Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note 1—Organization and description of business operations

 

Dova Pharmaceuticals, Inc. ("Dova" or the "Company") is a pharmaceutical company focused on acquiring, developing and commercializing drug candidates for diseases that are treated by specialist physicians, with an initial focus on addressing thrombocytopenia, a disorder characterized by a low blood platelet count. On May 21, 2018, the U.S. Food and Drug Administration (“FDA”) approved DOPTELET ^® (avatrombopag), which is an orally administered thrombopoietin receptor agonist for the treatment of thrombocytopenia in adult patients with chronic liver disease (“CLD”) scheduled to undergo a procedure, which was commercially launched on June 4, 2018. On June 20, 2019, the Company was granted a marketing authorization by the European Commission for the treatment of severe thrombocytopenia in adult patients with CLD who are scheduled to undergo an invasive procedure; DOPTELET has not yet been commercially launched in Europe. Furthermore, on June 26, 2019, the Company received FDA approval for DOPTELET for the treatment of thrombocytopenia in adult patients with chronic immune thrombocytopenia ("ITP") who have had an insufficient response to a previous treatment. The Company commercially launched DOPTELET for the treatment of ITP on July 16, 2019.

 

The unaudited condensed consolidated financial statements of the Company include the results of operations for the three and six months ended June 30, 2019 and June 30, 2018 .

 

Note 2—Significant accounting policies

 

Basis of presentation and principles of consolidation

 

The Company’s unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and include all adjustments necessary for the fair presentation of the Company’s financial position for the periods presented. The results of operations for the three and six months ended June 30, 2019 are not necessarily indicative of the results for the full year or the results for any future periods and should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2018 in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission (the "SEC") on March 5, 2019.

 

Liquidity and capital resources

 

The Company has incurred substantial operating losses since inception and expects to continue to incur significant operating losses for the foreseeable future and may never become profitable. As of June 30, 2019 , the Company had an accumulated deficit of $162.9 million.

 

Since inception, the Company has financed its operations through the issuance of equity and debt with net aggregate proceeds of $238.0 million .  Although the Company began generating revenue from product sales of DOPTELET in June 2018, the Company does not expect product revenue to be sufficient to satisfy its operating needs for several years. As of June 30, 2019 , the Company had $76.8 million in cash and equivalents. Based on the Company’s forecast of future cash flows, the Company believes that it has adequate cash and equivalents to continue to fund operations in the normal course of business for at least the next 12 months.

 

Use of estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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. The most significant estimates in the Company’s condensed consolidated financial statements relate to the determination of variable consideration for product sales, revenue recognized upon the satisfaction of performance obligations under the Company's strategic agreements, share-based compensation and some of its research and development expenses. These estimates and assumptions are based on current facts, historical experience and various other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of expenses that are not readily apparent from other sources. Actual results may differ materially and adversely

from these estimates. To the extent there are material differences between the estimates and actual results the Company’s future results of operations will be affected.

 

Segments

 

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker in making decisions regarding resource allocation and assessing performance. The Company views its operations and manages its business in one reportable segment, i.e., the development and commercialization of DOPTELET. Substantially all of the Company's assets and revenue are in the United States.

For the three and six months ended June 30, 2019 as well as for the year ended December 31, 2018, the Company relied primarily on two specialty pharmacies to purchase and supply the majority of DOPTELET. These two specialty pharmacies accounted for greater than 75% of all DOPTELET net product sales in the three and six months ended June 30, 2019 and accounted for predominately all of the Company's outstanding accounts receivable from product sales as of June 30, 2019 . The loss, or a significant change in the buying patterns, of either one of these specialty pharmacies as a customer could negatively impact the commercialization of DOPTELET.

 

Cash and equivalents

 

The Company considers all highly liquid investments purchased with original maturities of 90 days or less at acquisition to be cash equivalents. Cash and equivalents include cash held in banks and money market mutual funds and are classified as Level 1 investments.

 

Inventory

 

Inventory acquired prior to receipt of the FDA approval for DOPTELET was expensed as research and development expense as incurred. The Company began capitalizing inventory upon receipt of FDA approval on May 21, 2018. Inventory is stated at the lower of cost or estimated net realizable value with cost determined under the first in first out method. Inventory consists of work in process, and DOPTELET finished goods. The Company currently purchases inventory from Eisai under a long-term supply agreement for work in progress and finished drug product and the cost of inventory is the greater of a fixed payment per tablet or a payment calculated in the mid-single digit percentages of net sales of DOPTELET. The Company reduces its inventory to net realizable value for potentially excess, dated or obsolete inventory based on an analysis of forecasted demand compared to quantities on hand and any firm purchase orders, as well as product shelf life. At June 30, 2019 , the Company determined that no write downs to inventory for potentially excess, dated or obsolete inventory were required. The Company’s inventory at June 30, 2019 and 2018 consisted of the following (in thousands):

 

Research and development prepaid and accrued expenses

 

As part of the process of preparing financial statements, the Company is required to estimate its expenses resulting from its obligation under contracts with vendors and consultants and clinical site agreements in connection with its research and development efforts. The financial terms of these contracts are subject to negotiations which vary contract to contract and may result in payment flows that do not match the periods over which materials or services are provided to the Company under such contracts.  The Company’s objective is to reflect the appropriate clinical trial expenses in its financial statements by matching those expenses with the period in which services and efforts are expended. The Company accounts for these expenses according to the progress of the trial as measured by patient progression and the timing of various aspects of the trial. The Company determines prepaid and accrual estimates through discussion with applicable personnel and outside service providers as to the progress or state of communication of clinical trials, or other services completed. During the course of a clinical trial, the Company adjusts its rate of clinical trial expense recognition if actual results differ from its estimates. The Company makes estimates of its prepaid and accrued expenses as of each balance sheet date in its financial statements based on facts and

circumstances known at that time. Although the Company does not expect its estimates to be materially different from amounts actually incurred, its understanding of status and timing of services performed relative to the actual status and timing of services performed may vary and may result in the Company reporting amounts that are too high or too low for any particular period. The Company’s clinical trial prepaid and accrual expense is dependent upon the timely and accurate reporting of fee billings and pass-through expenses from contract research organizations and other third-party vendors, as well as the timely processing of any change orders from the contract research organizations.

Leases

Effective January 1, 2019, the Company adopted ASU No. 2016-02, "Leases (Topic 842)," as amended, using the modified retrospective approach. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard which among other things, allowed the Company to carry forward the historical lease classification. In addition, the Company elected the hindsight practical expedient to determine the lease term for existing leases. Our election of the hindsight practical expedient resulted in the shortening of lease terms for certain existing leases and the useful lives of corresponding leasehold improvements. In our application of hindsight, the Company determined that renewal options would not be reasonably certain in determining the expected lease term.

Adoption of the new standard resulted in the recording of additional net lease assets and lease liabilities of approximately  $1.4 million and  $1.7 million respectively, as of January 1, 2019. The standard did not materially impact our consolidated net

earnings and had no impact on cash flows.

The Company has operating leases for real estate (primarily office space) and certain equipment. The Company’s finance leases are not material. Leases with a term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term. For lease agreements entered into or reassessed after the adoption of Topic 842, the Company combines lease and non-lease components.

On March 5, 2019, the FASB issued ASU 2019-01, “Leases (Topic 842): Codification Improvements.” The new rule adds an exception to the interim transition disclosure requirements required for a change in accounting principle in the year of adoption of the new lease accounting standard, which was effective for the Company as of January 1, 2019. The exception eliminates the requirement to disclose the effect of the change in accounting principle on income from continuing operations, net income, and related per-share amounts for post-adoption interim periods.

Furniture and equipment

Furniture and equipment are generally recorded at cost, or in the case of acquired property and equipment, at fair value at the date of acquisition. Maintenance and repair expenditures are charged to expense as incurred.

Depreciation is computed on a straight-line basis over the estimated useful lives of the assets as follows:

Concentrations of credit risk and off-balance sheet risk

 

Cash and equivalents are financial instruments that are potentially subject to concentrations of credit risk. The Company’s cash and equivalents are deposited in accounts at large financial institutions, and amounts may exceed federally insured limits. The Company believes it is not exposed to significant credit risk due to the financial strength of the depository institutions in which the cash and equivalents are held. The Company has no financial instruments with off-balance sheet risk of loss.

 

Research and development costs

 

Research and development (“R&D”) expenses for the three and six months ended June 30, 2019 include direct and indirect R&D costs. Direct R&D costs consist principally of external costs, such as fees paid to investigators, consultants, central laboratories, contract manufacturing organizations and contract research organizations, including costs incurred in connection with clinical trials, and related clinical trial fees and all employee-related expenses for those employees working in R&D functions, including stock-based compensation for R&D personnel. Indirect R&D costs include insurance or other indirect costs related to the Company’s R&D function to specific product candidates. The Company expenses pre-approval inventory as R&D until regulatory approval is received.

 

Revenue recognition

 

Product sales

 

The Company is currently approved to sell DOPTELET in both the United States and throughout the European Union. The product is currently commercially available in the United States and is predominantly distributed to a limited number of specialty pharmacies (“customers”), who have agreements in place with the Company.  Patients and healthcare providers purchase the product from the Company's customers. 

 

The Company recognizes revenue on product sales when the control of the Company’s product passes to its customers, which occurs at a point in time, upon delivery to the customers, or over time depending on the nature of the contract. The Company has determined that the delivery of its product to its customers constitutes a single performance obligation as there are no other promises to deliver goods or services. Shipping and handling activities are considered to be fulfillment activities and are not considered to be a separate performance obligation. The Company has assessed the existence of a significant financing component in the agreements with its customers. The trade payment terms with its customers do not exceed one year and therefore the Company has elected to apply the practical expedient and no amount of consideration has been allocated as a financing component.

 

Revenue from product sales is recorded at the net sales price, which includes estimates of variable consideration for which reserves are established. Components of variable consideration include trade discounts and allowances, product returns, government chargebacks, discounts and rebates, and other incentives, such as voluntary patient assistance, and other fee for service amounts that are detailed within contracts between the Company and its customers relating to the Company’s sale of its products. These reserves, as detailed below, are based on the amounts earned, or to be claimed on the related sales, and are classified as reductions of accounts receivable or a current liability. These reserves reflect the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the respective underlying contracts.

 

Revenue from product sales is recorded after considering the impact of the following variable consideration amounts at the time of revenue recognition:

 

Trade discounts and distribution fees : Trade discounts relate to prompt settlement discounts provided to customers. In addition, the Company compensates its customers for data and other activities. The Company has determined that such services received to date are not distinct from its sale of products and may not reasonably represent fair value for these services.  Therefore, estimates of these payments are recorded as a reduction of revenue based on contractual terms.

 

Product returns: Consistent with industry practice, the Company generally offers customers a limited right of return for product that has been purchased from the Company based on the product’s expiration date. The Company estimates the amount of its product sales that may be returned by its customers and records this estimate as a reduction of revenue in the period the related product revenue is recognized, as well as within accrued expenses on the condensed consolidated balance sheets. The Company currently estimates product return liabilities using available industry data and its own sales information, including its visibility into the inventory remaining in the distribution channel. The Company has not received any returns to date.

 

Government rebates and chargebacks : The Company contracts with Medicaid, Medicare, U.S. Department of Veterans Affairs, 340b entities and other government agencies (“Government Payors”) so that DOPTELET will be eligible for purchase by, or partial or full reimbursement from, such Government Payors. The Company estimates the rebates, chargebacks and discounts it will provide to Government Payors and deducts these estimated amounts from its gross product revenue at the time the revenue is recognized. The Company estimates these reserves based upon a range of possible outcomes that are probability-weighted for the estimated payor mix. These reserves are recorded in the same period the revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability, which is included in accrued expenses and other current liabilities

on the condensed consolidated balance sheets. For Medicare, the Company also estimates the number of patients in the prescription drug coverage gap for whom the Company will owe an additional liability under the Medicare Part D program. The Company estimates the rebates, chargebacks and discounts that it will provide to Government Payors based upon (i) the government-mandated discounts applicable to government-funded programs, (ii) information obtained from its customers and (iii) information obtained from other third parties regarding the payor mix for DOPTELET. The Company’s liability for these rebates consists of estimates of claims for the current quarter and estimated future claims that will be made for product shipments that have been recognized as revenue but remain in the distribution channel inventories at the end of each reporting period.

 

Other incentives: Other incentives which the Company offers include voluntary patient assistance and assurance programs, such as a co-pay assistance program, which are intended to provide financial assistance to qualified commercially-insured patients with prescription drug co-payments required by payers. The calculation of the accrual for co-pay assistance is based on an estimate of claims using data provided by third-party administrators and the cost per claim that the Company expects to receive associated with product that has been recognized as revenue but remains in the distribution channel inventories at the end of each reporting period. The adjustments are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability which is included as a component of accrued expenses and other current liabilities on the condensed consolidated balance sheets.

 

Strategic agreements

 

The Company’s other revenue consists of revenue from the Company’s strategic agreements for the development and commercialization of DOPTELET. The terms of the agreements typically include non-refundable upfront fees, payments based upon achievement of milestones and eventually revenue from the commercialized product. These agreements usually have both fixed and variable consideration. Non-refundable upfront fees are considered fixed, while milestone payments and revenue from the commercialized product are identified as variable consideration.

 

In determining the appropriate amount of revenue to be recognized as it fulfills its obligations under these agreements, the Company performs the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations based on estimated selling prices; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.

 

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in Accounting Standards Codification ("ASC") Topic 606. The Company’s performance obligations include intellectual property rights, development services, and services associated with regulatory submission and approval processes. Significant management judgment is required to determine the level of effort required under an arrangement and the period over which the Company expects to complete its performance obligations under the arrangement. If the Company cannot reasonably estimate when its performance obligations either are completed or become inconsequential, then revenue recognition is deferred until the Company can reasonably make such estimates. Revenue is then recognized over the remaining estimated period of performance using the cumulative catch-up method.

 

As part of the accounting for these arrangements, the Company develops assumptions that require judgment to determine the estimated selling price of each performance obligation identified in the contract. The Company uses key assumptions to determine the selling price on a standalone basis, which may include forecasted revenue, development timelines, and probabilities of regulatory success.

 

The Company allocates the total transaction price to each performance obligation based on the estimated relative standalone selling prices of the promised goods or service underlying each performance obligation.

 

If the right to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenue from non-refundable, upfront fees allocated to the right when the right is transferred to the customer, and the customer can use and benefit from the right. For rights that are bundled with other promises, the Company utilizes 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, upfront fees. The Company evaluates the

measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.

 

At the inception of the arrangement, the Company evaluates whether the development milestones are considered probable of being achieved and estimates the amount to be included in the transaction price using the most likely amount method. Milestone payments that are not within the control of the Company, such as approvals from regulators, are not considered probable of being achieved until those approvals are received.

 

Stock-based compensation

 

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

 

Income taxes

 

Income taxes are recorded in accordance with ASC 740,  Income Taxes  (“ASC 740”), which provides for deferred taxes using an asset and liability approach. The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are provided, if based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

 

The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740. When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit would more likely than not be realized assuming examination by the taxing authority. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances.

The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Tax Income , states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis difference expected to reverse as global intangible low-taxed income (“GILTI”) in future years or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. The Company has elected to account for GILTI as a period expense in the year the tax is incurred.

 

Net loss per share

 

Net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Since the Company had a net loss in each of the periods presented, basic and diluted net loss per common share are the same. The computations of diluted net loss per common share for the three and six months ended June 30, 2019 excluded options to purchase 2,138,768 and 4,180,824 shares of common stock, respectively, and excluded restricted stock units of 75,089 and 148,784 shares of common stock, respectively, as the inclusion of these securities would have been antidilutive. The computations of diluted net loss per common share for the three and six months ended June 30, 2018 did not include options to purchase 2,596,080 shares and 2,425,386 shares, respectively, of common stock, as the inclusion of these securities would have been antidilutive. There were no restricted stock units issued during the three and six months ended June 30, 2018 .

 

Recent accounting pronouncements

 

In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," which was subsequently amended in November 2018, through ASU No. 2018-19, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses." ASU No. 2016-13 will require entities to estimate lifetime expected credit losses for trade and other receivables, net investments in leases, financing receivables, debt securities and other instruments, which will result in earlier recognition of credit losses. Further, the new credit loss model will affect how entities in all industries estimate their allowance for losses for receivables that are current with respect to their payment terms. ASU No. 2018-19 further clarifies that receivables arising from operating leases are not within the scope of Subtopic 326. Instead, impairment from receivables of operating leases should be accounted for in accordance with Topic 842, Leases. The new guidance on credit losses is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company expects to adopt ASU No. 2016-03, and the related ASU No. 2018-19 amendments, beginning as of January 1, 2020 and expects that the adoption of this ASU will not have a material impact on the Company's consolidated financial statements.

In June 2018, the FASB issued ASU 2018-7, “Improvements to Nonemployee Share-Based Payment Accounting”, which simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under the ASU, most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. The changes take effect for public companies for fiscal years starting after December 15, 2018, including interim periods within that fiscal year. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. The Company adopted this ASU during the first quarter and 2019, which did not have a material impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued an accounting standards update which expands the scope of costs associated with cloud computing arrangements that must be capitalized. Under the new guidance, costs associated with implementing a cloud computing arrangement that is a service contract must be capitalized and expensed over the term of the hosting arrangement. The provisions of the update are effective beginning January 1, 2020 for interim and annual periods with early adoption permitted for any interim period after issuance of the update. The Company is currently assessing the timing of its adoption as well as the potential impact that the standard will have on the Company's consolidated financial statements.

 

Note 3—The purchase agreement and related transactions

 

Purchase agreement with Eisai

 

Dova entered into a purchase agreement dated March 29, 2016 (the “Eisai stock purchase agreement”) with Eisai, Inc. (“Eisai”) for all of the issued and outstanding shares of the capital stock of AkaRx Inc., which consisted of the worldwide rights to DOPTELET. The terms of the Eisai stock purchase agreement included (i) an upfront payment of $5.0 million that was paid at closing and funded by a capital contribution by the Company's then sole member, PBM Capital Investments, LLC, (ii) milestone payments up to $135.0 million in the aggregate based on annual net sales of DOPTELET, and (iii) a commitment to negotiate in good faith to secure a long-term supply agreement with Eisai to govern manufacturing support and the purchase of DOPTELET from Eisai for a certain period not to exceed three years after the first commercial sale of DOPTELET.

 

The transaction was accounted for as an asset acquisition pursuant to ASU 2017-1,  Business Combinations (Topic 805), Clarifying the Definition of a Business,  as the majority of the fair value of the assets acquired was concentrated in a group of similar assets, and the acquired assets did not have outputs or employees. The assets acquired under the Eisai stock purchase agreement included a license to DOPTELET, other associated intellectual property, inventory, documentation and records, and related materials. The potential milestone payments based on annual net sales are not yet considered probable, and no additional milestone payments have been accrued at June 30, 2019 .

 

Supply agreement with Eisai

 

In June 2017, the Company entered into a supply agreement with Eisai, pursuant to which the Company agreed to purchase finished drug product of DOPTELET from Eisai and Eisai agreed to supply finished drug product of DOPTELET. The initial term of the agreement will expire three years after the first commercial sale of DOPTELET. After the initial term, the supply agreement may be renewed by mutual agreement of the parties. During the initial term, Eisai is the Company’s exclusive supplier of finished drug product of DOPTELET, except that the Company has the right to terminate the exclusivity early by

payment to Eisai of a fee calculated based on the Company’s forecasted purchases of DOPTELET during the remainder of the initial term. In addition, in the event that Eisai fails to deliver substantially all of the finished drug product due to the Company under the agreement, the Company may elect to seek alternative supply arrangements so long as such failure remains uncured, subject to certain exceptions. The aggregate payments to Eisai under the supply agreement for finished drug product will be the greater of a fixed payment per tablet or a payment calculated in the mid-single digit percentages of net sales of DOPTELET.

 

Amended and Restated Transition Services Agreement with Eisai and an Additional Work Order

Effective April 1, 2018, the Company and Eisai entered into an Amended and Restated Transition Services Agreement (the “Amended TSA”) and an Additional Work Order (“Work Order”), pursuant to which Eisai agreed to provide services to the Company after the expiration of the original Transition Services Agreement by and between Eisai and the Company, dated March 30, 2016 (the "TSA"), which expired on March 31, 2018. Under the Work Order, Eisai provided certain regulatory, CMC, nonclinical, clinical pharmacology, and statistical services to the Company in order to support the Company's new drug application and marketing authorization application to the European Medicines Agency for the period from April 1, 2018 through June 30, 2019, at which time the Work Order expired. The Company incurred  $32.2 million under the TSA and the Amended TSA.

Eisai note and security agreement

 

On March 30, 2016 , the Company issued a Note to Eisai, which had an interest rate of 5% per annum, and enabled the Company to finance payments due to Eisai under the TSA for all costs incurred through December 31, 2017 . The principal amount of the Note was increased on a quarterly basis by the amount of unpaid service fees and out-of-pocket expenses due and owed to Eisai under the TSA. The total aggregate spend through this Note was $31.1 million and on March 16, 2018 , this principal balance along with accumulated interest of $1.3 million was repaid in full.

 

License agreement with Astellas Pharma Inc.

 

The primary intellectual property related to DOPTELET is licensed from Astellas Pharma Inc. (“Astellas”) on an exclusive, worldwide basis under the terms of a license agreement that the Company acquired from Eisai under the Eisai stock purchase agreement. Under the terms of the license agreement, the Company is required to make payments upon the achievement of certain milestones. On September 21, 2017, upon the submission of the NDA, the Company recorded a milestone payment of $1.0 million . On June 26, 2019, upon the FDA approval of DOPTELET for ITP, the Company became obligated to pay another $1.0 million within 30 days, which has been recorded within research and development expenses. The Company will be required to make additional aggregate milestone payments of up to $3.0 million to Astellas if certain other regulatory milestones are achieved. In addition, the Company is required to pay Astellas tiered royalties ranging from the mid to high single digits on net sales of DOPTELET. No amounts have been accrued for any potential milestone payments as the payments were not deemed probable. Unless earlier terminated, this license agreement with Astellas will expire on a country-by-country and product-by-product basis upon the latest of (i) the expiration of the last-to-expire claim of the licensed patents, (ii) the expiration of any government-granted marketing exclusivity period for DOPTELET, and (iii)  10  years after the last date of launch of DOPTELET to have occurred in any country. Thereafter, the term of the license agreement may be extended for successive one -year terms if the Company notifies Astellas in writing of its desire to extend such term at least three months before it is otherwise set to expire.

 

Note 4—Related party agreements

 

Dova and AkaRx management services agreements

 

On April 1, 2016 , Dova and AkaRx each entered into a services agreement (each, a “SA”) with PBM Capital Group, LLC. Pursuant to the terms of each of the SAs, which have terms of twelve months each (and are automatically renewable for successive one -year periods), PBM Capital Group, LLC will render advisory and consulting services to Dova and AkaRx. Services provided under the SAs may include certain scientific and technical, accounting, operations and back office support services. In consideration for these services, Dova and AkaRx are each obligated to pay PBM Capital Group, LLC a monthly management fee of $25,000 . On March 30, 2018 , the SA agreement between AkaRx and PBM Capital Group, LLC was terminated. Effective April 1, 2018 , the monthly management fee for the SA between Dova and PBM Capital Group, LLC was reduced to $17,400 .

 

For the three and six months ended June 30, 2019 , the Company incurred expenses under the SAs of $52,200 and $104,400 , respectively, which were included in selling, general and administrative expenses.

 

For the three and six months ended June 30, 2018 , the Company incurred expenses under the SAs of $52,200 and $202,200 , respectively, which were included in selling, general and administrative expenses. 

Note 5—Stock-based compensation

 

Equity Awards

 

The Company maintains the Amended and Restated 2017 Equity Incentive Plan (“2017 Equity Incentive Plan”). The 2017 Equity Incentive Plan provides for the grant of incentive stock options to employees, and for the grant of nonstatutory options, restricted stock awards, restricted stock unit awards, stock appreciation rights, performance-based stock awards and other forms of stock awards to employees, including officers, consultants and directors. The 2017 Equity Incentive Plan also provides for the grant of performance-based cash awards to employees, including officers, consultants and directors. The Company’s stock options generally vest as follows:  25%  after 12 months of continuous services and the remaining  75%  on a ratable basis over a  36 -month period from 12 months after the grant date. Stock options granted to date have a maximum contractual term of  10 years .

On December 19, 2018, the Board amended the 2017 Equity Incentive Plan (as amended, the “Amended Plan”), pursuant to which the Company reserved  1,250,000  shares of the Company’s common stock for issuance as inducement awards (the “Inducement Pool”). The only persons eligible to receive grants of Awards (as defined below) from the Inducement Pool are individuals who satisfy the standards for inducement grants under Nasdaq Marketplace Rule 5635(c)(4) and the related guidance under Nasdaq IM 5635-1, including individuals who were not previously an employee or director of the Company or are following a bona fide period of non-employment, in each case as an inducement material to such individual’s agreement to enter into employment with the Company. An “Award” is any right to receive the Company’s common stock from the Inducement Pool, consisting of nonstatutory stock options and restricted stock unit awards. Options granted from the Inducement Pool generally vest over  four years and vest at a rate of  25%  upon the first anniversary of the issuance date and 1/48th per month thereafter and have terms of up to ten years consistent with options granted to other employees under the Amended Plan. All shares from the Inducement Pool were issued by December 31, 2018.

The Company initially reserved 4,285,250 shares of common stock for issuance under the Amended Plan. The number of shares of common stock reserved for issuance under the Amended Plan automatically increases on January 1 each year, for a period of ten years , from January 1, 2018 through January 1, 2027, by 4% of the total number of shares of the Company’s common stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares as may be determined by the Board. As of June 30, 2019 , 2,984,061 shares were available for grant under the Amended Plan. As of June 30, 2019 , options to purchase 3,983,337 shares of the Company’s common stock were outstanding at a weighted average exercise price of $12.06 per share.

 

Option awards

 

The fair value of the Company’s option awards was estimated using the assumptions below:

 

The following table summarizes the Company’s stock option activity for the six months ended June 30, 2019 :

Dova Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The aggregate intrinsic value in the above table is calculated as the difference between fair value of the Company’s closing common stock price on June 30, 2019 , or $14.10 per share, and the exercise price of the stock options that had strike prices below $14.10 per share. The weighted average grant date fair value per share of options granted during the six months ended June 30, 2019 was $6.04 . The weighted average remaining contractual term of exercisable options is approximately 8.3 years at June 30, 2019 . The expense is recognized over the vesting period of the award.

 

As of June 30, 2019 , there was approximately $14.7 million of total unrecognized compensation expense, related to the unvested stock options shown in the table above, which is expected to be recognized over a weighted average period of 1.2 years .

As of June 30, 2019 , the Company had unrecognized stock-based compensation expense related to restricted stock units of approximately $0.2 million with a weighted average vesting period of approximately 0.3 years .

 

Stock-based compensation expense has been reported in the Company’s consolidated statements of operations for the three and six months ended June 30, 2019 as follows (in thousands):

 

Note 6 — Significant agreements and contracts

 

Distribution Agreement with Fosun

 

On March 16, 2018 , the Company, through its wholly-owned subsidiary, AkaRx entered into an agreement by which it granted Shanghai Fosun Pharmaceutical Industrial Development Co., Ltd., a wholly owned subsidiary of Shanghai Fosun Pharmaceutical (Group) Co., Ltd., (collectively, “Fosun”) the exclusive development and distribution rights of DOPTELET in mainland China and Hong Kong (“territory”). Under the terms of the agreement, Fosun will have the right to exclusively commercialize and to assist the Company with the registration of DOPTELET in the territory. Fosun is solely responsible for commercialization activities in the territory and associated expenses. The Company is responsible for supplying product at a fixed price to Fosun for the distribution of product upon approval.

 

The agreement between Fosun and the Company is governed by a joint steering committee comprised of equal representation by the Company and Fosun and operated on a consensus basis. In the event that the parties do not agree, the Company will have deciding authority, except with respect to matters that solely affect the territory.

 

Under the agreement, the Company received a non-refundable upfront payment of $4.5 million during the second quarter of 2018, which consisted of an upfront payment of $5.0 million , less $0.5 million that was withheld in accordance with tax withholding requirements in China and recorded as an expense in 2018. The Company is also eligible to receive additional future payments upon the achievement of certain regulatory milestones. The Company assessed this arrangement in accordance with ASC Topic 606 and concluded that the contract counterparty, Fosun, is a customer. The Company determined the distinct, material performance obligations within this agreement consist of (1) the exclusive right to develop and commercialize DOPTELET for multiple indications in the territory, (2) the delivery of certain indication specific information, and (3) manufacture and supply of commercial product.

 

The transaction price includes the $5.0 million up-front consideration. None of the regulatory milestones have been included in the transaction price, as all milestone amounts were fully constrained. As part of its evaluation of the constraint, the Company considered numerous factors, including that receipt of the milestones is outside the control of the Company and contingent upon success in future clinical trials and Fosun’s efforts.

 

In 2018, the Company recognized $2.6 million related to the up-front payment as other revenue in connection with the Fosun agreement. The amount of revenue recognized in connection with this agreement is commensurate with the deliverables provided by the Company to Fosun in achieving the performance obligation. The remaining transaction price of $1.9 million and $0.5 million is recorded within short-term and long-term deferred revenue, respectively, as of June 30, 2019 , on the condensed consolidated balance sheet and will be recognized upon the delivery of certain information packages for indications which have been approved and are in development. The relative fair value of deliverables was calculated using a combination of discounted cash flow and cost avoidance models (Level 3 inputs), under which estimated cash flows were discounted using a risk-adjusted rate that aligns with publicly available information of Fosun's cost structure. Estimated cash flows were determined based on management's best estimate of the performance of DOPTELET for each indication in the territory.

 

Commercial Outsourcing Agreement with Integrated Commercial Solutions, LLC (“ICS”)

 

On March 1, 2018 , the Company entered into a Commercial Outsourcing Master Services Agreement with ICS, a division of AmerisourceBergen Specialty Group, a subsidiary of AmerisourceBergen, pursuant to which ICS is the exclusive provider of various third-party logistics services to support the Company’s distribution of DOPTELET in the United States. The key services provided by ICS include logistics, warehousing, returns and inventory management, contract administration and chargebacks processing and accounts receivable management.

 

Effective March 1, 2018 , the Company also entered into a first amendment to the Commercial Outsourcing Master Services Agreement in order for ICS to purchase and sell DOPTELET to the Company’s customers in the United States. Pursuant to the amendment, ICS will only make shipments to customers who have an executed contract with the Company. Under this arrangement, ICS places orders with the Company to maintain an appropriate level of inventory. ICS assumes all inventory risk and has sole responsibility for determining the prices at which it sells these products, subject to specified limitations in the amendment. Effective April 1, 2019 , ICS and the Company agreed to end the arrangement for ICS to purchase and sell DOPTELET to the Company’s customers, and ICS reverted to be the Company’s third-party logistics provider.

 

Co-Promotion Agreement with Valeant Pharmaceuticals North America LLC

On September 26, 2018 , the Company entered into a Co-Promotion Agreement (the "Co-Promotion Agreement") with the Salix division of Valeant Pharmaceuticals North America LLC (“Salix”), a subsidiary of Bausch Health Companies Inc., pursuant to

which the Company granted Salix the exclusive right to co-promote DOPTELET to specified medical professionals in the Gastroenterology, Colorectal Surgery and Proctology field (the “Specialty”) in the United States. On June 27, 2019, the Company entered in to a First Amendment to the Co-Promotion Agreement effective July 1, 2019 (the “Amendment”) in which the Company expanded its partnership with Salix, whereby Salix has the exclusive right to also co-promote in Hepatology, and Interventional Radiology, in addition to the previously defined Specialty (collectively, the “Expanded Specialty”) in the United States for the treatment of thrombocytopenia in adult patients with chronic liver disease who are scheduled to undergo a procedure.

Pursuant to the Co-Promotion Agreement, the Company has been paying Salix a fee based on the quarterly Net Sales (as defined in the Co-Promotion Agreement) of DOPTELET to specified medical professionals in the Specialty in the United States at specified tiered percentages, ranging from Salix receiving a mid-twenties to mid-thirties percent of Net Sales in a calendar year, subject to specified adjustments. Under the Amendment, the Company will pay Salix a fee based on the quarterly Net Sales of DOPTELET to specified medical professionals in the Expanded Specialty in the United States, which, commencing on July 1, 2019, will equal a mid-thirties percentage of those Net Sales in a calendar year . In addition, pursuant to the Co-Promotion Agreement, the Company has agreed to pay Salix a milestone payment of $2.5 million upon the achievement of an aggregate Net Sales amount to the Specialty. The Co-Promotion Agreement specifies that the Company will grant Salix a royalty-free right to use trademarks and copyrights relating to DOPTELET in connection with the promotion of DOPTELET in the United States. The Co-Promotion Agreement also contains provisions regarding payment terms, confidentiality and indemnification, as well as other customary provisions.

The co-promotion of DOPTELET in the United States pursuant to the terms of the Co-Promotion Agreement is supervised by a joint steering committee composed of an equal number of representatives from the Company and Salix. Under the terms of the Co-Promotion Agreement, the Company is responsible for the costs of maintaining regulatory approval of, manufacturing, supplying and distributing DOPTELET. Salix has also agreed to maintain at least one hundred Salix sales representatives (subject to certain adjustments) that will have the responsibility to promote DOPTELET in the Expanded Specialty in the United States. Pursuant to the Amendment, the Company agreed to extend the term of the Co-Promotion Agreement by an additional year until September 26, 2023.

Note 7 — Debt

 

On April 17, 2018, the Company and its wholly owned subsidiary, AkaRx (collectively “Co-Borrowers”), entered into a Loan and Security Agreement ("Term Loan") with Silicon Valley Bank (“SVB”) pursuant to which the Co-Borrowers borrowed $20.0 million . The Term Loan was originally scheduled to mature on April 17, 2021 unless the Company achieved a specified revenue milestone in which case the maturity date would be extended to April 17, 2022. The Co-Borrowers were only required to make monthly interest payments until April 30, 2019 unless the Company achieved the specified revenue milestone, in which case the interest-only period would have been extended until October 31, 2019. Following the interest-only period, the Co-Borrowers would be required to also make equal monthly payments of principal and interest for the remainder of the term. The Co-Borrowers would have also been required to pay an additional final payment at maturity equal to $2.0 million if the Term Loan was repaid by or after May 16, 2019 or a final payment of $0.6 million if the Term Loan was repaid during the interest-only period.  The final payment amount of $2.0 million was recorded as a debt discount and was being accreted to the carrying value of the debt using the effective interest method. In addition, at its option, the Co-Borrowers were permitted to prepay all amounts owed under the Term Loan (including all accrued and unpaid interest), subject to a prepayment charge if the loan has been outstanding for less than one year, which prepayment charge would be 4% of the outstanding principal amount on the date the loan is prepaid. All obligations under this agreement were guaranteed by all the assets of the Co-Borrowers, except for intellectual property and certain other assets. The Term Loan bore interest at the WSJ prime rate plus 1.25% per annum. In connection with the Term Loan, the Company incurred debt issuance costs totaling approximately $38,000 . These costs were being amortized over the estimated term of the debt using the effective interest method.

On May 6, 2019, the Co-Borrowers entered into an Amended and Restated Loan and Security Agreement ("Term Loan Facility") with SVB and WestRiver Innovation Lending Fund VIII, L.P. ("WestRiver" and, together with SVB, the "Lenders"), pursuant to which the Company may borrow up to $50.6 million , issuable in four separate tranches, of which $20.6 million ("Advance A") was issued upon execution of the Term Loan Facility and used to repay in full all of the Company's outstanding obligations and liabilities to SVB under the Term Loan, including a prepayment fee of $0.6 million , $10.0 million ("Advance B") was issued in July 2019 upon the occurrence of regulatory approval for the ITP indication which occurred on June 26, 2019, $10.0 million ("Advance C") is available to be issued upon the achievement of a specified commercial revenue milestone until the earlier of April 15, 2020 or the day before Advance D is available, and $10.0 million ("Advance D") is available to be

issued upon the achievement of specified regulatory and commercial revenue milestones until July 15, 2020. In the event that the Company does not borrow Advance C, then $20.0 million , rather than $10.0 million , will be available to be issued under Advance D upon the achievement of specified regulatory and commercial revenue milestones until July 15, 2020.

The maturity date of the Term Loan Facility is April 3, 2023. Under the terms of the Term Loan Facility, the Co-Borrowers will be required to make monthly interest-only payments on the principal amount outstanding under each Advance at a floating rate equal to the Prime Rate plus 2.00% . Upon the Company's draw of Advance B, the interest-only period was extended to August 3, 2020 followed by an amortization period of 32 months of equal monthly payments of principal plus interest amounts until paid in full. If either Advance C or Advance D is made, the interest-only period will be extended to May 3, 2021, followed by an amortization period of 23 months of equal monthly payments of principal plus interest amounts until paid in full. In addition to and not in substitution for the regular monthly payments of principal plus accrued interest, the Co-Borrowers are required to make a final payment equal to 10% of the aggregate principal amount of the Advances on the maturity date.

The Term Loan Facility has substantially the same terms as the Term Loan. In accordance with ASC 405-20,  Extinguishment of Liabilities , and ASC 470-50,  Debt Modifications and Extinguishments , the Company accounted for the repayment of the Company's outstanding obligations and liabilities to SVB under the Term Loan as a debt modification.

The Company deducted the debt issuance costs from the carrying amount of the debt as of June 30, 2019 . As of June 30, 2019 , the carrying value of the Term Loan Facility was approximately $20.7 million . The short-term portion of $1.2 million is due within 12 months and the long-term portion of $21.5 million is due in greater than 12 months . The debt balance has been categorized within Level 2 of the fair value hierarchy. The carrying amount of the debt approximates its fair value based on prevailing interest rates as of the balance sheet date.

 

As of June 30, 2019 , annual principal payments due under the Term Loan Facility were as follows:

 

Note 8 — Leases

The Company currently subleases 14,378 square feet of office space (the "Existing Office Space") for its corporate headquarters located at 240 Leigh Farm Road, Durham, North Carolina through April 30, 2020. Effective October 12, 2018, the Company leased an additional 1,961 square feet of office space adjacent to the Existing Office Space directly from the building's landlord. On May 22, 2018, the Company entered into an Office Lease Agreement (the “Lease”) directly with the building's landlord under which the Company will lease an additional 7,367 square feet of space adjacent to the Existing Office Space. Additionally, pursuant to the Lease, effective May 1, 2020, the Company will effectively renew the lease of the Existing Office Space directly with the landlord. On May 13, 2019, the Lease was amended to include an additional 3,881 square feet of office space, bringing the aggregate square feet of rentable office space to 25,626 square feet.

 

Under the sublease and the Lease, the Company's aggregate annual rent commitments are $182,506 for 2019, $532,647 for 2020, $713,385 for 2021, $733,160 for 2022, and $562,363 for 2023.

 

The term of the Lease will continue until September 30, 2023. The Company has an option to renew the Lease for one additional term of five years . If exercised, rent during the renewal term will be at the fair market rental rate as defined in the Lease.

The Lease provides for total tenant improvement allowance of approximately $322,305 . As of June 30, 2019 , none of the allowance was utilized.

The Company recorded operating lease expense of $99,000 and $197,000 for the three and six months ended June 30, 2019 , respectively, compared to operating lease expense of $71,600 and $177,000 for the three and six months ended June 30, 2018 , respectively. Operating lease expense is recorded and classified as selling, general and administrative expenses on the Company's consolidated statements of operations.

The weighted average remaining lease term is 4.3 years and the weighted average discount rate is 6.5% . The discount rate is the same as the Company's incremental borrowing rate as the rate implicit in the leases cannot be readily determined.

Note 9—Commitments and contingencies

Purchase commitments

 

As noted in Note 3, the Company has an agreement with Eisai for the commercial supply of DOPTELET. Under the terms of the agreement, the Company will supply Eisai with non-cancelable firm commitment purchase orders. Future minimum purchase obligations are $6.3 million through the first quarter of 2020.

 

The Company has also entered into other agreements with certain vendors for the provision of services, including services related to data access and packaging, under which the Company is contractually obligated to make certain payments to the vendors. The Company enters into contracts in the normal course of business that include, among others, arrangements with clinical research organizations for clinical trials, vendors for preclinical research, and vendors for manufacturing. These contracts generally provide for termination upon notice, and therefore the Company believes that its obligations under these agreements are not material.

 

Litigation

 

The Company is not a party to any material legal proceedings and is not aware of any pending or threatened claims. From time to time, the Company may be subject to various legal proceedings and claims that arise in the ordinary course of its business activities.

Note 10—Income taxes

 

The Company estimates an annual effective tax rate of  0%  for the year ending December 31, 2019  as the Company incurred losses for the  three and six months ended  June 30, 2019  and is forecasting additional losses through the fourth quarter of 2019 , resulting in an estimated net loss for both financial statement and tax purposes for the year ending December 31, 2019 . Therefore,  no  federal or state income taxes are expected, and none have been recorded at this time. Income taxes have been accounted for using the liability method in accordance with ASC 740.

 

Due to the Company’s history of losses since inception, the Company has determined, based upon available evidence, that it is more likely than not that the net deferred tax asset will not be realized and, accordingly, has provided a full valuation allowance against its net deferred tax asset.

 

At  June 30, 2019 , the Company had  no  unrecognized tax benefits that would reduce the Company’s effective tax rate if recognized.

 

Note 11—Employee benefit plan

 

The Company maintains a defined contribution 401(k) plan available to full-time employees, under which employee contributions are voluntary and are determined on an individual basis, limited by the maximum amounts allowable under federal tax regulations. The Company provides an automatic matching contribution of $1.00 per $1.00 of employee contribution into the plan for the first 3% and $0.50 per $1.00 of employee contribution for the next 2% , for a maximum deferral per employee of 4% of the employee’s salary. The Company's matching contributions totaled approximately $138,000 and $302,000 during the three and six months ended June 30, 2019 , respectively. The Company’s matching contributions totaled approximately $72,000 and $109,000 during the three and six months ended June 30, 2018 , respectively.