Company Quick10K Filing
Quick10K
Karuna Therapeutics
10-Q 2019-06-30 Quarter: 2019-06-30
S-1 2019-05-31 Public Filing
8-K 2019-08-08 Earnings, Exhibits
8-K 2019-07-02 Amend Bylaw, Other Events, Exhibits
BSPK Bespoke Extracts 99
ZNRG Znergy 23
FFLO Free Flow 0
SCGY Scientific Energy 0
GMER Good Gaming 0
BCTCV Boston Capital Tax Credit Fund V 0
CHWY Chewy 0
RSRT Realsource Residential 0
AMK AssetMark 0
FDCT FDCTech 0
KRTX 2019-06-30
Part I-Financial Information
Item 1. Financial Statements.
Note 1. Nature of The Business
Note 2. Summary of Significant Accounting Policies
Note 3. Prepaid Expenses and Other Current Assets and Accrued Expenses
Note 4. Convertible Notes Payable
Note 5. Redeemable Convertible Preferred Stock
Note 6. Common Stock
Note 7. Net Loss per Share
Note 8. Stock-Based Compensation
Note 9. Fair Value of Financial Assets and Liabilities
Note 10. Commitments and Contingencies
Note 11. Related Party Transactions
Note 12. 401(K) Savings Plan
Note 13. Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Limitations on Effectiveness of Controls and Procedures.
Part Ii-Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Item 5. Other Information.
Item 6. Exhibits.
EX-31.1 krtx-ex311_11.htm
EX-31.2 krtx-ex312_10.htm
EX-32.1 krtx-ex321_9.htm

Karuna Therapeutics Earnings 2019-06-30

KRTX 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 krtx-10q_20190630.htm 10-Q krtx-10q_20190630.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended 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: 001-38958

 

Karuna Therapeutics, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

27-0605902

(State or other jurisdiction of

incorporation or organization)

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

33 Arch Street, Suite 3110

Boston, Massachusetts

02110

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (857) 449-2244

 

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, $0.0001 par value per share

 

KRTX

 

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, 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 8, 2019, the registrant had 23,412,754 shares of common stock, $0.0001 par value per share, outstanding.

 

 

 

 


Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

1

Item 1.

Financial Statements (Unaudited)

1

 

Balance Sheets

1

 

Statements of Operations

2

 

Statements of Comprehensive Income (Loss)

3

 

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

4

 

Statements of Cash Flows

5

 

Notes to Financial Statements (Unaudited)

6

Item 2.

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

22

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

32

Item 4.

Controls and Procedures

32

PART II.

OTHER INFORMATION

34

Item 1.

Legal Proceedings

34

Item 1A.

Risk Factors

34

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

79

Item 3.

Defaults Upon Senior Securities

81

Item 4.

Mine Safety Disclosures

81

Item 5.

Other Information

81

Item 6.

Exhibits

82

Signatures

83

 

 

i


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

KARUNA THERAPEUTICS, INC.

BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)

 

 

 

June 30,

2019

 

 

December 31,

2018

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

10,495

 

 

$

8,904

 

Short-term investments

 

 

64,804

 

 

 

4,983

 

Deferred offering costs

 

 

2,032

 

 

 

 

Prepaid expenses and other current assets

 

 

1,717

 

 

 

1,709

 

Total current assets

 

 

79,048

 

 

 

15,596

 

Restricted cash

 

 

123

 

 

 

123

 

Property and equipment, net

 

 

186

 

 

 

138

 

Total assets

 

$

79,357

 

 

$

15,857

 

Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable (includes $8 and $112 at June 30, 2019 and December 31, 2018,

     respectively, due to related parties)

 

$

960

 

 

$

269

 

Accrued expenses

 

 

1,260

 

 

 

538

 

Deferred lease obligation, short term portion

 

 

55

 

 

 

 

Derivative liability

 

 

 

 

 

389

 

Total current liabilities

 

 

2,275

 

 

 

1,196

 

Non-current convertible notes, net of discount

 

 

 

 

 

2,516

 

Deferred lease obligation, long term portion

 

 

179

 

 

 

102

 

Total liabilities

 

 

2,454

 

 

 

3,814

 

Commitments and Contingencies (Note 10)

 

 

 

 

 

 

 

 

Redeemable convertible preferred stock

 

 

 

 

 

 

 

 

Redeemable convertible preferred stock, Series Seed, $0.0001 par value; 4,412,500

   shares authorized and outstanding at June 30, 2019 and December 31, 2018;

   liquidation preference of $4,413 as of June 30, 2019 and December 31, 2018

 

 

1

 

 

 

1

 

Redeemable convertible preferred stock, Series A, $0.0001 par value; 3,126,700

   shares authorized and outstanding at June 30, 2019 and December 31, 2018;

   liquidation preference of $42,085 as of June 30, 2019 and December 31, 2018

 

 

41,964

 

 

 

41,964

 

Redeemable convertible preferred stock, Series B, $0.0001 par value; 5,422,845 and

   0 shares authorized and outstanding at June 30, 2019 and December 31, 2018,

   respectively; liquidation preference of $80,016 as of June 30, 2019

 

 

81,927

 

 

 

 

Stockholders’ equity (deficit):

 

 

 

 

 

 

 

 

Common stock, $0.0001 par value; 20,779,200 and 12,337,650 shares authorized at

   June 30, 2019 and December 31, 2018, respectively; 164,122 and 12 shares issued

   and outstanding at June 30, 2019 and December 31, 2018, respectively

 

 

 

 

 

 

Additional paid-in capital

 

 

11,640

 

 

 

1,633

 

Accumulated deficit

 

 

(58,700

)

 

 

(31,555

)

Accumulated other comprehensive income

 

 

71

 

 

 

 

Total stockholders’ equity (deficit)

 

 

(46,989

)

 

 

(29,922

)

Total liabilities, redeemable convertible preferred stock and

   stockholders’ equity (deficit)

 

$

79,357

 

 

$

15,857

 

 

The accompanying notes are an integral part of these financial statements

1


Karuna Therapeutics, Inc.

Statements of Operations

(In thousands, except share and per share data)

(Unaudited)

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

6,784

 

 

$

2,175

 

 

$

13,751

 

 

$

3,399

 

General and administrative

 

 

8,286

 

 

 

256

 

 

 

12,892

 

 

 

492

 

Total operating expenses

 

 

15,070

 

 

 

2,431

 

 

 

26,643

 

 

 

3,891

 

Loss from operations

 

 

(15,070

)

 

 

(2,431

)

 

 

(26,643

)

 

 

(3,891

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income (expense) (Note 4)

 

 

 

 

 

(307

)

 

 

11

 

 

 

(588

)

Interest income

 

 

452

 

 

 

 

 

 

567

 

 

 

 

Accretion of debt discount

 

 

(522

)

 

 

(85

)

 

 

(945

)

 

 

(672

)

Change in fair value of derivative

 

 

 

 

 

2,284

 

 

 

(135

)

 

 

2,204

 

Total other income (expense), net

 

 

(70

)

 

 

1,892

 

 

 

(502

)

 

 

944

 

Net loss before income taxes

 

 

(15,140

)

 

 

(539

)

 

 

(27,145

)

 

 

(2,947

)

Income tax provision

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to common stockholders

 

$

(15,140

)

 

$

(539

)

 

$

(27,145

)

 

$

(2,947

)

Net loss per share, basic and diluted (Note 7)

 

$

(146.02

)

 

 

 

 

 

$

(507.76

)

 

 

 

 

Weighted average common shares outstanding used in

   computing net loss per share, basic and diluted

 

 

103,684

 

 

 

 

 

 

 

53,460

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements

2


Karuna Therapeutics, Inc.

STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net loss

 

$

(15,140

)

 

$

(539

)

 

$

(27,145

)

 

$

(2,947

)

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains on short-term investments

 

 

71

 

 

 

 

 

 

71

 

 

 

 

Comprehensive loss

 

$

(15,069

)

 

$

(539

)

 

$

(27,074

)

 

$

(2,947

)

 

The accompanying notes are an integral part of these financial statements

 

3


Karuna Therapeutics, Inc.

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

(In thousands, except share data)

(Unaudited)

 

 

 

Series Seed Redeemable

Convertible Preferred

Stock

 

 

Series A Redeemable

Convertible Preferred

Stock

 

 

Series B Redeemable

Convertible Preferred

Stock

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

 

 

Accumulated Other Comprehensive

 

 

Total

Stockholders’

Equity

 

 

 

Shares

 

 

Value

 

 

Shares

 

 

Value

 

 

Shares

 

 

Value

 

 

 

Shares

 

 

Value

 

 

Capital

 

 

Deficit

 

 

Income

 

 

(Deficit)

 

Balance, December 31, 2018

 

 

4,412,500

 

 

$

1

 

 

 

3,126,700

 

 

$

41,964

 

 

 

 

 

$

 

 

 

 

12

 

 

$

 

 

$

1,633

 

 

$

(31,555

)

 

$

 

 

$

(29,922

)

Issuance of Series B

   redeemable convertible

   preferred stock, net of

   issuance costs of $175

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,285,102

 

 

 

79,841

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of common warrants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

19,986

 

 

 

 

 

 

58

 

 

 

 

 

 

 

 

 

58

 

Shared-based compensation

   expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,104

 

 

 

 

 

 

 

 

 

3,104

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,005

)

 

 

 

 

 

(12,005

)

Balance, March 31, 2019

 

 

4,412,500

 

 

 

1

 

 

 

3,126,700

 

 

 

41,964

 

 

 

5,285,102

 

 

 

79,841

 

 

 

 

19,998

 

 

 

 

 

 

4,795

 

 

 

(43,560

)

 

 

 

 

 

(38,765

)

Issuance of Series B

   redeemable convertible

   preferred stock (Note 5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

137,743

 

 

 

2,086

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of common options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

38,961

 

 

 

 

 

 

4

 

 

 

 

 

 

 

 

 

4

 

Vesting of restricted stock

   units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

105,163

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shared-based compensation

   expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,841

 

 

 

 

 

 

 

 

 

6,841

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

71

 

 

 

71

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(15,140

)

 

 

 

 

 

(15,140

)

Balance, June 30, 2019

 

 

4,412,500

 

 

$

1

 

 

 

3,126,700

 

 

$

41,964

 

 

 

5,422,845

 

 

$

81,927

 

 

 

 

164,122

 

 

$

 

 

$

11,640

 

 

$

(58,700

)

 

$

71

 

 

$

(46,989

)

 

 

 

Series Seed Redeemable

Convertible Preferred

Stock

 

 

Series A Redeemable

Convertible Preferred

Stock

 

 

Series B Redeemable

Convertible Preferred

Stock

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

 

 

Accumulated Other Comprehensive

 

 

Total

Stockholders’

Equity

 

 

 

Shares

 

 

Value

 

 

Shares

 

 

Value

 

 

Shares

 

 

Value

 

 

 

Shares

 

 

Value

 

 

Capital

 

 

Deficit

 

 

Income

 

 

(Deficit)

 

Balance, December 31, 2017

 

 

4,412,500

 

 

$

1

 

 

 

 

 

$

 

 

 

 

 

$

 

 

 

 

 

 

$

 

 

$

675

 

 

$

(14,043

)

 

$

 

 

$

(13,368

)

Shared-based compensation

   expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

54

 

 

 

 

 

 

 

 

 

54

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,408

)

 

 

 

 

 

(2,408

)

Balance, March 31, 2018

 

 

4,412,500

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

729

 

 

 

(16,451

)

 

 

 

 

 

(15,722

)

Shared-based compensation

   expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

74

 

 

 

 

 

 

 

 

 

74

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(539

)

 

 

 

 

 

(539

)

Balance, June 30, 2018

 

 

4,412,500

 

 

$

1

 

 

 

 

 

$

 

 

 

 

 

$

 

 

 

 

 

 

$

 

 

$

803

 

 

$

(16,990

)

 

$

 

 

$

(16,187

)

 

The accompanying notes are an integral part of these financial statements

 

4


 

Karuna Therapeutics, Inc.

Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Six Months Ended

June 30,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(27,145

)

 

$

(2,947

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

22

 

 

 

2

 

Stock-based compensation expense

 

 

9,945

 

 

 

110

 

Warrant expense

 

 

 

 

 

18

 

Non-cash interest expense (income)

 

 

(11

)

 

 

588

 

Non-cash interest income

 

 

(282

)

 

 

 

Accretion of debt discount

 

 

945

 

 

 

672

 

Change in fair value of derivative liability

 

 

135

 

 

 

(2,204

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

(8

)

 

 

(1,969

)

Accounts payable

 

 

253

 

 

 

(778

)

Accrued expenses

 

 

327

 

 

 

126

 

Deferred lease obligation

 

 

132

 

 

 

 

Net cash used in operating activities

 

 

(15,687

)

 

 

(6,382

)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Acquisition of property and equipment

 

 

(70

)

 

 

 

Purchases of short-term investments

 

 

(64,468

)

 

 

 

Maturities of short-term investments

 

 

5,000

 

 

 

 

Net cash used in investing activities

 

 

(59,538

)

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from exercise of warrant

 

 

58

 

 

 

 

Payment of deferred offering costs

 

 

(1,199

)

 

 

 

Proceeds from issuance of Series B redeemable convertible preferred stock,

   net of issuance cost

 

 

74,825

 

 

 

 

Proceeds from issuance of convertible notes

 

 

3,128

 

 

 

7,000

 

Proceeds from exercise of stock options

 

 

4

 

 

 

 

Net cash provided by financing activities

 

 

76,816

 

 

 

7,000

 

Net increase in cash, cash equivalents and restricted cash

 

 

1,591

 

 

 

618

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

9,027

 

 

 

1,942

 

Cash, cash equivalents and restricted cash at end of period

 

$

10,618

 

 

$

2,560

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flows information

 

 

 

 

 

 

 

 

Conversion of convertible notes, accrued interest and discount upon

   conversion to preferred stock

 

$

7,102

 

 

$

 

Deferred offering costs included in accrued expenses and accounts payable

 

$

833

 

 

$

 

 

The accompanying notes are an integral part of these financial statements

5


NOTES TO FINANCIAL STATEMENTS

(Unaudited)

Note 1. Nature of the Business

Karuna Therapeutics, Inc. (the “Company”) was incorporated under the laws of the State of Delaware in July 2009 as Karuna Pharmaceuticals, Inc. and is headquartered in Boston, Massachusetts. In March 2019, the Company changed its name to Karuna Therapeutics, Inc. The Company is focused on the development of novel therapies to address disabling neuropsychiatric conditions characterized by significant unmet medical need.

Since the Company’s inception, it has focused substantially all of its efforts and financial resources on organizing and staffing the Company, acquiring and developing its technology, raising capital, building its intellectual property portfolio, undertaking preclinical studies and clinical trials and providing general and administrative support for these activities. The Company has not generated any product revenue related to its primary business purpose to date and is subject to a number of risks similar to those of other early stage companies, including dependence on key individuals, regulatory approval of products, uncertainty of market acceptance of products, competition from substitute products and larger companies, compliance with government regulations, protection of proprietary technology, dependence on third parties, product liability and the need to obtain adequate additional financing to fund the development of its product candidates.

Forward Stock Split

On June 14, 2019, the Company effected a one-for-1.2987 stock split of its issued and outstanding shares of common stock and a proportional adjustment to the existing conversion ratios for each series of the Company’s redeemable convertible preferred stock (see Note 5). Accordingly, all share and per share amounts for all periods presented in the accompanying financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect this stock split and adjustment of the redeemable convertible preferred stock conversion ratios.

Initial Public Offering

On June 27, 2019, the Company’s registration statement on Form S-1 relating to its initial public offering of its common stock (“IPO”) was declared effective by the Securities and Exchange Commission (“SEC”). In the IPO, which closed on July 2, 2019, the Company issued and sold 6,414,842 shares of common stock, including full exercise of the underwriters’ over-allotment option to purchase an additional 836,718 shares, at a public offering price of $16.00 per share. The aggregate net proceeds to the Company from the IPO, inclusive of proceeds from the over-allotment exercise, were approximately $93.2 million after deducting underwriting discounts and commissions of $7.2 million and estimated offering expenses of approximately $2.3 million. Upon closing of the IPO, all 12,962,045 shares of the Company’s redeemable convertible preferred stock then outstanding converted into an aggregate of 16,833,790 shares of common stock.

Liquidity

The Company’s financial statements have been prepared on the basis of continuity of operations, realization of assets and the satisfaction of liabilities in the ordinary course of business. The Company experienced negative operating cash flows of $15.7 million for the six months ended June 30, 2019 and had an accumulated deficit of $58.7 million as of June 30, 2019. The Company expects to continue to generate operating losses for the foreseeable future.

The Company expects that its cash and cash equivalents and short-term investments of $75.3 million as of June 30, 2019, together with the $93.2 million aggregate net proceeds received from the Company’s IPO on July 2, 2019, will be sufficient to fund its operating expenses and capital expenditure requirements through at least 12 months from the date of issuance of these financial statements. The future viability of the Company beyond that point is dependent on its ability to raise additional capital to fund its operations.

If the Company is unable to obtain funding, the Company could be forced to delay, reduce or eliminate some or all of its research and development programs, product portfolio expansion or commercialization efforts, which could adversely affect its business prospects, or the Company may be unable to continue operations. 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.

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NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Use of Estimates

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Any reference in these notes to applicable guidance is meant to refer to the authoritative United States generally accepted accounting principles as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASUs”) of the Financial Accounting Standards Board (“FASB”).

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, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Significant estimates and assumptions reflected in these financial statements include, but are not limited to, the accrual for research and development expenses, derivative liabilities, the valuation of stock-based awards and prior to the IPO, the valuation of common stock. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates.

Unaudited Interim Financial Information

The accompanying balance sheet as of June 30, 2019, the statements of operations, comprehensive loss, and cash flows for the three and six months ended June 30, 2019 and 2018, and the statements of redeemable convertible preferred stock and stockholders’ equity (deficit) for the three and six months ended June 30, 2019 and 2018 are unaudited. The unaudited interim financial statements have been prepared on the same basis as the audited annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of June 30, 2019 and the results of its operations and its cash flows for the three and six months ended June 30, 2019 and 2018. Certain information and footnote disclosures typically included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. Accordingly, these unaudited interim financial statements should be read in conjunction with the Company’s financial statements as of and for the year ended December 31, 2018, which are included in the Company’s prospectus related to the Company’s IPO, filed June 28, 2019 (File No. 333-231863) with the SEC, pursuant to Rule 424(b) under the Securities Act of 1933, as amended. The results for the three and six months ended June 30, 2019, are not necessarily indicative of results to be expected for the year ending December 31, 2019, any other interim periods, or any future year or period.

Cash and Cash Equivalents

The Company considers all short-term, highly liquid investments with original maturities of 90 days or less at acquisition date to be cash equivalents.

Short-term Investments

The Company’s short-term investments are classified as available-for-sale and are carried at fair value with the unrealized gains and losses reported as a component of accumulated other comprehensive income (loss) in stockholders’ equity. Realized gains and losses and declines in value judged to be other than temporary are included as a component of other income (expense), net based on the specific identification method.

Concentration of Manufacturing Risk

The Company is dependent on third-party manufacturers to supply products for research and development activities in its programs. In particular, the Company relies and expects to continue to rely on a small number of manufacturers to supply it with its requirements for the active pharmaceutical ingredients and formulated drugs related to these programs. These programs could be adversely affected by a significant interruption in the supply of active pharmaceutical ingredients and formulated drugs.

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 stockholders’ equity (deficit) as a reduction of additional paid-in capital generated as a result of the offering. Should the in-process equity financing be abandoned, the deferred offering costs will be expensed immediately as a charge to operating expenses in the statements of operations. As of June 30, 2019, the Company recorded deferred offering costs of $2.0 million in connection with its IPO. As of December 31, 2018, the Company had not recorded any deferred offering costs.

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Fair Value of Financial Instruments

The Company’s financial instruments consist of cash equivalents, short-term investments, accounts payable, accrued expenses, convertible notes and derivatives embedded within the convertible notes. The carrying amount of accounts payable and accrued expenses are considered a reasonable estimate of their fair value, due to the short-term maturity of these instruments. The Company’s cash equivalents, short-term investments and derivative liabilities are carried at fair value, determined according to the fair value hierarchy described below (see Note 9).

The Company follows the guidance in FASB ASC 820, Fair Value Measurements and Disclosures, which defines fair value and establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

Level 1:

Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2:

Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

Level 3:

Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Company’s own assumptions reflect those that market participants would use in pricing the asset or liability at the measurement date. The Company uses prices and inputs that are current as of the measurement date, including during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2 or Level 2 to Level 3.

Convertible Notes and Derivative Liabilities

In connection with the issuance of the Wellcome Trust Convertible Notes and the Convertible Notes (see Note 4), the Company has identified embedded derivatives, which are recorded as liabilities on the Company’s balance sheets and are remeasured to fair value at each reporting date until the derivative is settled. Changes in the fair value of the derivative liabilities are recognized as change in fair value of derivative in the statements of operations. The fair value of the derivative liabilities are determined at each period end using a with and without method, which assesses the likelihood and timing of events that would result in either a conversion or change-of-control feature being triggered, as well as changes in the market conditions.

Upon issuance of the notes, each note was recorded at cost, net of the derivative liability. The discount on each note is amortized as interest expense to the date such note is expected to convert using the effective interest rate method and is reflected in the statements of operations as accretion of debt discount.

The Company classifies its derivative liabilities in the balance sheet as current or non-current based on its expectation of when the derivative will be settled, consistent with the assumptions used when determining the fair value of the derivative liabilities.

Redeemable Convertible Preferred Stock

The Company records all shares of redeemable convertible preferred stock at their respective fair values on the dates of issuance, net of issuance costs. The redeemable convertible preferred stock is recorded outside of permanent equity because upon the occurrence of certain deemed liquidation events, the majority of the holders can opt to redeem the shares at the liquidation preference and these events, including a merger, acquisition or sale of substantially all of the assets, are considered not solely within the Company’s control. The Company has not adjusted the carrying values of the redeemable convertible preferred stock to its redemption value because it is uncertain whether or when a deemed liquidation event would occur. If a deemed liquidation event becomes probable, the carrying value will be adjusted to the redemption value at that time.

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Leases

Leases are classified at their inception as either operating or capital leases based on the economic substance of the agreement. The Company recognizes rent expense for its operating leases, inclusive of rent escalation provisions and rent holidays, on a straight-line basis over the respective lease term. Additionally, the Company recognizes tenant improvement allowances under the operating leases as a deferred lease obligation and amortizes the tenant improvement allowances as a reduction to rent expense on a straight-line basis over the respective lease term. At June 30, 2019 and December 31, 2018, no capital leases were recorded in the balance sheets.

Research and Development Costs

Research and development costs are expensed as incurred. Research and development costs include salaries and bonuses, stock compensation, employee benefits, consulting costs and external contract research and development and manufacturing expenses.

Upfront payments and milestone payments made for the licensing of technology are expensed as research and development in the period in which they are incurred. Advance payments for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. The prepaid amounts are expensed as the related goods are delivered or the services are performed.

Research Contract Costs and Accruals

The Company accrues for estimated costs of research and development activities conducted by third-party service providers, which include the conduct of preclinical studies and clinical trials, and contract manufacturing activities. The Company records the estimated costs of research and development activities based upon the estimated amount of services provided and includes these costs in accrued liabilities in the balance sheets and within research and development expense in the statements of operations. When evaluating the adequacy of the accrued liabilities, the Company analyzes progress of the research studies or clinical trials and manufacturing activities, including the phase or completion of events, invoices received and contracted costs. Significant judgments and estimates may be made in determining the accrued balances at the end of any reporting period. Actual results could differ from the Company’s estimates. The Company’s historical accrual estimates have not been materially different from the actual costs.

Stock-Based Compensation

The Company measures all stock options and other stock-based awards based on the date of the grant and recognizes compensation expense of those awards over the requisite service period, which is generally the vesting period of the respective award. The Company has mainly issued stock options with service-based vesting conditions and records the expense for these awards using the straight-line method. The Company has also issued stock options with performance-based vesting conditions and records the expense for these awards at the time that the achievement of the performance becomes highly probable or complete. The Company recognizes adjustments to stock-based compensation expense for forfeitures as they occur. The Company classifies stock-based compensation expense in its statements of operations in the same manner in which the award recipient’s payroll costs are classified or in which the award recipients’ service payments are classified.

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The Company historically has been a private company and lacked company-specific historical and implied volatility information. Therefore, it estimated its expected stock volatility based on the historical volatility of a publicly traded set of peer companies and expects to do so until such time as it has adequate historical data regarding the volatility of its own publicly traded stock price.

The expected term of the Company’s stock options has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future.

The fair value for each restricted common stock award is estimated on the date of grant based on the fair value of the Company’s common stock on that same date.

9


Net Loss Per Share

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

Basic net income (loss) per share attributable to common stockholders is computed by dividing the net income (loss) attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted net income (loss) attributable to common stockholders is computed by adjusting income (loss) attributable to common stockholders to reallocate undistributed earnings based on the potential impact of dilutive securities, including outstanding stock options. Diluted net income (loss) per share attributable to common stockholders is computed by dividing the diluted net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding for the period, including potential dilutive common shares assuming the dilutive effect of outstanding stock options.

The Company’s outstanding redeemable convertible preferred stock contractually entitle the holders of such shares to participate in distributions but contractually does not require the holders of such shares to participate in losses of the Company. As the Company reported a net loss attributable to common stockholders for the three and six months ended June 30, 2019, there is no income allocation required under the two-class method. In addition, there is no dilution attributed to weighted average shares outstanding in the calculation of diluted loss per share, since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive.

Comprehensive Loss

Comprehensive loss includes net loss as well as other changes in stockholders’ equity (deficit) that result from transactions and economic events other than those with stockholders. For the three and six months ended June 30, 2019, the Company’s only element of other comprehensive income was unrealized gains on available for sale securities. There was no difference between net loss and comprehensive loss for the six months ended June 30, 2018.

Recently Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASC 606”), and further updated through ASU 2016-12, which amends the existing accounting standards for revenue recognition. For public business entities, this standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. For all other entities, this standard is effective for annual reporting periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. Early adoption is permitted. Effective January 1, 2017, the Company adopted ASC 606, using the full retrospective method. The adoption did not have an impact on the Company’s financial statements as the Company has historically not had contracts with customers or recorded revenue to date.

In June 2018, the FASB issued Accounting Standards Update 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”), which expands the scope of Topic 718 to include all share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 specifies that Topic 718 applies to all share-based payment transactions in which the grantor acquires goods and services to be used or consumed in its own operations by issuing share-based payment awards. ASU 2018-07 also clarifies that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under ASC 606. The transition method provided by ASU 2018-07 is a modified retrospective basis which recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Effective January 1, 2017, the Company adopted ASU 2018-07, using the modified retrospective method. Management deems that non-employees who provide services to the Company have similar traits as employees with regard to their continued involvement in the Company, and therefore concluded that the adoption of ASU 2018-07 more fairly represented the results of the Company’s operations. The cumulative effect of the change on retained earnings for awards granted to non-employees as of January 1, 2017 was less than $0.1 million.

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In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This guidance addresses specific cash flow issues with the objective of reducing the diversity in practice for the treatment of these issues. The areas identified include: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies; distributions received from equity method investees; beneficial interests in securitization transactions; and application of the predominance principle with respect to separately identifiable cash flows. The Company adopted this new guidance beginning January 1, 2017, on a retrospective basis, which did not result in a material impact on its financial statements and related disclosures.

In November 2016, the FASB issued ASU 2016-18, Restricted Cash. The new standard requires restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the total beginning and ending amounts for the periods shown on the statement of cash flows. The Company has early adopted this new standard effective on January 1, 2018. The impact of the adoption was to reduce operating activities by the movement in restricted cash for each annual period presented, and to include cash, cash equivalents and restricted cash in a newly titled “Cash, cash equivalents, and restricted cash at beginning of year” and “Cash, cash equivalents, and restricted cash at the end of year” in the statements of cash flows.

In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”). This new guidance amends the scope of modification accounting for share-based payment awards. ASU 2017-09 provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. Effective January 1, 2017, the Company adopted ASU No. 2017-09, using the full retrospective method and will be applied prospectively to an award modified on or after the adoption date. The cumulative effect of the changes as of January 1, 2017 for the adoption of ASU 2017-09 was immaterial. Hence, the Company did not recognize the cumulative effect adjustment in its financial statements.

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 will require lessees to recognize most leases on their balance sheet as a right-of-use asset and a lease liability. Leases will be classified as either operating or finance, and classification will be based on criteria similar to current lease accounting, but without explicit bright lines. For public entities, the guidance is effective for annual reporting periods beginning after December 15, 2018 and for interim periods within those fiscal years. For non-public entities, the guidance is effective for annual reporting periods beginning after December 15, 2019. Early adoption is permitted for all entities. The Company is currently evaluating the impact that the adoption of ASU 2016-02 will have on its financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) (“ASU 2018-13”). ASU 2018-13 modifies fair value disclosure requirements, specifically around level transfers and valuation of Level 3 assets and liabilities. ASU 2018-13 is effective for financial statements issued for annual and interim periods beginning after December 15, 2019 for all entities. Early adoption of all or part of ASU No. 2018-13 is permitted. The Company does not expect that the adoption of this new standard will have a material impact on its disclosures.

Note 3. Prepaid Expenses and Other Current Assets and Accrued Expenses

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

 

 

 

June 30,

2019

 

 

December 31,

2018

 

Prepaid research and development expenses

 

$

1,654

 

 

$

1,686

 

Other

 

 

63

 

 

 

23

 

Total prepaid expenses and other current assets

 

$

1,717

 

 

$

1,709

 

 

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Accrued expenses consisted of the following (in thousands):

 

 

 

June 30,

2019

 

 

December 31,

2018

 

Accrued payroll and related expenses

 

$

540

 

 

$

311

 

Accrued research and development expenses

 

 

145

 

 

 

100

 

Professional fees

 

 

530

 

 

 

75

 

Other

 

 

45

 

 

 

52

 

Total accrued expenses

 

$

1,260

 

 

$

538

 

 

Note 4. Convertible Notes Payable

Wellcome Trust Convertible Notes

In June 2018, the Company entered into a second Company Funding Agreement with The Wellcome Trust, LLC (“Wellcome Trust”) to receive up to $8.0 million in gross proceeds from the issuance of a convertible note (the “2018 Convertible Note”). The Company received $2.0 million of proceeds in July 2018, $2.7 million in November 2018, $1.6 million in March 2019, and $1.6 million in April 2019. The Company is eligible to receive up to an aggregate of approximately $0.1 million in future funding under the terms of the 2018 Wellcome Funding Agreement, which would be payable by Wellcome Trust at the Company’s option upon the achievement of a specified clinical milestone.

The 2018 Convertible Note has a stated interest rate of 2% per annum above the three-month Dollar LIBOR rate, which is not payable until settlement of the principal. The note is subject to redemption upon written demand by Wellcome Trust any time after the fifth anniversary of the effective date, resulting in their classification as long-term liabilities as of December 31, 2018. The principal due under the 2018 Convertible Note converts into the class of the Company’s stock issued in the Company’s next qualified financing or upon event of default at a discounted conversion price between 0% and 25% of the purchase price per share of such securities issued. Th