UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2023
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 NO. 001-14888
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| (Address of principal executive offices) | (Zip Code) | |||||||
REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (267 ) 440-4200
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
| Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered | ||||||
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 during the preceding 12 months (or for such shorter period that the registrant 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. (Check one):
| Large accelerated filer | ☐ | 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 ☒
The number of shares outstanding of the Registrant’s Common Stock, $0.001 par value, was 268,074,869 as of August 7, 2023.
INOVIO PHARMACEUTICALS, INC.
FORM 10-Q
For the Quarterly Period Ended June 30, 2023
INDEX
SUMMARY OF THE MATERIAL RISKS ASSOCIATED WITH OUR BUSINESS
Our business is subject to a number of risks, including risks that may prevent us from achieving our business objectives or may adversely affect our business, financial condition, results of operations, cash flows and prospects. These risks are discussed more fully in Item 1A. Risk Factors herein. These risk factors include, but are not limited to, the following:
•We have incurred significant losses since inception, expect to incur significant net losses in the foreseeable future and may never become profitable.
•We have limited sources of revenue and our success is dependent on our ability to develop our DNA medicines and proprietary smart device technology.
•We will need substantial additional capital to develop our DNA medicines and proprietary smart device technology, which may prove difficult or costly to obtain.
•None of our DNA medicine candidates have been approved for sale, and we may never develop commercially successful DNA medicine products.
•DNA medicines are a novel approach to treating and preventing disease, and negative perception of the efficacy, safety, or tolerability of any investigational medicines we develop could adversely affect our ability to conduct our business, advance our investigational medicines, or obtain regulatory approvals.
•If we and the contract manufacturers upon whom we rely fail to produce our proprietary smart devices and DNA medicine candidates in the volumes that we require on a timely basis, or at all, or if these contractors fail to comply with their obligations to us or with stringent regulations, we may face delays in the development and commercialization of our proprietary smart devices and DNA medicine candidates.
•If we lose or are unable to secure collaborators or partners, or if our collaborators or partners do not apply adequate resources to their relationships with us, our product development and potential for profitability will suffer.
•We have agreements with government agencies that are subject to termination and uncertain future funding. Termination or cessation of funding would have a negative impact on our ability to develop certain of our pipeline candidates and/or require us to seek alternative funding sources to advance product candidates.
•Our operating results may be harmed if our corporate restructuring plans and cost reduction efforts do not achieve the anticipated results or cause undesirable consequences.
•We are currently subject to litigation and may become subject to additional litigation, which could harm our business, financial condition and reputation.
•We face intense and increasing competition and steps taken by our competitors, such as the introduction of a new, disruptive technology may impede our ability to develop and commercialize our DNA medicines.
•We have entered into collaborations with Chinese companies and rely on clinical materials manufactured in China for our development efforts. Uncertainties regarding the interpretation and enforcement of Chinese laws, rules and regulations, a trade war, political unrest or unstable economic conditions in China could materially adversely affect our business, financial condition and results of operations.
•It is difficult and costly to generate and protect our intellectual property and our proprietary technologies, and we may not be able to ensure their protection.
•If we are sued for infringing intellectual property rights of third parties, it will be costly and time-consuming, and an unfavorable outcome in that litigation would have a material adverse effect on our business.
•If we fail to comply or regain compliance with Nasdaq’s continued listing standards, our common stock may be delisted and the price of our common stock, our ability to access the capital markets and our financial condition could be negatively impacted.
Part I. Financial Information
Item 1. Financial Statements
1
INOVIO PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| June 30, 2023 | December 31, 2022 | ||||||||||
| (Unaudited) | |||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Short-term investments | |||||||||||
| Accounts receivable | |||||||||||
| Accounts receivable from affiliated entities | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Prepaid expenses and other current assets from affiliated entities | |||||||||||
| Total current assets | |||||||||||
| Fixed assets, net | |||||||||||
| Investment in affiliated entity | |||||||||||
| Intangible assets, net | |||||||||||
| Goodwill | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable and accrued expenses | $ | $ | |||||||||
| Accounts payable and accrued expenses due to affiliated entities | |||||||||||
| Accrued clinical trial expenses | |||||||||||
| Operating lease liability | |||||||||||
| Grant funding liability | |||||||||||
| Grant funding liability from affiliated entity | |||||||||||
| Convertible senior notes | |||||||||||
| Total current liabilities | |||||||||||
| Convertible senior notes | |||||||||||
| Operating lease liability, net of current portion | |||||||||||
| Deferred tax liabilities | |||||||||||
| Total liabilities | |||||||||||
| Stockholders’ equity: | |||||||||||
| Preferred stock | |||||||||||
| Common stock | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total Inovio Pharmaceuticals, Inc. stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
2
INOVIO PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Revenue from collaborative arrangements and other contracts | $ | $ | $ | $ | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Loss from operations | ( | ( | ( | ( | |||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Interest income | |||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Gain (loss) on investment in affiliated entity | ( | ( | |||||||||||||||||||||
| Net unrealized gain (loss) on available-for-sale equity securities | ( | ( | |||||||||||||||||||||
| Other expense, net | ( | ( | ( | ( | |||||||||||||||||||
| Net loss before share in net loss of Geneos | ( | ( | ( | ( | |||||||||||||||||||
| Share in net loss of Geneos | ( | ||||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Net loss per share | |||||||||||||||||||||||
| Basic and diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Weighted average number of common shares outstanding | |||||||||||||||||||||||
| Basic and diluted | |||||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
3
INOVIO PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Other comprehensive (loss) income: | |||||||||||||||||||||||
| Foreign currency translation | ( | ( | ( | ( | |||||||||||||||||||
| Unrealized gain (loss) on short-term investments, net of tax | ( | ( | ( | ||||||||||||||||||||
| Comprehensive loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
4
INOVIO PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
| Three and Six Months Ended June 30, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock | Common stock | ||||||||||||||||||||||||||||||||||||||||||||||
| Number of shares | Amount | Number of shares | Amount | Additional paid-in capital | Accumulated deficit | Accumulated other comprehensive loss | Total stockholders’ equity | ||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for legal settlement | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Vesting of RSUs, net of tax payments | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Unrealized gain on short-term investments, net of tax | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for cash, net of financing costs | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Vesting of RSUs, net of tax payments | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Unrealized loss on short-term investments, net of tax | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||
5
| Three and Six Months Ended June 30, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock | Common stock | ||||||||||||||||||||||||||||||||||||||||||||||
| Number of shares | Amount | Number of shares | Amount | Additional paid-in capital | Accumulated deficit | Accumulated other comprehensive loss | Total stockholders’ equity | ||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||
| — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for cash, net of financing costs | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options for cash and vesting of RSUs, net of tax payments | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Unrealized loss on short-term investments, net of tax | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for cash, net of financing costs | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options for cash and vesting of RSUs, net of tax payments | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Unrealized loss on short-term investments, net of tax | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
6
INOVIO PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
7
| Six Months Ended June 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Depreciation | |||||||||||
| Amortization of intangible assets | |||||||||||
| Amortization of operating lease right-of-use assets | |||||||||||
| Impairment of intangible assets | |||||||||||
| Non-cash stock-based compensation | |||||||||||
| Non-cash interest on senior convertible notes | |||||||||||
| Amortization of discounts on investments | ( | ( | |||||||||
| Loss on sales of short-term investments | |||||||||||
| Loss on disposal of fixed assets | |||||||||||
| Gain on remeasurement of investment in Geneos | ( | ||||||||||
| (Gain) loss on equity investment in affiliated entity | ( | ||||||||||
| Share of net loss in Geneos | |||||||||||
| Net unrealized (gain) loss on available-for-sale equity securities | ( | ||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable, including from affiliated entities | ( | ||||||||||
| Prepaid expenses and other current assets, including from affiliated entities | ( | ||||||||||
| Other assets | |||||||||||
| Accounts payable and accrued expenses, including due to affiliated entities | ( | ||||||||||
| Accrued clinical trial expenses | ( | ( | |||||||||
| Deferred revenue, including from affiliated entity | |||||||||||
| Operating lease right-of-use assets and liabilities, net | ( | ( | |||||||||
| Grant funding liability, including from affiliated entity | ( | ||||||||||
| Other liabilities | ( | ||||||||||
| Net cash used in operating activities | ( | ( | |||||||||
| Cash flows from investing activities: | |||||||||||
| Purchases of investments | ( | ( | |||||||||
| Proceeds from sale or maturity of investments | |||||||||||
| Purchases of capital assets | ( | ( | |||||||||
| Proceeds from sale of capital assets | |||||||||||
| Investment in Geneos | ( | ||||||||||
| Net cash provided by investing activities | |||||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from issuance of common stock, net of issuance costs | |||||||||||
| Proceeds from stock option exercises | |||||||||||
| Taxes paid related to net share settlement of equity awards | ( | ( | |||||||||
| Net cash provided by financing activities | |||||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ( | |||||||||
| Increase (Decrease) in cash and cash equivalents | ( | ||||||||||
| Cash and cash equivalents, beginning of period | |||||||||||
| Cash and cash equivalents, end of period | $ | $ | |||||||||
| Supplemental disclosures: | |||||||||||
| Amounts accrued for purchases of fixed assets | $ | $ | |||||||||
| Interest paid | $ | $ | |||||||||
| Issuance of common stock as part of litigation settlement | $ | $ | |||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
8
INOVIO PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Operations
Inovio Pharmaceuticals, Inc. (the “Company” or “INOVIO”) is a biotechnology company focused on developing and commercializing DNA medicines to help treat and protect people from diseases associated with HPV, cancer, and infectious diseases. The Company’s goal is to advance its pipeline of product candidates and deliver on the promise of DNA medicines technology in treating and preventing a wide array of diseases.
In clinical trials, INOVIO's DNA medicine candidates have shown the ability to generate immune responses, especially CD4+, CD8+, and memory T-cell responses against targeted pathogens and cancers, via its precisely designed plasmids. These plasmids are delivered into cells using the Company's investigational proprietary smart device, CELLECTRA.
INO-3107 is INOVIO's candidate for the treatment of the HPV-related disease recurrent respiratory papillomatosis (RRP). In October 2022 and February 2023, INOVIO announced data from the first and second cohorts of its Phase 1/2 clinical trial of INO-3107 for the treatment of HPV-6 and HPV-11 associated RRP. In this trial, treatment with INO-3107 resulted in a statistically significant reduction of the median number of surgical interventions required to manage the disease during the first year following initial treatment, a result that reinforces the Company's belief that DNA medicines may play a key role in the treatment of HPV-related diseases.
In addition to its development efforts with INO-3107, INOVIO is also actively developing or plan to develop DNA medicines for HPV-related precancers, including vulvar and anal dysplasia; HPV-related cancers, including head & neck cancer; and glioblastoma multiforme, or GBM, the most common aggressive type of brain cancer, as well as a potential vaccine booster to protect against the Ebola virus.
The Company's partners and collaborators include Advaccine Biopharmaceuticals Suzhou Co, ApolloBio Corporation, AstraZeneca, The Bill & Melinda Gates Foundation (Gates), Coalition for Epidemic Preparedness Innovations (CEPI), Defense Advanced Research Projects Agency (DARPA), The U.S. Department of Defense (DoD), HIV Vaccines Trial Network, Indiana University, International Vaccine Institute (IVI), Kaneka Eurogentec, National Cancer Institute (NCI), National Institutes of Health (NIH), National Institute of Allergy and Infectious Diseases (NIAID), Plumbline Life Sciences, Regeneron Pharmaceuticals, Richter-Helm BioLogics, Thermo Fisher Scientific, the University of Pennsylvania, the Walter Reed Army Institute of Research, and The Wistar Institute.
INOVIO was incorporated in Delaware in June 2001 and has its principal executive offices in Plymouth Meeting, Pennsylvania.
2. Basis of Presentation, Liquidity and Risks and Uncertainties
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Inovio have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) as contained in the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The condensed consolidated balance sheet as of June 30, 2023, the condensed consolidated statements of operations, the condensed consolidated statements of comprehensive loss and the condensed consolidated statements of stockholders' equity for the three and six months ended June 30, 2023 and 2022 and the condensed consolidated statements of cash flows for the six months ended June 30, 2023 and 2022 are unaudited, but include all adjustments (consisting of normal recurring adjustments) that the Company considers necessary for a fair presentation of the financial position, results of operations, cash flows and changes in stockholders' equity for the periods presented.
The results of operations for the three and six months ended June 30, 2023 shown herein are not necessarily indicative of the results that may be expected for the year ending December 31, 2023, or for any other period. These unaudited financial statements, and notes thereto, should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2022, included in the Company's Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on March 1, 2023. The balance sheet at December 31, 2022 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.
These unaudited condensed consolidated financial statements include the accounts of Inovio Pharmaceuticals, Inc. and its subsidiary. As of June 30, 2023 and December 31, 2022, the Company consolidated its wholly-owned subsidiary Inovio Asia LLC. All intercompany accounts and transactions were eliminated upon consolidation.
9
Liquidity
The Company incurred a net loss attributable to common stockholders of $35.5 million and $76.2 million for the three and six months ended June 30, 2023, respectively. The Company had working capital of $151.4 million and an accumulated deficit of $1.6 billion as of June 30, 2023. The Company has incurred losses in each year since its inception and expects to continue to incur significant expenses and operating losses for the foreseeable future in connection with the research and preclinical and clinical development of its product candidates. The Company’s cash, cash equivalents and short-term investments of $194.9 million as of June 30, 2023 are sufficient to support the Company's planned operations for a period of at least 12 months from the date of issuance of these financial statements.
In order to continue to fund future research and development activities, the Company will need to seek additional capital. This may occur through strategic alliance and licensing arrangements, grant agreements and/or future public or private debt or equity financings including At-the-Market Equity Offering Sales Agreements (“Sales Agreements”). The Company has a history of conducting debt and equity financings, including the receipt of net proceeds of $2.9 million and $83.0 million under a Sales Agreement during the six months ended June 30, 2023 and year ended December 31, 2022, respectively. However, sufficient funding may not be available in the future, or if available, may be on terms that significantly dilute or otherwise adversely affect the rights of existing stockholders. If adequate funds are not available, the Company may need to delay, reduce the scope of or put on hold one or more of its clinical and/or preclinical programs.
The Company’s ability to continue its operations is dependent upon its ability to obtain additional capital in the future and achieve profitable operations. The Company expects to continue to rely on outside sources of financing to meet its capital needs and the Company may never achieve positive cash flow. These condensed consolidated financial statements do not include any adjustments to the specific amounts and classifications of assets and liabilities, which might be necessary should Inovio be unable to continue as a going concern. The Company's condensed consolidated financial statements as of and for the three and six months ended June 30, 2023 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business for the foreseeable future. The Company has evaluated subsequent events after the balance sheet date through the date it issued these condensed consolidated financial statements.
3. Critical Accounting Policies
Collaboration Agreements and Revenue Recognition
The Company assesses whether its collaboration agreements are subject to Accounting Standards Codification ("ASC") Topic 808: Collaborative Arrangements (“Topic 808”) based on whether they involve joint operating activities and whether both parties have active participation in the arrangement and are exposed to significant risks and rewards. To the extent that the arrangement falls within the scope of Topic 808 and the Company concludes that its collaboration partner is not a customer, the Company presents such payments as a reduction of research and development expense. If payments from the collaboration partner to the Company represent consideration from a customer, then the Company accounts for those payments within the scope of Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (“Topic 606”).
The Company enters into collaborative arrangements with partners that typically include payment of one or more of the following: (i) license fees; (ii) product supply services; (iii) milestone payments related to the achievement of developmental, regulatory, or commercial goals; and (iv) royalties on net sales of licensed products. Where a portion of non-refundable, upfront fees or other payments received are allocated to continuing performance obligations under the terms of a collaborative arrangement, they are recorded as deferred revenue and recognized as revenue when (or as) the underlying performance obligation is satisfied.
As part of the accounting for these arrangements, the Company must develop estimates and assumptions that require judgment of management to determine the underlying stand-alone selling price for each performance obligation which determines how the transaction price is allocated among the performance obligation. The standalone selling price may include items such as forecasted revenues, development timelines, discount rates and probabilities of technical and regulatory success. The Company evaluates each performance obligation to determine if it can be satisfied at a point in time or over time. In addition, variable consideration must be evaluated to determine if it is constrained and, therefore, excluded from the transaction price.
10
For collaboration arrangements that include license fees, the Company recognizes revenues from non-refundable, upfront fees allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses that are bundled with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.
For collaboration arrangements that include milestone payments (variable consideration), the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. This assessment is based on the Company’s past experience with its collaboration partner, market insight and partner communication. Milestone payments that are not within the Company’s or the collaboration partner’s control, such as regulatory approvals, are generally not considered probable of being achieved until those approvals are received. At the end of each subsequent reporting period, the Company re-evaluates the probability of achieving such milestones and any related constraint, and if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect license, collaboration or other revenues and earnings in the period of adjustment and could be material.
For collaboration arrangements that include sales-based royalties, including milestone payments based on the level of sales, and for which the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue in the period the underlying sales occur. To date, the Company has not recognized any royalty revenue resulting from any of its collaborative arrangements.
Research and Development Expenses - Clinical Trial Accruals
The Company's activities have largely consisted of research and development efforts related to developing its proprietary smart device technology and DNA medicine candidates. For clinical trial expenses, judgements used in estimating accruals rely on estimates of total costs incurred based on participant enrollment, completion of studies and other events. Accrued clinical trial costs are subject to revisions as trials progress. Revisions are charged to expense in the period in which the facts that give rise to the revision become known. Historically, revisions have not resulted in material changes to research and development expense; however a modification in the protocol of a clinical trial or cancellation of a trial could result in a charge to the Company's results of operations.
4. Short-term Investments and Fair Value Measurements
The following is a summary of available-for-sale securities as of June 30, 2023 and December 31, 2022:
| As of June 30, 2023 | |||||||||||||||||||||||||||||
| Contractual Maturity (in years) | Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Market Value | |||||||||||||||||||||||||
| Mutual funds | --- | $ | $ | $ | ( | $ | |||||||||||||||||||||||
| U.S. treasury securities | Less than | ||||||||||||||||||||||||||||
| Certificates of deposit | Less than | ( | |||||||||||||||||||||||||||
| U.S. agency mortgage-backed securities | * | ( | |||||||||||||||||||||||||||
| $ | $ | $ | ( | $ | |||||||||||||||||||||||||
| As of December 31, 2022 | |||||||||||||||||||||||||||||
| Contractual Maturity (in years) | Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Market Value | |||||||||||||||||||||||||
| Mutual funds | --- | $ | $ | $ | ( | $ | |||||||||||||||||||||||
| U.S. treasury securities | Less than | ( | |||||||||||||||||||||||||||
| Certificates of deposit | Less than | ( | |||||||||||||||||||||||||||
| U.S. agency mortgage-backed securities | * | ( | |||||||||||||||||||||||||||
| $ | $ | $ | ( | $ | |||||||||||||||||||||||||
*No single maturity date.
During the three and six months ended June 30, 2023, the Company recorded gross realized gains on investments of $200 and $500 , respectively, and gross realized losses on investments of $1.5 million and $3.9 million, respectively. During the three and six months ended June 30, 2022, the Company recorded gross realized gains on investments of $1,000 and $21,000 ,
11
respectively, and gross realized losses on investments of $3,000 and $342,000 , respectively. During the three and six months ended June 30, 2023, the Company recorded net unrealized gains on available-for-sale equity securities of $923,000 and $4.1 million, respectively. During the three and six months ended June 30, 2022, the Company recorded net unrealized losses on available-for-sale equity securities of $4.0 million and $8.8 million, respectively. No material balances were reclassified out of accumulated other comprehensive loss for the three and six months ended June 30, 2023 and 2022. Interest and dividends on investments classified as available-for-sale are included in interest income in the condensed consolidated statements of operations. As of June 30, 2023, the Company had 23 available-for-sale securities with an aggregate total unrealized loss of $5.6 million. Of these securities, 21 had been in a loss position for longer than 12 months as of June 30, 2023.
The Company periodically reviews its portfolio of available-for-sale debt securities to determine if any investment is impaired due to credit loss or other potential valuation concerns. For the debt securities where the fair value of the investment is less than the amortized cost basis, the Company has assessed at the individual security level for various quantitative factors including, but not limited to, the nature of the investments, changes in credit ratings, interest rate fluctuations, industry analyst reports, and the severity of impairment. Unrealized losses on available-for-sale debt securities as of June 30, 2023 were primarily due to changes in interest rates, and not due to increased credit risks associated with specific securities. Based on the credit quality of the available-for-sale debt securities that are in an unrealized loss position, and the Company’s estimates of future cash flows to be collected from those securities, the Company believes the unrealized losses are not credit losses. Accordingly, at June 30, 2023, the Company has not recorded an allowance for credit losses related to its available-for-sale debt securities.
The following table presents the Company’s assets that were measured at fair value on a recurring basis, determined using the following inputs as of June 30, 2023:
| Fair Value Measurements at | |||||||||||||||||||||||
| June 30, 2023 | |||||||||||||||||||||||
| Total | Quoted Prices in Active Markets (Level 1) | Significant Other Unobservable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||
| Short-term investments | |||||||||||||||||||||||
| Mutual funds | $ | $ | $ | $ | |||||||||||||||||||
| U.S. treasury securities | |||||||||||||||||||||||
| Certificates of deposit | |||||||||||||||||||||||
| U.S. agency mortgage-backed securities | |||||||||||||||||||||||
| Total short-term investments | |||||||||||||||||||||||
| Investment in affiliated entity | |||||||||||||||||||||||
| Total assets measured at fair value | $ | $ | $ | $ | |||||||||||||||||||
The following table presents the Company’s assets that were measured at fair value on a recurring basis, determined using the following inputs as of December 31, 2022:
| Fair Value Measurements at | |||||||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||
| Total | Quoted Prices in Active Markets (Level 1) | Significant Other Unobservable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||
| Short-term investments | |||||||||||||||||||||||
| Mutual funds | $ | $ | $ | $ | |||||||||||||||||||
| U.S. treasury securities | |||||||||||||||||||||||
| Certificates of deposit | |||||||||||||||||||||||
| U.S. agency mortgage-backed securities | |||||||||||||||||||||||
| Total short-term investments | |||||||||||||||||||||||
| Investment in affiliated entity | |||||||||||||||||||||||
| Total assets measured at fair value | $ | $ | $ | $ | |||||||||||||||||||
12
Level 1 assets at June 30, 2023 consisted of mutual funds and U.S. treasury securities held by the Company that are valued at quoted market prices, as well as the Company’s investment in its affiliated entity, PLS. The Company accounts for its investment in 597,808 common shares of PLS based on the closing price of the shares on the Korea New Exchange Market on the applicable balance sheet date. Unrealized gains and losses on the Company's equity securities are reported in the consolidated statement of operations as unrealized gain or loss on available-for-sale equity securities or as a gain or loss on investment in affiliated entity.
Level 2 assets at June 30, 2023 consisted of certificates of deposit and U.S. agency mortgage-backed securities held by the Company that are initially valued at the transaction price and subsequently valued, at the end of each reporting period, typically utilizing market observable data. The Company obtains the fair value of its Level 2 assets from a professional pricing service, which may use quoted market prices for identical or comparable instruments, or inputs other than quoted prices that are observable either directly or indirectly. The professional pricing service gathers quoted market prices and observable inputs from a variety of industry data providers. The valuation techniques used to measure the fair value of the Company's Level 2 financial instruments were derived from non-binding market consensus prices that are corroborated by observable market data, quoted market prices for similar instruments, or pricing models such as discounted cash flow techniques. The Company validates the quoted market prices provided by the primary pricing service by comparing the service's assessment of the fair values of the Company's investment portfolio balance against the fair values of the Company's investment portfolio balance obtained from an independent source.
There were no Level 3 assets held as of June 30, 2023 or December 31, 2022.
5. Certain Balance Sheet Items
Prepaid and other current assets consisted of the following:
| June 30, 2023 | December 31, 2022 | ||||||||||
| Insurance recovery (a) | $ | $ | |||||||||
| Prepaid manufacturing expenses | |||||||||||
| Other prepaid expenses | |||||||||||
| $ | $ | ||||||||||
Accounts payable and accrued expenses consisted of the following:
| June 30, 2023 | December 31, 2022 | ||||||||||
| Trade accounts payable | $ | $ | |||||||||
| Accrued compensation | |||||||||||
| Accrued litigation settlement (a) | |||||||||||
| Other accrued expenses (b) | |||||||||||
| $ | $ | ||||||||||
(a) In July 2022, the Company entered into a memorandum of understanding for the proposed settlement of the class action securities litigation described in this report under “Legal Proceedings.” The final judicial order for the settlement was issued in January 2023. The settlement consisted of $30.0 million in cash and $14.0 million in shares of the Company's common stock to settle all outstanding claims. As of December 31, 2022, the Company's insurance carriers had paid the cash component of the proposed settlement, which amounts were being held in escrow. The Company's insurance carriers paid $252,000 of other expenses on behalf of the Company, which amounts were offset against the insurers' cash commitment as part of the settlement. During the three months ended March 31, 2023, the cash component of the settlement was released from escrow and the Company issued 9,121,000 shares of common stock pursuant to the securities class action settlement.
(b) In March 2023, the Company entered into a stipulation of settlement for the proposed settlement of the shareholder derivative litigation described in this report under “Legal Proceedings.” In June 2023, the court preliminarily approved the proposed settlement. As part of the settlement, subsequent to June 30, 2023, the Company paid $1.2 million
13
6. Goodwill and Intangible Assets
The following sets forth the goodwill and intangible assets by major asset class:
| June 30, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||
| Weighted Average Useful Life (Yrs) | Gross | Accumulated Amortization | Impairment | Net Book Value | Gross | Accumulated Amortization | Net Book Value | ||||||||||||||||||||||||||||||||||||||||
| Indefinite lived: | |||||||||||||||||||||||||||||||||||||||||||||||
| Goodwill | $ | $ | — | $ | $ | $ | — | $ | |||||||||||||||||||||||||||||||||||||||
| Definite lived: | |||||||||||||||||||||||||||||||||||||||||||||||
| Licenses | ( | ||||||||||||||||||||||||||||||||||||||||||||||
| Bioject(a) | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Other(b) | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Total intangible assets | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Total goodwill and intangible assets | $ | $ | ( | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||
(a)Bioject intangible assets represented the estimated fair value of developed technology and intellectual property which were recorded from an asset acquisition.
Aggregate amortization expense on intangible assets for the three and six months ended June 30, 2023 was $2.0 million and $2.1 million, respectively. Aggregate amortization expense on intangible assets for the three and six months ended June 30, 2022 was $131,000 and $257,000 , respectively. During the three months ended June 30, 2023, the Company recorded an impairment charge of $2.0 million to research and development expense for the remaining intangible assets related to the Bioject acquisition, as it was determined that there are no current plans to develop or utilize this technology based on the latest Company strategy. There were no No
7. Convertible Debt
Convertible Senior Notes
On February 19, 2019 and March 1, 2019, the Company completed a private placement of $78.5 6.50 75.7 million.
The Notes are senior unsecured obligations of the Company and accrue interest payable in cash semi-annually in arrears on March 1 and September 1 of each year at a rate of 6.50 % per annum. The Notes will mature on March 1, 2024, unless earlier converted, redeemed or repurchased. Prior to the close of business on the business day immediately preceding November 1, 2023, the Notes will be convertible at the option of the holders only upon the satisfaction of certain circumstances. Thereafter, the Notes will be convertible at the option of the holders at any time until the close of business on the scheduled trading day immediately before the maturity date. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of its common stock or a combination of cash and shares of its common stock, at its election. The initial conversion rate was 185.8045 shares per $1,000 principal amount of Notes (equivalent to an initial conversion price of approximately $5.38 per share), subject to adjustment upon the occurrence of specified events.
The Company may redeem all, or any portion, of the Notes for cash if the last reported sale price per share of the Company's common stock exceeds 130 % of the conversion price on (i) each of at least 20 trading days (whether or not consecutive) during the 30 consecutive trading days ending on, and including, the trading day immediately before the Company sends the related redemption notice; and (ii) the trading day immediately before the date the Company sends such redemption notice. The redemption price will be equal to 100 % of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
Initially, in accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of similar debt
14
instruments, which do not have an associated convertible feature. The carrying amount of the equity component representing the conversion option for the Notes was $16.3 million and was recorded as a debt discount, which was being amortized to interest expense at an effective interest rate of 13.1 %. In addition, the Company allocated $592,000 of debt issuance costs to the equity component and the remaining debt issuance costs of $2.2 million were allocated to the liability component, which were being amortized to interest expense under the effective interest rate method.
On January 1, 2022, the Company adopted ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which is intended to simplify the accounting for convertible instruments. The ASU eliminates the cash conversion feature models in ASC 470-20, Debt with Conversion and Other Options, which required an issuer of certain convertible debt to separately account for embedded conversion features as a component of equity. Instead, an issuer will account for these securities as a single unit of account, unless the conversion feature meets certain criteria. The Company adopted the new standard using the modified retrospective method, and recorded a net reduction to accumulated deficit of $1.8 million, a decrease to additional paid-in capital of $3.3 million, and an increase to convertible senior notes of $1.5 million to reflect the impact of the accounting change. The Notes are now accounted for as a single liability measured at amortized cost, as no other embedded features require bifurcation and recognition as derivatives.
The balance of the Notes at June 30, 2023 was as follows:
| Original principal amount | $ | ||||
| Principal amount converted into common shares | ( | ||||
| Unamortized debt issuance cost | ( | ||||
| Accrued interest | |||||
| Net carrying amount | $ | ||||
For both the three and six months ended June 30, 2023 and 2022, the Company recognized $313,000 627,000 267,000 533,000
As of June 30, 2023, future minimum payments due under the Notes, representing contractual amounts due, including interest based on the fixed rate of 6.5 % per annum, were as follows:
| 2023 | ||||||||
| 2024 | ||||||||
| Total | $ | |||||||
8. Stockholders’ Equity
The following is a summary of the Company's authorized and issued common and preferred stock as of June 30, 2023 and December 31, 2022:
| Outstanding as of | |||||||||||||||||||||||
| Authorized | Issued | June 30, 2023 | December 31, 2022 | ||||||||||||||||||||
Common Stock, par value $ | |||||||||||||||||||||||
Series C Preferred Stock, par value $ | |||||||||||||||||||||||
Issuances of Common Stock
On November 9, 2021, the Company entered into an ATM Equity OfferingSM Sales Agreement (the “2021 Sales Agreement”) with outside sales agents (collectively, the “Sales Agents”) for the offer and sale of its common stock for an aggregate offering price of up to $300.0 million. The 2021 Sales Agreement provides that the Sales Agents will be entitled to compensation in an amount equal to up to 3.0 % of the gross sales proceeds of any common stock sold through the Sales Agents under the 2021 Sales Agreement. During the six months ended June 30, 2023, the Company sold 5,105,152 shares of its common stock under the 2021 Sales Agreement at a weighted average price of $0.58 per share, resulting in aggregate net proceeds of $2.9 million. As of June 30, 2023 there was $164.4 million of remaining capacity under the 2021 Sales Agreement.
15
During the three months ended March 31, 2023, the Company issued 9,121,000 shares of common stock pursuant to the securities class action settlement, as described in Note 12.
Stock Options and Restricted Stock Units
The Board of Directors adopted the 2023 Omnibus Incentive Plan (the “2023 Plan”) on March 24, 2023, pursuant to which the Company may grant stock options, restricted stock awards, restricted stock units ("RSUs") and other stock-based awards or short-term cash incentive awards to employees, directors and consultants.
The 2023 Plan was approved by stockholders on May 16, 2023. The aggregate number of shares of the Company’s common stock that may be issued under the 2023 Plan will not exceed the sum of 14,000,000 shares plus any shares that may return from time to time from the 2016 Omnibus Incentive Plan (as amended, the “2016 Plan”) as a result of expirations, terminations or forfeitures of awards outstanding under the 2016 Plan as of May 16, 2023. At June 30, 2023, the Company had 14,098,753 shares of common stock available for future grant under the 2023 Plan, 0 shares underlying outstanding RSUs and 1,875 shares underlying options outstanding to purchase common stock under the 2023 Plan. The awards granted and available for future grant under the 2023 Plan generally vest over three years and have a maximum contractual term of ten years . The 2023 Plan terminates by its terms on March 24, 2033.
At June 30, 2023, the Company had 3,545,212 shares underlying outstanding but unvested RSUs and options outstanding to purchase 13,181,949 shares of common stock under the 2016 Plan. The outstanding awards granted under the 2016 Plan generally vest over three years and have a maximum contractual term of ten years . Following adoption of the 2023 Plan, no further awards may be made under the 2016 Plan, but outstanding awards continue to be governed by their existing terms.
On June 24, 2022, the Company's board of directors adopted a stock-based incentive plan (the "2022 Inducement Plan"), which provides for the discretionary grant of nonstatutory stock options, stock appreciation rights, restricted stock awards, RSU awards, performance awards, and other awards to individuals as a material inducement to entering into employment with the Company. The aggregate number of shares of the Company’s common stock that may be issued under the 2022 Inducement Plan will not exceed 2,000,000 shares. At June 30, 2023, the Company had 1,557,500 shares of common stock available for future grant under the 2022 Inducement Plan, 120,000 shares underlying outstanding but unvested RSUs and options outstanding to purchase 287,500 shares of common stock under the 2022 Inducement Plan. The 2022 Inducement Plan can be terminated by the Company's board of directors at any time.
9. Net Loss Per Share
Basic net loss per share is computed by dividing the net loss for the period by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share is calculated in accordance with the treasury stock method for the outstanding stock options and RSUs and reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted to common stock. The dilutive impact of the outstanding Notes issued by the Company (discussed in Note 7) has been considered using the "if-converted" method. The calculation of diluted net loss per share requires that, to the extent the average market price of the underlying shares for the reporting period exceeds the exercise price of the options or other securities and the presumed exercise of such securities are dilutive to net loss per share for the period, an adjustment to the net loss used in the calculation is required to remove the change in fair value of such securities from the numerator for the period. Likewise, an adjustment to the denominator is required to reflect the related dilutive shares, if any. For the three and six months ended June 30, 2023 and 2022, basic and diluted net loss per share were the same, as the assumed exercise or settlement of stock options and RSUs and the potentially dilutive shares issuable upon conversion of the Notes would have been anti-dilutive.
16
| Three and Six Months Ended June 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Options to purchase common stock | |||||||||||
| Service-based restricted stock units | |||||||||||
| Performance-based restricted stock units | |||||||||||
| Convertible preferred stock | |||||||||||
| Convertible notes | |||||||||||
| Total | |||||||||||
10. Stock-Based Compensation
The Company incurs stock-based compensation expense related to RSUs and stock options. The fair value of restricted stock is determined by the closing price of the Company's common stock reported on the Nasdaq Global Select Market on the date of grant. The Company estimates the fair value of stock options granted using the Black-Scholes option pricing model. The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of subjective assumptions, including the expected stock price volatility and expected option life. The Company amortizes the fair value of the awards on a straight-line basis over the requisite vesting period of the awards. Expected volatility is based on historical volatility. The expected life of options granted is based on historical expected life. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant. The dividend yield is based on the fact that no dividends have been paid historically and none are currently expected to be paid in the foreseeable future. The Company recognizes forfeitures as they occur.
The weighted average assumptions used in the Black-Scholes model for option grants to employees and directors are presented below:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Risk-free interest rate | |||||||||||||||||||||||
| Expected volatility | |||||||||||||||||||||||
| Expected life in years | |||||||||||||||||||||||
| Dividend yield | |||||||||||||||||||||||
Total employee and director stock-based compensation expense recognized in the condensed consolidated statements of operations for the three and six months ended June 30, 2023 was $2.8 million and $6.4 million, respectively, of which $1.3 million and $2.7 million, respectively, was included in research and development expenses, and $1.5 million and $3.7 million, respectively, was included in general and administrative expenses. Total employee and director stock-based compensation expense recognized in the condensed consolidated statements of operations for the three and six months ended June 30, 2022 was $8.8 million and $16.0 million, respectively, of which $2.2 million and $5.9 million, respectively, was included in research and development expenses, and $6.6 million and $10.1 million, respectively, was included in general and administrative expenses.
At June 30, 2023, there was $8.7 million of total unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted-average period of 1.6 years.
The weighted average grant date fair value per share, calculated using the Black-Scholes option pricing model, was $0.60 and $0.94 for employee and director stock options granted during the three and six months ended June 30, 2023, respectively, and $1.66 and $2.35 for the three and six months ended June 30, 2022, respectively.
At June 30, 2023, there was $6.3 million of total unrecognized compensation expense related to unvested service-based RSUs, which is expected to be recognized over a weighted-average period of 1.7 years.
The weighted average grant date fair value per share was $0.77 and $0.86 for service-based RSUs granted during the three and six months ended June 30, 2023, respectively, and $2.14 and $3.12 for the three and six months ended June 30, 2022, respectively.
The fair value of stock options granted to non-employees was estimated using the Black-Scholes pricing model. Total stock-based compensation expense for stock options and RSUs granted to non-employees for the three and six months ended June 30, 2023 was $146,000 and $366,000 , respectively. Total stock-based compensation expense for stock options and RSUs granted to non-employees for the three and six months ended June 30, 2022 was $415,000 and $965,000 , respectively.
17
11. Related Party Transactions
Plumbline Life Sciences, Inc.
The Company owned 597,808 shares of common stock in PLS as of June 30, 2023, representing an 18.7 % ownership interest, and one of the Company's directors, Dr. David B. Weiner, acts as a consultant to PLS.
Revenue recognized from PLS consists of milestone, license and patent fees. For both the three and six months ended June 30, 2023, the Company recognized no 6,000 and $15,000 , respectively. At each of June 30, 2023 and December 31, 2022, the Company had an accounts receivable balance of $59,000
The Wistar Institute
The Company's director Dr. David B. Weiner is a director of the Vaccine Center of The Wistar Institute ("Wistar"). Dr. Weiner is also the Executive Vice President of Wistar.
In March 2016, the Company entered into collaborative research agreements with Wistar for preventive and therapeutic DNA-based immunotherapy applications and products developed by Dr. Weiner and Wistar for the treatment of cancers and infectious diseases. Under the terms of the agreement, the Company reimbursed Wistar for all direct and indirect costs incurred in the conduct of the collaborative research, not to exceed $3.1 million during the five-year term of the agreements. In March 2021, upon expiration of the March 2016 agreements, the Company entered into new collaborative research agreements with Wistar with the same terms. The Company has the exclusive right to in-license new intellectual property developed under this agreement.
In 2020, the Company received a $10.7 million sub-grant through Wistar, which was amended in 2021 to $13.6 million, for the preclinical development and translational studies of dMAbs as countermeasures for COVID-19, with funding extended through August 2024. The sub-grant also includes an option for an additional $1.6 million in funding through September 2025.
In December 2022, the Company received a $1.2 million sub-grant through Wistar with funding through November 2023, with an option for an additional $5.4 million in funding through November 2027. The Company will support the Wistar lead consortium in the research and development of synthetic DNA-launched immunogens for HIV.
Deferred grant funding recognized from Wistar and recorded as contra-research and development expense is related to work performed by the Company on the research sub-contract agreements. For the three and six months ended June 30, 2023, the Company recorded $179,000 and $390,000 , respectively, and for the three and six months ended June 30, 2022 the Company recorded $3.9 million and $5.4 million, respectively, as contra-research and development expense from Wistar.
Research and development expenses recorded from Wistar relate primarily to the collaborative research agreements and sub-contract agreements related to Gates and CEPI (see Note 13). Research and development expenses recorded from Wistar for the three and six months ended June 30, 2023 were $510,000 and $932,000 , respectively. Research and development expenses recorded from Wistar for the three and six months ended June 30, 2022 were $444,000 and $626,000 , respectively. At June 30, 2023 and December 31, 2022, the Company had an accounts receivable balance of $5.0 million and $9.9 million, respectively, and an accounts payable and accrued liability balance of $1.7 million and $1.2 million, respectively, related to Wistar. As of June 30, 2023, the Company recorded $44,000 as deferred grant funding and $12,000 as prepaid expenses on the condensed consolidated balance sheet related to Wistar.
12. Commitments and Contingencies
Leases
The Company leases approximately 82,200 square feet of office, laboratory, and manufacturing space in San Diego, California and 57,360 square feet of office space in Plymouth Meeting, Pennsylvania under various non-cancellable operating lease agreements with remaining lease terms as of June 30, 2023 of 0.4 to 6.5 years, which represent the non-cancellable periods of the leases. The Company has excluded the extension options from its lease terms in the calculation of future lease payments as they are not reasonably certain to be exercised. The Company's lease payments consist primarily of fixed rental payments for the right to use the underlying leased assets over the lease terms as well as payments for common area maintenance and administrative services. The Company has received customary incentives from its landlords, such as reimbursements for tenant improvements and rent abatement periods, which effectively reduce the total lease payments owed for these leases.
The Company performed an evaluation of its contracts with customers and suppliers in accordance with ASC Topic 842 and determined that, except for the real estate leases described above and various copier leases, none of its other contracts contain a right-of-use asset.
18
Operating lease right-of-use assets and liabilities on the condensed consolidated balance sheet represents the present value of the remaining lease payments over the remaining lease terms. Payments for additional monthly fees to cover the Company's share of certain facility expenses are not included in operating lease right-of-use assets and liabilities. The Company uses its incremental borrowing rate to calculate the present value of its lease payments, as the implicit rates in the leases are not readily determinable.
As of June 30, 2023, the maturities of the Company's operating lease liabilities were as follows:
| Remainder of 2023 | $ | ||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| Thereafter | |||||
| Total remaining lease payments | |||||
| Less: present value adjustment | ( | ||||
| Total operating lease liabilities | |||||
| Less: current portion | ( | ||||
| Long-term operating lease liabilities | $ | ||||
| Weighted-average remaining lease term | |||||
| Weighted-average discount rate | |||||
Lease costs included in operating expenses in the condensed consolidated statements of operations for the three and six months ended June 30, 2023 were $856,000 and $1.7 million, respectively. Lease costs included in operating expenses in the condensed consolidated statements of operations for the three and six months ended June 30, 2022 were $851,000 and $1.7 million, respectively. Operating lease costs consisting of the fixed lease payments included in operating lease liabilities are recorded on a straight-line basis over the lease terms. Variable lease costs are recorded as incurred.
In the fourth quarter of 2019, the Company entered into two agreements to sublease a total of approximately 13,500 square feet in its Plymouth Meeting headquarters with one period through March 31, 2025 and the other month-to-month after December 31, 2022.
In the normal course of business, the Company is a party to a variety of agreements pursuant to which it may be obligated to indemnify the other party. It is not possible to predict the maximum potential amount of future payments under these types of agreements due to the conditional nature of the Company's obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the Company under these types of agreements have not had a material effect on its business, consolidated results of operations or financial condition.
Legal Proceedings
Securities Litigation
On March 12, 2020, a purported shareholder class action complaint, McDermid v. Inovio Pharmaceuticals, Inc. and J. Joseph Kim, was filed in the United States District Court for the Eastern District of Pennsylvania, naming the Company and its former President and Chief Executive Officer as defendants. The lawsuit alleged that the Company made materially false and misleading statements in violation of certain federal securities laws. The plaintiffs sought unspecified monetary damages on behalf of the putative class and an award of costs and expenses, including reasonable attorneys’ fees. The plaintiffs’ complaint was later amended to include certain of the Company’s other officers as defendants. After additional motions were filed in the case, in June 2022 the parties negotiated an agreement in principle to settle the shareholder class action complaint, which was approved by the court in January 2023. Under the settlement, the Company agreed to pay $30.0 million in cash and $14.0 million in shares of its common stock to settle all outstanding claims. The Company's insurance carriers paid the $30.0 million cash component of the settlement. During the three months ended March 31, 2023, the Company issued 9,121,000 shares of common stock pursuant to the securities class action settlement.
Shareholder Derivative Litigation
On April 20, 2020, a purported shareholder derivative complaint, Behesti v. Kim, et al., was filed in the United States District Court for the Eastern District of Pennsylvania, naming eight current and former directors of the Company as
19
defendants. The lawsuit asserted state and federal claims and was based on the same alleged misstatements as the shareholder class action complaint described above. The lawsuit accused the Company’s board of directors of failing to exercise reasonable and prudent supervision over the Company’s management, policies, practices, and internal controls. The plaintiff sought unspecified monetary damages on behalf of the Company as well as governance reforms. On June 5, 2020, the court stayed the Beheshti action. On June 12, 2020 and June 15, 2020, two additional shareholder derivative complaints were filed in the United States District Court for the Eastern District of Pennsylvania, captioned Isman v. Benito, et al. and Devarakonda et al. v Kim, et. al. The complaints asserted substantially similar claims as the Beheshti action and named the Company’s current directors as defendants. The Devarakonda complaint also named one of the Company’s former directors as a defendant. On July 21, 2020, the court consolidated the three derivative cases under the caption In re Inovio Pharmaceuticals, Inc. Derivative Litigation.
On July 7, 2020, a fourth shareholder derivative complaint, Fettig v. Kim et al., was filed in the United States District Court for the Eastern District of Pennsylvania, naming eight current and former directors of the Company as defendants. The complaint asserted substantially similar claims as those in the consolidated derivative action. On August 27, 2020, the Fettig action was consolidated with the other derivative cases.
On March 28, 2022, a fifth shareholder derivative complaint, Schumacher v. Benito et al., was filed in the Delaware Court of Chancery, naming eight current and former directors as defendants. The complaint asserted substantially similar claims as those in the consolidated derivative action. On May 4, 2022, the Delaware Court of Chancery entered a stay of the litigation.
On March 17, 2023, the parties submitted a joint status report to the Court of Chancery reporting that the parties agreed to a settlement in principle, which also provided for the resolution of the consolidated derivative action and certain stockholder demands.
On April 19, 2023, the plaintiffs in the consolidated derivative action filed a motion for preliminary approval of settlement with the United States District Court for the Eastern District of Pennsylvania. The proposed settlement provides for resolution of the consolidated derivative action, the derivative action pending in the Delaware Court of Chancery, and certain stockholder demands.
On June 14, 2023, the court entered an order preliminarily approving the proposed settlement of the derivative claims, in accordance with a Stipulation of Settlement dated March 31, 2023. The order also approved the form and manner of the notice of the Settlement and set October 11, 2023 as the date for a settlement hearing to determine, among other things, whether the terms of the Stipulation should be approved as fair, reasonable and adequate. The Stipulation of Settlement contemplates that, following the settlement hearing and the final approval of the settlement by the court, the Company will implement certain corporate governance reforms described in the Stipulation of Settlement. In addition, as part of the Settlement, subsequent to June 30, 2023, the Company paid $1.2 million to plaintiffs’ counsel for their fees and expenses, which amount remains subject to final court approval.
VGXI Litigation
On June 3, 2020, the Company filed a complaint in the Court of Common Pleas of Montgomery County, Pennsylvania against VGXI, Inc. and GeneOne Life Science, Inc., or GeneOne, and together with VGXI, Inc. collectively referred to as VGXI, alleging that VGXI had materially breached the Company’s supply agreement with them. The complaint seeks declaratory judgments, specific performance of the agreement, injunctive relief, an accounting, damages, attorneys’ fees, interest, costs and other relief from VGXI. On June 3, 2020, the Company filed a petition for preliminary injunction, which was denied on June 25, 2020. On June 26, 2020, the Company filed notice of appeal of the denial of the petition with the Pennsylvania Superior Court.
On July 7, 2020, VGXI filed an answer, new matter and counterclaims against the Company, alleging that the Company had breached the supply agreement, as well as misappropriation of trade secrets and unjust enrichment. The counterclaims seek injunctive relief, damages, attorneys’ fees, interest, costs and other relief from the Company. Also, on July 7, 2020, VGXI filed a third-party complaint against Ology Bioservices, Inc., a contract manufacturing organization that the Company had engaged to provide services similar to those that were being provided by VGXI. On July 27, 2020, the Company filed an answer to VGXI’s counterclaims, disputing the allegations and the claims raised in VGXI’s filing. On October 1, 2020, the Company filed a notice of discontinuance of appeal with the Pennsylvania Superior Court. A trial date for the litigation has not been set.
The Company intends to aggressively prosecute the claims set forth in its complaint against VGXI and to vigorously defend itself against VGXI’s counterclaims.
GeneOne Litigation
On December 7, 2020, GeneOne filed a complaint in the Court of Common Pleas of Montgomery County, Pennsylvania against the Company, alleging that the Company had breached the CELLECTRA Device License Agreement, or the Agreement, between the Company and GeneOne. The Company terminated the Agreement on October 9, 2020. The complaint asserts claims for breach of contract, declaratory judgment, unfair competition, and unjust enrichment. The complaint seeks injunctive relief, an accounting, damages, disgorgement of profits, attorneys’ fees, interest, and other relief from the Company.
20
On January 29, 2021, the Company filed preliminary objections to the complaint. On August 23, 2021, the court overruled the Company’s preliminary objections to the complaint. On September 13, 2021, the Company filed an answer to the complaint, new matter, and counterclaims. The Company’s counterclaims allege that GeneOne breached the Agreement and assert claims for breach of contract and declaratory judgment. The counterclaims seek damages, interest, expenses, attorney’s fees, and costs. On October 18, 2021, GeneOne filed its answer to the Company’s counterclaims and new matter. On November 8, 2021, we filed our answer to GeneOne’s new matter. A trial date for this litigation has not been set.
The Company intends to aggressively prosecute the claims set forth in its counterclaims against GeneOne and to vigorously defend itself against the claims in GeneOne’s complaint.
Other Matters
From time to time, the Company may be involved in disputes, including litigation, relating to claims arising out of operations in the normal course of its business. Any of these claims could subject the Company to costly legal expenses and, while the Company generally believes that it has adequate insurance to cover many different types of liabilities, its insurance carriers may deny coverage or its policy limits may be inadequate to fully satisfy any damage awards or settlements. If this were to happen, the payment of any such awards could have a material adverse effect on the Company's consolidated results of operations and financial position. Additionally, any such claims, whether or not successful, could damage the Company's reputation and business. Except as described above, the Company is not a party to any legal proceedings, the adverse outcome of which, in management’s opinion, individually or in the aggregate, would be reasonably expected to have a material adverse effect on the Company’s consolidated results of operations or financial position.
13. Collaborative Agreements
Advaccine Biopharmaceuticals Suzhou Co., Ltd.
On December 31, 2020, the Company entered into a Collaboration and License Agreement with Advaccine Biopharmaceuticals Suzhou Co., Ltd. (“Advaccine”), which was amended and restated on June 7, 2021 (as amended and restated, the “Advaccine Agreement”). Under the terms of the Advaccine Agreement, the Company granted to Advaccine the exclusive right to develop, manufacture and commercialize the Company’s vaccine candidate INO-4800 within the territories of China, Taiwan, Hong Kong and Macau (referred to collectively as “Greater China”) and 33 additional countries in Asia. Advaccine does not have the right to grant sublicenses, other than to affiliated entities, without the Company’s express prior written consent. As part of the collaboration, Advaccine also granted to the Company a non-exclusive license to certain DNA vaccine manufacturing processes.
The June 2021 amendment related to a collaboration between the Company and Advaccine to jointly conduct a global Phase 3 segment of the Company’s clinical trial of INO-4800 that was planned. The parties were jointly participating in the trial and were to equally share the global development costs for the trial, including the Company’s manufacturing costs to supply INO-4800. Advaccine agreed to be fully responsible for conducting the trial in Greater China, including its costs and expenses incurred. In the fourth quarter of 2022, the Company discontinued its internally funded efforts to develop INO-4800 as a COVID-19 heterologous booster vaccine. Advaccine will continue to develop INO-4800 with its own resources under the terms of the Advaccine Agreement.
Under the Advaccine Agreement, Advaccine made an upfront payment to the Company of $3.0 million in January 2021. In addition to the upfront payment, the Company is entitled to receive up to an aggregate of $200.0 million upon the achievement of specified milestones related to the development, regulatory approval and commercialization of INO-4800, including the achievement of specified net sales thresholds for INO-4800 in Greater China and the additional covered territories, if approved. The Company will also be entitled to receive a royalty equal to a high single-digit percentage of annual net sales in each region within the licensed territory, subject to reduction in the event of competition from biosimilar products in a particular region and in other specified circumstances. Advaccine’s obligation to pay royalties will continue, on a licensed product-by-licensed product basis and region-by-region basis, for ten years after the first commercial sale in a particular region within Greater China or, if later, until the expiration of the last-to-expire patent covering a given licensed product in a given region.
Beginning in the first calendar year following the first commercial sale of INO-4800 in the licensed territory outside of Greater China, Advaccine will pay the Company an annual maintenance fee of $1.5 million for a period of five years , which fee will be creditable against any royalties payable by Advaccine with respect to sales outside of Greater China.
Under the Advaccine Agreement, the Company will supply Advaccine’s clinical requirements of INO-4800 and devices, although Advaccine may manufacture INO-4800 for its clinical use and may procure alternate suppliers. Advaccine is responsible for the manufacture and supply of INO-4800 itself or through a contract manufacturer for commercial use. Upon Advaccine’s reasonable request, the parties may negotiate a separate clinical and/or commercial supply agreement.
21
The Advaccine Agreement will continue in force on a region-by-region basis until Advaccine has no remaining royalty obligations in such region. Either party may terminate the Advaccine Agreement (i) in the event the other party shall have materially breached its obligations thereunder and such default shall have continued for a specified period after written notice thereof or (ii) upon the bankruptcy or insolvency of the other party. In addition, the Company may terminate the agreement, upon prior written notice, if Advaccine (i) ceases all development or commercialization activities for at least nine months, subject to certain exceptions, or (ii) challenges the validity, enforceability or scope of any of the patents licensed by the Company to Advaccine under the Advaccine Agreement, subject to certain conditions. Advaccine may terminate the Advaccine Agreement at any time for convenience upon nine months’ written notice to the Company, if such notice is provided before the first commercial sale of INO-4800 in the licensed territory, or 18 months’ written notice thereafter; provided that the Company may accelerate the effectiveness of such termination to the extent permitted by law.
The Company evaluated the terms of the Advaccine Agreement under ASC Topics 606 and 808 at inception and determined that the contract was with a customer and therefore should be accounted for under ASC Topic 606. The license to INO-4800 in the territories was identified as the only distinct performance obligation on a standalone basis as of the inception of the Advaccine Agreement. The Company concluded that the license was distinct from potential future manufacturing and supply obligations. The Company further determined that the transaction price under the Advaccine Agreement consisted of the $3.0 million upfront payment received in January 2021 plus a $2.0 million milestone payment which was achieved upon contract signing. The future potential milestone amounts were not included in the transaction price, as they were all determined to be fully constrained. As part of the evaluation of the development and regulatory milestones constraint, the Company determined that the achievement of such milestones is contingent upon success in future clinical trials and regulatory approvals, each of which is uncertain. Future potential milestone amounts may be recognized as revenue under the Advaccine Agreement, as well as under other collaborative research and development arrangements, if unconstrained. Reimbursable program costs will be recognized proportionately with the performance of the underlying services or delivery of drug supply and are excluded from the transaction price.
Under Topic 606, the entire transaction price of $5.0 million was allocated to the license performance obligation. For each of the three and six months ended June 30, 2023 and 2022, no
In connection with the June 2021 amendment, the Company determined that the global Phase 3 trial component of the agreement was a collaboration and not a contract with a customer and therefore accounted for the June 2021 amendment under ASC Topic 808. Reimbursements from Advaccine were recognized as contra-research development expense on the condensed consolidated statement of operations once earned and collectibility was assured. For the three and six months ended June 30, 2023, the Company received funding of $1.2 million and $2.4 million, respectively, from Advaccine that was recorded as contra-research and development expense. No
ApolloBio Corporation
On December 29, 2017, the Company entered into an Amended and Restated License and Collaboration Agreement (the "ApolloBio Agreement"), with ApolloBio Corporation ("ApolloBio"), with an effective date of March 20, 2018. Under the terms of the ApolloBio Agreement, the Company has granted to ApolloBio the exclusive right to develop and commercialize VGX-3100, its DNA immunotherapy product candidate designed to treat pre-cancers caused by HPV, within the agreed upon territories.
The Company is entitled to receive up to an aggregate of $20.0 million, less required income, withholding or other taxes, upon the achievement of specified milestones related to the regulatory approval of VGX-3100 in accordance with the ApolloBio Agreement. In the event that VGX-3100 is approved for marketing, the Company will be entitled to receive royalty payments based on a tiered percentage of annual net sales, with such percentage being in the low- to mid-teens, subject to reduction in the event of generic competition in a particular territory. ApolloBio’s obligation to pay royalties will continue for 10 years after the first commercial sale in a particular territory or, if later, until the expiration of the last-to-expire patent covering the licensed products in the specified territory.
The ApolloBio Agreement will continue in force until ApolloBio has no remaining royalty obligations. Either party may terminate the ApolloBio Agreement in the event the other party shall materially breach or default in the performance of its material obligations thereunder and such default continues for a specified period after written notice thereof. In addition, ApolloBio may terminate the ApolloBio Agreement at any time beginning one year after the effective date for any reason upon 90 days written notice to the Company.
As of June 30, 2023 there have been no significant reimbursable program costs under the ApolloBio Agreement.
Coalition for Epidemic Preparedness Innovations
The Company previously entered into agreements with CEPI, pursuant to which the Company intended to develop vaccine candidates against Lassa fever and MERS. The goal of the collaboration between the Company and CEPI was to conduct research and development so that investigational stockpiles would be ready for clinical efficacy trial testing during
22
potential disease outbreaks. The agreements with CEPI contemplated preclinical studies, as well as Phase 1 and Phase 2 clinical trials, occurring over multiple years. As part of the arrangement between the parties, CEPI agreed to fund up to an aggregate of $56 million of costs over a five-year period for preclinical studies, as well as planned Phase 1 and Phase 2 clinical trials, to be conducted by the Company and collaborators, with funding from CEPI based on the achievement of identified milestones. During the three and six months ended June 30, 2023, the Company received funding of $303,000 and $1.9 million, respectively, related to these grants and recorded those payments as contra-research and development expense. During the three and six months ended June 30, 2022, the Company received funding of $3.2 million and $5.2 million, respectively, related to these grants and recorded those payments as contra-research and development expense. As of June 30, 2023, the Company had $1.5 million recorded as deferred grant funding on the condensed consolidated balance sheet related to these CEPI grants.
In November 2022, the Company announced that it and CEPI would discontinue the development of these product candidates targeting Lassa fever and MERS, following the initial analysis of data from the studies conducted by the Company and funded by CEPI.
In January 2020, CEPI awarded the Company a grant of up to $9.0 million to support preclinical and clinical development of INO-4800 through Phase 1 human testing in the United States. In April 2020, CEPI awarded the Company a grant of $6.9 million to work with the International Vaccine Institute ("IVI") and the Korea National Institute of Health ("KNIH") to conduct clinical trials of INO-4800 in South Korea, a grant of $5.0 million to accelerate development of the Company's next-generation intradermal electroporation device, known as CELLECTRA® 3PSP, for the intradermal delivery of INO-4800, and a grant of $1.3 million to support large-scale manufacturing of INO-4800. During the three and six months ended June 30, 2023, the Company received funding of $135,000 and $188,000 , respectively, from CEPI related to these grants for INO-4800 and recorded such amounts as contra-research and development expense. During the three and six months ended June 30, 2022, the Company received funding of $243,000 and $754,000 , respectively, from CEPI related to these grants for INO-4800 and recorded such amounts as contra-research and development expense. As of June 30, 2023, the Company had $2.2 million recorded as deferred grant funding on the condensed consolidated balance sheet from the CEPI grants related to INO-4800.
Bill & Melinda Gates Foundation
In October 2018, Gates awarded and funded the Company a grant of $2.2 million to advance the development of dMAbs to address issues in infectious disease prevention and therapy. This technology has high relevance for the control of influenza and HIV. This next-generation approach to the delivery of monoclonal antibodies would make the technology accessible to low and middle-income countries. In August 2019, Gates funded an additional $1.1 million for the project. During the three and six months ended June 30, 2023, the Company recorded $12,000 and $70,000 , respectively, as contra-research and development expense related to the Gates dMAb grant. During the three and six months ended June 30, 2022, the Company recorded $6,000 and $86,000 , respectively, as contra-research and development expense related to the Gates dMAb grant. As of June 30, 2023, the Company had $86,000 recorded as deferred grant funding on the condensed consolidated balance sheet related to the grant.
Department of Defense (DoD)
In June 2020, the Company entered into an Other Transaction Authority for Prototype Agreement (the “OTA Agreement”) with the DoD to fund the Company’s efforts in developing the CELLECTRA® 3PSP device and associated arrays to be used for delivery of INO-4800 against COVID-19. The total amount of funding provided to the Company under the OTA Agreement was $54.5 million. The Company determined that the OTA Agreement should be considered under Subtopic 958-605, Not-for-Profit Entities Revenue Recognition, which is outside the scope of Topic 606, as the government agency granting the Company funds was not receiving reciprocal value for their contributions. The Company recorded contra-research development expense on the condensed consolidated statement of operations in the same period that the underlying expenses were incurred. During the three and six months ended June 30, 2022, the Company recorded $2.9 million and $6.1 million, respectively, as contra-research and development expense related to the OTA Agreement. No
Additionally, in June 2020, the Company was awarded a fixed-price contract (the “Procurement Contract”) from the DoD for the purchase of the Company’s intradermal CELLECTRA® 2000 device and accessories. The total purchase price under the Procurement Contract was $16.8 million. The Company determined that the Procurement Contract fell under the scope of ASC Topic 606 as the contract was with a customer and the Company was able to satisfy its obligations under the arrangement. Performance obligations under the Procurement Contract consisted of the delivery of a specified number of CELLECTRA® 2000 devices and accessories. The total transaction price was allocated to the individual performance obligations based on the determined standalone selling price for the devices and accessories. In 2021, the DoD discontinued funding for the Phase 3 segment of the Company's clinical trials for INO-4800 and in January 2022, the total purchase price under the Procurement Contract was reduced to $10.7 million. All performance obligations under the Procurement Contract have been satisfied. During each of the three and six months ended June 30, 2022, the Company recorded revenue of $625,000 No
23
14. Income Taxes
15. Geneos Therapeutics, Inc.
In 2016, the Company formed Geneos to develop and commercialize neoantigen-based personalized cancer therapies. Geneos was considered a variable interest entity (VIE) for which the Company was the primary beneficiary. The Company's Chief Scientific Officer Dr. Laurent Humeau is on the Board of Directors of Geneos. The Company's director Dr. David B. Weiner is the Chairman of the Scientific Advisory Board of Geneos.
In 2019, Geneos completed the initial closing of a Series A preferred stock financing. The Company invested $1.2 million in the Series A preferred stock financing, which was led by an outside investor. Following this transaction, the Company held 61 % of the outstanding equity, on an as-converted to common stock basis, of Geneos and continued to consolidate its investment in Geneos under ASC 810, Consolidation.
In January 2020, Geneos completed the second closing of the Series A preferred stock financing, in which the Company invested $800,000 . Following this transaction, the Company held 52 % of the outstanding equity, on an as-converted to common stock basis, of Geneos and continued to consolidate its investment in Geneos.
In June 2020, Geneos closed an additional Series A preferred stock financing round, in which the Company invested $800,000 . Following this transaction, the Company owned 47 % of the outstanding equity of Geneos on an as-converted to common stock basis. This transaction triggered a VIE reconsideration, as the Company no longer held a controlling financial interest. Based on the Company’s assessment, Geneos continued to be a VIE as it did not have sufficient equity at risk to finance its activities without additional subordinated financial support. However, the Company was not the primary beneficiary of Geneos, as it did not have the power to direct the activities that most significantly impact Geneos’ economic performance. Accordingly, the Company deconsolidated its investment in Geneos as of June 1, 2020, resulting in a gain of $4.1 million, of which $2.4 million related to the remeasurement of the retained noncontrolling interest investment to fair value.
The Company applies the equity method to investments in common stock and to other investments in entities that have risk and reward characteristics that are substantially similar to an investment in the investee’s common stock. Since the Company’s Series A preferred stock investment in Geneos has a substantive liquidation preference, it is not substantially similar to the Company’s common stock investment and will therefore be recorded as an equity security under ASC 321.
Following the deconsolidation, the Company accounts for its common stock investment in Geneos, in which the Company lacks control but does have the ability to exercise significant influence over operating and financial policies, using the equity method. Generally, the ability to exercise significant influence is presumed when the investor possesses more than 20% of the voting interests of the investee. This presumption may be overcome based on specific facts and circumstances that demonstrate that the ability to exercise significant influence is restricted. In applying the equity method, the Company records the investment at cost unless the initial recognition is the result of the deconsolidation of a subsidiary, in which case it is recorded at fair value. The Company's proportionate share of net loss of Geneos is recorded in equity in net earnings of Geneos in the Company's condensed consolidated statements of operations. The Company's equity method investments are reviewed for indicators of impairment at each reporting period and are written down to fair value if there is evidence of a loss in value that is other-than-temporary. Any difference between the carrying amount of the Company’s investment and the amount of underlying equity in Geneos’ net assets is amortized into income or expense accordingly. There were no basis differences identified as of the deconsolidation date that would need to be amortized.
Upon deconsolidation, the Company recorded its Series A preferred stock investment at fair value based on the per share price paid by third party investors in connection with the preferred stock financing on June 1, 2020. The Company determined that its Series A preferred stock investment in Geneos does not have a readily determinable fair value and has therefore elected the measurement alternative in ASC 321 to subsequently record the investment at cost, less any impairments, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. When fair value becomes determinable, from observable price changes in orderly transactions, the Company’s
24
investment will be marked to fair value. There have been no observable price changes or impairments identified since the deconsolidation date.
In November 2020, Geneos completed the closing of a Series A-1 preferred stock financing. The Company invested $1.4 million in the Series A-1 preferred stock financing, which was led by outside investors. The closing date of this transaction was determined to be a VIE reconsideration event; based on the Company’s assessment, Geneos continued to be a VIE as it did not have sufficient equity at risk to finance its activities without additional subordinated financial support. The Company continued to not be the primary beneficiary of Geneos, as it did not have the power to direct the activities that most significantly impact Geneos’s economic performance and should not consolidate Geneos. Following this transaction, the Company held approximately 36 % of the outstanding equity, on an as-converted to common stock basis. Accordingly, the Company continued to account for its common stock investment in Geneos as an equity method investment under ASC 323 and its preferred stock investments as equity securities under ASC 321.
The Company’s share of net losses of Geneos for the three months ended March 31, 2021 was $1.5 million; however, only $434,000 was recorded, reducing the Company's total investment in Geneos to $0 . Of the total amount, $819,000 has been allocated to the equity method investment, thereby reducing the balance to $0 as of March 31, 2021. The remaining $4.2 million loss has been allocated to the Company’s Series A and Series A-1 preferred stock investment in Geneos, on a ratable basis, thereby reducing the balance to $0 as of March 31, 2021.
In February 2021, Geneos completed a second closing of the Series A-1 preferred stock financing, in which the Company did not participate. Following this transaction, the Company held approximately 35 % of the outstanding equity, on an as-converted to common stock basis.
In March 2022, Geneos completed the closing of a Series A-2 preferred stock financing. The Company invested $2.0 million in the Series A-2 preferred stock financing, which was led by outside investors. The closing date of this transaction was determined to be a VIE reconsideration event; based on the Company’s assessment, Geneos continued to be a VIE as it did not have sufficient equity at risk to finance its activities without additional subordinated financial support. The Company continued to not be the primary beneficiary of Geneos, as it did not have the power to direct the activities that most significantly impact Geneos’s economic performance and should not consolidate Geneos. Following this transaction, the Company held approximately 28 % of the outstanding equity, on an as-converted to common stock basis. Accordingly, the Company continued to account for its common stock investment in Geneos as an equity method investment under ASC 323 and its preferred stock investments as equity securities under ASC 321.
The fair value of Geneos’s Series A-2 preferred stock was based on the per share price paid by third-party investors in connection with the closing on March 21, 2022. The Company concluded that its Series A-2 preferred stock investment is a similar financial instrument as its Series A-1 preferred stock, and therefore remeasured the carrying value of the Series A-1 preferred stock investment at the Series A-2 preferred stock price, resulting in a gain on remeasurement of $165,000 .
The Company recorded its current and accumulated share of net losses of Geneos of $2.2 million, which was allocated to the Series A-1 and Series A-2 preferred stock investment in Geneos, thereby reducing the balance to $0 as of March 31, 2022 as shown in the table below:
| Investment in Geneos Series A-2 preferred stock | $ | |||||||
| Remeasurement of Geneos Series A-1 preferred stock | ||||||||
| Share in current and accumulated net loss of Geneos for the three months ended March 31, 2022 | ( | |||||||
| Investment in Geneos as of March 31, 2022 | $ | |||||||
The Company has not made any further investment in Geneos subsequent to March 31, 2022. The Company will not reduce its investment below $0 and will not record its share of further net losses of Geneos as the Company has no obligation to fund Geneos.
In March 2023, Geneos completed the closing of a Series A-3 preferred stock financing, in which the Company did not participate. Following this transaction, the Company held approximately 26 % of the outstanding equity of Geneos on an as-converted to common stock basis.
16. Subsequent Events
25
26
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report contains forward-looking statements, as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially.
Although we believe that the expectations reflected in the forward-looking statements are reasonable based on our current expectations and projections, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we, nor any other person, assume responsibility for the accuracy and completeness of the forward-looking statements. We are under no obligation to update any of the forward-looking statements after the filing of this Quarterly Report to conform such statements to actual results or to changes in our expectations.
The following discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes and other financial information appearing elsewhere in this Quarterly Report and our audited consolidated financial statements and related notes for the year ended December 31, 2022 included in our Annual Report on Form 10-K, or 2022 Annual Report, filed with the U.S. Securities and Exchange Commission, or SEC, on March 1, 2023. Readers are also urged to carefully review and consider the various disclosures made by us that attempt to advise interested parties of the factors that affect our business, including without limitation the disclosures made in Item 1A of Part II of this Quarterly Report under the captions “Risk Factors” and “Management's Discussion and Analysis of Financial Condition and Results of Operations,” and the disclosures made in our 2022 Annual Report under the caption “Risk Factors” and in our audited consolidated financial statements and related notes.
Risk factors that could cause actual results to differ from those contained in the forward-looking statements include but are not limited to: our history of losses; our lack of products that have received regulatory approval; uncertainties inherent in clinical trials and product development programs, including but not limited to the fact that preclinical and clinical results may not be indicative of results achievable in other trials or for other indications, that the studies or trials may not be successful or achieve desired results, that preclinical studies and clinical trials may not commence, have sufficient enrollment or be completed in the time periods anticipated, that results from one study may not necessarily be reflected or supported by the results of other similar studies, that results from an animal study may not be indicative of results achievable in human studies, that clinical testing is expensive and can take many years to complete, that the outcome of any clinical trial is uncertain and failure can occur at any time during the clinical trial process, and that our proprietary smart device technology and DNA medicine candidates may fail to show the desired safety and efficacy traits in clinical trials; the availability of funding; the ability to manufacture our DNA medicine candidates; the availability or potential availability of alternative therapies or treatments for the conditions targeted by us or our collaborators, including alternatives that may be more efficacious or cost-effective than any therapy or treatment that we and our collaborators hope to develop; our ability to receive development, regulatory and commercialization event-based payments under our collaborative agreements; whether our proprietary rights are enforceable or defensible or infringe or allegedly infringe on rights of others or can withstand claims of invalidity; and the impact of government healthcare laws and proposals.
Overview
We are a biotechnology company focused on developing and commercializing DNA medicines to help treat and protect people from diseases associated with HPV, cancer, and infectious diseases. Our goal is to advance our pipeline of product candidates and deliver on the promise of DNA medicines technology in treating and preventing a wide array of diseases.
In clinical trials, our DNA medicine candidates have shown the ability to generate immune responses, especially CD4+, CD8+, and memory T-cell responses against targeted pathogens and cancers, via our precisely designed plasmids. These plasmids are delivered into cells using our investigational proprietary smart device, CELLECTRA.
INO-3107 is our candidate for the treatment of the HPV-related disease recurrent respiratory papillomatosis, or RRP. In October 2022 and February 2023, we announced data from the first and second cohorts of our Phase 1/2 clinical trial of INO-3107 for the treatment of HPV-6 and HPV-11 associated RRP. In this trial, treatment with INO-3107 resulted in a statistically significant reduction of the median number of surgical interventions required to manage the disease during the first year following initial treatment, a result that reinforces our belief that DNA medicines may play a key role in the treatment of HPV-related diseases. We are preparing to conduct a randomized, placebo-controlled pivotal Phase 3 trial of INO-3107 in RRP patients. Subject to regulatory clearance to commence the trial, we are targeting having the first patient dosed in the first quarter of 2024.
27
In addition to our development efforts with INO-3107, we are also actively developing or plan to develop DNA medicines for HPV-related precancers, including vulvar and anal dysplasia; HPV-related cancers, including head & neck cancer; and glioblastoma multiforme, or GBM, the most common aggressive type of brain cancer, as well as a potential vaccine booster to protect against the Ebola virus. We were previously conducting clinical trials of a DNA medicine candidate for the treatment of cervical high-grade squamous intraepithelial lesions (HSIL) but announced in August 2023 that we were ceasing development for this indication in the United States. However, our collaborator ApolloBio Corporation continues to conduct a Phase 3 clinical trial of this candidate in China and plans to seek regulatory approval for and potentially commercialize the candidate in that jurisdiction.
In addition to ApolloBio, our partners and collaborators include Advaccine Biopharmaceuticals Suzhou Co, AstraZeneca, The Bill & Melinda Gates Foundation (Gates), Coalition for Epidemic Preparedness Innovations (CEPI), Defense Advanced Research Projects Agency (DARPA), The U.S. Department of Defense (DoD), HIV Vaccines Trial Network, Indiana University, International Vaccine Institute (IVI), Kaneka Eurogentec, National Cancer Institute (NCI), National Institutes of Health (NIH), National Institute of Allergy and Infectious Diseases (NIAID), Plumbline Life Sciences, Regeneron Pharmaceuticals, Richter-Helm BioLogics, Thermo Fisher Scientific, the University of Pennsylvania, the Walter Reed Army Institute of Research, and The Wistar Institute.
All of our DNA medicine candidates are in the research and development phase. We have not generated any revenues from the sale of any products, and we do not expect to generate any material revenues from commercial sales for at least the next several years. We earn revenue from license fees and milestone revenue and collaborative research and development agreements and contracts. Our DNA medicine candidates will require significant additional research and development efforts, including extensive preclinical and clinical testing. All DNA medicine candidates that we advance to clinical testing will require regulatory approval prior to commercial use, and will require significant costs for commercialization. We may not be successful in our research and development efforts, and we may never generate sufficient product revenue to be profitable.
As of June 30, 2023, we had an accumulated deficit of $1.6 billion. We expect to continue to incur substantial operating losses in the future due to our commitment to our research and development programs, the funding of preclinical studies, clinical trials and regulatory activities and the costs of general and administrative activities.
Reductions in Force
On July 31, 2023, we committed to and communicated a corporate reorganization plan, including a reduction in force of 58 employees, representing approximately 30% of our full-time employees (the “Reduction”). We expect to incur a one-time charge of $2.1 million in the third quarter of 2023 related to the Reduction, consisting primarily of one-time severance payments upon termination, continued benefits for a specific period of time, and outplacement services. We expect substantially all charges associated with the Reduction to be incurred during the quarter ending September 30, 2023, with related cash payments expected to be paid out by October 31, 2023. We expect that the Reduction will result in annual cost savings of approximately $9.9 million.
In the first quarter of 2023, we undertook a corporate reorganization and reduced overall headcount by approximately 24 employees, which represented 11% of our full-time employees. We incurred a one-time charge of $1.1 million in the first quarter of 2023 related to these actions, consisting primarily of one-time severance payments upon termination, continued benefits for a specific period of time and outplacement services.
VGX-3100
As part of the corporate reorganization plan announced on August 1, 2023, we have made the decision to discontinue further clinical development of VGX-3100 as a potential treatment for cervical HSIL in the United States. Our partner ApolloBio continues to conduct its ongoing Phase 3 trial in cervical HSIL patients in China with plans to seek regulatory approval for VGX-3100 in China.
Critical Accounting Policies and Estimates
There have been no significant changes to our critical accounting estimates since December 31, 2022. For a description of our critical accounting estimates and significant judgments used in the preparation of our condensed consolidated financial statements, refer to Note 3 to our Condensed Consolidated Financial Statements included in this Quarterly Report, as well as Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2022 Annual Report and Note 2 to our audited Consolidated Financial Statements contained in our 2022 Annual Report.
Results of Operations
Revenue. Total revenue, all of which was derived under collaborative arrangements and other contracts, was $226,000 and $341,000 for the three and six months ended June 30, 2023, respectively, as compared to $784,000 and $983,000 for the
28
three and six months ended June 30, 2022, respectively. The decrease in revenue was primarily due to no revenue from our Procurement Contract with the DoD as all performance obligations were satisfied during 2022.
Research and development expenses. Research and development expenses consist of expenses incurred in performing research and development activities, including compensation and benefits for full-time research and development employees, facilities expenses, overhead expenses, cost of laboratory supplies, clinical trial and related clinical manufacturing expenses, fees paid to contract research organizations and other consultants, and outside expenses. We utilize a labor reporting system to record employee compensation on a project-by-project basis. Unallocated research and development expenses include engineering and device-related expenses that are not allocable to a specific project, as well as stock-based compensation, other employee