allk-10q_20180930.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended September 30, 2018

OR

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

 

For the transition period from ________ to _________

 

Commission File Number: 001-38582

 

Allakos Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

45-4798831

( State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

75 Shoreway Road, Suite A

San Carlos, California

94070

(Address of principal executive offices)

(Zip Code)

(650) 597-5002

Registrant’s telephone number, including area code

 

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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

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

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

As of November 1, 2018, the registrant had 42,113,059 shares of common stock, $0.001 par value per share, outstanding.

 

 

 


ALLAKOS INC.

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

Item 1.

Financial Statements (Unaudited)

1

 

Balance Sheets

1

 

Statements of Operations and Comprehensive Loss

2

 

Statements of Cash Flows

3

 

Notes to Unaudited Financial Statements

4

Item 2.

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

15

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

24

Item 4.

Controls and Procedures

24

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

25

Item 1A.

Risk Factors

25

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

56

Item 3.

Defaults Upon Senior Securities

56

Item 4.

Mine Safety Disclosures

56

Item 5.

Other Information

56

Item 6.

Exhibits

57

Signatures

58

 

 

 

 

i


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

allakos inc.

balance sheets

(in thousands, except per share data)

 

 

September 30,

 

 

December 31,

 

 

2018

 

 

2017

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

51,635

 

 

$

85,207

 

Investments in marketable securities

 

141,903

 

 

 

 

Prepaid expenses and other current assets

 

3,647

 

 

 

1,037

 

Total current assets

 

197,185

 

 

 

86,244

 

Property and equipment, net

 

7,624

 

 

 

445

 

Other long-term assets

 

952

 

 

 

340

 

Total assets

$

205,761

 

 

$

87,029

 

Liabilities, convertible preferred stock and stockholders' equity (deficit)

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

4,333

 

 

$

1,703

 

Accrued expenses and other current liabilities

 

3,742

 

 

 

1,089

 

Total current liabilities

 

8,075

 

 

 

2,792

 

Other long-term liabilities

 

1,731

 

 

 

36

 

Total liabilities

 

9,806

 

 

 

2,828

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

Series A convertible preferred stock, $0.001 par value per share;

   no shares and 26,083 shares authorized as of September 30, 2018 and

   December 31, 2017, respectively; no shares and 20,866 shares issued

   and outstanding as of September 30, 2018 and December 31, 2017,

   respectively; aggregate liquidation preference of $0 and $46,950

   as of September 30, 2018 and December 31, 2017, respectively

 

 

 

 

42,996

 

Series B convertible preferred stock, $0.001 par value per share;

   no shares and 12,632 shares authorized as of September 30, 2018 and

   December 31, 2017, respectively; no shares and 10,105 shares issued

   and outstanding as of September 30, 2018 and December 31, 2017,

   respectively; aggregate liquidation preference of $0 and $100,141

   as of September 30, 2018 and December 31, 2017, respectively

 

 

 

 

99,973

 

Stockholders' equity (deficit):

 

 

 

 

 

 

 

Preferred stock, $0.001 par value per share; 20,000 and no shares

   authorized as of September 30, 2018 and December 31, 2017,

   respectively; no shares issued and outstanding as of

   September 30, 2018 and December 2017

 

 

 

 

 

Common stock, $0.001 par value per share; 200,000 and 55,000 shares

   authorized as of September 30, 2018 and December 31, 2017,

   respectively; 42,113 and 2,114 shares issued and outstanding as of

   September 30, 2018 and December 31, 2017, respectively

 

42

 

 

 

3

 

Additional paid-in capital

 

285,530

 

 

 

1,803

 

Accumulated other comprehensive loss

 

(33

)

 

 

 

Accumulated deficit

 

(89,584

)

 

 

(60,574

)

Total stockholders’ equity (deficit)

 

195,955

 

 

 

(58,768

)

Total liabilities, convertible preferred stock and stockholders’ equity (deficit)

$

205,761

 

 

$

87,029

 

 

See accompanying notes to unaudited interim financial statements

 

1


 

 

Allakos Inc.

Statements of Operations and Comprehensive Loss

(in thousands, except per share data)

(unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

8,706

 

 

$

5,333

 

 

$

22,256

 

 

$

13,455

 

General and administrative

 

 

3,269

 

 

 

900

 

 

 

7,952

 

 

 

2,353

 

Total operating expenses

 

 

11,975

 

 

 

6,233

 

 

 

30,208

 

 

 

15,808

 

Loss from operations

 

 

(11,975

)

 

 

(6,233

)

 

 

(30,208

)

 

 

(15,808

)

Interest income (expense), net

 

 

836

 

 

 

(579

)

 

 

1,352

 

 

 

(716

)

Other expense, net

 

 

(9

)

 

 

(74

)

 

 

(154

)

 

 

(110

)

Loss before benefit from income taxes

 

 

(11,148

)

 

 

(6,886

)

 

 

(29,010

)

 

 

(16,634

)

Provision for (benefit from) income taxes

 

 

 

 

 

(966

)

 

 

 

 

 

(966

)

Net loss

 

 

(11,148

)

 

 

(5,920

)

 

 

(29,010

)

 

 

(15,668

)

Unrealized loss on marketable securities, net of tax

 

 

(36

)

 

 

 

 

 

(33

)

 

 

 

Comprehensive loss

 

$

(11,184

)

 

$

(5,920

)

 

$

(29,043

)

 

$

(15,668

)

Net loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.34

)

 

$

(3.60

)

 

$

(2.34

)

 

$

(10.35

)

Weighted-average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

32,609

 

 

 

1,643

 

 

 

12,406

 

 

 

1,514

 

 

See accompanying notes to unaudited interim financial statements

 

 

 

2


 

Allakos Inc.

Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(29,010

)

 

$

(15,668

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

183

 

 

 

175

 

Accretion of tenant improvement allowance

 

 

(52

)

 

 

 

Stock-based compensation

 

 

2,031

 

 

 

266

 

Net amortization of premiums and discounts on marketable securities

 

 

(634

)

 

 

 

Noncash interest related to debt facility

 

 

 

 

 

76

 

Noncash interest related to convertible promissory notes payable

   to related parties

 

 

 

 

 

80

 

Amortization of beneficial conversion feature related to

   convertible promissory notes payable to related parties

 

 

 

 

 

424

 

Benefit from deferred income taxes

 

 

 

 

 

(966

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

(2,706

)

 

 

(273

)

Other long-term assets

 

 

440

 

 

 

(250

)

Accounts payable

 

 

915

 

 

 

27

 

Accrued expenses and other current liabilities

 

 

2,637

 

 

 

1,059

 

Other long-term liabilities

 

 

395

 

 

 

 

Net cash used in operating activities

 

 

(25,801

)

 

 

(15,050

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of marketable securities

 

 

(159,456

)

 

 

 

Purchases of property and equipment

 

 

(4,261

)

 

 

(251

)

Proceeds from maturities of marketable securities

 

 

18,000

 

 

 

 

Net cash used in investing activities

 

 

(145,717

)

 

 

(251

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock, net of issuance costs

 

 

138,357

 

 

 

 

Proceeds from issuance of convertible promissory notes, net of issuance costs

 

 

 

 

 

7,414

 

Proceeds from exercise of stock options, net of repurchases

 

 

341

 

 

 

109

 

Proceeds from repayment of recourse promissory note

 

 

50

 

 

 

 

Net cash provided by financing activities

 

 

138,748

 

 

 

7,523

 

Net decrease in cash, cash equivalents and restricted cash

 

 

(32,770

)

 

 

(7,778

)

Cash, cash equivalents and restricted cash, beginning of period

 

 

85,207

 

 

 

13,416

 

Cash, cash equivalents and restricted cash, end of period

 

$

52,437

 

 

$

5,638

 

Supplemental disclosures

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

 

 

$

153

 

Noncash investing and financing items:

 

 

 

 

 

 

 

 

Recognition of beneficial conversion feature related to convertible

   promissory notes to related parties, net of benefit for income taxes

 

$

 

 

$

1,867

 

Property and equipment purchased in accounts payable

 

$

1,715

 

 

$

8

 

Lessor funded lease incentives included in property and equipment

 

$

1,386

 

 

$

 

Vesting of restricted common stock subject to repurchase

 

$

18

 

 

$

22

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited interim financial statements

 

 

3


 

ALLAKOS INC.

NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS

1. Organization and Business

Allakos Inc. (“Allakos” or the “Company”) was incorporated in the state of Delaware in March 2012. Allakos is a clinical stage biopharmaceutical company focused on the development of AK002 for the treatment of eosinophil and mast cell related diseases. The Company’s primary activities to date have included establishing its facilities, recruiting personnel, conducting research and development of its product candidates and raising capital. The Company’s operations are located in San Carlos, California.

Liquidity Matters

Since inception, the Company has incurred net losses and negative cash flows from operations. During the nine months ended September 30, 2018, the Company incurred a net loss of $29.0 million and used $25.8 million of cash in operations. At September 30, 2018, the Company had an accumulated deficit of $89.6 million and does not expect to experience positive cash flows from operating activities in the foreseeable future. The Company has financed its operations to date primarily through the sale of common stock and issuance of convertible preferred stock. Management expects to incur additional operating losses in the future as the Company continues to further develop, seek regulatory approval for and, if approved, commence commercialization of its product candidates. The Company had $193.5 million of cash, cash equivalents and marketable securities at September 30, 2018. Management believes that this amount is sufficient to fund the Company’s operations for at least the next 12 months from the issuance date of these financial statements.

Initial Public Offering and Related Transactions

On July 23, 2018, the Company completed an initial public offering (“IPO”), selling 8,203,332 shares of common stock at an offering price of $18.00 per share. Proceeds from the IPO, net of underwriting discounts and commissions, were $137.3 million. Concurrently with the IPO, the Company completed a private placement of 250,000 shares of common stock at the IPO offering price of $18.00 per share to an existing stockholder. Proceeds from this private placement were $4.5 million.

In connection with the completion of the IPO on July 23, 2018, all then outstanding shares of convertible preferred stock were converted into 30,971,627 shares of common stock.

Upon the completion of the IPO, the Company’s certificate of incorporation was amended and restated. Under the amended and restated certificate of incorporation, the Company’s authorized capital stock consists of 200,000,000 shares of common stock with a par value $0.001 per share and 20,000,000 shares of convertible preferred stock with a par value $0.001 per share.

Reverse Stock Split

On July 6, 2018, the Company amended its certificate of incorporation to effect a 1-for-1.25 reverse stock split of every outstanding share of its convertible preferred stock and common stock. The financial statements and accompanying notes have been retroactively restated to reflect the reverse stock split.

2. Summary of Significant Accounting Policies

Basis of Presentation

The unaudited interim financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”). The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements and accompanying notes.

The interim balance sheet as of September 30, 2018, the statements of operations and comprehensive loss, and statements of cash flows for the nine months ended September 30, 2017 and 2018 are unaudited. The unaudited interim financial statements have been prepared on the same basis as the audited annual financial statements and reflect, in the opinion of management, all adjustments of a normal and recurring nature that are necessary for the fair presentation of the Company’s financial position as of September 30, 2018 and its results of operations and comprehensive loss for the three and nine months ended September 30, 2018 and 2017 and its cash flows for the nine months ended September 30, 2018 and 2017. Certain information and note disclosures normally included in annual audited financial statements prepared in accordance with U.S. GAAP have been omitted. The financial data and the other financial information disclosed in these notes to the interim financial statements are also unaudited. The results of operations for any interim period are not necessarily indicative of the results to be expected for the entire year or for any other future annual or interim period. The balance sheet as of December 31, 2017 included herein was derived from the audited financial statements as of that date. These interim financial statements should be read in conjunction with the Company’s audited financial statements included in the Company’s Prospectus that forms a part of the Company’s Registration Statement on Form S-1, which was filed with the Securities and Exchange Commission (the “SEC”) pursuant to Rule 424(b) on July 19, 2018.

 

4


 

Use of Estimates

Management uses significant judgment when making estimates related to common stock valuation and related stock-based compensation expense, accrued expenses related to clinical trials and deferred tax valuation allowances. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates under different assumptions or conditions, and those differences could be material to the financial position and results of operations.

Concentration of Credit Risk and Other Risks and Uncertainties

Financial instruments that potentially subject the Company to credit risk principally consist of cash, cash equivalents and marketable securities. These financial instruments are held in accounts at a single financial institution that management believes possesses high credit quality. Amounts on deposit with this financial institution have and will continue to exceed federally-insured limits. The Company has not experienced any losses on its cash deposits. Additionally, the Company’s investment policy limits its investments to certain types of securities issued by the U.S. government and its agencies.

The Company is subject to a number of risks similar to that of other early-stage biopharmaceutical companies, including, but not limited to, the need to obtain adequate additional funding, possible failure of current or future clinical trials, its reliance on third-parties to conduct its clinical trials, the need to obtain regulatory and marketing approvals for its product candidates, competitive developments, the need to successfully commercialize and gain market acceptance of the Company’s product candidates, its right to develop and commercialize its product candidates pursuant to the terms and conditions of the licenses granted to the Company, protection of proprietary technology, the ability to make milestone, royalty or other payments due under licensing agreements, and the need to secure and maintain adequate manufacturing arrangements with third-parties. If the Company does not successfully commercialize or partner its product candidates, it will be unable to generate product revenue or achieve profitability.

Cash, Cash Equivalents and Restricted Cash

The Company considers all highly liquid investments with original maturities of three months or less from the date of purchase to be cash equivalents. Restricted cash as of September 30, 2018 represents $0.8 million in deposits restricted from withdrawal and held by a bank in the form of collateral for an irrevocable standby letter of credit held as security for the lease of the Company’s facility in Redwood City, California. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Company’s balance sheets and which, in aggregate, represent the amounts reported in the accompanying statements of cash flows (in thousands):

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Cash and cash equivalents

 

$

51,635

 

 

$

85,207

 

Restricted cash in long term assets, deposit for lease facility

 

 

802

 

 

 

 

Total cash, cash equivalents and restricted cash

 

$

52,437

 

 

$

85,207

 

 

The Company had no restricted cash at September 30, 2017 and December 31, 2016.

Marketable Securities

The Company invests in marketable securities, primarily securities issued by the U.S. government and its agencies. Investments with contractual maturities greater than 90 days that mature less than one year from the balance sheet date are classified as short-term investments. Those investments with a contractual maturity date greater than one year are considered long-term investments. Unrealized gains and losses are excluded from earnings and are reported as a component of accumulated comprehensive income (loss). The cost of securities sold is determined using the specific-identification method. Interest earned and adjustments for the amortization of premiums and discounts on investments are included in interest income (expense), net, on the statements of operations and comprehensive loss. Realized gains and losses and declines in fair value judged to be other than temporary, if any, on investments in marketable securities are included in other expense, net, on the statements of operations and comprehensive loss.

