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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2014.

 

Or

 

o         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 001-35726

 

Radius Health, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

80-0145732

(State or other jurisdiction of

 

(IRS Employer

Incorporation or organization)

 

Identification Number)

 

 

 

950 Winter Street

 

 

Waltham, Massachusetts

 

02451

(Address of Principal Executive Offices)

 

(Zip Code)

 

(617) 551-4000

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x   No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company x

 

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

 

Number of shares of the registrant’s Common Stock, $.0001 par value per share, outstanding as of November 6, 2014: 32,923,834 shares

 

 

 



Table of Contents

 

RADIUS HEALTH, INC.

QUARTERLY REPORT FOR THE QUARTER ENDED SEPTEMBER 30, 2014

ON FORM 10-Q

 

INDEX

 

PART I FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

2

 

Condensed Balance Sheets as of September 30, 2014 and December 31, 2013

2

 

Condensed Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2014 and 2013

3

 

Condensed Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the nine months ended September 30, 2014

4

 

Condensed Statements of Cash Flows for the nine months ended September 30, 2014 and 2013

5

 

Notes to Unaudited Financial Statements

6

Item 2.

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

21

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

37

Item 4.

Controls and Procedures

38

 

 

 

PART II OTHER INFORMATION

39

 

 

 

Item 1.

Legal Proceedings

39

Item 1A.

Risk Factors

39

Item 2.

Unregistered Sales of Equity Securities and the Use of Proceeds

56

Item 3.

Defaults Upon Senior Securities

56

Item 4.

Mine Safety Disclosures

56

Item 5.

Other Information

56

Item 6.

Exhibits

57

 

 

 

SIGNATURES

 

58

 



Table of Contents

 

CURRENCY AND CONVERSIONS

 

In this report, references to “dollar” or “$” are to the legal currency of the United States, and references to “euro” or “€” are to the single currency introduced on January 1, 1999 at the start of the third stage of European Economic and Monetary Union, pursuant to the Treaty establishing the European Communities, as amended by the Treaty on European Union and the Treaty of Amsterdam. Unless otherwise indicated, the financial information in this report has been expressed in U.S. dollars. Unless otherwise stated, the U.S. dollar equivalent information translating euros into U.S. dollars has been made, for convenience purposes, on the basis of the noon buying rate published by the Board of Governors of the Federal Reserve as of September 30, 2014, which was €1.00 = $1.2628. Such translations should not be construed as a representation that the euro has been, could have been or could be converted into U.S. dollars at the rate indicated, any particular rate or at all.

 

Trademarks appearing in this report are the property of their respective holders.

 

1



Table of Contents

 

Item 1. Financial Statements

 

Radius Health, Inc.

Condensed Balance Sheets

(In thousands, except share and per share amounts)

 

 

 

September 30,

 

December 31,

 

 

 

2014

 

2013

 

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

16,466

 

$

12,303

 

Marketable securities

 

52,048

 

 

Prepaid expenses and other current assets

 

1,380

 

334

 

Total current assets

 

69,894

 

12,637

 

Property and equipment, net

 

790

 

76

 

Other assets

 

252

 

45

 

Total assets

 

$

70,936

 

$

12,758

 

 

 

 

 

 

 

LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

1,309

 

$

300

 

Accrued expenses and other current liabilities

 

21,911

 

22,007

 

Current portion of note payable, net of discount

 

2,027

 

13,005

 

Total current liabilities

 

25,247

 

35,312

 

 

 

 

 

 

 

Note payable, net of current portion and discount

 

22,295

 

 

Warrant liability

 

 

1,945

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

Series B-2 Convertible Preferred Stock, $.0001 par value; no shares and 655,000 shares authorized, no shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively

 

 

 

Series B Convertible Preferred Stock, $.0001 par value; no shares and 980,000 shares authorized, no shares and 701,235 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively

 

 

43,892

 

Series A-1 Convertible Preferred Stock, $.0001 par value; no shares and 1,000,000 shares authorized, no shares and 939,612 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively

 

 

78,737

 

Series A-2 Convertible Preferred Stock, $.0001 par value; no shares and 983,213 shares authorized, no shares and 983,208 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively

 

 

93,977

 

Series A-3 Convertible Preferred Stock, $.0001 par value; no shares and 142,230 shares authorized, no shares and 142,227 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively

 

 

12,232

 

Series A-4 Convertible Preferred Stock, $.0001 par value; no shares and 4,000 shares authorized, no shares and 3,998 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively

 

 

271

 

Series A-5 Convertible Preferred Stock, $.0001 par value; no shares and 7,000 shares authorized, no shares and 6,443 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively

 

 

525

 

Series A-6 Convertible Preferred Stock, $.0001 par value; no shares and 800,000 shares authorized, no shares and 496,111 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively

 

 

23,168

 

Stockholders’ equity (deficit):

 

 

 

 

 

Common stock, $.0001 par value; 200,000,000 shares and 100,000,000 shares authorized, 29,747,797 shares and 385,664 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively

 

3

 

 

Additional paid-in-capital

 

349,677

 

 

Accumulated other comprehensive loss

 

(10

)

 

 

Accumulated deficit

 

(326,276

)

(277,301

)

Total stockholders’ equity (deficit)

 

23,394

 

(277,301

)

Total liabilities, convertible preferred stock and stockholders’ equity (deficit)

 

$

70,936

 

$

12,758

 

 

See accompanying notes to unaudited condensed financial statements.

 

2



Table of Contents

 

Radius Health, Inc.

Condensed Statements of Operations and Comprehensive Loss

(Unaudited, in thousands, except share and per share amounts)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

Research and development

 

$

13,817

 

$

15,543

 

$

34,152

 

$

49,070

 

General and administrative

 

2,836

 

1,621

 

8,045

 

4,643

 

Loss from operations

 

(16,653

)

(17,164

)

(42,197

)

(53,713

)

OTHER (EXPENSE) INCOME:

 

 

 

 

 

 

 

 

 

Other (expense) income, net

 

 

(2,607

)

(506

)

7,465

 

Loss on retirement of note payable

 

 

 

(203

)

 

Interest income

 

35

 

11

 

42

 

27

 

Interest expense

 

(802

)

(582

)

(1,653

)

(1,938

)

NET LOSS

 

$

(17,420

)

$

(20,342

)

$

(44,517

)

$

(48,159

)

OTHER COMPREHENSIVE LOSS, NET OF TAX:

 

 

 

 

 

 

 

 

 

Unrealized loss from marketable securities

 

(11

)

(3

)

(10

)

 

COMPREHENSIVE LOSS

 

$

(17,431

)

$

(20,345

)

$

(44,527

)

$

(48,159

)

LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS - BASIC AND DILUTED (Note 11):

 

$

(17,420

)

$

(25,090

)

$

(53,517

)

$

(60,857

)

LOSS PER SHARE:

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.59

)

$

(65.05

)

$

(4.23

)

$

(159.09

)

Diluted

 

$

(0.59

)

$

(65.05

)

$

(4.23

)

$

(159.09

)

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE SHARES:

 

 

 

 

 

 

 

 

 

Basic

 

29,746,426

 

385,688

 

12,651,628

 

382,541

 

Diluted

 

29,746,426

 

385,688

 

12,651,628

 

382,541

 

 

See accompanying notes to unaudited condensed financial statements.

 

3



Table of Contents

 

Radius Health, Inc.

Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)

(Unaudited, in thousands except share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible Preferred Stock

 

 

 

Series B-2

 

Series B

 

Series A-1

 

Series A-2

 

Series A-3

 

Series A-4

 

Series A-5

 

Series A-6

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Balance at December 31, 2013

 

 

$

 

701,235

 

$

43,892

 

939,612

 

$

78,737

 

983,208

 

$

93,977

 

142,227

 

$

12,232

 

3,998

 

$

271

 

6,443

 

$

525

 

496,111

 

$

23,168

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain from available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of preferred stock

 

448,060

 

26,152

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

186,847

 

10,109

 

Accretion of dividends on preferred stock

 

 

 

685

 

 

 

1,515

 

 

 

3,084

 

 

 

3,246

 

 

 

470

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of warrants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of warrants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of convertible preferred stock into common stock

 

(448,060

)

(26,837

)

(701,235

)

(45,407

)

(939,612

)

(81,821

)

(983,208

)

(97,223

)

(142,227

)

(12,702

)

(3,998

)

(271

)

(6,443

)

(525

)

(682,958

)

(33,277

)

Reclassification of warrant liability to additional paid in capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2014

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

 

 

Stockholders’ Equity (Deficit)

 

 

 

Common Stock

 

Additional
Paid-In-
Capital

 

Accumulated Other
Comprehensive
Income (Loss)

 

Accumulated
Deficit

 

Total
Stockholders’
Equity (Deficit)

 

 

 

Shares

 

Amount

 

Amount

 

Amount

 

Amount

 

Amount

 

Balance at December 31, 2013

 

385,664

 

$

 

$

 

$

 

(277,301

)

$

(277,301

)

Net loss

 

 

 

 

 

 

 

 

 

(44,517

)

(44,517

)

Unrealized gain from available-for-sale securities

 

 

 

 

 

 

 

(10

)

 

 

(10

)

Issuance of preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

Accretion of dividends on preferred stock

 

 

 

 

 

(4,542

)

 

 

(4,458

)

(9,000

)

Issuance of warrants

 

 

 

 

 

41

 

 

 

 

 

41

 

Exercise of warrants

 

20,435

 

 

 

 

 

 

 

 

 

 

Exercise of options

 

1,168

 

 

 

3

 

 

 

 

 

3

 

Stock-based compensation expense

 

 

 

 

 

2,560

 

 

 

 

 

2,560

 

Issuance of common stock, net

 

7,012,744

 

1

 

50,437

 

 

 

 

 

50,438

 

Conversion of convertible preferred stock into common stock

 

22,327,786

 

2

 

298,061

 

 

 

 

 

298,063

 

Reclassification of warrant liability to additional paid in capital

 

 

 

 

 

3,117

 

 

 

 

 

3,117

 

Balance at September 30, 2014

 

29,747,797

 

$

3

 

$

349,677

 

$

(10

)

(326,276

)

$

23,394

 

 

See accompanying notes to unaudited condensed financial statements.

 

4



Table of Contents

 

Radius Health, Inc.

Statements of Cash Flows

(Unaudited, in thousands)

 

 

 

Nine Months Ended
September 30,

 

 

 

2014

 

2013

 

CASH FLOWS USED IN OPERATING ACTIVITIES:

 

 

 

 

 

Net loss

 

$

(44,517

)

$

(48,159

)

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

 

 

 

 

 

Depreciation and amortization

 

69

 

21

 

Amortization of premium (accretion of discount) on marketable securities, net

 

183

 

28

 

Stock-based compensation expense

 

2,560

 

1,247

 

Research and development expense settled in stock

 

2,717

 

10,568

 

Change in fair value of other current assets, warrant liability and other liability

 

505

 

(7,464

)

Non-cash interest

 

212

 

307

 

Loss on retirement of note payable

 

57

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

Prepaid expenses and other current assets

 

(845

)

1,813

 

Other long-term assets

 

(150

)

 

Accounts payable

 

1,009

 

2,134

 

Accrued expenses and other current liabilities

 

6,229

 

9,646

 

Net cash used in operating activities

 

(31,971

)

(29,859

)

CASH FLOWS USED IN INVESTING ACTIVITIES:

 

 

 

 

 

Purchases of property and equipment

 

(714

)

 

Purchases of marketable securities

 

(53,305

)

(17,070

)

Sales and maturities of marketable securities

 

1,065

 

10,793

 

Net cash used in investing activities

 

(52,954

)

(6,277

)

CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from exercise of stock options

 

 

13

 

Proceeds from note payable, net

 

24,555

 

 

Payments on note payable

 

(13,156

)

(5,907

)

Proceeds from the issuance of common stock, net

 

50,437

 

 

Deferred financing costs

 

(116

)

 

Proceeds from the issuance of preferred stock, net

 

27,368

 

42,870

 

Net cash provided by financing activities

 

89,088

 

36,976

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

4,163

 

840

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR

 

12,303

 

18,653

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

16,466

 

$

19,493

 

SUPPLEMENTAL DISCLOSURES:

 

 

 

 

 

Cash paid for interest

 

$

1,138

 

$

1,426

 

NON-CASH FINANCING ACTIVITIES:

 

 

 

 

 

Accretion of dividends on preferred stock

 

$

9,000

 

$

12,698

 

Fair value of Series A-6 convertible preferred stock issued as settlement of liability

 

$

10,109

 

$

 

Fair value of warrants issued

 

$

1,552

 

$

1,356

 

Reclassification of preferred stock to common stock

 

$

298,063

 

$

 

 

See accompanying notes to unaudited condensed financial statements.

 

5



Table of Contents

 

Radius Health, Inc.

Notes to Financial Statements

(Unaudited)

 

1. Organization

 

Radius Health, Inc. (“Radius” or the “Company”) is a science-driven biopharmaceutical company focused on developing new therapeutics for patients with osteoporosis as well as other serious endocrine-mediated diseases. The Company’s lead product candidate is the investigational drug abaloparatide (BA058), a bone anabolic for the treatment of osteoporosis delivered via subcutaneous injection, which the Company refers to abaloparatide-SC and is currently in Phase 3 development. The Company is leveraging its investment in abaloparatide-SC to develop a line extension that is designed to improve patient convenience by enabling administration of abaloparatide through a short-wear-time patch, which the Company refers to as abaloparatide-TD. The Company has recently completed a successful Phase 2 proof of concept study of abaloparatide-TD.

 

The Company’s current clinical product portfolio also includes the investigational drug RAD1901, a selective estrogen receptor down regulator/degrader (“SERD”) and RAD140, a nonsteroidal selective androgen receptor modulator (“SARM”).  The Company is developing RAD1901 at higher doses for the treatment of metastatic breast cancer. At low doses, RAD1901 acts as a selective estrogen-receptor modulator (“SERM”). Low-dose RAD1901 has shown potential to be effective for the treatment of vasomotor symptoms such as hot flashes in a successful Phase 2 proof of concept study.  RAD140 resulted from an internal drug discovery program that began in 2005.  RAD140 has demonstrated potent anabolic activity on muscle and bone in preclinical studies and has clinical potential in a number of indications including the treatment of weight loss due to cancer cachexia, sarcopenia, frailty and oncology.

 

The Company is subject to the risks associated with emerging companies with a limited operating history, including dependence on key individuals, a developing business model, the necessity of securing regulatory approval to market its investigational product candidates, market acceptance of the Company’s product candidates, competition for its product candidates, and the continued ability to obtain adequate financing to fund the Company’s future operations. The Company has incurred losses and expects to continue to incur additional losses for the foreseeable future. As of September 30, 2014, the Company had an accumulated deficit of $326.3 million, and total cash, cash equivalents and marketable securities of $68.5 million. On October 7, 2014, the Company completed a public offering whereby the Company sold 2,750,000 shares of common stock at a price of $18.25 per share, for aggregate proceeds, net of underwriting discounts, commissions and offering costs, of approximately $46.9 million. On October 7, 2014, the underwriters purchased an additional 378,524 shares in the aggregate by exercising a portion of the over-allotment option granted to them in connection with the offering. As a result of the public offering and subsequent exercise of the over-allotment option, the Company received aggregate proceeds, net of underwriting discounts, commissions and offering costs of approximately $53.3 million.

 

The Company believes that the aggregate proceeds from the offering on October 7, 2014, together with its cash, cash equivalents and marketable securities as of September 30, 2014, will be sufficient to fund its operations into the fourth quarter of 2015. Accordingly, the Company expects to pursue strategic financing alternatives that could include, but are not limited to, partnering or other collaboration agreements, or additional financing opportunities, including the completion of a private placement or public offering in order to address its capital needs.  However, there is no guarantee that any of these strategic or financing opportunities will be executed or executed on favorable terms, and some could be dilutive to existing stockholders. If the Company fails to obtain additional future capital, it may be unable to complete its planned preclinical and clinical trials and obtain approval of any investigational product candidates from the U.S. Food and Drug Administration or other regulatory authorities. In addition, the Company could be forced to discontinue product development, reduce or forego sales and marketing efforts, forego attractive business opportunities or discontinue operations entirely.

 

2. Basis of Presentation and Significant Accounting Policies

 

Basis of Presentation—The accompanying unaudited condensed financial statements and the related disclosures of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial reporting and as required by Regulation S-X, Rule 10-01. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (including those which are normal and recurring) considered necessary for a fair presentation of the interim financial information have been included.

 

When preparing financial statements in conformity with GAAP, the Company must make estimates and assumptions that affect the reported amounts of assets, liabilities, expenses and related disclosures at the date of the financial statements. Actual results could differ from those estimates. Additionally, operating results for the three and nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending December 31, 2014. Subsequent events have been evaluated up to the date of issuance of these financials. For further information, refer to the financial statements and footnotes included in the Company’s audited financial statements for the year ended December 31, 2013 included in the Company’s Annual Report on Form 10-K/A, as filed with the Securities and Exchange Commission on April 3, 2014.

 

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Significant Accounting Policies—The significant accounting policies identified in the Company’s most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2013 relate to research and development costs, stock-based compensation, fair value measures, property and equipment, license agreements, impairment of long-lived assets and income taxes. There were no changes to significant accounting policies during the nine months ended September 30, 2014.

 

Initial Public Offering-On June 11, 2014, the Company completed its initial public offering whereby the Company sold 6,500,000 shares of common stock at a price of $8.00 per share. The shares began trading on the NASDAQ Global Market on June 6, 2014. In connection with the offering, all outstanding shares of our convertible preferred stock converted into 19,465,132 shares of common stock and 2,862,654 shares of common stock were issued in satisfaction of accumulated dividends accrued on the preferred stock. In addition, all outstanding warrants to purchase shares of A-1 convertible preferred stock and warrants to purchase shares of series B-2 convertible preferred stock were converted into the right to purchase 149,452 shares of common stock and the Company’s warrant liability was reclassified to equity.

 

On June 18, 2014 and June 25, 2014, the underwriters purchased an additional 512,744 shares in the aggregate by exercising a portion of the over-allotment option granted to them in connection with the initial public offering.  As a result of the closing of the initial public offering and subsequent exercise of the over-allotment option, the Company received aggregate proceeds, net of underwriting discounts, commissions and offering costs, of approximately $50.4 million.

 

In connection with the completion of its initial public offering, the Company filed an amended and restated certificate of incorporation, which, among other things, changed the number of authorized shares of common stock to 200,000,000 shares.

 

Reverse Stock Split— On April 24, 2014, the Company effected a reverse stock split of the Company’s common stock. The number of authorized shares of the Company’s common stock and the par value did not change.  Pursuant to the stock split, every 2.28 shares of the Company’s issued and outstanding common stock were automatically combined into one issued and outstanding share of the Company’s common stock. All shares and per share amounts in the condensed financial statements and accompanying notes have been retroactively adjusted to give effect to the reverse stock split.

 

Recently Adopted Accounting Standards—In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”). ASU 2013-11 clarifies guidance and eliminates diversity in practice on the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. The amendments under ASU 2013-11 were effective for interim and annual fiscal periods beginning after December 15, 2013, with early adoption permitted. The Company adopted ASU 2013-11 on January 1, 2014.  Its adoption did not have a material impact on the Company’s results of operations, financial position, or cash flows.

 

In December 2013, the FASB issued Accounting Standards Update No. 2013-12, Definition of a Public Business Entity (“ASU 2013-12”). ASU 2013-12 amends the Master Glossary of the FASB Accounting Standards Codification to include one definition of public business entity for future use in GAAP. ASU 2013-12 does not affect existing requirements but will be used in considering the scope of new financial guidance and will identify whether the guidance does or does not apply to public business entities. The Company adopted ASU 2013-12 on January 1, 2014.  Its adoption did not have a material impact on the Company’s results of operations, financial position or cash flows.

 

Accounting Standards Updates—In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 provides guidance in GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The amendments under ASU 2014-15 are effective for interim and annual fiscal periods beginning after December 15, 2016, with early adoption permitted. The Company plans to adopt ASU 2013-12 on January 1, 2015.  We do not expect the adoption to have a material impact on the Company’s results of operations, financial position or cash flows.

 

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3. Accrued Expenses and Other Current Liabilities

 

Accrued expenses and other current liabilities consist of the following (in thousands):

 

 

 

September 30,

 

December 31,

 

 

 

2014

 

2013

 

Research costs - Nordic (1)

 

$

13,950

 

$

17,998

 

Research costs - other

 

5,413

 

1,599

 

Payroll and employee benefits

 

888

 

1,005

 

Professional fees

 

1,296

 

426

 

Vacation

 

151

 

69

 

Interest on notes payable

 

127

 

852

 

Other

 

86

 

58

 

Total accrued expenses and other current liabilities

 

$

21,911

 

$

22,007

 

 


(1)         Includes amounts accrued ratably over the estimated per patient treatment period under the Nordic Work Statement NB-1 and Work Statement NB-3.  Amounts do not include pass-through costs which are expensed as incurred or upon delivery.  See note 9 for additional information.

 

4.  Loan and Security Agreement

 

On May 30, 2014, the Company entered into a Loan and Security Agreement (the “New Credit Facility), with Solar Capital Ltd. (“Solar”), as collateral agent and a lender, and Oxford Finance LLC (“Oxford), as a lender (the “Lenders”), pursuant to which Solar and Oxford agreed to make available to the Company $30.0 million in the aggregate subject to certain conditions to funding. An initial term loan was made on May 30, 2014 in an aggregate principal amount equal to $21.0 million (“Initial Term Loan”).

 

The Company is required to make interest-only payments through June 1, 2015, and beginning on July 1, 2015, it is required to make payments of principal and accrued interest in equal monthly installments over a term of 36 months. If the Company consummates any one or more public or private stock offerings, equity raises or strategic partner arrangements resulting in the receipt of at least $65.0 million in aggregate net cash proceeds on or prior to May 31, 2015, it will be permitted to make interest-only payments through December 1, 2015 rather than July 1, 2015, and beginning on January 1, 2016, the Company would be required to make principal and accrued interest payments in equal monthly installments over a term of 30 months.

 

In addition to the Initial Term Loan, the Company would have been able to request an additional term loan in an aggregate principal amount of $9.0 million (the “Original Term B Loan”) after the completion of this initial public offering if the net cash proceeds were at least $65.0 million subject to certain customary conditions to funding. Given the net proceeds from the Company’s initial public offering were less than $65.0 million, it was not able to request the Original Term B Loan. The Initial Term Loan bears interest per annum at 9.85% plus one-month LIBOR (customarily defined). All principal and accrued interest on the initial term loan is due on June 1, 2018.

 

The Company used approximately $9.3 million of the Initial Term Loan to repay all the amounts owed under its credit facility with General Electric Capital Corporation and Oxford.

 

As security for its obligations under the New Credit Facility, the Company granted a security interest in substantially all of its existing and after-acquired assets except for our intellectual property and certain other customary exclusions.

 

On July 10, 2014, the Company entered into a first amendment to the New Credit Facility (“First Amendment”).  Pursuant to the terms of the First Amendment, a second term loan of $4.0 million was drawn on July 10, 2014.  The terms of the First Amendment, among other things,

 

·                  provide the Company with, subject to certain customary funding conditions, additional term loans in an aggregate principal amount of $4.0 million upon the closing of the First Amendment (the “Modified Term B Loan”).  All other terms applicable to the Original Term B Loan remain applicable to the Modified Term B Loan. The Original Term B Loan are replaced by the Modified Term B Loan.  The Company borrowed the full amount of the Modified Term B Loan on July 10, 2014.

 

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·                  provide the Company the ability to borrow additional term loans in an aggregate amount of $5.0 million (the “Term C Loan”) at any time through December 31, 2014.   In order to draw the Term C Loan, the Company must, in addition to other customary conditions, either (a) close public or private stock offerings, equity raises or strategic partner arrangements resulting in $13.0 million in aggregate net proceeds after the closing of the First Amendment, or (b) as it relates specifically to RAD1901, complete both the maximum tolerable dose trial and enroll the first patient in the breast cancer brain metastasis trial.

 

The future principal payments under the New Credit Facility, as amended, are as follows, as of September 30, 2014 (in thousands):

 

Years ending December 31,

 

 

 

2014

 

$

 

2015

 

4,167

 

2016

 

8,333

 

2017

 

8,333

 

2018

 

4,167

 

 

 

$

25,000

 

 

On May 30, 2014, pursuant to the Loan and Security Agreement with Solar and Oxford, the Company issued to Solar and Oxford warrants to purchase an aggregate of up to 10,258 shares of its series B-2 convertible preferred stock (“Series B-2”) at an exercise price equal to $61.42 per share. The warrants were initially classified as liabilities in the Company’s balance sheet and were re-measured at their estimated fair value through completion of the Company’s initial public offering. The changes in fair value are recorded as other (expense) income in the statement of operations. Upon the closing of its initial public offering at a price of $8.00 per share and the automatic conversion of the Series B-2 into common stock, these warrants became exercisable for up to 78,760 shares of common stock. Subsequent to the initial public offering, the Company’s warrant liability was reclassified to equity. On July 10, 2014, pursuant to the First Amendment and closing of the Modified Term B Loan, the Company issued both Solar and Oxford warrants to purchase up to 4,706 shares of common stock, each at a price per share equal to $12.75.

 

These warrants are immediately exercisable for cash or by net exercise and will expire five years from their issuance.

 

The initial fair value of the warrants issued in connection with Initial Term Loan was $0.3 million and was recorded as a discount to the Initial Term Loan.  The initial fair value of the warrants issued in connection with the First Amendment was $41 thousand and was recorded as a discount to the Modified Term B Loan. The Company also paid Solar and Oxford a facility fee of $0.3 million and reimbursed certain costs associated with the Loan and Security Agreement of approximately $0.1 million, both of which were also recorded as a discount to the Initial Term Loan. The discount is being amortized to interest expense over the 48 month period that the Initial Term Loan is expected to be outstanding using the effective interest method.

 

5. Convertible Preferred Stock

 

Below is a summary of the rights, preferences, and privileges of the Series B convertible preferred stock (“Series B”), Series B-2 convertible preferred stock (“Series B-2), Series A-1 convertible preferred stock (“Series A-1”), Series A-2 convertible preferred stock (“Series A-2”), Series A-3 convertible preferred stock (“Series A-3”), Series A-4 convertible preferred stock (“Series A-4”), Series A-5 convertible preferred stock (“Series A-5”) and Series A-6 convertible preferred stock (“Series A-6”) (the Series A-1, Series A-2, Series A-3, Series A-4, Series A-5 and Series A-6, collectively, the “Series A Preferred Stock”) prior to the conversion of all outstanding convertible preferred stock into common stock upon completion of the Company’s initial public offering on June 11, 2014.

 

On February 14, 2014, the Company entered into a Series B-2 Convertible Preferred Stock and Warrant Purchase Agreement (the “Series B-2 Purchase Agreement”), pursuant to which the Company was able to raise up to approximately $40.2 million through the issuance of (1) up to 655,000 shares of its Series B-2 and (2) warrants to acquire up to 718,201 shares of its common stock with an exercise price of $14.004 per share. In February and March 2014, the Company consummated closings under the Series B-2 Purchase Agreement, whereby, in exchange for aggregate gross proceeds to the Company of approximately $27.5 million, the Company issued an aggregate of 448,060 shares of Series B-2 and warrants to purchase up to a total of 491,293 shares of its common stock.

 

Conversion— Any holder of the Company’s preferred stock had the right, at any time or from time to time, to convert any or all of its shares of preferred stock into fully paid and non-assessable shares of the Company’s common stock for each share of preferred stock converted based upon the then in effect Conversion Price (“Conversion Feature”).  If the Company issued or sold any shares of its Common Stock (as defined by the Company’s certificate of incorporation) or options to purchase or other rights to subscribe for such

 

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convertible or exchangeable securities, in each case other than Excluded Stock (as defined by the Company’s certificate of incorporation), for a consideration per share less than the then in effect conversion price (“Dilutive Issuance”) of the Company’s Series A-1, A-2, A-3, B, or B-2 preferred stock, respectively, the Conversion Price for such series in effect immediately prior to each such Dilutive Issuance would automatically be reduced in accordance with the provisions set forth in the Certificate of Designations.  Upon issuance of each series of the Company’s preferred stock, the respective Conversion Prices were greater than the fair value of the Company’s common stock at the respective commitment dates.  Therefore, the Conversion Feature was not considered to be a beneficial conversion feature that would require the Company to record a deemed dividend on the preferred stock.  Each holder of Series B and Series B-2 shares had the right, at their option at any time, to convert any such shares of preferred stock into such number of fully paid shares of common stock as determined by dividing the original purchase price of $61.42 by the conversion price (“Series B Optional Conversion”). The conversion price of the Series B and Series B-2 as of June 6, 2014 was $14.004 per share and $8.00 per share, respectively, (the “Series B Conversion Price”), which represented a conversion ratio of one share of Series B or Series B-2 into approximately 4.386 and 7.678 shares of common stock, respectively.

 

Each holder of Series A-1, Series A-2 and Series A-3 had the right, at their option at any time, to convert any such shares of preferred stock into such number of fully paid shares of common stock as determined by dividing the original purchase price of $81.42 by the conversion price (“Optional Conversion”). The original conversion price of the Series A-1, Series A-2 and Series A-3 was $18.564 per share (the “Conversion Price”), which represented a conversion ratio of one share of Series A-1, Series A-2 or Series A-3 into approximately 4.386 shares of common stock. The issuance of the Series B in April and May of 2013 and the Series B-2 in February and March of 2014 resulted in an adjustment to the Conversion Price of the Series A-1, Series A-2 and Series A-3 (the “Anti-Dilution Adjustment”).  As a result of the Anti-Dilution Adjustment, the conversion price of each share of Series A-1, Series A-2 and Series A-3 was reduced to $16.970, which represented a conversion ratio of one share of Series A-1, Series A-2 or Series A-3 into approximately 4.798 shares of common stock.  This reduction of the Conversion Price did not create a beneficial conversion feature that would require the Company to record a deemed dividend on the Series A-1, Series A-2 or Series A-3 preferred stock.

 

Each holder of Series A-4, Series A-5 and Series A-6 had the right, at their option at any time, to convert any such shares of preferred stock into such number of fully paid shares of common stock as determined by dividing the original purchase price of $81.42 by the conversion price. The Conversion Price of the Series A-4, Series A-5 and Series A-6 as of June 6, 2014 was $18.564 per share, which represented a conversion ratio of one share of Series A-4, Series A-5 or Series A-6 into approximately 4.386 shares of common stock.

 

Upon an optional conversion, the holders of the converted Series B-2, Series B and Series A Preferred Stock were entitled to payment of all accrued, whether or not declared, but unpaid dividends in shares of the common stock of the Company at the then effective Conversion Price.

 

Each share of the Series B, Series B-2 and Series A Preferred Stock was automatically convertible into fully paid and non-assessable shares of common stock at the applicable conversion price (as described above) in effect upon, in the case of the Series A and Series B Preferred Stock, upon (1) a vote of the holders of at least 70% of the outstanding shares of Series B, Series B-2, Series A-1, Series A-2 and Series A-3 to convert all shares of Series B, Series B-2 and Series A Preferred Stock or (2) the common stock becoming listed for trading on a national stock exchange, and in the case of the Series B-2 Preferred Stock, upon (1) a vote of the holders of at least 70% of the outstanding shares of Series B-2 to convert all shares of Series B-2 Preferred Stock, (2) the closing of a firm commitment underwritten public offering on or prior to June 30, 2014 or (3) after June 30, 2014, the common stock becoming listed for trading on a national stock exchange (“Special Mandatory Conversion”). Upon a Special Mandatory Conversion, all accrued, whether or not declared, but unpaid dividends were to be paid in cash or shares of common stock (calculated based on the then effective conversion price) at the discretion of the Company’s Board of Directors.

 

In the event of a conversion upon the closing of a firm commitment underwritten public offering on or prior to June 30, 2014 in which the public offering price per share is less than the Series B-2 Conversion Price, then the Series B-2 Conversion Price was automatically reduced to the price equal to the public offering price.

 

Redemption— Unless redemption was waived by a requisite stockholder vote or consent, the shares of Series B, Series B-2 and Series A Preferred Stock were automatically redeemable upon an event of sale of the Company.  The shares of Series B, Series B-2 and Series A Preferred Stock were not redeemable at the option of the holder.

 

Dividends— Holders of shares of Series B and Series B-2 were entitled to receive dividends at a rate of 8% per annum, compounding annually, which accrued on a daily basis commencing on the date of issuance of the shares of Series B and Series B-2. Dividends were payable, as accrued, upon liquidation, event of sale, and conversion to common stock, as described above. The holders of shares of Series B and Series B-2 were also entitled to dividends declared or paid on any shares of common stock.

 

Following payment in full of required dividends to the holders of Series B and Series B-2, holders of shares of Series A-1 were entitled to receive dividends at a rate of 8% per annum, compounding annually, which accrued on a daily basis commencing on the date of issuance of the shares of Series A-1. Dividends were payable, as accrued, upon liquidation, event of sale, and conversion to

 

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common stock, as described above. The holders of shares of Series A-1 were also entitled to dividends declared or paid on any shares of common stock.

 

Following payment in full of required dividends to the holders of Series B, Series B-2 and Series A-1, holders of Series A-2 were entitled to receive dividends at a rate of 8% per annum, compounding annually, which accrued on a daily basis commencing on the date of issuance of the shares of Series A-2. Dividends were payable, as accrued, upon liquidation, event of sale, and conversion to common stock, as described above. The holders of shares of Series A-2 were also entitled to dividends declared or paid on any shares of common stock.

