Quarterly Report (10-q)

Date : 11/07/2019 @ 9:08PM
Source : Edgar (US Regulatory)
Stock : Proteostasis Therapeutics Inc (PTI)
Quote : 3.55  -0.24 (-6.33%) @ 4:59AM
After Hours
Last Trade
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Quarterly Report (10-q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

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

For the quarterly period ended September 30, 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: 001-37695

 

Proteostasis Therapeutics, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

20-8436652

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

80 Guest Street, Suite 500

Boston, Massachusetts 02135

(Address of principal executive office) (Zip Code)

Registrant’s telephone number, including area code: (617) 225-0096

 

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

 

Title of each class

Trading Symbol

Name of exchange on which registered

Common stock, $0.001

PTI

Nasdaq

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 5, 2019, there were 51,128,976 shares of the registrant’s Common Stock, $0.001 par value per share, outstanding.

 

 


 

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “aim,” “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:

 

our estimates regarding our clinical trials, including, without limitation, the timing of the initiation of, completion of, enrollment in, and data from our trials;

 

our estimates regarding anticipated filing of INDs and/or amended protocols for nominated drug candidates;

 

our estimates regarding expenses, future revenues and capital requirements;

 

our ability to obtain and maintain regulatory approval of our combination solutions, for any indication, and the labeling under any approval we may obtain;

 

our ability to obtain and maintain sanctioning or favorable scoring of our clinical trials or protocols from other third parties, such as the Therapeutics Development Network of the Cystic Fibrosis Foundation or the Clinical Trial Network of the European Cystic Fibrosis Society;

 

intense competition in the cystic fibrosis market and the ability of our competitors, many of whom have greater resources than we do, to run clinical trials that may limit the patients available for our trials, and to offer different, better or lower cost therapeutic alternatives than our product candidates;

 

anticipated regulatory developments in the United States and foreign countries;

 

our plans to develop and commercialize our combination solutions, including expected preclinical and clinical results and timing;

 

our ability to obtain and maintain intellectual property protection for our proprietary assets;

 

the size and growth of the potential markets for our combination solutions, and our ability to serve those markets;

 

the rate and degree of market acceptance of our combination solutions for any indication;

 

the benefits of FDA and European Commission designations such as, including, without limitation, Fast Track, Orphan Drug and Breakthrough Therapy;

 

our ability to obtain additional financing;

 

our ability to remain listed on a national securities exchange;

 

the loss of key scientific or management personnel; and

 

other forward-looking statements discussed elsewhere in this report.

Any forward-looking statements in this report reflect our current views with respect to future events and with respect to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those described under Part II, Item 1A. Risk Factors and elsewhere in this report. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

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

Kalydeco, Orkambi, Symdeko/Symkevi and Trikafta are trademarks of Vertex Pharmaceuticals Incorporated.

2


Proteostasis Therapeutics, Inc.

INDEX

 

 

 

 

 

Page

PART I – FINANCIAL INFORMATION

Item 1.

 

Condensed Financial Statements (unaudited):

 

 

 

 

Condensed Balance Sheets as of September 30, 2019 and December 31, 2018

 

4

 

 

Condensed Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2019 and 2018

 

5

 

 

Condensed Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2019 and 2018

 

6

 

 

Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018

 

7

 

 

Notes to Condensed Financial Statements

 

8

Item 2.

 

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

 

19

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

29

Item 4.

 

Management’s Evaluation of our Disclosure Controls and Procedures

 

29

 

PART II – OTHER INFORMATION

Item 1.

 

Legal Proceedings

 

30

Item 1A.

 

Risk Factors

 

30

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

66

Item 5.

 

Other Information

 

66

Item 6.

 

Exhibits

 

67

 

 

 

 

 

Signatures

 

68

 

3


PART I — FINANCIAL INFORMATION

PROTEOSTASIS THERAPEUTICS, INC.

CONDENSED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

September 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

35,304

 

 

$

28,810

 

Short-term investments

 

 

42,457

 

 

 

89,569

 

Prepaids and other current assets

 

 

1,933

 

 

 

2,481

 

Total current assets

 

 

79,694

 

 

 

120,860

 

Operating lease, right-of-use asset

 

 

12,940

 

 

 

13,849

 

Property and equipment, net

 

 

464

 

 

 

605

 

Other assets

 

 

112

 

 

 

 

Restricted cash

 

 

828

 

 

 

828

 

Total assets

 

$

94,038

 

 

$

136,142

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

4,068

 

 

$

1,884

 

Accrued expenses

 

 

6,377

 

 

 

5,661

 

Operating lease liabilities

 

 

1,129

 

 

 

1,056

 

Total current liabilities

 

 

11,574

 

 

 

8,601

 

Derivative liability

 

 

3

 

 

 

3

 

Operating lease liabilities, net of current portion

 

 

12,340

 

 

 

13,196

 

Total liabilities

 

 

23,917

 

 

 

21,800

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares

   issued and outstanding as of September 30, 2019 and December 31, 2018

 

 

 

 

 

 

Common stock, $0.001 par value; 125,000,000 shares authorized;

   51,128,976 and 50,808,422 shares issued and outstanding as of

   September 30, 2019 and December 31, 2018, respectively

 

 

51

 

 

 

51

 

Additional paid-in capital

 

 

394,858

 

 

 

391,825

 

Accumulated other comprehensive income

 

 

16

 

 

 

1

 

Accumulated deficit

 

 

(324,804

)

 

 

(277,535

)

Total stockholders’ equity

 

 

70,121

 

 

 

114,342

 

Total liabilities and stockholders’ equity

 

$

94,038

 

 

$

136,142

 

 

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

 

 

4


PROTEOSTASIS THERAPEUTICS, INC.

CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenue

 

$

 

 

$

1,055

 

 

$

5,000

 

 

$

2,840

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

10,145

 

 

 

15,591

 

 

 

43,217

 

 

 

36,595

 

General and administrative

 

 

3,154

 

 

 

4,150

 

 

 

10,781

 

 

 

11,931

 

Total operating expenses

 

 

13,299

 

 

 

19,741

 

 

 

53,998

 

 

 

48,526

 

Loss from operations

 

 

(13,299

)

 

 

(18,686

)

 

 

(48,998

)

 

 

(45,686

)

Interest income

 

 

224

 

 

 

171

 

 

 

879

 

 

 

530

 

Other income, net

 

 

242

 

 

 

87

 

 

 

850

 

 

 

224

 

Net loss

 

$

(12,833

)

 

$

(18,428

)

 

$

(47,269

)

 

$

(44,932

)

Net loss per share—basic and diluted

 

$

(0.25

)

 

$

(0.50

)

 

$

(0.93

)

 

$

(1.26

)

Weighted average common shares outstanding—basic and

   diluted

 

 

51,099,307

 

 

 

36,694,957

 

 

 

51,058,339

 

 

 

35,734,159

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on investments

 

 

(17

)

 

 

5

 

 

 

15

 

 

 

(5

)

Comprehensive loss

 

$

(12,850

)

 

$

(18,423

)

 

$

(47,254

)

 

$

(44,937

)

 

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

 

 

5


PROTEOSTASIS THERAPEUTICS, INC.

CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share amounts)

(Unaudited)

 

 

 

Common Stock

 

 

Additional

Paid-

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

in Capital

 

 

Income

 

 

Deficit

 

 

Equity

 

Balances at June 30, 2019

 

 

51,099,307

 

 

$

51

 

 

$

393,872

 

 

$

33

 

 

$

(311,971

)

 

$

81,985

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

961

 

 

 

 

 

 

 

 

 

961

 

Issuance of common stock pursuant

   to employee stock purchase plan

 

 

29,669

 

 

 

 

 

 

25

 

 

 

 

 

 

 

 

 

25

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

(17

)

 

 

 

 

 

(17

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,833

)

 

 

(12,833

)

Balances at September 30, 2019

 

 

51,128,976

 

 

$

51

 

 

$

394,858

 

 

$

16

 

 

$

(324,804

)

 

$

70,121

 

 

 

 

Common Stock

 

 

Additional

Paid-

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

in Capital

 

 

Income

 

 

Deficit

 

 

Equity

 

Balances at December 31, 2018

 

 

50,808,422

 

 

$

51

 

 

$

391,825

 

 

$

1

 

 

$

(277,535

)

 

$

114,342

 

Exercise of stock options

 

 

2,543

 

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

3

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

2,710

 

 

 

 

 

 

 

 

 

2,710

 

Issuance of common stock for payment of

   consulting services

 

 

102,302

 

 

 

 

 

 

242

 

 

 

 

 

 

 

 

 

242

 

Issuance of common stock pursuant

   to employee stock purchase plan

 

 

52,284

 

 

 

 

 

 

78

 

 

 

 

 

 

 

 

 

78

 

Vesting of restricted stock units

 

 

163,425

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

15

 

 

 

 

 

 

15

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(47,269

)

 

 

(47,269

)

Balances at September 30, 2019

 

 

51,128,976

 

 

$

51

 

 

$

394,858

 

 

$

16

 

 

$

(324,804

)

 

$

70,121

 

 

 

 

Common Stock

 

 

Additional

Paid-

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

in Capital

 

 

Income

 

 

Deficit

 

 

Equity

 

Balances at June 30, 2018

 

 

36,635,902

 

 

$

37

 

 

$

298,515

 

 

$

(12

)

 

$

(242,207

)

 

$

56,333

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

855

 

 

 

 

 

 

 

 

 

855

 

Issuance of common stock for payment of

   consulting services

 

 

61,046

 

 

 

 

 

 

170

 

 

 

 

 

 

 

 

 

170

 

Issuance of common stock related to

   at-the-market offering program, net

 

 

 

 

 

 

 

 

(28

)

 

 

 

 

 

 

 

 

(28

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

5

 

 

 

 

 

 

5

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(18,428

)

 

 

(18,428

)

Balances at September 30, 2018

 

 

36,696,948

 

 

$

37

 

 

$

299,512

 

 

$

(7

)

 

$

(260,635

)

 

$

38,907

 

 

 

 

Common Stock

 

 

Additional

Paid-

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

in Capital

 

 

Loss

 

 

Deficit

 

 

Equity

 

Balances at December 31, 2017

 

 

34,416,088

 

 

$

35

 

 

$

285,583

 

 

$

(2

)

 

$

(216,808

)

 

$

68,808

 

Exercise of stock options

 

 

8,775

 

 

 

 

 

 

21

 

 

 

 

 

 

 

 

 

21

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

2,697

 

 

 

 

 

 

 

 

 

2,697

 

Issuance of common stock for payment of

   consulting services

 

 

155,153

 

 

 

 

 

 

704

 

 

 

 

 

 

 

 

 

704

 

Issuance of common stock pursuant

   to employee stock purchase plan

 

 

6,114

 

 

 

 

 

 

25

 

 

 

 

 

 

 

 

 

25

 

Issuance of common stock related to

   at-the-market offering program, net

 

 

2,110,818

 

 

 

2

 

 

 

10,482

 

 

 

 

 

 

 

 

 

10,484

 

Impact of adoption of ASC 606

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,105

 

 

 

1,105

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(5

)

 

 

 

 

 

(5

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(44,932

)

 

 

(44,932

)

Balances at September 30, 2018

 

 

36,696,948

 

 

$

37

 

 

$

299,512

 

 

$

(7

)

 

$

(260,635

)

 

$

38,907

 

 

 

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

 

6


PROTEOSTASIS THERAPEUTICS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(47,269

)

 

$

(44,932

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,059

 

 

 

1,428

 

Accretion of short-term investments

 

 

(850

)

 

 

(205

)

Stock-based compensation expense

 

 

2,710

 

 

 

2,697

 

Stock issued for consulting services

 

 

242

 

 

 

704

 

Change in fair value of derivative liability

 

 

 

 

 

(22

)

Loss on disposal of property and equipment

 

 

 

 

 

41

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaids and other current assets

 

 

548

 

 

 

(553

)

Other assets

 

 

(112

)

 

 

27

 

Accounts payable

 

 

2,184

 

 

 

47

 

Accrued expenses

 

 

716

 

 

 

2,283

 

Operating lease liabilities

 

 

(783

)

 

 

(1,019

)

Net cash used in operating activities

 

 

(41,555

)

 

 

(39,504

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of short-term investments

 

 

(63,040

)

 

 

(30,604

)

Proceeds received from maturities of short-term investments

 

 

111,017

 

 

 

48,850

 

Purchases of property and equipment

 

 

(9

)

 

 

(406

)

Net cash provided by investing activities

 

 

47,968

 

 

 

17,840

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock related to at-the-market offering program, net

 

 

 

 

 

10,546

 

Proceeds from exercise of stock options

 

 

3

 

 

 

21

 

Proceeds from issuance of common stock pursuant to employee stock purchase plan

 

 

78

 

 

 

25

 

Deferred offering costs

 

 

 

 

 

(62

)

Net cash provided by financing activities

 

 

81

 

 

 

10,530

 

Net increase (decrease) in cash, cash equivalents and restricted cash

 

 

6,494

 

 

 

(11,134

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

29,638

 

 

 

31,674

 

Cash, cash equivalents and restricted cash at end of period

 

$

36,132

 

 

$

20,540

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Addition of operating lease, right-of-use asset

 

$

 

 

$

14,962

 

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

 

7


PROTEOSTASIS THERAPEUTICS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

 

1.

Nature of the Business

Proteostasis Therapeutics, Inc. (the “Company”) was incorporated in Delaware on December 13, 2006. The Company is a clinical stage biopharmaceutical company committed to the discovery and development of novel therapeutics to treat cystic fibrosis (“CF”) and other diseases caused by an imbalance in the proteostasis network, a set of pathways that control protein biosynthesis, folding, trafficking and clearance. The Company focuses on identifying therapies that restore protein function. CF is a disease caused by defects in the function or abundance of cystic fibrosis transmembrane conductance regulator (“CFTR”). The Company’s CF focused pipeline consists of novel CFTR modulators including correctors, potentiators and amplifiers. Upon discovery of amplifiers, a novel class of CFTR modulators, the Company has exploited its novel mechanism of action as a drug screening tool and has subsequently identified correctors and potentiators to be developed as part of combination therapies. Investigational agents representative of all three classes of CFTR modulators are currently in clinical development and include PTI-801, a third generation CFTR corrector, PTI-808, a CFTR potentiator, and PTI-428, a CFTR amplifier. The Company is pursuing proprietary dual combination of PTI-801 and PTI-808, and proprietary triple combination of PTI-801, PTI-808 and PTI-428 as product opportunities. The Company is developing and, if approved, intends to commercialize their own proprietary combination therapies for CF patients who have at least one F508del mutation, representing the majority of the patient population.

The Company is subject to risks and uncertainties common to early-stage companies in the biotechnology industry, including, but not limited to, development by competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, compliance with government regulations and ability to secure additional capital to fund operations. Product candidates currently under development will require significant additional research and development efforts, including extensive preclinical and clinical testing and regulatory approval prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel and infrastructure and extensive compliance-reporting capabilities. Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales.

In accordance with ASC 205-40, Going Concern (“ASC 205-40”), the Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financial statements are issued. The Company has incurred losses and negative cash flows from operations since its inception. As of September 30, 2019, the Company had an accumulated deficit of $324.8 million. During the nine months ended September 30, 2019, the Company incurred losses of $47.3 million and used $41.6 million of cash in operations. The Company expects that its operating losses and negative cash flows will continue for the foreseeable future. The Company expects that its cash, cash equivalents and short-term investments of $77.8 million will be sufficient to fund its operating expenses and capital requirements, based upon its current operating plan, for at least 12 months from the date that these financial statements are issued. The Company will seek additional funding through public financings, debt financings, collaboration agreements, strategic alliances and licensing arrangements. Although the Company has been successful in raising capital in the past, there is no assurance that it will be successful in obtaining such additional financing on terms acceptable to the Company, if at all, and the Company may not be able to enter into collaborations or other arrangements. If the Company is unable to obtain funding, the Company could be forced to delay, reduce or eliminate its research and development programs, product portfolio expansion or commercialization efforts, which could adversely affect its business prospects, or the Company may be unable to continue operations.

In May 2019, the Company entered into a sales agreement with H.C. Wainwright & Co., LLC (“HCW”) with respect to an at-the-market (“ATM”) offering program under which the Company may issue and sell, from time to time at its sole discretion, shares of its common stock, in an aggregate offering amount of up to $56.6 million (the “HCW ATM program”). HCW acts as the Company’s sales agent and will use commercially reasonable efforts to sell shares of common stock from time to time, based upon instruction from the Company. Common stock will be sold at prevailing market prices at the time of the sale; and as a result, prices may vary. The Company will pay HCW up to 3% of the gross proceeds from any common stock sold through the sales agreement. As of September 30, 2019, the Company has not sold any shares of its common stock under the HCW ATM program.

In the fourth quarter of 2018, the Company completed a follow-on public offering whereby the Company sold 12,650,000 shares of common stock at a public offering price of $6.75 per share, which included 1,650,000 shares issued pursuant to the exercise by the underwriters of their option to purchase additional shares of common stock. The Company received net proceeds of $80.1 million, after deducting underwriting discounts and commissions and other offering expenses.

