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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, 2020  

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.)

2100 Powell Street, Suite 900

Emeryville, CA 94608

(510) 848-5100

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:

Trading symbol(s):

Name of each exchange on which registered:

Common Stock, $0.001 par value

DVAX

The Nasdaq Stock Market LLC

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 every Interactive Data File required to be submitted 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 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 1, 2020, the registrant had outstanding 92,184,031 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, 2020 and December 31, 2019

4

 

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2020 and 2019

5

 

Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2020 and 2019

5

 

Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2020 and 2019

6

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019

7

 

Notes to Condensed Consolidated Financial Statements

8

Item 2.

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

23

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

29

Item 4.

Controls and Procedures

29

 

PART II OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

30

Item 1A.

Risk Factors

30

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

46

Item 5.

Other Information

46

Item 6.

Exhibits

47

 

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 the direct and indirect impact of the ongoing COVID-19 global pandemic on our business and operations, our ability to successfully commercialize HEPLISAV-B®, our anticipated market opportunity and level of sales of HEPLISAV-B, our business, collaboration and regulatory strategy, our ability to successfully develop and commercialize other vaccines containing our novel adjuvant CpG 1018, our ability to manufacture commercial supply and meet regulatory requirements, uncertainty regarding our capital needs and future operating results and profitability, anticipated sources of funds, liquidity and cash needs, 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, where appropriate, its subsidiary Dynavax GmbH.

 

 

 

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,

 

 

2020

 

 

2019

 

 

(unaudited)

 

 

(Note 1)

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

37,899

 

 

$

39,884

 

Marketable securities available-for-sale

 

91,634

 

 

 

111,171

 

Accounts and other receivables, net

 

8,135

 

 

 

8,886

 

Inventories, net

 

48,099

 

 

 

41,332

 

Prepaid expenses and other current assets

 

8,380

 

 

 

7,380

 

Total current assets

 

194,147

 

 

 

208,653

 

Property and equipment, net

 

30,897

 

 

 

32,022

 

Intangible assets, net

 

202

 

 

 

2,500

 

Operating lease right-of-use assets

 

28,436

 

 

 

30,252

 

Goodwill

 

2,061

 

 

 

2,081

 

Restricted cash

 

212

 

 

 

216

 

Other assets

 

3,301

 

 

 

3,344

 

Total assets

$

259,256

 

 

$

279,068

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

4,557

 

 

$

9,278

 

Accrued research and development

 

3,253

 

 

 

4,120

 

Accrued liabilities

 

12,268

 

 

 

14,802

 

Warrant liability

 

6,250

 

 

 

14,860

 

Other current liabilities

 

2,951

 

 

 

9,987

 

Total current liabilities

 

29,279

 

 

 

53,047

 

Long-term debt, net

 

179,583

 

 

 

178,601

 

Long-term portion of lease liabilities

 

36,972

 

 

 

37,845

 

Other long-term liabilities

 

1,598

 

 

 

1,285

 

Total liabilities

 

247,432

 

 

 

270,778

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock: $0.001 par value

 

 

 

 

 

 

 

Authorized: 5,000 shares; Issued and outstanding:

 

-

 

 

 

-

 

Series B Convertible Preferred stock  ̶  5 shares at March 31, 2020 and

   December 31, 2019

 

-

 

 

 

-

 

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

   March 31, 2020 and December 31, 2019; 87,599 and 83,871 shares

   issued and outstanding at March 31, 2020 and December 31, 2019, respectively

 

88

 

 

 

84

 

Additional paid-in capital

 

1,245,730

 

 

 

1,229,417

 

Accumulated other comprehensive loss

 

(2,575

)

 

 

(2,387

)

Accumulated deficit

 

(1,231,419

)

 

 

(1,218,824

)

Total stockholders’ equity

 

11,824

 

 

 

8,290

 

Total liabilities and stockholders’ equity

$

259,256

 

 

$

279,068

 

 

See accompanying notes.

4


Dynavax Technologies Corporation

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

 

 

Three Months Ended March 31,

 

 

2020

 

 

2019

 

Revenues:

 

 

 

 

 

 

 

Product revenue, net

$

10,514

 

 

$

5,627

 

Other revenue

 

405

 

 

 

146

 

Total revenues

 

10,919

 

 

 

5,773

 

Operating expenses:

 

 

 

 

 

 

 

Cost of sales - product

 

2,354

 

 

 

1,800

 

Cost of sales - amortization of intangible assets

 

2,298

 

 

 

2,273

 

Research and development

 

4,653

 

 

 

21,206

 

Selling, general and administrative

 

20,926

 

 

 

18,348

 

Total operating expenses

 

30,231

 

 

 

43,627

 

Loss from operations

 

(19,312

)

 

 

(37,854

)

Other income (expense):

 

 

 

 

 

 

 

Interest income

 

590

 

 

 

735

 

Interest expense

 

(4,731

)

 

 

(2,734

)

Sublease income

 

1,926

 

 

 

-

 

Change in fair value of warrant liability

 

8,610

 

 

 

-

 

Other income (expense), net

 

322

 

 

 

181

 

Net loss

 

(12,595

)

 

 

(39,672

)

Basic net loss per share

$

(0.15

)

 

$

(0.62

)

Weighted average shares used to compute basic net loss per share

 

85,477

 

 

 

63,778

 

Diluted net loss per share

$

(0.25

)

 

$

(0.62

)

Weighted average shares used to compute diluted net loss per share

 

85,648

 

 

 

63,778

 

 

Condensed Consolidated Statements of Comprehensive Loss

(In thousands)

(Unaudited)

 

 

Three Months Ended March 31,

 

 

2020

 

 

2019

 

Net loss

$

(12,595

)

 

$

(39,672

)

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

Unrealized gain on marketable securities available-for-sale

 

291

 

 

 

67

 

Foreign currency translation adjustments

 

(479

)

 

 

(483

)

Total other comprehensive loss

 

(188

)

 

 

(416

)

Total comprehensive loss

$

(12,783

)

 

$

(40,088

)

 

See accompanying notes.

5


Dynavax Technologies Corporation

Condensed Consolidated Statements of Stockholders’ Equity

(In thousands)

(Unaudited)

 

 

Common Stock

 

 

Preferred Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Par Amount

 

 

Shares

 

 

Par Amount

 

 

Additional

Paid-In Capital

 

 

Accumulated

Other

Comprehensive

(Loss) Income

 

 

Accumulated

Deficit

 

 

Total

Stockholders'

Equity

 

Balances at December 31, 2019

 

83,871

 

 

$

84

 

 

 

5

 

 

$

-

 

 

$

1,229,417

 

 

$

(2,387

)

 

$

(1,218,824

)

 

$

8,290

 

Issuance (withholding) of common

   stock upon exercise of stock options

   and restricted stock awards, net

 

728

 

 

 

1

 

 

 

-

 

 

 

-

 

 

 

(2

)

 

 

-

 

 

 

-

 

 

 

(1

)

Issuance of common stock under

   Employee Stock Purchase Plan

 

91

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

311

 

 

 

-

 

 

 

-

 

 

 

311

 

Issuance of common stock, net of

   issuance costs, in conjunction

   with an At Market Sales

   Agreement (see Note 11)

 

2,909

 

 

 

3

 

 

 

-

 

 

 

-

 

 

 

14,226

 

 

 

-

 

 

 

-

 

 

 

14,229

 

Stock compensation expense

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,778

 

 

 

-

 

 

 

-

 

 

 

1,778

 

Total other comprehensive loss

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(188

)

 

 

-

 

 

 

(188

)

Net loss

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(12,595

)

 

 

(12,595

)

Balances at March 31, 2020

 

87,599

 

 

$

88

 

 

 

5

 

 

$

-

 

 

$

1,245,730

 

 

$

(2,575

)

 

$

(1,231,419

)

 

$

11,824

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2018

 

62,862

 

 

$

63

 

 

 

-

 

 

$

-

 

 

$

1,131,241

 

 

$

(2,015

)

 

$

(1,066,224

)

 

$

63,065

 

Issuance (withholding) of common

   stock upon exercise of stock options

   and restricted stock awards, net

 

740

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(18

)

 

 

-

 

 

 

-

 

 

 

(18

)

Issuance of common stock under

   Employee Stock Purchase Plan

 

75

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

407

 

 

 

-

 

 

 

-

 

 

 

407

 

Issuance of common stock, net of

   issuance costs, in conjunction

   with an At Market Sales

   Agreement (see Note 11)

 

1,343

 

 

 

2

 

 

 

-

 

 

 

-

 

 

 

13,621

 

 

 

-

 

 

 

-

 

 

 

13,623

 

Stock compensation expense

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

6,170

 

 

 

-

 

 

 

-

 

 

 

6,170

 

Total other comprehensive loss

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(416

)

 

 

-

 

 

 

(416

)

Net loss

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(39,672

)

 

 

(39,672

)

Balances at March 31, 2019

 

65,020

 

 

$

65

 

 

 

-

 

 

$

-

 

 

$

1,151,421

 

 

$

(2,431

)

 

$

(1,105,896

)

 

$

43,159

 

 

See accompanying notes.

6


Dynavax Technologies Corporation

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

Three Months Ended March 31,

 

 

2020

 

 

2019

 

Operating activities

 

 

 

 

 

 

 

Net loss

$

(12,595

)

 

$

(39,672

)

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

 

 

 

 

 

 

 

Depreciation and amortization

 

1,014

 

 

 

1,702

 

Amortization of right-of-use assets

 

634

 

 

 

1,302

 

Gain on disposal of property and equipment and from lease termination

 

(76

)

 

 

-

 

Accretion of discounts on marketable securities

 

(87

)

 

 

(323

)

Change in fair value of warrant liability

 

(8,610

)

 

 

-

 

Stock compensation expense

 

1,778

 

 

 

6,170

 

Cost of sales - amortization of intangible assets

 

2,298

 

 

 

2,273

 

Non-cash interest expense

 

1,338

 

 

 

814

 

Tenant improvements provided by the landlord

 

908

 

 

 

-

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts and other receivables, net

 

751

 

 

 

(2,087

)

Inventories, net

 

(6,767

)

 

 

(8,547

)

Prepaid expenses and other current assets

 

(1,000

)

 

 

154

 

Other assets

 

43

 

 

 

1,872

 

Accounts payable

 

(2,095

)

 

 

4,424

 

Lease liabilities

 

(672

)

 

 

(106

)

Accrued liabilities and other liabilities

 

(3,728

)

 

 

(7,878

)

Net cash used in operating activities

 

(26,866

)

 

 

(39,902

)

Investing activities

 

 

 

 

 

 

 

Acquisition of technology licenses

 

(7,000

)

 

 

(7,000

)

Purchases of marketable securities

 

(17,985

)

 

 

(29,205

)

Proceeds from maturities and redemptions of marketable securities

 

37,900

 

 

 

54,700

 

Purchases of property and equipment, net

 

(2,352

)

 

 

(3,882

)

Net cash provided by investing activities

 

10,563

 

 

 

14,613

 

Financing activities

 

 

 

 

 

 

 

Proceeds from long-term debt, net

 

-

 

 

 

74,250

 

Proceeds from issuance of common stock, net

 

14,229

 

 

 

13,623

 

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

 

(1

)

 

 

(18

)

Proceeds from Employee Stock Purchase Plan

 

311

 

 

 

407

 

Net cash provided by financing activities

 

14,539

 

 

 

88,262

 

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

 

(225

)

 

 

(192

)

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

 

(1,989

)

 

 

62,781

 

Cash, cash equivalents and restricted cash at beginning of period

 

40,100

 

 

 

49,967

 

Cash, cash equivalents and restricted cash at end of period

$

38,111

 

 

$

112,748

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

Cash paid during the period for interest

$

3,412

 

 

$

1,940

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

Purchases of property and equipment, not yet paid

$

408

 

 

$

7,230

 

Right-of-use assets obtained in exchange for operating lease liabilities

$

-

 

 

$

34,807

 

 

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”), is a commercial stage biopharmaceutical company developing and commercializing novel vaccines. We launched our first product, HEPLISAV-B® [Hepatitis B Vaccine (Recombinant), Adjuvanted], in February 2018, following United States Food and Drug Administration (“FDA”) approval for prevention of infection caused by all known subtypes of hepatitis B virus in adults age 18 years and older. 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, 2019 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, 2019, 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: discovery, development and commercialization of novel vaccines.

Liquidity and Financial Condition

As of March 31, 2020, we had cash, cash equivalents and marketable securities of $129.5 million. As of March 31, 2020, the principal amount of our term loan was $180.9 million, including paid-in-kind interest. The term loan has a maturity date of December 31, 2023, unless earlier prepaid.

The Company has incurred losses and negative cash flows from operations since its inception and expects to incur operating losses for the foreseeable future as we continue to invest in commercialization of HEPLISAV-B. If we cannot 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. Raising additional funds through the issuance of equity or debt securities could result in dilution to our existing stockholders, increased fixed payment obligations, or both. In addition, these securities may have rights senior to those of our common stock and could include covenants that would restrict our operations.

We currently anticipate that our cash, cash equivalents and short-term marketable securities as of March 31, 2020, and anticipated revenues from HEPLISAV-B will be sufficient to fund our operations for at least the next 12 months from the date of this filing.

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. In addition, global financial crises and economic downturns, including those cause by widespread public health crises such as the COVID-19 pandemic, may cause extreme volatility and disruptions in capital and credit markets, and may impact our ability to raise additional capital when needed on acceptable terms, if at all. Adequate financing may not be available to us on acceptable terms, or at all.

8


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. However, the worldwide spread of COVID-19 has resulted in a global slowdown of economic activity which is likely to decrease demand for a broad variety of goods and services, while also disrupting sales channels and marketing activities for an unknown period of time until the disease is contained. We are unable to predict the future effect resulting from the COVID-19 pandemic. Actual results could differ materially from management’s estimates.

Summary of Significant Accounting Policies

Revenue Recognition

We recognize revenue when the customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. To determine revenue recognition for arrangements that we determine are within the scope of Accounting Standards Codification (“ASC”) 606, we perform 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) we satisfy 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. Taxes collected from Customers relating to product sales and remitted to governmental authorities are excluded from revenues.

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, rebates and other fees that are offered within contracts between us and our Customers, healthcare providers, pharmacies 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 Customer offsets the amount against its accounts receivable) or as an accrued liability (if we pay the amount through our accounts payable process). Variable consideration requires significant estimates, judgment and information 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. If we were to change any of these judgments or estimates, it could cause a material increase or decrease in the amount of revenue that we report in a particular period. There have been no material adjustments to these estimates for the three months ended March 31, 2020 and 2019.

9


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 healthcare providers, pharmacies and others. In addition to distribution agreements with Customers, we enter into arrangements with qualified healthcare 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 determined at the time of resale to the qualified healthcare providers 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 the qualified healthcare providers, and chargebacks for units that our Customers have sold to the qualified healthcare providers, but for which credits have not been issued.

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.

Rebates: Under certain contracts, customers may obtain rebates for purchasing minimum volumes of our product. We estimate these rebates based upon the expected purchases and the contractual rebate rate and record this estimate as a reduction in revenue in the period the related revenue is recognized.

Collaboration and Manufacturing Service Revenue

We have entered into collaborative arrangements and arrangements to provide manufacturing services to other companies. Such arrangements may include promises to customers which, if capable of being distinct, are accounted for as separate performance obligations. For agreements with multiple performance obligations, we allocate estimated revenue to each performance obligation at contract inception based on the estimated transaction price of each performance obligation. Revenue allocated to each performance obligation is then recognized when we satisfy the performance obligation by transferring control of the promised good or service to the customer. Collaboration and manufacturing service revenue are recorded in other revenue in the condensed consolidated statements of operations.

Leases

We determine if an arrangement includes a lease at inception. Operating leases are included in operating lease right-of-use assets, other current liabilities and long-term portion of lease liabilities in our condensed consolidated balance sheets. Right-of-use assets represent our right to use an underlying asset during the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. In determining the net present value of lease payments, we use our incremental borrowing rate which represents an estimated rate of interest that we would have to pay to borrow equivalent funds on a collateralized basis at the lease commencement date.

The operating lease right-of-use assets also include any lease payments made and exclude any lease incentives. Our leases may include options to extend or terminate the lease which are included in the lease term when it is reasonably certain that we will exercise any such options. Lease expense is recognized on a straight-line basis over the expected lease term. We have elected not to apply the recognition requirements of ASC 842 for short-term leases. We have also elected the practical expedient to not separate lease components from non-lease components.

As lessors, we determine if an arrangement includes a lease at inception. We elected the practical expedient to not separate lease components from non-lease components. Rent revenue is recognized on a straight-line basis over the expected lease term and is included in other income (expense) in our condensed consolidated statements of operations.

10


Inventories

Inventory is stated at the lower of cost or estimated net realizable value, on a first-in, first-out, or FIFO, basis. We primarily use actual costs to determine our cost basis for inventories. Our assessment of market value requires the use of estimates regarding the net realizable value of our inventory balances, including an assessment of excess or obsolete inventory. We determine excess or obsolete inventory based on multiple factors, including an estimate of the future demand for our products, product expiration dates and current sales levels. Our assumptions of future demand for our products are inherently uncertain and if we were to change any of these judgments or estimates, it could cause a material increase or decrease in the amount of inventory reserves that we report in a particular period. For the three months ended March 31, 2020 and 2019, there was no inventory reserve recognized.

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 the vial presentation of HEPLISAV-B. In March 2018, we received regulatory approval of the pre-filled syringe (“PFS”) presentation of 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. Prior to regulatory approval of PFS, costs associated with resuming operating activities at the Düsseldorf manufacturing facility were also included in research and development expense. Subsequent to regulatory approval of PFS, costs associated with resuming manufacturing activities at the Düsseldorf facility were included in cost of sales – product, until commercial production resumed in mid-2018 at which time these costs were recorded as raw materials inventory.

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.

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 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 for the three months ended March 31, 2020 and 2019.

Recent Accounting Pronouncements

Accounting Standards Update 2016-13

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments. The standard changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. As a smaller reporting company, this ASU and its subsequent updates, is effective for fiscal years beginning after December 15, 2022. We are currently evaluating the impact this standard will have on our condensed consolidated financial statements.

Accounting Standards Update 2019-12

In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). This ASU simplifies the accounting for income taxes by removing certain exceptions and improving consistent application in certain areas of Topic 740. The ASU is effective for annual periods beginning after December 15, 2020 with early adoption permitted. We are currently evaluating the impact this standard will have on our condensed consolidated financial statements.

 

11


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. There were no transfers between Level 1, 2 and 3 during the three months ended March 31, 2020.

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.

Recurring Fair Value Measurements

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

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

26,865

 

 

$

-

 

 

$

-

 

 

$

26,865

 

U.S. treasuries

 

-

 

 

 

6,597

 

 

 

-

 

 

 

6,597

 

U.S. government agency securities

 

-

 

 

 

49,692

 

 

 

-

 

 

 

49,692

 

Corporate debt securities

 

-

 

 

 

35,345

 

 

 

-

 

 

 

35,345

 

Total assets

$

26,865

 

 

$

91,634

 

 

$

-

 

 

$

118,499

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrant liability

$

-

 

 

$

-

 

 

$

6,250

 

 

$

6,250

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

27,854

 

 

$

-

 

 

$

-

 

 

$

27,854

 

U.S. treasuries

 

-

 

 

 

6,517

 

 

 

-

 

 

 

6,517

 

U.S. government agency securities

 

-

 

 

 

51,273

 

 

 

-

 

 

 

51,273

 

Corporate debt securities

 

-

 

 

 

61,373

 

 

 

-

 

 

 

61,373