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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 


 

FORM 10-Q

 


 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2017

 

OR

 

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

 

Commission File Number: 001-38080

 


 

Biohaven Pharmaceutical Holding Company Ltd.

(Exact Name of Registrant as Specified in its Charter)

 


 

British Virgin Islands

 

Not applicable

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

c/o Biohaven Pharmaceuticals, Inc.
234 Church Street, New Haven, Connecticut

 

06510

(Address of principal executive offices)

 

(Zip Code)

 

(203) 404-0410

(Registrant’s telephone number, including area code)

 

Not applicable

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

 


 

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

 

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 x No o

 

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

 

Large accelerated filer  o

 

Accelerated filer  o

 

 

 

Non-accelerated filer  x

 

Small reporting company  o

(Do not check if a small reporting company)

 

 

 

 

Emerging growth company  x

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. x

 

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

 

As of November 10, 2017, the registrant had 36,017,573 common shares, without par value per share, outstanding.

 

 

 



Table of Contents

 

Table of Contents

 

 

 

Page

PART I - FINANCIAL INFORMATION

 

Item 1.

Unaudited Interim Consolidated Financial Statements

3

 

Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016

3

 

Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2017 and 2016

4

 

Consolidated Statement of Convertible Preferred Shares and Shareholders’ Equity (Deficit) as of and for the nine months ended September 30, 2017

5

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016

6

 

Notes to Consolidated Financial Statements

7

Item 2.

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

34

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

49

Item 4.

Controls and Procedures

49

PART II - OTHER INFORMATION

 

Item 1.

Legal Proceedings

50

Item 1A.

Risk Factors

50

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

94

Item 6.

Exhibits

95

Signatures

 

96

 

2


 


Table of Contents

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

CONSOLIDATED BALANCE SHEETS

 

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

 

(Unaudited)

 

 

 

September 30,

 

December 31,

 

 

 

2017

 

2016

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash

 

$

175,754

 

$

23,565

 

Restricted cash

 

 

67

 

Prepaid expenses and other current assets

 

3,749

 

403

 

Total current assets

 

179,503

 

24,035

 

Property and equipment, net

 

267

 

26

 

Deferred offering costs

 

 

134

 

Equity method investment (Note 5)

 

4,900

 

2,753

 

Restricted cash

 

 

60

 

Deferred tax assets

 

 

9

 

Total assets

 

$

184,670

 

$

27,017

 

 

 

 

 

 

 

Liabilities, Convertible Preferred Shares and Shareholders’ Equity (Deficit)

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Notes payable, net of discount

 

$

 

$

4,216

 

Accounts payable

 

8,753

 

746

 

Accrued expenses

 

13,360

 

2,980

 

Total current liabilities

 

22,113

 

7,942

 

Warrant liability

 

6,289

 

780

 

Derivative liability

 

 

512

 

Contingent equity liability, non-current

 

 

18,938

 

Notes payable to related parties

 

 

595

 

Other long-term liabilities

 

75

 

13

 

Total liabilities

 

28,477

 

28,780

 

Commitments and contingencies (Note 14)

 

 

 

 

 

Series A convertible preferred shares, no par value, 0 and 11,242,172 shares authorized as of September 30, 2017 and December 31, 2016, respectively; 0 and 4,948,369 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively; aggregate liquidation preference of $0 and $45,976 as of September 30, 2017 and December 31, 2016, respectively

 

 

43,270

 

Shareholders’ equity (deficit):

 

 

 

 

 

Common shares, no par value; 200,000,000 and 38,000,000 shares authorized as of September 30, 2017 and December 31, 2016 , respectively; 35,930,698 and 13,088,500 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively

 

310,635

 

19,944

 

Additional paid-in capital

 

21,122

 

10,479

 

Accumulated deficit

 

(175,564

)

(75,456

)

Total shareholders’ equity (deficit)

 

156,193

 

(45,033

)

Total liabilities, convertible preferred shares and shareholders’ equity (deficit)

 

$

184,670

 

$

27,017

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3



Table of Contents

 

BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

 

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

 

(Unaudited)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

$

34,996

 

$

27,045

 

$

66,755

 

$

35,137

 

General and administrative

 

4,571

 

920

 

12,527

 

2,657

 

Total operating expenses

 

39,567

 

27,965

 

79,282

 

37,794

 

Loss from operations

 

(39,567

)

(27,965

)

(79,282

)

(37,794

)

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest expense

 

(239

)

(93

)

(906

)

(93

)

Interest income

 

10

 

 

10

 

 

Change in fair value of warrant liability

 

(2,426

)

2

 

(5,509

)

2

 

Change in fair value of derivative liability

 

 

(129

)

512

 

(105

)

Change in fair value of contingent equity liability

 

 

 

(13,082

)

 

Loss from equity method investment

 

(638

)

(75

)

(1,204

)

(75

)

Total other income (expense), net

 

(3,293

)

(295

)

(20,179

)

(271

)

Loss before provision for income taxes

 

(42,860

)

(28,260

)

(99,461

)

(38,065

)

Provision for income taxes

 

55

 

 

647

 

 

Net loss and comprehensive loss

 

(42,915

)

(28,260

)

(100,108

)

(38,065

)

Net loss attributable to non-controlling interests

 

 

50

 

 

69

 

Accretion of beneficial conversion feature on Series A preferred shares

 

 

 

(12,006

)

 

Net loss attributable to common shareholders of Biohaven Pharmaceutical Holding Company Ltd.

 

$

(42,915

)

$

(28,210

)

$

(112,114

)

$

(37,996

)

 

 

 

 

 

 

 

 

 

 

Net loss per share attributable to common shareholders of Biohaven Pharmaceutical Holding Company Ltd. — basic and diluted

 

$

(1.19

)

$

(2.16

)

$

(4.47

)

$

(3.05

)

Weighted average common shares outstanding—basic and diluted

 

35,930,698

 

13,050,446

 

25,102,920

 

12,447,153

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4



Table of Contents

 

BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

CONSOLIDATED STATEMENT OF CONVERTIBLE PREFERRED SHARES AND SHAREHOLDERS’ EQUITY (DEFICIT)

 

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

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series A Convertible

 

 

 

 

 

 

Additional

 

 

 

Total

 

 

 

Preferred Shares

 

 

Common Shares

 

Paid-in

 

Accumulated

 

Shareholders’

 

 

 

Shares

 

Amount

 

 

Shares

 

Amount

 

Capital

 

Deficit

 

Equity (Deficit)

 

Balances as of December 31, 2016

 

4,948,369

 

$

43,270

 

 

13,088,500

 

$

19,944

 

$

10,479

 

$

(75,456

)

$

(45,033

)

Issuance of Series A preferred shares, net of offering costs of $1,334

 

4,305,182

 

38,666

 

 

 

 

 

 

 

Issuance of Series A preferred shares as payment of offering costs

 

105,009

 

 

 

 

 

 

 

 

Beneficial conversion feature on Series A preferred shares

 

 

(12,006

)

 

 

 

12,006

 

 

12,006

 

Accretion of beneficial conversion feature on Series A preferred shares

 

 

12,006

 

 

 

 

(12,006

)

 

(12,006

)

Issuance of common shares as payment for equity investment (Note 5)

 

 

 

 

32,500

 

352

 

 

 

 

352

 

Conversion of convertible preferred shares to common shares

 

(9,358,560

)

(81,936

)

 

9,358,560

 

81,936

 

 

 

81,936

 

Issuance of common shares in settlement of contingent equity liability

 

 

 

 

1,883,523

 

32,020

 

 

 

32,020

 

Issuance of common shares upon completion of initial public offering, net of offering costs

 

 

 

 

11,385,000

 

176,128

 

 

 

176,128

 

Issuance of common share warrant as consideration for services

 

 

 

 

 

 

93

 

 

93

 

Exercise of stock options

 

 

 

 

182,615

 

255

 

(255

)

 

 

Share-based compensation expense

 

 

 

 

 

 

10,805

 

 

10,805

 

Net loss

 

 

 

 

 

 

 

(100,108

)

(100,108

)

Balances as of September 30, 2017

 

 

$

 

 

35,930,698

 

$

310,635

 

$

21,122

 

$

(175,564

)

$

156,193

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5



Table of Contents

 

BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

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

 

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2017

 

2016

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(100,108

)

$

(38,065

)

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

 

 

 

 

 

Share-based compensation expense

 

10,805

 

2,167

 

Depreciation expense

 

21

 

2

 

Non-cash interest expense

 

784

 

93

 

Fair value of warrants issued as consideration for license agreement

 

 

2,127

 

Change in fair value of warrant liability

 

5,509

 

(2

)

Change in fair value of derivative liability

 

(512

)

105

 

Change in fair value of contingent equity liability

 

13,082

 

13,125

 

Loss from equity method investment

 

1,204

 

75

 

Non-cash amortization of fair value of warrant issued as consideration for service

 

29

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

Prepaid expenses and other current assets

 

(3,282

)

(484

)

Deferred tax assets

 

9

 

 

 

Accounts payable

 

7,978

 

982

 

Accrued expenses

 

10,371

 

6,426

 

Other long-term liabilities

 

62

 

 

Net cash used in operating activities

 

(54,048

)

(13,449

)

Cash flows from investing activities:

 

 

 

 

 

Purchases of property and equipment

 

(253

)

(5

)

Purchase of equity method investment

 

(2,999

)

(3,000

)

Decrease in restricted cash

 

127

 

 

Net cash used in investing activities

 

(3,125

)

(3,005

)

Cash flows from financing activities:

 

 

 

 

 

Proceeds from issuance of common shares

 

 

11,399

 

Proceeds from issuance of common shares upon completion of initial public offering, net of underwriting commissions and discounts

 

179,996

 

 

Proceeds from issuance of Series A preferred shares

 

40,000

 

 

Payments of related party notes payable

 

(595

)

 

Proceeds from borrowings

 

 

5,000

 

Repayment of notes payable

 

(5,000

)

 

Payments of offering costs

 

(5,039

)

(238

)

Net cash provided by financing activities

 

209,362

 

16,161

 

Net increase in cash

 

152,189

 

(293

)

Cash at beginning of period

 

23,565

 

1,460

 

Cash at end of period

 

$

175,754

 

$

1,167

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

122

 

$

 

Cash paid for income taxes

 

$

450

 

$

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

Deferred offering costs included in accounts payable and accrued expenses

 

$

29

 

$

71

 

Debt issuance costs included in accrued expenses

 

$

 

$

26

 

Issuance of warrants to guarantor and co-guarantor of notes payable

 

$

 

$

934

 

Beneficial conversion feature on Series A preferred shares

 

$

12,006

 

$

 

Accretion of beneficial conversion feature on Series A preferred shares

 

$

12,006

 

$

 

Issuance of Series A preferred shares as payment of offering costs

 

$

1,242

 

$

 

Issuance of common shares as payment of equity investment

 

$

352

 

$

 

Issuance of common share warrant as consideration for services

 

$

93

 

$

 

Exercise of stock options

 

$

255

 

$

 

Purchases of property and equipment included in accounts payable

 

$

9

 

$

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

6



Table of Contents

 

BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

(Unaudited)

 

1. Nature of the Business and Basis of Presentation

 

Biohaven Pharmaceutical Holding Company Ltd. (the “Company”) was incorporated in Tortola, British Virgin Islands in September 2013. The Company is a clinical-stage biopharmaceutical company with a portfolio of innovative, late-stage product candidates targeting neurologic diseases, including rare disorders. The Company’s product candidates are small molecules based on two distinct mechanistic platforms—calcitonin gene-related peptide (“CGRP”) receptor antagonists and glutamate modulators—which the Company believes have the potential to significantly alter existing treatment approaches across a diverse set of neurological indications with high unmet need in both large markets and orphan indications. The most advanced product candidate from the Company’s CGRP receptor antagonist platform is rimegepant, which the Company is developing for the acute treatment of migraine and for which it initiated two Phase 3 clinical trials in July 2017, with topline results expected in the first quarter of 2018. In August 2017, the Company commenced a long term safety study of rimegepant in patients with migraine, with topline results expected in the second quarter of 2019.  The Company is planning to file its investigational new drug application (“IND”) for BHV-3500, a third generation CGRP receptor antagonist for the prevention of episodic and chronic migraine, by the first quarter of 2018.

 

The most advanced product candidate from the Company’s glutamate modulation platform is trigriluzole, which the Company is developing for the treatment of a variety of neurological conditions.  In October 2017, the Company reported topline data from the 8-week randomization period from the ongoing Phase 2/3 clinical trial in spinocerebellar ataxia (“SCA”).  At the 8-week timepoint, trigriluzole did not statistically differentiate from placebo. The 48-week extension phase of the SCA trial is ongoing with topline results expected by the fourth quarter of 2018. A Phase 2/3 double-blind, randomized controlled trial examining the efficacy and safety of trigriluzole in the treatment of Obsessive-Compulsive Disorder (“OCD”), is expected to commence by the end of 2017.  In addition, a Phase 2 double-blind, randomized controlled trial of trigriluzole in the treatment of mild-to-moderate Alzheimer’s disease is being advanced in collaboration with the Alzheimer’s Disease Cooperative Study, a consortium of sites funded by the National Institutes of Health. This clinical trial is expected to begin in the first half of 2018.  The Company’s second most advanced product candidate from its glutamate modulation platform is BHV-0223, which the Company is developing for the treatment of amyotrophic lateral sclerosis (“ALS”), a neurodegenerative disease that affects nerve cells in the brain and spinal cord. In November 2017, the Company announced that the first subject was dosed in its bioequivalence study designed to demonstrate the pharmacokinetic equivalence of sublingual BHV-0223 compared to riluzole.  If the results are positive, the Company plans to subsequently submit an NDA in 2018 for the use of BHV-0223 in patients with ALS under the Section 505(b)(2) regulatory pathway.

 

The Company is planning to file its IND for BHV-5000, a third product candidate in the Company’s glutamate modulation platform, for the treatment of Rett syndrome and commence a Phase 1 clinical trial by the end of 2017.  If the results of the Phase 1 study supports advancing the current formulation of BHV-5000, the Company plans to commence a single Phase 2/3 clinical trial of BHV-5000 for the treatment of breathing irregularities associated with Rett syndrome in 2018.

 

The Company is subject to risks and uncertainties common to early-stage companies in the biotechnology industry, including, but not limited to, development by competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, compliance with government regulations and the ability to secure additional capital to fund operations. Product candidates currently under development will require significant additional research and development efforts, including preclinical and clinical testing and regulatory approval, prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel and infrastructure and extensive compliance-reporting capabilities. Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales.

 

The Company has historically outsourced all of the research and clinical development for its programs under a master services agreement (the “MSA”) with Biohaven Pharmaceuticals, Inc. (“BPI”).  BPI was incorporated in the state of Delaware in July 2013. The three founders of BPI, each of whom beneficially owned one-third of the equity of BPI prior to the Company’s acquisition of BPI on December 31, 2016 (see Note 15), are shareholders of the Company and also serve as the Company’s Chairman of the board of directors, Chief Executive Officer, and Chief Medical Officer, respectively (see Note 15). BPI is a contract research organization (“CRO”) whose only customer is the Company.  Since its incorporation, substantially all of the operations of BPI have been performed in service to the Company under the terms of the MSA, and substantially all of the funding for the operations of BPI was provided by the Company. The Company has determined that (i) it has the authority to direct the activities of BPI that most

 

7



Table of Contents

 

BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

(Unaudited)

 

significantly impact the economics of the entity and (ii) the equity at risk in BPI is insufficient to finance its operations. As a result, the Company is deemed to have had a variable interest in BPI, and BPI is deemed to be a variable interest entity (“VIE”) of which the Company is the primary beneficiary.  Since the date of the Company’s incorporation in September 2013, the Company has consolidated the results of BPI. Upon original consolidation, the Company applied purchase accounting by recording the fair values of BPI’s assets acquired and liabilities assumed, which were determined to be zero because BPI had not yet commenced any operations. For the three and nine months ended September 30, 2016, 100% of the equity in BPI was reflected as a net loss attributable to non-controlling interest on the consolidated statement of operations and comprehensive loss. On December 31, 2016, the Company acquired 100% of the issued and outstanding shares of BPI (see Note 16), and as a result, for periods subsequent to the acquisition, the Company no longer reports any non-controlling interest related to BPI.

 

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of the Company and its subsidiaries after elimination of all significant intercompany accounts and transactions.

 

Stock Split

 

In October 2016, the Company effected a 500-for-one stock split of its issued and outstanding common shares. Accordingly, all share and per share amounts for all periods presented in the accompanying consolidated financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect this stock split.

 

Initial Public Offering

 

On May 3, 2017, the Company’s registration statement on Form S-1 relating to its initial public offering of its common shares (the “IPO”) was declared effective by the Securities and Exchange Commission (“SEC”). The IPO closed on May 9, 2017 and the Company issued and sold 9,900,000 common shares at a public offering price of $17.00 per share for net proceeds of $152,651 after deducting underwriting discounts and commissions of $11,781 and other offering expenses of approximately $3,868. Upon the closing of the IPO, all convertible preferred shares then outstanding converted into an aggregate of 9,358,560 common shares. In addition, on May 9, 2017, the underwriters of the IPO fully exercised their option to purchase additional shares, and on May 11, 2017, the Company issued and sold 1,485,000 common shares for net proceeds of $23,478 after deducting underwriting discounts and commissions of $1,767. Thus, the aggregate net proceeds to the Company from the IPO, after deducting underwriting discounts and commissions and other offering costs, were $176,128.

 

In connection with the completion of its IPO, the Company issued an aggregate of 1,883,523 common shares to Bristol Myers-Squibb Company (“BMS”) and AstraZeneca AB (“AstraZeneca”) in satisfaction of obligations to contingently issue equity securities pursuant to the license agreements (see Note 12) for no additional consideration.

 

Also in connection with the completion of its IPO in May 2017, the Company amended its memorandum and articles of association to authorize the issuance of up to 200,000,000 no par value common shares and 10,000,000 no par value undesignated preferred shares.

 

Going Concern

 

In accordance with Accounting Standards Update (“ASU”) 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40), management must evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. This evaluation initially does not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented as of the date the financial statements are issued. When substantial doubt exists under this methodology, management evaluates whether the mitigating effect of its plans sufficiently alleviates substantial doubt about the Company’s ability to continue as a going concern. The mitigating effect of management’s plans, however, is only considered if both (1) it is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued, and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued.  Generally, to be considered probable of being effectively implemented, the plans must have been approved before the date that the financial statements are issued.

 

Through September 30, 2017, the Company has funded its operations primarily with proceeds from sales of preferred and common shares, borrowings under a credit agreement and proceeds from the IPO. The Company has incurred recurring losses since its inception, including net losses of $100,108 and $38,065 during the nine months ended September 30, 2017 and 2016, respectively. In addition, as of September 30, 2017, the Company had an accumulated deficit of $175,564. The Company expects to continue to generate operating losses for the foreseeable future. As of November 14, 2017, the issuance date of these consolidated financial

 

8



Table of Contents

 

BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

(Unaudited)

 

statements, the Company expects that its cash of $175,754 as of September 30, 2017 will be sufficient to fund its operating expenses, capital expenditure requirements and debt service payments for at least 12 months from the date of issuance of these consolidated financial statements, and as a result, there is not substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued.  The future viability of the Company beyond that point is dependent on its ability to raise additional capital to finance its operations.

 

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BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

(Unaudited)

 

To execute its business plans, the Company will need substantial funding to support its continuing operations and pursue its growth strategy. Until such time as the Company can generate significant revenue from product sales, if ever, it expects to finance its operations through the sale of public or private equity, debt financings or other capital sources, including collaborations with other companies or other strategic transactions.  The Company may not be able to obtain financing on acceptable terms, or at all. The terms of any financing may adversely affect the holdings or the rights of the Company’s shareholders. If the Company is unable to obtain funding, the Company could be forced to delay, reduce or eliminate some or all of its research and development programs, product portfolio expansion or commercialization efforts, which could adversely affect its business prospects.

 

2.   Summary of Significant Accounting Policies

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the reporting periods. Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limited to, the accrual for research and development expenses and the valuation of common shares, stock options, warrants, derivative instruments and contingent equity instruments. In addition, management’s assessment of the Company’s ability to continue as a going concern involves the estimation of the amount and timing of future cash inflows and outflows. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates.

 

Unaudited Interim Consolidated Financial Information

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. The accompanying unaudited consolidated financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements. The accompanying year-end consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.  The unaudited interim consolidated financial statements have been prepared on the same basis as the audited annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of September 30, 2017 and the results of its operations for the three and nine months ended September 30, 2017 and 2016 and its cash flows for the nine months ended September 30, 2017 and 2016. The results for the three and nine months ended September 30, 2017 are not necessarily indicative of results to be expected for the year ending December 31, 2017, any other interim periods or any future year or period.

 

Restricted Cash

 

As of December 31, 2016, current restricted cash consisted of $67 of cash received from investors as an advance payment for their participation in the second closing of the Company’s sale of Series A preferred shares. The Company closed the second and final tranche of its Series A preferred financing in February 2017.  As a result, there was no current restricted cash as of September 30, 2017.  As of December 31, 2016, the Company’s non-current restricted cash consisted of a $60 certificate of deposit held as a security deposit in connection with the Company’s corporate credit card.  In June 2017, the $60 security deposit was returned and, as a result, there was no non-current restricted cash as of September 30, 2017.

 

Deferred Offering Costs

 

The Company capitalizes certain legal, professional accounting and other third-party fees that are directly associated with in-process equity financings as deferred offering costs until such equity financings are consummated. After consummation of the equity financing, these costs are recorded in shareholders’ equity (deficit) as a reduction of proceeds generated as a result of the offering. Should the planned equity financing be abandoned, the deferred offering costs will be expensed immediately as a charge to operating expenses in the consolidated statement of operations and comprehensive loss. As of December 31, 2016, the Company recorded deferred offering costs relating to its IPO of $134. The Company’s IPO was completed in May 2017 and these costs, as well as additional IPO costs incurred in 2017, were recorded as a reduction to shareholders’ equity.  As of September 30, 2017, the Company did not have any deferred offering costs recorded.

 

Equity Method Investments

 

Investments in non-public companies in which the Company owns less than a 50% equity interest and where it exercises significant influence over the operating and financial policies of the investee are accounted for using the equity method of accounting.

 

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BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

(Unaudited)

 

The Company’s proportionate share of the net income or loss of the equity method investment is included in other income (expense), net in the consolidated statement of operations and comprehensive loss and results in a corresponding adjustment to the carrying value of the investment on the consolidated balance sheet. Dividends received reduce the carrying value of the investment. The Company periodically reviews the carrying value of its investment to determine if there has been an other-than-temporary decline in carrying value. A variety of factors are considered when determining if a decline in carrying value is other than temporary, including, among other factors, the financial condition and business prospects of the investee as well as the Company’s intent with regard to the investment.

 

Fair Value Measurements

 

Certain assets of the Company are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:

 

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

·                  Level 2—Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.

·                  Level 3—Unobservable inputs that are supported by little or no market activity that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.

 

The Company’s warrant liability, derivative liability and contingent equity liability are carried at fair value, based upon Level 3 inputs described above (see Note 3). The carrying values of other current assets, accounts payable, accrued expenses and notes payable under a credit agreement approximate their fair values due to the short-term nature of these assets and liabilities.

 

Research and Development Costs

 

Research and development costs are expensed as incurred. Research and development expenses consist of costs incurred in performing research and development activities, including salaries, share-based compensation and benefits, facilities costs, depreciation, third-party license fees, and external costs of vendors engaged to conduct clinical development activities and clinical trials as well as to manufacture clinical trial materials. Non-refundable prepayments for goods or services that will be used or rendered for future research and development activities are deferred and capitalized. Such amounts are recognized as an expense as the goods are delivered or the related services are performed, or until it is no longer expected that the goods will be delivered or the services rendered.

 

Research Contract Costs and Accruals

 

The Company has entered into various research and development-related contracts with companies both inside and outside of the United States. These agreements are cancelable, and related payments are recorded as research and development expenses as incurred. The Company records accruals for estimated ongoing research costs. When evaluating the adequacy of the accrued liabilities, the Company analyzes progress of the studies or clinical trials, including the phase or completion of events, invoices received and contracted costs. Significant judgments and estimates are made in determining the accrued balances at the end of any reporting period. Actual results could differ from the Company’s estimates. The Company’s historical accrual estimates have not been materially different from the actual costs.

 

Share-Based Compensation

 

The Company measures stock options granted to employees and directors based on the fair value on the date of the grant and recognizes compensation expense of those awards, over the requisite service period, which is generally the vesting period of the respective award. Forfeitures are accounted for as they occur. Generally, the Company issues stock options with only service-based vesting conditions and records the expense for these awards using the straight-line method.  The Company also issues, from time to time, stock options with performance-based vesting conditions and records the expense for these awards when the Company concludes that it is probable that the performance condition will be achieved.

 

For share-based awards granted to consultants and non-employees, compensation expense is recognized over the period during which services are rendered by such consultants and non-employees until completed. At the end of each financial reporting period

 

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BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

(Unaudited)

 

prior to completion of the service, the fair value of these awards is remeasured using the then-current fair value of the Company’s common shares and updated assumption inputs in the Black-Scholes option-pricing model.

 

The Company classifies share-based compensation expense in its consolidated statement of operations and comprehensive loss in the same manner in which the award recipient’s payroll costs are classified or in which the award recipient’s service payments are classified.

 

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. Prior to May 2017, the Company was a private company and, accordingly, lacks company-specific historical and implied volatility information for its shares. Therefore, it estimates its expected share price volatility based on the historical volatility of publicly traded peer companies and expects to continue to do so until such time as it has adequate historical data regarding the volatility of its own traded share price. The expected term of the Company’s stock options has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options. The expected term of stock options granted to non-employees is equal to the contractual term of the option award. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that the Company has never paid cash dividends on common shares and does not expect to pay any cash dividends in the foreseeable future.

 

Warrant Liability

 

In connection with entering into a credit agreement (see Note 7), the Company issued warrants to purchase common shares to two of the Company’s directors in connection with a guarantee of its obligations under the agreement (see Note 7). The Company classifies the warrants as a liability on its consolidated balance sheet because each warrant represents a freestanding financial instrument that is not indexed to the Company’s own shares. The warrant liability was initially recorded at fair value upon entering into the credit agreement and is subsequently remeasured to fair value at each reporting date. Changes in the fair value of the warrant liability are recognized as a component of other income (expense), net in the consolidated statement of operations and comprehensive loss. Changes in the fair value of the warrant liability will continue to be recognized until the warrants are exercised, expire or qualify for equity classification.

 

Derivative Liability

 

The Company’s license agreement with Yale University (“Yale”) (see Note 12) provides for a change-of-control payment to Yale upon the occurrence of a change-of-control event, as defined in the agreement, including an IPO. The Company classifies the change-of-control payment obligation as a liability on its consolidated balance sheet because it represents a contingent obligation to pay a variable amount of cash that may be based, in part, on the value of the Company’s own shares. The derivative liability was initially recorded at fair value upon entering into the license agreement and is subsequently remeasured to fair value at each reporting date. Changes in the fair value of the derivative liability are recognized as a component of other income (expense), net in the consolidated statement of operations and comprehensive loss.

 

In April 2017, the agreement with Yale was amended such that if the change-of-control event was an IPO, the change-of-control payment would be due to Yale on the first trading day when Yale was free to sell its equity interest in the Company and the change-of-control fee would be reduced by the dollar value of Yale’s equity interest in the Company on the first trading day when Yale was free to sell its equity interest in the Company. Yale’s equity interest in the Company was subject to a lock-up agreement, which generally restricted Yale’s shares from being traded until October 31, 2017 and accordingly, the amount due to Yale in connection with the change-of-control provision of the agreement, if any, would be determined upon expiration of the lock-up period. The Company continued to remeasure the derivative liability to fair value at each reporting date and recognized any changes in the fair value of the derivative liability through October 31, 2017.  The fair value of the derivative liability was determined to be $0 as of September 30, 2017.  The derivative liability upon expiration of the lock-up period was determined to be $0 based on the value of the Company’s shares on this date.

 

Contingent Equity Liability

 

The Company’s license agreements with AstraZeneca and BMS (see Note 12) require the Company to issue shares of capital stock upon the occurrence of specified financing or change-of-control events or development milestones, as defined in the agreements. In each agreement, the class and number of shares to be issued upon a triggering event were not known upon entering into the license agreements; however, the dollar amount of the shares to be issued upon a triggering event is fixed. The Company classifies these contingent obligations to issue shares as a liability on its consolidated balance sheet because each represents an obligation to issue a variable number of shares for a fixed dollar amount. Each contingent equity liability was initially recorded at fair value upon entering into each respective agreement and is subsequently remeasured to fair value at each reporting date. Changes in the fair values of the contingent equity liabilities are recognized as a component of other income (expense), net in the consolidated statement of operations

 

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BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

(Unaudited)

 

and comprehensive loss. Changes in the fair value of the contingent equity liabilities will continue to be recognized until the occurrence of a respective triggering event.  In May 2017, upon closing of the IPO, the conditions for issuing shares to BMS and AstraZeneca under the terms of the respective license agreements were satisfied, and accordingly, the Company issued 1,345,374 and 538,149 common shares, respectively, to BMS and AstraZeneca.  The contingent equity liabilities were remeasured to fair value in the aggregate amount of $32,020 immediately prior to the completion of the IPO, and upon issuance of the common shares, the contingent equity liabilities were reclassified to shareholders’ equity.

 

Net Loss per Share Attributable to Common Shareholders of Biohaven Pharmaceutical Holding Company Ltd.

 

The Company follows the two-class method when computing net income (loss) per share as the Company has issued shares that meet the definition of participating securities. The two-class method determines net income (loss) per share for each class of common and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires income available to common shareholders for the period to be allocated between common and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed. Net income (loss) per share attributable to common shareholders is calculated based on net income (loss) attributable to Biohaven Pharmaceutical Holding Company Ltd. and excludes net income (loss) attributable to non-controlling interests for relevant periods.

 

Basic net income (loss) per share attributable to common shareholders is computed by dividing the net income (loss) attributable to common shareholders by the weighted average number of common shares outstanding for the period. Diluted net income (loss) attributable to common shareholders is computed by adjusting net income (loss) attributable to common shareholders to reallocate undistributed earnings based on the potential impact of dilutive securities. Diluted net income (loss) per share attributable to common shareholders is computed by dividing the diluted net income (loss) attributable to common shareholders by the weighted average number of common shares outstanding for the period, including potential dilutive common shares. For purpose of this calculation, outstanding options, warrants to purchase common shares, convertible preferred shares and contingently issuable equity are considered potential dilutive common shares.

 

The Company’s convertible preferred shares contractually entitled the holders of such shares to participate in dividends but contractually did not require the holders of such shares to participate in losses of the Company. Accordingly, in periods in which the Company reports a net loss attributable to common shareholders, diluted net loss per share attributable to common shareholders is the same as basic net loss per share attributable to common shareholders, since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive.

 

Recently Issued Accounting Pronouncements

 

In July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), and Derivatives and Hedging (Topic 815) (“ASU 2017-11”), which changes the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. The amendments require entities that present earnings per share (“EPS”) in accordance with Topic 260 to recognize the effect of the down round feature when triggered with the effect treated as a dividend and as a reduction of income available to common shareholders in basic EPS. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company does not expect that the adoption of ASU 2017-11 will have a material impact on its consolidated financial statements.

 

In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”), which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The standard is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of ASU 2017-09 will have on its consolidated financial statements.

 

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805) — Clarifying the Definition of a Business (“ASU 2017-01”). ASU 2017-01 finalizes previous proposals regarding shareholder concerns that the definition of a business is applied too broadly. The guidance assists entities with evaluating whether transactions should be accounted for as acquisitions of assets or of businesses. The amendments are effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The adoption of ASU 2017-01 will only have an impact on the Company’s consolidated financial statements if it completes a business combination, which has not occurred to date.

 

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other than Inventory (“ASU 2016-16”), which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The standard is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact that the adoption of ASU 2016-16 will have on its consolidated financial statements.

 

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BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

(Unaudited)

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), to address diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The standard is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact that the adoption of ASU 2016-15 will have on its consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. ASU 2016-02 (Accounting Standards Codification (“ASC”) Topic 842) supersedes the previous leases standard, ASC 840, Leases. The standard is effective for public entities for annual periods beginning after December 15, 2018 and for interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of ASU 2016-02 will have on its consolidated financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which supersedes existing revenue recognition guidance under GAAP. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The standard defines a five-step process to achieve this principle, and will require companies to use more judgment and make more estimates than under the current guidance. The Company expects that these judgments and estimates will include identifying performance obligations in the customer contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delays the effective date of ASU 2014-09 such that the standard is effective for public entities for annual periods beginning after December 15, 2017 and for interim periods within those fiscal years. Early adoption of the standard is permitted for annual periods beginning after December 15, 2016. In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (“ASU 2016-08”), which further clarifies the implementation guidance on principal versus agent considerations in ASU 2014-09. In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, clarifying the implementation guidance on identifying performance obligations and licensing. Specifically, the amendments in this update reduce the cost and complexity of identifying promised goods or services and improve the guidance for determining whether promises are separately identifiable. The amendments in this update also provide implementation guidance on determining whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right to access the entity’s intellectual property (which is satisfied over time). In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”), which clarifies the objective of the collectability criterion, presentation of taxes collected from customers, non-cash consideration, contract modifications at transition, completed contracts at transition and how guidance in ASU 2014-09 is retrospectively applied. ASU 2016-08, ASU 2016-10 and ASU 2016-12 have the same effective dates and transition requirements as ASU 2014-09. The Company is currently evaluating the impact that the adoption that these standards will have on its consolidated financial statements, if and when it generates revenue.

 

3.   Fair Value of Financial Assets and Liabilities

 

The following tables present information about the Company’s financial assets and liabilities measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values:

 

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BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

(Unaudited)

 

 

 

Fair Value Measurements as of

 

 

 

September 30, 2017 Using:

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(unaudited)

 

Liabilities:

 

 

 

 

 

 

 

 

 

Warrant liability

 

$

 

$

 

$

6,289

 

$

6,289

 

 

 

$

 

$

 

$

6,289

 

$

6,289

 

 

 

 

Fair Value Measurements as of

 

 

 

December 31, 2016 Using:

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Warrant liability

 

$

 

$

 

$

780

 

$

780

 

Derivative liability

 

 

 

512

 

512

 

Contingent equity liability

 

 

 

18,938

 

18,938

 

 

 

$

 

$

 

$

20,230

 

$

20,230

 

 

During the periods ended September 30, 2017 and December 31, 2016 there were no transfers between Level 1, Level 2 and Level 3.

 

Valuation of Warrant Liability

 

The warrant liability in the tables above is composed of the fair value of warrants to purchase common shares that the Company issued to two of its directors in connection with a guarantee of its obligations under a credit agreement (see Note 7). The fair value of the warrant liability was determined based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. At September 30, 2017, the Company utilized the Black-Scholes option pricing model to value the warrant liability. The Black-Scholes option pricing model incorporated assumptions and estimates to value the warrant liability. Estimates and assumptions impacting the fair value measurement included the number of shares for which the warrants will be exercisable, the fair value per share of the underlying common shares issuable upon exercise of the warrants, the remaining contractual term of the warrants, the risk-free interest rate, the expected dividend yield, and the expected volatility of the price of the underlying common shares. The fair value per share of the Company’s common shares was based on the closing trading price of the shares on September 29, 2017, the last trading day in the quarter, and the increase in the fair value of the common shares during the nine months ended September 30, 2017 is the primary reason for the increase in the fair value of the warrant liability during the same period. The Company was a private company prior to its IPO in May 2017 and therefore lacks company-specific historical and implied volatility information of its shares. Therefore, it estimated its expected share volatility based on the historical volatility of publicly traded peer companies for a term equal to the remaining contractual term of the warrants. The risk-free interest rate was determined by reference to the U.S. Treasury yield curve for time periods approximately equal to the remaining contractual term of the warrants. The Company estimated a 0% expected dividend yield based on the fact that the Company has never paid or declared dividends and does not intend to do so in the foreseeable future.

 

Valuation of Derivative Liability

 

The fair value of the derivative liability recognized in connection with the Company’s license agreement with Yale (see Note 12) was determined based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. At September 30, 2017, the fair value of the derivative liability was determined using a Monte-Carlo simulation, which is a statistical method used to generate a defined number of share price paths to develop a reasonable estimate of the range of the expected share prices. The Monte-Carlo simulation incorporated assumptions and estimates to value the derivative liability, including the amount of the payment, the settlement date, the trading price of the Company’s common shares on September 29, 2017, the last trading day in the quarter, the risk-free interest rate and the expected volatility of the price of the underlying common shares. In April 2017, the agreement with Yale was amended such that if the change-of-control event was an IPO, the change-of-control payment would be due to Yale on the first trading day Yale was free to sell its equity interest in the Company and the change-of-control fee would be reduced by the dollar value of Yale’s equity interest in the Company on the first trading day when Yale was free to sell its equity interest in the Company.  Yale’s equity interest in the Company was subject to a lock-up agreement which generally

 

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BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

(Unaudited)

 

restricted Yale’s shares from being traded until October 31, 2017, and accordingly, the amount due to Yale in connection with the change-of-control provision of the agreement, if any, would be determined upon expiration of the lock-up period in October 2017.  The fair value of the derivative liability was determined to be $0 as of September 30, 2017.  On October 31, 2017 the Company remeasured the derivative liability to fair value upon expiration of the lock-up period and determined that the fair value was $0 based on the value of the Company’s shares on this date.

 

Valuation of Contingent Equity Liability

 

BMS.     The fair value of the contingent equity liability recognized in connection with the Company’s license agreement with BMS (see Note 12) was determined based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The fair value of the contingent equity liability was determined using the PWERM, which considered as inputs the probability of occurrence of events that would trigger the issuance of shares, the expected timing of such events, the value of the contingently issuable equity and a risk-adjusted discount rate. As of December 31, 2016, the assumed probability of occurrence of the event that was most probable of triggering the issuance of shares was 75%, the expected timing of such an event was estimated to be less than one year, the value of the contingently issuable equity was $18,750 and the discount rate was assessed to be 0%. In connection with the closing of the IPO in May 2017, the conditions for issuing shares in connection with the contingent equity liability were satisfied, and accordingly, the Company issued 1,345,374 common shares to BMS.  The contingent equity liability was adjusted to fair value immediately prior to the completion of the IPO, and upon issuance of the common shares, the contingent equity liability was reclassified to equity.

 

AstraZeneca.     The fair value of the contingent equity liability recognized in connection with the Company’s license agreement with AstraZeneca (see Note 12) was determined based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The fair value of the contingent equity liability was determined using the PWERM, which considered as inputs the probability of occurrence of events that would trigger the issuance of shares, the expected timing of such events, the value of the contingently issuable equity and a risk-adjusted discount rate. The contingently issuable equity is issuable in two tranches, each for a fixed dollar amount of $5,000, for a total amount of $10,000. Using the PWERM, the Company assessed the fair value of each tranche of the contingent equity liability separately.

 

In October 2016, upon completion of the Series A First Closing (see Note 9), the first tranche of contingently issuable equity became issuable to AstraZeneca. As a result, the Company issued to AstraZeneca 538,150 Series A preferred shares with an aggregate fair value of $5,000, or $9.2911 per share, in satisfaction of the obligation to issue the first tranche of equity under the agreement. Upon the issuance of the 538,150 Series A preferred shares to AstraZeneca in October 2016, the Company reclassified the carrying value of the first tranche contingent equity liability, equal to the then-current fair value of $5,000, to the carrying value of Series A preferred shares.

 

The shares related to the second tranche become issuable upon the earlier of (i) the initiation of a Phase 2b or equivalent clinical trial of a product candidate based on the licensed patent rights and (ii) any liquidity event, including an IPO, any change of control or any assignment of the Company’s rights or obligations under the license agreement. As of December 31, 2016, the Company determined that the fair value of the second tranche contingent equity liability was $4,875. In determining this fair value, the assumed probability of occurrence of the event that was most probable of triggering the issuance of shares was 65%, the expected timing of such an event was estimated to be less than one year, the value of the contingently issuable equity was $7,500 and the discount rate was assessed to be 0%. In connection with the closing of the IPO in May 2017, the conditions for issuing shares in connection with the contingent equity liability were satisfied, and accordingly, the Company issued 538,149 common shares to AstraZeneca.  The contingent equity liability was adjusted to fair value immediately prior to the completion of the IPO, and upon issuance of the common shares, the contingent equity liability was reclassified to equity.

 

The following table provides a roll forward of the aggregate fair values of the Company’s warrant liability, derivative liability and contingent equity liability, for which fair value is determined by Level 3 inputs:

 

 

 

Warrant

 

Derivative

 

Contingent

 

 

 

Liability

 

Liability

 

Equity Liability

 

 

 

 

 

 

 

 

 

Balance at December 31, 2016

 

$

780

 

$

512

 

$

18,938

 

Change in fair value

 

5,509

 

(512

)

13,082

 

Issuance of common shares in settlement of contingent equity liability

 

 

 

(32,020

)

Balance at September 30, 2017

 

$

6,289

 

$

 

$

 

 

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BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

(Unaudited)

 

Beneficial Conversion Feature

 

In connection with the second tranche closing of Series A preferred shares on February 17, 2017, the Company determined that the conversion option associated with the shares sold met the definition of a beneficial conversion feature (“BCF”) as the fair value of the underlying common shares exceeded the adjusted conversion price.  The BCF was recognized at its fair value of $12,006 as a reduction to the carrying value of the Series A preferred shares and a corresponding adjustment to additional paid-in capital.  The fair value was determined using Level 3 inputs, equal to the product of the number of shares sold in the second tranche closing multiplied by the difference between the adjusted conversion price and the per share value of common shares at the commitment date (see Note 9).  In May 2017, upon the completion of the Company’s IPO, all of the outstanding Series A preferred shares were automatically converted into an aggregate of 9,358,560 common shares.  Upon conversion of the Series A preferred shares, the remaining unamortized BCF was reclassified to additional paid-in capital as a deemed dividend.

 

4.   Prepaid Expenses and Other Current Assets

 

Prepaid expenses and other current assets consisted of the following:

 

 

 

September 30,

 

December 31,

 

 

 

2017

 

2016

 

 

 

 

 

 

 

Prepaid clinical trial costs

 

$

2,863

 

$

388

 

Prepaid insurance

 

744

 

 

Other

 

142

 

15

 

 

 

$

3,749

 

$

403

 

 

5.   Equity Method Investment

 

On August 29, 2016, the Company executed a stock purchase agreement with Kleo Pharmaceuticals, Inc. (“Kleo”), a privately held Delaware corporation, to purchase 3,000,000 shares of Kleo’s common stock at an initial closing, with a commitment to purchase an aggregate of 5,500,000 additional shares of common stock, in each case at a share price of $1.00 per share (the “Kleo SPA”). Kleo is a development-stage biopharmaceutical company focused on advancing the field of immunotherapy by developing small molecules that emulate biologics. Under the terms of the Kleo SPA, the Company purchased 3,000,000 shares upon the initial closing on August 31, 2016, and the remaining 5,500,000 shares are to be purchased in four equal tranches of 1,375,000 shares beginning six months from the initial closing and then every three months thereafter. The Company completed three of the four remaining tranche purchases in March, June and October of 2017, with each tranche purchase consisting of 1,375,000 shares for cash consideration of $1,375 (see Note 17).

 

In connection with the Kleo SPA, the Company agreed to purchase an additional 500,000 shares of Kleo common stock from an officer and stockholder of Kleo. On March 30, 2017, the Company completed the purchase of these shares. The consideration paid for these shares consisted of a cash payment of $250 and the Company’s issuance of 32,500 common shares with a fair value of $10.82 per share on the date of issuance, or $352.

 

In addition, on October 5, 2017, the Company entered into two separate subscription agreements with Kleo (“First Subscription Agreement” and “Second Subscription Agreement”) in order to maintain the Company’s relative ownership interest in Kleo.  Pursuant to the First Subscription Agreement, the Company purchased 1,397,904 shares of Kleo’s common stock at a purchase price of $1.0993 per share, for total consideration of $1,537.  Pursuant to the Second Subscription Agreement, the Company purchased an additional 651,639 shares of Kleo’s common stock at a purchase price of $1.0993 per share, for total consideration of $716. Upon completion of the third tranche purchase and the purchases under the First Subscription Agreement and the Second Subscription Agreement, the Company’s ownership interest in the outstanding stock of Kleo increased to 43.3% (see Note 17).

 

The Company has a variable interest in Kleo through its equity investment. Kleo is a variable interest entity due to the equity investment at risk being insufficient to finance its activities. An assessment of whether or not the Company has the power to direct activities that most significantly impact Kleo’s economic performance and to identify the party that obtains the majority of the benefits of the investment was performed as of September 30, 2017 and December 31, 2016, and will be performed as of each subsequent reporting date. After each of these assessments, the Company concluded that the activities that most significantly impact Kleo’s economic performance are the ability to direct the research activities, the ability to select vendors to perform the research, the ability to maintain research staff and the ability to raise additional funds. Based on the outcome of these assessments, the Company concluded that consolidation of Kleo is not appropriate, and has therefore accounted for the investment under the equity method.

 

The Company’s purchase of 3,000,000 shares of Kleo’s common stock during the year ended December 31, 2016 and 3,250,000 shares during the nine months ended September 30, 2017 resulted in the Company owning 18.6% and 33.0% of the outstanding shares of Kleo stock as of December 31, 2016 and September 30, 2017, respectively. In connection with the initial investment, the Company

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

(Unaudited)

 

also received the right to designate two of the five members of Kleo’s board of directors. The Company accounts for its investment in Kleo under the equity method of accounting. The Company has recorded its investments in Kleo to date based on the costs of those investments, as adjusted for the Company’s proportional share of Kleo’s net income or loss in each period. The difference between the cost of the Company’s investments in Kleo and its proportionate share of the net assets of Kleo was allocated to goodwill and indefinite-lived intangible assets. The Company records future adjustments to the carrying value of its investment at each reporting date equal to its proportionate share of Kleo’s net loss for the corresponding period. The Company recorded other expense and a corresponding reduction in the carrying value of its investment in Kleo of $638 and $1,204 for its proportionate share of Kleo’s net loss for the three and nine months ended September 30, 2017, respectively.

 

The carrying value of the Company’s investment in Kleo was $4,900 and $2,753 as of September 30, 2017 and December 31, 2016, respectively, and is reported as equity method investment on the consolidated balance sheet. The carrying value of the investment represents the Company’s maximum loss exposure as of September 30, 2017.

 

The following table provides a roll forward of the carrying value of the Company’s equity method investment:

 

 

 

Carrying Value

 

 

 

 

 

Balance at December 31, 2016

 

$

2,753

 

Purchases of Kleo common stock

 

3,351

 

Loss recognized in connection with equity method investment

 

(1,204

)

Balance at September 30, 2017

 

$

4,900

 

 

Summarized financial information for Kleo is as follows:

 

 

 

September 30,

 

December 31,

 

 

 

2017

 

2016

 

Current assets

 

$

5,977

 

$

4,276

 

Total assets

 

$

6,357

 

$

4,323

 

Current liabilities

 

$

536

 

$

413

 

Total liabilities

 

$

4,225

 

$

1,554

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 2017

 

September 30, 2017

 

Revenue

 

$

 

$

 

Loss from operations

 

$

(1,784

)

$

(4,305

)

Net loss

 

$

(1,785

)

$

(4,327

)

 

The summarized financial information as of and for the year ended December 31, 2016 has been revised to reflect the revised financial statements received from Kleo.

 

6.   Accrued Expenses

 

Accrued expenses consisted of the following:

 

 

 

September 30,

 

December 31,

 

 

 

2017

 

2016

 

 

 

 

 

 

 

Accrued employee compensation and benefits

 

$

1,264

 

$

27

 

Accrued clinical trial costs

 

11,183

 

2,204

 

Accrued professional fees

 

490

 

516

 

Accrued income taxes

 

65

 

99

 

Other

 

358

 

134

 

 

 

$

13,360

 

$

2,980

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

(Unaudited)

 

7.   Notes Payable

 

Credit Agreement

 

On August 30, 2016, the Company entered into a one-year credit agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association (“Wells Fargo”) providing for a term loan in the principal amount of $5,000 (the “Loan”) and borrowed the full $5,000 available under the Credit Agreement. Borrowings under the Credit Agreement bore interest at a rate equal to monthly LIBOR plus 1.50% per annum, and the Credit Agreement required monthly, interest-only payments beginning on September 30, 2016 and continuing through August 30, 2017 (the “Maturity Date”), when all amounts of unpaid principal and interest became due. The monthly LIBOR rate was reset each month. The Credit Agreement was fully satisfied with a principal repayment to Wells Fargo of $5,000 on August 31, 2017.

 

In connection with entering into the Credit Agreement on August 30, 2016, the Company agreed to issue warrants to purchase $1,000 of common shares to each of the Guarantor and Co-Guarantor. The number of common shares issuable upon exercise of each warrant is determined by dividing $1,000 by the price per share paid by investors in the Series A First Closing (see Note 9). On January 26, 2017, the Company issued the warrants to the Guarantor and Co-Guarantor (see Note 8).

 

The Company determined that the obligation to issue the warrants represented a liability that was considered outstanding for accounting purposes on August 30, 2016, the date of the Credit Agreement (see Note 8). The fair value of the warrant liability upon issuance represented a premium paid for the guaranty of the Loan, and, accordingly, the Company recorded the issuance-date fair value of the warrant liability of $934 as a debt discount and as a warrant liability in the Company’s consolidated balance sheet. In addition, the Company paid an arrangement fee of $150 to the lender and incurred legal costs of $47, both of which were recorded as a debt discount. The debt discount was reflected as a reduction of the carrying value of the notes payable on the Company’s consolidated balance sheet and was amortized to interest expense over the term of the note using the effective interest method.

 

The Company recognized interest expense of $239 and $906 during the three and nine months ended September 30, 2017, respectively.  The Company recognized $215 and $784 related to the accretion of the debt discount during the three and nine months ended September 30, 2017, respectively. As of September 30, 2017, the unamortized debt discount was $0.

 

Notes Payable to Related Parties

 

On December 31, 2016, the Company entered into stock purchase agreements with each of the stockholders of BPI, acquiring 100% of the issued and outstanding shares of BPI for aggregate purchase consideration of $595. The Company funded the acquisition through the issuance of promissory notes to each of the former stockholders of BPI. The former stockholders of BPI are shareholders of the Company and also serve as the Company’s Chairman of the board of directors, Chief Executive Officer, and Chief Medical Officer, respectively. The notes were payable in five annual payments, the first four of which were interest only, with the final payment to include the principal balance outstanding plus any accrued and unpaid interest. The notes bore interest at a rate of 4.5% per annum and had a maturity date of December 31, 2021. The notes became immediately due and payable upon specified events, including immediately prior to the consummation of an initial public offering of the Company’s common shares or upon the occurrence of a change of control of the Company. There were no affirmative, negative or financial covenants associated with the notes.

 

In connection with the closing of the Company’s IPO in May 2017, the notes were paid in full as of September 30, 2017, including principal of $595 and interest of $9.

 

8.   Warrants

 

ALS Biopharma Warrants

 

On August 10, 2015, as partial consideration issued in connection with a license agreement with ALS Biopharma LLC (“ALS Biopharma”) (see Note 12), the Company issued to ALS Biopharma a warrant to purchase 275,000 common shares at an exercise price of $5.60 per share. The warrant was immediately exercisable upon issuance and expires 10 years from the issuance date. The warrant was classified as equity and recorded at its fair value on the date of issuance.

 

On August 10, 2015, in connection with the same license agreement, the Company issued to ALS Biopharma a warrant to purchase 325,000 common shares at an exercise price of $5.60 per share. The warrant became exercisable upon the Company’s filing of an investigational new drug application (“IND”) for a patented product under the license agreement, and expires 10 years from the issuance date. On May 31, 2016, the Company filed an IND for a patented product under the license agreement. The warrant was classified as equity and recorded at its fair value on May 31, 2016.

 

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BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

(Unaudited)

 

Guarantor and Co-Guarantor Warrants

 

The Company agreed to issue warrants to purchase $1,000 of common shares to each of the Guarantor and Co-Guarantor of the Credit Agreement (see Note 7), who are members of the Company’s board of directors (see Note 15). The number of common shares issuable upon exercise of each warrant is determined by dividing $1,000 by the price per share paid by investors in the Series A First Closing (see Note 9). On January 26, 2017, the Company issued the warrants to the Guarantor and Co-Guarantor, pursuant to which each director received a warrant to purchase 107,500 common shares at an exercise price of $9.2911 per share. The warrants are immediately exercisable and expire upon the second anniversary of the Company’s IPO.

 

As of December 31, 2016, the Company determined that the obligation to issue the warrants represented a liability that was considered outstanding for accounting purposes on August 30, 2016, the date the Company entered into the Credit Agreement. The Company classified the warrants as a liability on its consolidated balance sheet because each warrant represents a freestanding financial instrument that is not indexed to the Company’s own shares. As of September 30, 2017, the Company continued to classify these warrants as a liability on the consolidated balance sheet because the warrants contain anti-dilution price protection provisions through January 26, 2018. As a result, changes in the fair value of the warrant liability will continue to be recognized as a component of other income (expense), net until the earliest of (i) the exercise of the warrants, (ii) the expiration of the warrants or (iii) January 26, 2018. The warrant liability was initially recorded at fair value upon entering into the Credit Agreement and is subsequently remeasured to fair value at each reporting date. Changes in the fair value of the warrant liability are recognized as a component of other income (expense), net in the Company’s consolidated statement of operations and comprehensive loss.

 

The fair value of the warrant liability was determined to be $934 on the date of issuance. The Company remeasured the liability as of September 30, 2017 and December 31, 2016 and determined that the fair value of the warrant liability was $6,289 and $780, respectively. The Company recorded expense of $2,426 and $5,509 within other income (expense), net in the consolidated statements of operations for the three and nine months ended September 30, 2017, respectively.

 

Trout Warrants

 

On June 6, 2017, as partial consideration issued in connection with an agreement to perform investor relations services with The Trout Group LLC (“Trout”), the Company issued to Trout a warrant to purchase 6,751 common shares at an exercise price of $22.22 per share. The warrant was immediately exercisable upon issuance and expires 10 years from the issuance date. The warrant was classified as equity and recorded at its fair value of $93 on the date of issuance, with a corresponding adjustment to prepaid expenses and other current assets on the Company’s consolidated balance sheet.  The fair value of the warrant is being amortized on a straight-line basis over the one year term of the agreement.  The Company recorded general and administrative expense of $23 and $29 for the three and nine months ended September 30, 2017, respectively, for amortization of the issuance-date fair value of the warrant.

 

9.              Convertible Preferred Shares

 

In connection with the completion of its IPO in May 2017, the Company amended its memorandum and articles of association to authorize the issuance of up to 10,000,000 no par value undesignated preferred shares.

 

Prior to the completion of the IPO, the Company’s memorandum and articles of association, as amended and restated, authorized the Company to issue 11,242,172 Series A preferred shares. The holders of Series A preferred shares had liquidation rights in the event of a deemed liquidation that, in certain situations, was not solely within the control of the Company. Therefore, the Series A preferred shares were classified outside of shareholders’ equity (deficit).

 

In October 2016, the Company issued and sold an aggregate of 4,305,209 Series A preferred shares, at an issuance price of $9.2911 per share, for proceeds of $37,295, net of offering costs of $2,705 (the “Series A First Closing”). The $2,705 of offering costs consisted of $1,730 payable in cash and 105,010 shares of the Company’s Series A preferred shares valued at $975, or $9.2911 per share, which were issued directly to the two placement agents involved in the Series A financing. The preferred share purchase agreement provided for the issuance of additional Series A preferred shares in a second and final tranche (the “Series A Second Closing”). Also, in October 2016, the Company issued to AstraZeneca 538,150 Series A preferred shares with an aggregate fair value of $5,000, or $9.2911 per share, in satisfaction of the obligation to issue the first tranche of contingently issuable equity under the Company’s license agreement with AstraZeneca (see Note 12).

 

In February 2017, the Company completed the Series A Second Closing through the issuance and sale of an aggregate of 4,305,182 Series A preferred shares at an issuance price of $9.2911 per share for cash proceeds of $38,636, net of offering costs of $2,606. The $2,606 of offering costs for the second tranche consisted of $1,364 payable in cash and 105,009 shares of the Company’s Series A preferred shares valued at $1,242, or $11.83 per share, which were issued directly to the two placement agents involved in

 

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BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

(Unaudited)

 

the Series A financing.  The conversion option associated with the Series A preferred shares sold in the second closing met the definition of a BCF as the fair value of the underlying common shares of $9.85 per share exceeded the stated conversion price of $9.2911 (or $7.0613, as adjusted, as described below under Conversion).  Upon the sale and issuance of the Series A preferred shares, $2,406 of the BCF was immediately accreted, as this represented the difference between the stated conversion price and per share value of the common shares.  The remaining portion of the BCF is being amortized using the effective interest method over the period from the date of issuance to the date of the earliest possible conversion, October 1, 2017.

 

In May 2017, upon the completion of the Company’s IPO, all of the outstanding Series A preferred shares were automatically converted into an aggregate of 9,358,560 common shares.  Upon conversion of the Series A preferred shares, the remaining unamortized BCF was reclassified to additional paid-in capital as a deemed dividend.

 

The holders of the Series A preferred shares had the following rights and preferences prior to the conversion to common shares:

 

Voting

 

The holders of Series A preferred shares were entitled to vote, together with the holders of common shares, on all matters submitted to shareholders for a vote. The holders of Series A preferred shares were entitled to the number of votes equal to the number of common shares into which their Series A preferred shares could convert.

 

Conversion

 

Each Series A preferred share was convertible into common shares at the option of the shareholder at any time after the date of issuance. In addition, pursuant to the Company’s memorandum and articles of association, as amended and restated, each Series A preferred share would be automatically converted into common shares, at the applicable conversion ratio then in effect, upon the earlier of (i) a firm commitment public offering with proceeds to the Company of at least $50,000, before deducting underwriting discounts and commissions or (ii) the date specified by the vote or written consent of the holders of a majority of the then outstanding Series A preferred shares.

 

The conversion ratio of Series A preferred shares was determined by dividing the Original Issue Price by the Conversion Price. The Original Issue Price of the Series A preferred shares was $9.2911 per share. The Conversion Price of the Series A preferred shares was $9.2911 per share, subject to appropriate adjustment in the event of any stock split, stock dividend, combination or other similar recapitalization and other adjustments as set forth in the Company’s memorandum and articles of association, as amended and restated. On the date of issuance, each Series A preferred share was convertible into one common share. In the event that any Series A preferred share investor did not participate in the second and final tranche of the Series A preferred financing, that investor’s shares would have been convertible into common shares at a ratio of one common share for every 1,000 Series A preferred shares. In addition, if the Company decided not to move forward with a Phase 3 clinical trial on its product candidate, rimegepant, or if the Company failed to initiate a Phase 3 clinical trial prior to October 1, 2017, the Conversion Price of the Series A preferred shares would have been reduced to $7.0613 per share.

 

Dividends

 

The holders of Series A preferred shares were entitled to receive dividends in preference to any dividend on common shares at the rate of 8.0% per year of the Original Issue Price. Dividends accrued daily and compounded annually, whether or not declared, would be payable when, as and if declared by the board or directors of the Company and were noncumulative. The Company was not permitted to declare, pay or set aside any dividends on shares of any other class or series of capital stock of the Company unless the holders of Series A preferred shares then outstanding first received, or simultaneously received, dividends on each outstanding Series A preferred share.

 

Accruing dividends, whether or not declared, were payable upon any liquidation event. Declared but unpaid dividends would have been payable upon the conversion of the Series A preferred shares into common shares.

 

Liquidation

 

In the event of any voluntary or involuntary liquidation, dissolution or winding-up of the Company or a Deemed Liquidation Event (as described below), the holders of Series A preferred shares then outstanding were entitled to receive, in preference to holders of common shares, an amount equal to the greater of (i) the Original Issue Price per share, plus all dividends declared but unpaid on such shares or (ii) the amount such holders would have received had all of their Series A preferred shares been converted into common shares immediately prior to such liquidation event. If upon any such liquidation event, the assets of the Company available for distribution were insufficient to permit payment in full to the holders of Series A preferred shares, the proceeds would be ratably

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

(Unaudited)

 

distributed among the holders of Series A preferred shares in proportion to the respective amounts that they would have received if they were paid in full.

 

After payments have been made in full to the holders of Series A preferred shares, the remaining assets of the Company available for distribution would be distributed among the holders of common shares ratably in proportion to the number of shares held by each such holder.

 

Unless a majority of the holders of the then outstanding Series A preferred shares elected otherwise, a Deemed Liquidation Event would include a merger or consolidation (other than one in which shareholders of the Company own a majority by voting power of the outstanding shares of the surviving or acquiring corporation) or a sale, lease, transfer, exclusive license or other disposition of all or substantially all of the assets of the Company.

 

Redemption

 

The Company’s memorandum and articles of association, as amended and restated, did not provide redemption rights to the holders of Series A preferred shares.

 

10.   Common Shares

 

As of December 31, 2016, the Company’s memorandum and articles of association, as amended and restated, authorized the Company to issue 38,000,000 no par value common shares.  On April 21, 2017, the Company effected an increase in the number of authorized common shares to 50,000,000 shares. Additionally, in connection with the completion of its IPO in May 2017, the Company amended its memorandum and articles of association to authorize the issuance of up to 200,000,000 no par value common shares.

 

Each common share entitles the holder to one vote on all matters submitted to a vote of the Company’s shareholders. Common shareholders are entitled to receive dividends, as may be declared by the board of directors, if any. Through September 30, 2017, no dividends had been declared.

 

In February 2016, the Company issued 429,000 common shares at an issuance price of $7.00 per share for proceeds of $2,980, net of issuance costs of $23.

 

In May 2016 and July 2016, the Company issued an aggregate of 1,090,500 common shares at an issuance price of $7.70 per share for proceeds of $8,299, net of issuance costs of $97.

 

In July 2016, concurrently with the issuance of the Company’s common shares to Connecticut Innovations Incorporated (“CII”), the Company and CII entered into a put agreement (the “Put Agreement”). The Put Agreement grants CII the right to sell (the “Put Option”) to the Company all or any part of CII’s warrant rights (if any), shares (if any) or notes (if any). The Put Option becomes exercisable upon the Company’s breach of the covenant to maintain a presence in Connecticut, as defined in the Put Agreement. Upon CII’s exercise of the Put Option, the Company would be obligated to purchase CII’s shares for a price that is the greater of (i) the current market price of such share and (ii) the original purchase price of such share. The right to put the shares will terminate at such time that the shares may be sold (i) pursuant to an effective registration statement under the Securities Act of 1933 (the “Securities Act”), (ii) pursuant to Rule 144 promulgated under the Securities Act, but in each case, only after the termination of any applicable “lock-up” restrictions and, in the case of (ii), only if the common shares are then listed for trading on a national securities exchange. The fair value of the Put Option was determined to be $0 upon execution of the Put Agreement and as of September 30, 2017 because the ability to maintain a presence in Connecticut is within the Company’s control. The right to put the shares terminated on October 31, 2017 upon expiration of the lock-up period following the completion of the Company’s IPO.

 

On May 3, 2017, the Company’s registration statement on Form S-1 relating to the IPO was declared effective by the SEC.  The IPO closed on May 9, 2017 and the Company issued and sold 9,900,000 common shares at a public offering price of $17.00 per share for net proceeds of $152,651 after deducting underwriting discounts and commissions of $11,781 and other offering expenses of $3,868. Upon the closing of the IPO, all convertible preferred shares then outstanding converted into an aggregate of 9,358,560 common shares. In addition, on May 9, 2017, the underwriters of the IPO fully exercised their option to purchase additional shares, and on May 11, 2017, the Company issued and sold 1,485,000 common shares for net proceeds of $23,478 after deducting underwriting discounts and commissions of $1,767.  Thus, the aggregate net proceeds to the Company from the IPO, after deducting underwriting discounts and commissions and offering expenses, were $176,128.

 

In connection with the completion of its IPO, the Company issued an aggregate of 1,883,523 common shares to BMS and AstraZeneca in satisfaction of obligations to contingently issue equity securities pursuant to the license agreements (see Note 12), for no additional consideration.

 

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BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

(Unaudited)

 

11.   Share-Based Compensation

 

2014 Equity Incentive Plan

 

The Company’s 2014 Equity Incentive Plan, as amended (the “2014 Plan”), provides for the Company to sell or issue common shares or restricted common shares, or to grant incentive stock options or nonqualified stock options for the purchase of common shares, to employees, members of the board of directors and consultants of the Company. The 2014 Plan is administered by the board of directors, or at the discretion of the board of directors, by a committee of the board. The exercise prices, vesting and other restrictions are determined at the discretion of the board of directors, or their committee if so delegated, except that the exercise price per share of stock options may not be less than 100% of the fair market value of the common share on the date of grant and the term of stock option may not be greater than ten years.

 

The total number of common shares that may be issued under the 2014 Plan was 4,000,000 shares as of December 31, 2016. In January 2017, the Company effected an increase, effective October 28, 2016, in the number of common shares reserved for issuance under the 2014 Plan from 4,000,000 to 4,899,230 shares. The total number of common shares that may be issued under the 2014 Plan was 4,899,230 shares as of September 30, 2017. As of September 30, 2017 and December 31, 2016, 0 and 1,034,805 shares remained available for future grant under the 2014 Plan, respectively.

 

2017 Equity Incentive Plan

 

In April 2017, the Company’s shareholders approved the 2017 Equity Incentive Plan (the “2017 Plan”), which became effective on May 3, 2017 in connection with the Company’s IPO. Upon the effectiveness of the 2017 Plan, no further grants will be made under the 2014 Plan.  The 2017 Plan provides for the grant of incentive share options, nonstatutory share options, share appreciation rights, restricted share awards, restricted share unit awards, performance-based share awards and other share-based awards. Additionally, the 2017 Plan provides for the grant of performance cash awards. Upon the effectiveness of the 2017 Plan, there were 2,713,113 shares authorized for issuance under the 2017 Plan, including 372 shares which remained available for issuance under the 2014 Plan.  As of September 30, 2017, 2,369,319 shares remained available for future grant under the 2017 Plan.

 

Vesting periods are determined at the discretion of the board of directors. Stock options granted to employees and directors typically vest over three years. Stock options granted to non-employees typically vest over three years. The Company measures and records the value of these options over the period of time services are provided and, as such, unvested portions are subject to remeasurement at subsequent reporting periods.

 

During the nine months ended September 30, 2017, the Company granted options to purchase 1,225,450 common shares to employees and directors, and there were no options granted during the nine months ended September 30, 2016. The Company recorded share-based compensation expense for options granted to employees and directors of $5,810 and $484 during the three months ended September 30, 2017 and 2016, respectively, and $7,710 and $1,379 during the nine months ended September 30, 2017 and 2016, respectively.

 

During the nine months ended September 30, 2017, the Company granted options to purchase 137,537 common shares to non-employees, and there were no options granted during the nine months ended September 30, 2016. The Company recorded share-based compensation expense for options granted to non-employees of $446 and $260 during the three months ended September 30, 2017 and 2016, respectively, and $3,095 and $788 during the nine months ended September 30, 2017 and 2016, respectively.

 

2017 Employee Share Purchase Plan

 

In April 2017, the Company’s shareholders approved the 2017 Employee Share Purchase Plan, or ESPP, which became effective on May 3, 2017 in connection with the Company’s IPO. A total of 339,139 common shares were initially reserved for issuance under this plan. The number of common shares that may be issued under the 2017 ESPP will automatically increase on January 1 of each year, beginning on January 1, 2018 and continuing through and including January 1, 2027, by the least of (i) 600,000 common shares, (ii) 1% of the total number of common shares outstanding on December 31 of the preceding calendar year and (iii) a number of shares determined by the Company’s board of directors.

 

Stock Option Valuation

 

The assumptions that the Company used to determine the grant-date fair value of stock options granted to employees and directors under the 2014 Plan and the 2017 Plan (collectively, the “Plans”) during the three and nine months ended September 30,

 

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BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

(Unaudited)

 

2017 were as follows, presented on a weighted average basis, noting there were no stock options granted to employees and directors during the three and nine months ended September 30, 2016:

 

 

 

Three Months Ended
September 30, 2017

 

Nine Months Ended
September 30, 2017

 

Risk-free interest rate

 

2.12

%

2.01

%

Expected term (in years)

 

6.30

 

5.82

 

Expected volatility

 

72.65

%

71.74

%

Expected dividend yield

 

0

%

0

%

Exercise price

 

$

30.72

 

$

15.21

 

Fair value of common share

 

$

30.54

 

$

14.97

 

 

The assumptions that the Company used to determine the grant-date fair value of stock options granted to non-employees under the Plans during the three and nine months ended September 30, 2017 were as follows, presented on a weighted average basis, noting there were no stock options granted to non-employees during the three and nine months ended September 30, 2016:

 

 

 

Three Months Ended
September 30, 2017

 

Nine Months Ended
September 30, 2017

 

Risk-free interest rate

 

2.07

%

2.33

%

Expected term (in years)

 

10.00

 

10.00

 

Expected volatility

 

72.55

%

70.82

%

Expected dividend yield

 

0

%

0

%

Exercise price

 

$

37.54

 

$

15.41

 

Fair value of common share

 

$

37.54

 

$

15.15

 

 

Stock Options

 

Stock option activity under the Plans is summarized as follows:

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Weighted

 

Average

 

 

 

 

 

 

 

Average

 

Remaining

 

Aggregate

 

 

 

Number of

 

Exercise

 

Contractual

 

Intrinsic

 

 

 

Shares

 

Price

 

Term

 

Value

 

 

 

 

 

 

 

(in years)

 

 

 

Outstanding as of December 31, 2016

 

3,864,425

 

$

3.61

 

9.21

 

$

15,991

 

Granted

 

1,362,987

 

15.15

 

9.55

 

 

 

Exercised

 

(182,615

)

1.39

 

 

 

 

 

Forfeited

 

(11,760

)

4.44

 

 

 

 

 

Outstanding as of September 30, 2017

 

5,033,037

 

$

6.81

 

9.19

 

$

153,889

 

Options exercisable as of September 30, 2017

 

2,454,181

 

$

3.73

 

7.84

 

$

82,579

 

Options unvested as of September 30, 2017

 

2,578,856

 

$

9.74

 

8.69

 

$

71,310

 

 

The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options and the fair value of the Company’s common shares for those stock options that had exercise prices lower than the fair value of the Company’s common shares.

 

The weighted average grant-date fair value per share of stock options granted for the nine months ended September 30, 2017 was $4.87.  There were no stock options granted during the nine months ended September 30, 2016.

 

The total fair value of options vested for the nine months ended September 30, 2017 and 2016 was $2,631 and $0, respectively.

 

Share-Based Compensation

 

Share-based compensation expense was classified in the consolidated statements of operations and comprehensive loss as follows:

 

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BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

(Unaudited)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

 

 

 

 

 

 

 

 

Research and development expenses

 

$

4,195

 

$

352

 

$

6,421

 

$

1,039

 

General and administrative expenses

 

2,061

 

392

 

4,384

 

1,128

 

 

 

$

6,256

 

$

744

 

$

10,805

 

$

2,167

 

 

As of September 30, 2017, total unrecognized compensation cost related to the unvested share-based awards was $19,734, which is expected to be recognized over a weighted average period of 2.73 years.

 

12.  License Agreements

 

Yale Agreement

 

In September 2013, the Company entered into an exclusive license agreement with Yale (the “Yale Agreement”) to obtain a license to certain patent rights for the commercial development, manufacture, distribution, use and sale of products and processes resulting from the development of those patent rights, related to the use of riluzole in treating various neurological conditions, such as general anxiety disorder, post-traumatic stress disorder and depression. As part of the consideration for this license, the Company issued Yale 250,000 common shares and granted Yale the right to purchase up to 10% of the securities issued in specified future equity offerings by the Company. In the event that Yale’s fully diluted ownership position following the closing of the Company’s first two financings with institutional investors resulting in an investment of at least $3,500 fell below 1% of the Company’s fully diluted common shares outstanding, the Company would be required to issue to Yale an additional number of shares of common shares such that Yale’s ownership position is restored to no less than 1%. The obligation to contingently issue equity to Yale was determined to be a liability, which was accounted for at fair value and remeasured at each reporting date. The fair value of the obligation at inception of the Yale Agreement was $0 based on the Company’s assessment that the probability of issuing additional shares that would reduce Yale’s ownership percentage below 1% was remote. The fair value of the liability remained at $0 through the completion of the Company’s common share issuances in January 2014 and July 2015, at which time the contingent obligation terminated, as Yale’s ownership position remained above 1%.

 

The Yale Agreement provides for a change-of-control payment to Yale upon the occurrence of a change-of-control event, as defined in the agreement, including an IPO. Upon the occurrence of a change-of-control event, the Company is obligated to pay to Yale the lesser of (i) 5% of the dollar value of all initial and future potential consideration paid or payable by the acquirer and (ii) $1,500. If the change-of-control event is as an IPO, the amount the Company will be obligated to pay to Yale will be reduced by the value of Yale’s equity investment in the Company on the first day that Yale is free to sell its equity interest. The Company classifies the change-of-control payment obligation as a liability on its consolidated balance sheet because it represents a contingent obligation to pay a variable amount of cash that may be based, in part, on the value of the Company’s own shares. The issuance-date fair value of the derivative liability was recognized as research and development expense in the consolidated statement of operations and comprehensive loss upon entering into the agreement with Yale. The derivative liability is remeasured to fair value at each reporting date. Changes in the fair value of the derivative liability are recognized as a component of other income (expense), net in the consolidated statement of operations and comprehensive loss. In April 2017, the agreement with Yale was amended such that if the change-of-control event was an IPO, the change-of-control payment would be due to Yale on the first trading day when Yale was free to sell its equity interest in the Company and the change-of-control fee would be reduced by the dollar value of Yale’s equity interest in the Company on the first trading day when Yale was free to sell its equity interest in the Company.  Yale’s equity interest in the Company was subject to a lock-up agreement which generally restricted Yale’s shares from being traded until October 31, 2017, and accordingly, the amount due to Yale in connection with the change-of-control provision of the agreement, if any, would be determined upon expiration of the lock-up period. The Company continued to remeasure the derivative liability to fair value at each reporting date and recognized any changes in the fair value of the derivative liability through October 31, 2017.  The derivative liability upon expiration of the lock-up period was determined to be $0 based on the value of the Company’s shares on this date.

 

The Company recorded other income (expense) of $0, $(129), $512 and $(105), during the three months ended September 30, 2017 and 2016 and the nine months ended September 30, 2017 and 2016, respectively, for the change in the fair value of the derivative liability. The fair value of the derivative liability was $0 and $512 as of September 30, 2017 and December 31, 2016, respectively.

 

In addition, the Company agreed to pay Yale up to $2,000 upon the achievement of specified regulatory milestones and annual royalty payments of a low single-digit percentage based on net sales of products from the licensed patents, subject to a minimum amount of up to $1,000 per year. If the Company grants any sublicense rights under the Yale Agreement, it must pay Yale a low single-digit percentage of sublicense income that it receives.

 

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BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

(Unaudited)

 

The Yale Agreement also requires the Company to meet certain due diligence requirements based upon specified milestones. The Company can elect to extend the deadline for its compliance with the due diligence requirements by a maximum of one year upon the payment to Yale of up to $150. The Company is also required to reimburse Yale for any fees that Yale incurs related to the filing, prosecution, defending and maintenance of patent rights licensed under the Yale Agreement. In the event that the Company fails to make any payments, commits a material breach, fails to maintain adequate insurance or challenges the patent rights of Yale, Yale can terminate the Yale Agreement. The Company can terminate the Yale Agreement (i) upon 90 days’ notice to Yale, (ii) if Yale commits a material breach of the Yale Agreement or (iii) as to a specific country if there are no valid patent rights in such country. The Yale Agreement expires on a country-by-country basis upon the later of the date on which the last patent rights expire in such country or ten years from the date of the first sale of a product incorporating the licensed patents.

 

The Company recorded research and development expenses of $32, $0, $38 and $4 during the three months ended September 30, 2017 and 2016 and the nine months ended September 30, 2017 and 2016, respectively, for reimbursement of patent fees in connection with the Yale Agreement.

 

MGH Agreement

 

In September 2014, the Company entered into a license agreement (the “MGH Agreement”) with The General Hospital Corporation d/b/a Massachusetts General Hospital (“MGH”), pursuant to which MGH granted the Company a license to certain patent rights for the commercial development, manufacture, distribution and use of any products or processes resulting from development of those patent rights, related to treating depression with a combination of ketamine and scopolamine. The Company is also obligated to pay MGH annual license maintenance fees of between $30 and $50, beginning in 2017, future milestone payments of up to $750 upon the achievement of specified clinical and regulatory milestones and up to $2,500 upon the achievement of specified commercial milestones. The Company has also agreed to pay MGH royalties of a low single-digit percentage based on net sales of products licensed under the agreement. If the Company receives revenue from sublicensing any of its rights under the agreement, the Company is also obligated to pay a portion of that revenue to MGH.

 

The MGH Agreement also requires the Company to meet certain due diligence requirements based upon specified milestones. The Company can elect to extend the deadline for its compliance with the due diligence requirements by a maximum of one year by making payments to MGH of up to $300 in the aggregate. The Company is required to reimburse MGH for any fees that MGH incurs related to the filing, prosecution, defending, and maintenance of patent rights licensed under the agreement. The MGH Agreement expires upon expiration of the patent rights under the MGH Agreement, unless earlier terminated by either party.

 

The Company recorded research and development expenses of $30, $0, $31 and $5 during the three months ended September 30, 2017 and 2016 and nine months ended September 30, 2017 and 2016, respectively, associated with the MGH Agreement.

 

ALS Biopharma Agreement

 

In August 2015, the Company entered into an agreement (the “ALS Biopharma Agreement”) with ALS Biopharma and Fox Chase Chemical Diversity Center Inc. (“FCCDC”), pursuant to which ALS Biopharma and FCCDC assigned the Company their worldwide patent rights to a family of over 300 prodrugs of glutamate modulating agents, including trigriluzole, as well as other innovative technologies. Under the ALS Biopharma Agreement, the Company is obligated to use commercially reasonable efforts to commercialize and develop markets for the patent products. The Company is obligated to pay $3,000 upon the achievement of specified regulatory milestones with respect to the first licensed product and $1,000 upon the achievement of specified regulatory milestones with respect to subsequently developed products, as well as royalty payments of a low single-digit percentage based on net sales of products licensed under the agreement, payable on a quarterly basis.

 

In connection with the ALS Biopharma Agreement, the Company also issued to ALS Biopharma (i) 50,000 common shares; (ii) an immediately exercisable warrant to purchase 275,000 common shares at an exercise price of $5.60 per share; and (iii) a warrant to purchase 325,000 common shares at an exercise price of $5.60 per share, which warrant would become exercisable upon the Company’s achievement of a specified regulatory milestone (see Note 8). The ALS Biopharma Agreement terminates on a country-by-country basis as the last patent rights expire in each such country. If the Company abandons its development, research, licensing or sale of all products covered by one or more claims of any patent or patent application assigned under the ALS Biopharma Agreement, or if the Company ceases operations, it has agreed to reassign the applicable patent rights back to ALS Biopharma.

 

The Company recorded research and development expenses of $0, $250, $0 and $3,127 during the three months ended September 30, 2017 and 2016 and the nine months ended September 30, 2017 and 2016, respectively, as a result of the ALS Biopharma Agreement, which amounts consist of the fair value of the shares and warrants upon their issuance to ALS Biopharma.

 

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BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

(Unaudited)

 

Rutgers Agreement

 

In June 2016, the Company entered into an exclusive license agreement (the “Rutgers Agreement”) with Rutgers, The State University of New Jersey (“Rutgers”), licensing several patents and patent applications related to the use of riluzole to treat various cancers. Under the Rutgers Agreement, the Company is required to pay Rutgers annual license maintenance fees in the aggregate of $75 for the first five years following execution of the agreement, then $25 per year thereafter until the first commercial sale of a licensed product, at which point the Company will pay Rutgers minimum annual royalties totaling in the low six-digits. The Company is also obligated to pay Rutgers up to $825 in the aggregate upon the achievement of specified clinical and regulatory milestones. The Company also agreed to pay Rutgers royalties of a low single-digit percentage of net sales of licensed products sold by the Company, its affiliates or its sublicensees, subject to a minimum amount of up to $100 per year. If the Company grants any sublicense rights under the Rutgers Agreement, the Company must pay Rutgers a low double-digit percentage of sublicense income it receives.

 

Under the Rutgers Agreement, in the event that the Company experiences a change of control or sale of substantially all of its assets prior to the initiation of a Phase 3 clinical trial related to products licensed under the agreement, and such change of control or sale results in a full liquidation of the Company, the Company will be obligated to pay Rutgers a change-of-control fee equal to 0.3% of the total value of the transaction, but not less than $100. The Company determined that the change-of-control payment should be accounted for as a liability because it represents a contingent obligation to pay a variable amount of cash that may be based, in part, on the value of the Company’s own shares. The fair value of the obligation upon execution of the Rutgers Agreement was $0 based on the Company’s assessment that the probability of a change-in-control event occurring prior to the initiation of a Phase 3 clinical trial related to products licensed under the agreement was remote. The fair value of the liability remained at $0 through September 30, 2017.

 

The Rutgers Agreement also requires the Company to meet certain due diligence requirements based upon specified milestones. The Company can elect to extend the deadline for its compliance with the due diligence requirements by a maximum of one year upon payments to Rutgers of up to $500 in the aggregate. Under the Rutgers Agreement, the Company is required to reimburse Rutgers for any fees that Rutgers incurs related to the filing, prosecution, defending, and maintenance of patent rights licensed under the agreement. The Rutgers Agreement expires upon expiration of the patent rights under the agreement or ten years from the date of first commercial sale of a licensed product, whichever is later, unless terminated by either party.

 

The Company recorded research and development expenses of $0, $0, $0 and $72 during the three months ended September 30, 2017 and 2016 and the nine months ended September 30, 2017 and 2016, respectively, related to the Rutgers Agreement.

 

BMS Agreement

 

In July 2016, the Company entered into an exclusive, worldwide license agreement (the “BMS Agreement”) with BMS for the development and commercialization rights to rimegepant and BHV-3500, as well as other CGRP-related intellectual property. In exchange for these rights, the Company agreed to pay BMS initial payments, milestone payments and royalties on net sales of licensed products under the agreement.

 

The Company is obligated to make milestone payments to BMS upon the achievement of specified development and commercialization milestones. The development milestone payments due under the agreement depend on the licensed product being developed. With respect to rimegepant, the Company is obligated to pay up to $127,500 in the aggregate upon the achievement of the development milestones. For any product other than rimegepant, the Company is obligated to pay up to $74,500 in the aggregate upon the achievement of the development milestones. In addition, the Company is obligated to pay up to $150,000 for each licensed product upon the achievement of commercial milestones. If the Company receives revenue from sublicensing any of its rights under the agreement, it is also obligated to pay a portion of that revenue to BMS. The Company is also obligated to make tiered royalty payments to BMS based on annual worldwide net sales, with percentages in the low to mid teens.

 

Under the BMS Agreement, the Company is obligated to use commercially reasonable efforts to develop licensed products and to commercialize at least one licensed product using the patent rights licensed from BMS and is solely responsible for all development, regulatory and commercial activities and costs. The Company is also required to reimburse BMS for any fees that BMS incurs related to the filing, prosecution, defending, and maintenance of patent rights licensed under the BMS Agreement. Under the BMS Agreement, BMS transferred to the Company manufactured licensed products, including certain materials that will be used by the Company to conduct clinical trials.

 

The BMS Agreement will terminate on a licensed product-by-licensed product and country-by-country basis upon the expiration of the royalty term with respect to each licensed product in each country. BMS has the right to terminate the agreement upon the Company’s insolvency or bankruptcy, the Company’s uncured material breach of the agreement, including the failure to meet its development and commercialization obligations, or if the Company challenges any of BMS’s patent rights. The Company has the right to terminate the BMS Agreement if BMS materially breaches the agreement or if, after the Company provides notice, it chooses not to move forward with development and commercialization in a specific country.

 

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BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

(Unaudited)

 

The BMS Agreement required the Company to complete a financing transaction with gross proceeds of at least $30,000, of which a minimum of $22,000 was to be from investment in equity prior to October 17, 2016, unless extended by mutual agreement of the Company and BMS. The BMS Agreement was amended, effective October 14, 2016, to extend the deadline for completing the financing transaction to October 31, 2016, on which date the Series A First Closing was completed (see Note 9).

 

Under the BMS Agreement, the Company also agreed to issue BMS common shares in the amount of $12,500, which shares are contingently issuable upon the earliest to occur of (i) the initiation of a Phase 3 trial for the first licensed compound to reach such milestone, (ii) the Company’s IPO or (iii) an event resulting in the change of control of the Company. Under the terms of the BMS Agreement, if the qualifying financing transaction involves the issuance of preferred shares, BMS is entitled to receive preferred shares instead of common shares, at its option. BMS also had the right to purchase up to 8%, on a fully diluted basis, of shares issued in a qualifying financing transaction (as defined in the BMS Agreement) on the same terms and rights as all other investors involved in the financing. The number of shares issuable to BMS under the agreement will be determined by dividing $12,500 by a price per share equal to the lower of (i) the price per share paid by investors in the Series A First Closing, or $9.2911 (see Note 9), or (ii) the price per share paid by investors in any subsequent financing event that occurs prior to the events specified above.

 

The obligation to contingently issue equity to BMS is classified as a liability on the consolidated balance sheet because it represents an obligation to issue a variable number of shares for a fixed dollar amount. Upon entering into the BMS Agreement, the issuance-date fair value of the contingent equity liability was recognized as research and development expense in the consolidated statement of operations and comprehensive loss. The Company remeasured the fair value of the contingent equity liability at each reporting date since the date of issuance, recognizing changes in the fair value of the contingent equity liability as a component of other income (expense), net in the consolidated statement of operations and comprehensive loss. Changes in the fair value of the contingent equity liability continued to be recognized until the occurrence of a triggering event, which occurred in May 2017 with the completion of the IPO.

 

In May 2017, in connection with the completion of its IPO, the Company issued 1,345,374 common shares to BMS in satisfaction of its obligation to contingently issue equity securities pursuant to the license agreement and remeasured the contingent equity liability to fair value.  The Company recognized expense of $0 and $8,809 during the three and nine months ended September 30, 2017, respectively, as a result of changes to the fair value of the contingent equity liability prior to its extinguishment in May 2017.

 

The Company recorded $5,000 of research and development expense related to a payment made in connection with the BMS Agreement during the three and nine months ended September 30, 2017 for the achievement of a specified milestone.

 

AstraZeneca Agreement

 

In October 2016, the Company entered into an exclusive license agreement (the “AstraZeneca Agreement”) with AstraZeneca, pursuant to which AstraZeneca granted the Company a license to certain patent rights for the commercial development, manufacture, distribution and use of any products or processes resulting from development of those patent rights, including BHV-5000 and BHV-5500. In exchange for these rights, the Company agreed to pay AstraZeneca an upfront payment, milestone payments and royalties on net sales of licensed products under the agreement. The regulatory milestones due under the agreement depend on the indication of the licensed product being developed as well as the territory where regulatory approval is obtained. Development milestones due under the agreement with respect to Rett syndrome total up to $30,000, and, for any indication other than Rett syndrome, total up to $60,000. Commercial milestones are based on net sales of all products licensed under the agreement and total up to $120,000. The Company has also agreed to pay tiered royalties based on net sales of all products licensed under the agreement of mid single-digit to low double-digit percentages. If the Company receives revenue from sublicensing any of its rights under the AstraZeneca Agreement, the Company is also obligated to pay a portion of that revenue to AstraZeneca. The Company is also required to reimburse AstraZeneca for any fees that AstraZeneca incurs related to the filing, prosecution, defending, and maintenance of patent rights licensed under the AstraZeneca Agreement.

 

The AstraZeneca Agreement expires upon the expiration of the patent rights under the agreement, unless earlier terminated by either party, or on a country-by-country basis ten years after the first commercial sale.

 

As part of the consideration under the AstraZeneca Agreement, the Company agreed to issue to AstraZeneca common shares in the amount of $10,000 if the Company completed a qualifying equity financing resulting in proceeds of at least $30,000 prior to December 29, 2016. Under the terms of the AstraZeneca Agreement, if the qualifying financing transaction involved the issuance of preferred shares, AstraZeneca would be entitled to receive preferred shares instead of common shares, at its option. The number of shares issued would be determined based on the price per share paid by investors in the qualifying financing transaction. Upon the occurrence of the qualifying financing transaction, 50% of the shares would be issuable upon the closing of the transaction (the “First Tranche”) and the other 50% would become issuable upon the earlier of (i) the initiation of a Phase 2b or equivalent clinical trial of a

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

(Unaudited)

 

product candidate based on the licensed patent rights or (ii) any liquidity event, including an IPO of the Company, any change of control of the Company or any assignment of the Company’s rights and obligations under the AstraZeneca Agreement (the “Second Tranche”). The number of shares issuable to AstraZeneca in each of the First Tranche and the Second Tranche is determined by dividing $5,000 by the price per share paid by investors in the Company’s Series A First Closing, or $9.2911 (see Note 9). In addition, AstraZeneca had the right to purchase up to 8%, on a fully diluted basis, of shares issued in such qualifying financing transaction, on the same terms and rights as all other investors involved in the financing.

 

In October 2016, upon completion of the Series A First Closing (see Note 9), the contingency associated with the First Tranche of contingently issuable equity related to the occurrence of a qualified financing was satisfied. As a result, the Company issued to AstraZeneca 538,150 Series A preferred shares with an aggregate fair value of $5,000, or $9.2911 per share. Upon issuance of the 538,150 Series A preferred shares to AstraZeneca, the Company reclassified the contingent equity liability associated with the First Tranche of $5,000 to the carrying value of Series A preferred shares.

 

The Company determined that the fair value of the contingent equity liability associated with the Second Tranche at each reporting date since the date of issuance, recognizing changes in the fair value of the contingent equity liability as a component of other income (expense), net in the consolidated statement of operations and comprehensive loss. Changes in the fair value of the contingent equity liability continued to be recognized until the occurrence of a triggering event, which occurred in May 2017 with the completion of the IPO.

 

In May 2017, in connection with the completion of its IPO, the Company issued 538,149 common shares to AstraZeneca in satisfaction of its obligation to contingently issue the Second Tranche of equity securities pursuant to the license agreement and remeasured the contingent equity liability to fair value.  The Company recognized expense of $0 and $4,274 during the three and nine months ended September 30, 2017, respectively, as a result of changes to the fair value of the contingent equity liability prior to its extinguishment in May 2017.

 

The Company recorded no research and development expense related to the AstraZeneca Agreement during the three and nine months ended September 30, 2017.

 

Catalent Agreement

 

In March 2015, the Company entered into a development and license agreement (the “Catalent Agreement”) with Catalent U.K. Swindon Zydis Limited (“Catalent”) pursuant to which the Company obtained license rights to the Zydis technology in BHV-0223. BHV-0223 was developed under this agreement, and Catalent has manufactured BHV-0223 for clinical testing. Upon entering the Catalent Agreement, the Company is obligated to pay Catalent up to $1,575 upon the achievement of specified regulatory and commercial milestones. The Company is also obligated to make royalty payments of a low single-digit percentage based on net sales of products licensed under the Catalent Agreement.

 

Under the Catalent Agreement, the Company is responsible for conducting clinical trials and for preparing and filing regulatory submissions. The Company has the right to sublicense its rights under the Catalent Agreement subject to Catalent’s prior written consent. Catalent has the right to enforce the patents covering the Zydis Technology and to defend any allegation that a formulation using Zydis technology, such as BHV-0223, infringes a third party’s patent.

 

The Catalent Agreement terminates on a country-by-country basis upon the later of (i) 10 years after the launch of the most recently launched product in such country and (ii) the expiration of the last valid claim covering each product in such country, unless earlier voluntarily terminated by the Company. The Catalent Agreement automatically extends for one-year terms unless either party gives advance notice of intent to terminate. In addition, Catalent may terminate the agreement either in its entirety or terminate the exclusive nature of the Catalent Agreement on a country-by-country basis if the Company fails to meet specified development timelines, which it may extend in certain circumstances.

 

The Company recorded no research and development expense related to the Catalent agreement during the three and nine months ended September 30, 2017 and 2016.

 

13.   Net Loss per Share

 

Net Loss per Share Attributable to Common Shareholders of Biohaven Pharmaceutical Holding Company Ltd.

 

Basic and diluted net loss per share attributable to common shareholders of Biohaven Pharmaceutical Holding Company Ltd. was calculated as follows:

 

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BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

(Unaudited)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

Net loss

 

$

(42,915

)

$

(28,260

)

$

(100,108

)

$

(38,065

)

Net loss attributable to non-controlling interests

 

 

50

 

 

69

 

Accretion of beneficial conversion feature on Series A preferred shares

 

 

 

(12,006

)

 

Net loss attributable to common shareholders of Biohaven Pharmaceutical Holding Company Ltd.

 

$

(42,915

)

$

(28,210

)

$

(112,114

)

$

(37,996

)

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding—basic and diluted

 

35,930,698

 

13,050,446

 

25,102,920

 

12,447,153

 

 

 

 

 

 

 

 

 

 

 

Net loss per share attributable to common shareholders of Biohaven Pharmaceutical Holding Company Ltd.—basic and diluted

 

$

(1.19

)

$

(2.16

)

$

(4.47

)

$

(3.05

)

 

The Company’s potential dilutive securities, which include stock options and warrants to purchase common shares, have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per share. Therefore, the weighted average number of common shares outstanding used to calculate both basic and diluted net loss per share attributable to common shareholders of Biohaven Pharmaceutical Holding Company Ltd. is the same. The Company excluded the following potential common shares, presented based on amounts outstanding at each period end, from the computation of diluted net loss per share attributable to common shareholders for the periods indicated because including them would have had an anti-dilutive effect:

 

 

 

Three and Nine Months

 

 

 

Ended September 30,

 

 

 

2017

 

2016

 

Options to purchase common shares

 

5,028,037

 

3,247,500

 

Warrants to purchase common shares

 

821,751

 

600,000

 

 

 

5,849,788

 

3,847,500

 

 

In addition to the potentially dilutive securities noted above, as of September 30, 2016, the Company agreed to issue warrants to purchase common shares to each of the Guarantor and Co-Guarantor of the Credit Agreement (see Note 7).  As of September 30, 2016, the Series A Preferred Financing had not been completed and the warrants had not yet been issued. Accordingly, the Company has excluded these warrants from the table above and the calculation of diluted net loss per share for the three and nine months ended September 30, 2016.  On January 26, 2017, the Company issued the warrants to the Guarantor and Co-Guarantor, pursuant to which each director received a warrant to purchase 107,500 common shares at an exercise price of $9.2911 per share.  These warrants are included in the table above for the three and nine months ended September 30, 2017.

 

The Company had also agreed under the BMS Agreement to issue common shares to BMS upon the achievement of specified milestones or upon the occurrence of specified events (see Notes 5 and 12). Because the necessary conditions for issuance of the shares had not been met as of September 30, 2016, the Company excluded these shares from the table above and from the calculation of diluted net loss per share for the three and nine months ended September 30, 2016.  In May 2017, in connection with the completion of its IPO, the Company issued 1,345,374 common shares to BMS in full satisfaction of its obligation to contingently issue equity securities pursuant to the license agreement.  Accordingly, the table above does not include any shares related to the agreement with BMS for the three and nine months ended September 30, 2017.

 

14.   Commitments and Contingencies

 

Lease Agreement

 

In December 2016, the Company entered into an assignment agreement to assume an operating lease for its office space in New Haven, Connecticut. The lease agreement expires in October 2018, and the Company has the option to extend the term through October 2021. During the three and nine months ended September 30, 2017, the Company recorded rent expense of $10 and $37, respectively. The agreement requires future minimum lease payments for the years ending December 31, 2017 (remaining three months) and 2018 of $10 and $30, respectively.

 

In June 2017, the Company entered into a lease for an additional 2,240 square feet of office space at its headquarters in New Haven, Connecticut for a term of six months, expiring on December 31, 2017.  During the three and nine months ended September 30, 2017, the Company recorded rent expense of $14 and $19. The agreement requires minimum lease payments during the year ended December 31, 2017 (remaining three months) of $14.

 

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BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

(Unaudited)

 

In August 2017, the Company entered into a lease agreement for office space and the related property (the “215 Church Street Lease”) for its new headquarters in New Haven, Connecticut.  The lease commences on January 1, 2018 and will continue for a term of 85 months.  The lease was determined to represent a failed sales-leaseback due to the Company’s continuing involvement in the property in the form of non-recourse financing.  As a result, the 215 Church Street Lease will be accounted for under the financing method and the Company will be the deemed accounting owner under the arrangement, including the assets to be constructed.  Construction costs funded by the Company will be recognized on the consolidated balance sheet as incurred, and will be amortized over the assets’ respective depreciable lives, not to exceed the lease term.   The Company will recognize a financing obligation for the fair value of the property, construction costs incurred by the Company and the landlord allowance.  The liability will be amortized over the lease term based on the minimum lease payments required under the lease and the Company’s incremental borrowing rate.  The minimum lease payments are recorded as interest expense and in part as a payment of principal reducing the financing obligation.  The real property assets in the transaction, including the fair value of the building and land, will be recognized on the consolidated balance sheets and depreciated according to their asset classes.

 

As a result of the failed sales-lease back accounting treatment, during the three months ended September 30, 2017 the Company capitalized $95 in construction costs and recorded $32 in rent expense during the construction period.

 

The 215 Church Street Lease requires minimum lease payments for the following years ended December 31:

 

2017

 

$

 

2018

 

176

 

2019

 

197

 

2020

 

202

 

2021

 

207

 

Thereafter

 

670

 

 

 

$

1,452

 

 

License Agreements

 

The Company has entered into license agreements with various parties under which it is obligated to make contingent and non-contingent payments (see Note 12).

 

Research Commitments

 

The Company has entered into agreements with several CROs to provide services in connection with its preclinical studies and clinical trials. As of September 30, 2017, the Company had committed to minimum payments under these arrangements totaling $3,260.

 

Indemnification Agreements

 

In the ordinary course of business, the Company may provide indemnification of varying scope and terms to vendors, lessors, business partners and other parties with respect to certain matters including, but not limited to, losses arising out of breach of such agreements or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with members of its board of directors that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is, in many cases, unlimited. The Company’s amended and restated memorandum and articles of association also provide for indemnification of directors and officers in specific circumstances. To date, the Company has not incurred any material costs as a result of such indemnification provisions. The Company does not believe that the outcome of any claims under indemnification arrangements will have a material effect on its financial position, results of operations or cash flows, and it has not accrued any liabilities related to such obligations in its consolidated financial statements as of September 30, 2017 or December 31, 2016.

 

Legal Proceedings

 

The Company is not a party to any litigation and does not have contingency reserves established for any litigation liabilities.

 

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BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

(Unaudited)

 

15.   Related Party Transactions

 

License Agreement with Yale

 

On September 30, 2013, the Company entered into the Yale Agreement with Yale (see Note 12). Yale is a related party because the Company’s Chief Executive Officer is one of the inventors of the patents that the Company has licensed from Yale and, as such, is entitled to a specified share of the glutamate product-related royalty revenues that may be received by Yale under the Yale Agreement. As partial consideration for the license under the Yale Agreement, on September 30, 2013, the Company issued to Yale 250,000 common shares, representing 5.1% of the Company’s then outstanding equity on a fully diluted basis. The fair value of the shares, totaling $152, was recognized as research and development expense at the time of issuance of the shares. During the three months ended September 30, 2017 and 2016 and the nine months ended September 30, 2017 and 2016, the Company recognized research and development expense under the Yale Agreement $32, $0, $38 and $4, respectively. As of September 30, 2017 and December 31, 2016, the Company owed no amounts to Yale.

 

Guarantor and Co-Guarantor Warrants

 

The Guarantor and Co-Guarantor of the Credit Agreement with Wells Fargo are each shareholders and members of the board of directors of the Company. The Company issued warrants to the Guarantor and Co-Guarantor in exchange for their respective guaranties (see Notes 7 and 8). The warrants were issued on January 26, 2017, pursuant to which each director received a warrant to purchase 107,500 common shares at an exercise price of $9.2911 per share.

 

Kleo Pharmaceuticals, Inc.

 

On August 29, 2016, the Company executed a stock purchase agreement with Kleo to purchase 3,000,000 shares of Kleo common stock at a purchase price of $1.00 per share in an initial closing, which was completed on August 31, 2016, and committed to purchase an aggregate 5,500,000 additional shares of Kleo common stock at a purchase price of $1.00 per share (see Note 5). Kleo is a related party because the Company has determined that it exercises significant influence over the operating and financial policies of Kleo. In connection with its investment in Kleo, the Company received the right to designate two members of Kleo’s board of directors, who are the Chairman of the Company’s board of directors and another outside director of the Company. Also, the President and controlling stockholder of Kleo is a shareholder of the Company. In addition to the purchases under the stock purchase agreement described above, on August 29, 2016, the Company entered into an agreement with the then Chief Executive Officer of Kleo to purchase 500,000 shares of Kleo common stock from him, which purchase was completed in March 2017 (see Note 5). As of September 30, 2017, the Company owned 33.0% of Kleo’s outstanding capital stock. The Company has also entered into a clinical development master services agreement with Kleo to assist Kleo with clinical development. As of September 30, 2017, the Company had not performed any services or received any payments under this agreement.

 

Biohaven Pharmaceuticals, Inc.

 

BPI is a related party because the three founders, each of whom beneficially owned one-third of the equity of BPI prior to the Company’s acquisition of BPI on December 31, 2016 (see Note 16), are shareholders of the Company and also serve as the Company’s Chairman of the board of directors, Chief Executive Officer and Chief Medical Officer, respectively. Since the Company’s incorporation in September 2013, the Company is deemed to have had a variable interest in BPI, and BPI is deemed to have been a VIE, of which the Company is the primary beneficiary. Accordingly, the Company has consolidated the results of BPI since September 2013. All transactions between the Company and BPI have been eliminated in consolidation. On December 31, 2016, the Company acquired 100% of the capital stock of BPI for aggregate purchase consideration of $595 in the form of promissory notes to each of the former stockholders of BPI. In connection with the closing of the Company’s IPO in May 2017, the notes were paid in full, including principal of $595, and accrued interest of $9.

 

AstraZeneca AB

 

The Company entered into an exclusive license agreement with AstraZeneca in October 2016.  As part of the consideration under the agreement and in connection with the completion of the Series A First Closing in October 2016 and the completion of the IPO in May 2017, AstraZeneca received shares of the Company’s stock (see Notes 1 and 12).

 

Bristol Myers-Squibb Company

 

The Company entered into an exclusive license agreement with BMS in July 2016.  As part of the consideration under the agreement and in connection with the completion of the Company’s IPO in May 2017, BMS received shares of the Company’s stock (see Notes 1 and 12).

 

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BIOHAVEN PHARMACEUTICAL HOLDING COMPANY LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

(Unaudited)

 

16.  Acquisition of Biohaven Pharmaceuticals, Inc.

 

On December 31, 2016, the Company entered into stock purchase agreements with each of the stockholders of BPI, acquiring 100% of the issued and outstanding shares of BPI for aggregate purchase consideration of $595. Prior to the acquisition, the Company was deemed to have had a variable interest in BPI, and BPI was deemed to be a VIE of which the Company was the primary beneficiary. As a result, the Company has consolidated the results of BPI since the Company’s incorporation in September 2013, and, prior to the acquisition of BPI, recognized a non-controlling interest in its consolidated balance sheet representing 100% of the capital stock of BPI not owned by the Company. The three founders of BPI, each of whom beneficially owned one-third of the equity of BPI, also serve as the Company’s Chairman of the board of directors, Chief Executive Officer, and Chief Medical Officer, respectively (see Note 15).

 

The Company funded the acquisition through the issuance of promissory notes to each of the former stockholders of BPI. The notes were payable in five annual payments, the first four of which were interest only, with the final payment to include the principal balance outstanding plus any accrued and unpaid interest. The notes bore interest at a rate of 4.5% per annum and had a maturity date of December 31, 2021. The notes would become immediately due and payable upon specified events, including immediately prior to the consummation of the IPO of the Company’s common shares or upon the occurrence of a change of control of the Company. There were no affirmative, negative or financial covenants associated with the notes. In May 2017, in connection with the completion of the IPO, the notes became immediately due and payable, and the Company paid the notes, including principal and unpaid interest, in full.

 

Because the Company consolidated BPI as a VIE prior to the acquisition, the acquisition of all of the capital stock of BPI did not result in a change of control for accounting purposes and was accounted for as an equity transaction. Accordingly, as of the acquisition date, the $86 carrying value of the non-controlling interest on December 31, 2016 was derecognized and the difference between the carrying value of the non-controlling interest of $86 and the purchase price of $595 was recorded as a $509 reduction to additional paid-in capital. There were no changes to this accounting treatment of BPI during the three months ended September 30, 2017.

 

For the three and nine months ended September 30, 2016 when the Company consolidated BPI as a VIE, the Company recorded net loss of $50 and $69, respectively, attributable to non-controlling interests.

 

17.  Subsequent Events

 

For its unaudited consolidated financial statements as of September 30, 2017, and for the three and nine months then ended, the Company evaluated subsequent events through the date on which those financial statements were issued.

 

Purchases of Kleo Common Stock

 

On October 5, 2017, the Company purchased 1,375,000 shares of common stock, $0.0001 par value, of Kleo in satisfaction of the third of a series of the Company’s purchase commitments pursuant to the securities purchase agreement between Kleo and the Company, dated as of August 29, 2016.  The total consideration paid by the Company to Kleo for the shares was $1,375.

 

In addition, on October 5, 2017, the Company entered into two separate subscription agreements with Kleo (“First Subscription Agreement” and “Second Subscription Agreement”) in order to maintain the Company’s relative ownership interest in Kleo.  Pursuant to the First Subscription Agreement, the Company purchased 1,397,904 shares of Kleo’s common stock at a purchase price of $1.0993 per share, for total consideration of $1,537.  Pursuant to the Second Subscription Agreement, the Company purchased an additional 651,639 shares of Kleo’s common stock at a purchase price of $1.0993 per share, for total consideration of $716.

 

The Company’s purchase of 3,424,543 shares of Kleo’s common stock in October  2017 resulted in an increase in our ownership interest in Kleo to 43.3% of the outstanding stock of Kleo, compared with 33.0% as of September 30, 2017.

 

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

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and related notes for the year ended December 31, 2016 included in our final prospectus for our initial public offering of our common shares (“IPO”) filed with the Securities and Exchange Commission (“SEC”) pursuant to Rule 424(b)(4) on May 5, 2017. Some of the statements contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, constitute forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We have based these forward-looking statements on our current expectations and projections about future events. The following information and any forward-looking statements should be considered in light of factors discussed elsewhere in this Quarterly Report on Form 10-Q, particularly including those risks identified in Part II-Item 1A “Risk Factors” and our other filings with the SEC.

 

Our actual results and timing of certain events may differ materially from the results discussed, projected, anticipated, or indicated in any forward-looking statements. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q. Statements made herein are as of the date of the filing of this Form 10-Q with the SEC and should not be relied upon as of any subsequent date. Even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward-looking statements contained in this Quarterly Report on Form 10-Q, they may not be predictive of results or developments in future periods. We disclaim any obligation, except as specifically required by law and the rules of the SEC, to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.

 

We caution readers not to place undue reliance on any forward-looking statements made by us, which speak only as of the date they are made.

 

Overview

 

We are a clinical-stage biopharmaceutical company with a portfolio of innovative, late-stage product candidates targeting neurologic diseases, including rare disorders. Our product candidates are small molecules based on two distinct mechanistic platforms—calcitonin gene-related peptide, or CGRP, receptor antagonists and glutamate modulators—which we believe have the potential to significantly alter existing treatment approaches across a diverse set of neurologic indications with high unmet need in both large markets and orphan indications. The most advanced product candidate from our CGRP receptor antagonist platform is rimegepant, an orally available, potent and selective small molecule human CGRP receptor antagonist that we are developing for the acute treatment of migraine. In July 2016, we acquired exclusive, worldwide rights to our CGRP receptor antagonist platform, including rimegepant and another product candidate, BHV-3500, which we are developing for the acute treatment of migraine and the prevention of chronic migraine, through a license agreement with Bristol-Myers Squibb Company, or BMS. In July 2017, we initiated two Phase 3 clinical trials of rimegepant.  Topline results from these trials are expected in the first quarter of 2018. In August 2017, we commenced a long term safety study of rimegepant in patients with migraine, with topline results expected in the second quarter of 2019. We intend to submit an IND for BHV-3500, our third generation CGRP receptor antagonist, by the end of 2017 to permit us to commence clinical trials.

 

We are developing three product candidates that modulate the body’s glutamate system. Two of these product candidates, trigriluzole and BHV-0223, act as glutamate transporter modulators, while our product candidate BHV-5000 is an antagonist of the glutamate N-methyl-D-aspartate, or NMDA, receptor. We are developing trigriluzole for the treatment of ataxias, with an initial focus on spinocerebellar ataxia, or SCA. We have received both orphan drug designation and fast track designation from the U.S. Food and Drug Administration, or FDA, for trigriluzole for the treatment of SCA.  In October 2017, we reported topline data from the 8-week randomization period from the Phase 2/3 clinical trial in SCA. At the eight week timepoint, trigriluzole did not statistically differentiate from placebo.  In the trial, we observed a favorable safety and tolerability profile. The 48-week extension phase of the SCA trial is ongoing and we are continuing to assess the data from the trial. Based on post-hoc subgroup analyses we have requested a meeting with the FDA to discuss the potential for further development of trigriluzole in ataxias.  A Phase 2 double-blind, randomized controlled trial on the use of trigriluzole in Obsessive Compulsive Disorder, or OCD, will commence by the end of 2017.  In addition, a Phase 2 double-blind, randomized controlled trial of trigriluzole in the treatment of mild-to-moderate Alzheimer’s disease is being advanced in collaboration with the Alzheimer’s Disease Cooperative Study, a consortium of sites funded by the National Institutes of Health. This study is expected to commence in the first half of 2018.

 

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We are developing BHV-0223 for the treatment of amyotrophic lateral sclerosis, or ALS. In December 2016, we received orphan drug designation from the FDA for BHV-0223 to treat ALS. In November 2017, we announced that we had enrolled the first subject in a study comparing the bioequivalence of BHV-0223 and riluzole. In addition, in October 2017, we filed an IND for BHV-0223 and expect to commence a patient tolerability study by the first quarter of 2018.  If the outcome of the bioequivalence study is positive, we plan to submit a new drug application, or NDA, to the FDA and pursue the regulatory approval of BHV-0223 for ALS under Section 505(b)(2) of the U.S. Federal Food, Drug, and Cosmetic Act.

 

We are also developing BHV-5000, an orally available, first-in-class, low-trapping NMDA receptor antagonist, for the treatment of symptoms associated with Rett syndrome, including breathing irregularities. Rett syndrome is a rare and severe genetic neurodevelopmental disorder for which no approved treatments are currently available. We acquired worldwide rights to BHV-5000 under an exclusive license agreement with AstraZeneca AB, or AstraZeneca, in October 2016. We anticipate selecting a lead formulation by the end of 2017 and commencing a Phase 1 clinical trial of BHV-5000 in the fourth quarter of 2017 to evaluate its pharmacokinetic properties and support future later stage trials in Rett syndrome.

 

Since our inception in September 2013, we have devoted substantially all of our resources to organizing and staffing our company, business planning, raising capital, acquiring and developing product candidates and related intellectual property rights, planning for commercialization, and conducting research and development activities for our product candidates. We do not have any products approved for sale and have not generated any revenue from product sales. Prior to our IPO in May 2017, we funded our operations primarily with proceeds from the sale of preferred shares and common shares through private placements and borrowings under a credit agreement with a bank. Prior to the completion of our IPO in May 2017, we had received net cash proceeds of $96.4 million from sales of our preferred shares and common shares through private placements and gross proceeds of $5.0 million from borrowings under the credit agreement.

 

On May 3, 2017, our registration statement on Form S-1 relating to our IPO was declared effective by the SEC.  The IPO closed on May 9, 2017 and we issued and sold 9,900,000 common shares at a public offering price of $17.00 per share, for net proceeds of $152.7 million after deducting underwriting discounts and commissions of $11.8 million and other offering expenses of $3.9 million. Upon the closing of the IPO, all of the convertible preferred shares then outstanding converted into an aggregate of 9,358,560 common shares.

 

In addition, on May 9, 2017, the underwriters of the IPO fully exercised their option to purchase additional shares, and on May 11, 2017, we issued and sold 1,485,000 common shares resulting in net proceeds of $23.5 million after deducting offering expenses of $1.8 million.  Thus, the aggregate net proceeds we received from the IPO, after deducting underwriting discounts and commissions and offering expenses, were $176.1 million. In connection with the completion of the IPO, we issued an aggregate of 1,883,523 common shares to BMS and AstraZeneca in satisfaction of obligations to contingently issue equity securities pursuant to our license agreements for no additional consideration.

 

Since our inception, we have incurred significant operating losses. Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of one or more of our current product candidates and programs. Our net loss was $100.1 million and $38.1 million for the nine months ended September 30, 2017 and 2016, respectively. As of September 30, 2017, we had an accumulated deficit of $175.6 million. We will not generate revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for our product candidates. We expect to continue to incur significant expenses for at least the next several years as we advance our product candidates from discovery through preclinical development and clinical trials and seek regulatory approval and pursue commercialization of any approved product candidate. In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution. In addition, we may incur expenses in connection with the in-license or acquisition of additional product candidates. We also expect to incur additional costs associated with operating as a public company, including significant legal, accounting, investor relations and other expenses that we did not incur as a private company.

 

As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through the public or private sale of equity, debt financings or other capital sources, including collaborations with other companies or other strategic transactions. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more of our product candidates or delay our pursuit of potential in-licenses or acquisitions.

 

Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate

 

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product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.

 

As of September 30, 2017, we had cash of $175.8 million. We believe that our cash as of September 30, 2017 will enable us to repay our indebtedness and fund our operating expenses and capital expenditure requirements for at least 12 months from the date of issuance of these consolidated financial statements. We have based these estimates on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. See “—Liquidity and Capital Resources.” Our future viability beyond that point is dependent on our ability to raise additional capital to finance our operations.

 

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Components of Our Results of Operations

 

Revenue

 

To date, we have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products in the near future. If our development efforts for our product candidates are successful and result in regulatory approval or additional license agreements with third parties, we may generate revenue in the future from product sales.

 

Operating Expenses

 

Research and Development Expenses

 

Research and development expenses consist primarily of costs incurred in connection with the development of our product candidates. We expense research and development costs as incurred. These expenses include:

 

·                  expenses incurred under agreements with contract research organizations, or CROs, contract manufacturing organizations, or CMOs, as well as investigative sites and consultants that conduct our clinical trials, preclinical studies and other scientific development services;

 

·                  manufacturing scale-up expenses and the cost of acquiring and manufacturing preclinical and clinical trial materials and commercial materials, including manufacturing validation batches;

 

·                  employee-related expenses, including salaries, benefits, travel and share-based compensation expense for employees engaged in research and development functions;

 

·                  costs related to compliance with regulatory requirements;

 

·                  facilities costs, depreciation and other expenses, which include rent and utilities; and

 

·                  payments made in cash, equity securities or other forms of consideration under third-party licensing agreements.

 

We recognize external development costs based on an evaluation of the progress to completion of specific tasks using information provided to us by our service providers.

 

Our direct research and development expenses are tracked on a program-by-program basis for our product candidates and consist primarily of external costs, such as fees paid to outside consultants, CROs, CMOs, and central laboratories in connection with our preclinical development, process development, manufacturing and clinical development activities. Our direct research and development expenses by program also include fees incurred under license agreements. We do not allocate employee costs or facility expenses, including depreciation or other indirect costs, to specific programs because these costs are deployed across multiple programs and, as such, are not separately classified. We use internal resources primarily to oversee the research and development as well as for managing our preclinical development, process development, manufacturing and clinical development activities. These employees work across multiple programs and, therefore, we do not track their costs by program.

 

The table below summarizes our research and development expenses incurred by program:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

(in thousands)

 

(in thousands)

 

BHV-0223

 

$

615

 

$

32

 

$

1,309

 

$

330

 

Trigriluzole

 

4,897

 

2,082

 

9,182

 

8,115

 

Rimegepant

 

18,172

 

23,934

 

33,314

 

23,934

 

BHV-3500

 

3,291

 

 

6,252

 

 

BHV-5000

 

616

 

 

689

 

 

Unallocated research and development costs:

 

7,405

 

997

 

16,009

 

2,758

 

Total research and development expenses

 

$

34,996

 

$

27,045

 

$

66,755

 

$

35,137

 

 

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Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. As a result, we expect that our research and development expenses will increase substantially over the next several years as we increase personnel costs, including share-based compensation, conduct Phase 3 clinical trials and a long term safety trial of rimegepant, continue the ongoing extension phase of the Phase 2/3 clinical trial of trigriluzole in SCA, conduct other clinical trials with trigriluzole in OCD and Alzheimer’s disease and with BHV-5000 in Rett syndrome and other neurologic indications, and prepare regulatory filings for our product candidates. We also expect to incur additional expenses related to milestone and royalty payments payable to third parties with whom we have entered into license agreements to acquire the rights to our product candidates.

 

The successful development and commercialization of our product candidates is highly uncertain. At this time, we cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the preclinical and clinical development of any of our product candidates or when, if ever, material net cash inflows may commence from any of our product candidates. This uncertainty is due to the numerous risks and uncertainties associated with product development and commercialization, including the uncertainty of:

 

·                  the scope, progress, outcome and costs of our preclinical development activities, clinical trials and other research and development activities;

 

·                  establishing an appropriate safety profile with IND-enabling studies;

 

·                  successful patient enrollment in, and the initiation and completion of, clinical trials;

 

·                  the timing, receipt and terms of any marketing approvals from applicable regulatory authorities;

 

·                  establishing commercial manufacturing capabilities or making arrangements with third-party manufacturers;

 

·                  development and timely delivery of commercial-grade drug formulations that can be used in our clinical trials and for commercial launch;

 

·                  obtaining, maintaining, defending and enforcing patent claims and other intellectual property rights;

 

·                  significant and changing government regulation;

 

·                  launching commercial sales of our product candidates, if and when approved, whether alone or in collaboration with others; and

 

·                  maintaining a continued acceptable safety profile of the product candidates following approval.

 

We may never succeed in achieving regulatory approval for any of our product candidates. We may obtain unexpected results from our clinical trials. We may elect to discontinue, delay or modify clinical trials. Any changes in the outcome of any of these variables with respect to the development of our product candidates in preclinical and clinical development could mean a significant change in the costs and timing associated with the development of these product candidates. For example, if the FDA or another regulatory authority were to delay our planned start of clinical trials or require us to conduct clinical trials or other testing beyond those that we currently expect or if we experience significant delays in enrollment in any of our planned clinical trials, this could result in expending significant additional financial resources and time on the completion of clinical development of that product candidate. Drug commercialization will take several years and millions of dollars in development costs.

 

General and Administrative Expenses

 

General and administrative expenses consist primarily of salaries, benefits, travel expense and share-based compensation expense for personnel in executive, finance and administrative functions. General and administrative expenses also include professional fees for legal, patent, consulting, accounting and audit services.

 

We anticipate that our general and administrative expenses will increase in the future as we increase our general and administrative headcount to support our continued research and development activities of our product candidates. We also anticipate that we will continue to incur increased accounting, audit, legal, regulatory, compliance, director and insurance costs as well as investor and public relations expenses associated with being a public company. We anticipate the additional costs for these services will increase our general and administrative expenses by approximately $1.5 million to $2.0 million on an annual basis. Additionally, if and when we believe a regulatory approval of a product candidate appears likely, we anticipate an increase in payroll

 

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and related expenses as a result of our preparation for commercial operations, especially as it relates to the sales and marketing of our product candidate.

 

Other Income (Expense)

 

Interest Expense

 

Interest expense consists of interest on outstanding borrowings under our credit agreement with Wells Fargo Bank, National Association, or Wells Fargo, entered into in August 2016 at the applicable interest rate as well as amortization of the debt discount relating to that loan. Interest expense also includes interest on our notes payable to related parties, which we issued in December 2016 in connection with our acquisition of Biohaven Pharmaceuticals, Inc., or BPI, at the applicable interest rate. Upon the closing of the IPO, we paid principal and interest aggregating $0.6 million under the notes payable to related parties.  The credit agreement was fully satisfied with a principal repayment to Wells Fargo of $5.0 million on August 31, 2017.

 

Change in Fair Value of Warrant Liability

 

In connection with entering into our credit agreement with Wells Fargo, we issued warrants to purchase our common shares to two of our directors in connection with a guarantee of our obligations under the agreement. We classify the warrants as a liability on our consolidated balance sheet that we remeasure to fair value at each reporting date, and we recognize changes in the fair value of the warrant liability as a component of other income (expense), net in our consolidated statement of operations and comprehensive loss. We will continue to recognize changes in the fair value of the warrant liability until the warrants are exercised, expire or qualify for equity classification.

 

Change in Fair Value of Derivative Liability

 

Our license agreement with Yale University, or Yale, provides for a change-of-control payment to Yale upon the occurrence of a change-of-control event, as defined in the agreement, including an initial public offering. We classify the change-of-control payment obligation as a liability on our consolidated balance sheet that we remeasure to fair value at each reporting date, and we recognize changes in the fair value of the derivative liability as a component of other income (expense), net in our consolidated statement of operations and comprehensive loss. In April 2017, the agreement with Yale was amended such that if the change-of-control event was an IPO, the change-of-control payment would be due to Yale on the first trading day when Yale was free to sell its equity interest in the Company and the change-of-control fee would be reduced by the dollar value of Yale’s equity interest in the Company on the first trading day when Yale was free to sell its equity interest in the Company. Yale’s equity interest in the Company was subject to a lock-up, which generally restricted Yale’s shares from being traded until October 31, 2017 and accordingly, the amount due to Yale in connection with the change-of-control provision of the agreement, if any, would be determined upon expiration of the lock-up period. We continued to remeasure the derivative liability to fair value at each reporting date and recognized any changes in the fair value of the derivative liability through October 31, 2017.  As of September 30, 2017, the fair value of the derivative liability was determined to be zero. The derivative liability upon expiration of the lock-up period on October 31, 2017 was determined to be $0 based on the value of the Company’s shares on this date.

 

Change in Fair Value of Contingent Equity Liability

 

Our license agreements with BMS and AstraZeneca require us to issue shares of capital stock upon the occurrence of specified financing or change-of-control events or development milestones, as defined in the agreements. We classify these contingent obligations to issue shares as liabilities on our consolidated balance sheet that we remeasure to fair value at each reporting date, and we recognize changes in the fair values of the contingent equity liabilities as a component of other income (expense), net in our consolidated statement of operations and comprehensive loss. We continued to recognize changes in the fair values of the contingent equity liabilities until the occurrence of a respective triggering event. Upon the closing of the IPO in May 2017, the conditions for issuing shares to BMS and AstraZeneca under the terms of the respective license agreements were satisfied, and accordingly, we issued 1,345,374 and 538,149 common shares, respectively, to BMS and AstraZeneca valued at $22.9 million and $9.1 million, respectively.  The contingent equity liabilities were adjusted to fair value immediately prior to the completion of the IPO, and upon issuance of the common shares, the contingent equity liabilities were reclassified to equity.

 

Loss from Equity Method Investment

 

In August 2016, we executed a securities purchase agreement with Kleo Pharmaceuticals, Inc., a privately-held Delaware Corporation, or Kleo, to purchase shares of Kleo’s common stock at an initial closing, with a commitment to purchase an aggregate of 5,500,000 additional shares of common stock in four tranches over a 15-month period through December 2017. As of September 30,

 

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2017 and December 31, 2016, we owned approximately 33.0% and 18.6%, respectively, of the outstanding shares of Kleo stock. We account for our investment in Kleo under the equity method of accounting. As a result, our proportionate share of Kleo’s net income or loss each reporting period is included in other income (expense), net in our consolidated statement of operations and comprehensive loss and results in a corresponding adjustment to the carrying value of the equity method investment on our consolidated balance sheet.

 

On October 5, 2017, we purchased 1,375,000 shares of Kleo common stock in satisfaction of the third of a series of the Company’s purchase commitments pursuant to the securities purchase agreement.  The total consideration paid to Kleo for the shares was $1.4 million.

 

In addition, on October 5, 2017, we entered into two separate subscription agreements with Kleo (“First Subscription Agreement” and “Second Subscription Agreement”) in order to maintain our relative ownership interest in Kleo.  Pursuant to the First Subscription Agreement, we purchased 1,397,904 shares of Kleo’s common stock at a purchase price of $1.0993 per share, for total consideration of $1.5 million.  Pursuant to the Second Subscription Agreement, we purchased an additional 651,639 shares of Kleo’s common stock at a purchase price of $1.0993 per share, for total consideration of $0.7 million.  Our purchase of 3,424,543 shares of Kleo’s common stock in October  2017 resulted in an increase in our ownership interest in Kleo to 43.3% of the outstanding stock of Kleo, compared with 33.0% as of September 30, 2017.

 

Provision for Income Taxes

 

As a company incorporated in the British Virgin Islands, or BVI, we are principally subject to taxation in the BVI. Under the current laws of the BVI, tax on a company’s income is assessed at a zero percent tax rate. As a result, we have not recorded any income tax benefits from our losses incurred in the BVI during each reporting period, and no net operating loss carryforwards will be available to us for those losses.

 

In addition, in each reporting period, our tax provision includes the effects of consolidating the results of operations of BPI, either through December 30, 2016 as a variable interest entity or as of and subsequent to December 31, 2016 as our wholly owned subsidiary. As a company incorporated in the state of Delaware, BPI is subject to taxation in the United States. For the three and nine months ended September 30, 2016, we recorded no tax benefits for the losses incurred by BPI due to BPI’s history of cumulative losses through that date and recorded a full valuation allowance against BPI’s deferred tax assets, which consisted primarily of its U.S. net operating loss carryforwards for the three and nine months ended September 30, 2016, respectively.

 

As of December 31, 2016, we fully utilized BPI’s remaining U.S. net operating loss carryforwards due to BPI’s profitability in that period and we recorded a full release of the valuation allowance, which was a nominal amount. As a result, we recorded an income tax provision of $0.1 million and $0.6 million for the three and nine months ended September 30, 2017, respectively, due to taxable income associated with BPI.

 

Net Income (Loss) Attributable to Non-Controlling Interests

 

From our inception through December 30, 2016, we consolidated the results of BPI as a variable interest entity. Although we did not have an ownership interest in BPI through that date, we determined that BPI was a variable interest entity, of which we were the primary beneficiary.

 

Net income (loss) attributable to non-controlling interests in our consolidated statement of operations and comprehensive loss through December 30, 2016 consisted of the portion of the net income or loss of BPI that was not allocated to us. Changes in the amount of net income (loss) attributable to non-controlling interests were directly impacted by changes in the net income or loss of BPI. On December 31, 2016, we acquired 100% of the issued and outstanding shares of BPI. As a result, for the three and nine months ended September 30, 2017 and for periods thereafter, we no longer report any non-controlling interests related to BPI.

 

Results of Operations

 

Comparison of the Three Months Ended September 30, 2017 and 2016

 

The following table summarizes our results of operations for the three months ended September 30, 2017 and 2016:

 

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Three Months Ended

 

 

 

 

 

September 30,

 

 

 

 

 

2017

 

2016

 

Change

 

 

 

(in thousands)

 

Operating expenses:

 

 

 

 

 

 

 

Research and development

 

$

34,996

 

$

27,045

 

$

7,951

 

General and administrative

 

4,571

 

920

 

3,651

 

Total operating expenses

 

39,567

 

27,965

 

11,602

 

Loss from operations

 

(39,567

)

(27,965

)

(11,602

)

Other income (expense):

 

 

 

 

 

 

 

Interest expense

 

(239

)

(93

)

(146

)

Interest income

 

10

 

 

10

 

Change in fair value of warrant liability

 

(2,426

)

2

 

(2,428

)

Change in fair value of derivative liability

 

 

(129

)

129

 

Change in fair value of contingent equity liability

 

 

 

 

Loss from equity method investment

 

(638

)

(75

)

(563

)

Total other income (expense), net

 

(3,293

)

(295

)

(2,998

)

Loss before provision for income taxes

 

(42,860

)

(28,260

)

(14,600

)

Provision for income taxes

 

55

 

 

55

 

Net loss and comprehensive loss

 

(42,915

)

(28,260

)

(14,655

)

Net loss attributable to non-controlling interests

 

 

50

 

(50

)

Accretion of beneficial conversion feature

 

 

 

 

Net loss attributable to common shareholders of Biohaven Pharmaceutical Holding Company Ltd.

 

$

(42,915

)

$

(28,210

)

$

(14,705

)

 

Research and Development Expenses

 

 

 

Three Months Ended

 

 

 

 

 

September 30,

 

 

 

 

 

2017

 

2016

 

Change

 

 

 

(in thousands)

 

Direct research and development expenses by program:

 

 

 

 

 

 

 

BHV-0223

 

$

615

 

$

32

 

$

583

 

Trigriluzole

 

4,897

 

2,082

 

2,815

 

Rimegepant

 

18,172

 

23,934

 

(5,762

)

BHV-3500

 

3,291

 

 

3,291

 

BHV-5000

 

616

 

 

616

 

Unallocated research and development costs:

 

 

 

 

 

 

 

Personnel related (including share-based compensation)

 

6,246

 

680

 

5,566

 

Other

 

1,159

 

317

 

842

 

Total research and development expenses

 

$

34,996

 

$

27,045

 

$

7,951

 

 

Research and development expenses were $35.0 million for the three months ended September 30, 2017, compared to $27.0 million for the three months ended September 30, 2016. The increase of $8.0 million was primarily due to increases of $2.8 million in direct costs for our trigriluzole program, $6.4 million in unallocated research and development costs, $3.3 million in direct costs for our BHV-3500 program, $0.6 million in direct costs for our BHV-0223 program and $0.6 million in direct costs for our BHV-5000 program, for which development did not commence until 2017, partially offset by a decrease of $5.8 million in spending related to our rimegepant program.

 

The increase in direct costs for BHV-3500, one of our migraine programs, was primarily a result of costs associated with formulation development and toxicology during the three months ended September 30, 2017.  This program was acquired in July 2016 pursuant to a license agreement with BMS.  The increases in direct costs for our BHV-0223 and BHV-5000 programs was primarily a result of further clinical development and advancement of the programs.  The increase in direct costs for our trigriluzole program primarily related to costs associated with the commencement of our Phase 2/3 clinical trial in SCA in July 2017.

 

The increase in unallocated research and development costs was primarily due to an increase of $5.6 million in personnel-related costs, including share-based compensation, as a result of hiring additional research and development personnel. Our headcount in

 

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research and development increased to 26 as of September 30, 2017, compared to 6 as of September 30, 2016.  Personnel-related costs for the three months ended September 30, 2017 and 2016 included share-based compensation expense of $4.2 million and $0.3 million, respectively.  The increase in other unallocated costs was primarily due to increased use of research and development consultants that support activities across multiple drug candidate programs as well as the increased purchase of supplies used across all drug candidate programs.

 

Our other migraine program, rimegepant, was also acquired in July 2016 pursuant to the license agreement with BMS. During the three months ended September 30, 2017, we incurred direct costs of $18.2 million primarily associated with our Phase 3 clinical trials that commenced in July 2017. We incurred direct costs of $23.9 million primarily consisting of upfront payments of $9.0 million, $1.8 million of development costs and the fair value of contingent equity payments of $13.1 million related to this program during the three months ended September 30, 2016.

 

General and Administrative Expenses

 

General and administrative expenses were $4.6 million for the three months ended September 30, 2017, compared to $0.9 million for the three months ended September 30, 2016. The increase of $3.7 million was primarily due to increases of $2.1 million in personnel-related costs, including share-based compensation, due to the hiring of additional personnel in our general and administrative functions, $1.1 million in professional fees supporting ongoing business operations, $0.2 million in insurance costs, $0.2 million in costs associated with conferences and $0.1 million in facility-related costs. Personnel-related costs for the three months ended September 30, 2017 and 2016 included share-based compensation expense of $2.1 million and $0.4 million, respectively.

 

Other Income (Expense), Net

 

Other income (expense), net was a net expense of $3.3 million for the three months ended September 30, 2017, compared to net expense of $0.3 million for the three months ended September 30, 2016. The increase of $3.0 million in net expense was primarily due to an increase of $2.4 million in the fair value of the warrant liabilities associated with the warrants issued in connection with our Wells Fargo credit agreement, an increase of $0.6 million of loss from equity method investment and an increase in interest expense of $0.1 million due to interest on borrowings under our Wells Fargo credit agreement. These increases in other expense were partially offset by a decrease of $0.1 million in the fair value of the derivative liability associated with our license agreement with Yale.

 

Provision for Income Taxes

 

We recorded a provision for income taxes of $0.1 million for the three months ended September 30, 2017, compared to no provision for income taxes for the three months ended September 30, 2016. We recorded a tax provision for the three months ended September 30, 2017 for the U.S. federal and state income taxes of BPI’s profitable operations in the United States during that period and due to the fact that, as of December 31, 2016, we fully utilized BPI’s remaining U.S. net operating loss carryforwards.

 

Comparison of the Nine months Ended September 30, 2017 and 2016

 

The following table summarizes our results of operations for the nine months ended September 30, 2017 and 2016:

 

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Nine Months Ended

 

 

 

 

 

September 30,

 

 

 

 

 

2017

 

2016

 

Change

 

 

 

(in thousands)

 

Operating expenses:

 

 

 

 

 

 

 

Research and development

 

$

66,755

 

$

35,137

 

$

31,618

 

General and administrative

 

12,527

 

2,657

 

9,870

 

Total operating expenses

 

79,282

 

37,794

 

41,488

 

Loss from operations

 

(79,282

)

(37,794

)

(41,488

)

Other income (expense):

 

 

 

 

 

 

 

Interest expense

 

(906

)

(93

)

(813

)

Interest income

 

10

 

 

10

 

Change in fair value of warrant liability

 

(5,509

)

2

 

(5,511

)

Change in fair value of derivative liability