UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

For the quarterly period ended September 30, 2016

or

For the transition period from                      to                     

Commission File Number: 001-36579

 

Adverum Biotechnologies, Inc.

(Exact name of registrant as specified in its charter)

 

 

1035 O’Brien Drive,

Menlo Park, CA

(Address of principal executive offices)

94025

(Zip Code)

(650) 272-6269

(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  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

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

As of October 31, 2016 there were 41,718,515 shares of the registrant’s common stock, par value $0.0001 per share, outstanding.

 

 

 

 

 

 

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Adverum Biotechnologies, Inc.

(Formerly Avalanche Biotechnologies, Inc.)

TABLE OF CONTENTS

 

 

 

 

 

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PART I—FINANCIAL INFORMATION

Adverum Biotechnologies, Inc.

(Formerly Avalanche Biotechnologies, Inc.)

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands except share and per share data)

 

 

See accompanying notes to condensed consolidated financial statements

 

 

 

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Adverum Biotechnologies, Inc.

(Formerly Avalanche Biotechnologies, Inc.)

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

(In thousands except per share data)

 

 

See accompanying notes to condensed consolidated financial statements

 

 

 

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Adverum Biotechnologies, Inc.

(Formerly Avalanche Biotechnologies, Inc.)

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

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Adverum Biotechnologies, Inc.

(Formerly Avalanche Biotechnologies, Inc.)

September 30, 2016

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1. Organization and Basis of Presentation

Adverum Biotechnologies, Inc. (the “Company”, “we” or “us”) was incorporated in Delaware on July 17, 2006 as Avalanche Biotechnologies, Inc. and changed its name to Adverum Biotechnologies, Inc. on May 11, 2016. The Company is headquartered in Menlo Park, California. The Company is a gene therapy company committed to discovering and developing novel medicines that can offer potentially life-changing therapeutic benefit to patients suffering from chronic or debilitating and rare diseases. Since the Company’s inception, it has devoted its efforts principally to performing research and development activities, including conducting preclinical studies, early clinical trials, filing patent applications, obtaining regulatory agreements, hiring personnel, and raising capital to support these activities.

The Company has not generated any revenue from the sale of products since its inception. The Company has experienced net losses since its inception and has an accumulated deficit of $175.5 million as of September 30, 2016. The Company expects to incur losses and have negative net cash flows from operating activities as it engages in further research and development activities. The Company believes that it has sufficient funds to continue operations for at least the next 36 months.

On May 11, 2016, the Company completed the acquisition of all the outstanding shares of Annapurna Therapeutics SAS, a French simplified joint stock company (“Annapurna”), in accordance with the terms of the acquisition agreement (the “Agreement”) dated as of January 29, 2016, as amended on April 6, 2016. As a result, Annapurna is now a wholly owned subsidiary of the Company.

Pursuant to the terms of the Agreement, the Company issued 14,087,246 shares of the Company’s common stock, par value $0.0001 per share, for all of the issued and outstanding capital stock of Annapurna. All outstanding options and other rights to purchase capital stock of Annapurna were converted into the Company’s options for common stock. Refer to Note 3 for more details.

 

Upon completion of the acquisition, the Company changed its name to “Adverum Biotechnologies, Inc.”. The Company’s shares of common stock listed on The NASDAQ Global Market, previously trading through the close of business on Wednesday, May 11, 2016 under the ticker symbol “AAVL,” commenced trading on The NASDAQ Global Market under the ticker symbol “ADVM” on Thursday, May 12, 2016.

Follow-on Offerings —In January 2015, the Company completed a public offering of 2,369,375 shares of its common stock, which included 359,918 shares the Company issued pursuant to the underwriters’ exercise of their option to purchase additional shares. The Company received net proceeds of approximately $130.6 million, after underwriting discounts, commissions and offering expenses.

In March 2015, (i) the Company received net proceeds of approximately $8.3 million, after discounts and other issuance costs, which resulted from the sale of 230,000 common shares, and (ii) the Company issued 230,000 common shares to a shareholder that exercised warrants prior to the initial public offering.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and following the requirements of the Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP can be condensed or omitted. These condensed consolidated financial statements have been prepared on the same basis as the Company’s annual consolidated financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair statement of the Company’s consolidated financial information. The results of operations for the nine months ended September 30, 2016, are not necessarily indicative of the results to be expected for the full year or any other future period. The balance sheet as of December 31, 2015 has been derived from audited consolidated financial statements at that date but does not include all of the information required by U.S. GAAP for complete consolidated financial statements.

The accompanying condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC.

 

 

 

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2. Summary of Significant Accounting Policies

The accounting policies followed in the preparation of the interim condensed consolidated financial statements are consistent in all material respects with those presented in Note 2 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. The Company added the significant valuation accounting policies below as a result of the Annapurna acquisition in May 2016, and Editas revenue recognition policy related to the new license and collaboration agreement entered in August 2016.

 

Valuation of Long‑Lived Assets and Purchased Intangible Assets

The Company evaluates the carrying value of amortizable long‑lived assets, whenever events, or changes in business circumstances or the planned use of long‑lived assets indicate that their carrying amounts may not be fully recoverable or that their useful lives are no longer appropriate. If these facts and circumstances exist, the Company assesses for recovery by comparing the carrying values of long‑lived assets with their future undiscounted net cash flows. If the comparison indicates that impairment exists, long‑lived assets are written down to their respective fair value based on discounted cash flows. Significant management judgment is required in the forecast of future operating results that is used in the preparation of expected undiscounted cash flows. If management’s assumptions about future operating results were to change as a result of events or circumstances, the Company may be required to record an impairment loss on these assets. No impairment indicators were noted for the Company’s amortizable long-lived assets, fixed assets, in the periods presented.

The Company also evaluates the carrying value of intangible assets (not subject to amortization) related to in‑process research and development (“IPR&D”) assets, which are considered to be indefinite‑lived until the completion or abandonment of the associated research and development efforts. Accordingly, amortization of the IPR&D assets will not occur until the product reaches commercialization. During the period the assets are considered indefinite‑lived, they will be tested for impairment on an annual basis, as well as between annual tests if the Company become aware of any events occurring or changes in circumstances that would indicate that the fair values of the IPR&D assets are less than their carrying amounts. If and when development is complete, which generally occurs when regulatory approval to market the product is obtained, the associated IPR&D assets would be deemed definite‑lived and would then be amortized based on their estimated useful lives at that point in time based on respective patent terms. If the related project is terminated or abandoned, the Company may have an impairment related to the IPR&D asset, calculated as the excess of its carrying value over fair value. The Company estimated fair value of IPR&D assets acquired in Annapurna transaction at the acquisition closing date, May 11, 2016. No impairment indicators were noted and no impairment charge was recorded at September 30, 2016.

 

Revenue Recognition

Collaboration and License Revenue - Editas Collaboration, Option and License agreement

In August 2016, the Company entered into a collaboration, option and license agreement with Editas. Refer to Note 6 for details of the agreement.  Under the terms of the agreement, the Company received initial payments of $1.0 million that included $0.5 million for research services.  As the agreement provides for multiple deliverables, the Company accounts for this agreement as a multiple elements revenue arrangement.  At the inception of the agreement, identified deliverables include research services, manufacturing of viral vectors for research, participation in joint research committee and exclusivity during the option period. These deliverables did not appear to have a standalone value and were combined into one unit of accounting. Options for each indication to license the Company’s AAV vector are considered substantive options and do not include significant incremental discounts. Therefore, they are not considered as deliverables under the Agreement.

The Company allocated the $1.0 million received to a single unit of accounting identified in the arrangement.  The Company expects to recognize $1.0 million ratably over the associated period of performance, which is the maximum research period of three years.  As there is no discernible pattern of performance and/or objectively measurable performance measures do not exist, the Company will recognize revenue on a straight-line basis. During the three months ended September 30, 2016, the Company recognized $56,000 as collaboration revenue.

 

Recently-Issued Accounting Pronouncements — In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Accounting Standard Codification (ASC) 605, Revenue Recognition. This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. Companies may adopt ASU 2014-09 using a full

 

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retrospective approach or report the cumulative effect as of the date of adoption. In July 2015, the FASB voted to approve a one-year deferral of the effective date to December 15, 2017 for interim and annual reporting periods beginning after that date and permitted early adoption of the standard, but not before the original effective date of December 15, 2016. The FASB issued supplemental adoption guidance and clarification to ASU 2014-09 in March 2016, April 2016 and May 2016 within ASU 2016-08 Revenue From Contracts With Customers: Principal vs. Agent Considerations, ASU 2016-10 Revenue From Contracts with Customers: Identifying Performance Obligations and Licensing, and ASU 2016-12 Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients, respectively. The Company is evaluating the application of this ASU and method of adoption, but has not yet determined the potential effect it may have on the Company’s consolidated financial statements.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, requiring management to evaluate whether events or conditions could impact an entity’s ability to continue as a going concern and to provide disclosures if necessary. Management will be required to perform the evaluation within one year after the date that the financial statements are issued. Disclosures will be required if conditions give rise to substantial doubt and the type of disclosure will be determined based on whether management’s plans will be able to alleviate the substantial doubt. The accounting standards update will be effective for the first annual period ending after December 15, 2016, and for annual periods and interim periods thereafter with early application permitted. The adoption of this ASU is not expected to impact the Company’s financial position or results of operations.

In February 2016, the FASB issued ASU No. 2016-2, Leases. ASU 2016-2 is aimed at making leasing activities more transparent and comparable, and requires substantially all leases be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability, including leases currently accounted for as operating leases. The new standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2018, with early adoption permitted. The Company has not yet determined the method of adoption and the potential effect the new standard will have on the Company’s consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-9, Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting. ASU 2016-9 simplifies several aspects of the accounting for share-based payment award transactions, including: (1) the income tax consequences, (2) classification of awards as either equity or liabilities, and (3) classification in the consolidated statement of cash flows. The new standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2016, with early adoption permitted. The Company has not yet determined the method of adoption and the potential effect the new standard will have on the Company’s consolidated financial statements.

 

The Company has reviewed other recent accounting pronouncements and concluded they are either not applicable to the business or no material effect is expected on the consolidated financial statements as a result of future adoption.

 

 

3. Acquisition of Annapurna

 

 

On May 11, 2016, the Company completed the acquisition of all outstanding equity interests of Annapurna. Annapurna is a privately held French limited liability company and has two wholly-owned subsidiaries, Annapurna, Inc. in the U.S. and Annapurna Therapeutics Limited in Ireland. Annapurna is a biopharmaceutical company focused on discovering and developing novel gene therapy products for people living with severe rare diseases. The primary reasons for the acquisition were to expand the technology platforms within the Company’s research and development portfolio and to apply the Company’s resources and expertise in gene vectors development to advance Annapurna’s programs through development and clinical trials. Annapurna’s results of operations and fair value of assets acquired and liabilities assumed are included in the Company’s condensed consolidated financial statements from the date of acquisition.

 

The purchase price consideration was estimated to be $64.8 million, which was based on the Company’s common stock closing price on NASDAQ on the acquisition closing date of $4.14 per share. A total of 14,087,246 shares of the Company’s common stock were issued to shareholders of Annapurna in exchange for all common and preferred stock outstanding at the closing date. Annapurna stockholders did not receive any fractional shares of the Company’s common stock in connection with the acquisition. Instead of receiving any fractional shares, each Annapurna stockholder was paid an amount in cash (without interest) equal to such fraction amount multiplied by the average 10 business days sale price of the Company’s common stock on NASDAQ from the acquisition date. Annapurna Series O preferred shares issued to founders were canceled prior to the acquisition date and were not included in the purchase price consideration. Vesting of certain of Annapurna’s options and unvested common stock shares was accelerated at the closing date. The fair value of awards related to the accelerated vesting of options and shares of $0.9 million was excluded from the purchase price consideration and included in the Company’s operating expenses post acquisition. A portion of the purchase price has

 

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been attributed to the exchange of Annapurna’s options and other rights to purchase capital stock outstanding at the acquisition closing date for corresponding common stock options of the Company at an exchange ratio of 9.54655.

The Company reserved 3,673,940 shares for the future exercise of the Company’s stock options. The total fair value of assumed Annapurna stock options and stock-based awards was estimated at $14.7 million on the acquisition date, using the Black-Scholes pricing model, assuming no dividends, expected volatilities of 80% and 89%, risk-free interest rates of 1.4% and 1.1%, and expected lives of six and ten years for employees and non-employees awards, respectively. Of the total fair value, $7.4 million has been attributed as pre-combination service and included as part of the total purchase price consideration. The post-combination attribution of $7.2 million will be recognized as compensation expense over the remaining requisite service period. The Company has included $1.1 million in stock-based compensation expense related to the vesting of exchanged stock options and day-one post combination compensation expenses related to the accelerated vesting of options and shares in its condensed consolidated statement of operations during the second quarter 2016.

Total purchase price consideration was estimated as follows (in thousands):

 

 

The transaction has been accounted for using the acquisition method based on ASC 805, Business Combinations, with Adverum identified as the acquirer, based on the existence of a controlling financial interest of the combined entities. Under the acquisition method, assets acquired and liabilities assumed were recorded at their estimated fair values as of May 11, 2016. Goodwill, as well as intangible assets that do not qualify for separate recognition, is measured as of the acquisition date as the excess of consideration transferred, which is also measured at fair value, and the net of the fair values of the assets acquired and the liabilities assumed as of the acquisition closing date. Acquisition costs were expensed as incurred and recorded as general and administrative expenses. The Company recorded zero and $2.5 million of acquisition costs for the three-months and nine-months ended September 30, 2016, respectively.

 

Valuing certain components of the acquisition, primarily intangible assets acquired, deferred taxes, uncertain tax positions and accrued liabilities required us to make significant estimates that may be adjusted in the future; consequently, the fair value of identifiable assets acquired and liabilities assumed are considered preliminary. Final determination of these estimates could result in an adjustment to the preliminary purchase price allocation, with an offsetting adjustment to goodwill. During the third quarter of 2016, as management continued its review of the valuation model, the Company recorded an adjustment to reduce the fair value of the acquired IPR&D asset by $450,000, to adjust the related deferred tax liability by $56,000, and to adjust recorded goodwill by $394,000. The adjusted preliminary allocation of total purchase price consideration is as follows (in thousands):

 

 

The identifiable intangible assets acquired consist of IPR&D assets related to products in development, as summarized in the table below (in thousands):

 

 

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The fair value of each IPR&D asset is estimated using the income approach and calculated using cash flow projections adjusted for inherent risks regarding regulatory approval, promotion, and distribution, discounted at a rate of approximately 11.0%. The Company acquired two additional intangible assets relating to the Friedreich’s Ataxia (FA) and severe allergy programs, but the fair value of each of these assets was determined to be nominal and is not included in the total acquired intangible assets. All IPR&D intangible assets acquired are currently classified as indefinite-lived and are not currently being amortized. IPR&D asset becomes definite-lived upon the completion or abandonment of the associated research and development efforts, and will be amortized from that time over an estimated useful life based on respective patent terms. The fair value of each IPR&D asset will continue to be evaluated for impairment on an annual basis or more often if the Company identifies impairment indicators that would require earlier testing. Based on the preliminary fair values above, an amount of $49.5 million has been allocated to goodwill, which represents the excess of the purchase price over the fair values assigned to the net assets acquired. The full amount of the preliminary value of goodwill has been assigned to the entire Company, since management has determined that the Company has only one reporting unit. The goodwill is not deductible for tax purposes.

The amount of net loss of Annapurna included in the consolidated statements of operations from the acquisition date through the period ended September 30, 2016 was $1.2 million for the three months and $2.4 million for the nine months ended September 30, 2016. Annapurna did not generate any revenues prior or post acquisition.

The following table presents the unaudited pro forma results for the nine months ended September 30, 2016 and 2015. The pro forma financial information combines the results of operations of Adverum and Annapurna as though the businesses had been combined as of the beginning of fiscal 2015. The pro forma financial information is presented for informational purposes only, and is not indicative of the results of operations that would have been achieved in the current or any future periods.

 

 

Pro-forma adjustments included the following:

 

The unaudited condensed pro forma information does not include any anticipated synergies that may be achievable subsequent to the date of acquisition.

 

 

 

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As the Company recorded goodwill and IPR&D intangible assets upon the acquisition of Annapurna, the Company is required to test goodwill and indefinite lived intangible assets for impairment on an annual basis or more frequently if indicators of impairment exist. The Company operates as one reporting unit and goodwill was recorded to this reporting unit.

 

During the second quarter of 2016, the Company noted a continuing decrease in its stock price that resulted in the market capitalization being less than the carrying value of the Company’s net assets as of June 30, 2016. As the operating losses are expected to increase significantly in the following years due to continuing pre-clinical and expected clinical trials, the Company concluded that it is more likely than not that the fair value of the Company’s one reporting unit is less than its carrying value and as a result performed a step one goodwill impairment analysis.

 

In performing the step one analysis, the Company determined the fair value of the reporting unit using a market-based approach. The Company multiplied the stock price of $3.16 on June 30, 2016 by the 41.3 million common shares outstanding and applied a control premium to estimate the common equity value on a controlling basis. As the fair value was less than the carrying value of the Company’s net assets, the Company proceeded to step two of the impairment analysis.

 

The second step of the analysis includes allocating the calculated fair value (determined in the step one analysis) of the reporting unit to its assets and liabilities to determine an implied fair value of goodwill. The implied fair value of goodwill was determined in the same manner as the amount of goodwill recognized in an acquisition. That is, the estimated fair value of the reporting unit was allocated to all of the assets and liabilities as if the Company had been acquired and the estimated fair value was the purchase price paid. As part of this assessment the Company considered the preliminary valuation of Annapurna net assets acquired, excluding goodwill, as their fair value from May 11, 2016, the acquisition closing date, to June 30, 2016 did not change. The Company also noted that the fair value of current assets and liabilities approximates their carrying value due to their short-term nature, the Company’s cash and cash equivalent balance is higher than the fair value estimated in the step one analysis, and the fair value of fixed assets approximates their recorded value as most of the Company’s fixed assets are acquired in the last couple of years. Based on this analysis, the implied fair value of the goodwill was zero. Accordingly, the Company recorded a goodwill impairment charge of $49.1 million in the condensed consolidated statements of operations and comprehensive loss for the six month period ended June 30, 2016. During the third quarter of 2016, the Company recorded changes in acquired intangible assets, deferred tax liability, and goodwill as discussed above. This resulted in the additional goodwill impairment charge of $0.4 million recorded in the three months ended September 30, 2016. Total goodwill impairment charge was $49.5 million for the nine months ended September 30, 2016.

 

As the Annapurna purchase price allocation is preliminary and the amount of goodwill might change during the measurement period, the recorded impairment charge reflects the Company’s best estimate as of September 30, 2016.

 

The Company did not impair recorded IPR&D intangible assets, as there were no impairment indicators as of September 30, 2016.

 

 

4. Cash Equivalents and Marketable Securities

The Company did not hold any marketable securities as of September 30, 2016, all investments of $225.7 million were held in money market funds and are treated as cash equivalents.

The following is a summary of the cash equivalents and marketable securities as of December 31, 2015:

 

 

 

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As of December 31, 2015, the contractual maturities of the Company’s marketable securities were less than one year. The Company has not sold any securities prior to their maturities and so does not consider any losses on these investments to be other-than-temporarily impaired. There were no sales of available-for-sale securities in any of the periods presented.

 

 

5. Fair Value Measurements and Fair Value of Financial Instruments

The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows:

Level 1: Quoted prices in active markets for identical assets or liabilities.

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.

Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability.

The fair value of Level 1 securities are determined using quoted prices in active markets for identical assets. Level 1 securities consist of highly liquid money market funds. Financial assets and liabilities are considered Level 2 when their fair values are determined using inputs that are observable in the market or can be derived principally from or corroborated by observable market data such as pricing for similar securities, recently executed transactions, cash flow models with yield curves, and benchmark securities. In addition, Level 2 financial instruments are valued using comparisons to like-kind financial instruments and models that use readily observable market data as their basis. U.S. Treasury securities, U.S. government agency securities and certificate of deposit are valued primarily using market prices of comparable securities, bid/ask quotes, interest rate yields and prepayment spreads and are included in Level 2.

There were no transfers within the hierarchy during the nine months ended September 30, 2016 and the year ended December 31, 2015. As of September 30, 2016, the Company has no Level 3 assets and one Level 3 liability.  As of December 31, 2015, the Company had no Level 3 assets or liabilities.

The following table summarizes, for assets recorded at fair value on a recurring basis, the respective fair value and the classification by level of input within the fair value hierarchy as described above (in thousands):

 

 

In August 2016, the Company entered into a financing arrangement with an independent third party for a total amount of $0.3 million. Under the terms of the financing arrangement, the Company may be required to repay up to $1.4 million, depending on the

 

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achievement of certain development and commercialization milestones.  The Company elected the fair value option to account for this financing arrangement.  The fair value of the financing arrangement was determined based on the expected value approach and is classified as Level 3 within the fair value hierarchy.  The key unobservable inputs in the valuation model include timing of milestones, probability of achievement of development and commercial milestones and a discount factor.

The following table presents quantitative information about the inputs and valuation methodologies used for the fair value measurements classified in Level 3 at the fair value hierarchy at September 30, 2016:

 

 

Non-financial assets such as intangible assets, property, plant, and equipment are evaluated for impairment and adjusted to their fair value using Level 3 inputs, only when impairment is recognized. Fair values are considered Level 3 when management makes significant assumptions in developing a discounted cash flow model based upon a number of considerations including projections of revenues, earnings and a discount rate. In addition, in evaluating the fair value of goodwill impairment, further corroboration is obtained using our market capitalization.

 

 

6. Significant Agreements

Regeneron

In May 2014, the Company entered into a research collaboration and license agreement with Regeneron to discover, develop and commercialize novel gene therapy products for the treatment of ophthalmologic diseases. The collaboration covers up to eight distinct therapeutic targets (collaboration targets). The Company and Regeneron will collaborate during the initial research period of three years that can be extended by Regeneron for up to an additional five years. During the research period, Regeneron has the option to obtain an exclusive worldwide license for a collaboration target’s further development by giving written notice to the Company and paying $2.0 million per target. If Regeneron exercises its option, it will be responsible for all further development and commercialization of the target. The Company is then eligible to receive contingent payments of up to $80.0 million upon achievement of certain development and regulatory milestones for product candidates directed toward each collaboration target, for a combined total of up to $640.0 million in potential milestone payments for product candidates directed toward all eight collaboration targets, plus a royalty in the low- to mid-single-digits on worldwide net sales of collaboration products.

For any two collaboration targets, the Company has an option to share up to 35% of the worldwide product candidate development costs and profits. If the Company exercises this option, the Company will not be eligible for milestone and royalty payments discussed above but rather the Company will share development costs and profits with Regeneron.

The agreement will expire with respect to each collaboration target upon the earlier of the (a) expiration of the research term if the option right has not been triggered by the end of the research term or (b) expiration of the option right if the option right has not been exercised by Regeneron. If the option right has been exercised, the agreement in connection with each collaboration target will expire upon expiration of all payment obligations by Regeneron. In addition, the agreement, or Regeneron’s rights to any target development under the agreement, may terminate early under the following situations:

 

 

 

 

 

 

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University of California

In May 2010, the Company entered into a license agreement, as amended, with the Regents of the University of California (Regents) for exclusive rights in the U.S. to certain patents owned by the Regents. Under the terms of the agreement, the Company paid an upfront license fee of $100,000 and agreed to reimburse the Regents for patent-related expenses. The Company is obligated to pay the Regents royalties on net sales, if any, as well as an annual maintenance fee of $50,000 beginning in the calendar year after the first commercial sale of a licensed product and milestone payments related to the achievement of certain clinical and regulatory goals totaling up to $900,000 for the first indication and $500,000 for each additional indication for up to two additional indications. Through September 30, 2016, none of these goals had been achieved, and no milestones were payable.

 

Cornell University

 

In August 2014, as amended in December 2015, Annapurna entered into a master service agreement with Cornell University for assistance in regulatory affairs, overall project management and parameter development. Per the amended agreement, Annapurna will pay Cornell $13.3 million ratably over 4 years for these services, as services will be performed.

 

In December 2015, Annapurna Therapeutics Limited entered into three licensing agreements with Cornell University, pursuant to which Annapurna will advance its ANN-001, ANN-002 and ANN-004 programs, which were each based on gene-therapy programs initiated at the Department of Genetic Medicine at Weill Cornell. Under Adverum these programs will be ADVM-043, ADVM-053 and our program targeting severe allergy, respectively.

 

A1AT Deficiency License Agreement: Under this agreement, Annapurna Therapeutics Limited holds an exclusive license to certain technology related to alpha-1 antitrypsin (“A1AT”) deficiency and rights to an Investigational New Drug (“IND”) application to initiate clinical studies of gene therapy for A1AT.

 

HAE License Agreement: Under this agreement, Annapurna Therapeutics Limited holds an exclusive license to certain technology related to hereditary angioedema (“HAE”) and a non-exclusive license to certain other intellectual property related to the HAE program.

 

Allergy License Agreement: Under this agreement, Annapurna Therapeutics Limited holds an exclusive license to certain patents related to allergens and a non-exclusive license to certain other technology related to allergens.

 

The Company may terminate any of these license agreements for convenience upon ninety days written notice.

 

Across these three license agreements, Cornell University is entitled to receive aggregate annual maintenance fees ranging from $30,000 to $300,000 per year, up to $16.0 million in aggregate milestone payments and royalties on sales in the low single-digits, subject to adjustments and minimum thresholds. In addition, under a master services agreement with Cornell University, Annapurna will utilize the university to scale production of gene therapies by manufacturing processes that the institution has already used to produce Good Manufacturing Practice (GMP) material for other gene-therapy trials. The Company accrued $1.1 million as of September 30, 2016 and recorded research and development expenses of $0.8 million for the three months ended September 30, 2016 and $1.3 million (post Annapurna’s acquisition) for the period from May 11, 2016 through September 30, 2016, related to Cornell agreements. No milestone payments were probable to achieve and none were recorded as of September 30, 2016.

 

Dr. Crystal, Chairman of Genetic Medicine, the Bruce Webster Professor of Internal Medicine and a Professor of Genetic Medicine and of Medicine at Weill Cornell, served as a consultant to Annapurna since inception and continues to provide services to the Company for the annual compensation of $0.3 million. Dr. Crystal also owns common shares of the Company and he does not have significant influence on the Company’s operations.

 

REGENXBIO

 

A1AT Deficiency/Allergy License Agreement: In October 2015, Annapurna Therapeutics Limited entered into an exclusive worldwide license to certain intellectual property in order to make, have made, use, import, sell and offer for sale certain licensed products for the treatment of A1AT deficiency. Additionally under this agreement, the Company has an option to be granted an exclusive worldwide license to certain intellectual property related to the treatment of severe allergies. Under this license agreement, REGENXBIO is eligible to receive annual maintenance fees, up to approximately $20.0 million in combined milestone payments and royalties in the mid-to-high single digits.

 

 

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Friedreich’s Ataxia License Agreement: In April 2014, Annapurna entered into an exclusive worldwide license to certain intellectual property related to the Friedreich’s Ataxia (“FA”) program to make, have made, use, import, sell and offer for sale licensed products using AAVrh10 for FA where the vector is administered by any route except directly to the central nervous system (FA Systemic).  Under the terms of this license agreement, Annapurna also has an option to obtain a non-exclusive worldwide license to make, have made, use, import, sell and offer for sale licensed products using a single vector for each of FA where the vector is administered directly to the central nervous system and FA Systemic. Under this license agreement, REGENXBIO is eligible to receive annual maintenance fees, up to $13.85 million in combined milestone fees and royalties in the mid-to-high single digits.

 

The Company accrued $75,000 as of September 30, 2016 and recorded expenses of $49,000 (post Annapurna’s acquisition) for the period May 11, 2016 through September 30, 2016, related to REGENXBIO agreements. No milestone payments were probable to achieve and none were recorded as of September 30, 2016.

 

Inserm Transfert

 

In July 2014, Annapurna entered into an agreement with Inserm Transfert whereby Annapurna holds an exclusive license to certain patents to develop, make, have made, use, import, offer for sale and sell or otherwise distribute products for the treatment of Friedreich’s ataxia and a non-exclusive license to certain other intellectual property related to the FA program. The Agreement was amended in October 2015 to increase the scope of the intellectual property under the licenses.  Under this agreement, Inserm Transfert is entitled to receive certain de minimis license payments,  certain development milestone payments  of up to approximately  €2.0 million in the aggregate and royalties on sales in the low single-digits, subject to adjustments. The Company accrued $140,000 relating to Inserm as of September 30, 2016 and recorded research and development expenses of $140,000 for the three months ended September 30, 2016 and for the period from May 11, 2016 through September 30, 2016, related to this agreement. No milestone payments were probable to achieve and none were recorded as of September 30, 2016.

 

Editas Medicine, Inc.

In August 2016, the Company entered into a collaboration, option and license agreement with Editas Medicine, Inc. (“Editas”) pursuant to which the Company and Editas will collaborate on certain studies using adeno-associated viral (AAV) vectors in connection with Editas’ genome editing technology and the Company will grant to Editas an exclusive option to obtain certain exclusive rights to use the Company’s proprietary vectors in up to five ophthalmic indications. The Company received a $1.0 million non-refundable upfront payment, with $0.5 million of such payment to be credited against Editas’ obligation to fund research and development costs. Under the terms of the agreement, both the Company and Editas will be subject to exclusivity obligations.

 

Editas may exercise the option, with respect to a designated initial Indication, until the first anniversary of the effective date of the agreement.  With respect to the four other Indications, Editas may exercise the option until the third anniversary of the effective date, provided that the option will expire on the second anniversary of the effective date if Editas has not exercised the option with respect to the initial Indication or any other Indication by such date.  Upon each exercise of the option, Editas will pay the Company a $1.0 million fee per Indication.  If Editas elects to develop a product using certain of the Company’s proprietary vectors, the Company will be eligible to receive up to a mid-teen million dollar amount in development and commercialization milestone payments for such product, and tiered royalties between the mid-single digits and low teens on net sales of such product, subject to certain adjustments.

Unless early terminated, the agreement will be in effect until the later of the expiration of the option exercise period or the expiration of the royalty term of the last product.  At any time after the option is first exercised, Editas may terminate the Agreement for convenience in its entirety or on an indication-by indication or country-by-country basis, upon prior written notice to the Company.  The Company may also terminate the agreement if Editas challenges the Company’s patents relating to its proprietary vectors and does not withdraw such challenge within a defined period of time.  In addition, either party may terminate the agreement with written notice upon a bankruptcy of the other party or upon an uncured material breach by the other party.

 

 

 

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7. Property and Equipment, Net

Property and equipment, net consists of the following (in thousands):

 

 

Depreciation and amortization expense related to property and equipment for the three months ended September 30, 2016 and 2015 was $453,000 and $241,000, respectively.  Depreciation and amortization expense related to property and equipment for the nine months ended September 30, 2016 and 2015 was $1.1 million and $506,000, respectively.

 

 

8. Accrued Expenses and Other Current Liabilities

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

 

 

 

9. Other non-current liabilities

 

Due to the innovative nature of Annapurna’s product candidate development programs, Annapurna has benefited from certain sources of financial assistance from Banque Publique d’Investissement (“BPI France”). BPI France provides financial assistance and support to emerging French enterprises to facilitate the development and commercialization of innovative technologies. The funds received by the Company are intended to finance its research and development efforts and the recruitment of specific personnel. The Company has received such funding in the form of conditional advances.

 

In August 2015, BPI France granted Annapurna a €750,000 interest free conditional advance, of which €500,000 was drawn down as of December 31, 2015. The remaining €250,000 advance was not and is not expected to be drawn down on. Payments are scheduled in equal quarterly amounts of €25,000 from September 30, 2017 to June 30, 2022. This payment schedule will be modified if the Company will receive revenue from license or product sales before advances are paid in full. The Company calculated 7% imputed interest expense on these advances that was recorded as a discount at the issuance date. The discount is amortized as an interest expense over the life of the advances. As of September 30, 2016 the carrying value, which approximates the fair value, of the conditional advance was $381,000 and is recorded in other noncurrent liabilities and the Company recorded $11,000 interest expense from the acquisition closing date to September 30, 2016.

 

In July 2016, the Company entered into a sponsored research agreement with The Alpha-1 Project, Inc. (TAP) in which TAP will fund the Company’s A1AT research activities of up to $300,000. The Company may repay up to 4.5 times the received amount if and when certain product approval and sales milestones are achieved. During the third quarter, the Company received $100,000 and issued the common stock warrant for 10,000 shares exercisable anytime during five years from the issuance date at an exercise price of $4.33 per share. Warrants were valued at $26,000 at the issuance date and recorded as equity. Financing arrangement was recorded at estimated fair value of $74,000 in other noncurrent liabilities as of September 30, 2016. Refer to Note 5 for valuation details of this financing arrangement.

 

 

 

 

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10. Commitments and Contingencies

Collaborations and License Agreements

 

In August 2014, as amended December 2015, Annapurna entered into a master service agreement with Cornell University for assistance in regulatory affairs, overall project management and parameter development. Per the amended agreement, Annapurna will pay Cornell $13.3 million ratably over 4 years for these services.

 

The Company is a party to various agreements, principally relating to licensed technology that requires payment of annual maintenance fees and future payments relating to milestones or royalties on future sales of specified products. Refer to Note 6 for further details. The Company expenses the annual maintenance fees on a straight-line basis and accrues the aggregate balances until invoiced or paid. Through September 30, 2016, none of the goals had been achieved under the license agreements and no cash milestones were accrued or payable. Since the achievement of these milestones is not fixed and determinable, such commitments have not been included in the Company’s condensed consolidated balance sheets.

Guarantees and Indemnifications

In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and provide for indemnification for certain liabilities. The exposure under these agreements is unknown because it involves claims that may be made against the Company in the future but have not yet been made. To date, the Company has not paid any claims or been required to defend any action related to its indemnification obligations. However, the Company may record charges in the future as a result of these indemnification obligations. The Company also has indemnification obligations to its directors and executive officers for specified events or occurrences, subject to some limits, while they are serving at the Company’s request in such capacities. There have been no claims to date and the Company believes the fair value of these indemnification agreements is minimal. Accordingly, the Company has not recorded any liabilities for these agreements as of September 30, 2016.

Legal Proceedings

From time to time, the Company may become involved in litigation and other legal actions. The Company estimates the range of liability related to any pending litigation where the amount and range of loss can be estimated. The Company records its best estimate of a loss when the loss is considered probable. Where a liability is probable and there is a range of estimated loss with no best estimate in the range, the Company records a charge equal to at least the minimum estimated liability for a loss contingency when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that a liability had been incurred at the date of the financial statements and (ii) the range of loss can be reasonably estimated.

In July 2015, three securities class action lawsuits were filed against the Company and certain of its officers in the United States District Court for the Northern District of California, each on behalf of a purported class of persons and entities who purchased or otherwise acquired its publicly traded securities between July 31, 2014 and June 15, 2015. The lawsuits assert claims under the Securities Exchange Act of 1934 (Exchange Act) and the Securities Act of 1933, as amended (Securities Act) and allege that the defendants made materially false and misleading statements and omitted allegedly material information related to, among other things, the Phase 2a clinical trial for AVA-101 and the prospects of AVA-101. The complaints seek unspecified damages, attorneys’ fees and other costs. An amended consolidated complaint was filed in February 2016. On November 3, 2016, the Court granted the Company’s motion to dismiss the consolidated complaint.  It set a deadline of December 2, 2016 for plaintiffs to file an amended consolidated complaint.

In December 2015, a securities class action lawsuit was filed against the Company, its board of directors, underwriters of its January 13, 2015, follow-on public stock offering, and two of its institutional stockholders, in the Superior Court of the State of California for the County of San Mateo. The complaint alleges that, in connection with the Company’s follow-on stock offering, the defendants violated the Securities Act in essentially the same manner alleged by the consolidated federal action: by allegedly making materially false and misleading statements and by allegedly omitting material information related to the Phase 2a clinical trial for AVA-101 and the prospects of AVA-101. The complaint seeks unspecified compensatory and rescissory damages, attorneys’ fees and other costs. The plaintiff has dismissed the two institutional stockholder defendants. In August 2016, the Court denied the Company’s motion to stay without prejudice, denied the Company’s demurrer, and dismissed with leave to amend certain claims against the underwriter defendants.

 

The Company believes that the claims in the asserted actions are without merit and intends to defend the lawsuits vigorously. The Company expects to incur costs associated with defending the actions. While the Company has various insurance policies related to the risks associated with its business, including directors’ and officers’ liability insurance policies, there is no assurance that the Company will be successful in its defense of the actions, that its insurance coverage, which contains a self-insured retention, will be

 

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sufficient, or that its insurance carriers will cover all claims or litigation costs. Due to the inherent uncertainties of litigation, the Company cannot reasonably predict at this time the timing or outcomes of these matters or estimate the amount of losses, or range of losses, if any, or their effect, if any, on its condensed consolidated financial statements.

 

 

11. Stock Option Plans

The Company’s  2014 Equity Incentive Award Plan (2014 Plan) permits the issuance of stock options (options), restricted stock units (RSUs) and other types of awards to employees, directors, and consultants.

As of September 30, 2016, a total of 13,162,656 shares of common stock were authorized for issuance and 3,033,936 shares were available for future grants under the 2014 Plan.

In July 2014, the Company’s board of directors and its stockholders approved the establishment of the 2014 Employee Stock Purchase Plan (2014 ESPP). During the nine months ended September 30, 2016, 52,002 shares were issued under the 2014 ESPP and no shares were issued in the same period for 2015. A total of 675,383 shares of common stock have been reserved for issuance under the 2014 ESPP and 623,381 were available for issuance under the 2014 ESPP as of September 30, 2016.

The following table summarizes option activity under our stock plans and related information:

 

 

Options granted number includes the Company’s stock options for 3,673,940 common stock shares issued in exchange for Annapurna stock options at $0.21 exercise price per share. The weighted-average fair values of options granted and exchanged during the nine months ended September 30, 2016 and 2015 were $1.27 and $23.92, respectively. The total intrinsic value of options exercised during the nine months ended September 30, 2016 and 2015 were $7.1 million and $11.2 million, respectively.

The Company has recorded aggregate stock-based compensation expense related to the issuance of stock option awards to employees and nonemployees in the condensed consolidated statement of operations and comprehensive loss as follows (in thousands):

 

 

Stock-based compensation expense included additional charges of 0.5 million and $1.5 million, recorded in general and administrative expense, and zero and $1.4 million, recorded in research and development expense, related to stock modifications in connection with separation agreements for four Company’s executive officers for the three and nine-months ended September 30, 2016, respectively.

Restricted Stock Units

Restricted stock units, or RSUs, are share awards that entitle the holder to receive freely tradable shares of our common stock upon vesting. The fair value of RSUs is based upon the closing sales price of our common stock on the grant date. RSUs granted to employees generally vest over a two-to-four year period.

 

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The following table summarizes the RSUs activity under our stock plans and related information:

 

 

The total fair value of RSUs that vested for the nine months ended September 30, 2016 and 2015 was $4.0 million and $0.1 million, respectively. As of September 30, 2016, there was $3.9 million of unrecognized compensation cost related to unvested RSUs that the Company expects to recognize over a weighted-average period of 3.2 years.

Stock Options Granted to Employees

The fair value of each option issued to employees was estimated at the date of grant using the Black-Scholes valuation model with the following weighted-average assumptions:

 

 

As of September 30, 2016, there was $12.6 million of unrecognized stock-based compensation expense related to employees’ awards that the Company expects to recognize over a weighted-average period of 3.1 years.

Stock Options Granted to Non-Employees

Stock-based compensation related to stock options granted to non-employees is measured and recognized as the stock options are earned. The Company believes that the estimated fair value of the stock options is more readily measurable than the fair value of the services rendered. The following weighted-average assumptions were used in estimating non-employees’ stock-based compensation expenses:

 

 

As of September 30, 2016, there was $2.1 million of unrecognized stock-based compensation expense related to non-employees’ awards that the Company expects to recognize over a weighted-average period of 2.7 years.

 

 

 

12. 401(k) Savings Plan

The Company established a defined-contribution savings plan under Section 401(k) of the Code (the 401(k) Plan). The 401(k) Plan covers all employees who meet defined minimum age and service requirements, and allows participants to defer a portion of their annual compensation on a pretax basis. For the three months ended September 30, 2016 and 2015, the Company contributed $0.1

 

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million and $0 to the 401(k) Plan, respectively. For the nine months ended September 30, 2016 and 2015, the Company contributed $0.2 million and $0.1 million to the 401(k) Plan, respectively.

 

 

13. Net Loss Per Share

Basic net loss per share is calculated by dividing the net loss by the weighted-average number of shares of common stock outstanding for the period. Diluted net loss per share attributable is computed by giving effect to all potential dilutive common stock equivalents outstanding for the period. Diluted net loss per share is the same as basic net loss per share for all periods presented, since the effects of potentially dilutive securities are antidilutive.

We have excluded issued warrants for common stock, stock options and RSUs to purchase approximately 8.7 million and 5.8 million shares of our common stock that were outstanding as of September 30, 2016 and 2015, respectively, in the computation of diluted net loss per share attributable to common stockholders because their effect was antidilutive.

 

 

14. Subsequent Events

In October 2016, the Company announced the appointment of Amber Salzman, Ph.D., formerly the Company’s President and Chief Operating Officer, as Chief Executive Officer. Dr. Salzman joined Adverum as President and Chief Operating Officer in 2016 after the acquisition of Annapurna Therapeutics. Concurrently, Paul Cleveland, the Company’s former Chief Executive Officer, was appointed to Executive Chairman of the Board. Mr. Cleveland will remain the Company’s Principal Executive Officer. 

 

 

 

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The interim financial statements included in this Quarterly Report on Form 10-Q and this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2015, and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in our Annual Report on Form 10-K, as filed with the U.S. Securities and Exchange Commission (SEC) on March 4, 2016. In addition to historical information, this discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act). These forward-looking statements are subject to risks and uncertainties, including those discussed in the section titled “Risk Factors,” set forth in Part II – Other Information, Item 1A below and elsewhere in this report that could cause actual results to differ materially from historical results or anticipated results.

Overview

We are a publicly traded gene therapy company committed to discovering and developing novel medicines that can offer potentially life-changing therapeutic benefit to patients living with rare diseases or diseases of the eye, who currently have limited or burdensome treatment options.  We have leveraged our next-generation adeno-associated virus (AAV)-based directed evolution platform to generate product candidates designed to provide durable efficacy by inducing sustained expression of a therapeutic protein after a single administration of therapy.  We have also acquired certain other gene therapy product candidates through our acquisition on May 11, 2016, of Annapurna Therapeutics SAS, a privately-held French gene therapy company (Annapurna).  Our core capabilities include clinical development expertise, vector optimization, process development, manufacturing technology expertise, and assay development.

We are focused on advancing our three lead gene therapy programs to address unmet needs in wet AMD and rare diseases alpha 1 antitrypsin (A1AT) deficiency and hereditary angioedema (HAE).  For wet AMD, we are moving forward with the preclinical development of new anti-VEGF gene therapy candidates, ADVM-022 and ADVM-032.  These intravitreally administered therapies, which utilize a proprietary vector, have the potential to minimize the treatment burden of frequent injections and maximize visual outcomes in patients living with this disease.  At two recent scientific meetings, we presented preclinical proof-of-concept data of these vectors’ anti-angiogenic effect in a laser-induced choroidal neovascularization (CNV) model, the industry standard.  These data are comparable to the anti-VEGF standard of care when evaluated in a model for the treatment of age-related macular degeneration. Based on these data, we plan to initiate toxicology studies for ADVM-022 and ADVM-032 in the first half of 2017.

Before focusing on these two new therapies for wet AMD, we were developing AVA-101 in a Phase 2a clinical trial in 32 patients with wet AMD.  In June 2015, we announced top-line results indicating we did not observe evidence of a complete and/or durable anti-VEGF response in the majority of subjects treated with AVA-101 as administered (via surgical sub-retinal delivery) in the Phase 2a study.  As a result, we decided not to move forward with the Phase 2b clinical trial for AVA-101 with the current dose and invasive administration procedure and instead decided to move forward with the preclinical development of ADVM-022 and ADVM-032.

For our pipeline of gene therapies for rare diseases, we are advancing ADVM-043 (formerly known as ANN-001) for the treatment of alpha 1 antitrypsin deficiency (A1AT).  ADVM-043 is designed as a single administration treatment and may induce stable, long-term A1AT expression at therapeutic levels, as seen in a preclinical proof-of-concept study.  ADVM-043 has an open IND with the FDA, and we plan to meet with the agency in the first quarter of 2017 to review our development plan.  We plan to initiate patient enrollment in a Phase 1/2 trial in the fourth quarter of 2017.  Concurrently, we are upgrading ADVM-043’s manufacturing process to a baculovirus-based process and plan to transfer our third-party contract manufacturing for this product to a large-scale cGMP contract manufacturer with baculovirus-based manufacturing capabilities.

We are also advancing ADVM-053 (formerly known as ANN-002) to treat hereditary angioedema (HAE).  We plan to initiate toxicology studies for ADVM-053 in the first half of 2017. Our research programs include gene therapies targeting cardiomyopathy associated with Friedreich’s ataxia and severe allergy.  We also are developing other product candidates for the treatment of ophthalmic diseases, including AVA-311 for the treatment of juvenile X-linked retinoschisis (XLRS) as part of our research collaboration with Regeneron.

On May 11, 2016, we completed the acquisition of all of the outstanding shares of Annapurna and, as a result, Annapurna is now our wholly owned subsidiary.  At the closing of the acquisition, we issued 14,087,246 shares of our common stock to the shareholders of Annapurna, and the outstanding options or other rights to purchase capital stock of Annapurna were exchanged for options relating to shares of our common stock.

Upon completion of the Annapurna transaction, we changed our name to “Adverum Biotechnologies, Inc.”

 

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Financial Overview

Summary

We have not generated positive cash flow or net income from operations since our inception and, at September 30, 2016, we had an accumulated deficit of $175.5 million, primarily as a result of research and development, general and administrative expenses and the goodwill impairment charge.

While we may in the future generate revenue from a variety of sources, including license fees, milestone and research and development payments in connection with strategic partnerships, and potentially revenue from approved product sales, we have not yet generated any revenue from approved therapeutic product candidates.

We entered into our first license and development revenue generating agreement with Regeneron in May 2014. We entered into the collaboration, option and license agreement with Editas in August 2016 that also is a revenue agreement as discussed in Note 6, Significant Agreements, in the condensed consolidated financial statements included in this Form 10-Q.  We have no manufacturing facilities, and all of our manufacturing activities are contracted out to third parties. Additionally, we have used third-party clinical research organizations (CROs) to carry out our clinical development and we do not yet have a sales organization.

We expect to incur substantial expenditures in the foreseeable future for the development and potential commercialization of our product candidates.  We will need substantial additional funding in the future to support our operating activities as we advance our product candidates through preclinical and clinical development, seek regulatory approval and prepare for and, if approved, proceed to commercialization.  Adequate funding may not be available to us on acceptable terms, or at all.  If we are unable to raise capital, or to do so on acceptable terms, when needed, or to form additional collaboration partnerships to support our efforts, we could be forced to delay, reduce or eliminate our research and development programs or potential commercialization efforts.

As of September 30, 2016, we had $231.3 million in cash and cash equivalents.  We believe that we have sufficient funds to continue operations for at least the next 36 months.

Revenue

To date we have not generated any revenue from the sale of our products. In May 2014, we entered into a multi-year license and development agreement with Regeneron.  Under the terms of the agreement, we received initial payments of $8.0 million that included payment for research license fees, prepaid collaboration research costs and the right of first negotiation for a potential license to develop and commercialize AVA-101.  As the agreement provides for multiple deliverables, we account for this agreement as a multiple elements revenue arrangement.  If deliverables do not appear to have a standalone fair value, they were combined with other deliverables into a unit of accounting with standalone fair value.  We allocated the $8.0 million received to the fair values of the two units of accounting identified in the arrangement.  We expect to recognize $6.5 million for research licenses and related research and development services ratably over the associated period of performance, which is the maximum research period of eight years.  As there is no discernible pattern of performance and/or objectively measurable performance measures do not exist, we will recognize revenue on a straight-line basis over the eight-year performance period.  The remaining $1.5 million allocated to the second unit of accounting for the time-limited right of first negotiation for AVA-101 was deferred.  On November 2, 2015, Regeneron notified the management that it was not exercising this right of first negotiation and we recognized the entire $1.5 million as revenue in 2015.

The portion of the upfront payment that was applied to the original research budget was fully used in the fourth quarter of 2015, and the Company and Regeneron, through a joint review committee, agree annually on an updated research and development services budget through the research period.  The Company invoices Regeneron quarterly for services performed in each prior.  These additional research fees are added to the research licenses and related research and development services unit of accounting, recorded as deferred revenue and recognized to revenue over the remaining maximum research term.  

In August 2016, the Company entered into a collaboration, option and license agreement with Editas. Refer to Note 6 for details of the agreement.  Under the terms of the agreement, the Company received initial payments of $1.0 million that included $0.5 million for research services.  As the agreement provides for multiple deliverables, the Company accounts for this agreement as a multiple elements revenue arrangement.  At the inception of the agreement, identified deliverables include research services, manufacturing of viral vectors for research, participation in joint research committee and exclusivity during the option period. These deliverables did not appear to have a standalone value and were combined into one unit of accounting. Options for each indication to license the Company’s AAV vector are considered substantive options and do not include significant incremental discounts. Therefore, they are not considered as deliverables under the Agreement.

 

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The Company allocated the $1.0 million received to a single unit of accounting identified in the arrangement.  The Company expects to recognize $1.0 million ratably over the associated period of performance, which is the maximum research period of three years.  As there is no discernible pattern of performance and/or objectively measurable performance measures do not exist, the Company will recognize revenue on a straight-line basis.  During the three months ended September 30, 2016, the Company recognized $56,000 as collaboration revenue.  The Company recognized $395,000 and $953,000 as revenue during the three months ended September 30, 2016 and 2015, respectively, and $967,000 and $1,359,000 as revenue during the nine months ended September 30, 2016 and 2015, respectively.  The Company recorded $8.5 million of deferred revenue, including $1.7 million as current deferred revenue, and $1.8 million as a receivable from collaborative partner as of September 30, 2016.

Our ability to generate product revenue and become profitable depends upon our ability to successfully develop and commercialize our product candidates.  Because of the numerous risks and uncertainties associated with product development, we are unable to predict the amount or timing of product revenue.  Even if we are able to generate revenue from the sale of our products, we may be unable to continue our operations at planned levels and be forced to reduce our operations.

Research and Development Expenses

Conducting a significant amount of research and development is central to our business model.  Research and development expenses include certain payroll and personnel expenses, stock-based compensation expense, laboratory supplies, consulting costs, external contract research and development expenses, including expenses incurred under agreements with CROs, the cost of acquiring, developing and manufacturing clinical study materials and overhead expenses, including rent, equipment depreciation, insurance and utilities.

Research and development costs are expensed as incurred. Advance payments for goods or services for future research and development activities are deferred and expensed as the goods are delivered or the related services are performed.

We estimate preclinical study and clinical trial expenses based on the services performed pursuant to contracts with research institutions and CROs that have conducted and managed preclinical studies and clinical trials on our behalf. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. We estimate the amounts incurred through communications with third party service providers and our estimates of accrued expenses as of each balance sheet date are based on information available at the time. If the actual timing of the performance of services or the level of effort varies from the estimate, we will adjust the accrual accordingly.

At this time, we cannot reasonably estimate the nature, timing or aggregate costs of the efforts that will be necessary to complete the development of any of our product candidates. The successful development and commercialization of a product candidate is highly uncertain, and clinical development timelines, the probability of success and development and commercialization costs can differ materially from expectations.

We received refundable tax credits from the Australian and French tax authorities in connection with certain research costs incurred by our subsidiaries conducting research in Australia and France. These refunds do not depend on our taxable income or tax position and therefore we do not account for them under an income tax accounting model. We recognize such refunds as government grants in the period when qualified expenses are incurred as a reduction of research expenses. We have recorded the reimbursement from the Australian and French tax authorities as a reduction of research and development expense in the consolidated statements of operations and comprehensive loss for the applicable period.  The Company recorded tax credits of $187,000 and $252,000 for the three and nine months ended September 30, 2016, respectively, and $17,000 and $113,000 for the three and nine months ended September 30, 2015, respectively.

General and Administrative Expenses

General and administrative expenses consist principally of personnel-related costs, stock-based compensation, professional fees for legal, consulting, audit and tax services, rent and other general operating expenses not otherwise included in research and development expenses.  Our general and administrative expenses may increase in future periods if and to the extent we elect to increase our investment in infrastructure to support continued research and development activities and potential commercialization of our product candidates.  We will continue to evaluate the need for such investment in conjunction with ongoing consideration of our pipeline of product candidates.  We anticipate increased expenses related to audit, legal and regulatory functions, as well as director and officer insurance premiums and investor relations costs associated with being a public reporting company.

 

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Goodwill Impairment

As the Company recorded goodwill and IPR&D intangible assets upon the acquisition of Annapurna, the Company is required to test goodwill and indefinite-lived intangible assets for impairment on an annual basis or more frequently if indicators of impairment exist.  The Company operates as one reporting unit and goodwill was recorded to this reporting unit. The Company recorded goodwill impairment charge of $0.4 million and $49.5 million for the three and nine months ended September 30, 2016.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP).  The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we evaluate our critical accounting policies and estimates.  We base our estimates on historical experience and on various other assumptions that we believe to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions and conditions.  Our significant accounting policies are more fully described in Note 2 of the accompanying unaudited condensed consolidated financial statements and in Note 2 to our audited consolidated financial statements contained in our Annual Report on Form 10-K (Annual Report) as filed with the SEC, on March 4, 2016.

Refer to Note 2, Summary of Significant Accounting Policies of the accompanying unaudited condensed consolidated financial statements included in this Form 10-Q for our significant valuation accounting policy as a result of the Annapurna acquisition in May 2016, and our revenue recognition policy related to the new collaboration, option and license agreement with Editas in August 2016.

Results of Operations

Comparison of the Three and Nine Months Ended September 30, 2016 and 2015 (in thousands)

 

 

Revenue

Collaboration revenue decreased to $0.4 million for the three months ended September 30, 2016, from $1.0 million for the three months ended September 30, 2015, primarily due to the recognition of $0.8 million of revenue related to the delivery of the data package to Regeneron in the third quarter of 2015 off-set by $0.2 million related to license and research services that are deferred and recognized over maximum research terms under Regeneron and Editas agreements.

Collaboration revenue decreased to $1.0 million for the nine months ended September 30, 2016, from $1.4 million for the nine months ended September 30, 2015, primarily due to the recognition of $0.8 million of revenue related to the delivery of the data package to Regeneron in the third quarter of 2015 off-set by $0.4 million related to license and research services that are deferred and recognized over maximum research terms under Regeneron and Editas agreements.

Research and Development Expense

Research and development expense increased to $8.4 million for the three months ended September 30, 2016, from $7.5 million for the three months ended September 30, 2015, primarily due to $1.1 million increase in material production and preclinical expense as

 

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well as $0.2 million increase for outside services expense relating to toxicology, off-set by a $0.5 million decrease in stock-based compensation expense.

Research and development expense increased to $23.8 million for the nine months ended September 30, 2016, from $18.3 million for the nine months ended September 30, 2015, primarily due to a $3.8 million increase in stock-based compensation expenses, including $0.9 million relating to the accelerated vesting of Annapurna options and shares recorded after the acquisition closing and $1.4 million related to the accelerated vesting of executive stock options, $1.2 million increase for outside services expense related to toxicology studies expenses, $0.9 million increase in lab, material production and preclinical expenses, $0.7 million increase in facility and deprecation charges relating to build out of the laboratory space, partially offset by $0.6 million decrease in consulting and recruiting expenses and $0.5 million decrease in payroll related expenses.

For the periods presented, substantially all of our research and development expense related to Adverum development activities for AVA-101, for the treatment of wet AMD, and our other potential product candidates in our development program. Upon completion of the Annapurna acquisition in May 2016, we began incurring expenses related to Annapurna’s four development programs. We expect that research and development expenses will increase in future periods as we continue to invest in our pipeline products and preclinical studies relating to our gene therapies program.

General and Administrative Expense

General and administrative expense decreased to $6.1 million for the three months ended September 30, 2016, from $7.6 million for the three months ended September 30, 2015. The decrease in general and administrative expense was primarily due to $2.4 million decrease in stock-based compensation expense as a result of additional stock options modification expense recorded in the third quarter of 2015 and no such expense recorded in the comparable period of 2016, off-set by $0.6 million increase in severance-related expenses, and a $0.3 million increase in professional service fees.

General and administrative expense increased to $19.6 million for the nine months ended September 30, 2016, from $16.7 million for the nine months ended September 30, 2015. The increase in general and administrative expense was primarily due to increases of $2.4 million in consulting and professional service expenses relating to the Annapurna acquisition, $1.1 million in compensation and benefits, and $0.5 million in facilities allocation relating to new office space, off-set by $1.1 million decrease in stock-based compensation due to lower stock price.

We expect general and administrative expenses may increase in future periods if and to the extent we elect to increase our investment in infrastructure to support continued research and development activities and potential commercialization of our product candidates. We will continue to assess such expenses in conjunction with ongoing consideration of our pipeline of product candidates.

Goodwill Impairment Charge

During the quarter ended June 30, 2016, we noted a continuing decrease in our stock price that resulted in our market capitalization being less than the carrying value of our net assets as of June 30, 2016. As our operating losses are expected to increase in the following years due to continuing pre-clinical and  expected clinical trials, we concluded that it is more likely than not that the fair value of the Company’s one reporting unit is less than its carrying value and concluded to perform a goodwill impairment analysis. We performed a two-step goodwill impairment analysis and recorded a preliminary $0.4 million and $49.5 million goodwill impairment charge in our condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2016.

Other income, Net

Other income, net is comprised mainly of interest income on our cash and investment in marketable securities in 2016 and 2015.

Liquidity and Capital Resources and Plan of Operations

We have not generated positive cash flow or net income from operations since our inception and at September 30, 2016, we had an accumulated deficit of $175.5 million, primarily as a result of research and development and general and administration expenses and the goodwill impairment charge. As of September 30, 2016, we had $231.3 million in cash and cash equivalents and no marketable securities. We believe that our existing cash and cash equivalents as of September 30, 2016, will be sufficient to fund our operations for at least the next 36 months.

 

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We expect to incur substantial expenditures in the foreseeable future for the development and potential commercialization of our product candidates and ongoing internal research and development programs. At this time, we cannot reasonably estimate the nature, timing or aggregate amount of such costs. However, in order to complete our planned preclinical trials and any future clinical trials, and to complete the process of obtaining regulatory approval for our product candidates, as well as to build the sales, marketing and distribution infrastructure that we believe will be necessary to commercialize our product candidates, if approved, we will require substantial additional funding in the future.

If and when we seek additional funding, we will do so through equity or debt financings, collaborative or other arrangements with corporate sources or through other sources of financing. Adequate additional funding may not be available to us on acceptable terms or at all. Our failure to raise capital in the future could have a negative impact on our financial condition and our ability to pursue our business strategies. In order to complete development and commercialization of any of our product candidates, we anticipate that we will need to raise substantial additional capital, the requirements of which will depend on many factors, including:

If we are unable to raise additional funds when needed, we may be required to delay, reduce or terminate some or all of our development programs and any clinical trials. We may also be required to sell or license other technologies or clinical product candidates or programs that we would prefer to develop and commercialize ourselves.

Cash Flows

 

 

Cash Used in Operating Activities

During the nine months ended September 30, 2016, net cash used in operating activities was $30.0 million, primarily as a result of the net loss of $91.4 million offset by the following non-cash charges: $49.5 million goodwill impairment charge, $9.9 million stock-based compensation expense, $1.1 million depreciation and amortization expense and $0.8 million for net increase in operating assets and liabilities.

 

 

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During the nine months ended September 30, 2015, net cash used in operating activities was $26.2 million, primarily as a result of the net loss of $33.4 million offset by $7.1 million for non-cash charge related to stock-based compensation, $0.5 million for depreciation and amortization, $0.6 million for amortization of premium on marketable securities and $1.0 million for net decrease in operating assets and liabilities.

 

Cash Provided by (Used in) Investing Activities

Net cash provided by investing activities for the nine months ended September 30, 2016, was $39.7 million and primarily relates to the maturities of marketable securities of $37.7 million, $3.5 million of cash acquired in the acquisition of Annapurna, offset by $1.5 million purchases of property and equipment.

 

Net cash used in investing activities for the nine months ended September 30, 2015, was $71.6 million and primarily relates to the purchases marketable securities of $88.4 million and the purchases of property and equipment of $2.8 million, offset by cash received from maturities of marketable securities of $19.6 million. The purchases of property and equipment consisted primarily of acquisition of laboratory equipment to support our research and development activities.

 

Cash Provided by Financing Activities

The net cash provided by financing activities during the nine months ended September 30, 2016, of $0.4 million relates to $0.7 million from proceeds relating to the exercise of options for common shares and ESPP purchase, off-set by $0.5 million in taxes paid relating to net share settlement of restricted stock units and $0.1 million relating to funds received from financing arrangement.

 

The net cash provided by financing activities during the nine months ended September 30, 2015, of $139.1 million was primarily related to $130.6 million net proceeds from our follow-on offering and $8.3 million from sale of common shares.

Contractual Obligations and Commitments

In August 2014, as amended in December 2015, Annapurna entered into a master service agreement with Cornell University for assistance in regulatory affairs, overall project management and parameter development. Per the amended agreement, Annapurna will pay Cornell $13.3 million ratably over 4 years for these services.

 

In August 2015, BPI France granted Annapurna a €750,000 interest free conditional advance, of which €500,000 was received as of December 31, 2015. The remaining €250,000 advance was not and is not expected to be drawn down on. Payments are scheduled in equal quarterly amounts of €25,000 from September 30, 2017 to June 30, 2022. This payment schedule will be modified if the Company will receive revenue from license or product sales before advances are paid in full.  The Company calculated 7% imputed interest expense on these advances that was recorded as a discount at the issuance date and is amortized as an interest expense over the life of the advances. As of September 30, 2016 the carrying value of the conditional advance was $381,000.

 

In July 2016, the Company entered into a sponsored research agreement with The Alpha-1 Project, Inc. (TAP) in which TAP will fund the Company’s A1AT research activities of up to $300,000. The Company may repay up to 4.5 times the received amount for which the Company may make contingent milestone payments up to $1.4 million in the future. The Company accounted for the TAP agreement as a debt financial instrument at fair value of $74,000.  During the third quarter, the Company received $100,000 and the estimated fair value of $74,000 was recorded as other noncurrent liabilities as of September 30, 2016.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

 

 

There have not been any material changes to our exposure to market risk during the three months ended September 30, 2016. For additional information regarding market risk, refer to the Qualitative and Quantitative Disclosures About Market Risk section of our Annual Report on Form 10-K.

 

 

 

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Evaluation of disclosure controls and procedures. Management, including our Principal Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of September 30, 2016. The evaluation of our disclosure controls and procedures included a review of our processes and implementation and the effect on the information generated for use in this Quarterly Report on Form 10-Q. In the course of this evaluation, we sought to identify any material weaknesses in our disclosure controls and procedures to determine whether we had identified any acts of fraud involving personnel who have a significant role in our disclosure controls and procedures, and to confirm that necessary corrective action, including process improvements, was taken. This type of evaluation is done quarterly so that our conclusions concerning the effectiveness of these controls can be reported in our periodic reports filed with the SEC. The overall goals of these evaluation activities are to monitor our disclosure controls and procedures and to make modifications as necessary. We intend to maintain these disclosure controls and procedures, modifying them as circumstances warrant.

Based on that evaluation, the Principal Executive Officer and Chief Financial Officer concluded that as of September 30, 2016, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management, including the Principal Executive Officer and Chief Financial Officer, as appropriate to allow timely discussion regarding required disclosure.

Changes in internal control over financial reporting. There have been no changes in our internal control over financial reporting during the three months ended September 30, 2016 that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Controls and Procedures

Our management, including the Principal Executive Officer and the Chief Financial Officer, does not expect that our disclosure controls and procedures and our internal controls will prevent all error and all fraud. A control system, no matter how well designed and operated, can only provide reasonable assurances that the objectives of the control system are met. The design of a control system reflects resource constraints; the benefits of controls must be considered relative to their costs. Because there are inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been or will be detected. As these inherent limitations are known features of the financial reporting process, it is possible to design into the process safeguards to reduce, though not eliminate, these risks. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns occur because of simple error or mistake. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events. While our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, there can be no assurance that any design will succeed in achieving its stated goals under all future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with the policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

We intend to review and evaluate the design and effectiveness of our disclosure controls and procedures on an ongoing basis and to improve our controls and procedures over time and to correct any deficiencies that we may discover in the future. While our Principal Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2016, the design of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act, was effective, future events affecting our business may cause us to significantly modify our disclosure controls and procedures.

 

 

 

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PART II – OTHER INFORMATION

In July 2015, three securities class action lawsuits were filed against us and certain of our officers in the United States District Court for the Northern District of California, each on behalf of a purported class of persons and entities who purchased or otherwise acquired our publicly traded securities between July 31, 2014 and June 15, 2015. The lawsuits assert claims under the Exchange Act and Securities Act and allege that the defendants made materially false and misleading statements and omitted allegedly material information related to, among other things, the Phase 2a clinical trial for AVA-101 and the prospects of AVA-101. The complaints seek unspecified damages, attorneys’ fees and other costs. An amended consolidated complaint was filed in February 2016. On November 3, 2016, the Court granted the Company’s motion to dismiss the consolidated complaint.  It set a deadline of December 2, 2016 for plaintiffs to file an amended consolidated complaint.

In December 2015, a securities class action lawsuit was filed against us, our board of directors, underwriters of our January 13, 2015, follow-on public stock offering, and two of our institutional stockholders, in the Superior Court of the State of California for the County of San Mateo. The complaint alleges that, in connection with our follow-on stock offering, the defendants violated the Securities Act in essentially the same manner alleged by the consolidated federal action: by allegedly making materially false and misleading statements and by allegedly omitting material information related to the Phase 2a clinical trial for AVA-101 and the prospects of AVA-101. The complaint seeks unspecified compensatory and rescissory damages, attorneys’ fees and other costs. The plaintiff has dismissed the two institutional stockholder defendants. In August 2016, the Court denied the Company’s motion to stay without prejudice, denied the Company’s demurrer, and dismissed with leave to amend certain claims against the underwriter defendants.

We believe that the claims in the asserted actions are without merit and intend to defend the lawsuits vigorously. We expect to incur costs associated with defending the actions. While we have various insurance policies related to the risks associated with our business, including directors’ and officers’ liability insurance policies, there is no assurance that we will be successful in our defense of the actions, that our insurance coverage, which contains a self-insured retention, will be sufficient, or that our insurance carriers will cover all claims or litigation costs. Due to the inherent uncertainties of litigation, we cannot reasonably predict at this time the timing or outcomes of these matters or estimate the amount of losses, or range of losses, if any, or their effect, if any, on our financial statements.

 

 

Investing in our common stock involves a high degree of risk. Before deciding to invest in our common stock, you should carefully consider each of the risk factors described in “Part I - Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015 and all information set forth in our Quarterly Reports on Form 10-Q for the periods ending March 31, 2016 and June 30, 2016, and this Quarterly Report on Form 10-Q. Those risks and the risks described in this Quarterly Report on Form 10-Q, including in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” could materially harm our business, financial condition, operating results, cash flow and prospects. If that occurs, the trading price of our common stock could decline, and you may lose all or part of your investment.

There have been no material changes to the Risk Factors described under “Part I - Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015, and our Quarterly Reports on Form 10-Q for the periods ending March 31, 2016, and June 30, 2016, other than as set forth below. The below risk factors originally appeared in our Annual Report on Form 10-K or our Quarterly Reports on Form 10-Q for the periods ending March 31, 2016 and June 30, 2016, and have been updated.

Risks Related to Our Financial Position and Need for Capital

We have incurred significant operating losses since inception, and we expect to incur significant losses for the foreseeable future. We may never become profitable or, if achieved, be able to sustain profitability.

We have incurred significant operating losses since we were founded in 2006 and expect to incur significant losses for the foreseeable future as we continue development of our product candidates. Annapurna has also incurred significant operating losses since inception. As of September 30, 2016, on a pro forma basis, the combined company had an accumulated deficit of $175.5 million. Our losses have resulted primarily from costs incurred in our clinical trials, research and development programs and from our general and administrative expenses.  

 

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In the future, we intend to continue to conduct research and development, clinical testing, regulatory compliance activities and, if any of our product candidates is approved, sales and marketing activities that, together with anticipated general and administrative expenses, will likely result in us incurring significant losses for the next several years.

We currently generate no revenue from sales, and we may never be able to commercialize any of our product candidates. We do not currently have the required approvals to market any of our other product candidates, and we may never receive such approvals. We may not be profitable even if we or any of our future development partners succeed in commercializing any of our product candidates. Because of the numerous risks and uncertainties associated with developing and commercializing our product candidates, we are unable to predict the extent of any future losses or when we will become profitable, if at all.

Risks Related to the Discovery and Development of Our Product Candidates

Our business to date has depended substantially on the success of AVA-101. In the second quarter of 2016, we decided to discontinue development of AVA-101.  As a result, commercialization of our first product candidate may be delayed, and our business may be materially harmed.

We previously focused our advanced development efforts on one product candidate: AVA-101, a recombinant adeno-associated vector type 2 (AAV2) encoding the anti-VEGF protein sFlt-1, and considered successful continued development and ultimate regulatory approval of AVA-101 critical for our future business success.

In the second quarter of 2016, following analysis of the data generated in our Phase 2a clinical study of AVA-101, additional preclinical studies, and analysis of promising preclinical data evaluating different anti-VEGF compounds in non-human primate studies, we decided to discontinue development of AVA-101 and instead continue pre-clinical development of new anti-VEGF candidates, ADVM-022 and ADVM-032, focused on intravitreal delivery and utilizing a proprietary vector.  

We expect to initiate clinical studies for ADVM-043 (formerly ANN-001), in the fourth quarter of 2017. Our other product candidates are in the early stage of development and will require additional preclinical studies, substantial clinical development and testing, manufacturing bridging studies and process validation and regulatory approval prior to commercialization. As a result of our decision to discontinue AVA-101 and focus on our other, preclinical stage product candidates, commercialization of our first product candidate may be delayed, and we may not be able obtain funding in the future on favorable terms, or at all, that will be necessary to continue our business, or generate sufficient revenue to continue our business.

Our business will depend substantially on the success of one or more of our product candidates, which are still in preclinical development. If we are unable to commercialize our product candidates or if we experience significant delays in obtaining regulatory approval for, or commercializing, any or all of our product candidates, our business may be materially harmed.

Our product candidates are in the early stage of development and will require additional preclinical studies, substantial clinical development and testing, manufacturing bridging studies and process validation and regulatory approval prior to commercialization. In the second quarter of 2016, we decided to discontinue development of our one product candidate that had been the focus of advanced development efforts, AVA-101. We expect to initiate clinical studies for our most advanced product candidate, ADMV-043, in the fourth quarter of 2017, and we are continuing pre-clinical development of our other product candidates. It is critical to our business to successfully develop and obtain ultimate regulatory approval for one or more of these product candidates. Our ability to commercialize our product candidates effectively will depend on several factors, including the following:

 

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If we, or our collaborators, do not achieve one or more of these factors in a timely manner or at all, we could experience significant delays or an inability to commercialize our product candidates, which would materially and adversely affect our business, financial condition and results of operations.

Moreover, of the large number of biologics and drugs in development in the pharmaceutical industry, only a small percentage result in the submission of a Biologics License Application (BLA) to the FDA and even fewer are approved for commercialization. Furthermore, even if we do receive regulatory approval to market any of our product candidates, any such approval may be subject to limitations on the indicated uses for which we may market the product. Accordingly, even if we are able to obtain the requisite financing to continue to fund our development programs, we cannot assure you that any of our product candidates will be successfully developed or commercialized. If we decide to invest in the continued development and potential commercialization of any or all of our product candidates and we or any of our future development partners are unable to develop, or obtain regulatory approval for, or, if approved, successfully commercialize, such product candidates, we may not be able to generate sufficient revenue to continue our business.

If we encounter difficulties enrolling subjects in our clinical trials, our clinical development activities could be delayed or otherwise adversely affected.

We intend to initiate clinical trials for Annapurna’s most advanced rare disease product candidate, ADVM-043, in the fourth quarter of 2017 and accordingly we expect this to be our next product candidate to enter clinical development. Identifying and qualifying subjects to participate in clinical studies of ADVM-043 and our other product candidates will be critical to our success. The timing of future clinical studies will depend on the speed at which we can recruit subjects to participate in future testing of these product candidates.

Subject enrollment, a significant factor in the timing of clinical trials, is affected by many factors including the size and nature of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, the design of the clinical trial, competing clinical trials and clinicians’ and patients’ perceptions as to the potential advantages of the product candidate being studied in relation to other available therapies, including any new drugs that may be approved for the indications we are investigating. We will be required to identify and enroll a sufficient number of subjects with the relevant disease we are targeting for any future clinical trials for our product candidates. Potential subjects may not be adequately diagnosed or identified with the diseases which we are targeting or may not meet the entry criteria for our studies. We also may encounter difficulties in identifying and enrolling subjects with a stage of disease appropriate for such future clinical trials. We may not be able to identify, recruit and enroll a sufficient number of subjects, or those with required or desired characteristics to achieve diversity in a study.

In particular, each of the conditions for which we plan to evaluate product candidates acquired in the Annapurna transaction are rare genetic disorders with limited patient pools from which to draw for clinical studies. ADVM-043 is focused on the treatment of patients with A1AT deficiency. It is estimated that A1AT deficiency affects approximately 100,000 patients in the United States. ADVM-053 (formerly ANN-002) is focused on the treatment of patients with hereditary angioedema (HAE). The prevalence of HAE is estimated to be 1 in 10,000 to 1 in 50,000, with approximately 10,000 patients diagnosed across major markets. ADVM-063 (formerly ANN-003) is focused on the treatment of patients with Friedreich’s Ataxia (FA). It is estimated that FA affects approximately 5,000 people in the United States and approximately 5,000 to 10,000 people in Europe. In addition, we and our collaboration partner, Regeneron, are developing AVA-311 for the treatment of X-linked retinoschisis (XLRS), an orphan indication. Enrollment of eligible subjects with orphan diseases may be limited or slower than we anticipate in light of the small subject populations involved. We plan to seek initial marketing approval of these product candidates in the United States and Europe and we may not be able to initiate clinical studies if we cannot enroll a sufficient number of eligible subjects to participate in the clinical studies required by the FDA or the EMA or other regulatory agencies. In addition, the process of finding and diagnosing subjects may prove costly.

Further, if patients are unwilling to participate in our gene therapy studies because of negative publicity from adverse events in the biotechnology or gene therapy industries or inadequate results in our preclinical or clinical studies or for other reasons, including competitive clinical trials for similar patient populations or available approved therapies, our recruitment of subjects, conduct of studies and ability to obtain regulatory approval of our product candidates may be hindered.

Trials using early versions of retroviral vectors, which integrate with, and thereby alter, the host cell’s DNA, have led to several well-publicized adverse events. For example, generalized public backlash developed against gene therapy following the death in September 1999 of an 18-year-old who had volunteered for a gene therapy experiment at the University of Pennsylvania. Researchers at the university had infused the volunteer’s liver with a gene aimed at reversing a rare metabolic disease of the liver. The procedure

 

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triggered an extreme immune-system reaction that caused multiple-organ failure in a very short time, leading to the first death to occur as a direct result of a gene therapy experiment. In addition, in 2003, 20 subjects treated for X-linked severe combined immunodeficiency in two gene therapy studies using a murine gamma-retroviral vector showed correction of the disease, but the studies were terminated after five subjects developed leukemia (four of whom were subsequently cured). The cause of these adverse events was shown to be insertional oncogenesis, which is the process whereby the corrected gene inserts near a gene that is important in a critical cellular process like growth or division, and this insertion results in the development of a cancer (often leukemia). Using molecular diagnostic techniques, it was determined that clones from these subjects showed retrovirus insertion in proximity to the promoter of the LMO2 proto-oncogene. Earlier generation retroviruses like the one used in these two studies have been shown to preferentially integrate in regulatory regions of genes that control cell growth.

If we have difficulty enrolling a sufficient number of subjects to conduct clinical studies on our product candidates as planned, we may need to delay, limit or terminate future clinical studies, any of which would have an adverse effect on our business.

We believe we have appropriately accounted for the above factors in our trials when determining expected clinical trial timelines, but we cannot assure you that our assumptions are correct or that we will not experience delays in enrollment, which would result in the delay of completion of such trials beyond our expected timelines.

Risks Related to Our Reliance on Third Parties

We and our contract manufacturers are subject to significant regulation with respect to manufacturing our products. The manufacturing facilities on which we rely may not continue to meet regulatory requirements and may have limited capacity.

We currently have relationships with limited number of suppliers for the manufacturing of our viral vectors and product candidates. Our suppliers may require licenses to manufacture such components if such processes are not owned by the suppliers or in the public domain and we may be unable to transfer or sublicense the intellectual property rights we may have with respect to such activities. All entities involved in the preparation of therapeutics for clinical studies or commercial sale, including our existing contract manufacturer for our product candidates, are subject to extensive regulation. Components of a finished therapeutic product approved for commercial sale or used in late-stage clinical studies must be manufactured in accordance with current Good Manufacturing Practice (cGMP). These regulations govern manufacturing processes and procedures (including record keeping) and the implementation and operation of quality systems to control and assure the quality of investigational products and products approved for sale. Poor control of production processes can lead to the introduction of adventitious agents or other contaminants, or to inadvertent changes in the properties or stability of our product candidates that may not be detectable in final product testing. We or our contract manufacturers must supply all necessary documentation in support of a BLA on a timely basis and must adhere to the FDA’s current Good Laboratory Practice regulations and cGMP regulations enforced by the FDA through its facilities inspection program. Our contract manufacturers have not produced a commercially-approved product and therefore have not obtained the requisite FDA approvals to do so. Our facilities and quality systems and the facilities and quality systems of some or all of our third-party contractors must pass a pre-approval inspection for compliance with the applicable regulations as a condition of regulatory approval of our product candidates or any of our other potential products. In addition, the regulatory authorities may, at any time, audit or inspect our manufacturing facilities or those of our third-party contractors involved with the preparation of our product candidates or our other potential products or the associated quality systems for compliance with the regulations applicable to the activities being conducted. If the facility does not pass a pre-approval plant inspection, FDA approval of the products will not be granted.

The regulatory authorities also may, at any time following approval of a product for sale, audit our manufacturing facilities or those of our third-party contractors. If any such inspection or audit identifies a failure to comply with applicable regulations or if a violation of our product specifications or applicable regulations occurs independent of such an inspection or audit, we or the relevant regulatory authority may require remedial measures that may be costly and/or time-consuming for us or a third party to implement and that may include the temporary or permanent suspension of a clinical study or commercial sales or the temporary or permanent closure of a facility. Such violations could also result in civil and/or criminal penalties. Any such remedial measures or other civil and/or criminal penalties imposed upon us or third parties with whom we contract could materially harm our business.

If we or our third-party manufacturers fail to maintain regulatory compliance, the FDA can impose regulatory sanctions including, among other things, refusal to approve a pending application for a new drug product or biologic product, revocation of a pre-existing approval, other civil or criminal penalties or closing one or more manufacturing facilities. As a result, our business, financial condition and results of operations may be materially harmed.

Additionally, if supply from an approved manufacturer is interrupted, there could be a significant disruption in commercial supply. An alternative manufacturer would need to be qualified through a BLA supplement which could result in further delay. The regulatory agencies may also require additional studies if a new manufacturer is relied upon for commercial production. Switching manufacturers may involve substantial costs and is likely to result in a delay in our desired clinical and commercial timelines.

 

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These factors could cause the delay of clinical studies, regulatory submissions, required approvals or commercialization of our product candidates, cause us to incur higher costs and prevent us from commercializing our products successfully. Furthermore, if our suppliers fail to meet contractual requirements, and we are unable to secure one or more replacement suppliers capable of production at a substantially equivalent cost, our clinical studies may be delayed or we could lose potential revenue.

In addition, we recently decided to upgrade the ADVM-043 manufacturing process by implementing our proprietary baculovirus-based production system and transferring the third-party contract manufacturing for ADVM-043 to a large-scale contract manufacturer.  If we have difficulties or experience delays in transferring manufacturing to such third-party contract manufacturer, the planned initiation of our Phase 1/2 clinical trial for ADVM-043 in the fourth quarter of 2017 could be delayed.

Risks Related to Our Business Operations

We are dependent on the services of our key executives and scientific staff, and if we are not able to retain these members of our management or recruit additional management, clinical and scientific personnel, our business will suffer.

We are dependent on the principal members of our management and scientific staff. The loss of service of any of our management could harm our business. In addition, we are dependent on our continued ability to attract, retain and motivate highly qualified additional management, clinical and scientific personnel. If we are not able to retain our management, and to attract, on acceptable terms, additional qualified personnel necessary for the continued development of our business, we may not be able to sustain our operations or grow. Although we have executed employment agreements with each member of our current executive management team, these agreements are terminable at will with or without notice and, therefore, we may not be able to retain their services as expected.

We will need to expand and effectively manage our managerial, operational, financial, and other resources in order to successfully pursue our development and commercialization efforts. Our success also depends on our continued ability to attract, retain and motivate highly qualified management and scientific personnel. We may not be able to attract or retain qualified management and scientific and clinical personnel in the future due to the intense competition for qualified personnel among biotechnology, pharmaceutical and other businesses, particularly in the San Francisco Bay Area. Our industry has experienced a high rate of turnover of management and scientific personnel in recent years. If we are not able to attract, retain and motivate necessary personnel to accomplish our business objectives, we may experience constraints that will significantly impede the achievement of our development objectives, our ability to raise additional capital and our ability to implement our business strategy.

Paul B. Cleveland was appointed Executive Chairman of the Board in October 2016 after joining as our President and Chief Executive Officer in December 2015. Amber Salzman, Ph.D. was appointed as our Chief Executive Officer in October 2016 after joining as our President and Chief Operating Officer, following the completion of the transaction with Annapurna in May 2016. In addition, Leone Patterson joined us as our Chief Financial Officer in June 2016. Our future performance will depend, in part, on our ability to successfully transition Mr. Cleveland and Dr. Salzman into their new roles, otherwise integrate newly hired executive officers, including Dr. Salzman and Ms. Patterson, into our management team and develop an effective working relationship among senior management. Our failure to transition and integrate these individuals and create effective working relationships among them and other members of management could result in inefficiencies in the development and commercialization of our product candidates, harming future regulatory approvals, sales of our product candidates and our results of operations. Moreover, Dr. Salzman is based in Philadelphia, and her location outside of our Menlo Park headquarters may make her integration into our organization more challenging.

Additionally, we do not currently maintain “key person” life insurance on the lives of our executives or any of our employees. This lack of insurance means that we may not have adequate compensation for the loss of the services of these individuals.

If we fail to effectively integrate our new executive officers into our organization, the future development and commercialization of our product candidates may suffer, harming future regulatory approvals, sales of our product candidates or our results of operations.

Our current management team has only been working together for a relatively short period of time and some of our current executive team, including Executive Chairman of the Board Paul B. Cleveland, Chief Executive Officer Amber Salzman, Ph.D., and Chief Financial Officer Leone Patterson, have been employed by us for less than a year. In addition, we may continue to expand our management team in the future. Our future performance will depend, in part, on our ability to successfully integrate recently and subsequently hired executive officers into our management team and their ability to develop and maintain an effective working relationship. Our failure to integrate these individuals with other members of management could result in inefficiencies in the development and commercialization of our product candidates, harming future regulatory approvals, sales of our product candidates and our results of operations. Moreover, Dr. Salzman is based in Philadelphia, and her location outside of our Menlo Park headquarters may make her integration into our organization more challenging. In addition to the competition for personnel, the San

 

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Francisco Bay Area in particular is characterized by a high cost of living. As such, we could have difficulty attracting experienced personnel to our company and may be required to expend significant financial resources in our employee recruitment and retention efforts.

Risks Relating to Our Intellectual Property

Known third party patent rights could delay or otherwise adversely affect our planned development and sale of a new anti-VEGF product candidate.

We are aware of patent rights held by third parties that may cover certain compositions within our new anti-VEGF product candidates. A patent holder has the right to prevent others from making, using, or selling a drug that incorporates the patented compositions while the patent remains in force. While we believe that third party patent rights will not affect our planned development, regulatory clearance, and eventual marketing, commercial production, and sale of an anti-VEGF product candidate, there can be no assurance that this will be the case. In each case, the relevant patent expires before we expect to commercially introduce an anti-VEGF product candidate. In addition, the Hatch-Waxman exemption to U.S. patent law permits all uses of compounds in clinical trials and for other purposes reasonably related to obtaining FDA clearance of drugs that will be sold only after patent expiration, so our use of our product candidates in those FDA-related activities does not infringe any patent holder’s rights. However, were a patent holder to assert its rights against us before expiration of such patent holder’s patent for activities unrelated to FDA clearance, the development and ultimate sale of our anti-VEGF product could be significantly delayed, and we could incur the expense of defending a patent infringement suit and potential liability for damages for periods prior to the patent’s expiration.

Risks Related to Our Financial Results

We recognized an impairment in the carrying value of goodwill booked in connection with the Annapurna transaction. Any impairment of our intangible assets in the future could negatively affect our operating results and financial condition.

We recorded goodwill and intangible assets, consisting of in-process research and development (IPR&D) assets related to Annapurna products in development, upon the acquisition of Annapurna. During the second quarter, we noted a continuing decrease in our stock price that resulted in our market capitalization being less than the carrying value of our net assets and less than our cash and cash equivalents balance as of June 30, 2016.  As a result, we are conducting a two-step impairment analysis and, based on the work performed as of the filing date, we recorded a goodwill impairment charge of $49.1 million in our condensed consolidated statements of operations and comprehensive loss for the period ended June 30, 2016.

We will continue to conduct impairment analyses of the IPR&D assets on a regular basis, and we would be required to take impairment charges in the future if any assessments thereof reflect estimated fair values which are less than our recorded values, and such charges could be significant. Any impairment charges with respect to the IPR&D assets could negatively affect our operating results and financial condition.

The purchase price allocation for the Annapurna transaction has not been finalized, and any final adjustment to the valuation could have a material change on what is reported as the fair value assigned to the assets and liabilities.

The final purchase price allocation for the Annapurna transaction depends upon the finalization of asset and liability valuations, among other things. Valuing certain components of the acquisition, primarily intangible assets acquired, deferred taxes and accrued liabilities required us to make significant estimates that may be adjusted in the future; consequently, the fair value of identifiable assets acquired and liabilities assumed are considered preliminary. Final determination of these estimates could result in an adjustment to the preliminary purchase price allocation, with an offsetting adjustment to goodwill. Any resulting change to our condensed consolidated financial statements could be material.

 

 

Unregistered Sales of Equity Securities

None.

Use of Proceeds

On August 5, 2014, we closed our IPO and issued 6,900,000 shares of our common stock at an initial offering price of $17.00 per share. The offer and sale of all of the shares in the IPO were registered under the Securities Act pursuant to a registration statement on Form S-1, as amended (File Nos. 333-197133 and 333-197739), which was declared effective by the SEC on July 30, 2014. The joint book-running managers for the IPO were Jefferies LLC, Cowen and Company, LLC and Piper Jaffray & Co. The aggregate offering

 

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price to the public for the shares sold in the IPO was $117.3 million. We received net proceeds from the IPO of approximately $106.5 million, after deducting underwriting discounts and commissions of approximately $8.2 million and expenses of approximately $2.6 million payable by us. None of the expenses associated with the IPO were paid to directors, officers, persons owning 10% or more of any class of equity securities, or to their associates, or to our affiliates.

We invested the funds received in short-term, interest-bearing investment-grade securities and government securities.

We have discontinued development of AVA-101, and so we will not use approximately $20 million of our net proceeds from the IPO to fund Phase 3 research and development startup activities for our AVA-101 study, as we had described in our final prospectus filed with the SEC on July 31, 2014 pursuant to Rule 424(b) of the Securities Act. Instead, we have reallocated such proceeds to fund research and development expenses for other product candidates in our pipeline.

 

 

None.

 

 

Not applicable.

 

 

None.

 

 

See the Exhibit Index on the page immediately preceding the exhibits for a list of exhibits filed as part of this Quarterly Report on Form 10-Q, which Exhibit Index is incorporated herein by reference.

 

 

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

 

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EXHIBIT INDEX

 

 

 

 

 

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