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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 001-38501
______________________________________________________________________________
AXCELLA HEALTH INC.
(Exact name of registrant as specified in its charter)
______________________________________________________________________________
| | | | | |
Delaware | 26-3321056 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| |
840 Memorial Drive Cambridge, Massachusetts (Address of principal executive offices) | 02139 (Zip Code) |
| |
(857) 320-2200 (Registrant’s telephone number, including area code) | |
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common Stock | AXLA | The Nasdaq Global Market |
______________________________________________________________________________
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 8, 2019, the registrant had 23,113,715 shares of common stock, $0.001 par value per share, outstanding.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
In this Quarterly Report on Form 10-Q, or Quarterly Report, we use the following defined terms:
"AXA Candidate" to refer to one of our investigational product candidates.
"AXA Development Platform" to refer to our proprietary human-focused development platform.
"dose" to refer to the exposure amount of an AXA Candidate in Clinical Trials and Non-IND, IRB-Approved Clinical Studies.
"non-drug" to refer to a non-therapeutic use of an AXA Candidate. Such use may be as a food product or dietary supplement.
"Clinical Trial" to refer to a human clinical study of a drug product candidate subject to the requirements for an effective Investigational New Drug application, or an IND.
"Non-IND, IRB-Approved Clinical Study" to refer to Institutional Review Board-Approved, or IRB-Approved, clinical studies conducted in humans with our AXA Candidates under U.S. Food and Drug Administration, or the FDA, regulations and guidance supporting research with food outside of an IND (prior to any decision to develop an AXA Candidate as a drug product candidate under an IND or a non-drug product candidate). In these food studies, based on our understanding of FDA regulations and guidance, we evaluate in humans, including individuals with disease, an AXA Candidate for safety, tolerability and effects on the normal structures and functions of the body. These studies are not designed or intended to evaluate an AXA Candidate's ability to diagnose, cure, mitigate, treat or prevent a disease as these would be evaluated in Clinical Trials if we decide to develop an AXA Candidate as a drug or therapeutic.
This Quarterly Report 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 are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “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:
•the success, cost and timing of our product development activities, preclinical studies, Non-IND, IRB-Approved Clinical Studies and Clinical Trials, including statements regarding the timing of initiation and completion of preclinical studies, Non-IND, IRB-Approved Clinical Studies or Clinical Trials and related preparatory work, and the timing of the availability of the results of these preclinical studies, Non-IND, IRB-Approved Clinical Studies and Clinical Trials;
•our ability to obtain funding for our operations, including funding necessary to complete further development of our initial AXA Candidates, and if successful, commercialization of these candidates as drug or non-drug products;
•the potential for our identified research priorities to advance our AXA Development Platform, development programs or AXA Candidates;
•our ability to obtain and maintain regulatory approval or find alternate regulatory commercialization pathways from the FDA, the European Medicines Agency, or the EMA, and other comparable regulatory authorities for our AXA Candidates, and any related restrictions, limitations or warnings in the label of an approved AXA Candidate;
•our expectations regarding our ability to obtain and maintain intellectual property protection for our AXA Candidates, AXA Development Platform and the type of such protection;
•our ability and the potential to successfully manufacture our AXA Candidates for preclinical studies, Non-IND, IRB-Approved Clinical Studies and Clinical Trials and for commercial use, if approved;
•the size and growth potential of the markets for our AXA Candidates and our ability to serve those markets, either alone or in combination with others;
•the rate and degree of market acceptance of our AXA Candidates, if approved;
•regulatory developments in the United States and foreign countries;
•our ability to enter into a collaboration, partnership, or other agreement with a third party on reasonable terms or at all to develop one or more AXA Candidates or commercialize any of our AXA Candidates, if approved;
•our ability to secure sufficient manufacturing and supply chain capacity;
•the success of competing products or therapies that are or may become available;
•our ability to attract and retain key scientific, management or other necessary personnel;
•our estimates regarding expenses for both product development and as a public company, future revenue, capital requirements and needs for additional financing;
•the potential for faults in our internal controls; and
•other risks and uncertainties, including those discussed in Part II, Item 1A, Risk Factors in this Quarterly Report.
Any forward-looking statements in this Quarterly 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 Quarterly 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.
We may from time to time provide 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 Quarterly 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, prove not to have been accurate.
AXCELLA HEALTH INC.
FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item I. Condensed Consolidated Financial Statements (Unaudited)
AXCELLA HEALTH INC.
