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EX-32.1 - EX-32.1 - CYTOKINETICS INCcytk-ex321_6.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended September 30, 2018

or

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

For the transition period from                      to                     

Commission file number: 000-50633

 

CYTOKINETICS, INCORPORATED

(Exact name of registrant as specified in its charter)

 

 

Delaware

94-3291317

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

280 East Grand Avenue

South San Francisco, California

94080

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (650) 624-3000

 

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

◻  

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

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

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

Number of shares of common stock, $0.001 par value, outstanding as of November 5, 2018: 54,710,900

 

 

 

 


CYTOKINETICS, INCORPORATED

TABLE OF CONTENTS FOR FORM 10-Q

FOR THE three and six months ENDED September 30, 2018

 

 

Page

PART I. FINANCIAL INFORMATION

3

Item 1. Financial Statements   

3

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

3

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

4

Condensed Consolidated Statements of Stockholders’ Equity the nine months ended September 30, 2018

5

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

6

Notes to Condensed Consolidated Financial Statements

7

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

17

Item 3. Quantitative and Qualitative Disclosures About Market Risk

28

Item 4. Controls and Procedures

28

 

 

PART II. OTHER INFORMATION

29

Item 1. Legal Proceedings

29

Item 1A. Risk Factors

29

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

51

Item 3. Defaults Upon Senior Securities

51

Item 4. Mine Safety Disclosures

51

Item 5. Other Information

51

Item 6. Exhibits

52

 

 

SIGNATURES

53

 

 

 

 

 

 

2


PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

CYTOKINETICS, INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data) (Unaudited)

 

 

September 30, 2018

 

 

December 31, 2017

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

27,624

 

 

$

125,206

 

Short-term investments

 

 

182,686

 

 

 

143,685

 

Accounts receivable

 

 

9,156

 

 

 

1,112

 

Contract assets

 

 

5,876

 

 

 

Prepaid and other current assets

 

 

1,927

 

 

 

4,292

 

Total current assets

 

 

227,269

 

 

 

274,295

 

Long-term investments

 

 

 

 

 

16,518

 

Property and equipment, net

 

 

2,687

 

 

 

3,568

 

Other assets

 

 

323

 

 

 

429

 

Total assets

 

$

230,279

 

 

$

294,810

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,024

 

 

$

5,253

 

Accrued liabilities

 

 

15,652

 

 

 

17,392

 

Deferred revenue, current

 

 

 

 

 

9,572

 

Current portion of long-term debt

 

 

3,778

 

 

 

Other current liabilities

 

 

38

 

 

 

227

 

Total current liabilities

 

 

21,492

 

 

 

32,444

 

Long-term debt, net

 

 

38,127

 

 

 

31,777

 

Liability related to the sale of future royalties, net

 

 

117,718

 

 

 

104,650

 

Deferred revenue, non-current

 

 

 

 

 

15,000

 

Other long-term liabilities

 

 

873

 

 

 

1,097

 

Total liabilities

 

 

178,210

 

 

 

184,968

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value

 

 

 

 

Common stock, $0.001 par value

 

 

55

 

 

 

54

 

Additional paid-in capital

 

 

765,970

 

 

 

755,526

 

Accumulated other comprehensive income

 

 

447

 

 

 

343

 

Accumulated deficit

 

 

(714,403

)

 

 

(646,081

)

Total stockholders’ equity

 

 

52,069

 

 

 

109,842

 

Total liabilities and stockholders’ equity

 

$

230,279

 

 

$

294,810

 

 

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

 

3


CYTOKINETICS, INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands, except per share data) (Unaudited)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2018

 

 

September 30, 2017

 

 

September 30, 2018

 

 

September 30, 2017

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development, milestone, grant and other revenues, net

 

$

8,726

 

 

$

5,862

 

 

$

16,991

 

 

$

6,680

 

License revenues

 

 

1,915

 

 

 

318

 

 

 

5,133

 

 

 

6,706

 

Total revenues

 

 

10,641

 

 

 

6,180

 

 

 

22,124

 

 

 

13,386

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

21,391

 

 

 

24,947

 

 

 

65,858

 

 

 

64,045

 

General and administrative

 

 

7,164

 

 

 

9,657

 

 

 

23,724

 

 

 

26,210

 

Total operating expenses

 

 

28,555

 

 

 

34,604

 

 

 

89,582

 

 

 

90,255

 

Operating loss

 

 

(17,914

)

 

 

(28,424

)

 

 

(67,458

)

 

 

(76,869

)

Interest expense

 

 

(867

)

 

 

(806

)

 

 

(2,628

)

 

 

(2,346

)

Non-cash interest expense on liability related to sale of future royalties

 

 

(4,559

)

 

 

(3,906

)

 

 

(13,026

)

 

 

(9,918

)

Interest and other income, net

 

 

1,323

 

 

 

779

 

 

 

3,291

 

