mnlo-10q_20180930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2018

OR

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

FOR THE TRANSITION PERIOD FROM ___ TO ___.

Commission file number 001-38356

 

MENLO THERAPEUTICS INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

45-3757789

(State or other jurisdiction of
incorporation or organization)

 

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

 

200 Cardinal Way, 2nd Floor

Redwood City, California 94063

(Address of principal executive offices including zip code)

650-486-1416

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

Emerging growth

 

 

 

 

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 12b-2 of the Act).

Yes  ☐    No  ☒

As of November 1, 2018, there were 23,232,184 shares of the registrant’s Common Stock, par value $0.0001 per share, outstanding.

 

 

 

 

 


TABLE OF CONTENTS

 

 

 

Page

Part I

Financial Information

 

Item 1.

Financial Statements

 

 

Condensed Balance Sheets

4

 

Condensed Statements of Operations and Comprehensive Loss

5

 

Condensed Statements of Cash Flows

6

 

Notes to Unaudited Interim Condensed Financial Statements

7

Item 2.

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

17

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

25

Item 4.

Controls and Procedures

25

 

 

 

Part II

Other Information

26

Item 1

Legal Proceedings

26

Item 1A.

Risk Factors

26

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

59

Item 3.

Defaults Upon Senior Securities

59

Item 4.

Mine Safety Disclosures

59

Item 5.

Other Information

59

Item 6.

Exhibits

60

SIGNATURES

61

 

 

 

2


 

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q are statements that could be deemed forward-looking statements reflecting the current beliefs and expectations of management with respect to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. These statements are often identified by the use of words such as “aim,” “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “could,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective,” “plan,” “predict,” “potential,” “positioned,” “seek,” “should,” “target,” “will,” “would,” “until,” “if” and similar expressions or variations.

The following factors, among others, including those described in the section titled “Risk Factors” included in this Quarterly Report on Form 10-Q, could cause our future results to differ materially from those expressed in the forward-looking information:

 

our clinical and regulatory development plans for serlopitant, including the timing of the commencement of, and receipt of results from, our ongoing and planned Phase 2 and Phase 3 clinical trials and the timing of our submission of an NDA to the FDA for serlopitant;

 

our expectations regarding the potential safety and efficacy of serlopitant;

 

our expectations regarding the potential market size and size of the potential patient populations for serlopitant, if approved or cleared for commercial use;

 

the timing of commencement of future non-clinical studies and clinical trials;

 

our ability to successfully complete clinical trials;

 

our intentions and our ability to establish collaborations or obtain additional funding;

 

our use of net proceeds from our initial public offering;

 

the timing or likelihood of regulatory filings and approvals or clearances for our product candidates;

 

our commercialization, marketing and manufacturing capabilities and expectations;

 

our intentions with respect to the commercialization of serlopitant or any other candidates;

 

the pricing and reimbursement of serlopitant, if approved;

 

the scope of protection we are able to establish and maintain for intellectual property rights covering our product candidates, including the projected terms of patent protection;

 

estimates of our expenses, future revenue, capital requirements, our needs for additional financing and our ability to obtain additional capital;

 

our ability to attract and retain key scientific or management personnel;

 

the impact of laws and regulations;

 

our financial performance; and

 

developments and projections relating to our competitors and our industry, including competing drugs and therapies.

 

We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. We discuss these risks in greater detail in “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Quarterly Report on Form 10-Q. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

3


 

PART I – FINANCIAL INFORMATION

 

Item 1. Unaudited condensed Financial Statements

 

Menlo Therapeutics Inc.

Condensed Balance Sheets

(in thousands, except share and per share data)

 

 

 

September 30,

2018

 

 

December 31,

2017

 

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

70,196

 

 

$

10,206

 

Short-term investments

 

 

82,461

 

 

 

49,295

 

Accounts receivable

 

 

 

 

 

786

 

Prepaid expenses and other current assets

 

 

1,811

 

 

 

3,574

 

Total current assets

 

 

154,468

 

 

 

63,861

 

Long-term investments

 

 

 

 

 

2,978

 

Property and equipment, net

 

 

136

 

 

 

28

 

Other long-term assets

 

 

354

 

 

 

 

Total assets

 

$

154,958

 

 

$

66,867

 

LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’

   EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,702

 

 

$

2,462

 

Accrued expenses and other current liabilities

 

 

5,360

 

 

 

3,559

 

Deferred revenue, current

 

 

 

 

 

1,796

 

Total current liabilities

 

 

8,062

 

 

 

7,817

 

Deferred revenue, long-term

 

 

 

 

 

6,735

 

Other non-current liabilities

 

 

12

 

 

 

22

 

Total liabilities

 

 

8,074

 

 

 

14,574

 

Commitments and contingencies (see Note 7)

 

 

 

 

 

 

 

 

Series A convertible preferred stock, $0.001 par value, no shares and 14,300 shares

   authorized at September 30, 2018 and December 31, 2017, respectively; no shares and

   14,300 shares issued and outstanding at September 30, 2018 and December 31, 2017,

   respectively; Liquidation value of $0 and $14,300 as of September 30, 2018 and

   December 31, 2017, respectively

 

 

 

 

 

14,183

 

Series B convertible preferred stock, $0.001 par value, no shares and 14,106,583 shares

   authorized at September 30, 2018 and December 31, 2017, respectively; no shares and

   14,106,583 shares issued and outstanding at September 30, 2018 and December 31, 2017,

   respectively; Liquidation value of $0 and $45,000 as of September 30, 2018 and

   December 31, 2017, respectively

 

 

 

 

 

44,820

 

Series C convertible preferred stock, $0.001 par value, no shares and 14,201,878 shares

   authorized at September 30, 2018 and December 31, 2017, respectively; no shares and

   11,854,463 shares issued and outstanding at September 30, 2018 and December 31, 2017,

   respectively; Liquidation value of $0 and $50,500 as of September 30, 2018 and

   December 31, 2017, respectively

 

 

 

 

 

50,324

 

Stockholders’ equity (deficit):

 

 

 

 

 

 

 

 

Preferred stock: $0.0001 par value; 20,000,000 shares and no shares authorized at

   September 30, 2018 and December 2017, respectively; no shares issued and outstanding

   at September 30, 2018 and December 31, 2017

 

 

 

 

 

 

Common stock: $0.0001 par value; 300,000,000 shares and 55,000,000 shares authorized

   at September 30, 2018 and December 31, 2017, respectively; 23,232,184 and 5,298,593

   shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively

 

 

3

 

 

 

1

 

Additional paid-in capital

 

 

240,024

 

 

 

2,207

 

Accumulated other comprehensive loss

 

 

(101

)

 

 

(51

)

Accumulated deficit

 

 

(93,042

)

 

 

(59,191

)

Total stockholders’ equity (deficit)

 

 

146,884

 

 

 

(57,034

)

Total liabilities, convertible preferred stock and stockholders’ equity (deficit)

 

$

154,958

 

 

$

66,867

 

 

See accompanying notes.

4


 

Menlo Therapeutics Inc.

Condensed Statements of Operations and Comprehensive Loss

(Unaudited)

(in thousands, except share and per share data)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Collaboration and license revenue

 

$

 

 

$

909

 

 

$

10,640

 

 

$

1,807

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

10,667

 

 

 

8,008

 

 

 

37,913

 

 

 

18,461

 

General and administrative

 

 

3,035

 

 

 

1,236

 

 

 

8,822

 

 

 

3,462

 

Total operating expenses

 

 

13,702

 

 

 

9,244

 

 

 

46,735

 

 

 

21,923

 

Loss from operations

 

 

(13,702

)

 

 

(8,335

)

 

 

(36,095

)

 

 

(20,116

)

Interest income and other expense, net

 

 

855

 

 

 

163

 

 

 

2,243

 

 

 

316

 

Net loss attributable to common stockholders

 

$

(12,847

)

 

$

(8,172

)

 

$

(33,852

)

 

$

(19,800

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on available-for-sale securities

 

 

48

 

 

 

(19

)

 

 

(50

)

 

 

11

 

Comprehensive loss

 

$

(12,799

)

 

$

(8,191

)

 

$

(33,902

)

 

$

(19,789

)

Net loss attributable to common stockholders per share,

   basic and diluted

 

$

(0.56

)

 

$

(1.60

)

 

$

(1.60

)

 

$

(3.89

)

Weighted-average number of common shares used to

   compute basic and diluted net loss per share

 

 

22,977,793

 

 

 

5,116,165

 

 

 

21,164,069

 

 

 

5,093,418

 

 

See accompanying notes.

 

5


 

Menlo Therapeutics Inc.

Condensed Statements of Cash Flows

(Unaudited)

(in thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

Operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(33,852

)

 

$

(19,800

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

10

 

 

 

5

 

Amortization of premium on investment securities

 

 

(551

)

 

 

73

 

Stock-based compensation expense

 

 

2,564

 

 

 

1,217

 

Disposal of equipment

 

 

 

 

 

19

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

786

 

 

 

(460

)

Prepaid expenses and other current assets

 

 

1,763

 

 

 

(1,143

)

Other long-term assets

 

 

(354

)

 

 

66

 

Accounts payable

 

 

240

 

 

 

2,001

 

Accrued expenses and other current liabilities

 

 

1,819

 

 

 

1,320

 

Deferred revenue

 

 

(8,531

)

 

 

(1,347

)

Other non-current liabilities

 

 

(10

)

 

 

(16

)

Net cash used in operating activities

 

 

(36,116

)

 

 

(18,065

)

Investing activities

 

 

 

 

 

 

 

 

Purchase of property plant and equipment

 

 

(118

)

 

 

(15

)

Purchase of investments

 

 

(109,952

)

 

 

(59,171

)

Proceeds from sales of investments

 

 

5,100

 

 

 

6,000

 

Proceeds from maturities of investments

 

 

75,165

 

 

 

31,821

 

Net cash used in investing activities

 

 

(29,805

)

 

 

(21,365

)

Financing activities

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock, net of issuance costs

 

 

125,417

 

 

 

50,327

 

Proceeds from the exercise of stock options

 

 

494

 

 

 

34

 

Net cash provided by financing activities

 

 

125,911

 

 

 

50,361

 

Net increase in cash and cash equivalents

 

 

59,990

 

 

 

10,931

 

Cash and cash equivalents at beginning of period

 

 

10,206

 

 

 

4,027

 

Cash and cash equivalents at end of period

 

$

70,196

 

 

$

14,958

 

Non-cash financing activities

 

 

 

 

 

 

 

 

Conversion of preferred stock to common stock

 

$

109,327

 

 

$

 

 

See accompanying notes.

 

6


 

Menlo Therapeutics Inc.

Notes to Unaudited Interim Condensed Financial Statements

1.Formation and Business of the Company

Menlo Therapeutics Inc. (the “Company”) is a late‑stage biopharmaceutical company focused on the development and commercialization of serlopitant for the treatment of pruritus, or itch, associated with various conditions such as prurigo nodularis, psoriasis and chronic pruritus of unknown origin. The Company believes that its product candidate, serlopitant, a highly selective once‑daily, oral small molecule inhibitor of the neurokinin 1, or NK1 receptor, has the potential to significantly alleviate pruritus.

The Company was incorporated in Delaware in October 2011. Since commencing operations, the Company has devoted substantially all of its resources to developing its product candidate, serlopitant, including conducting clinical trials and providing general and administrative support for these operations.

Initial Public Offering

In January 2018, the Company completed its initial public offering (“IPO”) of shares of its common stock, pursuant to which the Company issued 8,050,000 shares of common stock, which includes 1,050,000 shares issued pursuant to the underwriter’s option to purchase additional shares, and received net proceeds of approximately $125.4 million, after deducting underwriting discounts, commissions and offering expenses. In connection with the completion of the Company's IPO, all shares of convertible preferred stock converted into 9,629,405 shares of common stock.

Liquidity and Capital Resources

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The financial statements do not reflect any adjustments relating to the recoverability and reclassification of assets and liabilities that might be necessary if the Company is unable to continue as a going concern. Since inception, the Company has incurred losses and negative cash flows from operations. For the nine months ended September 30, 2018, the Company incurred a net loss of $33.9 million and used $36.1 million of cash in operations. As of September 30, 2018, the Company had cash, cash equivalents and investments of $152.7 million and an accumulated deficit of $93.0 million.

Management expects to continue to incur additional substantial losses in the foreseeable future as a result of the Company’s research and development activities. Management plans to finance operations through equity or debt financings or other capital sources, including potential collaborations or other strategic transactions. There can be no assurances that, in the event that the Company requires additional financing, such financing will be available on terms which are favorable to the Company, or at all. If the Company is unable to raise additional funding to meet its working capital needs in the future, it will be forced to delay or reduce the scope of its research programs and/or limit or cease its operations.

The Company believes that its existing cash, cash equivalents and investments as of September 30, 2018 will provide sufficient funds to enable it to meet its obligations for at least the next 12 months from the issuance of our financial statements as of and for the nine months ended September 30, 2018.

2.Significant Accounting Policies

Basis of Presentation

The accompanying financial information for the three and nine months ended September 30, 2018 and 2017 is unaudited. These unaudited interim condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In management’s opinion, the unaudited interim condensed financial statements have been prepared on the same basis as the audited financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, and include all adjustments, which include only normal and recurring adjustments necessary for the fair presentation of the Company’s statement of financial position as of September 30, 2018, its statements of operations and comprehensive loss for the three and nine months ended September 30, 2018 and 2017 and its statements of cash flows for the nine months ended September 30, 2018 and 2017. The results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results expected for the full fiscal year or any other period(s). The financial statements and related disclosures have been prepared with the presumption that users of the interim financial statements have read or have access to the audited financial statements for the preceding fiscal year. Accordingly, these financial statements should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s Form 10-K for the year ended December 31, 2017, as filed with the SEC on March 28, 2018.

