allk-10q_20190331.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 March 31, 2019

OR

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

 

For the transition period from ________ to _________

 

Commission File Number: 001-38582

 

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.)

975 Island Drive, Suite 201

Redwood City, California

94065

(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  

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

Title of Each Class

Trading Symbol(s)

Name of Each Exchange on Which Registered

Common Stock, par value $0.001

ALLK

The Nasdaq Global Select Market

As of May 3, 2019, the registrant had 43,123,773 shares of common stock outstanding.

 

 

 


ALLAKOS INC.

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

Item 1.

Financial Statements (Unaudited)

2

 

Balance Sheets

2

 

Statements of Operations and Comprehensive Loss

3

 

Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)

4

 

Statements of Cash Flows

5

 

Notes to Unaudited Interim Financial Statements

6

Item 2.

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

15

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

22

Item 4.

Controls and Procedures

23

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

24

Item 1A.

Risk Factors

24

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

57

Item 3.

Defaults Upon Senior Securities

57

Item 4.

Mine Safety Disclosures

57

Item 5.

Other Information

57

Item 6.

Exhibits

58

Signatures

59

 

 

 

1


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

allakos inc.

balance sheets

(in thousands, except per share data)

 

 

March 31,

 

 

December 31,

 

 

2019

 

 

2018

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

31,464

 

 

$

33,660

 

Investments in marketable securities

 

135,724

 

 

 

145,246

 

Prepaid expenses and other current assets

 

1,511

 

 

 

2,703

 

Total current assets

 

168,699

 

 

 

181,609

 

Property and equipment, net

 

9,031

 

 

 

8,848

 

Operating lease right-of-use assets

 

5,977

 

 

 

 

Other long-term assets

 

802

 

 

 

802

 

Total assets

$

184,509

 

 

$

191,259

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

3,789

 

 

$

2,092

 

Accrued expenses and other current liabilities

 

4,443

 

 

 

3,164

 

Total current liabilities

 

8,232

 

 

 

5,256

 

Other long-term liabilities

 

8,388

 

 

 

2,009

 

Total liabilities

 

16,620

 

 

 

7,265

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

Preferred stock, $0.001 par value per share; 20,000 shares

   authorized as of March 31, 2019 and December 31, 2018;

   no shares issued and outstanding as of March 31, 2019

   and December 31, 2018

 

 

 

 

 

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

   authorized as of March 31, 2019 and December 31, 2018;

   43,124 and 42,117 shares issued and outstanding as of

   March 31, 2019 and December 31, 2018, respectively

 

43

 

 

 

42

 

Additional paid-in capital

 

291,881

 

 

 

288,079

 

Accumulated other comprehensive gain (loss)

 

30

 

 

 

(15

)

Accumulated deficit

 

(124,065

)

 

 

(104,112

)

Total stockholders’ equity

 

167,889

 

 

 

183,994

 

Total liabilities and stockholders’ equity

$

184,509

 

 

$

191,259

 

 

See accompanying notes to unaudited interim financial statements

 

2


 

 

Allakos Inc.

Statements of Operations and Comprehensive Loss

(in thousands, except per share data)

(unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Operating expenses

 

 

 

 

 

 

 

 

Research and development

 

$

15,098

 

 

$

6,401

 

General and administrative

 

 

5,829

 

 

 

2,308

 

Total operating expenses

 

 

20,927

 

 

 

8,709

 

Loss from operations

 

 

(20,927

)

 

 

(8,709

)

Interest income, net

 

 

1,030

 

 

 

224

 

Other expense, net

 

 

(56

)

 

 

 

Net loss

 

 

(19,953

)

 

 

(8,485

)

Unrealized gain on marketable securities, net of tax

 

 

45

 

 

 

 

Comprehensive loss

 

$

(19,908

)

 

$

(8,485

)

Net loss per common share:

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.47

)

 

$

(4.19

)

Weighted-average number of common shares outstanding:

 

 

 

 

 

 

 

 

Basic and diluted

 

 

42,620

 

 

 

2,024

 

 

See accompanying notes to unaudited interim financial statements

 


 

3


 

Allakos Inc.

Statements of CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

(in thousands)

(unaudited)

 

 

 

Convertible

Preferred Stock

 

 

 

Common Stock

 

 

Additional

Paid-In

Capital

 

 

Accumulated Other Comprehensive Gain (Loss)

 

 

Accumulated

Deficit

 

 

Total

Stockholders’

Equity

 

 

 

Shares

 

 

Amount

 

 

 

Shares

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

 

 

 

$

 

 

 

 

42,117

 

 

$

42

 

 

$

288,079

 

 

$

(15

)

 

$

(104,112

)

 

$

183,994

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,834

 

 

 

 

 

 

 

 

 

2,834

 

Issuance of common stock upon exercise of stock options

 

 

 

 

 

 

 

 

 

968

 

 

 

1

 

 

 

367

 

 

 

 

 

 

 

 

 

368

 

Issuance of common stock upon 2018 ESPP purchase

 

 

 

 

 

 

 

 

 

39

 

 

 

 

 

 

595

 

 

 

 

 

 

 

 

 

595

 

Vesting of restricted common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6

 

 

 

 

 

 

 

 

 

6

 

Unrealized gain on marketable securities, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

45

 

 

 

 

 

 

45

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(19,953

)

 

 

(19,953

)

Balance at March 31, 2019

 

 

 

 

$

 

 

 

 

43,124

 

 

$

43

 

 

$

291,881

 

 

$

30

 

 

$

(124,065

)

 

$

167,889

 

 

 

 

 

Convertible

Preferred Stock

 

 

 

Common Stock

 

 

Additional

Paid-In

Capital

 

 

Accumulated Other Comprehensive Gain (Loss)

 

 

Accumulated

Deficit

 

 

Total

Stockholders’

Deficit

 

 

 

Shares

 

 

Amount

 

 

 

Shares

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

 

30,971

 

 

$

142,969

 

 

 

 

2,114

 

 

$

3

 

 

$

1,803

 

 

$

 

 

$

(60,574

)

 

$

(58,768

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

614

 

 

 

 

 

 

 

 

 

614

 

Vesting of restricted common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6

 

 

 

 

 

 

 

 

 

6

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,485

)

 

 

(8,485

)

Balance at March 31, 2018

 

 

30,971

 

 

$

142,969

 

 

 

 

2,114

 

 

$

3

 

 

$

2,423

 

 

$

 

 

$

(69,059

)

 

$

(66,633

)

 

See accompanying notes to unaudited interim financial statements

 

4


 

Allakos Inc.

Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(19,953

)

 

$

(8,485

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

357

 

 

 

61

 

Stock-based compensation

 

 

2,834

 

 

 

614

 

Net amortization of premiums and discounts on marketable securities

 

 

(802

)

 

 

 

Noncash lease expense

 

 

73

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

1,320

 

 

 

(1,773

)

Other long-term assets

 

 

 

 

 

8

 

Accounts payable

 

 

1,278

 

 

 

7

 

Accrued expenses and other current liabilities

 

 

1,408

 

 

 

227

 

Other long-term liabilities

 

 

206

 

 

 

 

Net cash used in operating activities

 

 

(13,279

)

 

 

(9,341

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of marketable securities

 

 

(70,759

)

 

 

 

Purchases of property and equipment

 

 

(121

)

 

 

(17

)

Proceeds from maturities of marketable securities

 

 

81,000

 

 

 

 

Net cash provided by (used in) investing activities

 

 

10,120

 

 

 

(17

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock under the 2018 ESPP

 

 

595

 

 

 

 

Proceeds from exercise of stock options

 

 

368

 

 

 

 

Payments for deferred financing costs

 

 

 

 

 

(447

)

Net cash provided by (used in) financing activities

 

 

963

 

 

 

(447

)

Net decrease in cash, cash equivalents and restricted cash

 

 

(2,196

)

 

 

(9,805

)

Cash, cash equivalents and restricted cash, beginning of period

 

 

34,462

 

 

 

85,207

 

Cash, cash equivalents and restricted cash, end of period

 

$

32,266

 

 

$

75,402

 

Supplemental disclosures

 

 

 

 

 

 

 

 

Noncash investing and financing items:

 

 

 

 

 

 

 

 

Right-of-use assets obtained in exchange for lease obligations (1)

 

$

6,050

 

 

$

 

Property and equipment purchased in accounts payable

 

$

419

 

 

$

 

Deferred initial public offering costs in accounts payable

 

$

 

 

$

385

 

Vesting of restricted common stock subject to repurchase

 

$

6

 

 

$

6

 

 

(1)

Amount for the three months ended March 31, 2019 includes a transition adjustment recorded as part of the Company’s adoption of a new lease accounting policy effective January 1, 2019.

 

See accompanying notes to unaudited interim financial statements

 

 

5


 

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 Redwood City, California.

Liquidity Matters

Since inception, the Company has incurred net losses and negative cash flows from operations. During the three months ended March 31, 2019, the Company incurred a net loss of $20.0 million and used $13.3 million of cash in operations. At March 31, 2019, the Company had an accumulated deficit of $124.1 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 $167.2 million of cash, cash equivalents and marketable securities at March 31, 2019. 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.

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 March 31, 2019, the statements of operations and comprehensive loss, statements of convertible preferred stock and stockholders’ equity (deficit) and statements of cash flows for the three months ended March 31, 2019 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 March 31, 2019 and its results of operations and comprehensive loss for the three months ended March 31, 2019 and 2018 and its cash flows for the three months ended March 31, 2019 and 2018. 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, 2018 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 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission (the “SEC”) on March 14, 2019.

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, calculation of right-of-use assets and lease liabilities, 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

 

6


 

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 March 31, 2019 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):

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Cash and cash equivalents

 

$

31,464

 

 

$

33,660

 

Restricted cash in long term assets, deposit for lease facility

 

 

802

 

 

 

802

 

Total cash, cash equivalents and restricted cash

 

$

32,266

 

 

$

34,462

 

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Cash and cash equivalents

 

$

74,600

 

 

$

85,207

 

Restricted cash in long term assets, deposit for lease facility

 

 

802

 

 

 

 

Total cash, cash equivalents and restricted cash

 

$

75,402

 

 

$

85,207

 

 

Marketable Securities

The Company invests in marketable securities, primarily securities issued by the U.S. government and its agencies. The Company’s marketable securities are considered available-for-sale and are classified as current assets even when the stated maturities of the underlying securities exceed one year from the date of the current balance sheet being reported. This classification reflects management’s ability and intent to utilize proceeds from the sale of such investments to fund ongoing operations. 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, 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.

Leases

Effective January 1, 2019, the Company accounts for its leases in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 842, “Leases” (“ASC 842”). Prior period amounts continue to be reported in accordance with the Company’s historic accounting under previous lease guidance. Per ASC 842, operating leases are recorded as

 

7


 

right-of-use assets and other long-term liabilities in the Company’s balance sheet at March 31, 2019. Right-of-use assets represent the Company’s right to use an underlying asset over the lease term. Lease liabilities represent the present value of the Company’s lease payments over the lease term. In determining the net present value of the Company’s lease payments, the Company uses its incremental borrowing rate based on the information available at the lease commencement date. Right-of-use assets also include any lease payments made prior to the lease commencement date and exclude lease incentives. The Company’s leases may include options to extend or terminate the lease which are included in the lease term when it is reasonably certain that the Company will exercise any such options. Lease expense is recognized on a straight-line basis over the expected lease term.

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.

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.

 

8


 

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

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Numerator:

 

 

 

 

 

 

 

 

Net loss

 

$

(19,953

)

 

$

(8,485

)

Denominator:

 

 

 

 

 

 

 

 

Weighted-average shares of common stock outstanding,

   basic and diluted

 

 

42,620

 

 

 

2,024

 

Net loss per share, basic and diluted

 

$

(0.47

)

 

$

(4.19

)

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 Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Series A convertible preferred stock

 

 

 

 

 

20,866

 

Series B convertible preferred stock

 

 

 

 

 

10,105

 

Options to purchase common stock

 

 

6,845

 

 

 

6,225

 

Warrants to purchase common stock

 

 

 

 

 

48

 

Unvested restricted common stock

 

 

33

 

 

 

90

 

Shares issuable under 2018 Employee Stock Purchase Plan

 

 

10

 

 

 

 

Total

 

 

6,888

 

 

 

37,334

 

 

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued ASC 842 which became effective for fiscal years beginning after December 15, 2018. ASC 842 requires an entity to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. The recognition, measurement and presentation of expenses will depend on the lease’s classification as a finance or operating lease. ASC 842 also requires certain quantitative and qualitative disclosures about leasing arrangements. The Company adopted ASC 842 using a modified retrospective approach effective January 1, 2019, recording a right-of-use asset of $6.1 million and a long-term lease liability of $8.2 million. Adoption of ASC 842 did not result in a cumulative effect adjustment to accumulated deficit. See Note 6 for further disclosure.

