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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 September 30, 2020

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.)

545 Fifth Avenue, Suite 1400

New York, New York 10017

(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, par value $0.0001

APLT

The Nasdaq Global Market

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 November 11, 2020, the registrant had 22,488,081 shares of common stock, $0.0001 par value per share, outstanding.


Table of Contents

Table of Contents

Page

Special Note Regarding Forward-Looking Statements

2

PART I.

FINANCIAL INFORMATION

Item 1.

Financial Statements (Unaudited)

4

Condensed Balance Sheets

4

Condensed Statements of Operations

5

Condensed Statements of Comprehensive Loss

6

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

7

Condensed Statements of Cash Flows

9

Notes to Unaudited Condensed Financial Statements

10

Item 2.

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

28

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

42

Item 4.

Controls and Procedures

43

PART II.

OTHER INFORMATION

Item 1.

Legal Proceedings

43

Item 1A.

Risk Factors

43

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

86

Item 3.

Defaults Upon Senior Securities

86

Item 4.

Mine Safety Disclosures

86

Item 5.

Other Information

86

Item 6.

Exhibits

86

Signatures

87

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q may contain “forward-looking statements” within the meaning of the federal securities laws made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our strategy, future financial condition, future operations, projected costs, prospects, plans, objectives of management and expected market growth, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “aim,” “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “could,” “design,” “due,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “objective,” “plan,” “predict,” “positioned,” “potential,” “seek,” “should,” “target,” “will,” “would” and other similar expressions that are predictions of or indicate future events and future trends, or the negative of these terms or other comparable terminology.

We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of known and unknown risks, uncertainties and assumptions, including risks described in the section titled “Risk Factors” in this Quarterly Report on Form 10-Q:

the potential impact of the Covid-19 pandemic on the timing and progress of our ongoing clinical trials, our business, results of operations, liquidity, and operations and our ability to mitigate those potential impacts;
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.

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The foregoing list of risks is not exhaustive. Other sections of this Quarterly Report on Form 10-Q may include additional factors that could harm our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for our management to predict all risk factors nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in, or implied by, any forward-looking statements.

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 we have a reasonable basis for each forward-looking statement contained in this Quarterly Report on Form 10-Q, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur at all. You should refer to the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. Except as required by law, we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

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

September 30, 

December 31,

2020

2019

 

(Unaudited)

ASSETS

 

 

 

CURRENT ASSETS:

 

  

 

  

 

Cash and cash equivalents

$

48,679

$

18,850

Investments

67,826

20,004

Prepaid expenses and other current assets

 

6,380

 

7,301

Total current assets

 

122,885

 

46,155

Operating lease right-of-use asset

1,754

2,035

Security deposits and leasehold improvements

199

199

TOTAL ASSETS

$

124,838

$

48,389

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

  

CURRENT LIABILITIES:

 

 

  

Current portion of operating lease liabilities

380

356

Accounts payable

1,945

8,793

Accrued expenses and other current liabilities

 

18,177

 

4,950

Total current liabilities

 

20,502

 

14,099

NONCURRENT LIABILITIES:

Noncurrent portion of operating lease liabilities

1,396

1,683

Total noncurrent liabilities

1,396

1,683

Total liabilities

 

21,898

 

15,782

STOCKHOLDERS’ EQUITY:

 

  

 

  

Common stock, $0.0001 par value; 100,000,000 shares authorized as of September 30, 2020 and December 31, 2019; 22,456,686 shares and 18,531,560 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively

 

2

 

1

Additional paid-in capital

 

240,074

 

99,378

Accumulated other comprehensive loss

(94)

(2)

Accumulated deficit

 

(137,042)

 

(66,770)

Total stockholders' equity

 

102,940

 

32,607

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$

124,838

$

48,389

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

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Applied Therapeutics, Inc.

Condensed Statements of Operations

(in thousands, except share and per share data)

(Unaudited)

Three Months Ended

Nine Months Ended

 

 

September 30, 

September 30, 

    

2020

    

2019

    

2020

    

2019

OPERATING EXPENSES:

Research and development

$

19,945

$

7,453

$

47,974

$

18,582

General and administrative

10,020

3,294

22,744

9,331

Total operating expenses

 

29,965

10,747

 

70,718

27,913

LOSS FROM OPERATIONS

 

(29,965)

(10,747)

 

(70,718)

(27,913)

OTHER INCOME (EXPENSE), NET:

 

  

 

  

 

 

Interest income (expense), net

 

131

34

 

435

33

Other income (expense)

 

(10)

 

11

Total other income (expense), net

 

121

34

 

446

33

Net loss

$

(29,844)

$

(10,713)

$

(70,272)

$

(27,880)

Net loss attributable to common stockholders—basic and diluted

$

(29,844)

$

(10,713)

$

(70,272)

$

(27,880)

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

$

(1.33)

$

(0.63)

$

(3.22)

$

(1.98)

Weighted-average common stock outstanding—basic and diluted

 

22,426,203

 

17,095,870

 

21,790,207

 

14,085,579

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

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Applied Therapeutics Inc.

Condensed Statements of Comprehensive Income (Loss)

(in thousands)

(Unaudited)

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2020

    

2019

    

2020

    

2019

    

Net Loss

$

(29,844)

$

(10,713)

$

(70,272)

$

(27,880)

Other comprehensive income (loss)

 

  

 

 

Unrealized gain (loss) on marketable securities

 

(65)

 

11

 

(92)

 

11

Other comprehensive gain (loss), net of tax

 

(65)

 

11

 

(92)

 

11

Comprehensive income (loss), net of tax

$

(29,909)

$

(10,702)

$

(70,364)

$

(27,869)

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

 

Accumulated Other

Total

 

Preferred Stock

 

Preferred Stock

Par Value

Paid-in

Accumulated

Comprehensive

Stockholders’

    

Shares

    

Amount

    

Shares

    

Amount

  

  

Shares

    

Amount

    

Capital

    

Deficit

    

Income (Loss)

Deficit

BALANCE, January 1, 2019

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

Exercise of options for common stock issued under Equity Incentive Plan

81,988

226

226

Stock-based compensation expense

1,219

1,219

Net loss

(10,713)

(10,713)

Other comprehensive income (loss)

11

11

BALANCE, September 30, 2019

$

$

17,134,190

$

1

$

79,872

$

(49,137)

$

11

$

30,747

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Applied Therapeutics Inc.

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

(in thousands, except share and per share data)

(Unaudited)

Convertible Preferred Stock

 

Series A

 

Series B

 

Common Stock

 

 

 

 

Convertible

 

Convertible

 

$0.0001

 

Additional

Accumulated Other

 

Total

 

Preferred Stock

 

Preferred Stock

Par Value

Paid-in

Accumulated

Comprehensive

Stockholders’

    

Shares

    

Amount

    

Shares

    

Amount

  

  

Shares

    

Amount

    

Capital

    

Deficit

    

Income (Loss)

    

Deficit

BALANCE, January 1, 2020

$

$

  

  

18,531,560

$

1

$

99,378

$

(66,770)

$

(2)

$

32,607

Issuance of common stock upon secondary public offering, net of issuance costs of $714

 

 

 

 

3,152,712

 

1

 

134,127

 

 

134,128

Exercise of options for common stock issued under equity incentive plan

 

 

 

 

35,027

 

0

 

81

 

 

81

Private placement issuance costs

(41)

(41)

Exercise of warrants for common stock

249,978

Stock-based compensation expense

1,331

1,331

Net loss

(12,369)

(12,369)

Other comprehensive income

91

91

BALANCE, March 31, 2020

21,969,277

2

234,876

(79,139)

89

155,828

Exercise of options for common stock issued under equity incentive plan

 

 

 

 

324,614

 

 

1,342

 

 

1,342

Private placement issuance costs

 

 

 

 

 

 

(6)

 

 

(6)

Secondary public offering issuance costs

 

 

 

 

 

 

(25)

 

 

(25)

Registration of Form S-3 offering costs

(495)

(495)

Exercise of warrants for common stock

37,251

Stock-based compensation expense

1,737

1,737

Net loss

(28,059)

(28,059)

Other comprehensive income (loss)

(118)

(118)

BALANCE, June 30, 2020

22,331,142

2

237,429

(107,198)

(29)

130,204

Exercise of options for common stock issued under Equity Incentive Plan

 

 

 

 

125,544

 

 

242

 

 

242

Stock-based compensation expense

 

 

 

 

 

 

2,403

 

 

2,403

Net loss

 

 

 

 

 

 

 

(29,844)

 

(29,844)

Other comprehensive income (loss)

(65)

(65)

BALANCE, September 30, 2020

 

$

 

$

22,456,686

$

2

$

240,074

$

(137,042)

$

(94)

$

102,940

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Applied Therapeutics, Inc.

Condensed Statements of Cash Flows

(in thousands)

(Unaudited)

Nine Months Ended

September 30, 

    

2020

    

2019

CASH FLOWS FROM OPERATING ACTIVITIES:

  

  

Net loss

$

(70,272)

$

(27,880)

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

 

Stock-based compensation expense

 

5,471

4,823

Amortization of operating lease right-of-use assets

281

Payment of security deposit and leasehold improvements for long-term lease

(230)

Change in operating lease liability

(263)

Changes in operating assets and liabilities:

 

Prepaid expenses

 

3,396

(2,702)

Accounts payable

 

(6,739)

(1,327)

Accrued expenses and other current liabilities

 

11,127

3,416

Amortization of insurance premium

1,540

Net cash used in operating activities

 

(55,459)

 

(23,900)

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchase of available-for-sale securities

(127,558)

(19,878)

Proceeds from sale of available-for-sale securities

17,109

Proceeds from maturities of available-for-sale securities

62,536

Net cash used in investing activities

(47,913)

(19,878)

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 secondary public offering, net of cash issuance costs of $702

134,102

Proceeds from the IPO, net of underwriter commissions

 

37,200

Payment of deferred offering costs

(2,463)

Payment of private placement offering costs

(206)

Payment of registration statement on Form S-3 offering costs

(493)

Repayments of short-term borrowings

(1,074)

Financed insurance premium down payment

(793)

Exercise of stock options for common stock under equity incentive plan

 

1,665

227

Net cash provided by financing activities

 

133,201

 

38,095

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

29,829

(5,683)

Cash and cash equivalents at beginning of period

 

18,850

18,748

Cash and cash equivalents at end of period

$

48,679

$

13,065

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

  

 

  

Issuance of warrants in connection with Series B convertible preferred stock

$

$

80

Shelf offering costs still in accrued expense

$

2

$

Insurance premium obtained in exchange for a short-term loan

$

(4,015)

$

Unrealized gain (loss) on marketable securities

$

92

$

Conversion of preferred stock to equity following the 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 rare metabolic diseases such as galactosemia, and diabetic complications including diabetic cardiomyopathy. 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 (the “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 proceeds of $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.

On November 12, 2019, the Company completed a private placement (the “Private Placement”), pursuant to which it issued and sold 1,380,344 shares of the Company’s common stock at a price of $14.50 per share, for net proceeds of $18.4 million after deducting placement agent discounts and commissions and offering costs.

On January 28, 2020, the Company completed its secondary public offering (the “Secondary Public Offering”), pursuant to which it issued and sold 2,741,489 shares of common stock at a public offering price of $45.50 per share, with an additional 411,223 shares sold pursuant to the underwriters’ full exercise of their option to purchase additional shares. The aggregate net proceeds received by the Company from the offering, after deducting underwriting discounts and commissions and offering costs, were $134.1 million.

On June 4, 2020, the Company filed a shelf registration statement on Form S-3 (the “Shelf Registration Statement”) under which the Company may, from time to time, sell securities in one or more offerings having an aggregate offering price of up to $300.0 million. The Shelf Registration Statement was declared effective as of June 15, 2020. As of the filing date of this Quarterly Report on Form 10-Q, no securities have been sold under this shelf registration.

On June 12, 2020, the Company entered into an equity distribution agreement (the “Equity Distribution Agreement”) with Goldman Sachs & Co. LLC (“Goldman”), as a sales agent to sell shares of the Company’s common stock, from time to time, having an aggregate offering price of up to $100 million. Goldman may act as an agent on the Company’s behalf or purchase shares of the Company’s common stock as a principal. As of September 30, 2020, the Company had not sold any shares of common stock pursuant to the Equity Distribution Agreement.

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The accompanying unaudited condensed financial statements as of September 30, 2020 and December 31, 2019 and for the three and nine months ended September 30, 2020 and 2019 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, 2019 included in the Annual Report, filed with the SEC on March 13, 2020 (the “Annual Report”).

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 September 30, 2020, results of operations for the three and nine months ended September 30, 2020 and 2019 and cash flows for the nine months ended September 30, 2020 and 2019. Such adjustments are of a normal and recurring nature. The results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2020.

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, cash equivalents, and investments will allow the Company to continue its operations for at least 12 months from the issuance date of these financial statements. After 12 months from the issuance of these financial statements, the Company may need to obtain additional funding. The Company may pursue additional cash resources through public or private financings.

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, 2019, and the notes thereto, which are included in the Annual Report. Except as detailed below, there have been no material changes to the Company’s significant accounting policies during the three and nine months ended September 30, 2020.

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Stock-Based Compensation–Restricted Stock Units

The Company accounts for restricted stock units in accordance with the authoritative guidance for stock-based compensation. The fair value of restricted stock units is measured at the grant date based on the closing market price of the Company’s common stock on the date of grant, and is recognized as expense on a straight-line basis over the period of vesting. Forfeitures are recognized as a reduction of stock-based compensation expense as they occur.

Financed D&O Insurance Premium

In June 2020, the Company financed their directors' and officers' insurance premium with a short-term note, the principal amount of which is approximately $3.2 million bearing interest at a rate of 3.2% per annum. The note payable balance was $2.1 million, which was included within accrued expense and other current liabilities on the Condensed Balance Sheets as of September 30, 2020.

Recent Accounting Pronouncements

On January 1, 2020, the Company adopted ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology applies to financial instruments measured at amortized cost, including loan receivables and held-to-maturity debt securities, off-balance sheet credit exposures and net investments in leases recognized by a lessor. ASC 326 also made changes to the accounting for available-for-sale debt securities, where credit losses are required to be presented as an allowance as opposed to a write-down.

The FASB issued authoritative guidance that amends guidance on reporting credit losses for assets, including available-for-sale marketable securities and any other financial assets not excluded from the scope that have the contractual right to receive cash. For available-for-sale marketable securities, credit losses should be measured in a manner similar to current generally accepted accounting standards; however, ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, will require that credit losses be presented as an allowance rather than as a write-down.

For available-for-sale debt securities in an unrealized loss position, the Company assesses whether a decline in fair value resulted from credit losses or other factors. Management considers the extent to which fair value is less than amortized cost, any changes to the credit rating of the security, and adverse conditions specifically related to the security. If the assessment indicates a credit loss exists, an allowance is recorded that is limited to the amount the amortized cost exceeds the fair value. Any impairment that is not recognized through the allowance for credit loss is recognized in other comprehensive income.

The Company adopted ASC 326 using the modified retrospective method approach, where a cumulative-effect adjustment to credit loss allowance would be reflected in retained earnings. The adoption of this standard did not have an impact on the Company’s balance sheet as there were no credit losses identified.

In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement,” which modifies the disclosure requirements on fair value measurements. The new guidance is effective for fiscal years beginning after December 15, 2019. Upon the effective date, certain provisions are to be applied prospectively, while others are to be applied retrospectively to all periods presented. The amendments eliminated certain disclosure requirements such as the elimination of disclosing the valuation process for Level 3 fair value measurements. Other amendments in the update did not impact the Company. The Company adopted the amendments on January 1, 2020 with no impact on our financial statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes: Simplifying the Accounting for Income Taxes. The new standard intended to simplify the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the

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recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The standard is effective for annual periods beginning after December 15, 2020 and interim periods within, with early adoption permitted. Adoption of the standard requires certain changes to primarily be made prospectively, with some changes to be made retrospectively. The Company is currently evaluating the impact adoption of ASU 2019-12 will have on its 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.

The 2016 Columbia Agreement will terminate upon the expiration of all the Company’s royalty payment obligations in all countries. The Company may terminate the 2016 Columbia Agreement for convenience upon 90 days’ written notice to Columbia University. At its election, Columbia University may terminate the 2016 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 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 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.

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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”) 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 nine 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.

On October 3, 2019, and in connection with the 2019 Columbia Agreement, the Company entered into a research services agreement (the “PI3k Columbia Research Agreement” and collectively with the 2016 Columbia Agreement, 2019 Columbia Agreement and 2019 Columbia Research Agreement, the “Columbia Agreements”) with Columbia University with the purpose of analyzing PI3k inhibitors for the treatment of lymphoid malignancies. The research service agreement has a term of 18 months from is effective date; provided that the Company can terminate the research service agreement without cause with at least 30 days prior written notice. Midway through the study period, the Company and Columbia University will review the results of all completed and in progress research and determine whether the research will continue. In consideration for the services performed by Columbia University, the Company will be required to pay $0.4 million to Columbia University for staffing, supplies and indirect costs.

During the three and nine months ended September 30, 2020, the Company recorded $0 and $0.3 million, respectively, in research and development expense and $33,000 and $0.1 million, respectively, in general and administrative expense related to the Columbia Agreements. During the three and nine months ended September 30, 2019, the Company recorded  $17,000 and $42,000, respectively, in research and development expense and $28,000  and $0.3 million, respectively, in general and administrative expense related to the Columbia Agreements. In aggregate, the Company has incurred $2.3 million in expense from the execution of the Columbia Agreements through September 30, 2020.

As of September 30, 2020, the Company had $0.1 million due to Columbia University included in accrued expenses and $0 included in accounts payable. As of December 31, 2019, the Company had $0.1 million due to Columbia University included in accrued expenses and $0.1 million included in accounts payable.

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3. FAIR VALUE MEASUREMENTS

The following table summarizes, as of September 30, 2020, the Company's financial assets and liabilities that are measured at fair value on a recurring basis, according to the fair value hierarchy described in the significant accounting policies in the Company’s audited financial statements as of and for the year ended December 31, 2019, and the notes thereto, which are included in the Annual Report.

As of September 30, 2020

(in thousands)

Level 1

Level 2

Level 3

Total

Cash

$

34,924

$

$

$

34,924

Money market funds

13,755

13,755

Total cash and cash equivalents

$

48,679

$

$

$

48,679

CDs with Original Maturity < 1 year

997

997

U.S. government agency debt securities

66,829

66,829

Total marketable securities

$

$

67,826

$

$

67,826

Total financial assets measured at fair value on a recurring basis

$

48,679

$

67,826

$

$

116,505

Investments in certificate of deposits and U.S. government agency debt securities have been classified as Level 2 as they are valued using quoted prices in less active markets or other directly or indirectly observable inputs. Fair values of U.S. government agency debt securities were derived from a consensus or weighted average price based on input of market prices from multiple sources at each reporting period.

4. INVESTMENTS

Marketable Securities

Marketable securities, which the Company classifies as available-for-sale securities, primarily consist of high quality commercial paper, corporate bonds, and U.S. government debt obligations. The Company considers all available-for-sale securities, including those with maturity dates beyond 12 months, as available to support current operational liquidity needs. The Company classifies its investments as current based on the nature of the investments and their availability for use in current operations.

The following tables provide the Company’s marketable securities by security type as of September 30, 2020 and December 31, 2019:

As of September 30, 2020

As of December 31, 2019

Gross

Gross

 

Gross

Gross

 

    

Unrealized

    

Unrealized

    

Estimated

    

    

Unrealized

    

Unrealized

    

Estimated

(in thousands)

Cost

Gains

Losses

Fair Value

Cost

Gains

Losses

Fair Value

Commercial paper, corporate bonds, and CDs with original maturity < 1 year

$

1,003

$

-

$

(6)

$

997

$

7,540

$

$

(20)

$

7,520

US government agency debt security

66,917

16

(104)

66,829

12,466

19

(1)

12,484

Total

$

67,920

$

16

$

(110)

$

67,826

$

20,006

$

19

$

(21)

$

20,004

The Company adopted ASU No. 2016-13, “Financial Instruments–Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” on January 1, 2020 and applied the new modified credit impairment guidance related to available-for-sale debt securities prospectively. Under the new guidance, at each reporting date, entities must evaluate their individual available-for-sale debt securities that are in an unrealized loss position and determine whether

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the decline in fair value below the amortized cost basis from a credit loss or other factors. The amount of the decline related to credit losses are recorded as a credit loss expense in earnings with a corresponding allowance for credit losses and the amount of decline not related to credit losses are recorded through other comprehensive income, net of tax. As of September 30, 2020, our investment portfolio reported an unrealized loss of $0.1 million. Based on our evaluations, we determined that a credit loss allowance is not required since the decline was not related to underlying credit issues of the counterparties. The counterparties to these investments have high credit quality with investment grade ratings of at least AA+ or above, along with a history of no defaults. No single investment in the corporate bond portfolio had an individually material unrealized loss and in the aggregate. The total amount of unrealized losses of $0.1 million as of September 30, 2020 was only 0.16% of the total amortized costs basis of the investment portfolio. In addition, the Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell these investments before recovery of their amortized cost bases. Accordingly, based on the foregoing evaluation, the Company did not record any credit losses during the three and nine months ended September 30, 2020 and the entire amount of the decline in fair value below the amortized cost basis was recorded as an unrealized loss, net of tax, in other comprehensive loss in the Statements of Comprehensive Loss. Unrealized gains are also reflected, net of tax, as other comprehensive income (loss) in the Statements of Comprehensive Loss.

Contractual maturities of the Company’s marketable securities as of September 30, 2020 and December 31, 2019 are summarized as follows:

As of September 30, 2020

As of December 31, 2019

Gross

Gross

 

Gross

Gross

 

Unrealized

Unrealized

    

Estimated

Unrealized

Unrealized

    

Estimated

(in thousands)

Cost

    

Gains

    

Losses

    

Fair Value

    

Cost

    

Gains

    

Losses

    

Fair Value

Due in one year or less

$

67,920

$

16

$

(110)

$

67,826

$

20,006

$

19

$

(21)

$

20,004

Due in one through two years

Total

$

67,920

$

16

  

$

(110)

$

67,826

$

20,006

$

19

  

$

(21)

$

20,004

At September 30, 2020, the Company had $16,000 of gross unrealized gains and $0.1 million of gross unrealized losses primarily due to fluctuations in the fair value of certain U.S. government agency debt securities.

During the nine months ended September 30, 2020, the Company recorded a gross realized gains of $50,000 and gross realized losses of $48,000 from the sale of marketable securities.

The unrealized losses and fair values of available-for-sale securities that have been in an unrealized loss position for a period of less than and greater than 12 months as of September 30, 2020 are as follows:

As of September 30, 2020

Securities in an unrealized loss position less than 12 months

Securities in an unrealized loss position greater than 12 months

Total

Unrealized

    

Estimated

    

Unrealized

    

Estimated

    

Unrealized

    

Estimated

(in thousands)

Losses

Fair Value

Losses

Fair Value

Losses

Fair Value

CDs with original maturity < 1 year

$

(6)

$

748

$

$

$

(6)

$

748

US government agency debt security

(104)

22,149

(104)

22,149

Total

$

(110)

$

22,897

$

$

$

(110)

$

22,897

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The unrealized losses and fair values of available-for-sale securities that have been in an unrealized loss position for a period of less than and greater than 12 months as of December 31, 2019 are as follows:

As of December 31, 2019

Securities in an unrealized loss position less than 12 months

Securities in an unrealized loss position greater than 12 months

Total

Unrealized

    

Estimated

    

Unrealized

    

Estimated

    

Unrealized

    

Estimated

(in thousands)

Losses

Fair Value

Losses

Fair Value

Losses

Fair Value

Commercial paper and corporate bonds

$

(20)

$

7,520

$

$

$

(20)

$

7,520

US government agency debt security

(1)

3,497

(1)

3,497

Total

$

(21)

$

11,017

$

$

$

(21)

$

11,017

As of September 30, 2020, we did not intend to sell and it was not likely that we would be required to sell these investments before recovery of their amortized cost basis, which may be at maturity. Unrealized losses related to these investments are primarily due to interest rate fluctuations as opposed to changes in credit quality.

5. PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consisted of the following:

    

September 30, 

    

December 31,

(in thousands)

2020

2019

Prepaid research and development expenses

 

3,196

 

5,872

Insurance premium asset

2,475

Prepaid rent expenses

 

63

 

142

Prepaid insurance expenses

 

87

 

1,196

Interest Receivable

37

10

Other prepaid expenses and current assets

 

522

 

81

Total prepaid expenses & other current assets

$

6,380

$

7,301

6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consisted of the following:

    

September 30, 

    

December 31,

(in thousands)

2020

2019

Accrued pre-clinical and clinical expenses

$

12,133

$

4,287

Short-term insurance financing note

2,148

Accrued professional fees

 

996

 

345

Accrued compensation and benefits

 

1,172

 

Accrued commercial expenses

848

Accrued patent expenses

 

110

 

54

Other

 

770

 

264

Total accrued expenses & other current liabilities

$

18,177

$

4,950

In June 2020, the Company financed their directors' and officers' insurance premium with a short-term note, the principal amount of which is approximately $3.2 million bearing interest at a rate of 3.2% per annum. The note payable balance was $2.1 million, which was included within accrued expense and other current liabilities on the Condensed Balance Sheets at September 30, 2020.

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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, 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 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 September 30, 2020, there were 3,942,536 shares reserved by the Company to grant under the 2016 and 2019 Plans and an aggregate of 801,745 shares remained available for future grants under the 2019 Plan.

Stock-Based Compensation Expense

Total stock-based compensation expense recorded for employees, directors and non-employees during the three and nine months ended September 30, 2020 and 2019 was as follows:

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

(in thousands)

    

2020

    

2019

    

2020

    

2019

Research and development

$

638

$

495

$

$ 1,911

$

2,087

General and administrative

 

1,765

 

724

 

3,560

 

2,736

Total stock-based compensation expense

$

2,403

$

1,220

$

5,471

$

4,823

During the nine months ended September 30, 2020, the Company granted options to purchase 481,490 shares of common stock. During the nine months ended September 30, 2020 the Company also granted restricted stock units to purchase 145,126 shares of common stock. The Company recorded stock-based compensation expense for the three and nine months ended September 30, 2020 of $2.4 million and $5.5 million, respectively.

Stock Option Activity

As of September 30, 2020 and December 31, 2019, there were 3,942,536 and 4,079,888 options outstanding, respectively. The weighted-average fair value of options granted during the nine months ended September 30, 2020 and

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2019 was $24.74 and $4.71 per share, respectively. As of September 30, 2020, the total unrecognized stock-based compensation balance for unvested options was $18.5 million which is expected to be recognized over a period of 2.4 years.

The following table summarizes the information about options outstanding at September 30, 2020:

    

    

    

Weighted-Average

    

 

 

Weighted-

 

Remaining

 

Aggregate

Options

 

Average

 

Contractual

 

Intrinsic

(in thousands, except for share data)

Outstanding

Exercise Price

 

Term (in years)

Value

Outstanding at December 31, 2019

 

4,079,888

$

5.11

8.26

$

82,327

Options granted

 

481,490

40.56

Options exercised

 

(485,185)