7


 

Reverse Stock Split

On January 8, 2018, the Company effected a reverse split of shares of the Company’s common stock at a ratio of 1-for-2.6975 pursuant to an amendment to the amended and restated certificate of incorporation approved by the Company’s board of directors and stockholders. The par value and the authorized shares of the common stock were not adjusted as a result of the reverse split. All issued and outstanding common stock share and per share amounts contained in the financial statements have been retroactively adjusted to reflect this reverse split for all periods presented, and the conversion ratio of the preferred stock was adjusted accordingly.

Segments

The Company operates in one segment. Management uses one measurement of profitability and does not segregate its business for internal reporting. All long‑lived assets are maintained in the United States of America.

Use of Estimates

Preparation of financial statements in conformity with U.S. GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of expenses during the reporting periods covered by the financial statements and accompanying notes. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, stock‑based compensation expense, the resolution of uncertain tax positions and valuation allowance and accruals for research and development costs. Management bases its estimates on historical experience on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ materially from those estimates.

Research and Development Expenses

Research and development costs are expensed as incurred. Substantially all of the Company’s research and development expenses consist of expenses incurred in connection with the development of serlopitant. These expenses include certain payroll and personnel expenses including stock‑based compensation expense, consulting costs, contract manufacturing costs and fees paid to clinical research organizations, or CROs, to conduct research and development. Non-refundable advance payments for goods or services that will be used or rendered for future research and development activities are deferred and capitalized and recognized as an expense as the goods are delivered or the related services are performed.

The Company estimates non‑clinical study and clinical trial expenses based on the services performed pursuant to contracts with research institutions and clinical research organizations that conduct and manage non‑clinical studies and clinical trials on its behalf. In accruing service fees, the Company estimates the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, the Company will adjust the accrual accordingly. Payments made to third parties under these arrangements in advance of the receipt of the related services are recorded as prepaid expenses until the services are rendered.

Stock-Based Compensation

The Company measures and recognizes compensation expense for all stock‑based awards made to employees, directors and non‑employees, based on estimated fair values recognized using the straight‑line method over the requisite service period.

The fair value of options to purchase common stock granted to employees is estimated on the grant date using the Black‑Scholes option valuation model. The calculation of stock‑based compensation expense requires that the Company make certain assumptions and judgments about a number of complex and subjective variables used in the Black‑Scholes model, including the expected term, expected volatility of the underlying common stock, and risk‑free interest rate. The Company accounts for options issued to non‑employees using the Black‑Scholes option valuation model and is measured and recognized as the stock options are earned.

Revenue Recognition

The Company records revenue based on a five-step model in accordance with Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers ("ASC 606"). For the Company’s collaboration agreement, which is discussed further under Note 5, the Company identifies the performance obligations, determines the transaction price, allocates the contract transaction price to the performance obligations, and recognizes the revenue when (or as) the performance obligation is satisfied.

8


 

The Company identifies the performance obligations included within the agreement and evaluates which performance obligations are distinct. Upfront payments for licenses are evaluated to determine if the license is capable of being distinct from the obligations of the Company to participate on certain development and/or commercialization committees with the collaboration partners and supply manufactured drug product for clinical trials. For performance obligations that the Company satisfies over time, the Company utilizes the input method and revenue is recognized by consistently applying a method of measuring progress toward complete satisfaction of that performance obligation. The Company periodically reviews its estimated periods of performance based on the progress under each arrangement and accounts for the impact of any changes in estimated periods of performance on a prospective basis.

Milestone payments are a form of variable consideration as the payments are contingent upon achievement of a substantive event. Milestone payments are estimated and included in the transaction price when the Company determines that it is probable that there will not be a significant reversal of cumulative revenue recognized in future periods. The transaction price is then allocated to each performance obligation on a relative stand-alone selling price basis, for which the Company recognizes revenue as or when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of such milestones and any related constraint, and if necessary, adjusts the estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect license, collaboration or other revenues and earnings in the period of adjustment.

Research and development revenues and cost reimbursements are based upon negotiated rates for the Company’s full-time employee equivalents (“FTE”) and actual out-of-pocket costs. FTE rates are set based upon the Company’s costs, and which the Company believes approximate fair value. None of the revenues recognized to date are refundable if the relevant research effort is not successful.

In accordance with ASC 606, the Company is required to adjust the transaction price for the effects of the time value of money if the timing of payments agreed to by the parties to the contract, explicitly or implicitly, provides the Company or its customer with a significant benefit of financing the transfer of goods or services. The Company concluded that its collaboration agreement did not contain a significant financing component because the payment structure of its agreements arise from reasons other than providing a significant benefit of financing.

Net Loss per Share of Common Stock

Basic net loss per common share is calculated by dividing the net loss attributable to common stockholders by the weighted‑average number of common shares outstanding during the period, without consideration for potentially dilutive securities. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted‑average number of common shares and potentially dilutive securities outstanding for the period. For purposes of the diluted net loss per share calculation, convertible preferred stock and common stock options are considered to be potentially dilutive securities. Because the Company has reported a net loss for the three and nine months ended September 30, 2018 and 2017, diluted net loss per common share is the same as basic net loss per common share for those periods.

The following table sets forth the computation of basic and diluted net loss per share attributable to common stockholders (in thousands, except share and per share data):

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(unaudited)

 

 

(unaudited)

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to common stockholders, basic

   and diluted

 

$

(12,847

)

 

$

(8,172

)

 

$

(33,852

)

 

$

(19,800

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

23,063,757

 

 

 

5,283,282

 

 

 

21,269,957

 

 

 

5,281,144

 

Less: weighted-average common shares subject to

   repurchase

 

 

(85,964

)

 

 

(167,117

)

 

 

(105,888

)

 

 

(187,726

)

Weighted-average common shares used to compute basic

   and diluted net loss per share

 

 

22,977,793

 

 

 

5,116,165

 

 

 

21,164,069

 

 

 

5,093,418

 

Net loss per share attributable to common stockholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.56

)

 

$

(1.60

)

 

$

(1.60

)

 

$

(3.89

)

9


 

 

The following outstanding shares of potentially dilutive securities were excluded from the computation of diluted net loss per share attributable to common stockholders for the periods presented because including them would have been antidilutive:

 

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

 

(unaudited)

 

Stock options outstanding

 

 

3,050,067

 

 

 

2,152,906

 

Outstanding common stock subject to repurchase

 

 

79,351

 

 

 

160,246

 

Shares issuable related to ESPP

 

 

59,735

 

 

 

 

Convertible preferred stock issuable upon conversion to common stock

 

 

 

 

 

9,629,405

 

Total

 

 

3,189,153

 

 

 

11,942,557

 

 

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014‑09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In August 2015, FASB issued ASU No. 2015‑14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which effectively delayed the adoption date by one year, to an effective date for public entities for annual and interim periods beginning after December 15, 2017. In March, April and May 2016, the FASB issued additional updates to the new revenue standard relating to reporting revenue on a gross versus net basis, identifying performance obligations and licensing arrangements, and narrow‑scope improvements and practical expedients, respectively. The effective date of this additional update is the same as that of ASU 2014‑09. The guidance permits the use of either a full retrospective or modified retrospective method on January 1, 2018. The Company adopted the standard using the full retrospective method. The effect of initially applying the new revenue standard was immaterial. Based on the evaluation of its current collaboration agreement and associated revenue streams, revenue will be recorded consistently under both the current and the new standard.

