vtvt-10q_20180930.htm

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended September 30, 2018

Or

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

For the transition period from                      to                      

Commission file number: 001-37524

 

vTv Therapeutics Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

47-3916571

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

4170 Mendenhall Oaks Pkwy

High Point, NC

 

27265

(Address of principal executive offices)

 

(Zip Code)

(336) 841-0300

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

 

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the 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.

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

 

Smaller reporting company

 

 

 

 

Emerging growth company

  

 

 

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

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

 

Class of Stock

 

Shares Outstanding as of November 8, 2018

 

Class A common stock, par value $0.01 per share

 

 

17,652,148

 

Class B common stock, par value $0.01 per share

 

 

23,094,221

 

 

 


 

vTv THERAPEUTICS INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q

FOR THE QUARTER ENDED September 30, 2018

 

 

 

 

 

PAGE
NUMBER

 

 

 

 

PART I – FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

  

Condensed Consolidated Balance Sheets as of September 30, 2018 (Unaudited) and December 31, 2017

  

4

 

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2018 and 2017

 

5

 

 

 

 

 

 

 

Unaudited Condensed Consolidated Statement of Changes in Redeemable Noncontrolling Interest and Stockholders’ Deficit for the nine months ended September 30, 2018

 

6

 

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017

 

7

 

 

 

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

 

8

 

 

 

 

 

Item 2.

 

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

 

22

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

31

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

31

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

32

 

 

 

 

 

Item 1A.

 

Risk Factors

 

32

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

33

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

33

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

33

 

 

 

 

 

Item 5.

 

Other Information

 

34

 

 

 

 

 

Item 6.

 

Exhibits

 

35

 

 

 

 

 

 

 

Signatures

 

36

 

 

2


 

PART I – FINANCIAL INFORMATION

The financial statements and other disclosures contained in this report include those of vTv Therapeutics Inc. (“we”, the “Company” or the “Registrant”), which is the registrant, and those of vTv Therapeutics LLC (“vTv LLC”), which is the principal operating subsidiary of the Registrant.  Unless the context suggests otherwise, references in this Quarterly Report on Form 10-Q to the “Company”, “we”, “us” and “our” refer to vTv Therapeutics Inc. and its consolidated subsidiaries.

 

 

3


 

vTv Therapeutics Inc.

Condensed Consolidated Balance Sheets

(in thousands, except number of shares and per share data)

 

 

September 30,

 

 

December 31,

 

 

2018

 

 

2017

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

3,766

 

 

$

11,758

 

Restricted cash and cash equivalents

 

 

 

 

162

 

Accounts receivable, net

 

 

 

 

8,000

 

Prepaid expenses and other current assets

 

1,006

 

 

 

442

 

Current deposits

 

1,124

 

 

 

 

Total current assets

 

5,896

 

 

 

20,362

 

Restricted cash and cash equivalents, long-term

 

2,500

 

 

 

2,500

 

Property and equipment, net

 

177

 

 

 

283

 

Long-term investments

 

2,480

 

 

 

2,480

 

Long-term deposits

 

36

 

 

 

2,292

 

Total assets

$

11,089

 

 

$

27,917

 

Liabilities, Redeemable Noncontrolling Interest and Stockholders’ Deficit

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable and accrued expenses

$

8,965

 

 

$

13,901

 

Current portion of deferred revenue

 

6,747

 

 

 

8,757

 

Current portion of notes payable

 

9,597

 

 

 

4,271

 

Total current liabilities

 

25,309

 

 

 

26,929

 

Notes payable

 

8,611

 

 

 

15,316

 

Deferred revenue, net of current portion

 

595

 

 

 

4,497

 

Warrant liability, related party

 

382

 

 

 

492

 

Other liabilities

 

258

 

 

 

290

 

Total liabilities

 

35,155

 

 

 

47,524

 

Commitments and contingencies

 

 

 

 

 

 

 

Redeemable noncontrolling interest

 

19,912

 

 

 

131,440

 

Stockholders’ deficit:

 

 

 

 

 

 

 

Class A Common Stock, $0.01 par value; 100,000,000 shares authorized, 15,772,449

   and 9,693,254 shares outstanding as of September 30, 2018 and December 31, 2017,

   respectively

 

158

 

 

 

97

 

Class B Common Stock, $0.01 par value; 100,000,000 shares authorized, 23,094,221

   and 23,119,246 shares outstanding as of September 30, 2018 and December 31, 2017,

   respectively

 

232

 

 

 

232

 

Additional paid-in capital

 

144,617

 

 

 

127,682

 

Accumulated deficit

 

(188,985

)

 

 

(279,058

)

Total stockholders’ deficit attributable to vTv Therapeutics Inc.

 

(43,978

)

 

 

(151,047

)

Total liabilities, redeemable noncontrolling interest and stockholders’ deficit

$

11,089

 

 

$

27,917

 

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

 

4


 

vTv Therapeutics Inc.

Condensed Consolidated Statements of Operations - Unaudited

(in thousands, except number of shares and per share data)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenue

$

3,375

 

 

$

15

 

 

$

7,912

 

 

$

58

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

2,698

 

 

 

8,989

 

 

 

20,235

 

 

 

29,572

 

General and administrative

 

2,158

 

 

 

2,567

 

 

 

7,150

 

 

 

8,396

 

Total operating expenses

 

4,856

 

 

 

11,556

 

 

 

27,385

 

 

 

37,968

 

Operating loss

 

(1,481

)

 

 

(11,541

)

 

 

(19,473

)

 

 

(37,910

)

Other income

 

10

 

 

 

 

 

 

46

 

 

 

 

Other income – related party

 

319

 

 

 

 

 

 

610

 

 

 

 

Interest income

 

13

 

 

 

35

 

 

 

47

 

 

 

95

 

Interest expense

 

(822

)

 

 

(849

)

 

 

(2,547

)

 

 

(2,240

)

Loss before income taxes and noncontrolling interest

 

(1,961

)

 

 

(12,355

)

 

 

(21,317

)

 

 

(40,055

)

Income tax provision

 

 

 

 

 

 

 

200

 

 

 

 

Net loss before noncontrolling interest

 

(1,961

)

 

 

(12,355

)

 

 

(21,517

)

 

 

(40,055

)

Less:  net loss attributable to noncontrolling interest

 

(1,165

)

 

 

(8,705

)

 

 

(14,697

)

 

 

(28,222

)

Net loss attributable to vTv Therapeutics Inc.

$

(796

)

 

$

(3,650

)

 

$

(6,820

)

 

$

(11,833

)

Net loss per share of vTv Therapeutics Inc. Class A Common

   Stock, basic and diluted

$

(0.06

)

 

$

(0.38

)

 

$

(0.64

)

 

$

(1.22

)

Weighted-average number of vTv Therapeutics Inc. Class A

   Common Stock, basic and diluted

 

12,305,949

 

 

 

9,693,254

 

 

 

10,701,599

 

 

 

9,693,254

 

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

 

5


 

vTv Therapeutics Inc.

