Property and Equipment, Net
Property and equipment, net consist of the following (in thousands):
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Construction-in-progress
|
|
|
986
|
|
|
|
—
|
|
Leasehold improvements
|
|
|
3
|
|
|
|
—
|
|
Furniture & fixtures
|
|
|
66
|
|
|
|
—
|
|
Computer equipment and software
|
|
|
37
|
|
|
|
11
|
|
Laboratory equipment
|
|
|
645
|
|
|
|
214
|
|
Total property and equipment
|
|
|
1,737
|
|
|
|
225
|
|
Accumulated depreciation and amortization
|
|
|
(105
|
)
|
|
|
(25
|
)
|
Property and equipment, net
|
|
$
|
1,632
|
|
|
$
|
200
|
|
Depreciation expense was $38 thousand and $80 thousand for the three and nine months ended September 30, 2018 and $5 thousand and $9 thousand for the three and nine months ended September 30, 2017, respectively.
11
Accrued Expenses a
n
d Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued pre-clinical expenses
|
|
$
|
252
|
|
|
$
|
257
|
|
Accrued professional fees
|
|
|
150
|
|
|
|
77
|
|
Accrued payroll and benefits
|
|
|
347
|
|
|
|
10
|
|
Accrued taxes
|
|
|
115
|
|
|
|
103
|
|
Accrued leasehold improvement liabilities
|
|
|
582
|
|
|
|
—
|
|
Other liabilities
|
|
|
92
|
|
|
|
—
|
|
Total
|
|
$
|
1,538
|
|
|
$
|
447
|
|
5
.
|
Commitments and Contingencies
|
Significant Contracts and Agreements
Lease Agreement
In May 2016, the Company signed an operating lease for laboratory and office space that commenced in June 2016 and expired on October 31, 2017 (the
“
2016 Lease
”
). In June 2016, the Company entered into an amendment to the 2016 Lease which amended the timing of the rent payment from one single payment to 17 equal monthly installments. In February 2017, the Company entered into a second amendment to the 2016 Lease, which extended the expiration date of the 2016 Lease to October 31, 2018. In May 2018, the Company entered into a third amendment to the 2016 Lease which further extended the expiration date of the 2016 Lease to February 28, 2026. In October 2018, the Company entered into a fourth amendment to the 2016 Lease
which expanded our office and lab facilities by an additional 6,003 square feet
.
The Company’s future minimum operating lease payments, including the fourth amendment to the 2016 Lease, were as follows (in thousands):
|
|
Operating
Leases
|
|
2018 (remaining three months)
|
|
$
|
28
|
|
2019
|
|
|
337
|
|
2020
|
|
|
388
|
|
2021
|
|
|
396
|
|
2022
|
|
|
404
|
|
Thereafter
|
|
|
1,334
|
|
Future minimum operating lease payments
|
|
$
|
2,887
|
|
|
|
|
|
|
|
|
|
|
|
The Company recorded $60 thousand and $125 thousand in rent expense for the three and nine months ended September 30, 2018, and $20 thousand and $59 thousand for the three and nine months ended September 30, 2017, respectively.
Conversion to C-Corporation
On March 31, 2017, the Company converted from a limited liability company to a C-Corporation. Upon the conversion, all outstanding preferred units and common units were converted on a 1-to-1 basis into shares of preferred stock and common stock, respectively.
12
Stock Split and I
ncrease in Authorized Shares
On September 5, 2017, in connection with our IPO, the Company
’
s board of directors (the
“
Board
”
) approved a 1-to-4.5 forward stock split, in the form of a stock dividend, of all outstanding shares of common stock and preferred stock. Except as otherwise noted, all references to share and per share amounts related to common stock, common units, preferred stock, preferred units and stock options in these condensed consolidated financial statements reflect the stock split. The par value per share of $.00001 of our capital stock was not adjusted as a result of the stock split. Additionally, the Board approved an increase in authorized shares of common stock and preferred stock to 80,000,000 shares and 20,000,000 shares, respectively. The stock split and the increase in the number of authorized common and preferred shares occurred immediately prior to the effectiveness of our registration statement on Form S-1 (File No. 333-220085) relating to the IPO on September 19, 2017.
Initial Public Offering
On September 22, 2017, the Company completed its initial public offering of 4,554,000 shares of its common stock at a price to the public of $10.00 per share, which includes the sale of 594,000 shares of the Company
’
s common stock pursuant to the underwriters
’
full exercise of their option to purchase additional shares. The total proceeds from the offering to the Company, net of underwriting discounts and commissions of approximately $3.2 million, were approximately $42.3 million. After deducting offering expenses payable by the Company of approximately $1.6 million, net proceeds to the Company were approximately $40.7 million. Immediately prior to the closing of the IPO, all outstanding shares of the Company
’
s preferred stock converted into 2,061,773 shares of common stock on a 1-to-1 basis.
Sale of Common Stock
On August 25, 2017, following the completion of the Sun Pharma Offering (as further described below), Daniel S. Janney, a member of our board of directors, purchased 130,590 shares of our common stock at the same price per share paid by Sun Pharma, $7.66 per share, through an investment entity owned and controlled by a board member for a total consideration of approximately $1.0 million.
On November 1, 2017, the Company entered into a stock purchase agreement (the “Agreement”) with the Epidermolysis Bullosa Medical Research Foundation, a California not-for-profit corporation (“EBMRF”), and EB Research Partnership, Inc., a New York not-for-profit corporation (“EBRP” and together with EBMRF, the “Purchasers”), pursuant to which the Company issued and sold to the Purchasers an aggregate of 70,000 shares of the Company’s common stock, par value $0.00001 per share, for a purchase price of $11.00 per share, resulting in aggregate gross proceeds to the Company of $770,000 (the “Transaction”). The proceeds are to be used exclusively to complete the research plan pursuant to the Agreement.