 

5


 

Fair Value Measurements

The Company accounts for fair value of its financial instruments in accordance with Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) Topic No. 820, Fair Value Measurements (“ASC 820”). ASC 820 establishes a common definition for fair value, establishes a framework for measuring fair value and expands disclosures about such fair value measurements. Additionally, ASC 820 defines fair value 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.

The Company measures fair value based on a three-level hierarchy of inputs, of which the first two are considered observable and the last unobservable. Unobservable inputs reflect the Company’s own assumptions about current market conditions. The three-level hierarchy of inputs is as follows:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, 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 3Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of assets or liabilities.

To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

The carrying amounts reflected in the Company’s balance sheets for cash and cash equivalents, prepaid expenses and other current assets and other long-term assets approximate fair value, due to their short-term nature.

Deferred Initial Public Offering Costs

Costs incurred in connection with the IPO primarily consist of direct incremental legal, printing and accounting fees. IPO costs are capitalized as incurred and will be offset against proceeds upon consummation of the offering. In the event the offering had been terminated or abandoned, deferred IPO costs would have been expensed in the period such determination had been made. As of December 31, 2017, there was $0.2 million of deferred IPO costs included in other long-term assets on the Company’s balance sheets.  There were no deferred IPO costs at September 30, 2018.

Lease Liabilities

The Company classifies the agreements for its office and laboratory facilities as an operating lease. Rent expense is recorded on a straight-line basis over the term of the lease. Differences that exist between cash rent payments and the recognition of rent expense, such as those resulting from rent abatements or contractual escalations of minimum lease payments, are recorded as a deferred rent liability and recognized as adjustments to rental expense on a straight-line basis over the term of the lease. The current portion of the deferred rent liability is included within accrued expenses and other current liabilities on the Company’s balance sheets. Noncurrent portion of deferred rent liability is classified as other long-term liabilities. Tenant improvement allowances received are recorded as lease incentive obligations included in accrued expenses and other current liabilities and other long-term liabilities on the Company’s balance sheets and are amortized to rent expense over the term of the lease.

Term Loan Financing Costs

During the three months and nine months ended September 30, 2017, the Company recognized noncash interest expense of $25,000 and $76,000, respectively, related to its then outstanding debt facility.  Noncash interest included the amortization and accretion of various costs incurred in connection with the issuance of the associated debt instruments and calculated using the effective interest rate method over the expected term of the debt. In December 2017, the Company repaid all outstanding debt. Noncash interest expense is included in interest income (expense), net, within the Company’s statements of operations and comprehensive loss.

 

6


 

Research and Development Expense

Research and development costs are expensed as incurred. Research and development costs include, among others, consulting costs, salaries, benefits, travel, stock-based compensation, laboratory supplies and other non-capital equipment utilized for in-house research, allocation of facilities and overhead costs and external costs paid to third-parties that conduct research and development activities on the Company’s behalf. Amounts incurred in connection with license agreements are also included in research and development expense.

Advance payments for goods or services to be rendered in the future for use in research and development activities are deferred and included in prepaid expenses and other current assets. The deferred amounts are expensed as the related goods are delivered or the services are performed.

Accrued Research and Development Costs

Service agreements with contract research organizations (“CROs”) and contract development and manufacturing organizations (“CDMOs”) comprise a significant component of the Company’s research and development activities. External costs for CROs and CDMOs are recognized as the services are incurred. The Company accrues for expenses resulting from obligations under agreements with its third-parties for which the timing of payments does not match the periods over which the materials or services are provided to the Company. Accruals are recorded based on estimates of services received and efforts expended pursuant to agreements established with CROs, CDMOs and other outside service providers. These estimates are typically based on contracted amounts applied to the proportion of work performed and determined through analysis with internal personnel and external service providers as to the progress or stage of completion of the services.

The Company makes judgements and estimates in determining the accrual balance in each reporting period. In the event advance payments are made to a CRO, CDMO or other outside service provider, the payments are recorded within prepaid expenses and other current assets and subsequently recognized as research and development expense when the associated services have been performed. As actual costs become known, the Company adjusts its liabilities and assets. Inputs, such as the extent of services received and the duration of services to be performed, may vary from the Company’s estimates, which will result in adjustments to research and development expense in future periods. Changes in these estimates that result in material changes to the Company’s accruals could materially affect the Company’s results of operations. The Company’s historical estimates have not been materially different from actual amounts recorded.

Convertible Debt Features

Beneficial conversion features embedded within the Company’s convertible debt instruments are recognized at their intrinsic value at the commitment date. Intrinsic value is calculated as the difference between the effective conversion price and the fair value of the preferred stock into which the debt is convertible, multiplied by the number of shares of preferred stock into which the debt is convertible. The Company allocates a portion of the proceeds from issuance of the convertible debt to the beneficial conversion feature as a reduction to the carrying value of the debt, with the offset to additional paid-in capital. The resulting debt discount is amortized to interest expense through the stated maturity date of the convertible debt instrument using the effective interest method. Conversion of the debt to convertible preferred stock is accounted for as an extinguishment. Upon conversion, all unamortized discounts at the conversion date are recognized immediately as interest expense. The Company then allocates a portion of the reacquisition price to the repurchase of the beneficial conversion feature, as calculated by the intrinsic value of the conversion option at the extinguishment date. The residual amount, if any, is allocated to the convertible debt instrument. The gain or loss on extinguishment of the convertible debt instrument is measured as the difference between the retired debt’s reacquisition price and carrying amount prior to extinguishment. Gains or losses resulting from convertible debt instruments issued to related parties are classified as capital contributions or distributions.

Convertible Preferred Stock

The Company recorded all shares of convertible preferred stock net of offering costs at their respective fair values on the dates of issuance. The convertible preferred stock was recorded outside of stockholders’ deficit because, in the event of certain deemed liquidation events considered not solely within the Company’s control, such as a merger, acquisition or sale of all or substantially all of the Company’s assets, the convertible preferred stock will become redeemable at the option of the holders. In the event of a change of control of the Company, proceeds received from the sale of such shares will be distributed in accordance with the liquidation preferences set forth in the Company’s Second Amended and Restated Certificate of Incorporation unless the holders of convertible preferred stock had previously converted their shares of convertible preferred stock into shares of common stock. In connection with the completion of the IPO on July 23, 2018, all then outstanding shares of convertible preferred stock were converted into 30,971,627 shares of common stock.

 

7


 

Income Taxes

In December 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law. The Tax Act, among other changes, lowers the Company’s federal tax rate from 34% to 21%. Based on provisions of the Tax Act, the Company remeasured its deferred tax assets and liabilities as of December 31, 2017 to reflect the lower statutory tax rate, however, since the Company established a full valuation allowance to offset its deferred tax assets, there was no impact to the effective tax rate. The deferred tax remeasurement is provisional and is subject to revision as the Company completes its analysis of the Tax Act, collects and prepares necessary data and interprets any additional guidance issued by standard-setting bodies. As of September 30, 2018, the Company has not yet completed its accounting for all the tax effects of the Tax Act. Detailed analyses of the Company’s deferred tax assets and liabilities will be required through the measurement period ending December 22, 2018 and may result in additional adjustments. Future adjustments, if any, are not expected to impact the Company’s results of operations due to its loss position and full valuation allowance.

Comprehensive Loss

Comprehensive loss is defined as the change in stockholders’ equity (deficit) during a period from transactions and other events and circumstances from non-owner sources and consists primarily of unrealized gains and losses on the Company’s investments in marketable securities.

Net Loss per Share

The Company calculates basic net loss per share by dividing the net loss attributable to common stockholders by the weighted-average shares of common stock outstanding during the period. The Company calculates diluted net loss per share after giving consideration to all potentially dilutive securities outstanding during the period using the treasury-stock and if-converted methods, except where the effect of including such securities would be anti-dilutive. Because the Company has reported net losses since inception, the effect from potentially dilutive securities would have been anti-dilutive and therefore has been excluded from the calculation of diluted net loss per share.

Basic and diluted net loss per share was calculated as follows (in thousands, except per share data):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(11,148

)

 

$

(5,920

)

 

$

(29,010

)

 

$

(15,668

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares of common stock outstanding,

   basic and diluted

 

 

32,609

 

 

 

1,643

 

 

 

12,406

 

 

 

1,514

 

Net loss per share, basic and diluted

 

$

(0.34

)

 

$

(3.60

)

 

$

(2.34

)

 

$

(10.35

)

The following table sets forth the potentially dilutive securities that have been excluded from the calculation of diluted net loss per share due to their anti-dilutive effect for the periods indicated (in thousands):    

 

 

 

Three and Nine Months Ended

 

 

 

September 30,

 

 

 

2018

 

 

2017

 

Series A convertible preferred stock

 

 

 

 

 

20,866

 

Options to purchase common stock

 

 

6,779

 

 

 

4,579

 

Warrants to purchase common stock

 

 

 

 

 

48

 

Unvested restricted common stock

 

 

62

 

 

 

119

 

Shares issuable under 2018 Employee Stock Purchase Plan

 

 

12

 

 

 

 

Total

 

 

6,853

 

 

 

25,612

 

 

8


 

 

Recent Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. This ASU eliminates, modifies and adds disclosure requirements for fair value measurements. The amendments in this ASU are effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the effects of this ASU on its financial statements and related disclosures.

In August 2018, the SEC adopted amendments to certain disclosure requirements in the Securities Act Release No. 33-10532, Disclosure Update and Simplification. Under the amendments, the Company must provide an analysis of changes in each caption of stockholders' equity presented in the balance sheet in a note or separate statement. The Company will adopt the amendments beginning with the first quarter of fiscal year 2019. The Company does not expect the adoption of this standard to have a material impact on its financial statements. 

In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases. ASU 2016-02 will also require new qualitative and quantitative disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. For public entities, ASU 2016-02 is effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. In July 2018, the FASB issued ASU 2018-11, related to another transition method in lease accounting. If elected, the transition method allows entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company is evaluating the impact of the adoption of this standard on its financial statements but expects that it will have a material impact to its balance sheets from the recognition of right-of-use assets and corresponding lease liabilities related to its operating leases.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows: Restricted Cash (“ASU 2016-18”). ASU 2016-18 amends the classification and presentation of changes in restricted cash or restricted cash equivalents in the statement of cash flows. ASU 2016-18 is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company adopted ASU 2016-18 retrospectively as of January 1, 2018. There was no significant impact to the Company’s financial statements as there were no restricted cash or restricted cash equivalent balances in the prior periods.

3. Fair Value Measurements

The Company measures and reports certain financial instruments as assets and liabilities at fair value on a recurring basis. The Company’s financial assets measured at fair value on a recurring basis were as follows (in thousands):

 

 

 

September 30, 2018

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

11,059

 

 

$

 

 

$

 

 

$

11,059

 

Reverse repurchase agreements (1)

 

 

 

 

 

38,500

 

 

 

 

 

 

38,500

 

Total cash equivalents

 

 

11,059

 

 

 

38,500

 

 

 

 

 

 

49,559

 

Marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

 

141,903

 

 

 

 

 

 

 

 

 

141,903

 

Total cash equivalents and marketable securities

 

$

152,962

 

 

$

38,500

 

 

$

 

 

$

191,462

 

 

(1)

The Company, as part of its cash management strategy, may invest in reverse repurchase agreements. Such reverse repurchase agreements are tri-party repurchase agreements and have maturities of three months or less at the time of investment and are collateralized by U.S. treasury and agency securities at 102% of the principal amount. In a tri-party repurchase agreement, a third-party custodian bank functions as an independent intermediary to facilitate transfer of cash and holding the collateral on behalf of the underlying investor for the term of the agreement thereby minimizing risk and exposure to both parties. The reverse repurchase agreements are included within cash equivalents due to their high liquidity and relatively low risk.

 

 

 

December 31, 2017

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

82,526

 

 

$

 

 

$

 

 

$

82,526

 

Total cash equivalents

 

$

82,526

 

 

$

 

 

$

 

 

$

82,526

 

 

9


 

The Company evaluates transfers between levels at the end of each reporting period. There were no transfers of assets or liabilities between levels during the three and nine months ended September 30, 2018 and 2017.

4. Marketable Securities

All marketable securities were considered available-for-sale at September 30, 2018. The amortized cost, gross unrealized holding gains or losses, and fair value of the Company’s marketable securities by major security type at September 30, 2018 are summarized in the table below (in thousands):

 

 

 

September 30, 2018

 

 

 

Amortized

Cost Basis

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Fair

Value

 

Short-term marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

$

141,936

 

 

$

 

 

$

(33

)

 

$

141,903

 

Total short-term marketable securities

 

$

141,936

 

 

$

 

 

$

(33

)

 

$

141,903

 

The Company had no other-than-temporary impairments on its marketable securities during the three and nine months ended September 30, 2018. The Company has the intent and ability to hold all marketable securities until their maturities.

The Company held no marketable securities at December 31, 2017.

5. Balance Sheet Components and Supplemental Disclosures

Property and Equipment, Net

Property and equipment, net, consisted of the following (in thousands):

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Laboratory equipment

 

$

2,878

 

 

$

949

 

Furniture and office equipment

 

 

1,539

 

 

 

 

Leasehold improvements

 

 

55

 

 

 

55

 

Construction in progress

 

 

3,893

 

 

 

 

 

 

 

8,365

 

 

 

1,004

 

Less accumulated depreciation

 

 

(741

)

 

 

(559

)

Property and equipment, net

 

$

7,624

 

 

$

445

 

Depreciation and amortization expense for the three months ended September 30, 2018 and 2017 was $63,000 and $62,000, respectively. Depreciation and amortization expense for the nine months ended September 30, 2018 and 2017 was $183,000 and $175,000, respectively.

Construction in progress represents direct costs related to the construction of leasehold improvements and assembly of new laboratory equipment associated with the Company’s new Redwood City facility. Costs of assets under construction are capitalized but are not depreciated until the construction is substantially complete and the assets being constructed are ready for their intended use. Depreciation is recorded using the straight-line method over the lesser of the lease term or the estimated useful lives of the leasehold improvements.

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following (in thousands):

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Accrued outside professional services

 

$

1,461

 

 

$

787

 

Accrued compensation

 

 

1,921

 

 

 

265

 

Other current liabilities

 

 

360

 

 

 

37

 

Total

 

$

3,742

 

 

$

1,089

 

 

 

10


 

6. Commitments and Contingencies

Operating Lease Obligations

The Company’s operating lease obligations primarily relate to its leased office and laboratory space under two separate noncancelable operating leases that begin to expire in June 2019. The Company’s San Carlos lease agreement, which was amended in August 2015, includes two renewal provisions allowing the Company to extend the lease for an additional period of one year each. The amended lease agreement includes a rent abatement and escalation clauses for increased rent over the lease term.

The Company’s Redwood City lease agreement was entered into January 2018, with a contractual lease term commencing upon substantial completion and delivery of the premises. The base term of the lease is 10.75 years with an option to extend an additional term of 5 years. The lease agreement required a security deposit of $0.8 million, which the Company satisfied by establishing a letter of credit secured by restricted cash. Restricted cash is recorded in other long-term assets on the Company’s balance sheet.

The lease agreement entered into in January 2018 allows for a tenant improvement allowance of up to $1.4 million to be applied to the total cost of tenant improvements to the leased premises. Tenant improvement allowances received are recorded as lease incentive obligations included in accrued expenses and other current liabilities and other long-term liabilities on the Company’s balance sheets and are amortized to rent expense over the term of the lease. As of September 30, 2018, lease incentive obligations totaled $1.3 million.

In addition to the minimum future lease commitments presented below, both leases require the Company to pay property taxes, insurance, maintenance and repair costs. Rent expense is recognized using the straight-line method over the respective terms. The Company records a deferred rent liability calculated as the difference between rent expense and cash rental payments. The current portion of the liability is included within accrued expenses and other current liabilities on the Company’s balance sheets. The remaining non-current portion is classified in other long-term liabilities.

Future minimum lease payments required under operating leases are as follows (in thousands):

 

Fiscal Year Ending December 31,

 

 

 

 

2018 (remaining 3 months)

 

$

105

 

2019

 

 

613

 

2020

 

 

1,233

 

2021

 

 

1,270

 

2022

 

 

1,308

 

Thereafter

 

 

9,652

 

Total minimum future lease payments

 

$

14,181

 

In November 2015, the Company entered into a sublease agreement with a third-party for a portion of the Company’s facilities in San Carlos, California. The sublease has a month-to-month term and can be terminated by either party with a thirty-day written notice. Sublease payments owed are recorded as an offset to the Company’s rent expense.

Net rent expense was $0.4 million and $0.1 million for the three months ended September 30, 2018 and 2017, respectively. Net rent expense was $0.8 million and $0.4 million for the nine months ended September 30, 2018 and 2017, respectively.

Purchase Obligations

The Company has entered into contractual agreements with various research and development organizations and suppliers in the normal course of its business. All contracts are terminable, with varying provisions regarding termination. If a contract were to be terminated, the Company would only be obligated for the products or services that the Company had received through the time of termination as well as any non-cancelable minimum payments contractually agreed upon prior to the effective date of termination. In the case of terminating a clinical trial agreement with an investigational site conducting clinical activities on behalf of the Company, the Company would also be obligated to provide continued support for appropriate safety procedures through completion or termination of the associated study. At September 30, 2018, the Company had $6.3 million of non-cancelable purchase obligations under these agreements.

 

11


 

In-Licensing Agreements

The Company has entered into exclusive and non-exclusive, royalty bearing license agreements with third-parties for certain intellectual property. Under the terms of the license agreements, the Company is obligated to pay milestone payments upon the achievement of specified clinical, regulatory and commercial milestones. Actual amounts due under the license agreements will vary depending on factors including, but not limited to, the number of products developed and the Company’s ability to further develop and commercialize the licensed products. The Company is also subject to future royalty payments based on sales of the licensed products. In-licensing payments to third-parties for milestones are recognized as research and development expense in the period of achievement.

The Company recognized $0.3 million of milestone expense for the nine months ended September 30, 2018. The Company did not recognize any milestone expense during the three months ended September 30, 2018 and the three and nine months ended September 30, 2017. Milestone payments are not creditable against royalties. As of September 30, 2018, the Company has not incurred any royalty liabilities related to its license agreements, as product sales have not yet commenced.

Exclusive License Agreement with The Johns Hopkins University

In December 2013, the Company entered into a license agreement with The Johns Hopkins University (“JHU”) for a worldwide exclusive license to develop, use, manufacture and commercialize covered product candidates including AK001 and AK002, which was amended in September 30, 2016. Under the terms of the agreement, the Company has made upfront and milestone payments of $0.3 million through September 30, 2018 and may be required to make aggregate additional milestone payments of up to $4.0 million. The Company also issued 88,887 shares of common stock as consideration under the JHU license agreement. In addition to milestone payments, the Company is also subject to single-digit royalties to JHU based on future net sales of each licensed therapeutic product candidate by the Company and its affiliates and sublicensees, with up to a low six-digit dollar minimum annual royalty payment.

Non-exclusive License Agreement with BioWa Inc. and Lonza Sales AG

In October 2013, the Company entered into a tripartite agreement with BioWa Inc. (“BioWa”), and Lonza Sales AG (“Lonza”), for the non-exclusive worldwide license to develop and commercialize product candidates including AK002 that are manufactured using a technology jointly developed and owned by BioWa and Lonza. Under the terms of the agreement, the Company has made milestone payments of $0.4 million through September 30, 2018 and may be required to make aggregate additional milestone payments of up to $41.0 million. In addition to milestone payments, the Company is also subject to minimum annual commercial license fees of $40,000 per year to BioWa until such time as BioWa receives royalty payments, as well as low single-digit royalties to BioWa and to Lonza. Royalties are based on future net sales by the Company and its affiliates and sublicensees and vary dependent on Lonza’s participation as sole manufacturer for commercial production.

Indemnification Agreements

The Company has entered into indemnification agreements with certain directors and officers that require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. To date, no such matters have arisen and the Company does not believe that the outcome of any claims under indemnification arrangements will have a material adverse effect on its financial positions, results of operations or cash flows. Accordingly, the Company has not recorded a liability related to such indemnifications at September 30, 2018.

7. Convertible Promissory Notes Payable to Related Parties, Net

In August 2017, the Company entered into a note purchase agreement with existing investors as related parties to raise proceeds of up to $15.0 million via the issuance of convertible promissory notes (the “Notes”). The Notes bore interest at 6% per annum and were subject to automatic conversion upon a subsequent qualified financing event. Additional terms included within the note purchase agreement included an option at the election of the holder, upon maturity, to convert all outstanding principal and accrued interest into Series A convertible preferred stock at a fixed price per share, subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization. The Company determined this option represented a beneficial conversion feature (“BCF”) at the date of issuance as the fair value of the securities into which the Notes were convertible upon maturity was greater than the effective conversion price on the date of issuance.

During the nine months ended September 30, 2017, the Company recognized noncash interest expense of $0.5 million associated with the amortization of the discounts, issuance costs and BCF. 

 

12


 

Benefit from Income Taxes Related to Intra-Period Tax Allocations

The BCF associated with the convertible promissory notes to related parties resulted in a temporary difference between the carrying amount and tax basis of the debt instruments. Upon issuance, the Company recognized the temporary difference as a deferred tax liability of $1.0 million with an offsetting adjustment to additional paid in capital. Recognition of the deferred tax liability resulted in a reduction to the Company’s net deferred tax assets. Accordingly, the Company reduced its existing valuation allowance by $1.0 million and recognized a corresponding income tax benefit of $1.0 million in accordance with ASC 740-10, Accounting for Uncertainty in Income Taxes.

8. Stockholders’ Equity

As of September 30, 2018, the Company is authorized to issue a total of 220,000,000 shares of stock. Of these shares, 200,000,000 are designated as common stock and 20,000,000 are designated as preferred stock. There were 42,113,059 shares of common stock issued and outstanding at September 30, 2018.

Common stockholders are entitled to dividends if and when declared by the Board of Directors subject to the prior rights of preferred stockholders. As of September 30, 2018, no dividends on common stock had been declared by the Board of Directors.

Common Stock Warrant Exercises

During the three months ended September 30, 2018, warrants for the purchase of 47,616 shares of common stock were exercised by an accredited investor by net exercise, resulting in the Company’s issuance of 46,893 shares of common stock.

9. Stock-Based Compensation

Total stock-based compensation expense recognized is as follows (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Research and development

 

$

446

 

 

$

41

 

 

$

781

 

 

$

110

 

General and administrative

 

 

533

 

 

 

70

 

 

 

1,250

 

 

 

156

 

Total

 

$

979

 

 

$

111

 

 

$

2,031

 

 

$

266

 

No income tax benefits for stock-based compensation expense have been recognized for the three and nine months ended September 30, 2018 and 2017 as a result of the Company’s full valuation allowance applied to net deferred tax assets and net operating loss carryforwards.

Equity Incentive Plans

In July 2018, the Board of Directors adopted the 2018 Equity Incentive Plan (the “2018 Plan”). The 2018 Plan provides for the grant of incentive stock options, non-statutory stock options, restricted stock awards, restricted stock units, stock appreciation rights and other stock-based awards. The Company initially reserved 4,000,000 shares of common stock for issuance under the 2018 Plan. The number of shares of common stock that may be issued under the 2018 Plan will automatically increase on each January 1, beginning with the fiscal year ending December 31, 2019, equal to the least of (i) 5,000,000 shares, (ii) 5% of the outstanding shares of common stock as of the last day of the preceding fiscal year and (iii) such other amount as the Board of Directors may determine.  

Following the IPO and upon the effectiveness of the 2018 Plan, the 2012 Equity Incentive Plan, as amended, (the “2012 Plan”), terminated and no further awards will be granted thereunder. All outstanding awards under the 2012 Plan will continue to be governed by their existing terms. Any shares subject to awards granted under the 2012 Plan that, on or after the termination of the 2012 Plan, expire or terminate and shares previously issued pursuant to awards granted under the 2012 Plan that, on or after the termination of the 2012 Plan, are forfeited or repurchased by the Company will be transferred into the 2018 Plan. As of September 30, 2018, the maximum number of shares that may be added to the 2018 Plan pursuant to the preceding clause is 6,592,658 shares.

Prior to its termination, the 2012 Plan provided for the grant of stock options, stock appreciation rights, restricted stock and restricted stock units to employees, directors and consultants. Stock options granted under the 2012 Plan generally vest over four years and expire no more than 10 years from the date of grant. 

 

13


 

The following weighted-average assumptions were used to calculate the fair value of stock-based awards granted to employees and directors during the periods indicated:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2018

 

 

2017

 

2018

 

 

2017

 

Risk-free interest rate

 

 

2.77

%

 

*

 

 

2.68

%

 

 

1.78

%

Expected volatility

 

 

69.68

%

 

*

 

 

75.68

%

 

 

78.00

%

Expected dividend yield

 

 

 

 

*

 

 

 

 

 

 

Expected term (in years)

 

 

5.94

 

 

*

 

 

5.98

 

 

 

6.04

 

*

There were no grants of stock options during the three months ended September 30, 2017.

The Company’s stock option activity is summarized as follows (number of shares in thousands):

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

Average

 

 

 

Options

 

 

Exercise

 

 

 

Outstanding

 

 

Price

 

Balance at December 31, 2017

 

 

4,884

 

 

$

0.67

 

Granted

 

 

2,649

 

 

$

7.50

 

Exercised

 

 

(527

)

 

$

0.65

 

Forfeited

 

 

(227

)

 

$

0.64

 

Balance at September 30, 2018

 

 

6,779

 

 

$

3.34

 

Options exercisable

 

 

3,401

 

 

$

0.84

 

Options vested and expected to vest

 

 

6,741

 

 

$

3.33

 

During the three and nine months ended September 30, 2018 and 2017, the Company did not grant any stock options with performance-based or market-based vesting conditions, nor did the Company grant any stock options to non-employees in exchange for services.     

As of September 30, 2018, total unrecognized stock-based compensation expense relating to unvested stock options was $12.5 million. This amount is expected to be recognized over a weighted-average period of 3.4 years.

2018 Employee Stock Purchase Plan

In July 2018, the Company’s Board of Directors and stockholders approved the 2018 Employee Stock Purchase Plan (the “2018 ESPP”). There are 500,000 shares of common stock initially reserved for issuance under the 2018 ESPP. The number of shares of common stock that may be issued under the 2018 ESPP will automatically increase on each January 1, beginning with the fiscal year ending December 31, 2019, equal to the least of (i) 1,000,000 shares, (ii) 1% of the outstanding shares of common stock as of the last day of the immediately preceding fiscal year and (iii) such other amount determined by the 2018 ESPP administrator. Under the 2018 ESPP, employees may purchase shares of the Company’s common stock at a price per share equal to 85% of the lower of the fair market value of the common stock on the first trading day of the offering period or on the exercise date. The 2018 ESPP provides for consecutive, overlapping 24-month offering periods, each of which will include purchase periods. The first offering period commenced on July 18, 2018 and will end on the first trading day on or before August 15, 2020. The second offering period will commence on the first trading day on or after February 15, 2019. During the three and nine months ended September 30, 2018, stock-based compensation related to the 2018 ESPP was $85,000.

10. Defined Contribution Plans

In July 2013, the Company established a Savings Incentive Match Plan (the “SIMPLE IRA plan”) for its employees, allowing for both employee and employer contributions for those employees who meet defined minimum age and service requirements. The SIMPLE IRA plan allows participants to defer a portion of their annual compensation on a pretax basis. During the three and nine months ended September 30, 2017, the Company made contributions to the SIMPLE IRA plan of $24,000 and $75,000, respectively.

In January 2018, the Company terminated and replaced the SIMPLE IRA with a defined contribution plan under Section 401(k) of the Internal Revenue Code (the “401(k) plan”). The 401(k) plan covers all employees who meet defined minimum age and service requirements. Employee contributions are voluntary and are determined on an individual basis, limited to the maximum amount allowable under U.S. federal tax regulations. The Company makes matching contributions of up to 4% of the eligible employees’ compensation to the 401(k) plan. During the three and nine months ended September 30, 2018, the Company made contributions to the 401(k) plan of $58,000 and $176,000, respectively.

 

14


 

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

The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and the other financial information appearing elsewhere in this Quarterly Report on Form 10-Q. These statements generally relate to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. The following discussion and analysis contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Our actual results and the timing of events may differ materially from those discussed in our forward-looking statements as a result of various factors, including those discussed below and those discussed in the section entitled “Risk Factors” included in this Quarterly Report on Form 10-Q.

Forward-looking statements include, but are not limited to, statements about:

 

the impact that the adoption of new accounting pronouncements will have on our financial statements;

 

the ability of our clinical trials to demonstrate safety and efficacy of our product candidates, and other positive results;

 

the timing and focus of our future clinical trials, and the reporting of data from those trials;

 

our plans relating to commercializing AK002, if approved, including the geographic areas of focus and sales strategy;

 

the size of the market opportunity for AK002 in each of the diseases we are targeting;

 

the number of diseases represented in the patient population enrolled in our clinical trials, and our ability to evaluate response to treatment of AK002 in diseases other than the primary indication in our clinical trials;

 

our estimates of the number of patients in the United States who suffer from the diseases we are targeting and the number of patients that will enroll in our clinical trials;

 

the beneficial characteristics, safety, efficacy and therapeutic effects of AK002;

 

the timing or likelihood of regulatory filings and approvals, including our expectation to seek special designations, such as orphan drug designation, for AK002 or our other product candidates for various diseases;

 

our ability to obtain and maintain regulatory approval of AK002 or our other product candidates;

 

our plans relating to the further development of AK002 and our other product candidates;

 

existing regulations and regulatory developments in the United States and other jurisdictions;

 

our plans and ability to obtain or protect intellectual property rights, including extensions of existing patent terms where available;

 

our continued reliance on third-parties to conduct additional clinical trials of AK002 and our other product candidates, and for the manufacture of our product candidates for preclinical studies and clinical trials;

 

the need to hire additional personnel and our ability to attract and retain such personnel;

 

the accuracy of our estimates regarding expenses, future revenue, capital requirements and needs for additional financing;

 

our financial performance;

 

the sufficiency of our existing cash and cash equivalents to fund our future operating expenses and capital expenditure requirements;

 

our expectations regarding the period during which we will qualify as an emerging growth company under the JOBS Act; and

 

our anticipated use of the proceeds from our initial public offering and the concurrent private placement.

 

 

15


 

These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including, but not limited to, those described in “Risk Factors”. In some cases, you can identify these statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expects,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” or the negative of those terms, and similar expressions that convey uncertainty of future events or outcomes. These forward-looking statements reflect our beliefs and views with respect to future events and are based on estimates and assumptions as of the date of this Quarterly Report on Form 10-Q and are subject to risks and uncertainties. We discuss many of these risks in greater detail in the section entitled “Risk Factors” included in Part II, Item 1A and elsewhere in this report. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible 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. Given these uncertainties, you should not place undue reliance on these forward-looking statements. We qualify all of the forward-looking statements in this Quarterly Report on Form 10-Q by these cautionary statements. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

We are a clinical stage biotechnology company developing AK002, our wholly owned monoclonal antibody for the treatment of various eosinophil and mast cell related diseases. AK002 demonstrated pharmacodynamic activity in both of our completed Phase 1 trials, and in the single ascending dose Phase 1 trial involving patients with indolent systemic mastocytosis (“ISM”), patients reported improvements in their symptoms. AK002 selectively targets both eosinophils and mast cells, which are types of white blood cells that are widely distributed in the body and play a central role in the inflammatory response. Inappropriately activated eosinophils and mast cells have been identified as key drivers in a number of severe diseases affecting the gastrointestinal tract, eyes, skin, lungs and other organs. As such, AK002 has the potential to treat a large number of severe diseases. We are developing AK002 for the treatment of eosinophilic gastritis (“EG”) and eosinophilic gastroenteritis (“EGE”).  In addition, we are conducting studies in ISM, chronic urticaria (“CU”) and severe allergic conjunctivitis (“SAC”) and are evaluating additional indications for future development.

Despite the knowledge that eosinophils and mast cells drive many pathological conditions, there are no approved therapies that selectively target both eosinophils and mast cells. Current treatments for the diseases we are pursuing are non-selective and often come with serious side effects that make them unsuitable for long term use. AK002 binds to Siglec-8, an inhibitory receptor found on eosinophils and mast cells, which represents a novel way to selectively deplete or inhibit these important immune cells and thereby resolve inflammation. We believe AK002 is the only Siglec-8 targeting antibody currently in clinical development and has the potential to be an alternative to current treatments.

Since our inception in 2012, we have devoted substantially all of our resources and efforts towards the research and development of our product candidates. We initially began developing two product candidates, AK001 and AK002, both of which are monoclonal antibodies targeting Siglec-8. These compounds entered clinical trials in 2015 and 2016, respectively. Due to the greater activity of AK002, we decided to focus our development efforts on AK002 and discontinued the development of AK001 in 2017. We have no current plans to continue development of AK001 at this time but may choose to do so in the future. In addition to activities conducted internally at our facilities, we have utilized significant financial resources to engage contractors, consultants and other third-parties to conduct various preclinical and clinical development activities on our behalf.

To date, we have not had any products approved for sale and have not generated any revenue nor been profitable. Further, we do not expect to generate revenue from product sales until such time, if ever, that we are able to successfully complete the development and obtain marketing approval for one of our product candidates. We will continue to require additional capital to develop our product candidates and fund operations for the foreseeable future. We have incurred significant operating losses to date and expect to incur significant operating losses for the foreseeable future. Our net losses were $29.0 million and $15.7 million for the nine months ended September 30, 2018 and 2017, respectively. As of September 30, 2018, we had an accumulated deficit of $89.6 million.

Our operations have been financed primarily through the private placements of convertible debt instruments and convertible preferred stock. These private placements provided gross proceeds of $146.9 million. We also had a debt facility with Silicon Valley Bank (“SVB”) for an aggregate of $5.0 million, which was fully repaid and terminated during 2017. As of September 30, 2018, we had cash, cash equivalents and marketable securities of $193.5 million, which, together with the net proceeds from our initial public offering and the concurrent private placement in July 2018, we believe will be sufficient to fund our planned operations for at least the next 12 months.

 

 

16


 

Initial Public Offering

On July 23, 2018, we completed an initial public offering (“IPO”), selling 8,203,332 shares of common stock at $18.00 per share. Proceeds from our IPO, net of underwriting discounts and commissions, were $137.3 million. Concurrently with our IPO, we completed a private placement of 250,000 shares of common stock at $18.00 per share to an existing stockholder. Proceeds from this private placement were $4.5 million.

In connection with the completion of our IPO on July 23, 2018, all then outstanding shares of convertible preferred stock converted into 30,971,627 shares of common stock.

 

Components of Operating Results

Revenue

We have not generated any revenue from product sales or otherwise, and do not expect to generate any revenue for at least the next several years.

Operating Expenses

We classify operating expenses into two categories: (i) research and development and (ii) general and administrative.

Research and Development Expenses

Research and development expenses represent the following costs incurred by us for the discovery, development and manufacturing of our product candidates:

 

consultant and personnel-related costs including salaries, benefits, travel and stock-based compensation expense;

 

costs incurred under service agreements with contract research organizations (“CROs”) that conduct nonclinical and clinical research activities on our behalf;

 

costs incurred under service agreements with contract development and manufacturing organizations (“CDMOs”) for the manufacture and fill finish of our preclinical and clinical materials;

 

costs related to in-house research and development activities conducted at our facilities including laboratory supplies, non-capital laboratory equipment and depreciation of capital laboratory equipment and leasehold improvements to laboratories;

 

costs incurred under exclusive and non-exclusive license agreements with third-parties; and

 

allocated facility and other costs including the rent and maintenance of our facilities, insurance premiums, depreciation of shared-use leasehold improvements and general office supplies.

We expense research and development costs as incurred. We recognize costs for certain development activities, such as clinical trials, based on an evaluation of the progress to completion of specific tasks using data such as clinical site activations, patient enrollment or information provided to us by our vendors and our clinical investigative sites, along with analysis by our in-house clinical operations personnel. Advance payments for goods or services to be received in the future for use in research and development activities are deferred and capitalized as prepaid expenses, even when there is no alternative future use for the research and development. The capitalized amounts are expensed as the related goods are delivered or the services are performed.

The successful development of our product candidates is highly uncertain. Accordingly, it is difficult to estimate the nature, timing and extent of costs necessary to complete the remainder of the development of our product candidates. We are also unable to predict when, if ever, we will be able to generate revenue from our product candidates. This is due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty surrounding:

 

demonstrating sufficient safety and tolerability profiles of product candidates;

 

successful enrollment and completion of clinical trials;

 

requisite clearance and approvals from applicable regulatory authorities;

 

establishing and maintaining commercial manufacturing capabilities with CDMOs;

 

obtaining and maintaining protection of intellectual property; and

 

commercializing product candidates, if and when approved, alone or in collaboration with third-parties.