Condensed Consolidated Statement of Changes in Redeemable Noncontrolling Interest and Stockholders’ Deficit - Unaudited

(in thousands, except number of shares)

 

 

 

 

 

 

Class A Common Stock

 

 

Class B Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable

Noncontrolling

Interest

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Additional

Paid-in

Capital

 

 

Accumulated Deficit

 

 

Total Stockholders' Deficit

 

Balances at December 31, 2017

$

131,440

 

 

 

9,693,254

 

 

$

97

 

 

 

23,119,246

 

 

$

232

 

 

$

127,682

 

 

$

(279,058

)

 

$

(151,047

)

Net loss

 

(14,697

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,820

)

 

 

(6,820

)

Cumulative effect of accounting

   change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

213

 

 

 

213

 

Share-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,345

 

 

 

 

 

 

2,345

 

Exchange of Class B Common Stock

   for Class A Common Stock

 

(151

)

 

 

25,025

 

 

 

 

 

 

(25,025

)

 

 

 

 

 

151

 

 

 

 

 

 

151

 

Issuance of Class A Common Stock

   to a related party under the Letter

   Agreements

 

 

 

 

6,042,503

 

 

 

61

 

 

 

 

 

 

 

 

 

14,939

 

 

 

 

 

 

15,000

 

Issuance of Letter Agreement

   and warrants to purchase Class

   A Common Stock - related party

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(500

)

 

 

 

 

 

(500

)

Vesting of restricted stock units

 

 

 

 

11,667

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in redemption value of

   noncontrolling interest

 

(96,680

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

96,680

 

 

 

96,680

 

Balances at September 30, 2018

$

19,912

 

 

 

15,772,449

 

 

$

158

 

 

 

23,094,221

 

 

$

232

 

 

$

144,617

 

 

$

(188,985

)

 

$

(43,978

)

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

 

6


 

vTv Therapeutics Inc.

Condensed Consolidated Statements of Cash Flows - Unaudited

(in thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss before noncontrolling interest

 

$

(21,517

)

 

$

(40,055

)

Adjustments to reconcile net loss before noncontrolling interest to net cash used in operating

   activities:

 

 

 

 

 

 

 

 

(Gain) loss on disposal of property and equipment, net

 

 

(12

)

 

 

(11

)

Depreciation expense

 

 

111

 

 

 

152

 

Share-based compensation expense

 

 

2,345

 

 

 

2,657

 

Change in fair value of warrants, related party

 

 

(610

)

 

 

 

Amortization of debt discount

 

 

795

 

 

 

753

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

8,000

 

 

 

 

Prepaid expenses and other assets

 

 

(1,475

)

 

 

(113

)

Long-term deposits

 

 

2,256

 

 

 

(317

)

Accounts payable and accrued expenses

 

 

(4,936

)

 

 

(1,293

)

Deferred revenue

 

 

(5,912

)

 

 

(21

)

Other liabilities

 

 

(32

)

 

 

19

 

Net cash used in operating activities

 

 

(20,987

)

 

 

(38,229

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Proceeds from sale of assets

 

 

12

 

 

 

32

 

Purchases of property and equipment

 

 

(5

)

 

 

(39

)

Net cash provided by (used in) investing activities

 

 

7

 

 

 

(7

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Issuance of Class A Common Stock to a related party under the Letter Agreements

 

 

15,000

 

 

 

 

Proceeds from debt issuance

 

 

500

 

 

 

7,500

 

Repayment of notes payable

 

 

(2,674

)

 

 

 

Net cash provided by financing activities

 

 

12,826

 

 

 

7,500

 

Net decrease in cash, cash equivalents and restricted cash and cash equivalents

 

 

(8,154

)

 

 

(30,736

)

Total cash, cash equivalents and restricted cash and cash equivalents, beginning of period

 

 

14,420

 

 

 

51,505

 

Total cash, cash equivalents and restricted cash and cash equivalents, end of period

 

$

6,266

 

 

$

20,769

 

 

 

 

 

 

 

 

 

 

Non-cash activities:

 

 

 

 

 

 

 

 

Change in redemption value of noncontrolling interest

 

$

(96,680

)

 

$

36,349

 

Exchange of vTv Therapeutics Inc. Class B Common Stock and vTv Therapeutics, LLC

   member units for vTv Therapeutics Inc. Class A Common Stock

 

$

151

 

 

$

 

Issuance of Letter Agreement and warrants to purchase vTv Therapeutics Inc. Class A Common

    Stock to a related party

 

$

500

 

 

$

 

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

 

7


 

vTv Therapeutics Inc.

Notes to Condensed Consolidated Financial Statements – Unaudited

(dollar amounts are in thousands, unless otherwise noted)

 

 

Note 1:

Description of Business, Basis of Presentation and Going Concern

Description of Business

vTv Therapeutics Inc. (the “Company,” the “Registrant,” “we” or “us”) was incorporated in the state of Delaware in April 2015. The Company was formed to discover and develop orally administered small molecule drug candidates to fill significant unmet medical needs.

Principles of Consolidation

vTv Therapeutics Inc. is a holding company and its principal asset is a controlling equity interest in vTv Therapeutics LLC (“vTv LLC”), the Company’s principal operating subsidiary, which is a clinical-stage biopharmaceutical company engaged in the discovery and development of orally administered small molecule drug candidates to fill significant unmet medical needs.

The Company has determined that vTv LLC is a variable-interest entity (“VIE”) for accounting purposes and that vTv Therapeutics Inc. is the primary beneficiary of vTv LLC because (through its managing member interest in vTv LLC and the fact that the senior management of vTv Therapeutics Inc. is also the senior management of vTv LLC) it has the power and benefits to direct all of the activities of vTv LLC, which include those that most significantly impact vTv LLC’s economic performance. vTv Therapeutics Inc. has therefore consolidated vTv LLC’s results pursuant to Accounting Standards Codification Topic 810, “Consolidation” in its Condensed Consolidated Financial Statements. As of September 30, 2018, various holders own non-voting interests in vTv LLC, representing a 59.4% economic interest in vTv LLC, effectively restricting vTv Therapeutics Inc.’s interest to 40.6% of vTv LLC’s economic results, subject to increase in the future, should vTv Therapeutics Inc. purchase additional non-voting common units (“vTv Units”) of vTv LLC, or should the holders of vTv Units decide to exchange such units (together with shares of Class B Common Stock) for shares of Class A Common Stock (or cash) pursuant to the Exchange Agreement (as defined in Note 8). vTv Therapeutics Inc. has provided financial and other support to vTv LLC in the form of its purchase of vTv Units with the net proceeds of the Company’s initial public offering (“IPO”) in 2015, its agreeing to be a co-borrower under the Venture Loan and Security Agreement (the “Loan Agreement”) with Horizon Technology Finance Corporation and Silicon Valley Bank (together, the “Lenders”) which was entered into in 2016 and its entrance into the letter agreements, dated as of December 5, 2017 and July 30, 2018, with MacAndrews and Forbes Group LLC (the “Letter Agreements”). vTv Therapeutics Inc. will not be required to provide financial or other support for vTv LLC outside of its obligations pertaining to the Loan Agreement as a co-borrower. However, vTv Therapeutics Inc. will control its business and other activities through its managing member interest in vTv LLC, and its management is the management of vTv LLC. The creditors of vTv LLC do not have any recourse to the general credit of vTv Therapeutics Inc. except as allowed under the provisions of the Loan Agreement. Nevertheless, because vTv Therapeutics Inc. will have no material assets other than its interests in vTv LLC, any financial difficulties at vTv LLC could result in vTv Therapeutics Inc. recognizing a loss.

Going Concern and Liquidity

To date, the Company has not generated any product revenue and has not achieved profitable operations.  The continuing development of our drug candidates will require additional financing.  From its inception through September 30, 2018, the Company has funded its operations primarily through a combination of private placements of common and preferred equity, research collaboration agreements, upfront and milestone payments for license agreements, debt and equity financings and the completion of its IPO in August 2015.  As of September 30, 2018, the Company had an accumulated deficit of $189.0 million and has generated net losses in each year of its existence.  As of September 30, 2018, the Company’s liquidity sources included cash and cash equivalents of $3.8 million and $5.0 million of remaining funds available under the Letter Agreements.  Management estimates that these sources of funding will allow the Company to continue its operations and activities for a period of less than twelve months from the issuance of these Condensed Consolidated Financial Statements.

Based on the Company’s current operating plan, management believes that its current cash and cash equivalents and the remaining funds available under the Letter Agreements will allow the Company to meet its liquidity requirements into December 2018.

Though the Company’s expected cash needs for the foreseeable future have been significantly reduced with the discontinuation of the STEADFAST and open label extension studies, the Company will require additional financing to continue its operations.  The Company is seeking possible additional partnering opportunities for its GKA, GLP-1r and other drug candidates which it believes may provide additional cash for use in its operations and the continuation of clinical trials for its drug candidates.  The Company is also

8


 

pursuing other sources of financing to provide flexibility to its operating plan.  The timing and availability of such financing is not yet known. The failure of the STEADFAST Study to meet either co-primary endpoint may make it more difficult for the Company to obtain such financing. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

The Company’s financial statements have been prepared assuming the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business.  The Condensed Consolidated Financial Statements do not include adjustments to reflect the possible future effects on the recoverability and classification of recorded assets or the amounts of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

 

Note 2:

Summary of Significant Accounting Policies

Unaudited Interim Financial Information

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The accompanying Condensed Consolidated Balance Sheet as of September 30, 2018, Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2018 and 2017, Condensed Consolidated Statement of Changes in Redeemable Noncontrolling Interest and Stockholders’ Deficit for the nine months ended September 30, 2018 and Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017 are unaudited. These unaudited financial statements have been prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These financial statements should be read in conjunction with the audited financial statements and the accompanying notes for the year ended December 31, 2017 contained in the Company’s Annual Report on Form 10-K. The unaudited interim financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments (consisting of normal recurring adjustments) necessary to state fairly the Company’s financial position as of September 30, 2018, the results of operations for the three and nine months ended September 30, 2018 and 2017 and cash flows for the nine months ended September 30, 2018 and 2017. The December 31, 2017 Condensed Consolidated Balance Sheet included herein was derived from the audited financial statements but does not include all disclosures or notes required by GAAP for complete financial statements.

The financial data and other information disclosed in these notes to the financial statements related to the three and nine months ended September 30, 2018 and 2017 are unaudited. Interim results are not necessarily indicative of results for an entire year.

The Company does not have any components of other comprehensive income recorded within its Condensed Consolidated Financial Statements, and, therefore, does not separately present a statement of comprehensive income in its Condensed Consolidated Financial Statements.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

On an ongoing basis, the Company evaluates its estimates, including those related to the grant date fair value of equity awards, the fair value of warrants to purchase shares of its Class A Common Stock, the fair value of the Class B Common Stock, the useful lives of property and equipment, the fair value of derivative liabilities, and the fair value of the Company’s debt, among others. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable, the results of which form the basis for making judgments about the carrying value of assets and liabilities.

Concentration of Credit Risk

Financial instruments that potentially expose the Company to concentrations of credit risk consist principally of cash on deposit with multiple financial institutions. The balances of these cash accounts frequently exceed insured limits.

The accounts receivable balance at December 31, 2017 related to an upfront payment received in the first quarter of 2018 pursuant to the Company’s license agreement with Hangzhou Zhongmei Huadong Pharmaceutical Co., Ltd. (“Huadong”).  

Three customers represented 100% of the revenue earned during the three and nine months ended September 30, 2018.  One customer represented 100% of the revenue earned during the three and nine months ended September 30, 2017.

9


 

Cash and Cash Equivalents

The Company considers any highly liquid investments with an original maturity of three months or less to be cash and cash equivalents.

Restricted Cash and Cash Equivalents

Restricted cash and cash equivalents, current as of December 31, 2017 was $0.2 million.  This amount was received through a research, development and commercialization agreement with JDRF (the “JDRF Agreement”).  There were no amounts held as restricted cash and cash equivalents as of September 30, 2018 related to this agreement.  Restricted cash and cash equivalents, long-term as of September 30, 2018 and December 31, 2017 was $2.5 million at each date.  These amounts relate to the minimum balance that the Company must maintain in a deposit account that is pledged to secure the Loan Agreement and is subject to an account control agreement pursuant to the Loan Agreement.

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017 that sum to the total of the same such amounts shown in the Condensed Consolidated Statements of Cash Flows (in thousands):

 

 

September 30, 2018

 

 

December 31, 2017

 

Cash and cash equivalents

$

3,766

 

 

$

11,758

 

Restricted cash and cash equivalents

 

 

 

 

162

 

Restricted cash and cash equivalents, long-term

 

2,500

 

 

 

2,500

 

Total cash, cash equivalents and restricted cash and cash

   equivalents shown in the consolidated statement of

   cash flows

$

6,266

 

 

$

14,420

 

 

Investments

In connection with the License Agreement with Reneo Pharmaceuticals, Inc. (“Reneo”) (the “Reneo License Agreement”), the Company received common stock and certain participation rights representing a minority equity interest in Reneo that is classified as a long-term investment in the Company’s Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017.  This investment is accounted for under the cost method because the Company owns less than 20% of the voting equity and does not have the ability to exercise significant influence over Reneo.  

On January 1, 2018, the Company adopted ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities”.  This guidance requires equity investments to be measured at fair value with changes in fair value recognized in net income.  Since it does not have a readily determinable market value, the Company has elected to measure its investment in Reneo at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment.  

No adjustments have been made to the value of the Company’s investment in Reneo for the three and nine months ended September 30, 2018 either due to impairment or based on observable price changes.  

Revenue Recognition

On January 1, 2018, the Company adopted ASC Topic 606, “Revenue From Contracts With Customers” (“ASC Topic 606”), using the modified retrospective method applied to those contracts which were not completed as of the adoption date.  Results for reporting periods beginning after January 1, 2018 are presented under ASC Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historic accounting under ASC Topic 605.

The Company recorded a net reduction to its opening accumulated deficit of $0.2 million as of January 1, 2018 due to the cumulative impact of adopting ASC Topic 606, with the impact primarily related to the recognition of an asset for the incremental costs of obtaining contracts.

The majority of the Company’s revenue results from its license and collaboration agreements associated with the development of investigational drug products.  The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.  For each contract meeting these criteria, the Company identifies the performance obligations included within the contract.  A performance obligation is a promise in a contract to transfer a distinct good or service to the customer.  The Company then recognizes revenue under each contract as the related performance obligations are satisfied.  

10


 

The transaction price under the contract is determined based on the value of the consideration expected to be received in exchange for the transferred assets or services.  Development, regulatory and sales milestones included in the Company’s collaboration agreements are considered to be variable consideration.  The amount of variable consideration expected to be received is included in the transaction price when it becomes probable that the milestone will be met.  For contracts with multiple performance obligations, the contract’s transaction price is allocated to each performance obligation using the Company’s best estimate of the standalone selling price of each distinct good or service in the contract. The primary method used to estimate standalone selling price is the expected cost plus margin approach. Revenue is recognized over the related period over which the Company expects the services to be provided using a proportional performance model or a straight-line method of recognition if there is no discernable pattern over which the services will be provided.

