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Table of Contents
   
 
 
 
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 September 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
 
 
 
 
 
 
 
 
For the transition period from                  to                 
Commission file number:
001-33277
 
MADRIGAL PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
 
     
Delaware
 
04-3508648
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
     
Four Tower Bridge
200 Barr Harbor Drive, Suite 200
West Conshohocken, Pennsylvania
 
19428
(Address of principal executive offices)
 
(Zip Code)
 
 
 
 
 
 
 
 
 
 
 
 
 
Registrant’s telephone number, including area code: (267)
824-2827
Former name, former address and former fiscal year, if changed since last report:
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
 
MDGL
 
The NASDAQ Stock Market LLC
 
 
 
 
 
 
 
 
 
 
 
 
 
 
     
 
 
 
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  
     No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  
     No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
 12b-2
of the Exchange Act.
             
Large accelerated filer
 
 
Accelerated filer
 
             
Non-accelerated filer
 
 
Smaller reporting company
 
             
 
 
Emerging growth company
 
 
 
 
 
 
 
 
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities 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 November 01, 2019, the registrant had 15,429,154 shares of common stock outstanding.
 
 
 

Table of Contents
MADRIGAL PHARMACEUTICALS, INC.
TABLE OF CONTENTS
             
Item
 
Description
 
Page
 
 
 
 
 
 
 
 
 
Part I. Financial Information
 
 
 
 
 
 
 
 
 
 
 
 
 
3
 
 
 
 
3
 
 
 
 
4
 
 
 
 
5
 
 
 
 
6
 
 
 
 
7
 
 
 
 
8
 
 
 
 
16
 
 
 
 
21
 
 
 
 
22
 
 
 
 
 
 
 
 
 
Part II. Other Information
 
 
 
 
 
 
 
 
 
 
 
 
 
23
 
 
 
 
23
 
 
 
 
23
 
 
 
 
23
 
 
 
 
23
 
 
 
 
23
 
 
 
 
23
 
 
 
 
25
 
 
 
 
 
 
 
 
 
 
 
 
2
 

Table of Contents
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
MADRIGAL PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited; in thousands, except share and per share amounts)
                 
 
September 30,
 
 
December 31,
 
2019
 
 
2018
 
Assets
 
 
 
 
 
 
Current assets:
   
     
 
Cash and cash equivalents
  $
89,486
    $
57,379
 
Marketable securities
   
364,124
     
426,339
 
Prepaid expenses and other current assets
   
1,712
     
1,483
 
                 
Total current assets
   
455,322
     
485,201
 
Property and equipment, net
   
181
     
227
 
Right-of-use
asset
   
751
     
—  
 
                 
Total assets
  $
456,254
    $
485,428
 
                 
Liabilities and Stockholders’ Equity
 
 
 
 
 
 
Current liabilities:
   
     
 
Accounts payable
  $
773
    $
2,487
 
Accrued expenses
   
14,381
     
5,957
 
Lease liability
   
310
     
—  
 
                 
Total current liabilities
   
15,464
     
8,444
 
Long term liabilities:
   
     
 
Lease liability
   
441
     
—  
 
                 
Total long term liabilities
   
441
     
—  
 
                 
Total liabilities
   
15,905
     
8,444
 
                 
Stockholders’ equity:
   
     
 
Preferred stock, par value $0.0001 per share authorized: 5,000,000 shares at September 30, 2019 and December 31, 2018; 1,969,797 shares issued and outstanding at September 30, 2019 and December 31, 2018
   
—  
     
—  
 
Common stock, par value $0.0001 per share authorized: 200,000,000 at September 30, 2019 and December 31, 2018; 15,429,154 and 15,409,023 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively
   
2
     
2
 
Additional
paid-in-capital
   
635,535
     
616,573
 
Accumulated other comprehensive gain (loss)
   
292
     
(319
)
Accumulated deficit
   
(195,480
)    
(139,272
)
                 
Total stockholders’ equity
   
440,349
     
476,984
 
                 
Total liabilities and stockholders’ equity
  $
456,254
    $
485,428
 
                 
 
 
 
 
 
See accompanying notes to condensed consolidated financial statements.
 
