mnlo-10q_20190331.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 MARCH 31, 2019

OR

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

FOR THE TRANSITION PERIOD FROM ___ TO ___.

Commission file number 001-38356

 

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  ☒

           Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

 

MNLO

 

The Nasdaq Stock Market LLC

 


 

As of April 15, 2019, there were 23,928,779 shares of the registrant’s Common Stock, par value $0.0001 per share, outstanding.

 

 

 

 

 

 


TABLE OF CONTENTS

 

 

 

Page

Part I

Financial Information

4

Item 1.

Financial Statements

4

 

Condensed Balance Sheets

4

 

Condensed Statements of Operations and Comprehensive Loss

5

 

Condensed Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)

6

 

Condensed Statements of Cash Flows

7

 

Notes to Unaudited Interim Condensed Financial Statements

8

Item 2.

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

18

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

26

Item 4.

Controls and Procedures

26

 

 

 

Part II

Other Information

27

Item 1

Legal Proceedings

27

Item 1A.

Risk Factors

27

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

60

Item 3.

Defaults Upon Senior Securities

60

Item 4.

Mine Safety Disclosures

60

Item 5.

Other Information

60

Item 6.

Exhibits

61

SIGNATURES

62

 

 

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 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;

 

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

 

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

 

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 personnel;

 

the impact of laws and regulations;

 

our use of proceeds from our initial public offering and our ongoing at-the-market offering program;

 

our defense of current and any future litigation that may be initiated against us;

 

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)

 

 

 

March 31,

2019

 

 

December 31,

2018

 

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

61,958

 

 

$

49,510

 

Short-term investments

 

 

59,558

 

 

 

86,740

 

Prepaid expenses and other current assets

 

 

3,706

 

 

 

3,250

 

Total current assets

 

 

125,222

 

 

 

139,500

 

Property and equipment, net

 

 

143

 

 

 

146

 

Prepaid and other long-term assets

 

 

223

 

 

 

282

 

Right-of-use asset

 

 

670

 

 

 

 

Total assets

 

$

126,258

 

 

$

139,928

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,782

 

 

$

3,290

 

Accrued expenses and other current liabilities

 

 

6,161

 

 

 

6,254

 

Lease liability

 

 

684

 

 

 

 

Total current liabilities

 

 

10,627

 

 

 

9,544

 

Other non-current liabilities

 

 

 

 

 

7

 

Total liabilities

 

 

10,627

 

 

 

9,551

 

Commitments and contingencies (see Note 7)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock: $0.0001 par value; 20,000,000 shares authorized at

   March 31, 2019 and December 31, 2018, respectively; no shares issued and

   outstanding at March 31, 2019 and December 31, 2018

 

 

 

 

 

 

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

   at March 31, 2019 and December 31, 2018, respectively; 23,672,235 and

   22,233,184 shares issued and outstanding at March 31, 2019 and

   December 31, 2018, respectively

 

 

3

 

 

 

3

 

Additional paid-in capital

 

 

245,147

 

 

 

241,106

 

Accumulated other comprehensive loss

 

 

(10

)

 

 

(96

)

Accumulated deficit

 

 

(129,509

)

 

 

(110,636

)

Total stockholders’ equity

 

 

115,631

 

 

 

130,377

 

Total liabilities and stockholders’ equity

 

$

126,258

 

 

$

139,928

 

 

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 March 31,

 

 

 

2019

 

 

2018

 

Collaboration and license revenue

 

$

 

 

$

497

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

15,923

 

 

 

11,020

 

General and administrative

 

 

3,746

 

 

 

2,697

 

Total operating expenses

 

 

19,669

 

 

 

13,717

 

Loss from operations

 

 

(19,669

)

 

 

(13,220

)

Interest income and other expense, net

 

 

796

 

 

 

563

 

Net loss

 

$

(18,873

)

 

$

(12,657

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

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

 

 

86

 

 

 

(151

)

Comprehensive loss

 

$

(18,787

)

 

$

(12,808

)

Net loss attributable to common stockholders per share,

   basic and diluted

 

$

(0.81

)

 

$

(0.72

)

Weighted-average number of common shares used to

   compute basic and diluted net loss per share

 

 

23,286,282

 

 

 

17,583,377

 

 

See accompanying notes.

 

 

5


 

Menlo Therapeutics Inc.

Condensed Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)

(Unaudited)

(in thousands, except share data)

 

 

Series A Convertible Preferred Stock

 

 

Series B Convertible Preferred Stock

 

 

Series C Convertible Preferred Stock

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

 

 

Other

Comprehensive

 

 

Stockholders’

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Loss

 

 

(Deficit) Equity

 

Balance at December 31, 2017

 

14,300

 

 

$

14,183

 

 

 

14,106,583

 

 

$

44,820

 

 

 

11,854,463

 

 

$

50,324

 

 

 

5,298,593

 

 

$

1

 

 

$

2,207

 

 

$

(59,191

)

 

$

(51

)

 

$

(57,034

)

Conversion of preferred stock

   to common stock

 

(14,300

)

 

 

(14,183

)

 

 

(14,106,583

)

 

 

(44,820

)

 

 

(11,854,463

)

 

 

(50,324

)

 

 

9,629,405

 

 

 

1

 

 

 

109,326

 

 

 

 

 

 

 

 

 

109,327

 

Issuance of common stock

   under public offering, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,050,000

 

 

 

1

 

 

 

125,388

 

 

 

 

 

 

 

 

 

125,389

 

Vesting of early exercised stock

   options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6

 

 

 

 

 

 

 

 

 

6

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

822

 

 

 

 

 

 

 

 

 

822

 

Unrealized loss on available-

    for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(151

)

 

 

(151

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,657

)

 

 

 

 

 

(12,657

)

Balance at March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

22,977,998

 

 

$

3

 

 

$

237,749

 

 

$

(71,848

)

 

$

(202

)

 

$

165,702

 

 

 

Series A Convertible Preferred Stock

 

 

Series B Convertible Preferred Stock

 

 

Series C Convertible Preferred Stock

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

 

 

Other

Comprehensive

 

 

Stockholders’

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Gain (Loss)

 

 

Equity

 

Balance at December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

23,233,184

 

 

$

3

 

 

$

241,106

 

 

$

(110,636

)

 

$

(96

)

 

$

130,377

 

Issuance of common stock on

   exercise of stock options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

34,418

 

 

 

 

 

 

83

 

 

 

 

 

 

 

 

 

83

 

Issuance of common stock under

   Employee Stock Purchase Plan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

46,019

 

 

 

 

 

 

300

 

 

 

 

 

 

 

 

 

300

 

Issuance of common stock

   under at-the-market offering,

   net of commissions and

   offering costs of $229

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

358,614

 

 

 

 

 

 

2,632

 

 

 

 

 

 

 

 

 

2,632

 

Vesting of early exercised stock

   options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7

 

 

 

 

 

 

 

 

 

7

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,019

 

 

 

 

 

 

 

 

 

1,019

 

Unrealized gain on available-

   for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

86

 

 

 

86

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(18,873

)

 

 

 

 

 

(18,873

)

Balance at March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

23,672,235

 

 

$

3

 

 

$

245,147

 

 

$

(129,509

)

 

$

(10

)

 

$

115,631

 

 

See accompanying notes.

 

 

6


 

Menlo Therapeutics Inc.

Condensed Statements of Cash Flows

(Unaudited)

(in thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(18,873

)

 

$

(12,657

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

14

 

 

 

5

 

Amortization of right-of-use-asset

 

 

177

 

 

 

 

Amortization of premium on investment securities

 

 

(240

)

 

 

(123

)

Stock-based compensation expense

 

 

1,019

 

 

 

822

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

 

 

 

552

 

Prepaid expenses and other current assets

 

 

(456

)

 

 

75

 

Other long-term assets

 

 

59

 

 

 

(85

)

Accounts payable

 

 

493

 

 

 

1,039

 

Accrued expenses and other current liabilities

 

 

(87

)

 

 

(385

)

Lease liability

 

 

(163

)

 

 

 

Deferred revenue

 

 

 

 

 

(449

)

Other non-current liabilities

 

 

(7

)

 

 

4

 

Net cash used in operating activities

 

 

(18,064

)

 

 

(11,202

)

Investing activities

 

 

 

 

 

 

 

 

Purchase of property plant and equipment

 

 

(11

)

 

 

 

Purchase of investments

 

 

(21,399

)

 

 

(72,778

)

Proceeds from sales of investments

 

 

7,792

 

 

 

4,100

 

Proceeds from maturities of investments

 

 

41,115

 

 

 

22,812

 

Net cash provided by (used in) investing activities

 

 

27,497

 

 

 

(45,866

)

Financing activities

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock, net of issuance costs

 

 

2,632

 

 

 

125,389

 

Proceeds from purchases under the Employee Stock Purchase Plan

 

 

300

 

 

 

 

Proceeds from the exercise of stock options

 

 

83

 

 

 

 

Net cash provided by financing activities

 

 

3,015

 

 

 

125,389

 

Net increase in cash and cash equivalents

 

 

12,448

 

 

 

68,321

 

Cash and cash equivalents at beginning of period

 

 

49,510

 

 

 

10,206

 

Cash and cash equivalents at end of period

 

$

61,958

 

 

$

78,527

 

Non-cash financing activities

 

 

 

 

 

 

 

 

Addition of right-of-use-asset

 

$

847

 

 

$

 

Conversion of preferred stock to common stock

 

$

 

 

$

109,327

 

 

See accompanying notes.

7


 

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, or CPUO. The Company believes serlopitant, a highly selective small molecule inhibitor of the neurokinin 1 receptor, or NK1-R, given as a once-daily, oral tablet, 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.

Shelf Registration Statement and At-the-Market Offering

 

On February 1, 2019, the Company filed a shelf registration statement on Form S-3, which permitted: (a) the offering, issuance and sale by the Company of up to a maximum aggregate offering price of $150.0 million of its common stock, preferred stock, debt securities, warrants, purchase contracts and/or units; and (b) as part of the $150.0 million, the offering, issuance and sale by the Company of up to a maximum aggregate offering price of $50.0 million of its common stock that may be issued and sold under a sales agreement with Cantor Fitzgerald & Co in one or more at-the-market offerings. Cantor Fitzgerald is entitled to compensation for its services equal to up to 3.0% of the gross proceeds of any shares of common stock sold through Cantor Fitzgerald under the Sales Agreement.  

In March 2019, the Company issued 358,614 shares of its common stock pursuant to the Company’s at-the-market offering program at an average price of $8.08 per share for aggregate offering proceeds of $3.0 million and aggregate net proceeds of $2.9 million, after deducting sales agent fees and before offering costs. In April 2019, the Company issued 244,316 shares of its common stock pursuant to the at-the-market offering program at an average price of $7.83 per share for aggregate offering proceeds of $1.9 million and aggregate net proceeds of $1.8 million, after deducting sales agent fees and total year-to-date aggregate net proceeds under the at-the-market offering program of $4.7 million.

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 classification 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 three months ended March 31, 2019, the Company incurred a net loss of $18.9 million and used $18.1 million of cash in operations. As of March 31, 2019, the Company had cash, cash equivalents and investments of $121.5 million and an accumulated deficit of $129.5 million.

Management expects to continue to incur additional substantial losses in the foreseeable future as the Company continues its development, seeks regulatory approval of, and, if approved, begins to commercialize serlopitant. 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 March 31, 2019 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 three months ended March 31, 2019.

8


 

2.Significant Accounting Policies

Basis of Presentation

The accompanying financial information for the three months ended March 31, 2019 and 2018 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, 2018, and include all adjustments, which include only normal and recurring adjustments necessary for the fair presentation of the Company’s condensed balance sheet as of March 31, 2019, its condensed statements of operations and comprehensive loss for the three months ended March 31, 2019 and 2018, its condensed statements of convertible preferred stock and stockholders’ equity (deficit) for the three months ended March 31, 2019 and 2018, and its condensed statements of cash flows for the three months ended March 31, 2019 and 2018.  The results for the three months ended March 31, 2019 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, 2018, as filed with the SEC on February 28, 2019.

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. Generally Accepted Accounting Principles, 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 or 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.

 

Significant Accounting Policies

The Company’s significant accounting policies are described in Note 2 to our consolidated financial statements for the year ended December 31, 2018, included in our Annual Report on Form 10-K. There have been no material changes to the Company’s significant accounting policies during the three months ended March 31, 2019, except as noted below with respect to the Company’s adoption of ASC 842.

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, contract manufacturing, 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.

 

9


 

Leases

On January 1, 2019, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 842, Leases (“ASC 842), using the modified retrospective method for all lease arrangements at the beginning of the period of adoption. Results for reporting periods beginning January 1, 2019 are presented under ASC 842, while prior period amounts were not adjusted and continue to be presented in accordance with the Company’s historical accounting under ASC Topic 840, Leases. ASC 842 had an impact on the Company’s Condensed Balance Sheet but did not have a significant impact on the Company’s net loss. 

 

Under ASC 842, the Company determines if an arrangement is a lease at inception. Leases with a term greater than one year are recognized on the balance sheet as right-of-use assets, lease liabilities and, if applicable, long-term lease liabilities. The Company has elected not to recognize on the balance sheet leases with terms of one-year or less. Lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected lease term. The interest rate implicit in lease contracts is typically not readily determinable. As such, the Company estimates the incremental borrowing rate based on industry peers in determining the present value of lease payments. The Company’s facility operating lease has one single component. The lease component results in a right-of-use asset being recorded on the balance sheet and amortized as lease expense on a straight-line basis in the Company’s statements of operations.

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, directors and non-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.

Revenue Recognition

The Company records revenue based on a five-step model in accordance with 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.

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.

10


 

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 months ended March 31, 2019 and 2018, 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 March 31,

 

 

 

2019

 

 

2018

 

 

 

(unaudited)

 

Numerator:

 

 

 

 

 

 

 

 

Net loss attributable to common stockholders, basic

   and diluted

 

$

(18,873

)

 

$

(12,657

)

Denominator:

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

 

23,332,570

 

 

 

17,709,274

 

Less: weighted-average common shares subject to

   repurchase

 

 

(46,288

)

 

 

(125,897

)

Weighted-average common shares used to compute basic

   and diluted net loss per share

 

 

23,286,282

 

 

 

17,583,377

 

Net loss per share attributable to common stockholders

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.81

)

 

$

(0.72

)

 

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:

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

 

 

(unaudited)

 

Stock options available for issuance

 

 

2,275,293

 

 

 

3,731,172

 

Stock options outstanding

 

 

3,822,526

 

 

 

2,505,754

 

Outstanding common stock subject to repurchase

 

 

39,675

 

 

 

119,026

 

Shares issuable related to ESPP

 

 

43,618

 

 

 

 

Total

 

 

6,181,112

 

 

 

6,355,952

 

 

Recent Accounting Pronouncements

 

In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016‑02, Leases (ASC 842), which set 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 required 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 determined 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. 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 provided a 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 new standard has been adopted using

11


 

the modified retrospective approach in the first quarter of 2019. The adoption did not have a material impact on the Company’s statements of operations. The new standard has required the Company to establish liabilities and corresponding right-of-use assets on its condensed balance sheet for operating leases of $0.8 million that existed as of the January 1, 2019 adoption date. 

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 does not expect the adoption of this final rule to have a material impact on the financial statements.

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. The new standard has been adopted effective January 1, 2019 and did not have a material impact on the Company’s condensed statements of operations and comprehensive loss and its condensed balance sheet.

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 financial statements and disclosures.

3.Cash Equivalents and Investments

At March 31, 2019 and December 31, 2018, the balance in the Company’s accumulated other comprehensive loss was comprised solely of activity related to the Company’s available‑for‑sale securities. There were no material realized gains or losses recognized on the sale or maturity of available‑for‑sale securities during the three months ended March 31, 2019 and 2018 and as a result, the Company did not reclassify any amounts out of accumulated other comprehensive loss 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 March 31, 2019, 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.

The following table summarizes the cash and available‑for‑sale securities (in thousands):

 

 

 

Amortized

Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Fair Value

 

March 31, 2019 (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and money market funds

 

$

17,860

 

 

$

 

 

$

 

 

$

17,860

 

Corporate notes

 

 

29,757

 

 

 

10

 

 

 

(11

)

 

 

29,756

 

Commercial paper

 

 

65,193

 

 

 

3

 

 

 

(7

)

 

 

65,189

 

Asset backed securities

 

 

6,244

 

 

 

 

 

 

(6

)

 

 

6,238

 

Government notes

 

 

2,472

 

 

 

2

 

 

 

(1

)

 

 

2,473

 

Total

 

$

121,526

 

 

$

15

 

 

$

(25

)

 

$

121,516

 

Reported as:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

61,958

 

Short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

59,558

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

$

121,516

 

12


 

 

 

 

Amortized

Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Fair Value

 

December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and money market funds

 

$

7,490

 

 

$

 

 

$

 

 

$

7,490

 

Corporate notes

 

 

41,103

 

 

 

2

 

 

 

(70

)

 

 

41,035

 

Commercial paper

 

 

63,036

 

 

 

 

 

 

 

 

 

63,036

 

Asset backed securities

 

 

12,236

 

 

 

 

 

 

(23

)

 

 

12,213

 

Government notes

 

 

12,481

 

 

 

 

 

 

(5

)

 

 

12,476

 

Total

 

$

136,346

 

 

$

2

 

 

$

(98

)

 

$

136,250

 

Reported as:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

49,510

 

Short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

86,740

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

$

136,250

 

 

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.

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

 

March 31, 2019 (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

14,116

 

 

$

 

 

$

 

 

$

14,116

 

Corporate notes

 

 

 

 

 

29,756

 

 

 

 

 

 

29,756

 

Commercial paper