alec-10q_20190331.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 March 31, 2019

OR

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

FOR THE TRANSITION PERIOD FROM                      TO

Commission File Number 001-38792

 

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

 

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

151 Oyster Point Blvd, Suite 300

South San Francisco, California

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 May 6, 2019, the registrant had 68,871,792 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

4

 

Notes to Condensed Consolidated Financial Statements

5

Item 2.

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

12

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

18

Item 4.

Controls and Procedures

18

 

 

 

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

18

Item 1A.

Risk Factors

18

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

58

Item 3.

Defaults Upon Senior Securities

58

Item 4.

Mine Safety Disclosures

58

Item 5.

Other Information

58

Item 6.

Exhibits

59

 

Signatures

60

 

 

 

 

 

 

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;

 

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)

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

60,954

 

 

$

65,470

 

Marketable securities

 

 

375,641

 

 

 

224,938

 

Prepaid expenses and other current assets

 

 

5,519

 

 

 

2,768

 

Total current assets

 

 

442,114

 

 

 

293,176

 

Property and equipment, net

 

 

21,733

 

 

 

10,937

 

Operating lease right-of-use assets

 

 

30,665

 

 

 

 

Restricted cash

 

 

1,472

 

 

 

1,472

 

Other assets

 

 

60

 

 

 

2,774

 

TOTAL ASSETS

 

$

496,044

 

 

$

308,359

 

LIABILITIES, CONVERTIBLE PREFERRED STOCK, AND

   STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,200

 

 

$

126

 

Accrued clinical supply costs

 

 

3,723

 

 

 

4,463

 

Accrued liabilities

 

 

8,000

 

 

 

8,439

 

Deferred revenue, current portion

 

 

38,526

 

 

 

34,905

 

Deferred rent, current portion

 

 

 

 

 

15

 

Operating lease liabilities, current portion

 

 

4,385

 

 

 

 

Total current liabilities

 

 

55,834

 

 

 

47,948

 

Deferred revenue, long-term portion

 

 

130,489

 

 

 

139,715

 

Deferred rent, long-term portion

 

 

 

 

 

7,478

 

Operating lease liabilities, long-term portion

 

 

43,439

 

 

 

 

Other long-term liabilities

 

 

96

 

 

 

96

 

TOTAL LIABILITIES

 

 

229,858

 

 

 

195,237

 

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

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

   shares issued and outstanding as of March 31, 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 March 31, 2019 and December 31, 2018, respectively; 68,871,792 and 13,764,829

   shares issued and outstanding as of March 31, 2019 and December 31, 2018,

   respectively

 

 

7

 

 

 

1

 

Additional paid-in capital

 

 

399,066

 

 

 

17,078

 

Accumulated other comprehensive income (loss)

 

 

108

 

 

 

(42

)

Accumulated deficit

 

 

(132,995

)

 

 

(114,435

)

TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

266,186

 

 

 

(97,398

)

TOTAL LIABILITIES, CONVERTIBLE PREFERRED STOCK, AND

   STOCKHOLDERS’ EQUITY (DEFICIT)

 

$

496,044

 

 

$

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 March 31,

 

 

 

2019

 

 

2018

 

Revenue:

 

 

 

 

 

 

 

 

Collaboration revenue

 

$

5,605

 

 

$

4,751

 

Grant revenue

 

 

 

 

 

169

 

Total revenue

 

 

5,605

 

 

 

4,920

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

20,607

 

 

 

11,724

 

General and administrative

 

 

5,759

 

 

 

2,421

 

Total operating expenses

 

 

26,366

 

 

 

14,145

 

Loss from operations

 

 

(20,761

)

 

 

(9,225

)

Other income, net

 

 

2,201

 

 

 

788

 

Net loss

 

 

(18,560

)

 

 

(8,437

)

Unrealized income (loss) on marketable securities

 

 

150

 

 

 

(154

)

Comprehensive loss

 

$

(18,410

)

 

$

(8,591

)

Net loss per share, basic and diluted

 

$

(0.42

)

 

$

(0.78

)

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

 

 

43,828,106

 

 

 

10,858,473

 

 

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

 

Cancellation 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

 

 

 

 

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

)

Cancellation 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

)

 

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

 

3


ALECTOR, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net loss

 

