agle-10q_20180630.htm

 

 

 

 

T W

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended June 30, 2018

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: 001-37722

 

AEGLEA BIOTHERAPEUTICS, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

46-4312787

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

901 S. MoPac Expressway

Barton Oaks Plaza One

Suite 250

Austin, TX 78746

(Address of principal executive offices including zip code)

Registrant’s telephone number, including area code: (512) 942-2935

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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

 

  

(Do not check if a smaller reporting company)

 

 

Smaller reporting company

 

 

Emerging growth company

 

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

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

As of August 3, 2018, the registrant had 21,995,032 shares of common stock, $0.0001 par value per share, outstanding.

 

 

 

 


 

AEGLEA BIOTHERAPEUTICS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2018

TABLE OF CONTENTS

 

 

 

 

Page No.

PART I. FINANCIAL INFORMATION

1

 

 

 

 

Item 1.

 

Financial Statements (Unaudited)

1

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017

1

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2018 and 2017

2

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2018 and 2017

3

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017

4

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

5

 

 

 

 

Item 2.

 

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

14

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

23

 

 

 

 

Item 4.

 

Controls and Procedures

23

 

 

PART II. OTHER INFORMATION

23

 

 

 

 

Item 1.

 

Legal Proceedings

23

 

 

 

 

 

Item 1A.

 

Risk Factors

23

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

62

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

62

 

 

 

 

Item 4.

 

Mine Safety Disclosures

62

 

 

 

 

Item 5.

 

Other Information

62

 

 

 

 

Item 6.

 

Exhibits

64

 

 

 

 

 

 

Signatures

65

 

 

 


 

NOTE ABOUT FORWARD-LOOKING STATEMENTS

This quarterly report contains forward-looking statements. All statements other than statements of historical fact are “forward-looking statements” for purposes of this Quarterly Report on Form 10-Q. These forward-looking statements may include, but are not limited to, statements regarding our future results of operations and financial position, business strategy, market size, potential growth opportunities, clinical development activities, efficacy and safety profile of our product candidates, our ability to maintain and recognize the benefits of certain designations received by product candidates, results of pre-clinical studies and clinical trials, and the receipt and timing of potential regulatory designations, approvals and commercialization of product candidates. The words “believe,” “may,” “will,” “potentially,” “estimate,” “continue,” “anticipate,” “predict,” “target,” “intend,” “could,” “would,” “should,” “project,” “plan,” “expect,” and similar expressions that convey uncertainty of future events or outcomes are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in “Risk Factors” and elsewhere in this quarterly report. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this quarterly report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report to conform these statements to actual results or to changes in our expectations, except as required by law.

As used in this Quarterly Report on Form 10-Q, the terms “Aeglea,” “the Company,” “we,” “us,” and “our” refer to Aeglea BioTherapeutics, Inc. and, where appropriate, its consolidated subsidiaries, unless the context indicates otherwise.

 

 

 

 


 

PART I. – FINANCIAL INFORMATION

Item 1.

Financial Statements

Aeglea BioTherapeutics, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except share and per share amounts)

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

20,579

 

 

$

12,817

 

Marketable securities

 

 

51,614

 

 

 

37,482

 

Accounts receivable - grant

 

 

4,281

 

 

 

3,078

 

Prepaid expenses and other current assets

 

 

2,414

 

 

 

1,614

 

Total current assets

 

 

78,888

 

 

 

54,991

 

Property and equipment, net

 

 

776

 

 

 

854

 

Other non-current assets

 

 

49

 

 

 

232

 

TOTAL ASSETS

 

$

79,713

 

 

$

56,077

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

Accounts payable

 

$

952

 

 

$

389

 

Deferred revenue

 

 

 

 

 

20

 

Accrued and other current liabilities

 

 

5,223

 

 

 

5,220

 

Total current liabilities

 

 

6,175

 

 

 

5,629

 

Other non-current liabilities

 

 

91

 

 

 

111

 

TOTAL LIABILITIES

 

 

6,266

 

 

 

5,740

 

Commitments and Contingencies (Note 9)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value; 10,000,000 shares authorized as of

   June 30, 2018 and December 31, 2017; no shares issued and

   outstanding as of June 30, 2018 and December 31, 2017

 

 

 

 

 

 

Common stock, $0.0001 par value; 500,000,000 shares authorized as of

   June 30, 2018 and December 31, 2017; 21,908,192 shares and

   16,670,188 shares issued and outstanding as of June 30, 2018 and

   December 31, 2017, respectively

 

 

2

 

 

 

2

 

Additional paid-in capital

 

 

163,547

 

 

 

122,950

 

Accumulated other comprehensive loss

 

 

(56

)

 

 

(102

)

Accumulated deficit

 

 

(90,046

)

 

 

(72,513

)

TOTAL STOCKHOLDERS’ EQUITY

 

 

73,447

 

 

 

50,337

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

79,713

 

 

$

56,077

 

 

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

 

 

1


 

Aeglea BioTherapeutics, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except share and per share amounts)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grant

 

$

2,378

 

 

$

1,479

 

 

$

3,888

 

 

$

2,462

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

9,122

 

 

$

5,835

 

 

$

15,992

 

 

$

10,784

 

General and administrative

 

 

2,926

 

 

 

2,364

 

 

 

5,811

 

 

 

4,729

 

Total operating expenses

 

 

12,048

 

 

 

8,199

 

 

 

21,803

 

 

 

15,513

 

Loss from operations

 

 

(9,670

)

 

 

(6,720

)

 

 

(17,915

)

 

 

(13,051

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

263

 

 

 

100

 

 

 

406

 

 

 

195

 

Other expense, net

 

 

(7

)

 

 

(12

)

 

 

(24

)

 

 

(23

)

Total other income

 

 

256

 

 

 

88

 

 

 

382

 

 

 

172

 

Net loss

 

$

(9,414

)

 

$

(6,632

)

 

$

(17,533

)

 

$

(12,879

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share, basic and diluted

 

$

(0.46

)

 

$

(0.47

)

 

$

(0.94

)

 

$

(0.94

)

Weighted-average common shares outstanding,

    basic and diluted

 

 

20,598,711

 

 

 

14,114,101

 

