NOTES TO FINANCIAL STATEMENTS
March 31, 2019
(Unaudited)
Vical Incorporated, or the Company, a Delaware corporation, was incorporated in April 1987 and has devoted substantially all of its resources since that time to the research and development of biopharmaceutical products, including those based on its patented DNA delivery technologies for the prevention and treatment of serious or life-threatening diseases.
The unaudited financial statements at March 31, 2019, and for the three months ended March 31, 2019 and 2018, have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission, or SEC, and with accounting principles generally accepted in the United States applicable to interim financial statements. These unaudited financial statements have been prepared on the same basis as the audited financial statements included in the Company’s Annual Report on Form 10-K and include all adjustments, consisting of only normal recurring accruals, which in the opinion of management are necessary to present fairly the Company’s financial position as of the interim date and results of operations for the interim periods presented. Interim results are not necessarily indicative of results expected for a full year or future periods. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. These unaudited financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2018, included in its Annual Report on Form 10-K filed with the SEC.
Cash, Cash Equivalents and Marketable Securities
Cash and cash equivalents consist of cash and highly liquid securities with original maturities at the date of acquisition of ninety days or less and that can be liquidated without prior notice or penalty. Investments with an original maturity of more than ninety days are considered marketable securities and have been classified by management as available-for-sale. These investments are classified as current assets, even though the stated maturity date may be one year or more beyond the current balance sheet date which reflects management’s intention to use the proceeds from sales of these securities to fund its operations, as necessary. Such investments are carried at fair value, with unrealized gains and losses included as a separate component of stockholders’ equity. Realized gains and losses from the sale of available-for-sale securities or the amounts, net of tax, reclassified out of accumulated other comprehensive income (loss), if any, are determined on a specific identification basis.
Revenue Recognition
The Company recognizes revenue when control of its products and services is transferred to its customers in an amount that reflects the consideration the Company expects to receive from its customers in exchange for those products and services. This process involves identifying the contract with a customer, determining the performance obligations in the contract, determining the contract price, allocating the contract price to the distinct performance obligations in the contract, and recognizing revenue when the performance obligations have been satisfied. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. The Company considers a performance obligation satisfied once it has transferred control of a good or service to the customer, meaning the customer has the ability to use and obtain the benefit of the good or service. The Company recognizes revenue for satisfied performance obligations only when it determines there are no uncertainties regarding payment terms or transfer of control.
Research and Development Costs
Research and development costs are expensed as incurred. Research and development costs include salaries and personnel-related costs, supplies and materials, outside services, costs of conducting preclinical and clinical trials, facilities costs and amortization of intangible assets. The Company accounts for its clinical trial costs by estimating the total cost to treat a patient in each clinical trial, and accruing this total cost for the patient over the estimated treatment period, which corresponds with the period over which the services are performed, beginning when the patient enrolls in the clinical trial. This estimated cost includes payments to the site conducting the trial, and patient-related lab and other costs related to the conduct of the trial. Cost per patient varies based on the type of clinical trial, the site of the clinical trial, the method of administration of the treatment, and the number of treatments that a patient receives. Treatment periods vary depending on the clinical trial. The Company makes revisions to the clinical trial cost estimates in the current period, as clinical trials progress.
9
Manufacturing and Production Costs
Manufacturing and production costs include expenses related to manufacturing contracts and expenses for the production of plasmid DNA for use in the Company’s research and development efforts. Production expenses related to the Company’s research and development efforts are expensed as incurred.
Net Loss Per Share
Basic and diluted net loss per share has been computed using the weighted-average number of shares of common stock outstanding during the period. The weighted average number of shares used to compute diluted loss per share excludes any assumed exercise of stock options and warrants and any assumed issuance of common stock under restricted stock units (RSUs) as the effect would be antidilutive. Common stock equivalents of 7.0 million and 7.2 million shares for the three months ended March 31, 2019 and 2018, respectively, were excluded from the calculation because of their antidilutive effect.