$

(18,560

)

 

$

(8,437

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

298

 

 

 

212

 

Stock-based compensation

 

 

3,245

 

 

 

1,124

 

Accretion of discount on marketable securities

 

 

(1,321

)

 

 

(352

)

Loss from disposal of property and equipment, net

 

 

 

 

 

76

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

 

 

 

69

 

Prepaid expenses and other current assets

 

 

(2,751

)

 

 

(1,051

)

Other assets

 

 

17

 

 

 

 

Accounts payable

 

 

683

 

 

 

(783

)

Accrued liabilities and accrued clinical supply costs

 

 

(952

)

 

 

(1,616

)

Deferred revenue

 

 

(5,605

)

 

 

195,249

 

Deferred rent

 

 

(44

)

 

 

(1

)

Lease liabilities and other long-term liabilities

 

 

1,424

 

 

 

35

 

Net cash provided by (used in) operating activities

 

 

(23,566

)

 

 

184,525

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(2,030

)

 

 

(613

)

Purchase of marketable securities

 

 

(267,232

)

 

 

(178,902

)

Maturities of marketable securities

 

 

118,000

 

 

 

 

Net cash used in investing activities

 

 

(151,262

)

 

 

(179,515

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

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

   of issuance costs

 

 

170,307

 

 

 

 

Payment of convertible preferred stock issuance costs

 

 

 

 

 

(62

)

Proceeds from the exercise of options to purchase common stock

 

 

5

 

 

 

 

Net cash provided by (used in) financing activities

 

 

170,312

 

 

 

(62

)

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

 

 

(4,516

)

 

 

4,948

 

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

 

 

66,942

 

 

 

32,451

 

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

 

$

62,426

 

 

$

37,399

 

NON-CASH INVESTING AND FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Property and equipment purchases included in accounts payable and accrued liabilities

 

$

1,071

 

 

$

109

 

Issuance costs for convertible preferred stock included in accrued liabilities

 

$

 

 

$

33

 

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

 

$

179

 

 

$

 

Tenant improvements paid by landlord

 

$

8,286

 

 

$

 

 

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

 

4


 

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 March 31, 2019 relates to a letter of credit established for a lease entered into in June 2018.

5


 

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:

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

 

 

(In thousands)

 

Cash and cash equivalents

 

$

60,954

 

 

$

37,399

 

Restricted cash

 

 

1,472

 

 

 

 

Total cash, cash equivalents, and restricted cash

 

$

62,426

 

 

$

37,399

 

 

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 March 31, 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.

6


 

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 months ended March 31, 2019 and 2018 was $5.6 million and $4.8 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 $169.0 million as of March 31, 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:

 

 

 

March 31, 2019

 

 

 

Fair Value

Hierarchy

 

Amortized

Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Fair Market

Value

 

 

 

(In thousands)

 

Money market funds

 

Level 1

 

$

60,703

 

 

$

 

 

$

 

 

$

60,703

 

U.S. government treasury securities

 

Level 1

 

 

375,533

 

 

 

111

 

 

 

(3

)

 

 

375,641

 

Total cash equivalents and marketable

   securities

 

 

 

$

436,236

 

 

$

111

 

 

$

(3

)

 

$

436,344

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

7


 

4.

Balance Sheet Components

Property and Equipment, Net

Property and equipment, net consists of the following:

 

 

 

March 31,

2019

 

 

December 31,

2018

 

 

 

(In thousands)

 

Lab equipment

 

$

4,905

 

 

$

4,599

 

Computer equipment

 

 

538

 

 

 

449

 

Leasehold improvements

 

 

210

 

 

 

210

 

Office equipment

 

 

131

 

 

 

131

 

Construction-in-progress

 

 

18,147

 

 

 

7,449

 

Property and equipment, gross

 

 

23,931

 

 

 

12,838

 

Less accumulated depreciation and amortization

 

 

(2,198

)

 

 

(1,901

)

Total property and equipment, net

 

$

21,733

 

 

$

10,937

 

 

Accrued Liabilities

Accrued liabilities consist of the following:

 

 

 

March 31,

2019

 

 

December 31,

2018

 

 

 

(In thousands)

 

Accrued research and development costs

 

$

4,566

 

 

$

3,821

 

Accrued employee compensation

 

 

2,009

 

 

 

2,766

 

Accrued property and equipment

 

 

810

 

 

 

293

 

Accrued professional services

 

 

401

 

 

 

588

 

Accrued offering costs

 

 

49

 

 

 

792

 

Other

 

 

165

 

 

 

179

 

Total accrued liabilities

 

$

8,000

 

 

$

8,439

 

 

5.

Leases

In June 2018, the Company signed a lease agreement to lease approximately 105,000 square feet in new office and laboratory space in South San Francisco which serves as the new headquarters. The lease is over a ten-year term with an option to renew for a period of ten years. The Company occupied the premises and began to make rent payments on May 1, 2019. The lease commencement date was in January 2019, as that is when the Company was given control of the space. The landlord paid for $15.7 million of tenant improvements. In connection with the lease, the Company entered into a letter of credit arrangement in the amount of $1.5 million as collateral for the lease, which is classified as restricted cash on the consolidated balance sheets. The Company leased approximately 16,000 square feet as its headquarters with its main offices and laboratory facilities in South San Francisco under a sublease agreement that ended in April 2019. The Company also leases approximately 9,000 square feet of laboratory facilities in Milpitas under an agreement that ends in January 2022 with an option to extend for four years. None of the leases included the options to extend in the calculation of the lease liabilities as such extensions are not reasonably certain to occur. Variable lease costs for all of the Company’s leases consist of operating expenses for the spaces.

The components of lease expense were as follows (in thousands):

 

 

 

Three Months Ended

March 31, 2019

 

Operating lease cost

 

$

1,685

 

Variable lease cost

 

 

184

 

Short-term lease cost

 

 

34

 

Total

 

$

1,903

 

 

Rent expense under legacy leasing guidance for the three months ended March 31, 2018 was $0.3 million.

8


 

As of March 31, 2019, the weighted-average remaining lease term for operating leases was 10 years and the weighted-average discount rate was 8.8%.

The following are the undiscounted cash flows owed under the Company’s operating leases as of March 31, 2019:

 

 

 

(In thousands)

 

2019 (remaining nine months)

 

$

2,945

 

2020

 

 

6,882

 

2021

 

 

7,122

 

2022

 

 

7,146

 

2023

 

 

7,376

 

Thereafter

 

 

43,146

 

Total undiscounted lease payments

 

$

74,617

 

Less: Present value adjustment

 

 

(26,793

)

Total

 

$

47,824

 

 

6.

Stock-based Compensation

The Company recognized stock-based compensation as follows:

 

 

 

Three Months Ended

March 31,

 

 

 

2019

 

 

2018

 

 

 

(In thousands)

 

Research and development

 

$

1,704

 

 

$

609

 

General and administrative

 

 

1,541

 

 

 

515

 

Total stock-based compensation

 

$

3,245

 

 

$

1,124

 

Restricted Common Stock

Activity for the restricted common stock is shown below:

 

 

 

Number of

Shares

 

 

Weighted

Average Grant

Date Fair

Value per Share

 

Unvested restricted common stock as of

   December 31, 2018

 

 

1,917,848

 

 

$

6.95

 

Vested

 

 

(240,427

)

 

 

6.95

 

Cancelled/forfeited

 

 

(8,039

)

 

 

6.95

 

Unvested restricted common stock as of

   March 31, 2019

 

 

1,669,382

 

 

$

6.95

 

 

As of March 31, 2019, total unrecognized stock-based compensation related to unvested restricted common stock was $7.5 million, which the Company expects to recognize over a remaining weighted-average period of 2.4 years.

2019 Equity Incentive Plan

On February 6, 2019, the Company adopted the 2019 Equity Incentive Plan (“2019 Plan”) under which the Board may issue incentive stock options, nonstatutory stock options, restricted stock, restricted stock units, stock appreciation rights, performance units, and performance shares to the Company’s employees, directors, and consultants. The Company initially reserved for issuance 7,688,156 shares of common stock pursuant to the 2019 Plan. The Company’s 2017 Stock Option and Grant Plan (“2017 Plan”) was terminated; however, shares subject to awards granted under it will continue to be governed by the 2017 Plan. Shares reserved for issuance but not issued pursuant to, or not subject to, awards granted under the 2017 Plan were added to the available shares in the 2019 Plan. Shares subject to awards granted under the 2017 Plan that are repurchased by, or forfeited to, the Company will also be reserved for issuance under the 2019 Plan. The board of directors or a committee appointed by the board of directors has the authority to determine to whom options or shares will be granted, the number of

9


 

shares, the term, and the exercise price. If an individual owns stock representing 10% or more of the outstanding shares, the exercise price of each share shall be at least 110% of the fair market value and the term of the award shall not exceed than five years. All other options granted under the 2019 Plan must have an exercise price at least equal to the fair market value on the date of grant and have a term not to exceed ten years. The shares generally vest over a four-year period with straight-line vesting and a 25% one-year cliff. As of March 31, 2019, the Company had reserved 16,587,389 shares of common stock for issuance under the 2019 Plan, of which 7,404,136 shares were available for issuance.

Activity for the options to purchase common stock shown below (in thousands, except share and per share amounts):

 

 

 

Number of

Options

 

 

Weighted

Average

Exercise

Price Per

Share

 

 

Weighted

Average

Remaining

Contractual

Term

(In years)

 

Aggregate

Intrinsic

Value

 

Outstanding as of December 31, 2018

 

 

5,063,688

 

 

$

8.94

 

 

9.6

 

$

6,067

 

Granted

 

 

422,600

 

 

 

19.50

 

 

 

 

 

 

 

Exercised

 

 

(625

)

 

 

8.16

 

 

 

 

 

 

 

Cancelled/forfeited

 

 

(9,479

)

 

 

9.20

 

 

 

 

 

 

 

Outstanding as of March 31, 2019

 

 

5,476,184

 

 

$

9.75

 

 

9.4

 

$

49,417

 

Exercisable as of March 31, 2019

 

 

273,561

 

 

$

8.10

 

 

9.2

 

$

4,662

 

Vested and expected to vest as of March 31, 2019

 

 

5,476,184

 

 

$

9.75

 

 

9.4

 

$

49,417

 

 

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock options and the fair value of the Company’s common stock for stock options that were in-the-money. As of March 31, 2019, total unrecognized stock-based compensation related to unvested stock options was $32.4 million, which the Company expects to recognize over a remaining weighted-average period of 3.3 years.

2019 Employee Stock Purchase Plan

On February 6, 2019, the Company adopted the 2019 Employee Stock Option Plan (“2019 ESPP”). The 2019 ESPP will enable eligible employees of the Company to purchase shares of common stock at a discount. The Company has reserved for issuance 1,478,492 shares of common stock pursuant to the 2019 ESPP. The initial offering period began upon completion of the IPO on February 7, 2019 and will end on the last trading day on or before December 1, 2019. Each subsequent offering period will be approximately six months long. ESPP participants will purchase shares of common stock at a price per share equal to 85% of the lesser of (1) the fair market value per share of the common stock on the first trading day of the offering period or (2) the fair market value of the common stock on the purchase date.

7.

Related Party Transactions

The Company has a collaboration agreement with Adimab, LLC (“Adimab”) under which the Company is developing antibodies discovered by Adimab in its AL001 and AL101 product candidates, and the Company is developing antibodies optimized by Adimab in its AL002 and AL003 product candidates. The Chief Executive Officer of Adimab is a Co-Founder and Chairperson of the board of directors of Alector. For the three months ended March 31, 2019 and 2018, Alector incurred expenses of $0.8 million and less than $0.1 million, respectively, for services provided by Adimab. The total amount for the three months ended March 31, 2019 was related to milestone payments for the product candidate AL003. As of March 31, 2019, the Company had an accrued liabilities balance of $0.5 million related to one of the milestones achieved near the end of the first quarter. There were no payables as of December 31, 2018. The Company will owe up to $3.5 million in milestone payments per program to Adimab for its product candidates. The Company will also owe low- to mid- single-digit royalty payments for commercial sales of such product candidates.

10


 

8.

Net Loss Per Share

The following outstanding potentially dilutive shares have been excluded from the calculation of diluted net loss per share for the periods presented due to their anti-dilutive effect:

 

 

 

Three Months Ended

March 31,

 

 

 

2019

 

 

2018

 

Convertible preferred stock

 

 

 

 

 

36,001,203

 

Restricted stock subject to future vesting

 

 

1,669,382

 

 

 

2,770,409

 

Options to purchase common stock

 

 

5,476,184

 

 

 

100,000

 

Shares committed under ESPP

 

 

58,127

 

 

 

 

Total

 

 

7,203,693

 

 

 

38,871,612

 

 

9.