 

 

18,646,265

 

 

 

13,742,029

 

 

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

 

 

2


 

Aeglea BioTherapeutics, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

(In thousands)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net loss

 

$

(9,414

)

 

$

(6,632

)

 

$

(17,533

)

 

$

(12,879

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on marketable securities

 

 

42

 

 

 

8

 

 

 

46

 

 

 

(25

)

Total comprehensive loss

 

$

(9,372

)

 

$

(6,624

)

 

$

(17,487

)

 

$

(12,904

)

 

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

 

 

3


 

Aeglea BioTherapeutics, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2018

 

 

2017

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net loss

 

$

(17,533

)

 

$

(12,879

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

145

 

 

 

114

 

Purchase net discount (premium) on marketable securities

 

 

401

 

 

 

(40

)

Net (accretion of discount) amortization of premium on marketable securities

 

 

(107

)

 

 

80

 

Stock-based compensation

 

 

1,831

 

 

 

1,066

 

Research and development services settled with stock

 

 

41

 

 

 

 

Other, net

 

 

(20

)

 

 

(13

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable-grant

 

 

(1,203

)

 

 

2

 

Prepaid expenses and other assets

 

 

(573

)

 

 

29

 

Accounts payable

 

 

579

 

 

 

340

 

Deferred revenue

 

 

(20

)

 

 

 

Accrued and other liabilities

 

 

(32

)

 

 

(73

)

Net cash used in operating activities

 

 

(16,491

)

 

 

(11,374

)

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(118

)

 

 

(317

)

Purchases of marketable securities

 

 

(26,250

)

 

 

(37,780

)

Proceeds from maturities of marketable securities

 

 

11,870

 

 

 

17,010

 

Net cash used in investing activities

 

 

(14,498

)

 

 

(21,087

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

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

 

 

37,690

 

 

 

11,551

 

Proceeds from employee stock plan purchases and stock option exercises

 

 

1,061

 

 

 

96

 

Net cash provided by financing activities

 

 

38,751

 

 

 

11,647

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

 

7,762

 

 

 

(20,814

)

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS

 

 

 

 

 

 

 

 

Beginning of period

 

 

12,817

 

 

 

47,748

 

End of period

 

$

20,579

 

 

$

26,934

 

 

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

 

 

 

4


 

Aeglea BioTherapeutics, Inc.

Notes to Condensed Consolidated Financial Statements

 

 

1. The Company and Basis of Presentation

Aeglea BioTherapeutics, Inc. (“Aeglea” or the “Company”) is a clinical-stage biotechnology company that designs and develops innovative human enzyme therapeutics for patients with rare genetic diseases and cancer. The Company was formed as a Limited Liability Company (LLC) in Delaware on December 16, 2013 under the name Aeglea BioTherapeutics Holdings, LLC and was converted from a Delaware LLC to a Delaware corporation (the “LLC Conversion”) on March 10, 2015. The Company operates in one segment and has its principal offices in Austin, Texas.

Stock Offering

In April 2018, the Company issued and sold 5,046,510 shares of common stock in an underwritten public offering (“2018 Stock Offering”) pursuant to a shelf registration statement on Form S-3 at a public offering price of $8.00 per share, including 546,510 shares of common stock issued upon the partial exercise by the underwriters of their option to purchase additional shares. The net proceeds to the Company from this public offering were $37.7 million, after deducting underwriting discounts and commissions of $2.4 million and offering costs of $300,000. As of June 30, 2018, the Company had $36,000 in offering costs recorded as an outstanding liability on the balance sheet.

Liquidity

As of June 30, 2018, the Company had working capital of $72.7 million, an accumulated deficit of $90.0 million, and cash, cash equivalents, and marketable securities of $72.2 million. The Company has not generated any product revenues and has not achieved profitable operations. There is no assurance that profitable operations will ever be achieved, and, if achieved, could be sustained on a continuing basis. In addition, development activities, clinical and nonclinical testing, and commercialization of the Company’s products will require significant additional financing.

The Company is subject to a number of risks similar to other life science companies, including, but not limited to, risks related to the successful discovery and development of product candidates, raising additional capital, development of competing drugs and therapies, protection of proprietary technology and market acceptance of the Company’s products. As a result of these and other factors and the related uncertainties, there can be no assurance of the Company’s future success.

Based upon the Company’s current operating plans, the Company believes that it has sufficient resources to fund operations to the middle of 2020 with its existing cash, cash equivalents, and marketable securities. The Company will need to secure additional funding in the future, in order to carry out all of its planned research and development activities. If the Company is unable to obtain additional financing or generate license or product revenue, the lack of liquidity could have a material adverse effect on the Company’s future prospects.

Unaudited Interim Financial Information

The interim condensed consolidated financial statements included in this document are unaudited. The unaudited interim financial statements have been prepared on the same basis as the annual financial statements and reflect, in the opinion of management, all adjustments of a normal and recurring nature that are necessary for a fair statement of the Company’s financial position as of June 30, 2018, and its results of operations for the three and six months ended June 30, 2018 and 2017, and cash flows for the six months ended June 30, 2018 and 2017. The results of operations for the six months ended June 30, 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2018 or for any other future annual or interim period. The December 31, 2017 balance sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States (“U.S. GAAP”). These financial statements should be read in conjunction with the audited financial statements included in the Company’s Form 10-K for the year ended December 31, 2017 as filed with the SEC.

 

 

2. Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Such management estimates include those related to accruals of research and development related costs, stock-based compensation, and certain company income tax related items. Management bases its estimates on historical experience and on various other market-specific and relevant assumptions that management believes to be reasonable under the circumstances. Actual results could differ significantly from those estimates.

5


 

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less from the date of purchase to be cash equivalents. Cash equivalents consist of money market funds and debt securities and are stated at fair value.

Marketable Securities

All investments have been classified as available-for-sale and are carried at estimated fair value as determined based upon quoted market prices or pricing models for similar securities. Management determines the appropriate classification of its investments in debt securities at the time of purchase. The Company may or may not hold securities with stated maturities greater than one year until maturity. All available-for-sale securities are considered available to support current operations and are classified as current assets.

Unrealized gains and losses are excluded from earnings and are reported as a component of accumulated comprehensive loss. Realized gains and losses and declines in fair value judged to be other than temporary, if any, on available-for-sale securities are included in other income (expense). The cost of securities sold is based on the specific-identification method. There were no realized gains or losses on marketable securities for the six months ended June 30, 2018 and 2017. Interest on marketable securities is included in interest income.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash, cash equivalents, and marketable securities. The Company’s investment policy limits investments to high credit quality securities issued by the U.S. government, U.S. government-sponsored agencies and highly rated banks, subject to certain concentration limits and restrictions on maturities. The Company’s cash, cash equivalents, and marketable securities are held by financial institutions in the United States that management believes are of high credit quality. Amounts on deposit may at times exceed federally insured limits. The Company has not experienced any losses on its deposits of cash and cash equivalents and its accounts are monitored by management to mitigate risk. The Company is exposed to credit risk in the event of default by the financial institutions holding its cash and cash equivalents and bond issuers.

Property and Equipment

Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets. Repairs and maintenance that do not extend the life or improve an asset are expensed as incurred. Upon retirement or sale, the cost of disposed assets and their related accumulated depreciation and amortization are removed from the balance sheet. Any gain or loss is credited or charged to operations.

The useful lives of the property and equipment are as follows:

 

Laboratory equipment

 

5 years

Furniture and office equipment

 

5 years

Computer equipment

 

3 years

Software

 

3 years

Leasehold improvements

 

Shorter of remaining lease term or estimated useful life

 

Impairment of Long-Lived Assets

Long-lived assets are reviewed for indications of possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparison of the carrying amounts to the future undiscounted cash flows attributable to these assets. An impairment loss is recognized to the extent an asset group is not recoverable, and the carrying amount exceeds the projected discounted future cash flows arising from these assets. There were no impairments of long-lived assets for the six months ended June 30, 2018 and 2017.

6


 

Accrued Research and Development Costs

The Company records the costs associated with research nonclinical studies, clinical trials, and manufacturing development as incurred. These costs are a significant component of the Company’s research and development expenses, with a substantial portion of the Company’s on-going research and development activities conducted by third-party service providers, including contract research and manufacturing organizations.

The Company accrues for expenses resulting from obligations under agreements with contract research organizations (“CROs”), contract manufacturing organizations (“CMOs”), and other outside service providers for which payment flows do not match the periods over which materials or services are provided to the Company. Accruals are recorded based on estimates of services received and efforts expended pursuant to agreements established with CROs, CMOs, and other outside service providers. These estimates are typically based on contracted amounts applied to the proportion of work performed and determined through analysis with internal personnel and external service providers as to the progress or stage of completion of the services. The Company makes significant judgments and estimates in determining the accrual balance in each reporting period. In the event advance payments are made to a CRO, CMO, or outside service provider, the payments will be recorded as a prepaid asset which will be amortized as the contracted services are performed. As actual costs become known, the Company adjusts its accruals. Inputs, such as the services performed, the number of patients enrolled, or the study duration, may vary from the Company’s estimates, resulting in adjustments to research and development expense in future periods. Changes in these estimates that result in material changes to the Company’s accruals could materially affect the Company’s results of operations. The Company has not experienced any material deviations between accrued and actual research and development expenses.

Leases

The Company entered into lease agreements for its office and laboratory facilities. The leases are classified as operating leases. The Company records rent expense on a straight-line basis over the term of the leases and, accordingly records the difference between cash rent payments and the recognition of rent expense as a deferred rent liability. Incentives granted under the Company’s facilities leases, including allowances to fund leasehold improvements, are deferred and are recognized as adjustments to rental expense on a straight-line basis over the term of the lease.

Fair Value of Financial Instruments

The Company uses fair value measurements to record fair value adjustments to certain financial and non-financial assets and liabilities and to determine fair value disclosures. The accounting standards define fair value, establish a framework for measuring fair value, and require disclosures about fair value measurements. Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, the principal or most advantageous market in which the Company would transact are considered along with assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.

The accounting standard for fair value establishes a fair value hierarchy based on three levels of inputs, the first two of which are considered observable and the last unobservable, that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The three levels of inputs that may be used to measure fair value are as follows:

 

Level 1:

Observable inputs, such as quoted prices in active markets for identical assets or liabilities.

 

Level 2:

Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3:

Valuations based on unobservable inputs to the valuation methodology and including data about assumptions that market participants would use in pricing the asset or liability based on the best information available under the circumstances.

Financial instruments carried at fair value include cash, cash equivalents, and marketable securities. The carrying amount of accounts receivable, accounts payable and accrued liabilities approximate fair value due to their relatively short maturities.

7


 

Revenue Recognition

The Company’s sole source of revenue is grant revenue related to a $19.8 million research grant received from the Cancer Prevention and Research Institute of Texas (“CPRIT”), covering a four-year period from June 1, 2014 through May 31, 2018. Grant revenue is recognized when qualifying costs are incurred and there is reasonable assurance that the conditions of the award have been met for collection. Proceeds received prior to the costs being incurred or the conditions of the award being met are recognized as deferred revenue until the services are performed and the conditions of the award are met (see Note 5).

Research and Development Costs

Research and development costs are expensed as incurred. Research and development costs include, but are not limited to, salaries, benefits, travel, stock-based compensation, consulting costs, contract research service costs, laboratory supplies and facilities, contract manufacturing costs, and costs paid to other third parties that conduct research and development activities on the Company’s behalf. Amounts incurred in connection with license agreements are also included in research and development expense.

Certain research and development costs incurred were settled contractually by the Company issuing a variable number of the Company’s shares determined by dividing the fixed monetary amount of costs incurred by the issuance-date fair value of the issuable shares. The Company recorded research and development expense for these costs and accrued for the fixed monetary amount as an accrued liability as the services were rendered until the amount was settled. In June 2015, the remaining Company obligation to settle these costs with Company shares was converted to a cash-based payment through a contract amendment with the service provider.

Advance payments for goods or services to be rendered in the future for use in research and development activities are recorded as a prepaid asset and expensed as the related goods are delivered or the services are performed.

Stock-Based Compensation

The Company recognizes the cost of stock-based awards granted to employees based on the estimated grant-date fair values of the awards. The value of the award is recognized as compensation expense on a straight-line basis over the requisite service period. Forfeitures are recognized when they occur, which may result in the reversal of compensation costs in subsequent periods as the forfeitures arise. The Company recognizes the cost of stock-based awards granted to nonemployees at their then-current fair values as services are performed, and are remeasured through the counterparty performance date.

Income Taxes

The Company and its seven wholly-owned subsidiary corporations use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statements and the tax bases of assets and liabilities. Additionally, any changes in income tax laws are immediately recognized in the year of enactment.

A valuation allowance is established against the deferred tax assets to reduce their carrying value to an amount that is more likely than not to be realized. The deferred tax assets and liabilities are classified as noncurrent along with the related valuation allowance. Due to a lack of earnings history, the net deferred tax assets have been fully offset by a valuation allowance.

The Company recognizes benefits of uncertain tax positions if it is more likely than not that such positions will be sustained upon examination based solely on the technical merits, as the largest amount of benefits that is more likely than not to be realized upon the ultimate settlement. The Company’s policy is to recognize interest and penalties related to the unrecognized tax benefits as a component of income tax expense.

Comprehensive Loss

Comprehensive loss is the change in stockholders’ equity from transactions and other events and circumstances other than those resulting from investments by stockholders and distributions to stockholders. The Company’s other comprehensive income (loss) is currently comprised of changes in unrealized gains and losses on available-for-sale securities.

8


 

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which establishes a comprehensive new lease accounting model. The new standard: (a) clarifies the definition of a lease; (b) requires a dual approach to lease classification similar to current lease classifications; and, (c) causes lessees to recognize leases on the balance sheet as a lease liability with a corresponding right-of-use asset for leases with a lease-term of more than twelve months. The new standard is effective for fiscal years and interim periods beginning after December 15, 2018 and requires modified retrospective application. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of ASU 2016-02 will have on its consolidated financial statements, but expect the impact to be limited to the operating lease agreements for the office and laboratory spaces in Austin, Texas.

In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718), which expanded the scope of Topic 718 to include share-based transactions for acquiring goods and services from nonemployees. The amendment specifies that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. Consistent with the accounting requirement for employee share-based payment awards, nonemployee share-based payment awards within the scope of 718 are measured at grant-date fair value of the equity instruments that an entity is obligated to issue when the good has been delivered or the service has been rendered and any other conditions necessary to earn the right to benefit from the instruments have been satisfied. The amendment is effective for fiscal years beginning after December 15, 2019 and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company does not expect the adoption of ASU 2018-07 to have a material impact on its consolidated financial statements.

 

3. Cash Equivalents and Marketable Securities

The following tables summarize the estimated fair value of the Company’s cash equivalents and marketable securities and the gross unrealized gains and losses (in thousands):

 

 

 

June 30, 2018

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Estimated

Fair Value

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

6,807

 

 

$

 

 

$

 

 

$

6,807

 

Reverse repurchase agreements

 

 

6,250

 

 

 

 

 

 

 

 

 

6,250

 

Commercial paper

 

 

5,990

 

 

 

1

 

 

 

 

 

 

5,991

 

Total cash equivalents

 

 

19,047

 

 

 

1

 

 

 

 

 

 

19,048

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

 

25,927

 

 

 

8

 

 

 

(1

)

 

 

25,934

 

U.S. government securities

 

 

25,743

 

 

 

 

 

 

(63

)

 

 

25,680

 

Total marketable securities

 

$

51,670

 

 

$

8

 

 

$

(64

)

 

$

51,614

 

 

 

 

December 31, 2017

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Estimated

Fair Value

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

1,674

 

 

$

 

 

$

 

 

$

1,674

 

Reverse repurchase agreements

 

 

7,250

 

 

 

 

 

 

 

 

 

7,250

 

Total cash equivalents

 

 

8,924

 

 

 

 

 

 

 

 

 

8,924

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury securities

 

 

1,502

 

 

 

 

 

 

(1

)

 

 

1,501

 

U.S. government securities

 

 

36,082

 

 

 

 

 

 

(101

)

 

 

35,981

 

Total marketable securities

 

$

37,584

 

 

$

 

 

$

(102

)

 

$

37,482

 

 

The reverse repurchase agreements are settled in cash nightly, and as such are classified as cash equivalents.

9


 

As of June 30, 2018 and December 31, 2017, all debt securities with an unrealized loss position have been in a loss position for less than one year. The aggregate fair value of debt securities in an unrealized loss position as of June 30, 2018 and December 31, 2017 were $32.8 million and $37.5 million, respectively, with no individual securities in a significant unrealized loss position. The Company evaluated its securities for other-than-temporary impairment and considered the decline in market value for the securities to be primarily attributable to current economic and market conditions and would not be required to sell the securities before recovery of the amortized cost basis. Based on this analysis, these marketable securities were not considered to be other-than-temporarily impaired as of June 30, 2018 and December 31, 2017.

The following tables summarizes the contractual maturities of the Company’s marketable securities at estimated fair value (in thousands):

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Due in one year or less

 

$

51,614

 

 

$

34,498

 

Due in 1 - 2 years

 

 

 

 

 

2,984

 

Total marketable securities

 

$

51,614

 

 

$

37,482

 

 

The Company may sell investments at any time for use in current operations even if they have not yet reached maturity. As a result, the Company classifies marketable securities, including securities with maturities beyond twelve months as current assets.

 

 

4. Accrued and Other Current Liabilities

Accrued and other current liabilities consist of the following (in thousands):

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Accrued compensation

 

$

1,370

 

 

$

1,837

 

Accrued contracted research and development costs

 

 

3,155

 

 

 

2,552

 

Accrued professional and consulting fees

 

 

623

 

 

 

672

 

Accrued other and other current liabilities

 

 

75

 

 

 

159

 

Total accrued and other current liabilities

 

$

5,223

 

 

$

5,220

 

 

 

5. Grant Revenues

In June 2015, the Company entered into a Cancer Research Grant Contract (“Grant Contract”) with CPRIT, under which CPRIT awarded a grant not to exceed $19.8 million for use in developing cancer treatments by exploiting the metabolism of cancer cells. The Grant Contract covers a four-year period from June 1, 2014 through May 31, 2018.