 

 

1,828

 

Net loss

 

$

(22,017

)

 

$

(32,357

)

 

$

(79,821

)

 

$

(87,305

)

Net loss per share — basic and diluted

 

$

(0.40

)

 

$

(0.60

)

 

$

(1.47

)

 

$

(1.82

)

Weighted-average shares in net loss per share — basic and diluted

 

 

54,626

 

 

 

53,719

 

 

 

54,329

 

 

 

47,879

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on available-for-sale securities, net

 

 

3

 

 

 

512

 

 

 

104

 

 

 

289

 

Comprehensive loss

 

$

(22,014

)

 

$

(31,845

)

 

$

(79,717

)

 

$

(87,016

)

 

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

 

4


CYTOKINETICS, INCORPORATED

condensed CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ Equity

(In thousands, except share data) (Unaudited)

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income

 

 

Deficit

 

 

Equity

 

 

 

 

 

Balance, December 31, 2017

 

 

53,960,832

 

 

$

54

 

 

$

755,526

 

 

$

343

 

 

$

(646,081

)

 

$

109,842

 

Stock-based compensation

 

 

 

 

 

 

 

 

7,480

 

 

 

 

 

 

 

 

 

7,480

 

Exercise of stock options

 

 

415,263

 

 

 

1

 

 

 

3,112

 

 

 

 

 

 

 

 

 

3,113

 

Issuance of common stock under Employee Stock Purchase Plan

 

 

75,992

 

 

 

 

 

 

536

 

 

 

 

 

 

 

 

 

536

 

Vesting of restricted stock units, net of taxes withheld

 

 

189,433

 

 

 

 

 

 

(866

)

 

 

 

 

 

 

 

 

(866

)

Issuance of warrants

 

 

 

 

 

 

 

 

182

 

 

 

 

 

 

 

 

 

182

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

104

 

 

 

 

 

 

104

 

Adoption of ASC 606

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11,499

 

 

 

11,499

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(79,821

)

 

 

(79,821

)

Balance, September 30, 2018

 

 

54,641,520

 

 

$

55

 

 

$

765,970

 

 

$

447

 

 

$

(714,403

)

 

$

52,069

 

 

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

 

 

 

5


CYTOKINETICS, INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) (Unaudited)

 

 

Nine Months Ended

 

 

 

September 30, 2018

 

 

September 30, 2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(79,821

)

 

$

(87,305

)

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

 

 

 

 

 

 

 

 

Non-cash interest expense on liability related to sale of future royalties

 

 

13,026

 

 

 

9,954

 

Non-cash equity-related expense

 

 

7,480

 

 

 

6,588

 

Depreciation of property and equipment

 

 

1,559

 

 

 

1,310

 

Interest receivable and amortization on investments

 

 

(1,237

)

 

 

(Gain) loss on disposal of equipment

 

 

 

 

 

(82

)

Non-cash interest expense related to debt

 

 

412

 

 

 

418

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(8,044

)

 

 

(9,976

)

Contract assets

 

 

13,537

 

 

 

Prepaid and other assets

 

 

2,026

 

 

 

(2,308

)

Accounts payable

 

 

(3,230

)

 

 

1,462

 

Accrued and other liabilities

 

 

(2,109

)

 

 

(132

)

Contract liabilities

 

 

(18,750

)

 

 

Deferred revenue

 

 

(13,737

)

 

 

2,383

 

Net cash used in operating activities

 

 

(88,888

)

 

 

(77,688

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of investments

 

 

(188,428

)

 

 

(214,457

)

Sales and maturities of investments

 

 

167,732

 

 

 

119,963

 

Purchases of property and equipment

 

 

(679

)

 

 

(2,097

)

Net cash used in investing activities

 

 

(21,375

)

 

 

(96,591

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Public offerings of common stock, net of issuance costs

 

 

 

 

112,224

 

Sale of future royalties, net of issuance costs

 

 

 

 

90,621

 

Issuance of common stock related to sale of future royalties, net of issuance costs

 

 

 

 

7,560

 

Issuance of long term debt, net of debt discount and issuance costs

 

 

9,898

 

 

 

 

Issuance of equity for stock-based awards and warrants, net

 

 

2,783

 

 

 

13,320

 

Net cash provided by financing activities

 

 

12,681

 

 

 

223,725

 

Net increase (decrease) in cash and cash equivalents

 

 

(97,582

)

 

 

49,446

 

Cash and cash equivalents, beginning of period

 

 

125,206

 

 

 

66,874

 

Cash and cash equivalents, end of period

 

$

27,624

 

 

$

116,320

 

 

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

 

6


CYTOKINETICS, INCORPORATED

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Organization and Significant Accounting Policies

Cytokinetics, Incorporated (the “Company”, “we” or “our”) was incorporated under the laws of the state of Delaware on August 5, 1997. The Company is a late stage biopharmaceutical company focused on the discovery and development of novel small molecule therapeutics that modulate muscle function for the potential treatment of serious diseases and medical conditions.

Our financial statements contemplate the conduct of our operations in the normal course of business. We have incurred an accumulated deficit of $714.4 million since inception and there can be no assurance that we will attain profitability. The Company anticipates that it will have operating losses and net cash outflows in future periods.

We are subject to risks common to late stage biopharmaceutical companies including, but not limited to, development of new drug candidates, dependence on key personnel, and the ability to obtain additional capital as needed to fund our future plans. Our liquidity will be impaired if sufficient additional capital is not available on terms acceptable to us. To date, we have funded operations primarily through sales of our common stock, contract payments under our collaboration agreements, sale of future royalties, debt financing arrangements, sales of our convertible preferred stock, government grants and interest income. Until we achieve profitable operations, we intend to continue to fund operations through payments from strategic collaborations, additional sales of equity securities, grants and debt financings. We have never generated revenues from commercial sales of our drugs and may not have drugs to market for at least several years, if ever. Our success is dependent on our ability to enter into new strategic collaborations and/or raise additional capital and to successfully develop and market one or more of our drug candidates. As a result, we may choose to raise additional capital through equity or debt financings to continue to fund operations in the future. We cannot be certain that sufficient funds will be available from such a financing or through a collaborator when required or on satisfactory terms. Additionally, there can be no assurance that our drug candidates will be accepted in the marketplace or that any future products can be developed or manufactured at an acceptable cost. These factors could have a material adverse effect on our future financial results, financial position and cash flows.

Based on the current status of our research and development activities, we believe that our existing cash, cash equivalents and investments will be sufficient to fund cash requirements for at least the next 12 months from the filing date of this Quarterly Report on Form 10-Q. If, at any time, our prospects for financing research and development programs decline, we may decide to reduce research and development expenses by delaying, discontinuing or reducing funding of one or more of our research or development programs. Alternatively, we might raise funds through strategic collaborations, public or private financings or other arrangements. Such funding, if needed, may not be available on favorable terms, or at all. These financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis of Presentation

Our condensed consolidated financial statements include the accounts of Cytokinetics and our wholly-owned subsidiary. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The financial statements include all adjustments (consisting only of normal recurring adjustments) that management believes are necessary for the fair statement of our financial information. These interim results are not necessarily indicative of results to be expected for the full fiscal year or any future interim period. The balance sheet at December 31, 2017 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements. The financial statements and related disclosures have been prepared with the presumption that users of the interim financial statements have read or have access to the audited financial statements for the preceding fiscal year. Accordingly, these financial statements should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s Form 10-K for the year ended December 31, 2017, as filed with the SEC.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and reported amounts of revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, investments, accrued research and development expenses, other long-lived assets, stock-based compensation and the valuation of deferred tax assets. We base our estimates on our historical experience and also on assumptions that we believe are reasonable; however, actual results could significantly differ from those estimates.

7


Revenue Recognition – Adoption of Revenue from Contracts with Customers ASC 606

On January 1, 2018, we adopted Revenue from Contracts with Customers (ASC 606), using the modified retrospective method. On January 1, 2018, for contracts within the scope of ASC 606, we recognized a contract asset or liability and reduced our accumulated deficit by $11.5 million for the effect of adopting ASC 606 and did not revise our prior period financial statements. Pursuant to ASC 606, to recognize revenue from a contract with a customer, we:

(i) identify our contracts with our customers;

(ii) identify our distinct performance obligations in each contract;

(iii) determine the transaction price of each contract;

(iv) allocate the transaction price to the performance obligations; and

(v) recognize revenue as we satisfy our performance obligations.

At contract inception, we assess the goods or services promised within each contract and assess whether each promised good or service is distinct and determine those that are performance obligations. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

Collaborative Arrangements

We enter into collaborative arrangements with partners that typically include payment to us for one of more of the following: (i) license fees; (ii) milestone payments related to the achievement of developmental, regulatory, or commercial goals; and (iii) royalties on net sales of licensed products.  Each of these payments results in collaboration or other revenues. Where a portion of non-refundable up-front fees or other payments received are allocated to continuing performance obligations under the terms of a collaborative arrangement, they are recorded as deferred revenue and recognized as revenue when (or as) the underlying performance obligation is satisfied.  

As part of the accounting for these arrangements, we must develop estimates and assumptions that require judgment to determine the underlying stand-alone selling price for each performance obligation which determines how the transaction price is allocated among the performance obligation. The stand-alone selling price may include such items as, forecasted revenues, development timelines, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success, to determine the transaction price to allocate to each performance obligation.

For our collaboration agreements that include more than one performance obligation, such as a license combined with a commitment to perform research and development services, we make judgments to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, up-front fees. We evaluate our progress each reporting period and, if necessary, adjust the measure of a performance obligation and related revenue recognition.

License Fees:  If a license to our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we recognize revenues from non-refundable, up-front fees allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses that are bundled with other promises, we utilize judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, up-front license fees. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition.

Milestone Payments:  We use judgement to determine whether a milestone is considered probable of being reached. Using the most likely amount method, we include the value of a milestone payment in the consideration for a contract at inception if we then conclude achieving the milestone is more likely than not. Otherwise, we exclude the value of a milestone payment from contract consideration at inception and recognize revenue for a milestone at a later date, when we judge that it is more likely than not that the milestone will be achieved. If we conclude it is probable that a significant revenue reversal would not occur, the associated milestone is included in the transaction price. We then allocate the transaction price to each performance obligation on a relative stand-alone selling price basis, for which we recognize revenue as or when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, we re-evaluate the probability of achievement of such milestones and any related constraint, and if necessary, adjust our estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect license, collaboration and other revenues and earnings in the period of adjustment.

Royalties:  For contracts that include sales-based royalties, we recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied.  To date, we have not recognized any royalty revenues resulting from contracts.

8


Income Taxes

We account for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. We establish valuation allowances when necessary to reduce deferred tax assets to the amounts expected to be realized. We recognize uncertain tax positions taken or expected to be taken on a tax return. Tax positions are initially recognized when it is more likely than not that the position will be sustained upon examination by the tax authorities. We measure our tax positions as the largest amount of tax benefit that is more likely than not of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts. We recognize interest accrued related to unrecognized tax benefits and penalties as income tax expense.

In December 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 34% to 21% effective for tax years beginning after December 31, 2017. Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of US GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. We continue to analyze certain provisions of the Act including the application of new executive compensation limitation provisions under Internal Revenue Section 162(m). These items are subject to revisions from further analysis of the Tax Act and interpretation of any additional guidance issued by the U.S. Treasury Department, IRS, FASB, and other standard-setting and regulatory bodies.

We did not record a provision for income tax for three and nine months ended September 30, 2018 because we expect to report a net tax loss for the year ending December 31, 2018.

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, ‘Financial Instruments — Credit Losses — Measurement of Credit Losses on Financial Instruments. ASU 2016-13 changes the impairment model for most financial assets and certain other instruments and is effective for annual and interim reporting periods beginning after December 15, 2019. We do not expect the adoption of ASU 2016-13 to have a material impact on our financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires us to record right-of-use asset and lease liability on the statement of financial position for operating leases with lease terms of more than 12 months and is effective for annual and interim reporting periods beginning on or after December 15, 2018. We expect to adopt this standard beginning in 2019 using the modified retrospective approach. We do not expect that this standard will have a material impact on our results of operations, but we do expect that upon adoption, it will have a material impact on our assets and liabilities. The primary effect of adoption will be the requirement to record right-of-use assets and corresponding lease obligations for current operating leases with lease terms of more than 12 months.

Note 2 — Net Loss Per Share

We excluded the following from diluted net loss per share because inclusion would have been antidilutive (in thousands):

 

 

Nine Months Ended

 

 

 

September 30, 2018

 

 

September 30, 2017

 

Options to purchase common stock

 

 

5,451

 

 

 

6,020

 

Warrants to purchase common stock

 

 

107

 

 

 

100

 

Restricted Stock and Performance units

 

 

562

 

 

 

459

 

Shares issuable related to the ESPP

 

 

28

 

 

 

41

 

 

 

 

6,148

 

 

 

6,620

 

 

9


Note 3 — Revenue Recognition

We believe recognizing revenue as research and development services are performed provides a faithful depiction of the transfer of the services because completion of clinical programs results in data useful to determine satisfaction of our promise. We may fund research and development in advance of the performance of the services. When we complete our performance obligation, if we have received more than we incurred, we are obligated to return unused advance funding. We recognize these advance payments as deferred revenue until we perform the related services.

Our revenue for the three and nine months ended September 30, 2018 was affected by adopting ASC 606 as follows (in thousands):

 

 

 

Three Months

Ended

September 30, 2018

 

 

Nine Months

Ended

September 30, 2018

 

Research and development revenue using guidance in effect prior to ASC 606

 

$

(872

)

 

$

(2,206

)

Impact of adoption of ASC 606

 

 

9,598

 

 

 

19,197

 

Research and development revenue

 

$

8,726

 

 

$

16,991

 

 

 

 

 

 

 

 

 

 

License revenue using guidance in effect prior to ASC 606

 

$

4,954

 

 

$

12,901

 

Impact of adoption of ASC 606

 

 

(3,039

)

 

 

(7,768

)

License revenue

 

$

1,915

 

 

$

5,133

 

 

The impact of adoption of ASC 606 on our net loss per share was as follows (in thousands):

 

 

 

Three Months

Ended

September 30, 2018

 

 

Nine Months

Ended

September 30, 2018

 

Net loss per share using guidance in effect prior to ASC 606

 

$

(0.52

)

 

$

(1.68

)

Impact of adoption of ASC 606

 

 

0.12

 

 

 

0.21

 

Net loss per share

 

$

(0.40

)

 

$

(1.47

)

 

We have completed our performance obligations for the Co-Invest Option and the 2014 Astellas agreement. We expect to complete our performance obligations for the 2016 Astellas Amendment in 2019. Our contract assets and liabilities changed during the period, as follows (in thousands):

 

 

 

Three Months

Ended

September 30, 2018

 

 

Nine Months

Ended

September 30, 2018

 

Contract liability from the Amgen Agreement for the Co-Invest Option

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

6,250

 

 

$

18,750

 

Payments made for the Co-Invest Option

 

 

(6,250

)

 

 

(18,750

)

Balance at end of period

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

Contract asset from the 2016 Astellas Amendment

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

10,375

 

 

$

19,413

 

Reduction for services performed

 

 

(5,562

)

 

 

(12,865

)

Cash received in advance of services performed

 

 

1,063

 

 

 

(672

)

Balance at end of period

 

$

5,876

 

 

$

5,876

 

 

 

 

 

 

 

 

 

 

Contract liability from the 2014 Astellas Amendment

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

1,882

 

 

$

6,288

 

Reduction for services performed

 

 

(1,882

)

 

 

(6,288

)

Balance at end of period

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

10


Note 4 — Research and Development Arrangements

Amgen Inc. (“Amgen”)

We and Amgen continue activities related to novel small molecule therapeutics, including omecamtiv mecarbil, that activate cardiac muscle contractility for potential applications in the treatment of heart failure under the collaboration and option agreement between the Company and Amgen, as amended (the “Amgen Agreement”). We recognize research and development revenue for reimbursements from Amgen of both internal costs of certain full-time employee equivalents and other costs related to the Amgen Agreement.

In July 2018, we paid Amgen the final $6.3 million and completed the exercise of our option under the Amgen Agreement to co-invest $40.0 million in the Phase 3 development program of omecamtiv mecarbil in exchange for a total incremental royalty from Amgen of up to 4% on increasing worldwide sales of omecamtiv mecarbil outside Japan (the “Co-Invest Option”). We paid Amgen $18.8 million to fund the Co-Invest Option during the nine months ended September 30, 2018. Payments we made to fund the Co-Invest Option in 2016 and 2017 reduced research and development revenues in 2016 and 2017 by $1.3 million and $20.0 million, respectively.

Adoption of ASC 606

We determined that the Amgen Agreement was within the scope of ASC 606. As of January 1, 2018, all the performance obligations under the Amgen Agreement were complete. On January 1, 2018, we recognized a contract liability for $18.8 million with a corresponding increase in accumulated deficit for the Co-Invest Option. We paid Amgen $6.3 million and $18.8 million for the Co-Invest Option during the three and nine months ended September 30, 2018, respectively.

Revenue recognized related to the Amgen Agreement during the first nine months of 2017 consisted of $10.0 million for a development milestone related to the start of GALACTIC-HF in Japan and $1.3 million for research and development services, offset by our Co-Invest Option payments of $13.8 million.

Under the Amgen Agreement, we are eligible to receive over $300.0 million in additional development milestone payments based on various clinical milestones, including the initiation of certain clinical studies, the submission of an application for marketing authorization for a drug candidate to certain regulatory authorities and the receipt of such approvals. Additionally, we are eligible to receive up to $300.0 million in commercial milestone payments provided certain sales targets are met. Due to the nature of drug development, including the inherent risk of development and approval of drug candidates by regulatory authorities, we cannot estimate if and when these milestone payments could be achieved or become due and, accordingly, we consider the milestone payments to be constrained and exclude the milestone payments from the transaction price. 

Astellas Pharma Inc. (“Astellas”)

Cytokinetics and Astellas continue activities focused on the research, development, and commercialization of skeletal muscle activators, including reldesemtiv, as novel drug candidates for diseases and medical conditions associated with muscle weakness under the Amended and Restated License and Collaboration Agreement dated December 22, 2014, as amended (the “Astellas Agreement”).

We have recognized research and development revenue from Astellas for reimbursements of internal costs of certain full-time employee equivalents, supporting collaborative research and development programs, and of other costs related to those programs.

In 2014, we and Astellas amended and restated the license and collaboration agreement (the “2014 Astellas Amendment”) and expanded the objective of the collaboration to include spinal muscular atrophy (“SMA”) and potentially other neuromuscular indications for reldesemtiv and other fast skeletal muscle troponin activators (“FSTAs”); in connection therewith, Astellas paid us a $30.0 million non-refundable upfront license fee and a $15.0 million milestone payment. We determined at that time that the license for the expanded SMA rights did not have stand-alone value and the license and research and development services were a single unit of accounting and recognized revenue for these payments using the proportional performance model. As of September 30, 2018, all our performance obligations under the 2014 Astellas Amendment were complete.

In 2016, we and Astellas amended the Astellas Agreement (the “2016 Astellas Amendment”) to expand the collaboration to include the development of reldesemtiv for the potential treatment of amyotrophic lateral sclerosis (“ALS”), as well as the possible development in ALS of other FSTAs previously licensed by us to Astellas, and Astellas paid us a $35.0 million non-refundable upfront amendment fee and an accelerated $15.0 million milestone payment for the initiation of the first Phase 2 clinical trial of reldesemtiv in ALS that was otherwise provided for in the Astellas Agreement, as if such milestone had been achieved upon the execution of the 2016 Astellas Amendment, and committed research and development consideration of $44.2 million, for total consideration of $94.2 million. We allocated the consideration to the license and to the research and development services, and recognized license revenue and research and development revenue using the proportional performance model.

Astellas’ Option on Tirasemtiv

In 2016, Astellas paid us a $15.0 million non-refundable option fee for the option for a global collaboration for the development and commercialization of tirasemtiv, our first-generation fast skeletal muscle troponin activator (the “Option on Tirasemtiv”).

11


While Astellas holds the Option on Tirasemtiv, we are responsible for and have final decision-making authority on the development of tirasemtiv at our expense. We concluded in 2016 that (i) we had no obligation to Astellas related to any development services pursuant to the Option on Tirasemtiv, (ii) the Option on Tirasemtiv was a substantive option and not a deliverable under the 2016 Astellas Amendment, and (iii) the $15.0 million payment was deferred revenue until the Option on Tirasemtiv is exercised or expires unexercised. The $15.0 million payment was included as deferred revenue in our non-current liabilities at December 31, 2017 (prior to adopting ASC 606).

Adoption of ASC 606

On January 1, 2018, in adopting ASC 606, we concluded: (i) that the original agreement with Astellas in 2013 was outside the scope of ASC 606, since all performance obligations thereunder were completed prior to entering into the 2014 Astellas Amendment and the 2014 Astellas Amendment was not an amendment of the original agreement, (ii) the 2014 Astellas Amendment is a separate agreement within the scope of ASC 606 with no effect on the ongoing accounting for the related license and research and development service deliverables and (iii) the 2016 Astellas Amendment is a separate agreement within the scope of ASC 606. In adopting ASC 606 we determined:

 

Our performance obligations were the delivery of the license and performance of research and development services;

 

The transaction price included the $50.0 million in non-refundable fees, $35.6 million in committed research and development fees and the $15.0 million Astellas paid us for the Option on Tirasemtiv;

 

The consideration allocated to the license resulted in a contract asset of $19.4 million included in other current assets, with a corresponding decrease to accumulated deficit on January 1, 2018, and to be realized using the proportional performance model; and

 

Research services we perform under the Astellas Agreement in 2018 and beyond are a separate contract.

The transaction price above was allocated to the license (approximately $83 million) and to the services (approximately $18 million) based on their respective stand-alone prices.

Of the revenue we recognized in 2018, $4.4 million was included in the contract liability at the end of 2017. This revenue includes the cumulative effect of changes made during the period in the estimated costs of research and development services to be incurred to satisfy the related deliverable.

Revenue from Astellas included (in thousands):

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2018

 

 

September 30, 2017

 

 

September 30, 2018

 

 

September 30, 2017

 

Research and development revenues

 

$

8,526

 

 

$

2,112

 

 

$

16,791

 

 

$

8,810

 

License revenues

 

 

1,915

 

 

 

318

 

 

 

5,133

 

 

 

6,707

 

Total Revenue from Astellas

 

$

10,441

 

 

$

2,430

 

 

$

21,924

 

 

$

15,517

 

As of September 30, 2018, we have completed all our deliverables for the 2014 Astellas Amendment and have recognized as revenue all the consideration under that agreement. As of September 30, 2018, approximately $9.5 million of the transaction price for the 2016 Astellas Amendment allocated to research and development services remains unrecognized. We had accounts receivable from Astellas of $9.2 million at September 30, 2018 and no accounts receivable at December 31, 2017.

Under the Astellas Agreement, additional research and early and late state development milestone payments for research and clinical milestones, including the initiation of certain clinical studies, the submission of an application for marketing authorization for a drug candidate to certain regulatory authorities and the commercial launch of collaboration products could total over $600.0 million and includes up to $95.0 million relating to reldesemtiv in non-neuromuscular indications, and over $100.0 million related to reldesemtiv in each of SMA, ALS and other neuromuscular indications. Additionally, $200.0 million in commercial milestones could be received under the Astellas Agreement provided certain sales targets are met. We are eligible to receive up to $2.0 million in research milestone payments under the collaboration for each future potential drug candidate. Due to the nature of drug development, including the inherent risk of development and approval of drug candidates by regulatory authorities, it is not possible to estimate if and when these milestone payments could be achieved or become due, and accordingly, are constrained and not included in the transaction price.

12


Note 5 — Cash Equivalents and Investments

The amortized cost and fair value of cash equivalents and available for sale investments at September 30, 2018 and December 31, 2017 were as follows (in thousands):

 

 

September 30, 2018

 

 

 

Amortized

Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Fair

Value

 

Money market funds

 

$

26,353

 

 

$

 

 

$

 

 

$

26,353

 

U.S. Treasury securities

 

 

79,489

 

 

 

-

 

 

 

(97

)

 

 

79,392

 

Agency bonds

 

 

27,675

 

 

 

 

 

 

(9

)

 

 

27,666

 

Commercial paper

 

 

62,872

 

 

 

-

 

 

 

(16

)

 

 

62,856

 

Corporate obligations

 

 

13,883

 

 

 

 

 

 

(4

)

 

 

13,879

 

 

 

$

210,272

 

 

$

-

 

 

$

(126

)

 

$

210,146

 

 

 

 

December 31, 2017

 

 

 

Amortized

Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Fair

Value

 

Cash equivalents

 

$

111,501

 

 

$

 

 

$

 

 

$

111,501

 

Short-term investments

 

$

143,895

 

 

$

 

 

$

(210

)

 

$

143,685

 

Long-term investments

 

$

16,538

 

 

$

 

 

$

(20

)

 

$

16,518

 

 

Investments available for sale at September 30, 2018 excludes an investment in equity with a fair value and unrealized gain of $0.9 million. At September 30, 2018, there were no investments that had been in a continuous unrealized loss position for 12 months or longer.

Interest income was $1.3 million and $3.3 million for the three and nine months ended September 30 2018 and $0.8 million and $1.8 million for the three and nine months ended September 30, 2017, respectively.  

Note 6 — Fair Value Measurements

We value our financial assets and liabilities at fair value, defined as the price that would be received for assets when sold or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). We utilize market data or assumptions that we believe market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable.

We primarily apply the market approach for recurring fair value measurements and endeavors to utilize the best information reasonably available. Accordingly, we use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, and consider the security issuers’ and the third-party issuers’ credit risk in our assessment of fair value.

We classify fair value based on the observability of those inputs using a hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement):

Level 1 — Observable inputs, such as quoted prices in active markets for identical assets or liabilities;

Level 2 — Inputs, other than the quoted prices in active markets, that are observable either directly or through corroboration with observable market data; and

Level 3 — Unobservable inputs, for which there is little or no market data for the assets or liabilities, such as internally-developed valuation models.

13


Fair value of financial assets:

Financial assets measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017 are classified in the table below in one of the three categories described above (in thousands):

 

 

September 30, 2018

 

 

 

Fair Value Measurements Using

 

 

 

 

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Assets

At Fair Value

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

26,353

 

 

$

 

 

$

 

 

$

26,353

 

U.S. Treasury securities

 

 

79,392

 

 

 

 

 

 

 

 

 

79,392

 

Agency bonds

 

 

 

 

 

27,666

 

 

 

 

 

 

27,666

 

Commercial paper

 

 

 

 

 

62,856

 

 

 

 

 

 

62,856

 

Corporate obligations

 

 

 

 

 

13,879

 

 

 

 

 

 

13,879

 

 

 

$

105,745

 

 

$

104,401

 

 

$

 

 

$

210,146

 

 

 

 

December 31, 2017

 

 

 

Fair Value Measurements Using

 

 

 

 

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Assets

At Fair Value

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

51,001

 

 

$

 

 

$

 

 

$

51,001

 

U.S. Treasury securities

 

 

165,801

 

 

 

 

 

 

 

 

 

165,801

 

Agency bonds

 

 

 

 

 

54,329

 

 

 

 

 

 

54,329

 

Equity securities

 

 

573

 

 

 

 

 

 

 

 

 

573

 

 

 

$

217,375

 

 

$

54,329

 

 

$

 

 

$

271,704

 

 

The carrying amount of our accounts receivable and accounts payable approximates fair value due to the short-term nature of these instruments.

Fair value of financial liabilities:

As of September 30, 2018 and December 31, 2017, the fair value of the long-term debt approximated its carrying value of $41.9 million and $31.7 million, respectively, because it is carried at a market observable interest rate, which is considered Level 2.

As of September 30, 2018, the fair value of liability related to the sale of future royalties is based on our current estimates of future royalties expected to be paid to RPI Finance Trust (“RPI”), an entity related to Royalty Pharma, over the life of the arrangement, which are considered Level 3 (See Note 9 – “Liability Related to Sale of Future Royalties”).

There were no transfers between Level 1, Level 2, and Level 3 during the periods presented.

Note 7 — Balance Sheet Components

Accrued liabilities were as follows (in thousands):

 

 

September 30, 2018

 

 

December 31, 2017

 

Accrued liabilities:

 

 

 

 

 

 

 

 

Research and development services

 

$

8,801

 

 

$

9,436

 

Compensation related

 

 

5,372

 

 

 

6,260

 

Other accrued expenses

 

 

1,479

 

 

 

1,696

 

Total accrued liabilities

 

$

15,652

 

 

$

17,392

 

 

14


Note 8 — Long-Term Debt

We have a loan and security agreement (the “Loan Agreement”) with Oxford Finance LLC (“Oxford”) and Silicon Valley Bank (“SVB”) (Oxford and SVB, collectively the “Lenders”) to fund our working capital and other general corporate needs. During the three months ended September 30, 2018, following the satisfaction of certain conditions related to Phase 2 data for reldesemtiv in spinal muscular atrophy specified in the Loan Agreement, we drew down an additional $10.0 million under the Loan Agreement. Our Long-term debt and unamortized debt discount balances are as follows (in thousands):

 

 

 

September 30, 2018

 

 

December 31, 2017

 

Notes payable, gross

 

$

42,000

 

 

$

32,000

 

Less: Unamortized debt discount and issuance costs

 

 

(496

)

 

 

(325

)

Accretion of final payment fee

 

 

401

 

 

 

102

 

Carrying value of notes payable

 

 

41,905

 

 

 

31,777

 

Less: Current portion of long-term debt

 

 

(3,778

)

 

 

 

Long-term debt

 

$

38,127

 

 

$

31,777

 

Payments on the notes payable will be interest only through May 2019, followed by 41 months of monthly payments of interest and principal. We are required to make a final payment upon loan maturity of 6.5% of the notes payable, which we accrete over the life of the notes payable. The interest rate under the Amended Loan Agreement is the greater of (a) 8.05% or (b) the sum of 6.81% plus the 30-day U.S. LIBOR rate. 

The Loan Agreement contains customary representations and warranties and customary affirmative and negative covenants applicable to us and includes customary events of default, including but not limited to the nonpayment of principal or interest, violations of covenants and material adverse changes. Upon an event of default, the Lenders may, among other things, accelerate the loans and foreclose on the collateral. Our obligations under the Loan Agreement are secured by substantially all our current and future assets, other than our intellectual property.

Interest expense was $0.8 million and $0.8 million for the three months ended September 30, 2018 and 2017, respectively and $2.6 million and $2.3 million for the nine months ended September 30, 2018 and 2017, respectively. The effective interest rate on the Loan Agreement, including the amortization of the debt discount and issuance cost, and the accretion of the final payment, was 8.9% at September 30, 2018.

Minimum payments under the Loan Agreement are (in thousands):

Three months ended December 31, 2018

 

$

955

 

2019

 

 

10,437

 

2020

 

 

15,446

 

2021

 

 

14,283

 

2022

 

 

12,684

 

Total minimum payments

 

 

53,805

 

Less: Interest and final payment

 

 

(11,805

)

Notes payable, gross

 

$

42,000

 

 

Note 9 - Liability Related to Sale of Future Royalties

In February 2017, we entered into a Royalty Purchase Agreement (the “Royalty Agreement”), under which we sold a portion of our right to receive royalties on potential net sales of omecamtiv mecarbil (and potentially other compounds with the same mechanism of action) under the Amgen Agreement to RPI for a payment of $90.0 million (the “Royalty Monetization”). The Royalty Monetization is non-refundable, even if omecamtiv mecarbil is never commercialized.  Concurrently, we entered into a Common Stock Purchase Agreement with RPI through which RPI purchased 875,676 shares of our common stock for $10.0 million (the “RPI Common Stock”).

We concluded that there are two units of accounting for the Royalty Monetization and the RPI Common Stock: (1) the Liability related to sale of future royalties and (2) the sale of the RPI Common Stock. We determined the fair value for the Liability related to sale of future royalties at the time of the Royalty Monetization to be $96.7 million, with an effective annual non-cash interest rate of 17% based on our estimate of the cash flows to be received over the life of the Royalty Agreement. We further determined that the fair value of the RPI Common Stock was $8.1 million at the time we entered into the Royalty Agreement.  

We allocated the consideration of $100.0 million and related transaction costs of $1.8 million on a relative fair value basis to the liability for $92.3 million and the common stock for $7.7 million. We continue to accrete the Liability related to sale of future royalties using the interest method with an annual pre-tax interest rate of 17%. The transaction costs are amortized to non-cash interest expense over the estimated term of the Royalty Agreement. As of December 31, 2017, we determined the fair value at $131.6 million, after considering the new statutory effective tax rate of 21% in 2018.

15


We recognized $4.6 million and $3.9 million in non-cash interest expense in the three months ended September 30, 2018 and 2017, respectively, and $13.0 million and $9.9 million in non-cash interest expense in the nine months ended September 30, 2018 and 2017, respectively, related to the Royalt