Provention Bio, Inc. - Quarter Report: 2022 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2022

OR

For the transition period from ______ to ______.

Commission File Number: 001-38552

PROVENTION BIO, INC.

(Exact Name of Registrant as Specified in its Charter)

(908) 336-0360

(Registrant’s telephone number, including area code)

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

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

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

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

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 the close of business on October 31, 2022, 87,190,667 common shares, $0.0001 par value per share, of the registrant were issued and outstanding.

Provention Bio, Inc.

Form 10-Q

For the Quarter Ended September 30, 2022

Table of Contents

FORWARD-LOOKING STATEMENTS AND RISK FACTOR SUMMARY

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, contained in this Quarterly Report on Form 10-Q, including, among others, statements regarding the impact of the ongoing COVID-19 pandemic on our business; the timing progress and potential success of our ongoing and planned clinical trials; our ongoing and planned engagements with regulatory agencies relating to, and the expected timing of regulatory review of, or decisions relating to, our product candidates; execution of our business plans; and our current expectations regarding the ability of our cash, cash equivalents and marketable securities to fund our projected operating requirements for at least the next 12 months, are forward-looking statements. The words “believe,” “may,” “potentially,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan,” “expect” and similar expressions that convey uncertainty of future events or outcomes are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

These forward-looking statements are subject to a number of risks, uncertainties and assumptions. Moreover, we operate in a very competitive and rapidly changing environment and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed herein may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

Some of the key factors that could cause actual results to differ from our expectations include the following risks related to our business:

The forward-looking statements included herein are made only as of the date hereof. You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligations to update publicly any forward-looking statements for any reason after the date of this Form 10-Q to conform these statements to actual results or to changes in our expectations.

We may from time to time provide estimates, projections and other information concerning our industry, the general business environment, and the markets for certain diseases, including estimates regarding the potential size of those markets and the estimated incidence and prevalence of certain medical conditions. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties, and actual events, circumstances, or numbers, including actual disease prevalence rates and market size, may differ materially from the information reflected in this Quarterly Report. Unless otherwise expressly stated, we obtain industry, business information, market data, prevalence information and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data, and similar sources, in some cases applying our own assumptions and analysis that may, in the future, prove not to have been accurate.

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

PROVENTION BIO, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

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

PROVENTION BIO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (unaudited)

(in thousands, except per share data)

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

PROVENTION BIO, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (unaudited)

(in thousands, except per share data)

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

PROVENTION BIO, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (unaudited)

(in thousands, except per share data)

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

PROVENTION BIO, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands)

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

PROVENTION BIO, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(tabular dollars and shares in thousands, except per share data)

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Business

Provention Bio, Inc. (the “Company”), is a clinical-stage biopharmaceutical company dedicated to intercepting and preventing immune-mediated diseases. Since its inception, the Company has devoted substantially all of its efforts to business planning, research and development, recruiting management and technical staff, acquiring operating assets and raising capital. The Company’s business is subject to significant risks and uncertainties and will be dependent on raising substantial additional capital before it becomes profitable, and it may never achieve profitability. The Company was incorporated in 2016 under the laws of the State of Delaware.

Basis of presentation

The accompanying unaudited consolidated financial information as of September 30, 2022 and for the three and nine months ended September 30, 2022 and 2021 has been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The Condensed Consolidated Balance Sheet as of December 31, 2021 was derived from the Company’s audited financial statements. These interim financial statements should be read in conjunction with the notes to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K (“Annual Report”) for 2021, as filed with the SEC on February 24, 2022.

In the opinion of management, the unaudited consolidated financial information as of September 30, 2022 and for the three and nine months ended September 30, 2022 and 2021, reflects all adjustments, which are normal recurring adjustments, necessary to present a fair statement of the financial position, results of operations and cash flows of the Company. The results of operations for the three and nine months ended September 30, 2022 and 2021 are not necessarily indicative of the operating results for the full fiscal year or any future period.

2. LIQUIDITY

The accompanying unaudited consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates continuity of operations, realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company has incurred recurring losses since inception and as of September 30, 2022, the Company had an accumulated deficit of $372.4 million. To date, the Company has not generated any revenues from commercial product sales and has financed its operations primarily through equity offerings.

The Company has devoted substantially all of its financial resources and efforts to research and development and pre-commercial activities. As of September 30, 2022, the Company had cash, cash equivalents and marketable securities of approximately $186.5 million, which reflects $57.2 million in net proceeds from a private placement of common stock and warrants completed in July 2022 and $33.6 million in net proceeds from the sale of shares of common stock under its at-the-market (“ATM”) stock sale program during the third quarter of 2022. See Note 4 – Capitalization for a description and further details of this private placement and transactions completed under the ATM program.

In addition, during the three months ended September 30, 2022, the Company also received $23.7 million in net proceeds from a Loan and Security Agreement with Hercules Capital, Inc., which provides for up to $125.0 million of term loans in the aggregate, available to be funded in up to five tranches. The first tranche in an amount equal to $25.0 million was drawn on August 31, 2022. The Company may draw the second tranche in an amount equal to $40.0 million upon approval of the teplizumab BLA resubmission by the FDA, subject to certain conditions. See Note 11 – Debt for a full description and additional details of the Company’s Loan and Security Agreement with Hercules Capital, Inc.

Additionally, on October 4, 2022, the Company and Genzyme Corporation, a fully-owned subsidiary of Sanofi (“Sanofi”) entered into a Co-Promotion Agreement (the “Sanofi Co-Promotion Agreement”). Pursuant to the Sanofi Co-Promotion Agreement, the Company appointed Sanofi to co-promote and conduct certain commercialization activities with respect to teplizumab in the United States, should teplizumab receive approval by the FDA, on a co-exclusive basis for the treatment of the indication for which teplizumab receives approval in the United States. The Company also committed to reimburse the field force-related expenses and certain other allowable expenses that Sanofi will incur in connection with commercializing teplizumab under the agreement, up to an aggregate cap of $33.0 million, which includes a pre-determined margin on field force-related expenses.

The Company also granted Sanofi an exclusive, one-time right of first negotiation to obtain exclusive rights to research, develop and commercialize teplizumab with respect to the treatment or delay of T1D, or any of its root causes throughout the world, and to manufacture teplizumab in support of such research, development and commercialization (the “ROFN”) in exchange for a one-time upfront, non-refundable, payment of $20.0 million, which was received in October 2022.

Simultaneously with the Sanofi Co-Promotion Agreement, the Company and Sanofi also entered into a Securities Purchase Agreement (the “Sanofi Securities Purchase Agreement”), pursuant to which Sanofi has agreed to purchase $35.0 million of the Company’s common stock at a purchase price per share equal 140% of the daily volume-weighted average per share price of the Company’s common stock for the five consecutive trading days prior to the closing date, if the BLA submitted to the FDA for the delay of clinical T1D in at-risk individuals is approved by the FDA. The closing date and five consecutive trading day period for determining the purchase price per share shall be at the Company’s election, but the closing must occur no later than February 16, 2023. See Note 16 – Subsequent Events for a full description and additional details of the Sanofi Co-Promotion agreement and the Securities Purchase Agreement.

The Company expects to continue to incur significant expenses and increasing operating losses over the next several years due to, among other things, costs related to research funding, development of its product candidates, strategic alliances and pre-commercial activities for teplizumab, as well as the development of its administrative and commercial organization. The Company’s net losses may fluctuate significantly from quarter to quarter and year to year.

The Company’s cash requirements for the remainder of 2022 and for 2023 will be impacted by a number of factors, the most significant of which are expenses related to teplizumab, including costs, timing and outcome of the Company’s regulatory activities, costs to build out the Company’s commercial infrastructure and pre-commercial activities for teplizumab, and if approval is received from the FDA, commercial sales activities (including the Sanofi Co-Promotion Agreement), the PROTECT clinical trial, manufacturing activities for teplizumab and any potential milestone payments that may become due upon a potential regulatory approval of teplizumab by the FDA. Ahead of its upcoming FDA user fee goal date of November 17, 2022, the Company has invested and will continue to invest in pre-commercial activities to prepare for the potential commercial launch of teplizumab. Other factors include costs related to the Company’s other ongoing clinical trials, such as the Phase 2b PROACTIVE clinical study of PRV-015 in celiac disease and the Phase 2a PREVAIL-2 clinical study of PRV-3279 in lupus, which was initiated in January 2022.

The Company believes, based on its current operating plans, which include the Company’s plans to prepare for a potential commercialization of teplizumab if approved by the FDA, and other factors described above, that its cash, cash equivalents and marketable securities of $186.5 million as of September 30, 2022, together with the $20.0 million received in October 2022 under the Sanofi Co-Promotion Agreement, will be sufficient to fund the Company’s operating requirements for at least the next 12 months from the issuance of these financial statements. The Company has based these estimates on assumptions that may differ from actual results, and the Company’s available capital resources could be consumed faster than it currently expects.

The timing and outcome of the Company’s regulatory activities for teplizumab will impact the Company’s cash runway. If the Company’s teplizumab BLA resubmission is approved by the FDA, the Company will likely encounter future liquidity needs if it does not raise additional capital. Factors that could impact the Company’s cash runway include, but are not limited to, the Company’s plans for and potential changes to estimated costs of commercialization which would include the Company’s commitments under the Sanofi Co-Promotion Agreement, the success of the Company’s potential commercial launch for teplizumab and potential milestone payments that may be triggered under the Company’s current agreements, including with MacroGenics.

The Company will need to raise additional capital to fund its operations, to continue to execute its strategy and to continue as a going concern. The Company currently plans to raise additional capital through public or private equity or debt financings, or potential out-licensing transactions. Such additional funding will be necessary to continue to develop the Company’s product candidates, to pursue the license or purchase of other technologies, to commercialize its product candidates or to purchase other products. The Company may seek to sell common or preferred equity or convertible debt securities, enter into other credit facilities or another form of third-party funding, or seek other debt financing. In addition, the Company may consider raising additional capital to fund operating activities, to expand its business, to pursue strategic investments, to take advantage of financing opportunities, or for other reasons. The sale of equity and convertible debt securities may result in dilution to the Company’s stockholders and those securities may have rights senior to those of the Company’s common stock. If the Company raises additional funds through the issuance of preferred stock, convertible debt securities or other debt financing, these securities or other debt could contain covenants that would restrict the Company’s operations. Any other third-party funding arrangement could require the Company to relinquish valuable rights. The Company may require additional capital beyond its currently anticipated needs. Additional capital may not be available on reasonable terms, or at all. If the Company is unable to obtain sufficient additional funds when required, it may be forced to delay, restrict or eliminate all or a portion of its development programs, dispose of assets or technology or cease operations.

3. SIGNIFICANT ACCOUNTING POLICIES

A summary of the significant accounting policies followed by the Company in the preparation of the consolidated financial statements is as follows:

Use of estimates

The process of preparing 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 assets and liabilities at the date of financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates and changes in estimates may occur.

Segment and geographic information

Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company views its operations and manages its business in one operating and reporting segment.

In October 2021, the Company incorporated Provention Bio Limited, a wholly owned private limited subsidiary, in the United Kingdom. The Company incorporated this subsidiary to facilitate the potential future submission of a Marketing Authorization Application (“MAA”) for teplizumab, to the Medicines and Healthcare Products Regulatory Agency (“MHRA”).

Cash, cash equivalents and concentration of credit risk

The Company considers only those investments which are highly liquid, readily convertible to cash, or that mature within 90 days from the date of purchase to be cash equivalents. Marketable securities are those investments with original maturities in excess of 90 days. The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents are valued at cost, which approximates their fair value.

The Company has no off-balance-sheet concentration of credit risk such as foreign exchange contracts, option contracts or other hedging arrangements. The Company holds cash and cash equivalents in banks in excess of FDIC insurance limits. However, the Company believes risk of loss is minimal as the cash and cash equivalents are held by large, highly rated financial institutions.

Marketable securities

The Company considers securities with original maturities of greater than 90 days to be available for sale securities. Available for sale securities are classified as either current or non-current assets based on the nature of the securities and their availability for use in current operations. Securities with an effective maturity greater than one year from the balance sheet date are classified as non-current. Available for sale securities are recorded at fair value and unrealized gains and losses are recorded within accumulated other comprehensive (loss) income. The estimated fair value of the available for sale securities is determined based on quoted market prices or rates for similar instruments. In addition, the cost of debt securities in this category is adjusted for amortization of premium and accretion of discount to maturity.

On a quarterly basis, the Company reviews the status of each security in an unrealized loss position, to evaluate the existence of potential credit losses. The Company first considers whether it intends to sell, or if it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For securities that do not meet this criteria, the Company considers a number of factors to determine if the decline in fair value has resulted from credit losses or other factors, including but not limited to: (1) the extent of the decline; (2) changes to the rating of the security by a rating agency; (3) any adverse conditions specific to the security; and (4) other market conditions that may affect the fair value of the security. If this assessment indicates that a credit loss exists and the present value of cash flows expected to be collected is less than the amortized cost basis, an allowance for credit losses is required for the credit loss. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive (loss) income. As of September 30, 2022, the Company has not recognized any impairment or credit losses on its available for sale securities.

Financial instruments

Cash, cash equivalents and marketable securities are reflected in the accompanying consolidated financial statements at fair value. The carrying amount of accounts payable and accrued expenses and other current liabilities, including accrued research and development expenses, approximates fair value due to the short-term nature of those instruments. The Company believes the terms of its long-term debt reflect current market conditions for an instrument with similar terms and maturity. Therefore, the carrying value of the Company’s debt approximates its fair value.

Fixed assets, net

Fixed assets, which consists primarily of leasehold improvements, furniture and fixtures, software, office equipment and certain clinical equipment, are carried at cost less accumulated depreciation. Depreciation is computed over the estimated useful lives of the respective assets, generally three to seven years, using the straight-line method. Amortization of leasehold improvements is recorded over the shorter of the lease term or estimated useful life of the related asset.

Leases

The Company determines if an arrangement is a lease at contract inception. A lease is a contract, or part of a contract, which conveys the right to control the use of explicitly or implicitly identified property, plant or equipment in exchange for consideration. Control of an underlying asset is conveyed to the Company if the Company obtains the rights to direct the use of and to obtain substantially all of the economic benefits from using the underlying asset. The Company classifies its leases as operating or financing by considering factors such as the length of the lease term, the present value of the lease payments, the specialized nature of the asset being leased and the potential for ownership of the asset to transfer during the lease term.

Leases with terms greater than one-year are recognized on the Company’s consolidated balance sheets as right-of-use (“ROU”) assets and lease liabilities and are measured at the present value of the fixed payments due over the lease term minus the present value of any incentives, rebates or abatements expected to be received from the lessor. Options to extend a lease are typically excluded from the expected lease term as the exercise of the option is typically not reasonably certain. Leases are measured at present value using the rate implicit in the lease or, if the implicit rate is not determinable, the lessee’s incremental borrowing rate. As the implicit rate is not typically readily determinable, the Company uses an incremental borrowing rate, which is established based upon the information available at the lease commencement date, to determine the present value of lease payments due under an arrangement. The incremental borrowing rate approximates the rate the Company would pay to borrow on a collateralized basis over a similar term and amount equal to the lease payments.

ROU assets are amortized on a straight-line basis over the term of the lease. Lease liabilities accrete to yield and are reduced at the time when the lease payment is payable to the vendor. Costs determined to be variable and not based on an index or rate are not included in the measurement of the lease liability and are recognized in the consolidated statements of comprehensive loss in the same line item as expenses arising from fixed lease payments at the time when the event giving rise to the payment occurs.

Foreign currency translation

The Company considers the U.S. dollar to be its functional currency. Expenses denominated in foreign currencies are translated at the exchange rate on the date the expense is incurred. The effect of exchange rate fluctuations on translating foreign currency assets and liabilities into U.S. dollars is included in the consolidated statements of comprehensive loss. Foreign exchange transaction gains and losses are included in the results of operations and are not material in the Company’s consolidated financial statements.

Research and development expenses

Research and development expenses primarily consist of costs associated with the preclinical and clinical development of the Company’s product candidate portfolio, including the following:

Research and development expenses also include costs of acquired product licenses and related technology rights where there is no alternative future use, costs of prototypes used in research and development, consultant fees and amounts paid to certain of our collaborative partners.

All research and development expenses are charged to operations as incurred in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic (“ASC”) 730, Research and Development. The Company accounts for non-refundable advance payments for goods and services that will be used in future research and development activities as expenses when the service has been performed or when the goods have been received, rather than when the payment is made.

Accrued research and development expenses

As part of the process of preparing the consolidated financial statements, the Company is required to estimate its accrued expenses. This process involves reviewing quotations and contracts, identifying services that have been performed on the Company’s behalf and estimating the level of service performed and the associated cost incurred for the service when the Company has not yet been invoiced or otherwise notified of the actual cost. The majority of the Company’s service providers invoice the Company monthly in arrears for services performed or when contractual milestones are met. The Company makes estimates of its accrued expenses as of each balance sheet date in our consolidated financial statements based on facts and circumstances known to the Company at that time. The Company periodically confirms the accuracy of its estimates with the service providers and makes adjustments if necessary. The significant estimates in the Company’s accrued research and development expenses are related to expenses incurred with respect to CROs, CMOs and other vendors in connection with research and development and manufacturing activities.

The Company bases its expense related to CROs and CMOs on its estimates of the services received and efforts expended pursuant to quotations and contracts with such vendors that conduct research and development and manufacturing activities on the Company’s behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to the Company’s vendors will exceed the level of services provided and result in a prepayment of the applicable research and development or manufacturing expense. In accruing service fees, the Company estimates 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 its estimate, the Company adjusts the accrual or prepaid expense accordingly. Although the Company does not expect its estimates to be materially different from amounts actually incurred, the Company’s understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and could result in us reporting amounts that are too high or too low in any particular period. There have been no material changes in estimates for the periods presented.

Stock-based compensation expense

The Company follows the provisions of ASC 718, Compensation—Stock Compensation, which requires the measurement and recognition of compensation expense for all stock-based payment awards made to employees and non-employees, including stock options. Stock-based compensation expense is based on the grant date fair value estimated in accordance with the provisions of ASC 718 and is generally recognized as an expense over the requisite service period. For grants containing performance-based vesting provisions, the grant-date fair value of the performance-based stock options is recognized as compensation expense once it is probable that the performance condition will be achieved. The Company accounts for actual forfeitures in the period the forfeiture occurs.

Stock Options

The Company estimates the fair value of stock options on the date of grant using the Black-Scholes option-pricing model. Due to the lack of trading history, the Company’s computation of stock-price volatility is based on the volatility rates of comparable publicly held companies over a period equal to the expected term of the options granted by the Company. The Company also utilizes its limited available historical volatility, to a lesser weight, in its expected volatility calculation. The Company’s computation of expected term is determined using the “simplified” method, which is the midpoint between the vesting date and the end of the contractual term. The Company believes that it does not have sufficient reliable exercise data in order to justify the use of a method other than the “simplified” method of estimating the expected exercise term of employee stock option grants. For non-employee stock option grants, the Company has the option to utilize either the expected term or the contractual term, determined on an award-by-award basis. The Company utilizes a dividend yield of zero based on the fact that the Company has never paid cash dividends to stockholders and has no current intentions to pay cash dividends. The risk-free interest rate is based on the zero-coupon United States Treasury yield at the date of grant for a term equivalent to the expected term of the option.

Stock-based compensation expense is included in both research and development expenses and general and administrative expenses in the consolidated statements of comprehensive loss.

Collaboration revenue

At the inception of a collaboration agreement, the Company first assesses whether the contractual agreement is within the scope of ASC 808, Collaborative Arrangements by evaluating whether the agreement involves a joint operating activity and involves two (or more) parties that are both active participants in the activity and exposed to significant risks and rewards dependent on the commercial success of such activity. Then the Company determines whether the collaboration agreement in its entirety represents a contract with a customer as defined by ASC 606, Revenue from Contracts with Customers (“ASC 606”). If only a portion of the collaboration agreement is potentially with a customer, the Company applies the distinct good or service unit-of-account guidance in ASC 606 to determine whether there is a unit of account that should be accounted for under ASC 606.

In accordance with ASC 606, the Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps: (1) identify the contracts with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when or as the Company satisfies a performance obligation.

From time to time, the Company enters into licensing agreements that are within the scope of ASC 606, under which it may license rights to research, develop and commercialize its product candidates to third parties. The terms of these collaborative research and development agreements typically include non-refundable, upfront license fees; reimbursement for research and development activities; development, regulatory and commercial milestone payments; and royalties on net sales of commercialized products. The Company may also enter into development and manufacturing service agreements with its collaborators. For each arrangement, at contract inception, the Company identifies all performance obligations, which may include a license to intellectual property and know-how, research and development activities, transition activities and/or manufacturing services and determines if each performance obligation is distinct. In order to determine the transaction price, in addition to any upfront payment, the Company estimates the amount of variable consideration at the outset of the contract either utilizing the expected value or most likely amount method, depending on the facts and circumstances relative to the contract. The Company constrains the estimates of variable consideration such that it is probable that a significant reversal of previously recognized revenue will not occur. When determining if variable consideration should be constrained, management considers whether there are factors outside the Company’s control that could result in a significant reversal of revenue. These estimates are re-assessed each reporting period as required.

Once the estimated transaction price is established, amounts are allocated to the performance obligations that have been identified. The transaction price is generally allocated to each separate performance obligation on a relative standalone selling price basis, which requires the use of assumptions and judgement. Standalone selling prices used to perform the initial allocation are not updated after contract inception. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when or as the performance obligation is satisfied.

Amounts received prior to revenue recognition are recorded as deferred revenue. Amounts expected to be recognized as revenue within the 12 months following the balance sheet date are classified as current portion of deferred revenue in the accompanying consolidated balance sheets. Amounts not expected to be recognized as revenue within the 12 months following the balance sheet date are classified as deferred revenue, net of current portion. Refer to Note 6 – Commitments and Contingencies, for specific details regarding the Company’s collaboration agreements.

Debt issuance costs and debt discount

Debt issuance costs and debt discounts are presented on the accompanying consolidated balance sheets as a direct reduction from the carrying value of the debt and are amortized to interest expense over the term of the related debt using the effective interest method. The Company applies the relative fair value to allocate issuance costs among freestanding instruments that form part of the same transaction.

Income taxes

The Company utilizes the liability method of accounting for deferred income taxes, as set forth in ASC 740, Income Taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. A valuation allowance is established against deferred tax assets when, based on 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’s policy is to record interest and penalties on uncertain tax positions as income tax expense.

Recent accounting pronouncements

The Company considers the applicability and impact of all Accounting Standards Updates (“ASUs”). ASUs not discussed below were assessed and determined to be either not applicable or are expected to have minimal impact on the Company’s consolidated financial statements.

In May 2021, the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt - Modifications and Extinguishments (Subtopic 470-50), Compensation - Stock Compensation (Topic 718), and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (ASU 2021-04). This new standard provides clarification and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (such as warrants) that remain equity classified after modification or exchange. Effective January 1, 2022, the Company adopted ASU 2021-04 on a prospective basis. The adoption had no impact on the Company’s consolidated financial statements and related disclosures.

4. CAPITALIZATION

As of September 30, 2022 and December 31, 2021, the Company had authorized 150,000,000 shares of common stock, $0.0001 par value per share, of which 87,054,053 and 63,374,738 shares, respectively, were issued and outstanding. In addition, as of September 30, 2022 and December 31, 2021, the Company had authorized 25,000,000 shares of preferred stock, $0.0001 par value per share, of which none were issued and outstanding.

July 2022 Private Placement

In July 2022, the Company entered into a Securities Purchase Agreement with certain institutional purchasers, pursuant to which the Company sold, in a private placement, 13,318,535 shares of common stock and 13,318,535 warrants to acquire additional shares of common stock for aggregate gross proceeds of approximately $60.0 million, based on an offering price of $4.505 for each share plus one warrant (the “July 2022 Private Placement”). The warrants will expire five years from the closing date of the transaction, have an exercise price of $6.00 per share and are immediately exercisable upon issuance, subject to other limitations on exercise as described in the warrants. Net proceeds from the transaction were $57.2 million after deducting fees for the placement agent of $2.4 million and other offering expenses of $0.4 million.

2021 ATM Program

The Company has established an at-the-market program (the “2021 ATM Program”) through which the Company may sell, from time to time at its sole discretion, up to $150.0 million of shares of its common stock. During the nine months ended September 30, 2022, the Company sold 10,306,780 shares of its common stock for aggregate net proceeds of $47.4 million, net of $1.7 million in sales commissions and other offering expenses, under the 2021 ATM Program, of which, 7,263,808 shares of common stock were sold during the three months ended September 30, 2022 for aggregate net proceeds of $33.6 million, net of $1.1 million in sales commissions and other offering expenses.

January 2021 Public Offering

In January 2021, the Company completed an underwritten public offering in which it sold 6,250,000 shares of common stock at a public offering price of $16.00 per share. In February 2021, the underwriters partially exercised their option to purchase an additional 587,500 shares at a price of $16.00 per share. In the aggregate, total net proceeds from this underwritten public offering were $102.3 million, after deducting underwriting discounts and commissions of $6.6 million and other offering expenses of $0.5 million.

5. CASH, CASH EQUIVALENTS, AND MARKETABLE SECURITIES

The Company considers all highly liquid investments purchased with original maturities of 90 days or less at the date of purchase to be cash equivalents. Cash and cash equivalents as of September 30, 2022 and December 31, 2021 were $102.4 million and $78.2 million, respectively, and included cash and investments in money market funds and U.S. Treasury securities with original maturities of 90 days or less.

The Company considers securities with original maturities of greater than 90 days at the date of purchase to be available for sale securities. The Company held available for sale securities with a fair value totaling $84.1 million and $48.9 million at September 30, 2022 and December 31, 2021, respectively. These available for sale securities consisted solely of investment-grade corporate debt securities, U.S. Treasury securities and U.S. Government agency securities and have expected maturities ranging from approximately two months to approximately 13 months. The Company may sell certain of its marketable securities prior to their stated maturities for reasons including, but not limited to, managing liquidity, credit risk, duration and asset allocation.

The Company evaluates securities with unrealized losses, if any, to determine whether the decline in fair value has resulted from credit loss or other factors. As of September 30, 2022, the Company has not recognized any impairment or credit losses on the Company’s available for sale securities. While the Company classifies these securities as available for sale, the Company does not intend to sell its investments and based on its current plans, the Company currently believes it has the ability to hold these investments until maturity.

The following table summarizes the amortized cost, fair value, allowance for credit losses and effective maturities of the Company’s cash, cash equivalents and available for sale securities:

SCHEDULE OF AVAILABLE OF SALE SECURITIES

The Company’s available for sale securities are reported at fair value on the Company’s consolidated balance sheets. Unrealized gains (losses) are reported within accumulated other comprehensive (loss) income in the consolidated statements of comprehensive loss. The cost of securities sold and any realized gains/losses from the sale of available for sale securities are based on the specific identification method. The changes in accumulated other comprehensive (loss) income associated with the unrealized gain (loss) on available for sale securities during the three and nine months ended September 30, 2022 and 2021, respectively, were as follows:

SCHEDULE OF ACCUMULATED OTHER COMPREHENSIVE INCOME(LOSS) 

6. COMMITMENTS AND CONTINGENCIES

License and Other Agreements

In May 2018, the Company entered into an Asset Purchase Agreement (the “MacroGenics Asset Purchase Agreement”) with MacroGenics, Inc. (“MacroGenics”) pursuant to which the Company acquired MacroGenics’ interest in teplizumab (renamed PRV-031), a humanized mAb for the treatment of Type 1 Diabetes (“T1D”). As partial consideration for the MacroGenics Asset Purchase Agreement, the Company granted MacroGenics a warrant to purchase 2,162,389 shares of the Company’s common stock at an exercise price of $2.50 per share. The Company is obligated to pay MacroGenics contingent milestone payments totaling $170.0 million upon the achievement of certain regulatory approval milestones, including $60.0 million payable within 90 days of an approval of a BLA for a first indication in the United States. In addition, the Company is obligated to make contingent milestone payments to MacroGenics totaling $225.0 million upon the achievement of certain sales milestones. The Company has also agreed to pay MacroGenics a single-digit royalty on net sales of the product. The Company has also agreed to pay third-party obligations, including low single-digit royalties, a portion of which is creditable against royalties payable to MacroGenics, aggregate milestone payments of up to approximately $0.7 million and other consideration, for certain third-party intellectual property under agreements the Company assumed pursuant to the MacroGenics Asset Purchase Agreement. Further, the Company is required to pay MacroGenics a low double-digit percentage of certain consideration to the extent it is received in connection with a future grant of rights to teplizumab by the Company to a third party. The Company is obligated to use reasonable commercial efforts to develop and seek regulatory approval for teplizumab.

In May 2018, the Company entered into a License Agreement with MacroGenics (the “MacroGenics License Agreement”), pursuant to which MacroGenics granted the Company exclusive global rights for the purpose of developing and commercializing MGD010 (renamed PRV-3279), a humanized protein and a potential treatment for systemic lupus erythematosus (“SLE”) and other similar diseases. As partial consideration for the MacroGenics License Agreement, the Company granted MacroGenics a warrant to purchase 270,299 shares of the Company’s common stock at an exercise price of $2.50 per share. The Company is obligated to make contingent milestone payments to MacroGenics totaling $42.5 million upon the achievement of certain developmental and approval milestones for the first indication, of which, the Company paid $0.4 million to MacroGenics in April 2022. This payment was triggered upon the enrollment of the first patient in the Phase 2a PREVAIL-2 study. The Company is also obligated to make contingent milestone payments totaling $22.5 million upon the achievement of certain regulatory approvals for a second indication, and up to $225.0 million upon the achievement of certain sales milestones. The Company has also agreed to pay MacroGenics a single-digit royalty on net sales of the product. Further, the Company is required to pay MacroGenics a low double-digit percentage of certain consideration to the extent received in connection with a future grant of rights to PRV-3279 by the Company to a third party. In connection with the Company’s grant of certain rights for PRV-3279 to Hangzhou Zhongmei Huadong Pharmaceutical Co., Ltd. (“Huadong”) under the Huadong License Agreement (as defined below), in May 2021, the Company paid $1.1 million to MacroGenics related to “qualified” consideration, as defined in the MacroGenics License Agreement, that the Company received from Huadong. See below for further description of the Huadong License Agreement.

The Company is obligated to use commercially reasonable efforts to develop and seek regulatory approval for PRV-3279. The license agreement may be terminated by either party upon a material breach or bankruptcy of the other party, by the Company without cause upon prior notice to MacroGenics, and by MacroGenics in the event that the Company challenges the validity of any licensed patent under the agreement.

In February 2021, the Company entered into a License Agreement with Hangzhou Zhongmei Huadong Pharmaceutical Co., Ltd., a wholly-owned subsidiary of Huadong Medicine Co., Ltd. (the “Huadong License Agreement”), pursuant to which the Company granted Huadong exclusive rights for the purpose of developing and commercializing PRV-3279, a DART® (bispecific antibody-based molecule) targeting the B cell surface proteins CD32B and CD79B, in Greater China (mainland China, Hong Kong, Macau and Taiwan). Provention Bio will retain exclusive worldwide rights to develop PRV-3279 for combination uses to reduce the immunogenicity of biotherapeutics, but Huadong will have the exclusive right to distribute PRV-3279 in that field in Greater China. In consideration of the license and other rights granted as part of the Huadong License Agreement, the Company received an upfront payment of $6.0 million and has the ability to receive up to $11.5 million in research, development and manufacturing funding. As of September 30, 2022, the Company has received an aggregate of $5.5 million in research, development and manufacturing funding under the Huadong License Agreement, including $1.5 million received during the third quarter of 2022. If Huadong successfully develops, obtains regulatory approval for, and commercializes PRV-3279 in Greater China, the Company is eligible to receive up to $37.0 million in regulatory milestones and up to $135.0 million in commercial milestones based on aggregate net sales in a calendar year in Greater China. If commercialized, the Company would also be eligible to receive low double-digit royalties on net sales of PRV-3279 by Huadong in Greater China. The License Agreement may be terminated by either party upon a material breach or bankruptcy of the other party, by Huadong without cause upon at least 12 months prior notice to the Company, and by the Company in the event Huadong challenges a licensed patent or in the event that the Company’s upstream license terminates. The Company may also terminate the License Agreement if Huadong ceases commercialization of PRV-3279 for a consecutive period of six months after first commercial sale. The Company is generally responsible for the manufacturing of PRV-3279 through regulatory approval in Greater China and Huadong will exclusively purchase all clinical and commercial supply requirements of PRV-3279 from the Company until Huadong exercises its option to assume manufacturing responsibilities, which may be triggered after regulatory approval in China. The Company will retain all rights to PRV-3279 in the rest of the world. The Company initiated a Phase 2a trial of PRV-3279 in systemic lupus erythematosus in January 2022 and is conducting a portion of this trial in Hong Kong.

The Company evaluated the Huadong License Agreement under the provisions of ASC 606 and identified the following three material promises: (1) the license of rights to PRV-3279 in Greater China, (2) the performance of clinical research activities and (3) manufacturing process improvements. The Company concluded that the performance obligations were not distinct and consequently do not have value on a standalone basis. Accordingly, they were determined to represent one performance obligation. The Company determined that the transaction price of the Huadong License Agreement was $15.5 million, consisting of the $6.0 million up-front payment and $9.5 million of the research, development and manufacturing funding expected to be received, which would not result in a significant reversal of revenue in a future period. The total transaction price was allocated to the single identified performance obligation. The regulatory and sales event-based milestone payments represent variable consideration, and the Company used the most likely amount method to estimate this variable consideration because the potential milestone payment is a binary event, as the Company will either receive the milestone payment or it will not. Given the high degree of uncertainty around achievement of these milestones, the Company determined the milestone amounts to be fully constrained and will not recognize revenue until the uncertainty associated with these payments is resolved. Any consideration related to royalties will be recognized if and when the related sales occur. The Company re-assesses the transaction price in each reporting period and when events whose outcomes are resolved or other changes in circumstances occur.

The Company recognizes collaboration revenue using a cost-based input method according to costs incurred to date compared to estimated total costs of the clinical research activities over the period which the activities are performed under the agreement, which is currently expected to occur through the second half of 2024. The Company recognized collaboration revenue of $0.8 million and $2.1 million during the three and nine months ended September 30, 2022, respectively, and total deferred revenue at September 30, 2022 was $8.0 million. During the three and nine months ended September 30, 2021, the Company recognized collaboration revenue of $0.7 million and $0.7 million, respectively.

In November 2018, the Company entered into a License and Collaboration Agreement (the “Amgen Agreement”) with Amgen, Inc. (“Amgen”) for PRV-015 (ordesekimab, also known as AMG 714), a novel anti-IL-15 monoclonal antibody being developed for the treatment of gluten-free diet non-responsive celiac disease (“NRCD”). Under the terms of the agreement, the Company will conduct and fund a Phase 2b trial in NRCD and lead the development and regulatory activities for the program. Amgen agreed to make an equity investment of up to $20.0 million in the Company, subject to certain terms and conditions set forth in the agreement. Amgen is also responsible for the manufacturing of PRV-015. Upon completion of the Phase 2b trial, a $150.0 million milestone payment is due from Amgen to the Company upon exercise of Amgen’s option to continue development of the program, plus an additional potential regulatory milestone payment, and single digit royalties on future sales; provided, however, that Amgen has the right to elect not to pay the $150.0 million milestone, in which case the Company will have an option to negotiate for the transfer to the Company of rights to AMG 714 pursuant to a termination license agreement between Amgen and the Company and no additional royalties or milestones would be due from Amgen. The material terms of the termination license agreement have been negotiated and agreed and form part of the Amgen Agreement. Under the terms of the termination license agreement, the Company would be obligated to make certain contingent milestone payments to Amgen and other third parties totaling up to $70.0 million upon the achievement of certain clinical and regulatory milestones and a low double-digit royalty on net sales of any approved product based on the IL-15 technology. The agreement may be terminated by either party upon a material breach or upon an insolvency event and by Amgen if the Company is not able to fund our clinical development obligations (among other termination triggers). The agreement expires upon the expiration of Amgen’s last obligation to make royalty payments to Provention. In September 2019, in a private placement completed concurrently with the Company’s underwritten public offering, Amgen purchased 2,500,000 shares of the Company’s common stock at the underwritten public offering price of $8.00 per share, for a total investment of $20.0 million.

In April 2017, the Company entered into a License Agreement with Vactech Ltd. (the “Vactech License Agreement”), pursuant to which Vactech Ltd. (“Vactech”) granted the Company exclusive global rights for the purpose of developing and commercializing the group B coxsackievirus vaccine (“CVB”) platform technology. In consideration of the licenses and other rights granted by Vactech, the Company issued two million shares of its common stock to Vactech. The Company recorded the issuance of the shares at their estimated fair value of approximately $1.70 per share, for a total of $3.4 million as a license fee expense included as part of research and development expense for the year ended December 31, 2017. Provention paid Vactech a total of approximately $0.5 million for transition and advisory services during the first 18 months of the term of the agreement. In addition, Provention may be obligated to make a series of contingent milestone payments to Vactech totaling up to an additional $24.5 million upon the achievement of certain clinical development and regulatory filing milestones, of which the Company paid $0.5 million to Vactech in April 2021. This payment was triggered upon the dosing of the first patient in the Phase 1 PROVENT study, which occurred in January 2021. In addition, the Company has agreed to pay Vactech tiered single-digit royalties on net sales of any approved product based on the CVB platform technology and three additional payments totaling $19.0 million upon the achievement of certain annual net sales levels. The Vactech License Agreement may be terminated by the Company on a country-by-country basis without cause (in which case the exclusive global rights to the technology will transfer back to Vactech) and by either party upon a material breach or insolvency of the other party. If the Company terminates the agreement with respect to two or more specified European countries, the agreement will be deemed terminated with respect to all of the European Union, and if the Company terminates the agreement with respect to the United States, the agreement will be deemed terminated with respect to all of North America. The agreement expires upon the expiration of the Company’s last obligation to make royalty payments to Vactech.

Legal Proceedings

On May 21, 2021, a putative class action complaint was filed in the U.S. District Court for the District of New Jersey (the “Court”), naming the Company, Chief Executive Officer Ashleigh Palmer, and retired and former Chief Financial Officer Andrew Drechsler as defendants (the “Securities Action”). The complaint alleged violations of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 in connection with disclosures made regarding the teplizumab BLA and teplizumab’s commercialization timeline.

On December 23, 2021, the subsequently appointed lead plaintiff (“Lead Plaintiff”) and named plaintiff filed an amended complaint (the “Amended Complaint”) alleging similar violations to the original complaint. Lead Plaintiff sought to represent a class of shareholders who purchased or otherwise acquired the Company’s securities between November 2, 2020 and July 6, 2021. The Amended Complaint also sought unspecified damages. The Company, Mr. Palmer, and Mr. Drechsler filed their response, a motion to dismiss, to the Amended Complaint on February 8, 2022 (the “Motion to Dismiss”). The Lead Plaintiff filed an opposition to that motion on March 25, 2022. The Company, Mr. Palmer, and Mr. Drechsler filed their reply on April 26, 2022. On August 4, 2022, Judge Patty Shwartz of the Third Circuit, sitting by designation for the limited purpose of deciding the Motion to Dismiss, granted the Motion to Dismiss with prejudice. Lead Plaintiff did not appeal the decision.

On August 5, 2021 and October 7, 2021, two shareholder derivative lawsuits concerning substantially the same facts and disclosures underlying the Securities Action (the “New Jersey Derivative Actions”) were filed in the same Court, naming Chief Executive Officer Ashleigh Palmer, retired and former Chief Financial Officer Andrew Drechsler, and Company directors Jeffrey Bluestone, Avery Catlin, Sean Doherty, John Jenkins, Wayne Pisano, and Nancy Wysenski as defendants (the “Individual Defendants”). The Company was named in both New Jersey Derivative Actions as a nominal defendant. The New Jersey Derivative Actions alleged: (1) violations of Section 14(a) of the Exchange Act against the Company directors (including Ashleigh Palmer) in connection with the Company’s March 29, 2021 proxy statement; (2) breaches of fiduciary duty against all Individual Defendants in connection with disclosures made regarding the teplizumab BLA and teplizumab’s commercialization timeline, among other common law causes of action; and (3) sought contribution under Sections 10(b) and 21D of the Exchange Act against Ashleigh Palmer and Andrew Drechsler in connection with the Securities Action. The New Jersey Derivative Actions sought unspecified damages, including legal fees associated with the Securities Action and compensation paid to the Individual Defendants. The New Jersey Derivative Actions also sought an order directing the Company and Individual Defendants to take all necessary actions to reform and improve the Company’s corporate governance and internal procedures.

On October 28, 2021, both plaintiffs and all defendants in the New Jersey Derivative Actions filed a joint stipulation and proposed order to consolidate the Derivative Actions and appoint co-lead counsel, which the Court granted on November 1, 2021. In response to a series of stipulations and motions, the Court entered a temporary stay of proceedings in the New Jersey Derivative Actions pending the resolution of the Motion to Dismiss in the Securities Action. On September 21, 2022, following the dismissal of the Securities Action, the Court ordered a voluntarily dismissal of the New Jersey Derivative Actions without prejudice in response to a joint stipulation filed by the parties.

On August 8, 2022, a third shareholder derivative complaint was filed in the Court of Chancery of the State of Delaware concerning substantially the same facts and disclosures underlying the Securities Action and the New Jersey Derivative Actions (the “Delaware Derivative Action”). The Delaware Derivative Action names the same Individual Defendants as the New Jersey Derivative Actions and names the Company as a nominal defendant. The complaint in the Delaware Derivative Action alleges: (1) breaches of fiduciary duty against all Individual Defendants in connection with disclosures made regarding the teplizumab BLA and teplizumab’s commercialization timeline; and (2) unjust enrichment. The Delaware Derivative Action seeks unspecified damages from the Individual Defendants in favor of the Company and an order directing the Company to take all necessary actions to reform and improve the Company’s corporate governance and internal procedures, among other forms of relief. The Company’s and the Individual Defendants’ response to the complaint was filed on October 28, 2022.

The Company is unable at this time to determine whether the outcomes of these litigations would have a material impact on its results of operations, financial condition or cash flows. The Company does not have contingency reserves established for any litigation liabilities.

7. NET LOSS PER SHARE OF COMMON STOCK

Basic and diluted net loss per common share is determined by dividing net loss by the weighted average common shares outstanding during the period. For the periods where there is a net loss, stock options and warrants have been excluded from the calculation of diluted net loss per common share because their effect would be anti-dilutive. Therefore, the weighted average common shares used to calculate both basic and diluted net loss per common share would be the same.

The following table sets forth the computation of basic and diluted net loss per share of common stock for the periods indicated:

SCHEDULE OF COMPUTATION OF BASIC AND DILUTED NET LOSS PER SHARE 

The following potentially dilutive securities have been excluded from the computation of diluted weighted average shares outstanding as they would be antidilutive:

SCHEDULE OF ANTI - DILUTED SECURITIES EXCLUDED FROM COMPUTATION OF EARNING PER SHARE 

8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consisted of the following:

SCHEDULE OF ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES 

9. FAIR VALUE OF ASSETS AND LIABILITIES

The carrying amounts reported in the balance sheet for cash and cash equivalents, accounts payable and accrued expenses approximate fair value based on the short-term nature of these items.

In accordance with accounting principles generally accepted in the United States, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level hierarchy prioritizes the inputs used to measure fair value as follows:

Level 1 – Valuation is based on quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 – Valuation is based on observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

The following is a summary of assets and their related classifications under the fair value hierarchy:

SCHEDULE OF ASSETS AND LIABILITIES MEASURED AT FAIR VALUE ON RECURRING BASIS 

10. STOCK OPTIONS

In 2017, the Company adopted the Provention Bio, Inc. 2017 Equity Incentive Plan (the “2017 Plan”). Pursuant to the 2017 Plan, the Company’s Board of Directors may grant incentive stock options, nonqualified stock options and restricted stock to employees, officers, directors, consultants and advisors. As of September 30, 2022, there were options to purchase an aggregate of 13,089,589 shares of common stock outstanding under the 2017 Plan. Options issued under the 2017 Plan are exercisable for up to 10 years from the date of issuance.

In 2018, the Company amended and restated its 2017 Plan to, among other things, include an evergreen provision, which would automatically increase the number of shares available for issuance under the 2017 Plan in an amount equal to (1) the difference between (x) 18% of the total shares of the Company’s common stock outstanding, on a fully diluted basis, on December 31^st of the preceding calendar year, and (y) the total number of shares of the Company’s common stock reserved under the 2017 Plan on December 31^st of such preceding calendar year or (2) an amount less than this calculated increase as determined by the board of directors.

In connection with the evergreen provisions of the 2017 Plan, the number of shares available for issuance under the 2017 Plan was increased by 1,768,825 shares, as determined by the board of directors under the provisions described above, effective as of January 1, 2022. As of September 30, 2022, there were 488,969 shares available for future grants.

In October 2020, the Company adopted the Provention Bio, Inc. 2020 Inducement Plan (the “2020 Inducement Plan”). Pursuant to the terms of the 2020 Inducement Plan, the Company may grant non-statutory stock options, stock appreciation rights, restricted stock unit awards and restricted stock for up to a total of 2,000,000 shares of common stock to individuals that were not previously an employee or director of the Company or individuals returning to employment after a bona fide period of non-employment with the Company. In May 2022, the Company amended its 2020 Inducement Plan to increase the number of shares available for issuance by 2,500,000 shares, increasing the total number of shares available for issuance under the plan to 4,500,000 shares. As of September 30, 2022, there were options to purchase 2,275,133 shares of common stock outstanding under the 2020 Inducement Plan and 2,224,867 shares available for future grants. Options issued under the 2020 Inducement Plan are exercisable for up to 10 years from the date of issuance.

Stock-based compensation

Total stock-based compensation expense recognized for both employees and non-employees was as follows:

SCHEDULE OF STOCK BASED COMPENSATION EXPENSES 

Option activity

The Company grants options with service-based vesting requirements as well as options with performance-based vesting requirements. Generally, the service-based requirements vest over a four-year period in multiple tranches. Each tranche of the performance-based component vests upon the achievement of a specific milestone. These milestones are related to the Company’s clinical trials, manufacturing activities, regulatory activities, commercial activities and certain other performance metrics.

A summary of option activity for the nine months ended September 30, 2022 are presented below:

SUMMARY OF STOCK OPTION ACTIVITY 

The weighted average grant-date fair value of options granted during the nine months ended September 30, 2022 was $3.25 per share. As of September 30, 2022, there were approximately 1,988,000 unvested options subject to performance-based vesting criteria with approximately $12.8 million of unrecognized compensation expense. This expense will be recognized when each milestone becomes probable of occurring. In addition, as of September 30, 2022, there were approximately 6,423,000 unvested options outstanding subject to time-based vesting with approximately $26.1 million of unrecognized compensation expense which will be recognized over a period of 2.5 years.

Cash proceeds from, and the aggregate intrinsic value of, stock options exercised during the periods presented below were as follows:

SCHEDULE OF AGGREGATED INTRINSIC VALUE OF STOCK OPTION EXERCISED 

The Company uses the Black-Scholes option-pricing model to estimate the fair value of option awards with the following weighted-average assumptions for the period indicated:

SCHEDULE OF SHARE-BASED COMPENSATION VALUATION OF ASSUMPTIONS 

The weighted-average valuation assumptions were determined as follows:

11. DEBT

On August 31, 2022 (the “Closing Date”), the Company entered into a Loan and Security Agreement (the “Hercules LSA”) with certain financial institutions (the “Lenders”) and Hercules Capital, Inc., (“Hercules”). The Hercules LSA provides for up to $125.0 million of term loans in the aggregate, available to be funded in up to five tranches. The first tranche in an amount equal to $25.0 million which was drawn on the Closing Date. The Company may draw the second tranche in an amount of up to $40.0 million upon approval of the teplizumab BLA resubmission by the FDA, subject to certain customary borrowing conditions. The third tranche in an amount of up to $10.0 million may be drawn if the second tranche has been borrowed, as well as achievement of certain milestones related to cumulative net product revenue and new net cash proceeds from various allowable transactions. The fourth tranche will be available to the Company in an aggregate amount of up to $35.0 million (less the actual funded amount, if any, for the third tranche), subject to satisfaction of certain conditions, including achievement of specified cumulative net product revenue-based milestones. The availability of the fifth tranche of up to $25.0 million is subject to the approval of the Lenders.

The term loans have a scheduled maturity date of September 1, 2026 (the “Maturity Date”), which will be extended for an additional year upon approval of the teplizumab BLA resubmission by the FDA (the “Approval Milestone”) and certain other conditions. The Company will make interest-only monthly payments of accrued interest without amortization of principal until September 1, 2025, which will be extended, (i) by six months if the Company achieves (x) the Approval Milestone prior to September 1, 2025 and (y) a performance milestone based on aggregate net product revenue on a trailing six-month basis, and (ii) by an additional six months if the interest-only period has previously been extended and the Company maintains compliance with the financial covenants, described below, through March 1, 2026. After the conclusion of the interest-only period, monthly installments of principal and interest will be paid through the Maturity Date.

The term loans will bear interest at a per annum rate equal to the greater of (i) the prime rate as reported in The Wall Street Journal plus 2.70% and (ii) 8.20%. As of September 30, 2022, the interest rate was 8.95%. The Company paid Hercules a facility charge of approximately $0.2 million in respect of the funding of the first tranche of term loans. Each of the other tranches, if drawn, are subject to a facility charge, payable upon funding, equal to 0.75% of the principal amount of the amount of such tranche funded.

If the Company makes a prepayment on the term loans, it will be obligated to pay a prepayment charge, based on a percentage of the amount of term loans so prepaid, equal to: (i) 2.0%, if the prepayment occurs within the first 12 months following the Closing Date; (ii) 1.5% if the prepayment occurs more than 12 months, but on or prior to the date that is 24 months, following the Closing Date; and (iii) 1.0%, if the prepayment occurs more than 24 months following the Closing Date, but on or prior to the date that is 30 days prior to the Maturity Date. The Company is also obligated to pay an end of term charge of 6.60% of the principal amount so prepaid or repaid. No such charge is due in connection with certain refinancings of the Hercules LSA involving Hercules, the Lenders and their affiliates or as otherwise agreed in writing by Hercules and the Lenders.

The Hercules LSA contains customary representations and warranties as well as certain financial covenants in term loan facilities of this type for similarly situated companies, including but not limited to liquidity, monthly revenue performance and market capitalization covenants. The Company was in compliance with all such covenants at September 30, 2022.

In connection with the funding of each tranche of Hercules LSA, the Company will issue warrants to the Lenders to acquire shares of the Company’s common stock at an exercise price per share equal to the three-day volume-weighted average price prior to the closing of each tranche of term loans (the “Exercise Price”), subject to certain terms and conditions (the “Term Loan Warrants”). The number of shares of the Company’s common stock into which such Term Loan Warrants will be exercisable will be equal to the aggregate principal amount of the applicable tranche of term loans funded multiplied by 2.0%, divided by the applicable Exercise Price. The Term Loan Warrants may be exercised on a cashless basis and will be exercisable for a term beginning on the date of issuance and ending on the earlier to occur of seven years from the date of issuance or the consummation of certain acquisitions of the Company as set forth in the Term Loan Warrants. The Company issued Term Loan Warrants to acquire 111,934 shares of the Company’s common stock at an exercise price of approximately $4.47 per share in connection with the funding of the first tranche of the Hercules LSA.

In accordance with ASC 470, Debt, the value of the initial Hercules LSA term loan and the Term Loan Warrants was allocated using a relative fair value allocation. The Company evaluated the features of the Hercules LSA and the Term Loan Warrants in accordance with ASC 480, Distinguishing Liabilities from Equity and ASC 815, Derivatives and Hedging. The Company determined that the Hercules LSA and the Term Loan Warrants did not contain any features that would qualify as a derivative or embedded derivative. In addition, the Company determined that the Term Loan Warrants should be classified as equity. The estimated fair value of the Term Loan Warrants, determined to be approximately $0.5 million, was calculated using the Black-Scholes Option Pricing Model based on the following inputs:

SCHEDULE OF FAIR VALUE OF TERM LOAN WARRANTS 

The fair value of the Term Loan Warrants was recorded as a credit to additional paid-in capital and treated as a debt discount. The remaining value was allocated to the initial Hercules LSA term loan, net of $0.5 million of fees paid to the Lenders, including the facility charge and legal costs, which were recorded as a debt discount. In addition, the Company incurred legal, agent and other issuance costs of $0.8 million, which were recorded as debt issuance costs. The debt discount and debt issuance costs are being amortized to interest expense and the end of term charge is being accreted using the effective interest method over the term of the term loan.

The following table presents the carrying value of the Company’s debt balance as of the periods indicated:

SCHEDULE OF CARRYING VALUE OF DEBT BALANCE 

As of September 30, 2022, future principal payments of the Company’s debt balance, including the contractual end of term charge, for each of the fiscal years through maturity were as follows:

SCHEDULE OF FUTURE PRINCIPAL PAYMENTS 

Interest expense during the periods presented below were as follows:

SCHEDULE OF INTEREST EXPENSE  

12. WARRANTS

In connection with the April 2017 sale of Series A Convertible Redeemable Preferred Stock, the Company issued warrants to MDB Capital Group, LLC (“MDB”), the placement agent, and its designees to purchase 558,740 shares of Series A Convertible Redeemable Preferred Stock with an exercise price of $2.50 per share with a seven-year term. Upon completion of the IPO in July 2018, the warrants automatically became warrants for the purchase of 558,740 shares of the Company’s common stock. As of September 30, 2022, a total of 316,754 warrants have been exercised on a cashless basis.

In connection with the Company’s completion of its IPO, in July 2018, the Company issued to MDB, the underwriter in the IPO, and its designees warrants to purchase 1,596,956 shares of the Company’s common stock at an exercise price of $5.00 per share. These warrants have a five-year term. As of September 30, 2022, a total of 134,114 warrants have been exercised on a cashless basis.

In connection with the July 2022 Private Placement, the Company issued to certain institutional purchasers 13,318,535 warrants to acquire additional shares of the Company’s common stock. The warrants will expire five years from the closing date of the transaction, have an exercise price of $6.00 per share and are immediately exercisable upon issuance, subject to other limitations on exercise as described in the warrants.

The Company evaluated whether the warrants should be classified as a liability or equity in accordance with ASC 480, Distinguishing Liabilities from Equity and ASC 815, Derivatives and Hedging. Based on its evaluation, the Company determined that the warrants should be classified as equity and were recorded as a credit to additional paid-in capital as a component of the net proceeds from the July 2022 Private Placement and are not subject to remeasurement. The Company will continue to evaluate the classification of the equity warrants on a quarterly basis, to determine whether the warrants continue to meet equity classification.

During the three and nine months ended September 30, 2022 and 2021, no warrants to purchase shares of the Company’s common stock were exercised.

As of September 30, 2022, outstanding warrants consisted of the following:

SCHEDULE OF OUTSTANDING WARRANTS 

13. FIXED ASSETS

Fixed assets consisted of the following:

SCHEDULE OF FIXED ASSETS 

Depreciation expense was $0.1 million and $0.1 million for the three months ended September 30, 2022 and 2021, respectively, and $0.4 million and $0.3 million for the nine months ended September 30, 2022 and 2021, respectively.

14. LEASES

The Company’s lease portfolio consists of one office lease located in Red Bank, NJ. This lease is classified as an operating lease and has an initial term of 64 months from the lease commencement date, which began in October 2020. The Company has the option to renew or terminate the current term of a lease agreement at the end of the lease term. In its initial assessment of the lease term of the Red Bank, NJ office lease, the Company concluded that it is not reasonably certain to exercise the option to renew or terminate and therefore, this option was not considered in its lease assessment. The Company does not separate lease and non-lease components for all classes of underlying assets. The Company does not have any leases that contain residual value guarantees and the Company does not sublease any of its leased assets. The Company does not record leases with an initial lease term of one-year or less on its consolidated balance sheet. As of September 30, 2022, the Company has not entered into any short-term leases.

The components of lease expense from continuing operations were as follows:

SCHEDULE OF LEASE COSTS 

Supplemental balance sheet information related to leases are as follows:

 SCHEDULE OF SUPPLEMENTAL BALANCE SHEET INFORMATION 

As of September 30, 2022, maturities of lease liabilities on an annual basis for the remaining years of the Company’s non-cancelable lease agreements were as follows:

 SCHEDULE OF MATURITIES OF LEASE LIABILITIES  

15. INCOME TAXES

The Company recorded no provision or benefit for state income taxes for the three months ended September 30, 2022 and 2021. The Company recorded a benefit from state income taxes of $7.1 million and $1.0 million for the nine months ended September 30, 2022 and 2021, respectively. The benefit from state income taxes solely reflects the reversal of valuation allowances previously recorded against the Company’s New Jersey State net operating losses (“NOLs”) that resulted from the Company’s sale of approximately $86.9 million and $11.9 million, respectively in each period, of its New Jersey state NOLs under the State of New Jersey’s Technology Business Tax Certificate Transfer Program (the “Program”) for cash proceeds of $7.1 million and $1.0 million. The Program allows qualified technology and biotechnology businesses in New Jersey to sell unused amounts of NOLs and defined research and development tax credits.

16. SUBSEQUENT EVENTS

On October 4, 2022, the Company and Genzyme Corporation, a fully-owned subsidiary of Sanofi, entered into the Sanofi Co-Promotion Agreement. Pursuant to the Sanofi Co-Promotion Agreement, the Company appointed Sanofi to co-promote and conduct certain commercialization activities with respect to teplizumab in the United States on a co-exclusive basis for the treatment of the indication for which teplizumab receives approval in the United States during the term of the Sanofi Co-Promotion Agreement. The Company also committed to reimburse the field force-related expenses and certain other allowable expenses that Sanofi will incur in connection with commercializing teplizumab under the agreement, up to an aggregate cap of $33.0 million, which includes a pre-determined margin on field force-related expenses.

The Company also granted Sanofi an exclusive, one-time right of first negotiation to obtain exclusive rights to research, develop and commercialize teplizumab with respect to the treatment or delay of T1D, or any of its root causes throughout the world, and to manufacture teplizumab in support of such research, development and commercialization (the “ROFN”) in exchange for a one-time upfront, non-refundable, payment of $20.0 million. Sanofi may exercise the ROFN beginning on October 4, 2022 until June 30, 2023 (the “Initial ROFN Period”), and the Initial ROFN Period may be extended (a) at Sanofi’s election, upon payment of a one-time extension fee, to the later of (i) September 30, 2023, and (ii) 60 days after the Company delivers to Sanofi the top-line data for an identified clinical trial sponsored by the Company (the “Data Delivery Date”); or (b) automatically, without an extension fee, to 60 days after the Data Delivery Date if the Company does not receive regulatory approval for teplizumab before November 30, 2022.

Simultaneously, the Company and Sanofi also entered into the Sanofi Securities Purchase Agreement. Pursuant to the Sanofi Securities Purchase Agreement, if the BLA submitted to the FDA for the delay of clinical T1D in at-risk individuals is approved by the FDA, Sanofi has agreed to purchase $35.0 million of the Company’s common stock at a purchase price per share equal 140% of the daily volume-weighted average per share price of the Company’s common stock for the five consecutive trading days prior to the closing date. The closing date and five consecutive trading day period for determining the purchase price per share shall be at the Company’s election, but the closing must occur no later than February 16, 2023.

The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and related notes and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2021 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 24, 2022. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties and should be read together with the “Risk Factors” section of this Quarterly Report on Form 10-Q for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We are a clinical-stage biopharmaceutical company dedicated to intercepting and preventing immune-mediated diseases. Since our inception, we have devoted substantially all of our efforts to business planning, research and development, pre-commercial activities, recruiting management and technical staff, acquiring operating assets, partnering and raising capital. We have not yet commenced any commercial revenue-generating operations, do not have any positive cash flows from operations and we will need to raise additional capital to finance our operations.

We have not generated any revenue from commercial product sales to date and, through September 30, 2022, we had an accumulated deficit of $372.4 million. We have financed our operations primarily through equity offerings.

We expect that over the next several years we will continue to incur losses from operations as we increase our expenditures in research and development in connection with our regulatory submissions, clinical trials and other development activities, as well as costs to support our commercialization efforts to launch teplizumab, if we receive regulatory approval in the United States. If adequate funds are not available to us on a timely basis, or at all, we may be required to terminate or delay certain development and pre-commercial activities.

Our Focus and Pipeline

Our goal is to pioneer substantial improvements in standards of care for autoimmune disease. Autoimmune disorders are a leading cause of death and disability around the world. Over 24 million patients in the United States live with autoimmune disease, with prevalence increasing significantly. There are over 100 types of autoimmune disorders which reduce patient quality-of-life, can result in complications such as cardiovascular risk and organ failures, and increase the risk of overall mortality.

Our portfolio aims to address autoimmune disease through modulating key upstream and nodal mechanisms of immune dysregulation. Our lead asset is focused initially on patients at-risk for clinical T1D, for which we resubmitted a BLA to the FDA, have been assigned a user fee goal date of August 17, 2022 that was extended to November 17, 2022 and continue to prepare for a potential approval and commercialization, and newly diagnosed patients, for which we have an ongoing Phase 3 clinical trial, the PROTECT study. Further, we intend to pursue the development of our other pipeline product candidates in systemic lupus erythematosus (“SLE”), celiac disease, and other debilitating and life-threatening autoimmune diseases.

While the etiology of autoimmune diseases is often complex, poorly characterized or unknown, infections are believed to play a key role in triggering and/or driving the disease. Inflammation is a natural consequence of most infections, as it is the immune system’s first response to invading pathogens in the event of injury or acute illness. Most of the time, this response is beneficial and well-controlled; helping to repair tissue damage and clear pathogens from the body. But when patients have the requisite genetic predisposition for autoimmunity, infections can also trigger and/or drive chronic autoimmune responses that persist and progress long after the original insult has subsided. Our pipeline of investigational candidates under development target upstream autoimmune pathways and viral triggers/drivers with the goal of intercepting and preventing life-threatening and debilitating immune-mediated diseases.

Pipeline Status

Recent Company Developments

PRV-031 (teplizumab, anti-CD3 mAb)

Type-B Pre-BLA Resubmission Meeting

On January 27, 2022, we announced our intent to resubmit the teplizumab BLA for the delay of clinical T1D in at-risk individuals following a Type B pre-BLA resubmission meeting with the FDA. The purpose of the Type B pre-BLA resubmission meeting was to discuss the FDA’s feedback and obtain agreement on our proposed clinical pharmacology data package, including data and analysis from the pharmacokinetic/pharmacodynamic (“PK/PD”) substudy completed by us to address the FDA’s PK comparability considerations contained in the CRL issued in July 2021. In preliminary meeting comments, the FDA noted that the data package presented does not adequately support PK comparability because predicted primary PK parameters are indicative of a lower exposure. To address this concern, the FDA proposed, and we agreed, to use PK modeling to adjust the 14-day dosing regimen for the planned commercial product to match the exposure of clinical material used in prior clinical trials by ensuring that the 90% confidence intervals for relevant PK parameters fall within the target 80-125% range. On this basis, the FDA agreed that we could proceed to resubmit the BLA.

Based on our and the FDA’s agreed upon PK modeling, and our experience with various doses and regimens tested in prior clinical trials, we announced that we planned to propose in the BLA resubmission a modified 14-day course of therapy to address the FDA’s comparability considerations and also include responses to address the CRL’s Chemical, Manufacturing, and Controls (“CMC”) and product quality considerations, as agreed with the FDA at a Type A meeting held in August of 2021.

Teplizumab BLA Resubmission

On February 22, 2022, we announced that we resubmitted the BLA for teplizumab for the delay of clinical T1D in at-risk individuals. The purpose of the resubmission is to address the FDA’s PK comparability considerations contained in the CRL issued in July 2021, as well as the CRL’s CMC and product quality considerations. The CRL did not cite any clinical deficiencies related to the efficacy and safety data packages submitted to the original BLA. The resubmission comes after the January 2022 Type B meeting during which the FDA proposed, and we agreed, to use PK modeling to adjust the 14-day dosing regimen for the planned commercial product to match the exposure of clinical material used in prior clinical trials by ensuring that the 90% confidence intervals for relevant PK parameters fall within the target 80-125% range.

Teplizumab BLA Resubmission Acceptance

On March 21, 2022, we announced that the resubmitted BLA for teplizumab for the delay of clinical T1D in at-risk individuals was considered a complete, class 2 response to the July 2021 CRL from the FDA. The FDA assigned a user fee goal date of August 17, 2022.

Extension of FDA User Fee Goal Date

On June 30, 2022, we announced that the FDA extended its review period by three months for the BLA for teplizumab. The extended user fee goal date is now November 17, 2022. The FDA informed us that our timely responses to an information request, related to updating the PK model to include additional anti-drug antibody data and re-evaluating the proposed modeled regimens made earlier in June 2022, to be a Major Amendment to the BLA resubmission, requiring additional time for the FDA’s review.

We were also informed that if no major deficiencies are identified during the review period, the FDA plans to communicate proposed labeling and, if necessary, any post-marketing requirement or commitment requests by October 17, 2022.

The FDA has engaged with us in routine negotiations and discussions with respect to their ongoing review, the draft label sent to us by the FDA in October, as well as the FDA’s proposed post-marketing requirements or commitments. These negotiations and discussions with the FDA may not lead to an approval of the BLA resubmission for teplizumab.

Sanofi Co-Promotion Agreement

On October 4, 2022, we announced that we entered into the Sanofi Co-Promotion Agreement with Genzyme Corporation, a fully-owned subsidiary of Sanofi. Pursuant to the agreement, we appointed Sanofi to co-promote and conduct certain commercialization activities with respect to teplizumab in the United States on a co-exclusive basis for the treatment of the indication for which teplizumab receives approval in the United States during the term of the Sanofi Co-Promotion Agreement. We also committed to reimburse the field force-related expenses and certain other allowable expenses that Sanofi will incur in connection with commercializing teplizumab under the agreement, up to an aggregate cap of $33.0 million, which includes a pre-determined margin on field force-related expenses.

We also granted Sanofi an exclusive, one-time ROFN to obtain exclusive rights to research, develop and commercialize teplizumab with respect to the treatment or delay of T1D, or any of its root causes throughout the world, and to manufacture teplizumab in support of such research, development and commercialization in exchange for a one-time upfront, non-refundable, payment of $20.0 million.

Simultaneously, we also entered into the Sanofi Securities Purchase Agreement, pursuant to which, if the BLA submitted to the FDA for the delay of clinical T1D in at-risk individuals is approved by the FDA, Sanofi has agreed to purchase $35.0 million of our common stock at a purchase price per share equal 140% of the daily volume-weighted average per share price of our common stock for the five consecutive trading days prior to the closing date. The closing date and five consecutive trading day period for determining the purchase price per share shall be at our election, but the closing must occur no later than February 16, 2023.

PRV-3279 (humanized anti-CD32B and CD79B bispecific)

PREVAIL-2 Phase 2a Study

On January 20, 2022, we announced the initiation of the Phase 2a PREVAIL-2 study (PRV-3279 EVAluation In Lupus – Phase 2). PRV-3279 is an investigational humanized bispecific DART molecule targeting the B-cell surface proteins CD32B and CD79B, which has the potential to intercept the pathophysiology of SLE and other B cell-mediated autoimmune diseases, as well as to prevent the immunogenicity of biotherapeutic products such as gene therapy.

The PREVAIL-2 study is a Phase 2a proof-of-concept (“POC”) study in moderate-to-severe SLE patients induced into response with a short course of corticosteroids, and then monitored for relapse, after randomization to either PRV-3279 or placebo treatment. This design enables the withdrawal of most concomitant medications and clear POC evaluation. The study will be conducted in the United States and Hong Kong. Screening has commenced in the United States with the goal of identifying and enrolling approximately 100 patients to 6 monthly infusions of PRV-3279 or placebo, with primary efficacy readout at 24 weeks. PRV-3279 was well-tolerated in a prior single ascending dose Phase 1 study and a multiple ascending dose Phase 1b study, PREVAIL-1, establishing proof of mechanism with long-lasting inhibition of B cell function as shown by reduction in Immunoglobulin M (“IgM”) production 8 weeks post last dose of PRV-3279. These results, together with observations that CD32B genetic variants are associated with SLE, and that PRV-3279 inhibits B cells isolated from SLE patients, support evaluation in SLE.

The ongoing effects of the COVID-19 pandemic have affected the PREVAIL-2 study enrollment, primarily due to resource constraints at the clinical site level and subdued patient interest in participating in clinical trials of immune modulatory agents. We now expect top-line results of the PREVAIL-2 study in the second half of 2024.

PRV-101 (CVB Vaccine)

Final Results from First-in-Human Phase 1 Clinical Study of PRV-101 (PROVENT Study)

On March 28, 2022, we announced results from the final analysis of the first-in-human PROVENT study of PRV-101, a polyvalent inactivated CVB vaccine candidate targeting all key CVB strains associated with T1D autoimmunity. We are developing PRV-101 for the prevention of CVB- driven autoimmune damage to pancreatic beta cells that may progress to T1D and damage to intestinal cells that may lead to celiac disease.

The study’s primary endpoint was the safety of two dose levels of PRV-101 in healthy adult volunteers provided three administrations with 4-week intervals. Tolerability and immunogenicity were also evaluated. In the final analysis, 6-months following the last administered dose of the vaccine, PRV-101 met the primary endpoint confirming the tolerability observed in the previously reported interim analysis, with no treatment-emerging serious adverse events, adverse events of special interest, or adverse events leading to study drug discontinuation or study withdrawal. The results showed durability of viral neutralizing antibody (“VNT”) responses. 6-months following the final dosing, the percentage of subjects in the high-dose PRV-101 arm who maintained high titers of VNT were 100% for the majority of serotypes included in the vaccine and no less than 90% for all serotypes. We are currently exploring partnership opportunities to further the clinical development of PRV-101.

Impact of COVID-19 on our Business

We are closely monitoring continued developments related to the COVID-19 pandemic and are making every effort to ensure we remain focused on the health and well-being of our patients and our employees while maintaining business continuity. At this time, we are unable to predict what the long-term impact of the pandemic, and the associated economic downturn, will have on our business, including planned clinical trial readouts, regulatory interactions and submissions, manufacturing and supply chain, regulatory review and related timelines for our BLA resubmission, including any potential United States launch of teplizumab if approved by the FDA. We have experienced some level of disruption to each of our current trials. We completed target enrollment in the PROTECT study in August 2021 and expect to report top-line results in the second half of 2023, subject to change for any potential interruptions related to COVID-19, regulatory decisions or issues or other interruptions. We initiated the PRV-015 Phase 2b trial in gluten free diet NRCD in August 2020 and the pandemic has caused difficulties and delays in recruitment. As a result of these delays, we now expect to report top-line results from the PROACTIVE study by the end of 2023. Additionally, our plans to initiate the Phase 2a portion of the PREVAIL-2 study in lupus patients by the first half of 2021 were delayed, predominantly due to COVID-19 related impacts, and we initiated the study in January 2022. The ongoing effects of the COVID-19 pandemic have affected the PREVAIL-2 study enrollment, primarily due to resource constraints at the clinical site level and subdued patient interest in participating in clinical trials of immune modulatory agents. We now expect top-line results of the PREVAIL-2 study in the second half of 2024.

KEY COMPONENTS OF OUR RESULTS OF OPERATIONS

Collaboration Revenue

To date, we have not generated any revenue from commercial product sales. Our revenue currently consists only of collaboration revenue recognized under our License Agreement with Huadong, including certain amounts recognized in connection with the upfront license payment and research, development and manufacturing funding. We recognize revenue under the Huadong License Agreement using a cost-based input method according to costs incurred to date compared to estimated total costs of the clinical research activities over the period which the activities are performed under the agreement, which is currently expected to occur through the second half of 2024. We expect that revenue will fluctuate from period to period as a result of the timing of expenses incurred in conjunction with the related research and development activities.

Research and Development Expenses

Research and development expenses consist primarily of clinical studies, the cost of manufacturing our drug candidates for clinical study, regulatory costs, other internal operating expenses, and the cost of conducting preclinical activities. Expenses also include the cost of salaries, benefits and other related costs, including stock-based compensation, for personnel serving in our research and development functions. In addition, our research and development expenses include payments to third parties, as well as the fair value of equity issuances to third parties for the license rights to products in development (prior to marketing approval). Our expenses related to clinical trials are primarily related to activities at CROs and other consultants that design, obtain regulatory and ethics committee approval, and conduct clinical trials on our behalf. Our expenses related to the production of drug substance or drug product for our clinical trials and development programs are primarily related to activities performed by licensors, strategic partners or CMOs and other consultants on our behalf. Our development efforts from inception through September 30, 2022, have been principally related to the acquisition and development of our clinical programs, as well as the build out of our medical affairs infrastructure, medical education programs and grants to support the screening of potential T1D patients.

All research and development expenses are charged to operations as incurred in accordance with ASC 730, Research and Development. We account for non-refundable advance payments for goods and services that will be used in future research and development activities as expenses when the service has been performed or when the goods have been received, rather than when the payment is made.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries, benefits and other related costs, including stock-based compensation, for our personnel serving in our executive, business development, pre-commercial, legal, finance and accounting and other administrative functions. General and administrative expenses also include professional fees for marketing and other pre-commercial activities, legal, including patent-related expenses, consulting, insurance, board of director fees, tax and accounting services. We expect that our general and administrative expenses will increase significantly in the future as a result of the build out of our commercial organization and pre-commercial activities for teplizumab.

Interest Income, Net

Interest income, net, consists of interest income earned on our cash, cash equivalents and marketable securities offset by amortization of premiums and accretion of discounts to maturity on our marketable securities.

Interest Expense

Interest expense consists of the accretion of debt discount, contractual interest costs and the amortization of debt issuance costs related to our debt. Debt discount is accreted, and debt issuance costs are amortized, to interest expense using the effective interest rate method over the term of the debt. Our consolidated balance sheets reflect debt, net of the debt discount, debt issuance costs paid to the lender and other third-party costs.

RESULTS OF OPERATIONS

Comparison of the three months ended September 30, 2022 and 2021

Collaboration Revenue

Collaboration revenue was $0.8 million and $0.7 million for the three months ended September 30, 2022 and 2021, respectively, recognized from the Huadong License Agreement. The increase in collaboration revenue recognized is due to an increase in the related clinical research activities performed as a result of the initiation of the PREVAIL-2 Phase 2a study in January 2022.

Research and Development Expenses

Research and development expenses were $16.3 million for the three months ended September 30, 2022, a decrease of $1.4 million, compared to $17.7 million for the three months ended September 30, 2021. The decrease related primarily to lower costs for our teplizumab program, including the PROTECT study as we completed target enrollment in August 2021. This decrease in research and development expenses was partially offset by increased costs for the PROACTIVE Phase 2b study (PRV-015) and the PREVAIL-2 Phase 2a study (PRV-3279) which was initiated in January 2022. Research and development expenses for the three months ended September 30, 2022 and 2021 also included personnel costs of $6.1 million and $4.1 million, respectively, including stock-based compensation of $1.6 million and $1.2 million in each respective year. The increase in personnel costs relates to an increase in headcount.

General and Administrative Expenses

General and administrative expenses were $13.5 million for the three months ended September 30, 2022, an increase of $3.5 million, compared to $10.0 million for the three months ended September 30, 2021, driven by pre-commercial expenses. General and administrative expenses for the three months ended September 30, 2022 and 2021 were comprised of the following:

Pre-commercial expenses were $7.6 million for the three months ended September 30, 2022 and primarily consisted of $3.4 million in external costs for our pre-commercial activities, such as marketing and market access costs, $3.9 million in personnel costs, including stock-based compensation of $0.6 million and $0.3 million of other pre-commercial expenses. Pre-commercial expenses were $4.3 million for the three months ended September 30, 2021 and primarily consisted of $1.3 million in external costs for our pre-commercial activities, such as marketing and market access costs, and $3.0 million in personnel costs, including stock-based compensation of $0.5 million. The increase in pre-commercial expenses related primarily to an increase in our pre-commercial activities and associated costs following the FDA’s acceptance of our BLA resubmission in March 2022, for which an extended user fee goal date of November 17, 2022 has been assigned by the FDA. We expect our pre-commercial activities to increase in the fourth quarter of 2022 as we continue to build out our commercial infrastructure, including our headcount, as we prepare for the potential commercial launch of teplizumab.

Other general and administrative expenses were $5.9 million for the three months ended September 30, 2022 and primarily consisted of $3.0 million in personnel costs, including stock-based compensation of $1.1 million, $1.4 million in professional fees and legal expenses and approximately $0.6 million in insurance and other public company costs. Other general and administrative expenses were $5.7 million for the three months ended September 30, 2021 and primarily consisted of $2.8 million in personnel costs, including stock-based compensation of $1.4 million, $1.8 million in professional fees and legal expenses and approximately $0.6 million in insurance and other public company costs.

Interest Income, Net

Interest income, net, was $0.7 million during the three months ended September 30, 2022, compared to $0.1 million during the three months ended September 30, 2021. The increase in interest income, net, primarily related higher yields from our investment portfolio during the three months ended September 30, 2022 as well as an increased cash, cash equivalents and marketable securities balance during the three months ended September 30, 2022.

Interest Expense

Interest expense was $0.3 million during the three months ended September 30, 2022 and consisted of contractual interest, accretion of debt discount and amortization of debt issuance costs for our debt. We did not have any outstanding debt during the three months ended September 30, 2021.

Comparison of the nine months ended September 30, 2022 and 2021