Company Quick10K Filing
Quick10K
Replimune Group
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$16.17 32 $512
10-Q 2018-12-31 Quarter: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
8-K 2019-06-07 Enter Agreement, Exhibits
8-K 2019-02-14 Earnings, Exhibits
8-K 2018-11-14 Earnings, Exhibits
8-K 2018-08-30 Earnings, Exhibits
8-K 2018-07-30 Other Events
8-K 2018-07-24 Amend Bylaw, Exhibits
MKSI MKS Instruments 4,610
APY Apergy 2,960
EIG Employers Holdings 1,350
TGI Triumph Group 1,140
SONO Sonos 1,030
MTSI Macom Technology Solutions Holdings 1,010
OMI Owens & Minor 249
SESN Sesen Bio 95
DYSL Dynasil of America 18
TNTY True Nature Holding 0
REPL 2018-12-31
Part I - Financial Information
Item 1. Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
Item 4. Controls and Procedures.
Part II - Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors(1)
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosure
Item 5. Other Information
Item 6. Exhibits
EX-31.1 a18-40852_1ex31d1.htm
EX-31.2 a18-40852_1ex31d2.htm
EX-32.1 a18-40852_1ex32d1.htm
EX-32.2 a18-40852_1ex32d2.htm

Replimune Group Earnings 2018-12-31

REPL 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 a18-40852_110q.htm 10-Q

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended December 31, 2018

 

OR

 

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

 

For the transition period from           to           

 

Commission file number 001-38596

 

REPLIMUNE GROUP, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

82-2082553

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

18 Commerce Way

Woburn MA 01801

(Address of principal executive offices)

(Zip Code)

 

(781) 995-2443

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.045 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes  x  No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 o

 

Accelerated filer o

 

 

 

Non-accelerated filer x

 

Smaller reporting company o

 

 

 

 

 

Emerging growth company x

 

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. x

 

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

 

The number of shares of the registrant’s Common Stock, par value $0.001 per share, outstanding as of February 12, 2019 was 31,646,800.

 

 

 


Table of Contents

 

REPLIMUNE GROUP, INC.

 

FORM 10-Q

 

INDEX

 

 

Page No.

PART I FINANCIAL INFORMATION

3

 

 

Item 1. Consolidated Financial Statements (Unaudited)

3

 

 

Consolidated Balance Sheets

3

 

 

Consolidated Statements of Operations

4

 

 

Consolidated Statements of Comprehensive Loss

5

 

 

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

6

 

 

Consolidated Statements of Cash Flows

7

 

 

Notes to Unaudited Consolidated Financial Statements

8

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

29

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

39

 

 

Item 4. Controls and Procedures

39

 

 

PART II OTHER INFORMATION

40

 

 

Item 1. Legal Proceedings

40

 

 

Item 1A. Risk Factors

40

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

78

 

 

Item 3. Defaults Upon Senior Securities

79

 

 

Item 4. Mine Safety Disclosure

79

 

 

Item 5. Other Information

79

 

 

Item 6. Exhibits

79

 

 

SIGNATURES

80

 

2


Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Item 1.   Financial Statements.

 

REPLIMUNE GROUP, INC.

 

CONSOLIDATED BALANCE SHEETS

 

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

 

(Unaudited)

 

 

 

December 31,

 

March 31,

 

 

 

2018

 

2018

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

21,052

 

$

17,583

 

Short-term investments

 

120,751

 

43,968

 

Research and development incentives receivable

 

1,843

 

2,389

 

Prepaid expenses and other current assets

 

1,300

 

763

 

Total current assets

 

144,946

 

64,703

 

Property and equipment, net

 

6,055

 

370

 

Restricted cash

 

1,186

 

78

 

Total assets

 

$

152,187

 

$

65,151

 

 

 

 

 

 

 

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

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

1,501

 

$

1,993

 

Accrued expenses and other current liabilities

 

2,307

 

3,171

 

Total current liabilities

 

3,808

 

5,164

 

Deferred rent, net of current portion

 

168

 

52

 

Warrant liability

 

 

1,642

 

Lease liabilities

 

4,972

 

 

Total liabilities

 

8,948

 

6,858

 

Commitments and contingencies (Note 13)

 

 

 

 

 

Convertible preferred stock (Series Seed, A and B), $0.001 par value; 0 and 1,975,968 shares authorized as of December 31, 2018 and March 31, 2018, respectively; 0 and 1,925,968 shares issued and outstanding as of December 31, 2018 and March 31, 2018, respectively

 

 

86,361

 

Stockholders’ Equity (Deficit)

 

 

 

 

 

Common stock, $0.001 par value; 150,000,000 and 27,314,288 shares authorized (inclusive of 0 and 26,258 shares of common A stock) as of December 31, 2018 and March 31, 2018 , respectively; 31,640,672 and 5,007,485 shares issued and outstanding (inclusive of 0 and 26,258 shares of common A stock) as of December 31, 2018 and March 31, 2018 , respectively

 

32

 

5

 

Additional paid-in capital

 

197,697

 

1,097

 

Accumulated deficit

 

(53,110

)

(28,932

)

Accumulated other comprehensive loss

 

(1,380

)

(238

)

Total stockholders’ equity (deficit)

 

143,239

 

(28,068

)

Total liabilities, convertible preferred stock and stockholders’ equity (deficit)

 

$

152,187

 

$

65,151

 

 

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

 

3


Table of Contents

 

REPLIMUNE GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

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

 

(Unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

December 31,

 

December 31,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

$

7,857

 

$

3,573

 

$

16,760

 

$

9,013

 

General and administrative

 

2,280

 

1,159

 

6,360

 

3,151

 

Total operating expenses

 

10,137

 

4,732

 

23,120

 

12,164

 

Loss from operations

 

(10,137

)

(4,732

)

(23,120

)

(12,164

)

Other income (expense):

 

 

 

 

 

 

 

 

 

Research and development incentives

 

1,577

 

639

 

1,937

 

1,642

 

Interest income

 

882

 

32

 

1,775

 

72

 

Change in fair value of warrant liability

 

 

(387

)

(5,452

)

(965

)

Other income (expense), net

 

5

 

94

 

682

 

(1,439

)

Total other income (expense), net

 

2,464

 

378

 

(1,058

)

(690

)

Net loss

 

(7,673

)

(4,354

)

(24,178

)

(12,854

)

Net loss attributable to common shareholders

 

$

(7,673

)

$

(4,354

)

$

(24,178

)

$

(12,854

)

 

 

 

 

 

 

 

 

 

 

Net loss per share attributable to common shareholders, basic and diluted

 

$

(0.24

)

$

(0.87

)

$

(1.18

)

$

(2.58

)

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding—basic and diluted

 

31,577,313

 

4,981,227

 

20,433,580

 

4,977,659

 

 

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

 

4


Table of Contents

 

REPLIMUNE GROUP, INC.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

 

(Amounts in thousands)

 

(Unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

December 31,

 

December 31,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(7,673

)

$

(4,354

)

$

(24,178

)

$

(12,854

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Foreign currency translation gain (loss)

 

(102

)

111

 

(1,088

)

1,688

 

Net unrealized loss on short-term investments, net of tax

 

(55

)

(5

)

(54

)

(5

)

Comprehensive loss

 

$

(7,830

)

$

(4,248

)

$

(25,320

)

$

(11,171

)

 

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

 

5


Table of Contents

 

REPLIMUNE GROUP, INC.

 

CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

 

(Amounts in thousands, except share amounts)

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

Convertible

 

 

 

 

 

 

Additional

 

 

 

other

 

Total

 

 

 

preferred stock

 

 

Common stock

 

paid-in

 

Accumulated

 

comprehensive

 

stockholders’

 

 

 

Shares

 

Amount

 

 

Shares

 

Amount

 

capital

 

deficit

 

loss

 

equity (deficit)

 

Balances as of March 31, 2018

 

1,925,968

 

$

86,361

 

 

5,007,485

 

$

5

 

$

1,097

 

$

(28,932

)

$

(238

)

$

(28,068

)

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

 

(1,925,968

)

(86,361

)

 

19,157,360

 

19

 

86,342

 

 

 

86,361

 

Conversion of convertible preferred stock warrants into common stock warrants

 

 

 

 

 

 

7,094

 

 

 

7,094

 

Repurchase of class A common stock upon closing of initial public offering

 

 

 

 

(26,258

)

 

 

 

 

 

Issuance of common stock upon closing of initial public offering, net of issuance costs and underwriter fees of $9,935

 

 

 

 

7,407,936

 

7

 

101,177

 

 

 

101,184

 

Stock-based compensation expense

 

 

 

 

 

 

1,823

 

 

 

1,823

 

Exercise of stock options

 

 

 

 

94,149

 

1

 

164

 

 

 

165

 

Unrealized gain on short-term investments

 

 

 

 

 

 

 

 

(54

)

(54

)

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

(1,088

)

(1,088

)

Net loss

 

 

 

 

 

 

 

(24,178

)

 

(24,178

)

Balances as of December 31, 2018

 

 

$

 

 

31,640,672

 

$

32

 

$

197,697

 

$

(53,110

)

$

(1,380

)

$

143,239

 

 

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

 

6


Table of Contents

 

REPLIMUNE GROUP, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(Amounts in thousands)

 

(Unaudited)

 

 

 

Nine Months Ended December 31,

 

 

 

2018

 

2017

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(24,178

)

$

(12,854

)

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

 

 

 

 

 

Stock-based compensation expense

 

1,823

 

458

 

Depreciation and amortization

 

106

 

81

 

Change in fair value of warrant liability

 

5,452

 

965

 

Accretion of discounts on short-term investments

 

(1,171

)

 

Non-cash rent expense

 

40

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

Research and development incentives receivable

 

340

 

(170

)

Prepaid expenses and other current assets

 

(589

)

(505

)

Accounts payable

 

(521

)

176

 

Accrued expenses and other current liabilities

 

(767

)

86

 

Deferred rent

 

120

 

(18

)

Net cash used in operating activities

 

(19,345

)

(11,781

)

Cash flows from investing activities:

 

 

 

 

 

Purchases of property, plant and equipment

 

(752

)

(140

)

Purchase of short-term investments

 

(134,624

)

(25,830

)

Sales and maturities of short-term investments

 

58,958

 

 

Net cash used in investing activities

 

(76,418

)

(25,970

)

Cash flows from financing activities:

 

 

 

 

 

Proceeds from issuance of series B convertible preferred stock, net of issuance costs

 

 

54,752

 

Proceeds from issuance of common stock in initial public offering, net of underwriting fees and discounts

 

103,341

 

 

Exercise of stock options

 

165

 

 

Payment of issuance costs

 

(2,157

)

 

Net cash provided by financing activities

 

101,349

 

54,752

 

Effect of exchange rate changes on cash and cash equivalents

 

(1,009

)

1,608

 

 

 

 

 

 

 

Net increase in cash, cash equivalent and restricted cash

 

4,577

 

18,609

 

Cash, cash equivalents and restricted cash at beginning of period

 

17,661

 

20,594

 

Cash, cash equivalents and restricted cash at end of period

 

$

22,238

 

$

39,203

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

Purchases of property and equipment included in accounts payable

 

$

108

 

$

 

Conversion of preferred stock into common stock

 

$

86,361

 

$

 

Conversion of convertible preferred stock warrants into common stock warrants

 

$

7,094

 

$

 

Amounts capitalized under built-to-suit lease transaction

 

$

4,932

 

$

 

 

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

 

7


Table of Contents

 

REPLIMUNE GROUP, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

(Unaudited)

 

1.     Nature of the business

 

Replimune Group, Inc. (the “Company”) is a clinical-stage biotechnology company focused on the development of oncolytic immunotherapies to treat cancer.

 

Replimune Limited (“Replimune UK”) was incorporated in 2015 under the laws of England, and was the sole shareholder of Replimune, Inc. (“Replimune US”), a Delaware corporation. On July 5, 2017, Replimune Group, Inc., a Delaware corporation, was incorporated and on July 10, 2017 the shareholders of Replimune UK effected a share-for-share exchange pursuant to which they exchanged their outstanding shares in Replimune UK for shares in Replimune Group, Inc., on a one-for-one basis. In addition, the holders of warrants and stock options to purchase Replimune UK capital stock canceled their warrants to purchase shares of series seed preferred stock and stock options in Replimune UK and were issued replacement warrants to purchase shares of series seed preferred stock and stock options to acquire Replimune Group, Inc. capital stock on a one-for-one basis. These transactions are collectively referred to as the reorganization. Upon completion of the reorganization, the historical consolidated financial statements of Replimune UK became the historical consolidated financial statements of Replimune Group, Inc. because the reorganization was accounted for similar to a reorganization of entities under common control due to the high degree of common ownership of Replimune UK and Replimune Group, Inc. and lack of economic substance to the transaction. The Company concluded that the reorganization resulted in no change in the material rights and preferences of each respective class of equity interests and no change in the fair value of each respective class of equity interests before and after the reorganization. On December 8, 2017, Replimune UK transferred all outstanding shares of its wholly owned subsidiary, Replimune US to Replimune Group, Inc. Replimune Group. Inc., a Delaware corporation, is the sole shareholder of Replimune UK, Replimune US and Replimune Securities Corporation, a Massachusetts corporation that was incorporated in November 2017.

 

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

 

Forward stock split

 

On July 9, 2018, the Company effected a 1-for-9.94688 forward 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 Preferred Stock (see Note 7). Accordingly, all share and per share amounts for all periods presented in the accompanying consolidated financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect this forward stock split and adjustment of the preferred stock conversion ratios. Further, on July 9, 2018, the Company’s authorized shares of common stock were increased to 27,314,288. Accordingly, the authorized shares of common stock presented in the accompanying consolidated financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect the newly authorized shares of common stock.

 

Initial public offering

 

On July 24, 2018, the Company completed an initial public offering (“IPO”) of its common stock and issued and sold 6,700,000 shares of common stock at a public offering price of $15.00 per share, resulting in net proceeds of $93,465 after deducting underwriting discounts and commissions but before deducting offering costs of $2,157.

 

Upon closing of the IPO, the Company’s outstanding convertible preferred stock automatically converted into shares of common stock (see Note 7). Upon conversion of the convertible preferred stock, the Company reclassified the carrying value of the convertible preferred stock to common stock and additional paid-in capital.  The warrant to purchase shares of the Company’s series seed convertible preferred stock was converted into a warrant to purchase shares of the Company’s common stock upon the

 

8


Table of Contents

 

closing of the IPO. As a result, the warrant liability was remeasured a final time on the closing date of the IPO and reclassified to stockholders’ equity (deficit).  Additionally, the Company repurchased 26,258 shares of class A common stock at a price equal to its par value upon the closing of the IPO.

 

On July 30, 2018, the Company issued and sold an additional 707,936 shares of its common stock at the IPO price of $15.00 per share pursuant to the underwriters’ partial exercise of their option to purchase additional shares of common stock, resulting in additional net proceeds of $9,876 after deducting discounts and commissions and other offering expenses.

 

Also, in connection with the completion of its IPO on July 24, 2018, the Company filed an amended and restated certificate of incorporation with the Secretary of State of the State of Delaware to authorize the issuance of up to 150,000,000 shares of common stock, par value $0.001 per share, and 10,000,000 shares of undesignated preferred stock, par value $0.001 per share.

 

Basis of presentation

 

The accompanying consolidated financial statements have been prepared on the basis of continuity of operations, realization of assets and the satisfaction of liabilities and commitments in the ordinary course of business. The Company has incurred recurring losses since its inception, including net losses of $7,673 and $4,354 for the three months ended December, 2018 and 2017, respectively and net losses of $24,178 and $12,854 for the nine months ended December 31, 2018 and 2017, respectively. In addition, as of December 31, 2018, the Company had an accumulated deficit of $53,110. The Company expects to continue to generate operating losses for the foreseeable future. As of February 14, 2019, the issuance date of these consolidated financial statements, the Company expects that its cash and cash equivalents and short-term investments will be sufficient to fund its operating expenses and capital expenditure requirements through at least 12 months from the issuance of the consolidated financial statements. The future viability of the Company beyond that point is dependent on its ability to raise additional capital to finance its operations.

 

If the Company is unable to obtain funding it 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 it 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.

 

2.     Summary of significant accounting policies

 

Principles of consolidation

 

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, and include the accounts of the Company and its wholly owned subsidiaries, Replimune UK, Replimune US and Replimune Securities Corporation, after elimination of all intercompany accounts and transactions. The consolidated financial statements reflect the capital as if Replimune Group, Inc. had been in existence for all periods presented.

 

Use of estimates

 

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of expenses during the reporting periods. Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limited to, the accrual for research and development expenses and the valuation of common stock and stock-based awards. The Company bases its estimates on historical experience, known trends and other market-specific or other relevant factors that it believe to be reasonable under the circumstances. Estimates are periodically reviewed in light of reasonable 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 or assumptions.

 

Unaudited interim financial information

 

The accompanying consolidated balance sheet as of December 31, 2018, the consolidated statements of operations, of comprehensive loss and of cash flows for the three and nine months ended December 31, 2018 and 2017 and the consolidated statement of convertible preferred stock and stockholders’ equity (deficit) as of December 31, 2018 are unaudited. The unaudited interim consolidated financial statements have been prepared on the same basis as the audited annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of the Company’s financial position as of December 31, 2018 and the results of its operations and its cash flows for the three and nine months ended December 31, 2018 and 2017. The financial data and other information

 

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disclosed in these consolidated notes related to the three and nine months ended December 31, 2018 and 2017 are unaudited. The results for the three and nine months ended December 31, 2018 are not necessarily indicative of results to be expected for the year ending March 31, 2019, any other interim periods or any future year or period.

 

Foreign currency and currency translation

 

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

 

Concentrations of credit risk and of significant suppliers

 

Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents as well as short-term investments. The Company deposits its cash in financial institutions in amounts that may exceed federally insured limits, and has not experienced any losses on such accounts and does not believe it is exposed to any unusual credit risk beyond the normal credit risk associated with commercial banking relationships.

 

The Company relies, and expects to continue to rely, on a small number of vendors to manufacture supplies and raw materials for its development programs. These programs could be adversely affected by a significant interruption in these manufacturing services or the availability of raw materials.

 

Cash and cash equivalents

 

The Company considers all highly liquid investments with original maturities of three months or less at date of purchase to be cash equivalents. Cash equivalents consisted of money market funds at March 31, 2018 and December 31, 2018. As of December 31, 2018, and March 31, 2018, cash equivalents totaled $16,110 and $4,130, respectively.

 

Restricted Cash

 

The Company maintains certain minimum balances in segregated bank accounts in connection with its corporate credit cards and a letter of credit for the benefit of the landlords in connection with an operating lease. As of December 31, 2018 and March 31, 2018, restricted cash consisted of $0 and $78, respectively, held in connection with the Company’s corporate credit cards and $1,186 and $0, respectively, held for the benefit of the landlords in connection with an operating lease. These amounts have been classified as non-current assets on the Company’s consolidated balance sheets.

 

Short-term investments

 

The Company’s short-term debt security 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 (deficit). Realized gains and losses and declines in value determined to be other than temporary are based on the specific identification method and are included as a component of other income (expense), net in the consolidated statements of operations.

 

The Company evaluates its short-term debt security investments with unrealized losses for other-than-temporary impairment. When assessing short-term debt security investments for other-than-temporary declines in value, the Company considers such factors as, among other things, how significant the decline in value is as a percentage of the original cost, how long the market value of the investment has been less than its original cost, the Company’s ability and intent to retain the short-term debt security investment for a period of time sufficient to allow for any anticipated recovery in fair value and market conditions in general. If any adjustment to fair value reflects a decline in the value of the short-term debt security investment that the Company considers to be “other than temporary,” the Company reduces the short-term debt security investment to fair value through a charge to the consolidated statements of operations. No such adjustments were necessary during the periods presented.

 

The Company’s short-term debt security investments as of December 31, 2018 and March 31, 2018 had original maturities of less than one year.

 

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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 proceeds generated as a result of the offering. Should an in-process equity financing be abandoned, the deferred offering costs will be expensed immediately as a charge to operating expenses in the consolidated statements of operations. The Company did not record any deferred offering costs as of March 31, 2018.  As of December 31, 2018, the Company recorded $2,157 of deferred offering costs in stockholders’ equity (deficit) as a reduction of proceeds generated as a result of the initial public offering.

 

Property, plant and equipment

 

Property, plant and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization expense is recognized using the straight-line method over the estimated useful lives of the respective assets as follows:

 

 

 

Estimated Useful life

Office equipment

 

5 years

Computer equipment

 

3 years

Plant and laboratory equipment

 

5 years

Leasehold improvements

 

Lesser of lease term or 10 years

 

Costs for capital assets not yet placed into service are capitalized as construction-in-progress and depreciated in accordance with the above guidelines once placed into service. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in loss from operations. Expenditures for repairs and maintenance are charged to expense as incurred.

 

Impairment of long-lived assets

 

Long-lived assets consist of property, plant and equipment. Long-lived assets to be held and used are tested for recoverability whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Factors that the Company considers in deciding when to perform an impairment review include significant underperformance of the business in relation to expectations, significant negative industry or economic trends and significant changes or planned changes in the use of the assets. If an impairment review is performed to evaluate a long-lived asset group for recoverability, the Company compares forecasts of undiscounted cash flows expected to result from the use and eventual disposition of the long-lived asset group to its carrying value. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of an asset group are less than its carrying amount. The impairment loss would be based on the excess of the carrying value of the impaired asset group over its fair value, determined based on discounted cash flows. To date, the Company has not recorded any impairment losses on long-lived assets.

 

Deferred rent

 

The Company recognizes rent expense on a straight-line basis over the respective lease terms and has recorded deferred rent for rent expense incurred but not yet paid.

 

Fair value measurements

 

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

 

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

 

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

 

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

 

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The Company’s short-term investments, cash equivalents and warrant liability are carried at fair value, determined according to the fair value hierarchy described above (see Note 3). The carrying values of research and development incentives receivable, other current assets, accounts payable and accrued expenses and other current liabilities approximate their fair values due to the short-term nature of these assets and liabilities.

 

Warrant liability

 

The Company classifies warrants to purchase shares of series seed preferred stock (see Note 8) as a liability on its consolidated balance sheets as these warrants to purchase shares of series seed preferred stock are free-standing financial instruments that may require the Company to transfer assets upon exercise. The warrant liability was initially recorded at fair value upon the date of the warrants’ issuance and is subsequently remeasured to fair value at each reporting date. Changes in the fair value of the warrant liability are recognized as a component of other income (expense), net in the consolidated statements of operations. Changes in the fair value of the warrant liability will continue to be recognized until the warrants to purchase shares of series seed preferred stock are exercised, expire or qualify for equity classification.

 

The Company utilizes the Black-Scholes option-pricing model, which incorporates assumptions and estimates, to value the warrant liability. The Company assesses these assumptions and estimates on a quarterly basis as additional information impacting assumptions is obtained. Estimates and assumptions impacting the fair value measurement include the expected stock price volatility, the expected term of the warrant, the risk-free interest rate for a period that approximates the expected term of the warrant, and the Company’s expected dividend yield (see Note 3).

 

Upon the closing of the IPO, the warrant to purchase shares of the Company’s series seed convertible preferred stock was converted into a warrant to purchase shares of the Company’s common stock.  As a result, the warrant liability was remeasured a final time on the closing date of the IPO and reclassified to stockholders’ equity (deficit).

 

Segment information

 

The Company manages its operations as a single operating segment for the purposes of assessing performance and making operating decisions. The Company’s current focus is on developing oncolytic immunotherapies for the treatment of cancer.

 

Research and development costs

 

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

 

Research contract costs and accruals

 

The Company has entered into various research and development-related contracts with companies both inside and outside of the United States. These agreements are generally cancelable, and related costs are recorded as research and development expenses as incurred. The Company records accruals for estimated ongoing research costs. When evaluating the adequacy of the accrued liabilities, the Company analyzes progress of the studies or clinical trials, including the phase or completion of events, invoices received and contracted costs. Significant judgments and estimates are made in determining the accrued balances at the end of any reporting period. Actual results could differ from the Company’s estimates. The Company’s historical accrual estimates have not been materially different from the actual costs.

 

Patent costs

 

All patent-related costs incurred in connection with filing and prosecuting patent applications are expensed as incurred due to the uncertainty about the recovery of the expenditure. Amounts incurred are classified as general and administrative expenses.

 

Stock-based compensation

 

The Company measures all stock-based awards granted to employees and directors based on the fair value on the date of the grant and recognizes compensation expense for those awards over the requisite service period, which is generally the vesting period of the respective award. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model, which requires inputs based on certain subjective assumptions, including the expected stock price

 

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volatility, the expected term of the option, the risk-free interest rate for a period that approximates the expected term of the option, and the Company’s expected dividend yield (see Note 10). Forfeitures are accounted for as they occur. To date, the Company has issued stock-based awards with only service-based vesting conditions and records the expense for these awards using the straight-line method.

 

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

 

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

 

Research and development incentives and receivable

 

The Company, through its subsidiary in the United Kingdom, receives reimbursements of certain research and development expenditures as part of a United Kingdom government’s research and development tax reliefs program. Under the program, a percentage of qualifying research and development expenses incurred by the Company’s subsidiary in the United Kingdom are reimbursed up to 14.5%.

 

Management has assessed the Company’s research and development activities and expenditures to determine which activities and expenditures are likely to be eligible under the research and development incentive program described above. At each period end, management estimates the reimbursement available to the Company based on available information at the time.

 

The Company recognizes income from the research and development incentives when the relevant expenditure has been incurred, the associated conditions have been satisfied and there is reasonable assurance that the reimbursement will be received. The Company records these research and development incentives as other income. The research and development incentives receivable represents an amount due in connection with the above program. The Company recorded other income from research and development incentives of $1,577 and $1,937 during the three and nine months ended December 31, 2018, respectively. The Company recorded other income from research and development incentives of $639 and $1,642 during the three and nine months ended December 31, 2017, respectively, in the consolidated statements of operations and a research and development incentives receivable of $1,843  and $2,389 as of December 31, 2018 and March 31, 2018, respectively, on the consolidated balance sheets.

 

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 nine months ended December 31, 2018, comprehensive loss included $(102) and $(1,088) of foreign currency translation adjustments, respectively and $(55) and $(54) of unrealized losses on short-term investments, net of tax, respectively. For the three and nine months ended December 31, 2017, comprehensive loss included $111 and $1,688 of foreign currency translation adjustments, respectively and $(5) and $(5) of unrealized losses on short-term investments, net of tax, respectively.

 

Income taxes

 

The Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the consolidated financial statements or in the Company’s tax returns. Deferred tax assets and liabilities are determined on the basis of the differences between the consolidated financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it believes, based upon the weight of available evidence, that it is more likely than not that all or a portion of the deferred tax assets will not be realized, a valuation allowance is established through a charge to income tax expense. Potential for recovery of deferred tax assets is evaluated by estimating the future taxable profits expected and considering prudent and feasible tax planning strategies.

 

The Company accounts for uncertainty in income taxes recognized in the consolidated financial statements by applying a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination by the taxing authorities. If the tax position is deemed more-likely-than-not to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the consolidated financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than

 

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50% likelihood of being realized upon ultimate settlement. The provision for income taxes includes the effects of any resulting tax reserves, or unrecognized tax benefits, that are considered appropriate as well as the related net interest and penalties.

 

Net income (loss) per share

 

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

 

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

 

Common A shares are excluded when computing net income (loss) per share as they have nominal economic rights.

 

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

 

Recently Adopted Accounting Pronouncements

 

In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”), which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The standard is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The Company adopted ASU 2017-09 as of the required effective date of April 1, 2018 and will apply to any changes to the terms or conditions of share-based payment awards prospectively.

 

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”), which requires restricted cash to be presented with cash and cash equivalents on the consolidated statements of cash flows and disclosure of how the consolidated statements of cash flows reconciles to the balance sheet if restricted cash is shown separately from cash and cash equivalents on the balance sheet. The standard is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The Company adopted ASU 2016-18 as of April 1, 2018.  Restricted cash is now included as a component of cash, cash equivalents and restricted cash on the Company’s consolidated statement of cash flows. Upon the adoption of ASU 2016-18, the amount of cash and cash equivalents previously presented on the consolidated statements of cash flows reflects the inclusion of restricted cash in the amount reported for changes in cash, cash equivalents and restricted cash. Additionally, as a result of the adoption, transfers between restricted and unrestricted cash are no longer presented as a component of the Company’s investing activities.

 

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other than Inventory (“ASU 2016-16”), which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The standard is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted ASU 2016-16 as of the required effective date of April 1, 2018. The adoption of ASU 2016-16 did not have a material impact on the Company’s financial position, results of operations or cash flows.

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), to address diversity in practice in how certain cash receipts and cash payments are presented and classified in the consolidated statements of cash flows. The standard is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted ASU 2016-16 as of the required

 

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effective date of April 1, 2018. The adoption of ASU 2016-15 did not have a material impact on the Company’s financial position, results of operations or cash flows.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which supersedes existing revenue recognition guidance under GAAP. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The standard defines a five-step process to achieve this principle, and will require companies to use more judgment and make more estimates than under the current guidance. The Company expects that these judgments and estimates will include identifying performance obligations in the customer contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delays the effective date of ASU 2014-09 such that the standard is effective for public entities for annual periods beginning after December 15, 2017 and for interim periods within those fiscal years. Early adoption of the standard is permitted for annual periods beginning after December 15, 2016. The Company adopted ASU 2014-09 on a full retrospective basis effective April 1, 2018.  The adoption of ASU 2014-09 did not have an impact on the Company’s consolidated financial statements as the Company does not currently have any revenue-generating arrangements.

 

Recently Issued Accounting Pronouncements

 

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 (“ASU 2018-13”). The amendments in this ASU require certain existing disclosure requirements in Topic 820 to be modified or removed, and certain new disclosure requirements to be added to the Topic. In addition, this ASU allows entities to exercise more discretion when considering fair value measurement disclosures. ASU 2018-13 will be effective for the Company beginning April 1, 2020 with early adoption permitted. The Company is in the process of evaluating the impact of ASU 2018-13 on its consolidated financial statements and disclosures.

 

In July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815) I. Accounting for Certain Financial Instruments with Down Round Features II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception (“ASU 2017-11”). Part I applies to entities that issue financial instruments such as warrants, convertible debt or convertible preferred stock that contain down-round features. Part II replaces the indefinite deferral for certain mandatorily redeemable noncontrolling interests and mandatorily redeemable financial instruments of nonpublic entities contained within Accounting Standards Codification (“ASC”) Topic 480 with a scope exception and does not impact the accounting for these mandatorily redeemable instruments. ASU 2017-11 is required to be adopted for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. The adoption of ASU 2017-11 is not expected to have a material impact on the Company’s consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which supersedes FASB Topic 840, Leases (Topic 840) and provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. In January 2018, the FASB issued ASU 2018-01, Leases (Topic 842) Land Easement Practical Expedient for Transition to Topic 842, which amends ASU 2016-02 to provide entities an optional transition practical expedient to not evaluate under Topic 842 existing or expired land easements that were not previously accounted for as leases under the current leases guidance in Topic 842. An entity that elects this practical expedient should evaluate new or modified land easements under Topic 842 beginning at the date that the entity adopts Topic 842. In July 2018, the FASB also issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides an optional transition method that allows entities to elect to apply the standard prospectively at its effective date, versus recasting the prior periods presented. The standard will be effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted upon issuance. The Company is currently evaluating the impact of pending adoption on its consolidated financial statements and disclosures, including the impact on the Company’s build-to-suit lease for which the accounting may change under Topic 842.

 

In June 2018, the FASB issued (“ASU 2018-07”), Compensation — Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-17 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-17 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 Revenue from Contracts with Customers (Topic 606).

 

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The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted. The Company is currently assessing the effect that ASU 2018-17 will have on its consolidated financial statements and disclosures.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which is part of the disclosure framework project and eliminates certain disclosure requirements for fair value measurements, requires entities to disclose new information, and modifies existing disclosure requirements. The new guidance is effective after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact this change will have on its consolidated financial statements and disclosures.

 

3.     Fair value of financial assets and liabilities

 

The following tables present information about the Company’s financial assets and liabilities measured at fair value on a recurring basis:

 

 

 

Fair Value Measurements as of

 

 

 

December 31, 2018 Using:

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

Money market funds

 

$

 

$

16,110

 

$

 

$

16,110

 

Commercial paper

 

 

71,057

 

 

71,057

 

US Treasury

 

 

 

6,951

 

 

 

6,951

 

Coporate debt securities

 

 

42,743

 

 

42,743

 

 

 

$

 

$

136,861

 

$

 

$

136,861

 

 

 

 

Fair Value Measurements as of

 

 

 

March 31, 2018 Using:

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

Money market funds

 

$

 

$

4,130

 

$

 

$

4,130

 

Commercial paper

 

 

27,998

 

 

27,998

 

Corporate debt securities

 

 

15,970

 

 

15,970

 

 

 

$

 

$

48,098

 

$

 

$

48,098

 

Liabilities:

 

 

 

 

 

 

 

 

 

Warrant liability

 

$

 

$

 

$

1,642

 

$

1,642

 

 

 

$

 

$

 

$

1,642

 

$

1,642

 

 

During the three and nine months ended December 31, 2018 and 2017, there were no transfers between levels.

 

Valuation of cash equivalents and short-term investments

 

Money market funds, commercial paper, US Treasury bonds and corporate debt securities were valued by the Company using quoted prices in active markets for similar securities, which represent a Level 2 measurement within the fair value hierarchy.

 

Valuation of Warrant Liability

 

The warrant liability is related to the warrants to purchase shares of series seed preferred stock (see Note 8). The fair value of the warrant liability was determined based on significant inputs not observable in the market, which represents a Level 3

 

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measurement within the fair value hierarchy. Upon the closing of the IPO in July 2018, the warrant to purchase shares of the Company’s series seed convertible preferred stock was converted into a warrant to purchase shares of the Company’s common stock.  As a result, the warrant liability was remeasured a final time on the closing date of the IPO and reclassified to stockholders’ equity (deficit).

 

The Company used the Black-Scholes option-pricing model, which incorporated assumptions and estimates, to value the warrant liability. Key estimates and assumptions impacting the fair value measurement include (i) the expected term of the warrants, (ii) the risk-free interest rate, (iii) the expected dividend yield, (iv) expected volatility of the price of the underlying series seed preferred stock and (v) the fair value of the series seed preferred stock on the valuation date. The Company estimated the fair value per share of the underlying series seed preferred stock based, in part, on the results of third-party valuations and additional factors deemed relevant. The risk-free interest rate was determined by reference to the U.S. Treasury yield curve for time periods approximately equal to the remaining contractual term of the warrants. The Company estimated a 0% expected dividend yield based on the fact that the Company has never paid or declared dividends and does not intend to do so in the foreseeable future. Prior to July 2018, the Company was a private company and accordingly, lacked company-specific historical and implied volatility information of its stock, the expected stock volatility was based on the historical volatility of publicly traded peer companies for a term equal to the remaining expected term of the warrants.

 

As of March 31, 2018, the warrant liability was valued at $1,642 and classified as a non-current liability on the consolidated balance sheet. The following assumptions were used in valuing the warrant liability:

 

 

 

March 31,

 

 

 

2018

 

Risk-free interest rate

 

2.69

%

Expected dividend yield

 

0

%

Expected term (in years)

 

7.5

 

Expected volatility

 

65.8

%

 

Based on the terms and conditions of the warrant, upon closing of the Company’s IPO in July 2018, the warrant to purchase shares of the Company’s series seed convertible preferred stock was converted into a warrant to purchase shares of the Company’s common stock. On that date, the Company remeasured the warrant liability to fair value and reclassified the total carrying value to additional paid-in capital. The Company performed the final remeasurement of the warrant liability using the IPO price of $15.00 per share and recorded the change in fair value as a component of other income (expense), net in the consolidated statement of operations.

 

The following assumptions were used to measure the fair market value of the warrant liability upon the conversion date:

 

Risk-free interest rate

 

2.81

%

Expected dividend yield

 

0

%

Expected term (in years)

 

7.2

 

Expected volatility

 

64.4

%

 

The following table presents a roll forward of the warrant liability:

 

 

 

Warrant

 

 

 

Liability

 

Balance at March 31, 2018

 

$

1,642

 

Change in fair value

 

5,452

 

Conversion of convertible preferred stock warrant into common stock warrant

 

(7,094

)

Balance at December 31, 2018

 

$

 

 

4.     Short-term investments

 

Short-term investments by investment type consisted of the following:

 

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December 31, 2018

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

 

 

cost

 

Gains

 

Losses

 

Fair value

 

Commercial paper

 

$

71,139

 

$

 

$

(82

)

$

71,057

 

US Treasury

 

6,949

 

2

 

 

6,951

 

Corporate debt securities

 

42,782

 

 

(39

)

42,743

 

 

 

$

120,870

 

$

2

 

$

(121

)

$

120,751

 

 

 

 

March 31, 2018

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

 

 

cost

 

Gains

 

Losses

 

Fair value

 

Commercial paper

 

$

28,028

 

$

2

 

$

(32

)

$

27,998

 

Corporate debt securities

 

16,005

 

 

(35

)

15,970

 

 

 

$

44,033

 

$

2

 

$

(67

)

$

43,968

 

 

As of December 31, 2018 and March 31, 2018, none of the Company’s investments in commercial paper were classified within cash equivalents on the consolidated balance sheet.

 

5.              Property, plant and equipment, net

 

Property, plant and equipment, net consisted of the following:

 

 

 

December 31,
2018

 

March 31,
2018

 

Leasehold improvements

 

$

154

 

$

154

 

Construction in Progress

 

5,598

 

 

Office equipment

 

49

 

49

 

Computer equipment

 

108

 

87

 

Plant and laboratory equipment

 

508

 

336

 

 

 

$

6,417

 

$

626

 

Less: Accumulated depreciation and amortization

 

(362

)

(256

)

 

 

$

6,055

 

$

370

 

 

Depreciation and amortization expense was $37 and $106 for the three and nine months ended December 31, 2018, respectively.  Depreciation and amortization expense was $31 and $81 for the three and nine months ended December 31, 2017, respectively.

 

Construction-in-Progress, as of December 31, 2018, includes $4,932 capitalized in connection with the Company’s built-to-suit lease accounting (see Note 13).

 

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6.              Accrued expenses and other current liabilities

 

Accrued expenses and other current liabilities consisted of the following:

 

 

 

December 31,
2018

 

March 31,
2018

 

Accrued research and development costs

 

$

581

 

$

949

 

Accrued compensation and benefits costs

 

1,037

 

949

 

Accrued professional fees

 

414

 

1,094

 

Deferred rent

 

24

 

26

 

Other

 

251

 

153

 

 

 

$

2,307

 

$

3,171

 

 

7.           Convertible preferred stock

 

The Company has issued series seed convertible preferred stock (the “series seed preferred stock”), series A convertible preferred stock (the “series A preferred stock”) and series B convertible preferred stock (the “series B preferred stock”). The series seed preferred stock, series A preferred stock and series B preferred stock are collectively referred to as the “preferred stock.”  In connection with the closing of the IPO, the preferred stock converted into 19,157,360 shares of common stock on a 1:9.94688 basis. There was no preferred stock outstanding as of December 31, 2018.

 

As of March 31, 2018, preferred stock consisted of the following (in thousands, except share amounts):

 

 

 

March 31, 2018

 

 

 

 

 

Preferred

 

 

 

 

 

Common

 

 

 

Preferred

 

Shares

 

 

 

 

 

Stock

 

 

 

Shares

 

Issued and

 

Carrying

 

Liquidation

 

Issuable Upon

 

 

 

Authorized

 

Outstanding

 

Value

 

Preference

 

Conversion

 

Series Seed preferred stock

 

250,000

 

200,000

 

$

1,609

 

$

2,000

 

1,989,376

 

Series A preferred stock

 

864,553

 

864,553

 

30,000

 

30,000

 

8,599,601

 

Series B preferred stock

 

861,415

 

861,415

 

54,752

 

54,950

 

8,568,383

 

 

 

1,975,968

 

1,925,968

 

$

86,361

 

$

86,950

 

19,157,360

 

 

Prior to the closing of the IPO, the holders of the preferred stock had the following rights and preferences:

 

The holders of the Preferred Stock have the following rights and preferences:

 

Voting

 

The holders of the preferred stock were entitled to vote, together with the holders of common stock, on all matters submitted to the stockholders for a vote and were entitled to the number of votes equal to the number of whole shares of common stock into which such holders of preferred stock could convert on the record date of for determination of stockholders entitled to vote. The holders of preferred stock and common stock, voting as a single class, were entitled to elect two directors of the Company. Additionally, the holders of the series seed preferred stock were entitled to elect two directors of the Company, the holders of the series A preferred stock were entitled to elect one director of the Company and the holders of at least 55% of the outstanding series B preferred stock were entitled to elect two directors of the Company.

 

Conversion

 

Each share of preferred stock was convertible into common stock, at any time, at the option of the holder, and without the payment of additional consideration, at the applicable conversion ratio then in effect for each series of preferred stock and subject to adjustment in accordance with anti-dilution provisions. In addition, each share of preferred stock was convertible into common stock at the applicable conversion ratio then in effect for each series of preferred stock upon the earlier of (i) the closing of a firm commitment underwritten public offering of the Company’s common stock with gross proceeds to the Company of at least $30,000 and at a price per share of not less than $9.62, subject to appropriate adjustment in the event of any stock split, stock dividend, combination or other similar recapitalization, or (ii) a date specified by vote or written consent of the holders of 75% of the outstanding preferred stock (voting together as a single class on an as-converted basis). For any events of deemed liquidation

 

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(as defined below) in which series B preferred stock investors would receive less than their full liquidation preference, a further approval of holders of 55% of the outstanding series B preferred stock was required. As of March 31, 2018, each share of preferred stock was convertible into 9.94688 share of common stock.

 

The conversion ratio for each series of preferred stock was determined by dividing the original issue price of each series of preferred stock by the conversion price of each series (as defined below). As of March 31, 2018, the series seed preferred stock original issue price and series seed preferred stock conversion price were $1.01 per share and $10.00 per share, respectively. As of March 31, 2018, the series A preferred stock original issue price and series A preferred stock conversion price were $3.49 per share and $34.70 per share, respectively. As of March 31, 2018, the series B preferred stock original issue price and series B preferred stock conversion price were $6.41 per share and $63.79 per share, respectively. Such series seed preferred stock original issue price, series A preferred stock original issue price and series B preferred stock original issue price and series seed preferred stock conversion price, series A preferred stock conversion price and series B preferred stock conversion price, and the rate at which each series of preferred stock may be converted into common stock, were subject to appropriate adjustment from time to time in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the preferred stock. The series seed preferred stock conversion price, series A preferred stock conversion price and series B preferred stock conversion price were also subject to adjustments based on weighted-average anti-dilution provisions set forth in the Company’s certificate of incorporation, as amended and restated, in the event that additional securities were issued at a purchase price less than the series seed preferred stock conversion price, series A preferred stock conversion price or series B preferred stock conversion price then in effect.

 

Dividends

 

The holders of the preferred stock were entitled to be paid noncumulative dividends if and when declared by the Company’s board of directors. The Company could not pay any dividends on shares of common stock of the Company unless the holders of preferred stock then outstanding simultaneously receive dividends at the same rate and same time as dividends paid with respect to common stock. Dividends were to accrue on a daily basis assuming a 365-day year, and were to be paid in cash. Through December 31, 2018 and March 31, 2018, no dividends had been declared or paid.

 

Liquidation preference

 

In the event of any voluntary or involuntary liquidation event, dissolution, winding up of the Company or an event of deemed liquidation, each holder of the then outstanding series B preferred stock would have been entitled to receive, prior and in preference to any distributions to the holders of series A preferred stock, series seed preferred stock and common stock, an amount equal to the greater of (i) the applicable original issue price, plus any declared but unpaid dividends thereon, or (ii) the amount such holder would have received if such holder had converted its shares into common stock immediately prior to such liquidation event.

 

After the payment of all preferential amounts to the holders of series B preferred stock, each holder of the then outstanding series A preferred stock would have been entitled to receive, prior and in preference to any distributions to the holders of series seed preferred stock and common stock, an amount equal to the greater of (i) the applicable original issue price, plus any declared but unpaid dividends thereon, or (ii) the amount such holder would have received if such holder had converted its shares into common stock immediately prior to such liquidation event.

 

After the payment of all preferential amounts to the holders of series A preferred stock, each holder of the then outstanding series seed preferred stock would have been entitled to receive, prior and in preference to any distributions to the holders of common stock, an amount equal to the greater of (i) the applicable original issue price, plus any declared but unpaid dividends thereon or (ii) the amount such holder would have received if such holder had converted its shares into common stock immediately prior to such liquidation event.

 

After payments have been made in full to the holders of preferred stock, then, to the extent available, the remaining amounts would have been distributed among the holders of the shares of common stock, the holders of series B preferred stock and the holders of series A preferred stock, pro rata based on the number of shares held by each holder, assuming full conversion of all such preferred stock.

 

The holders of series B preferred stock and series A preferred stock were subject to a participation cap (as defined below) for remaining amounts that would have been distributed, which was $127.58 per share for the series B preferred stock and $69.40 per share for the series A preferred stock.

 

To the extent available, the remaining amounts greater than the total of the participation caps would have been distributed among the holders of the shares of common stock, pro rata based on the number of shares held by each holder.

 

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Unless a majority of the holders of the then outstanding preferred stock, on an as-if-converted basis voting together as a single class, elect otherwise, an event of deemed liquidation shall include a merger or consolidation (other than one in which stockholders of the Company own a majority by voting power of the outstanding shares of the surviving or acquiring corporation), sale, transfer or exclusive license of substantially all of the assets of the Company. The preferred stock was conditionally redeemable upon an event of deemed liquidation, which was defined as any (i) merger, consolidation or acquisition, involving the Company or its Subsidiary Undertaking, in which the Company or its subsidiary undertaking was not the surviving entity, (ii) an asset sale, (iii) a share sale, (iv) an initial public offering, (v) the occurrence of a change of control in respect of the Company, (vi) a winding up (vii) or any other a return of capital to stockholders (other than a conversion, redemption or repurchase of shares made in accordance with the applicable governing documents).

 

Redemption

 

The Company’s certificate of incorporation, as amended and restated, did not provide redemption rights to the holders of preferred stock.

 

The holders of shares of convertible preferred stock had liquidation rights in the event of a deemed liquidation that, in certain situations, were not solely within the control of the Company. Therefore, convertible preferred stock was classified outside of stockholders’ equity (deficit).

 

Upon issuance of each class of preferred stock, the Company assessed the embedded conversion and liquidation features of the securities. The Company determined that each class of preferred stock did not require the Company to separately account for the liquidation features. The Company also concluded that no beneficial conversion feature existed upon the issuance date of the series A preferred stock or series B preferred stock as of March 31, 2018. However, the Company did conclude that a beneficial conversion feature existed upon the issuance date of the series seed preferred stock. As the series seed preferred stock was convertible into common stock, at any time, at the option of the holder, and without the payment of additional consideration, at the applicable conversion ratio then in effect, the Company recognized the accretion of the beneficial conversion feature as a deemed dividend immediately upon the issuance of the series seed preferred stock.

 

8.              Preferred stock warrants

 

In connection with the issuance of the series seed preferred stock, the Company issued to the holders of the series seed preferred stock warrants for the purchase of 50,000 shares of series seed preferred stock, which became fully vested and exercisable in the year of issuance. The warrants to purchase shares of series seed preferred stock were issued at an exercise price of $10.00 per share and expire on the earlier of September 16, 2025 or a qualified change of control event.

 

The issuance date fair value of the warrants to purchase shares of series seed preferred stock was $391 and was recorded as a liability with a corresponding reduction in the carrying value of the series seed preferred stock. As of December 31, 2018 and March 31, 2018, the fair value of the warrant liability was $0 and $1,642, respectively. The Company recognized a loss of $0 and $5,452 within other income (expense), net in the consolidated statements of operations for the three and nine months ended December 31, 2018, respectively, related to the change in fair value of the warrant liability. The Company recognized losses of $387 and $965 within other income (expense), net in the consolidated statements of operations for the three and nine months ended December 31, 2017 related to the change in fair value of the warrant liability.

 

Upon the closing of the Company’s IPO in July 2018, all outstanding preferred stock was converted into common stock and the series seed preferred stock warrants became exercisable for common stock instead of series seed preferred stock. As a result, the warrant liability was remeasured a final time on the closing date of the IPO and reclassified to stockholders’ equity (deficit).

 

9.              Stockholders’ Equity

 

Common Stock

 

As of December 31, 2018, the Company’s certificate of incorporation, as amended and restated, authorized the Company to issue up to 150,000,000 shares of common stock, par value $0.001 per share. As of March 31, 2018, the Company was authorized to issue 27,314,288 shares of par value $0.001 per share common stock (including 26,258 authorized shares of common A stock). In July 2017, the Company issued and sold 26,258 shares of par value $0.001 per share common A stock for nominal cash proceeds. In July 2018, the Company repurchased 26,258 shares of par value $0.001 per share common A stock for nominal cash proceeds.  The voting, dividend and liquidation rights of the holders of the Company’s common stock is subject to and qualified by the rights, powers and preferences of the holders of the preferred stock as set forth above.

 

As of December 31, 2018, the Company had reserved 6,872,305 shares of common stock for the exercise of outstanding stock options, the number of shares remaining available for grant under the Company’s 2017 Equity Compensation Plan, the Company’s 2018 Omnibus Incentive Compensation Plan and the Company’s Employee Stock Purchase Plan (see Note 10)

 

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and the exercise of the outstanding warrants to purchase shares of common. As of March 31, 2018, the Company had reserved 22,306,801 shares of common stock for the conversion of outstanding shares of preferred stock (see Note 7), the exercise of outstanding stock options, the number of shares remaining available for grant under the Company’s 2017 Equity Compensation Plan (see Note 10) and the exercise of the outstanding warrants to purchase shares of series seed preferred stock (see Note 8), assuming all warrants to purchase shares of series seed preferred stock became warrants to purchase shares of common stock at the applicable conversion ratio.

 

Voting

 

Each share of common stock, including common A stock, entitles the holder to one vote, together with the holders of preferred stock, on all matters submitted to the stockholders for a vote. The holders of common stock, together with the holders of preferred stock and voting as a single class, are entitled to elect two directors of the Company by vote of a majority of such shares.

 

Dividends

 

Common stockholders are entitled to receive dividends, as may be declared by the Company’s board of directors, if any, subject to the preferential dividend rights of the preferred stock. Through December 31, 2018 no cash dividends have been declared or paid.

 

Each share of common A stock is entitled to receive dividends, as may be declared by the Company’s board of directors, if any, equal to a maximum of 100% of each share’s par value. Upon an event of deemed liquidation, common A stock is entitled to receive dividends equal to a maximum of 300% of each share’s par value.

 

Undesignated Preferred Stock

 

As of December 31, 2018, the Company’s certificate of incorporation, as amended and restated, authorized the Company to issue up to 10,000,000 shares of undesignated preferred stock, par value $0.001 per share.  There were no undesignated preferred shares issued or outstanding as of December 31, 2018.

 

10.       Stock-Based Compensation

 

2015 Enterprise Management Incentive Share Option Plan

 

The 2015 Enterprise Management Incentive Share Option Plan of Replimune UK (the “2015 Plan”) provided for Replimune UK to grant incentive stock options, non-statutory stock options, stock awards, stock units, stock appreciation rights and other stock-based awards. Incentive stock options are granted only to the Company’s employees, including officers and directors who are also employees. Non-statutory stock options are granted to employees, members of the board of directors, outside advisors and consultants of the Company.

 

2017 Equity Compensation Plan

 

In July 2017, in conjunction with the Reorganization, the 2015 Plan was terminated, and all awards were cancelled with replacement awards issued under the 2017 Equity Compensation Plan (the “2017 Plan”). Subsequent to the Reorganization, no additional grants will be made under the 2015 Plan and any outstanding awards under the 2015 Plan will continue with their original terms. The Company concluded that the cancellation of the 2015 Plan and issuance of replacement awards under the 2017 Plan was a modification with no change in the material rights and preferences and therefore no recorded change in the fair value of each respective award.

 

The Company’s 2017 Plan provides for the Company to grant incentive stock options or non-statutory stock options, stock awards, stock units, stock appreciation rights and other stock-based awards. Incentive stock options may be granted only to the Company’s employees, including officers and directors who are also employees. Restricted stock awards and non-statutory stock options may be granted to employees, officers, members of the board of directors, advisors and consultants of the Company. The maximum number of common shares that may be issued under the 2017 Plan was 2,659,885 as of December 31, 2018, of which 0 remained available for future grants as of December 31, 2018. Shares with respect to which awards have expired, terminated, surrendered or cancelled under the 2017 Plan without having been fully exercised will be available for future awards under the 2017 Plan. In addition, shares of common stock that are tendered to the Company by a participant to exercise an award are added to the number of shares of common stock available for the grant of awards.

 

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Table of Contents

 

2018 Omnibus Incentive Compensation Plan

 

On July 9, 2018, the Company’s board of directors adopted, and the Company’s stockholders approved the 2018 Omnibus Incentive Compensation Plan (the “2018 Plan”), which became effective immediately prior to the effectiveness of the registration statement for the Company’s initial public offering. The 2018 Plan provides for the issuance of incentive stock options, non-qualified stock options, stock awards, stock units, stock appreciation rights and other stock-based awards. The number of shares initially reserved for issuance under the 2018 Plan is 3,617,968 shares, which is equal to the sum of (i) 3,486,118 shares of the Company’s common stock, plus (ii) the number of shares of the Company’s common stock reserved for issuance under the 2017 Plan that remain available as of the effective date of the 2018 Plan (not to exceed 131,850 shares of the Company’s common stock). If any options or stock appreciation rights, including outstanding options and stock appreciation rights granted under the 2017 Plan (up to 2,520,247 shares), terminate, expire, or are canceled, forfeited, exchanged, or surrendered without having been exercised, or if any stock awards, stock units or other stock-based awards, including outstanding awards granted under the 2017 Plan, are forfeited, terminated, or otherwise not paid in full in shares of common stock, the shares of the Company’s common stock subject to such grants will be available for purposes of our 2018 Plan.  As of December 31, 2018, 2,352,814 shares remained available for future grants under the 2018 Plan.

 

The 2015 Plan, the 2017 Plan and the 2018 Plan was administered by the board of directors or, at the discretion of the board of directors, by a committee of the board of directors. However, the board of directors shall administer and approve all grants made to non-employee directors. The exercise prices, vesting and other restrictions are determined at the discretion of the board of directors, except that the exercise price per share of incentive stock options may not be less than 100% of the fair market value of the common stock on the date of grant (or 110% of fair value in the case of an award granted to employees who hold more than 10% of the total combined voting power of all classes of stock at the time of grant) and the term of stock options may not be greater than five years for an incentive stock option granted to a 10% stockholder and greater than ten years for all other options granted. Stock options awarded under both plans expire ten years after the grant date, unless the board of directors sets a shorter term. Vesting periods for both plans are determined at the discretion of the board of directors. Incentive stock options granted to employees and non-statutory options granted to employees, officers, members of the board of directors, advisors, and consultants of the Company typically vest over four years.

 

Employee Stock Purchase Plan

 

On July 9, 2018, the Company’s board of directors adopted and the Company’s stockholders approved the Employee Stock Purchase Plan (the “ESPP”), which became effective immediately prior to the effectiveness of the registration statement for the Company’s initial public offering. The total shares of common stock initially reserved for issuance under the ESPP is limited to 348,612 shares. In addition, as of the first trading day of each fiscal year during the term of the ESPP (excluding any extensions), an additional number of shares of the Company’s common stock equal to 1% of the total number of shares outstanding on the last trading day in the immediately preceding fiscal year or 697,224 shares, whichever is less (or such lesser amount as determined by the Company’s board of directors) will be added to the number of shares authorized under the ESPP. If the total number of shares of common stock to be purchased pursuant to outstanding purchase rights on any particular date exceed the number of shares then available for issuance under the ESPP, then the plan administrator will allocate the available shares pro-rata and refund any excess payroll deductions or other contributions to participants.

 

The following table presents, on a weighted-average basis, the assumptions that the Company used to determine the grant-date fair value of stock options granted to employees and directors:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

December 31,

 

December 31,

 

 

 

2018

 

2017

 

2018

 

2017

 

Risk-free interest rate

 

2.83

%

2.06

%

2.83

%

1.95

%

Expected term (in years)

 

6.1

 

6.1

 

6.1

 

6.1

 

Expected volatility

 

63.3

%

75.0

%

61.7

%

75.0

%

Expected dividend yield

 

0

%

0

%

0

%

0

%

 

The following table presents the assumptions that the Company used to determine the grant-date fair value of stock options granted to a non-employee:

 

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Table of Contents

 

 

 

Three and Nine

 

 

 

Months Ended

 

 

 

December 31,

 

 

 

2017

 

Risk-free interest rate

 

2.29

%

Expected term (in years)

 

10.0

 

Expected volatility

 

75.0

%

Expected dividend yield

 

0

%

 

Stock option valuation

 

The fair value of stock option grants is estimated using the Black-Scholes option-pricing model. The Company lacks 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. For options with service-based vesting conditions, the expected term of the Company’s stock options has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options. The expected term of stock options granted to non-employees is equal to the contractual term of the option award. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future.

 

Stock options

 

The following table summarizes the Company’s stock option activity:

 

 

 

Number of
Shares

 

Weighted
Average
Exercise
Price

 

Weighted
Average
Contractual
Term
(Years)

 

Aggregate
Intrinsic
Value

 

Outstanding as of March 31, 2018

 

2,520,247

 

$

2.72

 

8.91

 

$

2,808

 

Granted

 

1,280,500

 

15.04

 

9.59

 

 

 

Exercised

 

(94,149

)

1.75

 

 

 

 

 

Cancelled

 

(33,063

)

5.25

 

 

 

 

 

Outstanding as of December 31, 2018

 

3,673,535

 

$

7.02

 

8.68

 

$

17,385

 

Options exercisable as of March 31, 2018

 

592,349

 

1.84

 

8.22

 

$

1,184

 

Options exercisable as of December 31, 2018

 

1,152,525

 

2.45

 

7.96

 

$

8,699

 

 

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

 

The total fair value of options vested during the nine months ended December 31, 2018 and 2017 was $1,042 and $172, respectively.

 

As of December 31, 2018, there were no outstanding unvested service-based stock options held by non-employees.

 

Stock-Based Compensation

 

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

 

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Table of Contents

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

December 31,

 

December 31,

 

 

 

2018

 

2017

 

2018

 

2017

 

Research and development

 

$

474

 

$

114

 

$

989

 

$

216

 

General and administrative

 

407

 

143

 

834

 

242

 

 

 

$

881

 

$

257

 

$

1,823

 

$

458

 

 

As of December 31, 2018, total unrecognized compensation cost related to the unvested stock-based awards was $12,208, which is expected to be recognized over a weighted average period of 2.55 years.

 

11.       Net loss per share

 

Net Loss per Share

 

Basic and diluted net loss per share attributable to common stockholders was calculated as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

December 31,

 

December 31,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

Net loss attributable to common stockholders

 

$

(7,673

)

$

(4,354

)

$

(24,178

)

$

(12,854

)

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding, basic and diluted

 

31,577,313

 

4,981,227

 

20,433,580

 

4,977,659

 

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

 

$

(0.24

)

$

(0.87

)

$

(1.18

)

$

(2.58

)

 

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

 

 

 

Three and Nine 

 

 

 

Months Ended

 

 

 

December 31,

 

 

 

2018

 

2017

 

 

 

 

 

 

 

Options to purchase common stock

 

3,673,535

 

2,361,857

 

Convertible preferred stock (as converted to common stock)

 

 

19,157,360

 

Warrants to purchase convertible preferred stock (as converted to common stock)

 

497,344

 

497,344

 

 

 

4,170,879

 

22,016,561

 

 

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12.       Significant agreements

 

Agreement with Bristol-Myers Squibb Company

 

In February 2018, the Company entered into an agreement with Bristol-Myers Squibb Company (“BMS”). Pursuant to the agreement, BMS will provide to the Company, at no cost, a compound for use in the Company’s ongoing clinical trial. Under the agreement, the Company will sponsor, fund and conduct the clinical trial in accordance with an agreed-upon protocol. BMS granted the Company a non-exclusive, non-transferrable, royalty-free license (with a right to sublicense) under its intellectual property to its compound in the clinical trial and agreed to manufacture and supply its compound, at its cost and for no charge to the Company, for use in the clinical trial.

 

Unless earlier terminated, the agreement will remain in effect until (i) the completion of the clinical trial, (ii) all related clinical trial data have been delivered to both parties and (iii) the completion of any statistical analyses and bioanalyses contemplated by the clinical trial protocol or any analysis otherwise agreed upon by the parties. The agreement may be terminated by either party (i) in the event of an uncured material breach by the other party, (ii) in the event the other party is insolvent or in bankruptcy proceedings or (iii) for safety reasons. Upon termination, the licenses granted to the Company to use BMS’s compound in the clinical trial will terminate.

 

As of December 31, 2018, the Company had not incurred any costs and does not expect to incur future costs in connection with this agreement.

 

Agreement with Regeneron Pharmaceuticals, Inc.

 

In May 2018, the Company entered into an agreement with Regeneron Pharmaceuticals, Inc. (“Regeneron”). The Company and Regeneron are each independently developing compounds for the treatment of certain tumor types. Pursuant to the agreement, the Company and Regeneron will undertake one or more clinical trials using a combination of the compounds being developed by each entity. Under the agreement, each study will be conducted under terms set out in a separately agreed upon study plan that will identify the name of the sponsor and which party will manage the particular clinical trial, and include the protocol, the budget and a schedule of clinical obligations.  In June 2018, under the terms of the agreement between the Company and Regeneron, the parties agreed to the first study plan. The Company and Regeneron have agreed to the protocol, budget, sample testing and clinical obligations schedule under the study plan. Development and supply costs associated with the study plan will be split equally between the Company and Regeneron.

 

Pursuant to the terms of the agreement, each party granted the other party a non-exclusive license under its respective intellectual property and agreed to contribute the necessary resources needed to fulfill its respective obligations, in each case, under the terms of the agreed-upon or to-be agreed upon study plans. Development costs of a particular clinical trial will be split equally between the Company and Regeneron.

 

The agreement may be terminated by either party if (i) there is no active study plan for which a final study report has not been completed, (ii) the parties have not entered into a study plan for an additional clinical trial within a period of time after the delivery of the most recent final study report or (iii) in the event of a material breach.

 

The Company will account for costs incurred as part of the study, including costs to supply compounds for use in the study, as research and development expenses within the consolidated statement of operations.  The Company will recognize any amounts received from Regeneron in connection with this agreement as an offset to research and development expense within the consolidated statement of operations.

 

As of December 31, 2018, the Company had not incurred any costs or received any reimbursements in connection with this agreement.

 

13.       Commitments and contingencies

 

Lease agreements

 

In December 2015, the Company entered into a lease agreement for office space in Woburn, Massachusetts, which expires on March 30, 2021. The Company has the option to extend the lease agreement for successive periods of five years. Monthly lease payments, inclusive of base rent and ancillary charges, total $7. Monthly base rent is subject to increase each year in proportion to the Consumer Price Index.

 

In April 2016, the Company entered into a lease agreement for office and laboratory space in Abingdon, England, which expires on April 3, 2026. The Company has the right to terminate the lease as of April 4, 2021 upon at least nine months’ prior written notice. Monthly lease payments are inclusive of base rent, ancillary charges, non-rent shared tenant occupancy costs and the respective value added tax to be paid. Monthly lease payments include base rent of approximately $23 through December 3, 2016 and $31 thereafter. Monthly base rent is subject to increase after April 2021 in proportion to the Retail Price Index.

 

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Build-to-suit lease

 

In June 2018, the Company entered into an agreement to lease approximately 63,000 square feet of office, manufacturing and laboratory space within a previously occupied building with approximately 106,000 square feet of rentable space in Framingham, Massachusetts. Pursuant to the lease agreement, the lease term is estimated to commence in November 2018, subject to the landlord completing certain agreed upon landlord improvements. The rent commencement date is estimated to be eight months after the commencement of the lease term. The initial lease term is ten years from the rent commencement date and includes two optional five year extensions. Annual lease payments during the first year are $2,373 with increases of 3.0% each year.

 

The Company is not the legal owner of the leased space.  However, in accordance with ASC 840, Leases, the Company is deemed to be the owner of the leased space during the construction period because of certain indemnification provisions within the lease agreement.  As a result, as of December 31, 2018, the Company capitalized $4,932 (equal to the estimated fair value of its leased portion of the premises) as construction-in-progress within property and equipment and recorded a corresponding build-to-suit facility lease financing obligation, which was classified as a long-term liability on its consolidated balance sheet.  The construction is expected to be completed in September 2019, at which time the Company will assess and determine if the assets and corresponding liability should be de-recognized.

 

The Company recorded the following for the lease agreement for its new office, manufacturing and laboratory space during the construction period:

 

 

 

Three and Nine
Months Ended
December 31,
2018

 

Rent expense

 

$

40

 

Capitalized costs

 

$

4,932

 

 

The Company recorded total rent expense of $251 and $479 during the three and nine months ended December 31, 2018, respectively. The Company recorded rent expense of $108 and $318 during the three and nine months ended December 31, 2017, respectively.

 

The following table summarizes the future minimum lease payments due under the Company’s operating leases as of December 31, 2018:

 

2019 (remaining three months)

 

$

118

 

2020

 

2,054

 

2021

 

2,893

 

2022

 

2,493

 

2023

 

2,568

 

2024

 

2,645

 

Thereafter

 

15,496

 

 

 

$

28,267

 

 

Manufacturing commitments

 

The Company has entered into an agreement with a contract manufacturing organization to provide clinical trial products. As of December 31, 2018 and March 31, 2018, the Company had committed to minimum payments under these arrangements totaling $5,400 and $2,938 through December 31, 2019 and March 31, 2019, respectively.

 

Indemnification agreements

 

In the ordinary course of business, the Company may provide indemnification of varying scope and terms to vendors, lessors, business partners and other parties with respect to certain matters including, but not limited to, losses arising out of breach of such agreements or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with members of its board of directors that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is, in many cases, unlimited. To date, the Company has not incurred any material costs as a result of such indemnifications. The

 

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Company is not aware of any claims under indemnification arrangements, and therefore it has not accrued any liabilities related to such obligations in its consolidated financial statements as of December 31, 2018 or March 31, 2018.

 

Legal Proceedings

 

The Company is not a party to any litigation and does not have contingency reserves established for any litigation liabilities.

 

14.       Benefit Plans

 

The Company established a defined-contribution savings plan under Section 401(k) of the Code (the “401(k) Plan”). The 401(k) Plan covers substantially all employees who meet minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis. Matching contributions to the 401(k) Plan may be made at the discretion of the Company’s board of directors. During the three and nine months ended December 31, 2018, the Company made contributions totaling $57 and $191, respectively, to the 401(k) Plan. During the three and nine months ended December 31, 2017, the Company made contributions totaling $43 and $122, respectively, to the 401(k) Plan.

 

We provide a pension contribution plan for our employees in the United Kingdom, pursuant to which we match our employees’ contributions each year in amounts up to 8% of their annual base salary.

 

15.       Geographic Information

 

The Company operates in two geographic regions: the United States (Massachusetts) and the United Kingdom (Oxfordshire). Information about the Company’s long-lived assets held in different geographic regions is presented in the tables below:

 

 

 

December 31, 2018

 

March 31, 2018

 

United States

 

$

5,611

 

$

20

 

United Kingdom

 

444

 

350

 

 

 

$

6,055

 

$

370

 

 

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Table of Contents

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited consolidated financial statements and related notes appearing in Part I, Item I of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and notes thereto for the year ended March 31, 2018, included in our prospectus dated July 19, 2018 and filed on July 23, 2018 with the U.S. Securities and Exchange Commission, or the SEC, pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended, which we prefer to as our Prospectus.

 

Some of the statements contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. We have based these forward-looking statements on our current expectations and projections about future events. The following information and any forward-looking statements should be considered in light of factors discussed elsewhere in this Quarterly Report on Form 10-Q, particularly including those risks identified in Part II-Item 1A “Risk Factors” and our other filings with the SEC.

 

Our actual results and timing of certain events may differ materially from the results discussed, projected, anticipated, or indicated in any forward-looking statements. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q. Statements made herein are as of the date of the filing of this Form 10-Q with the SEC and should not be relied upon as of any subsequent date. Even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward-looking statements contained in this Quarterly Report on Form 10-Q, they may not be predictive of results or developments in future periods. We disclaim any obligation, except as specifically required by law and the rules of the SEC, to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions or circumstances on which any such statements may be based or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.

 

Overview

 

We are a clinical-stage biotechnology company committed to applying our leading expertise in the field of oncolytic immunotherapy to transform the lives of cancer patients. We use our proprietary Immulytic platform to design and develop product candidates that are intended to maximally activate the immune system against solid tumors. We are conducting a Phase 1/2 clinical trial with our lead product candidate, RP1, in approximately 150 patients with a range of solid tumors. In addition, in the first half of 2019, we plan to initiate a randomized, controlled Phase 2 clinical trial of RP1 in combination with cemiplimab, versus cemiplimab alone, in approximately 240 patients with cutaneous squamous cell carcinoma, or CSCC, which we are designing to potentially support product registration. We also intend to initiate a clinical trial for our second product candidate, RP2, in the first half of 2019.

 

Oncolytic immunotherapy is an emerging class of cancer treatment that exploits the ability of certain viruses to selectively replicate in and directly kill tumors, as well as induce a potent, patient-specific, anti-tumor immune response. Such oncolytic, or “cancer killing,” viruses have the potential to generate an immune response targeted to an individual patient’s particular set of tumor antigens, including to neo-antigens that are uniquely present in tumors. Our product candidates incorporate multiple mechanisms of action into single product candidates in a practical, “off-the-shelf” format that is intended to maximize the immune response against a patient’s cancer and to offer significant advantages over personalized vaccine approaches. Our management team has worked together for more than ten years and successfully developed the first oncolytic immunotherapy, Imlygic, also known as T-Vec, which was approved by the FDA for the treatment of advanced melanoma in 2015.

 

The foundation of our Immulytic platform consists of a proprietary, engineered strain of herpes simplex virus 1, or HSV-1, that has been “armed” with a fusogenic therapeutic protein intended to substantially increase anti-tumor activity. Our platform enables us to design multiple product candidates that incorporate various further genes whose expression is intended to augment the inherent properties of HSV-1 to both directly destroy tumor cells and induce an anti-tumor immune response.

 

We believe our lead product candidate, RP1, and our other product candidates will be effective at killing tumors and inducing immunogenic, or immune-stimulating, tumor cell death and that it will be highly synergistic with immune checkpoint blockade therapies.

 

We began operations as Replimune Limited, an English limited company that was incorporated in 2015. On July 5, 2017, Replimune Group, Inc., a Delaware corporation, was incorporated and, on July 10, 2017, the shareholders of Replimune Limited effected a share-for-share exchange pursuant to which they exchanged their outstanding shares in Replimune Limited for shares in Replimune Group, Inc., on a one-for-one basis.

 

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In addition, the holders of warrants to purchase shares of series seed preferred stock and stock options to acquire Replimune Limited capital stock canceled their warrants and stock options in Replimune Limited and were issued replacement warrants and stock options to acquire Replimune Group, Inc. capital stock on a one-for-one basis. We refer to these transactions collectively as the reorganization. Upon completion of the reorganization, the historical consolidated financial statements of Replimune Limited became the historical consolidated financial statements of Replimune Group, Inc. because the reorganization was accounted for similar to a reorganization of entities under common control due to the high degree of common ownership of Replimune Limited and Replimune Group, Inc. and lack of economic substance to the transaction. We concluded that the reorganization resulted in no change in the material rights and preferences of each respective class of equity interests and no change in the fair value of each respective class of equity interests before and after the reorganization. On December 8, 2017, Replimune Limited transferred all outstanding shares of its wholly owned subsidiary, Replimune, Inc., to Replimune Group, Inc., a Delaware corporation. Replimune Group, Inc. is the sole shareholder of Replimune Limited, Replimune, Inc. and Replimune Securities Corporation, a Massachusetts corporation that was incorporated in November 2017.

 

Financial overview

 

Since our inception, we have devoted substantially all of our resources to developing our Immulytic platform and our lead product candidate, RP1, building our intellectual property portfolio, conducting research and development of our product candidates, business planning, raising capital and providing general and administrative support for our operations. To date, we have financed our operations primarily with proceeds from the sale of equity securities. We do not have any products approved for sale and have not generated any revenue from product sales.  On July 24, 2018, we completed our initial public offering (IPO) of our common stock and issued and sold 6,700,000 shares of our common stock at a public offering price of $15.00 per share, resulting in net proceeds of approximately $93.5 million after deducting underwriting discounts and commissions but before deducting offering costs.  On July 30, 2018, we issued and sold an additional 707,936 shares of our common stock at the IPO price of $15.00 per share pursuant to the underwriters’ partial exercise of their option to purchase additional shares of common stock, resulting in additional net proceeds of approximately $9.9 million after deducting discounts and commissions and other offering expenses.

 

Since our inception, we have incurred significant operating losses. Our ability to generate product revenue sufficient to achieve profitability will depend on the successful development and eventual commercialization of one or more of our product candidates. Our net losses were $7.7 million and $4.4 million for the three months ended December 31, 2018 and 2017, respectively and $24.2 million and $12.9 million for the nine months ended December 31, 2018 and 2017, respectively. As of December 31, 2018, we had an accumulated deficit of $53.1 million. These losses have resulted primarily from costs incurred in connection with research and development activities and general and administrative costs associated with our operations. We expect to continue to incur significant expenses and increasing operating losses for at least the next several years.

 

We anticipate that our expenses and capital requirements will increase substantially in connection with our ongoing activities, particularly as we advance the preclinical activities and clinical trials of our product candidates.  In addition, we expect to continue to incur additional costs associated with operating as a public company. We expect that our expenses and capital requirements will increase substantially if and as we:

 

·                  conduct our current and future clinical trials with RP1;

 

·                  progress the preclinical and clinical development of RP2 and RP3;

 

·                  establish, equip, and operate our own in-house manufacturing facility;

 

·                  seek to identify and develop additional product candidates;

 

·                  seek marketing approvals for any of our product candidates that successfully complete clinical trials, if any;

 

·                  establish a sales, marketing and distribution infrastructure to commercialize any products for which we may obtain marketing approval;

 

·                  maintain, expand and protect our intellectual property portfolio;

 

·                  hire and retain additional clinical, quality control, scientific and finance personnel;

 

·                  acquire or in-license other drugs and technologies; and

 

·                  add operational, financial and management information systems and personnel, including personnel to support our research and development programs, any future commercialization efforts and our continued transition to operating as a public company.

 

We will not generate revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for RP1 or our other product candidates. If we obtain regulatory approval for any of our product candidates and do not enter into a commercialization partnership, we expect to incur significant expenses related to developing our internal commercialization capability to support product sales, marketing, and distribution. Further, we expect to continue to incur additional costs associated with operating as a public company.

 

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As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of equity offerings, debt financings, collaborations, strategic alliances, and marketing, distribution, or licensing arrangements. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back, or discontinue the development and commercialization of one or more of our product candidates.

 

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

 

As of December 31, 2018, we had cash and cash equivalents and short-term investments of $141.8 million. We believe that our existing cash and cash equivalents and short-term investments will enable us to fund our operating expenses and capital expenditure requirements through at least 12 months from the issuance of the consolidated financial statements included in this Quarterly Report on Form 10-Q.

 

See “—Liquidity and capital resources” and “Risk factors—Risks related to our financial position and need for additional capital.”

 

Components of our results of operations

 

Revenue

 

To date, we have not generated any revenue from product sales as we do not have any approved products and do not expect to generate any revenue from the sale of products in the near future. If our development efforts for RP1 or any other product candidates that we may develop in the future are successful and result in regulatory approval, or if we enter into collaboration or license agreements with third parties, we may generate revenue in the future from a combination of product sales or payments from those collaboration or license agreements.

 

Operating expenses

 

Our expenses since inception have consisted solely of research and development costs and general and administrative costs.

 

Research and development expenses

 

Research and development expenses consist primarily of costs incurred for our research activities, including our discovery efforts and the development of RP1 and our other product candidates, and include:

 

·                  expenses incurred under agreements with third parties, including clinical research organizations, or CROs, that conduct research, preclinical activities and clinical trials on our behalf as well as contract manufacturing organizations, or CMOs, that manufacture our product candidates for use in our preclinical and clinical trials;

 

·                  salaries, benefits and other related costs, including stock-based compensation expense, for personnel engaged in research and development functions;

 

·                  costs of outside consultants, including their fees, stock-based compensation and related travel expenses;

 

·                  the costs of laboratory supplies and acquiring, developing and manufacturing preclinical study and clinical trial materials;

 

·                  costs related to compliance with regulatory requirements in connection with the development of RP1 and our other product candidates; and

 

·                  facility-related expenses, which include direct depreciation costs and allocated expenses for rent and maintenance of facilities and other operating costs.

 

We expense research and development costs as incurred. We recognize external development costs based on an evaluation of the progress to completion of specific tasks using information provided to us by our service providers. Payments for these activities are based on the terms of the individual agreements, which may differ from the pattern of costs incurred, and are reflected in our consolidated financial statements as prepaid or accrued research and development expenses.

 

Our direct external research and development expenses are tracked on a program-by-program basis and consist of costs, such as fees paid to consultants, contractors, CMOs, and CROs in connection with our preclinical and clinical development activities. To date, we have not allocated expenses to our earlier-stage programs for RP2 and RP3. In addition, we do not allocate employee costs, costs associated with our discovery efforts, laboratory supplies, and facilities, including depreciation or other indirect costs,

 

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Table of Contents

 

to specific product development programs because these costs are deployed across multiple product development programs and, as such, are not separately classified.

 

The table below summarizes our research and development expenses by product candidate or development program for each of the periods presented:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

December 31,

 

December 31,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

(Amounts in thousands)

 

RP1

 

$

4,026

 

$

1,887

 

$

7,633

 

$

4,735

 

Unallocated research and development expenses

 

3,831

 

1,686

 

9,127

 

4,278

 

Total research and development expenses

 

$

7,857

 

$

3,573

 

$

16,760

 

$

9,013

 

 

Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect that our research and development expenses will continue to increase for the foreseeable future as we initiate additional clinical trials of RP1, complete preclinical development and pursue initial stages of clinical development of RP2 and RP3 and continue to discover and develop additional product candidates. The successful development and commercialization of our product candidates is highly uncertain. This is due to the numerous risks and uncertainties associated with product development and commercialization, including the following:

 

·                  the scope, rate of progress, expense and results of our ongoing clinical trials of RP1, as well as of any future clinical trials of RP2 and RP3 or other product candidates and other research and development activities that we may conduct;

 

·                  the number and scope of preclinical and clinical programs we decide to pursue;

 

·                  our ability to maintain our current research and development programs and to establish new ones;

 

·                  uncertainties in clinical trial design and patient enrollment rates;

 

·                  the successful completion of clinical trials with safety, tolerability, and efficacy profiles that are satisfactory to the FDA or any comparable foreign regulatory authority;

 

·                  the receipt of regulatory approvals from applicable regulatory authorities;

 

·                  our success in establishing, equipping, and operating a manufacturing facility, or securing manufacturing supply through relationships with third parties;

 

·                  our ability to obtain and maintain patents, trade secret protection, and regulatory exclusivity, both in the United States and internationally;

 

·                  our ability to protect our rights in our intellectual property portfolio;

 

·                  the commercialization of our product candidates, if and when approved;

 

·                  the acceptance of our product candidates, if approved, by patients, the medical community, and third-party payors;

 

·                  our ability to successfully develop our product candidates for use in combination with third-party products or product candidates;

 

·                  negative developments in the field of immuno-oncology;

 

·      competition with other products; and

 

·      significant and changing government regulation and regulatory guidance.

 

A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials beyond those that we anticipate will be required for the completion of clinical development of a product candidate, or if we experience significant trial delays due to patient enrollment or other reasons, we would be required to expend significant additional financial resources and time on the completion of clinical development. We may never succeed in obtaining regulatory approval for any of our product candidates.

 

General and administrative expenses

 

General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation, for personnel in our executive, finance, corporate and business development and administrative functions. General and administrative expenses also include professional fees for legal, patent, accounting, auditing, tax and consulting services; travel expenses; and facility-related expenses, which include direct depreciation costs and allocated expenses for rent and maintenance of facilities and other operating costs.

 

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We expect that our general and administrative expenses will increase in the future as we increase our general and administrative headcount to support our continued research and development and potential commercialization of our product candidates. We also expect to continue to incur increased expenses associated with being a public company, including costs of accounting, audit, legal, regulatory and tax-related services associated with maintaining compliance with exchange listing and SEC requirements; director and officer insurance costs; and investor and public relations costs.

 

Other income (expense), net

 

Research and development incentives

 

Research and development incentives consists of reimbursements of research and development expenditures. We participate, through our subsidiary in the United Kingdom, in the research and development program provided by the United Kingdom tax relief program, such that a percentage of up to 14.5% of our qualifying research and development expenditures are reimbursed by the United Kingdom government, and such incentives are reflected as other income.

 

Change in fair value of warrant liability

 

In connection with the issuance of the series seed preferred stock, we issued to the series seed preferred stock holders warrants to purchase shares of series seed preferred stock. Prior to the completion of our IPO, we classified the warrants as a liability on our consolidated balance sheets. We remeasured the warrant liability to fair value at each reporting date and recognized changes in the fair value of the warrant liability as a component of other income (expense), net in our consolidated statements of operations.

 

Effective upon the completion of our IPO, the warrants to purchase shares of series seed preferred stock became exercisable for shares of common stock instead of shares of preferred stock, and the warrant liability was reclassified to additional paid-in capital. As a result, effective upon the completion of our IPO, we no longer recognize changes in the fair value of the warrant liability as other income (expense), net in our consolidated statements of operations.

 

Interest income

 

Interest income consists of income earned on our cash and cash equivalents and short-term investments. Our interest income has not been significant due to low investment balances and low interest earned on those balances.

 

Other income (expense), net

 

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

 

Income taxes

 

Since our inception and through December 31, 2018, we have not recorded any income tax benefits for the net losses we incurred in each jurisdiction in which we operate, as we believe, based upon the weight of available evidence, that it is more likely than not that all of our net operating loss carryforwards will not be realized.

 

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act, or the Tax Act. The Tax Act includes a number of changes to existing tax law, including, among other things, a permanent reduction in the federal corporate income tax rate from a top marginal rate of 35% to a flat rate of 21%, effective as of January 1, 2018, as well as limitation of the deduction for net operating losses to 80% of annual taxable income and elimination of net operating loss carrybacks, in each case, for losses arising in taxable years beginning after December 31, 2017 (though any such net operating losses may be carried forward indefinitely). Under the Tax Act, our deferred tax assets and liabilities (before valuation allowance) were remeasured at the lower federal tax rate, resulting in an increase to our income tax provision with an equal and offsetting reduction in our valuation allowance. We have completed our final determination of the remeasurement of our deferred tax assets and liabilities during the three months ended December 31, 2018 under SEC Staff Accounting Bulletin No. 118 and we have not recorded any adjustments to the provisional amounts recorded at March 31, 2018.

 

Results of operations

 

Comparison of the three months ended December 31, 2018 and 2017

 

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

 

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Table of Contents

 

 

 

Three Months Ended

 

 

 

 

 

December 31,

 

 

 

 

 

2018

 

2017

 

Change

 

 

 

(Amounts in thousands)

 

Operating expenses:

 

 

 

 

 

 

 

Research and development

 

$

7,857

 

$

3,573

 

$

4,284

 

General and administrative

 

2,280

 

1,159

 

1,121

 

Total operating expenses

 

10,137

 

4,732

 

5,405

 

Loss from operations

 

(10,137

)

(4,732

)

(5,405

)

Other income (expense):

 

 

 

 

 

 

 

Research and development incentives

 

1,577

 

639

 

938

 

Interest income

 

882

 

32

 

850

 

Change in fair value of warrant liability

 

 

(387

)

387

 

Other income (expense), net

 

5

 

94

 

(89

)

Total other income (expense), net

 

2,464

 

378

 

2,086

 

Net loss

 

$

(7,673

)

$

(4,354

)

$

(3,319

)

 

Research and development expenses

 

 

 

Three Months Ended

 

 

 

 

 

December 31,

 

 

 

 

 

2018

 

2017

 

Change

 

 

 

(Amounts in thousands)

 

Direct research and development expenses by program:

 

 

 

 

 

 

 

RP1

 

$

4,026

 

$

1,887

 

$

2,139

 

Unallocated research and development expenses:

 

 

 

 

 

 

 

Personnel related (including stock-based compensation)

 

1,932

 

1,172

 

760

 

Other

 

1,899

 

514

 

1,385

 

Total research and development expenses

 

$

7,857

 

$

3,573

 

$

4,284

 

 

Research and development expenses for the three months ended December 31, 2018 were $7.9 million, compared to $3.6 million for the three months ended December 31, 2017. The increase of $4.3 million was due primarily to an increase of approximately $2.1 million in direct research costs associated with RP1 and an approximately $2.1 million increase in our unallocated research and development costs. The increase in RP1 costs was due primarily to an increase in clinical trial costs in the three months ended December 31, 2018 associated with our ongoing Phase 1/2 clinical trial, which commenced in October 2017.

 

The increase in unallocated research and development expenses reflected an increase of $0.8 million in personnel-related costs, including stock-based compensation, and an increase of $1.4 million in other costs. The increase in personnel-related costs was primarily due to the hiring of additional personnel in our research and development functions as we began work on our planned Phase 2 clinical trial of RP1 in patients with CSCC. Personnel-related costs for three months ended December 31, 2018 and 2017 included stock-based compensation expense of $0.5 million and $0.1 million, respectively. Other costs increased primarily due to purchases of supplies used across all of our product candidates.

 

General and administrative expenses

 

General and administrative expenses were $2.3 million for the three months ended December 31, 2018, compared to $1.2 million for the three months ended December 31, 2017. The increase of $1.1 million primarily reflected increases of $0.6 million in personnel related costs, $0.2 million in professional fees and $0.3 million in facility costs. The increase in personnel related costs was due to the hiring of additional personnel in our general and administrative functions as we expanded our operations in the United States.  The increase in professional fees was due primarily to costs associated with the preparation and review of our financial statements and costs associated with operating as a public company.  The increase in facility costs was due primarily to an increase in directors and officers insurance costs.

 

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Other income (expense), net

 

Other income (expense) was $2.5 million for the three months ended December 31, 2018, compared to $0.4 million for the three months ended December 31, 2017. The increase of $2.1 million was primarily attributable to a $0.9 million increase in research and development incentives, a $0.9 million increase in interest income, a $0.4 million charge related to the change in the fair value of the warrant liability, partially offset by a $0.1 million decrease in other income due primarily to changes in foreign currency rates.

 

Comparison of the nine months ended December 31, 2018 and 2017

 

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

 

 

 

Nine Months Ended

 

 

 

 

 

December 31,

 

 

 

 

 

2018

 

2017

 

Change

 

 

 

(Amounts in thousands)

 

Operating expenses:

 

 

 

 

 

 

 

Research and development

 

$

16,760

 

$

9,013

 

$

7,747

 

General and administrative

 

6,360

 

3,151

 

3,209

 

Total operating expenses

 

23,120

 

12,164

 

10,956

 

Loss from operations

 

(23,120

)

(12,164

)

(10,956

)

Other income (expense):

 

 

 

 

 

 

 

Research and development incentives

 

1,937

 

1,642

 

295

 

Interest income

 

1,775

 

72

 

1,703

 

Change in fair value of warrant liability

 

(5,452

)

(965

)

(4,487

)

Other income (expense), net

 

682

 

(1,439

)

2,121

 

Total other income (expense), net

 

(1,058

)

(690

)

(368

)

Net loss

 

$

(24,178

)

$

(12,854

)

$

(11,324

)

 

Research and development expenses

 

 

 

Nine Months Ended

 

 

 

 

 

December 31,

 

 

 

 

 

2018

 

2017

 

Change

 

 

 

(Amounts in thousands)

 

Direct research and development expenses by program:

 

 

 

 

 

 

 

RP1

 

$

7,633

 

$

4,735

 

$

2,898

 

Unallocated research and development expenses:

 

 

 

 

 

 

 

Personnel related (including stock-based compensation)

 

5,019

 

2,797

 

2,222

 

Other

 

4,108

 

1,481

 

2,627

 

Total research and development expenses

 

$

16,760

 

$

9,013

 

$

7,747

 

 

Research and development expenses for the nine months ended December 31, 2018 were $16.8 million, compared to $9.0 million for the nine months ended December 31, 2017. The increase of $7.7 million was due primarily to an increase of approximately $2.9 million in direct research costs associated with RP1 and an approximately $4.8 million increase in our unallocated research and development costs. The increase in RP1 costs was due primarily to an increase in clinical trial costs in the nine months ended December 31, 2018 associated with our ongoing Phase 1/2 clinical trial, which commenced in October 2017.

 

The increase in unallocated research and development expenses reflected an increase of $2.2 million in personnel-related costs, including stock-based compensation, and an increase of $2.6 million in other costs. The increase in personnel-related costs was primarily due to the hiring of additional personnel in our research and development functions as we began work on our planned Phase 2 clinical trial of RP1 in patients with CSCC. Personnel-related costs for nine months ended December 31, 2018

 

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and 2017 included stock-based compensation expense of $1.0 million and $0.2 million, respectively. Other costs increased primarily due to purchases of supplies used across all of our product candidates.

 

General and administrative expenses

 

General and administrative expenses were $6.4 million for the nine months ended December 31, 2018, compared to $3.2 million for the nine months ended December 31, 2017. The increase of $3.2 million primarily reflected increases of $1.5 million in personnel related costs, $1.1 million in professional fees and $0.8 million in facility costs. The increase in personnel related costs was due to the hiring of additional personnel in our general and administrative functions as we expanded our operations in the United States.  The increase in professional fees was due to costs associated with the preparation, audit and review of our financial statements and readiness to become a public company.  The increase in facility costs was due to additional space we leased in June 2018.

 

Other income (expense), net

 

Other income (expense) was $(1.1) million for the nine months ended December 31, 2018, compared to $(0.7) million for the nine months ended December 31, 2017. The increase of $0.4 million was primarily attributable to a $4.5 million charge related to the change in the fair value of the warrant liability partially offset by a $0.3 million increase in research and development incentives, a $2.1 million gain due to changes in foreign currency rates and a $1.7 million increase in interest income.

 

Liquidity and capital resources

 

Since our inception, we have not generated any revenue from product sales and have incurred significant operating losses and negative cash flows from our operations. We have not yet commercialized any of our product candidates, which are in various phases of preclinical and clinical development, and we do not expect to generate revenue from sales of any products for the foreseeable future, if at all.

 

Sources of liquidity

 

To date, we have financed our operations primarily with proceeds from the sale equity securities. Through December 31, 2018, we had received gross proceeds of $190.3 million from our sales of common stock and preferred stock. As of December 31, 2018, we had cash and cash equivalents and short-term investments of $141.8 million.

 

On July 24, 2018, we completed our IPO and issued and sold 6,700,000 shares of our common stock at a public offering price of $15.00 per share, resulting in net proceeds of $93.5 million after deducting underwriting discounts and commissions but before deducting offering costs.  On July 30, 2018, we issued and sold an additional 707,936 shares of our common stock at the IPO price of $15.00 per share pursuant to the underwriters’ partial exercise of their option to purchase additional shares of our common stock, resulting in additional net proceeds of $9.9 million after deducting discounts and commissions and other offering expenses.

 

Cash flows

 

The following table summarizes our cash flows for each of the periods presented:

 

 

 

Nine Months Ended

 

 

 

December 31,

 

 

 

2018

 

2017

 

 

 

(in thousands)

 

Net cash used in operating activities

 

$

(19,345

)

$

(11,781

)

Net cash used in investing activities

 

(76,418

)

(25,970

)

Net cash provided by financing activities

 

101,349

 

54,752

 

Effect of exchange rate changes on cash and cash equivalents

 

(1,009

)

1,608

 

Net increase in cash and restricted cash

 

$

4,577

 

$

18,609

 

 

Operating activities

 

During the nine months ended December 31, 2018, net cash used in operating activities was $19.3 million, primarily resulting from our net loss of $24.2 million, net cash used in changes in our operating assets and liabilities of $1.3 million, partially offset by net non-cash charges of $6.2 million. Net cash used in changes in our operating assets and liabilities for the nine months ended December 31, 2018 consisted primarily of a $0.6 million increase in prepaid expenses and other current assets, a $0.5 million decrease in accounts payable and a $0.8 million decrease in accrued expenses and other current liabilities, partially offset by a $0.3

 

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million decrease in the research and development incentives receivable from the United Kingdom government due to the timing and amount of our qualifying expenditures and a $0.1 million increase in deferred rent.

 

During the nine months ended December 31, 2017, net cash used in operating activities was $11.8 million, primarily resulting from our net loss of $12.9 million and net cash used in changes in our operating assets and liabilities of $0.4 million, partially offset by non-cash charges of $1.5 million. Net cash used by changes in our operating assets and liabilities for the nine months ended December 31, 2017 consisted primarily of a $0.5 million increase in prepaid expenses and other current assets and a $0.2 million increase in the research and development incentives receivable from the United Kingdom government due to the timing and amount of our qualifying expenditures, partially offset by a $0.2 million increase in accounts payable and a $0.1 million increase in accrued expenses and other current liabilities.  The increase in prepaid expenses and other current assets was due to value-added tax receivables and CMO deposits for RP1 clinical trial supplies.

 

Investing activities

 

During the nine months ended December 31, 2018, net cash used in investing activities was $76.5 million, consisting of $134.6 million in purchases of available for sale securities and $0.9 million in purchases of property, plant and equipment, partially offset by $59.0 million in proceeds from maturities of short-term investments.

 

During the nine months ended December 31, 2017, net cash used in investing activities was $26.0 million, consisting of $25.8 million in purchases of available for sale securities and $0.1 million in purchases of property, plant and equipment.

 

We expect that purchases of property, plant and equipment will increase over the next several years resulting from our intended establishment of our own in-house manufacturing facility.

 

Financing Activities

 

During the nine months ended December 31, 2018, net cash provided by financing activities consisted primarily of net cash proceeds of $103.3 million from our issuance of common stock in connection with our IPO and $0.2 million from the exercise of stock options, partially offset by $2.2 million of payments of issuance costs.

 

During the nine months ended December 31, 2017, net cash provided by financing activities consisted of net cash proceeds of $54.8 million from our issuance of Series B preferred stock.

 

Funding requirements

 

Our plan of operation is to continue implementing our business strategy, continue research and development of RP1 and our other product candidates and continue to expand our research pipeline and our internal research and development capabilities. We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance the preclinical activities and clinical trials of our product candidates. In addition, we expect to continue to incur additional costs associated with operating as a public company. We expect that our expenses will increase substantially if and as we:

 

·                  conduct our current and future clinical trials of RP1;

 

·                  progress the preclinical and clinical development of RP2 and RP3;

 

·                  seek to identify and develop additional product candidates;

 

·                  seek marketing approvals for any of our product candidates that successfully complete clinical trials, if any;

 

·                  establish a sales, marketing and distribution infrastructure to commercialize any products for which we may obtain marketing approval;

 

·                  until our planned manufacturing facility is operational, require the manufacture by third parties of larger quantities of our product candidates for clinical development and potentially commercialization;

 

·                  maintain, expand and protect our intellectual property portfolio;

 

·                  acquire or in-license other drugs and technologies; and

 

·                  add operational, financial and management information systems and personnel, including personnel to support our research and development programs, any future commercialization efforts and our continued transition to operating as a public company.

 

As of December 31, 2018, we had cash and cash equivalents and short-term investments of $141.8 million. We believe that our existing cash and cash equivalents and short-term investments will enable us to fund our operating expenses and capital expenditure requirements through at least 12 months from the issuance of the consolidated financial statements included in this Quarterly Report on Form 10-Q.

 

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Because of the numerous risks and uncertainties associated with the development of RP1 and other product candidates and programs, and because the extent to which we may enter into collaborations with third parties for development of our product candidates is unknown, we are unable to estimate the timing and amounts of increased capital outlays and operating expenses associated with completing the research and development of our product candidates. Our future capital requirements will depend on many factors, including those described in this section and above under “—Operating expenses—Research and development expenses.”

 

In addition, we intend to establish, equip, and operate an in-house manufacturing facility to manufacture RP1 and our other product candidates. We expect that such a facility would require capital expenditures of approximately $28.0 million to commence operations.

 

Developing novel biopharmaceutical products, including conducting preclinical studies and clinical trials, is a time-consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain marketing approval for any product candidates or generate revenue from the sale of any products for which we may obtain marketing approval. In addition, our product candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of therapies that we do not expect to be commercially available for many years, if ever. Accordingly, we will need to obtain substantial additional funds to achieve our business objectives.

 

Adequate additional funds may not be available to us on acceptable terms, or at all. We do not currently have any committed external source of funds. To the extent that we raise additional capital through the sale of our equity or convertible debt securities, our shareholders’ interest may be diluted, and the terms of these securities may include liquidation or other preferences and anti-dilution protections that could adversely affect the rights of our common stockholder. Additional debt or preferred equity financing, if available, may involve agreements that include restrictive covenants that may limit our ability to take specific actions, such as incurring debt adversely impact our ability to conduct our business, and may require the issuance of warrants, which could potentially dilute our shareholders’ interest.

 

If we raise additional funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technology, future revenue streams, research programs, or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings or collaborations, strategic alliances or licensing arrangements with third parties when needed, we may be required to delay, limit, reduce and/or terminate our product development programs or any future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

 

Contractual obligations and commitments

 

During the three and nine months ended December 31, 2018, there were no material changes to our contractual obligations and commitments from those described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations and Commitments” in our Prospectus.

 

Critical accounting policies and significant judgments and estimates

 

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States. The preparation of our consolidated financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amount of assets, liabilities, revenue, costs and expenses, and related disclosures. We believe that of our critical accounting policies described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Significant Judgments and Estimates” in our Prospectus, the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements:

 

·                  accrued research and development expenses and

 

·                  stock-based compensation.

 

Accordingly, we believe the policies set forth above are critical to fully understanding and evaluating our financial condition and results of operations. If actual results or events differ materially from the estimates, judgments and assumptions used by us in applying these policies, our reported financial condition and results of operations could be materially affected. There have been no significant changes to our critical accounting policies from those described in our Prospectus.

 

Off-balance sheet arrangements

 

We did not have any off-balance sheet arrangements during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

 

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Recently issued accounting pronouncements

 

A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 to our consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.

 

Item 3.         Quantitative and qualitative disclosures about market risks

 

Interest rate sensitivity

 

As of December 31, 2018, we had cash and cash equivalents and short-term investments of $141.8 million, which consisted of cash equivalents, commercial paper and commercial debt securities. Interest income is sensitive to changes in the general level of interest rates; however, due to the nature of these investments, an immediate 10% change in interest rates would not have a material effect on the fair market value of our investment portfolio.

 

As of December 31, 2018, we had no debt outstanding and are therefore not subject to interest rate risk related to debt.

 

Foreign currency exchange risk

 

Our headquarters are located in the United States, where the majority of our general and administrative expenses are incurred in U.S. dollars. The majority of our research and development costs are incurred by our subsidiary in Oxfordshire, United Kingdom, whose functional currency is the British pound. We are exposed to foreign exchange rate risk. During the three and nine months ended December 31, 2018, we recognized foreign currency transaction gains of $5,000, and $0.7 million, respectively. During the three and nine months ended December 31, 2017, we recognized foreign currency transaction gains (losses) of $0.1 million, and $(1.4) million, respectively. These gains (losses) are primarily related to unrealized and realized foreign currency gains and losses as a result of transactions entered into by our United Kingdom subsidiary in currencies other than the British pound, primarily the euro. These foreign currency transaction gains (losses) were recorded as a component of other income (expense), net in our consolidated statements of operations. We believe that a 10% change in the exchange rate between the British pound and the euro would not have a material impact on our financial position or results of operations.

 

As we continue to grow our business, our results of operations and cash flows will be subject to fluctuations due to changes in foreign currency exchange rates, which could adversely impact our results of operations. To date, we have not entered into any foreign currency hedging contracts to mitigate our exposure to foreign currency exchange risk.

 

Emerging growth company status

 

As an “emerging growth company,” the Jumpstart Our Business Startups Act of 2012 permits us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have irrevocably elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards when they are required to be adopted by public companies that are not emerging growth companies.

 

Item 4.         Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act refers to controls and procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to a company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

 

In designing and evaluating our disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with

 

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policies or procedures may deteriorate. Because of the inherent limitations in a control system, misstatements due to error or fraud may occur and not be detected.

 

Based on the evaluation of our disclosure controls and procedures as of December 31, 2018, our Chief Executive Officer and Chief Accounting Officer have concluded that, as of December 31, 2018, our disclosure controls and procedures were not effective at the reasonable assurance level as a result of the material weaknesses discussed below. Notwithstanding these material weaknesses, our management has concluded that the financial statements included elsewhere in this Quarterly Report on Form 10-Q present fairly, in all material respects, our financial position, results of operations and cash flows in conformity with GAAP.

 

During the audit of our consolidated financial statements as of and for the years ended March 31, 2017 and 2018, we identified material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.  The material weaknesses that we identified were as follows:

 

·                  We did not design or maintain an effective control environment commensurate with our financial reporting requirements. We lacked a sufficient number of professionals with an appropriate level of accou