T
here are redemption features whereby
the Company shall
repurchase all or a portion of the shares at a purchase price of $11.00 per share or the closing trading price of the common stock on the redemption request date, whichever is higher, should the
Company not commence work on or before September 1, 2018 or cease commercially reasonable efforts
.
T
he Company did commence work prior to
September 1, 2018.
As the Company does not intend to cease
commercially reasonable efforts,
the remaining redemption feature is within the control of the Company and consequently the issued common stock is classified as permanent equity.
The offer, sale and issuance of the shares of the Company under the Agreement are exempt from registration pursuant to Rule 506 of Regulation D and Section 4(a)(2) of the Securities Act of 1933, as amended.
The Transaction closed on November 2, 2017.
On August 16, 2018, the Company entered into a stock purchase agreement with Frazier Life Sciences for the private placement of 625,000 shares of the Company’s common stock at $16.00 per share. The private placement yielded gross proceeds of $10.0 million and closed on August 17, 2018. Pursuant to the terms of the purchase agreement, the Company filed a registration statement with the SEC which became effective on October 12, 2018.
Shares Outstanding
There were 10,978,916 and 10,307,247 shares of common stock outstanding at September 30, 2018 and December 31, 2017, respectively. No shares of preferred stock were outstanding at September 30, 2018 or December 31, 2017.
Issuance of Preferred Stock and Conversion of Convertible Promissory Notes and Related Party Convertible Promissory Notes
On August 8, 2017, the Company issued 914,107 shares of Series A Preferred Stock to a single investor (“Sun Pharma”) at a purchase price of $7.66 per share for aggregate proceeds of approximately $7.0 million (the “Sun Pharma
13
Offering”). Concurrently with the issuance of the Series A Preferred Stock,
and as further described in our Annual Report on Form 10-K for the year ended December 31, 2017, previously issued convertible promissory notes
plus accrued interest were automatically converted into shares of preferred stock. As the
conversion price per s
hare of preferred stock was lower than the market price of each share of preferred stock on the date of conversion, an interest expense of $3.2 million was recorded upon conversion representing
a
beneficial conversion feature
.
The following table outlines the conversion on August 8, 2017 of the convertible promissory notes into shares of preferred stock (in thousands except share and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
Fair
|
|
|
Fair
|
|
|
Loss on
Extinguishment
of Convertible
|
|
|
|
|
|
|
|
Accrued
|
|
|
|
|
|
|
Price Per
|
|
|
Shares of
|
|
|
Shares of
|
|
|
Date of
|
|
|
Value
|
|
|
Value
|
|
|
Promissory
|
|
|
|
Principal
|
|
|
Interest
|
|
|
Total
|
|
|
Share
(1)
|
|
|
Series A-1
|
|
|
Series A-2
|
|
|
Conversion
|
|
|
Series A-1
|
|
|
Series A-2
|
|
|
Notes
|
|
Convertible promissory notes
|
|
$
|
2,444
|
|
|
$
|
72
|
|
|
$
|
2,516
|
|
|
$
|
4.14
|
|
(1)
|
|
607,743
|
|
|
|
—
|
|
|
$
|
7.66
|
|
|
$
|
4,654
|
|
|
$
|
—
|
|
|
$
|
(2,138
|
)
|
Related party convertible
promissory notes
|
|
|
948
|
|
|
|
32
|
|
|
|
980
|
|
|
$
|
4.14
|
|
(1)
|
|
236,619
|
|
|
|
—
|
|
|
$
|
7.66
|
|
|
|
1,812
|
|
|
|
—
|
|
|
|
(832
|
)
|
Related party convertible
promissory notes—June
notes
|
|
|
750
|
|
|
|
8
|
|
|
|
758
|
|
|
$
|
6.13
|
|
(2)
|
|
—
|
|
|
|
123,691
|
|
|
$
|
7.66
|
|
|
|
—
|
|
|
|
947
|
|
|
|
(189
|
)
|
Total related party promissory
notes
|
|
|
1,698
|
|
|
|
40
|
|
|
|
1,738
|
|
|
|
|
|
|
|
236,619
|
|
|
|
123,691
|
|
|
|
|
|
|
|
1,812
|
|
|
|
947
|
|
|
|
(1,021
|
)
|
Total
|
|
$
|
4,142
|
|
|
$
|
112
|
|
|
$
|
4,254
|
|
|
|
|
|
|
|
844,362
|
|
|
|
123,691
|
|
|
|
|
|
|
$
|
6,466
|
|
|
$
|
947
|
|
|
$
|
(3,159
|
)
|
(1)
|
The conversion price was determined by dividing the target valuation of $16 million by the outstanding shares of 3,863,547 immediately prior to the issuance of the Series A on August 8, 2017.
|
(2)
|
The conversion price was determined to be 80% of the $7.66 sales price per share of the Series A shares issued on August 8, 2017.
|
Common Stock
The voting, dividend and liquidation rights of the holders of the common stock are subject to and qualified by the rights, powers and privileges of the holders of the preferred stock and are as follows:
Voting Rights.
The holders of shares of common stock are entitled to one vote for each share of common stock held at all meetings of stockholders and written actions in lieu of meetings. The Board shall be elected by vote of the Common Stock and the Preferred stock voting together as a single class on an as-converted basis.
Dividends.
The holders of the common stock are entitled to receive dividends, if and when declared by the Board, and all dividends shall be paid pro rata on the common stock and the preferred stock, without preference, based on the number of shares of the common stock of the holders. From inception through September 30, 2018, no dividends have been declared or paid by the Company.
Liquidation Preference.
After payment to the holders of shares of preferred stock of their liquidation preferences, the holders of the common stock are entitled to share ratably in the Company’s assets available for distribution to stockholders, in the event of any voluntary or involuntary liquidation, dissolution, winding up, consolidation or merger of the Company or upon the occurrence of a deemed liquidation event.
14
7.
|
Significant Agreements
|
Clinical Supply Agreement
The Company has entered into various product manufacturing and clinical supply agreements with Contract Manufacturing Organizations (“CMOs”). The product manufacturing and clinical supply agreements provide the terms and conditions under which the CMOs will formulate, fill, inspect, package, label and test our products, KB103 and KB105 for clinical supply. The Company is obligated to make milestone payments. Additionally, certain raw materials, supplies, outsourced testing and other services for the purposes of batch production will be invoiced separately by the CMOs. The estimated remaining commitment as of September 30, 2018 under these agreements for the manufacturing of our drug product is approximately $906 thousand. The Company is also responsible for the payment of a monthly service fee for project management services for the duration of the arrangement. The Company has incurred expenses under these agreements of $762 thousand and $2.4 million for the three and nine months ended September 30, 2018, and $483 thousand and $643 thousand for the three and nine months ended September 30, 2017, respectively.
8.
|
Stock-Based Compensation
|
On September 5, 2017, the Board approved the establishment of the Krystal Biotech, Inc. 2017 IPO Plan (the
“
2017 IPO Plan
”
), which was adopted prior to the effectiveness of our registration statement on Form S-1 relating to our IPO. Under the 2017 IPO Plan, the Company may grant incentive stock options, non-qualified stock options, stock appreciation rights, dividend equivalent rights, restricted stock, and stock grants to purchase up to 900,000 shares of the Company
’
s Common Stock.
The Company granted 38,500 and 174,000 stock options during the three and nine months ended September 30, 2018, respectively, to employees and directors of the Company, and 6,750 and 71,649 stock options were granted during the three and nine months ended September 30, 2017. Options granted to employees vest ratably over a four-year period and options granted to directors of the company vest ratably over one and four-year periods. Options have a life of ten years. Stock options granted to non-employees are accounted for using the fair value method of accounting, and are periodically revalued as the options vest, and are recognized as expense over the related service period.
The following table summarizes the Company
’
s stock option activity:
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
average
|
|
|
Aggregate
|
|
|
|
Stock
|
|
average
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Options
|
|
Exercise
|
|
Contractual
|
|
|
Value
|
|
|
|
Outstanding
|
|
|
Price
|
|
|
Life (Years)
|
|
|
(In thousands)
|
|
Balance at December 31, 2017
|
|
|
185,332
|
|
|
$
|
3.91
|
|
|
|
9.0
|
|
|
$
|
|
1,224
|
|
Granted
|
|
|
174,000
|
|
|
$
|
12.90
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(4,243
|
)
|
|
$
|
2.46
|
|
|
|
|
|
|
|
|
|
|
Cancelled or forfeited
|
|
|
(19,500
|
)
|
|
$
|
14.96
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2018
|
|
|
335,589
|
|
|
$
|
7.95
|
|
|
|
9.0
|
|
|
$
|
|
3,232
|
|
Exercisable at September 30, 2018
|
|
|
65,040
|
|
|
$
|
4.27
|
|
|
|
8.4
|
|
|
$
|
|
866
|
|
Vested at September 30, 2018
|
|
|
65,040
|
|
|
$
|
4.27
|
|
|
|
8.4
|
|
|
$
|
|
866
|
|
Aggregate intrinsic value represents the difference between the closing stock price of our common stock on September 28, 2018 and the exercise price of outstanding in-the-money options.
Options for 4,243 shares of our common stock with an intrinsic value of $53 thousand were exercised during the nine months ended September 30, 2018. No options were exercised during 2017.
15
The Company has recorded aggregate stock-based compensation expense related to the issuance of stock option awards to employees and non-employees in the
condensed
consolidated
statement
s
of operations for the three
and
nine
months ended
September
30
, 2018
and 201
7
as follows (in thousands):
|
Three Months Ended September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Research and development
|
$
|
86
|
|
|
$
|
40
|
|
|
$
|
209
|
|
|
$
|
107
|
|
General and administrative
|
|
82
|
|
|
|
14
|
|
|
|
135
|
|
|
|
81
|
|
Total stock-based compensation
|
$
|
168
|
|
|
$
|
54
|
|
|
$
|
344
|
|
|
$
|
188
|
|
Stock Options Granted to Employees.
The Company recorded stock-based compensation expense related to employee’s and board member’s stock options of $159 thousand and $312 thousand for the three and nine months ended September 30, 2018, respectively, and $47 thousand and $78 thousand for the three and nine months ended September 30, 2017, respectively. The fair value of options granted to employees was estimated at the date of grant using the Black-Scholes valuation model with the following weighted-average assumptions for the three and nine months ended September 30, 2018 and 2017:
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Expected stock price volatility
|
|
80
|
%
|
|
|
80
|
%
|
|
|
80
|
%
|
|
|
80
|
%
|
Expected term of the award (years)
|
|
6.25
|
|
|
|
6.25
|
|
|
|
6.25
|
|
|
|
6.25
|
|
Risk-free interest rate
|
|
2.90
|
%
|
|
|
1.92
|
%
|
|
|
2.77
|
%
|
|
|
1.93
|
%
|
Expected dividend yield
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
The weighted-average grant-date fair value per share of options granted to employees during the nine months ended September 30, 2018 was $9.15.
There was $1.5 million of unrecognized stock-based compensation expense related to employees
’
awards that is expected to be recognized over a weighted-average period of
3.10 years as of September 30, 2018.
Stock Options Granted to Non-Employees.
Stock-based compensation expense related to stock options granted to non-employees is recognized over the related service period. The Company believes that the estimated fair value of the stock options is more readily measurable than the fair value of the services rendered. The Company recorded stock-based compensation expense related to non-employees
’
stock options of $9 thousand and $32 thousand for the three and nine months ended September 30, 2018, respectively, and $7 thousand and $110 thousand for the three and nine months ended September 30, 2017, respectively. No options were granted to non-employees in the nine months ended September 30, 2018.
Restricted Stock Awards.
The Company granted 26,213 and 16,213
restricted stock awards (“RSA”s) on June 1, 2018 to our Chief Executive Officer and Chief Operating Officer, respectively. No RSAs were granted in the three and nine months ended September 30, 2017. The RSAs
vest ratably over a one-year period. 10,606 shares of RSAs had vested as of September 30, 2018. The RSAs, including the unvested portion, are considered issued and outstanding as of September 30, 2018.
The fair value of each restricted stock is the closing price of our common stock on the grant date. The weighted average grant-date fair value of each restricted stock was $10.30 in the three and nine months ended September 30, 2018.
The Company recorded stock-based compensation expense related to RSAs of $109 thousand and $146 thousand for the three and nine months ended September 30, 2018 within
general and administrative expenses in the accompanying condensed consolidated statements of operations
. As of September 30, 2018, t
here was $291 thousand of unrecognized stock-based compensation expense related to RSAs that is expected to be recognized over a weighted-average period of 8 months.
Stock options and restricted stock awards available for grant were 703,074 at September 30, 2018.
16
On October 23, 2018, the Company completed its secondary public offering of 3,450,000 shares of its common stock at a price to the public of $20.00 per share, which includes the sale of 450,000 shares of the Company
’
s common stock pursuant to the underwriters
’
full exercise of their option to purchase additional shares. The
Chief Executive Officer and Chief Operating Officer each purchased 25,000 shares of the Company’s common stock at $20.00 per share as part of the secondary public offering.
The total proceeds from the offering to the Company, net of underwriting discounts and commissions of approximately $4.1 million, but before offering expenses payable by the Company, were approximately $64.9 million.
17
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 the unaudited condensed consolidated financial statements and related notes included elsewhere in Item 1 of Part I of this Quarterly Report on Form 10-Q and with the audited financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, as filed with the SEC, on March 12, 2018.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words
“
believe,
”
“
may,
”
“
will,
”
“
potentially,
”
“
estimate,
”
“
continue,
”
“
anticipate,
”
“
intend,
”
“
could,
”
“
would,
”
“
project,
”
“
plan,
”
“
expect
”
and the negative and plural forms of these words and similar expressions are intended to identify forward-looking statements.
Overview
We are a gene therapy company dedicated to developing and commercializing novel treatments for patients suffering from skin diseases. We have developed a proprietary gene therapy platform, our STAR-D platform, that consists of an engineered, patented (issued and pending), viral vector based on modified herpes simplex virus 1, or HSV-1, and skin-optimized gene transfer technology, to develop off-the-shelf treatments for skin diseases for which we believe there are no known effective treatments. We are initially using our STAR-D platform to develop treatments for rare or orphan dermatological indications caused by the absence of or a mutation in a single gene, and plan to leverage our platform in the future to expand our pipeline to include other dermatological indications and skin conditions.
Our lead product candidate, KB103, seeks to use topical gene therapy to treat dystrophic epidermolysis bullosa, or DEB, a rare and severe genetic disease, for which there is currently no approved treatment. In May 2018, we commenced a Phase 1/2 clinical study of KB103, a first-in-class topical gene therapy for the treatment of DEB, at Stanford University. We announced positive interim results from this clinical study on October 15, 2018. In particular, results to date on two patients met all primary efficacy (presence of functional protein type VII collagen expression, observation of NC1 and NC2 reactive anchoring fibrils and continued expression following repeat administration) and safety endpoints (no adverse events, inflammation or irritation) in topically administered KB103 wounds.
KB103 is the first topical HSV-1 based gene therapy engineered to deliver a human collagen protein to patients suffering from DEB.
DEB affects the skin and mucosal tissues, and is caused by one or more mutations in a gene called COL7A1, which is responsible for the formation of protein type VII collagen, or COL7, that forms anchoring fibrils that bind the dermis to the epidermis. In DEB patients, the genetic defect in COL7A1 results in loss or malfunctioning of these anchoring fibrils, leading to extremely fragile skin that blisters and tears from minor friction or trauma. Those who are born with DEB are sometimes called “butterfly children”, because their skin is likened to be as fragile as the wings of a butterfly. DEB patients may suffer from open wounds, skin infections, fusion of fingers and toes, and gastrointestinal tract problems throughout their lifetime, and may eventually develop squamous cell carcinoma, a potentially fatal condition. Based on information from DEBRA International, a worldwide alliance of patient support groups for EB, of which DEB is a subset, we believe there may be as many as 125,000 patients worldwide who suffer from DEB. We estimate that there are 3,200 to 3,500 diagnosed DEB patients in the European Union, United States, Japan and Canada.
We commenced operations in April 2016. In March 2017, we converted from a California limited liability company to a Delaware C-corporation, and changed our name from Krystal Biotech, LLC to Krystal Biotech, Inc. On June 19, 2018, we incorporated Krystal Australia Pty Ltd, an Australian proprietary limited company, for the purposes of undertaking preclinical and clinical studies in Australia. To date, our operations have been focused on organizing and staffing our company, developing our proprietary STAR-D platform, identifying potential product candidates, undertaking preclinical studies and clinical trials, and developing an in-house good manufacturing practice (“GMP”) facility.
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On September 22, 2017, the Company completed its initial public offering (“IPO”) of 4,554,000 shares of its common sto
ck at a price to the public of $10.00 per share. Proceeds to the Company were $40.7 million, net of underwriting discounts, commissions and offering expenses.
On November 1, 2017, the Company entered into a stock purchase agreement with EBMRF and EBRP pursuant to which the Company agreed to issue and sell, and the Purchasers agreed to purchase, an aggregate of 70,000 shares of the Company’s common stock, par value $0.00001 per share, for a purchase price of $11.00 per share, resulting in aggregate gross proceeds to the Company of $770,000.
On August 16, 2018, the Company entered into a stock purchase agreement with Frazier Life Sciences for the private placement of 625,000 shares of the Company’s common stock at $16.00 per share. The private placement yielded gross proceeds of $10 million and closed on August 17, 2018.
On October 23, 2018, the Company completed its secondary public offering of 3,450,000 shares of its common stock at a price to the public of $20.00 per share, which includes the sale of 450,000 shares of the Company
’
s common stock pursuant to the underwriters
’
full exercise of their option to purchase additional shares
.
The total proceeds from the offering to the Company, net of underwriting discounts and commissions of approximately $4.1 million, but before offering expenses payable by the Company, were approximately $64.9 million.
At September 30, 2018, our cash, cash equivalents and short-term investments balance was approximately $52.3 million.
On November 2, 2017, the
U.S. Food and Drug Administration
, or the FDA, granted orphan drug designation to the Company’s lead product candidate, KB103, for the treatment of DEB. The FDA’s Office of Orphan Drug Products Development grants orphan drug designation to support the development of medicines for underserved patient populations, or rare disorders, that affect fewer than 200,000 people in the United States. Orphan drug designation may allow us to be eligible for a seven-year period of U.S. Marketing exclusivity upon approval of KB103, tax credits for certain clinical research costs, and a waiver of the Prescription Drug User Fee Act, or PDUFA, filing fees, subject to certain conditions.
On November 3, 2017, the Office of Science Policy or OSP at the National Institutes of Health or the NIH indicated that the Company’s Phase 1/2 protocol for KB103 has completed the RAC protocol registration process.
On January 16, 2018, the United States Patent and Trademark Office or USPTO granted U.S. Patent No. 9,877,990 to the Company which covers compositions comprising herpes simplex viral or HSV vectors and methods of using the same for providing prophylactic, palliative or therapeutic relief of a wound, disorder or disease of the skin in a subject.
On April 16, 2018, the European Commission granted the orphan medicinal product designation, or OMPD, for KB103. KB103 has the distinction of being the first investigational HSV-1 based gene therapy for DEB to receive this designation.
In May 2018, we commenced a Phase 1/2 clinical study of KB103, a first-in-class topical gene therapy for the treatment of DEB, at Stanford University. The Phase 1/2 trial at Stanford University is a single-center, open-label, placebo-controlled Phase 1/2 study conducting an intra-subject comparison of randomized treatment and control wounds. It is designed to evaluate the safety and tolerability of KB103 in subjects with the recessive form of dystrophic epidermolysis bullosa. Efficacy is also evaluated through analysis of collagen VII expression and anchoring fibril formation in the basement membrane zone and wound imaging.
In May 2018, the FDA granted Fast Track designation in the United States for KB103 for the treatment of DEB. Under the FDA Modernization Act of 1997, designation as a Fast Track product means the FDA will take action to expedite both the development and the review of the application for approval. The FDA may also evaluate for filing, and commence review of, portions of an application for approval of a Fast Track product under certain conditions.
On August 7, 2018, the FDA granted orphan drug designation to the Company’s second product candidate, KB105 which is
currently in preclinical development for treatment of patients with transglutaminase 1, or TGM-1, deficient autosomal recessive congenital ichthyosis, or ARCI. There are currently no treatments for this disease that affects approximately 20,000 patients worldwide. We anticipate filing an Initial New Drug, or IND, application in the fourth quarter of 2018. TGM-1 is an essential epidermal enzyme that facilitates the formation of the epidermal barrier, which prevents dehydration, and protects the skin from unwanted toxins and surface microorganisms. The loss of TGM-1-activity results in
19
the severe genetic
skin disease ARCI. Most patients with a TGM-1-deficiency exhibit life-long pronounced scaling with increased transepidermal water loss. The scales are plate-like, often of a dark color, and cover the whole
-
body surface area. TGM-1-deficient ARCI is associ
ated with increased mortality in the neonatal period and has a dramatic impact on quality of life. KB105 is a replication-defective, non-integrating viral vector that has been engineered employing Krystal’s STAR-D platform to deliver functional human TGM-1
gene directly to the patients’ dividing and non-dividing skin cells. HSV-1 is Krystal’s replication-deficient, non-integrating viral vector that can penetrate skin cells more efficiently than other viral vectors. Its high payload capacity allows it to acc
ommodate large or multiple genes and its low immunogenicity makes it a suitable choice for direct and repeat delivery to the skin.
On October 15, 2018, we announced positive interim results from placebo-controlled Phase 1/2 study of KB103. In particular, results to date on two patients met all primary efficacy (presence of functional protein type VII collagen expression, observation of NC1 and NC2 reactive anchoring fibrils and continued expression following repeat administration) and safety endpoints (no adverse events, inflammation or irritation) in topically administered KB103 wounds. With respect to secondary endpoints, topically administered KB103 wounds closed in 2 weeks. KB103 shows presence functional COL7 expression and anchoring fibrils in both patients when administered intradermally to intact skin.
Since operations began, we have incurred operating losses. Our net losses were $2.8 million and $7.2 million for the three and nine months ended September 30, 2018, respectively. At September 30, 2018, we had an accumulated deficit of $16.3 million. We expect to incur significant expenses and increasing operating losses for the foreseeable future. Our net losses may fluctuate significantly from quarter to quarter and year to year. We will need to generate significant revenue to achieve profitability, and we may never generate revenue or enough revenue to achieve profitability.
Costs related to clinical trials can be unpredictable and therefore there can be no guarantee that we will have sufficient proceeds from our IPO and from other sources to fund our planned preclinical and clinical studies or our operations. Our funds may not be sufficient to enable us to conduct pivotal clinical trials for, seek marketing approval for or commercially launch KB103 or any other product candidate, including KB105. Accordingly, to obtain marketing approval for and to commercialize this or any other product candidates, we may be required to obtain further funding through public or private equity offerings, debt financings, collaboration and licensing arrangements or other sources. Adequate additional financing may not be available to us on acceptable terms, if at all. Our failure to raise capital when needed could have a negative effect on our financial condition and our ability to pursue our business strategy.
Financial Overview
Revenue
We currently have no approved products for commercial marketing or sale and have not generated any revenue from the sale of products or other sources to date. In the future, we may generate revenue from product sales, royalties on product sales, or license fees, milestones, or other upfront payments if we enter into any collaborations or license agreements. We expect that our future revenue, if any, will fluctuate from quarter to quarter for many reasons, including the uncertain timing and amount of any such payments and sales.
Research and Development Expenses
Research and development expenses consist primarily of costs incurred to advance our preclinical and clinical candidates, which include:
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•
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expenses incurred under agreements with contract manufacturing organizations, or CMOs, consultants and other vendors that conduct our preclinical activities;
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|
•
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costs of acquiring, developing and manufacturing clinical trial materials and lab supplies; and
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•
|
facility costs, depreciation and other expenses, which include direct expenses for rent and maintenance of facilities and other supplies.
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We expense internal research and development costs to operations as incurred. We expense third party costs for research and development activities, such as the manufacturing of preclinical and clinical materials, based on an evaluation of the progress to completion of specific tasks such as manufacturing of drug substance, fill/finish and stability testing, which is provided to us by our vendors.
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We expect our research and development expenses will increase as we continue the manufacture of preclinical and clinical
materials and manage the clinical trials of, and seek regulatory approval for, our
product candidates and expand our product portfolio. In the near term, we expect that our research and development expenses will increase as we conduct our ongoing Phase 1/2 clinical trial for KB103
and
ongoing preclinical trials for KB10
5
. Due to the num
erous risks and uncertainties associated with product development, we cannot determine with certainty the duration, costs and timing of this clinical trial, and, as a result, the actual costs to complete this planned clinical trial may exceed the expected
costs.
General and Administrative Expenses
General and administrative expenses consist principally of professional fees associated with corporate and intellectual property legal expenses, consulting and accounting services and facility-related costs. Other general and administrative costs include stock-based compensation and travel expenses.
We anticipate that our general and administrative expenses will increase in the future to support the continued research and development of our product candidates and to operate as a public company. These increases will likely include increased costs for insurance, costs related to the hiring of additional personnel and payments to outside consultants, lawyers and accountants, among other expenses. Additionally, if and when we believe a regulatory approval of our first product candidate appears likely, we anticipate that we will increase our salary and personnel costs and other expenses as a result of our preparation for commercial operations.
Interest Income (Expense), Net
Interest income consists primarily of income earned from our cash, cash equivalents and short-term investments. Interest expense incurred is primarily from convertible promissory notes.
Critical Accounting Policies, Significant Judgments and Estimates
There have been no significant changes during the three and nine months ended September 30, 2018 to our critical accounting policies, significant judgments and estimates as disclosed in our management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2017.
Results of Operations
Three Months Ended September 30, 2018 and 2017
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
(In thousands)
|
|
(unaudited)
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
1,914
|
|
|
$
|
1,355
|
|
|
$
|
559
|
|
General and administrative
|
|
|
1,058
|
|
|
|
738
|
|
|
|
320
|
|
Total operating expenses
|
|
|
2,972
|
|
|
|
2,093
|
|
|
|
879
|
|
Loss from operations
|
|
|
(2,972
|
)
|
|
|
(2,093
|
)
|
|
|
(879
|
)
|
Other Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income (expense), net
|
|
|
217
|
|
|
|
(3,180
|
)
|
|
|
3,397
|
|
Total interest and other income (expense), net
|
|
|
217
|
|
|
|
(3,180
|
)
|
|
|
3,397
|
|
Net loss applicable to stockholders
|
|
$
|
(2,755
|
)
|
|
$
|
(5,273
|
)
|
|
$
|
2,518
|
|
Research and Development Expenses
Research and development expenses increased $559 thousand in the three months ended September 30, 2018 as compared to the three months ended September 30, 2017. Higher research and development expenses were due largely to increases in payroll, employee benefits and stock-based compensation of $419 thousand, lab supplies of $322 thousand, and other research and development expenses of $95 thousand partially offset by decreases in professional services related to outsourced manufacturing, in-vivo and clinical studies of $277 thousand.
21
General and Administrative Expenses
General and administrative expenses increased $320 thousand in the three months ended September 30, 2018 as compared to the three months ended September 30, 2017. Higher general and administrative spending was due largely to increases in payroll, employee benefits and stock-based compensation costs of $366 thousand, insurance expenses of $80 thousand as a result of being a public company, and other administrative costs of $143 thousand partially offset by decreases in legal and professional services of $269 thousand.
Interest and Other Income (Expense), Net
Interest and other income for the three months ended September 30, 2018 was $217 thousand and consisted of interest income earned from our cash, cash equivalents and short-term investments. Interest and other expense, net, for the three months ended September 30, 2017 was $3.2 million and consisted primarily of
interest expense incurred due to the beneficial conversion feature upon conversion of promissory notes to shares of preferred stock, and to a lesser degree due to interest expense on our convertible promissory notes before their conversion to shares of preferred stock, partially offset by interest earned on our cash.
Results of Operations
Nine Months Ended September 30, 2018 and 2017
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
(In thousands)
|
|
(unaudited)
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
4,959
|
|
|
$
|
2,120
|
|
|
$
|
2,839
|
|
General and administrative
|
|
|
2,738
|
|
|
|
1,154
|
|
|
|
1,584
|
|
Total operating expenses
|
|
|
7,697
|
|
|
|
3,274
|
|
|
|
4,423
|
|
Loss from operations
|
|
|
(7,697
|
)
|
|
|
(3,274
|
)
|
|
|
(4,423
|
)
|
Other Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income (expense), net
|
|
|
516
|
|
|
|
(3,253
|
)
|
|
|
3,769
|
|
Total interest and other income (expense), net
|
|
|
516
|
|
|
|
(3,253
|
)
|
|
|
3,769
|
|
Net loss applicable to stockholders and members
|
|
$
|
(7,181
|
)
|
|
$
|
(6,527
|
)
|
|
$
|
(654
|
)
|
Research and Development Expenses
Research and development expenses increased $2.8 million in the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017. Higher research and development expenses were due largely to increases in professional services related to outsourced manufacturing, in-vivo and clinical studies of $1.0 million, payroll, employee benefits and stock-based compensation of $1.0 million, lab supplies of $632 thousand, and other research and development expenses of $196 thousand.
General and Administrative Expenses
General and administrative expenses increased $1.6 million in the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017. Higher general and administrative spending was due largely to increases in legal and professional services of $137 thousand, payroll, employee benefits and stock-based compensation costs of $899 thousand, insurance expenses of $253 thousand as a result of being a public company, and other administrative costs of $296 thousand.
Interest and Other Income (Expense), Net
Interest and other income for the nine months ended September 30, 2018 was $516 thousand and consisted of interest income earned from our cash, cash equivalents and short-term investments. Interest and other expense, net, for the nine months ended September 30, 2017 was $3.3 million and consisted primarily of interest expense
incurred due to the beneficial conversion feature upon conversion of promissory notes to shares of preferred stock, and to a lesser degree due to interest expense on our convertible promissory notes before their conversion to shares of preferred stock, partially offset by interest earned on our cash.
22
Liquidity and Capital Resources
Overview
As of September 30, 2018, we had an accumulated deficit of $16.3million.
On October 25, 2018,
we received net proceeds of approximately $64.9 million from our
secondary public offering before offering expenses payable by the Company.
On August 17, 2018, we closed the sale of common stock to Frazier Life Sciences for aggregate proceeds of $10 million.
In November 2017, we closed the sale of common stock to EBMRF, a California not-for-profit corporation and EB Research Partnership, Inc., a New York not-for-profit corporation for aggregate proceeds of $770,000.
On September 22, 2017, we received net proceeds of approximately $40.7 million from our IPO.
In August 2017, we closed the sale of preferred stock to a single investor for aggregate proceeds of $7.0 million, and the sale of 130,590 shares of our common stock with a party related to a member of our board of directors for aggregate proceeds of $1.0 million.
Prior to August 2017, we had received $1.4 million in gross proceeds from the issuance of equity securities and $4.1 million in gross proceeds from debt financings.
We believe that our cash, cash equivalents and short-term investments of approximately $52.3 million as of September 30, 2018 together with our
secondary public offering in October 2018 which resulted in
p
roceeds of $64.9 million, net of underwriting discounts and commissions but before offering expenses payable by the Company,
will be sufficient to allow us to fund our operations for at least 12 months from the filing date of this Quarterly Report on Form 10-Q. As we continue to incur losses, a transition to profitability is dependent upon the successful development, approval and commercialization of our product candidates and the achievement of a level of revenues adequate to support our cost structure. We may never achieve profitability, and unless and until it does, we will continue to need to raise additional capital or obtain financing from other sources, such as partnerships. Management intends to fund future operations through equity and debt financings and may also seek additional capital through arrangements with strategic partners or other sources. There can be no assurances, however, that additional funding will be available on terms acceptable to us, if at all.
Operating Capital Requirements
Our primary uses of capital are, and we expect will continue to be for the near future, compensation and related expenses, manufacturing costs for preclinical and clinical materials, third party clinical trial research and development services, laboratory and related supplies, clinical costs, legal and other regulatory expenses and general overhead costs.
We believe that our available funds will be sufficient to enable us to obtain clinical data from our Phase 1/2 clinical trial for KB103 and to initiate Phase 1/2 clinical trials for KB105. We expect that these funds will not be sufficient to enable us to seek marketing approval for or commercialize any of our product candidates.
We have based our projections of operating capital requirements on assumptions that may prove to be incorrect and we may use all of our available capital resources sooner than we expect. Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical products, we are unable to estimate the exact amount of our operating capital requirements. Our future funding requirements will depend on many factors, including, but not limited to:
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•
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the timing and costs of our ongoing Phase 1/2 clinical trial for KB103;
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•
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the progress, timing and costs of manufacturing of KB103 for clinical trials;
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•
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the timing and costs of filing an IND for KB105 and commencing Phase 1/2 clinical trials for KB105;
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•
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the initiation, scope, progress, timing, costs and results of drug discovery, laboratory testing, manufacturing, preclinical studies and clinical trials for our other product candidates and potential product candidates;
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•
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the costs of establishing and maintaining our own commercial-scale cGMP manufacturing facility;
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23
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•
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the costs associated with the manufacturing process development and evaluation of third-party manufacturers
;
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•
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the costs of commercialization activities for KB103 and other product candidates if we receive marketing approval for KB103 or any other product candidates we may develop, including the costs and timing of establishing product sales, medical affairs, marketing, distribution and manufacturing capabilities;
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•
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subject to receipt of marketing approval, revenue, if any, received from commercial sale of KB103 or other product candidates, should any of our product candidates receive marketing approval;
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•
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the extent to which the costs of our product candidates, if approved, will be paid by health maintenance, managed care, pharmacy benefit and similar healthcare management organizations, or will be reimbursed by government authorities, private health coverage insurers and other third-party payors;
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•
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the amount and timing of any payments we may be required to make, or that we may receive, in connection with the licensing, filing, prosecution, defense and enforcement of any patents or other intellectual property rights, including milestone and royalty payments and patent prosecution fees that we are obligated to pay pursuant to our license agreements;
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•
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the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims;
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•
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our current license agreements remaining in effect and our achievement of milestones under those agreements;
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•
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the terms and timing of any future collaborations, licensing, consulting or other arrangements that we may establish;
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•
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our ability to establish and maintain collaborations and licenses on favorable terms, if at all; and
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•
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the extent to which we acquire or in-license other product candidates and technologies.
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We expect that we will need to obtain substantial additional funding in order to receive regulatory approval and to commercialize KB103 or any other product candidates, including KB105. To the extent that we raise additional capital through the sale of common stock, convertible securities or other equity securities, the ownership interests of our existing stockholders may be materially diluted and the terms of these securities could include liquidation or other preferences that could adversely affect the rights of our existing stockholders. In addition, debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include restrictive covenants that limit our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends, that could adversely affect our ability to conduct our business. If we are unable to raise capital when needed or on attractive terms, we could be forced to significantly delay, scale back or discontinue the development or commercialization of KB103 or KB105 or our other product candidates, seek collaborators at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available, and relinquish or license, potentially on unfavorable terms, our rights to KB103 or KB105 or our other product candidates that we otherwise would seek to develop or commercialize ourselves.
Sources and Uses of Cash
The following table summarizes our sources and uses of cash (in thousands):
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Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
(unaudited)
|
|
Net cash used in operating activities
|
|
$
|
(5,927
|
)
|
|
$
|
(1,763
|
)
|
Net cash used in investing activities
|
|
|
(6,556
|
)
|
|
|
(51
|
)
|
Net cash provided by financing activities
|
|
|
9,559
|
|
|
|
52,461
|
|
Net (decrease) increase in cash
|
|
$
|
(2,924
|
)
|
|
$
|
50,647
|
|
Operating Activities
Net cash used in operating activities for the nine months ended September 30, 2018 was $5.9 million and consisted primarily of a net loss of $7.2 million adjusted for non-cash items of depreciation and stock-based compensation expense of $570 thousand, and cash provided by net decreases in operating assets and liabilities of $684 thousand.
24
Net cash used by operating activities
for the
nine
months ended
September
30
, 2017
was $
1.8
million
and
consisted primarily of a net loss of $
6.6
million
adjusted for non-cash items
of
depreciation and stock-based
compensation expense of $
197
thousand
,
non-cash interest expense from
convertible
promissory notes of $
3.3
million
and cash provided by
net
decreases
in operating assets and liabilities of $
1.3
million
.
Investing Activities
Net cash used in investing activities for the nine months ended September 30, 2018 was $6.6 million and consisted primarily of purchases of $5.6 million of short-term available-for-sale investment securities, expenditures of $930 thousand on the build-out of our new GMP facilities and purchases of computer and laboratory equipment.
Net cash used in investing activities for the nine months ended September 30, 2017 was $51 thousand and consisted primarily of computer and laboratory equipment purchases.
Financing Activities
Net cash provided by financing activities for the nine months ended September 30, 2018 was $9.6 million and was primarily from proceeds from an August 2017
private placement of 625,000 shares of the Company’s common stock at $16.00 per share resulting in gross proceeds of $10.0 million, partially offset by transactions costs of $450,000.
Net cash provided by financing activities for the nine months ended September 30, 2017 was $52.5 million and was from proceeds of $1.3 million received from the issuance of convertible promissory notes, $1.0 million received from the issuance of related party convertible promissory notes, $43.2 million received from the issuance of common stock, and $7.0 million received from issuance of preferred stock and preferred units.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Contractual Obligations
There have been no material changes to our contractual obligations as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017.
JOBS Act Accounting Election
We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
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