asns-10q_20180331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended March 31, 2018

OR

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

For the transition period from _______________ to _______________

Commission File Number: 001-38295

 

ARSANIS, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

27-3181608

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

890 Winter Street, Suite 230

Waltham, MA

02451

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (781) 819-5704

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      No   

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

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

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  (Do not check if a small reporting company)

  

Small reporting company

 

 

 

 

 

Emerging growth Company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

 

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

As of April 30, 2018, the registrant had 14,294,421 shares of common stock, $0.001 par value per share, outstanding.

 

 

 

 


Table of Contents

 

 

 

 

Page

PART I.

 

FINANCIAL INFORMATION

 

3

 

 

 

 

 

Item 1.

 

Financial Statements (Unaudited)

 

3

 

 

Condensed Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017

 

3

 

 

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2018 and 2017

 

4

 

 

Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2018 and 2017

 

5

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017

 

6

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

7

 

 

 

 

 

Item 2.

 

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

 

22

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

34

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

34

 

 

 

 

 

PART II.

 

OTHER INFORMATION

 

35

 

 

 

 

 

Item 1A.

 

Risk Factors

 

35

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

72

 

 

 

 

 

Item 6.

 

Exhibits

 

73

 

 

 

 

 

Signatures

 

74

 

 

 

 

 

 

We own or have rights to trademarks, service marks and trade names that we use in connection with the operation of our business, including our corporate name, logos and website names. Other trademarks, service marks and trade names appearing in this Quarterly Report on Form 10-Q are the property of their respective owners. Solely for convenience, some of the trademarks, service marks and trade names referred to in this Quarterly Report on Form 10-Q are listed without the ® and ™ symbols, but we will assert, to the fullest extent under applicable law, our rights to our trademarks, service marks and trade names.

 

 

2

 


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

ARSANIS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share and per share amounts)

(Unaudited)

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

63,999

 

 

$

76,793

 

Grant and incentive receivables

 

 

1,926

 

 

 

1,608

 

Restricted cash

 

 

51

 

 

 

 

Prepaid expenses and other current assets

 

 

2,549

 

 

 

1,129

 

Total current assets

 

 

68,525

 

 

 

79,530

 

Property and equipment, net

 

 

384

 

 

 

421

 

Restricted cash

 

 

312

 

 

 

355

 

Other assets

 

 

 

 

 

948

 

Total assets

 

$

69,221

 

 

$

81,254

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,108

 

 

$

1,893

 

Accrued expenses

 

 

5,141

 

 

 

5,779

 

Unearned income

 

 

730

 

 

 

694

 

Loans payable, net of discount

 

 

2,318

 

 

 

2,314

 

Total current liabilities

 

 

9,297

 

 

 

10,680

 

Loan payable, net of discount and current portion

 

 

9,698

 

 

 

9,922

 

Unearned income

 

 

1,796

 

 

 

1,936

 

Other long-term liabilities

 

 

7

 

 

 

9

 

Total liabilities

 

 

20,798

 

 

 

22,547

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock, $0.001 par value; 200,000,000 shares authorized as of March 31,

   2018 and December 31, 2017; 14,294,421 and 14,294,383 shares issued and

   outstanding as of March 31, 2018 and December 31, 2017, respectively

 

 

15

 

 

 

15

 

Additional paid-in capital

 

 

151,396

 

 

 

150,830

 

Accumulated other comprehensive income (loss)

 

 

(93

)

 

 

127

 

Accumulated deficit

 

 

(102,895

)

 

 

(92,265

)

Total stockholders' equity

 

 

48,423

 

 

 

58,707

 

Total liabilities and stockholders’ equity

 

$

69,221

 

 

$

81,254

 

 

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

3


ARSANIS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except share and per share amounts)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

$

8,133

 

 

$

4,391

 

General and administrative

 

 

2,817

 

 

 

1,436

 

Total operating expenses

 

 

10,950

 

 

 

5,827

 

Loss from operations

 

 

(10,950

)

 

 

(5,827

)

Other income (expense):

 

 

 

 

 

 

 

 

Grant and incentive income

 

 

445

 

 

 

700

 

Interest expense

 

 

(267

)

 

 

(1,019

)

Interest income

 

 

216

 

 

 

 

Change in fair value of derivative liability

 

 

 

 

 

762

 

Other income (expense), net

 

 

(74

)

 

 

(1

)

Total other income (expense), net

 

 

320

 

 

 

442

 

Net loss

 

 

(10,630

)

 

 

(5,385

)

Accretion of redeemable convertible preferred stock to redemption value

 

 

 

 

 

(7

)

Net loss attributable to common stockholders

 

$

(10,630

)

 

$

(5,392

)

Net loss per share attributable to common stockholders—basic and diluted

 

$

(0.74

)

 

$

(10.49

)

Weighted average common shares outstanding—basic and diluted

 

 

14,294,421

 

 

 

513,900

 

 

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

4


ARSANIS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Amounts in thousands)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Net loss

 

$

(10,630

)

 

$

(5,385

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

Foreign currency translation gain (loss)

 

 

(220

)

 

 

(82

)

Comprehensive loss

 

$

(10,850

)

 

$

(5,467

)

 

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

5


ARSANIS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(10,630

)

 

$

(5,385

)

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

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

566

 

 

 

182

 

Depreciation and amortization expense

 

 

46

 

 

 

48

 

Non-cash interest expense

 

 

200

 

 

 

941

 

Non-cash rent expense

 

 

(7

)

 

 

(5

)

Change in fair value of derivative liability

 

 

 

 

 

(762

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Grant and incentive receivables

 

 

(277

)

 

 

(535

)

Prepaid expenses and other assets

 

 

(465

)

 

 

(1,952

)

Accounts payable

 

 

(788

)

 

 

1,339

 

Accrued expenses

 

 

(654

)

 

 

1,144

 

Unearned income

 

 

(168

)

 

 

1,474

 

Net cash used in operating activities

 

 

(12,177

)

 

 

(3,511

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

 

 

 

(17

)

Net cash used in investing activities

 

 

 

 

 

(17

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of convertible promissory notes

 

 

 

 

 

4,935

 

Repayments of loans payable

 

 

(583

)

 

 

(582

)

Payments of issuance costs of convertible promissory notes

 

 

 

 

 

(17

)

Payment of initial public offering costs

 

 

(43

)

 

 

 

Net cash provided by (used in) financing activities

 

 

(626

)

 

 

4,336

 

Effect of exchange rate changes on cash

 

 

17

 

 

 

12

 

Net increase (decrease) in cash, cash equivalents and restricted cash

 

 

(12,786

)

 

 

820

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

77,148

 

 

 

3,429

 

Cash, cash equivalents and restricted cash at end of period

 

$

64,362

 

 

$

4,249

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment included in accounts payable and

   accrued expenses

 

$

 

 

$

19

 

Derivative liability in connection with issuance of convertible promissory notes

 

$

 

 

$

403

 

Accretion of redeemable convertible preferred stock to redemption value

 

$

 

 

$

7

 

 

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

6


 ARSANIS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.

Nature of the Business and Basis of Presentation

Arsanis, Inc. (the “Company”) is a clinical-stage biopharmaceutical company focused on applying monoclonal antibody, or mAb, immunotherapies to address serious infectious diseases. The Company’s deep understanding of the pathogenesis of infection, paired with access to what the Company believes to be some of the most advanced mAb discovery techniques and platforms available today, has positioned the Company to further its goal of building and advancing a pipeline of novel mAbs with multiple mechanisms of action and high potency against their intended targets. The Company’s lead clinical program, ASN100, is aimed at serious Staphylococcus aureus infections and is being evaluated in a Phase 2 clinical trial for the prevention of S. aureus pneumonia in high-risk, mechanically ventilated patients. In addition to ASN100, the Company’s preclinical pipeline is comprised of mAbs targeting multiple serious bacterial and viral pathogens, including respiratory syncytial virus, or RSV.

Arsanis was incorporated under the laws of the State of Delaware and is headquartered in Waltham, Massachusetts, with a wholly-owned subsidiary that is primarily focused on discovery research in Vienna, Austria.

The Company is subject to risks and uncertainties common to early-stage companies in the biotechnology industry, including, but not limited to, development by competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, compliance with government regulations and the ability to secure additional capital to fund operations. Product candidates currently under development will require significant additional research and development efforts, including preclinical and clinical testing and regulatory approval, prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel and infrastructure and extensive compliance-reporting capabilities. Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales.

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of the Company and its wholly owned subsidiary, Arsanis Biosciences GmbH, after elimination of all significant intercompany accounts and transactions.

Reverse Stock Split

On November 3, 2017, the Company effected a one-for-3.4130 reverse stock split of its issued and outstanding shares of common stock and a proportional adjustment to the existing conversion ratios for each series of the Company’s redeemable convertible preferred stock. Accordingly, all share and per share amounts for all periods presented in the accompanying condensed consolidated financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect this reverse stock split and adjustment of the preferred stock conversion ratios.

Initial Public Offering

On November 20, 2017, the Company closed an initial public offering of its common shares, in which the Company issued and sold 4,000,000 common shares at a price to the public of $10.00 per share. Concurrent to the initial public offering, (i) the Company issued an additional 600,000 common shares at a price of $10.00 per share pursuant to the exercise of the underwriters’ over-allotment option and (ii) New Enterprise Associates 16, L.P., or NEA, purchased 2,000,000 shares of our common stock at the initial per share public offering price of $10.00 in a private placement. The aggregate net proceeds to the Company from the initial public offering, inclusive of the over-allotment exercise, and the private placement were $58.1 million after deducting underwriting discounts and commissions and offering expenses payable by the Company. Upon the closing of the initial public offering, all of the outstanding redeemable convertible preferred stock of the Company automatically converted into 7,180,483 shares of the Company’s common stock.  

Going Concern

In accordance with Accounting Standards Update (“ASU”) 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40), the Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the condensed consolidated financial statements are issued. As of March 31, 2018, the Company had an accumulated deficit of $102.9 million. During the three months ended March 31, 2018, the Company incurred a net loss of $10.6 million and used $12.2 million of cash in operations. The Company expects to continue to generate operating losses for the foreseeable future. Based on its current operating plan, the Company expects that its cash and cash equivalents of $64.0 million as of March 31, 2018, will be sufficient to fund its operating expenses, capital expenditure requirements and debt service payments for at least 12 months from the issuance date

7


of these condensed consolidated financial statements. The future viability of the Company beyond that point is dependent on its ability to raise additional capital to finance its operations. Although the Company has been successful in raising capital in the past, there is no assurance that it will be successful in obtaining such additional financing on terms acceptable to the Company, if at all. If the Company is unable to obtain funding, the Company could be forced to delay, reduce or eliminate some or all of its research and development programs, product portfolio expansion or commercialization efforts, which could adversely affect its business prospects, or the Company may be unable to continue operations.

2.

Summary of Significant Accounting Policies

Unaudited Interim Financial Statements

The condensed balance sheet at December 31, 2017 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). The accompanying condensed financial statements as of March 31, 2018 and for the three months ended March 31, 2018 are unaudited. The accompanying unaudited interim financial statements have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These unaudited condensed financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto for the year ended December 31, 2017 included in the Company’s Annual Report on Form 10-K as filed with the SEC on March 9, 2018. In the opinion of management, all adjustments, consisting only of normal recurring adjustments as necessary, for the fair statement of the Company’s condensed financial position as of March 31, 2018 and condensed results of its operations and cash flows for the three months ended March 31, 2018 have been made. The results of operations for the three months ended March 31, 2018 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2018.

Use of Estimates

The preparation of financial statements in conformity with 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 financial statements and the reported amounts of revenue and expenses during the reporting periods. Significant estimates and assumptions reflected in these financial statements include, but are not limited to, the accrual for research and development expenses and the valuation of common stock, stock options, warrants and derivative instruments. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates.

Foreign Currency and Currency Translation

The functional currency for the Company’s wholly owned foreign subsidiary, Arsanis Biosciences GmbH, is the Euro. Assets and liabilities of Arsanis Biosciences GmbH are translated into United States dollars at the exchange rate in effect on the balance sheet date. Income items and expenses are translated at the average exchange rate in effect during the period. Unrealized translation gains and losses are recorded as a cumulative translation adjustment, which is included in the consolidated balance sheets as a component of accumulated other comprehensive income (loss). Adjustments that arise from exchange rate changes on transactions denominated in a currency other than the local currency are included in other income (expense), net in the consolidated statements of operations as incurred.

Cash and Cash Equivalents

All unrestricted highly liquid investments purchased with an original maturity date of 90 days or less at the date of purchase are considered to be cash equivalents.

The Company’s cash equivalents, which are money market funds held in a sweep account, are measured at fair value on a recurring basis. As of March 31, 2018 and December 31, 2017, the carrying amount of cash equivalents was $62.6 million and $70.9 million, respectively, which approximates fair value and was determined based upon Level 1 inputs. The sweep account is valued using quoted market prices with no valuation adjustments applied. Accordingly, these securities are categorized as Level 1.

Restricted Cash

In March 2017, the Company received a payment of $1.6 million under a grant agreement with the Bill & Melinda Gates Foundation (the “Gates Foundation”). In April 2017, the Company entered into a letter agreement with the Gates Foundation. In connection with the letter agreement, the Gates Foundation purchased $8.0 million of shares of the Company’s Series D redeemable

8


convertible preferred stock and the Company committed to use the proceeds from the investment by the Gates Foundation solely to advance the development of a specified monoclonal antibody program that involves the monoclonal antibodies ASN-1, ASN-2 and ASN-3 and the Company’s product candidate, ASN100. Such funds received from the Gates Foundation were classified as restricted cash (current) until the Company incurred qualifying expenses under the letter agreement and the restrictions no longer apply. As of March 31, 2018 and December 31, 2017, none of the proceeds from the Gates Foundation for the purchase of shares was classified as restricted cash (current) in the consolidated balance sheet due to restrictions on the use of funds imposed by the agreement.

The Company maintains letters of credit for the benefit of the landlords in connection with the Company’s office leases.

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheet that sum to the total of the same such amounts shown in the statement of cash flows.

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

2017

 

 

2016

 

Cash and cash equivalents

 

$

63,999

 

 

$

2,282

 

 

$

76,793

 

 

$

3,035

 

Restricted cash – current

 

 

51

 

 

 

1,595

 

 

 

 

 

 

 

Restricted cash – non-current

 

 

312

 

 

 

372

 

 

 

355

 

 

 

394

 

Total cash, cash equivalents and restricted cash

   shown in the statement of cash flows

 

$

64,362

 

 

$

4,249

 

 

$

77,148

 

 

$

3,429

 

 

Fair Value Measurements

Certain assets of the Company are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:

 

Level 1—Quoted prices in active markets for identical assets or liabilities.

 

Level 2—Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.

 

Level 3—Unobservable inputs that are supported by little or no market activity that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.

The carrying values of cash equivalents, other current assets, accounts payable, and accrued expenses approximate their fair values due to the short-term nature of these assets and liabilities. The carrying value of the Company’s loan and security agreement with Silicon Valley Bank (“SVB”) approximates its fair value because the debt bears interest at a market rate. The carrying value of the loans received under the funding agreements with Österreichische Forschungsförderungsgesellschaft mbH (“FFG”) approximates their fair value because the Company records imputed interest expense based on rates that approximate market rates of interest as of the issuance date of each FFG loan. The carrying value of the Company’s convertible promissory notes approximated their fair value due to the short term of the notes.

Research and Development Costs

Research and development costs are expensed as incurred. Research and development expenses consist of costs incurred in performing research and development activities, including salaries, stock-based compensation and benefits, facility costs, depreciation, third-party license fees, and external costs of outside vendors engaged to conduct clinical development activities and clinical trials as well as to manufacture clinical trial materials. Non-refundable prepayments for goods or services that will be used or rendered for future research and development activities are recorded as prepaid expenses. Such amounts are recognized as an expense as the goods are delivered or the related services are performed, or until it is no longer expected that the goods will be delivered or the services rendered.

Research Contract Costs and Accruals

The Company has entered into various research and development-related contracts with companies both inside and outside of the United States. These agreements are cancelable, and related costs are recorded as research and development expenses as incurred. The Company records accruals for estimated ongoing research costs. When evaluating the adequacy of the accrued liabilities, the Company analyzes progress of the studies or clinical trials, including the phase or completion of events, invoices received and

9


contracted costs. Significant judgments and estimates are made in determining the accrued balances at the end of any reporting period. Actual results could differ from the Company’s estimates. The Company’s historical accrual estimates have not been materially different from the actual costs.

Stock-Based Compensation

The Company measures stock-based awards granted to employees and directors based on the fair value on the date of the grant and recognizes compensation expense for those awards over the requisite service period, which is generally the vesting period of the respective award. Forfeitures are accounted for as they occur. Generally, the Company issues stock-based awards with only service-based vesting conditions and records the expense for these awards using the straight-line method. The Company has not issued any stock-based awards with performance-based vesting conditions.

For stock-based awards granted to consultants and non-employees, compensation expense is recognized over the period during which services are rendered by such consultants and non-employees until completed. At the end of each financial reporting period prior to completion of the service, the fair value of these awards is remeasured using the then-current fair value of the Company’s common stock and updated assumption inputs in the Black-Scholes option-pricing model.

The Company classifies stock-based compensation expense in its consolidated statement of operations in the same manner in which the award recipient’s payroll costs are classified or in which the award recipient’s service payments are classified.

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model. Prior to November 20, 2017, the Company had been a private company and lacked company-specific historical and implied volatility information for its stock. Therefore, it estimates its expected stock price volatility based on the historical volatility of publicly traded peer companies and expects to continue to do so until such time as it has adequate historical data regarding the volatility of its own traded stock price. The expected term of the Company’s stock options has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options. The expected term of stock options granted to non-employees is equal to the contractual term of the option award. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that the Company has never paid cash dividends on common stock and does not expect to pay any cash dividends in the foreseeable future.

Comprehensive Loss

Comprehensive loss includes net loss as well as other changes in stockholders’ equity that result from transactions and economic events other than those with stockholders. For the three months ended March 31, 2018 and 2017, comprehensive loss included $0.2 million and $0.1 million of foreign currency translation loss adjustments, respectively.

Net Income (Loss) per Share

The Company follows the two-class method when computing net income (loss) per share as the Company has issued shares that meet the definition of participating securities. The two-class method determines net income (loss) per share for each class of common and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires income available to common stockholders for the period to be allocated between common and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed.

Basic net income (loss) per share attributable to common stockholders is computed by dividing the net income (loss) attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted net income (loss) attributable to common stockholders is computed by adjusting net income (loss) attributable to common stockholders to reallocate undistributed earnings based on the potential impact of dilutive securities. Diluted net income (loss) per share attributable to common stockholders is computed by dividing the diluted net income (loss) attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period, including potential dilutive common shares. For purpose of this calculation, outstanding stock options, warrants to purchase shares of redeemable convertible preferred stock, unvested restricted stock, convertible promissory notes and redeemable convertible preferred stock are considered potential dilutive common shares.

The Company’s redeemable convertible preferred stock contractually entitled the holders of such shares to participate in dividends but contractually did not require the holders of such shares to participate in losses of the Company. Accordingly, in periods in which the Company reports a net loss attributable to common stockholders, diluted net loss per share attributable to common stockholders is the same as basic net loss per share attributable to common stockholders, since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive.

10


Recently Adopted Accounting Pronouncements

In March 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-05, Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 ("ASU 2018-05"). This standard amends ASC 740, Income Taxes (“ASC 740”) to provide guidance on accounting for the tax effects of the Tax Cuts and Jobs Act pursuant to Staff Accounting Bulletin No. 118, which allows companies to complete the accounting under ASC 740 within a one-year measurement period from the Tax Act enactment date. This standard is effective upon issuance. The Company will continue to assess the impact that various provisions will have on its business. Any subsequent adjustment to these amounts will be recorded to current tax expense in the quarter of 2018 when the analysis is complete.

In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”), which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The Company adopted this guidance, effective January 1, 2018, and its adoption had no impact on the Company’s financial position, results of operations or cash flows.

In January 2017, FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”). The amendments in this update clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. The Company adopted this guidance, effective January 1, 2018, and its adoption had no impact on the Company’s financial position, results of operations or cash flows.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”), which requires restricted cash to be presented with cash and cash equivalents on the statement of cash flows and disclosure of how the statement of cash flows reconciles to the balance sheet if restricted cash is shown separately from cash and cash equivalents on the balance sheet. The Company adopted the standard retrospectively to all periods presented on the required effective date of January 1, 2018, and its adoption impacted the presentation of restricted cash in the cash flow. See “—Restricted Cash” for a reconciliation of cash and cash equivalents and restricted cash presented in the consolidated balance sheets and consolidated statements of cash flows.

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other than Inventory (“ASU 2016-16”), which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The Company adopted this guidance, effective January 1, 2018, and its adoption had no impact on the Company’s financial position, results of operations or cash flows.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), to address diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The Company adopted the standard retrospectively to all periods presented on the required effective date of January 1, 2018, and its adoption had no impact on the Company’s financial position, results of operations or cash flows.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which supersedes most existing revenue recognition guidance under GAAP. The FASB also issued several amendments and updates to the new revenue standard (collectively, “Topic 606”). The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The standard defines a five-step process to achieve this principle, and will require companies to use more judgment and make more estimates than under the current guidance. These judgments and estimates include identifying performance obligations in the customer contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. The Company adopted this guidance, effective January 1, 2018, and its adoption had no impact on the Company’s financial position, results of operations or cash flows as the Company does not currently have any revenue-generating arrangements.

Recently Issued Accounting Pronouncements

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815) I. Accounting for Certain Financial Instruments with Down Round Features II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain

11


Mandatorily Redeemable Noncontrolling Interests with a Scope Exception (“ASU 2017-11”). Part I applies to entities that issue financial instruments such as warrants, convertible debt or convertible preferred stock that contain down-round features. Part II replaces the indefinite deferral for certain mandatorily redeemable noncontrolling interests and mandatorily redeemable financial instruments of nonpublic entities contained within ASC Topic 480 with a scope exception and does not impact the accounting for these mandatorily redeemable instruments. ASU 2017-11 is required to be adopted for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact that the adoption of ASU 2017-11 will have on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. ASU 2016-02 (Accounting Standards Codification (“ASC”) (Topic 842) supersedes the previous leases standard, ASC 840, Leases. The standard is effective for public entities for annual periods beginning after December 15, 2018 including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of ASU 2016-02 will have on its consolidated financial statements.

3.

Fair Value of Financial Assets and Liabilities

The following tables present information about the Company’s financial assets measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values (in thousands):

 

 

 

Fair Value Measurements

 

 

 

as of March 31, 2018 Using:

 

 

 

Level 1

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

Cash equivalents - Money Market Funds

 

 

62,598

 

 

 

62,598

 

 

 

$

62,598

 

 

$

62,598

 

 

 

 

Fair Value Measurements

 

 

 

as of December 31, 2017 Using:

 

 

 

Level 1

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

Cash equivalents - Money Market Funds

 

$

70,891

 

 

$

70,891

 

 

 

$

70,891

 

 

$

70,891

 

 

During the three months ended March 31, 2018 and 2017, there were no transfers between Level 1, Level 2 and Level 3.

Valuation of Cash Equivalents

The cash equivalents in the table above are composed of money market funds held in a sweep account. The fair value of the cash equivalents was determined based on quoted market prices with no valuation adjustments applied, which represents a Level 1 measurement within the fair value hierarchy.

Valuation of Warrant Liability

The Company’s warrant liability in prior periods was composed of the fair value of warrants to purchase shares of Series A-2 redeemable convertible preferred stock (the “Series A-2 preferred stock”) and Series B redeemable convertible preferred stock (the “Series B preferred stock”) that were issued to the lender in connection with the Company’s 2012 Loan Agreement, as amended (see Note 10). The fair value of the warrant liability was determined based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy.

The Company used the Black-Scholes option-pricing model, which incorporates assumptions and estimates, to value the preferred stock warrants. Estimates and assumptions impacting the fair value measurement in prior periods included the fair value per share of the underlying shares of Series A-2 and Series B preferred stock, the remaining contractual term of the warrants, risk-free interest rate, expected dividend yield and expected volatility of the price of the underlying preferred stock. The Company determined

12


the fair value per share of the underlying preferred stock by taking into consideration the most recent sales of its preferred stock, results obtained from third-party valuations and additional factors that are deemed relevant. The Company historically has been a private company and lacks company-specific historical and implied volatility information of its stock. Therefore, it estimated its expected stock volatility based on the historical volatility of publicly traded peer companies for a term equal to the remaining contractual term of the warrant. The risk-free interest rate was determined by reference to the U.S. Treasury yield curve for time periods approximately equal to the remaining contractual term of the warrant. The Company estimated a 0% expected dividend yield based on the fact that the Company has never paid or declared dividends and does not intend to do so in the foreseeable future.

Valuation of Derivative Liability

The fair value of the derivative liability recognized in prior periods in connection with the Company’s convertible promissory notes (see Note 9) was determined based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The fair value of the derivative liability was determined using the probability-weighted expected return method (“PWERM”), which considered as inputs the type, timing and probability of occurrence of a change-of-control event, the future equity financing and cash settlement of the convertible promissory notes; the potential amount of the payment under each of these potential settlement scenarios; and the risk-adjusted discount rate reflecting the expected risk profile for each of the potential settlement scenarios.

There was no warrant liability or derivative liability as of March 31, 2018 and December 31, 2017.

4.

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Prepaid clinical trial costs

 

$

1,839

 

 

$

257

 

Prepaid directors' and officers' and other corporate

   insurance

 

 

372

 

 

 

524

 

Other

 

 

338

 

 

 

348

 

 

 

$

2,549

 

 

$

1,129

 

 

5.

Property and Equipment, Net

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

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Laboratory and office equipment

 

$

1,782

 

 

$

1,739

 

Furniture and fixtures

 

 

429

 

 

 

419

 

Leasehold improvements

 

 

303

 

 

 

297

 

Computer equipment and software

 

 

194

 

 

 

189

 

 

 

 

2,708

 

 

 

2,644

 

Less: Accumulated depreciation and amortization

 

 

(2,324

)

 

 

(2,223

)

 

 

$

384

 

 

$

421

 

 

Depreciation and amortization expense for the three months ended March 31, 2018 and 2017 was $46,000 and $48,000, respectively.

13


6.

Accrued Expenses

Accrued expenses consisted of the following (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Accrued clinical trial costs

 

$

2,888

 

 

$

2,317

 

Accrued compensation and benefits

 

 

1,465

 

 

 

2,454

 

Accrued professional fees

 

 

381

 

 

 

510

 

Other

 

 

407

 

 

 

498

 

 

 

$

5,141

 

 

$

5,779

 

 

7.

Collaboration, License and Funding Arrangements

Adimab Option and License Agreement

In February 2017, the Company entered into an option and license agreement with Adimab, LLC (“Adimab”), a related party (see Note 15) (the “Adimab Option Agreement”). Under the Adimab Option Agreement, Adimab has provided to the Company certain proprietary antibodies against respiratory syncytial virus (“RSV antibodies”) for its evaluation during a specified option period and has granted the Company an exclusive, non-sublicensable license in a specified field under certain Adimab patent rights and know-how during the option period. Under the Adimab Option Agreement, the Company has an exclusive option, exercisable during the option period upon payment of an option fee to Adimab, to require Adimab to assign to the Company all rights in up to a specified number of RSV antibodies selected by the Company and certain patent rights owned by Adimab that cover these antibodies, and to obtain from Adimab a non-exclusive license in a specified field, with the right to grant sublicenses, under certain other patent rights and know-how owned by Adimab.

In February 2017, the Company entered into a grant agreement with the Gates Foundation pursuant to which the Company has no payment obligations under the Adimab Option Agreement with respect to sales of products based on licensed RSV antibodies to the extent they are sold at cost in developing countries. However, if such products are sold in developing countries for an amount that exceeds cost, then the amount of such excess will be subject to certain royalty payment obligations described in the agreement.

During the three months ended March 31, 2018 and 2017, the Company recognized research and development expense of $0.1 million and $13,000, respectively, in connection with the Adimab Option Agreement, which consisted of reimbursement for services performed by Adimab.

Gates Foundation Grant Agreement

In February 2017, the Company entered into a grant agreement with the Gates Foundation, a related party (see Note 15), under which the Gates Foundation agreed to provide the Company up to $9.3 million to conduct preclinical development of monoclonal antibodies for the prevention of RSV infection in newborns (the “RSV project”).  

In March 2017, the Company received a payment of $1.6 million from the Gates Foundation under the grant agreement. The payment received from the Gates Foundation under the grant agreement was classified as restricted cash (current) in the consolidated balance sheet due to restrictions on the use of the funds imposed by the agreement. Such funds received from the Gates Foundation were no longer classified as restricted cash once the Company incurred qualifying expenses under the grant agreement and the restrictions no longer applied.

During the three months ended March 31, 2018 and 2017, the Company recognized grant income of $0 and $44,000, respectively, under the grant agreement with the Gates Foundation upon incurring qualifying expenses. As of March 31, 2018 and December 31, 2017, unearned income under the grant agreement with the Gates Foundation was $0.

Funding Agreements with FFG

Between September 2011 and March 2017, the Company entered into a series of funding agreements with FFG that provided for loans and grants to fund between 50% and 70% of qualifying research and development expenditures of the Company’s subsidiary in Austria on a project-by-project basis, as approved by FFG.

14


FFG Grants

For grants under the funding agreements with FFG, the Company recognized grant income of $0 and $0.1 million during the three months ended March 31, 2018 and 2017, respectively. As of March 31, 2018 and December 31, 2017, the Company recorded grant receivables from FFG of $0.1 million and $0.1 million, respectively, for qualifying expenses incurred that were reimbursable under the funding agreements. As of March 31, 2018 and December 31, 2017, there were no amounts recorded as unearned income in connection with the FFG grants.

FFG Loans

Loans under the funding agreements with FFG bear interest at rates that are below market rates of interest. The Company accounts for the imputed benefit arising from the difference between a market rate of interest and the rate of interest charged by FFG as additional grant funding from FFG. On the date that FFG loan proceeds are received, the Company recognizes the portion of the loan proceeds allocated to grant funding as a discount to the carrying value of the loan and as unearned income, which is recognized as additional grant income over the term of the funding agreement.

The Company recognized grant income of $0.2 million and $0.1 million during the three months ended March 31, 2018 and 2017, respectively, related to the recognition of the unearned income recorded for the imputed benefit of FFG loans at below-market interest rates. Unearned income (current) related to the imputed benefit of FFG loans at below-market interest rates was $0.7 million and $0.7 million as of March 31, 2018 and December 31, 2017, respectively, and unearned income (non-current) related to such benefit was $1.8 million and $1.9 million as of March 31, 2018 and December 31, 2017, respectively.

Research and Development Incentive

The Company participates in a research and development incentive program provided by the Austrian government whereby the Company is entitled to reimbursement by the Austrian government for a percentage of qualifying research and development expenses incurred by the Company’s subsidiary in Austria. Under the program, the reimbursement rate for qualifying research and development expenses incurred by the Company through its subsidiary in Austria was 12% for the year ended December 31, 2017, and is 14% for the year ended December 31, 2018.

The Company recognizes incentive income from Austrian research and development incentives when qualifying expenses have been incurred, there is reasonable assurance that the payment will be received, and the consideration can be reliably measured. Management has assessed the Company’s research and development activities and expenditures to determine which activities and expenditures are likely to be eligible under the research and development incentive program described above. At each reporting date, management estimates the reimbursable incentive income available to the Company based on available information at the time.

The Company recognized incentive income of $0.3 million and $0.4 million during the three months ended March 31, 2018 and 2017, respectively, in connection with the Austrian research and development incentive program. As of March 31, 2018 and December 31, 2017, the Company recorded receivables for amounts due under the program of $1.8 million and $1.5 million, respectively, which amounts were included in grant and incentive receivables in the condensed consolidated balance sheet.

8.

Loans Payable

The aggregate principal amount of debt outstanding as of March 31, 2018 and December 31, 2017 consisted of the following (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Term loans under 2012 Loan Agreement

 

$

4,083

 

 

$

4,667

 

FFG Loans

 

 

10,478

 

 

 

10,225

 

 

 

$

14,561

 

 

$

14,892

 

15


 

Current and non-current debt obligations reflected in the condensed consolidated balance sheets as of March 31, 2018 and December 31, 2017 consisted of the following (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Current liabilities:

 

 

 

 

 

 

 

 

Term loans under 2012 Loan Agreement

 

$

2,333

 

 

$

2,333

 

FFG loans

 

 

 

 

 

 

Unamortized debt discount

 

 

(15

)

 

 

(19

)

Loans payable, net of discount

 

 

2,318

 

 

 

2,314

 

Non-current liabilities:

 

 

 

 

 

 

 

 

Term loans under 2012 Loan Agreement

 

$

1,750

 

 

$

2,334

 

FFG loans

 

 

10,478

 

 

 

10,225

 

Unamortized debt discount

 

 

(2,530

)

 

 

(2,637

)

Loans payable, net of discount and current portion

 

 

9,698

 

 

 

9,922

 

Total loans payable, net of discount

 

$

12,016

 

 

$

12,236

 

 

2012 Loan Agreement

On December 7, 2012, the Company entered into a loan and security agreement (the “2012 Loan Agreement”) with SVB, which provided for a term loan of up to $0.5 million (the “2012 Term Loan A Advance”) on the closing date and additional term loans in the aggregate of $2.0 million (the “2012 Term Loan B Advance”). On February 19, 2016, the Company entered into the First Amendment to the 2012 Loan Agreement (the “First Amendment”). The First Amendment provided for an additional borrowing of $3.5 million (“2016 Term Loan A Advance”), with a requirement that a portion of the proceeds be used to pay in full, all amounts then outstanding, under the 2012 Term Loan A Advance and the 2012 Term Loan B Advance.

The First Amendment provided for two additional advances not to exceed, in the aggregate, $3.5 million, with each advance being for a minimum of $0.5 million (collectively the “2016 Term Loan B Advance”), and total borrowings under the 2012 Loan Agreement not to exceed $7.0 million. The Company borrowed the full $7.0 million available in two separate tranches: $3.5 million under the 2016 Term Loan A Advance, which was borrowed on February 29, 2016, and $3.5 million under the 2016 Term Loan B Advance, which was borrowed on August 23, 2016. Following these borrowings in February and August 2016, no additional amounts were available to be borrowed under the 2012 Loan Agreement. Borrowings under the 2016 Term Loan A Advance and 2016 Term Loan B Advance (collectively, the “2016 Term Loan Advance”) bear interest at a rate per annum equal to the greater of 3.25% and The Wall Street Journal prime rate, in each case minus 0.25%; provided, however, that in an event of default, as defined in the 2012 Loan Agreement, the interest rate applicable to borrowings under the First Amendment will be increased by 4.0%. As of March 31, 2018 and December 31, 2017, the interest rate applicable to borrowings under the 2016 Term Loan Advance was 4.50% and 4.25%, respectively.

The Company is required to make equal monthly payments of principal as well as accrued interest beginning January 1, 2017 through December 1, 2019 (the “First Amendment Maturity Date”), when all unpaid principal and interest become due and payable. The First Amendment also provided that the Company could voluntarily prepay all (but not less than all) of the outstanding principal at any time prior to the maturity date, subject to a prepayment fee, which ranges from 0% to 2% of the outstanding principal if paid prior to the First Amendment Maturity Date. The Company has not accrued for this prepayment fee as it does not intend to prepay the outstanding balance. A final payment of 5.0% multiplied by the principal amount of the borrowings under the 2016 Term Loan Advance is due upon the earlier to occur of the First Amendment Maturity Date or prepayment of all outstanding principal. In connection with the First Amendment, the Company paid an arrangement fee of $20,000 to SVB and incurred legal costs of $7,000, both of which were recorded as a debt discount. The debt discount is reflected as a reduction of the carrying value of the loan payable on the Company’s consolidated balance sheet and is being amortized to interest expense over the term of the loan using the effective interest method.

The Company recognized interest expense under the 2012 Loan Agreement, as amended, of $0.1 million and $0.1 million during the three months ended March 31, 2018 and 2017, respectively, including interest expense related to the amortization of the debt discount and final payment of $33,000 and $49,000 during the three months ended March 31, 2018 and 2017, respectively. As of March 31, 2018 and December 31, 2017, the unamortized debt discount was $19,000 and $26,000, respectively.

During the three months ended March 31, 2018 and 2017, the Company made aggregate principal payments in connection with the 2012 Loan Agreement of $0.6 million and $0.6 million, respectively.

16


FFG Loans

In connection with the funding agreements with FFG (see Note 7), the Company received loans from FFG. Loans from FFG were made on a project-by-project basis and had an aggregate principal amount outstanding of $10.5 million and $10.2 million as of March 31, 2018 and December 31, 2017, respectively. Amounts due under the FFG loans bear interest at rates ranging from 0.75% to 2.0% per annum and mature at various dates between June 2020 and March 2023. Interest on amounts due under the loans is payable semi-annually in arrears, with all principal and remaining accrued interest due upon maturity.

In addition, the Company has recorded a discount to the carrying value of each FFG loan for the portion of the loan proceeds allocated to grant funding, which is being amortized to interest expense over the term of the loan using the effective interest method. As of March 31, 2018 and December 31, 2017, the unamortized debt discount related to FFG loans was $2.5 million and $2.6 million, respectively.

The Company recognized interest expense of $0.2 million and $0.1 million during the three months ended March 31, 2018 and 2017, respectively, related to the FFG loans, which included interest expense related to the amortization of debt discount of $0.2 million and $0.1 million during the three months ended March 31, 2018 and 2017, respectively. There were no principal payments due or paid under the FFG loans during the three months ended March 31, 2018 and 2017.

9.

Convertible Promissory Notes

There were no convertible promissory notes outstanding as of March 31, 2018 and December 31, 2017.

2016 Notes

On April 12, 2016, the Company issued convertible promissory notes (the “2016 Notes”) in the aggregate principal amount of $5.5 million. The 2016 Notes bore interest at a rate of 0.70% per annum, were unsecured and were due and payable, including accrued interest, on October 12, 2017. In April 2017, in connection with the Company’s issuance and sale of its Series D redeemable convertible preferred stock (the “Series D preferred stock”), all of the outstanding principal and accrued interest under the 2016 Notes, totaling $5.5 million, was automatically converted into 1,896,297 shares of Series D preferred stock at a price equal to 90% of $3.2457 per share, the per share price paid in cash by investors in the Series D preferred stock financing.

The Company recognized interest expense of $0.7 million, including amortization of debt discount of $0.6 million, during the three months ended March 31, 2017 in connection with the 2016 Notes.

2017 Notes

On January 17, 2017, the Company issued convertible promissory notes (the “2017 Notes”) in the aggregate principal amount of $4.9 million. The 2017 Notes bore interest at a rate of 0.96% per annum, were unsecured and were due and payable, including accrued interest, on October 12, 2017. In April 2017, in connection with the Company’s issuance and sale of Series D preferred stock, all of the outstanding principal and accrued interest under the 2017 Notes, totaling $4.9 million, was automatically converted into 1,524,107 shares of Series D preferred stock at a price equal to $3.2457 per share, the per share price paid in cash by investors in the Series D preferred stock financing.

The Company recognized interest expense of $0.1 million, including amortization of debt discount of $0.1 million, during the three months ended March 31, 2017, in connection with the 2017 Notes.

10.

Preferred and Common Stock Warrants

As of March 31, 2018 and December 31, 2017, outstanding warrants to purchase shares of common stock consisted of the following:

 

 

 

Number of

 

 

Exercise

 

 

 

 

 

 

 

Date Exercisable

 

Shares Issuable

 

 

Price

 

 

Exercisable for

 

Classification

 

Expiration

December 12, 2012

 

 

788

 

 

$

12.70

 

 

Common

 

Equity

 

December 6, 2022

February 25, 2013

 

 

3,152

 

 

$

12.70

 

 

Common

 

Equity

 

December 6, 2022

February 29, 2016

 

 

3,237

 

 

$

16.22

 

 

Common

 

Equity

 

February 18, 2026

August 23, 2016

 

 

3,237

 

 

$

16.22

 

 

Common

 

Equity

 

February 18, 2026

 

 

 

10,414

 

 

 

 

 

 

 

 

 

 

 

 

17


In connection with the 2012 Loan Agreement and the First Amendment to the 2012 Loan Agreement, the Company issued to SVB warrants for the purchase of Series A-2 and Series B preferred stock.

The Company classified the warrants as a liability on its consolidated balance sheet (included in other long-term liabilities) as the warrants were free-standing financial instruments that may require the Company to transfer assets upon exercise. The liability associated with each portion of the warrants that became exercisable was recorded at fair value on the dates they became exercisable and was subsequently remeasured to fair value at each reporting date. Changes in the fair value of the warrant liability were recognized as a component of other income (expense), net in the Company’s consolidated statement of operations. Changes in the fair value of the warrant liability were recognized until the warrants qualified for equity classification. The Company recognized a gain (loss) of $0 for the three months ended March 31, 2017 related to the change in fair value of the warrants.

In November 2017, in connection with the closing of the initial public offering, the warrants for the purchase of redeemable convertible preferred stock converted into warrants for the purchase of common stock. Upon the conversion, the Company reclassified the warrants as equity, recorded at fair value on the date of the reclassification on its consolidated balance sheets (included in additional paid-in capital).

11.

Common Stock

As of March 31, 2018 and December 31, 2017, the Company had reserved 2,759,028 and 2,187,252 shares of common stock, respectively, for the exercise of outstanding stock options, the number of shares remaining available for grant under the Company’s 2017 Equity Incentive Plan and 2017 Employee Stock Purchase Plan (see Note 12) and the exercise of outstanding warrants to purchase shares of common stock (see Note 10).

On November 3, 2017, the Company effected a one-for-3.4130 reverse stock split of its issued and outstanding shares of common stock and a proportional adjustment to the existing conversion ratios for each series of the Company’s then-existing redeemable convertible preferred stock (see Note 1).

12.

Stock-Based Compensation

2017 Equity Incentive Plan

The Company’s 2017 Equity Incentive Plan (the “2017 Plan”) provides for the grant by the Company of incentive stock options, non-qualified options, stock appreciation rights, restricted stock awards, restricted stock units and other stock-based awards. Incentive stock options may be granted only to the Company’s employees, including officers and directors who are also employees. Awards other than incentive stock options may be granted to employees, officers, members of the board of directors, advisors and consultants of the Company.

As of March 31, 2018 and December 31, 2017, the number of shares of common stock reserved for issuance under the 2017 Plan was the sum of (i) 1,331,747 shares and 759,971 shares, respectively, plus (ii) the number of shares of our common stock subject to outstanding awards under our 2010 Special Stock Incentive Plan and our 2011 Stock Incentive Plan, each as amended to date, that expire, terminate or are otherwise surrendered, cancelled, forfeited or repurchased by us at their original issuance price pursuant to a contractual repurchase right, plus (iii) an annual increase, to be added on January 1 of each year, beginning on January 1, 2018 and continuing through January 1, 2027, in an amount equal to the lowest of 1,025,490 shares of the Company’s common stock, 4% of the number of shares of the Company’s common stock outstanding on January 1 of each year and an amount determined by the Company’s board of directors. As of March 31, 2018 and December 31, 2017, 422,747 shares and 553,971 shares, respectively, remained available for future grant.

Shares that are expired, terminated, surrendered or canceled under the 2017 Plan without having been fully exercised will be available for future awards. In addition, shares of common stock that are tendered to the Company by a participant to exercise an award are added to the number of shares of common stock available for the grant of awards.

Stock Option Grants During the Three Months Ended March 31, 2018 and 2017

During the three months ended March 31, 2018, the Company granted options to purchase 703,000 shares of common stock to employees and directors. The Company did not grant any such options to purchase shares of common stock during the three months ended March 31, 2017. The Company recorded stock-based compensation expense for options granted to employees and directors of $0.6 million and $0.2 million during the three months ended March 31, 2018 and 2017, respectively.

18


The Company did not grant options to purchase shares of common stock to non-employees during either of the three month-periods ended March 31, 2018 and 2017. The Company recorded stock-based compensation expense for options granted to non-employees of $6,000 and $3,000 during the three months ended March 31, 2018 and 2017, respectively.

Stock Option Valuation

The assumptions that the Company used to determine the grant-date fair value of stock options granted to employees and directors were as follows, presented on a weighted average basis:

 

 

 

Three Months Ended March 31,

 

 

2018

 

 

2017

Risk-free interest rate

 

 

2.71

%

 

*

Expected term (in years)

 

 

6.08

 

 

*

Expected volatility

 

 

77.3

%

 

*

Expected dividend yield

 

 

0

%

 

*

 

*

Not applicable as no stock options were granted during the three months ended March 31, 2017.

Stock Options

The following table summarizes the Company’s stock option activity since December 31, 2017 (in thousands, except share and per share amounts):

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

Average

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

Remaining

 

 

Aggregate

 

 

 

Number of

 

 

Exercise

 

 

Contractual

 

 

Intrinsic

 

 

 

Shares

 

 

Price

 

 

Term

 

 

Value

 

 

 

 

 

 

 

 

 

 

 

(in years)

 

 

 

 

 

Outstanding as of December 31, 2017

 

 

1,403,119

 

 

$

6.26

 

 

 

8.81

 

 

$

9,128

 

Granted

 

 

703,000

 

 

 

17.16

 

 

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding as of March 31, 2018

 

 

2,106,119

 

 

$

9.90

 

 

 

9.02

 

 

$

27,365

 

Options exercisable as of March 31, 2018

 

 

372,600

 

 

$

6.84

 

 

 

7.02

 

 

$

5,981

 

Options unvested as of March 31, 2018

 

 

1,733,519

 

 

$

10.55

 

 

 

9.45

 

 

$

21,384

 

 

The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options and the fair value of the Company’s common stock for those stock options that had exercise prices lower than the fair value of the Company’s common stock.

The weighted average grant-date fair value per share of stock options granted during the three months ended March 31, 2018 was $11.79. There were no options granted during the three months ended March 31, 2017.

The total fair value of options vested during the three months ended March 31, 2018 and 2017 was $0.2 million and $0.2 million, respectively.  

Stock-Based Compensation

Stock-based compensation expense was classified in the condensed consolidated statements of operations as follows (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Research and development expenses

 

$

178

 

 

$

62

 

General and administrative expenses

 

 

388

 

 

 

120

 

 

 

$

566

 

 

$

182

 

19


 

As of March 31, 2018 and December 31, 2017, total unrecognized compensation cost related to the unvested stock-based awards was $11.7 million and $4.0 million, respectively, which is expected to be recognized over weighted average periods of 3.46 and 2.76 years, respectively.

13.

Income Taxes

The Company did not record a federal or state income tax benefit for its losses for the three months ended March 31, 2018 and 2017 due to the conclusion that a full valuation allowance is required against the Company’s deferred tax assets.

On December 22, 2017, the United States enacted the Tax Cuts and Jobs Act ("Tax Reform Legislation"), which made significant changes to U.S. federal income tax law. On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Legislation. The ultimate impact of the Tax Reform Legislation may differ from this estimate, possibly materially, due to changes in interpretations and assumptions, guidance that may be issued and actions the Company may take in response to the Tax Reform Legislation. The Tax Reform Legislation is highly complex and the Company will continue to assess the impact that various provisions will have on its business. Income tax provision for the three months ended March 31, 2018, did not reflect any adjustment to the previously assessed Tax Reform Legislation enactment effect.

14.

Net Loss per Share

Net Loss per Share Attributable to Common Stockholders

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

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Numerator:

 

 

 

 

 

 

 

 

Net loss

 

$

(10,630

)

 

$

(5,385

)

Accretion of redeemable convertible preferred stock to

   redemption value

 

 

 

 

 

(7

)

Net loss attributable to common stockholders

 

$

(10,630

)

 

$

(5,392

)

Denominator:

 

 

 

 

 

 

 

 

Weighted average common shares outstanding—basic

   and diluted

 

 

14,294,421

 

 

 

513,900

 

Net loss per share attributable to common stockholders

   — basic and diluted

 

$

(0.74

)

 

$

(10.49

)

 

The Company’s potentially dilutive securities, which include stock options, warrants to purchase shares of Preferred Stock and common stock, unvested restricted stock, convertible promissory notes and Preferred Stock, have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per share. Therefore, the weighted average number of common shares outstanding used to calculate both basic and diluted net loss per share attributable to common stockholders is the same. The Company excluded the following potential common shares, presented based on amounts outstanding at each period end, from the computation of diluted net loss per share attributable to common stockholders for the periods indicated because including them would have had an anti-dilutive effect:

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Options to purchase common stock

 

 

2,106,119

 

 

 

544,411

 

Redeemable convertible preferred stock (as converted to

   common stock)

 

 

 

 

 

1,789,704

 

Warrants to purchase common stock

 

 

10,414

 

 

 

 

Warrants to purchase redeemable convertible preferred

   stock (as converted to common stock)

 

 

 

 

 

7,475

 

 

 

 

2,116,533

 

 

 

2,341,590

 

 

20


15.

Related Party Transactions

Agreements with Adimab, LLC

During the three months ended March 31, 2018 and 2017, the Company made payments to Adimab of $21,000 and $0, respectively, and recognized $0.1 million and $13,000 of research and development expense under the Adimab Option Agreement. As of March 31, 2018 and December 31, 2017, the Company owed $0.1 million and $21,000, respectively, to Adimab under the Adimab Option Agreement. The chairman of the Company’s board of directors is a co-founder of Adimab and currently serves as Adimab’s Chief Executive Officer.

Agreements with the Gates Foundation

During the three months ended March 31, 2018 and 2017, the Company recognized grant income of $0 and $44,000, respectively, under the grant agreement upon incurring qualifying expenses. As of March 31, 2018 and December 31, 2017, unearned income under the grant agreement was $0. The Gates Foundation is a principal stockholder of the Company.

Services and Facilities Agreement with EveliQure Biotechnologies GmbH

The Company’s wholly owned subsidiary, Arsanis Biosciences GmbH, leases office and lab space in Vienna, Austria from a third party. In February 2015, Arsanis Biosciences GmbH entered into a services and facilities agreement with EveliQure Biotechnologies GmbH (“EveliQure”) under which the Company provides certain laboratory services and sublets office and lab space to EveliQure. Tamas Henics, the husband of Eszter Nagy, the Company’s Chief Scientific Officer, serves as Chief Scientific Officer at EveliQure.

During the three months ended March 31, 2018 and 2017, the Company received payments from EveliQure under the agreement of $0.1 million and less than $0.1 million, respectively. During the three months ended March 31, 2018 and 2017, the Company recognized other income under the agreement of less than $0.1 million in each period. As of March 31, 2018 and December 31, 2017, amounts due from EveliQure totaled less than $0.1 million and $0.1 million, respectively.

16.

Geographic Information

The Company’s property and equipment, net by location was as follows (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

United States

 

$

27

 

 

$

35

 

Austria

 

 

357

 

 

 

386

 

Total property and equipment, net

 

$

384

 

 

$

421

 

 

21


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 together with our condensed consolidated financial statements and the related notes and the other financial information included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2017, which was filed with the Securities and Exchange Commission on March 9, 2018.

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. The words “anticipate,” “believe,” “continue” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “would,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. There are a number of important risks and uncertainties that could cause our actual results to differ materially from those indicated by forward-looking statements. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q, particularly in the section entitled “Risk Factors” in Part II, Item 1A that could cause actual results or events to differ materially from the forward-looking statements that we make.

You should read this Quarterly Report on Form 10-Q and the documents that we have filed as exhibits to this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. The forward-looking statements contained in this Quarterly Report on Form 10-Q are made as of the date of this Quarterly Report on Form 10-Q, and we do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.

Overview

We are a clinical-stage biopharmaceutical company focused on applying monoclonal antibody, or mAb, immunotherapies to address serious infectious diseases. Our deep understanding of the pathogenesis of infection, paired with access to what we believe to be some of the most advanced mAb discovery techniques and platforms available today, has positioned us to further our goal of building and advancing a pipeline of novel mAbs with multiple mechanisms of action and high potency against their intended targets. Our lead clinical program, ASN100, is aimed at serious Staphylococcus aureus infections and is being evaluated in a Phase 2 clinical trial for the prevention of S. aureus pneumonia in high-risk, mechanically ventilated patients. In addition to ASN100, our preclinical pipeline is comprised of mAbs targeting multiple serious bacterial and viral pathogens, including respiratory syncytial virus, or RSV.

Since our inception in 2010, we have devoted substantially all of our resources to building our business to support discovery, research and development activities for our programs. We do not have any products approved for sale and have not generated any revenue from product sales.

Since our inception, we have received significant proceeds from outside sources to fund our operations. We have funded our operations through March 31, 2018 primarily with proceeds from the following sources:

 

net cash proceeds of $75.1 million from sales of our preferred stock;

 

net cash proceeds of $39.5 million from sales of our common stock in our initial public offering;

 

net cash proceeds of $18.6 million from sales of our common stock in our private placement to New Enterprise Associates 16, L.P., or NEA;

 

gross proceeds of $14.4 million from borrowings under convertible promissory notes;

 

proceeds of $9.5 million from borrowings under a loan and security agreement with Silicon Valley Bank, or SVB, which, as amended, we refer to as the 2012 Loan Agreement;

 

proceeds of $9.2 million and $10.5 million of grant and loan proceeds, respectively, from our funding agreements with Österreichische Forschungsförderungsgesellschaft mbH, or FFG;

 

proceeds of $4.9 million of research and development incentive payments received from the Austrian government; and

 

proceeds of $1.6 million from a grant agreement with the Bill & Melinda Gates Foundation, or the Gates Foundation.

On November 20, 2017, we closed an initial public offering of our common shares, in which we issued and sold 4,000,000 common shares at a price to the public of $10.00 per share. Concurrent with the initial public offering, (i) we issued an additional 600,000 common shares at a price of $10.00 per share pursuant to the exercise of the underwriters’ over-allotment option and (ii) NEA

22


purchased 2,000,000 shares of our common stock at the initial per share public offering price of $10.00 in a private placement. The aggregate net proceeds to us from the initial public offering, inclusive of the over-allotment exercise, and the private placement were $58.1 million after deducting underwriting discounts and commissions and offering expenses payable by us.

Since our inception, we have incurred significant operating losses. Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of one or more of our current or future product candidates and programs. Our net losses were $10.6 million and $5.4 million for the three months ended March 31, 2018 and 2017, respectively. As of March 31, 2018, we had an accumulated deficit of $102.9 million. We expect to continue to incur significant expenses for at least the next several years as we advance our product candidates from discovery through preclinical development and clinical trials and seek regulatory approval of our product candidates. In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution. We may also incur expenses in connection with the in-licensing or acquisition of additional product candidates. Furthermore, we expect to incur additional costs associated with operating as a public company, including significant legal, accounting, investor relations and other expenses that we did not incur as a private company.

As a result, we will need substantial additional funding to support our continuing operations and pursue our business strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations with proceeds from outside sources, with a majority of such proceeds to be derived from sales of equity. We also plan to pursue additional funding from outside sources, including proceeds from our existing grant and potential future grant agreements with the Gates Foundation; our expansion of, or our entry into, new borrowing arrangements; grants and loans under our existing funding agreements with FFG; research and development incentive payments from the Austrian government; and our entry into potential future collaboration agreements for one or more of our programs. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more of our product candidates or delay our pursuit of potential in-licenses or acquisitions.

Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.

As of March 31, 2018, we had cash and cash equivalents of $64.0 million. We believe our existing cash and cash equivalents will enable us to fund our operating expenses, capital expenditure requirements and debt service payments into the second half of 2019. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. See “—Liquidity and Capital Resources.”

Components of Our Results of Operations

Revenue

To date, we have not generated any revenue from any sources, including from product sales, and we do not expect to generate any revenue from the sale of products in the near future. If our development efforts for our product candidates are successful and result in regulatory approval or license agreements with third parties, we may generate revenue in the future from product sales.

We recognize proceeds received from grants under our funding agreements with FFG, our research and development incentives from the Austrian government and our grant agreement with the Gates Foundation as other income, rather than as revenue.

Operating Expenses

Research and Development Expenses.    Research and development expenses consist primarily of costs incurred in connection with the discovery and development of our product candidates. We expense research and development costs as incurred. These expenses include:

 

expenses incurred under agreements with contract research organizations, or CROs, that are primarily engaged in the oversight and conduct of our clinical trials; contract manufacturing organizations, or CMOs, that are primarily engaged to provide preclinical and clinical drug substance and product for our research and development programs, as well as investigative sites and consultants that conduct our clinical trials, preclinical studies and other scientific development services;

 

the cost of acquiring and manufacturing preclinical and clinical trial materials, including manufacturing validation batches;

23


 

employee-related expenses, including salaries and benefits, travel and stock-based compensation expense for employees engaged in research and development functions;

 

costs related to compliance with regulatory requirements;

 

facilities-related expenses, which include direct depreciation costs and allocated rent and maintenance of facilities and other operating costs; and

 

payments made under third-party licensing or option agreements.

We recognize external development costs based on an evaluation of the progress to completion of specific tasks using information provided to us by our service providers. Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. Such amounts are recognized as an expense as the goods are delivered or the related services are performed, or until it is no longer expected that the goods will be delivered or the services rendered.

Our direct research and development expenses are tracked on a program-by-program basis for our product candidates and consist primarily of external costs, such as fees paid to outside consultants, CROs, CMOs and central laboratories in connection with our preclinical development, process development, manufacturing and clinical development activities. Our direct research and development expenses by program also include fees incurred under license or option agreements. We do not allocate employee costs or facility expenses, including depreciation or other indirect costs, to specific programs because these costs are deployed across multiple programs and, as such, are not separately classified. We use internal resources primarily to conduct our research and discovery as well as for managing our preclinical development, process development, manufacturing and clinical development activities. These employees work across multiple programs and, therefore, we do not track their costs by program.

The table below summarizes our research and development expenses incurred by program:

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

ASN100

 

$

5,237

 

 

$

2,482

 

ASN200

 

 

15

 

 

 

7

 

ASN300

 

 

16

 

 

 

2

 

ASN400

 

 

3

 

 

 

17

 

ASN500

 

 

271

 

 

 

28

 

Unallocated research and development expenses

 

 

2,591

 

 

 

1,855

 

Total research and development expenses

 

$

8,133

 

 

$

4,391

 

 

Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. As a result, we expect that our research and development expenses will increase substantially over the next several years as we continue our Phase 2 clinical trial of ASN100 as well as potentially conduct subsequent clinical trials of ASN100, seek to advance one or more additional product candidates, advance our preclinical programs, prepare associated regulatory filings for our product candidates and increase personnel costs, including stock-based compensation.

The successful development and commercialization of our product candidates is highly uncertain. At this time, we cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the preclinical and clinical development of any of our product candidates or when, if ever, material net cash inflows may commence from any of our product candidates. This uncertainty is due to the numerous risks and uncertainties associated with product development and commercialization, including the uncertainty of:

 

successful enrollment and completion of clinical trials;

 

a safety, tolerability and efficacy profile that is satisfactory to the U.S. Food and Drug Administration, or FDA, or any non-U.S. regulatory authority for marketing approval;

 

timely receipt of marketing approvals from applicable regulatory authorities;

 

the performance of our future collaborators, if any;

 

the extent of any required post-marketing approval commitments to applicable regulatory authorities;

24


 

establishment and maintenance of arrangements with third-party manufacturers for both clinical and any future commercial manufacturing;

 

adequate ongoing availability of raw materials and drug product for clinical development and any commercial sales;

 

obtaining and maintaining patent, trade secret protection and regulatory exclusivity, both in the United States and internationally;

 

protection of our rights in our intellectual property portfolio;

 

successful launch of commercial sales following any marketing approval;

 

a continued acceptable safety profile following any marketing approval;

 

commercial acceptance by the patient community, the medical community and third-party payors; and

 

our ability to compete with other therapies.

We may never succeed in achieving regulatory approval for any of our product candidates. We may obtain unexpected results from our clinical trials. We may elect to discontinue, delay or modify clinical trials of some product candidates or focus on others. Any changes in the outcome of any of these variables with respect to the development of our product candidates in preclinical and clinical development could mean a significant change in the costs and timing associated with the development of these product candidates. For example, if the FDA or another regulatory authority were to delay our planned start of clinical trials or require us to conduct clinical trials or other testing beyond those that we currently expect or if we experience significant delays in enrollment in any of our planned clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development of that product candidate. Drug commercialization will take several years and millions of dollars in development costs.

General and Administrative Expenses.    General and administrative expenses consist primarily of salaries and benefits, travel and stock-based compensation expense for personnel in executive, director, finance and administrative functions. General and administrative expenses also include professional fees for legal, patent, consulting, accounting and audit services.

We anticipate that our general and administrative expenses will remain reasonably consistent with expenses incurred for the three-month period ended March 31, 2018. General and administrative expenses incurred during this period include increased accounting, audit, legal, regulatory, compliance and director and officer insurance costs as well as investor and public relations expenses associated with our becoming a public company in November 2017. Additionally, if and when we believe a regulatory approval of a product candidate appears likely, we anticipate an increase in payroll and other employee-related expenses as a result of our preparation for commercial operations, especially as it relates to the sales and marketing of that product candidate.

Other Income (Expense), Net

Grant and Incentive Income.    Grant and incentive income consists of grant income recognized in connection with grants we receive under our funding agreements with FFG, or the FFG Grants, including the imputed benefit of FFG loans at below-market interest rates; incentive income received in connection with the research and development incentive program provided by the Austrian government; and grant income received under our grant agreement with the Gates Foundation.

Interest Expense.    Interest expense consists of interest on outstanding borrowings under the 2012 Loan Agreement, convertible promissory notes and loans from FFG as well as amortization of debt discount and debt issuance costs.

In April 2017, in connection with the sale of our Series D convertible preferred stock, all of the outstanding principal and accrued interest under the convertible promissory notes that we issued in 2016 and 2017 was automatically converted into shares of Series D convertible preferred stock. As a result, in periods subsequent to this conversion, we incurred no interest expense related to convertible promissory notes.

Interest Income.    Interest income primarily consists of interest earned on cash equivalents in our sweep account.

Change in Fair Value of Warrant Liability.    In connection with the 2012 Loan Agreement, we issued to SVB warrants to purchase shares of our preferred stock. We classified the warrants as a liability on our consolidated balance sheet. We remeasured this warrant liability to fair value at each reporting date using the Black-Scholes option-pricing model and recognized changes in the fair value of the warrant liability as a component of other income (expense), net in our consolidated statement of operations.

25


In November 2017, in connection with the closing of our initial public offering, the warrants for the purchase of preferred stock converted into warrants for the purchase of common stock. Upon the conversion, we reclassified the warrants as equity, recorded at fair value on the date of the reclassification on our consolidated balance sheets (included in additional paid-in capital).

Change in Fair Value of Derivative Liability.    We issued convertible promissory notes that contained a contingent put option and a conversion feature, each of which met the definition of a derivative instrument. We classified these derivative instruments as a liability on our consolidated balance sheet. We remeasured this derivative liability to fair value at each reporting date and recognized changes in the fair value of the derivative liability as a component of other income (expense), net in our consolidated statement of operations.

In April 2017, in connection with the sale of our Series D convertible preferred stock, the convertible promissory notes that we issued in 2016 and 2017 were automatically converted into shares of Series D convertible preferred stock. Subsequent to this conversion, no convertible promissory notes remained outstanding and as a result, we no longer have a derivative liability recorded on our consolidated balance sheet and therefore, we no longer recognize changes in the fair value of the derivative liability in our consolidated statement of operations.

Loss on the Extinguishment of Debt.    In April 2016, in connection with the sale of our Series C convertible preferred stock, all of the outstanding principal and accrued interest under the convertible promissory notes that we issued in 2015 was automatically converted into shares of Series C convertible preferred stock. We recorded a loss on extinguishment of debt related to this conversion.

In April 2017, in connection with the sale of our Series D convertible preferred stock, all of the outstanding principal and accrued interest under the convertible promissory notes that we issued in 2016 and 2017 was automatically converted into shares of Series D convertible preferred stock. We recorded a loss on extinguishment of debt related to this conversion.

Other Income (Expense).    Other income (expense), net consists primarily of realized and unrealized foreign currency transaction gains and losses.

Income Taxes

Since our inception, we have not recorded any U.S. federal or state income tax benefits or any foreign income tax benefits for the net losses we have incurred in each year or for our earned research and development tax credits, due to our uncertainty of realizing a benefit from those items. As of December 31, 2017, we had U.S. federal and state net operating loss carryforwards of $24.2 million and $20.4 million, respectively, which begin to expire in 2031 and 2036, respectively. In addition, as of December 31, 2017, we had foreign net operating loss carryforwards of $56.3 million, which do not expire. As of December 31, 2017, we also had U.S. federal and state research and development tax credit carryforwards of $0.3 million and $0.1 million, respectively, which begin to expire in 2032 and 2031, respectively. We have recorded a full valuation allowance against our net deferred tax assets at each balance sheet date.

26


Results of Operations

Comparison of the Three Months Ended March 31, 2018 and 2017

The following table summarizes our results of operations for the three months ended March 31, 2018 and 2017:

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

 

Change

 

 

 

(in thousands)

 

Operating expenses: