

 

2015

 

 

2,282

 

2016

 

 

2,332

 

2017

 

 

2,382

 

2018

 

 

1,350

 

Thereafter

 

 

2,496

 

Total

 

$

12,521

 

 

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, 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 research institutions, contract research organizations, clinical investigators as well as clinical and commercial material manufacturers of our product candidates. As of March 31, 2014, under the terms of our agreements, including certain agreements relating to the April 2014 initiation of the Phase 3 trial of HEPLISAV-B, we are obligated to make future payments as services are provided of approxima tely $38.4 million through 2016. 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.

Under the terms of our exclusive license agreements with The Regents of the University of California, as amended, for certain technology and related patent rights and materials, we pay annual license or maintenance fees and will be required to pay milestones,   and low single-digit royalties on net sales, if any, of certain products originating from the licensed technologies.

12


 

5. Collaborative Research and Development Agreements

GlaxoSmithKline

In December 2008, we entered into a worldwide strategic alliance with GSK to discover, develop and commercialize TLR inhibitors. Under the terms of the arrangement, we agreed to conduct research and early clinical development in up to four programs: the Lead TLR 7/9 program, a Follow-On TLR 7/9 program, and up to two other TLR programs. In 2011 we began development of a TLR 8 program as one of the two additional programs under the collaboration.   GSK subsequently returned all rights to this program to us.  

We are currently conducting a Phase 1 clinical trial in the Lead TLR 7/9 program with DV1179 in systemic lupus erythematosus patients. We are not currently performing any activities on the Follow-On TLR 7/9 program. GSK has not yet chosen to initiate development of the remaining program under the agreement. In December 2013, we amended our agreement with GSK to extend the research term until conclusion of the ongoing Phase 1 study of DV1179. In addition, the exclusivity provisions of the agreement were modified, giving us rights to immediately begin preclinical and clinical research on inhibitors of TLR 7 and 9 (other than DV1179) for oncology indications.

GSK can exercise its exclusive option to license each program. If GSK exercises an option, GSK would carry out further development and commercialization of the corresponding products. If GSK exercises their option on the Lead TLR 7/9 program, then we are eligible to receive payments of up to approximately $125 million, comprised of contingent option exerc ise payments and additional payments based on GSK’s achievement of certain development, regulatory and commercial objectives.

We are also eligible to receive up to $60 million if aggregate worldwide annual net sales milestones are achieved and tiered roya lties ranging from the mid-single digit to mid-teens on sales of any products originating from the collaboration. We have retained an option to co-develop and co-promote one product under this agreement.

We received an initial payment of $10 million in 20 08. The deliverables under this arrangement did not have stand-alone value and so did not qualify as separate units of accounting. In 2011, we earned and recognized $12 million in substantive development milestone payments related to the initiation of Phase I and proof-of-mechanism clinical trials of DV1179 in systemic lupus erythematosus patients. In 2011, we earned and recognized $3 million in substantive development milestone payments related to the initiation of development of the TLR 8 program.

Revenue from the initial payment from GSK was deferred and is being recognized over the expected period of performance under the agreement, initially estimated to be seven years. In the fourth quarter of 2013 we reevaluated and revised the expected period of per formance under the agreement from seven years to six years resulting in the recognition of $0.3 million of additional revenue in 2013 and 2014.

The following table summarizes the revenues recognized under our agreement with GSK (in thousands):

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2014

 

 

2013

 

Initial payment

 

$

631

 

 

$

357

 

Total

 

$

631

 

 

$

357

 

 

As of March 31, 2014 and December 31, 2013, deferred revenue relating to the initial payment was $ 1.9 million and $2.5 million, respectively.

Absent early termination, the agreement will expire when all of GSK’s payment obligations expire. Either party may terminate the agreement early upon written notice if the other party commits an uncured material breach of the agreement. Either party may terminate the agreement in the event of insolvency of the other party. GSK also has the option to terminate the agreement without cause upon prior written notice within a specified window of time dependent upon the stage of clinical development of the progra ms.

AstraZeneca

In September 2006, we entered into a three- year research collaboration and license agreement with AstraZeneca for the discovery and development of TLR 9 agonist-based therapies for the treatment of asthma and chronic obstructive pulmonary disease.

In October 2011, we amended our agreement with AstraZeneca to provide that we will conduct initial clinical development of AZD1419. Under the terms of the amended agreement, AstraZeneca will fund all program expenses to cover the cost of development

13


activities through Phase 2a, estimated to total approxim ately $20 million. We received an initial payment of $3 million in 2011 to begin the clinical development program. In the first quarter of 2012, we received a $2.6 million payment to advance AZD1419 into preclinical toxicology studies and these toxicology studies were completed in the third quarter of 2012. We and AstraZeneca have agreed to advance AZD1419 towards a Phase 1 clinical trial, which resulted in a development funding payment of $6 million, received in the fourth quarter of 2012. In January 2014, we again amended our agreement with AstraZeneca for the clinical development of AZD1419.  Under the terms of this amended agreement, upon completion of the Phase I trial responsibility for further conduct of clinical trials will be transferred from Dynavax to AstraZeneca.  In the first quarter of 2014, we received a $5.4 million payment that was due upon execution of this amended agreement. We are eligible to receive additional milestone payments, which we have determined to be substantive milestones, of up to approximately $100 million, based on the achievement of certain development and regulatory objectives. Additionally, upon commercialization, 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.

Revenue from the initial payment received in 2006 was deferred and is being recognized over the expected period of performance under the agreement, which is approximately 50 months. Revenue from the $5.4 payment received in the first quarter of 2014 was deferred and is being recognized over the expected remaining period of performance under the agreement, which is approximately 24 months. Revenue from the development funding payments is being recognized as the development work is performed.

The following table summarizes the revenues earned under our agreement with AstraZeneca (in thousands):

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2014

 

 

2013

 

Initial payment

 

$

180

 

 

$

180

 

Subsequent payment

 

 

675

 

 

 

-

 

Performance of research activities

 

 

887

 

 

 

346

 

Total

 

$

1,742

 

 

$

526

 

 

As of March 31, 2014 and December 31, 2013, total deferred revenue from the initial payment, subsequent payment and development funding payments was $8.4 million and $4.8 million, respectively.

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.

National Institutes of Health (“NIH”) and Other Funding

We have been awarded various grants from the NIH and the NIH’s National Institute of Allergy and Infectious Disease (“NIAID”) in order to fund research. The awards are related to specific research objectives and we earn revenue as the related research expenses are incurred. We have earned revenue during the periods ended March 31, 2014 and 2013 from the following awards:

·

September 2013, NIH awarded us $0.2 million to fund research in developing TLR antagonists for therapy of hepatic fibrosis and cirrhosis.

·

June 2012, NIH awarded us $0.6 million to fund research in screening for inhibitors of TLR 8 for treatment of autoimmune diseases.

·

May 2012, NIH awarded us $0.4 million to fund development of TLR 8 inhibitors for treatment of rheumatoid arthritis.

·

July 2011, NIH awarded us $0.6 million to fund research in preclinical models of skin autoimmune inflammation.

·

August 2010, NIAID awarded us a grant to take a systems biology approach to study the differences between individuals who do or do not respond to vaccination against the hepatitis B virus. This study will be one of several projects conducted under a grant to the Baylor Institute of Immunology Research in Dallas as part of the Human Immune Phenotyping Centers program. We have been awarded a total of $1.4 million under this grant.     

·

September 2008, NIAID awarded us a five-year $17 million contract to develop our ISS technology using TLR 9 agonists as vaccine adjuvants. The contract supports adjuvant development for anthrax as well as other disease models.

14


The following table summarizes the revenues recognized under the various arrangements with the NIH and NIAID (in thousands):

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2014

 

 

2013

 

NIAID contracts

 

$

874

 

 

$

598

 

All other NIH contracts

 

 

251

 

 

 

162

 

Total grant revenue

 

$

1,125

 

 

$

760

 

 

 

6. 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, common stock subject to repurchase by us, outstanding options, stock awards, warrants and Series B C onvertible Preferred Stock 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. Outstanding warrants, stock options, Series B Convertible Preferred Stock and stock awards to purchase approximately 77,800,000 and 30,800,000 shares of common stock as of March 31, 2014 and 2013, respectively, were excluded from the calculation of diluted net loss per share for the quarters ended March 31, 2014 and 2013, because the effect of their inclusion would have been anti-dilutive.

 

7. Stockholders’ Equity

Option activity under our stock-based compensation plans during the three months ended March 31, 2014 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, 2013

 

 

15,765

 

 

$

3.17

 

 

 

 

 

 

 

 

 

Options granted

 

 

4,890

 

 

 

1.71

 

 

 

 

 

 

 

 

 

Options exercised

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

Options cancelled:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options forfeited (unvested)

 

 

(89

)

 

 

2.71

 

 

 

 

 

 

 

 

 

Options cancelled (vested)

 

 

(461

)

 

 

3.71

 

 

 

 

 

 

 

 

 

Balance at March 31, 2014

 

 

20,105

 

 

 

2.80

 

 

 

6.25

 

 

$

1,566

 

Vested and expected to vest at March 31, 2014

 

 

20,105

 

 

 

2.80

 

 

 

6.25

 

 

$

1,566

 

Exercisable at March 31, 2014

 

 

10,899

 

 

 

3.32

 

 

 

3.76

 

 

$

969

 

 

Restricted stock unit activity under our stock-based compensation plans during the three months ended March 31, 2014 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, 2013

 

1,275

 

 

$

3.93

 

Granted

 

1,505

 

 

$

1.80

 

Vested

 

-

 

 

$

-

 

Forfeited or expired

 

(1,000

)

 

$

4.22

 

Non-vested as of March 31, 2014

 

1,780

 

 

$

1.76

 

 

The aggregate intrinsic value of the restricted stock units outstanding as of March 31 , 2014, based on our stock price on that date, was $3.2 million.

15


As of March 31 , 2014, approximately 1,000,000 shares underlying stock options and restricted stock units awards with performance-based vesting criteria were outstanding.

Under our stock-based compensation plans, option awards generally vest over a four-year period contingent upon continuous service and expire 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,

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Weighted-average fair value

 

$

1.57

 

 

$

2.70

 

 

$

0.92

 

 

$

1.46

 

Risk-free interest rate

 

 

1.8

%

 

 

1.1

%

 

 

0.2

%

 

 

0.2

%

Expected life (in years)

 

 

5.9

 

 

 

5.8

 

 

 

1.1

 

 

 

1.3

 

Volatility

 

 

1.4

 

 

 

1.4

 

 

 

0.9

 

 

 

0.7

 

Volatility is based on historical volatility of our stock price. The expected life of options granted is estimated based on historical option exercise and employee termination data, giving consideration to options that have not yet completed a full life cycle. Our s enior management, who hold a majority of the options outstanding, and other employees were grouped and considered separately for valuation purposes.  The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield is zero percent for all years and is based on our history and expectation of dividend payouts. All stock option awards to non-employees are accounted for at the fair value of the consideration received or the fair value of the equity instrument issued, as calculated using the Black-Scholes model.

Compensation expense is based on awards ultimately expected to vest and reflects estimated forfeitures. For equity awards with time-based vesting, the fair value is amortized to expense on a straight-line basis over the vesting periods. For equity awards with performance-based vesting criteria, the fair value is amortized to expense when the achievement of the vesting criteria becomes probable.

We recognized stock-based compensation expense of $ 1.3 million and $4.3 million for the three months ended March 31, 2014 and 2013, respectively. Stock-based compensation during the three months ended March 31, 2013 included $2.1 million of expense for accelerated vesting of stock options related to management continuity and severance arrangements with certain former employees and executive officers. The Company recorded stock-based compensation expense for awards to non-employees of $0.1 million for the three months ended March 31, 2014.

The components of stock-based compensation expense were (in thousands):

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2014

 

 

2013

 

Research and development

 

$

692

 

 

$

1,323

 

General and administrative

 

 

578

 

 

 

2,943

 

Total

 

$

1,270

 

 

$

4,266

 

As of March 31 , 2014, the total unrecognized compensation cost related to non-vested equity awards including all awards with time-based vesting amounted to $17.7 million, which is expected to be recognized over the remaining weighted-average vesting period of 3.19 years. Additionally, as of March 31, 2014, the total unrecognized compensation cost related to equity awards with performance-based vesting criteria not deemed probable of vesting amounted to $0.4 million.

Employee Stock Purchase Plan

As of March 31, 2014 , 996,000 shares have been reserved and approved for issuance under the 2004 Employee Stock Purchase Plan, subject to adjustment for a stock split, any future stock dividend or other similar change in our common stock or capital structure. To date, employees have acquired 887,987 shares of our common stock under the 2004 Employee Stock Purchase Plan including 59,573 shares during the three months ended March 31, 2014. As of March 31, 2014, 108,013 shares of our common stock remained available for future purchases.

16


Warrants

As of March 31, 2014, warrants to purchase an aggregate of approximately 12,500,000 sha res of our common stock were outstanding. The warrants are exercisable at a weighted average price of $1.96 per share. During the three months ended March 31, 2014 warrants were exercised to purchase an aggregate of approximately 100 shares of our common stock. There were no warrants exercised during the three months ended March 31, 2013 .

Preferred Stock Outstanding

As of March 31, 2014, there were 5,000,000 shares of preferred stock authorized and 43,430 shares of $0.001 par value Series B Convertible Preferred Stock outstanding. Each share of Series B Convertible Preferred Stock is convertible into 1,000 shares of common stock at any time at the holder’s option. However, the holder is prohibited from converting the Series B Convertible Preferred Stock into shares of common stock if, as a result of such conversion, the holder and its affiliates would own more than 9.98% of the total number of shares of common stock then issued and outstanding. In the event of the Company’s liquidation, dissolution, or winding up, holders of Series B Convertible Preferred Stock will receive a payment equal to $0.001 per share before any proceeds are distributed to the common stockholders. Shares of Series B Convertible Preferred Stock generally have no voting rights, except as required by law and except that the consent of holders of a majority of the outstanding Series B Convertible Preferred Stock is required to amend the terms of the Series B Convertible Preferred Stock. Holders of Series B Convertible Preferred Stock are not entitled to receive any dividends, unless and until specifically declared by the Company’s board of directors. The Series B Convertible Preferred Stock ranks senior to the Company’s common stock as to distributions of assets upon the Company’s liquidation, dissolution or winding up, whether voluntarily or involuntarily. The Series B Convertible Preferred Stock may rank senior to, on parity with or junior to any class or series of the Company’s capital stock created in the future depending upon the specific terms of such future stock issuance.

 

 

 

 

17


ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve a number of risks and uncertainties. Our actual results could differ materially from those indicated by forward-looking statements as a result of various factors, including but not limited to, the period for which we estimate our cash resources are sufficient, the availability of additional funds, clinical development timing and progress and ability to enter into strategic and licensing arrangements, as well as those set forth under “Risk Factors” and those that may be identified from time to time in our reports and registration statements filed with the Securities and Exchange Commission.

The following discussion and analysis is intended to provide an investor with a narrative of our financial results and an evaluation of our financial condition and results of operations. This discussion should be read in conjunction with the unaudited Condensed Consolidated Fi nancial Statements and related Notes included in Item 1 of this Quarterly Report and the Consolidated Financial Statements and related Notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2013.

