aimt-10q_20150930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

x

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

For the quarterly period ended September 30, 2015

OR

o

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: 001-37519

 

AIMMUNE THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

45-2748244

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

8000 Marina Blvd #300

Brisbane, California  94005

(Address of principal executive offices including zip code)

Registrant’s telephone number, including area code: (650) 614-5220

 

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  x    No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o

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

 

Large accelerated filer

o

 

Accelerated filer

o

 

 

 

 

 

Non-accelerated filer

x  (do not check if a smaller reporting company)

 

Smaller reporting company

o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x

As of October 31, 2015 the registrant had 42,249,431 shares of common stock, $0.0001 par value per share, outstanding.

 

 

 


Aimmune Therapeutics, Inc.

Quarterly Report on Form 10-Q

For the Quarter Ended September 30, 2015

INDEX

 

 

 

Page

 

 

 

PART I. – FINANCIAL INFORMATION

 

3

Item 1.

 

Condensed Consolidated Financial Statements

 

3

 

 

Condensed Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014

 

3

 

 

Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2015 and 2014

 

4

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014

 

5

 

 

Notes to Condensed Consolidated Financial Statements

 

6

Item 2.

 

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

 

17

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

23

Item 4.

 

Controls and Procedures

 

23

 

 

 

 

 

PART II. – OTHER INFORMATION

 

25

Item 1.

 

Legal Proceedings

 

25

Item 1A.

 

Risk Factors

 

25

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

57

Item 3.

 

Defaults Upon Senior Securities

 

57

Item 4.

 

Mine Safety Disclosures

 

57

Item 5.

 

Other Information

 

57

Item 6.

 

Exhibits

 

58

SIGNATURES

 

59

EXHIBIT INDEX

 

60

 

 

 

 


 

PART I. – FINANCIAL INFORMATION

Item 1. Financial Statements

AIMMUNE THERAPEUTICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

 

 

 

September 30,

 

 

December 31,

 

 

 

2015

 

 

2014

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

112,661

 

 

$

2,269

 

Short-term investments

 

 

103,946

 

 

 

 

Prepaid expenses

 

 

1,180

 

 

 

106

 

Total current assets

 

 

217,787

 

 

 

2,375

 

Long-term investments

 

 

2,784

 

 

 

 

Property and equipment, net

 

 

1,829

 

 

 

87

 

Restricted cash

 

 

100

 

 

 

40

 

Other assets

 

 

314

 

 

 

29

 

Total assets

 

$

222,814

 

 

$

2,531

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,014

 

 

$

478

 

Accrued liabilities

 

 

1,848

 

 

 

1,259

 

Other current liabilities

 

 

238

 

 

 

67

 

Total current liabilities

 

 

3,100

 

 

 

1,804

 

Other liabilities

 

 

826

 

 

 

56

 

Total liabilities

 

 

3,926

 

 

 

1,860

 

Commitments and contingencies (Note 5)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Series A convertible preferred stock, par value $0.0001 per share—0 and

   13,263,967 shares authorized as of September 30, 2015 (unaudited) and

   December 31, 2014, respectively; 0 and 13,263,967 shares issued and

   outstanding as of September 30, 2015 (unaudited) and December 31, 2014,

   respectively; aggregate liquidation preference of $0 and $16,989 as of

   September 30, 2015 (unaudited) and December 31, 2014, respectively

 

 

 

 

 

16,928

 

Series B convertible preferred stock, par value $0.0001 per share—0 shares

   authorized as of September 30, 2015 (unaudited) and December 31, 2014; 0

   shares issued and outstanding as of September 30, 2015 (unaudited) and

   December 31, 2014; aggregate liquidation preference of nil as of

   September 30, 2015 (unaudited) and December 31, 2014

 

 

 

 

 

 

Common stock, par value $0.0001 per share—50,046,000 and 32,925,000

   shares authorized as of September 30, 2015 (unaudited) and December 31, 2014,

   respectively; 42,249,431 and 4,252,248 shares issued and outstanding as of

   September 30, 2015 (unaudited) and December 31, 2014, respectively

   (including 770,786 and 788,873 shares subject to repurchase, legally issued and

   outstanding as of  September 30, 2015 (unaudited) and December 31, 2014,

   respectively)

 

 

4

 

 

 

 

Additional paid-in capital

 

 

256,211

 

 

 

1,260

 

Accumulated other comprehensive loss

 

 

(2

)

 

 

 

Accumulated deficit

 

 

(37,325

)

 

 

(17,517

)

Total stockholders’ equity

 

 

218,888

 

 

 

671

 

Total liabilities and stockholders’ equity

 

$

222,814

 

 

$

2,531

 

 

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

 

3


 

AIMMUNE THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

3,850

 

 

$

2,469

 

 

$

9,050

 

 

$

5,470

 

General and administrative

 

 

5,174

 

 

 

660

 

 

 

10,792

 

 

 

2,028

 

Total operating expenses

 

 

9,024

 

 

 

3,129

 

 

 

19,842

 

 

 

7,498

 

Loss from operations

 

 

(9,024

)

 

 

(3,129

)

 

 

(19,842

)

 

 

(7,498

)

Other income (expense), net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

33

 

 

 

 

 

 

34

 

 

 

12

 

Net loss

 

$

(8,991

)

 

$

(3,129

)

 

$

(19,808

)

 

$

(7,486

)

Other comprehensive loss, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized losses on investments

 

 

(2

)

 

 

 

 

 

(2

)

 

 

 

Comprehensive loss

 

$

(8,993

)

 

$

(3,129

)

 

$

(19,810

)

 

$

(7,486

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per common share, basic and diluted

 

$

(0.36

)

 

$

(1.07

)

 

$

(1.73

)

 

$

(2.56

)

Weighted average shares used in computing net loss per share,

   basic and diluted

 

 

25,149,428

 

 

 

2,926,665

 

 

 

11,446,922

 

 

 

2,926,665

 

 

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

 

4


 

AIMMUNE THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended

September 30,

 

 

 

2015

 

 

2014

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(19,808

)

 

$

(7,486

)

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

 

 

 

 

 

 

 

 

Depreciation

 

 

60

 

 

 

15

 

Stock-based compensation

 

 

2,751

 

 

 

48

 

Investment premium amortization, net

 

 

57

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses

 

 

(1,072

)

 

 

(121

)

Other assets

 

 

(285

)

 

 

(3

)

Accounts payable

 

 

536

 

 

 

586

 

Accrued liabilities

 

 

590

 

 

 

423

 

Other

 

 

73

 

 

 

 

Net cash used in operating activities

 

 

(17,098

)

 

 

(6,538

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(1,091

)

 

 

(51

)

Purchase of investments

 

 

(106,790

)

 

 

 

Restricted cash

 

 

(60

)

 

 

(40

)

Net cash used in investing activities

 

 

(107,941

)

 

 

(91

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock, net of issuance costs

 

 

168,117

 

 

 

 

Net proceeds from issuance of Series B convertible preferred stock, net of issuance

   costs

 

 

79,779

 

 

 

 

Repurchase of Series A convertible preferred stock

 

 

(12,874

)

 

 

 

Net cash proceeds from exercise of stock options, including early exercise

 

 

440

 

 

 

 

Repurchases of common stock subject to early exercise

 

 

(31

)

 

 

 

Net cash provided by financing activities

 

 

235,431

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

110,392

 

 

 

(6,629

)

Cash and cash equivalents at the beginning of the period

 

 

2,269

 

 

 

11,951

 

Cash and cash equivalents at the end of the period

 

$

112,661

 

 

$

5,322

 

Supplemental schedule of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Conversion of convertible preferred stock to common stock at closing of initial

   public offering

 

$

83,833

 

 

$

 

Capital expenditures and interest funded through long term lease obligation

 

$

711

 

 

$

 

 

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

 

 

 

5


 

AIMMUNE THERAPEUTICS, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2015

 

1. Formation and Business of the Company

Aimmune Therapeutics, Inc. (“Aimmune Therapeutics” or the “Company”), formerly known as Allergen Research Corporation, is a clinical-stage biopharmaceutical company advancing a new therapeutic approach, including the development of proprietary candidates, for the treatment of peanut and other food allergies. The Company is headquartered in Brisbane, California and was incorporated in the state of Delaware on June 24, 2011.

Since inception, the Company has incurred net losses and negative cash flows from operations. During the nine months ended September 30, 2015, the Company incurred a net loss of $19.8 million and used $17.1 million of cash in operations. As of September 30, 2015, the Company had an accumulated deficit of $37.3 million and the Company does not expect to experience positive cash flows in the near future. The Company has financed operations to date primarily through private placements of equity securities and its initial public offering (“IPO”) of common stock in August 2015. The Company’s ability to continue to meet its obligations and to achieve its business objectives is dependent upon a number of factors, which include raising additional capital, obtaining U.S. Food and Drug Administration (“FDA”) and European Medicines Agency (“EMA”) approval and commercializing in the United States and Europe, generating sufficient revenue and its ability to continue to control expenses, if necessary, to meet its obligations as they become due for the foreseeable future. Failure to obtain FDA and EMA approval, commercialize its lead product candidate, manage discretionary expenditures or raise additional financing, as required, may adversely impact the Company’s ability to achieve its intended business objectives.

Initial Public Offering

On August 5, 2015, the Company’s registration statement on Form S-1 (File No. 333-205501) relating to its IPO of common stock became effective. The IPO closed on August 11, 2015 at which time the Company issued 11,499,999 shares of its common stock at a price of $16.00 per share, which included 1,499,999 shares sold pursuant to the exercise of the underwriters’ option to purchase additional shares. The Company received proceeds of approximately $168 million, net of underwriting discounts and commissions, and offering expenses. In addition, upon the Company’s IPO, all outstanding shares of convertible preferred stock converted by their terms into approximately 25.1 million shares of common stock. As of September 30, 2015, the Company had 42,249,431 shares of common stock outstanding. See Note 6, “Stockholders’ Equity.”

Stock Split

On July 30, 2015, the Company effected a 1-for-1.317 stock split of the Company’s common stock and convertible preferred stock. The par value of the authorized stock was not adjusted as a result of the stock split. In addition, the Company increased the number of authorized shares of common stock to 55,051,264 and the number of authorized shares of preferred stock to 25,051,264. All issued and outstanding common stock, convertible preferred stock, stock options and per share amounts contained in the accompanying condensed consolidated financial statements and notes to the condensed consolidated financial statements have been retroactively adjusted to give effect to the stock split for all periods presented. In conjunction with the Company’s IPO, the Company filed its amended and restated certificate of incorporation that authorized 290,000,000 shares of common stock, $0.0001 par value per share, and 10,000,000 shares of preferred stock, $0.0001 par value per share.

2. Summary of Significant Accounting Policies

Basis of Preparation

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP have been condensed or omitted, and accordingly the balance sheet as of December 31, 2014 has been derived from audited consolidated financial statements at that date but does not include all of the information required by U.S. GAAP for complete financial statements. These condensed consolidated financial statements have been prepared on the same basis as our annual financial statements and, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair presentation of our financial information. The results of operations for the three and nine months ended September 30, 2015 are not necessarily indicative of the results to be expected for the year ending December 31, 2015 or for any other interim period or for any other future year. The company operates in one reportable segment.

 

6


 

The accompanying condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto for the year ended December 31, 2014 included in our Registration Statement on Form S-1 filed with the SEC.

Basis of Consolidation

The accompanying condensed consolidated financial statements of the Company include the accounts of its wholly-owned subsidiary. All significant intercompany transactions have been eliminated.

Use of Estimates

The preparation of the accompanying condensed consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of costs and expenses during the reporting period. The Company bases its estimates and assumptions on historical experience when available and on various factors that it believes to be reasonable under the circumstances. The Company evaluates its estimates and assumptions on an ongoing basis. The Company’s actual results could differ from these estimates under different assumptions or conditions.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less from the date of purchase to be cash equivalents. Cash equivalents consist primarily of money market funds and certain available-for-sale investments with maturities of three months or less.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents and certain investments in money market funds, agency securities, corporate securities, and commercial paper. Bank deposits are primarily held by a single financial institution and these deposits may exceed insured limits. The Company is exposed to credit risk in the event of default by the financial institution holding its cash and cash equivalents and issuers of investments that are recorded on the condensed consolidated balance sheets. The Company mitigates its risk by investing in high-grade instruments and limiting the concentration in any one issuer, which limits the Company’s exposure.

Investments

The Company’s available-for-sale investments consist primarily of money market funds, agency securities, corporate securities, and commercial paper. Investments with original maturities of greater than 90 days but less than one (1) year are classified as short-term available-for-sale securities on the condensed consolidated balance sheets.  Investments with original maturities greater than one (1) year are classified as long-term available-for-sale securities on the condensed consolidated balance sheets.

The Company’s investments in available-for-sale securities are reported at fair value. Unrealized gains and losses related to changes in the fair value of securities are recognized in accumulated other comprehensive loss, net of tax, on our condensed consolidated balance sheets. Changes in the fair value of available-for-sale securities impact the statements of operations only when such securities are sold or an other-than-temporary impairment is recognized. Realized gains and losses on the sale of securities are determined by specific identification of each security’s cost basis. The Company regularly reviews its investment portfolio to determine if any security is other-than-temporarily impaired, which would require us to record an impairment charge in the period any such determination is made. In making this judgment, the Company evaluates, among other things, the duration and extent to which the fair value of a security is less than its cost, the financial condition of the issuer and any changes thereto, and its intent to sell, or whether it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. The Company’s assessment on whether a security is other-than-temporarily impaired could change in the future due to new developments or changes in assumptions related to any particular security.

 

Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets. Maintenance and repairs are charged to operations as incurred. Upon sale or retirement of assets, the cost and related accumulated depreciation are removed from the balance sheet and the resulting gain or loss, if any, is reflected in operations.

 

7


 

The useful lives of property and equipment are as follows:

 

Furniture and office equipment

 

4 years

Computer equipment

 

3 years

Buildings

 

25 years

Fixtures

 

10 years

 

 

Impairment of Long-Lived Assets

The Company evaluates its long-lived assets, including property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. Recoverability of these assets is measured by comparison of the carrying amount of each asset to the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired assets. The Company has not recorded impairment of any long-lived assets in the periods presented.

Leases

The Company entered into lease agreements for its previous corporate headquarters in San Mateo, California through July 2017. In March 2015, the Company entered into a lease for its current corporate headquarters in Brisbane, California. In May 2015, the Company ceased use of its San Mateo facility and moved into its current facility. In August 2015, the Company entered into an amendment to the Brisbane, California facility lease. Pursuant to the amendment, the Company will lease an additional 11,655 square feet of office space, and the term of the existing office space has been extended so that it is coterminous with the new space.

These leases are classified as operating leases. Rent expense is recognized on a straight-line basis over the terms of the leases and, accordingly, the Company records the difference between cash rent payments and the recognition of rent expense as a deferred rent liability. Incentives granted under the Company’s facilities leases are deferred and recognized as adjustments to rental expense on a straight-line basis over the term of the lease.

In June 2015, the Company signed a lease for a manufacturing facility in Clearwater, Florida. The Company was considered the deemed owner for accounting purposes. See Note 5, “Commitments and Contingencies.”

Research and Development

The Company expenses research and development costs as incurred. The Company records accrued liabilities for estimated costs of research and development activities conducted by third-party service providers, which include the conduct of pre-clinical studies and clinical trials and contract manufacturing activities. These costs are a significant component of the Company’s research and development expenses. The Company accrues for these costs based on factors such as estimates of the work completed and in accordance with agreements established with its third-party service providers under the service agreements. The Company makes significant judgments and estimates in determining the accrued liabilities balance in each reporting period. As actual costs become known, the Company adjusts its accrued liabilities. The Company has not experienced any material differences between accrued costs and actual costs incurred. However, the status and timing of actual services performed, number of patients enrolled and the rate of patient enrollments may vary from the Company’s estimates, resulting in adjustments to expense in future periods. Changes in these estimates that result in material changes to the Company’s accruals could materially affect the Company’s results of operations.

Stock-based Compensation

Stock-based awards issued to employees, including stock options, are measured at fair value on the grant date using the Black-Scholes option-pricing model and recognized as expense on a straight-line basis over the employee’s requisite service period (generally the vesting period). Because noncash stock compensation expense is based on awards ultimately expected to vest, it is reduced by an estimate for future forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from estimates. There were 3,980,328 and 1,635,679 stock options granted during the nine months ended September 30, 2015 and 2014, respectively.

 

8


 

Income Taxes

The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and the tax bases of reported assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company must then assess the likelihood that the resulting deferred tax assets will be realized. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. Due to the Company’s lack of earnings history, the net deferred tax assets have been fully offset by a valuation allowance.

The Company has adopted Financial Accounted Standards Board Accounting Standards Codification 740, Income Taxes, regarding how uncertain tax positions should be recognized, measured, presented, and disclosed in the financial statements. As of September 30, 2015 and December 31, 2014, the Company does not have any unrecognized tax benefits.

 

Comprehensive Income or Loss

Comprehensive income or loss is defined as the change in equity during a period from transactions and other events, excluding changes resulting from investments from owners and distributions to owners. Other comprehensive loss includes net loss and unrealized losses on available-for-sale investments.

Offering Costs

Offering costs represent underwriting, legal, accounting and other direct costs related to the Company’s IPO.  These costs were deferred until completion of the IPO, at which time they were reclassified to additional paid-in capital as a reduction of the proceeds.

 

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board, or FASB, issued Auditing Standards Update, or ASU, No. 2014-09, Revenue from Contracts with Customers  (Topic 606), which provides a framework for addressing revenue recognition issues and, upon its effective date, replaces almost all existing revenue recognition guidance, including industry-specific guidance, in current U.S. generally accepted accounting principles (“U.S. GAAP”). The ASU provides a five-step analysis of transactions to determine when and how revenue is recognized. The ASU will require many companies to use more judgment than under current U.S. GAAP. For public business entities, ASU 2014-09 is effective for annual periods beginning after December 15, 2017, however early adoption is permitted for annual periods beginning after December 15, 2016. Public business entities will be required to apply the new revenue standard to interim reporting periods beginning in the first interim period within the year of adoption.

In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU 2014-15 requires management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. In doing so, companies will have reduced diversity in the timing and content of footnote disclosures than under today’s guidance. ASU 2014-15 is effective for the Company in the first quarter of 2016 with early adoption permitted. We do not believe the impact of adopting ASU 2014-15 on our consolidated financial statements will be material.

3. Fair Value Measurements

The carrying amounts of certain of the Company’s financial instruments, including cash equivalents and accounts payable approximated their fair values due to their short maturities. Assets and liabilities recorded at fair value on a recurring basis in the balance sheets, as well as assets and liabilities measured at fair value on a non-recurring basis or disclosed at fair value, are categorized based upon the level of judgment associated with inputs used to measure their fair values. The accounting guidance for fair value provide a framework for measuring fair value, and requires certain disclosures about how fair value is determined. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance also establishes a three-level valuation hierarchy that prioritizes the inputs to valuation techniques used to measure fair value based upon whether such inputs are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions made by the reporting entity. The three-level hierarchy for the inputs to valuation techniques is briefly summarized as follows:

Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

 

9


 

Level 2—Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and

Level 3—Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.

 

The Company’s valuation techniques used to measure the fair value of money market funds and certain marketable equity securities were derived from quoted prices in active markets for identical assets or liabilities. The valuation techniques used to measure the fair value of the Company’s debt instruments and all other financial instruments, all of which have counterparties with high credit ratings, were valued based on quoted market prices or model driven valuations using significant inputs derived from or corroborated by observable market data.

In accordance with fair value accounting requirements, companies may choose to measure eligible financial instruments and certain other items at fair value. The Company has not elected the fair value option for any eligible financial instruments.

The following table sets forth the Company’s financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands):

 

 

 

September 30, 2015

 

 

 

(unaudited)

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and money market funds

 

$

61,417

 

 

$

 

 

$

 

 

$

61,417

 

Agency securities

 

 

 

 

 

12,999

 

 

 

 

 

 

12,999

 

Corporate securities

 

 

 

 

 

8,250

 

 

 

 

 

 

8,250

 

Commercial paper

 

 

 

 

 

29,995

 

 

 

 

 

 

29,995

 

Total cash and cash equivalents

 

$

61,417

 

 

$

51,244

 

 

$

 

 

$

112,661

 

Available-for-sale investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency securities

 

$

 

 

$

37,905

 

 

$

 

 

$

37,905

 

Corporate securities

 

 

 

 

 

41,851

 

 

 

 

 

 

41,851

 

Commercial paper

 

 

 

 

 

26,974

 

 

 

 

 

 

26,974

 

Total available-for-sale investments

 

$

 

 

$

106,730

 

 

$

 

 

$

106,730

 

 

 

 

December 31, 2014

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and money market funds

 

$

2,269

 

 

$

 

 

$

 

 

$

2,269

 

Agency securities

 

 

 

 

 

 

 

 

 

 

 

 

Corporate securities

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

 

 

 

 

 

 

 

 

 

 

 

Total cash and cash equivalents

 

$

2,269

 

 

$

 

 

$

 

 

$

2,269

 

Available-for-sale investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency securities

 

$

 

 

$

 

 

$

 

 

$

 

Corporate securities

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

 

 

 

 

 

 

 

 

 

 

 

Total available-for-sale investments

 

$

 

 

$

 

 

$

 

 

$

 

 

 

 

10


 

Available-for-sale investments are carried at fair value and are included in the tables above. The aggregate market value, cost basis, and gross unrealized gains and losses of available-for-sale investments by security type, classified in cash equivalents, short-term investments, and long-term investments, as of September 30, 2015 are as follows (in thousands):

 

 

 

Amortized

Cost

 

 

Gross

unrealized gains

 

 

Gross

unrealized losses

 

 

Total

fair value

 

Agency securities

 

$

50,889

 

 

$

15

 

 

$

 

 

$

50,904

 

Corporate securities

 

 

50,118

 

 

 

9

 

 

 

(26

)

 

 

50,101

 

Commercial paper

 

 

56,969

 

 

 

 

 

 

 

 

 

56,969

 

Total available-for-sale investments

 

$

157,976

 

 

$

24

 

 

$

(26

)

 

$

157,974

 

 

 

There were no available-for-sale investments as of December 31, 2014. There were no gross realized gains or losses on sales of available-for-sale securities for the nine months ended September 30, 2015. The net adjustment to unrealized holding gains (losses) on available-for-sale securities included in other comprehensive loss totaled approximately $2,000 for the nine months ended September 30, 2015.

 

Contractual maturities of debt investment securities as of September 30, 2015 are as follows (in thousands):

 

 

 

 

 

 

 

 

Total Fair Value

 

Maturing within one year

 

$

103,946

 

Maturing in one to five years

 

 

2,784

 

Total available-for-sale investments

 

$

106,730

 

 

 

There were no investment securities as of December 31, 2014. Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.

 

At each reporting date, the Company performs separate evaluations of impaired debt securities to determine if the unrealized losses are other-than-temporary.

 

For debt securities, management determines whether it intends to sell or if it is more likely than not that it will be required to sell impaired securities. This determination considers current and forecasted liquidity requirements, regulatory and capital requirements and securities portfolio management. For all impaired debt securities for which there was no intent or expected requirement to sell, the evaluation considers all available evidence to assess whether it is likely the amortized cost value will be recovered. The Company conducts a regular assessment of its debt securities with unrealized losses to determine whether securities have other-than-temporary impairment considering, among other factors, the nature of the securities, credit rating or financial condition of the issuer, the extent and duration of the unrealized loss, expected cash flows of underlying collateral, market conditions and whether the Company intends to sell or it is more likely than not the Company will be required to sell the debt securities.

 

Based on the Company’s analysis, the Company did not identify any other-than-temporary losses for the nine months ended September 30, 2015. The Company does not consider unrealized losses on its other debt securities to be credit-related. These unrealized losses relate to changes in interest rates and market spreads subsequent to purchase. A substantial portion of securities that have unrealized losses are US corporate securities that are highly-rated. The Company has not made a decision to sell securities with unrealized losses and believes it is more likely than not it would not be required to sell such securities before recovery of its amortized cost.

 

 

 

11


 

4. Balance Sheet Components

Property and Equipment, Net

Property and equipment, net consists of the following (in thousands):

 

 

 

September 30, 2015

 

 

December 31, 2014

 

 

 

(unaudited)

 

 

 

 

 

Furniture and equipment

 

$

219

 

 

$

58

 

Computer equipment

 

 

254

 

 

 

67

 

Construction in progress

 

 

1,454

 

 

 

 

Property and equipment, gross

 

 

1,927

 

 

 

125

 

Less: accumulated depreciation

 

 

(98

)

 

 

(38

)

Property and equipment, net

 

$

1,829

 

 

$

87

 

 

Depreciation expense for the three months ended September 30, 2015 and 2014 was $30,000 and $9,000, respectively, and for the nine months ended September 30, 2015 and 2014, was $60,000 and $15,000, respectively.

Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

 

 

 

September 30, 2015

 

 

December 31, 2014

 

 

 

(unaudited)

 

 

 

 

 

Compensation and benefits

 

$

896

 

 

$

645

 

Research and development

 

 

281

 

 

 

542

 

Professional and consulting

 

 

657

 

 

 

71

 

Other

 

 

14

 

 

 

1

 

Total

 

$

1,848

 

 

$

1,259

 

5. Commitments and Contingencies

Facility Leases

In May 2015, the Company ceased use of its previous corporate headquarters and accrued a liability for approximately $121,000 as of June 30, 2015, net of estimated sublease payments. In September 2015, the Company revised its estimate for actual sublease payments which resulted in a complete reduction of the liability previously accrued. The reduction of the liability is reflected within rent expense for the period ended September 30, 2015.

In March 2015, the Company signed a new facility lease for its corporate headquarters in Brisbane, California. The new lease, which has been classified as an operating lease, commenced on May 1, 2015 with an initial term of 51 months. In August 2015, the Company entered into an amendment to the lease. Pursuant to the amendment, the Company will lease an additional 11,655 square feet of office space. The term for the new space is 72 months from the delivery of the premises to the Company, which is expected to occur near the end of 2015. In addition, the term of the existing office space has been extended so that it is coterminous with the new space. The amendment required a total security deposit of approximately $304,000. As of the commencement of the amendment, future aggregate minimum lease payments for the combined space are as follows (in thousands):

  

 

Year Ended December 31,

 

 

 

 

2015

 

$

190

 

2016

 

 

1,010

 

2017

 

 

1,602

 

2018

 

 

1,650

 

and after

 

 

5,265

 

Total

 

$

9,717

 

 

The Company is responsible for operating expenses over base operating expenses as defined in the headquarters lease agreement.

 

12


 

In June 2015, the Company signed a facility lease for a manufacturing facility in Clearwater, Florida. The initial term of the lease is for 120 months. For accounting purposes, due to the nature and extent of the Company’s involvement with the construction of this manufacturing facility, it was considered to be the owner of the assets during the construction period through the lease commencement date, even though the lessor is responsible for funding and repairing components of the building shell and constructing a portion of the related building infrastructure. Construction to this building commenced in July 2015 and as of September 30, 2015, the Company has incurred approximately $188,000 of construction and equipment costs related to the building which is recorded in Construction in progress. The Company also recorded $687,500 to Construction in progress for costs incurred by the lessor and recognized a corresponding amount included within other liabilities within the accompanying condensed consolidated balance sheet. The agreement calls for a security deposit of $35,000. The new lease calls for future aggregate minimum lease payments as of the commencement of the lease as follows (in thousands):

 

Year Ended December 31,

 

 

 

 

2015

 

$

38

 

2016

 

 

151

 

2017

 

 

156

 

2018

 

 

160

 

and after

 

 

1,198

 

Total

 

$

1,703

 

 

The Company is responsible for operating expenses including real estate taxes as defined in the manufacturing facility lease agreement.

 

Rent expense under operating leases for the three months ended September 30, 2015 and 2014 was $87,000 and $41,000, respectively, and for the nine months ended September 30, 2015 and 2014 was $342,000 and $90,000, respectively.

Purchase Commitments

The Company purchases peanut flour, the source material for AR101, from the Golden Peanut Company pursuant to a long term exclusive commercial supply agreement. Pursuant to the agreement, the Company’s purchase obligation commences with the first delivery of peanut flour for commercial use, which it currently anticipates will not occur prior to 2018. Assuming the Company starts its purchase obligation of peanut flour for commercial use in 2018, which is not assured, the aggregate purchase commitment under this agreement is $1.2 million over a term of five years.

Indemnifications

The Company indemnifies each of its officers and directors for certain events or occurrences, subject to certain limits, while the officer or director is or was serving at the Company’s request in such capacity, as permitted under Delaware law and in accordance with its certificate of incorporation and bylaws. The term of the indemnification period lasts as long as an officer or a director may be subject to any proceeding arising out of acts or omissions of such officer or director in such capacity. The maximum amount of potential future indemnification is unlimited; however, the Company currently holds director and officer liability insurance. This insurance allows the transfer of risk associated with the Company’s exposure and may enable it to recover a portion of any future amounts paid. The Company believes that the fair value of these indemnification obligations is minimal. Accordingly, it has not recognized any liabilities relating to these obligations for any period.

Legal

During the normal course of business, the Company may be a party to legal claims that may not be covered by insurance. Management does not believe that any such claims would have a material impact on the Company’s consolidated financial statements.

 

 

 

13


 

6. Stock-based Awards

In January 2013, the Company adopted its Stock Plan (the “2013 Plan”) and in July 2015, the Company adopted a new Stock Plan (the “2015 Plan”). 4,681,544 shares of the Company’s common stock are initially reserved under the 2015 Plan for the issuance of stock options and restricted stock to employees, directors, and consultants under terms and provisions established by the Board of Directors and approved by the Company’s stockholders. Upon consummation of the Company’s IPO, the 2013 Plan was terminated and no further shares are reserved for issuance under the 2013 Plan. As of September 30, 2015 and December 31, 2014 there were 4,548,306  and 639,625 and shares available for future grant, respectively. Under the terms of the 2015 Plan, options may be granted at an exercise price not less than fair market value. For employees holding more than 10% of the voting rights of all classes of stock, the exercise prices for incentive stock options may not be less than 110% of fair market value, as determined by the Board of Directors. The terms of options granted under the Plan may not exceed ten years. All options issued to date have had a ten-year life. To date, options granted generally vest in three ways: 1) over four years at a rate of 25% upon the first anniversary of the issuance date and 1/48th per month thereafter, 2) over two years at a rate of 1/24th per month, and 3) over four years at a rate of 1/48th per month. The 2015 Plan contains certain change of control provisions and the employment offer letters of certain employees provide for varied acceleration of vesting in the event of a change of control and/or termination without cause. It also contains a net exercise provision and allows for cashless exercise upon the class of shares subject to the option becoming publicly traded in an established securities market.

The 2013 Plan allowed employees to exercise a stock option in exchange for cash before the requisite service is provided (e.g., before the award is vested under its original terms); however, such arrangements permit the Company to subsequently repurchase such shares at the exercise price if the vesting conditions are not satisfied. Such an exercise is not substantive for accounting purposes. Therefore, the payment received by the Company for the exercise price is recognized as an early exercise liability on the balance sheets and will be transferred to common stock and additional paid-in capital as such shares vest. As of September 30, 2015 and December 31, 2014, 770,786  and 788,873 unvested shares were legally issued and outstanding, respectively. In connection with these unvested shares, the Company has recorded an early exercise liability as of September 30, 2015 of $271,000, of which $156,000 is included in other current liabilities and $115,000 is included in other non-current liabilities in the Company’s Balance Sheet. These shares are excluded from basic net loss per share until the Company’s repurchase right lapses and the shares are no longer subject to the repurchase feature.

Activity under the Plan is set forth below:

 

 

 

 

 

 

 

 

 

 

 

Options Outstanding

 

 

 

Shares

Available

for Grant

 

 

Number of

Options

and Unvested

Shares

 

 

Weighted-

Average

Exercise

Price

 

 

Weighted

Average

Remaining

Contractual Life

(in years)

 

 

Aggregate

Intrinsic

Value

(in

thousands)

 

Balance, December 31, 2014

 

 

639,625

 

 

 

2,566,559

 

 

$

0.14

 

 

 

9.19

 

 

 

 

 

Additional shares authorized

 

 

7,908,194

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares retired upon adoption of 2015 Plan

 

 

(230,978

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options granted

 

 

(3,980,328

)

 

 

3,980,328

 

 

$

5.47

 

 

 

 

 

 

 

 

 

Options exercised and shares vested

 

 

 

 

 

 

(1,464,016

)

 

$

0.16

 

 

 

 

 

 

 

 

 

Options repurchased

 

 

211,793

 

 

 

(211,793

)

 

$

0.14

 

 

 

 

 

 

 

 

 

Options cancelled

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances – September 30, 2015

 

 

4,548,306

 

 

 

4,871,078

 

 

$

4.49

 

 

 

9.59

 

 

$

101,441

 

Options vested and expected to vest as of September 30, 2015

   (unaudited)

 

 

 

 

 

 

4,489,667

 

 

$

4.73

 

 

 

9.17

 

 

$

92,439

 

Options exercisable as of September 30, 2015 (unaudited)

 

 

 

 

 

 

3,967,049

 

 

$

4.82

 

 

 

9.59

 

 

$

81,316

 

 

The aggregate intrinsic values of options outstanding, exercisable, and vested and expected to vest were calculated as the difference between the exercise price of the options and the market price for shares of the Company’s common stock as of September 30, 2015. The 2013 Plan provided for early exercise, therefore, all the Company’s outstanding stock options issued under that plan are exercisable.

 

Stock Options Granted

Stock options granted during the three months ended September 30, 2015 and 2014  had a weighted-average grant-date fair value of $11.05and $0.09, respectively. Stock options granted during the nine months ended September 30, 2015 and 2014 had a weighted-average grant-date fair value of $5.77 and $0.09, respectively. The fair value is being expensed over the vesting period of the options, which is either four years or two years on a straight-line basis as the services are being provided. No tax benefits were

 

14


 

realized from options during the periods. The Company issued one grant totaling 213,354 options to a non-employee during the three and nine-months ended September 30, 2015. The fair value of the non-employee options was measured using the Black-Scholes option-pricing model reflecting the same assumptions as applied to employee options, other than the expected life, which is assumed to be the remaining contractual life of the option.

As of September 30, 2015 and December 31, 2014 total unrecognized stock-based compensation expense was $17,503,000 and $120,000, which is expected to be recognized over the weighted-average remaining vesting period of 3.47  years and 2.43 years respectively.

The fair value of employee stock options was estimated using the Black-Scholes pricing model, with the following weighted-average assumptions (unaudited):

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Expected volatility

 

 

71.22

%

 

 

79.62

%

 

 

74.47

%

 

 

79.62

%

Risk free interest rate

 

 

1.79

%

 

 

1.51

%

 

 

1.72

%

 

 

1.51

%

Dividend yield

 

 

 

 

 

 

 

 

 

 

 

 

Expected term (in years)

 

 

5.95

 

 

 

4.65

 

 

 

5.98

 

 

 

4.65

 

 

Determining Fair Value of Stock Options

The fair value of each grant of stock options was determined by the Company using the methods and assumptions discussed below. The determination of each of these inputs is subjective and generally requires significant judgment.

Expected volatility—The expected stock price volatility assumption was determined by examining the historical volatilities of a group of industry peers, as the Company did not have any trading history for the Company’s common stock. The Company will continue to analyze the historical stock price volatility and expected term assumptions as more historical data for the Company’s common stock becomes available.

Expected term—The expected term of stock options represents the weighted average period the stock options are expected to be outstanding. The Company’s option grants are considered “plain vanilla.” Therefore, the Company has opted to use the simplified method for estimating the expected term as provided by the Securities and Exchange Commission. The simplified method calculates the expected term as the average time- to-vesting and the contractual life of the options.

Expected dividend—The expected dividend assumption was based on the Company’s history and expectation that it will not declare dividend payout for the near future.

Risk-free interest rate—The risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected terms.

Fair value of common stock—Prior to the Company’s IPO, the fair value of the shares of common stock underlying the stock options was the responsibility of and determined by the Company’s board of directors. Because there was no public market for the Company’s common stock, the board of directors determined fair value of common stock at the time of grant of the option by considering a number of objective and subjective factors including independent third-party valuations of the Company’s common stock, sales of convertible preferred stock to unrelated third parties, operating and financial performance, the lack of liquidity of capital stock and general and industry specific economic outlook, amongst other factors. Following the IPO, the market traded price of the shares of common stock underlying the stock options is the fair value of the Company’s stock as reported on the NASDAQ Global Select Market on the grant date.

 

Stock-based compensation expense, net of estimated forfeitures, is reflected in the statements of operations (in thousands, unaudited):

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Research and development

 

$

300

 

 

$

5

 

 

$

396

 

 

$

14

 

General and administrative

 

 

1,462

 

 

 

12

 

 

 

2,355

 

 

 

34

 

Total stock-based compensation expense

 

$

1,762

 

 

$

17

 

 

$

2,751

 

 

$

48

 

 

15


 

 

During the three and nine months ended September 30, 2015, the Company recorded $0 and approximately $562,000 of stock compensation expense related to the acceleration of certain former executives’ stock options.

7. Net Loss per Share

The following table sets forth the computation of the Company’s basic and diluted net loss per share during the three and nine months ended September 30, 2015 and 2014(in thousands, except share and per share data, unaudited):

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(8,991

)

 

$

(3,129

)

 

$

(19,808

)

 

$

(7,486

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used in computing net loss per share, basic and

   diluted

 

 

25,149,428

 

 

 

2,926,665

 

 

 

11,446,922

 

 

 

2,926,665

 

Net loss per share basic and diluted

 

$

(0.36

)

 

$

(1.07

)

 

$

(1.73

)

 

$

(2.56

)

 

The following common stock equivalents were excluded from the computation of diluted net loss per share for the periods presented because their inclusion would have been antidilutive (unaudited):

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Convertible preferred stock

 

 

11,436,443

 

 

 

13,263,967

 

 

 

22,289,679

 

 

 

13,263,967

 

Stock options

 

 

1,198,209

 

 

 

3,501,939

 

 

 

4,871,078

 

 

 

3,501,939

 

 

8. Subsequent Events

Executive Retirement

On October 6, 2015, the Company’s Chief Operating Officer informed the Company of his decision to retire from his position effective October 31, 2015. In connection with his separation from the Company, the Company entered into a transition and separation agreement whereby he has agreed to provide transition consulting services to the Company through October 31, 2016, on an as needed basis. In addition, he will receive nine months of his base salary, company subsidized COBRA coverage until the earlier of the end of July 31, 2016 or the date on which he becomes eligible for coverage by another employer, and accelerated vesting of his outstanding equity awards that would have vested had he continued to provide service to the Company for the six (6)-month period following his termination date. His outstanding equity awards will continue to vest in accordance to their terms after giving effect to the accelerated vesting while he provides consulting services to the Company. The Company did not record any termination charges during the nine months ended September 30, 2015 related to the retirement.

 

 

 

 

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 our unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our audited financial statements and related notes thereto for the year ended December 31, 2014, included in our prospectus dated August 5, 2015, filed with the Securities and Exchange Commission pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended, or the Prospectus. This discussion and other parts of this report contain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section of this report titled “Risk Factors.” Except as may be required by law, we assume no obligation to update these forward-looking statements or the reasons that results could differ from these forward-looking statements.

Overview

We are a clinical-stage biopharmaceutical company advancing a new therapeutic approach, including the development of proprietary product candidates, for the treatment of peanut and other food allergies. This approach, which we refer to as Characterized Oral Desensitization Immunotherapy, or CODITTM, is a system designed to desensitize patients to food allergens using rigorously characterized biologic products, defined treatment protocols and tailored support services. In January 2015, we successfully completed ARC001, a Phase 2 study of our lead CODIT product candidate, AR101, for the treatment of peanut allergy. The ARC002 study, an open label, follow-on study to the initial ARC001 trial is ongoing, and we plan to report data from this trial in the first quarter of 2016.

We are planning to initiate enrollment in a Phase 3 registration trial of AR101 at the beginning of 2016. In addition, we intend to initiate two Phase 2 studies of CODIT product candidates in 2016.

AR101 has been granted Breakthrough Therapy and Fast-Track designations by the U.S. Food and Drug Administration, or FDA. In Europe, we received approval from the European Medicines Agency, or EMA, for our pediatric investigation plan (PIP), a required component of the EMA regulatory approval process, for AR101 for the treatment of peanut allergy. If our planned Phase 3 trial is successful, we intend to file a Biologics License Application, or BLA, with the FDA and a Marketing Authorization Application, or MAA, with the EMA. We have worldwide commercial rights to all of our product candidates and, if approved, we intend to commercialize in the United States and Europe with our own specialty sales force.

Since commencing our operations in 2011, substantially all of our efforts have been focused on research, development and the advancement of our lead CODIT product candidate, AR101. We have not generated any revenue from product sales and, as a result, we have incurred significant losses. We incurred a net loss of $9.0 million and $3.1 million for the three months ended September 30, 2015 and 2014, respectively, and $19.8 million and $7.5 million for the nine months ended September 30, 2015 and 2014, respectively. As of September 30, 2015 our accumulated deficit was $37.3 million. We expect to continue to incur losses for the foreseeable future, and we anticipate these losses will increase as we continue our development of, seek regulatory approval for, and begin to commercialize, AR101 and as we develop other product candidates.

We do not expect to generate revenue from product sales unless and until we successfully complete development of, obtain regulatory approval for, and begin to commercialize one or more of our product candidates, which we expect will take a number of years and is subject to significant uncertainty. Accordingly, we anticipate that we will need to raise additional capital to fund our future operations. Until such time that we can generate substantial revenue from product sales, if ever, we expect to finance our operating activities through a combination of equity offerings and debt financings and we may seek to raise additional capital through strategic collaborations. However, we may be unable to raise additional funds or enter into such arrangements when needed on favorable terms, or at all, which would have a negative impact on our financial condition and could force us to delay, limit, reduce or terminate our development programs or commercialization efforts or grant to others rights to develop or market product candidates that we would otherwise prefer to develop and market ourselves. Failure to receive additional funding could cause us to cease operations, in part or in full. Furthermore, even if we believe we have sufficient funds for our current or future operating plans, we may seek additional capital due to favorable market conditions or strategic considerations.

We currently utilize contract manufacturers for all of our manufacturing activities. We entered into a lease for a manufacturing facility in Clearwater, Florida, but do not expect manufacturing operations by our contract manufacturer to commence at that facility until late-2016. Additionally, we currently utilize third-party clinical research organizations, or CROs, to carry out our clinical trials and we do not yet have a sales organization. We expect to significantly increase our investment in costs relating to our manufacturing process and sales organization as we prepare for the filing of a BLA with the FDA and a MAA with the EMA and prepare for a possible commercial launch of AR101.

 

17


 

Recent Developments

In August 2015, we completed our initial public offering, or IPO, of our common stock pursuant to which we issued 11,499,999 shares of our common stock at a price of $16.00 per share, which included 1,499,999 shares sold pursuant to the exercise of the underwriters’ option to purchase additional shares. We received proceeds of approximately $168 million from the IPO, net of underwriting discounts and commissions, and offering expenses.

Components of Results of Operations

Research and Development Expenses

The largest component of our total operating expenses has historically been our investment in research and development activities. Research and development expenses consist primarily of:

 

·

costs incurred to conduct research, such as the discovery and development of our product candidates;

 

·

costs related to production of clinical supplies, including fees paid to contract manufacturers and allocated facility expenses;

 

·

fees paid to clinical consultants, clinical trial sites and vendors, including clinical research organizations in conjunction with implementing and monitoring our clinical trials and acquiring and evaluating clinical trial data, including all related fees, such as for investigator grants, patient screening fees, laboratory work and statistical compilation and analysis;

 

·

salaries and related costs, including stock-based compensation expense, for personnel in our research and development functions; and

 

·

costs related to compliance with drug development regulatory requirements.

We recognize all research and development costs as they are incurred. Clinical trial costs, contract manufacturing and other development costs incurred by third parties are expensed as the contracted work is performed.

We expect our research and development expenses to increase in the future as we advance our product candidates into and through clinical trials and pursue regulatory approval of our product candidates in the United States and Europe. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming. The actual probability of success for our product candidates and technology platforms may be affected by a variety of factors including: the quality of our product candidates, early clinical data, investment in our clinical program, competition, manufacturing capability and commercial viability. We may never succeed in achieving regulatory approval for any of our product candidates. As a result of the uncertainties discussed above, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will generate revenue from the commercialization and sale of our product candidates.

General and Administrative Expenses

General and administrative expenses include personnel costs, expenses for outside professional services and other allocated expenses. Personnel costs consist of salaries, bonuses, severance, benefits and stock-based compensation. Outside professional services consist of legal, accounting and audit services and other consulting fees. Allocated expenses consist of rent expense related to our office facility. We expect to incur additional expenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the Securities and Exchange Commission, and those of The NASDAQ Global Select Market, additional insurance expenses, investor relations activities and other administrative and professional services.

 

18


 

Results of Operations

Comparison of the three months ended September 30, 2015 and 2014

 

 

 

Three Months Ended

September 30,

 

 

 

 

 

 

 

 

 

 

 

2015

 

 

2014

 

 

$ Change

 

 

% Change

 

 

 

(in thousands, except percentages)

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

3,850

 

 

$

2,469

 

 

$

1,381

 

 

 

56

%

General and administrative