ubx-10q_20180331.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 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, 2018

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: 001-38470

 

Unity Biotechnology, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

26-4726035

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

3280 Bayshore Blvd. Suite 100

Brisbane, CA

94005

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (650) 416-1192

 

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, 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

 

  (Do not check if a smaller reporting company)

  

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 May 31, 2018, the registrant had 42,313,552 shares of common stock, $0.0001 par value per share, outstanding.

 

 

 

 


 

UNITY BIOTECHNOLOGY, INC.

QUARTERLY REPORT ON FORM 10-Q

Table of Contents

 

PART I FINANCIAL INFORMATION

 

Item 1

Condensed Financial Statements

2

 

Condensed Balance Sheets as of March 31, 2018(unaudited) and December 31, 2017

2

 

Condensed Statement of Operations and Comprehensive Loss for the Three Months Ended March 31, 2018 and 2017 (unaudited)

3

 

Condensed Statement of Cash Flows for the Three Months Ended March 31, 2018 and 2017 (unaudited)

4

 

Notes to Condensed Financial Statements (unaudited)

5

Item 2

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

20

Item 3

Quantitative and Qualitative Disclosures About Market Risk

26

Item 4

Controls and Procedures

26

 

 

 

PART II – OTHER INFORMATION

 

 

 

Item 1

Legal Proceedings

26

Item 1A

Risk Factors

26

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

70

Item 3

Default Upon Senior Securities

71

Item 4

Mine Safety Disclosures

71

Item 5

Other Information

71

Items 6

Exhibits

71

Signatures

73

 

 

i


 

PART I—FINANCIAL INFORMATION

Item 1. Condensed Financial Statements.

Unity Biotechnology, Inc.

Condensed Balance Sheets

(In thousands, except share and per share amounts)

 

 

 

March 31,

2018

 

 

December 31,

2017

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

62,754

 

 

$

7,298

 

Contribution receivable

 

 

 

 

 

1,382

 

Short-term marketable securities

 

 

71,281

 

 

 

79,212

 

Deferred offering costs

 

 

1,707

 

 

 

 

Prepaid expenses and other current assets

 

 

697

 

 

 

988

 

Total current assets

 

 

136,439

 

 

 

88,880

 

Property and equipment, net

 

 

6,591

 

 

 

6,958

 

Long-term marketable securities

 

 

 

 

 

5,118

 

Restricted cash

 

 

550

 

 

 

550

 

Other long-term assets

 

 

522

 

 

 

518

 

Total assets

 

$

144,102

 

 

$

102,024

 

Liabilities, Convertible Preferred Stock, and Stockholders’ (Deficit) Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

5,037

 

 

$

2,378

 

Accrued compensation

 

 

958

 

 

 

2,181

 

Accrued and other current liabilities

 

 

4,668

 

 

 

3,338

 

Total current liabilities

 

 

10,663

 

 

 

7,897

 

Deferred rent, net of current portion

 

 

3,062

 

 

 

3,166

 

Other non-current liabilities

 

 

101

 

 

 

118

 

Total liabilities

 

 

13,826

 

 

 

11,181

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

 

Convertible preferred stock, $0.0001 par value; 103,283,818 and 91,739,149 shares

   authorized as of March 31, 2018 and December 31, 2017, respectively; 31,750,297

   and 28,159,724 shares issued and outstanding as of March 31, 2018 and

   December 31, 2017, respectively; aggregate liquidation preference of $245,825 as of

   March 31, 2018 and $190,825 as of December 31, 2017, respectively

 

 

228,907

 

 

 

173,956

 

Stockholders’ deficit:

 

 

 

 

 

 

 

 

Common stock, $0.0001 par value; 140,000,000 and 122,000,000 shares

   authorized as of March 31, 2018 and December 31, 2017, respectively;

   5,230,976 and 4,830,389 shares issued and outstanding as of March 31,

   2018 and December 31, 2017, respectively

 

 

1

 

 

 

1

 

Additional paid-in capital

 

 

5,511

 

 

 

4,072

 

Related party promissory notes for purchase of common stock

 

 

(592

)

 

 

(202

)

Employee promissory notes for purchase of common stock

 

 

(400

)

 

 

 

Accumulated other comprehensive loss

 

 

(138

)

 

 

(104

)

Accumulated deficit

 

 

(103,013

)

 

 

(86,880

)

Total stockholders’ deficit

 

 

(98,631

)

 

 

(83,113

)

Total liabilities, convertible preferred stock, and stockholders’ deficit

 

$

144,102

 

 

$

102,024

 

 

See accompanying notes to the condensed financial statements.

2


 

Unity Biotechnology, Inc.

Condensed Statements of Operations and Comprehensive Loss

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

Three Months Ended

March 31

 

 

 

2018

 

 

2017

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

$

13,025

 

 

$

6,970

 

General and administrative

 

 

3,457

 

 

 

2,070

 

Total operating expenses

 

 

16,482

 

 

 

9,040

 

Loss from operations

 

 

(16,482

)

 

 

(9,040

)

Interest income

 

 

352

 

 

 

108

 

Other expense, net

 

 

(3

)

 

 

(2

)

Net loss

 

 

(16,133

)

 

 

(8,934

)

Other comprehensive loss

 

 

 

 

 

 

 

 

Unrealized loss on marketable securities, net of tax

 

 

(34

)

 

 

 

Comprehensive loss

 

$

(16,167

)

 

$

(8,934

)

Net loss per share, basic and diluted

 

$

(4.69

)

 

$

(2.90

)

Weighted average number of shares used in computing net loss

   per share, basic and diluted

 

 

3,437,345

 

 

 

3,079,551

 

 

See accompanying notes to the condensed financial statements.

3


 

Unity Biotechnology, Inc.

Condensed Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

March 31,

 

 

 

2018

 

 

2017

 

Operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(16,133

)

 

$

(8,934

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

502

 

 

 

94

 

Amortization of premium and discounts on marketable securities

 

 

(33

)

 

 

13

 

Stock-based compensation

 

 

1,370

 

 

 

413

 

Accretion of tenant improvement allowance

 

 

(152

)

 

 

(151

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Contribution receivable

 

 

1,382

 

 

 

 

Prepaid expenses and other current assets

 

 

291

 

 

 

(319

)

Other long-term assets

 

 

(4

)

 

 

26

 

Accounts payable

 

 

1,830

 

 

 

1,045

 

Accrued compensation

 

 

(1,223

)

 

 

(190

)

Accrued liabilities and other current liabilities

 

 

239

 

 

 

(66

)

Deferred rent, net of current portion

 

 

48

 

 

 

209

 

Net cash used in operating activities

 

 

(11,883

)

 

 

(7,860

)

Investing activities

 

 

 

 

 

 

 

 

Purchase of marketable securities

 

 

(6,225

)

 

 

(59,214

)

Maturities of marketable securities

 

 

19,273

 

 

 

 

Purchase of property and equipment

 

 

(101

)

 

 

(294

)

Net cash provided by (used in) investing activities

 

 

12,947

 

 

 

(59,508

)

Financing activities

 

 

 

 

 

 

 

 

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

 

 

54,951

 

 

 

7,984

 

Proceeds from issuance of common stock upon exercise of stock options,

   net of repurchases

 

 

27

 

 

 

2

 

Payments of deferred offering costs

 

 

(569

)

 

 

 

Payments made on capital lease obligations

 

 

(17

)

 

 

 

Net cash provided by financing activities

 

 

54,392

 

 

 

7,986

 

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

 

 

55,456

 

 

 

(59,382

)

Cash, cash equivalents and restricted cash at beginning of year

 

 

7,848

 

 

 

89,736

 

Cash, cash equivalents and restricted cash at end of year

 

$

63,304

 

 

$

30,354

 

Supplemental Disclosures of Non-Cash Investing and Financing Information

 

 

 

 

 

 

 

 

Property and equipment included in accounts payable

 

$

34

 

 

$

126

 

Receipt of promissory note from related party for purchase of common stock

 

$

390

 

 

$

 

Receipt of promissory note from employees for purchase of common stock

 

$

400

 

 

$

 

Deferred offering costs included in accrued liabilities and accounts payable

 

$

1,138

 

 

$

 

 

See accompanying notes to the condensed financial statements.

4


 

Unity Biotechnology, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(Unaudited)

 

1. Organization

Description of Business

Unity Biotechnology, Inc. (the “Company” or “we” or “our” or “us”) is a biotechnology company engaged in the research and development of therapeutics to extend human healthspan. The Company devotes substantially all of its time and efforts to performing research and development, raising capital and recruiting personnel. The Company is located in Brisbane, California and was incorporated in the state of Delaware in March 2009 under the name Forge, Inc. and operates in one segment. The Company changed its name to Unity Biotechnology, Inc. in January 2015.

Initial Public Offering

On May 7, 2018, the Company closed its initial public offering (“IPO”), of 5,000,000 shares of common stock, at an offering price to the public of $17.00 per share. The Company received net proceeds of approximately $76.1 million, after deducting underwriting discounts, commissions and offering related transaction costs of approximately $8.9 million. In connection with the IPO, all of the Company’s outstanding shares of convertible preferred stock were automatically converted into 32,073,149 shares of common stock. In addition, all of our convertible preferred stock warrants were converted into warrants to purchase shares of common stock.

In connection with the completion of its IPO, on May 7, 2018, the Company’s certificate of incorporation was amended and restated to provide for 300,000,000 authorized shares of common stock with a par value of $0.0001 per share and 10,000,000 authorized shares of preferred stock with a par value of $0.0001 per share.

 

2. Summary of Significant Accounting Policies

Basis of Presentation

These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) the rules and regulations of United States Securities and Exchange Commission (“SEC”) for interim reporting.

The condensed consolidated financial statements are unaudited and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation for interim reporting. The results of operations for any interim period are not necessarily indicative of results of operations for any future period.  Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted.  Accordingly, the unaudited condensed financial statements should be read in conjunction with the financial statements as of and for the year ended December 31, 2017, which are included in the Company’s prospectus related to the Company’s initial public offering, filed May 4, 2018 (the “Prospectus”), pursuant to Rule 424 (b) under the Securities Act of 1933, as amended with the SEC.

 

Reverse Stock Split

On April 19, 2018, the Company’s board of directors approved an amendment to the Company’s amended and restated certificate of incorporation to effect a 1-for-2.95 reverse split (“Reverse Split”) of shares of the Company’s common and convertible preferred stock, which was effected on April 20, 2018. The par value and authorized shares of common stock and convertible preferred stock were not adjusted as a result of the Reverse Split. All of the share and per share information included in the accompanying financial statements have been adjusted to reflect the

5


 

Reverse Split. Accordingly, all share and per share information presented in the condensed consolidated financial statements herein, and notes thereto, have been retroactively adjusted to reflect the Reverse Split.  

Need for Additional Capital

The Company has incurred operating losses and has an accumulated deficit as a result of ongoing efforts to develop drug product candidates, including conducting preclinical trials and providing general and administrative support for these operations. The Company had an accumulated deficit of $103.0 million and $86.9 million as of March 31, 2018 and December 31, 2017, respectively. The Company had net losses of $16.1 million and $8.9 million for the three months ended March 31, 2018 and 2017, respectively, and net cash used in operating activities of $11.9 million and $7.9 million for the three months ended March 31, 2018 and 2017, respectively.  To date, none of the Company’s drug candidates have been approved for sale and therefore the Company has not generated any revenue from contracts with customers. The Company has evaluated and concluded there are no conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for a period of one year following the date that these financial statements are issued. Management expects operating losses to continue for the foreseeable future. As a result, the Company will need to raise additional capital. If sufficient funds on acceptable terms are not available when needed, the Company could be required to significantly reduce its operating expenses and delay, reduce the scope of, or eliminate one or more of its development programs. Failure to manage discretionary spending or raise additional financing, as needed, may adversely impact the Company’s ability to achieve its intended business objectives.

Use of Estimates

The condensed financial statements have been prepared in accordance with GAAP, which requires management to make estimates and assumptions that affect the amounts and disclosures reported in the condensed financial statements and accompanying notes. The Company bases its estimates on historical experience and market-specific or other relevant assumptions that it believes are reasonable under the circumstances. The amounts of assets and liabilities reported in the Company’s balance sheets and the amount of expenses and income reported for each of the periods presented are affected by estimates and assumptions, which are used for, but are not limited to, determining the fair value of assets and liabilities, common stock valuation, and stock-based compensation. Actual results could differ from such estimates or assumptions.

Deferred Offering Costs

Deferred offering costs, consisting of direct incremental legal, accounting, filing and other fees incurred related to the preparation of the IPO, have been capitalized and were offset against proceeds upon completion of the offering in May 2018. As of March 31, 2018, $1.7 million of deferred offering costs were capitalized and included in current assets on the balance sheet. There were no capitalized deferred offering costs at December 31, 2017.

Cash, Cash Equivalents and Restricted Cash

The Company considers all highly liquid investments with original maturities of 90 days or less from the date of purchase to be cash equivalents. Cash equivalents primarily include money market funds that invest in U.S. Treasury obligations which are stated at fair value.

The Company has issued a letter of credit under a lease agreement which has been collateralized. This cash is classified as noncurrent restricted cash on the balance sheet based on the term of the underlying lease.

6


 

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

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

Cash and cash equivalents

 

$

62,754

 

 

$

7,298

 

Restricted cash

 

550

 

 

550

 

Total cash, cash equivalents, and restricted cash

 

$

63,304

 

 

$

7,848

 

 

Variable Interest Entities

The Company reviews agreements it enters into with third-party entities, pursuant to which the Company may have a variable interest in the entity, in order to determine if the entity is a variable interest entity (“VIE”). If the entity is a VIE, the Company assesses whether or not it is the primary beneficiary of that entity. In determining whether the Company is the primary beneficiary of an entity, the Company applies a qualitative approach that determines whether it has both (i) the power to direct the economically significant activities of the entity and (ii) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to that entity. If the Company determines it is the primary beneficiary of a VIE, it consolidates that VIE into the Company’s financial statements. The Company’s determination about whether it should consolidate such VIEs is made continuously as changes to existing relationships or future transactions may result in a consolidation or deconsolidation event.

Concentrations of Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents, restricted cash, marketable securities and contribution receivable. Substantially all of the Company’s cash and cash equivalents and restricted cash is deposited in accounts with financial institutions that management believes are of high credit quality. Such deposits have and will continue to exceed federally insured limits. The Company maintains its cash with accredited financial institutions and accordingly, such funds are subject to minimal credit risk. The Company has not experienced any losses on its cash deposits. The contribution receivable is unsecured and is concentrated with one third-party organization, and accordingly the Company may be exposed to credit risk. To date, the Company has not experienced any loss related to its contributions receivable.

The Company’s investment policy limits investments to certain types of securities issued by the U.S. government, its agencies and institutions with investment-grade credit ratings and places restrictions on maturities and concentration by type and issuer. The Company is exposed to credit risk in the event of a default by the financial institutions holding its cash, cash equivalents, restricted cash and marketable securities and issuers of marketable securities to the extent recorded on the balance sheets. As of March 31, 2018, the Company had no off-balance sheet concentrations of credit risk.

The Company depends on third-party suppliers for key raw materials used in its manufacturing processes and is subject to certain risks related to the loss of these third-party suppliers or their inability to supply the Company with adequate raw materials.

 

Recently Issued Accounting Pronouncements

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This ASU clarifies the definition of a business when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those years. For all other entities, it is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the effect that this guidance will have on its financial statements.

7


 

In February 2016, the FASB issued ASU No. 2016-02 (“ASU 2016-02”), Leases (Topic 842), which supersedes the guidance in former ASC 840, Leases. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. For public entities, this standard is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. For all other entities, this standard is effective for annual reporting periods beginning after December 15, 2019, and interim periods within annual periods beginning after December 15, 2020. Early adoption is permitted. The ASU is expected to impact the Company’s financial statements as the Company has certain operating lease arrangements for which the Company is the lessee. Management expects that the adoption of this standard will result in the recognition of an asset for the right to use the leased facility on the Company’s balance sheet, as well as the recognition of a liability for the lease payments remaining on the lease. While the Company is currently evaluating the impact of the adoption of this standard on its financial statements, the Company anticipates the recognition of additional assets and corresponding liabilities on its balance sheet related to leases.

In May 2017, the Financial Accounting Standards Board (FASB) issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718)- Scope of Modification Accounting (ASU 2017- 09). The amendments included in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendments in this update will be applied prospectively to an award modified on or after the adoption date. The amendments in ASU 2017-09 became effective for the Company on January 1, 2018 and the adoption of this standard did not have a material impact on the Company’s condensed financial statements.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This guidance makes amendments to the classification and measurement of financial instruments and revises the accounting related to: (1) the classification and measurement of investments in equity securities (except for investments accounted for under the equity method of accounting); and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. In addition, the update also amends certain disclosure requirements associated with the fair value of financial instruments. The guidance is effective for public business entities in 2018. For all other calendar-year entities, it is effective for annual periods beginning in 2019 and interim periods beginning in 2020. Early adoptions of certain amendments within the update are permitted. The Company is currently evaluating the impact that the adoption of this guidance will have on its financial statements and related disclosures, including on the Company’s cost method investment.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230: Classification of Certain Cash Receipts and Cash Payments). This guidance addresses specific cash flow issues with the objective of reducing the diversity in practice for the treatment of these issues. The areas identified include: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies; distributions received from equity method investees; beneficial interests in securitization transactions; and application of the predominance principle with respect to separately identifiable cash flows. The guidance will generally be applied retrospectively and is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those years. For all other entities, it is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the effect that this guidance will have on its financial statements and related disclosures.

8


 

On December 22, 2017, the U.S. federal government enacted the Tax Cuts and Jobs Act (“the Act”). The Tax Act contains, among other things, significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21% for tax years beginning after December 31, 2017, limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, implementing a territorial tax system, and requiring a mandatory one-time tax on U.S. owned undistributed foreign earnings and profits known as the transition tax.  In December 2017, SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) to address the accounting implications of recently enacted U.S. federal tax reform. SAB 118 allows companies to record provisional amounts during a measurement period not to extend beyond one year of the enactment date to address ongoing guidance and tax interpretations that are expected over the next 12 months.  The Company has adopted SAB 118 and currently considers its accounting of the impact of U.S. federal tax reform to be incomplete but continues to make a reasonable estimate of the effects on our existing deferred tax assets. The Company expects to complete the remainder of the analysis within the measurement period in accordance with SAB 118.  Adjustments, if any, are not expected to impact the statement of operations and comprehensive loss due to the full valuation allowance on the Company’s deferred tax assets.

 

3. Fair Value Measurements

The Company determines the fair value of financial and non-financial assets and liabilities based on the assumptions that market participants would use in pricing the asset or liability in an orderly transaction between market participants at the measurement date. The identification of market participant assumptions provides a basis for determining what inputs are to be used for pricing each asset or liability. A fair value hierarchy has been established which gives precedence to fair value measurements calculated using observable inputs over those using unobservable inputs. This hierarchy prioritized the inputs into three broad levels as follows:

 

Level 1: Quoted prices in active markets for identical instruments

 

Level 2: Other significant observable inputs (including quoted prices in active markets for similar instruments)

 

Level 3: Significant unobservable inputs (including assumptions in determining the fair value of certain investments)

The carrying amounts of financial instruments such as cash and cash equivalents, restricted cash, contributions receivable, prepaid expenses and other current assets, accounts payable, accrued compensation, accrued and other current liabilities approximate the related fair values due to the short maturities of these instruments.

The fair value of the Company’s cost method investment is measured when it is deemed to be other-than- temporarily impaired.

9


 

The Company’s financial assets subject to fair value measurements on a recurring basis and the level of inputs used in such measurements were as follows:

 

 

 

March 31, 2018

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(in thousands)

 

Money market funds

 

$

62,085

 

 

$

62,085

 

 

$

 

 

$

 

Total

 

$

62,085

 

 

$

62,085

 

 

$

 

 

$

 

Short-term marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

 

5,428

 

 

 

 

 

 

5,428

 

 

 

 

Corporate debt securities

 

 

10,140

 

 

 

 

 

 

10,140

 

 

 

 

Asset-backed securities

 

 

14,404

 

 

 

 

 

 

14,404

 

 

 

 

U.S. government debt securities

 

 

41,309

 

 

 

 

 

 

41,309

 

 

 

 

Total short-term marketable securities

 

 

71,281

 

 

 

 

 

 

71,281

 

 

 

 

Total

 

$

133,366

 

 

$

62,085

 

 

$

71,281

 

 

$

 

 

 

 

December 31, 2017

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(in thousands)

 

Money market funds

 

$

5,709

 

 

$

5,709

 

 

$

 

 

$

 

Total

 

$

5,709

 

 

$

5,709

 

 

$

 

 

$

 

Short-term marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

 

6,359

 

 

 

 

 

 

6,359

 

 

 

 

Corporate debt securities

 

 

16,149

 

 

 

 

 

 

16,149

 

 

 

 

Asset-backed securities

 

 

14,588

 

 

 

 

 

 

14,588

 

 

 

 

U.S. government debt securities

 

 

42,116

 

 

 

 

 

 

42,116

 

 

 

 

Long-term marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed securities

 

 

2,742

 

 

 

 

 

 

2,742

 

 

 

 

U.S. government debt securities

 

 

2,376

 

 

 

 

 

 

2,376

 

 

 

 

Total marketable securities

 

 

84,330

 

 

 

 

 

 

84,330

 

 

 

 

Total

 

$

90,039

 

 

$

5,709

 

 

$

84,330

 

 

$

 

 

The Company estimates the fair value of its money market funds, commercial paper, corporate debt securities, asset-backed securities, and U.S. government debt securities by taking into consideration valuations obtained from third-party pricing services. The pricing services utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities, issuer credit spreads; benchmark securities; prepayment/default projections based on historical data; and other observable inputs.

There were no transfers within the hierarchy during the three months ended March 31, 2018 and the year ended December 31, 2017.

The grant date fair value of the Company’s common stock has been determined by the Company’s Board of Directors with the assistance of management and an independent third-party valuation specialist. The grant date fair value of the Company’s common stock was determined using valuation methodologies which utilizes certain assumptions including probability weighting of events, volatility, time to liquidation, a risk-free interest rate and an assumption for a discount for lack of marketability (Level 3 inputs). In determining the fair value of the Company’s common stock, the methodologies used to estimate the enterprise value of the Company were performed using methodologies, approaches, and assumptions consistent with the American Institute of Certified Public Accountants Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation (“AICPA Accounting and Valuation Guide”).

10


 

4. Marketable Securities

Marketable securities, which are classified as available-for-sale, consisted of the following as of March 31, 2018:

 

 

 

 

 

 

 

Amortized

Cost Basis

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

 

(in thousands)

 

Short-term marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

5,445

 

 

$

 

 

$

(17

)

 

$

5,428

 

Corporate debt securities

 

 

10,167

 

 

 

 

 

 

(27

)

 

 

10,140

 

Asset-backed securities

 

 

14,446

 

 

 

 

 

 

(42

)

 

 

14,404

 

U.S. government debt securities

 

 

41,361

 

 

 

 

 

 

(52

)

 

 

41,309

 

Total short term marketable securities

 

$

71,419

 

 

$

 

 

$

(138

)

 

$

71,281

 

 

Marketable securities, which are classified as available-for-sale, consisted of the following as of December 31, 2017:

 

 

 

 

 

 

 

Amortized

Cost Basis

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

 

(in thousands)

 

Short-term marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

6,369

 

 

$

 

 

$

(10

)

 

$

6,359

 

Corporate debt securities

 

 

16,162

 

 

 

 

 

 

(13

)

 

 

16,149

 

Asset-backed securities

 

 

14,604

 

 

 

 

 

 

(16

)

 

 

14,588

 

U.S. government debt securities

 

 

42,172

 

 

 

 

 

 

(56

)

 

 

42,116

 

Total short-term marketable securities

 

 

79,307

 

 

 

 

 

 

(95

)

 

 

79,212

 

Long-term marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed securities

 

 

2,752

 

 

 

 

 

 

(10

)

 

 

2,742

 

U.S. government debt securities

 

 

2,375

 

 

 

1

 

 

 

 

 

 

2,376

 

Total long-term marketable securities

 

 

5,127

 

 

 

1

 

 

 

(10

)

 

 

5,118

 

Total marketable securities

 

$

84,434

 

 

$

1

 

 

$

(105

)

 

$

84,330

 

 

At March 31, 2018, the remaining contractual maturities of available-for-sale securities were less than two years. There have been no significant realized gains or losses on available-for-sale securities for the periods presented. Available-for-sale debt securities that were in a continuous loss position but were not deemed to be other than temporarily impaired were immaterial at both March 31, 2018 and December 31, 2017.

 

5. License Agreements

License and Compound Library and Option Agreement

In February 2016, the Company entered into a license agreement with a privately held clinical-stage biopharmaceutical company to research, develop, and seek and obtain marketing approval for a licensed compound. In February 2016, in conjunction with this license agreement, the Company also entered into a compound library and option agreement with the same biopharmaceutical company to identify compounds with potential utility in the treatment of age-related conditions other than indications in oncology. This license agreement included contingent consideration of up to 666,670 shares of additional common stock to be issued, up to $70.3 million of milestone payments based on achievement of certain specified clinical development and sales milestone events and tiered royalties in the low-single digits based on sales of licensed products. As of March 31, 2018 and 2017, none of the milestones had been achieved and no royalties were due from the sales of licensed products.

11


 

In connection with the compound library and option agreement, the Company received an equity interest for 275,766 ordinary shares of an affiliate of the biopharmaceutical company at an aggregate purchase price of $0.5 million, which represents an insignificant level of ownership in the entity and approximates the fair value of the shares received and has been recorded as a cost method investments in the Company’s financial statements. The Company had a commitment to invest an additional $0.5 million in this entity in the future which was exercised in May 2018.  

The Company also agreed to provide funding to the biopharmaceutical company for research and development work performed at a cost of up to $2.0 million through February 2020. The research and development expense under the research services agreement was not material for the three months ended March 31, 2018 or 2017.

Under the consolidation guidance, the Company determined that the biopharmaceutical company is a VIE. The Company does not have the power to direct the activities that most significantly affect the economic performance of this entity and as such the Company is not the primary beneficiary and consolidation is not required. As of March 31, 2018 and December 31, 2017, the Company has not provided financial, or other, support to the biopharmaceutical company that was not contractually required.

Other License Agreements with Research Institutions

The Company has entered into license agreements with various research institutions which have provided the Company with rights to patents, and in certain cases, research “know-how” and proprietary research tools to research, develop and commercialize drug candidates. In addition to upfront consideration paid to these various research institutions in either cash or shares of the Company’s common stock, the Company may be obligated to pay milestone payments in cash or the issuance of the Company’s common stock specific to each agreement on achievement of certain specified clinical development and/or sales events. To date, none of these events had occurred and no milestone or royalty payments have been recognized.            

6. Commitments and Contingencies

Operating Lease

The Company has one non-cancelable operating leases consisting of administrative and research and development office space for its Brisbane, California headquarters that expires in October 2022. Future minimum lease payments under our non-cancellable operating leases at March 31, 2018 were as follows (in thousands):

 

 

 

 

 

 

 

 

Amount

 

 

 

(in thousands)

 

2018 (remaining 9 months)

 

$

1,473

 

2019

 

 

2,012

 

2020

 

 

2,072

 

2021

 

 

2,135

 

2022

 

 

1,621

 

Total future minimum lease payments

 

$

9,313

 

 

Rent expense for the three months ended March 31, 2018 and 2017 was $0.5 million and $0.5 million, respectively.

 

Indemnifications

The Company indemnifies each of its officers and directors for certain events or occurrences, subject to certain limits, while the officer or director is or was serving at the Company’s request in such capacity, as permitted under Delaware law and in accordance with the Company’s amended and restated certificate of incorporation and bylaws.

12


 

The term of the indemnification period lasts as long as an officer or director may be subject to any proceeding arising out of acts or omissions of such officer or director in such capacity.

The maximum amount of potential future indemnification is unlimited; however, the Company currently holds director and officer liability insurance. This insurance allows the transfer of risk associated with the Company’s exposure and may enable the Company to recover a portion of any future amounts paid. The Company believes that the fair value of these indemnification obligations is minimal. Accordingly, the Company has not recognized any liabilities relating to these obligations for any period presented.

 

7. Related-Party Transactions

Recourse Notes

In December 2015, April 2016, and July 2016, the Company issued three full-recourse promissory notes to two executive officers for an aggregate principal amount of $0.2 million with an interest rate of 2.5% per annum. All of the principal was used to early exercise options for 667,253 shares of the Company’s common stock, in aggregate.  All of these related party full-recourse notes were repaid on April 4, 2018 in accordance with the terms of such notes.

In October 2017, the Company issued two promissory notes to an executive officer for $1.6 million and $0.5 million, each with an interest rate of 1.85% per annum. The aggregate principal amount of $2.1 million was used to purchase 625,084 shares of restricted stock. The promissory notes were considered to be non-recourse in substance and accordingly, the shares sold subject to such promissory notes are considered an option for accounting purposes. In April 2018, the Company’s board of directors approved the forgiveness of all outstanding principal and accrued interest of the $1.6 million non-recourse promissory note.  The non-recourse promissory note outstanding of $0.5 million was repaid on April 4, 2018 in accordance with the terms of the note.

In January 2018, the Company issued full-recourse promissory notes to an executive and an executive officer of the Company for an aggregate principal amount of $0.4 million with an interest rate of 2.5% per annum. All of the principal was used to early exercise options for 114,406 shares of the Company’s common stock. The full recourse note of $0.2 million for the executive officer was repaid on April 4, 2018 in accordance with the terms of the note.                    

Financing Activities

During the three months ended March 31, 2018, the Company issued convertible preferred stock for total proceeds of $3.0 million to shareholders who are considered to be related parties.

 

8. Convertible Preferred Stock and Common Stock

Convertible Preferred Stock

In March 2018, the Company amended and restated its certificate of incorporation to, among other things, (i) increase its authorized shares of common stock from 122,000,000 to 140,000,000 shares, (ii) increase its authorized shares of preferred stock from 91,739,149 to 103,283,818 shares, of which 11,544,669 shares are designated as Series C convertible preferred stock, and (iii) set forth the rights, preferences and privileges of the Series C convertible preferred stock. In March 2018, the Company sold 3,590,573 shares of Series C convertible preferred stock at $15.3317 per share for net proceeds of $54.9 million and in April 2018, the Company sold an additional 322,852 shares of Series C convertible preferred stock $15.3317 per share for net proceeds of $5.0 million.   .

Each share of Series C convertible preferred stock was convertible into one share of the Company’s common stock. Each share of preferred stock was automatically convert into one share of common stock upon the consummation of a qualified public offering. A qualified public offering was defined as an initial public offering that resulted in listing

13


 

on a U.S. national securities exchange and at least $30.0 million of gross proceeds at a per share price of not less than the Series C original issue price of $15.3317.

The Company evaluated the other rights, preferences and privileges of each series of convertible preferred stock and concluded that there were either no freestanding derivative instruments or any embedded derivatives requiring bifurcation.

Convertible preferred stock consisted of the following:

 

 

 

At March 31, 2018

 

 

 

Shares

Authorized

 

 

Shares Issued

and

Outstanding

 

 

Liquidation

Preference

 

 

Carrying

Value

 

 

 

(in thousands, except for share amounts)

 

Series A-1

 

 

9,085,738

 

 

 

2,887,086

 

 

$

2,495

 

 

$

2,457

 

Series A-2

 

 

32,653,411

 

 

 

10,498,269

 

 

 

9,198

 

 

 

9,214

 

Series B

 

 

50,000,000

 

 

 

14,774,369

 

 

 

179,132

 

 

 

162,285

 

Series C

 

 

11,544,669

 

 

 

3,590,573

 

 

 

55,000

 

 

 

54,951

 

Total convertible preferred stock

 

 

103,283,818

 

 

 

31,750,297

 

 

$

245,825

 

 

$

228,907

 

 

 

 

At December 31, 2017

 

 

 

Shares

Authorized

 

 

Shares Issued

and

Outstanding

 

 

Liquidation

Preference

 

 

Carrying

Value

 

 

 

(in thousands, except for share amounts)

 

Series A-1

 

 

9,085,738

 

 

 

2,887,086

 

 

$

2,495

 

 

$

2,457

 

Series A-2

 

 

32,653,411

 

 

 

10,498,269

 

 

 

9,198

 

 

 

9,214

 

Series B

 

 

50,000,000

 

 

 

14,774,369

 

 

 

179,132

 

 

 

162,285

 

Total convertible preferred stock

 

 

91,739,149

 

 

 

28,159,724

 

 

$

190,825

 

 

$

173,956

 

 

Conversion Rights

Each share of convertible preferred stock was convertible at the right and option of the stockholder, at any time after the date of issuance, into such number of fully paid and non-assessable shares of common stock on a one for one ratio (1:1 conversion ratio). The Series A-1 conversion price was $0.864 per share, the Series A-2 conversion price was $0.876 per share, the Series B conversion price was $12.125 per share and the Series C conversion price was $15.3317, in each case, subject to certain antidilution adjustments as provided in the Company’s amended and restated certificate of incorporation.

Each share of convertible preferred stock was automatically convertible into a fully paid, non-assessable share of common stock at the then-effective conversion rate for such share (i) upon the closing of a firm commitment, underwritten initial public offering of the Company’s common stock at an aggregate gross proceeds of not less than $30.0 million and a price per share to the public of not less than $15.3317 per share; or (ii) upon the receipt by the Company of a written request for such conversion from at least 60% of the holders of the convertible preferred stock then outstanding (voting together as a single class and on an as-converted basis), or if later, the effective date for conversion specified in such requests.

Liquidation Rights

In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company or a deemed liquidation event, as further defined in the Company’s amended and restated certificate of incorporation, prior to and in preference to any distribution of any of the assets of the Company to the holders of Series B convertible preferred stock and the Series A-1 and Series A-2 convertible preferred stock and common stock, the holders of Series C convertible preferred stock would have been paid, on a pari passu basis, an amount per share equal to the Series C liquidation preference of $15.3317 per share, plus an amount equal to any dividends declared but unpaid thereon

14


 

(the “Series C Liquidation Preference”). If upon any such liquidation, dissolution or winding up of the Company or a deemed liquidation event, the assets of the Company available for distribution to its stockholders had been insufficient to pay the holders of Series C convertible preferred stock the full amount to which they were entitled, the holders of the Series C convertible preferred stock would have shared ratably in any distribution of the assets available for distribution in proportion to the respective amounts which would otherwise have been payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full.

After the payment or setting aside for payment to the holders of the Series C convertible preferred stock of the full amount of the Series C Liquidation Preference, prior to any distribution of any of the assets of the Company to the holders of the Series A-1 and Series A-2 convertible preferred stock and common stock, the holders of Series B convertible preferred stock would have been paid, on a pari passu basis, an amount per share equal to the Series B liquidation preference of $12.125 per share for Series B, plus, in each case, an amount equal to any dividends declared but unpaid thereon (the “Series B Liquidation Preference”). If upon any such liquidation, dissolution or winding up of the Company or deemed liquidation event, the assets of the Company available for distribution to its stockholders had been insufficient to pay the holders of shares of Series B convertible preferred stock the full amount to which they shall be entitled, the holders of the Series B convertible preferred stock would have shared ratably in any distribution of the assets available for distribution in proportion to the respective amounts which would otherwise have been payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full.

After the payment or setting aside for payment to the holders of the Series B convertible preferred stock of the full amount of the Series B Liquidation Preference, prior to any distribution of any of the assets of the Company to the holders of the common stock, the holders of Series A-1 and Series A-2 convertible preferred stock would have been paid, on a pari passu basis, an amount per share equal to $0.864 per share for Series A-1 and $0.876 per share for Series A-2, plus, in each case, an amount equal to any dividends declared but unpaid thereon (the “Series A Liquidation Preference”). If upon any such liquidation, dissolution or winding up of the Company or deemed liquidation event, the assets of the Company available for distribution to its stockholders had been insufficient to pay the holders of shares of Series A-1 and Series A-2 convertible preferred stock the full amount to which they shall be entitled, the holders of the Series A-1 and Series A-2 convertible preferred stock would have shared ratably in any distribution of the assets available for distribution in proportion to the respective amounts which would otherwise have been payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full.

After the payments or setting aside for payment to the holders of convertible preferred stock of the full amounts specified above, the entire remaining assets of the Company legally available for distribution shall be distributed pro rata to holders of the common stock of the Company in proportion to the number of shares of common stock held by them.

Voting Rights

The holders of outstanding shares of Series A-1 and Series A-2 convertible preferred stock, voting together as a single class, were entitled to elect two members of the Company’s Board of Directors. The holders of outstanding shares of Series B convertible preferred stock, voting together as a single class, were entitled to elect one member of the Company’s Board of Directors.

Additionally, each holder of the Company’s convertible preferred stock was entitled to a vote equal to the number of shares of common stock into which the shares of convertible preferred stock could have been converted as of the record date. The holders of convertible preferred were entitled to vote on all matters on which the common stock shall be entitled to vote.

15


 

Dividend Rights

Holders of the Series A-1, Series A-2, Series B and Series C convertible preferred stock were entitled to receive non-cumulative dividends at a rate of 6% of the original respective series of convertible preferred stock issuance price. Only after payment of the dividends to the holders of Series C convertible preferred stock were the holders of shares of Series B, Series A-1 and Series A-2 convertible preferred stock be entitled to receive dividends, out of any assets legally available therefore, prior and in preference to any declaration or payment of any dividend (other than dividends on the common stock payable solely in common stock) on the common stock.

After the payment or setting aside for payment of the dividends described above, any additional dividends (other than dividends on common stock payable solely in common stock) set aside or paid in any fiscal year could have been set aside or paid among the holders of the convertible preferred stock and common stock then outstanding on a pari passu basis in proportion to the greatest whole number of shares of common stock which would have been held by each such holder if all shares of convertible preferred stock were converted at the then-effective conversion rate.

Dividends were only payable as and if declared by the Board of Directors. To date, the Company has not declared or paid any dividends.

Redemption Rights

The convertible preferred stock was not mandatorily redeemable as it did not have a set redemption date or a date after which the shares may be redeemed by the holders. A redemption event would have occurred only upon the occurrence of certain change in control events that are outside the Company’s control, including a sale, lease, transfer, or other disposition of all or substantially all of the Company’s assets. The Company has elected not to adjust the carrying values of the convertible preferred stock to the liquidation preferences of such shares because it is uncertain whether or when an event would have occurred that would obligate the Company to pay the liquidation preferences to holders of shares of convertible preferred stock. Subsequent adjustments to the carrying values of the liquidation preferences will be made only when it becomes probable that such a liquidation event will occur. 

 

9.  Stock-Based Compensation

2018 Incentive Award Plan

In March 2018, the Company’s board of directors adopted the Company’s 2018 Incentive Award Plan (the “2018 Plan”). The 2018 Plan was approved by the Company’s stockholders in April 2018 and became effective on May 2, 2018.  The 2018 Plan initially reserved 4,289,936 shares for the issuance of stock options as well as any automatic annual increases in the number of shares of common stock reserved for future issuance under the 2018 Plan.  Awards granted under the 2018 Plan expire no later than ten years from the date of grant. For stock options, the option price shall not be less than 100% of the estimated fair value on the day of grant. Options granted typically vest over a four-year period but may be granted with different vesting terms.  

 

2018 Employee Stock Purchase Plan

In March 2018, the Company’s board of directors adopted the Company’s 2018 Employee Stock Purchase Plan (the “2018 ESPP”). The 2018 ESPP was approved by the Company’s stockholders in April 2018 and became effective on May 2, 2018.  The 2018 ESPP reserved 536,242 shares of common stock for issuance pursuant to future awards, as well as any automatic increases in the number of shares of our common stock reserved for future issuance under this plan.

2013 Equity Incentive Plan

In June 2013, the Company adopted the 2013 Equity Incentive Plan (the “2013 Plan”), which provides for the granting of incentive stock options (“ISOs”), non-statutory stock options (“NSOs”) and restricted shares to employees, directors, and consultants at the discretion of management and the Board of Directors. As of March 31, 2018, there were an aggregate of 450,233 shares of common stock authorized for issuance under the 2013 Plan.

16


 

The exercise price of an ISO and NSO shall not be less than 100% of the estimated fair value of the shares on the date of grant, and the exercise price of an ISO and NSO granted to a 10% stockholder shall not be less than 110% of the estimated fair value of the shares on the date of grant. For awards granted between September 2017 and March 2018 with an exercise price of $3.42, a deemed fair value ranging from $3.95 to $5.43 per share was used in calculating stock-based compensation expense, which was determined using management hindsight. Options granted under the 2013 Plan expire no later than 10 years from the date of grant and generally vest over a four-year period but may be granted with different vesting terms. The 2013Plan also provides that unvested options that were not exercised as of an employee’s termination date shall revert to the 2013 Plan.

Stock Option Activity

A summary of the Company’s stock option activity under the 2013 Plan is as follows:

 

 

 

Number of

Shares

 

 

Weighted-

Average

Exercise

Price

 

Balances at December 31, 2017

 

 

4,196,203

 

 

 

3.06

 

Granted

 

 

493,776

 

 

 

5.79

 

Exercised

 

 

(400,587

)

 

 

3.10

 

Canceled

 

 

(25,423

)

 

 

3.39

 

Balances at March 31, 2018

 

 

4,263,969

 

 

 

3.37

 

 

Performance Contingent Stock Options Granted to Employees

During the three months ended March 31, 2018, the Board of Directors granted performance contingent stock option awards exercisable for 53,575 shares, to certain members of the Company’s executive team. These awards had a weighted average exercise price of $3.42 which was based on the fair market value on the grant date, as determined by the Board of Directors, and vest upon the successful achievement of one or more specified performance goals.

The total estimated fair value of employee performance contingent stock option awards was estimated at the date of grant using a Black-Scholes option-pricing model using the same assumptions as the stock options granted to employees with service-based vesting conditions was $0.4 million. As of March 31, 2018, the Company determined that the achievement of the requisite performance conditions was not probable and, as a result, no compensation cost was recognized for the performance contingent awards.

As of March 31, 2018 and 2017, there were 329,498 and 275,922 performance contingent stock option awards outstanding with a total fair value of $0.7 million and $0.3 million respectively. As of March 31, 2018 and 2017, the Company determined that the achievement of the requisite performance conditions was not probable and, as a result, no compensation cost was recognized for these awards.

Performance and Market Contingent Stock Options Granted to Employees

During the three months ended March 31, 2018, the Board of Directors granted performance and market contingent stock option awards exercisable for 160,727 shares of common stock to certain members of the Company’s executive team. These awards had a weighted average exercise price of $3.42, which was based on the fair market value on the grant date, as determined by the Board of Directors. The total estimated grant-date fair value of these options was $0.7 million. Key assumptions in the valuation model included expected volatility, a risk-free interest rate, expected dividend yield, and an expected term unique to the terms of these awards.

Under the performance and market contingent awards, 53,575 of the shares have three separate market triggers for vesting based upon (i) the closing of a financing where the Company sells shares of its equity securities to institutional investors at a minimum price per share, (ii) a change in control with aggregate proceeds payable to the Company’s common stock at a minimum price per share, or (iii) an initial public offering that becomes effective at a minimum specified price per share The remaining 107,152 shares have three separate market triggers for vesting

17


 

based upon (i) the closing of a financing where the Company sells shares of its equity securities to institutional investors at a minimum pre-money valuation, (ii) a change in control with a minimum aggregate proceeds payable to the Company’s common stock, or (iii) an initial public offering that becomes effective or an achievement of a minimum market capitalization, as measured by a trailing 30 day volume-weighted average price.  

By definition, the market condition in these awards can only be achieved after the performance condition of a liquidity event has been achieved. As such, the requisite service period is based on the estimated period over which the market condition can be achieved. When a performance goal is deemed to be probable of achievement, time-based vesting and recognition of stock-based compensation expense commences. As of March 31, 2018, the Company determined that the achievement of the requisite performance conditions was not probable and, as a result, no compensation cost was recognized for these awards.

As of March 31, 2018 and 2017, there were 454,584 and 360,594 performance and market contingent stock option awards outstanding with a total fair value of $1.0 million and $0.4 million respectively. As of March 31, 2018 and 2017, the Company determined that the achievement of the requisite performance conditions was not probable and, as a result, no compensation cost was recognized for these awards.

Restricted Stock

A summary of the Company’s restricted stock activity for the three months ended March 31, 2018:

 

 

 

Shares

 

 

Weighted

Average

Grant Date

Fair Value

 

Unvested at December 31, 2017

 

 

478,971

 

 

$

4.57

 

Granted

 

 

 

 

$

4.57

 

Vested

 

 

(119,742

)

 

$

4.57

 

Unvested at March 31, 2018

 

 

359,229

 

 

$

4.57

 

 

Stock-Based Compensation Expense

 

The following table sets forth the total stock-based compensation expense for all options granted to employees and nonemployees, including shares sold through the issuance of non-recourse promissory notes which are considered to be options for accounting purposes, included in the Company’s statement of operations:

 

 

 

Three Months Ended

March 31,

 

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

Research and development

 

$

974

 

 

$

170

 

General and administrative

 

 

396

 

 

 

243

 

Total

 

$

1,370

 

 

$

413

 

 

10. Net Loss per Common Share

Basic net loss per share is calculated by dividing net loss by the weighted average number of shares outstanding for the period. Diluted net loss per share is calculated by dividing net loss by the weighted average number of shares of common stock and potential dilutive common stock equivalents outstanding during the period if the effect is dilutive.

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A reconciliation of the numerators and denominators used in computing net loss from continuing operations per share is as follows (in thousands, except per share amounts):

 

 

 

March 31,

 

 

 

2018

 

 

2017

 

Numerator:

 

 

 

 

 

 

 

 

Net loss

 

$

(16,133

)

 

$

(8,934

)

Denominator:

 

 

 

 

 

 

 

 

Weighted average number of shares

   outstanding—basic and diluted

 

 

3,437,345

 

 

 

3,079,551

 

Net loss per share—basic and diluted

 

$

(4.69

)

 

$

(2.90

)

 

Potentially dilutive securities that were not included in the diluted per share calculations because they would be anti-dilutive were as follows:

 

 

 

Three Months Ended

March 31,

 

 

 

2018

 

 

2017

 

Convertible preferred stock

 

 

31,750,297

 

 

 

25,280,436

 

Options to purchase common stock

 

 

4,433,459

 

 

 

2,332,221

 

Early exercised common stock subject to future

   vesting

 

 

1,058,270

 

 

 

1,199,098

 

Restricted stock accounted for as options

 

 

625,084

 

 

 

 

Warrants to purchase convertible preferred stock

 

 

763,501

 

 

 

763,501

 

Warrants to purchase common stock

 

 

96,610

 

 

 

96,610

 

Total

 

 

38,727,221

 

 

 

29,671,866

 

 

Up to 739,551 shares may be contingently issued, if certain performance conditions are met under our in-licensing agreements.

 

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following management’s discussion and analysis of our financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and notes thereto for the year ended December 31, 2017, included in our prospectus dated May 2, 2018, filed with the U.S. Securities and Exchange Commission (SEC) pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended (the “Prospectus”).

Overview

We are a biotechnology company engaged in researching and developing therapeutics with a mission to extend human healthspan, the period of time in one’s life unburdened by the diseases of aging. Age-associated diseases cause considerable economic, personal and societal burden for individuals, their families and broader communities. Enabled by foundational scientific insights, we have devoted over six years to identifying multiple mechanisms that we believe to be root causes of age-associated disease. We are utilizing these insights to develop a broad portfolio of drug candidates to treat these diseases of aging, and we expect to initiate our first clinical study of one of our lead drug candidates in the second quarter of 2018.

Since the commencement of our operations, we have invested a significant portion of our efforts and financial resources in research and development activities, and we have incurred net losses each year since inception. Our net losses were $16.1 million and $8.9 million for the three months ended March 31, 2018 and 2017, respectively. We do not have any products approved for sale, and we have never generated any revenue from contracts with customers. As of March 31, 2018, we had an accumulated deficit of $103.0 million, and we do not expect positive cash flows from operations in the foreseeable future. We expect to continue to incur net operating losses for at least the next several years as we continue our research and development efforts, advance our drug candidates through preclinical and clinical development, seek regulatory approval, prepare for and, if approved, proceed to commercialization. 

Prior to our initial public offering, or IPO, we had funded our operations primarily from the issuance and sale of convertible preferred stock and convertible promissory notes. In May 2018, we completed our IPO pursuant to which we issued 5,000,000 shares of our common stock at a price of $17.00 per share.  We received net proceeds of $76.1 million from the IPO.

We do not expect to generate revenue from any drug candidates that we develop until we obtain regulatory approval for one or more of such drug candidates and commercialize our products or enter into collaborative agreements with third parties. 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. As a result, we will need to raise additional capital. If sufficient funds on acceptable terms are not available when needed, we could be required to significantly reduce our operating expenses and delay, reduce the scope of, or eliminate one or more of our development programs.

We rely on third parties in the conduct of our preclinical studies and clinical trials and for manufacturing and supply of our drug candidates. We have no internal manufacturing capabilities, and we will continue to rely on third parties, many of whom are single-source suppliers, for our preclinical and clinical trial materials, as well as the commercial supply of our products. In addition, we do not yet have a marketing or sales organization or commercial infrastructure. Accordingly, we will incur significant expenses to develop a marketing and sales organization and commercial infrastructure in advance of generating any product sales.

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Components of Our Results of Operations

Research and Development Expenses

Research and development expenses consist primarily of costs incurred for the development of our drug candidates, which include:

 

personnel-related expenses, including salaries, benefits and stock-based compensation for personnel contributing to research and development activities;

 

laboratory expenses including supplies and services;

 

expenses incurred under agreements with third-party contract manufacturing organizations, contract research organizations, research and development service providers, academic research institutions, and consultants;

 

expenses related to license and sponsored research agreements; and

 

facilities and other allocated expenses, including expenses for rent and facilities maintenance, and depreciation and amortization.

We expect our research and development expenses to increase substantially in the future as we advance our drug candidates into and through preclinical and clinical trials and pursue regulatory approval of our drug candidates. The process of conducting the necessary clinical trials to obtain regulatory approval is costly and time-consuming. Clinical trials generally become larger and more costly to conduct as they advance into later stages and, in the future, we will be required to make estimates for expense accruals related to clinical trial expenses. The actual probability of success for our drug candidates may be affected by a variety of factors including: the safety and efficacy of our drug candidates, early clinical data, investment in our clinical program, the ability of collaborators, if any, to successfully develop any drug candidates we license to them, competition, manufacturing capability and commercial viability. We may never succeed in achieving regulatory approval for any of our drug candidates. Due to the early-stage nature of our lead programs, we do not track costs on a project-by-project basis. As our programs enter clinical studies, we intend to track the cost of each program.  As a result of the uncertainties discussed above, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will generate revenue from the commercialization and sale of our drug candidates.

General and Administrative Expenses

Our general and administrative expenses consist primarily of personnel costs, allocated facilities costs and other expenses for outside professional services, including legal, audit and accounting services, and depreciation and amortization expense related to property and equipment. Personnel costs consist of salaries, benefits and stock-based compensation. We expect to incur additional expenses associated with operating as a public company, including expenses related to compliance with the rules and regulations of the Securities and Exchange Commission and standards applicable to companies listed on a national securities exchange, additional insurance expenses, investor relations activities and other administrative and professional services. We also expect to increase the size of our administrative headcount to support the growth of our business and operate as a public company.  

Interest Income

Interest income is primarily related to interest earned on our marketable securities for the three months ended March 31, 2018 and 2017.  

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Results of Operations

Comparison of the Three Months Ended March 31, 2018 and 2017

The following table sets forth the significant components of our results of operations:

 

 

 

Three Months Ended

March 31,

 

 

 

 

 

 

 

2018

 

 

2017

 

 

Increase/

(Decrease)

 

 

 

(in thousands)

 

Summary of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

13,025

 

 

 

6,970

 

 

 

6,055

 

General and administrative

 

 

3,457

 

 

 

2,070

 

 

 

1,387

 

Total operating expenses

 

 

16,482

 

 

 

9,040

 

 

 

7,442

 

Loss from operations

 

 

(16,482

)

 

 

(9,040

)