3
 

Table of Contents
MADRIGAL PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in thousands, except share and per share amounts)
                                 
 
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
Revenues:
   
     
     
     
 
Total revenues
  $
—  
    $
—  
    $
—  
    $
—  
 
Operating expenses:
   
     
     
     
 
Research and development
   
19,447
     
6,211
     
47,414
     
16,518
 
General and administrative
   
4,748
     
5,122
     
17,604
     
9,710
 
                                 
Total operating expenses
   
24,195
     
11,333
     
65,018
     
26,228
 
                                 
Loss from operations
   
(24,195
)    
(11,333
)    
(65,018
)    
(26,228
)
Interest income
   
2,766
     
2,821
     
8,810
     
4,692
 
Other income
   
—  
     
—  
     
—  
     
200
 
                                 
Net loss
  $
(21,429
)   $
(8,512
)   $
(56,208
)   $
(21,336
)
                                 
Net loss per common share:
   
     
     
     
 
Basic and diluted net loss per common share
  $
(1.39
)   $
(0.56
)   $
(3.65
)   $
(1.46
)
Basic and diluted weighted average number of common shares outstanding
   
15,415,096
     
15,307,872
     
15,383,034
     
14,610,809
 
 
 
 
 
 
 
 
See accompanying notes to condensed consolidated financial statements.
 
4
 

Table of Contents
MADRIGAL PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited; in thousands)
                                 
 
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
Net Loss
  $
(21,429
)   $
(8,512
)   $
(56,208
)   $
(21,336
)
Other comprehensive income (loss):
   
     
     
     
 
Unrealized gain (loss) on
available-for-sale
securities
   
(193
)    
(100
)    
611
     
(112
)
                                 
Comprehensive loss
  $
(21,622
)   $
(8,612
)   $
(55,597
)   $
(21,448
)
                                 
 
 
 
 
 
See accompanying notes to condensed consolidated financial statements.
 
5
 

Table of Contents
MADRIGAL PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited; in thousands, except share and per share amounts)
 
                                                                 
 
 
 
 
 
 
 
 
 
Additional
paid-in

Capital
 
 
Accumulated
other
comprehensive
income (loss)
 
 
Accumulated
deficit
 
 
Total
stockholders’
equity
 
 
Preferred stock
   
Common stock
   
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
Balance at December 31, 2018
   
1,969,797
    $
 —  
     
15,409,023
    $
2
    $
616,573
    $
(319
)   $
(139,272
)   $
476,984
 
Exercise of common stock options
   
—  
     
—  
     
8,041
     
—  
     
83
     
—  
     
—  
     
83
 
Compensation expense related to stock options for services
   
—  
     
—  
     
—  
     
—  
     
6,022
     
—  
     
—  
     
6,022
 
Unrealized gain on marketable securities
   
—  
     
—  
     
—  
     
—  
     
—  
     
497
     
—  
     
497
 
Net loss
   
—  
     
—  
     
—  
     
—  
     
—  
     
—  
     
(15,080
)    
(15,080
)
Balance at March 31, 2019
 
 
1,969,797
 
 
$
 —  
 
 
 
15,417,064
 
 
$
2
 
 
$
622,678
 
 
$
178
 
 
$
(154,352
)
 
$
468,506
 
Exercise of common stock options
 
 
—  
 
 
 
—  
 
 
 
9,233
 
 
 
—  
 
 
 
117
 
 
 
—  
 
 
 
—  
 
 
 
117
 
Compensation expense related to stock options for services
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
7,755
 
 
 
—  
 
 
 
—  
 
 
 
7,755
 
Unrealized gain on marketable securities
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
307
 
 
 
—  
 
 
 
307
 
Net loss
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
(19,699
)
 
 
(19,699
)
                                                                 
Balance at June 30, 2019
   
1,969,797
    $
 —  
     
15,426,297
    $
2
    $
630,550
    $
485
    $
(174,051
)   $
456,986
 
Exercise of common stock options
   
—  
     
—  
     
2,857
     
—  
     
35
     
—  
     
—  
     
35
 
Compensation expense related to stock options for services
   
—  
     
—  
     
—  
     
—  
     
4,950
     
—  
     
—  
     
4,950
 
Unrealized gain on marketable securities
   
—  
     
—  
     
—  
     
—  
     
—  
     
(193
)    
—  
     
(193
)
Net loss
   
—  
     
—  
     
—  
     
—  
     
—  
     
—  
     
(21,429
)    
(21,429
)
                                                                 
Balance at September 30, 2019
   
1,969,797
    $
 —  
     
15,429,154
    $
2
    $
635,535
    $
292
    $
(195,480
)   $
440,349
 
                                                                 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
   
1,969,797
    $
 —  
     
14,227,634
    $
1
    $
288,750
    $
(31
)   $
(106,461
)   $
182,259
 
Exercise of common stock options
 
 
—  
 
 
 
—  
 
 
 
23,092
 
 
 
—  
 
 
 
265
 
 
 
—  
 
 
 
—  
 
 
 
265
 
Compensation expense related to stock options for services
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
1,167
 
 
 
—  
 
 
 
—  
 
 
 
1,167
 
Unrealized loss on marketable securities
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
(143
)
 
 
—  
 
 
 
(143
)
Net loss
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
(6,364
)
 
 
(6,364
)
Balance at March 31, 2018
 
 
1,969,797
 
 
$
 
 —  
 
 
 
14,250,726
 
 
$
1
 
 
$
290,182
 
 
$
(174
)
 
$
(112,825
)
 
$
177,184
 
Exercise of common stock options
   
—  
     
—  
     
35,078
     
—  
     
1,185
     
—  
     
—  
     
1,185
 
Issuance of common shares in equity offering, excluding related parties, net of transaction costs
   
—  
     
—  
     
1,079,580
     
1
     
311,824
     
—  
     
—  
     
311,825
 
Compensation expense related to stock options for services
   
—  
     
—  
     
—  
     
—  
     
2,227
     
—  
     
—  
     
2,227
 
Unrealized
gain
on marketable securities
   
—  
     
—  
     
—  
     
—  
     
—  
     
131
     
—  
     
131
 
Net loss
   
—  
     
—  
     
—  
     
—  
     
—  
     
—  
     
(6,460
)    
(6,460
)
                                                                 
Balance at June 30, 2018
   
1,969,797
    $
 —  
     
15,365,384
    $
2
    $
605,418
    $
(43
)   $
(119,285
)   $
486,092
 
Exercise of common stock options
   
—  
     
—  
     
27,925
     
—  
     
451
     
—  
     
—  
     
451
 
Compensation expense related to stock options for services
   
—  
     
—  
     
—  
     
—  
     
4,976
     
—  
     
—  
     
4,976
 
Unrealized gain on marketable securities
   
—  
     
—  
     
—  
     
—  
     
—  
     
(100
)    
—  
     
(100
)
Net loss
   
—  
     
—  
     
—  
     
—  
     
—  
     
—  
     
(8,512
)    
(8,512
)
                                                                 
Balance at September 30, 2018
   
1,969,797
    $
 —  
     
15,393,309
    $
2
    $
610,845
    $
(143
)   $
(127,797
)   $
482,907
 
                                                                 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to condensed consolidated financial statements.
 
6
 

Table of Contents
MADRIGAL PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in thousands)
                 
 
Nine Months Ended September 30,
 
 
2019
 
 
2018
 
Cash flows from operating activities:
   
     
 
Net loss
  $
(56,208
)   $
(21,336
)
Adjustments to reconcile net loss to net cash used in operating activities:
   
     
 
Stock-based compensation expense
   
18,727
     
8,370
 
Depreciation and amortization expense
   
84
     
71
 
Changes in operating assets and liabilities:
   
     
 
Prepaid expenses and other current assets
   
(229
)    
(281
)
Accounts payable
   
(1,714
)    
(898
)
Accrued expense
   
8,424
     
(2,514
)
Accrued interest, net of interest received on maturity of investments
   
1,574
     
(2,654
)
                 
Net cash used in operating activities
   
(29,342
)    
(19,242
)
                 
Cash flows from investing activities:
   
     
 
Purchases of marketable securities
   
(407,073
)    
(524,935
)
Sales and maturities of marketable securities
   
468,325
     
119,885
 
Purchases of property and equipment, net of disposals
   
(38
)    
(14
)
                 
Net cash provided by (used in) investing activities
   
61,214
     
(405,064
)
                 
Cash flows from financing activities:
   
     
 
Proceeds from issuances of stock, excluding related parties, net of transaction costs
   
—  
     
311,825
 
Proceeds from the exercise of common stock options
   
235
     
1,900
 
                 
Net cash provided by financing activities
   
235
     
313,725
 
                 
Net increase (decrease) in cash and cash equivalents
   
32,107
     
(110,581
)
Cash and cash equivalents at beginning of period
   
57,379
     
148,627
 
                 
Cash and cash equivalents at end of period
  $
89,486
    $
38,046
 
                 
Supplemental disclosure of cash flow information:
   
     
 
Obtaining a
right-of-use
asset in exchange for a lease liability
  $
900
    $
—  
 
 
 
 
 
 
 
See accompanying notes to condensed consolidated financial statements.
 
7
 

Table of Contents
MADRIGAL PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization, Business, and Basis of Presentation
Organization and Business
Madrigal Pharmaceuticals, Inc. (the “Company” or “Madrigal”) is a clinical-stage pharmaceutical company developing novel, high-quality, small-molecule drugs addressing major unmet needs in cardiovascular, metabolic, and liver diseases. The Company’s lead compound,
MGL-3196
(resmetirom), is being advanced for
non-alcoholic
steatohepatitis (“NASH”), a liver disease that commonly affects people with metabolic diseases such as obesity and diabetes, and
non-alcoholic
fatty liver disease (“NAFLD”). The Company initiated a Phase 2 study of resmetirom in NASH in October 2016. In February 2017, the Company initiated a Phase 2 study of resmetirom in patients with Heterozygous Familial Hypercholesterolemia (“HeFH”). Both Phase 2 studies were fully enrolled in 2017, the HeFH study was completed in February 2018, and the NASH study was completed in May 2018. The Company initiated a Phase 3 study of resmetirom in NASH in March 2019.
Madrigal was originally incorporated as a private company (“Private Madrigal”) on August 19, 2011 and operations commenced in September 2011. On July 22, 2016, Private Madrigal completed a reverse merger (the “Merger”) into Synta Pharmaceuticals Corp. (“Synta”). Upon the consummation of the Merger, the historical financial statements of Private Madrigal became the Company’s historical financial statements.
Basis of Presentation
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted. Accordingly, the unaudited condensed consolidated financial statements do not include all information and footnotes required by GAAP for complete annual financial statements. However, we believe that the disclosures included in these financial statements are adequate to make the information presented not misleading. The unaudited condensed financial statements, in the opinion of management, reflect all adjustments, which include normal recurring adjustments, necessary for a fair statement of such interim results. The interim results are not necessarily indicative of the results that we will have for the full year ending December 31, 2019 or any subsequent period. These unaudited condensed financial statements should be read in conjunction with the audited consolidated financial statements and the notes to those statements for the year ended December 31, 2018.
2. Summary of Significant Accounting Policies
Principle of Consolidation
The consolidated financial statements include the financial statements of the Company and its wholly owned subsidiaries. All significant intercompany balances have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities, and the reported amounts of revenues and expenses during the reporting periods. The Company bases its estimates on historical experience and various other assumptions that management believes to be reasonable under the circumstances. Changes in estimates are recorded in the period in which they become known. Actual results could ​​​​​​​differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents. The Company maintains its cash in bank accounts, the balance of which, at times, exceeds Federal Deposit Insurance Corporation insured limits.
The primary objective of the Company’s investment activities is to preserve its capital for the purpose of funding operations and the Company does not enter into investments for trading or speculative purposes. The Company’s cash is deposited in highly rated financial institutions in the United States. The Company invests in money market funds and high-grade, commercial paper and corporate bonds, which management believes are subject to minimal credit and market risk.
 
8
 

Marketable Securities
Marketable securities consist of investments in high-grade corporate obligations and government and government agency obligations that are classified as
available-for-sale.
Since these securities are available to fund current operations, they are classified as current assets on the consolidated balance sheets.
The Company adjusts the cost of
available-for-sale
debt securities for amortization of premiums and accretion of discounts to maturity. The Company includes such amortization and accretion as a component of interest income, net. Realized gains and losses and declines in value, if any, that the Company judges to be other-than-temporary on
available-for-sale
securities are reported as a component of interest income, net. To determine whether an other-than-temporary impairment exists, the Company considers whether it intends to sell the debt security and, if the Company does not intend to sell the debt security, it considers available evidence to assess whether it is more likely than not that it will be required to sell the security before the recovery of its amortized cost basis. During the three and nine months ended September 30, 2019 and 2018, the Company determined it did not have any securities that were other-than-temporarily impaired.
Marketable securities are stated at fair value, including accrued interest, with their unrealized gains and losses included as a component of accumulated other comprehensive income or loss, which is a separate component of stockholders’ equity. The fair value of these securities is based on quoted prices and observable inputs on a recurring basis. Realized gains and losses are determined on the specific identification method. During the three and nine months ended September 30, 2019 and 2018, the Company did not have any realized gains or losses on marketable securities.
Fair Value of Financial Instruments
The carrying amounts of the Company’s financial instruments, which include cash equivalents, and marketable securities, approximate their fair values. The fair value of the Company’s financial instruments reflects the amounts that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy has the following three levels:
Level 1—quoted prices in active markets for identical assets and liabilities.
Level 2—observable inputs other than Level 1 inputs. Examples of Level 2 inputs include quoted prices in active markets for similar assets or liabilities and quoted prices for identical assets or liabilities in markets that are not active.
Level 3—unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability.
Financial assets and liabilities are classified in their entirety within the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement. The Company measures the fair value of its marketable securities by taking into consideration valuations obtained from third-party pricing sources. 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 and other observable inputs. As of September 30, 2019, the Company’s financial assets valued based on Level 1 inputs consisted of cash and cash equivalents in a money market fund and its financial assets valued based on Level 2 inputs consisted of high-grade corporate bonds and commercial paper. During the three and nine months ended September 30, 2019 and 2018, the Company did not have any transfers of financial assets between Levels 1 and 2. As of September 30, 2019 and December 31, 2018, the Company did not have any financial liabilities that were recorded at fair value on a recurring basis on the balance sheet.
Research and Development Costs
Research and development costs are expensed as incurred. Research and development costs are comprised of costs incurred in performing research and development activities, including internal costs (including stock-based compensation), costs for consultants, milestone payments under licensing agreements, and other costs associated with the Company’s preclinical and clinical programs. In particular, the Company has conducted safety studies in animals, optimized and implemented the manufacturing of our drug, and conducted Phase
1-3
clinical trials, all of which are considered research and development expenditures. Significant judgment and estimates are made in determining the amount of research and development costs recognized in each reporting period. The Company analyzes the progress of its clinical trials, completion of milestones under its license agreements, invoices received and contracted costs when estimating research and development costs. Actual results could differ from the Company’s estimates. The Company’s historical estimates for research and development costs have not been materially different from the actual costs.
 
9
 

Table of Contents
Patents
Costs to secure and defend patents are expensed as incurred and are classified as general and administrative expense in the Company’s consolidated statements of operations.
Stock-Based Compensation
The Company recognizes stock-based compensation expense based on the grant date fair value of stock options granted to employees, officers, and directors. The Company uses the Black-Scholes option pricing model to determine the grant date fair value as management believes it is the most appropriate valuation method for its option grants. The Black-Scholes model requires inputs for risk-free interest rate, dividend yield, volatility and expected lives of the options. The expected lives for options granted represent the period of time that options granted are expected to be outstanding. The Company uses the simplified method for determining the expected lives of options. Expected volatility is based upon an industry estimate or blended rate including the Company’s historical trading activity. The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. The Company estimates the forfeiture rate based on historical data. This analysis is
re-evaluated
at least annually and the forfeiture rate is adjusted as necessary.
Certain of the employee stock options granted by the Company are structured to qualify as incentive stock options (“ISOs”). Under current tax regulations, the Company does not receive a tax deduction for the issuance, exercise or disposition of ISOs if the employee meets certain holding requirements. If the employee does not meet the holding requirements, a disqualifying disposition occurs, at which time the Company may receive a tax deduction. The Company does not record tax benefits related to ISOs unless and until a disqualifying disposition is reported. In the event of a disqualifying disposition, the entire tax benefit is recorded as a reduction of income tax expense. The Company has not recognized any income tax benefit for its share-based compensation arrangements due to the fact that the Company does not believe it is more likely than not it will realize the related deferred tax assets.
Income Taxes
The Company uses the asset and liability method to account for income taxes. Deferred tax assets and liabilities are determined based on the expected future tax consequences of temporary differences between the Company’s financial statement carrying amounts and the tax basis of assets and liabilities using enacted tax rates expected to be in effect in the years in which the differences are expected to reverse. The Company currently maintains a 100% valuation allowance on its deferred tax assets.
Comprehensive Loss
Comprehensive loss is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from
non-owner
sources. Changes in unrealized gains and losses on marketable securities represent the only difference between the Company’s net loss and comprehensive loss.
Basic and Diluted Loss Per Common Share
Basic net loss per share is computed using the weighted average number of common shares outstanding during the period, excluding restricted stock that has been issued but is not yet vested. Diluted net loss per common share is computed using the weighted average number of common shares outstanding and the weighted average dilutive potential common shares outstanding using the treasury stock method. However, for the nine months ended September 30, 2019 and 2018, diluted net loss per share is the same as basic net loss per share because the inclusion of weighted average shares of unvested restricted common stock, common stock issuable upon the exercise of stock options, and common stock issuable upon the conversion of preferred stock would be anti-dilutive.
The following table summarizes outstanding securities not included in the computation of diluted net loss per common share, as their inclusion would be anti-dilutive:
 
Three and Nine Months Ended September 30,
 
 
2019
 
 
2018
 
Common Stock Options
   
1,461,237
     
1,123,582
 
Unvested Restricted Common Stock
   
—  
     
52,063
 
Preferred Stock
   
1,969,797
     
1,969,797
 
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU
2016-02,
“Leases,” which, together with amendments comprising ASC 842, requires lessees to identify arrangements that should be accounted for as leases and generally recognized, for operating and finance leases with terms exceeding twelve months, a
right-of-use
asset (or “ROU”) and lease liability on the balance sheet. For public business entities,
 
10
 

ASU
2016-02
is effective for annual and interim reporting periods beginning after December 15, 2018, with early adoption permitted. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. The Company adopted ASU
2016-02
effective January 1, 2019. There was no significant retrospective impact from the adoption. The new standard provides a number of optional practical expedients in transition. We have elected the package of practical expedients, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. The new standard also provides practical expedients for an entity’s ongoing accounting. We have elected the short-term lease exception and we will not recognize ROU assets or lease liabilities for qualifying leases (leases with a term of less than 12 months from lease commencement). In 2019, the Company accounted for a new lease under the guidance (see Note
8
).
3. Liquidity and Uncertainties
The Company is subject to risks common to development stage companies in the biopharmaceutical industry including, but not limited to, uncertainty of product development and commercialization, dependence on key personnel, uncertainty of market acceptance of products and product reimbursement, product liability, uncertain protection of proprietary technology, potential inability to raise additional financing necessary for development and commercialization, and compliance with the U.S. Food and Drug Administration and other government regulations.
The Company has incurred losses since inception, including approximately $56.2 million for the nine months ended September 30, 2019, resulting in an accumulated deficit of approximately $195.5 million as of September 30, 2019. Management expects to incur losses for the foreseeable future. To date, the Company has funded its operations primarily through the issuance of convertible debt, the proceeds from the Merger on July 22, 2016, and proceeds from sales of the Company’s equity securities.
The Company believes that its cash, cash equivalents and marketable securities at September 30, 2019 will be sufficient to fund operations past one year from the issuance of these financial statements. To meet its future capital needs, the Company intends to raise additional capital through debt or equity financings, collaborations, partnerships or other strategic transactions. However, there can be no assurance that the Company will be able to complete any such transactions on acceptable terms or otherwise. The inability of the Company to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on the Company’s business, results of operations and financial condition. The Company has the ability to delay certain research activities and related clinical expenses if necessary due to liquidity concerns until a date when those concerns are relieved.
4. Cash, Cash Equivalents and Marketable Securities
A summary of cash, cash equivalents and
available-for-sale
marketable securities held by the Company as of September 30, 2019 and December 31, 2018 is as follows (in thousands):
 
September 30, 2019
 
 
Cost
 
 
Unrealized
gains
 
 
Unrealized
losses
 
 
Fair
value
 
Cash and cash equivalents:
   
     
     
     
 
Cash (Level 1)
  $
1,975
    $
 —  
    $
 —  
    $
1,975
 
Money market funds (Level 1)
   
87,511
     
—  
     
—  
     
87,511
 
Corporate debt securities due within 3 months of date of purchase (Level 2)
   
—  
     
—  
     
—  
     
—  
 
                                 
Total cash and cash equivalents
   
89,486
     
—  
     
—  
     
89,486
 
Marketable securities:
   
     
     
     
 
Corporate debt securities due within 1 year of date of purchase (Level 2)
   
278,707
     
264
     
(9
)    
278,962
 
Corporate debt securities due within 1 to 2 years of date of purchase (Level 2)
   
85,125
     
59
     
(22
)    
85,162
 
                                 
Total cash, cash equivalents and marketable securities
  $
453,318
    $
323
    $
(31
)   $
453,610
 
                                 
 
1
1
 

Table of Contents
 
December 31, 2018
 
 
Cost
 
 
Unrealized
gains
 
 
Unrealized
losses
 
 
Fair
value
 
Cash and cash equivalents:
   
     
     
     
 
Cash (Level 1)
  $
2,004
    $
—  
    $
—  
    $
2,004
 
Money market funds (Level 1)
   
43,401
     
—  
     
—  
     
43,401
 
Corporate debt securities due within 3 months of date of purchase (Level 2)
   
11,974
     
—  
     
—  
     
11,974
 
                                 
Total cash and cash equivalents
   
57,379
     
—  
     
—  
     
57,379
 
Marketable securities:
   
     
     
     
 
Corporate debt securities due within 1 year of date of purchase (Level 2)
   
426,658
     
14
     
(333
)    
426,339
 
                                 
Total cash, cash equivalents and marketable securities
  $
484,037
    $
14
    $
(333
)   $
483,718
 
                                 
5. Accrued Liabilities
Accrued liabilities as of September 30, 2019 and December 31, 2018 consisted of the following (in thousands):
 
September 30,
2019
 
 
December 31,
2018
 
Accrued contract research costs
 
$
7,882
 
 
$
571
 
Compensation and benefits
 
 
1,936
 
 
 
1,797
 
Other
 
 
4,563
 
 
 
3,589
 
 
 
 
 
 
 
 
 
 
 
$
14,381
 
 
$
5,957
 
 
 
 
 
 
 
 
 
 
6
. Stockholders’ Equity
Common Stock
Each common stockholder is entitled to one vote for each share of common stock held. The common stock will vote together with all other classes and series of stock of the Company as a single class on all actions to be taken by the Company’s stockholders. Each share of common stock is entitled to receive dividends, as and when declared by the Company’s board of directors.
The Company has never declared cash dividends on its common stock and does not expect to do so in the foreseeable future.
Preferred Stock
The Series A Preferred Stock has a par value of $0.0001 per share and is convertible into shares of the common stock at a
one-to-one
 
ratio,
 
subject to adjustment as provided in the Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock, that the Company filed with the Secretary of State of the State of Delaware on June 21, 2017 (the “Series A Certificate”). The terms of the Series A Preferred Stock are set forth in the Series A Certificate.
Each share of the Series A Preferred Stock is convertible into shares of Common Stock following notice that may be given at the holder’s option. Upon any liquidation, dissolution or
winding-up
of the Company, whether voluntary or involuntary, after the satisfaction in full of the debts of the Company and the payment of any liquidation preference owed to the holders of shares of capital stock of the Company ranking prior to the Series A Preferred Stock upon liquidation, the holders of the Series A Preferred Stock shall participate pari passu with the holders of the Common Stock (on an
as-if-converted-to
-Common-Stock
basis) in the net assets of the Company. Shares of the Series A Preferred Stock will generally have no voting rights, except as required by law. Shares of the Series A Preferred Stock will be entitled to receive dividends before shares of any other class or series of capital stock of the Company (other than dividends in the form of the Common Stock) equal to the dividend payable on each share of the Common Stock, on an
as-converted
basis.
June 2018 Registered Offering of Common Stock
In June 2018, the Company entered into an underwriting agreement with Goldman Sachs & Co. LLC, as representative of the several underwriters named therein (the “June 2018 Underwriters”), relating to an underwritten public offering (the “June 2018 Offering”) of 1,079,580 shares of the Company’s common stock, including 95,973 shares of the Company’s common stock purchased by the June 2018 Underwriters pursuant to a
30-day
option to purchase such additional shares granted therein, at a public offering price of $305.00 per share. The June 2018 Offering resulted in net proceeds to the Company of approximately $311.8 million, after deducting the June 2018 Underwriters’ discount and other offering costs. The June 2018 Offering closed on June 11, 2018.
 
12
 

Table of Contents
7
. Stock-based Compensation
The 2015 Stock Plan, as amended, is our primary plan through which equity ​​​​​​​based grants are awarded. We ceased making new awards under the 2006 Stock Plan upon adoption of the 2015 Stock Plan. The 2015 Stock Plan provides for the grant of incentive stock options,
non-statutory
stock options, restricted stock and other stock-based compensation awards to employees, officers, directors, and consultants of the Company. The administration of the 2015 Stock Plan is under the general supervision of the Compensation Committee of the Board of Directors. The terms of stock options awarded under the 2015 Stock Plan, in general, are determined by the Compensation Committee, provided the exercise price per share generally shall not be set at less than the fair market value of a share of the common stock on the date of grant and the term shall not be greater than ten years from