Stock-Based Compensation
The Company records its compensation expense associated with stock options and other forms of equity compensation based on their fair value at the date of grant using the Black-Scholes-Merton option pricing model. Stock-based compensation includes amortization related to stock option awards based on the estimated grant date fair value. Stock-based compensation expense related to stock options is recognized ratably over the vesting period of the option. In addition, the Company records expense related to RSUs granted based on the fair value of those awards on the grant date. The fair value related to the RSUs is amortized to expense over the vesting term of those awards. Forfeitures of stock options and RSUs are recognized as they occur.
Stock-based compensation expense for a stock-based award with a performance condition is recognized when the achievement of such performance condition is determined to be probable. If the outcome of such performance condition is not determined to be probable or is not met, no compensation expense is recognized and any previously recognized compensation expense is reversed.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” The new standard requires a lessee to record on the balance sheet the assets and liabilities for the rights and obligations created by leases with lease terms of more than 12 months and requires both lessees and lessors to disclose certain key information about lease transactions. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company adopted this standard during the first quarter of 2019. The adoption of this guidance did not have a material impact on the Company’s financial statements and related disclosures.
2.
|
STOCK-BASED COMPENSATION
|
Total stock-based compensation expense was allocated to research and development, manufacturing and production and general and administrative expense as follows (in thousands):
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Research and development
|
|
$
|
(50
|
)
|
|
$
|
28
|
|
Manufacturing and production
|
|
|
—
|
|
|
|
(68
|
)
|
General and administrative
|
|
|
31
|
|
|
|
87
|
|
Total stock-based compensation expense
|
|
$
|
(19
|
)
|
|
$
|
47
|
|
There were no stock-based awards granted by the Company during the three months ended March 31, 2019. During the three months ended March 31, 2018, the Company granted stock-based awards with a total estimated value of $0.4 million, which were equal to 2.3% of the outstanding shares of common stock at the end of the period. At March 31, 2019, total unrecognized estimated compensation expense related to unvested stock-based awards granted prior to that date was $0.1 million, which is expected to be recognized over a weighted-average period of 1.4 years.
10
3.
|
MARKETABLE SECURITIES, AVAILABLE FOR SALE
|
The following is a summary of available-for-sale marketable securities (in thousands):
March 31, 2019
|
|
Amortized
Cost
|
|
|
Unrealized
Gain
|
|
|
Unrealized
Loss
|
|
|
Market
Value
|
|
U.S. treasuries
|
|
$
|
34,255
|
|
|
$
|
17
|
|
|
$
|
—
|
|
|
$
|
34,272
|
|
|
|
$
|
34,255
|
|
|
$
|
17
|
|
|
$
|
—
|
|
|
$
|
34,272
|
|
December 31, 2018
|
|
Amortized
Cost
|
|
|
Unrealized
Gain
|
|
|
Unrealized
Loss
|
|
|
Market
Value
|
|
U.S. treasuries
|
|
$
|
36,219
|
|
|
$
|
—
|
|
|
$
|
18
|
|
|
$
|
36,201
|
|
|
|
$
|
36,219
|
|
|
$
|
—
|
|
|
$
|
18
|
|
|
$
|
36,201
|
|
At March 31, 2019, none of these securities were scheduled to mature outside of one year. The Company did not realize any gains or losses on sales of available-for-sale securities for the three months ended March 31, 2019. As of March 31, 2019, none of the securities had been in a continuous material unrealized loss position longer than one year.
4.
|
OTHER BALANCE SHEET ACCOUNTS
|
Accounts payable and accrued expenses consisted of the following (in thousands):
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Employee compensation
|
|
$
|
548
|
|
|
$
|
1,768
|
|
Post-termination benefit accrual
|
|
|
898
|
|
|
|
—
|
|
Clinical trial accruals
|
|
|
158
|
|
|
|
1,000
|
|
Accounts payable
|
|
|
877
|
|
|
|
412
|
|
Other accrued liabilities
|
|
|
40
|
|
|
|
371
|
|
Total accounts payable and accrued expenses
|
|
$
|
2,521
|
|
|
$
|
3,551
|
|
During the three months ended March 31, 2019, the Company sold its auction rate security classified as a long-term investment with a par value of $2.5 million. Included in investment and other income for the three months ended March 31, 2019 is a net gain of $0.4 million related to the sale.