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016‑02, Leases (ASC 842), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight‑line basis over the term of the lease, respectively. A lessee is also required to record a right‑of‑use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of twelve months or less will be accounted for similar to existing guidance for operating leases today. ASC 842 supersedes the previous leases standard, ASC 840 Leases. In August 2018, the FASB issued ASU 2018-11, Targeted Improvements to ASC 842, which provides a new transition option in which an entity initially applies ASU 2016-02 at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The standard is effective on January 1, 2019, with early adoption permitted. The Company is currently evaluating the effects, if any, that the adoption of this guidance will have on its financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses — Measurement of Credit Losses on Financial Instruments. ASU 2016-13 changes the impairment model for most financial assets and certain other instruments. ASU 2016-13 is effective for annual and interim reporting periods beginning after December 15, 2019. The Company is in the process of evaluating the impact the adoption of this standard would have on its financial statements and disclosures.

In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income that would permit entities to make a one-time reclassification from accumulated other comprehensive income (AOCI) to retained earnings for the stranded tax effects resulting from the newly enacted corporate tax rates under the Tax Cuts and Jobs Act (the "Act"), effective for the year ended December 31, 2017. The amount of the reclassification is calculated on the basis of the difference between the historical tax rate and newly enacted tax rate. The standard is effective for interim and annual periods beginning after December 15, 2018 with early adoption permitted. The Company is currently assessing the impact of this standard on its financial statements and disclosures.

10


 

In June 2018, the FASB issued ASU 2018-07 Improvements to Nonemployee Share-Based Payment Accounting (Topic 718) that expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for certain exemptions specified in the amendment. The guidance is effective for fiscal years beginning after December 15, 2018, including interim reporting periods within that fiscal year. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. The Company is currently evaluating the impact of the guidance on its financial statements.

In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders' equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. This final rule is effective on November 5, 2018. The Company is in the process of evaluating the impact of the final rule on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) which changes the fair value measurement disclosure requirements of ASC 820. The guidance is effective for fiscal years beginning after December 15, 2019, including interim reporting periods within that fiscal year. Early adoption is permitted. The Company is evaluating the potential impact of this standard on its condensed consolidated financial statements and disclosures.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40), relating to a customer's accounting for implementation, set-up, and other upfront costs incurred in a cloud computing arrangement that is hosted by a vendor (i.e., a service contract). Under the new guidance, a customer will apply the same criteria for capitalizing implementation costs as it would for an arrangement that has a software license.  The new guidance also prescribes the balance sheet, income statement, and cash flow classification of the capitalized implementation costs and related amortization expense, and requires additional quantitative and qualitative disclosures. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early application is permitted.  The Company can choose to adopt the new guidance (1) prospectively to eligible costs incurred on or after the date this guidance is first applied or (2) retrospectively. The Company is evaluating the impact, if any, that this pronouncement will have on our financial position and results of operations.

3.Cash Equivalents and Investments

At September 30, 2018 and December 31, 2017, the balance in the Company’s accumulated other comprehensive income was comprised solely of activity related to the Company’s available‑for‑sale securities. There were no realized gains or losses recognized on the sale or maturity of available‑for‑sale securities during the three and nine months ended September 30, 2018 and 2017 and as a result, the Company did not reclassify any amounts out of accumulated other comprehensive income for the same periods.  All of the Company’s available-for-sale securities are subject to a periodic impairment review. The Company considers an investment security to be impaired when its fair value is less than its carrying cost, in which case the Company would further review the investment to determine whether it is other-than-temporarily impaired. When the Company evaluates an investment for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, intent to sell, and whether it is more likely than not the Company will be required to sell the investment before the recovery of its cost basis. If an investment is other-than-temporarily impaired, the Company writes it down through earnings to its impaired value and establishes that as a new cost basis for the investment. The Company did not identify any of its available-for-sale securities as other-than-temporarily impaired in any of the periods presented. As of September 30, 2018, no investment was in a continuous unrealized loss position for more than one year, the unrealized losses were not due to change in credit risk, and the Company believes that it is more likely than not the investments will be held until maturity.

11


 

The following table summarizes the availableforsale securities (in thousands):

 

 

 

Amortized

Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Fair Value

 

September 30, 2018 (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

9,850

 

 

$

 

 

$

 

 

$

9,850

 

Corporate notes

 

 

31,749

 

 

 

 

 

 

(55

)

 

 

31,694

 

Commercial paper

 

 

83,744

 

 

 

 

 

 

 

 

 

83,744

 

Asset backed securities

 

 

12,226

 

 

 

 

 

 

(28

)

 

 

12,198

 

Government notes

 

 

12,448

 

 

 

 

 

 

(18

)

 

 

12,430

 

Total

 

$

150,017

 

 

$

 

 

$

(101

)

 

$

149,916

 

 

 

 

Amortized

Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Fair Value

 

December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

8,685

 

 

$

 

 

$

 

 

$

8,685

 

Corporate notes

 

 

46,133

 

 

 

 

 

 

(35

)

 

 

46,098

 

Government notes

 

 

6,191

 

 

 

 

 

 

(16

)

 

 

6,175

 

Total

 

$

61,009

 

 

$

 

 

$

(51

)

 

$

60,958

 

 

4.Fair Value Measurements

The fair value of the Company’s financial instruments reflects the amounts that the Company estimates it would receive in connection with the sale of an asset or pay in connection with the transfer of a liability in an orderly transaction between market participants at the measurement date (exit price). The Company discloses and recognizes the fair value of its assets and liabilities using a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to valuations based upon unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to valuations based upon unobservable inputs that are significant to the valuation (Level 3 measurements). The guidance establishes three levels of the fair value hierarchy as follows:

Level 1 – Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date;

Level 2 – Inputs other than quoted prices that are observable for the assets or liability either directly or indirectly, including inputs in markets that are not considered to be active;

Level 3 – Inputs that are unobservable.

Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability.

12


 

During the periods presented, the Company has not changed the manner in which it values assets and liabilities that are measured at fair value using Level 3 inputs. The Company recognizes transfers between levels of the fair value hierarchy as of the end of the reporting period. There were no transfers within the hierarchy during the periods presented. A summary of the assets and liabilities carried at fair value in accordance with the hierarchy defined above is as follows (in thousands):

 

 

 

Fair Value Measurements Using

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

September 30, 2018 (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

9,850

 

 

$

 

 

$

 

 

$

9,850

 

Corporate notes

 

 

 

 

 

31,694

 

 

 

 

 

 

31,694

 

Commercial paper

 

 

 

 

 

83,744

 

 

 

 

 

 

83,744

 

Asset backed securities

 

 

 

 

 

12,198

 

 

 

 

 

 

12,198

 

Government notes

 

 

 

 

 

12,430

 

 

 

 

 

 

12,430

 

Total assets

 

$

9,850

 

 

$

140,066

 

 

 

 

 

$

149,916

 

 

 

 

Fair Value Measurements Using

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

8,685

 

 

$

 

 

$

 

 

$

8,685

 

Corporate notes

 

 

5,103

 

 

 

40,995

 

 

 

 

 

 

46,098

 

Government notes

 

 

6,175

 

 

 

 

 

 

 

 

 

6,175

 

Total assets

 

$

19,963

 

 

$

40,995

 

 

$

 

 

$

60,958

 

 

The Company uses a market approach for determining the fair value of all its Level 1 and Level 2 money market funds and marketable securities. To value its money market funds, the Company values the funds at $1 stable net asset value, which is the market pricing convention for identical assets that the Company has the ability to access.

5.License Agreements

Merck License

In December 2012, the Company entered into an exclusive worldwide royalty free license agreement with Merck Sharp & Dohme Corp., (Merck) for exclusive worldwide rights for the development and commercialization of serlopitant and two other NK1‑receptor antagonists in all human diseases, disorders or conditions, except for the treatment and prevention of nausea or vomiting. The Company paid Merck an upfront non‑refundable non‑creditable licensing fee of $1.0 million dollars and issued to Merck shares of its common stock. In addition, the Company has agreed to make aggregate payments of up to $25.0 million dollars upon the achievement of specified development and regulatory milestones.

In May 2018, the Company paid a $3.0 million milestone payment associated with the initiation of the Company’s Phase 3 clinical program for pruritus associated with prurigo nodularis. Future milestone payments are considered a form of variable consideration and accrued for when the Company determines that it is probable that there will not be a significant reversal of the accrual in future periods.  

JT Torii Collaboration Agreement

In August 2016, the Company entered into a license and collaboration agreement (the “Collaboration Agreement”) with Japan Tobacco Inc. and Torii Pharmaceutical Co. Ltd. (together referred to as “JT Torii”). Under the Collaboration Agreement, the Company granted to JT Torii the rights to develop and commercialize products containing serlopitant in Japan, for the treatment of diseases and conditions other than nausea or vomiting. In exchange, JT Torii paid the Company an upfront, non‑refundable payment of $11.0 million. In addition, the Company was entitled to receive aggregate payments of up to $28.0 million upon the achievement of specified development and regulatory milestones, and $15.0 million upon the achievement of a commercial milestone, as well as tiered royalties from the mid-single digits up to the mid‑teens on sales of licensed products in Japan. The Company’s performance obligations under the license agreement included the transfer of intellectual property rights in the form of licenses, obligations to participate on certain development and/or commercialization committees with the collaboration partners and supply manufactured drug product for clinical trials.

13


 

In the second quarter of 2018, JT Torii informed the Company that they decided to halt the Japanese Phase 2 clinical trial of serlopitant, following which the Company and JT Torii agreed to terminate the Collaboration Agreement.  As a result, the Company has reacquired full ownership of the development and commercialization rights to serlopitant in Japan and accelerated recognition of the remaining deferred revenue of $8.1 million during the quarter. In the second quarter of 2018, the Company also earned and recognized a $2.0 million milestone payment related to JT Torii’s receipt of investigational new drug application (“IND”) enabling past clinical study reports delivered by the Company under the Collaboration Agreement.

Under the Collaboration Agreement, the Company was reimbursed by JT Torii for the non-commercial supplies of serlopitant at the same rate it was charged by the third-party manufacturer for such supplies, which price did not include a significant or incremental discount for JT Torii. The assessment of performance obligations required judgment in order to determine the allocation of revenue to each deliverable and the appropriate period of time over which the revenue should be recognized.

Under the Collaboration Agreement, the Company determined that the license was not distinct from the research and development services because JT Torii could not use the license with its available resources to obtain any economic value without the Company’s participation. The license and the services were combined as one unit of accounting and upfront payments were recorded initially as deferred revenue in the balance sheet. Revenue was then recognized over an estimated performance period as performance of services was being completed. The Company recognized the upfront fee based on performance of the obligation using input method over the period of performance, which represented the estimated development period in the territories based on the initial development plan managed by the joint steering committee. The original term of the agreement was through the expiration of the patents associated with serlopitant.

Under the Collaboration Agreement, the Company was entitled to receive aggregate payments of up to $28.0 million upon the achievement of specified development and regulatory milestones, and $15.0 million upon the achievement of a commercial milestone. Two of the milestones, which amount to $2.0 million each, related to the preparation of an IND for submission to regulatory authorities in the territory were considered substantive given that they are triggered by the Company’s performance relative to the achievement of pre-specified, “at risk” milestone events, including the submission of all completed trials clinical data packages and the validation of the manufacturing process.

On September 1, 2017, the Company entered into a new services agreement with JT Torii to provide research and development services, including regulatory, chemistry and manufacturing support and related materials that is distinct from the original Collaboration Agreement. The Company evaluated the new services agreement and determined that the research and materials delivered to JT Torii represented another contract that provides distinct goods and services to JT Torii. The fees received under the services agreement were recognized as and when such services were performed by the Company and JT Torii consumed the benefits of those services. During the three and nine months ended September 30, 2018, the Company recognized revenue of zero and $10.6 million, respectively in the statement of operations related to the services and collaboration agreement. The services agreement terminated upon the termination of the Collaboration Agreement.

 

6.Balance Sheets Components

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following (in thousands):

 

 

 

September 30,

2018

 

 

December 31,

2017

 

 

 

(unaudited)

 

 

 

 

 

Accrued personnel expenses

 

$

1,805

 

 

$

1,108

 

Accrued clinical and development expenses

 

 

3,215

 

 

 

2,250

 

Other

 

 

340

 

 

 

201

 

Total

 

$

5,360

 

 

$

3,559

 

 

14


 

7.Commitments and Contingencies

Legal Matters

The Company’s industry is characterized by frequent claims and litigation, including claims regarding intellectual property. As a result, the Company may be subject to various legal proceedings from time to time. The results of any future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors. Management is not aware of any material pending or threatened litigation.

Leases

The Company conducts its operations using leased office facilities. In April 2016, the Company entered into a lease agreement for its prior location. The twenty-six month lease, began in May 2016, and provided 4,000 square feet of office space in Menlo Park, California. Base annual rent was initially approximately $20,000 per month, with annual increases.

In September 2017, the Company entered into a lease agreement for its current location.  The thirty-month lease, began on October 1, 2017 and provides approximately 14,000 square feet of office space in Redwood City, California. Base annual rent is approximately $55,000 per month with annual increases.

The Company recognizes rent expense on a straight‑line basis over the respective lease period. Rent expense was $0.2 million and $0.6 million, respectively, for the three and nine months ended September 30, 2018 and $0.1 million and $0.2 million, respectively, for the three and nine months ended September 30, 2017. As of September 30, 2018, total future minimum lease payments under its operating leases are as follows (in thousands):

 

2018

 

$

168

 

2019

 

 

674

 

2020

 

 

173

 

Total future minimum lease payments

 

$

1,015

 

 

Indemnification

As permitted under Delaware law and in accordance with the Company’s bylaws, the Company is required to indemnify its officers and directors for certain events or occurrences while the officer or director is or was serving in such capacity. The Company is also party to indemnification agreements with its directors. The Company believes the fair value of the indemnification rights and agreements is minimal. Accordingly, the Company has not recorded any liabilities for these indemnification rights and agreements as of September 30, 2018.

Contingencies

From time to time, the Company may have certain contingent liabilities that arise in the ordinary course of its business activities. The Company accrues a liability for such matters when it is probable that future expenditures will be made, and such expenditures can be reasonably estimated. Management is not currently aware of any matters that could have a material adverse effect on the financial position, results of operations, or cash flows of the Company.

8.Stockholders’ Equity (Deficit)

Equity incentive plan

Under the Company’s 2011 Stock Incentive Plan (the “2011 Plan”), the Company may grant options to purchase common stock, restricted stock awards, or directly issue shares of common stock to employees, directors and consultants of the Company. Under the 2011 Plan, options granted are exercisable over a maximum term of 10 years from the date of grant and generally vest over a period of four years. The Company adopted a 2018 Omnibus Incentive Plan (the “2018 Plan”), effective January 2018. The 2018 Plan provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights and other stock and cash-based awards (including annual cash incentives and long-term cash incentives). The Company has reserved 3,000,000 shares of common stock for issuance pursuant to awards under the 2018 Plan. As of September 30, 2018, the Company has 2,195,901 shares of common stock available for issuance under the 2018 Plan.

The Company adopted a 2018 Employee Stock Purchase Plan (“ESPP”) in January 2018. The ESPP enables eligible employees of the Company and designated affiliates to purchase shares of common stock at a discount of 15%. Six month offer periods under the ESPP commenced on September 1, 2018. The Company has reserved 325,000 shares of common stock for issuance under the ESPP.

15


 

Total stock-based compensation expense for employees and non-employees recognized in the statements of operations was as follows (in thousands):

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(unaudited)

 

 

(unaudited)

 

Research and development

 

$

475

 

 

$

322

 

 

$

1,217

 

 

$

676

 

General and administrative

 

 

519

 

 

 

267

 

 

 

1,347

 

 

 

541

 

Total stock-based compensation expense

 

$

994

 

 

$

589

 

 

$

2,564

 

 

$

1,217

 

 

The table below summarizes stock option and restricted award activity under the 2011 and 2018 Plan:

 

 

 

Number of

Shares

Outstanding

 

 

Weighted-

Average

Exercise

Price

 

 

Weighted-

Average

Remaining

Contractual

Term (Years)

 

 

Aggregate

Intrinsic

Value

(in thousands)

 

Balances at December 31, 2017

 

 

2,506,926

 

 

$

3.50

 

 

 

8.79

 

 

$

24,033

 

Forfeited

 

 

(6,772

)

 

$

7.01

 

 

 

 

 

 

 

 

 

Exercised

 

 

(254,186

)

 

$

1.94

 

 

 

 

 

 

 

1,786

 

Granted

 

 

804,099

 

 

$

9.87

 

 

 

 

 

 

 

 

 

Balances at September 30, 2018

 

 

3,050,067

 

 

$

5.31

 

 

 

8.53

 

 

$

14,880

 

 

 

16


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

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the condensed financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2017.

Overview

We are a late‑stage biopharmaceutical company focused on the development and commercialization of serlopitant for the treatment of pruritus associated with various conditions such as prurigo nodularis, a severely pruritic skin condition with lesions, psoriasis and chronic pruritus of unknown origin. We believe that serlopitant, a highly selective small molecule inhibitor of the neurokinin 1, or NK1 receptor, has the potential to significantly alleviate pruritus.

We have initiated a broad clinical development program for serlopitant as a once‑daily oral tablet treatment for pruritus. We have completed three double‑blind Phase 2 clinical trials in over 850 patients with pruritus and observed clinically relevant and statistically significant improvements in pruritus in patients treated with serlopitant compared to patients treated with placebo in two of the three trials. The first Phase 2 clinical trial, conducted in 257 patients with chronic pruritus, met its primary and multiple secondary efficacy endpoints of pruritus reduction for patients treated at our two highest doses (5 mg and 1 mg daily) compared with those receiving placebo. The second Phase 2 clinical trial, conducted in 127 patients with prurigo nodularis, also met its primary and multiple secondary efficacy endpoints demonstrating significant pruritus reduction. In April 2018, we announced results from our third Phase 2 clinical trial, conducted in 484 patients with pruritus associated with atopic dermatitis. In this study, numerical differences favoring the serlopitant treated groups were evident at all timepoints, however, the study did not meet its primary and secondary efficacy endpoints, with no statistically significant difference demonstrated between the serlopitant treated groups and the placebo treated group. Serlopitant has been dosed in approximately 1,500 individuals and has been shown to be well tolerated, including when administered to patients in a clinical trial for up to one year.

Our current development program includes multiple ongoing and planned Phase 2 and pivotal Phase 3 clinical trials.

 

We are currently enrolling two Phase 3 trials in patients with pruritus associated with prurigo nodularis with results from these trials expected in the first half of 2020.  If these clinical trials are successful, we could potentially submit a New Drug Application, or NDA, in 2020.

 

Our Phase 2 clinical trial in pruritus associated with psoriasis is fully enrolled, and we expect to report top-line data in December 2018.

 

We plan to initiate a Phase 2 clinical trial in approximately 200 patients with chronic pruritus of unknown origin in the fourth quarter of 2018.

 

We are currently enrolling a 52-week, multicenter, open-label safety study of serlopitant for the treatment of pruritus.  The objective of this study is to provide long-term safety data for serlopitant in adults with pruritus associated with prurigo nodularis, atopic dermatitis, or psoriasis.  

After the completion of our Phase 2 clinical trial in patients with pruritus associated with atopic dermatitis, we conducted retrospective analyses of our three Phase 2 pruritus clinical trials completed with serlopitant in an effort to understand further the atopic dermatitis clinical trial results and determine potential patient populations who may best respond to serlopitant therapy. All of these post hoc analyses were conducted solely for the purposes of informing future study design and indication selection, and do not constitute specific conclusions of efficacy. In these analyses, we observed several patterns that have informed our decision to initiate a clinical trial in patients with chronic pruritus of unknown origin. Our analyses suggested that patients without inflammatory skin disease appeared to respond better to serlopitant therapy than patients with inflammatory skin disease. Older patients or patients who had been pruritic for longer appeared to respond better to serlopitant therapy than patients who were younger or had a shorter duration of pruritus. We have modified the eligibility criteria in our Phase 3 prurigo nodularis clinical trials to exclude patients with active pruritic inflammatory skin disease other than prurigo nodularis. Our ongoing psoriasis clinical trial is limited to a population with no more than 10% body surface area coverage with psoriasis lesions.

In addition to the clinical trials we have conducted with serlopitant for the treatment of pruritus, we also conducted a Phase 2 clinical trial in 185 patients with refractory chronic cough. In October 2018, we announced top-line results from this study in which treatment with serlopitant failed to demonstrate benefit versus placebo on the primary and key secondary endpoints. Treatment related adverse events occurred at comparable rates in the serlopitant and placebo treated groups. Based upon the results of this trial, we do not anticipate further development of serlopitant for the treatment of refractory chronic cough.

17


 

Since commencing operations in 2011, we have devoted substantially all of our efforts and financial resources to the clinical development of serlopitant. We have not generated any revenue from product sales and, as a result, we have never been profitable and have incurred net losses in each year since commencement of our operations. As of September 30, 2018, we had an accumulated deficit of $93.0 million, primarily as a result of research and development and general and administrative expenses. We incurred net losses of approximately $33.9 million and $19.8 million for the nine months ended September 30, 2018 and 2017 , respectively. We do not expect to generate product revenue unless and until we obtain marketing approval for and commercialize serlopitant for the treatment of pruritus associated with one or more various conditions and we can provide no assurance that we will ever generate significant revenue or profits.

As of September 30, 2018, our cash, cash equivalents and investments totaled $152.7 million. In January 2018, we completed our initial public offering. We sold 8,050,000 shares of our common stock and received cash proceeds of approximately $125.4 million, net of underwriting commissions and related expenses. We believe that our existing cash, cash equivalents and investments will be sufficient to fund our planned operations for at least the next 12 months from the issuance of our financial statements as of and for the nine months ended September 30, 2018. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect. See “— Liquidity and Capital Resources.”

Components of Operating Results

Collaboration and License Revenue

We recognized revenue pursuant to our license and collaboration agreement, or Collaboration Agreement and our services agreement with Japan Tobacco Inc. and Torii Pharmaceutical Co. Ltd., together referred to as JT Torii, in connection with the clinical development and commercialization of products covered by the collaboration, including non-refundable upfront license fees, contingent consideration payments based on the achievement of defined collaboration milestones and royalties on sales of commercialized products.

Under the Collaboration Agreement, we granted to JT Torii the right to develop and commercialize products containing serlopitant in Japan, for the treatment of diseases and conditions other than nausea or vomiting. In exchange, JT Torii paid us an upfront, non‑refundable payment of $11.0 million in August 2016. In addition, we were entitled to receive aggregate payments of up to $28.0 million upon the achievement of specified development of which, we earned and received $4.0 million and regulatory milestones, and $15.0 million upon the achievement of a commercial milestone, as well as tiered royalties from the mid-single digits up to the mid‑teens on sales of licensed products in Japan.

Revenue from the upfront payment was being amortized over the period of performance of the Collaboration Agreement, the period which we expect to provide research and development services to JT Torii.

On September 1, 2017, we entered into a services agreement with JT Torii to provide research and development services, including regulatory, chemistry and manufacturing support and related materials, that is distinct from the original Collaboration Agreement. We evaluated the services agreement and determined that the research and materials delivered to JT Torii represented a separate contractual arrangement that provided standalone value to JT Torii. The fees received under the services agreement were recognized as and when such services were performed by us and JT Torii consumed the benefits of those services.

In the second quarter of 2018, JT Torii informed us that they decided to halt the Japanese Phase 2 clinical trial of serlopitant, following which we and JT Torii agreed to terminate the Collaboration Agreement. As a result, we accelerated recognition of the remaining deferred revenue balance of $8.1 million. In the second quarter of 2018, we also earned and recognized a $2.0 million milestone payment related to JT Torii’s receipt of all of the IND-enabling past clinical study reports we delivered prior to the termination of the Collaboration Agreement.

 

Operating Expenses

Research and Development Expenses

Substantially all of our research and development expenses consist of expenses incurred in connection with the development of serlopitant. These expenses include certain payroll and personnel expenses including stock‑based compensation, consulting costs, contract manufacturing costs and fees paid to clinical research organizations or CROs to conduct certain research and development activities on our behalf. We do not allocate our costs by each indication for which we are developing serlopitant, as a significant amount of our development activities broadly support all indications.  In addition, several of our departments support our serlopitant drug candidate development program and we do not identify internal costs for each potential indication. We also have not historically tracked costs incurred in connection with our agreements with JT Torii separately, and such amounts have been included in research and development expenses. Nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities are deferred and capitalized and recognized as an expense as the goods are delivered or the related services are performed.

18


 

We expense both internal and external research and development expenses as they are incurred. We are focusing substantially all of our resources and development efforts on the development of serlopitant. We expect our research and development expenses to increase during the next few years as we seek to complete our clinical program, pursue regulatory approval of serlopitant in the United States and prepare for a possible commercial launch of serlopitant. Predicting the timing or the final cost to complete our clinical program or validation of our commercial manufacturing and supply processes is difficult and delays may occur because of many factors, including factors outside of our control. For example, if the U.S. Food and Drug Administration or FDA, or other regulatory authorities were to require us to conduct clinical trials beyond those that we currently anticipate, or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development. Furthermore, we are unable to predict when or if serlopitant will receive regulatory approval in the United States with any certainty.

General and Administrative Expenses

General and administrative expenses consist principally of personnel‑related costs, including stock‑based compensation, for personnel in executive, finance, business and corporate development, and other administrative functions, professional fees for legal, consulting, accounting services, rent and other general operating expenses not otherwise classified as research and development expenses.

We anticipate that our general and administrative expenses will increase as a result of increased personnel costs, including stock‑based compensation, expanded infrastructure and higher consulting, legal and accounting services associated with maintaining compliance with stock exchange listing and SEC requirements, investor relations costs and director and officer insurance premiums associated with being a public company.

Interest Income and Other Expense, Net

Interest income consists primarily of interest earned on our investments in corporate notes, commercial paper, asset backed securities, and government agency notes.

Results of Operations

Comparison of the Three and Nine Months Ended September 30, 2018 and 2017

The following table summarizes our results of operations for the periods indicated (in thousands):

 

 

 

Three Months Ended September 30,

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

2018

 

 

2017

 

 

Increase

(Decrease)

 

 

2018

 

 

2017

 

 

Increase

 

Collaboration and license revenue

 

$

 

 

$

909

 

 

$

(909

)

 

$

10,640

 

 

$

1,807

 

 

$

8,833

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

10,667

 

 

 

8,008

 

 

 

2,659

 

 

 

37,913

 

 

 

18,461

 

 

 

19,452

 

General and administrative

 

 

3,035

 

 

 

1,236

 

 

 

1,799

 

 

 

8,822

 

 

 

3,462

 

 

 

5,360

 

Loss from operations

 

 

(13,702

)

 

 

(8,335

)

 

 

(5,367

)

 

 

(36,095

)

 

 

(20,116

)

 

 

(15,979

)

Interest income and other expense, net

 

 

855

 

 

 

163

 

 

 

692

 

 

 

2,243

 

 

 

316

 

 

 

1,927

 

Net loss

 

$

(12,847

)

 

$

(8,172

)

 

$

(4,675

)

 

$

(33,852

)

 

$

(19,800

)

 

$

(14,052

)

 

Collaboration and License Revenue

Collaboration and license revenue for the three and nine months ended September 30, 2018 was zero and $10.6 million, respectively, compared to $0.9 million and $1.8 million for the corresponding periods in 2017. Collaboration and license revenue for the nine months ended September 30, 2018 primarily consisted of revenue we recognized during the period from the initial upfront payment of $11.0 million under the Collaboration Agreement with JT Torii. The increase in collaboration and license revenue was primarily due to the accelerated recognition of the initial upfront payment as a result of the termination of the Collaboration Agreement in June 2018 and a $2.0 million milestone payment related to completion of certain clinical study reports pursuant to the Collaboration Agreement prior to its termination.

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Research and Development Expenses

Research and development expenses for the three and nine months ended September 30, 2018 increased to $10.7 million and $37.9 million, respectively, from $8.0 million and $18.5 million for the same periods in 2017. The increase was primarily due to an increase in clinical trial expenses, an increase in personnel expenses as a result of an increase in our employee headcount, and an increase in manufacturing expenses. In May 2018, we made a $3.0 million milestone payment to Merck associated with the initiation of our Phase 3 clinical trials for pruritus associated with prurigo nodularis. For the periods presented, substantially all of our research and development expenses are related to our development activity for serlopitant.

General and Administrative Expenses

General and administrative expenses for the three and nine months ended September 30, 2018 increased to $3.0 million and $8.8 million, respectively from $1.2 million and $3.5 million for the same periods in 2017. The increase was primarily due to an increase in professional fees as a result of becoming a public company as well as an increase in personnel expenses as a result of an increase in our employee headcount.

Interest Income and Other Expense, Net

Interest income and other expense, net for the three and nine months ended September 30, 2018 and 2017 primarily consisted of interest income generated from our cash, cash equivalents and investments.

Liquidity and Capital Resources

Through September 30, 2018, we have financed our operations primarily through the sale of equity securities and payments under the Collaboration Agreement. As of September 30, 2018, we had cash, cash equivalents and investments of $152.7 million. Our cash, cash equivalents and investments are held in money market accounts and investments in commercial paper, corporate notes, asset backed securities, and government notes. We believe that our existing cash, cash equivalents and investments will be sufficient to fund our planned operations for at least the next 12 months from the issuance of our financial statements as of and for the nine months ended September 30, 2018. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect.

In January 2018, we completed our initial public offering. We sold 8,050,000 shares of our common stock and received cash proceeds of approximately $125.4 million, net of underwriting commissions and related expenses.

We expect to incur substantial expenditures in the foreseeable future as we advance serlopitant through clinical development, the regulatory approval process and, if approved, commercial launch activities. Specifically, in the near term, we expect to incur substantial expenses relating to our ongoing and planned clinical trials, the development and validation of our commercial manufacturing process for serlopitant, and other development activities including potentially commencing Phase 3 clinical trials for pruritus associated with psoriasis. In addition, we expect to incur additional costs associated with operating as a public company, including significant legal, accounting, investor relations and other expenses that we did not incur as a private company.

We will continue to require substantial additional capital to develop our product candidate and fund operations for the foreseeable future. We may seek to raise capital through private or public equity or debt financings, collaborative or other arrangements with corporate sources, or through other sources of financing. Adequate additional funding may not be available to us on acceptable terms or at all. Our failure to raise capital as and when needed could have a negative impact on our financial condition and our ability to pursue our business strategies. We anticipate that we will need to raise substantial additional capital, the requirements of which will depend on many factors, including:

 

the time and cost necessary to complete our ongoing and planned clinical trials of serlopitant, as well as the success of such trials;

 

the number, size, type and duration of any additional clinical trials or studies we may choose to initiate or that we may be required to complete prior to obtaining regulatory approval of serlopitant;

 

the timing of, and costs involved in, seeking and obtaining approvals from the FDA and comparable foreign regulatory authorities, including the potential by the FDA or comparable regulatory authorities to require that we perform more studies than those that we current expect, and the costs of post‑marketing studies that could be required by regulatory authorities;

 

the timing of the milestone payments we must make to Merck;

20


 

 

the costs of preparing to manufacture serlopitant on a commercial scale;

 

our ability to successfully commercialize serlopitant; 

 

the manufacturing, selling and marketing costs associated with serlopitant, including the cost and timing of forming and expanding our sales organization and marketing capabilities;

 

the amount of sales and other revenues from serlopitant, including the sales price and the availability of adequate third‑party reimbursement;

 

the degree and rate of market acceptance of any products launched by us or our partners;

 

the cash requirements of any future acquisitions or discovery of product candidates; 

 

the progress, timing, scope and costs of our non-clinical studies and clinical trials, including the ability to enroll patients in a timely manner for potential future clinical trials; 

 

the time and cost necessary to respond to technological and market developments;

 

the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;

 

our need and ability to hire additional personnel;

 

our decision to enter into additional collaboration, licensing, commercialization or other arrangements and the terms and timing of such arrangements; and

 

the emergence of competing technologies or other adverse market developments.

If we raise additional funds by issuing equity securities, our stockholders will experience dilution. Any future debt financing into which we enter may impose upon us additional covenants that restrict our operations, including limitations on our ability to incur liens or additional debt, pay dividends, repurchase our common stock, make certain investments and engage in certain merger, consolidation or asset sale transactions. Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders. If we are unable to raise additional funds when needed, we may be required to delay, reduce, or terminate some or all of our development programs and clinical trials. We may also be required to sell or license to others, rights to serlopitant in certain territories or indications that we would prefer to develop and commercialize ourselves.

See “Risk Factors” for further information regarding the risks associated with our substantial capital requirements.

Summary Statement of Cash Flows

The following table sets forth the primary sources and uses of cash for each of the periods presented below (in thousands):

 

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

Net cash (used in) provided by:

 

 

 

Operating activities

 

$

(36,116

)

 

$

(18,065

)

Investing activities

 

 

(29,805

)

 

 

(21,365

)

Financing activities

 

 

125,911

 

 

 

50,361

 

Net increase in cash

 

$

59,990

 

 

$

10,931

 

 

Cash Used in Operating Activities

Cash used in operating activities for the nine months ended September 30, 2018 was $36.1 million, primarily due to the net loss of $33.9 million, which amount was partially offset by stock-based compensation of $2.6 million and changes in operating assets and liabilities, including a decrease in deferred revenue of $8.5 million, an increase in accrued expenses and other current liabilities of $1.8 million, and a decrease in prepaid expenses and other current assets of $1.8 million. Cash used in operating activities for the nine months ended September 30, 2017 was primarily due to the net loss for the period of $19.8 million as well as non‑cash stock‑based compensation expense of $1.2 million, and was also affected by changes in operating assets and liabilities, including a decrease of $1.3 million in deferred revenue, an increase in prepaid expenses of $1.1 million and an increase in accounts receivable of $0.5 million, offset by an increase in accounts payable and accrued liabilities of $3.3 million.

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Cash Used in Investing Activities

Cash used in investing activities for the nine months ended September 30, 2018 represented purchases of investments of $110.0 million, which amount was partially offset by proceeds received from maturities and sales of investments of $80.3 million. Cash provided by investing activities for the nine months ended September 30, 2017 represented purchases of investments of $59.2 million, offset by proceeds received from maturities and sales of investments of $37.8 million.

Cash Provided by Financing Activities

Cash provided by financing activities for the nine months ended September 30, 2018 consisted of $125.4 million of net proceeds from our initial public offering and $0.5 million in proceeds from the exercise of stock options. During the nine months ended September 30, 2017 cash provided by financing activities was $50.4 million, consisting primarily of net proceeds from the sale of Series C convertible preferred stock.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations as of September 30, 2018 (in thousands):

 

 

 

Payments due by period