NEON THERAPEUTICS, INC. Our management's discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements included in this Annual Report on Form 10-K, which have been prepared by us in accordance withUnited States generally accepted accounting principles, or GAAP, and with Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended. This discussion and analysis should be read in conjunction with these consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in Part I, Item 1A. Risk Factors of this Annual Report on Form 10-K, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Overview We are a clinical-stage immuno-oncology company and a leader in the field of neoantigen-targeted therapies, dedicated to transforming the treatment of cancer by directing the immune system towards neoantigens. Genetic mutations, which are a hallmark of cancer, can result in specific immune targets called neoantigens. The presence of neoantigens in cancer cells and their absence in normal cells makes them compelling, untapped targets for cancer therapy. By directing the immune system towards these targets, we believe our neoantigen-targeted therapies will offer a new level of patient and tumor specificity in the field of cancer immunotherapy that will drive a strong risk-benefit profile to dramatically improve patient outcomes. We have deep expertise in the development of neoantigen therapies, with both T cell and vaccine modalities. We are leveraging over a decade of insights from our founders to develop neoantigen-targeted therapies that use two distinct approaches: the first approach utilizes fully personal therapies that target neoantigens specific to each individual, and the second approach utilizes therapies that target neoantigens that are shared across subsets of patients or tumor types. Both the personal neoantigen approach and the shared neoantigen approach focus on targeting a prioritized set of what we believe are the most therapeutically-relevant neoantigens. Our most advanced T cell program is NEO-PTC-01, our personal neoantigen adoptive T cell therapy, which consists of multiple T cell populations that are generated to target each individual patient's unique set of neoantigens. We are focusing the initial clinical development of NEO-PTC-01 in solid tumors for patients who are refractory to checkpoint inhibitors. InDecember 2019 , we announced that we filed a CTA with theDutch Health Authority to evaluate NEO-PTC-01 in a first-in-human clinical trial. We plan to initiate a Phase 1 dose escalation clinical trial in metastatic melanoma in collaboration with theNetherlands Cancer Institute in the third quarter of 2020. The second planned indication for NEO-PTC-01 is metastatic ovarian cancer, with the potential to both expand to other solid tumor types and pursue clinical development inthe United States . We are also advancing a T cell therapy program targeting shared neoantigens in genetically defined patient populations to direct the immune system towards prevalent mutations that are shared across patients in specific tumor types. We intend to develop product candidates targeting shared neoantigens using both non-engineered and engineered T cell modalities. Our first product candidate using the shared neoantigen approach, NEO-STC-01, is a non-engineered adoptive T cell therapy that targets RAS mutations prevalent across many solid tumors. We are focusing our initial efforts with NEO-STC-01 on the treatment of pancreatic ductal adenocarcinoma, or PDAC, as over 84% of PDAC tumors have a RAS mutation and there is a significant unmet medical need for PDAC therapies. We have also assembled libraries of high-quality T cell receptors, or TCRs, against various shared neoantigens across common human leukocyte antigens, or HLAs which are suitable for an engineered TCR-T cell therapy approach. We also have two neoantigen vaccines in our portfolio, NEO-PV-01, a fully personal neoantigen cancer vaccine, custom-designed and manufactured for each individual patient's tumor mutations, and NEO-SV-01, a neoantigen vaccine for the treatment of a subset of hormone receptor-positive breast cancer. NEO-PV-01 is in Phase 1b clinical development in metastatic disease settings, with three ongoing trials. InNovember 2019 , we reported top line results from the first trial, NT-001, at theSociety of Immunotherapy for Cancer 2019 meeting. OnNovember 20, 2019 , we announced that, as part of a new strategic focus, we were reducing our workforce by approximately 24% of our then current headcount. This corporate restructuring was substantially completed during the fourth quarter of 2019. We also announced the cessation of additional spending commitments related to our cancer vaccine programs, NEO-PV-01 and NEO-SV-01. We will continue to conduct follow-up from our ongoing NT-002 clinical trial of NEO-PV-01 in first-line patients with untreated advanced or metastatic non-small cell lung cancer, with plans to report initial clinical data from this trial in the second half of 2020. We have also ceased additional enrollment in our NT-003 trial in metastatic melanoma. After a comprehensive review of strategic alternatives, onJanuary 15, 2020 , we entered into the Merger Agreement withBioNTech , pursuant to which, if all of the conditions to closing are satisfied or waived, we will become a wholly-owned subsidiary 79
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of
Subject to the terms of the Merger Agreement, at Effective Time each share of our common stock issued and outstanding immediately prior to the Effective Time shall automatically be canceled and converted (without interest but subject to any withholding required under applicable law) into the right to receive 0.063 of an American Depositary Share ofBioNTech , or Parent ADS, with each Parent ADS representing one ordinary share ofBioNTech . The transaction is expected to close in the second quarter of 2020. Refer to Note 18, Subsequent Events, to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. To date, we have devoted substantially all of our resources to organizing and staffing our company, business planning, raising capital, acquiring and discovering product candidates, securing related intellectual property rights and conducting research and development activities related to our product candidates. OnJune 29, 2018 , we completed our IPO in which we issued and sold 6,250,000 shares of our common stock at a public offering price of$16.00 per share in exchange for net proceeds of$89.9 million after deducting underwriting discounts, commissions and other offering costs. Upon the completion of the IPO, all shares of redeemable convertible preferred stock then outstanding converted into an aggregate of 18,644,462 shares of common stock. From inception throughDecember 31, 2019 , we have funded our operations primarily through an aggregate of$89.9 million of net proceeds from our IPO, as well as an aggregate of$161.1 million of net proceeds from sales of our preferred stock and convertible debt. To date, we have not generated any revenue from product sales and do not expect to do so for several years, if at all. Due to our significant research and development expenditures, we have generated substantial operating losses in each period since inception, including net losses of$79.8 million and$76.9 million in the years endedDecember 31, 2019 and 2018, respectively. As ofDecember 31, 2019 , we had an accumulated deficit of$253.5 million . We expect to incur substantial additional losses in the foreseeable future as we expand our research and development activities. We expect to continue to incur substantial expenses in connection with our ongoing activities if, and as, we: • initiate or continue clinical trials of our product candidates; • advance our development programs into and through preclinical and clinical development; • seek regulatory approvals for any product candidates that successfully complete clinical trials;
• hire additional clinical, quality assurance and scientific personnel;
• expand our operational, financial and management systems and increase
personnel, including personnel to support our clinical development,
manufacturing and commercialization efforts and our operations as a public
company;
• maintain, expand and protect our intellectual property portfolio;
• establish a sales, marketing, medical affairs and distribution
infrastructure to commercialize any products for which we may obtain
marketing approval and intend to commercialize on our own or jointly with
third parties; and
• acquire or in-license other product candidates and technologies.
As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through the pursuit of a strategic transaction, sale of equity, debt financings or other capital sources, including collaborations with other companies. We may be unable to raise additional funds or enter into such other agreements or arrangements, including a strategic transaction, when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more of our product candidates or delay our pursuit of potential in-licenses or acquisitions. Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of expenses or the timing of when or if we will be able to achieve or maintain profitability. Even if we are able to generate product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations. As ofDecember 31, 2019 , we had cash and cash equivalents of$29.4 million . We believe that, based on our current operating plan, our existing cash and cash equivalents will enable us to fund our operating expenses and capital expenditure requirements 80
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into the third quarter of 2020. We have based this estimate on assumptions that may prove to be wrong and we could exhaust our available capital resources sooner than we expect. See "-Liquidity and Capital Resources." To finance our operations beyond that point we will need to raise additional capital, which cannot be assured. We have concluded that this circumstance raises substantial doubt about our ability to continue as a going concern. Refer to Note 1, Nature of Business, to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10K for additional information on our assessment. Components of Results of Operations Revenue We have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products for several years, if at all. If our development efforts for our current or future product candidates 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 collaboration or license agreements that we may enter into with third parties. Operating Expenses Research and Development Expenses Research and development expenses represent costs incurred by us for the discovery, development and manufacture of our product candidates and include: • expenses incurred under agreements with third parties, including CROs,
CMOs and suppliers;
• license fees to acquire and maintain in-process technology and data;
• costs related to the development of our platforms, including costs related
to RECON and NEO-STIM;
• personnel-related costs, including salaries, benefits and non-cash
stock-based compensation expense, for personnel engaged in research and
development functions;
• costs of outside consultants, including their fees, related travel
expenses and stock-based compensation expense;
• the costs of laboratory supplies and acquiring, developing and
manufacturing preclinical study and clinical trial materials;
• costs related to compliance with regulatory requirements; and
• facility-related expenses, which include direct depreciation costs and
allocated expenses for rent and maintenance of facilities and general
support services.
We expense research and development costs as incurred. We recognize costs for certain development activities, such as clinical trials and manufacturing costs, based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment or other information provided to us by our vendors. Payments for these activities are based on the terms of the individual agreements, which may differ from the pattern of costs incurred, and are reflected in our financial statements as prepaid or accrued external 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 recorded as prepaid expenses. These amounts are recognized as an expense as the goods are delivered or the related services are performed, or until it is no longer expected that the goods will be delivered or the services rendered. We use our employee and infrastructure resources across our multiple research and development programs directed toward developing our personal and shared approaches, as well as identifying and developing product candidates. We track outsourced development and manufacturing costs, including external clinical and regulatory costs, by development product candidates, but we do not allocate costs such as personnel costs or other internal costs to specific development of product candidates. These external and unallocated research and development expenses are summarized in the table below:
Year Ended December 31,
2019 2018
(in thousands)
NEO-PV-01 $ 17,333 $ 26,934
NEO-PTC-01 4,257 2,452
Other early-stage development expenses 7,078 3,027
Unallocated expenses 31,050 28,012
Total research and development expense $ 59,718 $ 60,425
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At this time, we cannot reasonably estimate or know the nature, timing, and estimated costs of the efforts that will be necessary to complete the development of our product candidates. We are also unable to predict when, if ever, material net cash inflows will commence from sales of our products, if approved. This is due to the numerous risks and uncertainties associated with developing our product candidates, including the uncertainty related to: • the addition and retention of key research and development personnel;
• successful and timely enrollment in and completion of our current or
future clinical trials;
• costs associated with the preclinical development and clinical trials for
our early discovery product candidates;
• maintaining agreements with third-party manufacturers for clinical supply
for our clinical trials and commercial manufacturing, if our product
candidates are approved;
• receipt of marketing approvals from applicable regulatory authorities;
• commercializing products, if and when approved, whether alone or in
collaboration with others;
• the terms and timing of any collaboration, license or other arrangement,
including the terms and timing of any milestone payments thereunder;
• obtaining and maintaining patent and trade secret protection and
regulatory exclusivity for our products if and when approved; and
• continued acceptable safety profiles of our products following approval.
A change in the outcome of any of these variables with respect to the
development of any of our product candidates would significantly change the
costs, timing and viability associated with the development of that product
candidate.
Research and development activities account for a significant portion of our
operating expenses. We expect to maintain our research and development expenses
over the next several years as we continue to implement our business strategy,
which includes advancing clinical development of NEO-PTC-01 and progressing
NEO-STC-01 into clinical development, expanding our research and development
efforts, seeking regulatory approvals for any product candidates that
successfully complete clinical trials, accessing and developing additional
product candidates and maintaining personnel to support our research and
development efforts. In addition, product candidates in later stages of clinical
development generally incur higher development costs than those in earlier
stages of clinical development, primarily due to the increased size and duration
of later-stage clinical trials. As a result, we expect our research and
development expenses to increase as our product candidates advance into later
stages of clinical development.
General and Administrative Expenses
General and administrative expenses consist of personnel-related costs,
including salaries, benefits and non-cash stock-based compensation expense, for
our personnel in executive, legal, finance and accounting, human resources,
business operations and other administrative functions, legal fees related to
patent, intellectual property and corporate matters, fees paid for accounting,
regulatory and tax services, insurance costs, consulting fees and
facility-related costs not otherwise included in research and development
expenses.
We expect to maintain our general and administrative expenses at similar levels
in future periods to support our continued research and development activities,
as well as the costs of operating as a public company.
Other Income, Net
Other income, net consists primarily of interest income related to our
investments in cash equivalents and marketable securities.
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Results of Operations
Comparison of the Years Ended
Year Ended
December 31,
2019 2018 Change
(in thousands)
Operating expenses:
Research and development
$ (79,776 ) $ (76,934 ) $ (2,842 ) Research and Development Research and development expenses decreased by$0.7 million from$60.4 million for the year endedDecember 31, 2018 to$59.7 million for the year endedDecember 31, 2019 due primarily to the following decreases: •$7.1 million for external manufacturing costs to support NEO-PV-01 and NEO-PTC-01; • the non-recurrence of a$0.6 million expense incurred during the year endedDecember 31, 2018 related to a one-time milestone payable under one of our collaboration agreements as a result of the closing of our IPO; •$0.5 million for external costs related to advancing our preclinical development candidates; and
•
These decreases were partially offset by the following increases: •$4.5 million for NEO-SV-01 costs, including expenses related to manufacturing, stability studies and the submission of an IND to the FDA; •$1.3 million for personnel-related restructuring charges, including one-time employee termination costs, severance and other benefits in connection with ourNovember 2019 workforce reduction; •$1.3 million for personnel-related costs due to increased headcount, all of which were incurred prior to theNovember 2019 workforce reduction; •$0.5 million for facility-related costs, including occupancy costs, as well as depreciation and other maintenance costs; and •$0.2 million for external development costs to support our ongoing NEO-PV-01 clinical trials. General and Administrative General and administrative expenses increased by$3.1 million from$18.3 million for the year endedDecember 31, 2018 to$21.4 million for the year endedDecember 31, 2019 due primarily to the following increases: •$2.2 million for personnel-related costs due to increased headcount, including$1.4 million of increased stock-based compensation expense; •$0.9 million for other general and administrative costs primarily due to the increased costs of being a public company, as well as additional insurance and tax related expenditures; and •$0.5 million for professional fee expenses, primarily associated with the Company's pursuit of strategic alternatives.
These increases were partially offset by
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Other Income (Expense), Net Other income decreased by$0.4 million from$1.8 million for the year endedDecember 31, 2018 to$1.4 million for the year endedDecember 31, 2019 primarily as a result of decreased interest income on our cash, cash equivalents and marketable securities. Liquidity and Capital Resources Sources of Liquidity Since our inception, we have incurred significant losses in each period and on an aggregate basis. We have not yet commercialized any of our product candidates, which are in various phases of preclinical and clinical development, and we do not expect to generate revenue from sales of any products for several years, if at all. We have funded our operations throughDecember 31, 2019 primarily with aggregate net proceeds of$89.9 million from our IPO, as well as an aggregate of$161.1 million of net proceeds from sales of our preferred stock and convertible debt. As ofDecember 31, 2019 , we had cash and cash equivalents of$29.4 million . OnJuly 1, 2019 , we filed a registration statement on Form S-3 (File No. 333-232487) with theSEC , which was declared effective onJuly 8, 2019 , or the Shelf Registration Statement, in relation to the registration of common stock, preferred stock, warrants and/or units of any combination thereof for the purposes of selling, from time to time, our common stock, convertible securities or other equity securities in one or more offerings. We also simultaneously entered into a Controlled Equity Offering Sales Agreement, or the Sales Agreement, withCantor Fitzgerald & Co. , or the Sales Agent, to provide for the offering, issuance and sale of up to an aggregate amount of$50.0 million of our common stock from time to time in "at-the-market" offerings under the Shelf Registration Statement and subject to the limitations thereof. As ofDecember 31, 2019 , we have sold$0.4 million of our common stock in "at the market offerings" under the Shelf Registration Statement, prior to applicable commissions under the Sales Agreement. We pay to the Sales Agent cash commissions of 3.0% of the aggregate gross proceeds of sales of common stock under the Sales Agreement. Sales of common stock, convertible securities or other equity securities by us under the Shelf Registration Statement may represent a significant percentage of our common stock currently outstanding. Historical Cash Flows The following table provides information regarding our cash flows for each of the periods presented (in thousands): Year Ended December 31, 2019 2018 (in thousands) Net cash provided by (used in): Operating activities$ (73,412 ) $ (63,428 ) Investing activities 49,597 (32,611 ) Financing activities 510 90,338
Net decrease in cash, cash equivalents and restricted cash
Cash Used in Operating Activities The cash used in operating activities resulted primarily from our net losses adjusted for non-cash charges and changes in components of working capital, which are primarily the result of increased expenses and timing of vendor payments. During the year endedDecember 31, 2019 , operating activities used$73.4 million of cash, primarily resulting from our net loss of$79.8 million and net cash used by changes in our operating assets and liabilities of$3.9 million , partially offset by net non-cash charges of$10.2 million . Net cash used by changes in our operating assets and liabilities for the year endedDecember 31, 2019 consisted primarily of a$2.3 million decrease in accounts payable, a$0.7 million decrease in accrued expenses and other liabilities and a$1.1 million decrease in operating lease liabilities, partially offset by a$0.3 million decrease in prepaid expenses and other current assets. During the year endedDecember 31, 2018 , operating activities used$63.4 million of cash, primarily resulting from our net loss of$76.9 million , partially offset by net non-cash charges of$7.7 million and changes in our operating assets and liabilities of$5.8 million . Net cash provided by changes in our operating assets and liabilities for the year endedDecember 31, 2018 consisted primarily of a$4.1 million increase in accrued expenses and other liabilities and a$2.0 million increase in accounts payable, partially offset by a$0.3 million increase in prepaid expenses and other current assets. 84
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Cash Provided by (Used in) Investing Activities During the year endedDecember 31, 2019 , net cash provided by investing activities was$49.6 million , consisting of proceeds from the sales and maturities of marketable securities of$50.7 million , partially offset by purchases of property and equipment of$1.1 million . During the year endedDecember 31, 2018 , net cash used in investing activities was$32.6 million , consisting of purchases of marketable securities of$72.9 million and purchases of property and equipment of$3.2 million , partially offset by proceeds from the sales and maturities of marketable securities of$43.6 million . Cash Provided by Financing Activities During the year endedDecember 31, 2019 , net cash provided by financing activities was$0.5 million , primarily consisting of$0.3 million of net proceeds from the issuance of shares of common stock pursuant to our ATM facility and$0.2 million in proceeds from the exercise of stock options and the issuance of shares under our employee stock purchase plan. During the year endedDecember 31, 2018 , net cash provided by financing activities was$90.3 million , primarily consisting of$93.0 million of net proceeds from our IPO, after deducting underwriting discounts and commissions, and$0.4 million in proceeds from the exercise of stock options, partially offset by payments of IPO costs of$3.1 million . Funding Requirements We expect to continue to incur substantial expenses in connection with our ongoing research and development activities, particularly as we advance the preclinical activities and clinical trials of our product candidates. As a result, we expect to incur substantial operating losses and negative operating cash flows for the foreseeable future. Based on our current operating plan, we expect that our existing cash and cash equivalents will enable us to fund our operating expenses and capital expenditure requirements into the third quarter of 2020. However, we have based this estimate on assumptions that may prove to be wrong and we could exhaust our capital resources sooner than we expect. Because of the numerous risks and uncertainties associated with the development of our product candidates or programs and because the extent to which we may enter into collaborations with third parties for development of our product candidates is unknown, we may incorrectly estimate the timing and amounts of increased capital outlays and operating expenses associated with completing the research and development of our product candidates. Our funding requirements, both near and long-term, as well as the timing and amount of our operating expenditures, will depend largely on: • the initiation, progress, scope, timing, costs and results of preclinical or nonclinical testing and studies and clinical trials for our product candidates;
• the clinical development plans we establish for these product candidates;
• the number and characteristics of product candidates that we develop or
may in-license;
• the terms of any collaboration agreements we may choose to execute;
• the outcome, timing and cost of meeting regulatory requirements
established by the FDA, EMA and other comparable foreign regulatory
authorities;
• the cost of filing, prosecuting, defending and enforcing our patent claims
and other intellectual property rights;
• the cost of defending intellectual property disputes, including any patent
infringement actions that may be brought by third parties in the future
against us or our product candidates;
• the effect of competing technological and market developments;
• the cost and timing of formulation development and manufacturing,
including the completion of commercial-scale outsourced manufacturing
activities; and
• the cost of establishing sales, marketing and distribution capabilities
for any product candidates for which we may receive regulatory approval in
regions where we choose to commercialize our products on our own.
A change in the outcome of any of these or other variables with respect to the development of any of our product candidates could significantly change the costs and timing associated with the development of that product candidate. Furthermore, our operating plans may change in the future and we may need additional funds to meet operational needs and capital requirements associated with these changed operating plans. In addition to the variables described above, if and when any of our product candidates successfully complete development, we will incur substantial additional costs associated with regulatory filings, marketing approval, post-marketing requirements,
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maintaining our intellectual property rights and regulatory protection, in addition to other commercial costs. We cannot reasonably estimate these costs at this time. Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through the pursuit of a strategic transaction, or a combination of equity or debt financings and collaboration arrangements. We currently have no credit facility or committed sources of capital. To the extent that we raise additional capital through a future strategic transaction or the future sale of equity or debt, the ownership interests of our stockholders will be diluted and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing common stockholders. If we raise additional funds through the issuance of debt securities, these securities could contain covenants that would restrict our operations. We may require additional capital beyond our currently anticipated amounts and additional capital may not be available on reasonable terms, or at all. If we raise additional funds through collaboration arrangements or other strategic transactions in the future, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate development or future commercialization efforts. We have concluded that the above circumstance raises substantial doubt about our ability to continue as a going concern. Refer to Note 1, Nature of Business, to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10K for additional information on our assessment. Off-Balance Sheet Arrangements During the periods presented we did not have, and we do not currently have, any off-balance sheet arrangements, as defined under applicableSEC rules. Contractual Obligations The following table summarizes our contractual obligations as ofDecember 31, 2019 and the effects that these obligations are expected to have on our liquidity and cash flows in future periods: Payments Due by Period Less Than 1 to 3 3 to 5 More Than 5 Total 1 Year Years Years Years (in thousands) Operating lease commitments(1)$ 9,780 $ 1,948 $ 4,072 $ 3,760 $ - Total$ 9,780 $ 1,948 $ 4,072 $ 3,760 $ -
______________________________
(1) Primarily represents minimum payments due for our lease of office and
laboratory space in Cambridge, Massachusetts under an operating lease
agreement that expires in 2024.
We enter into contracts in the normal course of business with CROs, CMOs and
other third parties for clinical trials, preclinical research studies and
testing and manufacturing services. These contracts are generally cancelable by
us upon up to 120 days prior written notice. Payments due upon cancellation
consist only of payments for services provided or expenses incurred, including
noncancelable obligations of our service providers up to and through the date of
cancellation. These payments are not included in the preceding table as the
amount and timing of these payments are not known. In
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Critical Accounting Policies and Significant Judgments and Estimates Our management's discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles inthe United States . The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. In addition, we believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management's judgments and estimates. Leases EffectiveJanuary 1, 2019 , we adopted Accounting Standards Codification Topic 842, or ASC 842, with no restatement of prior periods or cumulative adjustment to retained earnings. Comparative periods in our financial statements will be presented in accordance with the existing guidance under ASC 840. Upon adoption, we took advantage of the transition package of practical expedients permitted within ASU 2016-02, which allowed us to not reassess previous accounting conclusions around whether arrangements are, or contain, leases, as well as to carry forward both the historical classification of leases and the treatment of initial direct costs for existing leases. In addition, we also have made an accounting policy election to exclude leases with an initial term of twelve months or less from its balance sheet. Under ASC 842, we determine whether an arrangement is or contains a lease at the inception of the contract based on the unique facts and circumstances around identified assets, if present, and control over those identified assets. 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 it will exercise that option. We use the implicit rate when readily determinable and use our estimated 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. The incremental borrowing rate is determined using a secured borrowing rate for the same currency and term as the associated lease. We recognize lease costs on a straight-line basis over the lease term, and include amounts related to short-term leases. Adoption of the new standard resulted in the recognition of operating lease right-of-use assets and operating lease liabilities of approximately$8.7 million and$8.9 million , respectively, as ofJanuary 1, 2019 . The adoption of the new standard did not materially impact our condensed consolidated statement of operations. Refer to Note 2 and Note 7 to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10K. Research andDevelopment Expenses and Related Accruals Research and development expenses include costs directly attributable to the conduct of research and development programs, including personnel-related expenses such as salaries, benefits and non-cash stock-based compensation expense; materials; supplies; depreciation on and maintenance of research equipment; manufacturing and external costs related to outside vendors engaged to conduct both preclinical studies and clinical trials; costs related to the development of our platforms, unless such costs meet the criteria to be capitalized as internal-use software, and the allocable portions of facility costs, such as rent, utilities, repairs and maintenance, depreciation, and general support services. All costs associated with research and development activities are expensed as incurred. We enter into various research and development contracts with research institutions and other companies and record accruals for estimated ongoing research costs. When evaluating the adequacy of the accrued liabilities, we analyze progress of the studies or trials, including the phase or completion of events, invoices received and contracted costs. This process involves reviewing open contracts and purchase orders, communicating with personnel to identify services that have been performed and estimating the level of service performed and the associated costs incurred for the services for which we have not yet been invoiced. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the expense. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or amount of prepaid expense accordingly. Significant judgments and estimates are made in determining the accrued balances at the end of any reporting period. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing 87
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of services performed may vary and may result in us reporting amounts that are too high or too low in any particular period. To date, we have not made any material adjustments to our prior estimates of accrued research and development expenses. Stock-Based Compensation We measure stock-based compensation expense related to restricted common stock, restricted stock units and stock options granted to our employees and directors based on the fair value on the date of grant. We recognize compensation expense for these awards over the requisite service period, which is generally the vesting period of the respective award. Generally, we issue awards with only service-based vesting conditions and record the expense for these awards using the straight-line method. We have also granted certain stock-based awards with performance-based vesting conditions. We recognize compensation expense for awards with performance-based vesting conditions over the remaining service period when management determines that achievement of the performance condition is probable. We estimate the fair value of the stock options granted using the Black-Scholes option-pricing model, which uses as inputs the fair value of our common stock and subjective assumptions we make, including the expected stock price volatility, the expected term of the award, the risk-free interest rate and expected dividends. Because there had been no public market for our common stock prior to our IPO, there is a lack of Companyspecific historical and implied volatility data. Accordingly, we base our estimates of expected volatility on the historical volatility of a representative group of publicly traded companies for which historical information was available. The historical volatility is calculated based on a period of time commensurate with the assumption used for the expected term. The risk-free interest rate is based on theU.S. Treasury yield curve in effect at the time of grant commensurate with the expected term assumption. We use the simplified method to calculate the expected term for options granted to employees and directors. We utilize this method as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. For options granted to nonemployees, we utilize the contractual term of the arrangement as the basis for the expected term assumption. The expected dividend yield is assumed to be zero as we have never paid dividends and do not have current plans to pay any dividends on common stock. We determine the fair value of restricted common stock awards and restricted stock units based on the fair value of our common stock, less any applicable purchase price. We determine compensation expense for discounted purchases under our employee stock purchase plan using the Black-Scholes model to compute the fair value of the look-back provision plus the purchase discount, and recognize this compensation expense over the offering period. The Company accounts for stock-based compensation expense related forfeitures as the forfeiture occurs. EffectiveJanuary 1, 2019 , equity-classified share-based payment awards issued to nonemployees will be measured at grant date fair value similarly to those of employees. Refer to Note 2 to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10K. Determination of Fair Value of Common Stock on Grant Dates prior to our IPO Due to the absence of an active market for our common stock prior to the commencement of trading of our common stock on the Nasdaq Global Select Market onJune 27, 2018 in connection with our IPO, the estimated fair values of our common stock as of the grant dates prior to our IPO were determined using contemporaneous valuations performed in accordance with the guidance outlined in theAmerican Institute of Certified Public Accountants Practice Aid , Valuation of Privately-Held Company Equity Securities Issued as Compensation, also known as the Practice Aid. Following our IPO, it is no longer necessary for us to estimate the fair value of our common stock in connection with our accounting for stock options or other equity awards, as the fair value of our common stock can be determined by reference to its closing price on The Nasdaq Global Select Market on the applicable grant date. Valuations of our common stock were performed by third parties at various dates, which resulted in valuations of our common stock of$1.30 per share as ofDecember 31, 2015 ,$2.00 per share as ofApril 30, 2016 ,$2.65 per share as ofSeptember 20, 2016 ,$5.80 per share as ofDecember 31, 2016 ,$9.65 per share as ofDecember 1, 2017 ,$10.20 per share as ofJanuary 24, 2018 and$11.90 per share as ofApril 16, 2018 . In addition to considering the results of these third-party valuations, our board of directors considered various objective and subjective factors to determine the fair value of our common stock as of each grant date, which may be a date later than the most recent third-party valuation date, including: • the prices at which we sold shares of preferred stock and the superior
rights and preferences of the preferred stock relative to our common stock
at the time of each grant;
• the progress of our research and development programs, including the
status of preclinical studies and current and planned clinical trials for
our product candidates;
• our stage of development and commercialization and our business strategy;
• external market conditions affecting the biotechnology industry, and
trends within the biotechnology industry;
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• our financial position, including cash on hand, and our historical and
forecasted performance and operating results;
• the lack of an active public market for our common stock and our preferred
stock;
• the likelihood and potential timing of achieving a liquidity event, such
as an IPO or a sale of our company in light of prevailing market
conditions; and
• the analysis of IPOs and the market performance of similar companies in
the biopharmaceutical industry.
The assumptions underlying these valuations represented management's best
estimates, which involved inherent uncertainties and the application of
management judgment. Significant changes to the key assumptions used in the
valuations could have resulted in different fair values of our common stock at
each valuation date.
Recently Issued Accounting Pronouncements
For a discussion of new accounting pronouncements refer to Note 2, Summary of
Significant Accounting Policies and Basis of Presentation, to our consolidated
financial statements appearing elsewhere in this Annual Report on Form 10K.
Emerging Growth Company Status
The Jumpstart Our Business Startups Act of 2012, or the JOBS Act, permits an
"emerging growth company" such as us to take advantage of an extended transition
period to comply with new or revised accounting standards applicable to public
companies until those standards would otherwise apply to private companies. We
have irrevocably elected to "opt out" of this provision and, as a result, we
will comply with new or revised accounting standards when they are required to
be adopted by public companies that are not emerging growth companies.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
As of December 31, 2019 , we had cash and cash equivalents of $29.4 million . Our
cash and cash equivalents consist primarily of money market funds that are
invested in U.S. government-backed securities. Our primary exposure to market
risk is interest rate sensitivity, which is affected by changes in the general
level of U.S. interest rates. Due to the short-term nature of our cash
equivalents, a sudden change in interest rates would not be expected to have
material effect on our business, financial condition or results of operations.
Because of the short-term nature of the investments in our portfolio, an
immediate change by 100 basis points in market interest rates would not have a
material impact on the fair market value of our investment portfolio or on our
financial position or results of operations.
We are not currently exposed to significant market risk related to changes in
foreign currency exchange rates. However, we have contracted with, and may
continue to contract with, vendors that are located in Europe . We may be subject
to fluctuations in foreign currency rates in connection with certain of these
agreements. Transactions denominated in currencies other than the United States
dollar are recorded based on exchange rates at the time such transactions
arise. While we have not engaged in the hedging of our foreign currency
transactions to date, we are evaluating the costs and benefits of initiating
such a program and may in the future hedge selected significant transactions
denominated in currencies other than the U.S. dollar as we expand our
international operation and our risk grows.
Inflation generally affects us by increasing our cost of labor and clinical
trial costs. We do not believe that inflation had a material effect on our
business, financial condition or results of operations during the year-ended
December 31, 2019 .
Item 8. Financial Statements and Supplementary Data
Our consolidated financial statements, together with the independent registered
public accounting firm report thereon, are presented beginning on page F-1 of
this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
The Company has established disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e)) designed to ensure that information required to
be disclosed in the reports that the Company files or submits under the
Securities Exchange Act of 1934, as amended, or Exchange Act, is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms and is accumulated and communicated to management,
including the principal executive officer (our
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Chief Executive Officer) and principal financial and accounting officer (our Chief Financial Officer), to allow timely decisions regarding required disclosure. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) as ofDecember 31, 2019 . Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and our management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as ofDecember 31, 2019 , our Principal Executive Officer and Principal Financial and Accounting Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level. Management's Annual Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the company's principal executive and principal financial officers and effected by the company's board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: • pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; • provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and • provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Under the supervision of and with the participation of our principal executive officer and principal financial officer, our management assessed the effectiveness of our internal control over financial reporting as ofDecember 31, 2019 based on the criteria set forth by theCommittee of Sponsoring Organizations of theTreadway Commission in Internal Control-Integrated Framework (2013). Based on this assessment, management concluded that our internal control over financial reporting was effective as ofDecember 31, 2019 . This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm due to a transition period established by rules of theSEC for newly public companies. Changes in Internal Controls over Financial Reporting No change in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the three months endedDecember 31, 2019 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. Item 9B. Other Information None. 90
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