Overview

Dynavax Technologies Corporation (“we,” “our,” “us,” “Dynavax” or the “Company”), a clinical-stage biopharmaceutical company, develops products to prevent and treat infectious and inflammatory diseases and cancer based on Toll-like Receptor (“TLR”) biology and its ability to modulate the innate immune system. Our lead product candidate is HEPLISAV-B TM  (also known as “HEPLISAV”), an investigational adult hepatitis B vaccine in Phase 3 clinical development. HEPLISAV-B combines our proprietary TLR 9 agonist adjuvant and hepatitis B surface antigen (“HBsAg”) to elicit an immune response after two doses. In April of 2014 we initiated a Phase 3 study of HEPLISAV-B designed to provide a sufficiently-sized safety database for the U.S. Food and Drug Administration (“FDA”) to complete its review of Dynavax’s Biologics License Application (“BLA”).

In addition to HEPLISAV-B , we are conducting clinical and preclinical programs that utilize our expertise in TLR biology. Our product candidates include both TLR agonists and TLR inhibitors. Our clinical stage programs include our autoimmune program partnered with GlaxoSmithKline (“GSK”), our asthma therapeutic program partnered with AstraZeneca AB (“AstraZeneca”), and our cancer immunotherapy program. We also are advancing preclinical development programs in adjuvant technology and TLR 7, 8, and 9 inhibition. We compete with pharmaceutical companies, biotechnology companies, academic institutions and research organizations in developing therapies to prevent or treat infectious and inflammatory diseases and cancer.

Our revenues consist of amounts earned from collaborations, grants and fees from services and licenses. Product revenue will depend on our ability to receive regulatory approvals for, and successfully market, our drug candidates. We have yet to generate any revenues from product sales and have recorded an accumulated deficit of $516.1 million at March 31, 2014. These losses have resulted principally from costs incurred in connection with research and development activities, compensation and other related personnel costs and general corporate expenses. Research and development activities include costs of outside contracted services including clinical trial costs, manufacturing and process development costs, research costs and other consulting services. Salaries and other personnel-related costs include non-cash stock-based compensation associated with options and other equity awards granted to employees. General corporate expenses include outside services such as accounting, consulting, business development, investor relations, insurance services and legal costs. Our operating results may fluctuate substantially from period to period principally as a result of the timing of preclinical activities and other activities related to clinical trials for our drug candidates.

As of March  31, 2014, we had $177.7 million in cash, cash equivalents and marketable securities. Since our inception, we have relied primarily on the proceeds from public and private sales of our equity securities and revenues from collaboration agreements to fund our operations. We expect to continue to spend substantial funds in connection with the development and manufacturing of our product candidates, particularly HEPLISAV-B, human clinical trials for our product candidates and additional applications and advancement of our technology. In order to continue these activities, we may need to raise additional funds. This may occur through strategic alliance and licensing arrangements and/or future public or private financings. If adequate funds are not available in the future, we may need to delay, reduce the scope of or put on hold the HEPLISAV-B program or other development programs while we seek strategic alternatives.

18


Recent Developments

On April 15, 2014, we announced the initiation of a new Phase 3 clinical trial of HEPLISAV-B (known as HBV-23). This safety and immunogenicity study was designed to address the Complete Response Letter regarding the HEPLISAV-B Biologics License Application that was issued to Dynavax by the U.S. Food and Drug Administration in February, 2013. This study is intended to significantly increase the number of vaccinated subjects and provide a sufficiently-sized safety database for the FDA to make a final determination regarding the safety and immunogenicity of the product. The study is a Phase 3, observer-blinded, randomized, active-controlled, multicenter trial at approximately 40 sites in the U.S. Approximately 8,250 adult subjects between the ages of 18 and 70 will be randomized in a 2:1 ratio to receive a 2-dose series of HEPLISAV-B or a 3-dose series of a control vaccine, Engerix-B. Enrollment will be stratified by site, age group and type 2 diabetes mellitus status.

