rapt-10q_20200331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended March 31, 2020

or

 

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

 

For the transition period from               to                    

Commission file number: 001-38997

 

RAPT Therapeutics, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

47-3313701

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

561 Eccles Avenue

South San Francisco, California 94080

(Address of principal executive offices and zip code)

(650) 489-9000 

(Registrant’s telephone number, including area code)

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

 

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock $0.0001 par value per share

RAPT

Nasdaq Global Market

 

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

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

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

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

 

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

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

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

 

As of May 7, 2020, there were 24,373,723 shares of the registrants common stock outstanding.

 

 


RAPT THERAPEUTICS, INC.

TABLE OF CONTENTS

 

 

 

 

Page No.

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements

 

3

 

Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019

 

3

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2020 and 2019

 

4

 

Condensed Consolidated Statement of Stockholders’ Equity for the Three Months Ended March 31, 2020 and Condensed Consolidated Statement of Convertible Preferred Stock and Stockholders’ Deficit for the Three Months Ended March 31, 2019

 

5

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019

 

6

 

Notes to Condensed Consolidated Financial Statements

 

7

Item 2.

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

 

14

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

20

Item 4.

Controls and Procedures

 

20

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

21

Item 1A.

Risk Factors

 

21

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

58

Item 3.

Defaults Upon Senior Securities

 

58

Item 4.

Mine Safety Disclosures

 

58

Item 5.

Other Information

 

58

Item 6.

Exhibits

 

59

Signatures

 

60

 

 


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

 

RAPT THERAPEUTICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

(Note 2)

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

91,529

 

 

$

77,383

 

Accounts receivable

 

 

5,010

 

 

 

 

Marketable securities

 

 

46,670

 

 

 

 

Prepaid expenses and other current assets

 

 

3,685

 

 

 

3,123

 

Total current assets

 

 

146,894

 

 

 

80,506

 

Property and equipment, net

 

 

3,606

 

 

 

3,707

 

Other assets

 

 

389

 

 

 

389

 

Total assets

 

$

150,889

 

 

$

84,602

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,409

 

 

$

1,143

 

Accrued expenses

 

 

3,832

 

 

 

3,642

 

Deferred revenue, current

 

 

5,765

 

 

 

4,000

 

Other current liabilities

 

 

436

 

 

 

471

 

Total current liabilities

 

 

13,442

 

 

 

9,256

 

Deferred rent, net of current portion

 

 

2,218

 

 

 

2,225

 

Deferred revenue, non-current

 

 

3,300

 

 

 

 

Commitments

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Preferred stock

 

 

 

 

 

 

Common stock

 

 

2

 

 

 

2

 

Additional paid-in capital

 

 

307,009

 

 

 

235,049

 

Accumulated other comprehensive income

 

 

7

 

 

 

20

 

Accumulated deficit

 

 

(175,089

)

 

 

(161,950

)

Total stockholders' equity

 

 

131,929

 

 

 

73,121

 

Total liabilities and stockholders' equity

 

$

150,889

 

 

$

84,602

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

3


RAPT THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share data)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

Revenue

 

$

935

 

 

$

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

10,683

 

 

 

7,870

 

General and administrative

 

 

3,289

 

 

 

1,674

 

Total operating expenses

 

 

13,972

 

 

 

9,544

 

Loss from operations

 

 

(13,037

)

 

 

(9,544

)

Other income, net

 

 

135

 

 

 

356

 

Net loss before taxes

 

 

(12,902

)

 

 

(9,188

)

Provision for income taxes

 

 

237

 

 

 

 

Net loss

 

$

(13,139

)

 

$

(9,188

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

204

 

 

 

 

Unrealized loss on marketable securities

 

 

(217

)

 

 

 

Total comprehensive loss

 

$

(13,152

)

 

$

(9,188

)

Net loss per share, basic and diluted

 

$

(0.56

)

 

$

(13.28

)

Weighted average number of shares used in computing net loss

   per share, basic and diluted

 

 

23,266,063

 

 

 

691,834

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

4


RAPT THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands, except share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

Total

 

 

Preferred Stock

 

 

Common Stock

 

 

Paid-In

 

 

Accumulated

 

 

Comprehensive

 

 

Stockholders'

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Income

 

 

Equity

 

Balance at December 31, 2019

 

 

 

$

 

 

 

21,833,037

 

 

$

2

 

 

$

235,049

 

 

$

(161,950

)

 

$

20

 

 

$

73,121

 

     Issuance of common stock, net of issuance costs

 

 

 

 

 

 

 

2,500,000

 

 

 

 

 

 

69,842

 

 

 

 

 

 

 

 

 

69,842

 

Issuance of common stock upon exercise of stock

   options, net of repurchase

 

 

 

 

 

 

 

970

 

 

 

 

 

 

30

 

 

 

 

 

 

 

 

 

30

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

2,088

 

 

 

 

 

 

 

 

 

2,088

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

204

 

 

 

204

 

Unrealized loss on marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(217

)

 

 

(217

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13,139

)

 

 

 

 

 

(13,139

)

Balance at March 31, 2020

 

 

 

$

 

 

 

24,334,007

 

 

$

2

 

 

$

307,009

 

 

$

(175,089

)

 

$

7

 

 

$

131,929

 

 

 

CONDENSED CONSOLIDATED STATEMENT OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT

(In thousands, except share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Related Party

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Promissory Notes

 

 

 

 

 

 

Other

 

 

Total

 

 

Convertible Preferred Stock

 

 

Common Stock

 

 

Paid-In

 

 

for the Purchase

 

 

Accumulated

 

 

Comprehensive

 

 

Stockholders'

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

of Common Stock

 

 

Deficit

 

 

Loss

 

 

Deficit

 

Balance at December 31, 2018

 

98,491,880

 

 

$

161,111

 

 

$

878,413

 

 

$

1

 

 

$

22,441

 

 

$

(598

)

 

$

(118,953

)

 

$

(4

)

 

$

(97,113

)

Issuance of Series C-2 convertible preferred stock,

   net of issuance costs

 

3,039,908

 

 

 

6,947

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock upon exercise of stock

   options, net of repurchase

 

 

 

 

 

 

 

3,685

 

 

 

 

 

 

66

 

 

 

 

 

 

 

 

 

 

 

 

66

 

Repurchase of common stock from related party

 

 

 

 

 

 

 

(53,649

)

 

 

 

 

 

 

 

 

109

 

 

 

 

 

 

 

 

 

109

 

Interest on promissory notes from related parties

   for purchase of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2

)

 

 

 

 

 

 

 

 

(2

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

377

 

 

 

 

 

 

 

 

 

 

 

 

377

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,188

)

 

 

 

 

 

(9,188

)

Balance at March 31, 2019

 

101,531,788

 

 

$

168,058

 

 

$

828,449

 

 

$

1

 

 

$

22,884

 

 

$

(491

)

 

$

(128,141

)

 

$

(4

)

 

$

(105,751

)

 

 

See accompanying notes to condensed consolidated financial statements.

 

5


RAPT THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

Operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(13,139

)

 

$

(9,188

)

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

 

 

 

 

 

 

 

 

Accretion of discount on marketable securities

 

 

(4

)

 

 

 

Depreciation and amortization

 

 

199

 

 

 

331

 

Stock-based compensation expense

 

 

2,088

 

 

 

377

 

Gain on foreign currency translation

 

 

204

 

 

 

 

Noncash interest income (loss), net

 

 

 

 

 

(2

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(5,010

)

 

 

 

Prepaid expenses and other long-term assets

 

 

(562

)

 

 

(201

)

Accounts payable and accrued liabilities

 

 

2,421

 

 

 

49

 

Deferred revenue

 

 

5,065

 

 

 

 

Deferred rent

 

 

(7

)

 

 

 

Net cash used in operating activities

 

 

(8,745

)

 

 

(8,634

)

Investing activities

 

 

 

 

 

 

 

 

Purchase of marketable securities

 

 

(46,883

)

 

 

 

Purchase of property and equipment

 

 

(98

)

 

 

(419

)

Net cash used in investing activities

 

 

(46,981

)

 

 

(419

)

Financing activities

 

 

 

 

 

 

 

 

Proceeds from public offering, net of issuance costs

 

 

69,842

 

 

 

 

Proceeds from the sale of convertible preferred stock, net of issuance costs

 

 

 

 

 

6,947

 

Proceeds from issuance of common stock, net of repurchases

 

 

30

 

 

 

66

 

Net cash provided by financing activities

 

 

69,872

 

 

 

7,013

 

Net increase (decrease) in cash and cash equivalents

 

 

14,146

 

 

 

(2,040

)

Cash and cash equivalents at beginning of period

 

 

77,383

 

 

 

63,798

 

Cash and cash equivalents at end of period

 

$

91,529

 

 

$

61,758

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

6


RAPT THERAPEUTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Organization

Description of the Business

RAPT Therapeutics, Inc. (“RAPT” or the “Company”) is a clinical-stage, immunology-based biopharmaceutical company focused on discovering, developing and commercializing oral small molecule therapies for patients with significant unmet needs in oncology and inflammatory diseases. Utilizing its proprietary drug discovery and development engine, the Company develops highly selective small molecules that are designed to modulate the critical immune responses underlying these diseases. In May 2019, the Company changed its name from FLX Bio, Inc. to RAPT Therapeutics, Inc.

The Company is located in South San Francisco, California.

Equity Financing

In February 2020, the Company completed an underwritten public offering (the “Follow‑on Offering”) of 2,500,000 shares of common stock at an offering price of $30.00 per share. The Company received approximately $69.8 million in net proceeds from the Follow-on Offering, after deducting underwriting discounts and other offering-related costs.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and pursuant to Article 10 of Regulation S‑X of the Securities Act of 1933, as amended (the “Securities Act”). Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. These unaudited condensed consolidated financial statements include only normal and recurring adjustments that the Company believes are necessary to fairly state the Companys financial position and the results of its operations and cash flows. Interim-period results are not necessarily indicative of results of operations or cash flows for a full year or any subsequent interim period. The condensed balance sheet at December 31, 2019 has been derived from the audited financial statements at that date but does not include all disclosures required by U.S. GAAP for complete financial statements. Because all of the disclosures required by U.S. GAAP for complete financial statements are not included herein, these unaudited condensed consolidated financial statements and the notes accompanying them should be read in conjunction with the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2019 filed on March 30, 2020 with the Securities and Exchange Commission.

The accompanying consolidated financial statements have been prepared in accordance with U.S. GAAP and include the consolidated accounts of the Company and its wholly-owned subsidiary, RAPT Therapeutics Australia Pty Ltd., which was established in 2018. All intercompany balances and transactions have been eliminated in consolidation.

Revenue

License and collaborative agreements consist of license, milestone and royalty payments generated through agreements with strategic partners for the development and commercialization of certain product candidates. The terms of an agreement may include a non-refundable upfront fee, payments based upon achievement of milestones and royalties on net product sales. If a portion of the nonrefundable upfront fee or other payments received is allocated to continuing performance obligations under the terms of an agreement, such portion is recorded as deferred revenue and recognized as revenue when (or as) the underlying performance obligation is satisfied.

The Company recognizes revenue when it transfers promised goods or services to customers or counterparties in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. In determining the appropriate amount of revenue to be recognized, the Company performs the following steps: (i) identification of the promised goods or services in the agreement; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the agreement; (iii) measurement of the transaction price, including any constraint on variable consideration; (iv) allocation of the transaction price to performance obligations based on estimated selling prices; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.

7


Licenses: If a license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in an agreement, the Company will recognize revenue from the nonrefundable, upfront fee allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license. If a license is bundled with other performance obligations, the Company utilizes judgment to assess the nature of the combined performance obligations to determine whether the combined performance obligations are satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.

Milestone payments: If an agreement includes event-based or milestone payments, the Company evaluates whether the events or milestones are considered likely to be achieved and estimates the amount to be included in the transaction price using the most likely amount method. If it is unlikely that a significant revenue reversal would occur, the value of the associated event-based or milestone payments is included in the transaction price. Event-based or milestone payments that are not within the control of the Company are not included in the transaction price until they become likely to be achieved.

Royalties: If an agreement includes sales-based royalties and the license is deemed to be the predominant item to which the royalties relate, the Company will recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).

Stock-Based Compensation

The Company measures employee and director stock-based compensation expense for all stock-based awards based on their grant date fair value using the Black-Scholes option-pricing model. Subsequent to the adoption of ASU 2018-07, Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, stock-based compensation expense for non-employee stock-based awards is also measured based on the grant date fair value with the estimated fair value expensed over the period for which the non-employee is required to provide service in exchange for the award. For stock-based awards with service conditions only, stock-based compensation expense is recognized over the requisite service period using the straight-line method. For awards with performance conditions, the Company evaluates the probability of achieving performance conditions at each reporting date. The Company begins to recognize stock-based compensation expense using an accelerated attribution method when it is deemed probable that the performance condition will be met. Forfeitures are recognized as they occur.

Stock-based compensation expense related to restricted stock awards is determined using the estimated fair value of the Company’s common stock on the date of grant for the period prior to the Company’s initial public offering (“IPO”). The fair value of restricted stock awards granted after the IPO is determined based on the stock price on the date of grant. The estimated fair value is amortized as compensation expense over the service period of the award.

Stock-based compensation expense related to the Company’s employee stock purchase plan is recognized based on the fair value of each award estimated on the first day of the offering period using the Black‑Scholes option-pricing model and recorded as expense over the service period using the straight‑line method.

Net Loss Per Share

Basic net loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period, without consideration of potential dilutive securities. Diluted net loss per common share is computed by dividing the net loss by the sum of the weighted average number of common shares outstanding during the period plus the number of potential dilutive securities outstanding during the period calculated in accordance with the treasury stock method. Diluted net loss per share is the same as basic net loss per share since the effect of including potential dilutive securities is anti-dilutive.

Marketable securities

Marketable securities primarily consist of commercial paper and corporate bonds. The Company has classified its marketable securities as available-for-sale and may sell these securities prior to their stated maturities. The Company views these marketable securities as available to support current operations and classifies marketable securities with maturities beyond 12 months as current assets. The Company’s marketable securities are carried at estimated fair value, which is derived from independent pricing sources based on quoted prices in active markets for similar securities. Unrealized gains and losses are reported as a component of accumulated other comprehensive loss, net of tax. The amortized cost of marketable securities is adjusted for amortization of premiums and accretion of discounts to maturity, which is included in interest income on the condensed consolidated statements of operations.

8


Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (the “FASB”) or other standard setting bodies and adopted by the Company as of the specified effective date. Unless otherwise discussed, the impact of recently issued standards that are not yet effective will not have a material impact on our condensed consolidated financial statements upon adoption. Under the Jumpstart Our Business Startups Act of 2012, as amended (the “JOBS Act”), the Company meets the definition of an emerging growth company and has elected the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act.

Adopted Accounting Pronouncements

In June 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Non-Employee Share-Based Payment Accounting as part of the FASB’s simplification initiative. ASU 2018‑07 expands the scope of Topic 718, allowing the Company to apply the requirements of Topic 718 to certain non-employee awards to acquire goods and services from non‑employees. The Company adopted ASU 2018‑07 in the first quarter of 2020 using a modified retrospective method and there was an insignificant impact to the Company’s financial position and results of operations related to this adoption.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurements (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement as part of the FASB’s disclosure framework project. ASU 2018-13 removes certain disclosure requirements, including the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels and the valuation process for Level 3 fair value measurements. This ASU also modifies existing disclosure requirements by clarifying that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date, and adds disclosure requirements over Level 3 fair value measurements. The Company adopted ASU 2018-13 in the first quarter of 2020 and there was no impact to the Company’s financial position or results of operations related to this adoption.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. ASU 2019-12 also improves the consistent application, and the simplification, of other areas of Topic 740 by clarifying and amending existing guidance. The Company adopted ASU 2019-12 in the fourth quarter of 2019 and there was no impact to the financial position or results of operations related to this adoption.

Recently Issued Accounting Pronouncement Not Yet Adopted

In February 2016, the FASB issued ASU No. 2016-02, Leases. ASU 2016-02 requires lessees to record most leases on their balance sheet while recognizing expense in a manner similar to the accounting under ASC 840. ASU 2016‑02 states that a lessee would recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term. ASU 2016-02 is effective for the Company’s fiscal year beginning after December 15, 2020 and early adoption is permitted. The Company is currently assessing the timing of adoption of ASU 2016-02 and the impact that adoption will have on its consolidated financial statements and related disclosures.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 amended guidance on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities. For available-for-sale debt securities, credit losses will be presented as an allowance rather than as a write-down. ASU 2016-13 is effective for the Company’s fiscal year beginning after December 15, 2022 and early adoption is permitted. The Company is currently assessing the timing of adoption of ASU 2016-13 and the impact that adoption will have on its consolidated financial statements and related disclosures.

3. Fair Value Measurements

Fair value accounting is applied for all financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Financial instruments such as cash and cash equivalents, accounts payable and accrued liabilities approximate fair value due to their relatively short maturities.

9


Assets and liabilities recorded at fair value on a recurring basis in the balance sheet are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined as the exchange price that would be received for an asset or an exit price that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows:

Level 1Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

Level 2Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and

Level 3Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.

To date, the Company has not recorded any impairment charges on marketable securities due to other-than-temporary declines in market value. In determining whether a decline is other than temporary, the Company considers various factors, including the length of time and extent to which the market value has been less than amortized cost, the financial condition and near-term prospects of the issuer and the Company’s intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value.

The Company estimates the fair values of investments in corporate debt securities and commercial paper using valuations obtained from third-party pricing services. The pricing services utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities, issuer credit spreads, benchmark securities, prepayment/default projections based on historical data and other observable inputs.

Cash equivalents and marketable securities, all of which are classified as available-for-sale securities and measured at fair value on a recurring basis, consisted of the following (in thousands):

 

 

 

 

 

As of March 31, 2020

 

 

 

Fair Value Hierarchy Level

 

Amortized

Cost

 

 

Gross Unrealized

Losses

 

 

Fair

Value

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

Level 1

 

$

89,979

 

 

$

 

 

$

89,979

 

Corporate debt

 

Level 2

 

 

26,974

 

 

 

(217

)

 

 

26,757

 

Commercial paper

 

Level 2

 

 

19,913

 

 

 

 

 

 

19,913

 

Total

 

 

 

$

136,866

 

 

$

(217

)

 

$

136,649

 

As of December 31, 2019, the financial assets subject to fair value measurement on a recurring basis consisted of money market funds with a fair value of $77.4 million.

As of March 31, 2020, the Company’s marketable securities had remaining contractual maturities of less than two years. The Company does not intend to sell the securities that are in an unrealized loss position, and the Company believes it is more likely than not that the investments will be held until recovery of the amortized cost bases. The Company has determined that the gross unrealized losses on our securities as of March 31, 2020 were temporary in nature.

10


4. Property and Equipment

Property and equipment consisted of the following (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Laboratory equipment

 

$

5,814

 

 

$

5,752

 

Leasehold improvements

 

 

3,294

 

 

 

3,294

 

Computer equipment

 

 

362

 

 

 

326

 

Furniture and fixtures

 

 

394

 

 

 

394

 

Total property and equipment

 

 

9,864

 

 

 

9,766

 

Less accumulated depreciation and amortization

 

 

(6,258

)

 

 

(6,059

)

Property and equipment, net

 

$

3,606

 

 

$

3,707

 

Depreciation and amortization expenses were $0.2 million and $0.3 million for the three months ended March 31, 2020 and 2019, respectively.

5. Accrued Expenses

Accrued expenses consist of the following (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Accrued clinical expenses

 

$

1,762

 

 

$

1,353

 

Accrued compensation

 

 

1,497

 

 

 

1,779

 

Accrued professional and consulting services

 

 

351

 

 

 

192

 

Accrued lab supplies

 

 

26

 

 

 

29

 

Other

 

 

196

 

 

 

289

 

Total accrued expenses

 

$

3,832

 

 

$

3,642

 

 

6. Collaboration Agreements

Collaboration and License Agreement with Hanmi

In December 2019, the Company entered into a Collaboration and License Agreement (the “Hanmi Agreement”) with Hanmi, pursuant to which the Company granted Hanmi an exclusive license to develop, manufacture and commercialize FLX475 and related compounds and products with respect to human cancers in the Republic of Korea, the Republic of China (Taiwan) and the People’s Republic of China, including the special administrative regions of Macau and Hong Kong (the “Hanmi Territory”), and certain sublicense rights.

In consideration of the rights granted under the Hanmi Agreement, the Company was entitled to $10.0 million in an upfront payment of $4.0 million and a near-term milestone payment of $6.0 million. The milestone payment was received in April 2020. Additionally, the Company will be eligible to receive contingent payments of up to $108.0 million upon the achievement of specified milestones, as well as double-digit royalties on future net sales of FLX475 in the Hanmi Territory.

The Company determined that the transaction price as of March 31, 2020 was $10.0 million, consisting of the upfront fee of $4.0 million and the near-term milestone payment of $6.0 million, which was consistent with the transaction price as of December 31, 2019. The Company recognizes revenue for the performance obligation by applying the cost-based input method over the estimated service period. The Company determined that this method most faithfully depicts the transfer of its performance obligations to Hanmi as it reflects the progress made towards providing Hanmi with the necessary know-how to continue developing FLX475 in the Hanmi Territory.

For the three months ended March 31, 2020, $0.9 million was recognized as revenue pursuant to the Hanmi Agreement. As of March 31, 2020 and December 31, 2019, deferred revenue related to the Hanmi Agreement was $9.1 million and $4.0 million, respectively. The deferred revenue is expected to be recognized over the remaining Phase 1/2 clinical trial period.

7. Convertible Preferred Stock

Immediately prior to the closing of the Company’s IPO on November 4, 2019, all outstanding shares of the Company’s convertible preferred stock converted into 17,467,184 shares of the Company’s common stock.

11


8. Common Stock

The holders of the Companys common stock have one vote for each share of common stock held by them. Holders of shares of the Companys common stock are entitled to dividends when, as and if declared by the Board of Directors. No dividends had been declared as of March 31, 2020. As of March 31, 2020 and December 31, 2019, 24,334,007 shares and 21,833,037 shares of common stock were outstanding, respectively.

As of March 31, 2020, the Company had reserved the following shares of common stock for future issuance:

 

Options issued and outstanding

 

1,579,037

 

Options available for future grants

 

1,607,630

 

Shares reserved under the employee stock purchase plan

 

240,336

 

Total

 

3,427,003

 

 

9. Stock-based Compensation

In 2019, the Company adopted the 2019 Equity Incentive Plan (the “2019 Plan”) for eligible employees, officers, directors, advisors and consultants, which provides for the grant of incentive and non-statutory stock options and restricted shares of common stock. The Company’s 2015 Stock Plan (the “2015 Plan”) terminated in 2019 and no further grants may be made thereunder.

Activity under the Company’s stock option plans is set forth below for the three months ended March 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

Average

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

Remaining

 

 

Aggregate

 

 

 

 

 

 

 

Number of

 

 

Exercise

 

 

Contractual

 

 

Intrinsic

 

 

 

Shares

 

 

Shares

 

 

Price Per

 

 

Term

 

 

Value

 

 

 

Available

 

 

Outstanding

 

 

Share

 

 

(Years)

 

 

(in thousands)

 

Balances at December 31, 2019

 

 

1,874,759

 

 

 

1,313,468

 

 

$

9.77

 

 

 

8.93

 

 

$

23,438

 

Stock options granted

 

 

(274,588

)

 

 

274,588

 

 

 

39.93

 

 

 

 

 

 

 

 

 

Stock options exercised

 

 

 

 

 

(1,560

)

 

 

6.22

 

 

 

 

 

 

 

 

 

Stock options forfeited

 

 

7,459

 

 

 

(7,459

)

 

 

15.86

 

 

 

 

 

 

 

 

 

Balances at March 31, 2020

 

 

1,607,630

 

 

 

1,579,037

 

 

$

13.52

 

 

8.88

 

 

$

12,179

 

 

Stock-based compensation expense

Total stock-based compensation expense recognized for options granted to both employees and non-employees and for the employee stock purchase plan was as follows (in thousands):

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

Research and development

 

$

645

 

 

$

202

 

General and administrative

 

 

913

 

 

 

175

 

Total stock-based compensation expense

 

$

1,558

 

 

$

377

 

 

As of March 31, 2020, unrecognized stock-based compensation cost related to outstanding unvested stock options that are expected to vest was $15.2 million. This unrecognized stock-based compensation cost is expected to be recognized over 2.77 years.

2019 Employee Stock Purchase Plan

In October 2019, the Company adopted the 2019 Employee Stock Purchase Plan (the “2019 ESPP”). The Company reserved 240,336 shares of common stock pursuant to purchase rights to be granted to the Company’s employees. The 2019 ESPP provides that the number of shares reserved and available for issuance will automatically increase on January 1 of each calendar year, beginning January 1, 2020, by the lesser of (1) 1.0% of the total number of shares of common stock outstanding on December 31 of the preceding calendar year, (2) 240,336 shares or (3) a number determined by our board of directors that is less than (1) and (2).

12


Under the 2019 ESPP, eligible employees are granted rights to purchase shares of common stock, which can be funded through payroll deductions that cannot exceed 15% of each employee’s compensation. The 2019 ESPP generally provides for a 24-month offering period, which includes four six-month purchase periods. At the end of each purchase period, eligible employees are permitted to purchase shares of common stock at 85% of the lower of fair market value at the beginning of the offering period or fair market value at the end of the purchase period. The 2019 ESPP is considered a compensatory plan and the Company recorded stock-based compensation expense of $0.5 million for the three months ended March 31, 2020. As of March 31, 2020, no shares of common stock were issued under the 2019 ESPP.

10. Income Taxes

The Company recorded a provision for income taxes of $0.2 million for the three months ended March 31, 2020 related to Korean withholding taxes on the near-term milestone payment the Company is entitled to pursuant to the Hanmi Agreement. No provision had been recorded for the three months ended March 31, 2019. In addition, the Company’s deferred tax assets continue to be subject to a full valuation allowance.

On March 27, 2020, President Trump signed into U.S. federal law the CARES Act, which provides emergency assistance and health care for individuals, families and businesses affected by the COVID-19 pandemic. Based on the Company’s preliminary analysis, the relief provisions will not have a material impact on the Company’s consolidated financial statements.

11. Net Loss Per Share

Net loss per share

The following table sets forth the computation of the basic and diluted net loss per share for the three months ended March 31, 2020 and 2019 (in thousands, except share and per share data):

 

 

 

Three Months Ended

March 31,

 

 

 

2020

 

 

2019

 

Numerator:

 

 

 

 

 

 

 

 

Net loss

 

$

(13,139

)

 

$

(9,188

)

Denominator:

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

23,317,161

 

 

 

824,384

 

Less: weighted-average unvested restricted common

   stock subject to repurchase

 

 

 

 

 

(84,982

)

Less: weighted-average unvested common shares

   subject to repurchase

 

 

(51,098

)

 

 

(47,568

)

Weighted-average shares used to compute net loss per share,

   basic and diluted

 

 

23,266,063

 

 

 

691,834

 

Net loss per share, basic and diluted

 

$

(0.56

)

 

$

(13.28

)

 

Potential dilutive securities that were not included in the diluted per share calculations because they would be anti-dilutive were as follows:

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

Convertible preferred stock

 

 

 

 

 

16,921,931

 

Common stock options issued and outstanding

 

 

1,579,037

 

 

 

971,496

 

Estimated shares issuable under the employee stock purchase plan

 

 

32,918

 

 

 

 

Total

 

 

1,611,955

 

 

 

17,893,427

 

 

13


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

The following discussion and analysis of our financial condition and results of operations should be read together with the  unaudited condensed consolidated financial statements and related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and with the audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2020. This discussion includes both historical information and forward-looking statements that involve risk, uncertainties and assumptions. Our actual results may differ materially from management’s expectations as a result of various factors, including, but not limited to, those discussed in the section titled “Risk Factors” in this report.

Overview

We are a clinical-stage immunology-based biopharmaceutical company focused on discovering, developing and commercializing oral small molecule therapies for patients with significant unmet needs in oncology and inflammatory diseases. Utilizing our proprietary drug discovery and development engine, we are developing highly selective small molecules designed to modulate the critical immune responses underlying these diseases. We have discovered and advanced into clinical development two unique drug candidates, each targeting C-C motif chemokine receptor 4 (“CCR4”): FLX475 for the treatment of a range of tumors and RPT193 for the treatment of allergic inflammatory diseases. We are also pursuing a range of targets, including hematopoietic progenitor kinase 1 and general control nonderepressible 2, that are in the discovery stage of development.

Financial Overview

Since commencing operations in 2015, we have devoted substantially all of our efforts and financial resources to building our research and development capabilities and establishing our corporate infrastructure. As a result, we have incurred net losses since inception. As of March 31, 2020, we had an accumulated deficit of $175.1 million. We have incurred net losses of $13.1 million and $9.2 million for the three months ended March 31, 2020 and 2019, respectively. We do not expect to generate product revenue unless and until we obtain approval for the commercialization of a drug candidate, and we cannot assure you that we will ever generate significant revenue or profits.

Since inception, we have financed our operations primarily through the sale of equity securities. As of March 31, 2020, we had cash and cash equivalents and marketable securities of $138.2 million and working capital of $133.5 million. We believe our current cash and cash equivalents and marketable securities will be sufficient to fund our planned operations for a period of at least 12 months following the filing date of this report.

We expect to incur substantial expenditures in the foreseeable future as we expand our pipeline and advance our drug candidates through clinical development, undergo the regulatory approval process and, if our drug candidates are approved, launch commercial activities. Specifically, in the near term, we expect to incur substantial expenses relating to our ongoing and planned clinical trials, the development and validation of our manufacturing processes and other development activities.

We will need substantial additional funding to support our continuing operations and pursue our development strategy. Until we can generate significant revenue from sales of our drug candidates, if ever, we expect to finance our operations through equity or debt financings or other capital sources, including potential collaborations with other companies, or other strategic transactions. Adequate funding may not be available to us on acceptable terms, or at all. If we fail to raise capital or enter into such agreements as and when needed, we may have to significantly delay, scale back or discontinue the development and commercialization of our drug candidates or delay our efforts to expand our product pipeline. We may also be required to sell or license to other parties rights to develop or commercialize our drug candidates that we would prefer to retain.

14


Impact of COVID-19 Pandemic

We have been impacted by the global pandemic of the disease referred to as COVID-19, caused by a novel strain of coronavirus, SARS-CoV-2, and the responses by government entities to combat the virus. We continue to operate in all our jurisdictions and are complying with the rules and guidelines prescribed in each jurisdiction. We are closely monitoring the impact of COVID-19 on all aspects of our business and operations. Both the outbreak of the disease and the actions to slow its spread have had an adverse impact on our operations by, among other things, delaying our clinical trials and preventing our employees from coming to work. We have responded to such impacts by, among other things, implementing protocols to protect the health of our employees and closely monitoring the status of our clinical trial sites. However, if the pandemic continues or intensifies, it is possible that these or other challenges may begin having a larger impact on our operations. Additionally, concerns over the economic impact of COVID-19 have caused extreme volatility in financial and other capital markets, which has adversely impacted, and may continue to adversely impact, our stock price and our ability to access capital markets. The situation surrounding COVID-19 remains fluid, and we are actively managing our response and assessing potential impacts to our financial condition and other operations, employees, results of operations and our ability to access capital. The magnitude of any such adverse impact cannot currently be determined due to a number of uncertainties surrounding COVID-19 (refer to Item 1A. Risk Factors for related risks).

On March 27, 2020, President Trump signed into U.S. federal law the CARES Act, which provides emergency assistance and health care for individuals, families and businesses affected by the COVID-19 pandemic. Based on our preliminary analysis, the relief provisions will not have a material impact on our consolidated financial statements.

Components of Operating Results

Revenue

Revenue recognized during the periods presented relates to the Collaboration and License Agreement (the “Hanmi Agreement”) that we entered into with Hanmi Pharmaceutical LTD (“Hanmi”) in December 2019.

Research and Development Expenses

We expense both internal and external research and development costs as such expenses are incurred. We track the external research and development costs incurred for each of our drug candidates. However, we do not track our internal research and development costs by drug candidate, as the related efforts and their costs are typically spread across multiple drug candidates.

We account for non-refundable advance payments for goods or services that will be used in future research and development activities as expenses when the goods have been received or when the services have been performed rather than when the payment is made.

Clinical trial costs are a component of research and development expenses. We expense costs for our clinical trial activities performed by third parties, including clinical research organizations (“CROs”) and other service providers, as they are incurred, based upon estimates of the work completed over the life of the individual study in accordance with the associated agreements. We use information received from internal personnel and outside service providers to estimate the clinical trial costs incurred.

External research and development expenses consist primarily of costs incurred for the development of our drug candidates and include:

 

expenses incurred under agreements with CROs, investigative sites and consultants to conduct our clinical trials and preclinical and non-clinical studies;

 

costs to acquire, develop and manufacture supplies for clinical trials and other studies, including fees paid to contract manufacturing organizations (“CMOs”); and

 

costs related to compliance with drug development regulatory requirements.

Internal research and development costs include:

 

salaries and related costs, including stock-based compensation and travel expenses, for personnel in our research and development functions; and

 

depreciation and other allocated facility-related and overhead expenses.

15


We expect our research and development expenses to increase substantially during the next few years as we seek to complete existing and initiate additional clinical trials, pursue regulatory approval of FLX475 and RPT193 and advance other programs into clinical development. Over the next few years, we expect our preclinical, clinical and contract manufacturing expenses to increase significantly relative to what we have incurred to date. Predicting the time or the final cost to complete our clinical programs or validation of our manufacturing and supply processes is difficult and delays may occur because of many factors.

General and Administrative Expenses

General and administrative expenses consist principally of personnel-related costs, including payroll and stock‑based compensation for personnel in executive, finance, human resources, business and corporate development and other administrative functions; professional fees for legal, consulting and accounting services; allocated rent and facilities costs, depreciation and other general operating expenses not otherwise classified as research and development expenses.

We anticipate that our general and administrative expenses will increase substantially during the next few years as a result of staff expansion and additional occupancy costs, as well as costs associated with being a public company, including higher professional fees for legal, consulting and accounting services, higher investor relations costs, higher insurance premiums and other compliance costs.

Other Income, Net

Our cash and cash equivalents and marketable securities are invested in money market funds, corporate debt securities and commercial paper. Other income, net, consists primarily of interest earned on our cash and cash equivalents and marketable securities and remeasurement gains and losses on foreign currency transactions.

Critical Accounting Policies, Significant Judgments and Use of Estimates

Our condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP). The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are 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. We believe that the accounting policies related to revenue, clinical trial accruals and stock-based compensation reflect the more significant estimates and assumptions used in the preparation of our condensed consolidated financial statements.

There have been no significant changes in our critical accounting policies and estimates during the three months ended March 31, 2020, as compared to the critical accounting policies and estimates disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on March 30, 2020. Our critical accounting policies are also described in Note 2 of the accompanying condensed consolidated financial statements.

16


Results of Operations

Comparison of the Three Months Ended March 31, 2020 and 2019

The following table summarizes our results of operations for the periods indicated (in thousands):

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

March 31,

 

 

 

 

 

2020

 

 

2019

 

 

$ Change

 

 

% Change

 

Revenue

$

935

 

 

$

 

 

$

935

 

 

*

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

10,683

 

 

 

7,870

 

 

 

2,813

 

 

 

36

%

General and administrative

 

3,289

 

 

 

1,674

 

 

 

1,615

 

 

 

96

%

Total operating expenses

 

13,972

 

 

 

9,544

 

 

 

4,428

 

 

 

46

%

Loss from operations

 

(13,037

)

 

 

(9,544

)

 

 

(3,493

)

 

 

37

%

Other income, net

 

135

 

 

 

356

 

 

 

(221

)

 

 

-62

%

Net loss before taxes

 

(12,902

)

 

 

(9,188

)

 

 

(3,714

)

 

 

40

%

Provision for income taxes

 

237

 

 

 

-

 

 

 

237<