Upon commercialization of the product, the terms of the Grant Contract require the Company to pay tiered royalties in the low to mid-single digit percentages. Such royalties reduce to less than one percent after a mid-single-digit multiple of the grant funds have been paid to CPRIT as royalties.

The Company recognized grant revenue of $2.4 million and $1.5 million in the three months ended June 30, 2018 and 2017, respectively, and $3.9 million and $2.5 million in the six months ended June 30, 2018 and 2017, respectively, for qualified expenditures under the grant. As of June 30, 2018 and December 31, 2017, the Company had outstanding grant receivables of $4.3 million and $3.1 million, respectively, for the grant expenditures that were paid but had not been reimbursed and deferred revenue of $0 and $20,000, respectively, for proceeds received but for which the costs had not been incurred or the conditions of the award had not been met.

 

 

6. Stock-Based Compensation

On February 20, 2018, the Board of Directors approved and adopted the 2018 Equity Inducement Plan (“2018 Plan”) which became effective on the same date. The Board of Directors approved an initial reserve of 1,100,000 shares of common stock to be used exclusively for individuals who were not previously employees or directors, or following a bona fide period of non-employment, as an inducement material to the individual entering into employment with the Company. Nonqualified stock options or restricted stock units may be granted under the 2018 Plan at the discretion of the Compensation Committee or the Board of Directors. The Company did not seek stockholder approval of the 2018 Plan pursuant to Nasdaq Rule 5635(c)(4).

10


 

The 2016 Equity Incentive Plan (“2016 Plan”) provides for an annual increase in the number of shares available for issuance thereunder, to be added on the first day of each fiscal year, beginning on January 1, 2017 and continuing through 2023, up to 4% of the outstanding number of shares of the Company’s common stock on the December 31 immediately prior to the date of increase, provided that an increase is only effective if the Company’s board of directors either confirmed the increase or approved the increase of a lesser number of shares prior to January 1 of each relevant year. As a result of this provision, on January 1, 2018 and January 1, 2017, an additional 666,807 and 537,233 shares, respectively, became available for issuance under the 2016 Plan.

As of June 30, 2018, the 2016 Plan had 203,906 shares available for future issuance.

During the three months ended June 30, 2018 and 2017, the Company issued an aggregate of 203,600 and 244,100 options to purchase common stock, respectively, under the 2016 Plan and 2018 Plan for an aggregate fair value of $1.5 million and $713,000, respectively.

During the six months ended June 30, 2018 and 2017, the Company issued an aggregate of 1,033,100 and 1,016,900 options to purchase common stock, respectively, under the 2016 Plan and 2018 Plan for an aggregate fair value of $5.4 million and $4.9 million, respectively.

There were no shares issued and sold under the Company’s 2016 Employee Stock Purchase Plan (“2016 ESPP”) during the three months ended June 30, 2018 and 2017. The Company issued and sold 30,937 shares for aggregate cash proceeds of $78,000 during the six months ended June 30, 2018 and 18,184 shares for aggregate cash proceeds of $78,000 during the six months ended June 30, 2017.

Total stock-based compensation expense related to the Company’s equity incentive plans, 2018 Plan, and 2016 ESPP was as follows (in thousands):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Research and development

 

$

390

 

 

$

285

 

 

$

713

 

 

$

395

 

General and administrative

 

 

606

 

 

 

381

 

 

 

1,118

 

 

 

671

 

Total stock-based compensation expense

 

$

996

 

 

$

666

 

 

$

1,831

 

 

$

1,066

 

 

The following table summarizes the weighted-average Black-Scholes option pricing model assumptions used to estimate the fair value of stock options granted under the 2016 Plan and 2018 Plan, and the shares purchasable under the 2016 ESPP during the periods presented:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

2016 Plan and 2018 Plan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expected term

 

 

5.70

 

 

 

5.96

 

 

 

5.95

 

 

 

5.99

 

Expected volatility

 

 

84

%

 

 

86

%

 

 

85

%

 

 

86

%

Risk-free interest

 

 

2.79

%

 

 

1.87

%

 

 

2.73

%

 

 

2.07

%

Dividend yield

 

 

0

%

 

 

0

%

 

 

0

%

 

 

0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016 ESPP

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expected term

 

 

 

 

 

 

 

 

0.49

 

 

 

0.50

 

Expected volatility

 

 

 

 

 

 

 

 

69

%

 

 

79

%

Risk-free interest

 

 

 

 

 

 

 

 

2.00

%

 

 

0.68

%

Dividend yield

 

 

 

 

 

 

 

 

0

%

 

 

0

%

 

 

11


 

7. Fair Value Measurements

The Company measures and reports certain financial instruments as assets and liabilities at fair value on a recurring basis. The following tables sets forth the fair value of the Company’s financial assets and liabilities at fair value on a recurring basis based on the three-tier fair value hierarchy (in thousands):

 

 

 

June 30, 2018

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

6,807

 

 

$

 

 

$

 

 

$

6,807

 

Reverse repurchase agreements

 

 

 

 

 

6,250

 

 

 

 

 

 

6,250

 

Commercial paper

 

 

 

 

 

31,925

 

 

 

 

 

 

31,925

 

U.S. government securities

 

 

 

 

 

25,680

 

 

 

 

 

 

25,680

 

Total financial assets

 

$

6,807

 

 

$

63,855

 

 

$

 

 

$

70,662

 

 

 

 

December 31, 2017

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

1,674

 

 

$

 

 

$

 

 

$

1,674

 

Reverse repurchase agreements

 

 

 

 

 

7,250

 

 

 

 

 

 

7,250

 

U.S. treasury securities

 

 

1,501

 

 

 

 

 

 

 

 

 

1,501

 

U.S. government securities

 

 

 

 

 

35,981

 

 

 

 

 

 

35,981

 

Total financial assets

 

$

3,175

 

 

$

43,231

 

 

$

 

 

$

46,406

 

 

The Company measures the fair value of money market funds on quoted prices in active markets for identical asset or liabilities. The Level 2 assets include reverse repurchase agreements and U.S. government securities and are valued based on quoted prices for similar assets in active markets and inputs other than quoted prices that are derived from observable market data.

The Company evaluates transfers between levels at the end of each reporting period. There were no transfers between Level 1 and Level 2 during the periods presented.

 

 

8. Net Loss Per Share

Basic and diluted net loss per share is computed by dividing net loss by the weighted-average number of common stock outstanding during the period. For periods in which the Company generated a net loss, the Company does not include the potential impact of dilutive securities in diluted net loss per share, as the impact of these items is anti-dilutive.

The following weighted-average equity instruments were excluded from the calculation of diluted net loss per share because their effect would have been anti-dilutive for the periods presented:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Unvested restricted common stock

 

 

30,408

 

 

 

63,431

 

 

 

31,233

 

 

 

68,693

 

Options to purchase common stock

 

 

3,015,991

 

 

 

1,894,831

 

 

 

2,856,763

 

 

 

1,618,721

 

 

 

12


 

9. Research and License Agreements

University Research Agreement

In December 2013, the Company entered into a research agreement with the University of Texas at Austin (the “University”). Under the terms of this research agreement, the Company engaged the University to perform certain nonclinical research activities related to the systemic depletion of amino acids for cancer and rare disease therapy.

Under the research agreement, the Company was required to pay the University an annual amount not to exceed $386,000 during the one-year term of the agreement from the effective date. Pursuant to subsequent amendments to the research agreement, the term and maximum expenditure limitation were extended and increased through August 31, 2018 for a combined amount of $2.5 million. For the three months ended June 30, 2018, the Company did not make any payments to the University under the research agreement. During the three months ended June 30, 2017, the Company made payments of $188,000. For the six months ended June 30, 2018 and 2017, the Company paid $188,000 and $375,000, respectively, to the University under the research agreement.

License Agreements

In December 2013, two of the Company’s wholly owned subsidiaries, AECase, Inc. (“AECase”) and AEMase, Inc. (“AEMase”), entered into license agreements with the University under which the University granted to AECase and AEMase exclusive, worldwide, sublicenseable licenses. The University granted the AECase license under a patent application relating to the right to use technology related to the Company’s AEB3103 product candidate. The University granted the AEMase license under a patent relating to the right to use technology related to the Company’s AEB2109 product candidate.

In January and December 2017, the Company entered into and subsequently amended an Amended and Restated Patent License Agreement (the “Restated License”) with the University which consolidated the two license agreements, revised certain obligations, and licensed additional patent applications and invention disclosures to the Company. Pursuant to the terms of the Restated License, the Company may be required to pay the University up to $6.4 million milestone payments based on the achievement of certain development milestones, including clinical trials and regulatory approvals, the majority of which are due upon the achievement of later development milestones, including a $5.0 million payment due on regulatory approval of a product and a $500,000 payment payable on final regulatory approval of a product for a second indication. In addition, the Company is required to pay the University a low single-digit royalty on worldwide-net sales of products covered under the Restated License, together with a revenue share on non-royalty consideration received from sublicensees. The rate of the revenue share ranges from 6.5% to 25% depending on the date the sublicense agreement is signed.

 

 

10. Related Party Transactions

One of the founders, a non-employee member of the Company’s board of directors, entered into a consulting agreement with the Company in 2014 under which the founder would receive $50,000 per year for a fixed number of hours of consulting and advisory services and receive equity incentive shares, which converted into 43,290 restricted stock awards and 13,852 stock options upon the LLC Conversion, with the vesting contingent on time and performance milestones being achieved. For the six months ended June 30, 2018, there were no payments made to the Founder under the consulting agreement. For the six months ended June 30, 2017, there were $25,000 in payments made to the Founder under the consulting agreement. As of June 30, 2018 and December 31, 2017, the Company had no outstanding liability to the related party.

 

13


 

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 in conjunction with our unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report as well as the audited consolidated financial statements and notes and 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, 2017 filed with the SEC on March 13, 2018. This discussion and other parts of this Quarterly Report contain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section of this report entitled “Risk Factors.”

Overview

We are a clinical-stage biotechnology company that designs and develops innovative human enzyme therapeutics for patients with rare genetic diseases and cancer. We believe our novel approach of utilizing human enzymes offers advantages over bacterial enzyme-based approaches including a more favorable safety profile that may provide a greater likelihood of clinical success.

Our capabilities in enzyme engineering, preclinical disease modelling, and drug development in both rare genetic disease and cancer allow us to identify and advance innovative opportunities to address important unmet medical needs for the benefit of patients. Our programs and the decisions we make to progress assets into clinical studies are driven by the following considerations:

 

-

Potential for enhancement of human enzymatic activity

 

-

Strong preclinical data and rationale

 

-

Limited or no competition

 

-

Meaningful commercial opportunities

 

-

Worldwide commercial rights

We are a patient-focused organization conscious of the fact that people with a rare genetic disease or cancer have limited treatment options, and we recognize that their lives and well-being are highly dependent upon our efforts to develop improved therapies. For this reason, we are passionate about designing and developing novel therapeutics to address significant unmet medical need for rare genetic disease and cancer.

Our lead product candidate, pegzilarginase, is engineered to degrade the amino acid arginine and is being developed to treat two extremes of arginine metabolism, including arginine excess in patients with Arginase 1 Deficiency, a rare genetic disease, as well as some cancers which have been shown to have a metabolic dependence on arginine. Pegzilarginase is currently being evaluated in four ongoing clinical trials, consisting of one Phase 1/2 clinical trial for the treatment of Arginase 1 Deficiency, one open-label extension study for patients with Arginase 1 Deficiency, one Phase 1 clinical trial for the treatment of advanced solid tumors, and one Phase 1/2 combination clinical trial of pegzilarginase with pembrolizumab for the treatment of patients with small cell lung cancer (SCLC). We are also building a pipeline of additional product candidates targeting key amino acids and other metabolites, including homocysteine (and the oxidized form homocystine), a target for another rare genetic disease as well as cysteine, and its oxidized form cystine, and methionine, for cancer indications.

Since inception, we have devoted substantially all of our efforts and resources to identifying and developing product candidates, conducting nonclinical studies, initiating and conducting clinical trials, recruiting personnel and raising capital. To date, we have financed our operations primarily through private placements of our preferred stock, the initial public offering, or IPO, of our common stock, follow-on public offerings of our common stock, and collection of a research grant.

We have incurred net losses in each year since inception. Our net losses were $17.5 million and $12.9 million for the six months ended June 30, 2018 and 2017, respectively, and have resulted from costs incurred in connection with our research and development programs and from general and administrative expenses associated with our operations. As of June 30, 2018, we had an accumulated deficit of $90.0 million. We expect to continue to incur operating losses over the next several years. Our net losses may fluctuate significantly from quarter to quarter and from year to year. We anticipate that our expenses will increase significantly as we continue our clinical and diagnostic development activities for our lead product candidate, pegzilarginase; concurrently develop our pipeline product candidates; expand and protect our intellectual property portfolio; hire additional personnel; and continue to operate as a public company.

14


 

Recent Developments

In July 2018, we strengthened our leadership team with the appointment of Anthony G. Quinn, M.B. Ch.B, Ph.D. as our President and Chief Executive Officer. Additionally, Bryan Lawlis, Ph.D., was appointed to our Board of Directors.

Pegzilarginase in Patients with Arginase 1 Deficiency

In April 2018, we announced initial data that confirmed the utility of standardized assessment tools in quantifying disease manifestations and that we believe demonstrates clinically relevant treatment effects with pegzilarginase in two Arginase 1 Deficiency patients after eight weeks of dosing. Additionally, baseline data in five patients indicated that clinical abnormalities in Arginase 1 Deficiency patients can be detected and quantified using standardized assessment tools. Assessment tools used in the trial include:

 

Six-Minute Walk Test (6MWT) was below age and gender match norms for all five patients

 

Berg Balance Scale demonstrated impaired balance in two patients

 

Gross Motor Function Measure (GMFM) total and Part E subscale (walking, running, and jumping) was abnormal in four of the five patients

 

Purdue Pegboard test demonstrated fine motor ability was also quantifiably impaired in all five patients

 

All five patients had markedly elevated plasma arginine and plasma guanidino compounds (GC)

 

All patients had evidence of growth impairment with height in the lowest 10% for age and gender and protein intakes less than the prescribed restricted amounts, which we believe likely reflects an aversion to protein caused by the disease

 

One patient had abnormal baseline ammonia and hepatic transaminases, which are also potentially important disease related biochemical manifestations

 

Tests of neurocognition were abnormal in all subjects indicating significant cognitive impairment

Data was available for the first two patients that we believe demonstrated clinically relevant treatment effects using standardized assessment tools:

 

6MWT demonstrated that two patients observed improvements on pegzilarginase. Patient 1 experienced a 31.4% improvement, from 102 to 134 meters, and Patient 2 experienced a 23.4% improvement, from 261 to 322 meters. Both observed improvements were well above the Minimal Clinically Important Difference (MCID) of 9% at eight weeks, with continued improvement, described above, measured at twenty weeks.

 

Berg Balance Scale measured a clinically meaningful improvement in balance in Patient 1, who transitioned from a high risk to a medium risk of fall category. Patient 2 had a normal baseline assessment which precluded demonstration of any improvement.

 

The GMFM–Part E subscale demonstrated clinically important improvement after the initial eight repeat doses with further improvement by twenty weeks in Patient 1. Patient 2 was at the upper end of the scale at baseline, and as expected, no significant change was observed.

 

Protein intake relative to the prescribed amount improved during the initial eight weeks of repeat dosing in the first two patients. Despite the increase in protein intake, patients’ plasma arginine values were better controlled with pegzilarginase as compared to baseline values with a protein restricted diet and ammonia scavengers.

We expect to report enrollment status and repeat dose data in patients with Arginase 1 Deficiency at the Annual Symposium of the Society for the Study of Inborn Errors of Metabolism (SSIEM) in September 2018 and at the American Society of Human Genetics (ASHG) Annual Meeting in October 2018. To date, we have identified more than 100 patients who have Arginase 1 Deficiency in the global addressable market.

Pegzilarginase in Patients with Advanced Solid Tumors

In the first quarter of 2018, we initiated recruitment to cohort expansions of approximately 12 patients each and dosed our first patients with SCLC, uveal melanoma and cutaneous melanoma. The primary endpoint of each cohort expansion is to assess the safety of pegzilarginase in patients with each tumor type. Secondary endpoints include the assessment of pharmacokinetics, pharmacodynamics and clinical response. We will also use the data to inform the viability of companion diagnostic development, which has the potential to enrich patient populations with the greatest likelihood of clinical success.

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Pegzilarginase with Pembrolizumab in Patients with Small Cell Lung Cancer

In the first quarter of 2018, we initiated a Phase 1 clinical collaboration with Merck to evaluate the combination of pegzilarginase with Merck’s anti-PD1 therapy, pembrolizumab, for the treatment of patients with SCLC, with the primary objectives of determining the safety and dose of pegzilarginase that can be combined with pembrolizumab to be used in Phase 2. The Phase 2 primary objective is objective response rate (ORR) and secondary objectives include safety, clinical benefit rate, time to response, duration of response, progression free survival (PFS), overall survival, pegzilarginase pharmacokinetics, and to explore the correlation of tumor expression of ASS1 and PD-L1 with clinical activity. We dosed the first patient in the first quarter of 2018, expect to initiate Phase 2 in the fourth quarter of 2018, and expect to report topline safety and clinical activity for Phase 1 in the fourth quarter of 2018.

Stock Offering

In April 2018, we sold an aggregate of 5,046,510 shares of common stock in an underwritten public offering pursuant to a shelf registration statement on Form S-3, including 546,510 shares of common stock issued upon the partial exercise by the underwriters of their option to purchase additional shares, for gross proceeds of $40.4 million. The net proceeds to the Company from this public offering were approximately $37.7 million after deducting underwriting discounts and commissions and estimated offering expenses.

Components of Operating Results

Revenue

To date, we have recognized revenue solely from a research grant from the Cancer Prevention and Research Institute of Texas, or CPRIT, and have not generated any revenue from the sale of any of our product candidates. Our ability to generate product revenues, which we do not expect will occur for several years, if ever, will depend heavily on the successful development, regulatory approval and eventual commercialization of our product candidates.

In June 2015, we entered into a grant agreement with CPRIT, or the Grant Contract, for $19.8 million for use in developing cancer treatments by exploiting the metabolism of cancer cells. The Grant Contract covers a four-year period from June 1, 2014 through May 31, 2018. The grant allows us to receive funds in advance of costs and allowable expenses being incurred. We record the revenue as qualifying costs are incurred and there is reasonable assurance that the conditions of the award have been met for collection. Proceeds received prior to the costs being incurred or the conditions of the award being met are recognized as deferred revenue until the services are performed and the conditions of the award are met.

On a quarterly basis, we are required to submit a financial reporting package outlining the nature and extent of reimbursable costs paid and requesting reimbursement under the grant. At the end of each period, qualifying costs paid prior to reimbursement result in the recognition of a grant receivable. To date, we submitted reimbursement for the full $19.8 million grant and will not be recognizing grant revenue under the contract in future periods. We expect to collect the remaining funds of $4.3 million in 2018.

Research and development expenses

Research and development expenses consist primarily of costs incurred for the discovery and development of our product candidates, most notably, our lead product candidate pegzilarginase. Since we currently do not have internal manufacturing capabilities, we contract with external providers for manufacturing services. In addition, while we opened an internal research laboratory in February 2017, we continue to contract with external providers for nonclinical studies and clinical trials. Our research and development expenses include:

 

costs from acquiring clinical trial materials and services performed for contracted services with a contract manufacturing organization;

 

fees paid to clinical trial sites, clinical research organizations, contract research organizations, contract manufacturing organizations, nonclinical research companies, and academic institutions; and

 

employee and consultant-related expenses incurred, which include salaries, benefits, travel and stock-based compensation.

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Research and development costs are expensed as incurred. Advance payments for goods or services to be rendered in the future for use in research and development activities are deferred and capitalized. The capitalized amounts are expensed as the related goods are delivered or the services are performed.

Research and development expenses have historically represented the largest component of our total operating expenses. We plan to increase our research and development expenses for the foreseeable future as we continue the development of our product candidates.

Our expenditures on current and future nonclinical and clinical development programs are subject to numerous uncertainties in timing and cost to completion. The duration, costs, and timing of clinical trials and development of our product candidates will depend on a variety of factors, including:

 

the scope, rate of progress, and expenses of our ongoing research activities as well as any additional clinical trials and other research and development activities;

 

future clinical trial results;

 

uncertainties in clinical trial enrollment rates or drop-out or discontinuation rates of patients;

 

potential safety monitoring or other studies requested by regulatory agencies;

 

significant and changing government regulation; and

 

the timing and receipt of regulatory approvals, if any.

The process of conducting the necessary clinical research to obtain FDA and other regulatory approval is costly and time consuming and the successful development of our product candidates is highly uncertain. The risks and uncertainties associated with our research and development projects are discussed more fully in Part II, Item 1A of this Quarterly Report titled “Risk Factors.” As a result of these risks and uncertainties, we are unable to determine with any degree of certainty the duration and completion costs of our research and development projects, or if, when, or to what extent we will generate revenues from the commercialization and sale of any of our product candidates that obtain regulatory approval. We may never succeed in achieving regulatory approval for any of our product candidates.

General and administrative expenses

General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation, for personnel in executive, finance, accounting, operations, and human resources functions. Other significant costs include legal fees relating to corporate matters and fees for insurance, accounting, consulting, and recruiting services.

We expect that our general and administrative expenses will increase in the future to support our continued research and development activities, and the potential commercialization of our product candidates. These increases will likely include higher costs related to the hiring of additional personnel and fees to outside consultants, lawyers and accountants, among other expenses. Additionally, we have incurred and expect to continue to incur increased costs associated with being a public company, including expenses related to services associated with maintaining compliance with Nasdaq listing rules and SEC requirements, insurance, and investor relations costs.

Interest income

Interest income consists of interest earned on our cash, cash equivalents, and marketable securities.

Income taxes

We serve as a holding company for our seven wholly-owned subsidiary corporations and file consolidated corporate federal income tax returns. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statements and the tax bases of assets and liabilities. A valuation allowance is established against the deferred tax assets to reduce their carrying value to an amount that is more likely than not to be realized. The deferred tax assets and liabilities are classified as noncurrent along with the related valuation allowance. Due to our lack of earnings history, the net deferred tax assets have been fully offset by a valuation allowance.

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We recognize benefits of uncertain tax positions if it is more likely than not that such positions will be sustained upon examination based solely on the technical merits, as the largest amount of benefits that is more likely than not to be realized upon the ultimate settlement. Our policy is to recognize interest and penalties related to the unrecognized tax benefits as a component of income tax expense.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. These estimates form the basis for judgments we make about the carrying values of our assets and liabilities, which are not readily apparent from other sources. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ materially from these estimates under different assumptions or conditions.

Our critical accounting policies are those policies which require the most significant judgments and estimates in the preparation of our consolidated financial statements. We believe that the assumptions and estimates associated with our most critical accounting policies are those relating to accrued research and development costs and stock-based compensation.

There have been no significant changes in our critical accounting policies and estimates as compared to the critical accounting policies and estimates disclosed in Management’s Discussion and Analysis of Financial Condition and Operations included in our Annual Report on Form 10-K for the year ended December 31, 2017.

Results of Operations

Comparison of the Three Months Ended June 30, 2018 and 2017

The following table summarizes our results of operations for the three months ended June 30, 2018 and 2017, together with the changes in those items in dollars and as a percentage:

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

Dollar

 

 

 

 

 

 

 

2018

 

 

2017

 

 

Change

 

 

% Change

 

 

 

(dollars in thousands)

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grant

 

$

2,378

 

 

$

1,479

 

 

$

899

 

 

 

61

%

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

9,122

 

 

$

5,835

 

 

$

3,287

 

 

 

56

%

General and administrative

 

 

2,926

 

 

 

2,364

 

 

 

562

 

 

 

24

%

Total operating expenses

 

 

12,048

 

 

 

8,199