aplt_Current_Folio_10Q

Table of Contents

 

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 June 30, 2019

OR

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

For the transition period from ______________ to ______________

Commission File Number: 001-38898


Applied Therapeutics, Inc.

(Exact Name of Registrant as Specified in its Charter)


 

Delaware

81-3405262

(State or other jurisdiction of

incorporation or organization)

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

 

340 Madison Avenue, 19th Floor

New York, New York 10173

(212) 220-9226

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)


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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

APLT

The Nasdaq Stock Market LLC

 

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

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

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

 

 

 

 

 

 

 

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth 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 August 1, 2019, the registrant had 17,052,202 shares of common stock, $0.0001 par value per share, outstanding.

 

 

 

Table of Contents

Table of Contents

 

 

Page

PART I. 

FINANCIAL INFORMATION

 

Item 1. 

Financial Statements (Unaudited)

3

 

Condensed Balance Sheets

3

 

Condensed Statements of Operations

4

 

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

5

 

Condensed Statements of Cash Flows

6

 

Notes to Unaudited Condensed Financial Statements

7

Item 2. 

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

21

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

30

Item 4. 

Controls and Procedures

30

PART II. 

OTHER INFORMATION

 

Item 1. 

Legal Proceedings

31

Item 1A. 

Risk Factors

31

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

69

Item 3. 

Defaults Upon Senior Securities

70

Item 4. 

Mine Safety Disclosures

70

Item 5. 

Other Information

70

Item 6. 

Exhibits

71

 

 

 

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Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “aim,” “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “could,” “design,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective,” “plan,” “predict,” “positioned,” “potential,” “seek,” “should,” “target,” “will,” “would,” or similar expressions, or the negative or plural of these words or expressions. These forward-looking statements include statements concerning the following:

·

our plans to develop and commercialize our product candidates;

·

the initiation, timing, progress and results of our current and future preclinical studies and clinical trials and our research and development programs;

·

our ability to take advantage of expedited regulatory pathways for any of our product candidates;

·

our estimates regarding expenses, future revenue, capital requirements and needs for additional financing;

·

our ability to successfully acquire or in‑license additional product candidates on reasonable terms;

·

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

·

our ability to obtain regulatory approval of our current and future product candidates;

·

our expectations regarding the potential market size and the rate and degree of market acceptance of such product candidates;

·

our ability to fund our working capital requirements and expectations regarding the sufficiency of our capital resources;

·

the implementation of our business model and strategic plans for our business and product candidates;

·

our intellectual property position and the duration of our patent rights;

·

developments or disputes concerning our intellectual property or other proprietary rights;

·

our expectations regarding government and third‑party payor coverage and reimbursement;

·

our ability to compete in the markets we serve;

·

the impact of government laws and regulations and liabilities thereunder;

·

developments relating to our competitors and our industry; and

·

other factors that may impact our financial results.

These statements are only current predictions and are subject to known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from those anticipated by the forward-looking statements. We discuss many of these risks in greater detail under the heading “Risk Factors” and elsewhere in this report. In light of the significant uncertainties in these forward looking statements, you should not rely upon forward looking statements as predictions of future events.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by law, we are under no duty to update or revise any of the forward-looking statements in this report, whether as a result of new information, future events or otherwise, after the date of this report.

Unless the context otherwise requires, the terms “Applied,” “Applied Therapeutics,” “the company,” “we,” “us,” “our” and similar references in this Quarterly Report on Form 10-Q refer to Applied Therapeutics, Inc.

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

 

Applied Therapeutics, Inc.

Condensed Balance Sheets

(in thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

As of

 

As of

 

 

 

June 30, 

 

December 31, 

 

 

 

2019

 

2018

 

 

    

(Unaudited)

    

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

  

 

CURRENT ASSETS:

 

 

  

 

 

  

 

Cash and cash equivalents

 

$

41,076

 

$

18,748

 

Prepaid expenses and other current assets

 

 

5,708

 

 

1,498

 

Total current assets

 

 

46,784

 

 

20,246

 

TOTAL ASSETS

 

$

46,784

 

$

20,246

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

  

 

 

  

 

CURRENT LIABILITIES:

 

 

  

 

 

  

 

Accounts payable

 

 

3,987

 

 

3,015

 

Accrued expenses and other current liabilities

 

 

2,793

 

 

1,413

 

Total current liabilities

 

 

6,780

 

 

4,428

 

Other liabilities

 

 

 

 

 

 

 

Total liabilities

 

 

6,780

 

 

4,428

 

Series A convertible preferred stock, $0.0001 par value; 0 shares and 3,093,898 shares authorized at June 30, 2019 and December 31, 2018, respectively; 0 shares and 3,093,898 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively; liquidation preference of $0 and $7,000 at June 30, 2019  and December 31, 2018, respectively

 

 

 —

 

 

6,254

 

Series B convertible preferred stock, $0.0001 par value; 0 shares and 7,790,052 shares authorized as of June 30, 2019  and December 31, 2018, respectively; 0 shares and 4,001,848 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively; liquidation preference of $0 and $29,964 as of June 30, 2019  and December 31, 2018, respectively

 

 

 —

 

 

29,156

 

STOCKHOLDERS’ EQUITY (DEFICIT):

 

 

  

 

 

  

 

Common stock, $0.0001 par value; 100,000,000 and 20,441,982 shares authorized as of June 30, 2019 and December 31, 2018, respectively; 17,052,202 shares and 5,513,531 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively

 

 

 1

 

 

 —

 

Additional paid-in capital

 

 

78,427

 

 

1,665

 

Accumulated deficit

 

 

(38,424)

 

 

(21,257)

 

Total stockholders' equity (deficit)

 

 

40,004

 

 

(19,592)

 

TOTAL LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

 

$

46,784

 

$

20,246

 

 

The Notes to Condensed Financial Statements are an integral part of these statements.

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Table of Contents

Applied Therapeutics, Inc.

Condensed Statements of Operations

(in thousands, except share and per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30, 

 

June 30, 

 

    

2019

    

2018

    

2019

    

2018

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

4,254

 

$

1,937

 

$

11,128

 

$

3,385

General and administrative

 

 

4,183

 

 

400

 

 

6,037

 

 

820

Total operating expenses

 

 

8,437

 

 

2,337

 

 

17,165

 

 

4,205

LOSS FROM OPERATIONS

 

 

(8,437)

 

 

(2,337)

 

 

(17,165)

 

 

(4,205)

OTHER INCOME (EXPENSE), NET:

 

 

  

 

 

  

 

 

  

 

 

  

Interest income (expense), net

 

 

 —

 

 

(533)

 

 

(1)

 

 

(815)

Other expense

 

 

 —

 

 

(315)

 

 

 —

 

 

(501)

Total other income (expense), net

 

 

 —

 

 

(848)

 

 

(1)

 

 

(1,316)

Net loss

 

$

(8,437)

 

$

(3,185)

 

$

(17,166)

 

$

(5,521)

Net loss attributable to common stockholders—basic and diluted

 

$

(8,437)

 

$

(3,185)

 

$

(17,166)

 

$

(5,521)

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

 

$

(0.60)

 

$

(0.58)

 

$

(1.76)

 

$

(1.01)

Weighted-average common stock outstanding—basic and diluted

 

 

13,945,939

 

 

5,463,489

 

 

9,776,582

 

 

5,460,983

 

The Notes to Condensed Financial Statements are an integral part of these statements.

 

 

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Applied Therapeutics, Inc.

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

(in thousands, except share and per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible Preferred Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series A

 

Series B

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

Convertible

 

Convertible

 

 

$0.0001

 

Additional

 

 

 

 

Total

 

 

Preferred Stock

 

Preferred Stock

 

 

Par Value

 

Paid-in

 

Accumulated

 

Stockholders’

 

    

Shares

    

Amount

    

Shares

    

Amount

  

  

Shares

    

Amount

    

Capital

    

Deficit

    

Deficit

BALANCE, December 31, 2017

 

 

3,093,898

 

$

6,254

 

 

 —

 

$

 —

  

  

 

5,458,450

 

$

 —

 

$

775

 

$

(4,736)

 

$

(3,961)

Stock-based compensation expense

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

26

 

 

 —

 

 

26

Net loss

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 —

 

 

(2,335)

 

 

(2,335)

BALANCE, March 31, 2018

 

 

3,093,898

 

$

6,254

 

$

 —

 

$

 —

 

 

 

5,458,450

 

$

 —

 

$

801

 

$

(7,071)

 

$

(6,270)

Exercise of options for common stock issued under Equity Incentive Plan

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

9,171

 

 

 —

 

 

 9

 

 

 —

 

 

 9

Stock-based compensation expense

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

76

 

 

 —

 

 

76

Net loss

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 —

 

 

(3,185)

 

 

(3,185)

BALANCE, June 30, 2018

 

$

3,093,898

 

$

6,254

 

$

 —

 

$

 —

 

 

$

5,467,621

 

$

 —

 

$

886

 

$

(10,256)

 

$

(9,370)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible Preferred Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series A

 

Series B

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

Convertible

 

Convertible

 

 

$0.0001

 

Additional

 

 

 

 

Total

 

 

Preferred Stock

 

Preferred Stock

 

 

Par Value

 

Paid-in

 

Accumulated

 

Stockholders’

 

    

Shares

    

Amount

    

Shares

    

Amount

  

  

Shares

    

Amount

    

Capital

    

Deficit

    

Deficit

BALANCE, December 31, 2018

 

 

3,093,898

 

$

6,254

 

 

4,001,848

 

$

29,156

  

  

 

5,513,531

 

$

 —

 

$

1,665

 

$

(21,257)

 

$

(19,592)

Issuance of Series B convertible preferred stock for cash, net of issuance costs of $266

 

 

 —

 

 

 —

 

 

442,925

 

 

3,051

 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Issuance of common stock warrants in connection with the issuance of Series B convertible preferred stock

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

80

 

 

 —

 

 

80

Stock-based compensation expense

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

325

 

 

 —

 

 

325

Net loss

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 —

 

 

(8,730)

 

 

(8,730)

BALANCE, March 31, 2019

 

 

3,093,898

 

 

6,254

 

 

4,444,773

 

 

32,207

 

 

 

5,513,531

 

 

 —

 

 

2,070

 

 

(29,987)

 

 

(27,917)

Conversion of Series A convertible preferred stock into common stock upon closing of initial public offering

 

 

(3,093,898)

 

 

(6,254)

 

 

 —

 

 

 —

 

 

 

3,093,898

 

 

 —

 

 

6,254

 

 

 —

 

 

6,254

Conversion of Series B convertible preferred stock into common stock upon closing of initial public offering

 

 

 —

 

 

 —

 

 

(4,444,773)

 

 

(32,207)

 

 

 

4,444,773

 

 

 1

 

 

32,207

 

 

 —

 

 

32,208

Issuance of common stock upon initial public offering, net of issuance costs of $5,383

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

4,000,000

 

 

 —

 

 

34,617

 

 

 —

 

 

34,617

Stock-based compensation expense

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

3,279

 

 

 —

 

 

3,279

Net loss

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 —

 

 

(8,437)

 

 

(8,437)

BALANCE, June 30, 2019

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

 

$

17,052,202

 

$

 1

 

$

78,427

 

$

(38,424)

 

$

40,004

 

The Notes to Condensed Financial Statements are an integral part of these statements.

 

 

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Applied Therapeutics, Inc.

Condensed Statements of Cash Flows

(in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

June 30, 

 

    

2019

    

2018

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

  

 

 

  

Net loss

 

$

(17,166)

 

$

(5,521)

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

 

 

  

 

 

  

Stock-based compensation expense

 

 

3,604

 

 

102

Non-cash interest expense

 

 

 —

 

 

815

Change in fair value of derivative liability

 

 

 —

 

 

474

Change in fair value of warrant liability

 

 

 —

 

 

27

Changes in operating assets and liabilities:

 

 

  

 

 

  

Prepaid expenses

 

 

(4,330)

 

 

(858)

Accounts payable

 

 

462

 

 

130

Accrued expenses and other current liabilities

 

 

1,369

 

 

1,538

Net cash used in operating activities

 

 

(16,061)

 

 

(3,293)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

  

 

 

  

Proceeds from issuance of Series B convertible preferred stock, net of cash issuance costs of $186

 

 

3,131

 

 

 —

Proceeds from issuance of convertible promissory notes, net of cash issuance costs of $440

 

 

 —

 

 

5,560

Payment of offering costs

 

 

(1,942)

 

 

 —

Proceeds from the initial public offering, net of underwriter commissions

 

 

37,200

 

 

 —

Exercise of stock options for common stock under Equity Incentive Plan

 

 

 —

 

 

 9

Net cash provided by financing activities

 

 

38,389

 

 

5,569

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

 

22,328

 

 

2,276

Cash and cash equivalents at beginning of period

 

 

18,748

 

 

3,277

Cash and cash equivalents at end of period

 

$

41,076

 

$

5,553

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

 

  

 

 

  

Issuance of warrants in connection with convertible promissory notes

 

$

 —

 

$

74

Issuance of warrants in connection with Series B convertible preferred stock

 

$

80

 

$

 —

Derivative liability in connection with issuance of convertible promissory notes

 

$

 —

 

$

1,896

Initial public offering costs in accrued expenses

 

$

11

 

$

 —

Initial public offering costs in accounts payable

 

$

510

 

$

 —

Conversion of Preferred Stock to Equity Following IPO

 

$

38,461

 

$

 —

 

The Notes to Condensed Financial Statements are an integral part of these statements.

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Applied Therapeutics, Inc.

Notes to Condensed Financial Statements (Unaudited)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Operations and Business

Applied Therapeutics, Inc. (the “Company”) is a clinical-stage biopharmaceutical company developing a pipeline of novel product candidates against validated molecular targets in indications of high unmet medical need. In particular, the Company is currently targeting treatments for cardiovascular disease, galactosemia and diabetic complications. The Company was incorporated in Delaware on January 20, 2016 and is headquartered in New York, New York.

On May 16, 2019, the Company completed an initial public offering (“IPO”) in which the Company issued and sold 4,000,000 shares of its common stock at a public offering price of $10.00 per share, for aggregate gross proceeds of $40.0 million. The Company received net of proceeds $34.6 million, after deducting underwriting discounts and commissions and offering costs. Prior to the completion of the IPO, the Company primarily funded its operations with proceeds from the sale of convertible preferred stock (see Note 8).

In connection with the IPO, the Company effected a 55.2486-for-1 stock split of its issued and outstanding shares of common stock and convertible preferred stock. The stock split became effective on April 26, 2019. Stockholders entitled to fractional shares as a result of the forward stock split received cash payment in lieu of receiving fractional shares. All share and per share amounts for all periods presented in the accompanying condensed financial statements and notes thereto have been retroactively adjusted, where applicable, to reflect this stock split. Shares of common stock underlying outstanding stock options and other equity instruments were proportionately increased and the respective per share value and exercise prices, if applicable, were proportionately decreased in accordance with the terms of the agreements governing such securities.

Upon the closing of the IPO on May 16, 2019, all of the then-outstanding shares of convertible preferred stock automatically converted into 7,538,671 shares of common stock on a one-for-one basis. Subsequent to the closing of the IPO, there were no shares of convertible preferred stock outstanding.

The accompanying unaudited condensed financial statements as of June 30, 2019 and for the three and six months ended June 30, 2019 and 2018 have been prepared by the Company in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. These 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, 2018 included in the Company’s final prospectus that forms a part of the Company’s Registration Statement on Form S-1 (Reg. No. 333-230838), filed with the SEC pursuant to Rule 424(b)(4) on May 14, 2019 (the “Prospectus”).

The unaudited condensed financial statements have been prepared on the same basis as the audited financial statements. In the opinion of management, the accompanying unaudited condensed financial statements contain all adjustments which are necessary for a fair presentation of the Company’s financial position as of June 30, 2019, results of operations for the three and six months ended June 30, 2019 and 2018 and cash flows for the six months ended June 30, 2019 and 2018. Such adjustments are of a normal and recurring nature. The results of operations for the three and six months ended June 30, 2019 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2019.

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Liquidity

The Company has incurred, and expects to continue to incur, significant operating losses and negative cash flows for at least the next several years as it continues to develop its drug candidates. To date, the Company has not generated any revenue, and it does not expect to generate revenue unless and until it successfully completes development and obtains regulatory approval for one of its product candidates.

Management believes that the Company’s existing cash, together with the net proceeds from the IPO, will allow the Company to continue its operations for at least 12 months from the issuance date of these financial statements.  If the Company is unable to obtain additional funding, the Company will 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. Although management continues to pursue these plans, there is no assurance that the Company will be successful in obtaining sufficient funding on terms acceptable to the Company to fund continuing operations, if at all.

Risks and Uncertainties

The Company is subject to risks common to companies in the biotechnology industry, including but not limited to, risks of failure of preclinical studies and clinical trials, the need to obtain marketing approval for any product candidate that it may identify and develop, the need to successfully commercialize and gain market acceptance of its product candidates, dependence on key personnel, protection of proprietary technology, compliance with government regulations, development by competitors of technological innovations and reliance on third‑party manufacturers.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.

Significant Accounting Policies

The significant accounting policies and estimates used in preparation of the condensed financial statements are described in the Company’s audited financial statements as of and for the year ended December 31, 2018, and the notes thereto, which are included in the Company’s Prospectus. Except as detailed below, there have been no material changes to the Company’s significant accounting policies during the six months ended June 30, 2019.

Stock‑Based Compensation

The Company accounts for its stock-based compensation as expense in the condensed statements of operations based on the awards' grant date fair values. The Company accounts for forfeitures as they occur by reversing any expense recognized for unvested awards.

The Company estimates the fair value of options granted using the Black-Scholes option pricing model with the exception of stock options that include service, performance and market conditions, which are valued using the Monte-Carlo simulation model. The Black-Scholes option pricing model requires inputs based on certain subjective assumptions, including (a) the expected stock price volatility, (b) the calculation of expected term of the award, (c) the risk-free interest rate and (d) expected dividends. The Company has historically been a private company and lacks company-specific historical and implied volatility information. Therefore, the Company estimates its expected stock volatility based on the historical volatility of a publicly traded set of 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 historical volatility is calculated based on a period of time commensurate with the expected term assumption. The computation of expected volatility is based on the historical volatility of a representative group of companies with similar characteristics to the Company, including stage of product development and life science industry focus. The Company uses the

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simplified method as allowed by the Securities and Exchange Commission ("SEC") Staff Accounting Bulletin ("SAB") No. 107, Share-Based Payment, to calculate the expected term for options granted to employees as it does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected term of the stock options. The expected dividend yield is assumed to be zero as the Company has never paid dividends and has no current plans to pay any dividends on its common stock.  A Monte-Carlo simulation is an analytical method used to estimate fair value by performing a large number of simulations or trial runs and thereby determining a value based on the possible outcomes from these trial runs based on the specific vesting conditions.

The fair value of stock-based payments is recognized as expense over the requisite service period which is generally the vesting period, with the exception of the fair value of stock-based payments for awards that include service, performance and market conditions, which is recognized as expense over the derived service period determined using the Monte-Carlo simulation.

Deferred Offering Costs

The Company capitalizes certain legal, professional accounting and other third-party fees that are directly associated with in-process equity financings as deferred offering costs until such financings are consummated. After consummation of the equity financing, these costs are recorded in the statement of stockholders’ (deficit) equity as a reduction of proceeds generated as a result of the offering. Should a planned equity financing be abandoned, the deferred offering costs would be expensed immediately as a charge to operating expenses in the statement of operations.

Upon closing the IPO in May 2019, $2.6 million in deferred offering costs were reclassified from prepaid and other current assets and recorded against the IPO proceeds reducing additional paid-in capital.  As of June 30, 2019, the Company did not have any deferred offering costs recorded in prepaid and other current assets.

Recently Adopted Accounting Pronouncements

The new accounting pronouncements recently adopted by the Company are described in the Company’s audited financial statements as of and for the year ended December 31, 2018, and the notes thereto, which are included in the Company’s Prospectus as filed with the SEC on May 14, 2019.  Except as described below, there have been no new accounting pronouncements adopted by the Company during the six months ended June 30, 2019.

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), which requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases on their balance sheet date (“ASU No. 2016-02”). ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018. In July 2018, an amendment was made that allows companies the option of using the effective date of the new standard as the initial application date (at the beginning of the period in which the new standard is adopted, rather than at the beginning of the earliest comparative period). This update includes a short-term lease exception for leases with a term of 12 months or less, in which a lessee can make an accounting policy election not to recognize the associated lease assets and lease liabilities on its balance sheet. Additionally, in March 2019, the FASB issued ASU 2019-01, Leases (Topic 842): Codification Improvements (“ASU No. 2019-01”). ASU No. 2019-01 clarifies the transition guidance related to interim disclosures provided in the year of adoption. Lessees will continue to differentiate between finance leases (previously referred to as capital leases) and operating leases, using classification criteria that are substantially similar to the previous guidance. For lessees, the recognition, measurement, and presentation of expenses and cash flows arising from a lease did not significantly change from previous U.S. GAAP. The modified retrospective method includes several optional practical expedients that entities may elect to apply, as well as transition guidance specific to nonstandard leasing transactions. The Company adopted Topic 842 on January 1, 2019 using a cumulative-effect adjustment on the effective date of the standard, for which comparative periods are presented in accordance with the previous guidance under ASC 840.

In adopting Topic 842, the Company elected to utilize the available package of practical expedients permitted under the transition guidance within the new standard, which does not require the reassessment of the following: i) whether existing or expired arrangements are or contain a lease; ii) the lease classification of existing or expired leases;

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and iii) whether previous initial direct costs would qualify for capitalization under the new lease standard. Additionally, the Company made an accounting policy election not to recognize assets or related lease liabilities with a lease term of twelve months or less in its condensed balance sheet.

The adoption of this standard did not have an impact on the Company’s condensed balance sheet as all of the Company’s leases are for terms that are less than 12 months.  Additionally, the adoption of this standard did not have a material impact on the Company’s condensed statements of operations or condensed statements of cash flows.

As further described in Note 12—Subsequent Events, on August 6, 2019 the Company entered into a lease for new office space. The Company is currently evaluating the impact of this lease to the Company’s consolidated financial statements under ASC 842.

Recently Issued Accounting Pronouncements

There have been no additional new accounting pronouncements or changes to accounting pronouncements during the six months ended June 30, 2019 that could be expected to materially impact the Company’s unaudited condensed financial statements.

 

 

2. LICENSE AGREEMENT

Columbia University

In October 2016, the Company entered into a license agreement (the “2016 Columbia Agreement”) with the Trustees of Columbia University (“Columbia University”) to obtain an exclusive royalty-bearing sublicensable license in respect to certain patents. As part of the consideration for entering into the 2016 Columbia Agreement, the Company issued to Columbia University shares equal to 5% of its outstanding common stock on a fully diluted basis at the time of issue. The common stock had a fair value of $0.5 million at the time of issuance. The Company will be required to make further payments to Columbia University of up to an aggregate of $1.3 million for the achievement of specified development and regulatory milestones, and up to an aggregate of $1.0 million for the achievement of a specified level of aggregate annual net sales, in each case in connection with products covered by the 2016 Columbia Agreement. The Company will also be required to pay tiered royalties to Columbia University in the low‑ to mid‑single digit percentages on the Company’s, its affiliates’ and its sublicensees’ net sales of licensed products, subject to specified offsets and reductions. In addition, the Company is required to make specified annual minimum royalty payments to Columbia University, which is contingent upon the approval of the licensed products, in the mid-six figures beginning on the 10th anniversary of the effective date of the 2016 Columbia Agreement. The Company has not granted any sublicenses under the 2016 Columbia Agreement.  However, if the Company sublicenses the rights granted under the 2016 Columbia Agreement to one or more third parties, it will be required to pay Columbia University a portion of the net sublicensing revenue received from such third parties, at percentages between 10% and 20%, depending on the stage of development at the time such revenue is received from such third parties.

In January 2019, the Company entered into a second license agreement with Columbia University (the “2019 Columbia Agreement”). Pursuant to the 2019 Columbia Agreement, Columbia University granted the Company a royalty-bearing, sublicensable license that is exclusive with respect to certain patents, and non-exclusive with respect to certain know-how, in each case to develop, manufacture and commercialize PI3k inhibitor products. The license grant is worldwide. Under the 2019 Columbia Agreement, the Company is obligated to use commercially reasonable efforts to research, discover, develop and market licensed products for commercial sale in the licensed territory, and to comply with certain obligations to meet specified development and funding milestones within defined time periods. Columbia University retains the right to conduct, and grant third parties the right to conduct, non-clinical academic research using the licensed technology, provided that such research is not funded by a commercial entity or for-profit entity or results in rights granted to a commercial or for-profit entity. As consideration for entering into the 2019 Columbia Agreement, the Company made a nominal upfront payment to Columbia University.  The Company will be required to make further payments to Columbia University of up to an aggregate of $1.3 million for the achievement of specified development and regulatory milestones, and up to an aggregate of $1.0 million for the achievement of a specified level of aggregate annual net sales, in each case in connection with products covered by the 2019 Columbia Agreement. The Company will

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also be required to pay tiered royalties to Columbia University in the low- to mid-single digit percentages on the Company’s, its affiliates’ and its sublicensees’ net sales of licensed products, subject to specified offsets and reductions. In addition, the Company is required to make specified annual minimum royalty payments to Columbia University, which is contingent upon the approval of the licensed products, in the mid-six figures beginning on the tenth anniversary of the effective date of the 2019 Columbia Agreement.

The Company has not granted any sublicenses under the 2019 Columbia Agreement. However, if the Company sublicenses the rights granted under the 2019 Columbia Agreement to one or more third parties, it will be required to pay Columbia University a portion of the net sublicensing revenue received from such third parties, at percentages between 10% and 50%, depending on the stage of development at the time such revenue is received from such third parties. The 2019 Columbia Agreement will terminate upon the expiration of all the Company’s royalty payment obligations in all countries. The Company may terminate the 2019 Columbia Agreement for convenience upon 90 days’ written notice to Columbia University. At its election, Columbia University may terminate the 2019 Columbia Agreement, or convert the licenses granted to the Company into non-exclusive, non-sublicensable licenses, in the case of (a) the Company’s uncured material breach upon 30 days’ written notice (which shall be extended to 90 days if the Company is diligently attempting to cure such material breach), (b) the Company’s failure to achieve the specified development and funding milestone events, or (c) the Company’s insolvency.

In March 2019, and in connection with the 2016 Columbia Agreement, the Company entered into a research services agreement (the “2019 Columbia Research Agreement” and collectively with the 2016 Columbia Agreement and 2019 Columbia Agreement, the “Columbia Agreements”) with Columbia University with the purpose of analyzing structural and functional changes in brain tissue in an animal model of galactosemia, and the effects of certain compounds whose intellectual property rights were licensed to the Company as part of the 2016 Columbia Agreement on any such structural and functional changes.  The 2019 Columbia Research Agreement has a term of 12 months from its effective date, provided that the Company can terminate the 2019 Columbia Research Agreement without cause with at least 30 days’ prior written notice. The services covered by the 2019 Columbia Research Agreement will be performed by Columbia University in two parts consisting of six months. The decision to proceed with Part 2 of the 2019 Columbia Research Agreement shall be made solely by the Company and will be contingent on the success of the research performed in Part 1. In consideration for the services performed by Columbia University in Part 1, the Company will be required to pay $0.1 million to Columbia University for staffing, supplies and indirect costs. If the Company decides to continue the research defined in Part 2, the Company will be required to pay an additional $0.2 million to Columbia University.

During the three and six months ended June 30, 2019, the Company recorded $24,000 and $25,000, respectively, in research and development expense and $0.1 million and $0.3 million, respectively, in general and administrative expense related to the Columbia Agreements. During the three and six months ended June 30, 2018, the Company recorded $0.1 million and $0.3 million, respectively, in research and development expense and $36,000 and $0.1 million, respectively, in general and administrative expense related to the Columbia Agreements. In aggregate, the Company has incurred $1.7 million in expense from the execution of the Columbia Agreements through June 30, 2019.

As of June 30, 2019, the Company had $0.2 million due to Columbia University included in accrued expenses and $49,000 included in accounts payable. As of December 31, 2018, the Company had $0.1 million due to Columbia University included in accrued expenses and $0.1 million included in accounts payable.

 

3. FAIR VALUE MEASUREMENTS

As of June 30, 2019 and December 31, 2018, the Company did not have financial assets or liabilities that are measured at fair value on a recurring basis.

During the three and six months ended June 30, 2018, the Company had Level 3 financial liabilities that were measured at fair value on a recurring basis. The Company's convertible promissory notes issued on February 5, 2018 (the "2018 Notes") (see Note 4), contained certain features which met the criteria to be bifurcated and accounted for separately from the 2018 Notes (the "Derivative Liability").  Also in connection with the issuance of the 2018 Notes, the Company had a contingent obligation to issue common stock warrants ("2018 Notes Warrants") upon the conversion of

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the 2018 Notes into Series B convertible preferred stock ("Series B Preferred Stock") (the "Warrant Liability"). The Derivative Liability and the Warrant Liability were initially recorded at fair value of $1.9 million and $0.1 million, respectively, and were subsequently remeasured at fair value at each reporting period. In November 2018, the Derivative Liability was settled in connection with the extinguishment of the 2018 Notes (see Note 4).

The following table provides a roll forward of the aggregate fair values of the Derivative Liability and Warrant Liability as of June 30, 2018, for which fair value is determined using Level 3 inputs (in thousands):

 

 

 

 

 

 

 

 

 

    

Derivative

    

Warrant

 

 

Liability

 

Liability

Balance as of January 1, 2018

 

$

 —

 

$

 —

Initial fair value of Derivative Liability

 

 

1,896

 

 

 —

Initial fair value of Warrant Liability

 

 

 —

 

 

74

Change in fair value

 

 

180

 

 

 6

Balance as of March 31, 2018

 

$

2,076

 

$

80

Change in fair value

 

 

294

 

 

21

Balance as of June 30, 2018

 

$

2,370

 

$

101

 

Changes in the fair value of the Derivative Liability and Warrant Liability were recognized in other income (expense), net in the condensed statement of operations. The Company recognized other expense in connection with the Derivative Liability of $0.3 million and $0.5 million during the three and six months ended June 30, 2018, respectively. The Company recognized other income in connection with the Warrant Liability of $21,000 and $27,000 during the three and six months ended June 30, 2018, respectively.

 

4. CONVERTIBLE PROMISSORY NOTES

There were no convertible promissory notes outstanding as of June 30, 2019 and December 31, 2018.

On February 5, 2018, the Company issued the 2018 Notes in the aggregate principal amount of $6.0 million. The 2018 Notes bore interest at a rate of 15.0% per annum, were unsecured and were due and payable, including accrued interest, on August 8, 2019. In the event of a qualified sale of preferred stock to one or more investors resulting in gross proceeds to the Company of at least $8.0 million, all principal and accrued and unpaid interest under the 2018 Notes was automatically convertible into a number of shares of the Company’s preferred stock issued in such a financing equal to the outstanding principal and accrued but unpaid interest under the 2018 Notes, divided by an amount equal to 80% of the lowest price per share of the preferred stock sold in the financing. In the event of a corporate transaction or change of control event, the 2018 Notes contained a put option whereby the Company was required to pay to the holders of 2018 Notes an amount equal to (i) the principal amount then outstanding under the 2018 Notes plus any accrued but unpaid interest, plus (ii) an amount equal to 30% of the outstanding principal amount.

The terms of the 2018 Notes provided that: (i) all outstanding principal and interest was due and payable in cash upon an event of acceleration, as defined in the 2018 Notes agreement; (ii) amounts outstanding under the notes were not prepayable without the written consent of the holders of more than 50% of the outstanding principal of the notes, and in addition to the balance the Company will prepay, the Company will also pay the noteholders an amount equal to 15% of the principal amount of the notes that the Company is prepaying; and (iii) with respect to subordination, the Company has no outstanding indebtedness for borrowed money or any other liabilities, other than accounts payable arrangements with vendors entered into in the ordinary course of business and consistent with usual trade terms and will not issue or incur additional indebtedness for borrowed money while the 2018 Notes remain outstanding. There were no financial or negative covenants associated with the convertible promissory notes.

The Derivative Liability represents the conversion feature in the event of a qualified financing and the put option, each of which met the definition of an embedded derivative and were required to be combined and accounted for as a separate unit of accounting. The Company recorded the issuance-date fair value of the Derivative Liability of $1.9 million as a debt discount and Derivative Liability in the Company’s balance sheet (see Note 3).

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In connection with the 2018 Notes, the Company paid legal costs and bank fees of $0.4 million and were obligated to issue the 2018 Notes Warrants (see Note 3 and Note 9) with an initial fair value of $0.1 million, which were capitalized and recorded as a debt discount. The debt discount, which included the Derivative Liability and 2018 Notes Warrants, was amortized at an effective interest rate of 54.9% using the effective interest method over the term of the loan. In connection with the 2018 Notes, the Company recognized interest expense of $0.5 million and $0.8 million during the three and six months ended June 30, 2018, respectively. The interest expense includes amortization of the debt discount of $0.3 million and $0.5 million for the three and six months ended June 30, 2018 , respectively.

In November 2018, in connection with the Company’s issuance and sale of Series B Preferred Stock, all of the then-outstanding principal and accrued interest under the 2018 Notes, totaling $6.6 million, was automatically converted into 1,097,721 shares of Series B Preferred Stock at a price equal to 80% of the $7.49 per share price paid by investors in the Series B Preferred Stock financing.

 

5. PREPAID EXPENSES AND OTHER CURRENT ASSETS

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

 

 

 

 

 

 

 

 

 

    

June 30,

    

December 31,

 

 

2019

 

2018

Deferred offering costs 

 

$

 —

 

$

310

Prepaid research and development expenses

 

 

2,119

 

 

1,044

Prepaid rent expenses

 

 

85

 

 

65

Prepaid insurance expenses

 

 

2,694

 

 

 1

Other prepaid expenses and current assets

 

 

810

 

 

78

Total prepaid expenses & other current assets

 

$

5,708

 

$

1,498

 

 

6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

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

 

 

 

 

 

 

 

 

 

    

June 30,

    

December 31,

 

 

2019

 

2018

Accrued pre-clinical and clinical expenses

 

$

1,723

 

 

865

Accrued professional fees

 

 

293

 

 

312

Accrued compensation and benefits

 

 

433

 

 

56

Accrued patent expenses

 

 

198

 

 

126

Other

 

 

146

 

 

54

Total accrued expenses & other current liabilities

 

$

2,793

 

$

1,413

 

 

7. STOCK‑BASED COMPENSATION

Equity Incentive Plans

In May 2019, the Company's board of directors (the "Board") adopted its 2019 Equity Incentive Plan ("2019 Plan"), which was subsequently approved by its stockholders and became effective on May 13, 2019. As a result, no additional awards under the Company's 2016 Equity Incentive Plan, as amended (the "2016 Plan") will be granted and all outstanding stock awards granted under the 2016 Plan that are repurchased, forfeited, expired or are cancelled will become available for grant under the 2019 Plan in accordance with its terms. The 2016 Plan will continue to govern outstanding equity awards granted thereunder.

The 2019 Plan provides for the issuance of incentive stock options ("ISOs") to employees, and for the grant of nonstatutory stock options ("NSOs"), stock appreciation rights, restricted stock awards, restricted stock unit awards, performance stock awards, performance cash awards and other forms of stock awards to the Company's employees, officers and directors, as well as non- employees, consultants and affiliates to the Company. Under the terms of the 2019

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Plan, stock options may not be granted at an exercise price less than fair market value of the Company's common stock on the date of the grant. The 2019 Plan will be administered by the Compensation Committee of the Company's Board.

Initially, subject to adjustments as provided in the 2019 Plan, the maximum number of the Company's common stock that may be issued under the 2019 Plan is 4,530,000 shares, which is the sum of (i) 1,618,841 new shares, plus (ii) the number of shares (not to exceed 2,911,159 shares) that remained available for the issuance of awards under the 2016 Plan, at the time the 2019 Plan became effective, and (iii) any shares subject to outstanding stock options or other stock awards granted under the 2016 Plan that are forfeited, expired, or reacquired. The 2019 Plan provides that the number of shares reserved and available for issuance under the 2019 Plan will automatically increase each January 1, beginning on January 1, 2020, by 5% of the outstanding number of shares of common stock on the immediately preceding December 31 or such lesser number of shares as determined by the Board. Subject to certain changes in capitalization of the Company, the aggregate maximum number of shares of common stock that may be issued pursuant to the exercise of ISOs shall be equal to 13,000,000 shares of common stock. Stock options awarded under the 2019 Plan expire 10 years after grant and typically vest over four years.

As of June 30, 2019, there were options to purchase 3,855,083 shares of common stock outstanding under the 2016 Plan and 2019 Plan and 674,917 shares of common stock were available for future issuance under the 2019 Plan.

Stock-Based Compenstion Expense

Total stock-based compensation expense recorded for employees, directors and non-employees during the three and six months ended June 30, 2019 and 2018 was as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30, 

 

June 30, 

 

    

2019

    

2018

    

2019

    

2018

Research and development

 

$

1,445

 

$

37

 

$

1,592

 

$

50

General and administrative

 

 

1,833

 

 

39

 

 

2,012

 

 

53

Total stock-based compensation expense

 

$

3,278

 

$

76

 

$

3,604

 

$

103

 

During the six months ended June 30, 2019, the Company granted options to purchase 2,657,628 shares of common stock.  The Company recorded stock-based compensation expense for options granted during the three and six months ended June 30, 2019 of $3.3 million and $3.6 million, respectively. As of June 30, 2019 and December 31, 2018, there were 3,855,083 and 1,202,979 options outstanding, respectively. The weighted‑average fair value of options granted during the six months ended June 30, 2019 and 2018 was $4.79 and $1.03 per share, respectively. As of June 30, 2019, the total unrecognized stock‑based compensation balance for unvested options was $10.8 million expected to be recognized over a period of 2.7 years.

The following table summarizes the information about options outstanding at June 30, 2019 (in thousands, except share and per share data):

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

    

Weighted-Average

    

 

 

 

 

 

 

Weighted-

 

Remaining

 

Aggregate

 

 

Options

 

Average

 

Contractual

 

Intrinsic

 

 

Outstanding

 

Exercise Price

 

Term (in years)

 

Value

Outstanding at December 31, 2018

 

1,202,979

 

$

1.35

 

9.14

 

$

4,029

Options granted

 

2,657,628

 

$

7.34

 

  

 

 

  

Options exercised

 

 —

 

$

 —

 

  

 

$

 —

Forfeited

 

(5,524)

 

$

 —

 

  

 

 

 —

Expired

 

 —

 

$

 —

 

  

 

 

 —

Outstanding at June 30, 2019

 

3,855,083

 

$

5.48

 

9.21

 

$

13,303

Exercisable at June 30, 2019

 

1,380,612

 

$

2.74

 

9.06

 

$

7,598

Nonvested at June 30, 2019

 

2,474,471

 

$

7.00

 

9.64

 

$

5,705

 

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In April 2019, the Company modified certain stock options, originally granted under the 2016 Plan. As a result of this modification, the Company accelerated the vesting for some of the stock options. There was no incremental stock-based compensation expense as a result of this modification as the fair-value-based measures of the modified awards immediately after the modification were less than the fair-value-based measures of the original awards immediately before the modification.

Stock Options Granted to Employees that Contain Service, Performance and Market Conditions

Included in the stock options granted during the six months ended June 30, 2019 were 159,501 stock options that contain service-, performance- and market-based vesting conditions granted to the Company's interim Chief Financial Officer ("CFO") with a fair value at the grant date of $0.5 million, valued using the Monte-Carlo simulation model. The derived service period, calculated using the Monte-Carlo simulation model, ranged from one day to three years.  The assumptions used in the Monte-Carlo simulation model were as follows:

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30, 

 

 

    

2019

 

Time to expiration (in years)

 

 

10.0

 

Volatility

 

 

68.54

%

Risk-free interest rate

 

 

2.64

%

Dividend yield

 

 

0.00

%

Cost of equity

 

 

24.00

%

Fair value of underlying common stock (as of valuation date)

 

$

5.85

 

 

The compensation expense for these awards is recognized over the derived service period, or, if earlier, until the vesting condition is met.

The condition for the performance-based stock options was based on the Company's completion of its IPO and the condition for the market-based stock options was based on the future price of the Company's common stock trading at or above a specified threshold. During the six months ended June 30, 2019, 79,778 of the stock options containing service-, and performance-based vesting conditions were vested following the satisfaction of service- and performance-based conditions.

In May 2019, the Company entered into a severance agreement, effective on May 31, 2019 ("Termination Date"), with the interim CFO. As part of this severance arrangement and as of the Termination Date, the Company accelerated the vesting of 79,723 unvested options, which were originally granted to the former CFO under the 2016 Plan. As a result of this modification, the Company recorded stock-based compensation expense of $0.6 million included in general and administrative expense for the three months and six months ended June 30, 2019. The Company accounted for this modification as a Type III modification since, at the modification date, the expectation of the award vesting changed from improbable to probable.  As a result, the stock-based compensation expense recognized was based on the modification-date fair value.

As of June 30, 2019 there were no outstanding stock options containing service-, performance-, and market-based vesting conditions.

During the three and six months ended June 30, 2019, the Company incurred $0.7 million and $0.8 million, respectively, in stock-based compensation expense relating to the vesting of stock options containing service-, performance- and market-based vesting conditions, which includes the stock-based compensation expense resulting from the modification of these options in May 2019 and were included in general and administrative expense as of June 30, 2019.

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2019 Employee Stock Purchase Plan

In May 2019, the Company’s Board and its stockholders approved the 2019 Employee Stock Purchase Plan (the “2019 ESPP”), which became effective as of May 13, 2019. The ESPP is intended to qualify as an “employee stock purchase plan” within the meaning of Section 423 of the U.S. Internal Revenue Code of 1986, as amended. The number of shares of common stock initially reserved for issuance under the ESPP was 180,000 shares. The ESPP provides for an annual increase on the first day of each year beginning in 2020 and ending in 2029, in each case subject to the approval of the Board, equal to the lesser of (i) 1% of the shares of common stock outstanding on the last day of the calendar month before the date of the automatic increase and (ii) 360,000 shares; provided, that prior to the date of any such increase, the Board may determine that such increase will be less than the amount set forth in clauses (i) and (ii). As of June 30, 2019, no shares of common stock had been issued under the ESPP. The first offering period has not yet been decided by the Board.

 

8. STOCKHOLDERS’ EQUITY

Common Stock

The holders of the common stock are entitled to one vote for each share of common stock held at all meetings of the stockholders. There are no cumulative voting rights.

Preferred Stock

In February 2019, the Company issued 442,925 shares of Series B Preferred Stock at $7.49 per share for gross proceeds of approximately $3.3 million.  Issuance costs were $0.3 million, which included the obligation to issue warrants to purchase common stock (see Note 9).

Upon completion of the IPO, all 7,538,671 shares of outstanding Series A Preferred Stock (“Series A Preferred Stock”) and Series B Preferred Stock (collectively , "the Preferred Stock") was converted into common stock on a one-to-one basis. As of June 30, 2019, there were no shares of preferred stock outstanding.

As of December 31, 2018, the Preferred Stock consisted of the following (in thousands, except share data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

Preferred

 

 

 

 

 

 

 

 

 

 

Preferred

 

Stock Issued

 

 

 

 

 

 

 

Common stock

 

 

Stock

 

and

 

Carrying

 

Liquidation

 

Issuable Upon

 

    

Authorized

    

Outstanding

    

Value

    

Value

    

Conversion

Series A Preferred Stock

 

3,093,898

 

3,093,898

 

$

6,254

 

$

7,000

 

3,093,898

Series B Preferred Stock

 

7,790,052

 

4,001,848

 

 

29,156

 

 

29,964

 

4,001,848

 

 

10,883,950

 

7,095,746

 

$

35,410

 

$

36,964

 

7,095,746

 

The rights and privileges of the preferred stockholders were as follows:

Voting

The holders of Preferred Stock had the right to one vote for each share of common stock into which such Preferred Stock could be converted and will vote together with the holders of common stock as a single class.

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Dividends

Dividends were payable to holders of Preferred Stock prior to payment of any dividend to holders of common stock. Dividends were payable when and if declared out of funds legally available and such dividends were not cumulative. In the event the Board declared a dividend payable on the common stock, the holders of the Preferred Stock were entitled to receive the amount of dividends per share of Preferred Stock that would be payable on the number of whole shares of the common stock into which each share of such Preferred Stock held by each holder could be converted into.

Liquidation

Prior to the IPO, in the event of any liquidation, dissolution or winding up of the Company, or a Deemed Liquidation Event (as defined below), the holders of shares of Preferred Stock then outstanding would have been entitled to be paid out of the assets of the Company available for distribution to its stockholders before any payment shall be made to the holders of common stock by reason of their ownership thereof, in an amount per share equal to the greater of (i) the original issue price ($2.26 per share for Series A Preferred Stock and $7.49 per share for Series B Preferred Stock) plus any dividends declared but unpaid thereon or (ii) such amount per share as would have been payable had each series of Preferred Stock been converted into common stock immediately prior to a liquidation, dissolution or winding up of the Company or Deemed Liquidation Event. If upon any such liquidation, dissolution or winding up of the Company or Deemed Liquidation Event, the proceeds would have been insufficient to pay the holders of shares of Preferred Stock the full amount to which they shall be entitled, the holders of shares of Preferred Stock would have shared ratably in any distribution of the proceeds in proportion to the respective amounts which would have otherwise been payable in respect of the shares of Preferred Stock held by them upon such distribution if all amounts payable with respect to such shares were paid in full. After the payment of all preferential amounts to be paid to the holders of shares of Preferred Stock, the remaining proceeds would have been distributed among the holders of shares of common stock pro rata based on the number of shares held by each such holder.

A Deemed Liquidation Event was defined as: (i) a merger where the Company is a constituent party or a subsidiary of the Company is a constituent party and the Company issues shares of its capital stock pursuant to such merger or consolidation, except any such merger or consolidation involving the Company or a subsidiary in which the shares of capital stock of the Company outstanding immediately prior to such merger or consolidation continue to represent, or are converted into or exchanged for shares of capital stock that represent, immediately following such merger or consolidation, at least a majority, by voting power, of the capital stock of (1) the surviving or resulting corporation or (2) if the surviving or resulting corporation is a wholly owned subsidiary of another corporation immediately following such merger or consolidation, the parent corporation of such surviving or resulting corporation; or (ii) the sale, lease, transfer, exclusive license or other disposition, in a single transaction or series of related transactions, by the Company or any subsidiary of the Company of all or substantially all the assets of the Company and its subsidiaries taken as a whole, or the sale or disposition (whether by merger or otherwise) of one or more subsidiaries of the Company if substantially all of the assets of the Company and its subsidiaries taken as a whole are held by such subsidiary or subsidiaries, except where such sale, lease, transfer, exclusive license or other disposition is to a wholly owned subsidiary of the Company.

Protective Provisions

Prior to the IPO, at any time when any shares of Preferred Stock remained outstanding, the Company could not take any of the following actions without the vote or written consent of the holders of a majority of the then outstanding shares of Preferred Stock separately as a class: (i) liquidate, dissolve or wind-up the business and affairs of the Company, effect any merger, consolidation or any other Deemed Liquidation Event, or consent to any of the foregoing, in each case other than in the event that such event would provide the holders of the Preferred Stock a return per each share of Preferred Stock, including all distributions and dividends paid to such holders prior to such event by the Company, if any, of at least two (2) times the Series B original issue price in the twenty-four (24) months following the Series B original issue date (November 5, 2018) or three (3) times the Series B original issue price thereafter; (ii) amend, alter, or repeal any provision of the Certificate of Incorporation or the Company’s bylaws in a manner that adversely affects the powers, preferences or rights of the Preferred Stock; (iii) create, or authorize the creation of, or issue or

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obligate itself to issue shares of, any additional class or series of capital stock unless the same ranks junior to the Preferred Stock with respect to the distribution of assets on the liquidation, dissolution or winding up of the Company, the payment of dividends and rights of redemption, or increase the authorized number of shares of Preferred Stock; (iv) purchase or redeem (or permit any subsidiary to purchase or redeem) or pay or declare any dividend or make any distribution on, any shares of capital stock of the Company other than (a) redemptions of or dividends or distributions on the Preferred Stock as expressly authorized herein, (b) dividends or other distributions payable on the common stock solely in the form of additional shares of common stock and (c) repurchases of stock from former employees, officers, directors, consultants or other persons who performed services for the Company or any subsidiary in connection with the cessation of such employment or service at the lower of the original purchase price or the then-current fair market value thereof; (v) create, or authorize the creation of, or issue, or authorize the issuance of any debt security, or permit any subsidiary to take any such action with respect to any debt security, if the aggregate indebtedness of the Company and its subsidiaries for borrowed money following such action would exceed $2.0 million other than equipment leases or bank lines of credit; (vi) create, or hold capital stock in, any subsidiary that is not wholly owned (either directly or through one or more other subsidiaries) by the Company, or sell, transfer or otherwise dispose of any capital stock of any direct or indirect subsidiary of the Company, or permit any direct or indirect subsidiary to sell, lease, transfer, exclusively license or otherwise dispose (in a single transaction or series of related transactions) of all or substantially all of the assets of such subsidiary; or (vi) increase or decrease the authorized number of directors of the Company.

Optional Conversion Rights

Each share of Preferred Stock was convertible, at the option of the holder thereof, at any time and from time to time after issuance, and without the payment of additional consideration into such number of fully paid and nonassessable shares of common stock as is determined by dividing the original issue price ($2.26 per share for Series A Preferred Stock and $7.49 per share for Series B Preferred Stock) by the series conversion price ($2.26 per share for Series A Preferred Stock and $7.49 per share for Series B Preferred Stock) in effect at the time of conversion.

Mandatory Conversion Rights

All outstanding shares of Preferred Stock were to be automatically converted into shares of common stock, at the then effective conversion rate, upon either (a) the closing of the sale of shares of common stock to the public in a firm-commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, resulting in at least $30.0 million of proceeds, net of the underwriting discount and commissions, to the Company, or (b) the date and time, or the occurrence of an event, specified by vote or written consent of the holders of at least a majority of the then outstanding shares of Preferred Stock.

Redemption

The Preferred Stock was redeemable upon the occurrence of a Deemed Liquidation Event, which would not be solely in control of the Company. Therefore, the Preferred Stock was classified as temporary equity.

 

9. WARRANTS

Warrants Issued with the 2018 Notes

On January 18, 2018, the Company entered into a placement agent agreement through which it became obligated to issue common stock warrants in connection with the issuance of the 2018 Notes. The obligation to issue the 2018 Notes Warrants was recorded as a liability at its fair value (see Note 3), which was initially $0.1 million, and was included in the issuance costs of the 2018 Notes (see Note 4). On November 5, 2018, in connection with the extinguishment of the 2018 Notes into shares of Series B Preferred Stock, the Company issued the 2018 Notes Warrants, which were equity‑classified warrants upon issuance, to purchase 76,847 shares of common stock, valued at $0.3 million. The 2018 Notes Warrants vested immediately upon issuance and have an exercise price of $6.59 per share and expire on November 4, 2028.

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Warrants Issued with Series B Preferred Stock

In November and December 2018, in connection with the sale and issuance of the Series B Preferred Stock, the Company was obligated to issue warrants to purchase 72,261 shares of common stock (collectively the “2018 Warrants”), valued in the aggregate at $0.2 million, which was included in the issuance costs for the Series B Preferred Stock (see Note 8). The warrants vest immediately upon issuance, have an exercise price of $8.24 per share and expire 10 years from the date of issuance.

The fair value of the 2018 Warrants was estimated using the Black‑Scholes option pricing model with the following assumptions:

 

 

 

 

 

Contractual term (in years)

    

10.0

 

Volatility

 

74.48

%

Risk-free interest rate

 

3.20

%

Dividend yield

 

0.00

%

 

In February 2019, in connection with the sale and issuance of the Series B Preferred Stock, the Company was obligated to issue warrants to purchase 23,867 shares of common stock (collectively the “2019 Warrants”), valued in the aggregate at $0.1 million, which was included in the issuance costs for the Series B Preferred Stock (see Note 8). The warrants vest immediately upon issuance, have an exercise price of $8.24 per share and expire 10 years from the date of issuance.

The fair value of the 2019 Warrants was estimated using the Black-Scholes option pricing model with the following assumptions:

 

 

 

 

 

Contractual term (in years)

    

10.0

 

Volatility

 

73.22

%

Risk-free interest rate

 

2.70

%

Dividend yield

 

0.00

%

 

The inputs utilized by management to value the warrants are highly subjective. The assumptions used in calculating the fair value of the warrants represent the Company’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and the Company uses different assumptions, the fair value of the warrants may be materially different in the future.

 

10. INCOME TAXES

During the three and six months ended June 30, 2019 and the year ended December 31, 2018, the Company recorded a full valuation allowance on federal and state deferred tax assets since management does not forecast the Company to be in a profitable position in the near future.

 

11. NET LOSS PER COMMON SHARE

Basic net loss per common share is computed by dividing the net loss available to common stockholders by the weighted‑average number of shares of common stock outstanding during the period.

Diluted net loss per common share is computed by giving the effect of all potential shares of common stock, including stock options, preferred shares, warrants and instruments convertible into common stock, to the extent dilutive. Basic and diluted net loss per common share was the same for the three and six months ended June 30, 2019 and 2018, as the inclusion of all potential common shares outstanding would have been anti‑dilutive.

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The following table sets forth the computation of basic and diluted net loss per common share for the threes and six months ended June 30, 2019 and 2018 (in thousands, except share and per share data):

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

June 30, 

 

    

2019

    

2018

Numerator:

 

 

  

 

 

  

Net loss

 

$

(8,437)

 

$

(3,185)

Denominator: