arav-10q_20190630.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended June 30, 2019

OR

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

For the transition period from                  to                 

Commission file number: 001-36361

 

Aravive, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Delaware

 

2834

 

26-4106690

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

 

(I.R.S. Employer

Identification Number)

River Oaks Tower

3730 Kirby Drive, Suite 1200

Houston, Texas 77098

(Address of principal executive offices)

(936) 355-1910

(Registrant’s Telephone Number, including area code)

LyondellBasell Tower

1221 McKinney Street, Suite 3200

Houston, Texas 77010

(Former Name, Former Address and Former Fiscal Year, if changed Since Last Report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, par value $0.0001 per share

ARAV

Nasdaq Global Select Market

 

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 than 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 definition 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  

As of August 1, 2019, there were 11,284,964 outstanding shares of common stock, par value $0.0001 per share, of Aravive, Inc.

 

 

 

 


 

ARAVIVE, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED June 30, 2019

PART I. FINANCIAL INFORMATION

 

Item

  

 

  

Page

1.

  

Financial Statements (unaudited):

  

 

 

  

a. Condensed Consolidated Balance Sheets at June 30, 2019 and December 31, 2018

  

3

 

  

b. Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2019 and 2018

  

4

 

 

c. Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2019 and 2018

 

5

 

  

d. Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018

  

6

 

  

e. Notes to Condensed Consolidated Financial Statements

  

7

2.

  

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

  

18

3.

  

Quantitative and Qualitative Disclosures About Market Risk

  

23

4.

  

Controls and Procedures

  

23

 

PART II. OTHER INFORMATION

1.

  

Legal Proceedings

  

24

1A.

  

Risk Factors

  

24

2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

  

27

5.

 

Other Information

 

27

6.

  

Exhibits

  

28

 

 

Signatures

 

29

 

 

 

2

 


 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ARAVIVE, INC. (FORMERLY KNOWN AS VERSARTIS, INC.)

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands, except share and per share data)

 

 

June 30,

 

 

December 31,

 

 

2019

 

 

2018

 

Assets

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

Cash and cash equivalents

$

48,384

 

 

$

56,992

 

Prepaid expenses and other current assets

 

3,667

 

 

 

1,038

 

Total current assets

 

52,051

 

 

 

58,030

 

Restricted cash

 

2,409

 

 

 

2,396

 

Property and equipment, net

 

1,996

 

 

 

32

 

Operating lease right-of-use assets

 

9,501

 

 

 

 

Build-to-suit lease asset

 

 

 

 

8,651

 

Intangible asset, net

 

280

 

 

 

341

 

Other assets

 

509

 

 

 

20

 

Total assets

 

66,746

 

 

 

69,470

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

$

711

 

 

$

426

 

Accrued liabilities

 

1,400

 

 

 

1,365

 

Operating lease obligation, current portion

 

2,505

 

 

 

 

Deferred revenue

 

 

 

 

146

 

Total current liabilities

 

4,616

 

 

 

1,937

 

Contingent payable

 

264

 

 

 

264

 

Operating lease obligation

 

8,995

 

 

 

 

Build-to-suit lease obligation

 

 

 

 

7,324

 

Total liabilities

 

13,875

 

 

 

9,525

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

 

Common stock, $0.0001 par value, 100,000,000 shares authorized at

   June 30, 2019 and December 31, 2018; 11,284,580 and 11,266,151 shares

   issued and outstanding at June 30, 2019 and December 31, 2018, respectively

 

1

 

 

 

1

 

Additional paid-in capital

 

512,511

 

 

 

510,509

 

Accumulated deficit

 

(459,641

)

 

 

(450,565

)

Total stockholders' equity

 

52,871

 

 

 

59,945

 

Total liabilities and stockholders’ equity

$

66,746

 

 

$

69,470

 

 

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

 

 

3

 


 

ARAVIVE, INC. (FORMERLY KNOWN AS VERSARTIS, INC.)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share data)

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2019

 

 

2018

 

 

2019

 

 

 

 

2018

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grant revenue

$

3,054

 

 

$

 

 

$

4,753

 

 

 

 

$

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

3,637

 

 

 

3,438

 

 

$

6,485

 

 

 

 

$

7,038

 

General and administrative

 

3,291

 

 

 

6,003

 

 

 

7,881

 

 

 

 

 

10,920

 

Total operating expenses

 

6,928

 

 

 

9,441

 

 

 

14,366

 

 

 

 

 

17,958

 

Loss from operations

 

(3,874

)

 

 

(9,441

)

 

 

(9,613

)

 

 

 

 

(17,958

)

Interest income

 

233

 

 

 

249

 

 

 

579

 

 

 

 

 

442

 

Other income (expense), net

 

597

 

 

 

(656

)

 

 

1,286

 

 

 

 

 

(1,313

)

Net loss

$

(3,044

)

 

$

(9,848

)

 

$

(7,748

)

 

 

 

$

(18,829

)

Net loss per share - basic and diluted

$

(0.27

)

 

$

(1.64

)

 

$

(0.69

)

 

 

 

$

(3.14

)

Weighted-average common shares used to compute

   basic and diluted net loss per share

 

11,280

 

 

 

6,023

 

 

 

11,277

 

 

 

 

 

6,002

 

 

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

 

4

 


 

ARAVIVE, INC. (FORMERLY KNOWN AS VERSARTIS, INC.)

CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY

(unaudited)

(in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three and Six Months Ended

 

 

 

June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-In

 

 

Accumulated

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Equity

 

Balances at January 1, 2019

 

 

11,266,151

 

 

$

1

 

 

$

510,509

 

 

$

(450,565

)

 

$

59,945

 

Issuance of common stock under employee

   benefit plans

 

 

10,349

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

1,048

 

 

 

 

 

 

1,048

 

Cumulative-effect adjustment to equity due to

   adoption of ASU 2016-02

 

 

 

 

 

 

 

 

 

 

 

(1,328

)

 

 

(1,328

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(4,704

)

 

 

(4,704

)

Balances at March 31, 2019

 

 

11,276,500

 

 

 

1

 

 

 

511,557

 

 

 

(456,597

)

 

 

54,961

 

Issuance of common stock upon exercise of

   options

 

 

2,000

 

 

 

 

 

 

2

 

 

 

 

 

 

2

 

Issuance of common stock under employee

   benefit plans

 

 

6,080

 

 

 

 

 

 

11

 

 

 

 

 

 

11

 

Stock-based compensation

 

 

 

 

 

 

 

 

941

 

 

 

 

 

 

941

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(3,044

)

 

 

(3,044

)

Balances at June 30, 2019

 

 

11,284,580

 

 

$

1

 

 

$

512,511

 

 

$

(459,641

)

 

$

52,871

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three and Six Months Ended

 

 

 

June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-In

 

 

Accumulated

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Equity

 

Balances at January 1, 2018

 

 

5,989,645

 

 

$

1

 

 

$

456,984

 

 

$

(374,232

)

 

$

82,753

 

Issuance of common stock upon exercise

   of options

 

 

3,643

 

 

 

 

 

 

35

 

 

 

 

 

 

35

 

Issuance of common stock under employee

   benefit plans

 

 

18,300

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

2,820

 

 

 

 

 

 

2,820

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(8,981

)

 

 

(8,981

)

Balances at March 31, 2018

 

 

6,011,588

 

 

 

1

 

 

 

459,839

 

 

 

(383,213

)

 

 

76,627

 

Issuance of common stock under employee

   benefit plans

 

 

28,477

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

2,155

 

 

 

 

 

 

2,155

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(9,848

)

 

 

(9,848

)

Balances at June 30, 2018

 

 

6,040,065

 

 

$

1

 

 

$

461,994

 

 

$

(393,061

)

 

$

68,934

 

 

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

5

 


 

ARAVIVE, INC. (FORMERLY KNOWN AS VERSARTIS, INC.)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

 

 

Six Months Ended

 

 

June 30,

 

 

2019

 

 

2018

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net loss

$

(7,748

)

 

$

(18,829

)

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

 

 

 

 

 

 

 

Depreciation and amortization

 

248

 

 

 

236

 

Stock-based compensation expense

 

1,989

 

 

 

4,976

 

Changes in assets and liabilities

 

 

 

 

 

 

 

Prepaid expenses and other assets

 

(3,118

)

 

 

(124

)

Accounts payable

 

284

 

 

 

(695

)

Deferred revenue

 

(146

)

 

 

 

Accrued and other liabilities

 

(117

)

 

 

(860

)

Net cash used in operating activities

 

(8,608

)

 

 

(15,296

)

Cash flows from financing activities

 

 

 

 

 

 

 

Inducement on build-to-suit lease obligation

 

 

 

 

1,896

 

Proceeds from issuance of common stock in connection with employee benefit plans

 

13

 

 

 

35

 

Net cash provided by financing activities

 

13

 

 

 

1,931

 

Net change in cash, cash equivalents, and restricted cash

 

(8,595

)

 

 

(13,365

)

Cash, cash equivalents, and restricted cash at beginning of period

 

59,388

 

 

 

83,529

 

Cash, cash equivalents, and restricted cash at end of period

$

50,793

 

 

$

70,164

 

 

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

 

 

6

 


 

ARAVIVE, INC. (FORMERLY KNOWN AS VERSARTIS, INC.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

1. Formation and Business of the Company

Aravive, Inc. (“Aravive” or the “Company”) was incorporated on December 10, 2008 in the State of Delaware. Aravive is a clinical stage biopharmaceutical company developing treatments designed to halt the progression of life-threatening diseases, including cancer and fibrosis. Prior to the merger with Aravive Biologics, Inc. (the “Merger”), Aravive (then known as Versartis, Inc.) was an endocrine-focused biopharmaceutical company that was developing a long-acting recombinant human growth hormone for the treatment of growth hormone deficiency. The “Company” refers to Aravive as a combined company following the completion of the Merger with Aravive Biologics, Inc. (“Private Aravive”).  The Merger became effective on October 12, 2018. On October 15, 2018, Versartis, Inc. changed its name to Aravive, Inc.

The Company has been primarily performing research and development activities, including clinical trials, filing patent applications, and raising capital to support and expand these activities. Its headquarters and principal operations are located in Houston, Texas.

The Company’s product candidates, AVB-S6, are a set of novel, ultra high-affinity, decoy proteins that target the GAS6-AXL pathway. By capturing serum GAS6, these high affinity decoy proteins starve the AXL pathway of its signal, potentially halting the biological programming that promotes disease progression. AXL signaling plays an important role in multiple types of malignancies by promoting metastasis, cancer cell survival, resistance to treatments, and immune suppression. The GAS6-AXL signaling pathway also plays a significant role in fibrogenesis. The Company’s lead product candidate is AVB-500 (previously referred to as AVB-S6-500).

The Company has generated preclinical data for AVB-S6 proteins in both acute myeloid leukemia and certain advanced solid tumors including ovarian, renal, pancreatic, and breast cancers. The Company’s current development program benefits from the availability of a complementary serum-based biomarker that it expects will help accelerate drug development and reduce risk by allowing the Company to select a pharmacologically active dose. In its Phase 1 clinical trial with its clinical lead product candidate, AVB-500, the Company established proof of mechanism by demonstrating full GAS6 neutralization at all doses tested. Importantly, the lead protein candidate had a favorable safety profile preclinically and in the first in human study. The Company has initiated the Phase 1b portion of a Phase 1b/2 clinical trial of AVB-500 combined with standard of care therapies in patients with platinum-resistant ovarian cancer. We intend to expand development into additional oncology and fibrotic indications.

In July 2016, Private Aravive was approved for a $20 million Product Development Award from the Cancer Prevention and Research Institute of Texas (“CPRIT Grant”). The CPRIT Grant is expected to allow Private Aravive to develop the product candidates referenced above through clinical trials. The CPRIT Grant is effective as of June 1, 2016 and terminates on November 30, 2019. After the termination date, Private Aravive is not permitted to retain any unused grant award proceeds without CPRIT’s approval, but Private Aravive’s royalty and other obligations, including its obligation to repay the disbursed grant proceeds under certain circumstances, survive the termination of the agreement. The CPRIT Grant is subject to customary CPRIT funding conditions including a matching funds requirement where Private Aravive will match 50% of funding from the CPRIT Grant. Consequently, Private Aravive was required to raise $10.0 million in matching funds over the three-year project. Private Aravive has raised all of its required $10.0 million in matching funds.

Private Aravive’s award from CPRIT requires it to pay CPRIT a portion of its revenues from sales of certain products by it, or received from its licensees or sublicensees, at tiered percentages of revenue in the low- to mid-single digits until the aggregate amount of such payments equals 400% of the grant award proceeds, and thereafter at a rate of less than one percent for as long as Private Aravive maintains government exclusivity. In addition, the grant contract also contains a provision that provides for repayment to CPRIT of the full amount of the grant proceeds under certain specified circumstances involving relocation of Private Aravive’s principal place of business outside Texas.

As consideration for the rights granted as part of a license agreement with Stanford University, Private Aravive is obligated to pay yearly license fees and milestone payments, and a royalty based on net sales of products covered by the patent-related rights. More specifically, Private Aravive is obligated to pay Stanford University (i) annual license payments (ii) milestone payments of up to an aggregate of $1,000,000 upon achievement of clinical and regulatory milestones, and (iii) royalties equal to a percentage (in the low single digits) of net sales of licensed products; provided that the annual license payments made will offset (and be credited against) any royalties due in such license year. In the event of a sublicense to a third party of any rights based on the patents that are solely owned by Stanford University, Private Aravive is obligated to pay royalties to Stanford University equal to a percentage of what Private Aravive would have been required to pay to Stanford University had it sold the products under sublicense itself. In addition, in such event it is required to pay to Stanford University a percent of sublicensing income. In the event of a termination, Private Aravive will be obligated to pay all amounts that accrued prior to such termination.

 

 

7


ARAVIVE, INC. (FORMERLY KNOWN AS VERSARTIS, INC.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (unaudited)

 

Unaudited Interim Financial Information

In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of its financial position as of June 30, 2019 and, its results of operations for each of the three and six months ended June 30, 2019 and 2018, and cash flows for the six months ended June 30, 2019, and 2018. The December 31, 2018 condensed consolidated balance sheet was derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles in the United States of America, or GAAP. The results for interim periods are not necessarily indicative of the results for the entire year or any other interim period. The accompanying condensed consolidated financial statements and related financial information should be read in conjunction with the audited financial statements and the related notes thereto for the year ended December 31, 2018 included in the Company’s Annual Report on Form 10-K filed by the Company on March 15, 2019 or the Annual Report with the U.S. Securities and Exchange Commission, or the SEC.

 

 

2. Summary of Significant Accounting Policies

Significant Accounting Policies

As of January 1, 2019, the Company adopted ASC 842 – Leases, as discussed in the section titled “Recent Accounting Pronouncements” of this Note 2.  As a result, the Company added a new significant accounting policy “Leases” as described below.  There have been no other significant changes to the Company’s accounting policies described in the Annual Report.

Basis of Presentation and Use of Estimates

The accompanying condensed consolidated financial statements have been prepared in accordance with GAAP. The preparation of the accompanying condensed consolidated financial statements in accordance 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 condensed consolidated financial statements, and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.

The accompanying unaudited condensed consolidated financial position as of June 30, 2019 and as of December 31, 2018, the results of operations for each of the three and six months ended June 30, 2019 and 2018, and cash flows for the six months ended June 30, 2019 and 2018 include the accounts of Aravive, Inc. and its wholly-owned subsidiaries, Versartis Cayman Holdings Company, incorporated in 2014, Versartis GmbH, incorporated in 2015 and Private Aravive, incorporated in 2007, which was not included as a subsidiary in 2018. After 2015, the Cayman and GmbH subsidiaries became dormant. All intercompany accounts and transactions have been eliminated. The U.S. dollar is the functional currency for all of the Company's subsidiaries and consolidated operations.

As of June 30, 2019, the Company had a cash and cash equivalents balance of approximately $48.4 million consisting of cash and cash equivalents in highly liquid U.S. money market funds. The Company believes that its existing cash and cash equivalents will be sufficient to sustain operations for at least the next 12 months from the issuance of these financial statements, based on its current business plan.  The Company’s expected primary use of cash will be to fund the Company’s clinical development programs, specifically for its product candidate AVB-500. Since inception, the Company has incurred net losses and negative cash flows from operations supporting the Company’s clinical development programs and related general and administrative expenses. At June 30, 2019, the Company had an accumulated deficit of approximately $459.6 million and working capital of approximately $47.4 million. The Company expects to continue to incur losses supporting its clinical development program and related administrative expenses. The Company anticipates it may need additional financing to support its business plan as it moves forward. Although management has been successful in raising capital in the past, there can be no assurance that the Company will be successful or that any needed financing will be available in the future at terms acceptable to the Company.

 

Segments

The Company operates in one segment. Management uses one measurement of performance and does not segregate its business for internal reporting. All long-lived assets are maintained in the United States of America.

 

Concentration of credit risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents. All of the Company’s cash and cash equivalents are held at several financial institutions that management believes are of high credit quality. Such deposits may exceed federally insured limits.

8

 


ARAVIVE, INC. (FORMERLY KNOWN AS VERSARTIS, INC.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (unaudited)

 

 

Risk and Uncertainties

The Company’s future results of operations involve a number of risks and uncertainties. Factors that could affect the Company’s future operating results and cause actual results to vary materially from expectations include, but are not limited to, uncertainty of results of clinical trials and reaching milestones, uncertainty of regulatory approval of the Company’s potential drug candidates, uncertainty of market acceptance of the Company’s products, competition from substitute products and larger companies, securing and protecting proprietary technology, strategic relationships or a strategic transaction and dependence on key individuals and sole source suppliers.

Products developed by the Company require clearances from the U.S. Food and Drug Administration, or the FDA, the Pharmaceuticals Medicines and Devices Agency, or the PMDA, or other international regulatory agencies prior to commercial sales. There can be no assurance that the products will receive the necessary clearances. If the Company was denied clearance, clearance was delayed, or the Company was unable to maintain clearance, it could have a materially adverse impact on the Company.

The Company expects to incur substantial operating losses for the next several years and will need to obtain additional financing in order to develop, launch and commercialize any product candidates for which it receives regulatory approval.

Cash and cash equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. At June 30, 2019 and December 31, 2018, the Company’s cash and cash equivalents were held at multiple institutions in the United States and included deposits in money market funds which were unrestricted as to withdrawal or use.

Restricted Cash

Restricted cash includes cash and cash equivalents that is restricted through legal contracts, regulations or the Company’s intention to use the cash for a specific purpose. The Company’s restricted cash primarily relates to the letter of credit provided to its Landlord for the Company’s facilities in Menlo Park, California (as described in Note 5) to secure its obligations under the lease.

Property and equipment, Net

Property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets, generally between three and five years. Leasehold improvements are amortized on a straight-line basis over the lesser of their useful life or the term of the lease. Maintenance and repairs are charged to expense as incurred, and improvements are capitalized. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the balance sheet and any resulting gain or loss is reflected in operations in the period realized.

Leases

The Company adopted ASC 842 on January 1, 2019.  For the periods prior to January 1, 2019, the Company’s leases were accounted for under ASC 840. The Company leases all of its office space in conducting its business. At inception, the Company determines whether an agreement represents a lease and at commencement the Company evaluates each lease agreement to determine whether the lease is an operating or financing lease. As described below under "Recent Accounting Pronouncements”, the Company adopted the Financial Accounting Standards Board Accounting Standards Update, or ASU, "Leases," or ASU 2016-02. The Company elected to adopt the standard on January 1, 2019 using the alternative transition method provided by ASU 2018-11 whereby the Company recorded right-of-use (“ROU”) assets and lease liabilities for its existing leases as of January 1, 2019, as well as a cumulative-effect adjustment to accumulated deficit of initially applying the new standard as of January 1, 2019.

The new standard provides a number of optional practical expedients in transition. The Company has elected the practical expedients to not reassess its prior conclusions about lease identification under the new standard, to not reassess lease classification, and to not reassess initial direct costs. The Company has elected the practical expedient allowing the use-of-hindsight which doesn’t require the Company to reassess the lease term of its leases based on all facts and circumstances through the effective date.

The new guidance also provides practical expedients for ongoing lease accounting. The Company has elected the recognition exemption for short-term lease for all leases that qualify. Under this exemption, the Company will not recognize ROU assets or lease liabilities on the balance sheet for those leases that qualify as a short-term lease, which includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. The Company has also elected the practical expedient to not separate lease and non-lease components for all equipment and real-estate leases.

 

9

 


ARAVIVE, INC. (FORMERLY KNOWN AS VERSARTIS, INC.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (unaudited)

 

With the adoption of ASU 2016-02, the Company recorded an operating lease right-of-use asset and an operating lease obligation on the consolidated balance sheet. ROU assets represent the Company’s ROU of the underlying asset for the lease term and the lease obligation represents the Company’s commitment to make the lease payments arising from the lease. ROU obligations are recognized at the commencement date based on the present value of remaining lease payments over the lease term and ROU assets are calculated as the lease liability, adjusted by unamortized initial direct costs, unamortized lease incentives received, cumulative deferred or prepaid lease payments, and accumulated impairment losses. As the Company’s leases do not provide an implicit rate, the Company has used an estimated incremental borrowing rate based on the information available at the adoption date in determining the present value of lease payments. The lease term may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Operating lease expense is recognized on a straight-line basis over the lease term, subject to any changes in the lease or expectations regarding the terms. Variable lease costs such as common area costs and property taxes are expensed as incurred. For all lease agreements the Company has combined lease and nonlease components. Leases with an initial term of 12 months or less are not recorded on the balance sheet.

 

Prior to the Company’s adoption of ASU 2016-02, when the Company’s lease agreements contained renewal options, tenant improvement allowances, rent holidays and rent escalation clauses, the Company recorded a deferred rent asset or liability equal to the difference between the rent expense and the future minimum lease payments due. The lease expense related to operating leases was recognized on a straight-line basis in the statements of operations over the term of each lease.

Impairment of Long-Lived Assets

The Company reviews property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by the comparison of the carrying amount to the future net cash flows which the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value (i.e. determined through estimating projected discounted future net cash flows or other acceptable methods of determining fair value) arising from the asset. There have been no such impairments of long-lived assets as of June 30, 2019 or December 31, 2018.

Fair Value of Financial Instruments

The carrying value of the Company’s cash and cash equivalents, prepaid expenses, accounts payable and accrued liabilities approximate fair value due to the short-term nature of these items.

Fair value is defined as the exchange price that would be received for an asset or an exit price paid to transfer a liability 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.

The fair value hierarchy defines a three-level valuation hierarchy for disclosure of fair value measurements as follows:

Level 1Unadjusted quoted prices in active markets for identical assets or liabilities;

Level 2Inputs other than quoted prices included within Level 1 that are observable, unadjusted quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and

Level 3Unobservable inputs that are supported by little or no market activity for the related assets or liabilities.

The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The Company’s financial instruments consist of Level 1 assets as of June 30, 2019. Level 1 securities are comprised of highly liquid money market funds.

10

 


ARAVIVE, INC. (FORMERLY KNOWN AS VERSARTIS, INC.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (unaudited)

 

Preclinical and Clinical Trial Accruals

The Company’s clinical trial accruals are based on estimates of patient enrollment and related costs at clinical investigator sites as well as estimates for the services received and efforts expended pursuant to contracts with multiple research institutions and clinical research organizations, or CROs, that conduct and manage clinical trials on the Company’s behalf.

The Company estimates preclinical and clinical trial expenses based on the services performed, pursuant to contracts with research institutions and clinical research organizations that conduct and manage preclinical studies and clinical trials on its behalf. In accruing service fees, the Company estimates the time period over which services will be performed and the level of patient enrollment and activity expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, the Company will adjust the accrual accordingly. Payments made to third parties under these arrangements in advance of the receipt of the related services are recorded as prepaid expenses until the services are rendered.

Research and development

Research and development costs are charged to operations as incurred. Research and development costs include, but are not limited to, payroll and personnel expenses, laboratory supplies, consulting costs, external research and development expenses and allocated overhead, including rent, equipment depreciation, and utilities. Costs to acquire technologies to be used in research and development that have not reached technological feasibility and have no alternative future use are expensed to research and development costs when incurred.

Income taxes

The Company accounts for income taxes under the asset and liability approach. 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. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.

The Company assesses all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge by relevant taxing authorities. Assessing an uncertain tax position begins with the initial determination of the position’s sustainability and is measured at the largest amount of benefit that is greater than percent likely of being realized upon ultimate settlement. As of each balance sheet date, unresolved uncertain tax positions must be reassessed, and the Company will determine whether (i) the factors underlying the sustainability assertion have changed and (ii) the amount of the recognized tax benefit is still appropriate. The recognition and measurement of tax benefits requires significant judgment. Judgments concerning the recognition and measurement of a tax benefit might change as new information becomes available.     

Stock-Based compensation

For stock options granted to employees, the Company recognizes compensation expense for all stock-based awards based on the grant-date estimated fair value. The value of the portion of the award that is ultimately expected to vest is recognized as expense ratably over the requisite service period. The fair value of stock options is determined using the Black-Scholes option pricing model. The determination of fair value for stock-based awards on the date of grant using an option pricing model requires management to make certain assumptions regarding a number of complex and subjective variables.

Stock-based compensation expense related to stock options granted to nonemployees is recognized based on the fair value of the stock options, determined using the Black-Scholes option pricing model, as they are earned. The awards generally vest over the time period the Company expects to receive services from the nonemployee.

Stock-based compensation expense, net of estimated forfeitures, is reflected in the condensed consolidated statements of operations and comprehensive loss as follows (in thousands):

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

$

112

 

 

$

877

 

 

$

198

 

 

$

1,759

 

General and administrative

 

829

 

 

 

1,278

 

 

 

1,791

 

 

 

3,216

 

Total

$

941

 

 

$

2,155

 

 

$

1,989

 

 

$

4,975

 

 

11

 


ARAVIVE, INC. (FORMERLY KNOWN AS VERSARTIS, INC.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (unaudited)

 

Comprehensive Loss

Comprehensive loss is defined as a change in equity of a business enterprise during a period, resulting from transactions from non-owner sources.  Specifically, the Company includes cumulative foreign currency translation adjustments and net unrealized gains and losses on effective cash flow hedges. There was no difference between net loss and comprehensive loss for all periods presented.

Net Loss per Share of Common Stock

Basic net loss per common share is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration for potentially dilutive securities. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common shares and potentially dilutive securities outstanding for the period. For purposes of the diluted net loss per share calculation, stock options, restricted stock units and shares issued under the Company’s Employee Stock Purchase Plan are considered to be potentially dilutive securities. Because the Company has reported a net loss for all of the periods presented, diluted net loss per common share is the same as basic net loss per common share for those periods.

Intangible Asset

Intangible assets consist of an assembled workforce which was acquired as part of the Merger.  Intangible assets with definite lives are amortized based on their pattern of economic benefit over their estimated useful lives and reviewed periodically for impairment.  The estimated useful life of the assembled workforce is 3 years.

Revenue Recognition

The Company’s sole source of revenue for 2019 and 2018 was grant revenue related to the CPRIT contract, which is being recognized when qualifying costs are incurred and there is reasonable assurance that the conditions of the award have been met for collection. Proceeds received prior to the costs being incurred or the conditions of the award being met are recognized as deferred revenue until the services are performed and the conditions of the award are met.

As of June 30, 2019, the Company has recognized $4.8 million from the CPRIT grant.  Funds received are reflected in deferred revenue as a liability until revenue is earned. Grant revenue is recognized when qualifying costs are incurred. As of June 30, 2019, the Company had an unbilled receivable from CPRIT of $2.0 million, which is reflected in prepaids and other current assets on the accompanying consolidated balance sheet.

Quarterly reclassifications

Certain reclassifications of prior period amounts have been made within the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019. Specifically, during the fourth quarter ended December 31, 2018, the Company determined that the amount related to the inducement on build-to-suit lease obligation as reflected within one line in the investing activities section of the unaudited consolidated statement of cash flows for the six month period ended June 30, 2018 included in the Form 10-Q, should have been classified as cash flows provided from financing activities.  There is no impact to the consolidated statements of operations and comprehensive loss or consolidated balance sheets for any of these periods. The Company evaluated the effect of this misclassification and concluded it was not material to any of its previously issued unaudited consolidated financial statements.  Upon revision, cash flows from investing activities for the six-month period ended June 30, 2018, decreased by $1.9 million and cash flows from financing activities for the respective periods increased by $1.9 million. This adjustment had no impact to the Company’s financial position, results of operations or cash flows as of and for the year ended December 31, 2018.

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board, or FASB, or other standard setting bodies and adopted by us as of the specified effective date. Unless otherwise discussed, the impact of recently issued standards that are not yet effective is not expected to have a material impact on the Company’s financial position or results of operations upon adoption.

In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718) - Improvements to Nonemployee Share-Based Payment Accounting. This amendment provides additional guidance related to share-based payment transactions for acquiring goods or services from nonemployees. The guidance will be effective for the Company for fiscal years beginning after December 15, 2018, including the interim periods within that fiscal year. The Company has adopted this new guidance as of January 1, 2019, which had no material impact on the Company’s consolidated financial statements.

12

 


ARAVIVE, INC. (FORMERLY KNOWN AS VERSARTIS, INC.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (unaudited)

 

In June 2018, the FASB issued ASU No. 2018-08, Not-For-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made, which is intended to clarify and improve the scope and the accounting guidance for contributions received and contributions made. The amendments in ASU No. 2018-08 should assist entities in (1) evaluating whether transactions should be accounted for as contributions (nonreciprocal transaction) within the scope of Topic 958, Not-for-Profit Entities, or as exchange (reciprocal) transactions subject to other guidance and (2) determining whether a contribution is conditional. This amendment applies to all entities that make or receive grants or contributions. This ASU is effective for public companies serving as a resource recipient for fiscal years beginning after June 15, 2018, including interim periods within that fiscal year. The Company has adopted this guidance as of January 1, 2019 which had no material impact to its consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU is a comprehensive new leases standard that amends various aspects of existing guidance for leases and requires additional disclosures about leasing arrangements. The new standard requires that all lessees recognize the assets and liabilities that arise from leases on the balance sheet and disclose qualitative and quantitative information about its leasing arrangements. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the previous lease guidance.  ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842)-- Targeted Improvements, that allows entities to apply the provisions of the new standard at the effective date (e.g. January 1, 2019), as opposed to the earliest period presented under the modified retrospective transition approach (January 1, 2017) and recognize a cumulative-effect adjustment to the opening balance of accumulated deficit in the period of adoption. The modified retrospective approach includes a number of optional practical expedients primarily focused on leases that commenced before the effective date of Topic 842, including continuing to account for leases that commence before the effective date in accordance with previous guidance, unless the lease is modified. The Company adopted ASC Topic 842 with the cumulative effect of adoption recognized to retained earnings on January 1, 2019, as described in Note 2.

 

As a result of the adoption of ASC 842 on January 1, 2019, the Company derecognized $8.6 million for the existing asset; $7.3 million for the obligation and $1.3 million to the opening balance of the accumulated deficit. The existing asset and obligation on the consolidated balance sheet resulted from the build-to-suit lease arrangement at the 1020 Space, which did not meet the criteria for “sale-leaseback” treatment at the time construction was completed in 2017, and the Company has applied the general lessee transition guidance to this lease. Based on the Company’s assessment of the 1020 Space, qualifies as an operating lease under ASC 842.  

 

Additionally, as a result of adoption of ASC 842, the Company recognized operating lease ROU assets of approximately $10.4 million, $2.1 million of leasehold improvements, an operating lease obligation of $12.6 million and derecognition of deferred rent of $0.1 million as of January 1, 2019.

 

3. Balance Sheet Components

Prepaid expenses and other current assets (in thousands)

 

 

 

June 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Preclinical and clinical (1)

 

$

745

 

 

$

416

 

Lease receivable

 

 

906

 

 

 

606

 

Unbilled receivable from CPRIT

 

 

2,000

 

 

 

 

Other

 

 

16

 

 

 

16

 

Total

 

$

3,667

 

 

$

1,038

 

 

(1)

These prepayments consist primarily of advances to the Company’s contract manufacturers and contract research organizations

13

 


ARAVIVE, INC. (FORMERLY KNOWN AS VERSARTIS, INC.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (unaudited)

 

Property and equipment, net (in thousands)

 

 

 

June 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Equipment and furniture

 

$

1,442

 

 

$

1,442

 

Buildings, leasehold and building improvements

 

 

2,674

 

 

 

134

 

 

 

 

4,116

 

 

 

1,576

 

Less: Accumulated depreciation and amortization

 

 

(2,120

)

 

 

(1,544

)

Property and equipment, net

 

$

1,996

 

 

$

32

 

 

Depreciation expense was approximately $0.1 million and $0.2 million for the three and six months ended June 30, 2019 and 2018, respectively. Additionally, as a result of the adoption of ASC 842, the Company recognized accumulated depreciation of approximately $0.5 million for its leasehold improvements associated with the 1020 Space as of January 1, 2019.

 

 

Accrued Liabilities (in thousands)  

 

 

 

June 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Payroll and related

 

$

800

 

 

$

509

 

Preclinical and clinical

 

 

600

 

 

 

563

 

Other

 

 

 

 

 

293

 

Total

 

$

1,400

 

 

$

1,365

 

 

 

4. Fair Value Measurements

The Company’s financial instruments consist principally of cash and cash equivalents, prepaid expenses, accounts payable and accrued liabilities. The following table sets forth the Company’s financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands):

 

 

Fair Value Measurements at June 30, 2019

 

 

(unaudited)

 

 

Total

 

 

Level 1

 

Assets

 

 

 

 

 

 

 

Money market funds

$

36,363

 

 

$

36,363

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at December 31, 2018

 

 

Total

 

 

Level 1

 

Assets

 

 

 

 

 

 

 

Money market funds

$

48,389

 

 

$

48,389

 

 

 

5. Leases

In March 2017, the Company entered into an operating facility lease agreement for approximately 34,500 rentable square feet located at 1020 Marsh Road, Menlo Park, California or the 1020 Space.  The lease commenced in August 2017 for a period of 87 months with one renewal option for a five-year term. The Company did not include the renewal option period as the Company determined it was not reasonably certain the lease would be renewed as of the modification date.

In October 2018, the Company executed a sublease agreement in Palo Alto, California for approximately 4,240 square feet for office space. The rental term of the sublease commenced on October 30, 2018 and expires August 31, 2020.  

During the three and six months ended June 30, 2019, the Company’s operating lease costs were $0.5 million and $1.1 million, respectively and cash paid for amounts included in the measurement of lease obligations for operating cash flows from operating leases for the six months ended June 30, 2019 was $1.3 million. As of June 30, 2019, the Company’s operating leases had a weighted average remaining lease term of 5.6 years and a weighted average discount rate of 7.75%, which approximates the Company’s incremental borrowing rate.

 

14

 


ARAVIVE, INC. (FORMERLY KNOWN AS VERSARTIS, INC.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (unaudited)

 

 

As of June 30, 2019, minimum lease payments under non-cancelable operating leases by period were expected to be as follows (in thousands):

 

Year Ending December 31,

 

 

 

 

2019 (6 months remaining)

 

$

1,336

 

2020

 

 

2,668

 

2021

 

 

2,618

 

2022

 

 

2,697

 

2023

 

 

2,777

 

Thereafter

 

 

2,373

 

Total operating lease payments

 

 

14,469

 

Less imputed interest

 

 

(2,969

)

Total operating lease obligations

 

 

11,500

 

Less current operating lease obligations

 

 

(2,505

)

Noncurrent operating lease obligations

 

$

8,995

 

 

 

1020 Marsh Sublease

In August 2018, the Company entered into an operating sublease agreement with EVA Automation, Inc. (“EVA”) for the 1020 Space referenced above. The 1020 Space Sublease commenced on October 1, 2018 for 72 months.  EVA is entitled to an abatement of base rent of approximately $0.9 million for the first five full calendar months of the term of the sublease. Lease income associated with this sublease is recorded in other income in the accompanying consolidated statement of operations. The Company has recorded lease income associated with this sublease of approximately $0.6 million and $1.3 million for the three and six months ended June 30, 2019, respectively.  During the six months ended June 30, 2019, cash received from EVA was $0.8 million, which amount was included in other current assets for operating cash flows.

Future base rent and additional rent EVA shall pay to the Company over the sublease term as of June 30, 2019, are as follows (in thousands):

 

 

 

 

 

 

Year Ending December 31,

 

 

 

 

2019 (6 months remaining)

 

$

1,258

 

2020

 

 

2,563

 

2021

 

 

2,628

 

2022

 

 

2,695

 

2023

 

 

2,764

 

Thereafter

 

 

2,355

 

Total

 

$

14,263

 

 

6. Commitments and Contingencies

In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications. The Company’s exposure under these agreements is unknown because it involves claims that may be made against the Company in the future. The Company accrues a liability for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated.

As of June 30, 2019 and 2018 the Company is contingently committed to make development and sales-related milestone payments of up to $30.0 million under certain circumstances, and other payments of $10.0 million, as well as royalties relating to potential future product sales under the License Agreement with Amunix. On May 28, 2019, the Company provided notice of termination to Amunix Operating, Inc. terminating the License Agreement.  Pursuant to the terms of the License Agreement, the termination is effective as of August 26, 2019.

 

15

 


ARAVIVE, INC. (FORMERLY KNOWN AS VERSARTIS, INC.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (unaudited)

 

7. Stockholders’ Equity

 

Equity Incentive Plans

The Company’s Board of Directors, or Board, and stockholders previously approved the 2014 Equity Incentive Plan, or the 2014 Plan, which became effective on March 21, 2014.  As of June 30, 2019, the total number of shares of common stock available for issuance under the 2014 Plan was approximately 723,462.  Unless the Board provides otherwise, beginning on January 1, 2015, and continuing until the expiration of the 2014 Plan, the total number of shares of common stock available for issuance under the 2014 Plan will automatically increase annually on January 1 by 4.5% of the total number of issued and outstanding shares of common stock as of December 31 of the immediately preceding year.  

In March 2014, the Board and stockholders approved the 2014 Employee Stock Purchase Plan, or the ESPP, which became effective as of March 5, 2014. The Company initially reserved a total of 150,000 shares of common stock for issuance under the ESPP. Unless the Board provides otherwise, beginning on January 1, 2015, and continuing until the expiration of the ESPP, the total number of shares of common stock available for issuance under the ESPP will automatically increase annually on January 1 by the lesser of (i) 1% of the total number of issued and outstanding shares of common stock as of December 31 of the immediately preceding year, or (ii) 300,000 shares of common stock.

As part of the Merger, the Company assumed the 2010 Stock Option Plan (the “2010 Plan”) from Private Aravive. The Company has reserved a total of 1,368,060 shares of common stock for issuance under the 2010 Plan. As of June 30, 2019, the total number of shares of common stock available for issuance under the 2010 Plan was approximately 108,839. The 2010 Plan provides for granting of equity awards, including restricted stock and incentive and nonqualified stock options to purchase common stock, to employees, directors, officers and independent consultants of the Company. Options granted to employees and consultants under the Plan generally vest 25% after one year of service, and ratably on a monthly basis over the following three years. Options expire ten years from the date of grant.

As part of the Merger, the Company assumed the 2017 Stock Option Plan (the “2017 Plan”) from Private Aravive. The Company has reserved a total of approximately 1,051,544 shares of common stock for issuance under the 2017 Plan. As of June 30, 2019, the total number of shares of common stock available for issuance under the 2017 Plan was approximately 551,133. The 2017 Plan provides for granting of equity awards, including restricted stock and incentive and nonqualified stock options to purchase common stock, to employees, directors, officers and independent consultants of the Company. Options granted to employees and consultants under the Plan generally vest 25% after one year of service, and ratably on a monthly basis over the following three years. Options expire ten years from the date of grant.

Activity under the Company’s stock option plans is set forth below:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

Remaining

 

 

Aggregate

 

 

 

 

 

 

 

 

Average

 

 

Contractual

 

 

Intrinsic

 

 

 

 

Number of

 

 

Exercise

 

 

Life

 

 

Value

 

 

 

 

Shares

 

 

Price

 

 

(in years)

 

 

(in thousands)

 

Balances, January 1, 2019

 

 

 

1,515,923

 

 

$

18.65

 

 

 

 

 

 

 

 

 

Options granted

 

 

 

438,328

 

 

 

5.53

 

 

 

 

 

 

 

 

 

Options cancelled

 

 

 

(97,382

)

 

 

96.15

 

 

 

 

 

 

 

 

 

Options exercised

 

 

 

(2,000

)

 

 

0.66

 

 

 

 

 

 

 

 

 

Balances, June 30, 2019

 

 

 

1,854,869

 

 

$

11.48

 

 

 

7.1

 

 

$

6,804

 

Outstanding and expected to vest as of June 30, 2019

 

 

 

1,821,599

 

 

$

11.55

 

 

 

7.1

 

 

$

6,796

 

Exercisable as of June 30, 2019

 

 

 

1,464,578

 

 

$

11.86

 

 

 

6.5

 

 

$

6,692

 

 

16

 


ARAVIVE, INC. (FORMERLY KNOWN AS VERSARTIS, INC.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (unaudited)

 

Stock Options Granted to Employees

During the six months ended June 30, 2019, the Company granted stock options to officers, directors and employees to purchase shares of common stock with a weighted-average grant date fair value of $4.69 per share. The fair value is being expensed over the vesting period of the options, which is usually 4 years on a straight-line basis as the services are being provided. No tax benefits were realized from options and other share-based payment arrangements during the periods.

As of June 30, 2019, total unrecognized employee stock-based compensation related to stock options granted was $2.8 million, which is expected to be recognized over the weighted-average remaining vesting period of 3.4 years.

The fair value of employee stock options was estimated using the Black-Scholes model with the following weighted-average assumptions:

 

 

 

June 30,

 

 

 

2019

 

Expected volatility

 

 

111.0

%

Risk-free interest rate

 

 

2.5

%

Dividend yield

 

 

0.0

%

Expected life (in years)

 

 

6.0

 

 

 

 

 

 

 

 

 

 

 

 

Restricted Stock Units 

Restricted stock units are shares of common stock which are forfeited if the employee leaves the Company prior to vesting. These stock units offer employees the opportunity to earn shares of the Company’s stock over time, rather than options that give the employee the right to purchase stock at a set price. As a result of these restricted stock units, the Company recognized $0.4 million and $0.7 million in compensation expense during the three months ended June 30, 2019 and 2018, respectively and $0.8 million and $1.9 million during the six months ended June 30, 2019 and 2018, respectively.  As all of the restricted stock vests through 2018 and beyond, the Company will continue to recognize stock-based compensation expense related to the grants of these restricted stock units. If all of the remaining restricted stock units that were granted in prior years vest, the Company will recognize approximately $1.5 million in compensation expense over a weighted average remaining period of 1.6 years. However, no compensation expense will be recognized for restricted stock units that do not vest.

 

 

8. Net loss per share of Common Stock

The following table summarizes the computation of basic and diluted net loss per share of the Company (in thousands, except per share data):

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net loss

$

(3,044

)

 

$

(9,848

)

 

$

(7,748

)

 

$

(18,829

)

Basic and diluted net loss per common share

$

(0.27

)

 

$

(1.64

)

 

$

(0.69

)

 

$

(3.14

)

Weighted-average shares used to compute basic and diluted net

   loss per share

 

11,280

 

 

 

6,023

 

 

 

11,277

 

 

 

6,002

 

 

Basic net loss per share is computed by dividing the net loss by the weighted-average number of common shares outstanding for the period. Diluted net loss per share is computed by dividing the net loss per common share by the weighted-average number of common shares and dilutive common stock equivalents outstanding for the period, determined using the treasury-stock method and the as-if converted method, for convertible securities, if inclusion of these is dilutive. Because the Company has reported a net loss for all periods presented, diluted net loss per share is the same as basic net loss per common share for those periods.

 

 

17

 


 

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

You should read the following management’s discussion and analysis of our financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our audited financial statements and notes thereto for the year ended December 31, 2018, included in our Annual Report on Form 10-K filed on March 15, 2019, or the 2018 Annual Report, with the U.S. Securities and Exchange Commission, or SEC.

Special note regarding forward-looking statements

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements. The statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “strategy,” “target,” “will,” “would” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” included under Part II, Item 1A below and those identified under Part 1, Item 1A of the 2018 Annual Report. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Overview

We are a clinical stage biopharmaceutical company developing treatments designed to halt the progression of life-threatening diseases, including cancer and fibrosis. Prior to the merger (the “Merger”) with Aravive Biologics, Inc. (“Private Aravive”), we (then known as Versartis, Inc.) were an endocrine-focused biopharmaceutical company that was developing a long-acting recombinant human growth hormone for the treatment of growth hormone deficiency.

Our focus has been primarily performing research and development activities, including clinical trials, filing patent applications, and raising capital to support and expand these activities. Our headquarters and principal operations are located in Houston, Texas.

Our product candidates, AVB-S6, are a set of novel, ultra high-affinity, decoy proteins that target the GAS6-AXL pathway. By capturing serum GAS6, these high affinity decoy proteins starve the AXL pathway of its signal, potentially halting the biological programming that promotes disease progression. AXL signaling plays an important role in multiple types of malignancies by promoting metastasis, cancer cell survival, resistance to treatments, and immune suppression. The GAS6-AXL signaling pathway also plays a significant role in fibrogenesis. Our lead product candidate is AVB-500 (previously referred to as AVB-S6-500).

We have generated preclinical data for AVB-S6 proteins in both acute myeloid leukemia and certain advanced solid tumors including ovarian, renal, pancreatic, and breast cancers. Our current development program benefits from the availability of a complementary serum-based biomarker that it expects will help accelerate drug development and reduce risk by allowing us to select a pharmacologically active dose. In our Phase 1 clinical trial with its clinical lead product candidate, AVB-500, we have established proof of mechanism by demonstrating full GAS6 neutralization at all doses tested. Importantly, AVB-500 had a favorable safety profile preclinically and in the first in human study. We have initiated the Phase 1b portion of a Phase 1b/2 clinical trial of AVB-500 combined with standard of care therapies in patients with platinum-resistant ovarian cancer. We intend to expand development into additional oncology and fibrotic indications.

Recent Developments

On July 31, 2019, we issued a press release announcing that the preliminary efficacy data from our ongoing clinical trial with AVB-500 showed compelling anti-tumor activity in the 12 patients treated from the first cohort of the ongoing  Phase 1b portion of the Phase 1b/2 trial of AVB-500 in patients with platinum-resistant recurrent ovarian cancer where response to standard of care chemotherapy alone in patients is typically 10-15 percent.

The open-label, Phase 1b safety lead-in portion of the efficacy and safety study of AVB-500 in patients with platinum-resistant recurrent ovarian cancer enrolled patients into two cohorts, one investigating a combination of AVB-500 with pegylated liposomal doxorubicin (PLD) and the other, a combination of AVB-500 with paclitaxel (PAC). The overall best response rate (ORR) in the AVB-500 combination cohorts to date by investigator determined RECIST v1.1 criteria was greater than response rates observed historically with standard of care chemotherapy alone in this clinical setting. We therefore have decided to expand enrollment in the Phase 1b portion of the study, to validate the unanticipated early positive efficacy signal.

18

 


 

Important Note

 

This Management’s Discussion and Analysis includes a discussion of our operations for the quarter ended June 30, 2019, which reflects the operations of Private Aravive, that are not included in the discussion for the three and six months ended June 30, 2018 due to the fact that the Merger was consummated in October 2018.  Accordingly, the results of operations reported for the three and six months ended June 30, 2019 and 2018, in this Management’s Discussion and Analysis are not comparable.

Due to the substantial changes in our assets, liabilities and operations resulting from the completion of the Merger on October 12, 2018, our historical financial results do not provide a reasonable basis from which to predict the merged company’s future financial results or condition.

References in this report to “we,” “us,” “our” and similar first-person expressions refer to Aravive, Inc. (formerly known as Versartis, Inc.) and its subsidiaries, including Private Aravive. References to “Versartis, Inc.” or “Private Aravive” refer to those respective companies prior to the completion of their merger in October 2018.

Financial overview

Revenue

We have never generated net income from operations on an annual basis, and, as of June 30, 2019, we had an accumulated deficit of approximately $459.6 million, primarily as a result of research and development and general and administrative expenses. We have never earned revenue from commercial sales of any of our product candidates. We generated grant revenue of approximately $3.1 and $4.8 million for the three and six months ended June 30, 2019 and $1.4 million for the year ended December 31, 2018, respectively.

In the future, we may generate revenue from a variety of sources, including product sales if we develop products which are approved for sale, license fees, milestones, research and development and royalty payments in connection with strategic collaborations or government contracts, or licenses of our intellectual property.

Research and development expenses

Research and development costs are expensed as incurred. Research and development expense includes payroll and personnel expenses; consulting costs; external contract research and development expenses; and allocated overhead, including rent, equipment depreciation and utilities, and relate to both company-sponsored programs as well as costs incurred pursuant to reimbursement arrangements. Nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities are deferred and capitalized and recognized as an expense as the goods are delivered or the related services are performed.

As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued research and development expenses. This process involves reviewing contracts and purchase orders, reviewing the terms of our license agreements, communicating with our applicable personnel to identify services that have been performed on our behalf, and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual cost. The majority of our service providers invoice us monthly in arrears for services performed. We make estimates of our accrued expenses as of each consolidated balance sheet date in our consolidated financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. Examples of estimated accrued research and development expenses include fees to:

 

contract manufacturers in connection with the production of clinical trial materials;

 

contract research organizations and other service providers in connection with clinical studies;

 

investigative sites in connection with clinical studies;

 

vendors in connection with preclinical development activities; and

 

professional service fees for consulting and related services.

We base our expenses related to clinical studies on our estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and contract research organizations that conduct and manage clinical studies on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract, and may result in uneven payment flows and expense recognition. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual accordingly. Our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in our reporting changes in estimates in any particular period. To date, there have been no material differences from our estimates to the amount actually incurred. However, due to the nature of these estimates, we cannot assure you that we will not make changes to our estimates in the future as we become aware of additional information about the status or conduct of our clinical studies or other research activity.

19

 


 

General and administrative expenses

General and administrative expenses consist principally of personnel-related costs, professional fees for legal, consulting, audit and tax services, rent and other general operating expenses not included in research and development.

 

Other income (expense), net

Other income (expense), net is primarily comprised of sublease income for our 1020 Marsh property lease, interest charges related to our build-to-suite lease obligation, and gains and losses on foreign currency transactions related to third party contracts with foreign-based contract manufacturing organizations.

Critical accounting policies, significant judgments and use of estimates

Our management’s discussion and analysis of financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with GAAP.  The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. On an ongoing basis, we evaluate our critical accounting policies and estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions. Our significant accounting policies are more fully described in Note 2 of the accompanying unaudited condensed consolidated financial statements and in Note 2 to our audited consolidated financial statements contained in the 2018 Annual Report.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). The amendments in this update create Topic 842, Leases, and supersede the leases requirements in Topic 840, Leases. Topic 842 specifies the accounting for leases. The objective of Topic 842 is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. The main difference between Topic 842 and Topic 840 is the recognition of lease assets and lease liabilities for those leases classified as operating leases under Topic 840. Topic 842 retains a distinction between finance leases and operating leases. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the previous lease guidance. The result of retaining a distinction between finance leases and operating leases is that under the lessee accounting model in Topic 842, the effect of leases in the statement of comprehensive income and the statement of cash flows is largely unchanged from previous GAAP. The amendments in ASU 2016-02 became effective for us on January 1, 2019, we wrote off our previously recorded build-to-suit asset as a result of adoption and recorded a right-of-use asset for our existing leases. The full adoption impact of the ASU 2016-02 is illustrated in the accompanying consolidated financial statements.

Other than as discussed above, there have been no significant or material changes in our critical accounting policies during the six months ended June 30, 2019, as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Use of Estimates” in the 2018 Annual Report.

Results of operations

Comparison of the Three and Six Months Ended June 30, 2019 and 2018

The following table summarizes our net loss during the periods indicated (in thousands, except percentages):

 

 

Three Months Ended

 

 

Increase/

 

 

Six Months Ended

 

 

Increase/

 

 

 

June 30,

 

 

(Decrease)

 

 

June 30,

 

 

(Decrease)

 

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grant revenue

$

3,054

 

 

$

 

 

 

3,054

 

 

NM (1)

 

 

$

4,753

 

 

$

 

 

 

4,753

 

 

NM (1)

 

 

Operating expenses: