Dynavax(US:DVAX)2021-11-03 16:00PART I FINANCIAL INFORMATION This section presents the company's financial statements, management's analysis, market risk disclosures, and internal controls Item 1. Financial Statements The company's financial position significantly strengthened by September 30, 2021, with substantial asset and revenue growth driven by CpG 1018 sales, alongside a positive shift in operating cash flow despite a net loss from warrant liability changes Condensed Consolidated Balance Sheets The balance sheet reflects significant growth in assets and liabilities, primarily driven by cash, receivables, and deferred revenue from CpG 1018 sales and new convertible notes Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2021 (unaudited) | Dec 31, 2020 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $246,351 | $32,073 | | Accounts and other receivables, net | $200,362 | $22,661 | | Total current assets | $852,670 | $290,015 | | Total assets | $919,711 | $353,272 | | Liabilities & Equity | | | | Deferred revenue (current) | $358,588 | $38,212 | | Warrant liability | $72,017 | $10,736 | | Total current liabilities | $528,935 | $77,411 | | Convertible Notes, net | $220,223 | - | | Long-term debt, net | - | $179,811 | | Total liabilities | $852,135 | $294,579 | | Total stockholders' equity | $67,576 | $58,693 | - The significant increase in assets was primarily driven by higher cash, accounts receivable, and prepaid manufacturing, while the rise in liabilities stemmed mainly from increased deferred revenue related to CpG 1018 adjuvant supply agreements and the issuance of new Convertible Notes, replacing previous long-term debt41 Condensed Consolidated Statements of Operations The statements of operations show substantial revenue growth, primarily from CpG 1018 sales, leading to operating income but a net loss due to non-cash warrant liability expenses Condensed Consolidated Statements of Operations Highlights (in thousands, except per share data) | Metric | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $108,270 | $13,414 | $244,372 | $27,001 | | Product revenue, net | $106,996 | $13,276 | $242,558 | $26,195 | | Cost of sales - product | $60,090 | $4,031 | $99,560 | $7,352 | | R&D Expense | $6,186 | $8,521 | $21,111 | $19,058 | | SG&A Expense | $26,926 | $21,538 | $70,932 | $61,418 | | Income (loss) from operations | $16,068 | ($13,825) | $53,769 | ($56,476) | | Change in fair value of warrant liability | ($45,121) | $21,245 | ($68,576) | $4,200 | | Net (loss) income | ($28,430) | $4,401 | ($23,066) | ($59,773) | | Basic EPS | ($0.24) | $0.04 | ($0.20) | ($0.61) | | Diluted EPS | ($0.24) | ($0.15) | ($0.20) | ($0.65) | - The substantial increase in revenue for both the three and nine-month periods was driven by CpG 1018 adjuvant sales for COVID-19 vaccines, yet the company reported a net loss primarily due to a significant non-cash expense from the change in fair value of its warrant liability despite achieving operating income45 Condensed Consolidated Statements of Cash Flows Cash flow statements reveal a significant positive shift in operating cash flow, largely due to advance payments for CpG 1018, and strategic financing activities Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $215,031 | ($76,508) | | Net cash used in investing activities | ($40,713) | ($40,874) | | Net cash provided by financing activities | $40,960 | $109,433 | | Net increase (decrease) in cash | $214,265 | ($7,186) | - The significant positive shift in operating cash flow was primarily driven by a $320.4 million increase in deferred revenue and a $68.0 million increase in long-term deferred revenue, largely from advance payments for CpG 1018 adjuvant supply57 - Financing activities in 2021 primarily involved net proceeds of $219.8 million from issuing Convertible Notes, partially used to repay $190.2 million of long-term debt, contrasting with 2020's financing mainly from $108.5 million in common stock issuance57 Notes to Condensed Consolidated Financial Statements The notes detail the company's primary products, recent convertible note issuance, and significant supply agreements for its CpG 1018 adjuvant - The company's primary products are HEPLISAV-B® for hepatitis B prevention and CpG 1018®, an adjuvant used in HEPLISAV-B and in development for other vaccines like COVID-19, pertussis, and plague through collaborations60 - In May 2021, the company issued $225.5 million in 2.50% convertible senior notes due 2026, using the proceeds to retire a previous loan agreement and purchase capped call transactions64 - The company has entered into significant supply agreements for its CpG 1018 adjuvant with partners including CEPI, Clover, Biological E., Medigen, and Valneva, leading to substantial deferred revenue and contract assets on the balance sheet129136142 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes significant revenue growth to CpG 1018 adjuvant sales and HEPLISAV-B gains, noting the pandemic's mixed impact, while a new convertible note strengthened liquidity, with sufficient funds expected for the next 12 months Overview This overview introduces Dynavax as a commercial-stage biopharmaceutical company with key products HEPLISAV-B and CpG 1018, highlighting its collaborations and the pandemic's mixed impact - Dynavax is a commercial-stage biopharmaceutical company with two main products: HEPLISAV-B, a hepatitis B vaccine, and CpG 1018, an adjuvant used in HEPLISAV-B and supplied to partners for developing vaccines against COVID-19, pertussis, and plague212 - The company has established multiple collaborations for its CpG 1018 adjuvant, including agreements with CEPI, Biological E. Limited, Medigen, Valneva, and Clover, to support the development and commercialization of COVID-19 vaccines216217223 - The COVID-19 pandemic has had a mixed impact, significantly reducing the utilization and sales of HEPLISAV-B but creating a major new market for the CpG 1018 adjuvant226227 Results of Operations The results of operations detail the dramatic revenue increase driven by CpG 1018 sales, corresponding cost of sales, and the impact of warrant liability changes on net income Revenue Breakdown (in thousands) | Revenue Source | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | % Change | | :--- | :--- | :--- | :--- | | HEPLISAV-B | $44,698 | $24,518 | 82% | | CpG 1018 | $197,860 | $1,677 | 11,698% | | Total product revenue, net | $242,558 | $26,195 | 826% | | Other revenue | $1,814 | $806 | 125% | | Total revenues | $244,372 | $27,001 | 805% | - The dramatic increase in total revenue was overwhelmingly driven by CpG 1018 adjuvant sales to collaboration partners for COVID-19 vaccine development and commercialization, which