alec-10q_20190630.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended June 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 001-38792

 

Alector, Inc.

(Exact name of Registrant as specified in its Charter)

 

 

Delaware

 

82-2933343

(State or other jurisdiction of

incorporation or organization)

 

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

131 Oyster Point Blvd, Suite 600

South San Francisco, California

 

94080

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code: 415-231-5660

 

 

Not applicable

(Former name, former address, and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

Emerging growth company

 

 

 

 

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

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

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

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock

ALEC

The NASDAQ Global Select Market

As of August 1, 2019, the registrant had 68,831,857 shares of common stock, $0.0001 par value per share, outstanding.

 

 

 

 


Alector, Inc.

 

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

Item 1.

Financial Statements

1

 

Condensed Consolidated Balance Sheets

1

 

Condensed Consolidated Statements of Operations and Comprehensive Loss

2

 

Condensed Consolidated Statements of Stockholders’ Equity

3

 

Condensed Consolidated Statements of Cash Flows

5

 

Notes to Condensed Consolidated Financial Statements

6

Item 2.

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

13

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

20

Item 4.

Controls and Procedures

20

 

 

 

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

21

Item 1A.

Risk Factors

21

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

61

Item 3.

Defaults Upon Senior Securities

61

Item 4.

Mine Safety Disclosures

61

Item 5.

Other Information

61

Item 6.

Exhibits

62

 

Signatures

63

 

 

 

 

 

 

i


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements. All statements other than statements of historical facts contained in this report, including statements regarding our future results of operations and financial position, business strategy, product candidates, planned preclinical studies and clinical trials, results of clinical trials, research and development costs, regulatory approvals, timing and likelihood of success, as well as plans and objectives of management for future operations, are forward-looking statements. These statements involve known and unknown risks, uncertainties, and other important factors that are in some cases beyond our control and may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements.

In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “would,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential,” or “continue” or the negative of these terms or other similar expressions. Forward-looking statements contained in this report include, but are not limited to, statements about:

 

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

 

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

 

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

 

the expected potential benefits of strategic collaborations with third parties and our ability to attract collaborators with development, regulatory and commercialization expertise;

 

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

 

the size of the market opportunity for our product candidates in each of the diseases we are targeting;

 

our ability to expand our product candidates into additional indications and patient populations;

 

the success of competing therapies that are or may become available;

 

the beneficial characteristics, safety, efficacy, and therapeutic effects of our product candidates;

 

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

 

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

 

our plans relating to the further development and manufacturing of our product candidates, including additional indications that we may pursue;

 

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

 

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

 

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

 

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

 

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

 

our financial performance;

 

 

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

 

our expectations regarding the period during which we will qualify as an emerging growth company under the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”).

We have based these forward-looking statements largely on our current expectations and projections about our business, the industry in which we operate and financial trends that we believe may affect our business, financial condition, results of operations, and prospects, and these forward-looking statements are not guarantees of future performance or development. These forward-looking statements speak only as of the date of this report and are subject to a number of risks, uncertainties, and assumptions described in the section titled “Risk Factors” and elsewhere in this report. Because forward-looking statements are inherently subject to risks and

ii


uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein until after we distribute this Quarterly Report on Form 10-Q, whether as a result of any new information, future events, or otherwise.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain, and you are cautioned not to unduly rely upon these statements.

Investors and others should note that we may announce material business and financial information to our investors using our investor relations website (https://investors.alector.com), Securities and Exchange Commission (“SEC”) filings, webcasts, press releases, and conference calls. We use these mediums, including our website, to communicate with our stockholders and public about our company, our products, and other issues. It is possible that the information that we make available may be deemed to be material information. We therefore encourage investors and others interested in our company to review the information that we make available on our website.

 

iii


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

ALECTOR, INC.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)

 

 

 

June 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

69,208

 

 

$

65,470

 

Marketable securities

 

 

341,725

 

 

 

224,938

 

Prepaid expenses and other current assets

 

 

3,664

 

 

 

2,768

 

Total current assets

 

 

414,597

 

 

 

293,176

 

Property and equipment, net

 

 

32,014

 

 

 

10,937

 

Operating lease right-of-use assets

 

 

29,058

 

 

 

 

Restricted cash

 

 

1,472

 

 

 

1,472

 

Other assets

 

 

110

 

 

 

2,774

 

TOTAL ASSETS

 

$

477,251

 

 

$

308,359

 

LIABILITIES, CONVERTIBLE PREFERRED STOCK, AND

   STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Accounts payable

 

$

540

 

 

$

126

 

Accrued clinical supply costs

 

 

5,981

 

 

 

4,463

 

Accrued liabilities

 

 

14,577

 

 

 

8,439

 

Deferred revenue, current portion

 

 

40,871

 

 

 

34,905

 

Deferred rent, current portion

 

 

 

 

 

15

 

Operating lease liabilities, current portion

 

 

5,133

 

 

 

 

Total current liabilities

 

 

67,102

 

 

 

47,948

 

Deferred revenue, long-term portion

 

 

121,227

 

 

 

139,715

 

Deferred rent, long-term portion

 

 

 

 

 

7,478

 

Operating lease liabilities, long-term portion

 

 

42,797

 

 

 

 

Other long-term liabilities

 

 

409

 

 

 

96

 

TOTAL LIABILITIES

 

 

231,535

 

 

 

195,237

 

Convertible preferred stock; $0.0001 par value; zero and 45,849,677 shares authorized

   as of June 30, 2019 and December 31, 2018, respectively; zero and 45,374,836

   shares issued and outstanding as of June 30, 2019 and December 31,

   2018, respectively

 

 

 

 

 

210,520

 

STOCKHOLDERS’ EQUITY (DEFICIT):

 

 

 

 

 

 

 

 

Common stock, $0.0001 par value; 200,000,000 and 65,000,000 shares authorized as

   of June 30, 2019 and December 31, 2018, respectively; 68,831,857 and 13,764,829

   shares issued and outstanding as of June 30, 2019 and December 31, 2018,

   respectively

 

 

7

 

 

 

1

 

Additional paid-in capital

 

 

402,823

 

 

 

17,078

 

Accumulated other comprehensive income (loss)

 

 

441

 

 

 

(42

)

Accumulated deficit

 

 

(157,555

)

 

 

(114,435

)

TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

245,716

 

 

 

(97,398

)

TOTAL LIABILITIES, CONVERTIBLE PREFERRED STOCK, AND

   STOCKHOLDERS’ EQUITY (DEFICIT)

 

$

477,251

 

 

$

308,359

 

 

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

1


ALECTOR, INC.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

(In thousands, except share and per share data)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collaboration revenue

 

$

6,917

 

 

$

7,109

 

 

$

12,522

 

 

$

11,860

 

Grant revenue

 

 

 

 

 

 

 

 

 

 

 

169

 

Total revenue

 

 

6,917

 

 

 

7,109

 

 

 

12,522

 

 

 

12,029

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

25,640

 

 

 

16,818

 

 

 

46,247

 

 

 

28,542

 

General and administrative

 

 

8,429

 

 

 

2,522

 

 

 

14,188

 

 

 

4,943

 

Total operating expenses

 

 

34,069

 

 

 

19,340

 

 

 

60,435

 

 

 

33,485

 

Loss from operations

 

 

(27,152

)

 

 

(12,231

)

 

 

(47,913

)

 

 

(21,456

)

Other income, net

 

 

2,592

 

 

 

1,110

 

 

 

4,793

 

 

 

1,898

 

Net loss

 

 

(24,560

)

 

 

(11,121

)

 

 

(43,120

)

 

 

(19,558

)

Unrealized income (loss) on marketable securities

 

 

333

 

 

 

62

 

 

 

483

 

 

 

(92

)

Comprehensive loss

 

$

(24,227

)

 

$

(11,059

)

 

$

(42,637

)

 

$

(19,650

)

Net loss per share, basic and diluted

 

$

(0.36

)

 

$

(1.00

)

 

$

(0.77

)

 

$

(1.78

)

Shares used in computing net loss per share, basic and diluted

 

 

67,327,975

 

 

 

11,157,024

 

 

 

55,643,532

 

 

 

11,008,568

 

 

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

 

 

2


ALECTOR, INC.

Condensed Consolidated Statement of Convertible Preferred Stock and Stockholders’ Equity (Deficit)

(Unaudited)

(In thousands, except share data)

 

 

 

Convertible

Preferred Stock

 

 

 

Common Stock

 

 

Additional

Paid-In

Capital

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Accumulated

Deficit

 

 

Total

Stockholders’

Equity (Deficit)

 

 

 

Shares

 

 

Amount

 

 

 

Shares

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance — December 31, 2018

 

 

45,374,836

 

 

$

210,520

 

 

 

 

13,764,829

 

 

$

1

 

 

$

17,078

 

 

$

(42

)

 

$

(114,435

)

 

$

(97,398

)

Conversion of convertible preferred

   stock into common stock

 

 

(45,374,836

)

 

 

(210,520

)

 

 

 

45,374,836

 

 

 

5

 

 

 

210,516

 

 

 

 

 

 

 

 

 

210,521

 

Issuance of common stock upon

   initial public offering, net of

   issuance costs

 

 

 

 

 

 

 

 

 

9,739,541

 

 

 

1

 

 

 

168,222

 

 

 

 

 

 

 

 

 

168,223

 

Exercise of stock options

 

 

 

 

 

 

 

 

 

625

 

 

 

 

 

 

5

 

 

 

 

 

 

 

 

 

5

 

Forfeiture of restricted common

   stock

 

 

 

 

 

 

 

 

 

(8,039

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,245

 

 

 

 

 

 

 

 

 

3,245

 

Accumulated other comprehensive

   income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

150

 

 

 

 

 

 

150

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(18,560

)

 

 

(18,560

)

Balance — March 31, 2019

 

 

 

 

 

 

 

 

 

68,871,792

 

 

 

7

 

 

 

399,066

 

 

 

108

 

 

 

(132,995

)

 

 

266,186

 

Exercise of stock options

 

 

 

 

 

 

 

 

 

8,999

 

 

 

 

 

 

63

 

 

 

 

 

 

 

 

 

63

 

Forfeiture of restricted common

   stock

 

 

 

 

 

 

 

 

 

(48,934

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,694

 

 

 

 

 

 

 

 

 

3,694

 

Accumulated other comprehensive

   income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

333

 

 

 

 

 

 

333

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(24,560

)

 

 

(24,560

)

Balance — June 30, 2019

 

 

 

 

$

 

 

 

 

68,831,857

 

 

$

7

 

 

$

402,823

 

 

$

441

 

 

$

(157,555

)

 

$

245,716

 

3


ALECTOR, INC.

Condensed Consolidated Statement of Convertible Preferred Stock and Stockholders’ Equity (Deficit)

(Unaudited)

(In thousands, except share data)

 

 

 

 

Convertible

Preferred Stock

 

 

 

Common Stock

 

 

Additional

Paid-In

Capital

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Accumulated

Deficit

 

 

Total

Stockholders’

Deficit

 

 

 

Shares

 

 

Amount

 

 

 

Shares

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance — December 31, 2017

 

 

36,001,203

 

 

$

77,485

 

 

 

 

13,776,153

 

 

$

1

 

 

$

10,153

 

 

$

 

 

$

(62,187

)

 

$

(52,033

)

Forfeiture of restricted common

   stock

 

 

 

 

 

 

 

 

 

(11,324

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,124

 

 

 

 

 

 

 

 

 

1,124

 

Accumulated other comprehensive

   loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(154

)

 

 

 

 

 

(154

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,437

)

 

 

(8,437

)

Balance — March 31, 2018

 

 

36,001,203

 

 

 

77,485

 

 

 

 

13,764,829

 

 

 

1

 

 

 

11,277

 

 

 

(154

)

 

 

(70,624

)

 

 

(59,500

)

Issuance of Series E convertible

   preferred stock, net of issuance costs

 

 

4,941,825

 

 

 

70,084

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,161

 

 

 

 

 

 

 

 

 

1,161

 

Accumulated other comprehensive

   income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

62

 

 

 

 

 

 

62

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(11,121

)

 

 

(11,121

)

Balance — June 30, 2018

 

 

40,943,028

 

 

$

147,569

 

 

 

 

13,764,829

 

 

$

1

 

 

$

12,438

 

 

$

(92

)

 

$

(81,745

)

 

$

(69,398

)

 

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

 

4


ALECTOR, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net loss

 

$

(43,120

)

 

$

(19,558

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,119

 

 

 

464

 

Stock-based compensation

 

 

6,939

 

 

 

2,285

 

Accretion of discount on marketable securities

 

 

(2,857

)

 

 

(953

)

Impairment loss on right-of-use asset

 

 

1,158

 

 

 

 

Loss from disposal of property and equipment, net

 

 

39

 

 

 

89

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

 

 

 

238

 

Prepaid expenses and other current assets

 

 

(896

)

 

 

(1,636

)

Other assets

 

 

17

 

 

 

153

 

Accounts payable

 

 

414

 

 

 

(830

)

Accrued liabilities and accrued clinical supply costs

 

 

5,843

 

 

 

(949

)

Deferred revenue

 

 

(12,522

)

 

 

188,140

 

Deferred rent

 

 

(44

)

 

 

(1

)

Lease liabilities and other long-term liabilities

 

 

2,292

 

 

 

35

 

Net cash provided by (used in) operating activities

 

 

(41,618

)

 

 

167,477

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(11,393

)

 

 

(1,310

)

Purchase of marketable securities

 

 

(339,447

)

 

 

(268,328

)

Maturities of marketable securities

 

 

226,000

 

 

 

50,000

 

Net cash used in investing activities

 

 

(124,840

)

 

 

(219,638

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock upon initial public offering, net

   of issuance costs

 

 

170,128

 

 

 

 

Proceeds from issuance of convertible preferred stock, net of issuance costs

 

 

 

 

 

70,092

 

Proceeds from the exercise of options to purchase common stock

 

 

68

 

 

 

 

Net cash provided by financing activities

 

 

170,196

 

 

 

70,092

 

Net increase in cash, cash equivalents, and restricted cash

 

 

3,738

 

 

 

17,931

 

Cash, cash equivalents, and restricted cash at beginning of period

 

 

66,942

 

 

 

32,451

 

Cash, cash equivalents, and restricted cash at end of period

 

$

70,680

 

 

$

50,382

 

NON-CASH INVESTING AND FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Property and equipment purchases included in accrued liabilities

 

$

2,849

 

 

$

8

 

Issuance costs for convertible preferred stock included in accrued liabilities

 

$

 

 

$

3

 

Deferred offering costs for initial public offering included in accounts payable and accrued liabilities

 

$

 

 

$

104

 

Tenant improvements paid by landlord

 

$

8,286

 

 

$

 

 

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

 

5


 

ALECTOR, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1.

The Company and Liquidity

Alector, Inc. (“Alector” or the “Company”) is a Delaware corporation headquartered in South San Francisco, California. Alector is a biotechnology company focused on harnessing the immune system to cure neurodegenerative diseases.

Initial Public Offering

On February 7, 2019, the Company completed an initial public offering (“IPO”) through issuing and selling 9,739,541 shares of common stock at a public offering price of $19.00 per share, including 489,541 shares sold pursuant to the underwriters’ partial exercise of their option to purchase additional shares. The aggregate net proceeds received by the Company from the offering, net of underwriting discounts and commissions and offering expenses, were $168.2 million. Upon the closing of the IPO, all of the outstanding shares of convertible preferred stock automatically converted into 45,374,836 shares of common stock. Subsequent to the closing of the IPO, there were no shares of convertible preferred stock outstanding.

2.

Summary of Significant Accounting Policies

Basis of Presentation

The condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States (“GAAP”) as defined by the Financial Accounting Standards Board (“FASB”). In the opinion of management, these unaudited condensed consolidated financial statements include all normal, recurring adjustments that are necessary to present fairly the results of the interim periods presented. The condensed consolidated financial statements include the accounts of Alector, Inc. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year. These interim financial statements should be read in conjunction with the audited financial statements as of and for the year ended December 31, 2018, and the notes thereto, which are included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 26, 2019.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity 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 revenue and expense during the reporting period. The Company evaluates its estimates, including those related to revenue recognition, manufacturing accruals, clinical accruals, fair value of assets and liabilities, income taxes uncertainties, stock-based compensation, and related assumptions on an ongoing basis using historical experience and other factors and adjusts those estimates and assumptions when facts and circumstances dictate. Actual results could materially differ from those estimates.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents, and short-term marketable securities. Cash and cash equivalents are deposited in checking and sweep accounts at a financial institution. Such deposits may, at times, exceed federally insured limits.

Cash, Cash Equivalents, and Restricted Cash

The Company considers all highly liquid investments with original maturities of three months or less at the date of purchase to be cash and cash equivalents. Cash equivalents, which consist of amounts invested in money market funds, are stated at fair value. There are no unrealized gains or losses on the money market funds for the periods presented.

Restricted cash as of June 30, 2019 relates to a letter of credit established for a lease entered into in June 2018.

6


 

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same amounts shown in the condensed consolidated statements of cash flows:

 

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

 

(In thousands)

 

Cash and cash equivalents

 

$

69,208

 

 

$

48,910

 

Restricted cash

 

 

1,472

 

 

 

1,472

 

Total cash, cash equivalents, and restricted cash

 

$

70,680

 

 

$

50,382

 

 

Leases

The Company adopted Accounting Standards Update No. 2016-02, Leases on January 1, 2019. Upon adoption, the Company recorded a right-of-use asset and a lease liability for all leases with a term of greater than 12 months. The Company adopted the guidance on a modified retrospective basis and did not restate comparative periods. The Company elected to adopt the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allows the historical lease classification of existing leases be carried forward. As a result of the adoption, the Company recorded operating right-of-use assets of $31.4 million and lease liabilities of $38.9 million on January 1, 2019. The prior deferred rent balances of $7.5 million under legacy guidance, primarily related to a tenant improvement allowance, was derecognized. The lease liabilities balance increase through June 30, 2019 due to additional tenant improvement allowance paid by a landlord. There was no effect on accumulated deficit as a result of the adoption.

The Company determines whether the arrangement is or contains a lease at the inception of the lease. Leases are recognized on the balance sheet as right-of-use assets and lease liabilities. Lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected lease term. The Company utilizes the appropriate incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received and any prepaid or accrued rent. Rent expense for the operating lease is recognized on a straight-line basis over the lease term and is included in operating expenses on the statements of operations and comprehensive loss. Variable lease payments include lease operating expenses.

The Company elected to exclude from its balance sheets recognition of leases having a term of 12 months or less (“short-term leases”) and elected to not separate lease components and non-lease components for its long-term leases.

Fair Value of Financial Instruments

The Company’s financial instruments include cash and cash equivalents, receivables, accounts payable, and accrued liabilities. The Company’s financial instruments approximate fair value due to their relatively short maturities.

The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines the fair value of its financial instruments based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:

Level 1 – Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

Level 2 – Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and

Level 3 – Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.

7


 

Revenue Recognition

The Company signed an agreement in October 2017 with AbbVie Biotechnology, Ltd. (“AbbVie”) to co-develop antibodies to two program targets in preclinical development (“AbbVie Agreement”). Under the terms of the AbbVie Agreement, AbbVie made $205.0 million in upfront payments, of which $5.0 million and $200.0 million was received by the Company in October 2017 and January 2018, respectively. The Company will perform research and development services for the antibodies to the two programs through the end of Phase 2 clinical trials which the Company expects to conduct through 2023. AbbVie will then have the exclusive right to exercise an option to enter into a license and collaboration agreement with the Company for one or both of the programs for $250.0 million each. If AbbVie exercises its option for the programs, AbbVie will take over the development of the product candidates for such program and costs will be split between the parties. The Company will also share in profits and losses upon commercialization of any products from such program. However, following AbbVie’s exercise of its option for a program, the Company may opt out of sharing in development costs and profits or losses for that program and instead receive tiered royalties. Additionally, under the terms of the AbbVie Agreement, the Company will be eligible to earn up to an additional $242.8 million in milestone payments per program related to the initiation of certain clinical studies and regulatory approval for up to three indications per program. The Company assessed its collaboration agreement with AbbVie in the context of the delivery of the research and development services.

The Company recognizes collaboration revenue by measuring the progress toward complete satisfaction of the performance obligation using an input measure. In order to recognize revenue over the research and development period, the Company measures actual costs incurred to date compared to the overall total expected costs to satisfy the performance obligation. Revenues are recognized as the program costs are incurred. Collaboration revenue under the Company’s collaboration agreement with AbbVie during the three and six months ended June 30, 2019 was $6.9 million and $12.5 million, respectively, the entire amount of which was included in deferred revenue at the beginning of the respective periods. The Company recorded deferred revenue of $162.1 million as of June 30, 2019. The deferred revenue is expected to be recognized over the research and development period of the programs through the completion of Phase 2 clinical trials.

Comprehensive Loss

Comprehensive loss includes net loss and certain changes in stockholders’ equity that are the result of transactions and economic events other than those with stockholders. The Company’s only element of other comprehensive loss was net unrealized losses on marketable securities.

 

3.

Fair Value Measurements

The following tables summarize the Company’s financial assets measured at fair value on a recurring basis by level within the fair value hierarchy:

 

 

 

June 30, 2019

 

 

 

Fair Value

Hierarchy

 

Amortized

Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Fair Market

Value

 

 

 

(In thousands)

 

Money market funds

 

Level 1

 

$

68,958

 

 

$

 

 

$

 

 

$

68,958

 

U.S. government treasury securities

 

Level 1

 

 

341,284

 

 

 

441

 

 

 

 

 

 

341,725

 

Total cash equivalents and marketable

   securities

 

 

 

$

410,242

 

 

$

441

 

 

$

 

 

$

410,683

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

Fair Value

Hierarchy

 

Amortized

Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Fair Market

Value

 

 

 

(In thousands)

 

Money market funds

 

Level 1

 

$

65,222

 

 

$

 

 

$

 

 

$

65,222

 

U.S. government treasury securities

 

Level 1

 

 

224,980

 

 

 

3

 

 

 

(45

)

 

 

224,938

 

Total cash equivalents and marketable

   securities

 

 

 

$

290,202

 

 

$

3

 

 

$

(45

)

 

$

290,160

 

 

As of June 30, 2019, the remaining balance of all investments were less than one year.

8


 

4.

Balance Sheet Components

Property and Equipment, Net

Property and equipment, net consists of the following:

 

 

 

June 30,

2019

 

 

December 31,

2018

 

 

 

(In thousands)

 

Leasehold improvements

 

$

23,735

 

 

$

210

 

Lab equipment

 

 

7,733

 

 

 

4,599

 

Furniture and fixtures

 

 

1,870

 

 

 

131

 

Computer equipment

 

 

1,377

 

 

 

449

 

Construction-in-progress

 

 

56

 

 

 

7,449

 

Property and equipment, gross

 

 

34,771

 

 

 

12,838

 

Less accumulated depreciation and amortization

 

 

(2,757

)

 

 

(1,901

)

Total property and equipment, net

 

$

32,014

 

 

$

10,937

 

 

Accrued Liabilities

Accrued liabilities consist of the following:

 

 

 

June 30,

2019

 

 

December 31,

2018

 

 

 

(In thousands)

 

Accrued research and development costs

 

$

7,814

 

 

$

3,821

 

Accrued employee compensation

 

 

2,922

 

 

 

2,766

 

Accrued property and equipment

 

 

2,849

 

 

 

293

 

Accrued professional services

 

 

836

 

 

 

588

 

Accrued offering costs

 

 

 

 

 

792

 

Other

 

 

156

 

 

 

179