Research and Development

Major components of research and development costs include cash and share-based compensation, depreciation expense on research and development property and equipment, costs of preclinical studies, clinical trials and related clinical manufacturing, costs of drug development, costs of materials and supplies, facilities costs, overhead costs, regulatory and compliance costs, and fees paid to consultants and other entities that conduct certain research and development activities on the Company’s behalf. Research and development costs are expensed as incurred.

The Company records accruals based on estimates of the services received, efforts expended and amounts owed pursuant to contracts with numerous contract research organizations. In the normal course of business, the Company contracts with third parties to perform various clinical study activities in the ongoing development of potential products. The financial terms of these agreements are subject to negotiation and variation from contract to contract and may result in uneven payment flows. Payments under the contracts depend on factors such as the achievement of certain events and the completion of portions of the clinical study or similar conditions. The objective of the Company’s accrual policy is to match the recording of expenses in its financial statements to the actual services received and efforts expended. As such, expense accruals related to clinical studies are recognized based on the Company’s estimate of the degree of completion of the event or events specified in the specific clinical study.

The Company records nonrefundable advance payments it makes for future research and development activities as prepaid expenses. Prepaid expenses are recognized as expense in the Condensed Consolidated Statements of Operations as the Company receives the related goods or services.

Research and development costs that are reimbursed under a cost-sharing arrangement are reflected as a reduction of research and development expense.

Recently Issued Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue From Contracts With Customers”, that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The Company adopted this guidance as of January 1, 2018 using the modified retrospective transition method.  See Note 2 – “Revenue Recognition” for further details.  

In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities”, which amends ASC 825-10, “Financial Instruments – Overall”. This ASU amends various aspects of the recognition, measurement, presentation and disclosure of financial instruments.  This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  The Company adopted this guidance in the first quarter of fiscal 2018.  The Company has elected to use the measurement alternative, defined as cost, less impairments, adjusted by observable price changes.  The adoption of this guidance did not have a material impact on the Company’s Condensed Consolidated Financial Statements.  See Note 2 – “Investments” for further details.

In May 2017, the FASB issued ASU No. 2017-09, “Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU 2017-09”), which clarifies the changes to terms or conditions of a share-based payment award that require an entity to apply modification accounting. ASU 2017-09 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2017. The Company adopted this guidance in the first quarter of fiscal 2018.  The adoption of this guidance did not have a material impact on the Company's Condensed Consolidated Financial Statements.

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Recently Issued Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB issued ASU No. 2016-02, “Lease (Topic 842)” (“ASU 2016-02”), which increases transparency and comparability among companies accounting for lease transactions.  The most significant change of this update will require the recognition by a lessee of lease assets and liabilities on its balance sheet for operating lease arrangements with lease terms greater than 12 months.  This update will require a modified retrospective application which includes a number of optional practical expedients related to the identification and classification of leases commenced before the effective date.  This ASU is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2018.  The adoption of this guidance will result in the recognition of additional assets and liabilities related to the Company’s operating leases within its Condensed Consolidated Balance Sheets.

 

 

Note 3:Collaboration Agreements

Reneo License Agreement

On December 21, 2017, the Company entered into the Reneo License Agreement, under which Reneo obtained an exclusive, worldwide, sublicensable license to develop and commercialize the Company’s peroxisome proliferation activated receptor delta (PPAR-δ) agonist program, including the compound HPP593, for therapeutic, prophylactic or diagnostic application in humans.  Under the terms of the Reneo License Agreement, Reneo paid the Company an upfront cash payment of $3.0 million. The Company is eligible to receive additional potential development, regulatory and sales-based milestone payments totaling up to $94.5 million.  In addition, Reneo is obligated to pay the Company royalty payments at mid-single to low-double digit rates, based on tiers of annual net sales of licensed products.  Such royalties will be payable on a licensed product-by-licensed product and country-by-country basis until the latest of expiration of the licensed patents covering a licensed product in a country, expiration of data exclusivity rights for a licensed product in a country or a specified number of years after the first commercial sale of a licensed product in a country.  As additional consideration, the Company has also received common stock and certain participation rights representing a minority equity interest in Reneo.

Pursuant to the terms of the Reneo License Agreement, the Company is required to provide technology transfer services for a defined period after the effective date.  In accordance with ASC Topic 606, the Company identified all of the performance obligations at the inception of the Reneo License Agreement.  The significant obligations were determined to be the license and the technology transfer services.  The Company has determined that the license and technology transfer services represent a single performance obligation because they were not capable of being distinct on their own.  The transaction price has been fully allocated to this combined performance obligation.  The remaining milestone payments that the Company is eligible to receive have not been included in the transaction price as of September 30, 2018, as it is not considered probable that such payments will be received.  The unrecognized amount of the transaction price allocated to this performance obligation as of September 30, 2018 was $2.6 million.

The Company determined that there was no discernable pattern in which the technology services would be provided during the transfer services period.  As such, the Company determined that the straight-line method would be used to recognize revenue over the transfer service period.  The remainder of this performance obligation will be recognized over approximately 8.5 months. For the three and nine months ended September 30, 2018, $0.9 million and $2.7 million of revenue has been recognized related to this combined performance obligation, respectively.

Huadong License Agreement

On December 21, 2017, the Company entered into a License Agreement with Huadong (the “Huadong License Agreement”), under which Huadong obtained an exclusive and sublicensable license to develop and commercialize the Company’s glucagon-like peptide-1 receptor agonist (“GLP-1r”) program, including the compound TTP273, for therapeutic uses in humans or animals, in China and certain other Pacific Rim countries, including Australia and South Korea (collectively, the “Huadong License Territory”).  Additionally, under the Huadong License Agreement, the Company obtained a non-exclusive, sublicensable, royalty-free license to develop and commercialize certain Huadong patent rights and know-how related to the Company’s GLP-1r program for therapeutic uses in humans or animals outside of the Huadong License Territory.  Under the terms of the Huadong License Agreement, Huadong paid the Company an initial license fee of $8.0 million and is obligated to pay potential development and regulatory milestone payments totaling up to $25.0 million, with an additional potential regulatory milestone of $20.0 million if Huadong receives regulatory approval for a central nervous system indication.  In addition, the Company is eligible for an additional $50.0 million in potential sales-based milestones, as well as royalty payments ranging from low-single to low-double digit rates, based on tiered sales of licensed products.  

Under the Huadong License Agreement, the Company is also responsible for conducting a Phase 2 multi-region clinical trial (the “Phase 2 MRCT”) including sites in both the United States and Huadong License Territory for the purpose of assessing the safety and efficacy of TTP273 in patients with type 2 diabetes.  The Phase 2 MRCT will be designed to satisfy the requirements of the China

12


 

Food and Drug Administration necessary in order for Huadong to begin a Phase 3 clinical trial in China.  The Company will also be responsible for contributing up to $3.0 million in connection with the Phase 2 MRCT.

In accordance with ASC Topic 606, the Company identified all of the performance obligations at the inception of the Huadong License Agreement.  The significant performance obligations were determined to be (i) the exclusive license to develop and commercialize the Company’s GLP-1r program, (ii) technology transfer services related to the chemistry and manufacturing know-how for a defined period after the effective date (iii) the obligation to sponsor and conduct the Phase 2 MRCT, (iv) the Company’s obligation to participate on a joint development committee, and (v) other obligations considered to be de minimis in nature.  

The transaction price has been allocated to these performance obligations based on their relative standalone selling prices, which were estimated using an expected cost plus margin approach. The remaining milestone payments that the Company is eligible to receive have not been included in the transaction price as of September 30, 2018, as it is not considered probable that such payments will be received.

The Company has determined that the license and technology transfer services related to the chemistry and manufacturing know-how represent a combined performance obligation because they were not capable of being distinct on their own.   The Company also determined that there was no discernable pattern in which the technology transfer services would be provided during the transfer service period.  As such, the Company determined that the straight-line method would be used to recognize revenue for this performance obligation over the transfer service period.  The unrecognized amount of the transaction price allocated to this performance obligation of $3.3 million will be recognized over approximately 8.5 months.  For the three and nine months ended September 30, 2018, $1.2 million and $3.5 million of revenue has been recognized related to this combined performance obligation, respectively.

The Company also determined that the obligation to sponsor and conduct a portion of the Phase 2 MRCT should be treated as a separate performance obligation.  A portion of the total consideration received under the Huadong License Agreement was allocated to this performance obligation based on its estimated standalone selling price.  This amount was deferred as of September 30, 2018 and revenue will be recognized using the proportional performance model over the period during which the Company conducts the Phase 2 MRCT trial.  No revenue for this performance obligation has been recognized during the three and nine months ended September 30, 2018.

The Company also determined that the obligation to participate in the joint development committee (the “JDC”) to oversee the development of products and the Phase 2 MRCT in accordance with the development plan should be treated as a separate performance obligation.  A portion of the total consideration received under the Huadong License Agreement was allocated to this performance obligation based on its estimated standalone selling price.  This amount was deferred as of September 30, 2018 and revenue will be recognized using the proportional performance model over the period of the Company’s participation on the JDC. An immaterial amount of revenue for this performance obligation has been recognized during the three and nine months ended September 30, 2018.

Newsoara License Agreement

On May 31, 2018, the Company entered into a license agreement with Newsoara Biopharma Co., Ltd., (“Newsoara”) (the “Newsoara License Agreement”), under which Newsoara obtained an exclusive and sublicensable license to develop and commercialize the Company’s phosphodiesterase type 4 inhibitors (“PDE4”) program, including the compound HPP737, in China, Hong Kong, Macau, Taiwan and other pacific rim countries (collectively, the “Newsoara License Territory”).  Additionally, under the Newsoara License Agreement, the Company obtained a non-exclusive, sublicensable, royalty-free license to develop and commercialize certain Newsoara patent rights and know-how related to the Company’s PDE4 program for therapeutic uses in humans outside of the Newsoara License Territory.  Under the terms of the Newsoara License Agreement, Newsoara paid the Company an upfront cash payment of $2.0 million. The Company is eligible to receive additional potential development, regulatory and sales-based milestone payments totaling up to $63.0 million.  In addition, Newsoara is obligated to pay the Company royalty payments at high-single to low-double digit rates, based on tiers of annual net sales of licensed products.  Such royalties will be payable on a licensed product-by-licensed product and country-by-country basis until the latest of expiration of the licensed patents covering a licensed product in a country, expiration of data exclusivity rights for a licensed product in a country or a specified number of years after the first commercial sale of a licensed product in a country.  

Pursuant to the terms of the Newsoara License Agreement, the Company is required to provide technology transfer services for a defined period after the effective date.  In accordance with ASC Topic 606, the Company identified all of the performance obligations at the inception of the Newsoara License Agreement.  The significant obligations were determined to be the license and the technology transfer services.  The Company has determined that the license and technology transfer services represent a single performance obligation because they were not capable of being distinct on their own.  The transaction price has been fully allocated to this combined performance obligation.  The remaining milestone payments that the Company is eligible to receive have not been included in the transaction price as of September 30, 2018, as it is not considered probable that such payments will be received.  The unrecognized amount of the transaction price allocated to this performance obligation as of September 30, 2018 was $0.3 million.

13


 

The Company determined that there was no discernable pattern in which the technology services would be provided during the transfer services period.  As such, the Company determined that the straight-line method would be used to recognize revenue over the transfer service period.  The remainder of this performance obligation will be recognized over approximately 0.5 months. For the three and nine months ended September 30, 2018, $1.3 million and $1.7 million of revenue has been recognized related to this combined performance obligation, respectively.

JDRF Agreement

In August 2017, the Company entered into the JDRF Agreement to support the funding of the Simplici-T1 Study, an adaptive Phase 1b/2 study to explore the effects of TTP399 in type 1 diabetics.  The Company initiated the Phase 2 portion of this study in the second quarter of 2018.  According to the terms of the JDRF Agreement, JDRF will provide research funding of up to $3.0 million based on the achievement of research and development milestones, with the total funding provided by JDRF not to exceed approximately one-half of the total cost of the project.  Additionally, the Company has the obligation to make certain milestone payments to JDRF upon the commercialization, licensing, sale or transfer of TTP399 as a treatment for type 1 diabetes.

Payments that the Company receives from JDRF under this agreement will be recorded as restricted cash and current liabilities and recognized as an offset to research and development expense, based on the progress of the project, and only to the extent that the restricted cash is utilized to fund such development activities.  As of September 30, 2018, the Company had received funding under this agreement of $0.8 million.  Research and development costs were offset by a total of $0.8 million over the course of this agreement.  As of September 30, 2018, the Company has recognized restricted cash of an immaterial amount related to this agreement.

Contract Liabilities

Contract liabilities related to the Company’s collaboration agreements consisted of the following (in thousands):

 

 

September 30, 2018

 

 

December 31, 2017

 

 

Change

 

Deferred revenue

$

6,747

 

 

$

8,757

 

 

$

(2,010

)

Deferred revenue - net of current portion

 

595

 

 

 

4,497

 

 

 

(3,902

)

Total contract liabilities

$

7,342

 

 

$

13,254

 

 

$

(5,912

)

The change in the Company’s contract liabilities for the nine months ended September 30, 2018 was due to the recognition of revenue based on the estimated performance of services under the related collaboration agreements as well as the recognition of deferred revenue related to the Company’s Newsoara License Agreement.  There were no changes in the estimated transaction prices for the related contracts during the three and nine months ended September 30, 2018.

 

 

Note 4:

Share-Based Compensation

During the three and nine months ended September 30, 2018, the Company issued non-qualified stock option awards to certain employees of the Company. These option awards vest ratably over a three-year period and the option awards expire after a term of ten years from the date of grant. As of September 30, 2018, the Company had total unrecognized stock-based compensation expense for its outstanding stock option awards of approximately $1.6 million, which is expected to be recognized over a weighted average period of 1.5 years. The weighted average grant date fair value of option grants during the nine months ended September 30, 2018 and 2017 was $2.28 and $4.17 per option, respectively. The aggregate intrinsic value of the in-the-money awards outstanding at September 30, 2018 was $0.

The Company uses the Black-Scholes option pricing model to calculate the fair value of stock options granted. The fair value of stock options granted was estimated using the following assumptions:

 

 

For the Nine Months Ended September 30,

 

 

2018

 

 

2017

 

Expected volatility

71.15% - 99.23%

 

 

76.88% - 85.93%

 

Expected life of option, in years

5.7 - 6.0

 

 

5.8 - 6.0

 

Risk-free interest rate

2.69% - 2.84%

 

 

1.87% - 2.24%

 

Expected dividend yield

0.00%

 

 

0.00%

 

14


 

The following table summarizes the activity related to the stock option awards for the nine months ended September 30, 2018:

 

 

Number of Shares

 

 

Weighted-

Average Exercise Price

 

Awards outstanding at December 31, 2017

 

1,960,732

 

 

$

8.50

 

Granted

 

102,750

 

 

 

3.25

 

Forfeited

 

(280,794

)

 

 

6.17

 

Awards outstanding at September 30, 2018

 

1,782,688

 

 

$

8.57

 

Options exercisable at September 30, 2018

 

1,173,468

 

 

$

10.20

 

Weighted average remaining contractual term

7.3 Years

 

 

 

 

 

Options vested and expected to vest at September 30, 2018

 

1,742,506

 

 

$

8.64

 

Weighted average remaining contractual term

7.7 Years

 

 

 

 

 

The following table summarizes the activity related to the RSU awards for the nine months ended September 30, 2018:

 

 

Number of Shares

 

 

Weighted-

Average Grant Date Fair Value

 

Awards outstanding at December 31, 2017

 

35,000

 

 

$

5.81

 

Vested

 

(11,667

)

 

 

5.81

 

Awards outstanding at September 30, 2018

 

23,333

 

 

$

5.81

 

RSUs expected to vest at September 30, 2018

 

22,896

 

 

$

5.81

 

 

As of September 30, 2018, the Company had total unrecognized stock-based compensation expense for its outstanding RSU awards of approximately $0.1 million, which is expected to be recognized over a weighted-average period of 1.4 years.  The aggregate intrinsic value of the RSUs outstanding at September 30, 2018 was de minimis.

Compensation expense related to the grants of stock options and RSUs is included in research and development and general and administrative expense as follows (in thousands):

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Research and development

$

247

 

 

$

405

 

 

$

871

 

 

$

1,077

 

General and administrative

 

332

 

 

 

554

 

 

 

1,474

 

 

 

1,580

 

Total share-based compensation expense

$

579

 

 

$

959

 

 

$

2,345

 

 

$

2,657

 

 

 

Note 5:Notes Payable

Notes payable consist of the following (in thousands):

 

 

September 30, 2018

 

 

December 31, 2017

 

Notes payable under the Loan Agreement

$

17,396

 

 

$

20,000

 

Short-term financing

 

431

 

 

 

 

Accreted final payment (unamortized debt discount)

 

381

 

 

 

(413

)

Total notes payable

 

18,208

 

 

 

19,587

 

Less:  Current portion

 

(9,597

)

 

 

(4,271

)

Total notes payable, net of current portion

$

8,611

 

 

$

15,316

 

In October 2016, the Company entered into the Loan Agreement with Horizon Technology Finance Corporation and Silicon Valley Bank, under which the Company and vTv LLC borrowed $20.0 million.

Each loan tranche bears interest at a floating rate equal to 10.5% plus the amount by which the one-month London Interbank Offer Rate (“LIBOR”) exceeds 0.5%.

The Company borrowed the first tranche of $12.5 million upon close of the Loan Agreement in October 2016.  The first tranche requires only monthly interest payments until May 1, 2018 followed by equal monthly payments of principal plus accrued interest through the scheduled maturity date on May 1, 2020.  In addition, a final payment for the first tranche loan equal to $0.8 million will be due on May 1, 2020, or such earlier date specified in the Loan Agreement. The Company borrowed the second tranche of $7.5 million in March 2017.  The second tranche requires only monthly interest payments until October 1, 2018 followed by equal monthly

15


 

payments of principal plus accrued interest through the scheduled maturity date on October 1, 2020.  In addition, a final payment for the second tranche loan equal to $0.5 million will be due on October 1, 2020, or such earlier date specified in the Loan Agreement.  The availability of the third tranche of $5.0 million expired unused on June 30, 2017.

If the Company repays all or a portion of the loan prior to the applicable maturity date, it will pay the Lenders a prepayment penalty fee, based on a percentage of the then outstanding principal balance equal to 4.0% during the first 18 months following the funding of the second tranche and 2.0% thereafter.

The Company’s obligations under the Loan Agreement are secured by a first priority security interest in substantially all of its assets.  As a result of the termination of the STEADFAST Study, the Company granted the Lenders a first priority security interest in all of the Company’s intellectual property, subject to certain limited exceptions.  The Company has agreed not to pledge or otherwise encumber its intellectual property assets, subject to certain exceptions.

The Loan Agreement includes customary affirmative and restrictive covenants, including, but not limited to, restrictions on the payment of dividends or other equity distributions and the incurrence of debt or liens upon the assets of the Company or its subsidiaries.  The Loan Agreement does not contain any financial maintenance covenants other than a requirement to maintain a minimum cash balance of not less than $2.5 million in a deposit account pledged to secure the Loan Agreement and subject to an account control agreement.  The minimum cash balance covenant was included as part of an amendment to the Loan Agreement in connection with the entry into the Huadong License Agreement in December 2017.  The Loan Agreement includes customary events of default, including payment defaults, covenant defaults, and material adverse change default.  Upon the occurrence of an event of default and following any applicable cure periods, a default interest rate of an additional 5.0% will be applied to the outstanding loan balances, and the Lenders may declare all outstanding obligations immediately due and payable and take such other actions as set forth in the Loan Agreement.

In connection with the Loan Agreement, the Company issued to the Lenders warrants to purchase shares of the Company’s Class A Common Stock (the “Warrants”).  On October 28, 2016, the Company issued Warrants to purchase 152,580 shares of its Class A Common Stock at a per share exercise price of $6.39 per share, which aggregate exercise price represents 6.0% of the principal amount borrowed under the first tranche of the Loan Agreement and 3.0% of the amount available under the second tranche of the Loan Agreement. On March 24, 2017, in connection with the funding of the second tranche, the Company issued Warrants to purchase 38,006 shares of its Class A Common Stock at a per share exercise price of $5.92 per share, which aggregate exercise price represents 3.0% of the principal amount of the second tranche of the Loan Agreement.  In each instance, the Warrants have an exercise price equal to the lower of (a) the volume weighted average price per share of the Company’s Class A Common Stock, as reported on the principal stock exchange on which the Company’s Class A Common Stock is listed, for 10 trading days prior to the issuance of the applicable Warrants or (b) the closing price of a share of the Company’s Class A Common Stock on the trading day prior to the issuance of the applicable Warrants.  The Warrants will expire seven years from their date of issuance.

The costs incurred in connection with the Loan Agreement, along with the allocated fair value of the Warrants issued of $0.9 million were treated as a debt discount and are offset against the carrying value of the notes payable in the Company’s Condensed Consolidated Balance Sheet as of September 30, 2018 and December 31, 2017.  These costs will be recognized as interest expense over the term of the first tranche using the effective interest method.  The final payments for the first and second loan tranches of $0.8 million and $0.5 million, respectively, will be accrued as additional interest expense, using the effective interest method, over the term of the relevant tranche.  

 

 

Note 6:

Commitments and Contingencies

Legal Matters

From time to time, the Company is involved in various legal proceedings arising in the normal course of business. If a specific contingent liability is determined to be probable and can be reasonably estimated, the Company accrues and discloses the amount. The Company is not currently a party to any material legal proceedings.

Columbia University Agreement

In May 2015, the Company entered into a worldwide exclusive agreement with Columbia University (“Columbia”) to license certain intellectual property from Columbia. Under the agreement, the Company is obligated to pay to Columbia (1) an annual fee of $0.1 million from 2015 through 2021, (2) a potential regulatory milestone payment of $0.8 million and (3) potential royalty payments at a single digit royalty rate based on net sales of licensed products as defined in the agreement.

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Novo Nordisk

In February 2007, the Company entered into an Agreement Concerning Glucokinase Activator Project with Novo Nordisk A/S (the “Novo License Agreement”) whereby we obtained an exclusive, worldwide, sublicensable license under certain Novo Nordisk intellectual property rights to discover, develop, manufacture, have manufactured, use and commercialize products for the prevention, treatment, control, mitigation or palliation of human or animal diseases or conditions. As part of this license grant, the Company obtained certain worldwide rights to Novo Nordisk’s GKA program, including rights to preclinical and clinical compounds such as TTP399. Under the terms of the Novo License Agreement, the Company has additional potential developmental and regulatory milestone payments totaling up to $115.0 million for approval of a product. The Company may also be obligated to pay an additional $75.0 million in potential sales-based milestones, as well as royalty payments, at mid-single digit royalty rates, based on tiered sales of commercialized licensed products.

Huadong License Agreement

Under the terms of the Huadong License Agreement, vTv LLC is responsible for sponsoring the Phase 2 MRCT including sites in both the US and the Huadong License Territory for the purpose of assessing the safety and efficacy of TTP273 in patients with type 2 diabetes.  vTv LLC will be responsible for contributing up to $3.0 million in connection with the Phase 2 MRCT.

 

 

Note 7:

Redeemable Noncontrolling Interest

The Company is subject to the Exchange Agreement with respect to the vTv Units representing the 59.4% noncontrolling interest in vTv LLC outstanding as of September 30, 2018 (see Note 8). The Exchange Agreement requires the surrender of an equal number of vTv Units and Class B Common Stock for (i) shares of Class A Common Stock on a one-for-one basis or (ii) cash (based on the fair market value of the Class A Common Stock as determined pursuant to the Exchange Agreement), at the Company’s option (as the managing member of vTv LLC), subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications. The exchange value is determined based on a 20-day volume weighted average price of the Class A Common Stock as defined in the Exchange Agreement, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications.

The redeemable noncontrolling interest is recognized at the higher of (1) its initial fair value plus accumulated earnings/losses associated with the noncontrolling interest or (2) the redemption value as of the balance sheet date. At September 30, 2018 and December 31, 2017, the redeemable noncontrolling interest was recorded based on the redemption value as of the balance sheet date of $19.9 million and $131.4 million, respectively.

 

 

Note 8:

Related-Party Transactions

MacAndrews & Forbes Incorporated

As of September 30, 2018, subsidiaries and affiliates of MacAndrews & Forbes Incorporated (collectively “MacAndrews”) indirectly controlled 23,084,267 shares of the Company’s Class B Common Stock and 8,658,169 shares of the Company’s Class A Common Stock. As a result, MacAndrews’ holdings represent approximately 81.7% of the combined voting power of the Company’s outstanding common stock.

The Company has entered into several agreements with MacAndrews or its affiliates as further detailed below:

Letter Agreements

The Company has entered into the Letter Agreements with MacAndrews.  Under the terms of the Letter Agreements, the Company has the right to sell to MacAndrews shares of its Class A Common Stock at a specified price per share, and MacAndrews has the right (exercisable up to three times) to require the Company to sell to it shares of Class A Common Stock at the same price.  An aggregate of $10.0 million worth of Class A Common Stock may be sold under each of the Letter Agreements (whether at the Company’s or MacAndrews’ option).  In addition, in connection with and as a commitment fee for the entrance into these Letter Agreements, the Company also issued MacAndrews warrants (the “Letter Agreement Warrants”) to purchase additional shares of the Company’s Class A Common Stock.  

17


 

The critical terms of these Letter Agreements are set forth in the table below:

 

 

December 5, 2017 Letter Agreement

 

 

July 30, 2018 Letter Agreement

 

Specified purchase price per share

$

4.38

 

 

$

1.33

 

Expiration date of letter agreement

December 5, 2018

 

 

July 30, 2019

 

Shares available to be issued under related warrants

 

198,267

 

 

 

518,654

 

Exercise price of related warrants

$

5.04

 

 

$

1.53

 

Expiration date of related warrants

December 5, 2024

 

 

July 30, 2025

 

Total shares issued as of September 30, 2018

 

2,283,105

 

 

 

3,759,398

 

Remaining shares to be issued as of September 30, 2018

 

 

 

 

3,759,399

 

 

Exchange Agreement

The Company and MacAndrews are party to an exchange agreement (the “Exchange Agreement”) pursuant to which the vTv Units (along with a corresponding number of shares of the Class B Common Stock) are exchangeable for (i) shares of the Company’s Class A Common Stock on a one-for-one basis or (ii) cash (based on the fair market value of the Class A Common Stock as determined pursuant to the Exchange Agreement), at the Company’s option (as the managing member of vTv LLC), subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications. Any decision to require an exchange for cash rather than shares of Class A Common Stock will ultimately be determined by the entire board of directors of vTv Therapeutics Inc. (the “Board of Directors”). As of September 30, 2018, MacAndrews had not exchanged any shares under the provisions of this agreement.

Tax Receivable Agreement

The Company and MacAndrews are party to a tax receivable agreement (the “Tax Receivable Agreement”), which provides for the payment by the Company to M&F TTP Holdings Two LLC (“M&F”), as successor in interest to vTv Therapeutics Holdings, LLC (“vTv Therapeutics Holdings”), and M&F TTP Holdings LLC (or certain of its transferees or other assignees) of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that the Company actually realizes (or, in some circumstances, the Company is deemed to realize) as a result of (a) the exchange of Class B Common Stock, together with the corresponding number of vTv Units, for shares of the Company’s Class A Common Stock (or for cash), (b) tax benefits related to imputed interest deemed to be paid by the Company as a result of the Tax Receivable Agreement and (c) certain tax benefits attributable to payments under the Tax Receivable Agreement.  

As no shares have been exchanged by MacAndrews pursuant to the Exchange Agreement (discussed above), the Company has not recognized any liability nor has it made any payments pursuant to the Tax Receivable Agreement as of September 30, 2018.

Investor Rights Agreement

The Company is party to an investor rights agreement with M&F, as successor in interest to vTv Therapeutics Holdings (the “Investor Rights Agreement”).  The Investor Rights Agreement provides M&F with certain demand, shelf and piggyback registration rights with respect to its shares of Class A Common Stock and also provides M&F with certain governance rights, depending on the size of its holdings of Class A Common Stock.  Under the Investor Rights Agreement, M&F was initially entitled to nominate a majority of the members of the Board of Directors and designate the members of the committees of the Board of Directors.

 

 

Note 9:

Income Taxes

The Company is subject to U.S. federal income taxes as well as state taxes. The Company recorded an income tax provision of $0.2 million for the nine months ended September 30, 2018 representing foreign withholding taxes incurred in connection with the Newsoara License Agreement.  The Company did not record an income tax provision for the three and nine months ended September 30, 2017. Management has evaluated the positive and negative evidence surrounding the realization of its deferred tax assets, including the Company’s history of losses, and under the applicable accounting standards determined that it is more-likely-than-not that the deferred tax assets will not be realized. The difference between the effective tax rate of the Company and the U.S. statutory tax rate of 21% at September 30, 2018 is due to the valuation allowance against the Company’s expected net operating losses.

As discussed in Note 8, the Company is party to a tax receivable agreement with a related party which provides for the payment by the Company to M&F (or certain of its transferees or other assignees) of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that the Company actually realizes (or, in some circumstances, the Company is deemed to

18


 

realize) as a result of certain transactions. As no transactions have occurred which would trigger a liability under this agreement, the Company has not recognized any liability related to this agreement as of September 30, 2018.

On December 22, 2017, the U.S. federal government enacted comprehensive tax reform commonly referred to as the Tax Cuts and Jobs Act (“TCJA”).  Under ASC Topic 740, the effects of changes in tax rates and laws are recognized in the period which the new legislation is enacted.  Among other things, the TCJA (1) reduces the U.S federal statutory corporate income tax rate from 35% to 21% effective January 1, 2018, (2) eliminates the corporate alternative minimum tax, (3) eliminates the Section 199 deduction, and (4) changes rules related to uses and limitations of net operating loss carryforwards beginning after December 31, 2017.

The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of TCJA.  SAB 118 provides a measurement period that should not extend beyond one year from the TCJA enactment date for companies to complete the accounting under ASC Topic 740.  To the extent that a company’s accounting for certain income tax effects of the TCJA is incomplete but is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements.

The TCJA reduces the corporate tax rate to 21% effective January 1, 2018.  While we are able to make a reasonable estimate of the impact of the reduction in the corporate rate, it may be affected by other analyses related to the TCJA.  The Company will continue to assess and refine, as necessary, its accounting for the TCJA as additional guidance and interpretation is provided.

 

 

Note 10:

Net Loss per Share

Basic loss per share is computed by dividing net loss attributable to vTv Therapeutics Inc. by the weighted-average number of shares of Class A Common Stock outstanding during the period. Diluted loss per share is computed giving effect to all potentially dilutive shares. Diluted loss per share for all periods presented is the same as basic loss per share as the inclusion of potentially issuable shares would be antidilutive.

A reconciliation of the numerator and denominator used in the calculation of basic and diluted net loss per share of Class A Common Stock is as follows (in thousands, except share and per share amounts):

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(1,961

)

 

$

(12,355

)

 

$

(21,517

)

 

$

(40,055

)

Less: Net loss attributable to noncontrolling interests

 

(1,165

)

 

 

(8,705

)

 

 

(14,697

)

 

 

(28,222

)

Net loss attributable to vTv Therapeutics Inc., basic

   and diluted

$

(796

)

 

$

(3,650

)

 

$

(6,820

)

 

$

(11,833

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average vTv Therapeutics Inc. Class A

   Common Stock, basic and diluted

 

12,305,949

 

 

 

9,693,254

 

 

 

10,701,599

 

 

 

9,693,254

 

Net loss per share of vTv Therapeutics Inc. Class A

   Common Stock, basic and diluted

$

(0.06

)

 

$

(0.38

)

 

$

(0.64

)

 

$

(1.22

)

 

Potentially dilutive securities not included in the calculation of diluted net loss per share are as follows:

 

 

September 30, 2018

 

 

September 30, 2017

 

Class B Common Stock (1)

 

23,094,221

 

 

 

23,119,246

 

Common stock options granted under the Plan

 

1,782,688

 

 

 

1,952,399

 

Restricted stock units

 

23,333

 

 

 

35,000

 

Common stock options granted under Letter Agreement

 

3,759,399

 

 

 

 

Common stock warrants

 

907,507

 

 

 

190,586

 

Total

 

29,567,148

 

 

 

25,297,231

 

 

 

 

(1)

Shares of Class B Common Stock do not share in the Company’s earnings and are not participating securities.  Accordingly, separate presentation of loss per share of Class B Common Stock under the two-class method has not been provided.  Each share of Class B Common Stock (together with a corresponding vTv Unit) is exchangeable for one share of Class A Common Stock.  

19


 

 

 

Note 11:Fair Value of Financial Instruments

The carrying amount of certain of the Company’s financial instruments, including cash and cash equivalents, net accounts receivable, accounts payable and other accrued liabilities approximate fair value due to their short-term nature.

The fair value of the Company’s Loan Agreement is considered to approximate its carrying value because it bears interest at a variable interest rate.

The Company measures the value of its investment in Reneo at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment.  During the three and nine months ended September 30, 2018, there were no observable price changes in identical or similar investments, nor were there any indications of impairment.  As such, the value of the Company’s investment in Reneo was not remeasured.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The Company evaluates its financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level in which to classify them for each reporting period. This determination requires significant judgments. The following table summarizes the conclusions reached regarding fair value measurements as of September 30, 2018 and December 31, 2017 (in thousands):

 

 

Balance at September 30, 2018

 

 

Quoted Prices in Active Markets for Identical Assets

(Level 1)

 

 

Significant Other Observable Inputs

(Level 2)

 

 

Significant Unobservable Inputs

(Level 3)

 

Warrant liability, related party (1)

$

382

 

 

$

 

 

$

 

 

$

382

 

Total

$

382

 

 

$

 

 

$

 

 

$

382

 

 

 

Balance at December 31, 2017

 

 

Quoted Prices in Active Markets for Identical Assets

(Level 1)

 

 

Significant Other Observable Inputs

(Level 2)

 

 

Significant Unobservable Inputs

(Level 3)

 

Warrant liability, related party (2)

$

492

 

 

$

 

 

$

 

 

$

492

 

Total

$

492

 

 

$

 

 

$

 

 

$

492

 

 

(1)

Fair value determined using the Black-Scholes option pricing model.  Expected volatility is based on a portfolio of selected stocks of companies believed to have market and economic characteristics similar to its own.  The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of the valuation.

(2)

Fair value determined using an option pricing model based on the Company’s current capitalization.  Expected volatility is based on a portfolio of selected stocks of companies believed to have market and economic characteristics similar to its own.  The risk-free rate is based on the yield of U.S. government securities with the same term as the option as of the valuation date.

 

 

Changes in Level 3 instruments for the nine months ended September 30,

 

 

Balance at January 1

 

 

Net Change in

fair value included in earnings

 

 

Purchases /

Issuance

 

 

Sales /

Repurchases

 

 

Balance at September 30,

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrant liability, related party

 

492

 

 

 

(610

)

 

 

500

 

 

 

 

 

 

382

 

Total

$

492

 

 

$

(610

)

 

$

500

 

 

$

 

 

$

382

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrant liability

$

167

 

 

$

 

 

$

 

 

$

(167

)

 

$

 

Total

$

167

 

 

$

 

 

$

 

 

$

(167

)

 

$

 

 

During the three and nine months ended September 30, 2018, the Company recognized a gain of $0.3 million and $0.6 million, respectively, related to the change in fair value of the Letter Agreement Warrants.  This gain was recognized as a component of other

20


 

income – related party in the Condensed Consolidated Statements of Operations.  Significant inputs utilized in the valuation of the Letter Agreement Warrants as of September 30, 2018 were:

 

Expected volatility

96.05% - 98.58%

Risk-free interest rate

2.98% - 3.00%

 

Changes in the unobservable inputs noted above would impact the amount of the liability for the Letter Agreement Warrants.  Increases (decreases) in the estimates of the Company’s annual volatility would increase (decrease) the liability and an increase (decrease) in the annual risk-free rate would increase (decrease) the liability.  

 

Note 12:Subsequent Events

On October 26, 2018, we entered into amendments to the Letter Agreement Warrants with MacAndrews, which removed certain anti-dilution provisions of the Letter Agreement Warrants.

On November 6, 2018, the Company caused MacAndrews to purchase an additional 1,879,699 shares of its Class A Common Stock under the terms of the letter agreement entered into on July 30, 2018 for $2.5 million in cash.

21


 

ITEM 2.

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

As used in this Quarterly Report on Form 10-Q, the “Company”, the “Registrant”, “we” or “us” refer to vTv Therapeutics Inc. and “vTv LLC” refers