began in Q3 2020243 - Cost of sales for CpG 1018 increased to $81.6 million for the nine months ended Sep 30, 2021, from $0.8 million in the prior year, corresponding with the surge in sales248250 - The change in fair value of warrant liability resulted in a $68.6 million expense for the nine months ended Sep 30, 2021, compared to a $4.2 million income in the prior year, primarily due to the increase in the company's stock price264 Liquidity and Capital Resources The company's liquidity improved significantly with substantial cash from operations, driven by advance payments, and a strategic convertible note issuance to repay debt - As of September 30, 2021, the company had $414.2 million in cash, cash equivalents, and marketable securities265 - The company generated $215.0 million in cash from operations in the first nine months of 2021, a significant improvement from a $76.5 million use of cash in the same period of 2020, primarily due to advance payments from collaboration partners for CpG 1018 adjuvant269 - In May 2021, the company issued $225.5 million in Convertible Notes and used the proceeds to repay its previous long-term debt, resulting in a lower effective interest rate267 - Management anticipates that current cash reserves and expected revenues will be sufficient to fund operations for at least the next 12 months265 Item 3. Quantitative and Qualitative Disclosures about Market Risk The company states that there were no material changes to its market risk disclosures during the nine months ended September 30, 2021, as compared to those presented in its Annual Report on Form 10-K for the year ended December 31, 2020 - There were no material changes to the company's market risk disclosures from the last annual report285 Item 4. Controls and Procedures Management concluded the company's disclosure controls and procedures were effective as of September 30, 2021, with no material changes to internal controls over financial reporting during the quarter - Management concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period287 - No material changes were made to the company's internal controls over financial reporting during the most recent fiscal quarter288 PART II OTHER INFORMATION This section provides disclosures on legal proceedings, key risk factors, equity sales, other significant information, and a list of exhibits Item 1. Legal Proceedings The company reports that it is not currently aware of any material legal proceedings involving the company - The company is not currently involved in any material legal proceedings291 Item 1A. Risk Factors The company faces significant risks including HEPLISAV-B commercialization challenges, high reliance on unpredictable CpG 1018 sales, manufacturing dependencies, intellectual property vulnerabilities, and financial risks from convertible debt and stock volatility Risks Related to Business and Capital Requirements This section outlines business and capital risks, including HEPLISAV-B commercialization uncertainty, reliance on CpG 1018 sales, manufacturing dependencies, and the need for future capital - The commercial success of HEPLISAV-B is uncertain due to significant competition, unpredictable market uptake, and the negative impact of the COVID-19 pandemic on adult vaccine utilization293301 - The company's financial results may fluctuate significantly due to a heavy reliance on CpG 1018 adjuvant sales, which are difficult to predict and dependent on the success of collaborators' vaccine programs322323 - Dynavax relies on its Düsseldorf facility and a limited number of third-party suppliers for manufacturing, posing a risk of supply chain disruption for both HEPLISAV-B and CpG 1018325327 - Despite recent profitability, the company has a history of annual net losses and may continue to incur significant losses, requiring substantial additional capital to finance operations358360 Risks Related to Intellectual Property Intellectual property risks include the lack of composition of matter patent protection for key products, reliance on third-party licenses, and potential for costly infringement litigation - The company's HEPLISAV-B and CpG 1018 adjuvant lack composition of matter patent protection, forcing reliance on method-of-use patents and trade secrets, which may provide weaker protection and limit the ability to prevent competition426 - The business depends on licenses from third parties, and the failure to maintain these licenses or disputes over them could severely harm operations417418 - The company may face costly intellectual property litigation from third parties claiming infringement, which could result in substantial damages or prevent the commercialization of products419420 Risks Related to Debt and Common Stock Risks related to debt and common stock include significant cash requirements for convertible notes, potential stock dilution from conversions, and high stock price volatility - Servicing the $225.5 million in Convertible Notes requires significant cash, and the company's business may not generate sufficient cash flow to meet these debt obligations438 - The conversion of the Convertible Notes, which became an option for holders as of October 1, 2021, could dilute the ownership interest of existing stockholders and depress the stock price442443 - The company's stock price is subject to high volatility due to factors such as clinical trial results, regulatory decisions, financial performance, and broader market fluctuations431 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reports no unregistered sales of equity securities during the period - None463 Item 5. Other Information On October 29, 2021, the company amended its supply agreement with Valneva, canceling two purchase orders for CpG 1018 while retaining advance payments, and establishing a new, smaller order for 2022 delivery, following the UK Government's termination of its vaccine supply agreement with Valneva - On October 29, 2021, Dynavax amended its supply agreement with Valneva following the UK Government's termination of its own supply agreement with Valneva464465 - The amendment cancels two outstanding purchase orders, allows Dynavax to retain the associated advance payments, and replaces them with a new, smaller purchase order for 2022 delivery466467 Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including corporate governance documents, debt agreements, material contracts, and certifications by the company's principal officers - This section provides a list of all exhibits filed as part of the quarterly report, including newly filed agreements such as a commercial lease in Düsseldorf and an amendment to the manufacturing agreement with Baxter471