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 (deficit) presented in the balance sheet in a note or separate statement. The Company adopted the amendments during the three months ended March 31, 2019. The adoption of the amendments did not have a material impact on the Company’s financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

In August 2018, the FASB issued Accounting Standards Update (“ASU”) No. 2018-13, Fair Value Measurement (ASC 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 and does not expect there to be a material impact.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (ASC Topic 326): Measurement of Credit Losses on Financial Instruments. This guidance will require Companies to recognize an allowance for credit losses on available-for-sale debt securities rather than the current approach of recording a reduction to the carrying value of the asset. The ASU is effective for fiscal years beginning after December 15, 2019 and interim periods therein. Early adoption is permitted for annual periods beginning after December 15, 2018 and interim periods therein. The Company is currently evaluating the effects of this ASU on its financial statements and related disclosures and does not expect there to be a material impact.

 

9


 

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):

 

 

 

March 31, 2019

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

29,355

 

 

$

 

 

$

 

 

$

29,355

 

Total cash equivalents

 

$

29,355

 

 

$

 

 

$

 

 

$

29,355

 

Marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

$

135,724

 

 

$

 

 

$

 

 

$

135,724

 

Total marketable securities

 

$

135,724

 

 

$

 

 

$

 

 

$

135,724

 

Total cash equivalents and marketable

   securities

 

$

165,079

 

 

$

 

 

$

 

 

$

165,079

 

 

 

 

December 31, 2018

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

31,555

 

 

$

 

 

$

 

 

$

31,555

 

Total cash equivalents

 

$

31,555

 

 

$

 

 

$

 

 

$

31,555

 

Marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

$

145,246

 

 

$

 

 

$

 

 

$

145,246

 

Total marketable securities

 

$

145,246

 

 

$

 

 

$

 

 

$

145,246

 

Total cash equivalents and marketable

   securities

 

$

176,801

 

 

$

 

 

$

 

 

$

176,801

 

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 months ended March 31, 2019 and 2018.

4. Marketable Securities

All marketable securities were considered available-for-sale at March 31, 2019. The amortized cost, gross unrealized holding gains or losses, and fair value of the Company’s marketable securities by major security type at March 31, 2019 and December 31, 2018 are summarized in the table below (in thousands):

 

 

 

March 31, 2019

 

 

 

Amortized

Cost Basis

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Fair

Value

 

Marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

$

135,694

 

 

$

30

 

 

$

 

 

$

135,724

 

Total marketable securities

 

$

135,694

 

 

$

30

 

 

$

 

 

$

135,724

 

 

 

 

December 31, 2018

 

 

 

Amortized

Cost Basis

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Fair

Value

 

Marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

$

145,261

 

 

$

 

 

$

(15

)

 

$

145,246

 

Total marketable securities

 

$

145,261

 

 

$

 

 

$

(15

)

 

$

145,246

 

The Company had no other-than-temporary impairments on its marketable securities during the three months ended March 31, 2019. The Company has the intent and ability to hold all marketable securities until their maturities.

 

10


 

5. Balance Sheet Components and Supplemental Disclosures

Property and Equipment, Net

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

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Laboratory equipment

 

$

3,759

 

 

$

3,272

 

Furniture and office equipment

 

 

1,685

 

 

 

1,666

 

Leasehold improvements

 

 

4,572

 

 

 

4,545

 

 

 

 

10,016

 

 

 

9,483

 

Less accumulated depreciation

 

 

(985

)

 

 

(635

)

Property and equipment, net

 

$

9,031

 

 

$

8,848

 

Depreciation and amortization expense for the three months ended March 31, 2019 and 2018 was $0.4 million and $0.1 million, respectively.

Accrued Expenses and Other Current Liabilities

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

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Accrued outside professional services

 

$

2,779

 

 

$

1,964

 

Accrued compensation and benefits

 

 

1,644

 

 

 

1,041

 

Lease incentive obligation, current

 

 

 

 

 

123

 

Other current liabilities

 

 

20

 

 

 

36

 

Total

 

$

4,443

 

 

$

3,164

 

 

6. Commitments and Contingencies

Lease Obligations

As described in Note 2, the Company adopted ASC 842 effective January 1, 2019. Prior period amounts have not been adjusted and continue to be reported in accordance with the Company’s previous accounting method. The Company terminated its previous lease agreement for its San Carlos, California office during the year ended December 31, 2018 and as of March 31, 2019, the Company’s outstanding lease obligations primarily relate to leased office and laboratory space under a single noncancelable operating lease entered into during January 2018. The lease agreement includes a contractual lease term which commenced upon substantial completion and delivery of the premises in November 2018. The base term of the lease is 10.75 years and includes an option to extend for an additional term of 5 years. This option to extend the lease term has not been included in the Company’s calculations under ASC 842 as the exercise of the option is highly uncertain and therefore deemed not probable.