 

Following payment in full of required dividends to the holders of Series B, Series B-2, Series A-1 and Series A-2, holders of Series A-3 were entitled to receive dividends at a rate of 8% per annum, compounding annually, which accrued on a daily basis commencing on the date of issuance of the shares of Series A-3. Dividends were payable, as accrued, upon liquidation, event of sale and conversion to common stock, as described above. The holders of shares of Series A-3 were also entitled to dividends declared or paid on any shares of common stock.

 

Without regard to the payment of required dividends to the holders of Series B, Series B-2, Series A-1, Series A-2 and Series A-3, holders of Series A-5 were entitled to receive the Series A-5 Special Accruing Dividend (as defined in the Company’s certificate of incorporation) paid in shares of Series A-6 as described in note 9. Dividends were payable, as accrued, upon liquidation, event of sale and conversion to common stock, as described above. The holders of shares of Series A-5 were also entitled to dividends declared or paid on any shares of common stock.

 

Following payment in full of required dividends to the holders of Series B, Series B-2, Series A-1, Series A-2, Series A-3 and Series A-5, holders of Series A-4 and Series A-6 were entitled to receive, when, if and as declared by the Board of Directors, dividends on any shares of Series A-4 Stock or Series A-6 Stock, as the case may be, out of funds legally available for that purpose, at a rate to be determined by the Board of Directors if and when they may so declare any dividend on the Series A-4 Stock or A-6 Stock, as the case may be. Dividends were payable, as accrued, upon liquidation, event of sale, and conversion to common stock, as described above. The holders of shares of Series A-4 and Series A-6 were also entitled to dividends declared or paid on any shares of common stock.

 

As of June 6, 2014, the Company had accrued dividends of $3.9 million, $18.1 million, $21.2 million and $3.1 million on Series B, Series A-1, Series A-2 and Series A-3, respectively. As of June 11, 2014 the Company had accrued dividends of $0.7 million on Series B-2. Upon completion of the Company’s initial public offering, all accrued dividends were paid in shares of common stock at the then effective Conversion Price.

 

Voting—The holders of Series B, Series B-2 and Series A Preferred Stock were entitled to vote together with the holders of the common stock as one class on an as-if converted basis.  In addition, as long as the shares of Series A-1 were outstanding, the holders of Series A-1, voting as a separate class, had the right to elect two members of the Company’s Board of Directors.

 

Liquidation— The shares of Series B and Series B-2 ranked equally to other shares of Series B and Series B-2, and ranked senior to the Series A-1 and all other classes of Series A Preferred Stock.  The shares of Series A-1 ranked senior to all other classes of Series A Preferred Stock. Series A-2 ranked junior to Series A-1 and senior to Series A-3, Series A-4, Series A-5 and Series A-6. Series A-3, Series A-5 and Series A-6 ranked equally but junior to Series A-1 and Series A-2 and senior to Series A-4. Series A-4 ranked senior to the Company’s common stock.

 

In the event of a liquidation, dissolution, or winding-up of the Company, the holders of Series B and Series B-2 were entitled to be paid first out of the assets available for distribution, before any payment is made to the Series A Preferred Stock. Payment to the holders of Series B was to consist of two (2) times the original purchase price of $61.42, plus all accrued but unpaid dividends. Payment to the holders of Series B-2 was to consist of one and a half (1.5) times the original purchase price of $61.42, plus all accrued but unpaid dividends. After such distribution to the holders of Series B and Series B-2, the holders of Series A-1 would have been entitled to be paid out of the remaining assets available for distribution, before any payment is made to the Series A-2, Series A-3, Series A-4, Series A-5 and Series A-6. Payment to the holders of Series A-1 was to consist of the original purchase price of $81.42, plus all accrued but unpaid dividends. After the distribution to the holders of Series A-1, the holders of Series A-2 would have been entitled to receive an amount per share equal to the original purchase price per share of $81.42, plus any accrued but unpaid dividends. After the distribution to the holders Series A-1 and Series A-2, the holders of Series A-3, Series A-5 and Series A-6, would have been entitled to receive an amount per share equal to the original purchase price per share of $81.42, plus any accrued but unpaid or declared and unpaid dividends, as appropriate. After the distribution to the holders Series A-1, Series A-2, Series A-3, Series A-5 and Series A-6, the holders of Series A-4 would have been entitled to receive an amount per share equal to the original purchase price per share of $81.42, plus any declared and unpaid dividends.  If the assets of the Company were insufficient to pay the full preferential amounts to the holders of Series B, the assets would have been distributed ratably among the holders of Series B in proportion to their aggregate liquidation preference amounts.  If the assets of the Company were insufficient to pay the full preferential amounts to the

 

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holders of Series A-1, the assets would have been distributed ratably among the holders of Series A-1 in proportion to their aggregate liquidation preference amounts. If the assets of the Company were insufficient to pay the full preferential amounts to the holders of Series A-2, the assets would have been distributed ratably among the holders of Series A-2 in proportion to their aggregate liquidation preference amounts. If the assets of the Company were insufficient to pay the full preferential amounts to the holders of Series A-3, Series A-5 and Series A-6, the assets would have been distributed ratably among the holders of Series A-3, Series A-5 and Series A-6 in proportion to their aggregate liquidation preference amounts. If the assets of the Company were insufficient to pay the full preferential amounts to the holders of Series A-4, the assets would have been distributed ratably among the holders of Series A-4 in proportion to their aggregate liquidation preference amounts. After all liquidation preference payments have been made to the holders of the Series B, Series B-2 and Series A Preferred Stock, the holders of the Series B, Series B-2 and Series A-1, Series A-2 and Series A-3 were to participate in the distribution of the remaining assets with the holders of the Company’s common stock on an as-if converted basis.

 

In the event of, and simultaneously with, the closing of an event of sale of the Company (as defined in the Company’s Amended Certificate of Incorporation), the Company was to redeem all of the shares of Series B, Series B-2 and Series A Preferred Stock then outstanding at the Special Liquidation Price, as defined. If the event of sale involved consideration other than cash, the Special Liquidation Price could have been paid with such consideration having a value equal to the Special Liquidation Price. The Special Liquidation Price was to be equal to an amount per share, which would be received by each holder of the Preferred Stock if, in connection with the event of sale, all the consideration paid in exchange for the assets or the shares of capital stock of the Company was actually paid to and received by the Company, and the Company was immediately liquidated thereafter and its assets distributed pursuant to the liquidation terms above.

 

6. Marketable Securities

 

Available-for-sale marketable securities and cash and cash equivalents consist of the following (in thousands):

 

 

 

September 30, 2014

 

 

 

Amortized Cost
Value

 

Gross Unrealized
Gains

 

Gross Unrealized
Losses

 

Fair Value

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

Cash

 

$

2,135

 

$

 

$

 

$

2,135

 

Money market funds

 

14,331

 

 

 

14,331

 

Total

 

$

16,466

 

$

 

$

 

$

16,466

 

Marketable securities:

 

 

 

 

 

 

 

 

 

Domestic corporate debt securities

 

43,561

 

 

(13

)

43,548

 

Domestic corporate commercial paper

 

8,497

 

3

 

 

8,500

 

Total

 

$

52,058

 

$

3

 

$

(13

)

$

52,048

 

 

 

 

December 31, 2013

 

 

 

Amortized Cost
Value

 

Gross Unrealized
Gains

 

Gross Unrealized
Losses

 

Fair Value

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

Cash

 

$

2,710

 

$

 

$

 

$

2,710

 

Money market fund

 

9,593

 

 

 

9,593

 

Total

 

$

12,303

 

$

 

$

 

$

12,303

 

 

There were no debt securities that had been in an unrealized loss position for more than 12 months as of September 30, 2014 or December 31, 2013. There were 18 debt securities in an unrealized loss position for less than 12 months at September 30, 2014 and there were no debt securities that had been in an unrealized loss position for less than 12 months at December 31, 2013. The aggregate unrealized loss on these securities as of September 30, 2014 was less than $14 thousand and the fair value was $29.8 million. The Company considered the decline in market value for these securities to be primarily attributable to current economic conditions. As it was not more likely than not that the Company would be required to sell these securities before the recovery of their amortized cost basis, which may be maturity, the Company did not consider these investments to be other-than-temporarily impaired as of September 30, 2014.

 

The contractual term to maturity of all marketable securities held by the Company as of September 30, 2014 is less than one year.

 

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7. Fair Value Measurements

 

The Company determines the fair values of its financial instruments based upon the fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Below are the three levels of inputs that may be used to measure fair value:

 

·                                Level 1—Quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

·                                Level 2—Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

·                                Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

The following table summarizes the financial instruments measured at fair value on a recurring basis in the accompanying condensed balance sheets as of September 30, 2014 and December 31, 2013 (in thousands):

 

 

 

September 30, 2014

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

Cash

 

$

2,135

 

$

 

$

 

$

2,135

 

Money market funds (1)

 

14,331

 

 

 

14,331

 

Total

 

$

16,466

 

$

 

$

 

$

16,466

 

Marketable securities:

 

 

 

 

 

 

 

 

 

Domestic corporate debt securities (2)

 

 

43,548

 

 

43,548

 

Domestic corporate commercial paper (2)

 

 

8,500

 

 

8,500

 

Total

 

$

 

$

52,048

 

$

 

$

52,048

 

 

 

 

December 31, 2013

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

Cash

 

$

2,710

 

$

 

$

 

$

2,710

 

Money market funds (1)

 

9,593

 

 

 

9,593

 

 

 

$

12,303

 

$

 

$

 

$

12,303

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Warrant liability (3)

 

$

 

$

 

$

1,945

 

$

1,945

 

Stock liability (3)

 

 

 

5,328

 

5,328

 

 

 

$

 

$

 

$

7,273

 

$

7,273

 

 


(1)                           Fair value is based upon quoted market prices.

(2)                           Fair value is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets.  Inputs are obtained from various sources, including market participants, dealers and brokers.

(3)                           Fair value is determined using the probability-weighted expected return model (“PWERM”), as discussed below.  Changes in the fair value of the Level 3 assets and liabilities are recorded as other (expense) income in the condensed statement of operations.

 

The stock liability represents the accrued balance of the research and development expense related to the stock dividends that were issuable to Nordic Bioscience Clinical Development VII A/S (“Nordic”) in shares of Series A-6 (or in shares of common stock if the Company lists its common stock on a national exchange) as of December 31, 2013, for services rendered which is being recognized ratably over the estimated per patient treatment period under the three work statements executed with Nordic (the “Nordic Work Statements”) (see note 9). The fair value of the stock liability was based upon the fair value of the Series A-6 as determined using

 

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PWERM, which considered the value of the Company’s various classes of preferred stock. The fair value of the Company’s various classes of preferred stock was determined through an analysis of the future values for equity assuming various future outcomes. Accordingly, share value was based upon the probability weighted present value of expected future net cash flows, considering each of the possible future events, discount rate as determined using the capital asset pricing model, as well as the rights and preferences of each share class. PWERM is complex as it requires numerous assumptions relating to potential future outcomes of equity. Accordingly, the valuation of the Company’s stock liability was determined using Level 3 inputs. Upon completion of the Company’s initial public offering, any payments owed by the Company to Nordic in relation to the Nordic Work Statements were changed from the right to receive shares of Series A-6 to the right to receive a total cash payment from the Company of $4.3 million.

 

The warrant liability as of December 31, 2013, represents the liability for the warrants issued to the placement agent in connection with the Company’s Series A-1 financing, to the investors in the Series B financing in April and May 2013, and to the lenders in connection with the Company’s Loan and Security Agreement executed with Oxford and General Electric Capital Corporation in May 2011. The warrant liability was calculated using the Black-Scholes option pricing method. This method of valuation includes using inputs such as the fair value of the Company’s common stock or preferred stock, historical volatility, the term of the warrant and risk free interest rates. Prior to its initial public offering, the fair value of the Company’s shares of common stock and preferred stock is estimated using PWERM, as described above. Accordingly, the valuation of the warrant liability at December 31, 2013, was determined using Level 3 inputs. Upon completion of the Company’s initial public offering, the outstanding warrants to purchase shares of A-1 convertible preferred stock were converted into the right to purchase shares of common stock and the Company’s warrant liability was reclassified to equity.

 

The following table provides a roll-forward of the fair value of the assets, where fair value is determined using Level 3 inputs (in thousands):

 

Balance at December 31, 2013

 

$

 

Issuance of shares of Series A-6 - prepayment

 

1,220

 

Nordic amendment

 

(1,220

)

Balance at September 30, 2014

 

$

 

 

The following table provides a roll-forward of the fair value of the liabilities, where fair value is determined using Level 3 inputs (in thousands):

 

Balance at December 31, 2013

 

$

7,273

 

Issuance of shares of Series A-6

 

(8,889

)

Additions — accrued shares of Series A-6

 

2,717

 

Additions — warrants

 

1,511

 

Change in fair value

 

505

 

Warrant liability reclassified to equity

 

(3,117

)

Balance at September 30, 2014

 

$

 

 

Additions represent the value of the asset or liability for additional accrued shares of stock that were issuable to Nordic for services rendered in connection with the Company’s Phase 3 Clinical Trial of abaloparatide-SC (see note 9), as well as the value of any new warrants issued during the period. The issuance of shares of Series A-6 represents the release of the quarterly stock dividends of Series A-6 accrued under the Nordic Work Statements (see note 9). The Nordic amendment represents amounts that were originally payable in shares of Series A-6, but converted to the right to receive cash upon completion of the Company’s initial public offering and no longer require fair value measurement at September 30, 2014 (see note 9).

 

The fair value of the Company’s note payable is determined using current applicable rates for similar instruments as of the balance sheet date. The carrying value of the Company’s note payable approximated its fair value as of September 30, 2014, as the Company’s interest rate is near current market rates. The fair value of the Company’s notes payable was determined using Level 3 inputs.

 

8. License Agreements

 

On September 27, 2005, the Company entered into a license agreement (the “Ipsen Agreement”), as amended, with SCRAS S.A.S, a French corporation on behalf of itself and its affiliates (collectively, “Ipsen”). Under the Ipsen Agreement, Ipsen granted to the Company an exclusive right and license under certain Ipsen compound technology and related patents to research, develop, manufacture and commercialize certain compounds and related products in all countries, except Japan and (subject to certain co-marketing and co-promotion rights retained by Ipsen) France. With respect to France, if Ipsen exercises its co-marketing and co-promotion rights, then Ipsen may elect to receive a percentage of the aggregate revenue from the sale of products by both parties in

 

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France (subject to a mid-double digit percentage cap), and Ipsen shall bear a corresponding percentage of the costs and expenses incurred by both parties with respect to such marketing and promotion efforts in France; Ipsen shall also pay Radius a mid-single digit royalty on Ipsen’s allocable portion of aggregate revenue from the sale of products by both parties in France. Abaloparatide is subject to the Ipsen Agreement. Ipsen also granted the Company an exclusive right and license under the Ipsen compound technology and related patents to make and have made compounds or product in Japan. Ipsen also granted the Company an exclusive right and license under certain Ipsen formulation technology and related patents solely for purposes of enabling the Company to develop, manufacture and commercialize compounds and products covered by the compound technology license in all countries, except Japan and (subject to certain co-marketing and co-promotion rights retained by Ipsen) France.

 

In consideration for these licenses, the Company made a nonrefundable, non-creditable payment of $250,000 to Ipsen, which was expensed during 2005. The Ipsen Agreement provides for further payments in the range of €10.0 million to €36.0 million ($12.6 million to $45.5 million) to Ipsen upon the achievement of certain development and commercialization milestones specified in the Ipsen Agreement, and for the payment of fixed 5% royalties on net sales of any product by the Company or its sub-licensees on a country-by-country basis until the last to expire of the licensed patents or for a period of 10 years after the first commercial sale in such country of any product that includes the compound licensed from Ipsen or any analog thereof, whichever is longer.

 

If the Company sublicenses the rights licensed from Ipsen, then the Company will also be required to pay Ipsen a percentage of certain payments received from such sublicensee (in lieu of milestone payments not achieved at the time of such sublicense). The applicable percentage is in the low double digit range. In addition, if the Company or its sub-licensees commercialize a product that includes a compound discovered by it based on or derived from confidential Ipsen know-how, it will be obligated to pay to Ipsen a fixed low single digit royalty on net sales of such product on a country-by-country basis until the last to expire of its patents that cover such product or for a period of 10 years after the first commercial sale of such product in such country, whichever is longer.  In January 2006, we entered into a Pharmaceutical Development Agreement with Ipsen as contemplated by the Ipsen Agreement.  In connection with the Ipsen Agreement and Pharmaceutical Development Agreement, the Company recorded $0.1 million and less than $0.1 million in costs during the three months ended September 30, 2014 and 2013, respectively, and $0.4 million and $0.2 million during the nine months ended September 30, 2014 and 2013, respectively, which were incurred by Ipsen and charged to the Company for the manufacture of the clinical supply of the licensed compound.

