alna-10q_20170930.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 September 30, 2017

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: 001-38268

 

ALLENA PHARMACEUTICALS, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

45-2729920

( State or other jurisdiction of

incorporation or organization)

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

 

One Newton Executive Park, Suite 202

Newton, Massachusetts

02462

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (617) 467-4577

 

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 small reporting company)

  

Small 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 December 11, 2017, the registrant had 20,670,254 shares of common stock, $0.001 par value per share, outstanding.

 

 

 

 

 

 


 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements. These statements include all matters that are not related to present facts or current conditions or that are not historical facts, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management and expected market growth. The words “anticipate,” “believe,” “could,” “continue,” “should,” “predict,” “estimate,” “expect,” “intend,” “may,” “plan,” “potentially,” “will,” “may,” “would,” or the negative of these terms or other similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements.

We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, regarding, among other things:

 

the design and conduct of our planned Phase 3 clinical program of ALLN-177 in enteric hyperoxaluria;

 

the number, designs, results and timing of our clinical trials and preclinical studies and the timing of the availability of data from these trials and activities;

 

our ability to enroll a sufficient number of patients and the ability of subjects in our clinical trials to adhere to the protocol, including capsule and dietary regimen and urinary collection requirements;

 

the therapeutic benefits, effectiveness and safety of ALLN-177, ALLN-346 and our future product candidates;

 

our ability to receive regulatory approval for our product candidates in the United States, Europe and other geographies;

 

our ability to obtain, on satisfactory terms or at all, the financing required to support operations, development, clinical trials, and commercialization of products;

 

our reliance on third-parties for the planning, conduct and monitoring of clinical trials and for the manufacture of clinical drug supplies and drug product;

 

potential changes in regulatory requirements, and delays or negative outcomes from the regulatory approval process;

 

our estimates of the size and characteristics of the markets that may be addressed by ALLN-177 and ALLN-346;

 

the market acceptance of ALLN-177, ALLN-346 or any future product candidates that are approved for marketing in the United States or other countries;

 

our ability to successfully commercialize ALLN-177 with a targeted sales force;

 

the safety and efficacy of therapeutics marketed by our competitors that are targeted to indications which our product candidates have been developed to treat;

 

our ability to utilize our proprietary technological approach to develop and commercialize ALLN-346 and future product candidates;

 

potential collaborators to license and commercialize ALLN-177, if approved, or any products for which we receive regulatory approval in the future outside of the United States;

 


 

 

our heavy dependence on licensed intellectual property, including our ability to source and maintain licenses from third-party owners;

 

our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others;

 

our ability to attract, retain and motivate key personnel;

 

our ability to generate revenue and become profitable; and

 

our estimates regarding our capital requirements and our need for additional financing.

These risks are not exhaustive. Other sections of this Quarterly Report on Form 10-Q may include additional factors that could adversely impact our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for our management to predict all risk factors nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in, or implied by, any forward-looking statements.

We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q, particularly in the “Risk Factors” section, that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. No forward-looking statement is a guarantee of future performance.

You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q and have filed as exhibits to the registration statement of which this Quarterly Report on Form 10-Q is a part completely and with the understanding that our actual future results may be materially different from what we expect. The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.

 

 

 


 

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

2

Item 1.

Financial Statements (Unaudited)

2

 

Condensed Consolidated Balance Sheets

2

 

Condensed Consolidated Statements of Operations and Comprehensive Loss

3

 

Condensed Consolidated Statements of Cash Flows

4

 

Notes to Unaudited Condensed Consolidated Financial Statements

5

Item 2.

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

15

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

25

Item 4.

Controls and Procedures

25

PART II.

OTHER INFORMATION

27

Item 1.

Legal Proceedings

27

Item 1A.

Risk Factors

27

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

64

Item 3.

Defaults Upon Senior Securities

64

Item 4.

Mine Safety Disclosures

64

Item 5.

Other Information

64

Item 6.

Exhibits

65

Signatures

66

Exhibit Index

 

 

 

 

 

i


 

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements.

Allena Pharmaceuticals, Inc.

Condensed Consolidated Balance Sheets

(unaudited)

(in thousands, except share and per share data)

 

 

 

September 30,

2017

 

 

December, 31,

2016

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

33,874

 

 

$

25,250

 

Short-term investments

 

 

 

 

 

23,505

 

Prepaid expenses and other current assets

 

 

577

 

 

 

520

 

Total current assets

 

 

34,451

 

 

 

49,275

 

Property and equipment, net

 

 

134

 

 

 

169

 

Deferred initial public offering costs

 

 

1,589

 

 

 

 

Other assets

 

 

89

 

 

 

35

 

Total assets

 

$

36,263

 

 

$

49,479

 

Liabilities, Convertible Preferred Stock and Stockholders’ Deficit

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,913

 

 

$

1,464

 

Loan payable, net of discount

 

 

3,066

 

 

 

176

 

Accrued expenses

 

 

2,159

 

 

 

1,610

 

Total current liabilities

 

 

7,138

 

 

 

3,250

 

Loan payable, net of current portion and discount

 

 

6,620

 

 

 

9,409

 

Warrants for the purchase of shares subject to redemption

 

 

460

 

 

 

267

 

Other liabilities

 

 

266

 

 

 

103

 

Total liabilities

 

 

14,484

 

 

 

13,029

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

 

Series A convertible preferred stock, $0.001 par value; 18,510,200 shares authorized

   at September 30, 2017 and December 31, 2016; 18,367,344 shares issued and

   outstanding at September 30, 2017 and December 31, 2016 (aggregate liquidation

   preference of $18,000 at September 30, 2017 and December 31, 2016)

 

 

17,973

 

 

 

17,967

 

Series B convertible preferred stock, $0.001 par value; 19,841,270 shares authorized,

   issued and outstanding at September 30, 2017 and December 31, 2016 (aggregate

   liquidation preference of $25,000 at September 30, 2017 and December 31, 2016)

 

 

24,944

 

 

 

24,931

 

Series C convertible preferred stock, $0.001 par value; 20,000,000 shares authorized,

   issued and outstanding at September 30, 2017 and December 31, 2016 (aggregate

   liquidation preference of $53,000 at September 30, 2017 and December 31, 2016)

 

 

52,862

 

 

 

52,829

 

Stockholders’ deficit:

 

 

 

 

 

 

 

 

Common stock, $0.001 par value; 75,000,000 shares authorized at September 30, 2017

   and December 31, 2016; 1,349,492 and 1,341,385 shares issued and outstanding at

   September 30, 2017 and December 31, 2016, respectively

 

 

1

 

 

 

1

 

Additional paid-in capital

 

 

1,279

 

 

 

1,031

 

Accumulated other comprehensive loss

 

 

 

 

 

(2

)

Accumulated deficit

 

 

(75,280

)

 

 

(60,307

)

Total stockholders’ deficit

 

 

(74,000

)

 

 

(59,277

)

Total liabilities, convertible preferred stock and stockholders’ deficit

 

$

36,263

 

 

$

49,479

 

 

See accompanying notes.

 

2


 

Allena Pharmaceuticals, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(unaudited)

(in thousands, except share and per share data)

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

2,949

 

 

$

5,263

 

 

$

10,758

 

 

$

15,288

 

General and administrative

 

 

1,413

 

 

 

839

 

 

 

3,621

 

 

 

2,896

 

Total operating expenses

 

 

4,362

 

 

 

6,102

 

 

 

14,379

 

 

 

18,184

 

Loss from operations

 

 

(4,362

)

 

 

(6,102

)

 

 

(14,379

)

 

 

(18,184

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income (expense), net

 

 

(146

)

 

 

(42

)

 

 

(401

)

 

 

(113

)

Other income (expense), net

 

 

(162

)

 

 

8

 

 

 

(193

)

 

 

9

 

Other income (expense), net

 

 

(308

)

 

 

(34

)

 

 

(594

)

 

 

(104

)

Net loss

 

$

(4,670

)

 

$

(6,136

)

 

$

(14,973

)

 

$

(18,288

)

Net loss per share attributable to common stockholders—basic and

   diluted

 

$

(3.49

)

 

$

(4.59

)

 

$

(11.19

)

 

$

(13.70

)

Weighted-average common shares outstanding—basic and diluted

 

 

1,343,429

 

 

 

1,341,385

 

 

 

1,342,898

 

 

 

1,338,539

 

Net loss

 

$

(4,670

)

 

$

(6,136

)

 

$

(14,973

)

 

$

(18,288

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on investments

 

 

 

 

 

 

 

 

2

 

 

 

 

 

Total other comprehensive income (loss)

 

 

 

 

 

 

 

 

2

 

 

 

 

Comprehensive loss

 

$

(4,670

)

 

$

(6,136

)

 

$

(14,971

)

 

$

(18,288

)

 

See accompanying notes.

 

 

 

3


 

Allena Pharmaceuticals, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

 

 

 

For the Nine Months

Ended September 30,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(14,973

)

 

$

(18,288

)

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

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

295

 

 

 

166

 

Depreciation expense

 

 

53

 

 

 

31

 

Non-cash interest expense

 

 

264

 

 

 

85

 

Amortization of premium on investments

 

 

33

 

 

 

102

 

Change in fair value of warrant liability

 

 

193

 

 

 

2

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

(22

)

 

 

420

 

Other assets

 

 

(89

)

 

 

 

Accounts payable

 

 

150

 

 

 

(201

)

Accrued expenses

 

 

(132

)

 

 

227

 

Other liabilities

 

 

 

 

 

(140

)

Net cash used in operating activities

 

 

(14,228

)

 

 

(17,596

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(56

)

 

 

(49

)

Purchases of investments

 

 

(1,247

)

 

 

(49,205

)

Maturities of investments

 

 

24,721

 

 

 

19,500

 

Net cash provided by (used in) investing activities

 

 

23,418

 

 

 

(29,754

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from exercise of stock options

 

 

5

 

 

 

19

 

Payments of initial public offering costs

 

 

(571

)

 

 

 

Proceeds from loan payable

 

 

 

 

 

7,500

 

Repayment of loan payable

 

 

 

 

 

(6,256

)

Debt issuance costs paid

 

 

 

 

 

(368

)

Net cash provided by (used in) financing activities

 

 

(566

)

 

 

895

 

Net increase (decrease) in cash and cash equivalents

 

 

8,624

 

 

 

(46,455

)

Cash and cash equivalents, beginning of period

 

 

25,250

 

 

 

69,011

 

Cash and cash equivalents, end of period

 

$

33,874

 

 

$

22,556

 

Supplemental disclosure of non-cash activities:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

332

 

 

$

234

 

Deferred initial public offering costs included in accounts payable and accrued expenses

 

$

1,018

 

 

$

 

Issuance of warrants in connection with loan payable

 

$

 

 

$

45

 

Accretion of convertible preferred stock to redemption value

 

$

52

 

 

$

52

 

 

See accompanying notes.

 

 

4

 


 

Allena Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(in thousands, except share and per share data)

1. Nature of Business

Allena Pharmaceuticals, Inc. (the “Company”) is a late-stage clinical biopharmaceutical company dedicated to developing and commercializing first-in-class, oral enzyme therapeutics to treat patients with rare and severe metabolic and kidney disorders. The Company is focused on metabolic disorders that result in excess accumulation of certain metabolites that can cause kidney stones, damage the kidney, and potentially lead to chronic kidney disease (“CKD”), and end-stage renal disease. The Company’s lead product candidate, ALLN-177, is a first-in-class, oral enzyme therapeutic that it is developing for the treatment of hyperoxaluria, a metabolic disorder commonly associated with kidney stones, CKD and other serious kidney diseases. The Company was incorporated under the laws of the State of Delaware on June 24, 2011 and is located in Newton, Massachusetts.

On November 6, 2017, the Company completed an initial public offering (“IPO”), in which the Company issued and sold 5,333,333 shares of its common stock at a public offering price of $14.00 per share, for aggregate gross proceeds of $74.7 million. The underwriters partially exercised their over-allotment option December 1, 2017, and purchased an additional 16,969 shares of our common stock for aggregate gross proceeds of $0.2 million.  As a result of the IPO, the Company received approximately $66.6 million in net proceeds after deducting $8.3 million of underwriting discounts and commissions and offering costs.

Upon the closing of the IPO, all of the outstanding shares of convertible preferred stock automatically converted into 13,945,509 shares of common stock. Subsequent to the closing of the IPO, there were no shares of preferred stock outstanding. In connection with the IPO, the Company amended and restated its certificate of incorporation to change the authorized capital stock to 125,000,000 shares designated as common stock and 5,000,000 shares designated as preferred stock, all with a par value of $0.001 per share. The financial statements as of September 30, 2017, including share and per share amounts, do not give effect to the IPO, as it closed subsequent to September 30, 2017.

In connection with preparing for its IPO, the Company effected a 1-for-4.174 reverse stock split of the Company’s common stock. The reverse stock split became effective on October 23, 2017. The par value and authorized shares of common stock and convertible preferred stock were not adjusted as a result of the reverse stock split. All share and per share amounts in the financial statements and notes thereto have been retroactively adjusted for all periods presented to give effect to this reverse stock split, including reclassifying an amount equal to the reduction in par value of common stock to additional paid-in capital. The financial statements have also been retroactively adjusted to reflect adjustments to the conversion ratio for each series of convertible preferred stock effected in connection with the reverse stock split.

The Company is subject to risks common to companies in the biotechnology industry, including but not limited to, risks of failure of preclinical studies and clinical trials, the need to obtain marketing approval for any drug product candidate that it may identify and develop, the need to successfully commercialize and gain market acceptance of its product candidates, dependence on key personnel, protection of proprietary technology, compliance with government regulations, development by competitors of technological innovations, reliance on third party manufacturers, ability to transition from pilot-scale manufacturing to large-scale production of products and the need to obtain adequate additional financing to fund the development of its product candidates.

The Company has an accumulated deficit of $75.3 million at September 30, 2017, and will require substantial additional capital to fund operations. The future success of the Company is dependent on its ability to identify and develop its product candidates and ultimately upon its ability to attain profitable operations. At September 30, 2017, the Company had $33.9 million of cash and cash equivalents.  The Company believes that its cash and cash equivalents as of September 30, 2017, along with the net proceeds received from its IPO, will be sufficient to fund the Company’s operating plan into 2020.

2. Summary of Significant Accounting Policies

Basis of Presentation

The Company’s unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). Any reference in these notes to applicable guidance is meant to refer to the authoritative United States generally accepted accounting principles as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (ASU) of the Financial Accounting Standards Board (“FASB”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted from this report, as is permitted by such rules and regulations.  Accordingly, these financial statements should be read in conjunction with the audited financial statements as of and for the year ended December 31, 2016 and notes thereto, included in the Company’s final prospectus for the IPO filed with the Securities and Exchange Commission pursuant to Rule 424(b)(4) on November 2, 2017 (the “Prospectus”). 

 

5


 

The unaudited interim consolidated financial statements have been prepared on the same basis as the audited financial statements. In the opinion of the Company’s management, the accompanying unaudited interim condensed consolidated financial statements contain all adjustments which are necessary to present fairly the Company’s financial position as of September 30, 2017, the results of its operations for the three and nine months ended September 30, 2017 and 2016 and cash flows for the nine months ended September 30, 2017 and 2016. Such adjustments are of a normal and recurring nature. The results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results for the year ending December 31, 2017, or for any future period.

Principles of Consolidation

The consolidated financial statements include the accounts of Allena Pharmaceuticals, Inc. and its wholly owned subsidiaries Allena Pharmaceuticals Security Corporation (“Security Corporation”), which was incorporated in December 2014, and Allena Pharmaceuticals Ireland Limited, which was incorporated in March 2017. All intercompany transactions and balances have been eliminated.

Investments

The Company invests available cash primarily in U.S. and foreign corporate debt securities and United States government treasury securities. The Company classifies its investments as available-for-sale. Available-for-sale investments are carried at fair value with unrealized gains and losses included in stockholders’ (deficit) equity. Any premium or discount arising at purchase is amortized and/or accreted to interest income and/or expense. All investments are classified as current assets as they have contractual maturities of less than one year and are available to meet working capital needs and to fund current operations.

The cost of securities sold is determined on a specific identification basis, and realized gains and losses are included in interest income (expense) within the statement of operations and comprehensive loss.

The Company evaluates its investments with unrealized losses for other-than-temporary impairment. When assessing investments for other-than-temporary declines in value, the Company considers such factors as, among other things, how significant the decline in value is as a percentage of the original cost, how long the market value of the investment has been less than its original cost, the Company’s ability and intent to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value and market conditions in general. If any adjustment to fair value reflects a decline in the value of the investment that the Company considers to be “other than temporary”, the Company reduces the investment to fair value through a charge to the statement of operations and comprehensive loss. No such adjustments were necessary during the periods presented.

Fair Value of Financial Instruments

Fair value is defined as the price that would be received upon sale of an asset or paid to transfer a liability between market participants at measurement dates. ASC Topic 820, Fair Value Measurement (“ASC 820”), establishes a three-level valuation hierarchy for instruments measured at fair value. The hierarchy is based on the transparency of inputs to the valuation of an asset or liability as of the measurement date. The hierarchy defines three levels of valuation inputs, of which the first two are considered observable and the last is considered unobservable:

 

Level 1

inputs: Quoted prices in active markets for identical assets or liabilities.

 

Level 2

inputs: Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable, such as quoted market prices, interest rates and yield curves.

 

Level 3

inputs: Unobservable inputs developed using estimates or assumptions developed by the Company, which reflect those that a market participant would use in pricing the asset or liability.

To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

 

6


 

Deferred Initial Public Offering Costs

The Company capitalizes deferred IPO costs, which primarily consist of direct, incremental legal, professional, accounting and other third-party fees relating to the Company’s IPO, within other non-current assets. The deferred IPO costs will be offset against IPO proceeds upon the consummation of an offering. Approximately $1.6 million of deferred IPO costs were incurred and capitalized as of September 30, 2017.  There were no deferred IPO costs as of December 31, 2016.  

Recently Issued Accounting Pronouncements  

From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies and adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its consolidated financial position or results of operations upon adoption.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern (“ASU No. 2014-15”), which defines management’s responsibility to evaluate, at each annual and interim reporting period, whether there are conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date the financial statements are issued and to provide related footnote disclosures in certain circumstances. In connection with each annual and interim period, management must assess if there is substantial doubt about the company’s ability to continue as a going concern within one year after the issuance date. Disclosures are required if conditions give rise to substantial doubt. This standard is effective for all companies in the first annual period ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. The Company adopted ASU No. 2014-15 for the year ended December 31, 2016. The adoption of ASU No. 2014-15 did not have a significant impact on the Company’s financial statement disclosures. Refer to Note 1 for a discussion of the Company’s liquidity.

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. This standard amends existing guidance to require the presentation of debt issuance costs in the balance sheet as a deduction from the carrying amount of the related debt liability rather than as a deferred charge. It is effective for annual reporting periods beginning after December 15, 2015. The Company adopted the standard on January 1, 2016 and reclassified its debt issuance costs to a reduction of the debt balances, accordingly. The adoption did not have a material impact on the Company’s consolidated financial statements.

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes (“ASU No. 2015-17”), which simplifies the presentation of deferred income taxes by eliminating the need for entities to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. For non-public entities, the guidance in this ASU is effective for annual periods beginning after December 15, 2017 and interim periods within annual periods beginning after December 15, 2018. Earlier application is permitted for all entities as of the beginning of an interim or an annual reporting period. The Company prospectively adopted this ASU as of January 1, 2017. Prior period amounts were not retrospectively adjusted, and the adoption of ASU No. 2015-17 did not have a material impact on the Company’s consolidated balance sheets.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU No. 2016-02”). The new standard aims to increase transparency and comparability among organizations by requiring lessees to recognize lease assets and lease liabilities on the balance sheet and requiring disclosure of key information about leasing arrangements. ASU No. 2016-02 is effective for public entities for annual periods beginning after December 15, 2018 and for interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the potential impact that ASU No. 2016-02 may have on its financial position and results of operations.

In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (“ASU No. 2016-09”), which amends ASC Topic 718, Compensation-Stock Compensation. ASU No. 2016-09 identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. The amendments are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company adopted ASU No. 2016-09 effective January 1, 2017. The adoption of ASU No. 2016-09 did not have a material impact on the Company’s financial statements. Upon adoption, the Company elected to account for forfeitures as they occur. The Company did not have any excess tax benefits associated with stock option exercises and therefore there was no deferred tax asset recorded upon adoption.

 

7


 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (“ASU No. 2016-15”). This guidance addresses the presentation and classification of certain cash receipts and cash payments in the statement of cash flows. The standard is effective for annual periods beginning after December 15, 2017 and for interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the potential impact that the adoption of ASU No. 2016-15 will have on its financial statements.

In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU No. 2017-09”). This update clarifies the changes to terms or conditions of a share-based payment award that require an entity to apply modification accounting. ASU No. 2017-09 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2017. Early application is permitted and prospective application is required. The Company does not expect that the adoption of this guidance will have a significant impact on the Company’s financial position, results of operations or cash flows.

The remainder of the Company’s significant accounting policies are described in the Prospectus.

3. Net Loss per Share

Basic net loss per share is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding for the period, without consideration for potentially dilutive securities. The Company has computed diluted net loss per common share after giving consideration to all potentially dilutive common shares, including options to purchase common stock, restricted common stock, convertible preferred stock and warrants to purchase convertible preferred stock, outstanding during the period determined using the treasury-stock and if-converted methods, except where the effect of including such securities would be antidilutive. Because the Company has reported net losses since inception, these potential common shares have been anti-dilutive and basic and diluted loss per share have been the same.

Basic and diluted net loss per share attributable to common stockholders was calculated as follows (in thousands, except share and per share data):

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(4,670

)

 

$

(6,136

)

 

$

(14,973

)

 

$

(18,288

)

Accretion of convertible preferred stock

 

 

(17

)

 

 

(17

)

 

 

(52

)

 

 

(52

)

Net loss attributable to common stockholders

 

$

(4,687

)

 

$

(6,153

)

 

$

(15,025

)

 

$

(18,340

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares—basic and diluted

 

 

1,343,429

 

 

 

1,341,385

 

 

 

1,342,898

 

 

 

1,338,539

 

Net loss per share attributable to common

   stockholders—basic and diluted

 

$

(3.49

)

 

$

(4.59

)

 

$

(11.19

)

 

$

(13.70

)

 

The following table sets forth the potentially dilutive securities that have been excluded from the calculation of diluted net loss per share because to include them would be anti-dilutive (in common stock equivalent shares):

 

 

 

For the Three and Nine Months Ended

 

 

 

September 30,

 

 

 

2017

 

 

2016

 

Series A convertible preferred stock

 

 

4,400,410

 

 

 

4,400,410

 

Series B convertible preferred stock

 

 

4,753,536

 

 

 

4,753,536

 

Series C convertible preferred stock

 

 

4,791,563

 

 

 

4,791,563

 

Warrants

 

 

43,265

 

 

 

41,005

 

Stock options

 

 

1,528,370

 

 

 

1,348,849

 

Total

 

 

15,517,144

 

 

 

15,335,363

 

 

4. Investments

The Company did not have any investments as of September 30, 2017.

 

8


 

The following table summarizes the Company’s investments as of December 31, 2016 (in thousands):

 

 

 

Amortized

 

 

Gross Unrealized

 

 

Estimated

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury securities

 

$

13,258

 

 

$

3

 

 

$

(2

)

 

$

13,259

 

U.S. corporate debt securities

 

 

7,397

 

 

 

 

 

 

(3

)

 

 

7,394

 

Foreign corporate debt securities

 

 

2,852

 

 

 

 

 

 

 

 

 

2,852

 

Total available-for-sale securities

 

$

23,507

 

 

$

3

 

 

$

(5

)

 

$

23,505

 

 

The aggregate fair value of investments with unrealized losses was approximately $16.5 million at December 31, 2016. At December 31, 2016, 10 investments were in an unrealized loss position. All such investments have been in an unrealized loss position for less than a year and these losses are considered temporary. The Company has the ability and intent to hold these investments until a recovery of their amortized cost.

 

5. Fair Value Measurements

The following tables present information about the Company’s financial assets and liabilities that have been measured at fair value at September 30, 2017 and December 31, 2016, and indicates the fair value hierarchy of the valuation inputs utilized to determine such fair value (in thousands):

 

Description

 

September 30,

2017

 

 

Quoted

Prices

in Active

Markets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds, included in cash and cash equivalents

 

$

32,935

 

 

$

32,935

 

 

$

 

 

$

 

Total assets

 

$

32,935

 

 

$

32,935

 

 

$

 

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants for the purchase of shares subject to redemption

 

$

460

 

 

$

 

 

$

 

 

$

460

 

Total liabilities

 

$

460

 

 

$

 

 

$

 

 

$

460

 

 

 

Description

 

December 31,

2016

 

 

Quoted

Prices

in Active

Markets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds, included in cash and cash equivalents

 

$

24,302

 

 

$

24,302

 

 

$

 

 

$

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury securities

 

 

13,259

 

 

 

13,259

 

 

 

 

 

 

 

U.S. corporate debt securities

 

 

7,394

 

 

 

 

 

 

7,394

 

 

 

 

Foreign corporate debt securities

 

 

2,852

 

 

 

 

 

 

2,852

 

 

 

 

Total assets

 

$

47,807

 

 

$

37,561

 

 

$

10,246

 

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants for the purchase of shares subject to redemption

 

$

267

 

 

$

 

 

$

 

 

$

267

 

Total liabilities

 

$

267

 

 

$

 

 

$

 

 

$

267

 

 

 

At September 30, 2017 and December 31, 2016, all of the Company’s cash equivalents were comprised of money market funds.

At December 31, 2016, items classified as Level 2 within the valuation hierarchy consist of U.S. and foreign corporate debt securities. The Company estimates the fair values of these investments by taking into consideration valuations obtained from third-party pricing sources. These pricing sources 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 market pricing based on real-time trade data for the same or similar securities, issuer credit spreads, benchmark yields, and other observable inputs. The Company validates the prices provided by its third-party pricing sources by understanding the models used, obtaining market values from other pricing sources and analyzing pricing data in certain instances. The Company had no items classified as Level 2 at September 30, 2017.

 

9


 

At September 30, 2017 and December 31, 2016, the Company’s warrants for the purchase of shares subject to redemption were the only financial instruments classified as Level 3.

There were no changes to the valuation methods or transfers between fair value measurement levels during the nine months ended September 30, 2017 and the year ended December 31, 2016. There were no transfers within the fair value hierarchy during the nine months ended September 30, 2017 and the year ended December 31, 2016.

The carrying amounts reflected in the consolidated balance sheets for cash and cash equivalents, prepaid expenses and other current assets, accounts payable and accrued expenses approximate their carrying values. The Company believes the terms of the loan payable reflect current market conditions for an instrument with similar terms and maturity, therefore the carrying value of the Company’s debt approximates its fair value based on Level 3 of the fair value hierarchy.

Warrants to Purchase Shares Subject to Redemption

In connection with entering into a Loan and Security Agreement (“Loan Agreement”) in August 2014 (Note 7), the Company issued a warrant for the purchase of 71,428 shares of Series A preferred stock (“Series A Warrant”) when the Loan Agreement was executed. The warrant became exercisable for an additional 71,428 shares of Series A Preferred Stock in connection with the advances under the Loan Agreement. The Company amended the Loan Agreement in May 2016. In connection with the advances under the amended Loan Agreement, the Company issued a warrant for the purchase of up to 37,736 shares of Series C preferred stock (“Series C Warrant”, together with the Series A Warrant, the “Warrants”). The estimated fair value of the Warrants was determined using the Black- Scholes option-pricing model. A significant input to the fair value of the warrants is the fair value of the Series A Preferred Stock and the C Preferred Stock which was determined based upon the Company’s common stock valuations. The fair value of the Warrants is remeasured at each reporting date using then-current assumptions with changes in fair value charged to other income (expense) on the statements of operations and comprehensive loss. As of September 30, 2017 and December 31, 2016, the Warrants were valued at $0.5 million and $0.3 million, respectively. The following assumptions were used in valuing the Warrants:

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Risk-free interest rate

 

2.1%-2.2%

 

 

2.3%-2.5%

 

Expected dividend yield

 

 

%

 

 

%

Expected term (in years)

 

6.9-8.6

 

 

7.6-9.3

 

Expected volatility

 

84%-87%

 

 

 

90

%

 

The following table sets forth a summary of changes in the fair value of the Warrants, which represented a recurring measurement classified within Level 3 of the fair value hierarchy, wherein fair value was estimated using significant unobservable inputs (in thousands, except share data):

 

Balance at December 31, 2016

 

$

267

 

Change in fair value of Warrants included in other income

   (expense)

 

 

193

 

Balance at September 30, 2017

 

$

460

 

 

An entity may choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. The Company did not elect to measure any financial instruments or other items at fair value.

6. Accrued Expenses

Accrued expenses consist of the following (in thousands):

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Payroll and employee-related expenses

 

$

929

 

 

$

914

 

Professional fees

 

 

290

 

 

 

172

 

Third-party research and development expenses

 

 

207

 

 

 

413

 

IPO-related services

 

 

681

 

 

 

 

Loan interest

 

 

40

 

 

 

28

 

Other

 

 

12

 

 

 

83

 

Total accrued expenses

 

$

2,159

 

 

$

1,610

 

 

 

10


 

7. Loan and Security Agreement

In August 2014, the Company entered into a Loan Agreement with Silicon Valley Bank (“SVB”) and borrowed $7.0 million under the loan.  

In May 2016, the Loan Agreement was amended (“Amended Loan Agreement”) to borrow up to $10.0 million with a portion of the proceeds to be used to pay down the outstanding balance of the original $7.0 million of advances. At the time of the Amended Loan Agreement, SVB advanced a gross amount of $7.5 million to the Company. Net proceeds received by the Company were $1.6 million after deducting $5.3 million for repayment of the original advances and $0.6 million for final interest due upon maturity or prepayment of the original advances. The Amended Loan Agreement was accounted for as a debt modification pursuant to ASC 450-70, Modifications or Extinguishments. In December 2016, upon the achievement of certain milestones, SVB advanced the remaining $2.5 million available under the Amended Loan Agreement.

The borrowings are secured by a lien on all Company assets, excluding intellectual property. The May 2016 and December 2016 advances have a floating per annum interest rate of the greater of 4.0% or 0.5% above the prime rate. The interest rate on the borrowings at December 31, 2016 and September 30, 2017 was 4.25% and 4.75%, respectively. Beginning in May 2016, payments were interest only for a period of 12 months. In December 2016, the interest only period was extended to 18 months. Upon the expiration of the interest only period, amounts borrowed will be repaid over 30 equal monthly payments of principal and interest. At its option, the Company may prepay all, but not less than all, of the outstanding borrowings subject to a prepayment premium as defined in the Amended Loan Agreement. The Company is also required to make a final payment equal to 8.25% of the total borrowings which is due on the earliest of the loan maturity date, an acceleration of the loan as defined in the Amended Loan Agreement or at the time of prepayment. The final payment is being accreted to interest expense through the maturity date of the loan.

The Company issued the Series A Warrant to SVB to purchase 71,428 shares of Series A convertible preferred stock (“Series A Preferred Stock”) at $0.98 per share upon executing the Loan Agreement. The warrant became exercisable for an additional 71,428 shares of Series A Preferred Stock at $0.98 per share in connection with the advances under the loan agreement.  The Series A Warrant expires on August 17, 2024. Under the terms of the Amended Loan Agreement, the Company issued a Series C Warrant to SVB to purchase a number of shares of Series C convertible preferred stock (“Series C Preferred Stock”) at $2.65 per share equal to 1.0% of each loan advance amount. At September 30, 2017 and December 2016, the Series C Warrant was exercisable for 37,736 and  shares of Series C Preferred Stock at $2.65 per share. The Series C Warrant expires on May 1, 2026.

The Company recorded the fair value of the Warrants at issuance as a reduction to the loan payable balance. The discount is being accreted to interest expense over the period that the loan will be outstanding. The offsetting credit was recorded as warrants to purchase shares subject to redemption in the long-term liabilities section on the consolidated balance sheets. The fair value of the Warrants is remeasured at each reporting period and changes in fair value are recognized in other income (expense) in the statement of operations.

The Amended Loan Agreement contains negative covenants restricting the Company’s activities, including limitations on dispositions, mergers or acquisitions, incurring indebtedness or liens, paying dividends or making investments and certain other business transactions. There are no financial covenants associated with the Amended Loan Agreement. The obligations under the Amended Loan Agreement are subject to acceleration upon the occurrence of specified events of default, including a material adverse change in the Company’s business, operations or financial or other condition. The Company has determined that the risk of subjective acceleration under the material adverse events clause is remote and therefore has classified the outstanding principal in current and long-term liabilities based on scheduled principal payments.

The Loan Agreement requires the Company to maintain a balance of cash and cash equivalents in the Company’s operating, depository and securities accounts in an amount not less than 125% of the outstanding debt balance so long as the Company maintains a cash balance in the Security Corporation. At September 30, 2017 and December 31, 2016, the Company was required to have and had a balance of not less than $12.5 million in the Company’s operating account.

The Company evaluated the Loan Agreement and Amended Loan Agreement for embedded features that require bifurcation, noting that the contingent interest feature and the incremental interest upon an event of default were required to be bifurcated, but were concluded to be de minimus in value at inception and at September 30, 2017 and December 31, 2016.

8. Convertible Preferred Stock

As discussed in Note 1, the Company’s preferred stock converted into 13,945,509 shares of common stock upon the IPO.  Prior to conversion, the Company’s preferred stock had the following rights and preferences:

 

11


 

Conversion

The Preferred Stock is convertible into common stock at any time at the option of the holder, initially on a 1-for-0.2396 basis, and is subject to mandatory conversion upon (1) the closing of a firm commitment underwritten public offering with proceeds of at least $50.0 million or (2) upon the written notice from the holders of at least 60% of the then-outstanding shares of Preferred Stock, voting together as a single class on an as converted basis and at least a majority of the then outstanding shares of the Series C Preferred Stock, voting as a separate class, at the original issue price per share plus any declared but unpaid dividends.

Voting

The holders of the Preferred Stock have voting rights equivalent to the number of shares of common stock into which their shares convert.

Dividends

Holders of Series C Preferred Stock are entitled to receive, before any cash is paid out or set aside for any other class or series of capital stock, dividends at 8% of the Series C Preferred Stock issuance price, subject to adjustment for any stock dividend, stock split, or other similar recapitalization affecting such class or series of capital stock. The dividends are non-cumulative, and are payable only when and if declared by the Board of Directors of the Company.

Holders of shares of Series A Preferred Stock and Series B Preferred Stock are then entitled to receive, before or simultaneously with common stockholders, a dividend at least equal to the amount of dividends per share received by the common stockholders. No dividends have been declared since the Company’s inception.

Liquidation Preference

Upon a voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of the Series A, Series B and Series C Preferred Stock are entitled to receive an amount equal to $0.98 per share, $1.26 per share and $2.65 per share, respectively, plus declared but unpaid dividends. Holders of Series C Preferred Stock are entitled to receive payment prior to holders of Series B Preferred Stock, and holders of Series B Preferred Stock prior to holders of Series A Preferred Stock. After the payment of all preferential amounts required to be paid upon liquidation to the holders of the Preferred Stock, holders of the Preferred Stock will also share in the remaining assets with holders of the common stock on a pro-rata basis, assuming conversion into common stock. However, the aggregate amount paid to the holders of Series A, Series B and Series C Preferred Stock shall not exceed the greater of $1.96 per share, $2.52 per share and $5.30 per share, respectively, and the amount such holder would have received if all shares of Series A, Series B and Series C Preferred Stock had been converted into common stock immediately prior to liquidation. If the assets available for distribution are insufficient to pay the holders the full amount to which they are entitled, the holders of Series C Preferred Stock (and subsequently the holders of Series B and Series A Preferred Stock, as applicable) will share ratably in any distribution of the assets available in proportion to the amounts that would otherwise be payable.

Redemption

The Company shall redeem the outstanding shares of Preferred Stock in three annual installments at any time on or after November 25, 2020 upon the written notice from the holders of at least 60% of the then-outstanding shares of Preferred Stock, voting together as a single class on an as converted basis and at least a majority of the then outstanding shares of Series C Preferred Stock, voting as a separate class, at the original issue price per share plus any declared but unpaid dividends.

The Company’s Preferred Stock has been classified as temporary equity on the accompanying consolidated balance sheets in accordance with authoritative guidance for the classification and measurement of redeemable securities as the Preferred Stock is redeemable at a determinable price on a fixed date or upon the occurrence of a deemed liquidation event. The Preferred Stock is being accreted to its redemption value through the earliest redemption date.

9. Stockholders’ Deficit

Common Stock

The holders of common stock are entitled to one vote for each share held. Common stockholders are not entitled to receive dividends, unless declared by the Board of Directors.

 

12


 

The Company has reserved for future issuances the following shares of common stock as of September 30, 2017 and December 31, 2016:

 

 

 

As of

September 30,

2017

 

 

As of

December 31,

2016

 

Series A convertible preferred stock

 

 

4,400,410

 

 

 

4,400,410

 

Series B convertible preferred stock

 

 

4,753,536

 

 

 

4,753,536

 

Series C convertible preferred stock

 

 

4,791,563

 

 

 

4,791,563

 

Warrants

 

 

43,265

 

 

 

43,265

 

Stock options

 

 

2,122,404

 

 

 

2,130,560

 

Total

 

 

16,111,178

 

 

 

16,119,334

 

 

10. Stock Incentive Plan

In September 2011, the Company adopted the 2011 Stock Incentive Plan (“2011 Plan”). All of the Company’s employees, officers, directors, consultants and advisors are eligible to be granted options, restricted stock units (“RSUs”), and other share-based awards under the terms of the 2011 Plan. The 2011 Plan provides for the grant of awards for 2,293,272 shares of common stock. As of September 30, 2017 and December 31, 2016, 594,034 and 778,074 shares of common stock were available for future grant under the 2011 Plan, respectively.

On October 31, 2017, the Company adopted the 2017 Stock Option and Incentive Plan (“2017 Plan”).  Upon the adoption of the 2017 Plan, no further grants will be made under the 2011 Plan.  The 2017 Plan initially provides for the grant of awards for 2,038,021 shares of common stock.  In addition to the shares available for grant under the 2017 Plan, any awards outstanding under the 2011 Plan as of the October 31, 2017 are cancelled, forfeited or otherwise terminated without being exercised, the number of shares underlying such awards will be available for future grant under the 2017 Plan. The 2017 Plan also provides that an additional number of shares will automatically be added to the shares authorized for issuance under the 2017 Plan on January 1 of each year. The number of shares added each year will be equal to the lesser of: (i) 4% of the outstanding shares on the immediately preceding December 31 or (ii) such amount as determined by the Compensation Committee of the registrant’s Board of Directors.

All stock option grants are nonstatutory stock options except option grants to employees (including officers and directors) intended to qualify as incentive stock options under the Internal Revenue Code of 1986, as amended. Incentive stock options may not be granted at less than the fair market value of the Company’s common stock on the date of grant, as determined in good faith by the Board of Directors at its sole discretion. Nonqualified stock options may be granted at an exercise price established by the Board of Directors at its sole discretion (which has not been less than fair market value on the date of grant) and the vesting periods may vary. Vesting periods are generally four years and are determined by the Board of Directors or a delegated subcommittee. Stock options become exercisable as they vest. Options granted under both the 2011 Plan and 2017 Plan expire no more than 10 years from the date of grant.

Stock-based compensation expense included in the Company’s statements of operations and comprehensive loss is as follows (in thousands):

 

 

 

For the Three Months

Ended September 30,

 

 

For the Nine Months

Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Research and development

 

$

30

 

 

$

18

 

 

$

87

 

 

$

46

 

General and administrative

 

 

69

 

 

 

49

 

 

 

208

 

 

 

120

 

Total

 

$

99

 

 

$

67

 

 

$

295

 

 

$

166

 

 

The fair value of each stock option granted to employees and directors was estimated on the date of grant using the Black-Scholes option-pricing model, with the following range of assumptions for the three and nine months ended September 30, 2017 and 2016 are as follows:

 

 

 

For the Three Months

Ended September 30,

 

For the Nine Months

Ended September 30,

 

 

2017

 

2016

 

2017

 

2016

Risk-free interest rate

 

1.9%-2.0%

 

1.3%-1.5%

 

1.9%-2.0%

 

1.3%-2.4%

Expected dividend yield

 

—%

 

—%

 

—%

 

—%

Expected term (in years)

 

5.9-6.3

 

5.6-6.0

 

5.6-6.3

 

5.4-10.0

Expected volatility

 

82%

 

77%-82%

 

82%-87%

 

77%-96%

 

 

13


 

A summary of the stock option activity under the 2011 Plan is as follows:

 

 

 

Shares

 

 

Weighted-

Average

Exercise

Price

 

 

Weighted-

Average

Remaining

Contractual

Life

(in years)

 

 

Aggregate

Intrinsic

Value

(in thousands)

 

Outstanding at December 31, 2016

 

 

1,348,845

 

 

 

1.29

 

 

 

8.6

 

 

$

3,642

 

Granted

 

 

201,997

 

 

 

5.25

 

 

 

 

 

 

 

 

 

Exercised

 

 

(8,105

)

 

 

0.67

 

 

 

 

 

 

 

 

 

Cancelled

 

 

(14,367

)

 

 

1.93

 

 

 

 

 

 

 

 

 

Outstanding at September 30, 2017

 

 

1,528,370

 

 

$

1.83

 

 

 

8.1

 

 

$

11,819

 

Exercisable at September 30, 2017

 

 

732,390

 

 

$

1.22

 

 

 

7.5

 

 

$

6,110

 

Vested and expected to vest at September 30, 2017

 

 

1,528,370

 

 

$

1.83

 

 

 

8.1

 

 

$

11,819

 

As of September 30, 2017 and December 31, 2016, total unrecognized stock-based compensation expense relating to unvested stock options was $1.2 million and $0.8 million, respectively. This amount is expected to be recognized over a weighted-average period of 2.6 years.

Performance-based awards

 

The Company granted 101,820 stock options to members of its Board of Directors on September 26, 2017, which contain performance-based vesting criteria. Vesting of these options is contingent on a successful IPO within one year of the grant date. Stock-based compensation expense associated with these performance-based stock options is recognized if the performance conditions are considered probable of being achieved, using management’s best estimates. The Company determined that the successful completion of an IPO was not deemed probable of achievement during the three and nine months ended September 30, 2017, and accordingly did not recognize stock-based compensation expense for these options during these periods.

 

11. Related Party Transactions

From September 2015 to September 2017, the Company received consulting and management services from one of its investors, Third Rock Ventures LLP (“Third Rock Ventures”). The Company paid Third Rock Ventures $2,000 and $69,000 for these services during the nine months ended September 30, 2017 and 2016, respectively. No amounts were payable to Third Rock Ventures at September 30, 2017 and December 31, 2016.

12. Commitments and Contingencies

In August 2011 and October 2013, the Company and an independent third party entered into operating leases for approximately 6,055 square feet of office space in Newton, MA (“Newton Lease”) and approximately 3,170 square feet of laboratory space in Natick, MA, respectively.  In October 2016, the Newton lease was amended to extend the term one year to May 2018 and, effective June 1, 2017 removed the independent third party from the lease and all related obligations of the lease.  In August 2017, the Newton lease was amended again to extend the lease term another year to May 2019.  Base rent for this space is approximately $0.3 million annually. The lease for the laboratory space in Natick, MA expired in October 2017 and the lease was not renewed by the Company.

In August 2016, the Company entered into an operating lease for approximately 3,890 square feet of laboratory space in Sudbury, MA. This lease was to expire in August 2017. In February 2017, the Company amended this lease to extend the term to February 2019 and increase the amount of rentable space to approximately 5,133 square feet, with an option to lease another 2,029 square feet. Base rent for this space is approximately $0.1 million annually.

 

14


 

Item 2.

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and the audited financial information and the notes thereto included in our final prospectus for our initial public offering filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended, or the Securities Act, with the Securities and Exchange Commission, or the SEC on November 2, 2017, or the Prospectus.

Our actual results and timing of certain events may differ materially from the results discussed, projected, anticipated, or indicated in any forward-looking statements. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from the forward-looking statements contained in this Quarterly Report. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward-looking statements contained in this Quarterly Report, they may not be predictive of results or developments in future periods. 

The following information and any forward-looking statements should be considered in light of factors discussed elsewhere in the Quarterly Report on Form 10-Q, including those risks identified under Part II, Item 1A. Risk Factors.

We caution readers not to place undue reliance on any forward-looking statements made by us, which speak only as of the date they are made. We disclaim any obligation, except as specifically required by law and the rules of the SEC, to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.

Overview

We are a late-stage clinical biopharmaceutical company dedicated to developing and commercializing first-in-class, oral enzyme therapeutics to treat patients with rare and severe metabolic and kidney disorders. We are focused on metabolic disorders that result in excess accumulation of certain metabolites that can cause kidney stones, damage the kidney, and potentially lead to chronic kidney disease, or CKD, and end-stage renal disease. Our lead product candidate, ALLN-177, is a first-in-class, oral enzyme therapeutic that we are developing for the treatment of hyperoxaluria, a metabolic disorder characterized by markedly elevated urinary oxalate levels and commonly associated with kidney stones, CKD and other serious kidney diseases. There are currently no approved therapies for the treatment of hyperoxaluria. We have conducted a robust clinical development program of ALLN-177, including three Phase 2 clinical trials, and we expect to initiate the first of two planned pivotal Phase 3 clinical trials for ALLN-177 in the first quarter of 2018, with topline data anticipated in the second half of 2019.

On November 6, 2017, we completed our IPO, in which we issued and sold 5,333,333 shares of our common stock at a public offering price of $14.00 per share, for aggregate gross proceeds of $74.7 million. The underwriters partially exercised their over-allotment option on December 1, 2017, and purchased 16,969 shares of our common stock, for aggregate gross proceeds of $0.2 million.  As a result of the IPO, we received approximately $66.6 million in net proceeds after deducting $8.3 million of underwriting discounts and commissions and offering costs.

Our operations to date have been limited to organizing and staffing our company, business planning, raising capital, developing our technology, identifying potential product candidates, producing drug substance and drug product material for use in preclinical studies and clinical trials, conducting preclinical studies of our product candidates and clinical trials for our lead product candidate, ALLN-177. We do not have any products approved for sale and have not generated any revenue to date. As of September 30, 2017, we had cash and cash equivalents totaling $33.9 million.

We have incurred significant net operating losses in every year since our inception and expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. Our net losses may fluctuate significantly from quarter to quarter and year to year. Our net losses were $4.7 million and $6.1 million for the three months ended September 30, 2017 and 2016, respectively, and $15.0 million and $18.3 million for the nine months ended September 30, 2017 and 2016, respectively. As of September 30, 2017, we had an accumulated deficit of $75.3 million. We anticipate that our expenses will increase significantly as we:

 

conduct future clinical trials of our lead product candidate, ALLN-177;

 

manufacture additional material for our planned pivotal Phase 3 clinical program, planned Phase 2 clinical basket trial and potential future clinical studies we might conduct for our product candidates;

 

15


 

 

scale up our manufacturing process for ALLN-177 to prepare for the filing of a potential biologics license application, or BLA, and commercialization if our clinical development program is successful;

 

advance the development of our second product candidate, ALLN-346;

 

 

seek regulatory and marketing approvals for product candidates that successfully complete clinical trials, if any;

 

establish a sales, marketing and distribution infrastructure to commercialize any products for which we may obtain regulatory approval in geographies in which we plan to commercialize our products ourselves;

 

maintain, expand and protect our intellectual property portfolio;

 

hire additional staff, including clinical, scientific, technical, operational, and financial personnel, to execute our business plan; and

 

add clinical, scientific, operational, financial and management information systems to support our product development and potential future commercialization efforts, and to enable us to operate as a public company.

We do not expect to generate revenue from product sales unless and until we successfully complete development and obtain regulatory approval for a product candidate. Additionally, we currently use contract research organizations, or CROs, and contract manufacturing organizations, or CMOs, to carry out our preclinical and clinical development activities. We do not yet have a sales organization. If we obtain regulatory approval for our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. Furthermore, commencing upon the closing of our IPO, we expect to incur additional costs associated with operating as a public company. Accordingly, we may seek to fund our operations through public or private equity or debt financings or other sources, including strategic collaborations. We may, however, be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. Our failure to raise capital or enter into such other arrangements as and when needed would have a negative impact on our financial condition and our ability to develop our current product candidates, or any additional product candidates, if developed.

Financial Operations Overview

Revenue

To date, we have not generated any revenue from product sales or any other source and do not expect to generate any revenue from the sale of products for the foreseeable future. If our development efforts for ALLN-177 or other product candidates that we may develop in the future are successful and result in marketing approval or collaboration or license agreements with third parties, we may generate revenue in the future from a combination of product sales or payments from such collaboration or license agreements.

Research and Development Expenses

Research and development expenses consist primarily of costs incurred for our research activities, including our drug discovery efforts and the development of our product candidates, which include:

 

employee-related expenses, including salaries, benefits and stock-based compensation expense;

 

costs incurred under agreements with third parties, including CROs, that conduct research and development, preclinical studies and clinical trials on our behalf;

 

costs related to production of preclinical and clinical materials, including fees paid to CMOs;

 

consulting, licensing and professional fees related to research and development activities;

 

costs of purchasing laboratory supplies and non-capital equipment used in our preclinical activities;

 

costs related to compliance with clinical regulatory requirements; and

 

facility costs and other allocated expenses, which include expenses for rent and maintenance of facilities, insurance, depreciation and other supplies.

We expense research and development costs as incurred. We recognize costs for certain development activities, such as clinical trials, based on an evaluation of the progress to completion of specific tasks using data such as clinical site activations, patient enrollment, or information provided to us by our vendors and our clinical investigative sites. Payments for these activities are based on the terms of the individual agreements, which may differ from the pattern of costs incurred, and may be reflected in our consolidated financial statements as prepaid or accrued research and development expenses. Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are deferred and capitalized, even when there is no alternative future use for the research and development. The capitalized amounts are expensed as the related goods are delivered or the services are performed.

 

16


 

The following summarizes our most advanced current research and development programs:

 

ALLN-177 is our lead product candidate which we are developing for the treatment of hyperoxaluria. Substantially all of our research and development costs to date have been used to fund this program.

 

ALLN-346 is our second product candidate which we are developing for patients with hyperuricemia and CKD. We began incurring external research and development costs for this program in 2016.

We typically use our employee and infrastructure resources across our development programs. We track outsourced development costs by product candidate or development program, but we do not allocate personnel costs and other internal costs to specific product candidates or development programs.

The following table summarizes our research and development expenses by program (in thousands):

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

ALLN-177 external costs

 

$

1,485

 

 

$

4,174

 

 

$

6,653

 

 

$

12,753

 

ALLN-346 external costs

 

 

208

 

 

 

46

 

 

 

331

 

 

 

46

 

Employee compensation and benefits

 

 

1,019

 

 

 

867

 

 

 

3,100

 

 

 

2,061

 

Other

 

 

237

 

 

 

176

 

 

 

674