In March 2018, the Company entered into a sales agreement with Leerink Partners LLC (“Leerink”) with respect to an ATM offering program under which the Company could have issued and sold, from time to time at its sole discretion, shares of its common stock, in an aggregate offering amount of up to $50.0 million. As of March 31, 2019, the Company had sold an aggregate of 3,475,166 shares of its common stock for total net proceeds of approximately $21.6 million under the ATM program. On March 28, 2019 the Company delivered a notice of termination of the ATM offering program to Leerink, effective as of April 7, 2019. 

 

8


2.

Summary of Significant Accounting Policies

Unaudited Interim Financial Information

The condensed balance sheet as of December 31, 2018 was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). The accompanying condensed financial statements as of September 30, 2019 and for the three and nine months ended September 30, 2019 are unaudited and have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The Company believes that the disclosures are adequate to make the information presented not misleading. These unaudited condensed financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto for the year ended December 31, 2018 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 8, 2019. In the opinion of management, all adjustments, consisting only of normal recurring adjustments as necessary, for the fair statement of the Company’s financial position as of September 30, 2019, results of its operations for the three and nine months ended September 30, 2019, and cash flows for the nine months ended September 30, 2019 have been made. The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results of operations to be expected for the year ending December 31, 2019.

Summary of Significant Accounting Policies  

The Company’s significant accounting policies, which are disclosed in the audited consolidated financial statements for the year ended December 31, 2018 and the notes thereto are included in the Company’s Annual Report on Form 10-K that was filed with the SEC on March 8, 2019.  

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Significant estimates and assumptions reflected in these financial statements include, but are not limited to, revenue recognition, the accrual for research and development expenses and the valuation of common stock, and the derivative liability. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates.

Revenue Recognition

Effective January 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), using the modified retrospective transition method. Under this method, results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with ASC 605. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments.

Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue at a point in time, or over time, as the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that it will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract, determines those that are performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

The Company enters into licensing agreements which are within the scope of ASC 606, under which it may exclusively license rights to research, develop, manufacture and commercialize its product candidates to third parties. The terms of these arrangements typically include payment to the Company of one or more of the following: nonrefundable, upfront license fees; reimbursement of certain costs; customer option exercise fees; development, regulatory and commercial milestone payments; and royalties on net sales of licensed products.

9


As part of the accounting for these arrangements, the Company must use significant judgment to determine: a) the number of performance obligations based on the determination under step (ii) above; b) the transaction price under step (iii) above; and c) the stand-alone selling price for each performance obligation identified in the contract for the allocation of transaction price in step (iv) above. The Company uses judgment to determine whether milestones or other variable consideration should be included in the transaction price as described further below. The transaction price is allocated to each performance obligation on a relative stand-alone selling price basis, for which the Company recognizes revenue as or when the performance obligations under the contract are satisfied. In developing the stand-alone price for a performance obligation, the Company considers applicable market conditions and relevant entity-specific factors, including factors that were contemplated in negotiating the agreement with the customer and estimated costs. The Company validates the stand-alone selling price for performance obligations by evaluating whether changes in the key assumptions used to determine the stand-alone selling prices will have a significant effect on the allocation of transaction price between multiple performance obligations.  The Company records any amounts received prior to satisfying the revenue recognition criteria as deferred revenue.  Amounts recognized as revenue, but not yet received or invoiced are recorded as current assets.

Exclusive Licenses

 

If the license to the Company’s intellectual property is determined to be distinct from the other promises or performance obligations identified in the arrangement, the Company recognizes revenue from nonrefundable, upfront fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license. In assessing whether a promise or performance obligation is distinct from the other promises, the Company considers factors such as the research, development, manufacturing and commercialization capabilities of the collaboration partner and the availability of the associated expertise in the general marketplace. In addition, the Company considers whether the collaboration partner can benefit from a promise for its intended purpose without the receipt of the remaining promise, whether the value of the promise is dependent on the unsatisfied promise, whether there are other vendors that could provide the remaining promise, and whether it is separately identifiable from the remaining promise. For licenses that are combined with other promises, the Company assesses the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition. The measure of progress, and thereby periods over which revenue should be recognized, are subject to estimates by management and may change over the course of the research and development and licensing agreement. Such a change could have a material impact on the amount of revenue the Company records in future periods.

Research and Development Services

The promises under the Company’s collaboration and license agreements generally include research and development services to be performed by the Company on behalf of the collaboration partner. As the provision of research and development services is a part of the Company’s central operations, when the Company is principally responsible for the performance of these services under the agreements, the Company recognizes revenue on a gross basis for research and development services in accordance with the ASC 606 framework described above.

Customer Options

 

If an arrangement is determined to contain customer options that allow the customer to acquire additional goods or services, the goods and services underlying the customer options are not considered to be performance obligations at the outset of the arrangement, as they are contingent upon option exercise. The Company evaluates the customer options for material rights, or options to acquire additional goods or services for free or at a discount. If the customer options are determined to represent a material right, the material right is recognized as a separate performance obligation at the outset of the arrangement. The Company allocates the transaction price to material rights based on the relative standalone selling price, which is determined based on the identified discount and the probability that the customer will exercise the option. Amounts allocated to a material right are not recognized as revenue until, at the earliest, the option is exercised.

 

Milestone Payments

 

At the inception of each arrangement that includes development milestone payments, the Company evaluates whether the milestones or other variable consideration should be included in the transaction price. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the control of the Company or the licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. The Company evaluates factors such as the scientific, clinical, regulatory, commercial, and other risks that must be overcome to achieve the particular milestone in making this assessment. There is considerable judgment involved in determining whether it is probable that a significant revenue reversal would not occur. At the end of each subsequent reporting period, the Company reevaluates the probability of achievement of all milestones subject to constraint and, if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues and earnings in the period of adjustment.

 

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Royalties

 

For arrangements that include sales-based royalties, including milestone payments based on a level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, the Company has not recognized any royalty revenue resulting from any of its licensing arrangements. For a complete discussion of accounting for collaboration revenues, see Note 8 - Significant Agreements.

Recently Issued and Adopted Accounting Pronouncements

In June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). The new standard simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. The new standard was effective for the Company on January 1, 2019. The adoption of this standard did not have a material impact on the Company’s financial position or results of operations.

Recently Issued Accounting Pronouncements

In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). The new standard modifies the disclosure requirements on fair value measure in Topic 820, including removals of existing disclosures, modifications of existing disclosures, and additions of new disclosures. Certain amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair values measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim of annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted for any removed or modified disclosure. The new standard is effective for the Company on January 1, 2020. The Company is currently evaluating the impact that the adoption of ASU 2018-13 will have on its results of operations.

3.

Short-Term Investments

The following table summarizes the Company’s short-term investments as of September 30, 2019 and December 31, 2018 (in thousands):

 

 

 

September 30, 2019

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

U.S government-sponsored enterprise securities

 

$

27,500

 

 

$

11

 

 

$

 

 

$

27,511

 

U.S. treasury securities

 

 

14,941

 

 

 

5

 

 

 

 

 

 

14,946

 

 

 

$

42,441

 

 

$

16

 

 

$

 

 

$

42,457

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

U.S government-sponsored enterprise securities

 

$

41,478

 

 

$

2

 

 

$

(3

)

 

$

41,477

 

U.S. treasury securities

 

 

48,090

 

 

 

3

 

 

 

(1

)

 

 

48,092

 

 

 

$

89,568

 

 

$

5

 

 

$

(4

)

 

$

89,569

 

 

The Company did not have any realized gains or losses on its short-term investments for the three and nine months ended September 30, 2019 and 2018. There were no other-than-temporary impairments recognized for the three and nine months ended September 30, 2019 and 2018.

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4.Fair Value of Financial Assets and Liabilities

The following tables present information about the Company’s financial assets and liabilities measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values (in thousands):

 

 

 

Fair Value Measurements as of September 30, 2019 using:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

32,351

 

 

$

 

 

$

 

 

$

32,351

 

U.S. treasury securities

 

 

 

 

 

1,996

 

 

 

 

 

 

1,996

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government-sponsored enterprise securities

 

 

 

 

 

27,511

 

 

 

 

 

 

27,511

 

U.S. treasury securities

 

 

 

 

 

14,946

 

 

 

 

 

 

14,946

 

 

 

$

32,351

 

 

$

44,453

 

 

$

 

 

$

76,804

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liability

 

$

 

 

$

 

 

$

3

 

 

$

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements as of December 31, 2018 using:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

26,806

 

 

$