The co-primary objectives of the study are : (1) to evaluate the overall safety of HEPLISAV-B with respect to clinically significant adverse events and (2) to demonstrate the noninferiority of the seroprotection rate (“SPR”) induced by HEPLISAV-B compared with Engerix-B at week 28 in subjects with type 2 diabetes mellitus. All subjects will be evaluated for safety through study week 56. All potential autoimmune events will be reviewed by a Safety Evaluation and Adjudication Committee (SEAC) and overall safety will be monitored by a Data and Safety Monitoring Board (DSMB). We expect that all study subjects will be enrolled by the end of 2014 and all follow-up will be completed by the fourth quarter of 2015. We estimate the external costs of the study to be in the range of $50-55 million.

Critical Accounting Policies and the Use of Estimates

The accompanying discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements and the related disclosures, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of these financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenues and expenses for the periods presented. On an ongoing basis, we evaluate our estimates, assumptions and judgments described below that have the greatest potential impact on our consolidated financial statements, including those related to revenue recognition, research and development activities and stock-based compensation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Accounting assumptions and estimates are inherently uncertain and actual results may differ materially from these estimates under different assumptions or conditions. We believe that there have been no significant changes in our critical accounting policies during the three months ended March 31, 2014, as compared with those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013.

Results of Operations

Revenues

Revenues consist of amounts earned from collaborations, grants and services and license fees. Collaboration revenue includes amounts recognized under our collaboration agreements. Grant revenue includes amounts earned under government and private agency grants. Service and license fees include revenues re lated to research and development and contract manufacturing services, license fees and royalty payments.

The following is a summary of our revenues (in thousands, except for percentages):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase

 

 

 

 

 

 

 

 

 

 

 

(Decrease) from

 

 

 

Three Months Ended March 31,

 

 

2013 to 2014

 

 

Revenues:

2014

 

 

2013

 

 

$

 

 

%

 

 

Collaboration revenue

$

2,373

 

 

$

883

 

 

$

1,490

 

 

 

169

%

 

Grant revenue

 

1,125

 

 

 

760

 

 

 

365

 

 

 

48

%

 

Service and license revenue

 

-

 

 

 

442

 

 

 

(442

)

 

 

(100

)%

 

Total revenues

$

3,498

 

 

$

2,085

 

 

$

1,413

 

 

 

68

%

 

Total revenues for the three months ended March 31, 2014 increased by $1.4 million, or 68 %, as compared to the same quarter of 2013. Collaboration revenue increased by $1.5 million due to work performed for the Phase 1 clinical trial and the recognition of revenue related to the $5.4 million payment received from AstraZeneca in March 2014 that is being deferred and recognized over the estimated performance period of 24 months. Grant revenue increased by $0.4 million primarily due to our National Institute of Allergy and Infectious Diseases contract for adjuvant development. There was no service or license revenue earned in the current quarter.

19


Research and Development Expense

Research and development expense consists primarily of compensation and related personnel costs, which include benefits, recruitment, travel and supply costs, outside services, allocated facility costs and non-cash stock-based compensation. Outside services relate to our preclinical experiments and clinical trials as well as our regulatory filings and manufacturing of our product candidates. For the three months ended March 31, 2014 and 2013, approximately 51% and 78%, respectively, of our total research an d development expense, excluding non-cash stock-based compensation, is related to our lead product candidate, HEPLISAV-B. The remainder of our research and development expense results primarily from earlier-stage programs.

The following is a summary of our research and development expense (in thousands, except for percentages):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase

 

 

 

 

 

 

 

 

 

 

(Decrease) from

 

 

Three Months Ended March 31

 

 

2013 to 2014

 

Research and Development:

2014

 

 

2013

 

 

$

 

 

%

 

Compensation and related personnel costs

$

5,654

 

 

$

5,855

 

 

$

(201

)

 

 

(3

)%

Outside services

 

5,295

 

 

 

5,449

 

 

 

(154

)

 

 

(3

)%

Facility costs

 

1,590

 

 

 

1,537

 

 

 

53

 

 

 

3

%

Non-cash stock-based compensation

 

692

 

 

 

1,323

 

 

 

(631

)