The Company’s lease agreement included a $1.4 million tenant improvement allowance that has been applied to the total cost of tenant improvements made to the leased premises. Tenant improvement allowances received were recorded as leasehold improvements with an offsetting adjustment included in the Company’s calculation of its right-of-use asset under ASC 842. Leasehold improvements are depreciated over the term of the lease.

The Company has performed an evaluation of its other contracts with vendors in accordance with ASC 842 and has determined that, except for the lease described above, none of its other contracts contain a lease.

The balance sheet classification of the Company’s lease liabilities at March 31, 2019 was as follows (in thousands):

 

Operating lease liabilities

 

 

 

 

Non-current portion included in other long-term liabilities

 

$

8,388

 

Total operating lease liabilities

 

$

8,388

 

 

11


 

The components of lease costs, which were included in operating expenses in the Company’s statements of operations and comprehensive loss for the three months ended March 31, 2019, were as follows (in thousands):

 

Operating lease cost

 

$

280

 

Variable cost

 

 

87

 

Total lease costs

 

$

367

 

As of March 31, 2019, the maturities of the Company’s operating lease liabilities are as follows (in thousands):

 

Fiscal Year Ending December 31,

 

 

 

 

2019 (remaining 9 months)

 

$

503

 

2020

 

 

1,233

 

2021

 

 

1,270

 

2022

 

 

1,308

 

2023

 

 

1,348

 

Thereafter

 

 

8,304

 

Total lease payments

 

 

13,966

 

Less:

 

 

 

 

Present value adjustment

 

 

5,578

 

Operating lease liabilities

 

$

8,388

 

Operating lease liabilities are based on the net present value of the remaining lease payments over the remaining lease term. In determining the present value of lease payments, the Company used its incremental borrowing rate based on the information available at the lease commencement date. As of March 31, 2019, the remaining lease term is 10.3 years and the discount rate used to determine the operating lease liability was 10.0%.

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 March 31, 2019, the Company had $12.6 million of non-cancelable purchase obligations under these agreements.

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 three months ended March 31, 2018. The Company did not recognize any milestone expense during the three months ended March 31, 2019. Milestone payments are not creditable against royalties. As of March 31, 2019, 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 AK002, which was amended in September 2016. Under the terms of the agreement, the Company has made upfront and milestone payments of $0.3 million through March 31, 2019 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

 

12


 

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 March 31, 2019 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 March 31, 2019.

7. Stock-Based Compensation

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

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Research and development

 

$

1,053

 

 

$

168

 

General and administrative

 

 

1,781

 

 

 

446

 

Total

 

$

2,834

 

 

$

614

 

No income tax benefits for stock-based compensation expense have been recognized for the three months ended March 31, 2019 and 2018 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 Company’s 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 March 31, 2019, the maximum number of shares that may be added to the 2018 Plan pursuant to the preceding clause is 5,531,222 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

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Risk-free interest rate

 

 

2.55

%

 

 

2.48

%

Expected volatility

 

 

69.02

%

 

 

77.82

%

Expected dividend yield

 

 

 

 

 

 

Expected term (in years)

 

 

6.08

 

 

 

5.93

 

 

The Company’s stock option activity during the three months ended March 31, 2019 is summarized as follows (number of shares in thousands):

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

Average

 

 

 

Options

 

 

Exercise

 

 

 

Outstanding

 

 

Price

 

Balance at December 31, 2018

 

 

7,811

 

 

$

8.60

 

Granted

 

 

23

 

 

$

41.84

 

Exercised

 

 

(968

)

 

$

0.59

 

Forfeited

 

 

(21

)

 

$

40.37

 

Balance at March 31, 2019

 

 

6,845

 

 

$

9.75

 

Options exercisable

 

 

2,979

 

 

$

1.40

 

Options vested and expected to vest

 

 

6,808