Subsequent Event

In May 2019, the Company entered in a sublease agreement with a third party to sublease approximately 25,000 square feet of the Company’s office and lab space. The sublease will commence on June 1, 2019 with a term of 30 months. The third party is obligated to pay the Company base rent of $4.5 million and a prorated portion of operating expenses over the term of the sublease.

11


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that involve risks and uncertainties, including those described in the section titled “Special Note Regarding Forward Looking Statements.” Our actual results and the timing of selected events could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those set forth under the section titled “Risk Factors” included elsewhere in this report.

Overview

We are a clinical stage biopharmaceutical company pioneering immuno-neurology, a novel therapeutic approach for the treatment of neurodegeneration. Immuno-neurology targets immune dysfunction as a root cause of multiple pathologies that are drivers of degenerative brain disorders. We are developing therapies designed to simultaneously counteract these pathologies by restoring healthy immune function to the brain. Supporting our scientific approach, our Discovery Platform enables us to advance a broad portfolio of product candidates, validated by human genetics, which we believe will improve the probability of technical success over shorter development timelines. As a result, in the last six years, we have identified over forty immune system targets, progressed over ten programs into preclinical research, and advanced three product candidates, AL001, AL002, and AL003, into clinical development.

In the first quarter of 2019, the dosing of the single ascending dose Phase 1a in healthy subjects was completed for AL001, initially aimed at treating a subset of frontotemporal dementia (“FTD”) patients who have a known genetic mutation that causes a deficiency in progranulin (“PGRN”), which is called FTD-GRN. There were no drug-related serious adverse events or dose limiting adverse events reported in the study, achieving the primary endpoint. Moreover, statistically significant increases in plasma and cerebrospinal fluid PGRN levels relative to baseline were also observed, successfully demonstrating proof-of-mechanism for AL001 in the central nervous systems of healthy subjects. Subsequently, in the second quarter of 2019, we advanced AL001 into a Phase 1b study in FTD-GRN patients. We plan to advance AL001 into a Phase 2 study in 2019, with proof-of-concept data in FTD-GRN patients expected in the first half of 2020.

In addition, in the second quarter of 2019, we initiated a Phase 1b study in Alzheimer’s disease patients with AL002. Furthermore, in the first quarter of 2019, we initiated an ascending dose Phase 1a study with AL003, a product candidate targeting Alzheimer’s disease, in healthy subjects. In the second half of 2019, we expect to initiate a Phase 1 study with AL101, a product candidate targeting multiple neurodegenerative disorders.

Our operations have been financed primarily through the issuance and sale of convertible preferred stock, our collaboration with AbbVie, and issuance of common stock upon the completion of our initial public offering (“IPO”). We completed our IPO in February 2019, and received $168.2 million net proceeds, net of underwriting discounts and commissions and offering expenses.

To date, we have not had any products approved for sale and have not generated any revenue from product sales nor been profitable. Further, we do not expect to generate revenue from product sales until such time, if ever, that we are able to successfully complete the development and obtain marketing approval for one of our product candidates. We will continue to require additional capital to develop our product candidates and fund operations for the foreseeable future. We have incurred net losses in each year since inception and expect to continue to incur net losses for the foreseeable future. Our ability to generate product revenue will depend on the successful development and eventual commercialization of one or more of our product candidates. Our net losses were $18.6 million and $8.4 million for the three months ended March 31, 2019 and 2018, respectively. As of March 31, 2019, we had an accumulated deficit of $133.0 million. Substantially all of our net losses have resulted from costs incurred in connection with our research and development programs and from general and administrative costs associated with our operations. We expect our expenses will increase substantially in connection with our ongoing activities, as we:

 

advance product candidates through preclinical studies and clinical trials;

 

pursue regulatory approval of product candidates;

 

hire additional personnel;

 

operate as a public company;

 

acquire, discover, validate, and develop additional product candidates;

 

require the manufacture of supplies for our preclinical studies and clinical trials; and

 

obtain, maintain, expand, and protect our intellectual property portfolio.

12


 

Components of Results of Operations

Revenue

We have not generated any revenue from product sales and do not expect to do so in the near future. Our revenue to date has been primarily related the AbbVie Agreement to co-develop product candidates in two programs in clinical development with AbbVie. We recognize revenue related to our research and development grant as the related research services are performed. We recognize revenue from the upfront payments under the AbbVie Agreement over time as the services are provided. Revenues are recognized as the program costs are incurred by measuring actual costs incurred to date compared to the overall total expected costs to satisfy the performance obligation. In addition to receiving the upfront payments, we may also be entitled to development and regulatory milestone payments, opt-in payments for continued development after proof-of-concept for AL002 and AL003, and other future payments from profit sharing or royalties after commercialization of product candidates from such programs.

We expect that our revenue for the next several years will be derived primarily from the AbbVie Agreement. We recorded deferred revenue of $169.0 million as of March 31, 2019. The deferred revenue is expected to be recognized over the research and development period of the programs through the completion of proof-of-concept for AL002 and AL003.

Research and Development Expenses

Research and development expenses account for a significant portion of our operating expenses. We record research and development expenses as incurred. Research and development expenses consist primarily of costs incurred for the discovery and development of our product candidates, which include:

 

expenses incurred under agreements with third-party contract organizations, preclinical testing organizations, and consultants;

 

costs related to production of clinical materials, including fees paid to contract manufacturers;

 

laboratory and vendor expenses related to the execution of preclinical studies and clinical trials;

 

personnel-related expenses, including salaries, benefits, and stock-based compensation for personnel engaged in research and development functions;

 

costs related to the preparation of regulatory submissions;

 

third-party license fees; and

 

facilities and other expenses, which include expenses for rent and maintenance of facilities, depreciation and amortization expense, and other supplies.

We expense all research and development costs in the periods in which they are incurred. Costs for certain development activities are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors, collaborators, and third-party service providers. Nonrefundable advance payments for goods or services to be received in future periods for use in research and development activities are deferred and capitalized. The capitalized amounts are then expensed as the related goods are delivered and as services are performed.

Specific program expenses include expenses associated with the development of our most advanced product candidates, AL001, AL002, and AL003, which are in Phase 1 clinical trials. We also have expenses related to the discovery and development of future product candidates and separately tracked expenses related to programs that we expect to move out of preclinical studies and into Phase 1 clinical trials. We do not track personnel or other operating expenses incurred for our research and development programs on a program-specific basis. These expenses primarily relate to salaries and benefits, stock-based compensation, facility expenses, including depreciation, and lab consumables.

At this time, we cannot reasonably estimate or know the nature, timing, and estimated costs of the efforts that will be necessary to complete the development of, and obtain regulatory approval for, any of our product candidates. We expect our research and development expenses to increase substantially for the foreseeable future as we continue to invest in research and development activities related to developing our product candidates, as our product candidates advance into later stages of development, as we begin to conduct larger clinical trials, as we seek regulatory approvals for any product candidates that successfully complete clinical trials, and incur expenses associated with hiring additional personnel to support our research and development efforts. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, and the successful development of our product candidates is highly uncertain.

13


 

General and Administrative Expenses

General and administrative expenses consist primarily of personnel-related costs, including stock-based compensation, for our personnel in executive, legal, finance and accounting, human resources, and other administrative functions. General and administrative expenses also include legal fees relating to intellectual property and corporate matters, professional fees paid for accounting, auditing, consulting, and tax services, insurance costs, and facility costs not otherwise included in research and development expenses.

We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support our continued research activities and development of our programs. We also anticipate that we will incur increased expenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the SEC and those of the NASDAQ Stock Market on which our securities are traded, legal, auditing, additional insurance expenses, investor relations activities, and other administrative and professional services.

Other Income, Net

Other income, net consists of interest earned on our cash equivalents and marketable securities and foreign currency transaction gains and losses incurred during the period.

Results of Operations

Comparison of the Three Months Ended March 31, 2019 and 2018

 

 

 

Three Months Ended

March 31,

 

 

Dollar

 

 

 

2019

 

 

2018

 

 

Change

 

 

 

(In thousands)

 

Revenue: