zfgn-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 001-36510

 

ZAFGEN, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

20-3857670

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

Zafgen, Inc.

175 Portland Street, 4th Floor

Boston, Massachusetts 02114

(Address of principal executive offices, including zip code)

Registrant’s Telephone Number, Including Area Code: (617) 622-4003

 

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Emerging growth company

Smaller reporting 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 Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

ZFGN

NASDAQ Global Market

As of April 30, 2019, there were 37,326,895 shares of the registrant’s Common Stock, $0.001 par value per share, outstanding.

 

 

 

 


 

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q Report, or Quarterly Report, contains forward-looking statements that involve risks and uncertainties. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. All statements other than statements of historical facts contained in this Quarterly Report are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:

 

the accuracy of our estimates regarding expenses, future revenues, cash forecasts and capital requirements;

 

our ability to successfully file and have our investigational new drug application, or IND, for ZGN-1258, ZGN-1345 and/or ZGN-1061 go into effect, including our ability to overcome the full clinical hold placed on ZGN-1061 by the U.S. Food and Drug Administration, or FDA;

 

our ability to continue to evaluate ZGN-1258 and to advance the program in nonclinical and clinical development following an unexpected finding in muscle tissue in rodent toxicology studies;

 

our ability to successfully advance ZGN-1061 and our other product candidates into and through all clinical trials to enable submission of a new drug application, or NDA;

 

our ability to gain regulatory approval and to successfully commercialize our product candidates;

 

our ability to develop supportive clinical and nonclinical data for partnering and to successfully partner ZGN-1061 before commencing Phase 3 clinical development;

 

our ability to advance our earlier-stage product candidates, including ZGN-1258 (if our further evaluation of ZGN-1258 warrants continued development and potential commercialization) or ZGN-1345, into clinical development and successfully complete clinical trials;

 

our ability to dissociate effects of methionine aminopeptidase 2, or MetAP2, inhibitors from pro-thrombotic effects or other adverse events observed in clinical development of our first-generation compound, beloranib;

 

our ability to distinguish ZGN-1061, ZGN-1258, ZGN-1345 and other novel MetAP2 inhibitors relative to our first-generation compound;

 

regulatory and political developments in the United States and foreign countries;

 

the performance of our third-party contract manufacturers and clinical research organizations;

 

our ability to obtain and maintain intellectual property protection for our proprietary assets;

 

the size of the potential markets for our product candidates and our ability to serve those markets;

 

the rate and degree of market acceptance of our product candidates for any indication once approved;

 

our ability to obtain additional financing when needed;

 

the success of competing products that are or become available for the indications that we are pursuing;

 

the loss of our executive, medical and development teams; and

 

other risks and uncertainties, including those listed under Part I, Item 1A. Risk Factors.

Any forward-looking statements in this Quarterly Report reflect our current views with respect to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under Part II, Item 1A. Risk Factors and elsewhere in this Quarterly Report. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

This Quarterly Report also contains estimates, projections and other information concerning our industry, our business, and the markets for certain diseases, including data regarding the estimated size of those markets, and the incidence and prevalence of certain medical conditions. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained this industry, business, market and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data and similar sources.

 

 


Zafgen, Inc.

INDEX

 

 

 

 

 

Page

 

 

 

 

 

PART I – FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1

 

Financial Statements (unaudited)

 

3

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2019 and 2018

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Changes in Stockholders Equity for the Three Months Ended March 31, 2019 and 2018

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018

 

6

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

7

 

 

 

 

 

Item 2.

 

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

 

16

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

26

 

 

 

 

 

Item 4.

 

Management’s Evaluation of our Disclosure Controls and Procedures

 

26

 

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

27

 

 

 

 

 

Item 1A.

 

Risk Factors

 

27

 

 

 

 

 

Item 6.

 

Exhibits

 

53

 

 

 

 

 

Signatures

 

54

 

 

2


PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

ZAFGEN, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

36,423

 

 

$

49,331

 

Marketable securities

 

 

68,243

 

 

 

68,735

 

Tax incentive receivable

 

 

1,550

 

 

 

1,536

 

Prepaid expenses and other current assets

 

 

1,259

 

 

 

1,728

 

Total current assets

 

 

107,475

 

 

 

121,330

 

Property and equipment, net

 

 

337

 

 

 

375

 

Operating lease right-of-use assets

 

 

883

 

 

 

 

Tax incentive receivable, net of current portion

 

 

94

 

 

 

 

Restricted cash

 

 

1,339

 

 

 

 

Other assets

 

 

57

 

 

 

57

 

Total assets

 

$

110,185

 

 

$

121,762

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,156

 

 

$

3,590

 

Accrued expenses and other

 

 

3,299

 

 

 

4,261

 

Notes payable, current

 

 

7,273

 

 

 

5,455

 

Total current liabilities

 

 

13,728

 

 

 

13,306

 

Notes payable, long-term

 

 

13,526

 

 

 

15,185

 

Operating lease liabilities

 

 

567

 

 

 

 

Total liabilities

 

 

27,821

 

 

 

28,491

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Preferred stock; $0.001 par value per share; 5,000,000 shares authorized as of

   March 31, 2019 and December 31, 2018; no shares issued and outstanding as

   of March 31, 2019 and December 31, 2018

 

 

 

 

 

 

Common stock, $0.001 par value per share; 115,000,000 shares authorized as of

   March 31, 2019 and December 31, 2018; 37,323,079 and 37,287,221 shares

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

   respectively

 

 

37

 

 

 

37

 

Additional paid-in capital

 

 

446,383

 

 

 

444,212

 

Accumulated deficit

 

 

(364,057

)

 

 

(350,945

)

Accumulated other comprehensive income (loss)

 

 

1

 

 

 

(33

)

Total stockholders' equity

 

 

82,364

 

 

 

93,271

 

Total liabilities and stockholders' equity

 

$

110,185

 

 

$

121,762

 

 

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

 

3


ZAFGEN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share data)

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Revenue

 

$

 

 

$

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

9,631

 

 

 

12,433

 

General and administrative

 

 

3,646

 

 

 

3,269

 

Total operating expenses

 

 

13,277

 

 

 

15,702

 

Loss from operations

 

 

(13,277

)

 

 

(15,702

)

Other income (expense):

 

 

 

 

 

 

 

 

Interest income

 

 

642

 

 

 

267

 

Interest expense

 

 

(500

)

 

 

(458

)

Foreign currency transaction gains (losses), net

 

 

23

 

 

 

(63

)

Total other income (expense), net

 

 

165

 

 

 

(254

)

Net loss

 

$

(13,112

)

 

$

(15,956

)

Net loss per share, basic and diluted

 

$

(0.35

)

 

$

(0.58

)

Weighted average common shares outstanding, basic and diluted

 

 

37,313,947

 

 

 

27,541,594

 

Comprehensive loss:

 

 

 

 

 

 

 

 

Net loss

 

$

(13,112

)

 

$

(15,956

)

Other comprehensive income:

 

 

 

 

 

 

 

 

Unrealized gain on marketable securities

 

 

34

 

 

 

9

 

Total other comprehensive income

 

 

34

 

 

 

9

 

Total comprehensive loss

 

$

(13,078

)

 

$

(15,947

)

 

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


4


ZAFGEN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

Total

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Accumulated

 

 

Comprehensive

 

 

Stockholders'

 

 

 

 

 

Shares

 

 

Par Value

 

 

Capital

 

 

Deficit

 

 

Loss

 

 

Equity

 

Balances as of December 31, 2017

 

 

 

 

27,489,457

 

 

$

27

 

 

$

367,825

 

 

$

(289,577

)

 

$

(58

)

 

$

78,217

 

Issuance of common stock upon exercise of stock

   options and employee stock purchase plan

 

 

 

 

63,893

 

 

 

1

 

 

 

260

 

 

 

 

 

 

 

 

 

261

 

Issuance of restricted stock units

 

 

 

 

5,533

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

2,466

 

 

 

 

 

 

 

 

 

2,466

 

Unrealized gain on marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9

 

 

 

9

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

(15,956

)

 

 

 

 

 

(15,956

)

Balances as of March 31, 2018

 

 

 

 

27,558,883

 

 

$

28

 

 

$

370,551

 

 

$

(305,533

)

 

$

(49

)

 

$

64,997

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances as of December 31, 2018

 

 

 

 

37,287,221

 

 

$

37

 

 

$

444,212

 

 

$

(350,945

)

 

$

(33

)

 

$

93,271

 

Issuance of common stock upon exercise of stock

   options and employee stock purchase plan

 

 

 

 

31,391

 

 

 

 

 

 

95

 

 

 

 

 

 

 

 

 

95

 

Issuance of restricted stock units

 

 

 

 

4,467

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

2,076

 

 

 

 

 

 

 

 

 

2,076

 

Unrealized gain on marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

34

 

 

 

34

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

(13,112

)

 

 

 

 

 

(13,112

)

Balances as of March 31, 2019

 

 

 

 

37,323,079

 

 

$

37

 

 

$

446,383

 

 

$

(364,057

)

 

$

1

 

 

$

82,364

 

 

 

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

 

 

5


ZAFGEN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(13,112

)

 

$

(15,956

)

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

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

2,076

 

 

 

2,466

 

Depreciation expense

 

 

51

 

 

 

50

 

Unrealized foreign currency transaction (gains) losses

 

 

(14

)

 

 

14

 

Premium on marketable securities, net

 

 

 

 

 

(3

)

Amortization of discount on marketable securities

 

 

(283

)

 

 

(11

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

469

 

 

 

507

 

Tax incentive receivable

 

 

(94

)

 

 

(581

)

Accounts payable

 

 

(445

)

 

 

776

 

Accrued expenses and other

 

 

(1,119

)

 

 

(527

)

Net cash used in operating activities

 

 

(12,471

)

 

 

(13,265

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Proceeds from sales and maturities of marketable securities

 

 

34,275

 

 

 

30,839

 

Purchases of marketable securities

 

 

(33,466

)

 

 

(12,880

)

Purchases of property and equipment

 

 

(2

)

 

 

(1

)

Net cash provided by investing activities

 

 

807

 

 

 

17,958

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from exercise of common stock options and employee stock purchase plan

 

 

95

 

 

 

261

 

Net cash provided by financing activities

 

 

95

 

 

 

261

 

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

 

 

(11,569

)

 

 

4,954

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

49,331

 

 

 

40,777

 

Cash, cash equivalents and restricted cash at end of period

 

$

37,762

 

 

$

45,731

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Property and equipment included in accounts payable

 

$

11

 

 

$

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

339

 

 

$

198

 

 

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

 

6


ZAFGEN, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of the Business and Basis of Presentation

Zafgen, Inc., or the Company, was incorporated on November 22, 2005 under the laws of the State of Delaware. The Company is a clinical-stage biopharmaceutical company leveraging its proprietary knowledge of the methionine aminopeptidase 2 (“MetAP2”) pathway to develop novel therapies for patients affected by a range of complex metabolic diseases. Zafgen has pioneered the study of MetAP2 inhibitors in both common and rare metabolic disorders, and its current disease areas of focus are type 2 diabetes, Prader-Willi syndrome (“PWS”) and liver diseases. The Company’s lead product candidate, ZGN-1061, is a MetAP2 inhibitor in Phase 2 clinical development with unique properties that maximize impact on metabolic parameters relevant to the treatment of type 2 diabetes and other related metabolic disorders. In November 2018, the Company received a letter from the U.S. Food and Drug Administration (“FDA”) placing a full clinical hold on the investigational new drug application (“IND”) for the first U.S. clinical trial of ZGN-1061. The FDA cited the possibility of cardiovascular (“CV”) safety risk based on the Company’s prior compound and outlined multiple potential paths for moving forward, including nonclinical or clinical options, to address these concerns in the ongoing development of ZGN-1061. In January 2018, the Company announced advancement of its highly optimized MetAP2 development candidate ZGN-1258, and in the first quarter of 2018, initiated IND enabling nonclinical efforts for evaluation of ZGN-1258 in the treatment of people affected by PWS. In March 2019, the Company announced its decision to suspend plans to file an IND for ZGN-1258 in order to evaluate ZGN-1258 following an unexpected finding in muscle tissue in rodent toxicology studies. In the fourth quarter of 2018, the Company announced that ZGN-1345, an oral dosed MetAP2 inhibitor specifically targeting the liver, has been formally advanced to development candidate stage. The Company is subject to risks common to companies in the biotechnology industry including, but not limited to, new technological innovations, protection of proprietary technology, dependence on key personnel, compliance with government regulations and the need to obtain additional financing. Product candidates currently under development will require significant additional research and development efforts, including extensive nonclinical and clinical testing and regulatory approval, prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel infrastructure, and extensive compliance-reporting capabilities.

Each of the Company’s product candidates is in the research and development stage. There can be no assurance that the Company’s research and development will be successfully completed, that adequate protection for the Company’s intellectual property will be obtained, that any product candidates developed will obtain necessary government regulatory approval or that any approved products will be commercially viable. Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the Company will generate significant revenue from product sales. The Company operates in an environment of rapid change in technology and substantial competition from pharmaceutical and biotechnology companies. In addition, the Company is dependent upon the services of its employees and consultants.

The Company has incurred losses and negative cash flows from operations since its inception. As of March 31, 2019, the Company had an accumulated deficit of $364.1 million. From its inception through March 31, 2019, the Company received net proceeds of $397.9 million from the sales of redeemable convertible preferred stock, the issuance of convertible promissory notes, the proceeds from its initial public offering (“IPO”) in June 2014 and its follow-on offerings in January 2015 and July 2018. On July 2, 2018, the Company completed a public offering of its common stock, which resulted in the sale of 9,200,000 shares at a price of $7.50 per share, resulting in net proceeds of approximately $64.6 million after deducting underwriting discounts and commissions, as well as offering costs. As disclosed in Note 5 to the condensed consolidated financial statements, the Company has a term loan with an aggregate principal balance of $20.0 million as of March 31, 2019. The loan agreement requires that the Company maintain certain minimum liquidity at all times, which as of March 31, 2019, was approximately $21.0 million. If the minimum liquidity covenant is not met, the Company may be required to repay the loan prior to scheduled maturity dates. Until such time, if ever, as the Company can generate substantial product revenue, the Company expects to finance its cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements and other sources of funding.

Based on its current operating plans, the Company believes its cash, cash equivalents and marketable securities of $104.7 million as of March 31, 2019 will be sufficient to fund its anticipated level of operations, capital expenditures and satisfy debt repayments for a period of at least 12 months from the issuance date of this Quarterly Report. The Company expects to generate operating losses for the foreseeable future. If the Company is unable to raise additional funds through equity or debt financings, the Company may be required to delay, limit, reduce or terminate product development or future commercialization efforts or grant rights to develop and market products or product candidates that the Company would otherwise prefer to develop and market itself.

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries Zafgen Securities Corporation, Zafgen Australia Pty Limited, and Zafgen Animal Health, LLC. All intercompany balances and transactions have been eliminated.

7


Unaudited Interim Financial Information

The condensed consolidated balance sheet as of December 31, 2018 was derived from the Company’s audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). The accompanying unaudited condensed consolidated financial statements as of March 31, 2019 and for the three months ended March 31, 2019 and 2018, have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), for interim financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto for the year ended December 31, 2018, included in the Company’s Annual Report on Form 10-K, for the year ended December 31, 2018, on file with the SEC. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of the Company’s condensed consolidated financial position as of March 31, 2019 and condensed consolidated results of operations and cash flows for the three months ended March 31, 2019 and 2018 have been made. The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2019.

2. Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the condensed consolidated financial statements, and the reported amounts of expenses during the reporting periods. Significant estimates and assumptions reflected in these condensed consolidated financial statements include, but are not limited to, the accrual of research and development expenses and the valuation of stock-based awards. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Actual results could differ from the Company’s estimates.

Marketable securities

Marketable securities consist of investments with original maturities greater than ninety days. The Company has classified its investments with maturities beyond one year as short term, based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations. The Company classifies its marketable securities as available-for-sale. Accordingly, these investments are recorded at fair value, which is based on quoted market prices. Unrealized gains and losses are reported as a component of accumulated other comprehensive income (loss) in stockholders’ equity. Realized gains and losses and declines in value judged to be other than temporary are included as a component of other income (expense), net, based on the specific identification method. When determining whether a decline in value is other than temporary, the Company considers various factors, including whether the Company has the intent to sell the security, and whether it is more likely than not that the Company will be required to sell the security prior to recovery of its amortized cost basis. Fair value is determined based on quoted market prices.

Net Loss Per Share

Basic net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net loss per share attributable to common stockholders is computed by dividing the diluted net loss attributable to common stockholders by the weighted average number of common shares, including potential dilutive common shares assuming the dilutive effect of outstanding stock options and unvested restricted common shares, as determined using the treasury stock method. For periods in which the Company has reported net losses, diluted net loss per common share attributable to common stockholders is the same as basic net loss per common share attributable to common stockholders, since dilutive common shares are not assumed to have been issued if their effect is antidilutive.

The Company excluded the following common stock equivalents, outstanding as of March 31, 2019 and 2018, from the computation of diluted net loss per share for the three months ended March 31, 2019 and 2018 because they had an anti-dilutive impact due to the net loss incurred for the periods:

 

 

 

As of March 31,

 

 

 

2019

 

 

2018

 

Options to purchase common stock

 

 

6,663,162

 

 

 

5,839,261

 

Unvested restricted common stock

 

 

351,371

 

 

 

13,393

 

 

 

 

7,014,533

 

 

 

5,852,654

 

8


 

Recently Issued and Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2016-02, Leases and in July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements. The new leasing standards generally require lessees to recognize operating and financing lease liabilities and corresponding right-of-use assets on the consolidated balance sheet and to provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising from leasing arrangements.

We adopted the new leasing standards using the modified retrospective transition approach, as of January 1, 2019, with no restatement of prior periods or cumulative adjustment to retained earnings. Upon adoption, we elected the package of transition practical expedients, which allowed us to carry forward prior conclusions related to whether any expired or existing contracts are or contain leases, the lease classification for any expired or existing leases and initial direct costs for existing leases. In addition, the Company elected the hindsight practical expedient to determine the lease term for existing leases. The Company elected not to record leases with an initial term of 12 months or less on the balance sheet and recognize the associated lease payments in the consolidated statements of operations on a straight-line basis over the lease term. Upon adoption of the new leasing standards we recognized an operating lease asset of approximately $1.0 million and a corresponding operating lease liability of approximately $1.0 million, which are included in our condensed consolidated balance sheet. The adoption of the new leasing standards did not have an impact on our condensed consolidated statements of income or cash flows.

We determine if an arrangement is a lease at contract inception. Operating lease assets represent our right to use an underlying asset for the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at the commencement date of the lease based upon the present value of lease payments over the lease term. When determining the lease term, we include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. We use the implicit rate when readily determinable and use our incremental borrowing rate when the implicit rate is not readily determinable based upon the information available at the commencement date in determining the present value of the lease payments. Our incremental borrowing rate is determined using a secured borrowing rate for the same currency and term as the associated lease.

The lease payments used to determine our operating lease assets may include lease incentives, stated rent increases and escalation clauses linked to rates of inflation when determinable and are recognized in our operating lease assets in our condensed consolidated balance sheets.

Our operating leases are reflected in operating lease right-of-use assets, accrued expenses and in long-term operating lease liabilities in our condensed consolidated balance sheets. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

For additional information on the adoption of the new leasing standards, please read Note 7, Commitments and Contingencies, to these condensed consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. This ASU is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent accounting for employee share-based compensation. This standard was effective for the Company in 2019. The adoption of this guidance had an immaterial impact on the Company’s consolidated financial statements as of and for the three months ended March 31, 2019.

3. Fair Value Measurements and Marketable Securities

Fair Value Measurements

The following tables present information about the Company’s financial assets that have been measured at fair value as of March 31, 2019 and December 31, 2018 and indicate the fair value of the hierarchy of the valuation inputs utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair value determined by Level 2 inputs utilize observable inputs other than Level 1 prices, such as quoted prices, for similar assets or liabilities, quoted market prices 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. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. During the three months ended March 31, 2019 and the year ended December 31, 2018, there were no transfers between Level 1 and Level 2 financial assets.

9


The following tables summarize the Company’s cash equivalents and marketable securities as of March 31, 2019 and December 31, 2018:

 

 

 

March 31, 2019

 

 

 

 

 

 

 

Quoted

 

 

Significant

 

 

 

 

 

 

 

 

 

 

Prices in

 

 

Other

 

 

Significant

 

 

 

 

 

 

 

Active

 

 

Observable

 

 

Unobservable

 

 

 

 

 

 

 

Markets

 

 

Inputs

 

 

Inputs

 

 

 

Total

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

 

(in thousands)

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

17,499

 

 

$

17,499

 

 

$

 

 

$

 

Commercial paper

 

 

10,675

 

 

 

 

 

 

10,675

 

 

 

 

U.S. Government securities

 

 

1,246

 

 

 

 

 

 

1,246

 

 

 

 

Total cash equivalents

 

 

29,420

 

 

 

17,499

 

 

 

11,921

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

 

33,732

 

 

 

 

 

 

33,732

 

 

 

 

Corporate bonds

 

 

22,441

 

 

 

 

 

 

22,441

 

 

 

 

U.S. Government securities

 

 

12,070

 

 

 

 

 

 

12,070

 

 

 

 

Total marketable securities

 

 

68,243

 

 

 

 

 

 

68,243

 

 

 

 

Total cash equivalents and marketable securities

 

$

97,663

 

 

$

17,499

 

 

$

80,164

 

 

$

 

 

 

 

December 31, 2018

 

 

 

 

 

 

 

Quoted

 

 

Significant

 

 

 

 

 

 

 

 

 

 

 

Prices in

 

 

Other

 

 

Significant

 

 

 

 

 

 

 

Active

 

 

Observable

 

 

Unobservable

 

 

 

 

 

 

 

Markets

 

 

Inputs

 

 

Inputs

 

 

 

Total

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

(in thousands)

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

40,231

 

 

$

40,231

 

 

$

 

 

$

 

Commercial paper

 

 

4,979

 

 

 

 

 

 

4,979

 

 

 

 

Total cash equivalents

 

 

45,210

 

 

 

40,231

 

 

 

4,979

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

 

38,911

 

 

 

 

 

 

38,911

 

 

 

 

Corporate bonds

 

 

25,830

 

 

 

 

 

 

25,830

 

 

 

 

U.S. Government securities

 

 

3,994

 

 

 

 

 

 

3,994

 

 

 

 

Total marketable securities

 

 

68,735

 

 

 

 

 

 

68,735

 

 

 

 

Total cash equivalents and marketable securities

 

$

113,945

 

 

$

40,231

 

 

$

73,714

 

 

$

 

 

The carrying amounts reflected in the condensed consolidated balance sheets for tax incentive receivable, accounts payable, and accrued expenses approximate fair value due to their short-term maturities. The carrying value of the Company’s outstanding notes payable approximates fair value (a Level 2 fair value measurement), reflecting interest rates currently available to the Company.

10


Marketable Securities

The following tables summarize the Company’s marketable securities as of March 31, 2019 and December 31, 2018:

 

 

 

March 31, 2019

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

 

 

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper (due within 1 year)

 

$

33,733

 

 

$

 

 

$

(1

)

 

$

33,732

 

Corporate bonds (due within 1 year)

 

 

22,439

 

 

 

4

 

 

 

(2

)

 

 

22,441

 

U.S. Government securities (due within 1 year)

 

 

12,067

 

 

 

3

 

 

 

 

 

 

12,070

 

 

 

$

68,239

 

 

$

7

 

 

$

(3

)

 

$

68,243

 

 

 

 

December 31, 2018

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

 

 

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper (due within 1 year)

 

$

38,921

 

 

$

 

 

$

(10

)

 

$

38,911

 

Corporate bonds (due within 1 year)

 

 

25,851

 

 

 

3

 

 

 

(24

)

 

 

25,830

 

U.S. Government securities (due within 1 year)

 

 

3,995

 

 

 

 

 

 

(1

)

 

 

3,994

 

 

 

$

68,767

 

 

$

3

 

 

$

(35

)

 

$

68,735

 

 

4. Accrued Expenses and Other

Accrued expenses and other consisted of the following as of March 31, 2019 and December 31, 2018:

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

(in thousands)

 

Accrued research and development expenses

 

$

1,338

 

 

$

1,526

 

Accrued payroll and related expenses

 

 

931

 

 

 

2,291

 

Accrued professional fees

 

 

486

 

 

 

221

 

Operating lease liabilities

 

 

332

 

 

 

 

Accrued other

 

 

212

 

 

 

223

 

 

 

$

3,299

 

 

$

4,261

 

 

5. Notes Payable

On December 29, 2017, the Company entered into a loan and security agreement with Silicon Valley Bank (the “Term Loan”). The Term Loan provided for borrowings of $20.0 million. On December 29, 2017, the Company received proceeds of $20.0 million from the issuance of a promissory note. The promissory note issued under the Term Loan is collateralized by substantially all of the Company’s personal property, other than its intellectual property.

Upon entering into the Term Loan, the Company became obligated to make monthly, interest-only payments until March 29, 2019 and, thereafter, to pay 33 consecutive, equal monthly installments of principal and interest from April 1, 2019 through December 1, 2021. The outstanding Term Loan bears a variable interest at an annual rate of 1.25% above the prime rate, which at March 31, 2019 was 5.5%. In addition, a final payment equal to 8.0% of the Term Loan is due upon the earlier of the maturity date, acceleration of the Term Loan or prepayment of all or part of the Term Loan. The Company accrues the final payment amount of $1.6 million, to outstanding debt by charges to interest expense using the effective-interest method from the date of issuance through the maturity date.

Additionally, the Company, as borrower, is required to maintain a minimum cash, cash equivalents and marketable securities balance at Silicon Valley Bank of no less than 105% of the total outstanding principal balance of the Term Loan, which was $21.0 million as of March 31, 2019 and December 31, 2018.

11


Further, since 45 days after the Term Loan was entered in, the Company has met its obligation to maintain a balance of unrestricted cash, cash equivalents and marketable securities at Silicon Valley Bank in an amount not less than the greater of (i) $55.0 million and (ii) sixty-five percent (65%) of all the Company’s cash, cash equivalents and marketable securities. If the Company does not meet this requirement it will not be considered an event of default provided it immediately secures 87.5% of the principal balance in a restricted cash account.

There are negative covenants restricting the Company’s activities, including limitations on dispositions, mergers or acquisitions; encumbering or granting a security interest in its intellectual property; incurring indebtedness or liens; paying dividends; making certain investments; limiting the aggregate value of cash maintained by its Australian subsidiary not to exceed $4.0 million and certain other business transactions.

The Term Loan also includes events of default, the occurrence and continuation of any of which provides the lenders the right to exercise remedies against the Company and the collateral securing the amounts due under the Term Loan, including cash in the amount of the outstanding balance. These events of default include, among other things, failure to pay any amounts due under the Term Loan, insolvency, the occurrence of a material adverse event, the occurrence of any default under certain other indebtedness and a final judgment against the Company in an amount greater than $0.3 million.

As of March 31, 2019 and December 31, 2018, notes payable consist of the following:

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

(in thousands)

 

Notes payable

 

$

20,000

 

 

$

20,000

 

Less: current portion

 

 

(7,273

)

 

 

(5,455

)

Notes payable, net of current portion

 

 

12,727

 

 

 

14,545

 

Accretion related to final payment

 

 

799

 

 

 

640

 

Notes payable, long term

 

$

13,526

 

 

$

15,185

 

As of March 31, 2019, the estimated future principal payments due are as follows:

 

Year Ending December 31,

 

 

 

 

(in thousands)

 

 

 

 

2019 (April - December)

 

$

5,455

 

2020

 

 

7,273

 

2021

 

 

7,272

 

Total

 

$

20,000

 

 

During the three months ended March 31, 2019 and 2018, the Company recognized $0.5 million of interest expense related to the Term Loan. The effective annual interest rate as of March 31, 2019 on the outstanding debt under the Term Loan was approximately 9.9%.

6. Stock-Based Awards

The Company’s 2014 Stock Option and Incentive Plan, as amended (the “2014 Plan”) provides for the grant of stock options, stock appreciation rights, restricted stock awards, restricted stock units, unrestricted stock awards, performance-share awards, cash-based awards and dividend equivalent rights to employees, members of the board of directors and consultants of the Company. The Company has outstanding stock-based awards under its Amended and Restated 2006 Stock Option Plan but is no longer granting awards under this plan. The Company also issues common stock under its 2014 Employee Stock Purchase Plan (the “ESPP”). As of March 31, 2019, 1,986,794 shares are available for grant under the 2014 Plan, includ