 

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A change pertaining to any of these variables would significantly impact the timing and extent of costs incurred with respect to the development and commercialization of our product candidates.

External costs incurred from third-party CROs and CDMOs have comprised a significant portion of our research and development expenses since inception. We track external CRO and CDMO costs on a program-by-program basis following the advancement of a product candidate into clinical development. To date, we have advanced two product candidates, AK001 and AK002, into clinical development, although we discontinued the development of AK001 in 2017. Residual costs related to AK001 incurred after discontinuation in 2017 are primarily related to the winding down of historically contracted research and development activities and as such, we do not anticipate incurring significant expenses related to AK001 development in future periods. Consulting and personnel-related costs, laboratory supplies and non-capital equipment utilized in the conduct of in-house research, in-licensing fees and general overhead, are not tracked on a program-by-program basis, nor are they allocated, as they commonly benefit projects in our pipeline or span multiple programs.

The following table summarizes our research and development expenses for the periods indicated (in thousands):

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

 

 

2017

 

 

2018

 

 

2017

 

AK002 contract research and development

 

$

3,875

 

 

 

 

$

2,359

 

 

$

8,560

 

 

$

3,720

 

AK001 contract research and development

 

 

50

 

 

 

 

 

587

 

 

 

908

 

 

 

3,404

 

Consulting and personnel-related costs

 

 

3,413

 

 

 

 

 

1,512

 

 

 

9,188

 

 

 

3,894

 

Other unallocated research and development costs

 

 

1,368

 

 

 

 

 

875

 

 

 

3,600

 

 

 

2,437

 

Total

 

$

8,706

 

 

 

 

$

5,333

 

 

$

22,256

 

 

$

13,455

 

General and Administrative Expenses

General and administrative expenses consist of fees paid to consultants, salaries, benefits and other personnel-related costs, including stock-based compensation, for our personnel in executive, finance, accounting and other administrative functions, legal costs, fees paid for accounting and tax services and facility costs not otherwise included in research and development expenses. Legal costs include general corporate and patent legal fees and related costs.

We anticipate that our general and administrative expenses will increase in the future to support our continued research and development activities including costs related to personnel, outside consultants, attorneys and accountants, among others. Additionally, we expect to incur incremental costs associated with operating as a public company, including expenses related to maintaining compliance with the rules and regulations of the Securities and Exchange Commission (“SEC”), and those of any national securities exchange on which our securities are traded, additional insurance premiums, investor relations activities and other ancillary administrative and professional services.

Interest Income (Expense), Net

Interest income (expense), net, primarily consists of stated interest on outstanding principal amounts drawn under our historical debt facility with SVB, amortization of debt discounts and beneficial conversion feature associated with convertible notes payable to related parties and the amortization and accretion of debt discounts and deferred issuance costs associated with amounts drawn under our historical debt facility with SVB. Also included within interest income (expense), net, is interest and investment income earned on our cash, cash equivalents and marketable securities included on the balance sheets.

Other Expense, Net

Other expense, net, primarily consists of charges related to the extinguishment of our historical debt facility with SVB, as well as amounts realized from gains and losses related to fluctuations in foreign currencies.

In-Licensing Agreements

We have entered into a number of exclusive and nonexclusive, royalty bearing license agreements with third-parties for certain intellectual property. Under the terms of the license agreements described below, we are obligated to pay milestone payments upon the achievement of specified clinical, regulatory and commercial milestones. Actual amounts due under the license agreements vary depending on factors including, but not limited to, the number of product candidates we develop and our ability to successfully develop and commercialize our product candidates covered under the respective agreements. In addition to milestone payments, we are also subject to future royalty payments based on sales of our product candidates covered under the agreements, as well as certain minimum annual royalty and commercial reservation fees. Because the achievement of milestones and the timing and extent of future royalties is not fixed and determinable, these contingent amounts have not been included on our balance sheets or as part of Contractual Obligations and Commitments discussion below.

 

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We recognized $0.3 million of milestone expense for the nine months ended September 30, 2018. We did not recognize any milestone expense during the three months ended September 30, 2018 and the three and nine months ended September 30, 2017. Milestone payments are not creditable against royalties. As of September 30, 2018, we have not incurred any royalty liabilities related to our license agreements, as product sales have not yet commenced.

Exclusive License Agreement with The Johns Hopkins University

In December 2013, we entered into a license agreement with The Johns Hopkins University, (“JHU”) for a worldwide exclusive license to develop, use, manufacture and commercialize covered product candidates including AK001 and AK002, which was amended in September 30, 2016. Under the terms of the agreement, we have made upfront and milestone payments of $0.3 million through September 30, 2018 and we may be required to make aggregate additional milestone payments of up to $4.0 million. We also issued 88,887 shares of common stock as consideration under the JHU license agreement. In addition to milestone payments, we are also subject to single-digit royalties to JHU based on future net sales of each licensed therapeutic product candidate by us and our affiliates and sublicensees, with up to a low six-digit dollar minimum annual royalty payment.

Non-exclusive License Agreement with BioWa Inc. and Lonza Sales AG

In October 2013, we entered into a tripartite agreement with BioWa Inc. (“BioWa”), and Lonza Sales AG (“Lonza”), for the non-exclusive worldwide license to develop and commercialize product candidates including AK002 that are manufactured using a technology jointly developed and owned by BioWa and Lonza. Under the terms of the agreement, we have made milestone payments of $0.4 million through September 30, 2018 and we may be required to make aggregate additional milestone payments of up to $41.0 million. In addition to milestone payments, we are also subject to minimum annual commercial license fees of $40,000 per year to BioWa until such time as BioWa receives royalty payments, as well as low single-digit royalties to BioWa and to Lonza. Royalties are based on future net sales by us and our affiliates and sublicensees and vary dependent on Lonza’s participation as sole manufacturer for commercial production.

Critical Accounting Policies and Use of Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

On an ongoing basis, we evaluate our judgments and estimates in light of changes in circumstances, facts and experience. During the nine months ended September 30, 2018, there have been no material changes to our critical accounting policies and estimates as disclosed in our Prospectus.  

Recent Accounting Pronouncements

See Note 2 to our financial statements for recently issued accounting pronouncements, including the respective effective dates of adoption and effects on our results of operations and financial condition.

JOBS Act

In April 2012, the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), was enacted. Section 107 of the JOBS Act provides that an emerging growth company (“EGC”), can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933 as amended, (the “Securities Act”), for complying with new or revised accounting standards. Thus, an EGC can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.

 

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We will remain an emerging growth company until the earliest of (i) the last day of our first fiscal year in which we have total annual gross revenues of $1.07 billion or more, (ii) the date on which we are deemed to be a “large accelerated filer” under the rules of the SEC with at least $700.0 million of outstanding equity securities held by non-affiliates, (iii) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the previous three years or (iv) the last day of our fiscal year following the fifth anniversary of the date of the completion of our IPO.

Results of Operations

Comparison of the Three Months Ended September 30, 2018 and 2017

The following table summarizes our results of operations for the periods indicated (in thousands):

 

 

 

Three Months Ended September 30,

 

 

 

2018

 

 

 

 

2017

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

8,706

 

 

 

 

$

5,333

 

General and administrative

 

 

3,269

 

 

 

 

 

900

 

Total operating expenses

 

 

11,975

 

 

 

 

 

6,233

 

Loss from operations

 

 

(11,975

)

 

 

 

 

(6,233

)

Interest income (expense), net

 

 

836

 

 

 

 

 

(579

)

Other expense, net

 

 

(9

)

 

 

 

 

(74

)

Loss before benefit from income taxes