ymab_Current_Folio_10Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q


      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 001-38650


Y-mAbs Therapeutics, Inc.

(Exact name of registrant as specified in its charter)


 

 

 

Delaware

    

47‑4619612

 

 

 

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

230 Park Avenue

Suite 3350

New York, NY 10169

(Address of principal executive offices)

(Zip Code)

(646)‑885‑8505

(Registrant’s telephone number, including area code)

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

 

 

 

 

 

Title of each class:

    

Trading Symbol

    

Name of each exchange on which registered:

Common Stock, $0.0001 par value

 

YMAB

 

NASDAQ Global Select Market

 


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

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

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

 

 

 

Large accelerated filer 

    

Accelerated filer 

 

 

 

Non-accelerated filer 

 

Smaller reporting company 

 

 

Emerging growth company 

 

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

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

There were 39,728,416 shares of Common Stock ($0.0001 par value) outstanding as of November 1, 2019.

 

 

 

 

 

 

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FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10‑Q contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, contained in this Quarterly Report on Form 10‑Q, including statements regarding our business strategy, future operations and results thereof, future financial position, future revenue, projected costs, prospects, current and prospective products, product approvals, research and development costs, current and prospective collaborations, timing and likelihood of success, plans and objectives of management, expected market growth and future results of current and anticipated products, are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “contemplate,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

These forward-looking statements include, among other things, statements about:

·

the implementation of our business model and our plans to develop and commercialize our two lead product candidates and other product candidates, including the potential clinical efficacy and other benefits thereof;

·

our ongoing and future clinical trials for our two lead product candidates and other product candidates, whether conducted by us or by any of our collaborators, including the timing of initiation of these trials, the pace of enrollment, the completion of enrollment, the availability of data from these trials, the expected dates of Biological License Application, or BLA, submission and approval by the U.S. Food and Drug Administration, or FDA, and equivalent foreign regulatory authorities and of the anticipated results;

·

our pre-clinical studies and future clinical trials for our other product candidates and our research and development programs, whether conducted by us or by any of our collaborators, including the timing of initiation of these trials, the pace of enrollment, the expected date of completion and of the anticipated results;

·

the timing of and our ability to obtain and maintain regulatory, marketing and reimbursement approvals for our product candidates;

·

the rate and degree of market acceptance and clinical utility of any products for which we receive marketing approval;

·

the pricing and reimbursement levels of our product candidates, if approved;

·

our ability to retain the continued service of our key employees and to identify, hire and retain additional qualified employees, including a direct sales force;

·

our plans for remediation of material weaknesses in our internal control over financial reporting;

·

our commercialization, marketing and manufacturing capabilities and strategy;

·

our intellectual property position and strategy and the scope of protection we are able to establish and maintain for the intellectual property rights covering our product candidates and technology;

·

our ability to identify and develop additional product candidates and technologies with significant commercial potential;

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·

our plans and ability to enter into collaborations or strategic partnerships for the development and commercialization of our product candidates and future operations;

·

the potential benefits of any future collaboration or strategic partnerships;

·

our expectations related to the use of our cash and cash equivalents, how long that cash is expected to last;

·

the need for, timing and amount of any future financing transaction;

·

our financial performance, including our estimates regarding revenues, expenses, capital expenditure requirements,

·

developments relating to our competitors and our industry;

·

the impact of government laws and regulations;

·

our expectations regarding the time during which we will be an emerging growth company under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act; and

·

our expectations related to the use of proceeds from our prior initial public offering and our recent follow-on shelf public offering.

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q, particularly in the “Risk Factors” section, that could cause actual results or events to differ materially from the forward-looking statements that we make.  Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments that we may make.

The forward-looking statements contained in this Quarterly Report on Form 10-Q are made as of the date of this Quarterly Report on Form 10-Q, and we undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

 

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TABLE OF CONTENTS

 

 

 

 

 

 

Page

 

PART I — FINANCIAL INFORMATION

 

 

 

 

Item 1. 

Consolidated Financial Statements:

4

 

Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018 (unaudited)

4

 

Consolidated Statements of Net Loss and Comprehensive Loss for the three and nine months ended September 30, 2019 and 2018 (unaudited)

5

 

Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2019 and 2018 (unaudited)

6

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018 (unaudited)

7

 

Notes to Consolidated Financial Statements (unaudited)

8

Item 2. 

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

22

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

34

Item 4. 

Controls and Procedures

35

 

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

Item 1. 

Legal Proceedings

38

Item 1A. 

Risk Factors

38

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

98

Item 3. 

Defaults Upon Senior Securities

98

Item 4. 

Mine Safety Disclosures

98

Item 5. 

Other Information

98

Item 6. 

Exhibits

99

You should read this Quarterly Report and the documents we have filed as exhibits to this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from the plans, intentions, and expectations disclosed in the forward-looking statements we may make.

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PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements.

Y‑MABS THERAPEUTICS, INC.

Consolidated Balance Sheets

(unaudited)

(in thousands, except share data)

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

2019

 

2018

 

 

 

 

 

 

ASSETS

 

 

  

 

 

  

CURRENT ASSETS

 

 

  

 

 

  

Cash and cash equivalents

 

$

98,192

 

$

147,840

Restricted cash

 

 

 —

 

 

31

Other current assets

 

 

1,399

 

 

3,661

Total current assets

 

 

99,591

 

 

151,532

Property and equipment, net

 

 

1,689

 

 

205

Operating lease right-of-use assets

 

 

2,086

 

 

 —

Other assets

 

 

318

 

 

187

TOTAL ASSETS

 

$

103,684

 

$

151,924

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

  

 

 

  

LIABILITIES

 

 

  

 

 

  

Accounts payable

 

$

7,628

 

$

5,872

Accrued liabilities

 

 

5,848

 

 

3,251

Operating lease liabilities, current portion

 

 

516

 

 

 —

Total current liabilities

 

 

13,992

 

 

9,123

Accrued milestone and royalty payments

 

 

1,932

 

 

2,050

Operating lease liabilities, long-term portion

 

 

1,821

 

 

 —

Other liabilities

 

 

 —

 

 

224

TOTAL LIABILITIES

 

 

17,745

 

 

11,397

Commitments and contingencies (Note 6)

 

 

  

 

 

  

STOCKHOLDERS’ EQUITY

 

 

  

 

 

  

Preferred stock, $0.0001 par value, 5,500,000 shares authorized at September 30, 2019 and December 31, 2018; none issued at September 30, 2019 and December 31, 2018

 

 

 —

 

 

 —

Common stock, $0.0001 par value, 100,000,000 shares authorized at September 30, 2019 and December 31, 2018; 34,593,666 and 34,193,666 shares issued at September 30, 2019 and December 31, 2018, respectively

 

 

 3

 

 

 3

Additional paid in capital

 

 

228,532

 

 

225,352

Accumulated other comprehensive income

 

 

131

 

 

 7

Accumulated deficit

 

 

(142,727)

 

 

(84,835)

TOTAL STOCKHOLDERS’ EQUITY

 

 

85,939

 

 

140,527

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

103,684

 

$

151,924

The accompanying notes are an integral part of the consolidated financial statements

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Y‑MABS THERAPEUTICS, INC.

Consolidated Statements of Net Loss and Comprehensive Loss

(unaudited)

(In thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

    

Nine months ended September 30, 

 

 

 

2019

 

2018

    

2019

 

2018

 

 

 

 

 

OPERATING EXPENSES

 

 

  

 

 

  

 

 

  

 

 

  

 

Research and development

 

$

19,660

 

$

8,731

 

$

46,665

 

$

23,228

 

General and administrative

 

 

4,699

 

 

2,684

 

 

12,581

 

 

5,924

 

Total operating expenses

 

 

24,359

 

 

11,415

 

 

59,246

 

 

29,152

 

Loss from operations

 

 

(24,359)

 

 

(11,415)

 

 

(59,246)

 

 

(29,152)

 

OTHER INCOME/(EXPENSES)

 

 

  

 

 

  

 

 

  

 

 

  

 

Interest and other income/(expenses)

 

 

437

 

 

(11)

 

 

1,354

 

 

(62)

 

NET LOSS

 

$

(23,922)

 

$

(11,426)

 

$

(57,892)

 

$

(29,214)

 

Other comprehensive income

 

 

  

 

 

  

 

 

  

 

 

  

 

Foreign currency translation

 

 

134

 

 

39

 

 

124

 

 

121

 

COMPREHENSIVE LOSS

 

$

(23,788)

 

$

(11,387)

 

$

(57,768)

 

$

(29,093)

 

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

 

$

(0.70)

 

$

(0.42)

 

$

(1.69)

 

$

(1.08)

 

Weighted average common shares outstanding, basic and diluted

 

 

34,371,927

 

 

27,330,579

 

 

34,253,739

 

 

26,945,432

 

The accompanying notes are an integral part of the consolidated financial statements

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Y‑MABS THERAPEUTICS, INC.

Consolidated Statements of Changes in Stockholders’ Equity

(unaudited)

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

Common Stock

 

Additional

 

Comprehensive

 

Accumulated

 

Stockholders’

 

    

Shares

    

Amount

    

Paid-in Capital

    

Income/(Loss)

    

Deficit

    

Equity

Balance December 31, 2017

 

26,749,666

 

$

 3

 

$

123,879

 

$

(169)

 

$

(41,561)

 

$

82,152

Stock-based compensation expense

 

 —

 

 

 —

 

 

172

 

 

 —

 

 

 —

 

 

172

Foreign currency translation

 

 —

 

 

 —

 

 

 —

 

 

 3

 

 

 —

 

 

 3

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(7,483)

 

 

(7,483)

Balance March 31, 2018

 

26,749,666

 

 

 3

 

 

124,051

 

 

(166)

 

 

(49,044)

 

 

74,844

Stock-based compensation expense

 

 —

 

 

 —

 

 

904

 

 

 —

 

 

 —

 

 

904

Foreign currency translation

 

 —

 

 

 —

 

 

 —

 

 

78

 

 

 —

 

 

78

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(10,305)

 

 

(10,305)

Balance June 30, 2018

 

26,749,666

 

 

 3

 

 

124,955

 

 

(88)

 

 

(59,349)

 

 

65,521

Issuance of common stock in initial public offering, net of issuance costs

 

6,900,000

 

 

 —

 

 

100,498

 

 

 —

 

 

 —

 

 

100,498

Issuance of common stock to nonemployees

 

544,000

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Stock-based compensation expense

 

 —

 

 

 —

 

 

395

 

 

 —

 

 

 —

 

 

395

Foreign currency translation

 

 —

 

 

 —

 

 

 —

 

 

40

 

 

 —

 

 

40

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(11,426)

 

 

(11,426)

Balance September 30, 2018

 

34,193,666

 

$

 3

 

$

225,848

 

$

(48)

 

$

(70,775)

 

$

155,028

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

Common Stock

 

Additional

 

Comprehensive

 

Accumulated

 

Stockholders’

 

    

Shares

    

Amount

    

Paid-in Capital

    

(Loss)/Income

    

Deficit

    

Equity

Balance December 31, 2018

 

34,193,666

 

$

 3

 

$

225,352

 

$

 7

 

$

(84,835)

 

$

140,527

Stock-based compensation expense

 

 —

 

 

 —

 

 

864

 

 

 —

 

 

 —

 

 

864

Foreign currency translation

 

 —

 

 

 —

 

 

 —

 

 

56

 

 

 —

 

 

56

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(15,934)

 

 

(15,934)

Balance March 31, 2019

 

34,193,666

 

 

 3

 

 

226,216

 

 

63

 

 

(100,769)

 

 

125,513

Stock-based compensation expense

 

 —

 

 

 —

 

 

971

 

 

 —

 

 

 —

 

 

971

Foreign currency translation

 

 —

 

 

 —

 

 

 —

 

 

(66)

 

 

 —

 

 

(66)

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(18,036)

 

 

(18,036)

Balance June 30, 2019

 

34,193,666

 

 

 3

 

 

227,187

 

 

(3)

 

 

(118,805)

 

 

108,382

Issuance of common stock to nonemployees

 

400,000

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Stock-based compensation expense

 

 —

 

 

 —

 

 

1,345

 

 

 —

 

 

 —

 

 

1,345

Foreign currency translation

 

 —

 

 

 —

 

 

 —

 

 

134

 

 

 —

 

 

134

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(23,922)

 

 

(23,922)

Balance September 30, 2019

 

34,593,666

 

$

 3

 

$

228,532

 

$

131

 

$

(142,727)

 

$

85,939

The accompanying notes are an integral part of the consolidated financial statements

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Y‑MABS THERAPEUTICS, INC.

Consolidated Statements of Cash Flows

(unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 

 

 

 

2019

 

2018

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

  

 

 

  

 

Net loss

 

$

(57,892)

 

$

(29,214)

 

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

 

 

  

 

 

  

 

Depreciation and amortization

 

 

87

 

 

15

 

Stock-based compensation

 

 

3,180

 

 

1,471

 

Foreign currency transactions

 

 

123

 

 

101

 

Changes in assets and liabilities:

 

 

  

 

 

  

 

Other current assets

 

 

2,262

 

 

(1,881)

 

Other assets

 

 

(131)

 

 

(188)

 

Accounts payable

 

 

1,031

 

 

1,700

 

Accrued liabilities and other

 

 

2,422

 

 

344

 

NET CASH USED IN OPERATING ACTIVITIES

 

 

(48,918)

 

 

(27,652)

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

  

 

 

  

 

Purchase of property and equipment

 

 

(818)

 

 

(177)

 

NET CASH USED IN INVESTING ACTIVITIES

 

 

(818)

 

 

(177)

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

  

 

 

  

 

Proceeds from issuance of common stock, net of issuance costs

 

 

 —

 

 

101,607

 

Payment of offering costs for private placement

 

 

 —

 

 

(1,002)

 

NET CASH PROVIDED BY FINANCING ACTIVITIES

 

 

 —

 

 

100,605

 

Effect of exchange rates on cash, cash equivalents and restricted cash

 

 

57

 

 

32

 

NET INCREASE/(DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH

 

 

(49,679)

 

 

72,808

 

Cash, cash equivalents and restricted cash at the beginning of period

 

 

147,871

 

 

90,515

 

Cash, cash equivalents and restricted cash at the end of period

 

$

98,192

 

$

163,323

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES

 

 

  

 

 

  

 

Property and equipment purchases in accounts payable

 

$

752

 

$

 —

 

Right-of-use assets obtained in exchange for lease obligations

 

 

901

 

 

 —

 

Common stock issuance costs in accounts payable

 

 

 —

 

 

517

 

Deferred offering costs included in other assets and accounts payable and accrued liabilities and other

 

 

 —

 

 

851

 

The accompanying notes are an integral part of the consolidated financial statements

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1—ORGANIZATION AND DESCRIPTION OF BUSINESS

Y‑mAbs Therapeutics, Inc. (“we,” “us,” “our,” the “Company,” or “Y‑mAbs”) is a late-stage clinical biopharmaceutical company focused on the development and commercialization of novel antibody-based therapeutic products for the treatment of cancer.

We have entered into a worldwide license and research collaboration agreement (the “MSK License Agreement”) with Memorial Sloan‑Kettering Cancer Center (“MSK”), under which we have obtained the exclusive rights to MSK’s rights to two clinical stage antibody‑based product development programs for the treatment of neuroblastoma and other oncology indications. The MSK License Agreement also includes a protein multimerization platform technology, and an option to obtain the rights to certain chimeric antigen receptor T‑cell, or CAR‑T, technologies, as well as rights to certain next‑generation humanized, affinity matured bispecific antibodies.

The Company is headquartered in New York, New York and was incorporated on April 30, 2015 under the laws of the State of Delaware.

NOTE 2—BASIS OF PRESENTATION

The Company has not generated any revenue and has incurred losses since inception. Operations of the Company are subject to certain risks and uncertainties, including, among others, uncertainty of drug candidate development; technological uncertainty; uncertainty regarding patents and proprietary rights; uncertainty in obtaining FDA approval in the United States and regulatory approval in other jurisdictions; marketing or sales capability or experience; uncertainty in getting adequate payer coverage and reimbursement; dependence on key personnel; compliance with government regulations and the need to obtain additional financing. The Company’s drug candidates currently under development will require significant additional research and development efforts, including extensive preclinical and clinical testing and regulatory approval, prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel infrastructure and extensive compliance‑reporting capabilities.

The Company’s drug candidates are in the development stage. There can be no assurance that the Company’s research and development will be successfully completed, that adequate protection for the Company’s intellectual property will be obtained, that any products developed will obtain necessary government regulatory approval or that any approved products will be commercially viable. Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the Company will generate significant revenue from product sales. The Company operates in an environment of rapid change in technology and substantial competition from pharmaceutical and biotechnology companies.

The Company’s financial statements have been prepared on the basis of continuity of operations, realization of assets and the satisfaction of liabilities in the ordinary course of business. The Company has experienced negative cash flows and had an accumulated deficit of $142.7 million as of September 30, 2019 and $84.8 million as of December 31, 2018. Through September 30, 2019, the Company has funded its operations through proceeds from sales of shares of its common stock, including its initial public offering (“IPO”), in September 2018. As of September 30, 2019, the Company had cash and cash equivalents of $98.2 million, and as of December 31, 2018 the Company had cash and cash equivalents of $147.8 million. As of the issuance date of the quarterly financial statements for the three and nine months ended September 30, 2019, the Company expects that its cash and cash equivalents at September 30, 2019 will be sufficient to fund its operating expenses and capital expenditure requirements through at least the next twelve months. In November 2019, the Company completed a follow-on shelf public offering and raised $134.7 million, net of issuance costs. The future viability of the Company, until such time that the Company has commercialized any of its products, is dependent on its ability to raise additional capital to finance its operations.

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The Company may be required to raise additional capital to fund future operations through the sale of its equity securities, incurring debt, entering into licensing or collaboration agreements with partners, grants or other sources of financing. Sufficient funds may not be available to the Company at all or on attractive terms when needed from equity or debt financing. If the Company is unable to obtain additional financing from these or other sources when needed, or to the extent needed, it may be necessary to significantly reduce its current rate of spending through delaying, scaling back, or suspending certain research and development programs and other operational programs.

The accompanying unaudited consolidated financial statements reflect the accounts of the Company and its wholly‑owned subsidiary and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information, Accounting Standards Codification (“ASC”) Topic 270-10 and with the instructions to Form 10-Q. Accordingly, these financial statements do not include all of the information and notes required by GAAP for complete financial statements. The unaudited interim financial statements include all adjustments (consisting only of normal recurring nature) necessary in the judgment of management for a fair statement of the results for the periods presented. All intercompany balances and transactions have been eliminated. The Company has evaluated subsequent events through the date of this filing.  Operating results for the three and nine-month periods ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ended December 31, 2019, any other interim periods, or any future year or period. The December 31, 2018 consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.  You should read these unaudited interim condensed consolidated financial statements in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

NOTE 3—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Our critical accounting policies are detailed in our Annual Report on Form 10-K for the year ended December 31, 2018. Effective January 1, 2019, the Company adopted Accounting Standards Update No. 2018-09 (“ASU 2018-09”), Codification Improvements, which clarify, correct errors in, or make minor improvements to a variety of ASC topics;  ASU No. 2018‑07, Compensation—Stock Compensation (Topic 718), Improvements to Nonemployee Share‑Based Payment Accounting; Accounting Standards Update No. 2018‑02, (“ASU 2018-02”), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income; and Accounting Standards Update No. 2016‑02 (“ASU 2016‑02”), Leases. Other than the adoption of the new accounting guidance, our critical accounting policies have not changed materially from December 31, 2018.

Operating Leases

As described below, the Company adopted Topic 842 as of January 1, 2019. The Company determines if an arrangement includes a lease at inception. Operating lease right-of-use assets represent the Company’s right to use an underlying asset for the lease term and operating lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. In determining the net present value of lease payments, the Company uses its estimated incremental borrowing rate based on information available at the lease commencement date. Because most of the Company’s leases do not provide an implicit rate of return, an incremental borrowing rate is used based on the information available at the commencement date in determining the present value of lease payments on an individual lease basis. The Company’s incremental borrowing rate for a lease is the estimated rate of interest it would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms.

The Company’s leases may include options to extend or terminate the lease which are included in the lease term when it is reasonably certain that it will exercise any such options. None of the Company’s leases contain any residual value guarantees. Lease expense is recognized on a straight-line basis over the expected lease term. Related variable lease costs incurred are not material to the Company.

Topic 842 also provides practical expedients and certain exemptions for an entity’s ongoing accounting post implementation. The Company currently elected the short-term lease recognition exemption for all leases that qualify.

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This means, for those leases that qualify, we will not recognize right-of-use assets or liabilities, and this includes not recognizing right-of-use assets or liabilities for existing short-term leases of those assets in transition. We also elected the practical expedient to not separate lease and non-lease components for all of our leases. The Company has made an accounting policy election to account for each separate lease component of a contract and its associated non-lease components as a single lease component. See the Lease Agreements section in Note 6 for the related disclosures.

Use of Estimates

The preparation of 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 financial statements and the reported amounts of expenses during the reporting period. Significant estimates and assumptions reflected in these financial statements include, but are not limited to, the accrual for research and development expenses, the accrual of milestone and royalty payments, and the valuation of stock options. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates.

Segment Information

The Company is engaged solely in the discovery and development of novel antibody-based therapeutic products for the treatment of cancer. Accordingly, the Company has determined that it operates in one operating segment.

Recently Issued Accounting Pronouncements - Adopted

In July 2018, the FASB issued Accounting Standards Update No. 2018-09 (“ASU 2018-09”), Codification Improvements, which clarify, correct errors in, or make minor improvements to a variety of ASC topics.  The changes in ASU 2018-09 are not expected to have a significant effect on current accounting practices. Some of the amendments in this update do not require transition guidance and will be effective upon this update. However, many of the updates do have transition guidance with effective dates for periods beginning after December 15, 2018.  The adoption of this standard on January 1, 2019 did not have a material impact on our consolidated financial statements and related disclosures.

In June 2018, the FASB issued ASU No. 2018‑07, Compensation—Stock Compensation (Topic 718), Improvements to Nonemployee Share‑Based Payment Accounting (“ASU 2018‑07”). ASU 2018‑07 is intended to simplify aspects of share‑based compensation issued to non‑employees by making the guidance consistent with the accounting for employee share‑based compensation. ASU 2018‑07 is required to be adopted for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The adoption of this standard on January 1, 2019 did not have a material impact on our consolidated financial statements and related disclosures.

In February 2018, the FASB issued Accounting Standards Update No. 2018‑02, (“ASU 2018-02”), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. ASU 2018‑02 allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. ASU 2018‑07 is required to be adopted for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The adoption of this standard on January 1, 2019 did not have a material impact on our consolidated financial statements and related disclosures.

In February 2016, the FASB issued Accounting Standards Update No. 2016‑02 (“ASU 2016‑02”), Leases, which is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018 with early adoption permitted. Under ASU 2016‑02, lessees will be required to recognize for all leases, at the commencement date of the lease, a lease liability, which is a lessee’s obligation to make lease payments arising from a lease measured on a discounted basis, and a right‑to‑use asset, which is an asset that represents the lessee’s right to use or control the use of a specified asset for the lease term. Topic 842 was subsequently amended by ASU 2017-13, Revenue and Leases:

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Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments; ASU 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; ASU No. 2018-11, Targeted Improvements and ASU No. 2018-20, Narrow Scope Improvements for Lessors.

The Company adopted the new leasing standards using the modified retrospective transition approach as of January 1, 2019, with no restatement of prior periods or cumulative adjustment to retained earnings. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. The Company used the effective date as our date of initial application.  Consequently, financial information was not updated and the disclosures required under the new standard are not provided for dates and periods before January 1, 2019.  The new standard also provides a number of optional practical expedients in transition. The Company elected the package of practical expedients, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs.

Upon adoption of the new leasing standards, the Company recognized a lease liability of $1.8 million and a related right-of-use asset of $1.5 million with the difference being due to the elimination of previously reported deferred rent. The Company subsequently entered into two new lease agreements during the three months ended March 31, 2019, and recognized an incremental lease liability and related right-of-use asset of $0.9 million.

Recently Issued Accounting Pronouncements – Not Yet Adopted

In August 2018, the FASB issued Accounting Standards Update No. 2018-15 (“ASU 2018-15”), Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 clarifies certain aspects of ASU 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, which was issued in April 2015. Specifically, ASU 2018-14 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years with early adoption permitted. The Company is currently evaluating the impact its adoption may have on its consolidated financial statements.

 

 

 

 

NOTE 4—NET LOSS PER SHARE

Basic net loss per share (“EPS”) is calculated by dividing net income or loss attributable to common stockholders by the weighted average common stock outstanding. Diluted EPS is calculated by adjusting weighted average common shares outstanding for the dilutive effect of common stock options and restricted stock units. In periods in which a net loss is recorded, no effect is given to potentially dilutive securities, since the effect would be antidilutive. Securities that could potentially dilute basic EPS in the future were not included in the computation of diluted EPS because to do so would have been antidilutive. The calculations of basic and diluted net loss per share are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

Nine months ended September 30, 

 

 

    

2019

 

2018

    

2019

 

2018

 

 

 

(in thousands, except per share amounts)

 

 

 

 

 

Net loss (numerator)

 

$

(23,922)

 

$

(11,426)

 

$

(57,892)

 

$

(29,214)

 

Weighted-average shares (denominator)

 

 

34,372

 

 

27,331

 

 

34,254

 

 

26,945

 

Basic and diluted net loss per share

 

$

(0.70)

 

$

(0.42)

 

$

(1.69)

 

$

(1.08)

 

Potentially dilutive securities excluded from the computation of diluted earnings per share relate to stock options outstanding and unvested restricted shares and RSUs and totaled 4,124,169 shares as of September 30, 2019 and 2,799,373 shares as of September 30, 2018.

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NOTE 5—ACCRUED LIABILITIES

Accrued short‑term liabilities at September 30, 2019 and December 31, 2018 are as follows:

 

 

 

 

 

 

 

 

 

September 30, 

    

December 31, 

 

    

2019

 

2018

 

 

(in thousands)

 

 

 

 

 

 

 

Accrued milestone and royalty payments

 

$

268

 

$

1,475

Accrued clinical costs

 

 

1,079

 

 

63

Accrued compensation and board fees

 

 

1,765

 

 

1,144

Accrued rent

 

 

 —

 

 

44

Accrued manufacturing costs

 

 

2,734

 

 

 —

Other

 

 

 2

 

 

525

Total

 

$

5,848

 

$

3,251

 

 

NOTE 6—LICENSE AGREEMENTS AND COMMITMENTS

The Company has entered into two license agreements and certain other agreements with MSK. The license agreements are further described below as the MSK License Agreement and the CD33 License Agreement. These license agreements with MSK grant the Company certain patent rights and intellectual property rights. In consideration of obtaining the patent rights and intellectual property rights, the Company agreed to make certain payments and issue shares of the Company’s common stock to MSK. Certain of the payments are contingent milestone and royalty payments, the terms of which are further described below. Amounts disclosed in the consolidated balance sheets for accrued milestone and royalty payments are inclusive of obligations under the MSK License Agreement and CD33 License Agreement, collectively.

MSK License Agreement

On August 20, 2015, we entered into the MSK License Agreement that grants us a worldwide, sublicensable license to MSK’s rights to certain patent rights and intellectual property rights related to certain know‑how to develop, make, and commercialize licensed products and to perform services for all therapeutic and diagnostic uses in the field of cancer diagnostics and cancer treatments.

The patents and patent applications covered by this agreement are directed, in part, to naxitamab, an anti GD2 antibody, and omburtamab, which is an anti B7‑H3 antibody, as well as affinity matured versions of these certain antibodies and certain single chain variable fragments (Fv) constructs, and their use for immunotherapy, targeting the treatment of neuroblastoma, diffuse intrinsic pontine glioma (DIPG), osteosarcoma and other oncology indications. Upon entering into the MSK License Agreement in 2015 and in exchange for the licenses, we paid MSK an upfront payment, issued 1,428,500 shares of our common stock to MSK and agreed to provide certain anti‑dilution rights to MSK. In addition, we are required to pay to MSK certain royalty and milestone payments. We expensed the upfront payment and the issuance of shares to MSK in 2015. We also recorded expenses related to common stock issued related to certain anti‑dilution rights held by MSK.

The MSK License Agreement requires us to pay to MSK mid-to-high single digit royalties based on annual net sales of licensed products or the performance of licensed services by us and our affiliates and sublicensees. We are obligated to pay annual minimum royalties of $80,000 over the royalty term, commencing on the fifth anniversary of the license agreement. These amounts are non‑refundable but are creditable against royalty payments otherwise due under the MSK License Agreement. Total expensed minimum royalty payments in 2016 under the MSK License Agreement were $1,200,000, upon determination that the payment of such minimum royalties was probable and the amount was estimable in 2016. As of September 30, 2019, $18,000 of the accrued minimum royalties were recorded as short-term accrued liabilities, and $1,182,000 were recorded as long‑term accrued liabilities. As of December 31, 2018, all accrued minimum royalties were recorded as long-term accrued liabilities. We are also obligated to pay MSK certain clinical,

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regulatory and sales‑based milestone payments under the MSK License Agreement. Certain of the clinical and regulatory milestone payments become due at the earlier of completion of the related milestone activity or the date indicated in the MSK License Agreement. Total clinical and regulatory milestones potentially due under the MSK License Agreement are $2,450,000 and $9,000,000, respectively. There are also sales‑based milestones that become due should the Company achieve certain amounts of sales of licensed products resulting from the license arrangement with MSK, with total sales‑based milestones potentially due of $20,000,000. The Company records milestones in the period in which the contingent liability is probable and the amount is reasonably estimable. In addition, to the extent we enter into sublicense arrangements, we are obligated to pay to MSK a percentage of certain payments that we receive from sublicensees of the rights licensed to us by MSK, which percentage will be based upon the achievement of certain clinical milestones. The Company has not entered into any sublicenses related to the MSK License Agreement. Failure by the Company to meet certain conditions under the arrangement could cause the related license to such licensed product to be canceled and could result in termination of the entire arrangement with MSK. In addition, the Company may terminate the MSK License Agreement with prior written notice to MSK.

No milestones were expensed in the three or nine months ended September 30, 2019 or 2018. We paid $725,000 under this arrangement in the first quarter of 2019. As of September 30, 2019, $150,000 of accrued milestone obligations were recorded in accrued short term liabilities and $300,000 was recorded within long-term liabilities. As of December 31, 2018, $875,000 of accrued milestone obligations were recorded in accrued short term liabilities and $300,000 was recorded within long-term liabilities. These milestone‑related charges were recorded as research and development expense in 2016, upon determination that payment of these clinical milestone obligations was probable after satisfying the financing requirements described herein.

Research and development is inherently uncertain and as described above, should such research and development fail, the MSK License Agreement is cancelable at the Company’s option. The Company also considered the development risk and each party’s termination rights under the agreement when considering whether any regulatory‑based milestone payments, certain of which also contain time‑based payment requirements, were probable. Given the uncertainty associated with research and development and the Company’s ability to cancel the MSK License Agreement, such regulatory‑based obligations were determined not to be probable as of September 30, 2019 and December 31, 2018 and therefore have not been accrued.

CD33 License Agreement

On November 13, 2017, we entered into an exclusive license agreement for certain MSK rights in connection with certain CD33 bispecific antibodies, which we refer to as the CD33 License Agreement. The CD33 License Agreement obligates us to pay to MSK mid to high single digit royalties based on annual net sales of licensed products or the performance of licensed services by us and our affiliates and sublicensees. We are obligated to pay annual minimum royalties of $40,000 over the royalty term, increasing to $60,000 once a patent within the licensed rights is issued, and commencing on the tenth anniversary of the CD33 License Agreement. These amounts are non‑refundable but are creditable against royalty payments otherwise due under the CD33 License Agreement. We are also obligated to pay MSK certain fees under a sponsored research agreement under the CD33 License Agreement. In addition, milestone payments become due upon achievement of the related clinical, regulatory or sales‑based milestone defined in the CD33 License Agreement. Certain of the clinical and regulatory milestone payments become due at the earlier of completion of the related milestone activity or the date indicated in the CD33 License Agreement. Total potential clinical and regulatory milestones potentially due under the CD33 License Agreement are $550,000 and $500,000, respectively. There are also sales‑based milestones that become due should the Company achieve certain amounts of sales of licensed products resulting from the CD33 License Agreement with MSK, with total sales‑based milestones potentially due of $7,500,000. Failure by the Company to meet certain conditions under the CD33 License Agreement could cause the related license to such licensed product to be canceled and could result in termination of the arrangement with MSK. In addition, the Company may terminate the CD33 License Agreement with prior written notice to MSK. The Company records milestones in the period in which the contingent liability is probable and the amount is reasonably estimable. In addition, to the extent we enter into sublicense arrangements, we are obligated to pay to MSK a percentage of certain payments that we receive from sublicensees of the rights licensed to us by MSK, which percentage will be based upon

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the achievement of certain clinical milestones. The Company has not entered into any sublicenses related to the CD33 License Agreement.

No milestones were expensed in the three or nine months ended September 30, 2019 or 2018. None of the clinical milestone obligations previously accrued were paid in the three or nine months ended September 30, 2019 or 2018. The total amount accrued in prior periods of $550,000 was recorded as $100,000 of accrued short‑term liabilities and $450,000 of accrued long‑term liabilities as of September 30, 2019, and $550,000 as accrued long‑term liabilities as of December 31, 2018. These milestone‑related charges were recorded as research and development expense in 2017. Research and development is inherently uncertain and as described above, should such research and development fail, the CD33 License Agreement is cancelable at the Company’s option. The Company considered risks as well as each party’s termination rights under the CD33 License Agreement when considering whether any regulatory‑based milestone payments and minimum royalty payments, certain of which also contain time‑based payment requirements, were probable. Given the uncertainty associated with research and development and the Company’s ability to cancel the CD33 License Agreement, such obligations were determined not to be probable as of September 30, 2019 and December 31, 2018 and therefore have not been accrued.

MabVax sublicense agreement

On June 27, 2018, we entered into a sublicense agreement with MabVax Therapeutics Holding, Inc., (“MabVax”) pursuant to which MabVax has sublicensed to the Company certain of MabVax’s patent rights and know-how for development and commercialization of products for the prevention or treatment of neuroblastoma by means of administering a bi-valent ganglioside vaccine, granted to MabVax pursuant to an exclusive license agreement between MabVax and MSK. Under the sublicense agreement, the Company has paid an up-front license fee of $700,000 to MabVax and paid an additional $600,000 upon the first anniversary of the sublicense agreement. The initial license fee of $700,000 was expensed and paid upon execution of the agreement and the continuation fee of $600,000 was accrued in the fourth quarter of 2018 and paid in the third quarter of 2019. The Company has agreed to become solely responsible for future amounts payable to MSK and to handle other of MabVax’ obligations applicable to the licensed indication towards MSK. This includes the obligation to pay development milestones totaling $1,400,000 and mid-single-digit royalty payments to MSK. Research and development is inherently uncertain and as described above, should such research and development fail, the MabVax sublicense agreement is cancelable at the Company’s option. The Company considered risks as well as each party’s termination rights under the MabVax sublicense agreement when considering whether any milestone payments and minimum royalty payments were probable. Given the uncertainty associated with research and development and the Company’s ability to cancel the MabVax sublicense agreement, such obligations were determined not to be probable as of September 30, 2019 and December 31, 2018 and therefore have not been accrued.

Other agreements

On November 5, 2015, we entered into a sponsored research agreement, which we refer to as the SRA, with MSK pursuant to which we agreed to pay MSK to provide research services related to the intellectual property licensed under the MSK License Agreement. The SRA was amended on September 13, 2019, and will expire five years from the date of the amendment. During the three months ended September 30, 2019 and 2018, we incurred research and development expenses of $306,000 and $297,000, respectively, under the SRA, and in the nine months ended September 30, 2019 and 2018, we incurred expenses of $918,000 and $891,000, respectively, under the SRA.

On March 20, 2016, we entered into a master data services agreement, which we refer to as the MDSA, with MSK pursuant to which we committed to make certain payments in exchange for services provided by approximately two full time employees at MSK, who are engaged in transferring clinical data, databases, regulatory files and other know‑how included in the MSK License Agreement to the Company. On October 1, 2018 the MDSA was amended to increase the resources to approximately five full time employees. During the three months ended September 30, 2019 and 2018, we incurred expenses of $205,000 and $60,000, respectively, under the MDSA, and in the nine months ended September 30, 2019 and 2018, we incurred expenses of $547,000 and $273,000, respectively, under the MDSA.

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On June 21, 2017, we entered into a master clinical trial agreement, which we refer to as the CTA, with MSK pursuant to which we committed to fund certain clinical trials at MSK. Under the MSK License Agreement, the funding of clinical activities is limited to a five-year period. During the three months ended September 30, 2019 and 2018, we incurred expenses of $513,000 and $363,000, respectively, under the CTA, and in the nine months ended September 30, 2019 and 2018, we incurred expenses of $2,647,000 and $2,504,000, respectively, under the CTA.

On June 27, 2017, we entered into two separate core facility service agreements, which we refer to as the CFAs, with MSK pursuant to which we committed to obtaining certain laboratory services from MSK. During the three months ended September 30, 2019 and 2018, we incurred expenses of $186,000 and $28,000, respectively, under the CFAs, and in the nine months ended September 30, 2019 and 2018, we incurred expenses of $674,000 and $223,000, respectively, under the CFAs.

On November 13, 2017, we entered into a CD33 sponsored research agreement, which we refer to as the CD33 SRA, with MSK pursuant to which we agreed to pay MSK to provide research services over a period of two years related to the intellectual property licensed under the CD33 License Agreement. During the three months ended September 30, 2019 and 2018, we incurred expenses of $174,000 and $167,000, respectively, under the CD33 SRA, and in the nine months ended September 30, 2019 and 2018, we incurred expenses of $521,000 and $501,000,  respectively, under the CD33 SRA.

Lease Agreements

In February 2019, the Company entered into a lease agreement in connection with its 4,500 square feet laboratory in New Jersey. The term of the lease is three years from the date the Company occupied the premises, with an option to extend for an additional two years which the Company expects to exercise and has included in the determination of the related lease liability. Fixed rent payable under the lease is approximately $144,000 per annum and is payable in equal monthly installments of approximately $12,000.

In January 2018, the Company entered into a lease agreement in connection with its corporate headquarters in New York, New York. The term of the lease is five years from the date the Company occupied the premises. Fixed rent payable under the lease is approximately $384,000 per annum and is payable in equal monthly installments of approximately $32,000.

Additionally, the Company entered into a three‑year lease agreement for the lease of certain office space in Denmark in February 2018, as amended in November 2018 and February 2019. Fixed rent payable under the lease is approximately $227,000 per annum and is payable in equal monthly installments of approximately $19,000.

As described above in Note 3, the Company adopted Topic 842 as of January 1, 2019. Prior period amounts have not been adjusted and continue to be reported in accordance with the Company’s historical accounting under Topic 840.

Total operating lease costs were $174,000 and $91,000 for the three months ended September 30, 2019 and 2018, respectively, and $502,000 and $181,000 for the nine months ended September 30, 2019 and 2018, respectively.

During the three months ended September 30, 2019, the expenses were recorded as $129,000 in research and development expense and $45,000 in general and administrative expense. During the three months ended September 30, 2018, the expenses were all recorded in general and administrative expense. During the nine months ended September 30, 2019, the expenses were recorded as $367,000 in research and development expense and $135,000 in general and administrative expense. During the nine months ended September 30, 2018, the expenses were all recorded in general and administrative expense.

Cash paid for amounts included in the measurement of lease liabilities for the three and nine months ended September 30, 2019 was $188,000 and $419,000, respectively, and was included in net cash used in operating activities in the Company’s Consolidated Statements of Cash Flows.

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Maturities of operating lease liabilities at September 30, 2019 were as follows (in thousands):

 

 

 

 

 

 

Operating Leases

 

    

at September 30, 2019

 

 

 

 

Remainder of 2019

 

$

186

Years ending December 31,

 

 

 

2020

 

 

749

2021

 

 

753

2022

 

 

646

2023

 

 

539

Thereafter

 

 

77

Total lease payments

 

 

2,950

Less: Imputed interest

 

 

(613)

Total operating lease liabilities at September 30, 2019

 

$

2,337

Disclosures related to periods prior to the adoption of Topic 842:

Future minimum lease payments, including imputed interest, under non-cancelable operating leases at December 31, 2018 were as follows (in thousands):

 

 

 

 

 

 

Contractual Obligations

 

    

at December 31, 2018

 

 

 

 

2019

 

$

510

2020

 

 

616

2021

 

 

616

2022

 

 

616

2023

 

 

462

Thereafter

 

 

64

Total lease payments

 

 

2,884

Less: Imputed interest

 

 

 —

Contractual obligations at December 31, 2018

 

$

2,884

Operating lease liabilities are based on the net present value of the remaining lease payments over the remaining lease term. In determining the present value of lease payments, the Company uses its estimate of its incremental borrowing rate based on the information available at the lease commencement date. As of September 30, 2019, the weighted average remaining lease term is 4.1 years and the weighted average discount rate used to determine the operating lease liability was 11.0%.

NOTE 7—STOCKHOLDERS’ EQUITY

Authorized Stock

As of September 30, 2019 and December 31, 2018, the Company has authorized a total of 105,500,000 shares, 100,000,000 of which are common stock, par value $0.0001 per share, and 5,500,000 of which are preferred stock, par value $0.0001 per share.

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Common Stock

Each share of common stock is entitled to one vote. Common stockholders are entitled to receive dividends, as may be declared by the board of directors, if any, subject to preferential dividend rights of the preferred stock, none of which have been issued. The Company had issued 34,593,666 shares of its common stock as of September 30, 2019 and 34,193,666 shares of its common stock as of December 31, 2018.

Preferred Stock

Preferred stock may be issued from time to time in one or more series with such designations, preferences and relative participating, optional or other special rights and qualifications, limitations or restrictions as approved by the Company’s Board of Directors. No preferred stock has been issued as of September 30, 2019 or December 31, 2018.

Stock grant agreements with non‑employees

In August 2015, we entered into certain stock grant agreements with non‑employees of the Company. We agreed to issue a total of 2,800,000 shares to two non‑employee researchers who were involved in the development of technology licensed from MSK in consideration for their prior service. These two researchers were employees of MSK. The shares are released according to a vesting schedule. A total of 560,000 shares were issued in 2015, and a total of 448,000 shares issued in each of 2016 and 2017. In 2018, a total of 448,000 shares were issued to the two non-employee researchers, and upon completion of the IPO, we issued an additional 96,000 shares pursuant to a stock grant agreement and the issuance did not result in proceeds to the Company. A total of 400,000 shares were issued in 2019 and 400,000 shares are to be issued in 2020 to one of the non-employee researchers, subject to certain conditions, such that the total grant will have been issued. The total award was expensed at its estimated fair value in 2015, as no future service was required to continue to vest in and receive the shares of common stock. In August 2016, the Company repurchased and retired a total of 83,600 shares from the two non‑employees of the Company at an amount equal to the estimated fair value of $4.38 per share. The transaction reduced the Company’s shareholders’ equity by $366,000.

In April 2018, the Company granted 72,373 common stock options to one of the non‑employee researchers employed by MSK under our 2015 Equity Incentive Plan (the “2015 Plan”). The options become exercisable over a four‑year period, with the first twenty‑five percent (25%) exercisable twelve (months) from the date of grant and the remainder becoming exercisable ratably each month over the three years thereafter. The contractual term of the option award is 10 years from the date of grant. The total award was expensed at its estimated fair value in April 2018, as no future service was required by the non‑employee to continue to vest in the option grant. The shares will become immediately exercisable upon the occurrence of a change in control, as defined in the 2015 Plan as further described in Note 8, Share-Based Compensation.

Issuance of common stock

In August 2019, we issued 400,000 shares of our common stock. The issuance was made pursuant to a stock grant agreement and did not result in proceeds to the Company.

In September 2018, we completed an initial public offering and issued 6,900,000 shares of common stock at a purchase price of $16.00 per share for an aggregate consideration of $99,507,000, net of issuance costs. Upon completion of the IPO, we also issued 96,000 shares of our common stock pursuant to a stock grant agreement and the issuance did not result in proceeds to the Company.

In August 2018, we issued 448,000 shares of our common stock. The issuance was made pursuant to stock grant agreements and did not result in proceeds to the Company.

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NOTE 8—SHARE-BASED COMPENSATION

2015 Equity Incentive Plan

Our board of directors and stockholders have approved and adopted the 2015 Plan, which provided for the grant of incentive stock options, within the meaning of Section 422 of the Code (the Internal Revenue Code), to our employees and any parent and subsidiary corporations’ employees, and for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock and restricted stock units to our employees, directors and consultants and our parent and subsidiary corporations’ employees and consultants. A total of 4,500,000 shares of our common stock were reserved for issuance pursuant to the 2015 Plan. Options granted under the 2015 Plan vest according to the schedule specified in the grant agreements, which is generally a four year period and generally become immediately exercisable upon the occurrence of a change in control, as defined. Upon the 2018 Equity Incentive Plan (the “2018 Plan’) becoming effective in September 2018, no further grants are allowed under the 2015 Plan.

2018 Equity Incentive Plan

Our board of directors and stockholders approved and adopted the 2018 Plan, which became effective upon the Company’s initial public offering in September 2018 and which provides for the grant of incentive stock options, within the meaning of Section 422 of the Code (the Internal Revenue Code), to our employees and any parent and subsidiary corporations’ employees, and for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock and restricted stock units to our employees, directors and consultants and our parent and subsidiary corporations’ employees and consultants. A total of 5,500,000 shares of our common stock, inclusive of the awards previously granted under the 2015 Equity Incentive Plan, are reserved for issuance pursuant to the 2018 Plan. In addition, the number of shares available for issuance under the 2018 Plan will also include an annual increase on the first day of each fiscal year beginning in 2019, equal to 4% of the outstanding shares of common stock as of the last day of our immediately preceding fiscal year. The exercise price of options granted under the plans must at least be equal to the fair market value of our common stock on the date of grant. The term of an incentive stock option may not exceed 10 years, except that with respect to any participant who owns more than 10% of the voting power of all classes of our outstanding stock, the term must not exceed five years and the exercise price must equal at least 110% of the fair market value on the grant date. The administrator will determine the methods of payment of the exercise price of an option, which may include cash, shares or other property acceptable to the administrator, as well as other types of consideration permitted by applicable law. Options granted under the 2018 Plan vest according to the schedule specified in the grant agreements, which is generally a four year period and generally become immediately exercisable upon the occurrence of a change in control, as defined.

Stock Option Valuation

During the three month periods ended September 30, 2019 and 2018, stock based compensation for stock option grants were $1,324,000 and $395,000, respectively, for options granted to employees and directors. During the three months ended September 30, 2019, the expenses were recorded as $263,000 in research and development expense and $1,061,000 in general and administrative expense. During the three months ended September 30, 2018, the expenses were recorded as $67,000 in research and development expense and $328,000 in general and administrative expense.

During the nine month periods ended September 30, 2019 and 2018, stock based compensation for stock option grants were $3,124,000 and $1,471,000, respectively, for options granted to employees, non-employees and directors. During the nine months ended September 30, 2019, the expenses were recorded as $577,000 in research and development expense and $2,547,000 in general and administrative expense. During the nine months ended September 30, 2018, the expenses were recorded as $192,000 in research and development expense and $694,000 in general and

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administrative expense for options granted to employees and directors. During the nine months ended September 30, 2018, $585,000 was recorded in research and development expense for options granted to non-employees.

The following table summarizes common stock options issued and outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

 

 

    

Weighted

 

 

 

 

Weighted

 

Aggregate

 

average

 

 

 

 

average

 

intrinsic

 

remaining

 

 

 

 

exercise

 

value

 

contractual

 

 

Options

 

price

 

(in thousands)

 

life (years)

Outstanding and expected to vest at December 31, 2018

 

3,357,873

 

$

7.74

 

$

43,224

 

7.90

Granted

 

356,000

 

$

21.50

 

 

  

 

  

Outstanding and expected to vest at September 30, 2019

 

3,713,873

 

$

9.06

 

$

63,144

 

7.39

Exercisable at September 30, 2019

 

2,243,931

 

$

4.04

 

$

49,408

 

6.43

There were no stock options granted during the three months ended September 30, 2019. The weighted average fair value of stock options granted during the three months ended September 30, 2018 was $7.54.

The weighted average fair value of stock options granted during the nine month ended September 30, 2019 and 2018 was $12.34 and $6.77, respectively. 

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.

As of September 30, 2019, we had $12.1 million of unrecognized compensation related to employee stock options that is expected to vest over a period of 2.63 years. As of December 31, 2018, we had $10.8 million of unrecognized compensation related to employee stock options that are expected to vest over a period of 2.82 years.

Restricted Stock Unit Activity

During the three and nine months ended September 30, 2019, stock-based compensation for restricted stock unit grants was $21,000 and $56,000, respectively. During the three months ended September 30, 2019, the expenses were recorded as $18,000 in research and development expense and $2,000 in general and administrative expense. During the nine months ended September 30, 2019, the expenses were recorded as $50,000 in research and development expense and $6,000 in general and administrative expense. There was no stock based compensation for restricted stock units during the three or nine months ended September 30, 2018.

The following table summarizes restricted stock units issued and outstanding:

 

 

 

 

 

    

Restricted Stock Units

    

Outstanding and expected to vest at December 31, 2018

 

 —

 

Granted

 

10,296

 

Outstanding and expected to vest at September 30, 2019

 

10,296

 

 

The weighted average fair value of restricted stock units granted during the three and nine months ended September 30, 2019 was $23.11. As of September 30, 2019, we had $183,000 of unrecognized compensation related to employee restricted stock units that are expected to vest over a period of 2.30 years.

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NOTE 9—RELATED PARTY TRANSACTIONS

MSK is a shareholder of the Company. Under the MSK License Agreement, the CD33 License Agreement, CTA, CFAs, SRA and MDSA, we have expensed costs in the total amount of $1,384,000 and $914,000 in the three months ended September 30, 2019 and 2018, respectively, for milestones, minimum royalties, and research and development costs. We expensed costs in the total amounts of $5,307,000 and $4,526,000 in the nine months ended September 30, 2019 and 2018, respectively, under these agreements with MSK. Please refer to Note 6 for additional details on our agreements with MSK. As of September 30, 2019 and December 31, 2018, we had a total of $3,829,000 and $4,475,000, respectively, recorded as accounts payable and accrued liabilities related to amounts due to MSK.

NOTE 10—INCOME TAXES

The Company provided no current and deferred income taxes on net losses of $23.9 millon and $11.4 million for the three month periods ended September 30, 2019 and 2018, respectively, and the net losses of $57.9 million and $29.2 million for the nine month periods ended September 30, 2019 and 2018, respectively.

The Company recognizes income tax benefits for tax positions determined more likely than not to be sustained upon examination, based on the technical merits of the positions. As of September 30, 2019 and December 31, 2018, the Company has determined that there were no uncertain tax positions. The Company’s tax returns for years 2018, 2017, 2016, and 2015 are open for tax examination by U.S. federal and state, and the Danish tax authorities.

The valuation allowance related primarily to net U.S. deferred tax assets from operating losses, research and development tax credit carryforwards, and acquired intangibles.

The Company maintains a full valuation allowance on its U.S. and foreign deferred tax assets. The assessment regarding whether a valuation allowance is required considers both positive and negative evidence when determining whether it is more‑likely‑than‑not that deferred tax assets are recoverable. In making this assessment, significant weight is given to evidence that can be objectively verified. In its evaluation, the Company considered its cumulative loss in recent years and its forecasted losses in the near‑term as significant negative evidence. Based upon review of available positive and negative evidence, the Company determined that the negative evidence outweighed the positive evidence and a full valuation allowance on its U.S. and foreign deferred tax assets will be maintained. The Company will continue to assess the realizability of its deferred tax assets and will adjust the valuation allowance as needed.

NOTE 11—OTHER BENEFITS

On October 1, 2018, the Company adopted a defined contribution 401(k) savings plan (the 401(k) plan) covering all U.S. employees of the Company.  Participants may elect to defer a percentage of their pretax or after-tax compensation to the 401(k) plan, subject to defined limitations. The plan allows for a discretionary match by the Company. The Company made no matching contributions to the plan during the three or nine months ended September 30, 2019 and 2018.

The Company has established a retirement program for employees of the Company’s Danish subsidiary pursuant to which all such employees can contribute an amount at their election from their base compensation and may receive contributions from our Danish subsidiary. Contributions from our Danish subsidiary were immaterial during the three and nine months ended September 30, 2019 and 2018. In addition, health insurance benefits for our Danish employees are fully paid for by such employees. Our Danish subsidiary does not incur any costs for these health insurance benefits.

 

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NOTE 12-SUBSEQUENT EVENTS

In November 2019, the Company completed a follow-on shelf public offering of 5,134,750 shares of its common stock, including underwriters overallotment option, at a public offering price of $28 per share for an aggregate consideration of $134.7 million net of issuance costs.

 

 

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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 accompanying financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2018 on file with the SEC. Some of the information 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 and related financing, includes forward‑looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this Quarterly Report on Form 10-Q, our actual results could differ materially from the results described in or implied by the forward‑looking statements contained in the following discussion and analysis. For convenience of presentation some of the numbers have been rounded in the text below.

Overview

We are a late‑stage clinical biopharmaceutical company focused on the development and commercialization of novel, antibody‑based therapeutic products for the treatment of cancer. We have a broad and advanced product pipeline, including two pivotal‑stage product candidates—naxitamab and omburtamab—which target tumors that express GD2 and B7‑H3, respectively. We are developing naxitamab for the treatment of pediatric patients with relapsed or refractory, or R/R, high‑risk neuroblastoma, or NB, and radiolabeled omburtamab for the treatment of pediatric patients with central nervous system, or CNS, leptomeningeal metastases, or LM, from NB. NB is a rare and almost exclusively pediatric cancer that develops in the sympathetic nervous system and CNS/LM is a rare and usually fatal complication of NB in which the disease spreads to the membranes, or meninges, surrounding the brain and spinal cord in the CNS.

We expect to initiate submission of a rolling Biologics License Application, or BLA, for naxitamab in November 2019, with a goal of receiving approval by the U.S. Food and Drug Administration, or FDA, in 2020. For omburtamab, we expect the BLA submission, either via a rolling submission or via a single submission, to be completed by the end of the first quarter of 2020 with the goal of receiving approval by the FDA in 2020. We plan to commercialize both of our lead product candidates in the United States as soon as possible after obtaining FDA approval, if such approval occurs. Additionally, we have two omburtamab follow‑on product candidates in pre‑clinical development, omburtamab‑DTPA (diethylenetriamine pentaacetate) and huB7‑H3, a humanized version of omburtamab, each targeting indications with large adult patient populations. 

We have initiated a Phase I trial with our huGD2 bispecific antibody, or BsAb, for the treatment of refractory GD2 positive adult and pediatric solid tumors, thereby addressing large patient populations. We are also advancing a pipeline of novel BsAbs through late pre‑clinical development, including our huCD33‑BsAb product candidate for the treatment of hematological cancers expressing CD33, a transmembrane receptor expressed on cells of myeloid lineage. We believe our BsAbs have the potential to result in improved tumor‑binding, longer serum half‑life and significantly greater T‑cell mediated killing of tumor cells without the need for continuous infusion. Our mission is to become the world leader in developing better and safer antibody‑based pediatric oncology products addressing clear unmet medical needs and, as such, have a transformational impact on the lives of patients. We intend to advance and expand our product pipeline into certain adult cancer indications either independently or in collaboration with potential partners.

Since our inception in April 2015, we have devoted substantially all of our resources to organizing and staffing our company, business planning, identifying potential product candidates, conducting pre‑clinical studies of our product candidates and clinical trials of our lead product candidates, raising capital, and acquiring and developing our technology platform among other matters. We do not have any products approved for sale and have not generated any revenues from product sales.

To date, we have financed our operations primarily through private placements of our securities and the proceeds of our initial public offering. On September 25, 2018, we completed the initial public offering, or IPO, of our common stock pursuant to which we issued and sold 6,900,000 shares at a price to the public of $16.00 per share which included the exercise in full of the underwriters’ option to purchase additional shares for gross proceeds of approximately $110.4 million, before deducting underwriting discounts and commissions and estimated offering

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expenses.  We have received aggregate gross proceeds of approximately $230.0 million through September 30, 2019 from the sale and issuance of our common stock. In November 2019, we completed a follow-on shelf public offering and issued 5,134,750 shares at a price to the public of $28.00 per share, which included the exercise in full of the underwriters’ option to purchase additional shares for gross proceeds of approximately $143.8 million, before deducting underwriting discounts and commissions and estimated offering expenses.

As of September 30, 2019, we had an accumulated deficit of $142.7 million. Our net losses were $23.9 million and $11.4 million for the three months ended September 30, 2019 and 2018, respectively, and $57.9 million and $29.2 million for the nine months ended September 30, 2019 and 2018, respectively. We have incurred significant net operating losses in every year since our inception and expect to continue to incur increasing net operating losses and significant expenses for the foreseeable future. Our net losses may fluctuate significantly from quarter to quarter and year to year. We anticipate that our expenses will increase significantly as we:

·

continue to advance our lead product candidates through pivotal stage development towards registration;

·

continue to advance our other product candidates through pre‑clinical and clinical development;

·

continue to identify additional research programs and additional product candidates, as well as additional indications for existing product candidates;

·

initiate pre‑clinical studies and clinical trials for any additional product candidates we identify;

·

develop, maintain, expand and protect our intellectual property portfolio;

·

hire additional research, sales force, commercialization, clinical and scientific personnel; and

·

incur additional costs associated with operating as a public company, including expanding our operational, finance and management teams.

We believe that our cash on hand, including the net proceeds from our follow-on shelf public offering in November 2019, will be sufficient to fund our operations and capital expenditures through the fourth quarter of 2022. We do not expect to generate revenues from product sales unless and until we successfully complete development and obtain regulatory approval for a product candidate, which is subject to significant uncertainty and may never occur. Although no assurance can be given, our goal is to complete the development of our lead product candidates, naxitamab for the treatment of pediatric R/R high‑risk NB, and omburtamab for the treatment of CNS/LM from NB, by the end of 2019. Additionally, we currently use Contract Research Organizations, or CROs, and Contract Manufacturing Organizations, or CMOs, to carry out our pre‑clinical and clinical development activities and we do not yet have a sales organization.

Moreover, pursuant to the MSK License, we have obtained exclusive rights to MSK’s rights in our current product candidates. Under the MSK License, we have committed to funding scientific research and conducting certain clinical trial activities at MSK through 2020. As these product candidates progress through clinical development, regulatory approval and commercialization, certain milestone payments will come due either as a result of the milestones having been met or the passage of time even if the milestones have not been met. Also, we will owe MSK customary royalties on commercial sales of our approved products, including a fixed minimum royalty starting in 2020 whether or not product sales are ever achieved. In addition, we have committed to obtain certain personnel and laboratory services at MSK under our MDSA, and two separate CFAs. Also, under our CTA with MSK, we will provide drug product and funding for certain clinical trials at MSK. These MSK agreements are important to our business. For a more detailed discussion of the terms and conditions of these agreements, see note 6 “License Agreements and Commitments.”

If we obtain regulatory approval for our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. Accordingly, we may continue to fund our

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operations through public or private equity or debt financings or other sources, including strategic collaborations. We may, however, be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. Our failure to raise capital or enter into such other arrangements as and when needed would have a negative impact on our financial condition and our ability to develop our current product candidates, or any additional product candidates, if developed. Because of the numerous risks and uncertainties associated with the development of our existing product candidates and any future product candidates, our platform and technology and because the extent to which we may enter into collaborations with third parties for development of any of our product candidates is unknown, we are unable to estimate the amounts of increased capital outlays and operating expenses associated with completing the research and development of our product candidates. If we raise additional funds through collaborations, strategic alliances, or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs, product candidates or grant licenses on terms that may not be favorable to us and could have a negative impact on our financial condition.

Components of Our Results of Operations

Revenue

To date, we have not generated any revenue from product sales. We expect that we will experience increasing losses as we continue our development of, and seek regulatory approvals for, our product candidates and begin to commercialize any approved products. Our ability to generate revenue for each product candidate for which we receive regulatory approval, if any, will depend on numerous factors, including reimbursement coverage, competition, commercial manufacturing capability and market acceptance of such approved products.

Operating Expenses

Research and Development Expenses

Research and development expenses consist of expenses incurred in connection with the discovery and development of our product candidates. We expense research and development costs as incurred. These expenses include:

·

sponsored research, laboratory facility services, clinical trial and data service at MSK under the SRA, the two CFAs, the CTA, and the MDSA, with MSK;

·

expenses incurred under agreements with CROs, as well as investigative sites and consultants that conduct our non‑clinical studies and pre‑clinical and clinical trials;

·

expenses incurred under agreement with CMOs, including manufacturing scale‑up expenses and the cost of acquiring and manufacturing pre‑clinical and clinical trial materials, including manufacturing validation batches;

·

upfront and milestone and other non-revenue related payments due under our third‑party licensing agreements;

·

employee‑related expenses, which include salaries, benefits, travel and stock‑based compensation;

·

expenses relating to regulatory activities, including filing fees paid to regulatory agencies;

·

outsourced professional scientific development services; and

·

allocated expenses for utilities and other facility‑related costs, including rent, insurance, supplies and maintenance expenses, and other operating costs.

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The successful development of our product candidates is highly uncertain. At this time, we cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the remainder of the development of naxitamab and omburtamab or any future product candidates we may develop. This uncertainty is due to the numerous risks and uncertainties associated with the duration and cost of clinical trials, which vary significantly over the life of a project as a result of many factors, including:

·

the number of patients and clinical sites included in the trials;

·

the availability and length of time required to enroll a sufficient number of suitable patients in our clinical trials;

·

the actual probability of success for our product candidates, including the safety and efficacy, early clinical data, competition, manufacturing capability and commercial viability;

·

significant and changing government regulation and regulatory guidance;

·

the performance of our existing and any future collaborators;

·

the number of doses patients receive;

·

the duration and frequency of patient follow‑up;

·

the results of our clinical trials and pre‑clinical studies;

·

the establishment of commercial manufacturing capabilities;

·

adequate ongoing availability of raw materials and drug substance for clinical development and any commercial sales;

·

the receipt of marketing approvals, including a safety, tolerability and efficacy profile that is satisfactory to the FDA or any non‑U.S. regulatory authority;

·

the expense of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; and

·

the commercialization of approved products.

Our expenditures are subject to additional uncertainties, including the terms and timing of regulatory approvals. We may never succeed in achieving regulatory approval for naxitamab, omburtamab or any other product candidates we may develop.

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 delays in our clinical trials 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.

Research and development activities are central to our business model. Product candidates in later stages of clinical development, like naxitamab and omburtamab, 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 our research and development expenses to increase significantly over the next several years as we increase personnel

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costs, including stock‑based compensation, conduct clinical trials and potentially prepare regulatory filings for naxitamab and omburtamab.

General and Administrative Expenses

General and administrative expenses consist primarily of employee related expenses, including salaries, bonus, benefits, and stock‑based compensation expenses for personnel in executive, finance and administrative functions. Other significant costs include facility costs not otherwise included in research and development expenses, legal fees relating to corporate matters, and fees for patent, accounting, tax, and consulting services.

We anticipate that our general and administrative expenses will increase in the future to support continued research and development activities, potential commercialization of our product candidates and increased costs associated with operating as a public company, including expenses related to services associated with maintaining compliance with exchange listing and the SEC requirements, regulatory expenses, director and officer insurance costs and investor and public relations costs. These increases will likely include increased costs related to the hiring of additional personnel and fees to outside consultants, lawyers and accountants, among other expenses. Additionally, if and when we believe a regulatory approval of a product candidate appears likely, we anticipate an increase in payroll and other employee‑related expenses as a result of our preparation for commercial operations, especially as it relates to the sales and marketing of that product candidate.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which we have prepared in accordance with U.S. generally accepted accounting principles, or GAAP. We believe that several accounting policies are significant to understanding our historical and future performance. We refer to these policies as critical because these specific areas generally require us to make judgments and estimates about matters that are uncertain at the time we make the estimate, and different estimates—which also would have been reasonable—could have been used. On an ongoing basis, we evaluate our estimates and judgments, including those described in greater detail below. We base our estimates on historical experience and other market‑specific or other relevant assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail in the notes to our financial statements appearing elsewhere in this Quarterly Report on Form 10-Q, we believe the following accounting policies to be most critical to the judgments and estimates used in the preparation of our financial statements.

Use of Estimates

The preparation of 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 financial statements and the reported amounts of expenses during the reporting period. Significant estimates and assumptions reflected in these financial statements include, but are not limited to, the accrual for research and development expenses, the accrual of milestone and royalty payments, the valuation of shares of common stock and stock options. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates.

Research and Development Expenses

Research and development costs are charged to operations when incurred and are included in operating expenses. Research and development costs consist principally of compensation cost for our employees and consultants that perform our research activities, the fees paid to maintain our licenses, the payments to third parties for manufacturing and clinical research organizations and additional product development, and consumables and other

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materials used in research and development. We record accruals for estimated ongoing research costs. When evaluating the adequacy of the accrued liabilities, we analyze progress of the studies or clinical trials, including the phase or completion of events, invoices received and contracted costs. Actual results could differ from our estimates. We are obligated to make certain milestone and royalty payments in accordance with the contractual terms of the MSK License based upon the resolution of certain contingencies. Certain of these milestone payments are due and payable with the passage of time whether or not the milestones have actually been met. We record the milestone and royalty payment when the achievement of the milestone (including the passage of time) or payment of the milestone or royalty is probable and the amount of the payment is reasonably estimable.

Income Taxes

We account for income taxes under the asset and liability approach for the financial accounting and reporting of income taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to net operating loss carry forwards and temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. These assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to reverse. A valuation allowance is established when management determines that it is more likely than not that some portion or all of the deferred tax assets will not be realized.

We prepare and file tax returns based on its interpretation of tax laws and regulations. In the normal course of business, our tax returns are subject to examination by various taxing authorities. Such examinations may result in future tax and interest assessments by these taxing authorities. In determining our tax provision for financial reporting purposes, we establish a reserve for uncertain tax positions unless such positions are determined to be more likely than not of being sustained upon examination based on their technical merits. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes. Accordingly, we will report a liability for unrecognized tax benefits resulting from any uncertain tax positions taken or expected to be taken on a tax return.

Our policy is to recognize, when applicable, interest and penalties on uncertain tax positions as part of income tax expense.

Stock‑Based Compensation

We measure stock options and restricted share units granted to employees and directors based on the fair value on the date of the grant and recognize compensation expense of those awards, over the requisite service period, which is the vesting period of the respective award. Forfeitures are accounted for as they occur. We issue stock options and restricted share units to employees and directors with only service‑based vesting conditions and record the expense for these awards using the straight‑line method over the requisite service period.

For share‑based awards granted to non‑employees prior to January 1, 2019, compensation expense is recognized over the period during which services are rendered by such 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 our shares of common stock and updated assumption inputs in the Black‑Scholes option‑pricing model. No share-based awards were granted to non-employees after December 31, 2018.

The fair value of each stock option grant is estimated on the date of grant using the Black‑Scholes option pricing model. Historically, we have been a private company and lack company‑specific historical and implied volatility information for our shares. Therefore, we estimate our expected share price volatility based on the historical volatility of a group of publicly‑traded peer companies and we expect to continue to do so until such time as we have adequate historical data regarding the volatility of our own traded share price. The expected term of our stock options has been determined utilizing the “simplified” method for awards as we have limited historical data to support the expected term assumption. 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

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of the award for time periods approximately equal to the expected term of the award. The expected dividend yield is based on the fact that we have never paid cash dividends on shares of our common stock and do not expect to pay any cash dividends in the foreseeable future.

Results of Operations

Comparison of the Three Months Ended September 30, 2019 and 2018

The following table summarizes our results of operations for the three months ended September 30, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

September 30, 

 

 

 

 

    

2019

    

2018

    

Change

 

 

(in thousands)

 

 

 

Operating expenses:

 

 

  

 

 

  

 

 

  

Research and development

 

$

19,660

 

$

8,731

 

$

10,929

General and administrative

 

 

4,699

 

 

2,684

 

 

2,015

Total operating expenses

 

 

24,359

 

 

11,415

 

 

12,944

Loss from operations

 

 

(24,359)

 

 

(11,415)

 

 

(12,944)

Interest and other income (expense)

 

 

437

 

 

(11)

 

 

448

Net loss

 

$

(23,922)

 

$

(11,426)

 

$

(12,496)

 

Research and Development Expenses

We do not record our research and development expenses on a program‑by‑program or on a product‑by‑product basis as they primarily relate to personnel, research, manufacturing, license fees, non‑cash expense in connection with equity issuances to MSK and consumable costs, which are simultaneously deployed across multiple projects under development. These costs are included in the table below.

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

September 30, 

 

    

2019

    

2018

 

 

(in thousands)

Outsourced manufacturing

 

$

11,337

 

$

4,028

Licensing agreements

 

 

 —

 

 

 —

Clinical trials

 

 

1,344

 

 

523

Outsourced research and supplies