6.
|
FAIR VALUE MEASUREMENTS
|
The Company measures fair value as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. Fair value measurements are based on a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
|
•
|
Level 1: Observable inputs such as quoted prices in active markets;
|
|
•
|
Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
|
|
•
|
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
|
11
Cash equivalents, marketable securities and long-term investments measured at fair value are classified in the table below in one of the three
categories described above (in thousands):
|
|
Fair Value Measurements
|
|
March 31, 2019
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Money market funds
|
|
$
|
10,613
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,613
|
|
U.S. treasuries
|
|
|
34,272
|
|
|
|
—
|
|
|
|
—
|
|
|
|
34,272
|
|
|
|
$
|
44,885
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
44,885
|
|
|
|
Fair Value Measurements
|
|
December 31, 2018
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Money market funds
|
|
$
|
11,523
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11,523
|
|
U.S. treasuries
|
|
|
36,201
|
|
|
|
—
|
|
|
|
—
|
|
|
|
36,201
|
|
Auction rate securities
|
|
|
—
|
|
|
|
—
|
|
|
|
2,386
|
|
|
|
2,386
|
|
|
|
$
|
47,724
|
|
|
$
|
—
|
|
|
$
|
2,386
|
|
|
$
|
50,110
|
|
The Company’s investments in U.S. treasury securities, certificates of deposit and money market funds are valued based on publicly available quoted market prices for identical securities as of March 31, 2019. The Company determines the fair value of corporate bonds and other government-sponsored enterprise related securities with the aid of valuations provided by third parties using proprietary valuation models and analytical tools. These valuation models and analytical tools use market pricing or similar instruments that are both objective and publicly available, including matrix pricing or reported trades, benchmark yields, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids and/or offers. The Company validates the valuations received from its primary pricing vendors for its Level 2 securities by examining the inputs used in that vendor’s pricing process and determines whether they are reasonable and observable. The Company also compares those valuations to recent reported trades for those securities. As of March 31, 2019 and December 31, 2018, the Company had no investments in Level 2 securities. The Company did not transfer any investments between level categories during the three months ended March 31, 2019.
Activity for assets measured at fair value using significant unobservable inputs (Level 3) is presented in the table below (in thousands):
Balance at December 31, 2018
|
|
$
|
2,386
|
|
Change in fair market value included in other comprehensive loss
|
|
|
83
|
|
Sale of Level 3 security
|
|
|
(2,469
|
)
|
Balance at March 31, 2019
|
|
$
|
—
|
|
Total gains or losses for the period included in net loss attributable to the change in
unrealized gains or losses relating to assets still held at the reporting date
|
|
$
|
—
|
|
7.
|
COMMITMENTS AND CONTINGENCIES
|
In the ordinary course of business, the Company may become a party to additional lawsuits involving various matters. The Company is unaware of any such lawsuits presently pending against it which, individually or in the aggregate, are deemed to be material to the Company’s financial condition or results of operations.
The Company prosecutes its intellectual property vigorously to obtain the broadest valid scope for its patents. Due to uncertainty of the ultimate outcome of these matters, the impact on future operating results or the Company’s financial condition is not subject to reasonable estimates.
8.
|
ASTELLAS OUT-LICENSE AGREEMENTS
|
In July 2011, the Company entered into license agreements with Astellas Pharma Inc., or Astellas, related to the Company’s CMV program. The license agreement was terminated in February 2018. Under the terms of the agreements, the Company was performing research and development services and manufacturing services which were being paid for by Astellas. During the three months ended March 31, 2018, the Company recognized $0.5 million of revenue related to these contract services.
12
The Company occupies approximately 17,000 square feet of research laboratory and office space at a single site in San Diego, California under a sublease with Genopis, Inc., or Genopis. In July 2018, the Company entered into an agreement with Genopis to sell the Company’s idle manufacturing assets for $1.7 million. As part of the agreement, Genopis agreed to sublease 51,400 square feet of the Company’s facility through the remaining term of the Company’s lease, which expired on December 31, 2018. Genopis was also required to sign a long-term lease with the facility’s landlord beginning on January 1, 2019. Genopis agreed to sublease 17,000 square feet of the facility (consisting of lab and office space) to the Company at no cost for the one-year period ending on December 31, 2019. The fair value of rent of the lab and office space that the Company is occupying at no cost was $0.6 million as of March 31, 2019 and is recorded in receivables and other assets.
1
0
.
|
STOCKHOLDERS’ EQUITY
|
As of the date of this filing, the Company has on file a shelf registration statement that allows it to raise up to an additional $40.0 million from the sale of common stock, preferred stock, debt securities and/or warrants, subject to limitations on the amount of securities that it may sell under the registration statement in any 12-month period. Specific terms of any offering under a shelf registration statement and the securities involved would be established at the time of sale.
In November 2017, the Company sold 9,194,286 shares of its common stock in a public offering at a price of $1.75 per share, including an overallotment of 2,142,857 shares issued at a price of $1.75 per share, and pre-funded warrants to purchase 7,234,285 shares of common stock at a purchase price of $1.74 per share. The pre-funded warrants have an exercise price of $0.01 per share and may be exercised at any time. In March 2019, 993,211 warrants were exercised. As of March 31, 2019, warrants to purchase 6,241,074 shares of common stock were outstanding.
1
1
.
|
RELATED PARTY TRANSACTION
|
On April 4, 2017, the Company entered into a research collaboration agreement with AnGes. As of the date of the transaction, AnGes held 18.6% of the outstanding stock of the Company. Pursuant to the collaboration agreement, AnGes agreed to make a non-refundable payment to the Company of $750,000 and the Company agreed to conduct certain research activities related to a development program targeting chronic hepatitis B. An amendment to the agreement was executed in September 2018 that added an additional non-refundable payment from AnGes to the Company of $145,000. The HBV program was cancelled in 2019. As of March 31, 2019, the Company had recognized the full $895,000 as contract revenue.
13
In February 2019, the Company made the decision to discontinue the Phase 2 clinical trial of VL-2397. As a result, the Company restructured its operations to conserve capital and recorded a restructuring charge of $1.5 million during the three months ended March 31, 2019.
In January 2018, the Company and Astellas announced that ASP0113 did not meet its primary endpoint in a Phase 3 clinical study in CMV end organ disease, after which Astellas informed the Company that it was terminating further development. As a result, the Company restructured its operations to conserve capital, which included a staff reduction of 40 employees and the write-off of certain intangible assets. The Company recorded charges for one-time employee termination benefits of $1.1 million and for intangible asset impairments of $0.3 million during the three months ended March 31, 2018. Overhead costs associated with the former manufacturing facility of 0.2 million were recognized as general and administrative expense during the three months ended March 31, 2018.
The following table summarizes the restructuring charges (in thousands) recorded for the three months ended March 31, 2019 and 2018:
|
|
Employee
|
|
|
|
|
|
|
|
|
|
|
|
Termination
|
|
|
Asset
|
|
|
|
|
|
2019
|
|
Benefits
|
|
|
Impairments
|
|
|
Total
|
|
Research and development
|
|
$
|
1,491
|
|
|
$
|
—
|
|
|
$
|
1,491
|
|
General and administrative
|
|
|
26
|
|
|
|
—
|
|
|
|
26
|
|
|
|
$
|
1,517
|
|
|
$
|
—
|
|
|
$
|
1,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
|
|
|
|
|
|
|
|
|
|
|
|
Termination
|
|
|
Asset
|
|
|
|
|
|
2018
|
|
Benefits
|
|
|
Impairments
|
|
|
Total
|
|
Research and development
|
|
$
|
272
|
|
|
$
|
267
|
|
|
$
|
539
|
|
Manufacturing and production
|
|
|
735
|
|
|
|
—
|
|
|
|
735
|
|
General and administrative
|
|
|
117
|
|
|
|
—
|
|
|
|
117
|
|
|
|
$
|
1,124
|
|
|
$
|
267
|
|
|
$
|
1,391
|
|
The following table sets forth the accrual activity for employee termination benefits for the three months ended March 31, 2019 (in thousands).
|
|
|
|
|
Balance at December 31, 2018
|
|
$
|
—
|
|
Accruals
|
|
|
1,517
|
|
Payments
|
|
|
(619
|
)
|
Balance at March 31, 2019
|
|
$
|
898
|
|
14