tptx-10q_20190930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended September 30, 2019

OR

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

 

For the transition period from                      to                     

 

Commission File Number: 001-38871

 

Turning Point Therapeutics, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

46-3826166

( State or other jurisdiction of

incorporation or organization)

 

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

10628 Science Center Drive, Ste. 200

San Diego, California

92121

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (858) 926-5251

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.0001 par value per share

TPTX

The Nasdaq Stock Market LLC

 

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

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

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

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

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

As of October 15, 2019, the registrant had 35,849,541 shares of common stock, $0.0001 par value per share, outstanding.

 

 

 

 


 

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

Item 1.

Condensed Financial Statements (unaudited)

3

 

Condensed Balance Sheets

3

 

Condensed Statements of Operations and Comprehensive Loss

4

 

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

5

 

Condensed Statements of Cash Flows

6

 

Notes to the Unaudited Condensed Financial Statements

7

Item 2.

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

15

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

20

Item 4.

Controls and Procedures

20

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

21

Item 1A.

Risk Factors

21

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

64

Item 3.

Defaults Upon Senior Securities

65

Item 4.

Mine Safety Disclosures

65

Item 5.

Other Information

65

Item 6.

Exhibits

66

Signatures

67

 

 

2


 

PART IFINANCIAL INFORMATION

Item 1. Financial Statements

Turning Point Therapeutics, Inc.

Condensed Balance Sheets

(In thousands, except share amounts)

 

 

September 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

172,421

 

 

$

101,029

 

Marketable securities

 

 

251,154

 

 

 

 

Prepaid expenses and other current assets

 

 

5,795

 

 

 

494

 

Total current assets

 

 

429,370

 

 

 

101,523

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

2,184

 

 

 

1,000

 

Right-of-use assets from operating leases

 

 

4,761

 

 

 

 

Security deposits

 

 

73

 

 

 

73

 

Deferred financing costs

 

 

 

 

 

684

 

Total assets

 

$

436,388

 

 

$

103,280

 

 

 

 

 

 

 

 

 

 

Liabilities, convertible preferred stock, and stockholders' equity (deficit)

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,811

 

 

$

1,494

 

Accrued expenses and other current liabilities

 

 

2,950

 

 

 

2,415

 

Accrued compensation

 

 

3,784

 

 

 

1,413

 

Current portion of operating lease liabilities

 

 

1,175

 

 

 

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

 

11,720

 

 

 

5,322

 

 

 

 

 

 

 

 

 

 

Operating lease liabilities, net of current portion

 

 

4,144

 

 

 

448

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible preferred stock, $0.0001 par value; zero shares issued and outstanding as of September 30, 2019 and 65,423,901 shares issued and outstanding as of December 31, 2018; aggregate liquidation preference of $0 and $146,460 as of September 30, 2019 and December 31, 2018, respectively

 

 

 

 

 

145,916

 

 

 

 

 

 

 

 

 

 

Stockholders' equity (deficit):

 

 

 

 

 

 

 

 

Common stock, $0.0001 par value; 200,000,000 shares authorized as of September 30, 2019 and 104,000,000 shares authorized as of December 31, 2018; 35,839,196 shares issued and outstanding as of September 30, 2019; 3,411,516 shares issued and outstanding at December 31, 2018

 

 

4

 

 

 

1

 

Additional paid-in capital

 

 

522,123

 

 

 

2,346

 

Accumulated other comprehensive income

 

 

322

 

 

 

 

Accumulated deficit

 

 

(101,925

)

 

 

(50,753

)

Total stockholders’ equity (deficit)

 

 

420,524

 

 

 

(48,406

)

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

 

$

436,388

 

 

$

103,280

 

 

 

 

See accompanying notes.

3


 

Turning Point Therapeutics, Inc.

Condensed Statements of Operations and Comprehensive Loss

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

16,640

 

 

$

5,129

 

 

$

40,802

 

 

$

13,841

 

General and administrative

 

 

5,500

 

 

 

1,000

 

 

 

13,857

 

 

 

2,319

 

Total operating expenses

 

 

22,140

 

 

 

6,129

 

 

 

54,659

 

 

 

16,160

 

Loss from operations

 

 

(22,140

)

 

 

(6,129

)

 

 

(54,659

)

 

 

(16,160

)

Interest income

 

 

1,657

 

 

 

132

 

 

 

3,487

 

 

 

393

 

Net loss

 

$

(20,483

)

 

$

(5,997

)

 

$

(51,172

)

 

$

(15,767

)

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on marketable securities, net of tax

 

 

(24

)

 

 

 

 

 

322

 

 

 

-

 

Comprehensive loss

 

$

(20,507

)

 

$

(5,997

)

 

$

(50,850

)

 

$

(15,767

)

Net loss per share, basic and diluted

 

$

(0.63

)

 

$

(1.77

)

 

$

(2.54

)

 

$

(4.66

)

Weighted-average common shares outstanding, basic and diluted

 

 

32,312,814

 

 

 

3,394,423

 

 

 

20,178,979

 

 

 

3,381,404

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

4


 

Turning Point Therapeutics, Inc.

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

(In thousands, except share amounts)

(Unaudited)

 

 

Convertible

Preferred Stock

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

income (loss)

 

 

Deficit

 

 

Equity (Deficit)

 

Balance at December 31, 2018

 

 

65,423,901

 

 

$

145,916

 

 

 

3,411,516

 

 

$

1

 

 

$

2,346

 

 

$

 

 

$

(50,753

)

 

$

(48,406

)

Option exercises

 

 

 

 

 

 

 

 

12,337

 

 

 

 

 

 

22

 

 

 

 

 

 

 

 

 

22

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,926

 

 

 

 

 

 

 

 

 

1,926

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13,547

)

 

 

(13,547

)

Balance at March 31, 2019

 

 

65,423,901

 

 

 

145,916

 

 

 

3,423,853

 

 

 

1

 

 

 

4,294

 

 

 

 

 

 

(64,300

)

 

 

(60,005

)

Issuance of common stock in

   connection with an initial public

   offering, net of underwriting

   discounts, commissions, and

   offering costs

 

 

 

 

 

 

 

 

10,637,500

 

 

 

1

 

 

 

175,150

 

 

 

 

 

 

 

 

 

175,151

 

Conversion of convertible

   preferred stock into common

   stock

 

 

(65,423,901

)

 

 

(145,916

)

 

 

16,993,194

 

 

 

2

 

 

 

145,914

 

 

 

 

 

 

 

 

 

145,916

 

Option exercises

 

 

 

 

 

 

 

 

242,876

 

 

 

 

 

 

591

 

 

 

 

 

 

 

 

 

591

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,059

 

 

 

 

 

 

 

 

 

3,059

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(17,142

)

 

 

(17,142

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

345

 

 

 

 

 

 

345

 

Balance at June 30, 2019

 

 

 

 

 

 

 

 

31,297,423

 

 

 

4

 

 

 

329,008

 

 

 

345

 

 

 

(81,442

)

 

 

247,915

 

Option exercises

 

 

 

 

 

 

 

 

41,773

 

 

 

 

 

 

96

 

 

 

 

 

 

 

 

 

96

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,493

 

 

 

 

 

 

 

 

 

3,493

 

Issuance of common stock in

   connection with an equity

   offering, net of underwriting

   discounts, commissions, and

   offering costs

 

 

 

 

 

 

 

 

4,500,000

 

 

 

 

 

 

189,526

 

 

 

 

 

 

 

 

 

189,526

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(20,483

)

 

 

(20,483

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(23

)

 

 

 

 

 

(23

)

Balance at September 30, 2019

 

 

 

 

 

 

 

 

35,839,196

 

 

$

4

 

 

$

522,123

 

 

$

322

 

 

$

(101,925

)

 

$

420,524

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible

Preferred Stock

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

income (loss)

 

 

Deficit

 

 

Deficit

 

Balance at December 31, 2017

 

 

39,135,778

 

 

$

66,161

 

 

 

3,367,742

 

 

$

1

 

 

$

1,123

 

 

$

 

 

$

(25,968

)

 

$

(24,844

)

Option exercises

 

 

 

 

 

 

 

 

2,597

 

 

 

 

 

 

6

 

 

 

 

 

 

 

 

 

6

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

85

 

 

 

 

 

 

 

 

 

85

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,733

)

 

 

(4,733

)

Balance at March 31, 2018

 

 

39,135,778

 

 

 

66,161

 

 

 

3,370,339

 

 

 

1

 

 

 

1,214

 

 

 

 

 

 

(30,701

)

 

 

(29,486

)

Option exercises

 

 

 

 

 

 

 

 

20,777

 

 

 

 

 

 

39

 

 

 

 

 

 

 

 

 

39

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

137

 

 

 

 

 

 

 

 

 

137

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,037

)

 

 

(5,037

)

Balance at June 30, 2018

 

 

39,135,778

 

 

$

66,161

 

 

 

3,391,116

 

 

$

1

 

 

$

1,390

 

 

$

 

 

$

(35,738

)

 

$

(34,347

)

Option exercises

 

 

 

 

 

 

 

 

17,478

 

 

 

 

 

 

26

 

 

 

 

 

 

 

 

 

26

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

179

 

 

 

 

 

 

 

 

 

179

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,997

)

 

 

(5,997

)

Balance at September 30, 2018

 

 

39,135,778

 

 

 

66,161

 

 

 

3,408,594

 

 

$

1

 

 

$

1,595

 

 

$

 

 

$

(41,735

)

 

$

(40,139

)

 

 

See accompanying notes.

5


 

Turning Point Therapeutics, Inc.

Condensed Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

Operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(51,172

)

 

$

(15,767

)

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

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

8,478

 

 

 

401

 

Depreciation

 

 

322

 

 

 

64

 

Accretion of discount on marketable securities

 

 

(846

)

 

 

 

Amortization of right-of-use operating lease asset

 

 

707

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

(4,618

)

 

 

(49

)

Accounts payable

 

 

1,196

 

 

 

506

 

Accrued expenses and other current liabilities

 

 

(122

)

 

 

(1,257

)

Accrued compensation

 

 

2,370

 

 

 

427

 

Net cash used in operating activities

 

 

(43,685

)

 

 

(15,675

)

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

 

Purchases of marketable securities

 

 

(264,909

)

 

 

 

Maturities of marketable securities

 

 

14,923

 

 

 

 

Purchases of property and equipment

 

 

(983

)

 

 

(221

)

Net cash used in investing activities

 

 

(250,969

)

 

 

(221

)

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock in initial public offering, net

 

 

175,151

 

 

 

 

Proceeds from issuance of common stock in public offering, net

 

 

190,186

 

 

 

 

Proceeds from issuance of common stock from stock option exercises

 

 

709

 

 

 

71

 

Net cash provided by financing activities

 

 

366,046

 

 

 

71

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

71,392

 

 

 

(15,825

)

Cash and cash equivalents at the beginning of period

 

 

101,029

 

 

 

45,033

 

Cash and cash equivalents at the end of period

 

$

172,421

 

 

$

29,208

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

1

 

 

$

1

 

Supplemental disclosure of non-cash investing and financing information:

 

 

 

 

 

 

 

 

Purchases of property and equipment in accounts payable

 

$

523

 

 

$

 

Costs incurred in connection with the public offering included in accounts

   payable and accrued expenses

 

$

660

 

 

$

-

 

Operating lease liabilities arising from obtaining right-of-use assets

 

$

5,554

 

 

$

-

 

 

 

 

 

 

 

 

 

See accompanying notes.

6


 

Turning Point Therapeutics, Inc.

Notes to Unaudited Condensed Financial Statements

1. Formation and Business of the Company; Basis of Presentation

Organization

Turning Point Therapeutics, Inc. (the Company) was organized in 2013 and commenced operations in 2014. The Company is a clinical stage biopharmaceutical company designing and developing novel small molecule, targeted oncology therapies. The Company’s principal operations are in the United States and the Company operates in one segment, with its headquarters in San Diego, California.

The Company’s primary activities since inception have been to build infrastructure, conduct research and development, including clinical trials, perform business and financial planning, and raise capital.

The accompanying unaudited condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and pursuant to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (SEC). Accordingly, since they are interim statements, the accompanying condensed financial statements do not include all of the information and notes required by GAAP for complete financial statements. The unaudited interim financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results for the periods presented. All such adjustments are of a normal and recurring nature. The condensed balance sheet at December 31, 2018 has been derived from the audited consolidated financial statements at that date, but does not include all information and footnotes required by GAAP for complete financial statements. The operating results presented in these unaudited condensed financial statements are not necessarily indicative of the results that may be expected for any future periods. These unaudited condensed financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for the year ended December 31, 2018 included in the Company’s prospectus dated April 16, 2019 that forms a part of the Company’s Registration Statements on Form S-1, as filed with the SEC pursuant to Rule 424 promulgated under the Securities Act of 1933, as amended, on April 18, 2019.

Public Offerings

On April 22, 2019, the Company completed an initial public offering (IPO) of its common stock. In connection with its IPO, the Company issued and sold 10,637,500 shares of its common stock at a price to the public of $18.00 per share. The net proceeds from the IPO were approximately $175.2 million after deducting underwriting discounts and commissions of $13.4 million and offering expenses of approximately $2.9 million paid by the Company. At the closing of the IPO, 65,423,901 shares of outstanding convertible preferred stock were automatically converted into 16,993,194 shares of common stock. Following the IPO, there were no shares of preferred stock outstanding.

On September 10, 2019, the Company completed an underwritten public offering of its common stock, which resulted in the issuance and sale of an aggregate of 4,500,000 shares of common stock at a public offering price of $45.00 per share. The net proceeds from the offering were approximately $189.5 million, after deducting underwriting discounts and commissions of $12.2 million and offering expenses of approximately $0.8 million payable by the Company.

Reverse Stock Split

On April 5, 2019, the Company effected a 1-for-3.85 reverse stock split of its common stock. The par value and the authorized number of shares of the common stock were not adjusted as a result of the reverse stock split. The accompanying financial statements and notes to the financial statements give retroactive effect to the reverse stock split for all periods presented.

Liquidity

Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year from the financial statement issuance date. The Company determined that there are no conditions or events that raise substantial doubt about its ability to continue as a going concern within one year after the date that the condensed financial statements for the quarter ended September 30, 2019 are issued.

 

7


 

2. Summary of Significant Accounting Policies

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that impact the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities in the Company’s financial statements and accompanying notes. The most significant estimates in the Company’s financial statements relate to preclinical and clinical study accruals and stock-based compensation costs. Management bases its estimates on historical experience and on various other market-specific and relevant assumptions that management believes to be reasonable under the circumstances. Although these estimates are based on the Company’s knowledge of current events and actions it may undertake in the future, actual results may ultimately materially differ from these estimates and assumptions.

Marketable securities

The Company classifies all marketable securities as available for sale, as the sale of such securities may be required prior to maturity. These marketable securities are carried at fair value, with unrealized gains and losses reported as accumulated other comprehensive income (loss) until realized. The cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion, as well as interest and dividends, are included in interest income. Realized gains and losses from the sale of available for sale securities, if any, are determined on a specific identification basis and are also included in interest income. The Company’s marketable securities are classified as current assets, even though the stated maturity date may be one year or more beyond the current balance sheet date, which reflects management’s intention to use the proceeds from sales of these securities to fund our operations, as necessary.

At each reporting date, the Company performs an evaluation of impairment to determine if any unrealized losses are other-than-temporary. Factors considered in determining whether a loss is other-than-temporary include the length of time and extent to which fair value has been less than the cost basis, the financial condition of the issuer, and the Company’s intent and ability to hold the investment until recovery of the amortized cost basis. The Company intends, and has the ability, to hold its investments until their amortized cost basis has been recovered.

Concentration of Credit Risk

Substantially all the Company’s cash and money market funds are held with a single financial institution. Due to its size, the Company believes this financial institution represents a minimal credit risk. Cash amounts held at financial institutions are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. At September 30, 2019, the Company had $423.4 million in excess of the FDIC insured limit. At September 30, 2019, the Company’s money market funds and marketable securities are not subject to FDIC insurance. The Company’s money market funds and marketable securities are invested in short term, high grade securities. As a result, the Company believes its money market and marketable securities represent a minimal credit risk.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful life of the assets, which ranges between three to seven years. Tenant improvements are stated at cost and depreciated over the shorter of the estimated useful life or the remaining life of the lease at the time the asset is placed into service.

Intellectual Property

The legal and professional costs incurred by the Company to maintain its patent rights have been expensed as part of general and administrative expenses since inception. As of September 30, 2019, the Company has determined that these expenses have not met the criteria to be capitalized. Intellectual property related expenses were $0.3 million and $0.1 million for the three months ended September 30, 2019 and 2018, respectively and were $0.6 million and $0.3 million for the nine months ended September 30, 2019 and 2018, respectively.

Research and Development Expenses

Research and development costs are expensed as incurred. These costs consist primarily of salaries and other personnel-related expenses, including stock-based compensation; facility-related expenses; depreciation of facilities and equipment; laboratory consumables; and services performed by clinical research organizations, clinical manufacturing services, research institutions, and other outside service providers.

Income Taxes

Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax basis of assets and liabilities using enacted tax rates which will be in effect when the differences reverse. The Company provides a valuation allowance against net deferred tax assets unless, based upon the available evidence, it is more likely than not that the deferred tax asset will be realized.

8


 

The Company follows the provisions of the Income Taxes Topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification that defines a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Under the Income Taxes Topic, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained.

Stock-Based Compensation

Stock-based compensation expense represents the cost of the grant date fair value of employee and non-employee stock option grants recognized over the requisite service period of the awards (usually the vesting period) on a straight-line basis, net of actual forfeitures during the period. The Company estimates the fair value of stock option grants using the Black-Scholes option pricing model. Prior to the Company’s IPO, the exercise price for all stock options granted was at the estimated fair value of the underlying common stock as determined on the date of grant by the Company’s Board of Directors.

Net Loss Per Share

The Company computes basic loss per share by dividing the net loss available to common stockholders by the weighted average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted net loss assumes the conversion, exercise or issuance of all potential common stock equivalents, unless the effect of inclusion would be anti-dilutive. For purposes of this calculation, common stock equivalents include the Company’s stock options and convertible preferred stock, which is convertible into shares of the Company’s common stock. No shares related to the convertible preferred stock were included in the diluted net loss calculation for the three and nine months ended September 30, 2019 or 2018 because the inclusion of such shares would have had an anti-dilutive effect. The shares to be issued upon exercise of certain outstanding stock options were also excluded from the diluted net loss calculation for the three and nine months ended September 30, 2019 and 2018 because such shares are anti-dilutive.

Historical outstanding anti-dilutive securities not included in the diluted net loss per share calculation include the following:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Convertible preferred stock (as converted)

 

 

 

 

 

10,165,120

 

 

 

 

 

 

10,165,120

 

Common stock options

 

 

5,119,383

 

 

 

1,030,176

 

 

 

5,119,383

 

 

 

1,030,176

 

Total

 

 

5,119,383

 

 

 

11,195,296

 

 

 

5,119,383

 

 

 

11,195,296

 

 

 

Recent Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments – Credit Losses, which changes the accounting for recognizing impairments of financial assets. Under the new guidance, credit losses for certain types of financial instruments will be estimated based on expected losses. The new guidance also modifies the impairment models for available for sale debt securities and for purchased financial assets with credit deterioration since their origination. This update is effective for annual periods beginning after December 15, 2019, and interim periods within those periods, and early adoption is permitted. The Company is in the process of determining the effects the adoption will have on its financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement: Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which adds and modifies certain disclosure requirements for fair value measurements. Under the new guidance, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, or valuation processes for Level 3 fair value measurements. However, public companies will be required to disclose the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and related changes in unrealized gains and losses included in other comprehensive income. This update is effective for annual periods beginning after December 15, 2019, and interim periods within those periods, and early adoption is permitted. The Company is in the process of determining the impact the adoption will have on its financial statements.

Recently Adopted Accounting Standards Updates

In February 2016, the FASB issued ASU No. 2016-02, “Leases”. ASU 2016-02 requires lessees to recognize most leases on their balance sheet as a right-of-use asset and a lease liability. The Company adopted the new standard beginning January 1, 2019 using a modified retrospective approach. ASU 2016-02 provides a number of optional practical expedients and accounting policy elections. The Company elected the package of practical expedients requiring no reassessment of whether any expired or existing contracts are

9


 

or contain leases, the lease classification of any expired or existing leases, or initial direct costs for any existing leases. As a result of these decisions, financial information will not be updated, and the disclosures required under this guidance will not be provided for dates and periods prior to January 1, 2019. Additionally, the Company elected the hindsight provision for determining the lease term and elected to aggregate all lease and non-lease components for each class of underlying assets into a single lease component.

The Company currently has one operating lease for office and laboratory spaces in San Diego, California. The operating lease was impacted by the new accounting standard and resulted in the present values of the future lease payments being presented as a right-to-use asset, with a corresponding lease liability at the date of adoption. The financial impact from the adoption of this guidance is discussed in Note 7.

 

3. Marketable Securities

 

The Company invests its excess cash in marketable securities, including debt instruments of financial institutions, corporations with investment grade credit ratings, commercial paper and government agencies.

 

At September 30, 2019, marketable securities consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

Unrealized

 

 

 

 

 

 

 

Maturity

 

Amortized Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

U.S. government agency securities

 

2 years or less

 

$

28,607

 

 

$

13

 

 

$

(4

)

 

$

28,616

 

Corporate debt securities

 

2 years or less

 

 

119,313

 

 

 

233

 

 

 

(6

)

 

 

119,540

 

Commercial paper

 

1 years or less

 

 

102,913

 

 

 

101

 

 

 

(16

)

 

 

102,998

 

Total marketable securities

 

 

 

$

250,833

 

 

$

347

 

 

$

(26

)

 

$

251,154

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Company’s marketable securities are classified as current assets, even though the stated maturity date may be one year or more beyond the current balance sheet date, which reflects management’s intention to use the proceeds from sales of these securities to fund our operations, as necessary. Gross realized gains and losses on available for sale securities were immaterial during the three and nine months ended September 30, 2019. At December 31, 2018, the Company had no marketable securities.

 

None of the investments have been in a gross unrealized loss for a period greater than 12 months. The Company did not identify any other-than-temporary losses as of September 30, 2019.

4. Fair Value Measurements

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 at the measurement date. Fair value should maximize the use of observable inputs and minimize the use of unobservable inputs. The Company determines the fair value of financial assets and liabilities using three levels of inputs as follows:

Level 1 – Inputs which include quoted prices in active markets for identical assets or liabilities at the measurement date.

Level 2 – Inputs (other than quoted market prices included in Level 1) that are either directly or indirectly observable, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the instrument’s anticipated life.

Level 3 – Unobservable inputs for assets or liabilities and include little or no market activity.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. During the three and nine months ended September 30, 2019, the Company had no Level 3 financial assets or liabilities that were subject to fair value measurements on a recurring basis. During the three and nine months ended September 30, 2018, the Company had no Level 2 or 3 financial assets or liabilities that were subject to fair value measurements on a recurring basis.

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The Company’s financial assets subject to fair value measurements on a recurring basis and the level of inputs used for such measurements were as follows (in thousands):

 

 

 

Fair Value Measurements at September 30, 2019 Using:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Money market funds included in cash and cash equivalents

 

$

163,403

 

 

$

-

 

 

$

-

 

 

$