 

9. Research Agreements

 

Abaloparatide-SC Phase 3 Clinical Trial—On March 29, 2011, the Company and Nordic entered into a Clinical Trial Services Agreement, a Work Statement NB-1 (the “Work Statement NB-1”) under such Clinical Trial Services Agreement and a related Stock Issuance Agreement, as amended to date (the “Stock Issuance Agreement”). Pursuant to the Work Statement NB-1, Nordic is managing the Phase 3 Clinical Trial (the “Phase 3 Clinical Trial”) of abaloparatide-SC and is being compensated for such services in a combination of cash and shares of stock.

 

In December 2011, the Company entered into an amendment to the Work Statement NB-1(the “First Amendment”). Pursuant to the original terms of the Work Statement NB-1, the study was to be conducted in 10 countries at a specified number of sites within each country. The terms of the First Amendment (1) provided for two additional countries (the United States and India) in which the trial would be conducted, (2) specified a certain number of sites within each such additional country for the conduct of the study, and (3) amended various terms and provisions of the Work Statement NB-1 to reflect the addition of such countries and sites within the study’s parameters. Payments to be made by the Company to Nordic under the First Amendment are denominated in both euros and U.S. dollars and total up to €717,700 ($906,312) and $289,663, respectively, for the 15 additional study sites in India contemplated by the First Amendment and up to €1.2 million ($1.6 million) and $143,369, respectively, for the five additional study sites in the United States contemplated by the First Amendment.

 

In June 2012, the Company entered into a second amendment to the Work Statement NB-1(the “Second Amendment”). Pursuant to the original terms of the Work Statement NB-1, as amended by the First Amendment, the study was to be conducted in 12 countries at a specified number of sites within each country. The terms of the Second Amendment (1) increased the overall number of sites by adding sites in Europe, Brazil and Argentina and removing other sites, (2) specified a certain number of sites within each country for the conduct of the study, and (3) amended various terms and provisions of the Work Statement NB-1 to reflect additional services to be provided at existing sites and the addition of the new study sites within the study’s parameters. The Second Amendment also provided that cash payments to Nordic under the Clinical Trial Services Agreement as well as the payment of shares of stock under the related Stock Issuance Agreement will each be reduced by an amount of €11,941 ($15,079) per subject for any subjects enrolled in India or the United States. Such reductions are applied in pro rata monthly installments. Payments to be made by the Company to Nordic under the Second Amendment in connection with the additional services provided at existing sites and the conduct of the study at the new study sites are denominated in both euros and U.S. dollars and total of up to €3.7 million ($4.7 million) and $205,540, respectively.

 

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In March 2014, the Company entered into a fourth amendment to the Work Statement NB-1 (the “Fourth Amendment”).  Pursuant to the terms of the Fourth Amendment, the Company agreed to pay to Nordic an additional performance incentive, or a Performance Incentive Payment, of $500,000 for every 50 patients that, subsequent to March 28, 2014, complete all end-of-study procedures, up to a maximum aggregate amount of additional payments equal to $5.0 million.  Any Performance Incentive Payment would have been paid in cash in the event that the Company’s initial public offering of its common stock was completed prior to May 31, 2014. If an initial public offering was not completed prior to May 31, 2014, any Performance Incentive Payments would have been paid through the issuance to Nordic of shares of capital stock of the Company under the same model for equity-based compensation contemplated by the Company’s existing outstanding work statements under the Clinical Trial Services Agreement. On May 19, 2014, the Company entered into a fifth amendment to Work Statement NB-1, which amended the date prior to which an initial public offering must be completed to June 30, 2014. As the Company completed an initial public offering of its common stock on June 11, 2014, all Performance Incentive Payments will be paid in cash.

 

Pursuant to the Work Statement NB-1, the Company is required to make certain per patient payments denominated in both euros and U.S. dollars for each patient enrolled in the Phase 3 Clinical Trial followed by monthly payments for the duration of the study and final payments in two equal euro-denominated installments and two equal U.S. dollar-denominated installments. Changes to the Clinical Trial schedule may alter the timing, but not the aggregate amounts of the payments.

 

The Work Statement NB-1, as amended on December 9, 2011, June 18, 2012, March 28, 2014 and May 19, 2014, provides for a total of up to approximately €41.2 million ($52.0 million) of euro-denominated payments and a total of up to approximately $3.2 million of U.S. dollar-denominated payments over the course of the Phase 3 Clinical Trial, plus Performance Incentive Payments of up to $5.0 million. These payments may be adjusted based upon actual sites opened, work performed or number of patients enrolled.

 

Pursuant to the Stock Issuance Agreement, Nordic agreed to purchase the equivalent of €371,864 of Series A-5 at $8.142 per share, and 64,430 shares of Series A-5 were sold to Nordic on May 17, 2011 for proceeds of $525,154. These shares were exchanged for an aggregate of 6,443 shares of the Company’s Series A-5 pursuant to an Agreement and Plan of Merger (the “Merger”) entered into in April 2011 by and among the Company, which was formerly known as MPM Acquisition Corp., (a public-reporting, Form 10 shell company at the time), RHI Merger Corp., a Delaware corporation and wholly owned subsidiary of the Company (“MergerCo”), and Radius Health, Inc., a privately-held Delaware corporation (“Former Operating Company”).  Pursuant to the Merger, MergerCo merged with and into the Former Operating Company, with the Former Operating Company remaining as the surviving entity and a wholly-owned subsidiary of the Company.

 

The Stock Issuance Agreement provided that Nordic was entitled to receive quarterly stock dividends, payable in shares of Series A-6 or shares of common stock if the Company’s preferred stock had been converted in accordance with its amended certificate of incorporation, having an aggregate value, under the Work Statement NB-1, of up to €36.8 million ($46.5 million) (the “Nordic Accruing Dividend”). In the event Nordic sold the shares of Series A-5 or in the event the shares of Series A-5 were converted into common stock in accordance with the Company’s amended certificate of incorporation, this right to receive the Nordic Accruing Dividend would terminate, but a right to receive an equivalent number of shares of Series A-6 or common stock, as applicable, would remain with Nordic as a contractual right under the Stock Issuance Agreement.

 

On March 28, 2014, the Company entered into Amendment No. 2 to the Amended and Restated Stock Issuance Agreement entered into by the parties as of May 16, 2011 (the “Second Stock Issuance Agreement Amendment”), with Nordic.  The Second Stock Issuance Agreement Amendment required that the Company’s Board of Directors declare, as soon as reasonably practical, a stock dividend of twenty nine (29) shares of its Series A-6 for each share of the Company’s then outstanding Series A-5, all of which were held by Nordic, for a total of 186,847 shares of Series A-6, in full satisfaction of all stock dividends payable in 2014 under the terms of the Stock Issuance Agreement in relation to Work Statement NB-1 and Work Statement NB-3. In March 2014, Nordic requested that all 186,847 shares of Series A-6 be issued.  Accordingly, the Company’s Board of Directors declared and issued a dividend to Nordic of all 186,847 shares on March 31, 2014.  The Second Stock Issuance Agreement Amendment further provided that in the event an initial public offering of the Company’s common stock occurred prior to May 31, 2014, any payments owed by the Company to Nordic in relation to Work Statement NB-1 and Work Statement NB-3, excluding Performance Incentive Payments, for all periods of time after 2014, would be changed from the right to receive stock to the right to receive a total cash payment from the Company of $4.3 million payable in ten equal monthly installments of $430,000 beginning on March 31, 2015. On May 19, 2014, the Company entered into Amendment No. 3 to the Stock Issuance Agreement, which amended the date prior to which an initial public offering must occur to June 30, 2014.   The Second Stock Issuance Agreement Amendment also stipulated that all consideration to be paid to Nordic pursuant to the Stock Issuance Agreement at any time after the consummation of an initial public offering be payable in cash. As the Company completed an initial public offering on June 11, 2014, Nordic no longer has the right to receive stock from the Company and agreed to be paid in cash for all periods after the consummation of the initial public offering.

 

Prior to the issuance of shares of stock to Nordic in satisfaction of the Nordic Accruing Dividend, the liability to issue shares of stock was being accounted for as a liability in the Company’s balance sheet, based upon the fair value of the Series A-6 as determined using

 

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PWERM. Changes in the fair value from the date of accrual to the date of issuance of the Series A-6 shares were recorded as a gain or loss in other (expense) income in the statement of operations.

 

The Company recognizes research and development expense for the amounts due to Nordic under the Work Statement NB-1, First Amendment and Second Amendment ratably over the estimated per patient treatment period beginning upon enrollment in the Phase 3 Clinical Trial, or a twenty-month period. The Company recognizes research and development expense for the amounts due to Nordic under the Fourth Amendment on a per patient basis when the End-of-Study visit and all other required procedures are completed. The Company recorded $1.2 million and $7.6 million of research and development expense during the three months ended September 30, 2014 and 2013, respectively and $8.1 million and $25.5 million during the nine months ended September 30, 2014 and 2013, respectively, for per patient costs incurred for patients that had enrolled in the Phase 3 Clinical Study.

 

As of September 30, 2014, the Company had a liability of $9.5 million reflected in accrued expenses and other current liabilities on the balance sheet resulting from services provided by Nordic, which are payable in cash.

 

Abaloparatide-SC Phase 3 Clinical Extension Study—In February 2013, the Company entered into a Work Statement NB-3 (the “Work Statement NB-3”) under the Clinical Trial Services Agreement and the related Stock Issuance Agreement. Pursuant to Work Statement NB-3, Nordic will perform an extension study to evaluate six months of standard-of-care osteoporosis management following the completion of the 18-month abaloparatide-SC Phase 3 Clinical Trial (the “Extension Study”) and will be compensated for such services in a combination of cash and shares of stock. Under the terms of a Letter of Intent that the Company entered into with Nordic on October 22, 2012 setting forth the parties’ obligations to negotiate in good faith to enter into Work Statement NB-3, the Company was required to make an initial payment of €806,468 ($1.0 million).

 

In March 2014, the Company entered into an amendment to the Work Statement NB-3 (the “NB-3 Amendment”).  The NB-3 Amendment was effective as of February 28, 2014 and provides that Nordic will perform a Period 2 extension study (the “Second Extension”), to evaluate an additional eighteen months of standard-of-care osteoporosis management following the Period 1 extension of six months upon completion of the Phase 3 clinical trial of the Company’s abaloparatide-SC product.  Payments in cash to be made by the Company to Nordic under the NB-3 Amendment are denominated in both euros and U.S. dollars and total up to approximately €3.0 million ($3.7 million) and $527,740, respectively.  In addition, the Company agreed to issue to Nordic shares of the Company’s series A-6 having a value of up to approximately €3.0 million ($3.7 million) and $527,740 as additional payment for the services to be provided under the NB-3 Amendment, with the issuance of such shares to be made pursuant to the terms of an Amendment No. 2, entered into by the Company with Nordic on March 28, 2014, to the Amended and Restated Stock Issuance Agreement entered into by the parties as of May 16, 2011.

 

Payments in cash to be made to Nordic under the Work Statement NB-3, as amended by the NB-3 Amendment, are denominated in both euros and U.S. dollars and total up to €7.5 million ($9.5 million) and $1.1 million, respectively. In addition, the Company will issue to Nordic, shares of the Company’s Series A-6 having a value of up to €7.5 million ($9.5 million) and $0.8 million, as additional payment for services to be provided under the Work Statement NB-3 and the Services Agreement.

 

The Stock Issuance Agreement provided that, beginning with the quarter ended March 31, 2013, Nordic was entitled to receive quarterly stock dividends in connection with services performed under the Work Statement NB-3, payable in shares of Series A-6 or shares of common stock if the Company’s preferred stock automatically converted into common stock in accordance with its amended certificate of incorporation, having an aggregate value of up to €7.5 million ($9.5 million) and $0.8 million. In the event Nordic sold the shares of Series A-5 or in the event the shares of Series A-5 were converted into common stock in accordance with the Company’s amended certificate of incorporation, this right to receive the Nordic Accruing Dividend would terminate, but a right to receive an equivalent number of shares of Series A-6 or common stock, as applicable, would remain with Nordic as a contractual right under the Stock Issuance Agreement.

 

On March 28, 2014, the Company entered into Amendment No. 2 to the Amended and Restated Stock Issuance Agreement entered into by the parties as of May 16, 2011 (the “Second Stock Issuance Agreement Amendment”), with Nordic.  The Second Stock Issuance Agreement Amendment required that the Company’s Board of Directors declare, as soon as reasonably practical, a stock dividend of twenty nine (29) shares of its Series A-6 for each share of the Company’s then outstanding Series A-5, all of which were held by Nordic, for a total of 186,847 shares of Series A-6, in full satisfaction of all stock dividends payable in 2014 under the terms of the Stock Issuance Agreement in relation to Work Statement NB-1 and Work Statement NB-3. In March 2014, Nordic requested that all 186,847 shares of Series A-6 be issued.  Accordingly, the Company’s Board of Directors declared and issued a dividend to Nordic of all 186,847 shares on March 31, 2014.  The Second Stock Issuance Agreement Amendment further provided that in the event an initial public offering of the Company’s common stock occurred prior to May 31, 2014, any payments owed by the Company to Nordic in relation to Work Statement NB-1 and Work Statement NB-3, excluding Performance Incentive Payments,  for all periods of time after 2014, would be changed from the right to receive stock to the right to receive a total cash payment from the Company of $4.3 million payable in ten equal monthly installments of $430,000 beginning on March 31, 2015. On May 19, 2014, the Company entered into Amendment No. 3 to the Stock Issuance Agreement, which amended the date prior to which an initial public offering must occur to June 30, 2014.   The Second Stock Issuance Agreement Amendment also stipulated that all consideration to be paid to

 

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Nordic pursuant to the Stock Issuance Agreement at any time after the consummation of an initial public offering be payable in cash. As the Company completed an initial public offering on June 11, 2014, Nordic no longer has the right to receive stock from the Company and agreed to be paid in cash for all periods after the consummation of the initial public offering.

 

Prior to the issuance of the shares of Series A-6 to Nordic in satisfaction of the Nordic Accruing Dividend, the liability to issue shares of stock was being accounted for as a liability in the Company’s balance sheet, based upon the fair value of the Series A-6 as determined using PWERM. Changes in the fair value from the date of accrual to the date of issuance of the Series A-6 shares are recorded as a gain or loss in other (expense) income in the statement of operations.

 

On December 6, 2013, the Company entered into a Letter of Intent (the “Letter of Intent”) with Nordic, which provided that the Company and Nordic would continue to negotiate the definitive terms of the NB-3 Amendment, which provides for an additional 18 months of standard-of-care treatment for those patients enrolled in the Extension Study being performed under Work Statement NB-3. The NB-3 Amendment was executed on March 28, 2014 and provides for payment by the Company to Nordic of both cash and equity compensation in consideration of the services provided by Nordic, with the equity portion of such compensation to be made pursuant to an Amendment No. 2 to the Amended and Restated Stock Issuance Agreement entered into by the parties as of May 16, 2011. Pursuant to the Letter of Intent, the Company was required to make an initial payment of €222,573 ($0.3 million) and agreed to commence payment of the cash compensation due in consideration of the services being provided by Nordic under the Amendment.

 

The Company recognizes research and development expense for the amounts due to Nordic under the Work Statement NB-3 and Amendment ratably over the estimated per patient treatment periods beginning upon enrollment, or over a nine-month and nineteen-month period, respectively. The Company recorded $2.3 million and $1.3 million of research and development expense during the three months ended September 30, 2014 and 2013, respectively, and $7.7 million and $2.6 million for the nine months ended September 30, 2014 and 2013, respectively, for per patient costs incurred for patients that had enrolled in the Extension Study and Second Extension.

 

As of September 30, 2014, the Company had a liability of $4.5 million reflected in accrued expenses and other current liabilities on the balance sheet resulting from services provided by Nordic, which are payable in cash.

 

Abaloparatide-TD Phase 2 Clinical Trial—On July 26, 2012, the Company entered into a Letter of Intent (the “Phase 2 Letter of Intent”) with Nordic, which provided that the Company and Nordic would, subject to compliance by the Company with certain requirements of its Certificate of Incorporation and applicable securities laws, negotiate in good faith to enter into (1) a Work Statement NB-2 (the “Work Statement NB-2”), a draft of which is attached to the Phase 2 Letter of Intent, and (2) an amendment to the Amended and Restated Stock Issuance Agreement.

 

In February 2013, the Company executed the final Work Statement NB-2 under the Clinical Trial Services Agreement and the related Stock Issuance Agreement. Pursuant to the Work Statement NB-2, Nordic would provide clinical trial services relating to the Phase 2 Clinical Trial and would be compensated for such services in a combination of cash and shares of stock. Payments in cash to be made by the Company to Nordic under the Work Statement NB-2 were denominated in both euros and U.S. dollars and totaled up to €3.6 million ($4.5 million) and $0.3 million, respectively. In addition, the Company would issue to Nordic shares of its Series A-6 stock having a value of up to $2.9 million, as additional payment for services to be provided under the Work Statement NB-2 and the Clinical Trial Services Agreement.

 

As of December 31, 2013, 32,215 shares of Series A-6 were due to Nordic under Work Statement NB-2, or, after the automatic conversion into common stock of the Company’s preferred stock, 141,294 shares the Company’s common stock. In December 2013, Nordic requested that all 32,215 shares of Series A-6 accrued as of December 31, 2013 under Work Statement NB-2 be issued. Accordingly, the Company’s Board of Directors declared a dividend to Nordic of all 32,215 shares of Series A-6 accrued under Work Statement NB-2 on December 31, 2013, which constituted all shares of Series A-6 due under Work Statement NB-2.

 

The Company recognized research and development expense for the amounts due to Nordic under the Work Statement NB-2 ratably over the estimated per patient treatment period beginning upon enrollment in the Phase 2 Clinical Trial, or a nine-month period. The Company recorded no expense and $0.6 million of research and development expense during the three months ended September 30, 2014 and 2013, respectively, and nil and $4.1 million during the nine months ended September 30, 2014 and 2013, respectively, for per patient costs incurred for patients that had enrolled in the Phase 2 Clinical Trial. As of September 30, 2014, all obligations due to Nordic under Work Statement NB-2 had been paid.

 

The Company is also responsible for certain pass-through costs in connection with the Phase 3 Clinical Trial, Extension Study and Phase 2 Clinical Trial. Pass through costs are expensed as incurred or upon delivery. The Company recognized research and development expense of $0.3 million and $1.3 million for pass-through costs during the three months ended September 30, 2014 and 2013, respectively, and $0.8 million and $3.3 million during the nine months ended September 30, 2014 and 2013, respectively.

 

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10. Stock-Based Compensation

 

A summary of stock option activity during the nine months ended September 30, 2014 is as follows (in thousands, except for per share amounts):

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

 

 

Average

 

Weighted-

 

 

 

 

 

 

 

Exercise

 

Average

 

 

 

 

 

 

 

Price (in

 

Contractual

 

Aggregate

 

 

 

 

 

dollars per

 

Life (in

 

Intrinsic

 

 

 

Shares

 

share)

 

years)

 

Value

 

Options outstanding at December 31, 2013

 

1,667

 

$

7.05

 

 

 

 

 

Granted

 

1,894

 

8.25

 

 

 

 

 

Exercised

 

(1

)

2.46

 

 

 

 

 

Cancelled

 

(1,182

)

8.63

 

 

 

 

 

Expired

 

(1

)

3.42

 

 

 

 

 

Options outstanding at September 30, 2014

 

2,377

 

$

7.22

 

8.12

 

$

32,756

 

Options exercisable at September 30, 2014

 

968

 

$

5.52

 

6.23

 

$

14,974

 

Options vested or expected to vest at September 30, 2014

 

2,299

 

$

7.18

 

8.08

 

$

31,761

 

 

The weighted-average grant-date fair value per share of options granted during the three and nine months ended September 30, 2014 was $8.36 and $4.80, respectively, and the total grant-date fair value of stock options that vested during the nine months ended September 30, 2014 was approximately $1.9 million.  As of September 30, 2014, there was approximately $6.2 million of total unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted-average period of approximately three years.

 

11. Net Loss Per Share

 

Basic and diluted net loss per share is calculated as follows (in thousands, except share and per share numbers):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Numerator:

 

 

 

 

 

 

 

 

 

Net loss

 

$

(17,420

)

$

(20,342

)

$

(44,517

)

$

(48,159

)

Accretion of Preferred Stock

 

 

(4,748

)

(9,000

)

(12,698

)

Loss attributable to common stockholders - basic and diluted

 

$

(17,420

)

$

(25,090

)

$

(53,517

)

$

(60,857

)

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares used in loss per share - basic and diluted (1)

 

29,746,426

 

385,688

 

12,651,628

 

382,541

 

 

 

 

 

 

 

 

 

 

 

Loss per share - basic and diluted

 

$

(0.59

)

$

(65.05

)

$

(4.23

)

$

(159.09

)

 


(1)                           Common shares adjusted for 2.28:1 stock split that was affected April 24, 2014.

 

The following potentially dilutive securities, prior to the use of the treasury stock method, have been excluded from the computation of diluted weighted-average shares outstanding, as they would be anti-dilutive. For the three and nine months ended September 30, 2014 and 2013, all of the Company’s classes of preferred stock, options to purchase common stock and warrants outstanding were assumed to be anti-dilutive as earnings attributable to common stockholders was in a loss position.

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Convertible preferred stock

 

 

7,108,324

 

5,157,682

 

6,203,960

 

Options to purchase common stock

 

2,599,770

 

1,699,830

 

2,449,476

 

1,705,552

 

Warrants

 

1,379,551

 

783,898

 

1,235,074

 

465,559

 

 

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12. Commitments and Contingencies

 

The Company may be exposed, individually or in the aggregate, to certain claims or assessments in the ordinary course of business. In the opinion of management, the outcome of these matters is not likely to have any material effect on the financial statements of the Company.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Cautionary Statement

 

This Quarterly Report on Form 10-Q, including the information incorporated by reference herein, contains, in addition to historical information, forward-looking statements. We may, in some cases, use words such as “project,” “believe,” “anticipate,” “plan,” “expect,” “estimate,” “intend,” “continue,” “should,” “would,” “could,” “potentially,” “will,” “may” or similar words and expressions that convey uncertainty of future events or outcomes to identify these forward-looking statements. Forward-looking statements in this Quarterly Report on Form 10-Q may include, among other things, statements about:

 

·            the progress of, timing of and amount of expenses associated with our research, development and commercialization activities;

·            the success of our clinical studies for our product candidates;

·            our ability to obtain U.S. and foreign regulatory approval for our product candidates and the ability of our product candidates to meet existing or future regulatory standards;

·            our expectations regarding federal, state and foreign regulatory requirements;

·            the therapeutic benefits and effectiveness of our product candidates;

·            the safety profile and related adverse events of our product candidates;

·            our ability to manufacture sufficient amounts of abaloparatide, RAD1901, and RAD140 for commercialization activities with target characteristics following regulatory approvals;

·            our plans with respect to collaborations and licenses related to the development, manufacture or sale of our product candidates;

·            our expectations as to future financial performance, expense levels and liquidity sources;

·            our ability to compete with other companies that are or may be developing or selling products that are competitive with our product candidates;

·            anticipated trends and challenges in our potential markets; and

·            our ability to attract and motivate key personnel.

 

The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties and other important factors that could cause actual results to differ materially from the results anticipated by these forward-looking statements. These important factors include our financial performance, our ability to attract and retain customers, our development activities and those factors we discuss in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K/A filed with the Securities and Exchange Commission, or the SEC, on April 3, 2014 under the caption “Risk Factors.” You should read these factors and the other cautionary statements made in this Quarterly Report on Form 10-Q as being applicable to all related forward-looking statements wherever they appear in this Quarterly Report on Form 10-Q. These risk factors are not exhaustive and other sections of this Quarterly Report on Form 10-Q may include additional factors which could adversely impact our business and financial performance.

 

You should read the following discussion of our financial condition and results of operations in conjunction with our financial statements and related notes set forth in this report. Unless the context otherwise requires, “we,” “our,” “us” and similar expressions used in this Management’s Discussion and Analysis of Financial Condition and Results of Operations section refer to Radius Health, Inc., a Delaware corporation, or Radius.

 

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Executive Overview

 

We are a science-driven biopharmaceutical company focused on developing new therapeutics for patients with osteoporosis as well as other serious endocrine-mediated diseases. Our lead product candidate is the investigational drug abaloparatide (BA058), a bone anabolic for the potential treatment of osteoporosis delivered via subcutaneous injection, which we refer to as abaloparatide-SC. We are currently in Phase 3 development of abaloparatide-SC and plan to announce top-line 18-month fracture data from this study in late December 2014. If the results meet the study endpoints, we plan to submit a new drug application, or NDA, in the United States, and a marketing authorization application, or MAA, in Europe, in mid-2015. We hold worldwide commercialization rights to abaloparatide-SC, other than in Japan, and subject to a regulatory review and a favorable regulatory outcome, we anticipate our first commercial sales of abaloparatide-SC will take place in 2016. We are leveraging our investment in abaloparatide-SC to develop a line extension that is designed to improve patient convenience by enabling administration of abaloparatide through a short-wear-time patch, which we refer to as abaloparatide-TD. We have recently completed a successful Phase 2 proof of concept study of abaloparatide-TD.

 

Our current clinical product portfolio also includes the investigational drug RAD1901, a selective estrogen receptor down-regulator/degrader, or SERD, and RAD140, a nonsteroidal selective androgen receptor modulator, or SARM. We are developing RAD1901 at higher doses for the potential treatment of metastatic breast cancer, and intend to advance its development with the initiation of Phase 1 clinical trials, including a maximum tolerated dose study that has commenced patient dosing and a Phase 1b clinical trial in metastatic breast cancer patients, which is expected to commence in late 2014.  The precise patient population will be defined in the study protocol and determined in conjunction with our investigators.  At lower doses, RAD1901 acts as a selective estrogen-receptor modulator, or SERM.  Low-dose RAD1901 has shown potential to be effective for the treatment of vasomotor symptoms such as hot flashes in a successful Phase 2 proof of concept study. We intend to commence a Phase 2b clinical trial in vasomotor symptoms in the second half of 2015. RAD140 resulted from an internal drug discovery program that began in 2005.  RAD140 has demonstrated potent anabolic activity on muscle and bone in preclinical studies and has clinical potential in a number of indications including the treatment of weight loss due to cancer cachexia, sarcopenia, frailty and oncology.

 

Abaloparatide

 

Abaloparatide is a synthetic peptide analog of parathyroid hormone-related protein, or PTHrP, that we are developing as a potential bone anabolic treatment for osteoporosis. Osteoporosis is a disease that affects nearly 10 million people in the United States, with an additional approximately 43 million people at increased risk for the disease. It is characterized by low bone mass and structural deterioration of bone tissue, which leads to greater fragility and an increase in fracture risk. Anabolic agents, like Forteo (teriparatide), are used to increase bone mineral density, or BMD, and to reduce the risk of fracture. We believe abaloparatide has the potential to increase BMD and bone quality to a greater degree and at a faster rate than other approved drugs for the treatment of osteoporosis. We are developing two formulations of abaloparatide:

 

·                  Abaloparatide-SC is an injectable subcutaneous formulation of abaloparatide. In August 2009, we announced positive Phase 2 data from a study that showed abaloparatide-SC produced faster and greater BMD increases at the spine and the hip with substantially less hypercalcemia than Forteo, which is the only approved subcutaneous injectable anabolic agent for the treatment of osteoporosis in the United States. The abaloparatide-SC Phase 2 manuscript has been accepted for publication in the Journal of Clinical Endocrinology and Metabolism and an online version is expected to be available in November 2014. A subsequent Phase 2 clinical trial announced in January 2014 confirmed the results of our first clinical trial as data from the second study showed that abaloparatide-SC produced BMD increases from baseline in the spine and hip that were comparable to our earlier Phase 2 clinical trial. In April 2011, we commenced a Phase 3 clinical trial of abaloparatide-SC. Enrollment was completed in March 2013. The last patient, last visit for the 18-month anabolic treatment portion of the Phase 3 clinical trial occurred during October 2014 and all continuing patients are now enrolled in the 6-month standard-of-care extension study. We plan to announce top-line 18-month data, including efficacy and safety data for each treatment group included in the 18-month anabolic phase, in late December 2014. Assuming the study meets its endpoints, we plan to use the results from this Phase 3 clinical trial to support a new drug application, or NDA, with the U.S. Food and Drug Administration, or FDA, and believe we could obtain approval of the NDA in 2016.

 

·                  Abaloparatide-TD is a line extension of abaloparatide-SC in the form of a convenient, short-wear-time (approximately five minutes) transdermal patch. Data from a recent Phase 2 clinical trial showed abaloparatide-TD produced a statistically significant mean percent increase from baseline in BMD as compared to placebo at the lumbar spine and at the hip. These Phase 2 results demonstrated proof of concept by achieving a dose-dependent increase in BMD. Following additional formulation development work, we intend to advance an optimized abaloparatide-TD product in additional clinical studies and in a Phase 3 bridging study in order to submit an application for regulatory approval. We hold worldwide commercialization rights to abaloparatide-TD technology.

 

In April 2011, we began the dosing of subjects in a pivotal Phase 3 clinical trial managed by Nordic Bioscience Clinical Development VII A/S, or Nordic, at certain clinical sites operated by the Center for Clinical and Basic Research, a leading global clinical research organization, or CRO, with extensive experience in global osteoporosis registration studies. We designed this Phase 3 study to enroll a total of 2,400 patients to be randomized equally to receive daily doses of one of the following: 80 micrograms (µg) of abaloparatide, a matching placebo, or the approved dose of 20 µg of Forteo for 18 months. The study also includes a 6-month extension period in order to obtain 24-months of fracture data, as requested by the FDA. We plan to submit the NDA with the 24-month fracture data. The study was designed to evaluate whether abaloparatide is superior to placebo for prevention of vertebral fracture. The study was also designed to evaluate whether abaloparatide is superior to Forteo for greater BMD improvement at major skeletal sites and for a lower

 

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occurrence of hypercalcemia, a condition in which the calcium level in a patient’s blood is above normal. We plan to announce top-line fracture data, including efficacy and safety data for each treatment group included in the 18-month anabolic phase, in late December 2014. We will remain blinded at the patient and site level until such time as the 6-month standard-of-care extension study is completed. Following completion of this Phase 3 clinical trial, if the results from this study indicate that the study endpoints were met, we intend to submit for regulatory approval in the United States and Europe in mid-2015. With standard review time and a favorable regulatory outcome, we expect to begin commercial sales in 2016.

 

On May 9, 2014, we submitted a breakthrough therapy designation request to the FDA for abaloparatide-SC for the treatment of postmenopausal osteoporosis. Abaloparatide-SC was selected for clinical development on the basis of its demonstrated marked effects on increasing bone mass in non-clinical models. The recently completed analyses of two abaloparatide Phase 2 clinical trials have confirmed these non-clinical results, demonstrating potentially important clinical benefits relative to current anabolic therapies, including faster and greater increases in hip (non-vertebral) and spine (vertebral) BMD. We believe these results could support a breakthrough therapy designation.  In July 2014, the FDA responded to our request and indicated that abaloparatide-SC would be considered for a breakthrough therapy designation if clinical evidence, such as the results of our Phase 3 clinical trial, demonstrate that patients dosed with abaloparatide-SC show substantial improvement in treatment of postmenopausal osteoporosis, or safety, over existing therapies. Once we have evaluated the results from the Phase 3 clinical trial, a decision will be made on whether or not to re-submit our request for breakthrough designation with focus on areas highlighted by the FDA.

 

RAD1901

 

RAD1901 is a SERD that we believe crosses the blood-brain barrier and that we are evaluating for the potential treatment of metastatic breast cancer. RAD1901 has been shown to bind with good selectivity to the estrogen receptor and to have both estrogen-like and estrogen-antagonistic effects in different tissues. In many cancers, hormones, like estrogen, stimulate tumor growth and a desired therapeutic goal is to block this estrogen-dependent growth while inducing apoptosis of the cancer cells. SERDs are an emerging class of endocrine therapies that directly induce estrogen receptor, or ER, degradation, enabling them to remove the estrogen growth signal in ER-dependent tumors without allowing ligand-independent resistance to develop. There is currently only one SERD, Faslodex (fulvestrant), approved in the United States for the treatment of hormone-receptor positive metastatic breast cancer. In 2012, the worldwide market for Faslodex exceeded $650.0 million. However, for patients with brain metastases, there are no approved targeted therapies that cross the blood-brain barrier. If successfully developed, we believe there is a significant opportunity for RAD1901 to be the first ER-targeted therapy that crosses the blood-brain barrier to more effectively treat ER- positive metastatic breast cancer and potentially reduce both intracranial and extracranial tumors.

 

In June 2014, we initiated a Phase 1 maximum tolerated dose, or MTD, study of RAD1901 in healthy volunteers. The study is designed to evaluate the tolerability, safety and pharmacokinetics of RAD1901, and also to use 18F-estradiol positron emission tomography, or FES-PET, imaging to provide a pharmacodynamic assessment of estrogen receptor turnover following administration of RAD1901. Levels of RAD1901 in cerebrospinal fluid samples taken from study subjects will be measured to confirm that RAD1901 has crossed the blood-brain barrier. Based upon initial study results, FES-PET imaging of RAD1901 has demonstrated potent SERD activity.  As of September 30, 2014, 40 subjects had completed dose escalation in the ongoing MTD study, and FES-PET imaging had been completed in a total of six subjects across two different doses. Each of these six subjects demonstrated, based on FES-PET imaging, suppression of the FES-PET signal to background levels after six days of dosing. In addition, RAD1901, at the doses that showed suppression of the FES-PET signal, was well tolerated in these six patients. We expect to report additional results from the MTD study of RAD1901 and to commence a Phase 1b clinical study of RAD1901 for metastatic breast cancer in late 2014.

 

In March 2014, we submitted to the FDA an application for orphan drug product designation of RAD1901 for the treatment of breast cancer brain metastases.  In June 2014, we received a request from the FDA for additional data with respect to our orphan drug designation application.  We plan to meet with the FDA and are working to provide them with the data requested.

 

We are also developing RAD1901 at lower doses as a selective estrogen receptor modulator, or SERM, for the potential treatment of vasomotor symptoms. Historically, hormone replacement therapy, or HRT, with estrogen (with or without the addition of progesterone) was considered the most efficacious approach to relieving menopausal symptoms such as hot flashes. However, because of the concerns about the potential long-term risks and contraindications associated with HRT, we believe a significant need exists for new therapeutic treatment options to treat vasomotor symptoms. In a Phase 2 proof of concept study, RAD1901 at lower doses demonstrated a reduction in the frequency and severity of moderate and severe hot flashes. We intend to commence a Phase 2b trial in vasomotor symptoms in the second half of 2015.

 

Our efforts and resources are focused primarily on developing abaloparatide-SC, abaloparatide-TD, RAD1901 and our other pharmaceutical product candidates, raising capital and recruiting personnel. We have no product sales to date and we will not receive any revenue from product sales unless and until we receive regulatory approval for abaloparatide-SC from the FDA, or equivalent foreign regulatory bodies. However, developing pharmaceutical products is a lengthy and very expensive process. Accordingly, our success depends not only on demonstrating the safety and efficacy of abaloparatide, but also on our ability to finance the development of these products, which will require substantial additional funding to complete development and submit applications seeking

 

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marketing approval. Our ability to raise this additional financing will depend on our ability to execute on the abaloparatide development plan, manage and coordinate, on a cost-effective basis, the required components of the NDA submission for abaloparatide-SC and scale-up abaloparatide-SC and abaloparatide-TD manufacturing capacity. In addition, we currently have no sales or distribution capabilities and thus our ability to market abaloparatide once approved may depend in part on our ability to enter into and maintain collaborative relationships, which will depend on the strength of our clinical data, our access to capital and other factors.

 

Recent Financings

 

On June 11, 2014, we completed our initial public offering whereby we sold 6,500,000 shares of our common stock at a price of $8.00 per share. The shares began trading on the NASDAQ Global Market on June 6, 2014. In connection with the completion of the offering, all outstanding shares of our convertible preferred stock converted into 19,465,132 shares of common stock, and 2,862,654 shares of common stock were issued in satisfaction of accumulated dividends accrued on the preferred stock. In addition, all outstanding warrants to purchase shares of A-1 convertible preferred stock and warrants to purchase shares of series B-2 convertible preferred stock were converted into the right to purchase 149,452 shares of common stock and our warrant liability was reclassified to equity. On June 18, 2014 and June 25, 2014, the underwriters purchased an additional 512,744 shares in the aggregate by exercising a portion of the over-allotment option granted to them in connection with the initial public offering.  As a result of the closing of the initial public offering and subsequent exercise of the over-allotment option, we received aggregate proceeds, net of underwriting discounts, commissions and offering costs, of approximately $50.4 million.

 

On October 7, 2014, we completed an additional public offering whereby we sold 2,750,000 shares of common stock at a price of $18.25 per share, for aggregate proceeds, net of underwriting discounts, commissions and offering costs, of approximately $46.9 million. On October 7, 2014, the underwriters purchased an additional 378,524 shares in the aggregate by exercising a portion of the over-allotment option granted to them in connection with the offering. As a result of the public offering and subsequent exercise of the over-allotment option, we received aggregate proceeds, net of underwriting discounts, commissions and offering costs of approximately $53.3 million.

 

Future Financing Needs

 

We expect to finance the future development costs of abaloparatide-SC, abaloparatide-TD and RAD1901 with our existing cash and cash equivalents and marketable securities, or through strategic financing opportunities, future offerings of our equity, or the incurrence of debt. We anticipate that we will make determinations as to which additional programs to pursue and how much funding to direct to each program on an ongoing basis in response to the scientific and clinical data of each product candidate, progress on securing third-party collaborators, as well as ongoing assessments of such product candidate’s commercial potential and our ability to fund this product development.

 

The successful development of our product candidates is subject to numerous risks and uncertainties associated with developing drugs, including, but not limited to, the variables listed below. A change in the outcome of any of these variables with respect to the development of any of our product candidates could mean a significant change in the cost and timing associated with the development of that product candidate.

 

Abaloparatide-SC is our only product candidate in late stage development, and our business currently depends heavily on its successful development, regulatory approval and commercialization. We have not submitted an NDA to the FDA or comparable applications to foreign regulatory authorities. Obtaining approval of a product candidate is an extensive, lengthy, expensive and uncertain process, and any approval of abaloparatide-SC may be delayed, limited or denied for many reasons, including:

 

·                  we may not be able to demonstrate that abaloparatide is safe and effective as a treatment for osteoporosis to the satisfaction of the FDA or other foreign regulatory authorities;

·                  the results of our clinical studies may not meet the level of statistical or clinical significance required for marketing approval;

·                  the FDA or other foreign regulatory authorities may disagree with the number, design, size, conduct or implementation of our clinical studies;

·                  the CRO that we retain to conduct clinical studies may take actions outside of our control that materially adversely impact our clinical studies;

·                  the FDA or other foreign regulatory authorities may not find the data from preclinical studies and clinical studies sufficient to demonstrate that abaloparatide’s clinical and other potential benefits outweigh its safety risks;

·                  the FDA or other foreign regulatory authorities may disagree with our interpretation of data from our preclinical studies and clinical studies or may require that we conduct additional studies;

·                  the FDA or other foreign regulatory authorities may not agree with our proposed labeling and may require labeling that undermines or otherwise significantly impairs the commercial value of the product if it were to be approved with such labeling;

 

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·                  the FDA or other foreign regulatory authorities may not accept data generated at our clinical study sites;

·                  the FDA may require development of a Risk Evaluation and Mitigation Strategy, or REMS, as a condition of approval;

·                  if our NDA is reviewed by an advisory committee, the FDA may have difficulties scheduling an advisory committee meeting in a timely manner or the advisory committee may recommend against approval of our application or may recommend that the FDA require, as a condition of approval, additional preclinical studies or clinical studies, limitations on approved labeling or distribution and use restrictions; or

·                  the FDA or other foreign regulatory authorities may identify deficiencies in the manufacturing processes or facilities of our third-party manufacturers.

 

In addition, the FDA or other foreign regulatory authorities may change their approval policies or adopt new regulations. For example, on February 15, 2012, we received a letter from the FDA stating that, after internal consideration, the agency believes that a minimum of 24-months of fracture data is necessary for approval of new products for the treatment of postmenopausal osteoporosis, and our ongoing abaloparatide-SC pivotal Phase 3 clinical trial is designed to produce fracture data based on an 18-month primary endpoint. Based on our discussions with the FDA, we believe that continued use of the 18-month primary endpoint will be acceptable, provided that our NDA includes the 24-month fracture data derived from a 6-month extension of the abaloparatide 80 µg and placebo groups in our Phase 3 clinical trial.  In the extension study, patients are receiving an approved alendronate (generic Fosamax) therapy for osteoporosis management. We plan to submit the NDA with the 24-month fracture data. We cannot be certain that the FDA, or other regulatory authorities, will be supportive of this plan, will not change this approval policy again, or adopt other approval policies or regulations that adversely affect any NDA that we may submit.

 

Financial Overview

 

Research and Development Expenses

 

Research and development expenses consist primarily of clinical testing costs, including payments in cash and stock made to CROs, salaries and related personnel costs, fees paid to consultants and outside service providers for regulatory and quality assurance support, licensing of drug compounds and other expenses relating to the manufacture, development, testing and enhancement of our product candidates. We expense our research and development costs as they are incurred.

 

None of the research and development expenses in relation to our product candidates are currently borne by third parties. Our lead product candidate is abaloparatide and it represents the largest portion of our research and development expenses for our product candidates. We began tracking program expenses for abaloparatide-SC in 2005, and program expenses from inception to September 30, 2014 were approximately $170.8 million. We began tracking program expenses for abaloparatide-TD in 2007, and program expenses from inception to September 30, 2014 were approximately $30.6 million. We began tracking program expenses for RAD1901 in 2006, and program expenses from inception to September 30, 2014 were approximately $16.9 million. We began tracking program expenses for RAD140 in 2008, and program expenses from inception to September 30, 2014 were approximately $5.2 million. These expenses relate primarily to external costs associated with manufacturing, preclinical studies and clinical trial costs.

 

Costs related to facilities, depreciation, stock-based compensation and research and development support services are not directly charged to programs as they benefit multiple research programs that share resources.

 

We estimate that future development costs for abaloparatide-SC may exceed $44.0 million, including $10.0 million for clinical costs, $23.0 million for license and milestone payments and NDA submission fees, $10.0 million for manufacturing costs and $1.0 million for preclinical costs. For abaloparatide-TD, we estimate that future development costs may exceed $44.0 million, including $35.0 million for clinical costs, $8.0 million for manufacturing costs, and $1.0 million for preclinical costs and NDA submission fees.

 

Our current strategy is to commence a Phase 1b clinical study of RAD1901 for the potential treatment of metastatic breast cancer in late 2014. However, due to its early stage of development, we are not yet able to determine the possible marketing approval timeline or future development costs at this time.  We intend to initiate a Phase 2b clinical study of RAD1901 for the potential treatment of vasomotor symptoms in the second half of 2015. We are currently designing the trial and have not finalized the full development plan. In addition, we are currently evaluating alternative development options for RAD140 and anticipate selecting a therapeutic area of focus during 2015. Therefore, it is currently not possible to project the future development costs or possible marketing approval timelines at this time.

 

The following table sets forth our research and development expenses related to abaloparatide-SC, abaloparatide-TD, RAD1901 and RAD140 for the three and nine months ended September 30, 2014 and 2013 (in thousands):

 

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Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Abaloparatide-SC

 

$

10,132

 

11,815

 

$

26,779

 

35,753

 

Abaloparatide-TD

 

523

 

2,942

 

992

 

10,867

 

RAD1901

 

1,027

 

 

1,402

 

 

RAD140

 

 

 

 

 

 

General and Administrative Expenses

 

General and administrative expenses consist primarily of salaries and related expenses for executive, finance and other administrative personnel, professional fees, business insurance, rent, general legal activities, including the cost of maintaining our intellectual property portfolio, and other corporate expenses.

 

Our results also include stock-based compensation expense as a result of the issuance of stock option grants to employees, directors and consultants. The stock-based compensation expense is included in the respective categories of expense in the statement of operations (research and development and general and administrative expenses). We expect to record additional non-cash stock-based compensation expense in the future, which may be significant.

 

Interest Income and Interest Expense

 

Interest income reflects interest earned on our cash, cash equivalents and marketable securities.

 

Interest expense reflects interest due under our loan and security agreement, entered into on May 23, 2011 with General Electric Capital Corporation, or GECC, as agent and lender, and Oxford Finance, as a lender, or the Original Credit Facility, and our loan and security agreement entered into on May 30, 2014 with Solar Capital Ltd., or Solar, as agent and lender, and Oxford Finance as, as lender, or the New Credit Facility. Under the Original Credit Facility, we drew $12.5 million under an initial and second term loan during the year ended December 31, 2011 and an additional $12.5 million under a third term loan during the year ended December 31, 2012.  Under the New Credit Facility, we drew $21.0 million under an initial term loan on May 30, 2014 and $4.0 million under a second term loan on July 10, 2014.

 

On May 30, 2014, we used approximately $9.3 million of the New Credit Facility to repay all the amounts owed under the Original Credit Facility.

 

Other (Expense) Income

 

For the three and nine months ended September 30, 2014 and 2013, other (expense) income reflects changes in the fair value of our warrant liability and the series A-6 convertible preferred stock liability and stock asset from the date of the initial accrual to the reporting date as discussed in note 7 to our condensed financial statements for the three and nine months ended September 30, 2014.

 

Critical Accounting Policies and Estimates

 

Management’s discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or

GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses, as well as related disclosures. We evaluate our policies and estimates on an ongoing basis, including those related to accrued clinical expenses, research and development expenses, stock-based compensation and fair value measures, which we discussed in our Annual Report on Form 10-K for the year ended December 31, 2013. Management bases its estimates on historical experience and other various assumptions that are believed to be reasonable under the circumstances.  Actual results may differ from these estimates under different assumptions or conditions.

 

We have reviewed our policies and estimates to determine our critical accounting policies for the three and nine months ended September 30, 2014. We have made no material changes to the critical accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2013, as amended.

 

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Results of Operations

 

Three Months Ended September 30, 2014 and September 30, 2013 (in thousands, except percentages)

 

 

 

Three Months Ended

 

 

 

 

 

 

 

September 30,

 

Change

 

 

 

2014

 

2013

 

$

 

%

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

$

13,817

 

$

15,543

 

$

(1,726

)

-11

%

General and administrative

 

2,836

 

1,621

 

1,215

 

75

%

Loss from operations

 

(16,653

)

(17,164

)

(511

)

-3

%

Other (expense) income:

 

 

 

 

 

 

 

 

 

Other income (expense), net

 

 

(2,607

)

(2,607

)

-100

%

Interest (expense) income, net

 

(767

)

(571

)

196

 

34

%

Net Loss

 

$

(17,420

)

$

(20,342

)

$

(2,922

)

-14

%

 

Research and development expenses—For the three months ended September 30, 2014, research and development expense was $13.8 million compared to $15.5 million for the three months ended September 30, 2013, a decrease of $1.7 million, or 11%. This decrease is primarily a result of a decrease in the total professional contract service costs associated with the development of abaloparatide-SC and abaloparatide-TD, partially offset by an increase in professional contract service costs associated with the development of RAD1901.  During the three months ended September 30, 2014, we incurred professional contract service costs associated with the development of abaloparatide-SC, abaloparatide-TD and RAD1901 of $10.1 million, $0.5 million and $1.0 million, respectively, compared to $11.8 million, $2.9 million and zero, respectively, for the three months ended September 30, 2013. The decrease in contract service costs associated with the development of abaloparatide-SC is primarily a result of fewer patients enrolled in the Phase 3 clinical trial as of September 30, 2014, as compared to the three months ended September 30, 2013.  We expect that costs associated with the development of abaloparatide-SC will continue to decrease over the course of the clinical trial as patients complete treatment under the 18-month fracture study and 6-month extension study.  In addition, there will be variability from quarter to quarter in the costs for abaloparatide-SC, driven primarily by the euro/dollar exchange rate, which is more fully described below under “Research and Development Agreements.”  The decrease in contract service costs associated with the development of abaloparatide-TD is a result of the completion of the Phase 2 clinical trial in September 2013. We expect that the costs associated with the development of abaloparatide-TD will increase as we begin to advance an optimized abaloparatide-TD product in additional clinical studies, followed by a Phase 3 bridging study.   The increase in contract service costs associated with the development of RAD1901 is a result of the initiation of various preclinical and manufacturing activities in 2014.  We expect that the costs associated with the development of RAD1901 will increase as we begin to advance RAD1901 through various preclinical and clinical studies, including a Phase 1b study in metastatic breast cancer, which is expected to commence in late 2014, and a Phase 2b study in vasomotor symptoms, which is expected to commence in the second half of 2015.

 

General and administrative expenses— For the three months ended September 30, 2014, general and administrative expense was $2.8 million compared to $1.6 million for the three months ended September 30, 2013, an increase of $1.2 million, or 75%. This increase was primarily the result of higher legal fees and consulting support costs of approximately $0.6 million during the three months ended September 30, 2014.  This increase can also be attributed to higher compensation costs, including non-cash stock-based compensation expense, due to an overall increase in employee headcount.

 

Other income (expense), net—For the three months ended September 30, 2014, there was no other income, net of other expense, as compared to other expense, net of other income during the three months ended September 30, 2013 of $2.6 million.  Other income, net of other expense, primarily reflects changes in the fair value of the stock liability, other liability and warrant liability as discussed in notes 7 and 9 to the financial statements included in our condensed financial statements for the three and nine months ended September 30, 2014. There was no other income, net of expense, recorded for the three months ended September 30, 2014, as, following our initial public offering on June 6, 2014, the warrant liability was reclassified to equity. The $2.6 million of other expense, net of income, as of September 30, 2013 was primarily due to an increase in the fair value of our stock liability and other liability as a result of an increase in the fair value of the underlying convertible preferred stock from June 30, 2013 to September 30, 2013.

 

Interest (expense) income—For the three months ended September 30, 2014, interest expense, net of interest income, was $0.8 million compared to $0.6 million for the three months ended September 30, 2013, an increase of $0.2 million, or 34%. This increase was primarily a result of higher average debt outstanding during the three months ended September 30, 2014 as compared to the three months ended September 30, 2013.

 

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Nine Months Ended September 30, 2014 and September 30, 2013 (in thousands, except percentages)

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

September 30,

 

Change

 

 

 

2014

 

2013

 

$

 

%

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

$

34,152

 

$

49,070

 

$

(14,918

)

-30

%

General and administrative

 

8,045

 

4,643

 

3,402

 

73

%

Loss from operations

 

(42,197

)

(53,713

)

(11,516

)

-21

%

Other (expense) income:

 

 

 

 

 

 

 

 

 

Other (expense) income, net

 

(506

)

7,465

 

7,971

 

107

%

Loss on retirement of note payable

 

(203

)

 

203

 

100

%

Interest (expense) income, net

 

(1,611

)

(1,911

)

(300

)

-16

%

Net Loss

 

$

(44,517

)

$

(48,159

)

$

(3,642

)

-8

%

 

Research and development expenses— For the nine months ended September 30, 2014, research and development expense was $34.2 million compared to $49.1 million for the nine months ended September 30, 2013, a decrease of $14.9 million, or 30%. This decrease is primarily a result of a decrease in the total professional contract service costs associated with the development of abaloparatide-SC and abaloparatide-TD, partially offset by an increase in professional contract services costs associated with the development of RAD1901.  During the nine months ended September 30, 2014, we incurred professional contract service costs associated with the development of abaloparatide-SC, abaloparatide-TD and RAD1901 of $26.8 million, $1.0 million and $1.4 million, respectively, compared to $35.8 million, $10.9 million and zero, respectively, for the nine months ended September 30, 2013. The decrease in contract service costs associated with the development of abaloparatide-SC is primarily a result of fewer patients enrolled in the Phase 3 clinical trial as of September 30, 2014, as compared to the nine months ended September 30, 2013.  We expect that costs associated with the development of abaloparatide-SC will continue to decrease over the course of the clinical trial as patients complete treatment under the 18-month fracture study and 6-month extension study.  In addition, there will be variability from quarter to quarter in the costs for abaloparatide-SC, driven primarily by the euro/dollar exchange rate, which is more fully described below under “Research and Development Agreements.”  The decrease in contract service costs associated with the development of abaloparatide-TD is a result of the completion of the Phase 2 clinical trial (which began dosing patients in September 2012) in September 2013.  The increase in contract service costs associated with the development of RAD1901 is a result of the initiation of various preclinical and manufacturing activities in 2014.

 

General and administrative expenses— For the nine months ended September 30, 2014, general and administrative expense was $8.0 million compared to $4.6 million for the nine months ended September 30, 2013, an increase of $3.4 million, or 73%. This increase was primarily due to an increase in compensation costs, including an increase of $1.1 million in non-cash stock-based compensation expense as a result of the issuance of new option awards during the period, as well as the acceleration of vesting for a portion of our Chief Executive Officer’s outstanding option awards, in accordance with his employment agreement, upon completion of our initial public offering.  This increase can also be attributed to higher legal fees and consulting support costs of approximately $1.3 million during the nine months ended September 30, 2014.

 

Other (expense) income, net— For the nine months ended September 30, 2014, other expense, net of other income, was $0.5 million, as compared to other income, net of expense during the nine months ended September 30, 2013 of $7.5 million.  Other expense, net of other income, primarily reflects changes in the fair value of the stock asset, stock liability, other liability and warrant liability as discussed in notes 7 and 9 to our financial statements included in our condensed quarterly financial statements for the three and nine months ended September 30, 2014. The $0.5 million of other expense, net of income, for the nine months ended September 30, 2014 was primarily due to an increase in the fair value of our warrant liability as a result of an overall increase in the fair value of the underlying common stock from December 31, 2013 to June 6, 2014. Following our initial public offering on June 6, 2014, our warrant liability was reclassified to equity.  The $7.5 million of other income, net of other expense, as of September 30, 2013 was primarily due to a decrease in the fair value of our stock liability and other liability as a result of a decrease in the fair value of the underlying convertible preferred stock from December 31, 2012 to September 30, 2013.

 

Loss on retirement of note payable—For the nine months ended September 30, 2014, loss on retirement of note payable was $0.2 million.  This loss was a result of the prepayment of our Original Credit Facility on May 30, 2014.

 

Interest (expense) income— For the nine months ended September 30, 2014, interest expense, net of interest income, was $1.6 million compared to $1.9 million for the nine months ended September 30, 2013, a decrease of $0.3 million, or 16%. This decrease was

 

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primarily a result of lower average debt outstanding during the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013.

 

Liquidity and Capital Resources

 

From inception to September 30, 2014, we have incurred an accumulated deficit of $326.3 million, primarily as a result of expenses incurred through a combination of research and development activities related to our various product candidates and expenses supporting those activities. Our total cash, cash equivalents and marketable securities balance as of September 30, 2014 was $68.5 million.  We have financed our operations since inception primarily through the private sale of preferred stock as well as the receipt of $5.0 million in fees associated with an option agreement. In addition, on June 11, 2014, we completed our initial public offering.  As a result of the closing of the initial public offering and subsequent exercise of the over-allotment option, we received aggregate proceeds, net of underwriting discounts, commissions and offering costs, of approximately $50.4 million. On October 7, 2014, we completed an additional public offering whereby we sold 2,750,000 shares of common stock at a price of $18.25 per share.  As a result of the closing of the additional offering and subsequent exercise of the over-allotment option, we received aggregate proceeds, net of underwriting discounts, commissions and offering costs, of approximately $53.3 million.  We have also borrowed $25.0 million under our Original Credit Facility in three term loans and $25.0 million under our New Credit Facility.

 

We believe that the aggregate proceeds from the offering on October 7, 2014, together with our cash, cash equivalents and marketable securities as of September 30, 2014, will be sufficient to fund our operations into the fourth quarter of 2015. Accordingly, we plan to pursue strategic financing alternatives that could include, but are not limited to, partnering or other collaboration agreements, or the completion of an additional public offering. However, there is no guarantee that any of these financing opportunities will be available to us on favorable terms, and some could be dilutive to existing stockholders. Our future capital requirements will depend on many factors, including the scope and progress made in our research and development activities and our clinical trials. If we fail to obtain additional future capital, we may be unable to complete our planned preclinical and clinical trials and obtain approval of any product candidates from the FDA and other foreign regulatory authorities.

 

The following table sets forth the major sources and uses of cash for each of the periods set forth below (in thousands):

 

 

 

Nine Months Ended
September 30,

 

Change

 

 

 

2014

 

2013

 

$

 

%

 

 

 

 

 

 

 

 

 

 

 

Net cash (used in) provided by:

 

 

 

 

 

 

 

 

 

Operating activities

 

$

(31,971

)

$

(29,859

)

$

2,112

 

7

%

Investing activities

 

(52,954

)

(6,277

)

46,677

 

744

%

Financing activities

 

89,088

 

36,976

 

52,112

 

141

%

Net increase (decrease) in cash and cash equivalents

 

$

4,163

 

$

840

 

 

 

 

 

 

Cash Flows from Operating Activities

 

Net cash used in operating activities during the nine months ended September 30, 2014 was $32.0 million, which was primarily the result of a net loss of $44.5 million, partially offset by $6.3 million of net non-cash adjustments to reconcile net loss to net cash used in operations and net changes in working capital of $6.2 million. The $44.5 million net loss was primarily due to expenses incurred in connection with our ongoing Phase 3 clinical trial of abaloparatide-SC.  The $6.3 million net non-cash adjustments to reconcile net loss to net cash used in operations included $2.7 million of research and development expenses settled in stock, stock-based compensation expense of $2.6 million and a $0.5 million increase in the fair value of our warrant liability and stock liability as a result of an increase in the fair value of the underlying convertible preferred stock and common stock from December 31, 2013 to September 30, 2014.

 

Net cash used in operating activities for the nine months ended September 30, 2013 was $29.9 million, which was primarily the result of a net loss of $48.2 million, partially offset by net changes in working capital of $13.6 million and $4.7 million net non-cash adjustments to reconcile net loss to net cash used in operations. The $48.2 million net loss was primarily due to expenses incurred in connection with our ongoing Phase 3 clinical study of abaloparatide-SC and our Phase 2 clinical study of abaloparatide-TD, which finished dosing patients during the three months ended September 30, 2013.  The $4.7 million net non-cash adjustments to reconcile net loss to net cash used in operations included $10.6 million of research and development expenses settled in stock and stock-based compensation expense of $1.2 million, partially offset by a $7.5 million reduction in the fair value of our warrant liability, stock liability and other liability as a result of a decline in the fair value of the underlying convertible preferred stock from December 31, 2012 to September 30, 2013.

 

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Cash Flows from Investing Activities

 

Net cash used in investing activities during the nine months ended September 30, 2014 was $53.0 million, which was primarily the result of $53.3 million of purchases of marketable securities.  Net cash used during the nine months ended September 30, 2013 was $6.3 million, which was primarily the result of $17.1 million of purchases of marketable securities, partially offset by $10.8 million of net proceeds received from the sale or maturity of marketable securities.

 

Our investing cash flows will be impacted by the timing of purchases and sales of marketable securities. All of our marketable securities have contractual maturities of less than one year. Due to the short-term nature of our marketable securities, we would not expect our operational results or cash flows to be significantly affected by a change in market interest rates.

 

On January 7, 2014, we entered into a letter agreement with Vetter Pharma International GMBH, or Vetter that authorized Vetter to begin purchasing and installing dedicated equipment that will be utilized in the formulation and filling of abaloparatide-SC.  In accordance with the letter agreement, the total capital expenditures are not to exceed €0.6 ($0.8 million) without our prior written consent.  We expect that all equipment will be purchased and installed in 2014 and funded by our existing cash and cash equivalents.

 

Cash Flows from Financing Activities

 

Net cash provided by financing activities during the nine months ended September 30, 2014 was $89.1 million, as compared to $37.0 million net cash provided by financing activities during the nine months ended September 30, 2013.

 

Net cash provided by financing activities during the nine months ended September 30, 2014 consisted of $50.4 million of net proceeds from our initial public offering, $27.4 million of net proceeds from the issuance of our series B-2 convertible preferred stock in February and March of 2014, and $24.6 million of net proceeds from our New Credit Facility, partially offset by payments under our Original Credit Facility of $13.2 million.

 

Net cash provided by financing activities for the nine months ended September 30, 2013 consisted of $42.9 million of net proceeds from the issuance of our series B convertible preferred stock in April and May of 2013, partially offset by payments under our Original Credit Facility of $5.9 million.

 

Our continued operations will depend on whether we are able to raise additional funds through various potential sources, such as potential collaboration agreements and equity and debt financing. Through September 30, 2014, almost all of our financing has been through our initial public offering, private placements of preferred stock and borrowings under our Original Credit Facility and New Credit Facility. In addition, on October 7, 2014, we completed an additional public offering. As a result of the additional public offering and subsequent exercise of the over-allotment option, we received aggregate proceeds, net of underwriting discounts, commissions and offering costs of approximately $53.3 million. In subsequent periods, we plan to seek to raise additional capital in order to continue operating our business. We can give no assurances that any additional capital that we are able to obtain, if any, will be sufficient to meet our needs. Our future capital requirements will depend on many factors, including the scope and progress made in our research and development activities and our clinical studies. We may also need additional funds for possible future strategic acquisitions of businesses, products or technologies complementary to our business. Financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could materially adversely impact our growth plans and our financial condition and results of operations. Additional equity financing may be dilutive to the holders of our common stock and debt financing, if available, may involve significant cash payment obligations and covenants that restrict our ability to operate our business.

 

Preferred Stock Financings

 

Series B-2 Financing-On February 14, 2014, we entered into a Series B-2 Convertible Preferred Stock and Warrant Purchase Agreement, or Purchase Agreement, pursuant to which we were able to raise up to approximately $40.2 million through the issuance of (1) up to 655,000 series B-2 Shares convertible preferred stock, or Series B-2, par value $.0001 per share, and (2) warrants to acquire up to 718,201 shares of our common stock, at an exercise price of $14.004 per share.

 

Shares of our Series B-2 were convertible, in whole or in part, at the option of the holder at any time into shares of common stock, on an approximately 4.386-for-one basis at an initial effective conversion price of $14.004 per share. Shares of our Series B-2 were automatically convertible into shares of our common stock upon the closing of an initial public offering on or prior to June 30, 2014 at a conversion rate determined by dividing the initial purchase price of $61.42 per share by the lower of (1) $14.004 per share and (2) the initial public offering price, or upon listing of the common stock on a national securities exchange after June 30, 2014 at the then applicable conversion rate. Holders of shares of Series B-2 were entitled to receive dividends at a rate of 8% per annum, compounding annually, which accrue on a daily basis commencing on the date of issuance of the shares of Series B-2. Dividends were

 

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payable, as accrued, upon liquidation, event of sale, and conversion to common stock, including upon mandatory conversion of the Series B-2 upon the closing of our initial public offering on or prior to June 30, 2014 or upon listing of the common stock on a national securities exchange after June 30, 2014. The holders of shares of Series B-2 were also entitled to dividends declared or paid on any shares of common stock.

 

Shares of Series B-2 ranked senior in payment to any other dividends payable on any and all series of preferred stock and upon liquidation, or an event of sale, each share of Series B-2 ranked equally with each other share of Series B-2 and Series B, senior to all shares of Series A-1, Series A-2, Series A-3, Series A-4, Series A-5 and Series A-6 and senior to all shares of common stock. In the event of a liquidation, dissolution, or winding-up of the Company, the holders of the Series B-2 were entitled to be paid first out of the assets available for distribution, before any payment was made to the Series A-1, Series A-2, Series A-3, Series A-4, Series A-5 and Series A-6. Payment to the holders of Series B-2 was to consist of one and a half (1.5) times the original issuance price of $61.42, plus all accrued but unpaid dividends.

 

On February 14, 2014, February 19, 2014, February 24, 2014, March 14, 2014 and March 28, 2014, we consummated closings under the Series B-2 Purchase Agreement, whereby, in exchange for aggregate proceeds to us of approximately $27.5 million, we issued an aggregate of 448,060 Series B-2 Shares and warrants to purchase up to a total of 491,293 shares of our common stock.

 

Each share of Series B-2 had the right to that number of votes per share as is equal to the number shares of common stock into which such share of Series B-2 was then convertible.

 

The warrants issuable pursuant to the Purchase Agreement are exercisable for a period of five years from issuance.

 

The issuances in February and March 2014 of the Series B-2 and accompanying warrants under the Purchase Agreement resulted in an additional adjustment to the Conversion Price of the Series A-1, Series A-2 and Series A-3. As a result of the Anti-Dilution Adjustment, the effective conversion price of each share of Series A-1, Series A-2 and Series A-3 was reduced to $16.970. Accordingly, each share of Series A-1, Series A-2 and Series A-3 was convertible into approximately 4.798 shares of common stock.

 

Upon completion of our initial public offering, all shares of Series B-2 were converted into shares of our common stock at a conversion rate of 7.678, which is equal to the initial purchase price, divided by the initial public offering price of $8.00 per share.

 

Research and Development Agreements

 

Abaloparatide-SC Phase 3 Clinical Trial—On March 29, 2011, we and Nordic entered into a Clinical Trial Services Agreement, a Work Statement NB-1 under the Clinical Trial Services Agreement and a related Stock Issuance Agreement, as amended to date, or the Stock Issuance Agreement. Pursuant to the Work Statement NB-1, Nordic is managing the Phase 3 clinical trial, or the Phase 3 Clinical Trial, of abaloparatide-SC and is being compensated for such services in a combination of cash and shares of stock.

 

In December 2011, we entered into an amendment to the Work Statement NB-1 or the First Amendment. Pursuant to the original terms of the Work Statement NB-1, the study was to be conducted in 10 countries at a specified number of sites within each country. The terms of the First Amendment (1) provided for two additional countries (the United States and India) in which the trial would be conducted, (2) specified a certain number of sites within each such additional country for the conduct of the study, and (3) amended various terms and provisions of the Work Statement NB-1 to reflect the addition of such countries and sites within the study’s parameters. Payments to be made by us to Nordic under the First Amendment are denominated in both euros and U.S. dollars and total up to €717,700 ($906,312) and $289,663, respectively, for the 15 additional study sites in India contemplated by the First Amendment and up to €1.2 million ($1.6 million) and $143,369, respectively, for the five additional study sites in the United States contemplated by the First Amendment.

 

In June 2012, we entered into a second amendment to the Work Statement NB-1, or the Second Amendment. Pursuant to the original terms of the Work Statement NB-1, as amended by the First Amendment, the study was to be conducted in 12 countries at a specified number of sites within each country. The terms of the Second Amendment (1) increased the overall number of sites by adding sites in Europe, Brazil and Argentina and removing other sites, (2) specified a certain number of sites within each country for the conduct of the study, and (3) amended various terms and provisions of the Work Statement NB-1 to reflect additional services to be provided at existing sites and the addition of the new study sites within the study’s parameters. The Second Amendment also provided that cash payments to Nordic under the Clinical Trial Services Agreement as well as the payment of shares of stock under the related Stock Issuance Agreement will each be reduced by an amount of €11,941 ($15,079) per subject for any subjects enrolled in India or the United States. Such reductions are applied in pro rata monthly installments. Payments to be made by us to Nordic under the Second Amendment in connection with the additional services provided at existing sites and the conduct of the study at the new study sites are denominated in both euros and U.S. dollars and total of up to €3.7 million ($4.7 million) and $205,540, respectively.

 

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In March 2014, we entered into a fourth amendment to the Work Statement NB-1, or the Fourth Amendment.  Pursuant to the terms of the Fourth Amendment, we agreed to pay to Nordic an additional performance incentive payment, or a Performance Incentive Payment, of $500,000 for every 50 patients that, subsequent to March 28, 2014, complete all end-of-study procedures, up to a maximum aggregate amount of additional payments equal to $5.0 million.  Any Performance Incentive Payment would have been paid in cash in the event that the initial public offering of our common stock was completed prior to May 31, 2014. If an initial public offering was not completed prior to May 31, 2014, any Performance Incentive Payments would have been paid through the issuance to Nordic of shares of our capital stock under the same model for equity-based compensation contemplated by our existing outstanding work statements under the Clinical Trial Services Agreement. On May 19, 2014, we entered into a fifth amendment to Work Statement NB-1, which amended the date prior to which an initial public offering must be completed to June 30, 2014. As we completed an initial public offering of our common stock on June 11, 2014, all Performance Incentive Payments will be paid in cash.

 

Pursuant to the Work Statement NB-1, we are required to make certain per patient payments denominated in both euros and U.S. dollars for each patient enrolled in the Phase 3 Clinical Trial followed by monthly payments for the duration of the study and final payments in two equal euro-denominated installments and two equal U.S. dollar-denominated installments. Changes to the Clinical Trial schedule may alter the timing, but not the aggregate amounts of the payments.

 

The Work Statement NB-1, as amended on December 9, 2011, June 18, 2012, March 28, 2014 and May 19, 2014, provides for a total of up to approximately €41.2 million ($52.0 million) of euro-denominated payments and a total of up to approximately $3.2 million of U.S. dollar-denominated payments over the course of the Phase 3 Clinical Trial, plus Performance Incentive Payments of up to $5.0 million. These payments may be adjusted based upon actual sites opened, work performed or number of patients enrolled.

 

Pursuant to the Stock Issuance Agreement, Nordic agreed to purchase the equivalent of €371,864 of series A-5 convertible preferred stock at $8.142 per share, and 64,430 shares of series A-5 convertible preferred stock were sold to Nordic on May 17, 2011 for proceeds of $525,154. These shares were exchanged in a merger of the former operating company with a subsidiary of ours in May 2011 (see note 9 to our condensed quarterly financial statements for the nine months ended September 30, 2014) for an aggregate of 6,443 shares of our series A-5 convertible preferred stock.

 

The Stock Issuance Agreement provided that Nordic was entitled to receive quarterly stock dividends, payable in shares of series A-6 convertible preferred stock or shares of common stock if our preferred stock had been converted in accordance with our amended certificate of incorporation, having an aggregate value, under the Work Statement NB-1, of up to €36.8 million ($46.5 million), or the Nordic Accruing Dividend. In the event Nordic sold the shares of series A-5 convertible preferred stock or in the event the shares of series A-5 convertible preferred stock were converted into common stock in accordance with our amended certificate of incorporation, this right to receive the Nordic Accruing Dividend will terminate, but a right to receive an equivalent number of shares of series A-6 convertible preferred stock or common stock, as applicable, would remain with Nordic as a contractual right under the Stock Issuance Agreement.

 

On March 28, 2014, we entered into Amendment No. 2 to the Amended and Restated Stock Issuance Agreement entered into by the parties as of May 16, 2011, or the Second Stock Issuance Agreement Amendment, with Nordic.  The Second Stock Issuance Agreement Amendment required that our Board of Directors declare, as soon as reasonably practical, a stock dividend of twenty nine (29) shares of our Series A-6 for each share of our then outstanding Series A-5, all of which were held by Nordic, for a total of 186,847 shares of Series A-6, in full satisfaction of all stock dividends payable in 2014 under the terms of the Stock Issuance Agreement in relation to Work Statement NB-1 and Work Statement NB-3. In March 2014, Nordic requested that all 186,847 shares of Series A-6 be issued.  Accordingly, our Board of Directors declared and issued a dividend to Nordic of all 186,847 shares on March 31, 2014.  The Second Stock Issuance Agreement Amendment further provided that in the event an initial public offering of our common stock occurred prior to May 31, 2014, any payments owed by us to Nordic in relation to Work Statement NB-1 and Work Statement NB-3, excluding Performance Incentive Payments, for all periods of time after 2014 would change from the right to receive stock to the right to receive a total cash payment from us of $4.3 million payable in ten equal monthly installments of $430,000 beginning on March 31, 2015.  On May 19, 2014, we entered into Amendment No. 3 to the Stock Issuance Agreement, which amended the date prior to which an initial public offering must occur to June 30, 2014.  The Second Stock Issuance Agreement Amendment also stipulated that all consideration to be paid to Nordic pursuant to the Stock Issuance Agreement at any time after the consummation of an initial public offering shall be payable in cash. As the Company completed an initial public offering on June 11, 2014, Nordic no longer has the right to receive stock from the Company and agreed to be paid in cash for all periods after the consummation of the initial public offering.

 

Prior to the issuance of shares of stock to Nordic in satisfaction of the Nordic Accruing Dividend, the liability to issue shares of stock was being accounted for as a liability on our balance sheet, based upon the fair value of the Series A-6 as determined using PWERM. Changes in the fair value from the date of accrual to the date of issuance of the Series A-6 shares were recorded as a gain or loss in other (expense) income in the statement of operations.

 

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We recognize research and development expense for the amounts due to Nordic under the Work Statement NB-1, First Amendment and Second Amendment ratably over the estimated per patient treatment period beginning upon enrollment in the Phase 3 Clinical Trial, or a twenty-month period. We recognize research and development expense for the amounts due to Nordic under the Fourth Amendment on a per patient basis when the End-of-Study visit and all other required procedures are completed.  We recorded $1.2 million and $7.6 million of research and development expense during the three months ended September 30, 2014 and 2013, respectively, and $8.1 million and $25.5 million for the nine months ended September 30, 2014 and 2013, respectively, for per patient costs incurred for patients that had enrolled in the Phase 3 Clinical Trial.

 

As of September 30, 2014, we had a liability of $9.5 million reflected in accrued expenses and other current liabilities on the balance sheet resulting from services provided by Nordic, which are payable in cash.

 

Abaloparatide-SC Phase 3 Clinical Extension Study—In February 2013, we entered into the Work Statement NB-3, or the Work Statement NB-3, under the Clinical Trial Services Agreement and the related Stock Issuance Agreement. Pursuant to the Work Statement NB-3, Nordic will perform an extension study to evaluate six months of standard-of-care osteoporosis management following the completion of the 18-month abaloparatide-SC Phase 3 Clinical Trial, or the Extension Study, and will be compensated for such services in a combination of cash and shares of stock. Under the terms of a Letter of Intent that we entered into with Nordic on October 22, 2012 setting forth the parties’ obligations to negotiate in good faith to enter into Work Statement NB-3, we were required to make an initial payment of €806,468 ($1.0 million).

 

In March 2014, we entered into an amendment to the Work Statement NB-3, or the NB-3 Amendment.  The NB-3 Amendment was effective as of February 28, 2014 and provides that Nordic will perform a Period 2 extension study, or the Second Extension, to evaluate an additional eighteen months of standard-of-care osteoporosis management following the Period 1 extension of six months upon completion of the Phase 3 clinical study of our abaloparatide-SC product.  Payments in cash to be made by us to Nordic under the NB-3 Amendment are denominated in both euros and U.S. dollars and total up to approximately €3.0 million ($3.7 million) and $527,740, respectively.  In addition, we agreed to issue to Nordic shares of our Series A-6 having a value of up to the sum of approximately €3.0 million ($3.7 million) and $527,740 as additional payment for the services to be provided under the NB-3 Amendment, with the issuance of such shares to be made pursuant to the terms of an Amendment No. 2, entered into by us with Nordic on March 28, 2014, to the Amended and Restated Stock Issuance Agreement entered into by the parties as of May 16, 2011.

 

Payments in cash to be made to Nordic under the Work Statement NB-3, as amended by the NB-3 Amendment, are denominated in both euros and U.S. dollars and total up to €7.5 million ($9.5 million) and $1.1 million, respectively. In addition, we will issue to Nordic shares of our series A-6 convertible preferred stock having a value of up to €7.5 million ($9.5 million) and $0.8 million, as additional payment for services to be provided under the Work Statement NB-3 and the Services Agreement.

 

The Stock Issuance Agreement provided that, beginning with the quarter ended March 31, 2013, Nordic is entitled to receive quarterly stock dividends in connection with services performed under the Work Statement NB-3, payable in shares of series A-6 convertible preferred stock, or shares of common stock if our preferred stock automatically converted into common stock in accordance with our amended certificate of incorporation, having an aggregate value of up to €7.5 million ($9.5 million) and $0.8 million. In the event Nordic sold the shares of series A-5 convertible preferred stock or in the event the shares of series A-5 convertible preferred stock were converted into common stock in accordance with our amended certificate of incorporation, this right to receive the Nordic Accruing Dividend would terminate, but a right to receive an equivalent number of shares of series A-6 convertible preferred stock or common stock, as applicable, would remain with Nordic as a contractual right under the Stock Issuance Agreement.

 

On March 28, 2014, we entered into Amendment No. 2 to the Amended and Restated Stock Issuance Agreement entered into by the parties as of May 16, 2011, or the Second Stock Issuance Agreement Amendment, with Nordic.  The Second Stock Issuance Agreement Amendment required that our Board of Directors declare, as soon as reasonably practical, a stock dividend of twenty nine (29) shares of our Series A-6 for each share of our then outstanding Series A-5, all of which were held by Nordic, for a total of 186,847 shares of Series A-6, in full satisfaction of all stock dividends payable in 2014 under the terms of the Stock Issuance Agreement in relation to Work Statement NB-1 and Work Statement NB-3. In March 2014, Nordic requested that all 186,847 shares of Series A-6 be issued.  Accordingly, our Board of Directors declared and issued a dividend to Nordic of all 186,847 shares on March 31, 2014.  The Second Stock Issuance Agreement Amendment further provided that in the event an initial public offering of our common stock occurred prior to May 31, 2014, any payments owed by us to Nordic in relation to Work Statement NB-1 and Work Statement NB-3, excluding Performance Incentive Payments, for all periods of time after 2014 would change from the right to receive stock to the right to receive a total cash payment from us of $4.3 million payable in ten equal monthly installments of $430,000 beginning on March 31, 2015.  On May 19, 2014, we entered into Amendment No. 3 to the Stock Issuance Agreement, which amended the date prior to which an initial public offering must occur to June 30, 2014.  The Second Stock Issuance Agreement Amendment also stipulated that all consideration to be paid to Nordic pursuant to the Stock Issuance Agreement at any time after the consummation of an initial public offering shall be payable in cash. As the Company completed an initial public offering on June 11, 2014, Nordic no longer has the right to receive stock from the Company and agreed to be paid in cash for all periods after the consummation of the initial public offering.

 

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Prior to the issuance of shares of stock to Nordic in satisfaction of the Nordic Accruing Dividend, the liability to issue shares of stock was being accounted for as a liability on our balance sheet, based upon the fair value of the Series A-6 as determined using PWERM. Changes in the fair value from the date of accrual to the date of issuance of the Series A-6 shares are recorded as a gain or loss in other (expense) income in the statement of operations.

 

On December 6, 2013, we entered into a Letter of Intent, or the Letter of Intent, with Nordic, which provided that we and Nordic would continue to negotiate the definitive terms of the NB-3 Amendment. Pursuant to the Letter of Intent, we were required to make an initial payment of €222,573 ($0.3 million) and agreed to commence payment of the cash compensation due in consideration of the services being provided by Nordic under the NB-3 Amendment. The Letter of Intent terminated in accordance with its terms on February 28, 2014 (pursuant to an extension mutually agreed to by the Company and Nordic).

 

We recognize research and development expense for the amounts due to Nordic under the Work Statement NB-3 and Amendment ratably over the estimated per patient treatment periods beginning upon enrollment or over a nine-month and nineteen-month period, respectively. We recorded $2.3 million and $1.3 million of research and development expense during the three months ended September 30, 2014 and 2013, respectively, and $7.7 million and $2.6 million during the nine months ended September 30, 2014 and 2013, respectively, for per patient costs incurred for patients that had enrolled in the Extension Study and Second Extension.

 

As of September 30, 2014, we had a liability of $4.5 million reflected in accrued expenses and other current liabilities on the balance sheet resulting from services provided by Nordic, which are payable in cash.

 

Abaloparatide-TD Phase 2 Clinical Trial—On July 26, 2012, we entered into a Letter of Intent, or the Phase 2 Letter of Intent, with Nordic, which provides that we and Nordic will, subject to compliance by us with certain requirements of our Certificate of Incorporation and applicable securities laws, negotiate in good faith to enter into (1) a Work Statement NB-2, or the Work Statement NB-2, a draft of which is attached to the Phase 2 Letter of Intent, and (2) an amendment to the Amended and Restated Stock Issuance Agreement.

 

In February 2013, we executed the final Work Statement NB-2 under the Clinical Trial Services Agreement and the related Stock Issuance Agreement. Pursuant to the Work Statement NB-2, Nordic agreed to provide clinical trial services relating to the Phase 2 Clinical Trial and to be compensated for such services in a combination of cash and shares of stock. Payments in cash to be made by us to Nordic under Work Statement NB-2 were denominated in both euros and U.S. dollars and totaled up to €3.6 million ($4.5 million) and $0.3 million, respectively. In addition, we agreed to issue to Nordic shares of our series A-6 preferred stock having a value of up to $2.9 million, as additional payment for services to be provided under the Work Statement NB-2 and the Clinical Trial Services Agreement.

 

As of December 31, 2013, 32,215 shares of Series A-6 were due to Nordic under Work Statement NB-2, or, after the automatic conversion into common stock of the Company’s preferred stock, 141,294 shares the Company’s common stock.  In December 2013, Nordic requested that all 32,215 shares of Series A-6 accrued as of December 31, 2013 under Work Statement NB-2 be issued.  Accordingly, our Board of Directors declared a dividend to Nordic of all 32,215 shares of Series A-6 accrued under Work Statement NB-2 on December 31, 2013, which constituted all shares of Series A-6 due under Work Statement NB-2.

 

We recognized research and development expense for the amounts due to Nordic under the Work Statement NB-2 ratably over the estimated per patient treatment period beginning upon enrollment in the Phase 2 Clinical Trial, or a nine-month period. We recorded no expense and $0.6 million of research and development expense during the three months ended September 30, 2014 and 2013, respectively, and nil and $4.1 million during the nine months ended September 30, 2014 and 2013, respectively, for per patient costs incurred for patients that had enrolled in the Phase 2 Clinical Trial. As of September 30, 2014, all obligations due to Nordic under Work Statement NB-2 had been paid.

 

We are also responsible for certain pass-through costs in connection with the Phase 3 Clinical Trial, Extension Study and Phase 2 Clinical Trial. Pass-through costs are expensed as incurred or upon delivery. We recognized research and development expense of $0.3 million and $1.3 million for pass through costs during three months ended September 30, 2014 and 2013, respectively, and $0.8 million and $3.3 million during the nine months ended September 30, 2014 and 2013 respectively.

 

License Agreement Obligations

 

Abaloparatide

 

In September 2005, we exclusively licensed the worldwide rights (except Japan) to abaloparatide and analogs from an affiliate of Ipsen Pharma SAS, or Ipsen, including US Patent No. 5,969,095, (effective filing date March 29, 1996, statutory term expires March 29, 2016) entitled “Analogs of Parathyroid Hormone” that claims a