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands, except share and per share data)
| | | | | | | | | | | |
| As of | | |
| September 30, 2019 | | December 31, 2018 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 105,355 | | | $ | 79,466 | |
Prepaid expenses and other current assets | 2,957 | | | 835 | |
Total current assets | 108,312 | | | 80,301 | |
Property and equipment, net | 659 | | | 1,076 | |
Security deposits and other assets | 216 | | | 216 | |
Deferred offering costs | — | | | 251 | |
Total assets | $ | 109,187 | | | $ | 81,844 | |
| | | |
Liabilities, Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit) | | | |
Current liabilities: | | | |
Accounts payable | $ | 3,586 | | | $ | 1,612 | |
Accrued expenses | 5,633 | | | 5,299 | |
Total current liabilities | 9,219 | | | 6,911 | |
Long term debt, net of discount | 24,808 | | | 24,521 | |
Other liabilities | 816 | | | 1,898 | |
Preferred stock warrant liability | — | | | 425 | |
Total liabilities | 34,843 | | | 33,755 | |
Commitments and contingencies (Note 8) | — | | | — | |
Redeemable convertible preferred stock (Note 7) | — | | | 197,842 | |
Stockholders' equity (deficit): | | | |
Common stock, $0.001 par value; 150,000,000 and 47,000,000 shares authorized, 23,517,446 and 5,193,915 shares issued and 23,098,465 and 4,774,934 shares outstanding at September 30, 2019 and December 31, 2018, respectively | 24 | | | 6 | |
Additional paid-in capital | 274,693 | | | 7,290 | |
Treasury stock, 418,981 shares at cost | — | | | — | |
Accumulated deficit | (200,373) | | | (157,049) | |
Total stockholders' equity (deficit) | 74,344 | | | (149,753) | |
Total liabilities, redeemable convertible preferred stock and stockholders' equity (deficit) | $ | 109,187 | | | $ | 81,844 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
AXCELLA HEALTH INC.
Condensed Consolidated Statements of Operations (Unaudited)
(in thousands, except share and per share data)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| 2019 | | 2018 | | 2019 | | 2018 |
Operating expenses: | | | | | | | |
Research and development | $ | 12,157 | | | $ | 6,147 | | | $ | 29,063 | | | $ | 17,609 | |
General and administrative | 4,840 | | | 2,087 | | | 13,036 | | | 7,124 | |
Total operating expenses | 16,997 | | | 8,234 | | | 42,099 | | | 24,733 | |
Loss from operations | (16,997) | | | (8,234) | | | (42,099) | | | (24,733) | |
Other income (expense): | | | | | | | |
Change in fair value of preferred stock warrant liability | — | | | 5 | | | (51) | | | 46 | |
Interest income (expense), net | (307) | | | (555) | | | (1,174) | | | (1,620) | |
Total other income (expense), net | (307) | | | (550) | | | (1,225) | | | (1,574) | |
Net loss | $ | (17,304) | | | $ | (8,784) | | | $ | (43,324) | | | $ | (26,307) | |
Net loss per share, basic and diluted | $ | (0.75) | | | $ | (1.85) | | | $ | (3.01) | | | $ | (5.92) | |
Weighted average common shares outstanding, basic and diluted | 23,083,367 | | | 4,769,387 | | | 14,430,397 | | | 4,470,013 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
AXCELLA HEALTH INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
| | | | | | | | | | | |
| Nine Months Ended September 30, | | |
| 2019 | | 2018 |
Cash flows from operating activities: | | | |
Net loss | $ | (43,324) | | | $ | (26,307) | |
Adjustment to reconcile net loss to net cash used in operating activities: | | | |
Depreciation and amortization | 518 | | | 854 | |
Stock-based compensation expense | 4,322 | | | 1,897 | |
Change in fair value of preferred stock warrant liability | 51 | | | (46) | |
Non-cash interest expense | 429 | | | 335 | |
Gain on sale of property and equipment | (18) | | | (36) | |
Changes in current assets and liabilities: | | | |
Prepaid expenses and other current assets | (2,108) | | | (87) | |
Accounts payable | 2,013 | | | 176 | |
Accrued expenses | 536 | | | 72 | |
Net cash used in operating activities | (37,581) | | | (23,142) | |
| | | |
Cash flows from investing activities: | | | |
Purchases of property and equipment | (102) | | | (486) | |
Proceeds from the sale of property and equipment | 19 | | | 73 | |
Net cash used in investing activities | (83) | | | (413) | |
| | | |
Cash flows from financing activities: | | | |
| | | |
Proceeds from initial public offering, net of issuance costs | 64,532 | | | — | |
Proceeds from issuance of long term debt | — | | | 1,000 | |
Payment of debt issuance costs | — | | | (844) | |
Payment of success fee obligation | (1,220) | | | — | |
Proceeds from exercise of common stock options | 241 | | | 27 | |
Net cash provided by financing activities | 63,553 | | | 183 | |
Net increase (decrease) in cash and cash equivalents | 25,889 | | | (23,372) | |
Cash and cash equivalents, beginning of period | 79,466 | | | 46,817 | |
Cash and cash equivalents, end of period | $ | 105,355 | | | $ | 23,445 | |
| | | |
Supplemental cash flow information: | | | |
Cash paid for interest | $ | 2,151 | | | $ | 1,656 | |
| | | |
| | | |
Supplemental disclosure of non-cash investing and financing activities: | | | |
Reclassification of warrants to additional paid-in capital | $ | 476 | | | $ | — | |
Conversion of preferred stock to common stock upon closing of the initial public offering | $ | 197,888 | | | $ | — | |
| | | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
AXCELLA HEALTH INC.
Condensed Consolidated Statements of Stockholders' Equity (Deficit) (Unaudited)
(in thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Redeemable convertible preferred stock | | | | | Common stock | | | | | | Treasury stock | | | | | | Total |
| Shares | | Amount | | | Shares | | Par Value | | Additional paid-in capital | | Shares | | Amount | | Accumulated deficit | | stockholders’ equity (deficit) |
BALANCE - December 31, 2017 | 21,549,244 | | | $ | 138,828 | | | | 4,648,078 | | | $ | 5 | | | $ | 4,621 | | | 418,981 | | | $ | — | | | $ | (120,980) | | | $ | (116,354) | |
Accretion of preferred stock to redemption value | | | 38 | | | | | | | | (38) | | | | | | | | | (38) | |
Stock-based compensation | | | | | | | | | | 368 | | | | | | | | | 368 | |
Net loss | | | | | | | | | | | | | | | | (8,100) | | | (8,100) | |
BALANCE - March 31, 2018 | 21,549,244 | | | 138,866 | | | | 4,648,078 | | | 5 | | | 4,951 | | | 418,981 | | | — | | | (129,080) | | | (124,124) | |
Exercise of common stock options | | | | | | 535,320 | | | 1 | | | | | | | | | | | 1 | |
Accretion of preferred stock to redemption value | | | 41 | | | | | | | | (41) | | | | | | | | | (41) | |
Stock-based compensation | | | | | | | | | | 710 | | | | | | | | | 710 | |
Net loss | | | | | | | | | | | | | | | | (9,423) | | | (9,423) | |
BALANCE - June 30, 2018 | 21,549,244 | | | 138,907 | | | | 5,183,398 | | | 6 | | | 5,620 | | | 418,981 | | | — | | | (138,503) | | | (132,877) | |
Exercise of common stock options | | | | | | 7,464 | | | | | | 26 | | | | | | | | | 26 | |
Accretion of preferred stock to redemption value | | | 41 | | | | | | | | (41) | | | | | | | | | (41) | |
Stock-based compensation | | | | | | | | | | 819 | | | | | | | | | 819 | |
Net loss | | | | | | | | | | | | | | | | (8,784) | | | (8,784) | |
BALANCE - September 30, 2018 | 21,549,244 | | | $ | 138,948 | | | | 5,190,862 | | | $ | 6 | | | $ | 6,424 | | | 418,981 | | | $ | — | | | $ | (147,287) | | | $ | (140,857) | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
AXCELLA HEALTH INC.
Condensed Consolidated Statements of Stockholders' Equity (Deficit) (Unaudited) - continued
(in thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Redeemable convertible preferred stock | | | | | Common stock | | | | | | Treasury stock | | | | | | Total |
| Shares | | Amount | | | Shares | | Par Value | | Additional paid-in capital | | Shares | | Amount | | Accumulated deficit | | stockholders’ equity (deficit) |
BALANCE - December 31, 2018 | 26,831,246 | | | $ | 197,842 | | | | 5,193,915 | | | $ | 6 | | | $ | 7,290 | | | 418,981 | | | $ | — | | | $ | (157,049) | | | $ | (149,753) | |
Exercise of common stock options | | | | | | 1,335 | | | | | 12 | | | | | | | | | 12 | |
Accretion of preferred stock to redemption value | | | 46 | | | | | | | | (46) | | | | | | | | | (46) | |
Stock-based compensation | | | | | | | | | | 1,137 | | | | | | | | | 1,137 | |
Net loss | | | | | | | | | | | | | | | | (11,573) | | | (11,573) | |
BALANCE - March 31, 2019 | 26,831,246 | | | 197,888 | | | | 5,195,250 | | | 6 | | | 8,393 | | | 418,981 | | | — | | | (168,622) | | | (160,223) | |
Exercise of common stock options | | | | | | 44,697 | | | | | 211 | | | | | | | | | 211 | |
Conversion of preferred stock to common stock upon closing of the initial public offering | (26,831,246) | | | (197,888) | | | | 14,641,997 | | | 15 | | | 197,873 | | | | | | | | | 197,888 | |
Issuance of common stock, net of issuance costs of $6,896 | | | | | | 3,571,428 | | | 3 | | | 64,529 | | | | | | | | | 64,532 | |
Reclassification of warrants to additional paid-in capital | | | | | | | | | | 476 | | | | | | | | | 476 | |
Exercise of common stock warrant | | | | | | 45,414 | | | | | — | | | | | | | | | — | |
Stock-based compensation | | | | | | | | | | 1,507 | | | | | | | | | 1,507 | |
Net loss | | | | | | | | | | | | | | | | (14,447) | | | (14,447) | |
BALANCE - June 30, 2019 | — | | | — | | | | 23,498,786 | | | 24 | | | 272,989 | | | 418,981 | | | — | | | (183,069) | | | 89,944 | |
Exercise of common stock options | | | | | | 18,660 | | | | | | 26 | | | | | | | | | | | | 26 | |
Stock-based compensation | | | | | | | | | | | | 1,678 | | | | | | | | | | | | 1,678 | |
Net loss | | | | | | | | | | | | | | | | | | | | | (17,304) | | | (17,304) | |
BALANCE - September 30, 2019 | — | | | $ | — | | | | 23,517,446 | | | $ | 24 | | | $ | 274,693 | | | 418,981 | | | $ | — | | | $ | (200,373) | | | $ | 74,344 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
AXCELLA HEALTH INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. NATURE OF BUSINESS
Axcella Health Inc. and subsidiaries ("Axcella," the "Company" or "we") is a biotechnology company that was incorporated in Delaware on August 27, 2008 and has a principal place of business in Cambridge, Massachusetts. The Company is pioneering the research and development of novel multifactorial interventions to support health and address dysregulated metabolism across a broad spectrum of consumers and patients who have limited options.
The Company is subject to risks common to early-stage companies in the biotechnology industry, including, but not limited to, successful development of technology, obtaining additional funding, protection of proprietary technology, compliance with government regulations, risks of failure of preclinical studies, Non-IND, IRB-Approved Clinical Studies and Clinical Trials, the need to obtain marketing approval for its product candidates, if required, and successfully market consumer products, fluctuations in operating results, economic pressure impacting therapeutic pricing, dependence on key personnel, risks associated with changes in technologies, development by competitors of technological innovations and the ability to scale manufacturing to large scale production. Product candidates currently under development will require significant additional research and development efforts, including preclinical and clinical testing and any necessary regulatory approval prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel and infrastructure and extensive compliance-reporting capabilities. Even if development efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales.
On April 29, 2019, the Company filed a certificate of amendment to its certificate of incorporation to effect a one-for-1.842 reverse stock split of the Company’s common stock. All share and per share data shown in the accompanying condensed consolidated financial statements and related notes have been retroactively revised to reflect the reverse stock split.
On May 13, 2019, the Company completed an initial public offering (the “IPO”) of 3,571,428 shares of its common stock for aggregate gross proceeds of $71.4 million and its shares started trading on The Nasdaq Global Market under the ticker symbol “AXLA.” The Company received $64.5 million in net proceeds after deducting underwriting discounts and commissions and other estimated offering expenses payable by the Company. Upon closing of the IPO, all of the Company's outstanding shares of redeemable convertible preferred stock automatically converted into 14,641,997 shares of common stock.
The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the ordinary course of business. The Company has historically funded its operations with proceeds from sales of preferred and common stock and borrowings under a loan and security agreement. As of September 30, 2019, the Company had an accumulated deficit of $200.4 million. The Company expects to continue to generate operating losses in the foreseeable future. The Company expects that its cash and cash equivalents at September 30, 2019 will be sufficient to fund its operations for at least the next twelve months from the date of the issuance of the interim condensed consolidated financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The Company's condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP").
The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Unaudited Interim Financial Information
The condensed consolidated financial statements of the Company included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted from this report, as is permitted by such rules and regulations. Accordingly, these condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Prospectus that forms a part of the Company’s Registration Statement on Form S-1 (File No. 333-230822), which was filed with the SEC pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended ("Securities Act"), on May 9, 2019 (the “Prospectus”). The results for any interim period are not necessarily indicative of results for any future period.
Use of Estimates
The preparation of the condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of expenses during the reporting period. The Company bases its estimates on historical experience, known trends and other market-specific or relevant factors that it believes to be reasonable under the circumstances. On an ongoing basis, management evaluates its estimates as there are changes in circumstances, facts and experience. Actual results may differ from those estimates or assumptions.
Deferred Offering Costs
The Company capitalized certain legal, professional accounting and other third-party fees that were directly associated with the IPO as deferred offering costs. As of December 31, 2018, the Company had capitalized $0.3 million of deferred offering costs related to the IPO. After consummation of the IPO, which closed on May 13, 2019, deferred offering costs totaling $1.9 million were recorded in stockholders' equity (deficit) as a reduction of additional paid-in capital generated as a result of the offering.
Patent Costs
All patent-related costs incurred in connection with filing and prosecuting patent applications are expensed as incurred due to the uncertainty about the recovery of the expenditure. Amounts incurred are classified as general and administrative expenses.
Accounting Pronouncements Issued and Not Adopted
In February 2016, the Financial Accounting Standards Board issued Accounting Standards Update, or ASU, No. 2016-02, Leases, which alters the accounting model and financial statement presentation and disclosure of leases. The new standard requires recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 is effective for the Company beginning January 1, 2020. The Company is assessing the impact the adoption of ASU 2016-02 will have on its condensed consolidated financial statements and will recognize a lease obligation and right of use asset for its existing operating leases upon adoption. See additional information regarding the Company's lease obligations in Note 8.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
| | | | | | | | | | | |
| September 30, 2019 | | December 31, 2018 |
Laboratory equipment | $ | 3,475 | | | $ | 3,489 | |
Leasehold improvements | 564 | | | 564 | |
Office and computer equipment | 294 | | | 294 | |
Furniture and fixtures | 122 | | | 122 | |
Property and equipment | 4,455 | | | 4,469 | |
Less: accumulated depreciation and amortization | (3,796) | | | (3,393) | |
Property and equipment, net | $ | 659 | | | $ | 1,076 | |
Depreciation and amortization expense for the nine months ended September 30, 2019 and 2018 was $0.5 million and $0.9 million, respectively.
4. FAIR VALUE MEASUREMENTS
The following table sets forth by level, within the fair value hierarchy, the assets and liabilities carried at fair value on a recurring basis (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair value measurements at September 30, 2019 using: | | | | | | |
| Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | |
Cash Equivalents | $ | 105,105 | | | $ | — | | | $ | — | | | $ | 105,105 | |
Total | $ | 105,105 | | | $ | — | | | $ | — | | | $ | 105,105 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair value measurements at December 31, 2018 using: | | | | | | |
| Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | |
Cash Equivalents | $ | 79,216 | | | $ | — | | | $ | — | | | $ | 79,216 | |
Total | $ | 79,216 | | | $ | — | | | $ | — | | | $ | 79,216 | |
Liabilities: | | | | | | | |
Success Fee Liability | $ | — | | | $ | — | | | $ | 1,220 | | | $ | 1,220 | |
Preferred Stock Warrant Liability | — | | | — | | | 425 | | | 425 | |
Total | $ | — | | | $ | — | | | $ | 1,645 | | | $ | 1,645 | |
Cash equivalents are comprised of funds held in an exchange traded money market fund and the fair value of the cash equivalents is determined based upon quoted market price for that fund. The fair value of the preferred stock warrant was determined using the Black-Scholes option-pricing model with the assumptions as disclosed in Note 7.
The fair value of the success fee liability was determined using a probability weighted present value of cash flows. The Company has projected that 100% of the liability will be paid and that the time value of discounting those cash flows did not have a material impact on the fair value measurement due to the expected term.
As a result of the IPO, the preferred stock warrants were converted to warrants to purchase common stock and the fair value of the warrant liability was reclassified to stockholders’ equity and subsequently settled. The success fee liability was also settled.
A roll forward of the fair value of the success fee liability and preferred stock warrant liability categorized with Level 3 inputs for the period ended September 30, 2019 is as follows (in thousands):
| | | | | | | | | | | |
| Success fee | | Preferred stock warrant liability |
Balance — January 1, 2019 | $ | 1,220 | | | $ | 425 | |
Increase in warrant fair value included in other expense | — | | | 51 | |
Reclassification to additional paid-in capital in connection with IPO | — | | | (476) | |
Settlement of success fee | (1,220) | | | — | |
Balance — September 30, 2019 | $ | — | | | $ | — | |
There were no transfers among Level 1, Level 2, or Level 3 categories in the periods presented.
The carrying value of accounts payable and accrued expenses that are reported on the consolidated balance sheets approximate their fair value due to the short-term nature of these assets and liabilities. The carrying value of the long term debt approximates fair value as evidenced by the recent amendment to the Company's debt facility.
5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other liabilities consisted of the following (in thousands):
| | | | | | | | | | | |
| September 30, 2019 | | December 31, 2018 |
Accrued employee compensation and benefits | $ | 1,987 | | | $ | 1,957 | |
Accrued external research and development expenses | 2,422 | | | 1,679 | |
Accrued professional fees | 315 | | | 678 | |
Other | 909 | | | 985 | |
Total accrued expenses and other current liabilities | $ | 5,633 | | | $ | 5,299 | |
6. DEBT FINANCING
Long term debt consisted of the following (in thousands):
| | | | | | | | | | | |
| September 30, 2019 | | December 31, 2018 |
Principal amount of long term debt | $ | 26,000 | | | $ | 26,000 | |
Debt discount | (493) | | | (612) | |
Deferred financing fees | (699) | | | (867) | |
Long term debt, net of discount | $ | 24,808 | | | $ | 24,521 | |
In January 2018, the Company entered into a new secured debt facility (the "2018 Facility") with the existing lender that replaced the February 2017 amended facility. The 2018 Facility increased the funding up to $21.0 million. The Company paid a transaction fee of $0.9 million to the lender in connection with the 2018 Facility, and that fee was recognized as debt discount. The 2018 Facility required interest only payments through January 2019 with the ability to extend the interest only payment period through January 2020 if certain conditions were met. Monthly principal payments of $0.6 million were to commence in February 2019 for 36 months. The 2018 Facility has an interest rate equal to the LIBOR plus 8.50% per annum (10.61% as of September 30, 2019) payable monthly and a $1.1 million success fee which was payable upon the occurrence of certain events, including the IPO. The success fee was comprised of $0.7 million associated with the February 2017 amended facility and an additional $0.4 million arising from the January 2018 amendment. The fair value of the additional success fee was recorded as an obligation to the lenders and created an additional debt discount. The Company granted the lender a first priority security interest in all assets of the Company, excluding intellectual property and granted a negative pledge on such intellectual property.
In October 2018, the Company amended the 2018 Facility (the "Amended 2018 Facility") to extend the interest only period through July 2020 or January 2021 and the Maturity Date to July 2022 or January 2023 if certain conditions are met. The Amended 2018 Facility provides additional funding in the amounts of $5.0 million ("Term B Loan") and $4.0 million ("Term C Loan") if certain conditions are met. The Term B Loan of $5.0 million was drawn in December 2018. The success fee, increased to $1.2 million, which increased the debt discount by $0.1 million. Financing costs of $0.1 million were incurred related to the amendment. The interest rate was not changed through the amendment.
Upon completion of the IPO in May 2019, the interest only period was extended through January 2021 and the Maturity Date was extended to January 2023. Monthly principal payments of $1.1 million are to commence February 2021 for 24 months. The $1.2 million success fee was also paid.
For the nine months ended September 30, 2019 and 2018, interest expense arising from the amortization of the debt discount and deferred financing fees was $0.4 million and $0.3 million, respectively.
Terminal Interest Fee
The Company's August 2015 debt facility, as amended, and the 2018 Facility, included a terminal interest fee obligation, which is due with the final principal payment of the loan. The Company was accruing the terminal fee obligation over the term of the facility. The October 2018 amendment increased the terminal interest fee to $1.4 million. The carrying value of the terminal interest fee was $0.8 million and $0.7 million at September 30, 2019 and December 31, 2018, respectively.
The scheduled principal maturity of the long term debt, as of September 30, 2019 is as follows (in thousands):
| | | | | |
Year Ending December 31, | |
2020 | $ | — | |
2021 | 11,917 | |
2022 | 13,000 | |
2023 | 1,083 | |
| $ | 26,000 | |
7. STOCKHOLDERS' EQUITY
Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Company’s stockholders. Common stockholders are not entitled to receive dividends, unless declared by the board of directors.
Upon closing of the IPO in May 2019, all of the preferred stock converted into an aggregate of 14,641,997 shares of common stock.
In May 2019, the Company restated its certificate of incorporation, which, among other things, restated the number of shares of all classes of stock that the Company has authority to issue to 160,000,000 shares, consisting of (i) 150,000,000 shares of common stock, $0.001 par value per share, and (ii) 10,000,000 shares of preferred stock, $0.001 par value per share. The shares of preferred stock are currently undesignated.
Preferred Stock Warrants — In connection with the issuance of debt in 2012, the Company issued warrants to purchase 112,795 shares of Series A Preferred Stock with an exercise price of $1.95 per share and an expiration date of April 13, 2020. The fair value of the warrants was estimated using a Black-Scholes option-pricing model (see Note 4), and the resulting change in fair value was recorded in other income (expense) in the Company’s consolidated statement of operations.
Upon closing of the IPO on May 13, 2019, the outstanding warrants to purchase Series A Preferred Stock became outstanding warrants to purchase an aggregate of 61,235 shares of common stock at a weighted average exercise price of $3.59 per share. In June 2019, the holders of such warrants completed a cashless exercise of the warrants, resulting in the Company's issuance of 45,414 shares of common stock.
Stock-Based Compensation — The fair value of stock option grants is estimated using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires several key assumptions. The key assumptions used to apply this pricing model were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| 2019 | | 2018 | | 2019 | | 2018 |
Risk-free interest rate | 1.43% - 1.95% | | 2.82% | | 1.43% - 2.50% | | 1.93% - 2.90% |
Expected term (in years) | 0.34 - 6.25 | | 6.25 | | 0.25 - 6.25 | | 0.25 - 6.25 |
Expected dividend yield | 0 | % | | 0 | % | | 0 | % | | 0 | % |
Expected volatility of underlying common stock | 73.4 | % | | 65.0 | % | | 73.4 | % | | 65 | % |
The risk-free interest rate was based on rates associated with U.S. Treasury issues approximating the expected life of the stock options. The expected term of options granted to employees was determined using the simplified method, which represents the midpoint of the contractual term of the option and the weighted-average vesting period of the option. The Company uses the simplified method because it does not have sufficient historical option exercise data to provide a reasonable basis upon which to estimate the expected term. The expected dividend-yield assumption was based on the Company's expectation of no future dividend payments. The expected volatility of the underlying stock was based on the average historical volatility of comparable publicly traded companies based on weekly price returns as reported by a pricing service, as the Company has historically been a private company and lacks company-specific historical and implied volatility information.
The weighted-average grant date fair value of the options granted during the nine months ended September 30, 2019 and 2018, were $6.73 and $3.38 per share, respectively. As of September 30, 2019, there was $15.4 million of unrecognized compensation expense related to unvested stock options that is expected to be recognized over a weighted-average period of 2.8 years. Stock-based compensation related to stock options and unvested stock awards are classified as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| 2019 | | 2018 | | 2019 | | 2018 |
Research and development | $ | 659 | | | $ | 254 | | | $ | 1,727 | | | $ | 695 | |
General and administrative | 1,019 | | | 568 | | | 2,595 | | | 1,202 | |
| $ | 1,678 | | | $ | 822 | | | $ | 4,322 | | | $ | 1,897 | |
The following table summarizes the option activity under the 2010 Stock Incentive Plan:
| | | | | | | | | | | | | | | | | | | | | | | |
| Options | | Weighted Average Exercise Price | | Weighted Average Remaining Life (in Years) | | Intrinsic Value (in thousands) |
Outstanding January 1, 2019 | 4,039,487 | | | $ | 5.67 | | | 8.6 | | $ | 5,331 | |
Granted | 1,152,381 | | | 14.20 | | | | | |
Exercised | (64,700) | | | 3.79 | | | | | |
Canceled | (231,296) | | | 6.53 | | | | | |
Outstanding September 30, 2019 | 4,895,872 | | | $ | 7.68 | | | 8.0 | | |
Options vested or expected to vest as of September 30, 2019 | 4,837,022 | | | $ | 7.68 | | | 8.0 | | $ | (9,771) | |
Options exercisable as of September 30, 2019 | 2,003,863 | | | $ | 5.19 | | | 6.8 | | $ | 942 | |
The intrinsic value of options exercised during the period ended September 30, 2019 was nominal.
2010 Stock Option and Incentive Plan — The Company’s 2010 Stock Incentive Plan (the “2010 Plan”) provided for the Company to issue incentive stock options or nonqualified stock options, restricted stock, and other equity awards to employees, directors and consultants of the Company.
Upon effectiveness of the 2019 Plan, no future issuances will be made under the 2010 Plan.
2019 Stock Option and Incentive Plan — The 2019 Stock Option and Incentive Plan (the "2019 Plan") was approved by our board of directors on April 29, 2019 and became effective upon the IPO. The 2019 Plan provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock units, restricted stock awards, unrestricted stock awards, cash-based awards and dividend equivalent rights to the Company's officers, employees, directors and consultants. The number of shares initially reserved for issuance under the 2019 Plan is 905,000, which shall be cumulatively increased on January 1, 2020 and each January 1 thereafter by 4% of the number of shares of the Company's common stock outstanding on the immediately preceding December 31, or such lesser number of shares determined by the Company's board of directors or compensation committee of the board of directors.
2019 Employee Stock Purchase Plan — The 2019 Employee Stock Purchase Plan (the "2019 ESPP") was approved by our board of directors on April 29, 2019 and became effective upon the IPO. A total of 237,181 shares of common stock were initially reserved for issuance under this plan, which shall be cumulatively increased on January 1, 2020 and each January 1 thereafter by 1% of the number of shares of the Company's common stock outstanding on the immediately preceding December 31, or such lesser number of shares determined by the Company's board of directors or compensation committee of the board of directors.
8. COMMITMENTS AND CONTINGENCIES
Leases
The Company maintains a lease agreement for laboratory and office space with an expiration date of April 1, 2021. The lease agreement contains escalating rent payments. Rent expense is recorded on a straight-line basis. The Company had deferred rent of $0.1 million as of both September 30, 2019 and December 31, 2018. The Company is obligated to make minimum lease payments under the facility lease as follows (in thousands):
| | | | | |
Years Ending December 31, | |
2019 | $ | 301 | |
2020 | 1,226 | |
2021 | 415 | |
Total | $ | 1,942 | |
Rent expense for the nine months ended September 30, 2019 and 2018 was $0.9 million and $0.9 million, respectively.
We enter into contracts in the normal course of business with contract research organizations ("CROs"), contract manufacturing organizations ("CMOs") and other third parties for preclinical research studies, Non-IND, IRB-Approved Clinical Studies, Clinical Trials and testing and manufacturing services. These contracts do not contain minimum purchase commitments and are cancelable by us upon prior written notice. Payments due upon cancellation consist only of payments for services provided or expenses incurred, including noncancelable obligations of service providers, up to the date of cancellation.
9. RETIREMENT PLAN
The Company has a 401(k) retirement and savings plan (the "Plan") covering all qualified employees. The Plan allows each participant to contribute a portion of his or her base wages up to an amount not to exceed an annual statutory maximum. The Company is permitted to make discretionary matching contributions to the Plan. The Company has not made any discretionary contributions.
10. NET LOSS PER SHARE
Net Loss Per Share
Basic and diluted net loss per share attributable to common stockholders was calculated as follows (in thousands, except share and per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| 2019 | | 2018 | | 2019 | | 2018 |
Numerator: | | | | | | | |
Net loss | $ | (17,304) | | | $ | (8,784) | | | $ | (43,324) | | | $ | (26,307) | |
Accretion of redeemable convertible preferred stock | — | | | (41) | | | (46) | | | (79) | |
Net loss attributable to common stockholders | $ | (17,304) | | | $ | (8,825) | | | $ | (43,370) | | | $ | (26,386) | |