Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark One)

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

 

For the quarterly period ended September 30, 2018

 

OR

 

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

 

For the transition period from                      to                      

 

Commission File No. 001-38551

 

NEON THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

 


 

Delaware

 

46-3915846

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification Number)

 

40 Erie St., Suite 110
Cambridge, MA

 

02139

(Address of principal executive offices)

 

(Zip Code)

 


 

(617) 337-4701

(Registrant’s telephone number, including area code)

 


 

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  x  No  o

 

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  x  No  o

 

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 o

 

Accelerated Filer o

 

Non-Accelerated Filer x

 

Smaller Reporting Company o
Emerging Growth Company x

 

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 to Section 7(a)(2)(B) of the Securities Act. x

 

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

 

As of November 9, 2018, there were 28,313,417 shares of common stock, $0.001 par value per share, outstanding.

 

 

 


Table of Contents

 

Table of Contents

 

 

 

Page

 

 

 

Part I. Financial Information

 

 

 

 

Item 1.

Financial Statements (unaudited)

5

 

 

 

 

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

5

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2018 and 2017

6

 

 

 

 

Condensed Consolidated Statement of Redeemable Convertible Preferred Stock, Contingently Redeemable Restricted Common Stock and Stockholders’ Equity (Deficit) for the Nine Months Ended September 30, 2018 and Year Ended December 31, 2017

7

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017

8

 

 

 

 

Notes to Condensed Consolidated Financial Statements

9

 

 

 

Item 2.

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

21

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

29

 

 

 

Item 4.

Controls and Procedures

29

 

 

 

Part II. Other Information

 

 

 

 

Item 1.

Legal Proceedings

30

 

 

 

Item 1A.

Risk Factors

30

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

76

 

 

 

Item 3.

Defaults Upon Senior Securities

76

 

 

 

Item 4.

Mine Safety Disclosures

76

 

 

 

Item 5.

Other Information

76

 

 

 

Item 6.

Exhibits

76

 

 

 

Signatures

 

78

 

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NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains forward-looking statements which are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements may be identified by such forward-looking terminology as “may,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. Our forward-looking statements are based on a series of expectations, assumptions, estimates and projections about our company, are not guarantees of future results or performance and involve substantial risks and uncertainty. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in these forward-looking statements. Our business and our forward-looking statements involve substantial known and unknown risks and uncertainties, including the risks and uncertainties inherent in our statements regarding:

 

·                  the success, cost and timing of our product development activities and clinical trials, including statements regarding the timing of initiation and completion of studies or trials and related preparatory work, the period during which the results of the trials will become available, and our research and development programs;

·                  our ability and the potential to successfully manufacture and supply our product candidates for clinical trials and for commercial use, if approved;

·                  the potential for our identified research priorities to advance our platform, programs or product candidates;

·                  the ability and willingness of our third-party research institution collaborators to continue research and development activities relating to our product candidates;

·                  our ability to obtain and maintain regulatory approval of our lead product candidate, NEO-PV-01, and any other product candidates, and any related restrictions, limitations or warnings in the label of an approved product candidate;

·                  the ability to license additional intellectual property relating to our product candidates and to comply with our existing license agreements;

·                  our ability to commercialize our products in light of the intellectual property rights of others;

·                  our ability to obtain funding for our operations, including funding necessary to complete further development and commercialization of our product candidates;

·                  our plans to research and develop our product candidates;

·                  the commercialization of our product candidates, if approved;

·                  our ability to attract collaborators with development, regulatory and commercialization expertise;

·                  future agreements with third parties in connection with the commercialization of our product candidates and any other approved product;

·                  the size and growth potential of the markets for our product candidates, and our ability to serve those markets;

·                  the rate and degree of market acceptance of our product candidates;

·                  regulatory developments in the United States and foreign countries;

·                  our ability to contract with third-party suppliers and manufacturers and their ability to perform adequately;

·                  our ability to produce our products or product candidates with advantages in turnaround times or manufacturing cost in an economically viable manner;

·                  the success of competing therapies that are or may become available;

·                  our ability to attract and retain key scientific or management personnel;

·                  the accuracy of our estimates regarding expenses, future revenue, capital requirements and needs for additional financing;

·                  the impact of laws and regulations;

·                  our use of the proceeds from our initial public offering;

·                  our expectations regarding the time during which we will be an “emerging growth company” under the Jumpstart Our Business Startups Act; and

·                  our expectations regarding our ability to obtain and maintain intellectual property protection for our product candidates.

 

All of our forward-looking statements are as of the date of this Quarterly Report on Form 10-Q only. In each case, actual results may differ materially from such forward-looking information. We can give no assurance that such expectations or forward-looking statements will prove to be correct. An occurrence of or any material adverse change in one or more of the risk factors or risks and uncertainties referred to in this Quarterly Report on Form 10-Q or included in our other public disclosures or our other periodic reports or other documents or filings filed with or furnished to the Securities and Exchange Commission, or the SEC, could materially and adversely affect our business, prospects, financial condition and results of operations. Except as required by law, we do not undertake or plan to update or revise any such forward-looking statements to reflect actual results, changes in plans, assumptions, estimates or projections or other circumstances affecting such forward-looking statements occurring after the date of this Quarterly

 

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Report on Form 10-Q, even if such results, changes or circumstances make it clear that any forward-looking information will not be realized. Any public statements or disclosures by us following this Quarterly Report on Form 10-Q that modify or impact any of the forward-looking statements contained in this Quarterly Report on Form 10-Q will be deemed to modify or supersede such statements in this Quarterly Report on Form 10-Q.

 

NOTE REGARDING TRADEMARKS

 

Neon Therapeutics, Inc. is the owner of the NEON THERAPEUTICS, RECON, and NEO-STIM trademarks, as well as certain other trademarks, including design versions of some of these trademarks.  The symbols ™ and ® are not used in connection with the presentation of these trademarks in this report and their absence does not indicate a lack of trademark rights.  Certain other trademarks used in this report are the property of third-party trademark owners and may be presented with or without trademark references.

 

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PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

NEON THERAPEUTICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands, except share and per share amounts)

 

 

 

September 30,
2018

 

December 31,
2017

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

60,779

 

$

58,250

 

Marketable securities

 

60,962

 

21,475

 

Prepaid expenses and other current assets

 

2,269

 

1,581

 

Total current assets

 

124,010

 

81,306

 

Property and equipment, net

 

7,962

 

6,888

 

Deferred offering costs

 

 

1,567

 

Other long-term assets

 

607

 

732

 

Total assets

 

$

132,579

 

$

90,493

 

Liabilities, Redeemable Convertible Preferred Stock, Contingently Redeemable Restricted Common Stock and Stockholders’ Equity (Deficit)

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

2,742

 

$

2,166

 

Accrued expenses

 

6,809

 

6,601

 

Total current liabilities

 

9,551

 

8,767

 

Other liabilities

 

121

 

48

 

Total liabilities

 

9,672

 

8,815

 

Commitments and contingencies (Note 7)

 

 

 

 

 

Redeemable convertible preferred stock (Series A and B), $0.001 par value; 10,000,000 shares and 93,222,418 shares authorized as of September 30, 2018 and December 31, 2017, respectively, no shares and 93,222,418 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively

 

 

174,895

 

Contingently redeemable restricted common stock

 

 

355

 

 

 

 

175,250

 

Stockholders’ equity (deficit):

 

 

 

 

 

Common stock, $0.001 par value; 150,000,000 shares and 130,000,000 shares authorized as of September 30, 2018 and December 31, 2017, respectively; 28,313,417 and 3,302,927 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively

 

28

 

3

 

Additional paid-in capital

 

273,542

 

 

Accumulated other comprehensive loss

 

(24

)

(13

)

Accumulated deficit

 

(150,639

)

(93,562

)

Total stockholders’ equity (deficit)

 

122,907

 

(93,572

)

Total liabilities, redeemable convertible preferred stock, contingently redeemable restricted common stock and stockholders’ equity (deficit)

 

$

132,579

 

$

90,493

 

 

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

 

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NEON THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)

(In thousands, except share and per share amounts)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

$

14,441

 

$

11,530

 

$

42,403

 

$

26,274

 

General and administrative

 

4,612

 

2,612

 

12,524

 

7,180

 

Total operating expenses

 

19,053

 

14,142

 

54,927

 

33,454

 

Loss from operations

 

(19,053

)

(14,142

)

(54,927

)

(33,454

)

Other income (expense), net

 

 

 

 

 

 

 

 

 

Interest income

 

672

 

153

 

1,136

 

394

 

Other expense

 

(10

)

 

(20

)

 

Total other income, net

 

662

 

153

 

1,116

 

394

 

Net loss

 

(18,391

)

(13,989

)

(53,811

)

(33,060

)

Accretion of redeemable convertible preferred stock to redemption value

 

 

(2,530

)

(6,371

)

(7,509

)

Net loss attributable to common stockholders

 

$

(18,391

)

$

(16,519

)

$

(60,182

)

$

(40,569

)

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

 

$

(0.67

)

$

(9.59

)

$

(5.55

)

$

(25.33

)

Weighted average common shares outstanding, basic and diluted

 

27,357,812

 

1,722,959

 

10,833,984

 

1,601,641

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

Net loss

 

$

(18,391

)

$

(13,989

)

$

(53,811

)

$

(33,060

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on marketable securities

 

(22

)

14

 

(11

)

(10

)

Total other comprehensive income (loss)

 

(22

)

14

 

(11

)

(10

)

Comprehensive loss

 

$

(18,413

)

$

(13,975

)

$

(53,822

)

$

(33,070

)

 

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

 

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NEON THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK, CONTINGENTLY REDEEMABLE RESTRICTED COMMON STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) (UNAUDITED)

(In thousands, except share amounts)

 

 

 

Redeemable
Convertible
Preferred Stock

 

Contingently
Redeemable
Restricted

 

 

Common Stock

 

Additional
Paid-in

 

Accumulated
Other
Comprehensive

 

Accumulated

 

Total
Stockholders’
Equity

 

 

 

Shares

 

Amount

 

Common Stock

 

 

Shares

 

Amount

 

Capital

 

Loss

 

Deficit

 

(Deficit)

 

Balance at December 31, 2016

 

80,411,030

 

$

128,618

 

$

95

 

 

3,296,723

 

$

3

 

$

 

$

 

$

(38,495

)

$

(38,492

)

Issuance of Series B redeemable convertible preferred stock, net of issuance costs of $119

 

12,811,388

 

35,881

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

260

 

 

 

 

2,782

 

 

 

2,782

 

Accretion of redeemable convertible preferred stock to redemption value

 

 

10,396

 

 

 

 

 

(2,865

)

 

(7,531

)

(10,396

)

Exercise of stock options

 

 

 

 

 

23,734

 

 

56

 

 

 

56

 

Cancellation of restricted common stock

 

 

 

 

 

(17,530

)

 

 

 

 

 

Vesting of restricted common stock

 

 

 

 

 

 

 

27

 

 

 

27

 

Unrealized losses on marketable securities

 

 

 

 

 

 

 

 

(13

)

 

(13

)

Net loss

 

 

 

 

 

 

 

 

 

(47,536

)

(47,536

)

Balance at December 31, 2017

 

93,222,418

 

174,895

 

355

 

 

3,302,927

 

3

 

 

(13

)

(93,562

)

(93,572

)

Stock-based compensation expense

 

 

 

210

 

 

 

 

4,505

 

 

 

4,505

 

Accretion of redeemable convertible preferred stock to redemption value

 

 

6,371

 

 

 

 

 

(3,105

)

 

(3,266

)

(6,371

)

Conversion of redeemable convertible preferred stock and contingently redeemable restricted common stock to common stock

 

(93,222,418

)

(181,266

)

(565

)

 

18,644,462

 

19

 

181,812

 

 

 

181,831

 

Issuance of common stock upon completion of initial public offering, net of commissions, underwriting discounts and offering costs

 

 

 

 

 

6,250,000

 

6

 

89,914

 

 

 

89,920

 

Exercise of stock options

 

 

 

 

 

128,653

 

 

399

 

 

 

399

 

Cancellation of restricted common stock

 

 

 

 

 

(12,625

)

 

 

 

 

 

Vesting of restricted common stock

 

 

 

 

 

 

 

17

 

 

 

17

 

Unrealized losses on marketable securities

 

 

 

 

 

 

 

 

(11

)

 

(11

)

Net loss

 

 

 

 

 

 

 

 

 

(53,811

)

(53,811

)

Balance at September 30, 2018

 

 

$

 

$

 

 

28,313,417

 

$

28

 

$

273,542

 

$

(24

)

$

(150,639

)

$

122,907

 

 

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

 

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NEON THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)

 

 

 

Nine Months Ended
September 30,

 

 

 

2018

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(53,811

)

$

(33,060

)

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

 

 

 

 

 

Depreciation and amortization expense

 

1,066

 

642

 

Net amortization of premiums and discounts on marketable securities

 

(4

)

163

 

Stock-based compensation expense

 

4,715

 

2,126

 

Loss on disposal of property and equipment

 

21

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

Prepaid expenses and other current assets

 

(493

)

248

 

Other long-term assets

 

125

 

814

 

Accounts payable

 

490

 

(1,602

)

Accrued expenses and other liabilities

 

2,349

 

1,302

 

Net cash used in operating activities

 

(45,542

)

(29,367

)

Cash flows from investing activities:

 

 

 

 

 

Purchases of marketable securities

 

(72,939

)

(31,356

)

Sales and maturities of marketable securities

 

33,250

 

4,500

 

Purchases of property and equipment

 

(2,608

)

(2,756

)

Net cash used in investing activities

 

(42,297

)

(29,612

)

Cash flows from financing activities:

 

 

 

 

 

Proceeds from initial public offering of common stock, net of commissions and underwriting discounts

 

93,000

 

 

Payment of initial public offering costs

 

(3,030

)

 

Proceeds from exercise of stock options

 

399

 

56

 

Repurchase of unvested restricted common stock

 

(1

)

(1

)

Net cash provided by financing activities

 

90,368

 

55

 

Net increase (decrease) in cash, cash equivalents and restricted cash

 

2,529

 

(58,924

)

Cash, cash equivalents and restricted cash, beginning of period

 

58,857

 

89,150

 

Cash, cash equivalents and restricted cash, end of period

 

$

61,386

 

$

30,226

 

Supplemental disclosure of noncash items:

 

 

 

 

 

Accretion of redeemable convertible preferred stock to redemption value

 

$

6,371

 

$

7,509

 

Purchases of property and equipment included in accounts payable and accrued expenses

 

$

472

 

$

59

 

Conversion of redeemable convertible preferred stock and contingently redeemable restricted common stock to common stock upon closing of the initial public offering

 

$

181,831

 

$

 

 

The following table provides a reconciliation of the cash, cash equivalents and restricted cash balances as of each of the periods shown above:

 

 

 

September 30,

 

 

 

2018

 

2017

 

Cash and cash equivalents

 

$

60,779

 

$

29,619

 

Restricted cash included in other long-term assets

 

607

 

607

 

Total cash, cash equivalents and restricted cash

 

$

61,386

 

$

30,226

 

 

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

 

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NEON THERAPEUTICS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. Nature of the Business

 

Neon Therapeutics, Inc. (collectively referred to with its wholly-owned, controlled subsidiary, Neon Securities Corporation, as “Neon” or the “Company”) is a clinical-stage immuno-oncology company and a leader in the field of neoantigen-targeted therapies, dedicated to transforming the treatment of cancer by directing the immune system towards neoantigens.

 

The Company is subject to risks common to early-stage companies in the biotechnology industry including, but not limited to, development by competitors of new technological innovations, protection of proprietary technology, dependence on key personnel, compliance with government regulations and the ability to obtain additional financing to fund operations. Product candidates currently under development will require significant additional research and development efforts, including extensive preclinical and clinical testing and regulatory approval, prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel infrastructure and extensive compliance-reporting capabilities. Even if the Company’s development efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales.

 

On June 29, 2018, the Company completed an initial public offering (“IPO”) of its common stock, and issued and sold 6,250,000 shares of common stock at a public offering price of $16.00 per share, resulting in net proceeds of $90.0 million after deducting underwriting discounts, commissions and other offering costs. Upon the closing of the IPO in June 2018, all 93,222,418 shares of the Company’s outstanding redeemable convertible preferred stock converted into an aggregate of 18,644,462 shares of common stock (Note 8). In advance of the IPO, the board of directors and the stockholders of the Company approved a one-for-five reverse split of the Company’s issued and outstanding common stock. The reverse stock split became effective on June 13, 2018. All common share and per share amounts in these condensed consolidated financial statements have been retroactively adjusted for all periods presented to give effect to the reverse stock split.

 

Liquidity

 

In accordance with Accounting Standards Update (“ASU”) No. 2014-15, Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40), management must evaluate whether there are conditions or events, when considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued.

 

The Company’s financial statements have been prepared on the basis of continuity of operations, realization of assets and the satisfaction of liabilities in the ordinary course of business. Through September 30, 2018, the Company has funded its operations with gross proceeds of $100.0 million from its IPO, as well as sales of the Company’s preferred stock and convertible debt. Since inception, the Company has incurred recurring losses and negative cash flows from operations in each period and on an aggregate basis. As of September 30, 2018 and December 31, 2017, the Company had an accumulated deficit of $150.6 million and $93.6 million, respectively. The Company expects its operating losses and negative operating cash flows to continue into the foreseeable future as it continues to develop, manufacture and commercialize its products.

 

As of November 13, 2018, the issuance date of these unaudited interim condensed consolidated financial statements, the Company expects that its cash, cash equivalents and marketable securities will be sufficient to fund its operating expenses and capital expenditure requirements into at least the first quarter of 2020. The future viability of the Company beyond that point is dependent on its ability to raise additional capital to finance its operations. Although the Company has been successful in raising capital in the past, there is no assurance that it will be successful in obtaining such additional financing on terms acceptable to the Company, if at all.

 

The Company expects that its expenses will increase in connection with its ongoing business activities. As a result, the Company will need substantial additional funding to support its continuing operations and pursue its growth strategy. Until such time as the Company can generate significant revenue from product sales, if ever, it expects to finance its operations through the sale of equity, debt financings or other capital sources, including collaborations with other companies or other strategic transactions. The Company may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If the Company is unable to obtain funding, the Company could be forced to delay, reduce or eliminate some or all of its research and development programs, product portfolio expansion or commercialization efforts, which could adversely affect its business prospects, or the Company may be unable to continue operations.

 

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2. Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements and the related disclosures are unaudited and have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) and accounting principles generally accepted in the United States of America (“GAAP”). Additionally, certain information and footnote disclosures normally included in the Company’s annual financial statements have been condensed or omitted. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements as of and for the year ended December 31, 2017, and notes thereto, which are contained in the Company’s prospectus filed under Rule 424(b)(4), which was filed with the SEC on June 28, 2018 (the “Final Prospectus”).

 

The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all normal recurring adjustments considered necessary for a fair presentation of the Company’s financial position as of September 30, 2018, and the results of its operations for the three and nine months ended September 30, 2018 and 2017, and its cash flows for the nine months ended September 30, 2018 and 2017. The results of operations for the three and nine months ended September 30, 2018 and 2017 are not necessarily indicative of the results that may be expected for the full year or any other subsequent interim period.

 

Principles of Consolidation

 

The accompanying condensed consolidated financial statements include the accounts of Neon Therapeutics, Inc. and its wholly-owned, controlled subsidiary, Neon Securities Corporation. All intercompany transactions and balances have been eliminated. The Company consolidates entities in which it has a controlling financial interest.

 

The Company uses a qualitative approach in assessing the consolidation requirement for variable interest entities (“VIEs”). The approach focuses on identifying which enterprise has the power to direct the activities that most significantly impact the VIE’s economic performance and which enterprise has the obligation to absorb losses or the right to receive benefits from the VIE. In the event that the Company is the primary beneficiary of a VIE, the assets, liabilities, and results of operations of the VIE would be included in the Company’s consolidated financial statements. As of September 30, 2018 and December 31, 2017 and during the periods then ended, the Company was not the primary beneficiary of a VIE.

 

Summary of Significant Accounting Policies

 

The significant accounting policies and estimates used in the preparation of the condensed consolidated financial statements are described in the Company’s Final Prospectus. There have been no material changes in the Company’s significant accounting policies during the nine months ended September 30, 2018.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting periods. Significant estimates of accounting reflected in these condensed consolidated financial statements include, but are not limited to, estimates related to accrued expenses, the valuation of common stock and stock-based awards and income taxes. The Company bases its estimates on historical experience and other market specific or other relevant assumptions it believes to be reasonable under the circumstances. On an ongoing basis, management evaluates its estimates, as there are changes in circumstances, facts and experience. Actual results could differ from those estimates or assumptions.

 

Recently Issued Accounting Pronouncements

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 requires lessees to recognize most leases on their balance sheet as a right-of-use asset and a lease liability. Leases are now classified as either operating or finance based on criteria similar to current lease accounting, but without explicit bright lines. The guidance is effective for annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years. The Company will adopt ASU 2016-02, effective as of January 1, 2019. In July 2018, the FASB subsequently issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements (“ASU 2018-11”), which includes certain amendments to ASU 2016-02 intended to provide relief in implementing the new standard. Among these amendments is the option to not restate comparative periods presented in the financial statements. The Company intends to elect this new transition approach, using a cumulative-effect adjustment on the effective date of the standard, with comparative periods presented in accordance with the previous guidance in ASC 840. The Company will take advantage of the transition package of practical expedients permitted within ASU 2016-02, which allows the Company to not reassess

 

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previous accounting conclusions around whether arrangements are, or contain, leases, the classification of leases, and the treatment of initial direct costs. The Company also expects to make an accounting policy election to exclude leases with an initial term of 12 months or less from the balance sheet.  The Company anticipates that due to this new accounting standard, it will recognize additional assets and corresponding liabilities related to its operating leases and is currently evaluating the potential impact that ASU 2016-02 may have on the Company’s financial position, results of operations, and related footnotes.

 

In July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815) I. Accounting for Certain Financial Instruments with Down Round Features II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception (“ASU 2017-11”). Part I of this standard applies to entities that issue financial instruments such as warrants, convertible debt or convertible preferred stock that contain down-round features. Part II of this standard replaces the indefinite deferral for certain mandatorily redeemable noncontrolling interests and mandatorily redeemable financial instruments of nonpublic entities contained within ASC Topic 480 with a scope exception and does not impact the accounting for these mandatorily redeemable instruments. ASU 2017-11 is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact that the adoption of ASU 2017-11 will have on its condensed consolidated financial statements.

 

In June 2018, the FASB issued ASU No. 2018-07 (Topic 718) Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”), which expands the scope of ASC Topic 718 to include all share-based payment arrangements related to the acquisition of goods and services from both nonemployees and employees. An entity should apply the requirements of Topic 718 to nonemployee awards except for certain exemptions specified in the amendment. ASU 2018-07 is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of this amendment will have on its condensed consolidated financial statements.

 

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which modifies the disclosure requirements on fair value measurements. ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact of the pending adoption of ASU 2018-13 on its condensed consolidated financial statements.

 

In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract  (“ASU 2018-15”)which clarifies the accounting for implementation costs in cloud computing arrangements. ASU 2018-15 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of this amendment will have on its condensed consolidated financial statements.

 

3. Fair Value Measurement

 

The following tables present information about the Company’s assets that are measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values (in thousands):

 

 

 

Fair Value Measurements at September 30, 2018
Using:

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

Money market funds

 

$

60,780

 

$

60,780

 

$

 

$

 

Marketable securities:

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

56,500

 

 

56,500

 

 

Commercial paper

 

4,462

 

 

4,462

 

 

 

 

$

121,742

 

$

60,780

 

$

60,962

 

$

 

 

 

 

Fair Value Measurements at December 31, 2017
Using:

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

Money market funds

 

$

57,750

 

$

57,750

 

$

 

$

 

Marketable securities:

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

21,475

 

 

21,475

 

 

 

 

$

79,225

 

$

57,750

 

$

21,475

 

$

 

 

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There were no transfers between fair value measurement levels during the three and nine months ended September 30, 2018 or 2017.

 

4. Marketable Securities

 

Marketable securities consisted of the following at September 30, 2018 and December 31, 2017 (in thousands):

 

 

 

September 30, 2018

 

 

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

Short-term investments:

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

56,524

 

$

3

 

$

(27

)

$

56,500

 

Commercial paper

 

4,462

 

 

 

4,462

 

 

 

$

60,986

 

$

3

 

$

(27

)

$

60,962

 

 

 

 

December 31, 2017

 

 

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

Short-term investments:

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

21,488

 

$

 

$

(13

)

$

21,475

 

 

 

$

21,488

 

$

 

$

(13

)

$

21,475

 

 

The contractual maturities of all securities held at September 30, 2018 are one year or less. There were 18 and 14 securities in an unrealized loss position at September 30, 2018 and December 31, 2017, respectively, none of which had been in an unrealized loss position for more than twelve months. The aggregate fair value of these securities at September 30, 2018 and December 31, 2017 was $43.4 million and $20.7 million, respectively. The Company reviews its investments for other-than-temporary impairment whenever the fair value of an investment is less than amortized cost and evidence indicates that an investment’s carrying amount is not recoverable within a reasonable period of time. To determine whether an impairment is other-than-temporary, the Company considers whether it has the ability and intent to hold the investment until a market price recovery and considers whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary. The Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity. The Company did not hold any securities with other-than-temporary impairment at September 30, 2018.

 

There were no sales of available-for-sale securities during the three or nine months ended September 30, 2018 or 2017. Net unrealized holding gains or losses for the period that have been included in accumulated other comprehensive loss were not material to the Company’s condensed consolidated results of operations.

 

5. Property and Equipment, Net

 

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

 

 

 

September 30,
2018

 

December 31,
2017

 

Software

 

$

1,180

 

$

1,012

 

Laboratory equipment

 

7,935

 

6,088

 

Computer equipment

 

102

 

102

 

Furniture and fixtures

 

371

 

325

 

Leasehold improvements

 

581

 

335

 

Assets under construction

 

184

 

361

 

 

 

10,353

 

8,223

 

Less: Accumulated depreciation and amortization

 

(2,391

)

(1,335

)

 

 

$

7,962

 

$

6,888

 

 

Depreciation and amortization expense for the three and nine months ended September 30, 2018 was $0.4 million and $1.1 million, respectively, and for the three and nine months ended September 30, 2017 was $0.2 million and $0.6 million, respectively.

 

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6. Accrued Expenses

 

Accrued expenses consisted of the following (in thousands):

 

 

 

September 30,
2018

 

December 31,
2017

 

Accrued compensation costs

 

$

2,910

 

$

1,468

 

Accrued professional services

 

989

 

2,490

 

Accrued external research and manufacturing costs

 

1,825

 

1,097

 

Accrued additions of property and equipment

 

282

 

815

 

Other accrued expenses

 

803

 

731

 

 

 

$

6,809

 

$

6,601

 

 

7. Commitments and Contingencies

 

Operating Leases

 

On January 21, 2016, the Company entered into a lease for office and laboratory space at its current headquarters in Cambridge, Massachusetts. The lease commenced on September 28, 2016 and expires on September 27, 2024. The Company has the right to extend the lease for one additional five-year period at a market rental rate as determined by the landlord and agreed to by the Company.

 

The Company also, from time to time, enters into short-term operating lease arrangements for certain laboratory equipment.

 

The Company records rent expense on a straight-line basis over the lease term. Rent expense during the three and nine months ended September 30, 2018 was $0.5 million and $1.5 million, respectively, and for the three and nine months ended September 30, 2017 was $0.5 million and $1.5 million, respectively.

 

Future minimum lease payments for the Company’s operating leases as of September 30, 2018 were as follows (in thousands):

 

Year Ending December 31,

 

 

 

2018(1)

 

$

525

 

2019

 

1,891

 

2020

 

1,948

 

2021

 

2,006

 

2022

 

2,066

 

Thereafter

 

3,761

 

 

 

$

12,197

 

 


(1) Amounts are for the three months ending December 31, 2018.

 

Significant Agreements

 

Manufacturing Agreement

 

In December 2015, the Company entered into a manufacturing agreement (the “Manufacturing Agreement”) with an independent third party (the “vendor”) whereby the vendor performs manufacturing, analytical testing and quality assurance services related to the manufacture of drug product for use in the preclinical and clinical activities for the Company. The Manufacturing Agreement included the development and establishment of a manufacturing suite (a “Cell”) at the vendor’s facility that would be used in the manufacturing process to fill orders of peptides ordered by the Company. All amounts incurred under the Manufacturing Agreement and subsequent amendments are recognized as research and development expense as incurred.

 

In October 2016, the Company and the vendor amended the Manufacturing Agreement (hereinafter, the “2016 Manufacturing Agreement”) to modify the payment due for the establishment of a second Cell and amend the fixed pricing for drug product produced by the vendor. The 2016 Manufacturing Agreement had a three-year term and was able to be terminated by the Company for convenience with six-months’ notice.

 

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In July 2017, the Company and the vendor further amended the 2016 Manufacturing Agreement (hereinafter, the “2017 Manufacturing Agreement”). Under the 2017 Manufacturing Agreement, the Company has agreed to reimburse the vendor for specified manufacturing costs incurred in the manufacture of the peptides, plus a fixed profit margin. The 2017 Manufacturing Agreement has a five-year term and can be terminated by the Company for convenience with three-months’ notice.

 

As part of the 2017 Manufacturing Agreement, the vendor created a wholly owned limited liability company (the “LLC”) and the vendor agreed to confer legal right, title and interest in the Cell’s assets to the LLC. The vendor granted the Company an exclusive option to purchase the LLC at a variable cost that is contractually defined.

 

The Company has determined that the option to purchase the LLC represents a variable interest and that the LLC is a VIE. As the Company does not have the power to direct the activities of the VIE that most significantly affect its economic performance, the Company is not the primary beneficiary of the VIE and as such does not consolidate the assets, liabilities, and results of operations of the VIE.

 

Other Agreements

 

On November 13, 2015, the Company entered into a license agreement with the Broad Institute, Inc. (“Broad”), a related party (Note 13), pursuant to which the Company has been granted an exclusive worldwide license to certain intellectual property rights owned or controlled by Broad, Dana-Farber Cancer Institute (“DFCI”) and The General Hospital Corporation d/b/a Massachusetts General Hospital (“MGH”) (the “2015 Broad Agreement”) for technology to be utilized in the Company’s research and development. As consideration for the license, the Company paid Broad a non-refundable license fee of $0.1 million. As additional consideration for the license, the Company must pay Broad immaterial annual license maintenance fees. Additionally, the Company granted 60,000 shares of restricted common stock to each of Broad, DFCI and MGH, which were determined to have an aggregate fair value of $0.2 million, and reimbursed Broad $0.6 million for a portion of its past patent expenses related to the in-licensed patent rights. In June 2018, to align with institutional policies in place between Broad, DFCI and MGH, DFCI and MGH transferred certain of the shares of restricted common stock that they had previously received to Broad. Under the 2015 Broad Agreement, the Company will reimburse Broad for future patent expenses related to the patents covered by the license agreement. The Company could be obligated to make up to $12.6 million of developmental milestone payments to Broad if certain development milestones are achieved over the term of the license agreement. Additionally, under the terms of the license agreement, the Company could be obligated to make up to an aggregate of $97.5 million of payments upon the achievement of specified sales milestones and to pay tiered royalties of low to mid single-digit percentages on net sales of products licensed under the agreement. The Company is required to pay Broad a low double-digit percentage of any consideration received by the Company from a sublicensee in consideration for a sublicense. No developmental or commercial milestones have been achieved to date. The Company has the right to terminate the agreement for any reason, with or without cause.

 

On August 5, 2016, the Company entered into a license agreement with DFCI to grant the Company an exclusive, royalty-free license to provide certain licensed know-how. The know-how in this agreement has particular utility in connection with the development of the licensed products referred to in the 2015 Broad Agreement. The agreement also grants a non-exclusive, royalty free, right to certain clinical data being generated by DFCI. In consideration for the licenses, the Company granted 120,000 shares of common stock to each of Broad and DFCI. The shares issued to Broad were unrestricted and fully vested. The 120,000 shares issued to DFCI contained a contingent repurchase option whereby, if DFCI failed to achieve three specific milestones, the Company could repurchase the shares (one third for each milestone) at the original purchase price, which is at zero cost. The Company has accounted for these awards consistent with equity awards with performance-based vesting conditions and, upon it being probable that the Company would not repurchase the award associated with a milestone, the expense associated with the equity grant would be recognized. During the nine months ended September 30, 2017, the repurchase option associated with one-third of the shares expired due to the achievement of the specified criteria and the Company recognized $0.2 million of incremental stock-based compensation expense, which is reflected within research and development expenses in the accompanying condensed consolidated financial statements. During the three months ended March 31, 2018, the repurchase option associated with an additional one-third of the shares expired due to the achievement of additional specified criteria and the Company recognized $0.4 million of incremental stock-based compensation expense, which is also reflected within research and development expenses in the accompanying condensed consolidated financial statements. The Company has the right to terminate the license agreement with DFCI for any reason, with or without cause.

 

Indemnification Agreements

 

In the ordinary course of business, the Company may provide indemnification of varying scope and terms to vendors, lessors, business partners and other parties with respect to certain matters arising out of the relationship between the parties. In addition, the Company has entered into indemnification agreements with members of its board of directors and certain executive officers and other employees that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers or employees. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is, in many cases, unlimited. To date, the Company has not incurred any

 

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material costs as a result of these indemnification obligations. The Company does not believe that the outcome of any existing claims under indemnification arrangements will have a material effect on its financial position, results of operations or cash flows, and it had not accrued any liabilities related to its obligations under these agreements in its condensed consolidated financial statements as of September 30, 2018 or December 31, 2017.

 

Legal Proceedings

 

The Company is not currently party to any material legal proceedings. At each reporting date, the Company evaluates whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies. The Company expenses as incurred the costs related to its legal proceedings.

 

8. Preferred Stock

 

As of September 30, 2018, the Company had 10,000,000 shares of preferred stock authorized and no shares issued or outstanding. As of December 31, 2017, the Company had 93,222,418 shares of preferred stock authorized, of which 55,500,000 shares were issued and outstanding and were designated as $0.001 par value Series A Preferred Stock, and 37,722,418 shares were issued and outstanding and were designated as $0.001 par value Series B Preferred Stock (together, the “Redeemable Convertible Preferred Stock”).

 

Upon completion of the Company’s IPO on June 29, 2018, all shares of the Redeemable Convertible Preferred Stock converted into an aggregate of 18,644,462 shares of common stock. The Company is also authorized to issue 10,000,000 shares of undesignated preferred stock in one or more series. As of September 30, 2018, no shares of preferred stock were issued or outstanding.

 

9. Common Stock

 

As of September 30, 2018 and December 31, 2017, the Company’s certificate of incorporation, as amended and restated, authorized the Company to issue 150,000,000 and 130,000,000 shares, respectively, of common stock with a par value of $0.001 per share.

 

Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Company’s stockholders. Common stockholders are entitled to receive dividends, as may be declared by the Company’s board of directors. No dividends have been declared or paid during the three or nine months ended September 30, 2018 or 2017.

 

As of September 30, 2018 and December 31, 2017 the Company has reserved for future issuance the following number of shares of common stock:

 

 

 

September 30,
2018

 

December 31,
2017

 

Shares reserved for conversion of Series A preferred stock outstanding

 

 

11,099,994

 

Shares reserved for conversion of Series B preferred stock outstanding

 

 

7,544,468

 

Shares reserved for exercise of outstanding stock options under the 2015 Stock Option and Grant Plan

 

2,074,876

 

1,587,293

 

Shares reserved for future issuance under the 2015 Stock Option and Grant Plan

 

 

1,684,952

 

Shares reserved for exercise of outstanding stock options under the 2018 Stock Option and Grant Plan

 

198,240

 

 

Shares reserved for future issuance under the 2018 Stock Option and Grant Plan

 

1,026,947

 

 

Shares reserved for future issuance under the 2018 Employee Stock Purchase Plan

 

270,000

 

 

 

 

3,570,063

 

21,916,707

 

 

10. Stock-Based Compensation

 

2015 Stock Option and Grant Plan

 

The Company’s 2015 Stock Option and Grant Plan, as amended (the “2015 Plan”), provided for the Company to grant incentive or nonqualified stock options, restricted stock awards, unrestricted stock awards or restricted stock units to employees, directors and consultants of the Company. The 2015 Plan was administered by the board of directors, or at the discretion of the board of directors, by a committee of the board of directors. The exercise prices, vesting and other restrictions for awards granted under the

 

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2015 Plan were determined at the discretion of the board of directors, or their committee if so delegated, except that the exercise price per share of the stock options was not permitted to be less than 100% of the fair market value of a share of the Company’s common stock on the date of grant and the term of the stock options was not permitted to be greater than ten years. Stock options granted under the 2015 Plan to employees generally vest over four years and expire after 10 years.

 

The total number of shares of common stock that were authorized for issuance under the 2015 Plan was 4,665,175 shares as of December 31, 2017. As of the effective date of the 2018 Stock Option and Incentive Plan, and as of September 30, 2018, no shares remained available for future issuance under the 2015 Plan.

 

2018 Stock Option and Incentive Plan

 

In anticipation of the Company’s IPO, on June 13, 2018, the Company’s stockholders approved the 2018 Stock Option and Incentive Plan (the “2018 Plan”), which became effective upon the effectiveness of the Company’s registration statement on Form S-1 for its IPO. The 2018 Plan provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock units, restricted stock awards, unrestricted stock awards and dividend equivalent rights to the Company’s officers, employees, directors and other key persons (including consultants). The number of shares initially reserved for issuance under the 2018 Plan was 1,215,000 shares, which shall be cumulatively increased on January 1, 2019 and each January 1 thereafter by 4% of the number of shares of the Company’s common stock outstanding on the immediately preceding December 31 or such lesser number of shares determined by the Company’s compensation committee.

 

On and after the effective date of the 2018 Plan, the Company will not grant any further awards under the 2015 Plan. However, the shares of common stock underlying any awards that are forfeited, cancelled, held back upon exercise or settlement of an award to satisfy the exercise price or tax withholding, reacquired by the Company prior to vesting, satisfied without the issuance of stock, expire or are otherwise terminated (other than by exercise) under the 2018 Plan and the 2015 Plan will be added back to the shares of common stock available for issuance under the 2018 Plan.

 

The terms of stock options and restricted stock awards, including vesting requirements, are determined by the board of directors or its delegates, subject to the provisions of the 2018 Plan.

 

As of September 30, 2018, there were 1,026,947 shares available for future issuance under the 2018 Plan.

 

2018 Employee Stock Purchase Plan

 

On June 13, 2018, the Company’s stockholders approved the 2018 Employee Stock Purchase Plan (the “ESPP”), which became effective upon the effectiveness of the Company’s registration statement on Form S-1 for its IPO. A total of 270,000 shares of common stock were reserved for issuance under the ESPP. In addition, the number of shares of common stock that may be issued under the ESPP will automatically increase on January 1, 2019, and each January 1 thereafter through January 1, 2028, by the lesser of (i) 405,000 shares of common stock, (ii) 1% of the number of shares of the Company’s common stock outstanding on the immediately preceding December 31 or (iii) such lesser number of shares determined by the administrator of the Company’s ESPP. No offering periods under the 2018 ESPP had been initiated as of September 30, 2018.

 

Stock Options

 

The following table summarizes the Company’s stock option activity under the 2015 Plan and the 2018 Plan since December 31, 2017:

 

 

 

Number
of
Shares

 

Weighted
Average
Exercise Price

 

Weighted
Average
Contractual
Term

 

Aggregate
Intrinsic
Value

 

 

 

 

 

 

 

(in years)

 

(in thousands)

 

Outstanding as of December 31, 2017

 

1,587,293

 

$

4.11

 

9.17

 

$

8,790

 

Granted

 

838,663

 

11.21

 

 

 

Exercised

 

(128,653

)

3.10

 

 

 

Forfeited

 

(24,187

)

11.71

 

 

 

Outstanding as of September 30, 2018

 

2,273,116

 

$

6.71

 

8.81

 

$

6,376

 

Options vested or expected to vest as of September 30, 2018

 

2,273,116

 

$

6.71

 

8.81

 

$

6,376

 

Options exercisable as of September 30, 2018

 

493,958

 

$

3.67

 

8.32

 

$

2,418

 

 

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The weighted average grant-date fair value per share of stock options granted during the three and nine months ended September 30, 2018 was $9.85 per share and $8.99 per share, respectively. The weighted average grant-date fair value per share of stock options granted during the three and nine months ended September 30, 2017 was $4.69 per share.

 

The aggregate intrinsic value of stock options exercised during the three and nine months ended September 30, 2018 was $0.3 million and $1.1 million, respectively. The aggregate intrinsic value of stock options exercised during the three and nine months ended September 30, 2017 was $0.1 million.

 

Stock Option Valuation

 

The assumptions that the Company used to determine the fair value of the stock options granted to employees and directors were as follows, presented on a weighted average basis:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Expected volatility

 

102.45

%

103.25

%

101.82

%

103.31

%

Risk-free interest rate

 

2.84

%

1.87

%

2.63

%

1.88

%

Expected dividend yield

 

0.00

%

0.00

%

0.00

%

0.00

%

Expected life (in years)

 

6.08

 

6.02

 

6.00

 

6.06

 

 

There were no stock option awards granted to non-employees during the three or nine months ended September 30, 2018. Stock option awards granted to non-employees during the three and nine months ended September 30, 2017 were not significant.

 

Restricted Common Stock

 

Restricted stock awards originally issued under the terms of the 2015 Plan allow the Company, at its discretion, to repurchase unvested shares at the initial purchase price if the employees or non-employees terminate their service relationship with the Company.

 

The following table summarizes the Company’s restricted common stock activity under the 2015 Plan since December 31, 2017:

 

 

 

Number of
Shares

 

Weighted
Average Grant-
Date Fair Value
per Share

 

Unvested restricted common stock as of December 31, 2017

 

703,155

 

$

1.93

 

Cancelled

 

(12,625

)

$

1.30

 

Vested

 

(231,912

)

$

1.77

 

Unvested restricted common stock as of September 30, 2018

 

458,618

 

$

2.00

 

 

The aggregate intrinsic value of restricted common stock awards that vested during the three and nine months ended September 30, 2018 was $0.1 million and $2.0 million, respectively, and during the three and nine months ended September 30, 2017 was $1.7 million and $2.3 million, respectively.

 

Founder and Collaborator Awards

 

From May 2015 through July 2016, the Company issued 1,510,000 shares of restricted common stock outside of the 2015 Plan to non-employee founders and collaborators. The shares were issued under the terms of the respective restricted common stock agreements and unvested shares are subject to repurchase by the Company upon the holder’s termination of their relationship with the Company. The unvested shares of restricted common stock are subject to the Company’s right to repurchase at the original purchase price per share.

 

Of the total shares of restricted common stock awarded to the founders and collaborators, 300,000 shares vested immediately upon grant; 910,000 shares vest quarterly over a four-year period based on each grantee’s continued service relationship with the Company in varying capacity as advisors; and 180,000 shares vest upon the achievement of specified performance milestones. Additionally, 120,000 shares were issued as fully vested awards, but are subject to a repurchase option, which expires upon the achievement of specified milestones. As of September 30, 2018, the repurchase option on 80,000 of these shares has expired.

 

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Of these awards, the underlying restricted common stock agreement for 180,000 shares of restricted common stock provides for a put option whereby the recipient may sell its vested shares back to the Company at a price per share equal to the fair value of the Company’s common stock upon both (i) the termination of the consulting agreement between the recipient and the Company for any reason and (ii) the determination by the recipient’s employer that the ownership of the restricted common stock is in violation of the employer’s conflict of interest policy. Prior to the closing of the Company’s IPO, these awards were classified in the consolidated balance sheet as contingently redeemable common stock and were presented outside of permanent equity. As of December 31, 2017 $0.4 million was recorded in temporary equity related to these awards. Upon the closing of the Company’s IPO, this put option expired and the amount recorded in temporary equity was recorded to additional paid in capital.

 

A summary of the changes in the Company’s unvested restricted common stock awards granted to founders and collaborators since December 31, 2017 is as follows:

 

 

 

Number of
Shares

 

Weighted
Average Grant-
Date Fair Value
per Share

 

Unvested restricted common stock as of December 31, 2017

 

578,123

 

$

1.30

 

Vested

 

(170,622

)

$

1.30

 

Unvested restricted common stock as of September 30, 2018

 

407,501

 

$

1.30

 

 

The aggregate intrinsic value of restricted common stock awards issued outside of the 2015 Plan that vested during the three and nine months ended September 30, 2018 was $0.1 million and $1.5 million, respectively, and during the three and nine months ended September 30, 2017 was $0.9 million and $1.5 million, respectively.

 

Stock-Based Compensation Expense

 

The Company recorded stock-based compensation expense related to all stock-based awards in the following expense categories of its condensed consolidated statements of operations and comprehensive loss (in thousands):

 

 

 

Three Months
Ended September 30,

 

Nine Months Ended
September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Research and development expenses

 

$

896

 

$

500

 

$

3,071

 

$

1,551

 

General and administrative expenses

 

748

 

229

 

1,644

 

575

 

 

 

$

1,644

 

$

729

 

$

4,715

 

$

2,126

 

 

During the three months ended March 31, 2018, the Company recognized stock-based compensation expense of $0.4 million for awards with performance-based vesting conditions related to the expiration of an additional repurchase option on a portion of the unvested restricted common shares issued to DFCI (Note 7). During the nine months ended September 30, 2017, the Company recognized stock-based compensation expense of $0.2 million for awards with performance-based vesting conditions related to the expiration of a repurchase option on a portion of the unvested restricted common shares issued to DFCI upon the achievement of a specified development milestone by DFCI.

 

As of September 30, 2018, excluding awards with performance-based vesting conditions, the Company had an aggregate of $12.1 million of unrecognized stock-based compensation expense, which is expected to be recognized over a weighted average period of 1.17 years.

 

11. Income Taxes

 

2017 U.S. Tax Reform

 

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Reform Act”) was enacted, which significantly reforms the Internal Revenue Code of 1986, as amended. The Tax Reform Act, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from the existing top marginal rate of 35% to a flat rate of 21%, effective as of January 1, 2018; limitation of the tax deduction for interest expense; limitation of the deduction for net operating losses to 80% of annual taxable income and elimination of net operating loss carrybacks, in each case, for losses arising in taxable years beginning after December 31, 2017 (though any such tax losses may be carried forward indefinitely); and modifying or repealing many business deductions and credits, including reducing the business tax credit for certain clinical testing expenses incurred in the testing of certain drugs for rare diseases or conditions generally referred to as “orphan drugs”.

 

The staff of the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable

 

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detail to complete the accounting for certain income tax effects of the Tax Reform Act. In connection with the initial analysis of the impact of the Tax Reform Act, the Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. The remeasurement of the Company’s deferred tax assets and liabilities was offset by a corresponding change in the Company’s valuation allowance.

 

As of December 31, 2017, the Company was still in the process of analyzing the impact to the Company of the Tax Reform Act. Where the Company was not able to make reasonable estimates of the effects for which its analysis was not yet complete, the Company recorded provisional amounts. During the three months ended June 30, 2018, the Company finalized its analysis and filed its 2017 U.S. corporate income tax return. As a result, no material adjustments were made to the net provisional amounts recorded as of December 31, 2017 related to the Tax Reform Act.

 

Income Taxes

 

During the three and nine months ended September 30, 2018 and 2017, the Company recorded no income tax benefits for the net operating losses incurred and research and development tax credits earned due to its uncertainty of realizing a benefit from those items. As of September 30, 2018, the amount of the Company’s deferred tax assets did not change materially from the amount as of December 31, 2017.

 

The Company has not recorded any amounts for unrecognized tax benefits as of September 30, 2018 or December 31, 2017.

 

The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal and state jurisdictions, where applicable. There are currently no pending tax examinations. As of September 30, 2018 and December 31, 2017, the Company’s tax years are still open under statute from 2014 to the present. It is the Company’s policy to include penalties and interest expense related to income taxes as a component of other income (expense) and interest expense, respectively, as necessary. As of September 30, 2018 and December 31, 2017, the Company had no accrued interest or penalties related to uncertain tax positions and no amounts have been recognized in the Company’s condensed consolidated statements of operations and comprehensive loss.

 

12. Net Loss per Share

 

Net Loss per Share

 

The Company excluded 866,119 shares of restricted common stock for the three and nine months ended September 30, 2018 and 1,427,948 shares of restricted common stock for the three and nine months ended September 30, 2017 from the calculation of basic net loss per share because these shares had not vested.

 

The Company’s potential dilutive securities, which include stock options, unvested restricted common stock and redeemable convertible preferred stock, have been excluded from the computation of diluted net loss per share attributable to common stockholders whenever the effect of including them would be to reduce the net loss per share. In periods where there is a net loss, the weighted average number of common shares outstanding used to calculate both basic and diluted net loss per share attributable to common stockholders is the same. The following potential common shares, presented based on amounts outstanding at each period end, were excluded from the calculation of diluted net loss per share attributable to common stockholders for the periods indicated because including them would have had an anti-dilutive effect:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

Series A preferred stock

 

 

11,099,994

 

 

11,099,994

 

Series B preferred stock

 

 

4,982,201

 

 

4,982,201

 

Outstanding stock options

 

2,273,116

 

1,521,420

 

2,273,116

 

1,521,420

 

Unvested restricted common stock

 

866,119

 

1,427,948

 

866,119

 

1,427,948

 

 

 

3,139,235

 

19,031,563

 

3,139,235

 

19,031,563

 

 

13. Related Parties

 

A member of the Company’s board of directors is a founding director and the current president of Broad. In November 2015, the Company entered into the 2015 Broad Agreement with Broad (Note 7) and, as consideration, the Company granted 60,000 shares of restricted common stock to Broad, which were determined to have a fair value of $0.1 million. Additionally, the Company must pay Broad immaterial annual license maintenance fees. At the time the Company entered into the 2015 Broad Agreement, the Company reimbursed Broad $0.6 million for a portion of past patent expenses and, under the terms of the license agreement, the Company is required to reimburse Broad for future patent expenses related to patents licensed to the Company. The Company could be obligated

 

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to make up to $12.6 million of developmental milestone payments to Broad if certain development milestones are achieved over the term of the license agreement. Additionally, under the terms of the license agreement, the Company could be obligated to make up to an aggregate of $97.5 million of payments upon the achievement of specified sales milestones and to pay tiered royalties of low to mid single-digit percentages on net sales of products licensed under the agreement. The Company is required to pay Broad a low double-digit percentage of any consideration received by the Company from a sublicensee in consideration for a sublicense. No developmental or commercial milestones have been achieved to date. In August 2016, the Company entered into a license agreement with DFCI in connection with the development of licensed products referred to in the 2015 Broad Agreement. As consideration, the Company granted 120,000 shares of restricted common stock to Broad, which were determined to have a fair value of $0.2 million. In June 2018, to align with institutional policies in place between Broad, DFCI and MGH, DFCI and MGH transferred certain of the shares of restricted common stock that they had previously received to Broad. The Company recorded expenses related to payments to Broad of $0.5 million and $1.0 million during the three and nine months ended September 30, 2018, respectively, and $0.3 million and $0.8 million during the three and nine months ended September 30, 2017, respectively. At September 30, 2018 and December 31, 2017, the Company had $1.0 million and $0.2 million in accounts payable and accrued expenses due to Broad, respectively.

 

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

 

Overview

 

We are a clinical-stage immuno-oncology company and a leader in the field of neoantigen-targeted therapies, dedicated to transforming the treatment of cancer by directing the immune system towards neoantigens. Genetic mutations, which are a hallmark of cancer, can result in specific immune targets called neoantigens. The presence of neoantigens in cancer cells and their absence in normal cells makes them compelling, untapped targets for cancer therapy. By directing the immune system towards these targets, we believe our neoantigen-targeted therapies will offer a new level of patient and tumor specificity in the field of cancer immunotherapy that will drive a strong risk-benefit profile to dramatically improve patient outcomes.

 

To date, we have devoted substantially all of our resources to organizing and staffing our company, business planning, raising capital, acquiring and discovering product candidates, securing related intellectual property rights and conducting research and development activities related to our product candidates. From inception through September 30, 2018, we have funded our operations primarily through an aggregate of $100.0 million of gross proceeds from our initial public offering of our common stock, or IPO, as well as sales of our preferred stock and convertible debt. To date, we have not generated any revenue from product sales and do not expect to do so for several years, if at all. Due to our significant research and development expenditures, we have generated substantial operating losses in each period since inception, including net losses of $18.4 million and $53.8 million in the three and nine months ended September 30, 2018, respectively, and $14.0 million and $33.1 million in the three and nine months ended September 30, 2017, respectively. As of September 30, 2018, we had an accumulated deficit of $150.6 million. We expect to incur substantial additional losses in the future as we expand our research and development activities.

 

We anticipate that our expenses will increase significantly in connection with our ongoing activities, as we:

 

·                  advance our lead product candidate, NEO-PV-01 in multiple clinical trials, including continuing our ongoing clinical trials and commencing additional clinical trials;

 

·                  advance NEO-PTC-01 and NEON / SELECT product candidates into clinical trials;

 

·                  further invest in the development of our RECON® bioinfomatics engine;

 

·                  further invest in our combined T cell biology and immune-monitoring capabilities;

 

·                  further invest in our manufacturing capabilities;

 

·                  maintain, expand, protect and defend our intellectual property portfolio;

 

·                  acquire or in-license technology;

 

·                  increase our headcount to support our research and development efforts; and

 

·                  incur additional costs and headcount associated with operating as a public company.

 

As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through the sale of equity, debt financings or other capital sources, including collaborations with other companies or other strategic transactions. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more of our product candidates or delay our pursuit of potential in-licenses or acquisitions.

 

Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses or the timing of when or if we will be able to achieve or maintain profitability. Even if we are able to generate product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.

 

On June 29, 2018, we completed our IPO in which we issued and sold 6,250,000 shares of our common stock at a public offering price of $16.00 per share in exchange for net proceeds of $90.0 million after deducting underwriting discounts, commissions and other offering costs.

 

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As of September 30, 2018, we had cash, cash equivalents and marketable securities of $121.7 million. We believe that our existing cash, cash equivalents and marketable securities, will enable us to fund our operating expenses and capital expenditure requirements into at least the first quarter of 2020. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. See “—Liquidity and Capital Resources.”

 

Components of Results of Operations

 

Revenue

 

We have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products for several years, if at all. If our development efforts for our current or future product candidates are successful and result in marketing approval or collaboration or license agreements with third parties, we may generate revenue in the future from a combination of product sales or payments from collaboration or license agreements that we may enter into with third parties.

 

Operating Expenses

 

Research and Development Expenses

 

Research and development expenses represent costs incurred by us for the discovery, development and manufacture of our product candidates and include:

 

·                  expenses incurred under agreements with third parties, including contract research organizations, or CROs, contract manufacturing organizations, or CMOs, and suppliers;

 

·                  license fees to acquire and maintain in-process technology and data;

 

·                  personnel-related costs, including salaries, benefits and non-cash stock-based compensation expense, for personnel engaged in research and development functions;

 

·                  costs of outside consultants, including their fees, related travel expenses and stock-based compensation expense;

 

·                  the costs of laboratory supplies and acquiring, developing and manufacturing preclinical study and clinical trial materials;

 

·                  costs related to compliance with regulatory requirements; and

 

·                  facility-related expenses, which include direct depreciation costs and allocated expenses for rent and maintenance of facilities and general support services.

 

We expense research and development costs as incurred. We recognize costs for certain development activities, such as clinical trials and manufacturing costs, based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment or other information provided to us by our vendors. Payments for these activities are based on the terms of the individual agreements, which may differ from the pattern of costs incurred, and are reflected in our financial statements as prepaid or accrued external research and development expenses. Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. These amounts are recognized as an expense as the goods are delivered or the related services are performed, or until it is no longer expected that the goods will be delivered or the services rendered.

 

We use our employee and infrastructure resources across our multiple research and development programs directed toward developing our NEON / ONE and NEON / SELECT approaches and for identifying and developing product candidates. We track outsourced development and manufacturing costs, including external clinical and regulatory costs, by development product candidates, but we do not allocate costs such as personnel costs or other internal costs to specific development of product candidates. These external and unallocated research and development expenses are summarized in the table below:

 

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Table of Contents

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

(in thousands)

 

NEO-PV-01

 

$

6,338

 

$

5,533

 

$

18,328

 

$

10,571

 

NEO-PTC-01

 

389

 

495

 

1,537

 

965

 

Other early-stage development expenses

 

731

 

640

 

1,882

 

1,446

 

Unallocated expenses

 

6,983

 

4,862

 

20,656

 

13,292

 

Total research and development expenses

 

$

14,441

 

$

11,530

 

$

42,403

 

$

26,274

 

 

At this time, we cannot reasonably estimate or know the nature, timing, and estimated costs of the efforts that will be necessary to complete the development of our product candidates. We are also unable to predict when, if ever, material net cash inflows will commence from sales of our products, if approved. This is due to the numerous risks and uncertainties associated with developing our product candidates, including the uncertainty related to:

 

·                  addition and retention of key research and development personnel;

 

·                  successful enrollment in and completion of our current clinical trials for NEO-PV-01, as well as the cost of future clinical trials for NEO-PV-01, NEO-PTC-01 and our NEON / SELECT approach;

 

·                  costs associated with the preclinical development and clinical trials for our early discovery product candidates;

 

·                  maintaining agreements with third-party manufacturers for clinical supply for our clinical trials and commercial manufacturing, if our product candidates are approved;

 

·                  receipt of marketing approvals from applicable regulatory authorities;

 

·                  commercializing products, if and when approved, whether alone or in collaboration with others;

 

·                  the terms and timing of any collaboration, license or other arrangement, including the terms and timing of any milestone payments thereunder;

 

·                  obtaining and maintaining patent and trade secret protection and regulatory exclusivity for our products if and when approved; and

 

·                  continued acceptable safety profiles of our products following approval.

 

A change in the outcome of any of these variables with respect to the development of any of our product candidates would significantly change the costs, timing and viability associated with the development of that product candidate.

 

Research and development activities account for a significant portion of our operating expenses. We expect our research and development expenses to increase over the next several years as we continue to implement our business strategy, which includes advancing clinical development of NEO-PV-01 and progressing NEO-PTC-01 and our NEON / SELECT approach into clinical development, expanding our research and development efforts, seeking regulatory approvals for any product candidates that successfully complete clinical trials, accessing and developing additional product candidates, and hiring additional personnel to support our research and development efforts. In addition, product candidates in later stages of clinical development generally incur higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. As a result, we expect our research and development expenses to increase as our product candidates advance into later stages of clinical development.

 

General and Administrative Expenses

 

General and administrative expenses consist of personnel-related costs, including salaries, benefits and non-cash stock-based compensation expense, for our personnel in executive, legal, finance and accounting, human resources, business operations and other administrative functions, legal fees related to patent, intellectual property and corporate matters, fees paid for accounting, regulatory and tax services, insurance costs, consulting fees and facility-related costs not otherwise included in research and development expenses.

 

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We anticipate that our general and administrative expenses will increase in the future to support our continued research and development activities and the increased costs of operating as a public company, including costs of accounting, audit, legal, regulatory and tax-related services associated with maintaining compliance with exchange listing and U.S. Securities and Exchange Commission, or SEC, requirements, additional insurance costs, investor and public relations costs, and other administration and professional services.

 

Other Income, Net

 

Other income, net consists primarily of interest income related to our investments in cash equivalents and marketable securities.

 

Results of Operations

 

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

 

The following table summarizes our results of operations for the three months ended September 30, 2018 and 2017, along with the changes in those items in dollars:

 

 

 

Three Months Ended
September 30,

 

 

 

 

 

2018

 

2017

 

Change

 

 

 

(in thousands)

 

Operating expenses:

 

 

 

 

 

 

 

Research and development

 

$

14,441

 

$

11,530

 

$

2,911

 

General and administrative

 

4,612

 

2,612

 

2,000

 

Total operating expenses

 

19,053

 

14,142

 

4,911

 

Loss from operations

 

(19,053

)

(14,142

)

(4,911

)

Other income, net

 

662

 

153

 

509

 

Net loss

 

$

(18,391

)

$

(13,989

)

$

(4,402

)

 

Research and Development

 

Research and development expenses increased by $2.9 million from $11.5 million for the three months ended September 30, 2017 to $14.4 million for the three months ended September 30, 2018 due primarily to the following:

 

·                  $1.8 million for increased personnel-related costs due to increased headcount, including $0.4 million of increased non-cash stock-based compensation expense;

 

·                  $0.8 million for increased costs related to the advancement of our NEO-PV-01 product candidate, primarily including the following:

 

·                  $0.6 million of increased external research and development costs to support our ongoing clinical trials, as well as costs related to the preparation for additional planned clinical trials, and

 

·                  $0.2 million of increased external manufacturing and infrastructure costs related to the clinical supply of NEO-PV-01; and

 

·                  $0.3 million of increased costs to support the advancement of our other product candidates.

 

General and Administrative

 

General and administrative expenses increased by $2.0 million from $2.6 million for the three months ended September 30, 2017 to $4.6 million for the three months ended September 30, 2018. The increase in general and administrative expenses was primarily attributable to the following:

 

·                  $0.9 million for increased consulting and professional fees, including accounting, tax and legal services;

 

·                  $0.5 million of increased non-cash stock-based compensation expense; and

 

·                  $0.4 million of increased other general and administrative costs primarily due to the increased costs of being a public company, as well as insurance related costs.

 

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Other Income, Net

 

Other income increased by $0.5 million from $0.2 million for the three months ended September 30, 2017 to $0.7 million for the three months ended September 30, 2018 due primarily to increased interest and investment income on our cash, cash equivalents and marketable securities as a result of the investment of the net proceeds received from our IPO.

 

Comparison of the Nine Months Ended September 30, 2018 and 2017

 

The following table summarizes our results of operations for the nine months ended September 30, 2018 and 2017, along with the changes in those items in dollars:

 

 

 

Nine Months Ended
September 30,

 

 

 

 

 

2018

 

2017

 

Change

 

 

 

(in thousands)

 

Operating expenses:

 

 

 

 

 

 

 

Research and development

 

$

42,403

 

$

26,274

 

$

16,129

 

General and administrative

 

12,524

 

7,180

 

5,344

 

Total operating expenses

 

54,927

 

33,454

 

21,473

 

Loss from operations

 

(54,927

)

(33,454

)

(21,473

)

Other income, net

 

1,116

 

394

 

722

 

Net loss

 

$

(53,811

)

$

(33,060

)

$

(20,751

)

 

Research and Development

 

Research and development expenses increased by $16.1 million from $26.3 million for the nine months ended September 30, 2017 to $42.4 million for the nine months ended September 30, 2018 due primarily to the following:

 

·                  $7.8 million for increased costs related to the advancement of our NEO-PV-01 product candidate, primarily including the following:

 

·                  $6.0 million of increased external manufacturing and infrastructure costs related to the clinical supply of NEO-PV-01, and

 

·                  $1.7 million of other external research and development costs to support our ongoing clinical trials, as well as costs related to the preparation for additional planned clinical trials;

 

·                  $5.5 million for increased personnel-related costs due to increased headcount, including $1.5 million of increased non-cash stock-based compensation expense;

 

·                  $0.6 million for increased costs related to NEO-PTC-01, primarily due to increased external research and development and consulting costs;

 

·                  $0.6 million related to a milestone payable under one of our collaboration agreements as a result of the closing of our IPO;

 

·                  $0.5 million in increased facility-related costs, including occupancy costs, as well as depreciation and other maintenance costs;

 

·                  $0.5 million in increased purchases of laboratory supplies and consumables for the advancement of our product candidates; and

 

·                  $0.4 million for increased costs related to our early stage development candidates.

 

General and Administrative

 

General and administrative expenses increased by $5.3 million from $7.2 million for the nine months ended September 30, 2017 to $12.5 million for the nine months ended September 30, 2018. The increase in general and administrative expenses was primarily attributable to the following:

 

·                  $2.4 million for increased personnel-related costs, including $1.1 million of increased non-cash stock-based compensation expense, primarily due to increased general and administrative headcount to support the growth of our research and development organization and increased headcount associated with being a public company;

 

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·                  $1.9 million for increased consulting and professional fees, including accounting, tax and legal services; and

 

·                  $1.0 million of increased other general and administrative costs primarily associated with being a public company, including travel, insurance and tax related expenditures.

 

Other Income, Net

 

Other income increased by $0.7 million from $0.4 million for the nine months ended September 30, 2017 to $1.1 million for the nine months ended September 30, 2018 due primarily to increased interest and investment income on our cash, cash equivalents and marketable securities as a result of the investment of the net proceeds received from our IPO.

 

Liquidity and Capital Resources

 

Sources of Liquidity

 

Since our inception, we have incurred significant losses in each period and on an aggregate basis. We have not yet commercialized any of our product candidates, which are in various phases of preclinical and clinical development, and we do not expect to generate revenue from sales of any products for several years, if at all. We have funded our operations through September 30, 2018 with gross proceeds of $100.0 million from our IPO, as well as sales of our preferred stock and convertible debt. As of September 30, 2018, we had cash, cash equivalents and marketable securities of $121.7 million.

 

Historical Cash Flows

 

The following table provides information regarding our cash flows for each of the periods presented (in thousands):

 

 

 

Nine Months Ended
September 30,

 

 

 

2018

 

2017

 

 

 

 

 

 

 

Net cash provided by (used in):

 

 

 

 

 

Operating activities

 

$

(45,542

)

$

(29,367

)

Investing activities

 

(42,297

)

(29,612

)

Financing activities

 

90,368

 

55

 

Net increase (decrease) in cash, cash equivalents and restricted cash

 

$

2,529

 

$

(58,924

)

 

Cash Used in Operating Activities

 

The cash used in operating activities resulted primarily from our net losses adjusted for non-cash charges and changes in components of working capital, which are primarily the result of increased expenses and timing of vendor payments.

 

During the nine months ended September 30, 2018, operating activities used $45.5 million of cash, primarily resulting from our net loss of $53.8 million, partially offset by net non-cash charges of $5.8 million and changes in our operating assets and liabilities of $2.5 million. Net cash provided by changes in our operating assets and liabilities for the nine months ended September 30, 2018 consisted primarily of a $2.3 million increase in accrued expenses and other liabilities and a $0.5 million increase in accounts payable, partially offset by a $0.5 million increase in prepaid expenses and other current assets.

 

During the nine months ended September 30, 2017, operating activities used $29.4 million of cash, primarily resulting from our net loss of $33.1 million, partially offset by net non-cash charges of $2.9 million and cash provided by changes in our operating assets and liabilities of $0.8 million. Net cash provided by changes in our operating assets and liabilities for the nine months ended September 30, 2017 consisted primarily of a $1.3 million increase in accrued expenses and other liabilities, a $0.8 million decrease in other long-term assets and a $0.3 million decrease in prepaid expenses and other current assets, partially offset by a $1.6 million decrease in accounts payable.

 

Cash Used in Investing Activities

 

During the nine months ended September 30, 2018, net cash used in investing activities was $42.3 million, consisting of purchases of marketable securities of $72.9 million and purchases of property and equipment of $2.6 million, partially offset by proceeds from the sales and maturities of marketable securities of $33.2 million.

 

During the nine months ended September 30, 2017, net cash used in investing activities was $29.6 million, consisting of purchases of marketable securities of $31.3 million and purchases of property and equipment of $2.8 million, partially offset by proceeds from the sales and maturities of marketable securities of $4.5 million.

 

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Cash Provided by Financing Activities

 

During the nine months ended September 30, 2018, net cash provided by financing activities was $90.4 million, primarily consisting of $93.0 million of net proceeds from our IPO, after deducting underwriting discounts and commissions, and $0.4 million in proceeds from the exercise of stock options, partially offset by payments of initial public offering costs of $3.0 million.

 

During the nine months ended September 30, 2017, net cash provided by financing activities were insignificant and consisted primarily of proceeds from the exercise of stock options.

 

Funding Requirements

 

We expect our expenses to increase substantially in connection with our ongoing research and development activities, particularly as we advance the preclinical activities and clinical trials of our product candidates. As a result, we expect to incur substantial operating losses and negative operating cash flows for the foreseeable future.

 

Based on our current operating plan, we expect that our existing cash, cash equivalents and marketable securities, will enable us to fund our operating expenses and capital expenditure requirements into at least the first quarter of 2020. However, we have based this estimate on assumptions that may prove to be wrong and we could exhaust our capital resources sooner than we expect.

 

Because of the numerous risks and uncertainties associated with the development of our NEO-PV-01 and NEO-PTC-01 product candidates, other preclinical product candidates or programs, and our NEON / ONE and NEON / SELECT approaches and because the extent to which we may enter into collaborations with third parties for development of our product candidates is unknown, we may incorrectly estimate the timing and amounts of increased capital outlays and operating expenses associated with completing the research and development of our product candidates. Our funding requirements and timing and amount of our operating expenditures will depend largely on:

 

·                  the successful enrollment in, and completion of, our current clinical trials for NEO-PV-01, as well as the cost of future clinical trials for NEO-PV-01, NEO-PTC-01 and our NEON / SELECT approach;

 

·                  the number and characteristics of product candidates that we develop or may in-license;

 

·                  the terms of any collaboration agreements into which we may choose to enter;

 

·                  the outcome, timing and cost of meeting regulatory requirements established by the U.S. Food and Drug Administration, the European Medicines Agency and other comparable foreign regulatory authorities;

 

·                  the cost of filing, prosecuting, defending and enforcing our patent claims and other intellectual property rights;

 

·                  the cost of defending intellectual property disputes, including patent infringement or opposition actions brought by third parties against us or our product candidates;

 

·                  the effect of competing technological and market developments;

 

·                  the cost and timing of completion of commercial-scale outsourced manufacturing activities; and

 

·                  the cost of establishing sales, marketing and distribution capabilities for any product candidates for which we may receive regulatory approval in regions where we choose to commercialize our products on our own.

 

A change in the outcome of any of these or other variables with respect to the development of any of our product candidates could significantly change the costs and timing associated with the development of that product candidate. Furthermore, our operating plans may change in the future, and we may need additional funds to meet operational needs and capital requirements associated with such operating plans.

 

In addition to the variables described above, if and when any of our product candidates successfully complete development, we will incur substantial additional costs associated with regulatory filings, marketing approval, post-marketing requirements, maintaining our intellectual property rights, and regulatory protection, in addition to other commercial costs. We cannot reasonably estimate these costs at this time.

 

Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity or debt financings and collaboration arrangements. We currently have no credit facility or committed sources of capital. To the extent that we raise additional capital through the future sale of equity or debt, the ownership interests of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing common stockholders. If we raise additional funds through the issuance of debt securities, these securities could

 

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contain covenants that would restrict our operations. We may require additional capital beyond our currently anticipated amounts, and additional capital may not be available on reasonable terms, or at all. If we raise additional funds through collaboration arrangements or other strategic transactions in the future, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates, or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce, or terminate development or future commercialization efforts.

 

Off-Balance Sheet Arrangements

 

We did not have, during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under applicable SEC rules.

 

Contractual Obligations and Commitments

 

During the nine months ended September 30, 2018, there have been no material changes to our contractual obligations and commitments outside the ordinary course of business.

 

The following table summarizes our contractual obligations as of September 30, 2018 and the effects that these obligations are expected to have on our liquidity and cash flows in future periods:

 

Payments Due by Period

 

 

 

Total

 

Less Than
1 Year

 

1 to 3
Years

 

4 to 5
Years

 

More Than 5
Years

 

 

 

(in thousands)

 

Operating lease commitments(1)

 

$

12,197

 

$

1,933

 

$

3,924

 

$

4,164

 

$

2,176

 

Total

 

$

12,197

 

$

1,933

 

$

3,924

 

$

4,164

 

$

2,176

 

 


(1)         Primarily represents minimum payments due for our lease of office and laboratory space in Cambridge, Massachusetts under an operating lease agreement that expires in 2024.

 

We enter into contracts in the normal course of business with CROs, CMOs and other third parties for clinical trials, preclinical research studies and testing and manufacturing services. These contracts are generally cancelable by us upon up to 120 days’ prior written notice. Payments due upon cancellation consist only of payments for services provided or expenses incurred, including noncancelable obligations of our service providers, up to and through the date of cancellation. These payments are not included in the preceding table as the amount and timing of these payments are not known.

 

In the normal course of business, we have also entered into license and collaboration agreements with third parties. We have not included future payments under these agreements in the table of contractual obligations above since obligations under these agreements are contingent upon future events such as our achievement of specified development, regulatory, and commercial milestones, or royalties on net product sales. As of September 30, 2018 or December 31, 2017, the aggregate maximum amount of milestone payments we could be required to make under our then-existing license and collaboration agreements was approximately $116.9 million and $117.5 million, respectively. As of September 30, 2018 and December 31, 2017, we were unable to estimate the timing or likelihood of achieving these milestones or generating future product sales. During the three months ended June 30, 2018 and as a result of the closing of our IPO, we recorded approximately $0.6 million of incremental research and development expense related to a milestone payable under one of our collaboration agreements.

 

For a complete discussion of our contractual obligations and commitments, please refer to our “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Contractual Obligations and Commitments” in the Final Prospectus for our IPO filed pursuant to Rule 424(b)(4) under the Securities Act with the SEC on June 28, 2018, or the Final Prospectus.

 

Critical Accounting Policies and Estimates

 

Our management’s discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been 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 and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. During the nine months ended September 30, 2018, there were no material changes to our critical accounting policies as reported in our Final Prospectus.

 

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A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 to our condensed consolidated financial statements appearing elsewhere in this Quarterly Report.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

As of September 30, 2018, we had cash, cash equivalents and marketable securities of $121.7 million. This amount was comprised of cash and cash equivalents of $60.8 million and short-term marketable securities of $60.9 million. Our cash and cash equivalents consist primarily of money market funds that are invested in U.S. government-backed securities. Our short-term marketable securities consist of corporate debt securities and commercial paper with an original maturity greater than ninety days and less than one year from the balance sheet date. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates. Due to the short-term nature of our cash equivalents and marketable securities, a sudden change in interest rates would not be expected to have material effect on our business, financial condition or results of operations. Because of the short-term nature of the investments in our portfolio, an immediate change by 100 basis points in market interest rates would not have a material impact on the fair market value of our investment portfolio or on our financial position or results of operations.

 

We are not currently exposed to significant market risk related to changes in foreign currency exchange rates; however, we have contracted with and may continue to contract with vendors that are located in Europe. We may be subject to fluctuations in foreign currency rates in connection with certain of these agreements. Transactions denominated in currencies other than the United States dollar are recorded based on exchange rates at the time such transactions arise. While we have not engaged in the hedging of our foreign currency transactions to date, we are evaluating the costs and benefits of initiating such a program and may in the future hedge selected significant transactions denominated in currencies other than the U.S. dollar as we expand our international operation and our risk grows.

 

Inflation generally affects us by increasing our cost of labor and clinical trial costs. We do not believe that inflation had a material effect on our business, financial condition or results of operations during the nine months ended September 30, 2018 or 2017.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

The Company has established disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934, as amended, or Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to management, including the principal executive officer (our Chief Executive Officer) and principal financial officer (our Chief Financial Officer), to allow timely decisions regarding required disclosure.

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) as of September 30, 2018. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and our management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2018, our Principal Executive Officer and Principal Financial and Accounting Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

 

Changes in Internal Control over Financial Reporting

 

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1.   Legal Proceedings

 

From time to time, we may be involved in lawsuits, claims, investigations and proceedings, consisting of intellectual property, commercial, employment and other matters which arise in the ordinary course of business. While the outcome of any such proceedings cannot be predicted with certainty, as of September 30, 2018, we were not party to any legal proceedings that we would expect to have a material adverse impact on our financial position, results of operations or cash flow.

 

Item 1a. Risk Factors

 

In evaluating the Company and our business, careful consideration should be given to the following risk factors, in addition to the other information set forth in this Quarterly Report on Form 10-Q and in other documents that we file with the SEC. Investing in our common stock involves a high degree of risk. If any of the following risks and uncertainties actually occurs, our business, prospects, financial condition and results of operations could be materially and adversely affected. The risks described below are not intended to be exhaustive and are not the only risks facing the Company. New risk factors can emerge from time to time, and it is not possible to predict the impact that any factor or combination of factors may have on our business, prospects, financial condition and results of operations.

 

Risks Related to Our Business, Technology and Industry

 

We have incurred net losses in every year since our inception and anticipate that we will continue to incur net losses in the future.

 

We are a clinical-stage biopharmaceutical company with a limited operating history. Investment in biopharmaceutical product development is highly speculative because it entails substantial upfront capital expenditures and significant risk that any potential product candidate will fail to demonstrate adequate effect or an acceptable safety profile, gain regulatory approval and become commercially viable. We have no products approved for commercial sale and have not generated any revenue from product sales to date, and we continue to incur significant research and development and other expenses related to our ongoing operations. As a result, we are not profitable and have incurred losses in each period since our inception in October 2013. For the year ended December 31, 2017 and the nine months ended September 30, 2018, we reported net losses of $47.5 million and $53.8 million, respectively. As of September 30, 2018, we had an accumulated deficit of $150.6 million. We expect to continue to incur significant losses for the foreseeable future, and we expect these losses to increase as we continue our research and development of, and seek regulatory approvals for, our product candidates. We anticipate that our expenses will increase substantially if, and as, we:

 

·                  advance NEO-PV-01 into later-stage clinical development;

 

·                  advance our development programs into preclinical and clinical development;

 

·                  seek regulatory approvals for any product candidates that successfully complete clinical trials;

 

·                  hire additional clinical, quality assurance and scientific personnel;

 

·                  expand our operational, financial and management systems and increase personnel, including personnel to support our clinical development, manufacturing and commercialization efforts and our operations as a public company;

 

·                  maintain, expand and protect our intellectual property portfolio;

 

·                  establish a sales, marketing, medical affairs and distribution infrastructure to commercialize any products for which we may obtain marketing approval and intend to commercialize on our own or jointly with third parties; and

 

·                  acquire or in-license other product candidates and technologies.

 

To become and remain profitable, we or any potential future collaborator must develop and eventually commercialize products with significant market potential. This will require us to be successful in a range of challenging activities, including completing preclinical studies and clinical trials, obtaining marketing approval for product candidates, manufacturing, marketing and selling products for which we may obtain marketing approval and satisfying any post-marketing requirements. We may never succeed in any or all of these activities and, even if we do, we may never generate revenue that is significant or large enough to achieve profitability. If we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to

 

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become and remain profitable would decrease the value of our company and could impair our ability to raise capital, maintain our research and development efforts, expand our business or continue our operations. A decline in the value of our company also could cause you to lose all or part of your investment.

 

Even if we succeed in commercializing one or more of our product candidates, we will continue to incur substantial research and development and other expenditures to develop and market additional product candidates. We may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. The size of our future net losses will depend, in part, on the rate of future growth of our expenses and our ability to generate revenue. Our prior losses and expected future losses have had and will continue to have an adverse effect on our stockholders’ equity and working capital.

 

We will require additional capital to fund our operations and, if we fail to obtain necessary financing, we will not be able to complete the development and commercialization of our product candidates.

 

Our operations have consumed substantial amounts of cash since our inception. We expect to continue to spend substantial amounts to conduct further research and development and preclinical or nonclinical testing and studies and clinical trials of our current and future programs, to seek regulatory approvals for our product candidates and to launch and commercialize any products for which we receive regulatory approval, including potentially building our own commercial organization. As of September 30, 2018, we had approximately $121.7 million in cash, cash equivalents and marketable securities. Based on our current operating plan, we believe that our existing cash, cash equivalents and marketable securities will be sufficient to fund our operating expenses and capital expenditure requirements into at least the first quarter of 2020. However, our future capital requirements and the period for which our existing resources will support our operations may vary significantly from what we expect. We will in any event require additional capital in order to complete clinical development of any of our current programs. Our monthly spending levels will vary based on new and ongoing development and corporate activities. Because the length of time and activities associated with development of our product candidates is highly uncertain, we are unable to estimate the actual funds we will require for development and any approved marketing and commercialization activities. Our future funding requirements, both near and long-term, will depend on many factors, including, but not limited to:

 

·                  the initiation, progress, timing, costs and results of preclinical or nonclinical testing and studies and clinical trials for our product candidates;

 

·                  the clinical development plans we establish for these product candidates;

 

·                  the number and characteristics of product candidates that we develop or may in-license;

 

·                  the terms of any collaboration agreements we may choose to execute;

 

·                  the outcome, timing and cost of meeting regulatory requirements established by the U.S. Food and Drug Administration, or FDA, the European Medicines Agency, or EMA, and other comparable foreign regulatory authorities;

 

·                  the cost of filing, prosecuting, defending and enforcing our patent claims and other intellectual property rights;

 

·                  the cost of defending intellectual property disputes, including any patent infringement actions that may be brought by third parties in the future against us or our product candidates;

 

·                  the effect of competing technological and market developments;

 

·                  the cost and timing of formulation development and manufacturing, including the completion of commercial-scale outsourced manufacturing activities; and

 

·                  the cost of establishing sales, marketing and distribution capabilities for any product candidates for which we may receive regulatory approval in regions where we choose to commercialize our products on our own.

 

We do not have any committed external source of funds or other support for our development efforts and we cannot be certain that additional funding will be available on acceptable terms, or at all. Until we can generate sufficient product or royalty revenue to finance our cash requirements, which we may never do, we expect to finance our future cash needs through a combination of public or private equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements and other marketing or distribution arrangements. If we raise additional funds through public or private equity offerings, the terms of these securities may include liquidation or other preferences that adversely affect our stockholders’ rights. Further, to the extent that we raise additional capital

 

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through the sale of common stock or securities convertible or exchangeable into common stock, your ownership interest will be diluted. If we raise additional capital through debt financing, we would be subject to fixed payment obligations and may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional capital through marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish certain valuable rights to our product candidates, technologies, future revenue streams or research programs or grant licenses on terms that may not be favorable to us. We also could be required to seek collaborators for one or more of our current or future product candidates at an earlier stage than otherwise would be desirable or relinquish our rights to product candidates or technologies that we otherwise would seek to develop or commercialize ourselves. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of one or more of our products or product candidates or one or more of our other research and development initiatives. Any of the above events could significantly harm our business, prospects, financial condition and results of operations and cause the price of our common stock to decline.

 

In the past, our independent registered public accounting firm has included an explanatory paragraph relating to our ability to continue as a going concern in its report on our audited financial statements  and it is possible that their report on our financial statements may include it such an explanation again in the future.

 

The report from our independent registered public accounting firm for the year ended December 31, 2017 included an explanatory paragraph stating that our recurring losses and negative cash flows from operations since inception and required additional funding to finance our operations raised substantial doubt about our ability to continue as a going concern. With the completion of our initial public offering, we believe we now have sufficient capital to fund our operations into at least the first quarter of 2020. Going forward, if we are unable to obtain sufficient funding to support our operations, we could be forced to delay, reduce or eliminate all of our research and development programs, product portfolio expansion or commercialization efforts, and our financial condition and results of operations will be materially and adversely affected and we may be unable to continue as a going concern. In the future, reports from our independent registered public accounting firm may also contain statements expressing substantial doubt about our ability to continue as a going concern. If we seek additional financing to fund our business activities in the future and there remains substantial doubt about our ability to continue as a going concern, investors or other financing sources may be unwilling to provide additional funding to us on commercially reasonable terms or at all.

 

Our most advanced product candidates are uniquely manufactured for each patient and we may encounter difficulties in production, particularly with respect to scaling our manufacturing capabilities. If we or any of our third-party manufacturers with whom we contract encounter these types of difficulties, our ability to provide supply of our product candidates for clinical trials or our products for patients, if approved, could be delayed or stopped, or we may be unable to maintain a commercially viable cost structure.

 

The manufacturing process used to produce our product candidates is complex and novel and has not been validated for clinical or commercial production. For example, for NEO-PV-01, we custom design and manufacture up to 20 individually selected peptides with a proprietary formulation to construct a unique vaccine for each patient. Similarly, for NEO-PTC-01, we must harvest T cells from a patient and activate and expand these T cells ex vivo and ultimately infuse the T cells back into the patient’s body. As a result of these complexities, the cost to manufacture our product candidates is generally higher than traditional small molecule chemical compounds, and the manufacturing process is less reliable and is more difficult to reproduce.

 

Our manufacturing process will be susceptible to product loss or failure due to logistical issues associated with the collection of a patient’s tumor and blood or other samples, shipping that material to analytical laboratories, and shipping the final product back to the location using cold chain distribution where it will be administered to the patient, manufacturing issues associated with the differences in patient starting materials, interruptions in the manufacturing process, contamination, equipment or reagent failure, improper installation or operation of equipment, vendor or operator error, inconsistency in cell growth, and variability in product characteristics. Even minor deviations from normal manufacturing processes could result in reduced production yields, lot failures, product defects, product recalls, product liability claims and other supply disruptions. If for any reason we lose a patient’s starting material or one of our custom manufactured products at any point in the process, the manufacturing process for that patient will need to be restarted and the resulting delay may adversely affect that patient’s outcome. If microbial, viral or other contaminations are discovered in our product candidates or in the manufacturing facilities in which our product candidates are made, the manufacturing facilities may need to be closed for an extended period of time to investigate and remedy the contamination, which could result in our inability to produce or ship product. Because our product candidates are manufactured for each particular patient, we will be required to maintain a chain of identity with respect to materials as they move from the patient to the manufacturing facility, through the manufacturing process and back to the patient. Maintaining this type of chain of identity is difficult and complex, and failure to do so could result in adverse patient outcomes, loss of product, or regulatory action, including withdrawal of any approved products from the market. Further, as product candidates are developed through preclinical to later-stage clinical trials towards approval and commercialization, it is common that various aspects of the development program, such as manufacturing methods, are altered in an effort to optimize

 

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processes and results. If we make these types of changes, we may not achieve our intended objectives, and any of these changes could cause our product candidates to perform differently than we expect, potentially affecting the results of clinical trials.

 

Although we continue to optimize our manufacturing process, doing so is a difficult and uncertain task, and there are risks associated with scaling to the level required for advanced clinical trials or commercialization, including, among others, cost overruns, potential problems with process scale-out, process reproducibility, stability issues, lot consistency and timely availability of reagents or raw materials. If we are unable to adequately validate or scale-up the manufacturing process with our current manufacturer, we will need to transfer to another manufacturer and complete the manufacturing validation process, which can be a lengthy process. We ultimately may not be successful in transferring our production system or the manufacturer on whom we rely may not have the necessary capabilities to complete the implementation and development process. If we are able to adequately validate and scale-up the manufacturing process for our product candidates with a contract manufacturer, we will still need to negotiate an agreement for commercial supply with that contract manufacturer and it is not certain we will be able to come to agreement on terms acceptable to us. As a result, we may ultimately be unable to reduce the cost of goods for our product candidates to levels that will allow for an attractive return on investment if and when those product candidates are approved and commercialized.

 

The manufacturing process for any products that we may develop is subject to the FDA and foreign regulatory authority approval processes, and we will need to contract with manufacturers who we believe can meet applicable FDA and foreign regulatory authority requirements on an ongoing basis. If we or our contract manufacturing organizations, or CMOs, are unable to reliably produce products to specifications acceptable to the FDA or other regulatory authorities, we may not obtain or maintain the approvals we need to commercialize our products. Even if we obtain regulatory approval for any of our product candidates, there is no assurance that either we or our CMOs will be able to manufacture the approved product to specifications and under required good manufacturing practices acceptable to the FDA or other regulatory authorities, to produce it in sufficient quantities to meet the requirements for the potential launch of the product, or to meet potential future demand. Any of these challenges could delay completion of clinical trials, require bridging clinical trials or the repetition of one or more clinical trials, increase clinical trial costs, delay approval of our product candidates, impair commercialization efforts, increase our cost of goods and have an adverse effect on our business, financial condition, results of operations and growth prospects.

 

Our future success depends on our ability to manufacture our products on a timely basis with acceptable manufacturing costs, while at the same time maintaining good quality control and complying with applicable regulatory requirements, and an inability to do so could have a material adverse effect on our business, financial condition, prospects and results of operations. In addition, we could incur higher manufacturing costs if manufacturing processes or standards change, and we could need to replace, modify, design or build and install equipment, all of which would require additional capital expenditures. Specifically, because our product candidates may have a higher cost of goods than conventional therapies, and may require long-term follow up evaluations, the risk that coverage and reimbursement rates may be inadequate for us to achieve profitability may be greater.

 

We expect to evaluate the use of one or more CMOs, as well as the possibility of establishing our own capabilities and infrastructure, including a manufacturing facility. If we choose to build our own manufacturing facility, we will need significant funding and will need to select an adequate location. We expect that development of our own manufacturing facility would provide us with enhanced control of material supply for both clinical trials and the commercial market, enable the more rapid implementation of process changes, and allow for better long-term margins. However, we have no experience in developing a manufacturing facility and may never be successful in developing our own manufacturing facility or capability. If we determine to establish our own manufacturing capabilities and infrastructure, we will also need to hire additional personnel to manage our operations and facilities and develop the necessary infrastructure to continue the research and development, and eventual commercialization, if approved, of our product candidates. If we fail to select the correct location, complete the construction in an efficient manner, recruit the required personnel and generally manage our growth effectively, the development and production of our product candidates could be curtailed or delayed. We may establish multiple manufacturing facilities as we expand our commercial footprint to multiple geographies, which may lead to regulatory delays or could prove costly. Even if we are successful, our manufacturing capabilities could be affected by cost-overruns, unexpected delays, equipment failures, labor shortages, natural disasters, power failures and numerous other factors that could prevent us from realizing the intended benefits of our manufacturing strategy and have a material adverse effect on our business, financial condition, results of operations and prospects.

 

In addition, the FDA, the EMA and other foreign regulatory authorities may require us to submit samples of any lot of any approved product, together with the protocols showing the results of applicable tests at any time. Under some circumstances, the FDA, the EMA or other foreign regulatory authorities may require that we not distribute a lot until the relevant agency authorizes its release. Slight deviations in the manufacturing process, including those affecting quality attributes and stability, may result in unacceptable changes in the product that could result in lot failures or product recalls. Lot failures or product recalls could cause us to delay product launches or clinical trials, which could be costly to us and otherwise harm our business, financial condition, results of operations and prospects. Problems in our manufacturing process could restrict our ability to meet market demand for our products.

 

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We also may encounter problems hiring and retaining the experienced scientific, quality-control and manufacturing personnel needed to operate our manufacturing processes, which could result in delays in production or difficulties in maintaining compliance with applicable regulatory requirements.

 

Any problems in our manufacturing process or facilities could make us a less attractive collaborator for potential partners, including larger pharmaceutical companies and academic research institutions, which could limit our access to additional attractive development programs.

 

Our business is highly dependent on the success of our lead product candidate, NEO-PV-01, as well as NEO-PTC-01, NEO-SV-01 and our other preclinical programs. All of our product candidates will require significant additional nonclinical and clinical development before we can seek regulatory approval for and launch a product commercially.

 

Our business and future success depends on our ability to obtain regulatory approval of and then successfully launch and commercialize our lead product candidate, NEO-PV-01, as well as NEO-PTC-01, NEO-SV-01 and our other preclinical programs. NEO-PV-01 is currently being investigated in two Phase 1b clinical trials, and we plan to initiate two additional exploratory clinical trials evaluating NEO-PV-01. In addition, we are currently conducting additional research and development to optimize the manufacturing process for NEO-PTC-01 and NEO-SV-01 and to determine the other indications that we will be targeting with our NEON  /  SELECT approach. In particular, given that NEO-PV-01 is our first clinical program, we may be exposed to additional risks related to trial execution, difficulties with patient enrollment, trial design and establishing trial protocols. Meanwhile, NEO-PTC-01 involves the activation and expansion of neoantigen-specific T cells ex vivo, an approach that may be less effective than anticipated. Finally, the success of our NEON / SELECT program (including NEO-SV-01) depends on our ability to validate high priority shared neoantigen targets and to develop neoantigen-targeted therapies for these shared targets that are therapeutically-relevant across subsets of patients or tumor types. We may, however, be unable to achieve either or both of these goals.

 

All of our product candidates will require additional clinical and nonclinical development, regulatory review and approval in multiple jurisdictions, substantial investment, access to sufficient commercial manufacturing capacity, and significant marketing efforts before we can generate any revenue from product sales. In addition, because NEO-PV-01 is our most advanced product candidate, if NEO-PV-01 encounters safety or efficacy problems, developmental delays or regulatory issues or other problems, our development plans and business would be significantly harmed.

 

The successful development of biopharmaceuticals, such as neoantigen-targeted therapies, is highly uncertain.

 

Successful development of biopharmaceuticals, such as neoantigen-targeted therapies, is highly uncertain and is dependent on numerous factors, many of which are beyond our control. Neoantigen-targeted therapies that appear promising in the early phases of development may fail to reach the market for several reasons including:

 

·                  nonclinical or preclinical testing or study results may show the neoantigen-targeted therapies to be less effective than desired or to have harmful or problematic side effects;

 

·                  clinical trial results may show the neoantigen-targeted therapies to be less effective than expected (e.g., a clinical trial could fail to meet its primary endpoint(s)) or could have unacceptable side effects or toxicities;

 

·                  we may fail to receive the necessary regulatory approvals or experience a delay in receiving those approvals, including delays that may be caused by slow enrollment in clinical trials, patients dropping out of trials, the required length of time to achieve trial endpoints, additional time requirements for data analysis or biologics license application, or BLA, preparation, discussions with the FDA, an FDA request for additional nonclinical or clinical data, or unexpected safety or manufacturing issues;

 

·                  manufacturing costs, turnaround time, formulation issues, pricing or reimbursement issues, or other factors that make the neoantigen-targeted therapy uneconomical; and

 

·                  the proprietary rights of others and their competing products and technologies that may prevent the neoantigen-targeted therapy from being commercialized.

 

The length of time necessary to complete clinical trials and to submit an application for marketing approval for a final decision by a regulatory authority may vary significantly from one therapy to the next, and may be difficult to predict.

 

Even if we are successful in getting market approval for our product candidates, commercial success of any approved products will also depend in large part on the availability of coverage and adequate reimbursement from third-party payors, including

 

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government payors such as the Medicare and Medicaid programs and managed care organizations, which may be affected by existing and future healthcare reform measures designed to reduce the cost of healthcare. In order to qualify for reimbursement, third-party payors could require us to conduct additional studies, including post-marketing studies related to the cost effectiveness of a product, which could be costly and divert our resources. If government and other healthcare payors were not to provide adequate coverage and reimbursement levels for one any of our products once approved, market acceptance and commercial success would be reduced.

 

In addition, if any of our products is approved for marketing, we will be subject to significant regulatory obligations regarding the submission of safety and other post-marketing information and reports and registration, and will need to continue to comply (or ensure that our third-party providers) comply with current good manufacturing practices, or cGMPs, and good clinical practices, or GCPs, for any clinical trials that we conduct post-approval. In addition, there is always the risk that we or a regulatory authority might identify previously unknown problems with a product post-approval, such as adverse events of unanticipated severity or frequency. Compliance with these requirements is costly, and any failure to comply or other issues with our product candidates post-approval could have a material adverse effect on our business, financial condition, prospects and results of operations.

 

Clinical development is a lengthy and expensive process with an uncertain outcome. We may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of any product candidates.

 

To obtain the requisite regulatory approvals to commercialize any product candidates, we must demonstrate through extensive preclinical studies and clinical trials that our products are safe, pure and potent or effective in humans. Clinical testing is expensive and can take many years to complete, and the outcome of any clinical trial is inherently uncertain. We may be unable to establish clinical endpoints that applicable regulatory authorities would consider clinically meaningful, and a clinical trial can fail at any stage of testing. The outcome of nonclinical studies and early clinical trials may not be predictive of the success of later clinical trials, and interim results of a clinical trial do not necessarily predict final results. For example, our ongoing Phase 1b clinical trials of NEO-PV-01 are open-label, but we expect later-stage clinical trials of NEO-PV-01 will require placebo comparison or comparison with an active comparator. Differences in trial design between early stage clinical trials and later-stage clinical trials make it difficult to extrapolate the results of earlier clinical trials to later clinical trials. Moreover, nonclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that have believed their product candidates performed satisfactorily in nonclinical studies and clinical trials have nonetheless failed to obtain marketing approval of their products.

 

Successful completion of clinical trials is a prerequisite to submitting a BLA to the FDA, a Marketing Authorization Application, or MAA, to the EMA, and similar marketing applications to comparable foreign regulatory authorities, for each product candidate and, consequently, the ultimate approval and commercial marketing of any product candidates. We do not know whether any of our clinical trials will begin or be completed on schedule, if at all.

 

We may experience delays in completing our preclinical or nonclinical testing and studies and initiating or completing clinical trials. We also may experience numerous unforeseen events or circumstances during, or as a result of, any future clinical trials that we may conduct that could delay or prevent our ability to receive marketing approval or commercialize our product candidates, including:

 

·                  regulators or institutional review boards, or IRBs, or ethics committees may not authorize us or our investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site;

 

·                  we may experience delays in reaching, or fail to reach, agreement on acceptable terms with prospective trial sites and prospective contract research organizations, or CROs, as the terms of these agreements can be subject to extensive negotiation and vary significantly among different CROs and trial sites;

 

·                  clinical trials of any product candidates may fail to show safety, purity or potency, or produce negative or inconclusive results, which may cause us to decide, or regulators to require us, to conduct additional nonclinical studies or clinical trials or which may cause us to decide to abandon product development programs;

 

·                  the number of patients required for clinical trials of any product candidates may be larger than we anticipate, enrollment in these clinical trials may be slower than we anticipated or participants may drop out of these clinical trials or fail to return for post-treatment follow-up at a higher rate than we anticipated;

 

·                  our CROs and other third-party contractors involved in our clinical trials may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner, or at all, or they may deviate from the clinical trial protocol or drop out of the trial, which may require that we add new clinical trial sites or investigators;

 

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·                  we may elect to, or regulators, IRBs or ethics committees may require that we or our investigators, suspend or terminate clinical research or trials for various reasons, including noncompliance with regulatory requirements or a finding that participants are being exposed to unacceptable health risks;

 

·                  the cost of preclinical or nonclinical testing and studies and clinical trials of any product candidates may be greater than we anticipate;

 

·                  the potential insufficiency or inadequacy of the supply or quality of our product candidates or other materials necessary to conduct clinical trials of our product candidates;

 

·                  our ability to manufacture and supply product to patients consistent with clinical trial protocols;

 

·                  our product candidates may have undesirable side effects or other unexpected characteristics, causing us or our investigators, regulators, IRBs or ethics committees to suspend or terminate trials, or reports may arise from nonclinical or clinical testing of other cancer therapies that raise safety or efficacy concerns about our product candidates; and

 

·                  the FDA or other regulatory authorities may require us to submit additional data such as long-term toxicology studies, or impose other requirements on us, before permitting us to initiate a clinical trial.

 

We could also encounter delays if a clinical trial is suspended or terminated by us, the IRBs of the institutions in which such trials are being conducted, or the FDA or other regulatory authorities, or if a clinical trial is recommended for suspension or termination by the relevant Data Safety Monitoring Board, or DSMB. A suspension or termination may be imposed due to a number of factors, including failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols, inspection of the clinical trial operations or trial site by the FDA or other regulatory authorities that results in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a product or treatment, failure to establish or achieve clinically meaningful trial endpoints, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial. Many of the factors that could cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of our product candidates. Further, the FDA or other regulatory authorities may disagree with our clinical trial design and our interpretation of data from clinical trials, or may change the requirements for approval even after they have reviewed and commented on the design for our clinical trials.

 

Our product development costs will increase if we experience delays in conducting clinical testing or receiving marketing approvals. We do not know whether any of our preclinical or nonclinical testing and studies or clinical trials will begin as planned, will need to be restructured or will be completed on schedule, or at all. Significant preclinical or nonclinical testing and studies or clinical trial delays also could shorten any periods during which we may have the exclusive right to commercialize our product candidates and may allow our competitors to bring products to market before we do, potentially impairing our ability to successfully commercialize our product candidates and harming our business, financial condition, prospects and results of operations. Any delays in our nonclinical or future clinical development programs may harm our business, financial condition, prospects and results of operations significantly.

 

Preclinical development is uncertain. Our preclinical programs may experience delays or may never advance to clinical trials, which would adversely affect our ability to obtain regulatory approvals or commercialize these programs on a timely basis or at all, which would have an adverse effect on our business.

 

With the exception of NEO-PV-01, all of our other product candidates are still in the preclinical discovery stage, and their risk of failure is high. Before we can commence clinical trials for a product candidate, we must complete extensive preclinical testing and studies that support our planned Investigational New Drug applications, or INDs, in the United States, or similar applications in other jurisdictions. We cannot be certain of the timely completion or outcomes of our preclinical testing and studies and cannot predict if the FDA or other regulatory authorities will accept our proposed clinical programs or if the outcomes of our preclinical testing and studies will ultimately support the further development of our programs. As a result, we cannot be sure that we will be able to submit INDs or similar applications for our preclinical programs on the timelines we expect, if at all, and we cannot be sure that submission of INDs or similar applications will result in the FDA or other regulatory authorities allowing clinical trials to begin.

 

Our planned clinical trials or those of our future collaborators may reveal significant adverse events not seen in our preclinical or nonclinical studies and may result in a safety profile that could inhibit regulatory approval or market acceptance of any of our product candidates.

 

Before obtaining regulatory approvals for the commercial sale of any products, we must demonstrate through lengthy, complex and expensive preclinical studies and clinical trials that our product candidates are both safe and effective for use in each target

 

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indication. Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the clinical trial process. The results of preclinical studies and early clinical trials of our product candidates may not be predictive of the results of later-stage clinical trials. In addition, initial success in clinical trials may not be indicative of results obtained when those trials are completed. There is typically an extremely high rate of attrition from the failure of product candidates proceeding through clinical trials. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy profile despite having progressed through nonclinical studies and initial clinical trials. Companies in the biopharmaceutical industry have suffered significant setbacks in later-stage clinical trials due to lack of efficacy or unacceptable safety issues, notwithstanding promising results in earlier trials. Most product candidates that commence clinical trials are never approved as products and there can be no assurance that any of our current or future clinical trials will ultimately be successful or support further clinical development of any of our product candidates.

 

We intend to develop NEO-PV-01, and may develop future product candidates, in combination with one or more cancer therapies. This combination may have additional side effects that were not present in initial clinical trials of our product candidates with other cancer therapies. The uncertainty resulting from the use of our product candidates in combination with other cancer therapies may make it difficult to accurately predict side effects in future clinical trials.

 

If significant adverse events or other side effects are observed in any of our current or future clinical trials, we may have difficulty recruiting patients to our clinical trials, patients may drop out of our trials, or we may be required to abandon the trials or our development efforts of one or more product candidates altogether. We, the FDA or other applicable regulatory authorities, or an IRB, may suspend clinical trials of a product candidate at any time for various reasons, including a belief that trial subjects are being exposed to unacceptable health risks or adverse side effects. Some potential therapeutics developed in the biotechnology industry that initially showed therapeutic promise in early-stage trials have later been found to cause side effects that prevented their further development. Even if the side effects presented do not preclude the drug from obtaining or maintaining marketing approval, undesirable side effects may inhibit market acceptance of the approved product due to its tolerability versus other therapies. Any of these developments could materially harm our business, financial condition, prospects and results of operations.

 

If we encounter difficulties enrolling patients in our clinical trials, our clinical development activities could be delayed or otherwise adversely affected.

 

We may experience difficulties in patient enrollment in our clinical trials for a variety of reasons. The timely completion of clinical trials in accordance with their protocols depends, among other things, on our ability to enroll a sufficient number of patients who remain in the study until its conclusion. The enrollment of patients depends on many factors, including:

 

·                  the patient eligibility and exclusion criteria defined in the protocol;

 

·                  the size of the patient population required for analysis of the trial’s primary endpoints;

 

·                  the proximity of patients to trial sites;

 

·                  the design of the trial;

 

·                  the ability to recruit clinical trial investigators with the appropriate competencies and experience;

 

·                  the ability to obtain and maintain patient consents; and

 

·                  the risk that patients enrolled in clinical trials will drop out of the trials before completion.

 

In addition, our clinical trials will compete with other clinical trials for product candidates that are similar therapeutic areas as our product candidates, which may reduce the number and types of patients available to us. In addition, since the number of qualified clinical investigators is limited, we expect to conduct some of our clinical trials at the same clinical trial sites that some of our competitors use, which will reduce the number of patients who are available for our clinical trials at those sites. Moreover, because our product candidates represent a departure from more commonly used methods for cancer treatment, potential patients and their doctors may be inclined to use conventional therapies, such as chemotherapy and bone marrow transplantation, rather than enroll patients in a clinical trial. This may be particularly true for patients with late-stage disease who may perceive that our approach is not effective for patients with that disease profile.

 

Delays in patient enrollment may result in increased costs or may affect the timing or outcome of our planned clinical trials. These delays could also prevent completion of these trials and adversely affect our ability to advance the development of our product candidates.

 

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We expect to develop NEO-PV-01 and, potentially future product candidates, in combination with other therapies, and safety or supply issues with combination use products may delay or prevent development and approval of our product candidates.

 

We intend to develop NEO-PV-01, and likely other product candidates, in combination with one or more approved or unapproved cancer therapies.

 

Even if any product candidate we develop were to receive marketing approval or be commercialized for use in combination with other existing therapies, we would continue to be subject to the risks that the FDA or similar regulatory authorities outside of the United States could revoke approval of the therapy used in combination with our product or that safety, efficacy, manufacturing or supply issues could arise with any of those existing therapies. If the therapies we use in combination with our product candidates are replaced as the standard of care for the indications we choose for any of our product candidates, the FDA or similar regulatory authorities outside of the United States may require us to conduct additional clinical trials. The occurrence of any of these risks could result in our own products, if approved, being removed from the market or being less successful commercially.

 

We also plan to evaluate NEO-PV-01 or any other future product candidates in combination with one or more cancer therapies that have not yet been approved for marketing by the FDA or similar regulatory authorities outside of the United States. We will not be able to market and sell NEO-PV-01 or any product candidate we develop in combination with an unapproved cancer therapy if that unapproved cancer therapy does not ultimately obtain marketing approval. In addition, unapproved cancer therapies face the same risks described with respect to our product candidates currently in development and clinical trials, including the potential for serious adverse effects, delay in their clinical trials and lack of FDA approval.

 

If the FDA or similar regulatory authorities outside of the United States do not approve these other drugs or revoke their approval of, or if safety, efficacy, manufacturing, or supply issues arise with, the drugs we choose to evaluate in combination with NEO-PV-01 or any product candidate we develop, we may be unable to obtain approval of or market NEO-PV-01 or any product candidate we develop.

 

Neoantigen-targeted therapies are a novel approach and negative perception of the efficacy or safety of any of our product candidates could adversely affect our ability to conduct our business or obtain regulatory approvals for our product candidates.

 

Neoantigen-targeted therapies remain novel and unproven technologies, with no neoantigen-targeted therapy approved to date in the United States or the European Union, or EU. Neoantigen vaccines, neoantigen T cell therapies or any other modality that we seek to use may not gain the acceptance of the public or the medical community. For example, earlier cancer vaccines attempted to direct the immune system against a class of molecules found predominantly, but not exclusively, at the tumor site. Since the targets of these cancer vaccines were are also found on normal cells, they were regarded as ‘self’, which caused the immune system to prohibit destruction of the cancerous cells. As a result, these cancer vaccines did not generate potent immune responses. Our neoantigen vaccines may be viewed in the same vein as the earlier cancer vaccines, limiting our ability to enroll patients in our clinical trials or if approved, our vaccines’ market acceptance. Further, with respect to our NEO-PTC-01 program, the use of T cells as a potential cancer treatment is a recent scientific development and may not become broadly accepted by physicians, patients, hospitals, cancer treatment centers and others in the medical community.

 

Our success will depend upon physicians who specialize in the treatment of diseases targeted by our product candidates prescribing treatments that involve the use of our product candidates in lieu of, or in addition to, existing treatments with which they are more familiar and for which greater clinical data may be available. Adverse events in clinical trials of our product candidates or in clinical trials of others developing similar products and the resulting publicity, as well as any other adverse events in the field of neoantigen-targeted therapies cancer vaccines, or T cell therapies, could result in a decrease in demand for any product that we may develop. In addition, responses by the U.S., state or foreign governments to negative public perception may result in new legislation or regulations that could limit our ability to develop or commercialize any product candidates, obtain or maintain regulatory approval or otherwise achieve profitability. More restrictive statutory regimes, government regulations or negative public opinion would have an adverse effect on our business, financial condition, prospects and results of operations and may delay or impair the development and commercialization of our product candidates or demand for any products we may develop.

 

NEO-PV-01 includes a development-stage vaccine adjuvant, poly-IC:LC. It is difficult for us to predict how our use of poly-IC:LC will be viewed by the FDA or other regulatory agencies as we attempt to demonstrate the safety of NEO-PV-01.

 

We use an adjuvant, poly-IC:LC, with our NEO-PV-01 vaccine product candidate, which makes it difficult to predict how the FDA and applicable other regulatory agencies will evaluate the safety of NEO-PV-01. Adjuvants are compounds that are added to vaccines to enhance the activation of and improve the immune response and efficacy of vaccines. Any vaccine, because of the presence of an adjuvant, may have side effects that may pose too great a safety risk to warrant approval of the vaccine. Development-

 

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stage vaccine adjuvants, such as poly-IC:LC, may pose an increased safety risk to patients. Poly-IC:LC has been used as an adjuvant in other investigational vaccine trials but has never been approved by the FDA for commercial use. The existence of additional trials using this adjuvant may provide support for approval of our product candidates, however, negative safety or efficacy results from other trials using poly-IC:LC could similarly jeopardize the continued development of our product candidates that use poly-IC:LC as an adjuvant.

 

If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or incur costs that could have a material adverse effect on the success of our business.

 

We are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and the handling, use, storage, treatment and disposal of hazardous materials and wastes. Our research and development activities involve the use of biological and hazardous materials and produce hazardous waste products. We generally contract with third parties for the disposal of these materials and wastes. We cannot eliminate the risk of contamination or injury from these materials, which could cause an interruption of our commercialization efforts, research and development efforts and business operations, as well as environmental damage that could result in costly clean-up and liabilities under applicable laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products. Although we believe that the safety procedures utilized by our third-party manufacturers for handling and disposing of these materials generally comply with the standards prescribed by applicable laws and regulations, we cannot guarantee that this is the case or eliminate the risk of accidental contamination or injury from these materials. In the event of any contamination or injury, we may be held liable for any resulting damages in an amount that could potentially exceed our resources, and state or federal or other applicable authorities may curtail our use of certain materials and/or interrupt our business operations. Furthermore, environmental laws and regulations are complex, change frequently and have tended to become more stringent. We cannot predict the impact of changes to applicable laws and regulations and cannot be certain of our future compliance. In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. These current or future laws and regulations may impair our research, development or production efforts. Failure to comply with these laws and regulations also may result in substantial fines, penalties or other sanctions.

 

Although we maintain workers’ compensation insurance to cover us for costs and expenses we may incur due to injuries to our employees resulting from the use of hazardous materials or other work-related injuries, this insurance may not provide adequate coverage against potential liabilities. We do not carry specific biological waste or hazardous waste insurance coverage, or workers compensation or property and casualty and general liability insurance policies that include coverage for damages and fines arising from biological or hazardous waste exposure or contamination.

 

We may incur substantial liabilities and may be required to limit commercialization of our product candidates if we face product liability lawsuits.

 

We face an inherent risk of product liability as a result of testing our product candidates in clinical trials and will face an even greater risk if we commercialize any products. For example, we may be sued if our product candidates cause or are perceived to cause injury or are found to be otherwise unsuitable during clinical trials, manufacturing, marketing or sale. We could face product liability claims that may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability or a breach of warranties. In addition, we could face claims asserted under state consumer protection acts. If we cannot successfully defend ourselves against product liability claims or state consumer protection claims, we may incur substantial liabilities or be required to limit commercialization of our product candidates. Even the successful defense against a claim of this nature would require significant financial and management resources. Regardless of the merits or eventual outcome, claims of liability of this nature may result in:

 

·                  our inability to bring a product candidate to the market;

 

·                  decreased demand for our products;

 

·                  injury to our reputation;

 

·                  withdrawal of clinical trial participants and inability to continue clinical trials;

 

·                  initiation of investigations by regulators;

 

·                  costs to defend the related litigation;

 

·                  diversion of management’s time and our resources;

 

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·                  substantial monetary awards to trial participants or patients;

 

·                  product recalls, withdrawals or labeling, marketing or promotional restrictions;

 

·                  loss of revenue;

 

·                  exhaustion of any available insurance and our capital resources;

 

·                  the inability to commercialize any product candidate; and

 

·                  decline in our share price.

 

Our inability to obtain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could prevent or inhibit the commercialization of products we develop, alone or with collaborators. Even if our agreements with any future corporate collaborators entitle us to indemnification against losses, that indemnification may not be available or adequate should any claim arise. Although we currently carry $10.0 million in clinical trial insurance, that amount of insurance coverage may not be adequate, and, in the future, we may be unable to maintain this insurance coverage, or we may not be able to obtain additional or replacement insurance at a reasonable cost, if at all. Our insurance policies also have various exclusions, and we may be subject to a product liability claim for which we have no coverage. We may have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able to obtain, sufficient capital to pay those amounts.

 

The market opportunities for our product candidates may be limited or small.

 

The potentially addressable patient population for our product candidates may be limited or may not be amenable to treatment with our product candidates. In addition, our projections of both the number of people who have the cancers we are targeting, as well as the subset of people with these cancers in a position to receive our therapies, if approved, are based on our beliefs and estimates. These estimates have been derived from a variety of sources, including scientific literature, surveys of clinics, patient foundations, or market research, and may prove to be incorrect. Further, new studies may change the estimated incidence or prevalence of these cancers. The number of potential patients for our product candidates may turn out to be lower than expected. Even if we obtain significant market share for our product candidates, if the potential target populations are small, we may never achieve profitability without obtaining regulatory approval for additional indications.

 

We face significant competition from other biotechnology and pharmaceutical companies, and our operating results will suffer if we fail to compete effectively.

 

The biopharmaceutical industry is characterized by intense competition and rapid innovation. Our competitors may be able to develop other compounds or drugs that are able to achieve similar or better results. Our potential competitors include major multinational pharmaceutical companies, established biotechnology companies, specialty pharmaceutical companies and universities and other research institutions. Many of our competitors have substantially greater financial, technical and other resources, such as larger research and development staff and experienced marketing and manufacturing organizations and well-established sales forces. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large, established companies. Established pharmaceutical companies may also invest heavily to accelerate discovery and development of novel therapeutics or to in-license novel therapeutics that could make the product candidates that we develop obsolete. Mergers and acquisitions in the biotechnology and pharmaceutical industries may result in even more resources being concentrated in our competitors. Competition may increase further due to advances in the commercial applicability of technologies and greater availability of capital for investment in these industries. Our competitors, either alone or with collaborative partners, may succeed in developing, acquiring or licensing on an exclusive basis drug or biologic products that are more effective, safer, more easily commercialized or less costly than our product candidates, or they may develop proprietary technologies or secure patent protection that we may need for the development of our technologies and products. We believe the key competitive factors that will affect the development and commercial success of our product candidates are efficacy, safety, tolerability, reliability, convenience of use, price and reimbursement.

 

We anticipate competing with the largest pharmaceutical companies in the world, many of which are all currently conducting research in neoantigen based therapies and all of which have greater financial and human resources than we currently have. In addition to these fully-integrated biopharmaceutical companies, we will also face competition from other immunotherapy-focused oncology companies. Further, we directly compete with a number of neoantigen therapeutics-focused companies, some of whom are developing vaccines, while others are developing T cell therapies and/or T cell receptor-based therapies.  These competitors include Aduro

 

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Biotech, Inc., Achilles Therapeutics Limited, Adaptimmune Therapeutics plc, Adicet Bio, Inc., Advaxis, Inc., Agenus Inc., AgenTus Therapeutics, Inc., BioNTech AG, Celgene Corporation, Genocea Biosciences, Inc., Gilead Sciences, Inc., Gritstone Oncology, Inc., Immatics Biotechnologies GmbH, IMV Inc., Iovance Biotherapeutics, Inc., ISA Pharmaceuticals, B.V., Lion TCR Pte. Ltd., Medigene AG, Moderna, Inc., Nouscom AG, PACT Pharma, Inc., Regeneron Pharmaceuticals, Inc., Vaccibody AS, Zelluna Immunotherapy AS and ZIOPHARM Oncology, Inc.

 

Even if we obtain regulatory approval of our product candidates, the availability and price of our competitors’ products could limit the demand and the price we are able to charge for our product candidates. We may not be able to implement our business plan if the acceptance of our product candidates is inhibited by price competition or the reluctance of physicians to switch from existing methods of treatment to our product candidates, or if physicians switch to other new drug or biologic products or choose to reserve our product candidates for use in limited circumstances.

 

We rely on our RECON bioinformatics engine to identify neoantigen targets. Our competitive position could be materially harmed if our competitors develop a platform similar to RECON and develop rival product candidates.

 

We rely on unpatented know-how, inventions and other proprietary information, to strengthen our competitive position. We consider know-how to be our primary intellectual property with respect to our RECON (Real-time Epitope Computation for Oncology) bioinformatics engine. The algorithms composing RECON require accurate input data to enable the algorithms to detect patterns. Our clinical trials allow us to collect clinical data together with myriad samples of blood and tumor tissue, which we use as a feedback loop to make improvements to RECON. However, know-how can be difficult to protect. In particular, we anticipate that, with respect to this platform, this know-how may over time be disseminated within the industry through independent development, the publication of journal articles describing the method, and the movement of skilled personnel.

 

We cannot rule out that our competitors may have or obtain the knowledge necessary to analyze and characterize similar data to our known data for the purpose of identifying and developing products that could compete with NEO-PV-01, NEO-PTC-01 or any of our future product candidates. Our competitors may also have significantly greater financial, product development, technical, and human resources and access to other human tumors than we do. Further, our competitors may have significantly greater experience in using translational science methods to identify and develop product candidates.

 

We may not be able to prohibit our competitors from using technology or methods that are the same as or similar to RECON to develop their own product candidates. If our competitors develop bioinformatics and engage in the computation and analysis of complex algorithms to identify neoantigen targets and develop associated therapies, our ability to develop and market a promising product or product candidate may diminish substantially, which could have a material adverse effect on our business, financial condition, prospects and results of operations.

 

Continuous and up-to-date clinical data is a key feature of RECON. We cannot guarantee that we will be permitted by regulatory authorities, or have the resources to obtain, continuous clinical data that would be input into RECON. For example, regulatory authorities may require that we refrain from inputting any additional data into RECON after we commence a pivotal clinical trial. If we are prevented or impeded from adding additional clinical data into RECON, we will not be able to advance RECON and its utility may be diminished. In addition, we cannot guarantee that any changes or additions we make to RECON will ultimately result in improved therapeutic outcomes for any product candidates that are generated as a result of RECON. As a result, our ability to develop product candidates through the use of RECON that provide therapeutic benefit may be significantly impacted, which could have a material adverse effect on our business, financial condition, prospects and results of operations.

 

Even if a product candidate we develop receives marketing approval, it may fail to achieve the degree of market acceptance by physicians, patients, third-party payors and others in the medical community necessary for commercial success.

 

If any product candidate we develop receives marketing approval, whether as a single agent or in combination with other therapies, it may nonetheless fail to gain sufficient market acceptance by physicians, patients, third-party payors, and others in the medical community. For example, other cancer treatments like chemotherapy and radiation therapy are well established in the medical community, and doctors may continue to rely on these therapies. If the product candidates we develop do not achieve an adequate level of acceptance, we may not generate significant product revenues and we may not become profitable. The degree of market acceptance of any product candidate, if approved for commercial sale, will depend on a number of factors, including:

 

·                  efficacy and potential advantages compared to alternative treatments;

 

·                  price competitiveness;

 

·                  convenience and ease of administration compared to alternative treatments;

 

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·                  the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;

 

·                  the strength of marketing and distribution support;

 

·                  the ability to obtain sufficient third-party coverage and adequate reimbursement, including with respect to the use of the approved product as a combination therapy;

 

·                  adoption of a companion diagnostic and/or complementary diagnostic; and

 

·                  the prevalence and severity of any side effects.

 

We will need to grow the size of our organization, and we may experience difficulties in managing this growth.

 

We expect to experience significant growth in the number of our employees and the scope of our operations, particularly in the areas of technology research, product development and manufacturing, regulatory affairs and, if any product candidates are submitted for or receive marketing approval, sales, marketing and distribution. Future growth would impose significant added responsibilities on members of management, including:

 

·                  identifying, recruiting, integrating, maintaining and motivating additional employees;

 

·                  managing our internal development efforts effectively, including the clinical and FDA review process for our product candidates, while complying with our contractual obligations to contractors and other third parties; and

 

·                  improving our operational, financial and management controls, reporting systems and procedures.

 

Our future financial performance and our ability to commercialize our product candidates will depend, in part, on our ability to effectively manage any future growth, and our management may also have to divert a disproportionate amount of its attention away from day-to-day activities in order to devote a substantial amount of time to managing these growth activities.

 

We currently rely, and for the foreseeable future will continue to rely, in substantial part on certain independent organizations, advisors, contractors and consultants to provide certain services, including substantially all aspects of regulatory approval, clinical management and manufacturing. There can be no assurance that the services of independent organizations, advisors, contractors and consultants will continue to be available to us on a timely basis when needed, or that we can find qualified replacements. In addition, if we are unable to effectively manage our outsourced activities or if the quality or accuracy of the services provided by independent organizations, advisors, contractors or consultants is compromised for any reason, our clinical trials may be extended, delayed or terminated, and we may not be able to obtain regulatory approval of our product candidates or otherwise advance our business. There can be no assurance that we will be able to manage our existing independent organizations, advisors, contractors or consultants or find other competent resources on economically reasonable terms, or at all.

 

If we are not able to effectively expand our organization by hiring new employees and expanding the roster of independent organizations, advisors and consultants on whom we rely on an outsourced basis, we may not be able to successfully implement the tasks necessary to further develop and commercialize our product candidates and, accordingly, may not achieve our research, development and commercialization goals.

 

If we lose key management personnel, or if we fail to recruit additional highly skilled personnel, our ability to identify and develop new or next generation product candidates will be impaired, could result in loss of markets or market share and could make us less competitive.

 

Our ability to compete in the highly competitive biotechnology and pharmaceutical industries depends upon our ability to attract and retain highly qualified managerial, scientific and medical personnel. We are highly dependent on our management, scientific and medical personnel, including Hugh O’Dowd, our Chief Executive Officer, Yasir B. Al-Wakeel, our Chief Financial Officer, Richard Gaynor, our President of Research & Development, and Robert Ang, our Chief Business Officer. The loss of the services of any of our executive officers, other key employees, and other scientific and medical advisors, and our inability to find suitable replacements could result in delays in product development and harm our business.

 

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We conduct our operations at our facility in Cambridge, Massachusetts. This region is headquarters to many other biopharmaceutical companies and many academic and research institutions and competition for skilled personnel in our market is intense and may limit our ability to hire and retain highly qualified personnel on acceptable terms or at all.

 

To induce valuable employees to remain at our company, in addition to salary and cash incentives, we have provided restricted stock and stock options that vest over time. The value to employees of stock options that vest over time may be significantly affected by movements in our stock price that are beyond our control, and may at any time be insufficient to counteract more lucrative offers from other companies. Despite our efforts to retain valuable employees, members of our management, scientific and development teams may terminate their employment with us on short notice. Although we have employment agreements with certain of our key employees, these employment agreements provide for at-will employment, which means that any of our employees could leave our employment at any time, with or without notice. We do not maintain “key man” insurance policies on the lives of these individuals or the lives of any of our other employees. Our success also depends on our ability to continue to attract, retain and motivate highly skilled junior, mid-level and senior managers, as well as junior, mid-level and senior scientific and medical personnel.

 

Business disruptions could seriously harm our future revenue and financial condition and increase our costs and expenses.

 

Our operations, and those of our CROs, CMOs and other independent organizations, advisors, contractors and consultants, could be subject to earthquakes, power shortages, telecommunications failures, water shortages, floods, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics and other natural or man-made disasters or business interruptions, for which we are predominantly self-insured. The occurrence of any of these business disruptions could seriously harm our operations and financial condition and increase our costs and expenses. We rely on third-party manufacturers to produce and process our product candidates on a patient-by-patient basis. Our ability to obtain clinical supplies of our product candidates could be disrupted if the operations of these suppliers are affected by a man-made or natural disaster or other business interruption.

 

Our internal computer systems, or those used by our CROs or other independent organizations, advisors, contractors or consultants, may fail or suffer security breaches.

 

Despite the implementation of security measures, our internal computer systems and those of our future CROs and other independent organizations, advisors, contractors and consultants are vulnerable to damage from computer viruses and unauthorized access. While we have not experienced any such material system failure or security breach to date, if an event of that nature were to occur and cause interruptions in our operations, it could result in a material disruption of our development programs and our business operations. For example, the loss of clinical trial data from completed or future clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. Additionally, a security breach related to RECON’s proprietary combination of algorithms could adversely affect our ability to apply RECON to predict therapeutically-relevant neoantigens or result in our competitors having access to these algorithms, which could adversely affect our competitive position. Likewise, we currently do, and may in the future continue to, rely on third parties for the manufacture of our product candidates and to conduct clinical trials, and similar events relating to their computer systems could also have a material adverse effect on our business. To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the further development and commercialization of our product candidates could be delayed.

 

Our employees, independent contractors, consultants, commercial partners and vendors may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements.

 

We are exposed to the risk of employee fraud or other illegal activity by our employees, independent contractors, consultants, commercial partners and vendors. Misconduct by these parties could include intentional, reckless and/or negligent conduct that fails to comply with the laws enforced by the FDA and other similar foreign regulatory bodies, provide true, complete and accurate information to the FDA and other similar foreign regulatory bodies, comply with manufacturing standards we have established, comply with healthcare fraud and abuse laws in the United States and similar foreign laws, or report financial information or data accurately or to disclose unauthorized activities to us. If we obtain FDA approval of any of our product candidates and begin commercializing those products in the United States, our potential exposure under these laws will increase significantly, and our costs associated with compliance with these laws are also likely to increase. These laws may impact, among other things, our current activities with principal investigators and research patients, as well as proposed and future sales, marketing and education programs.

 

Our relationships with healthcare providers and physicians and third-party payors will be subject to applicable anti-kickback, fraud and abuse and other healthcare laws and regulations, which could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm and diminished profits and future earnings.

 

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Healthcare providers, physicians and third-party payors in the United States and elsewhere play a primary role in the recommendation and prescription of pharmaceutical products. Arrangements with third-party payors and customers can expose pharmaceutical manufactures to broadly applicable fraud and abuse and other healthcare laws and regulations, including, without limitation, the federal Anti-Kickback Statute and the federal False Claims Act, or the FCA, which may constrain the business or financial arrangements and relationships through which companies sell, market and distribute pharmaceutical products. In particular, the promotion, sales and marketing of healthcare items and services, as well as certain business arrangements in the healthcare industry, are subject to extensive laws designed to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, structuring and commission(s), certain customer incentive programs and other business arrangements generally. Activities subject to these laws also involve the improper use of information obtained in the course of patient recruitment for clinical trials. The applicable federal, state and foreign healthcare laws and regulations laws that may affect our ability to operate include, but are not limited to:

 

·                  the federal Anti-Kickback Statute, which prohibits, among other things, knowingly and willfully soliciting, receiving, offering or paying any remuneration (including any kickback, bribe, or rebate), directly or indirectly, overtly or covertly, in cash or in kind, to induce, or in return for, either the referral of an individual, or the purchase, lease, order or recommendation of any good, facility, item or service for which payment may be made, in whole or in part, under a federal healthcare program, such as the Medicare and Medicaid programs. A person or entity can be found guilty of violating this statute without actual knowledge of the statute or specific intent to violate it. In addition, a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the FCA. The Anti-Kickback Statute has been interpreted to apply to arrangements between pharmaceutical manufacturers, on the one hand, and prescribers, purchasers and formulary managers, on the other. There are a number of statutory exceptions and regulatory safe harbors protecting some common activities from prosecution;

 

·                  federal civil and criminal false claims laws and civil monetary penalty laws, including the FCA, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, false or fraudulent claims for payment to, or approval by Medicare, Medicaid, or other federal healthcare programs, knowingly making, using or causing to be made or used a false record or statement material to a false or fraudulent claim or an obligation to pay or transmit money to the federal government, or knowingly concealing or knowingly and improperly avoiding or decreasing or concealing an obligation to pay money to the federal government. Manufacturers can be held liable under the FCA even when they do not submit claims directly to government payors if they are deemed to “cause” the submission of false or fraudulent claims. The FCA also permits a private individual acting as a “whistleblower” to bring actions on behalf of the federal government alleging violations of the FCA and to share in any monetary recovery;

 

·                  the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which created new federal criminal statutes that prohibit knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or obtain, by means of false or fraudulent pretenses, representations, or promises, any of the money or property owned by, or under the custody or control of, any healthcare benefit program, regardless of the payor (e.g., public or private) and knowingly and willfully falsifying, concealing or covering up by any trick or device a material fact or making any materially false statements in connection with the delivery of, or payment for, healthcare benefits, items or services relating to healthcare matters. Similar to the federal Anti-Kickback Statute, a person or entity can be found guilty of violating HIPAA without actual knowledge of the statute or specific intent to violate it;

 

·                  HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, and their respective implementing regulations, which impose, among other things, requirements on certain covered healthcare providers, health plans and healthcare clearinghouses, as well as their respective business associates that perform services for them that involve the use, or disclosure of, individually identifiable health information, relating to the privacy, security and transmission of individually identifiable health information without appropriate authorization. HITECH also created new tiers of civil monetary penalties, amended HIPAA to make civil and criminal penalties directly applicable to business associates, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorneys’ fees and costs associated with pursuing federal civil actions;

 

·                  the federal Physician Payment Sunshine Act, created under the Patient Protection and Affordable Care Act, and its implementing regulations, which require manufacturers of drugs, devices, biologicals and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report annually to the United States Department of Health and Human Services, or HHS, information related to payments or other transfers of value made to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members;

 

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·                  federal consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially harm consumers; and

 

·                  analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, which may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers, and may be broader in scope than their U.S. federal equivalents; state and foreign laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government or otherwise restrict payments that may be made to healthcare providers; state and foreign laws that require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures; and state and foreign laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.

 

The distribution of pharmaceutical products is subject to additional requirements and regulations, including extensive record-keeping, licensing, storage and security requirements intended to prevent the unauthorized sale of pharmaceutical products.

 

The scope and enforcement of each of these laws is uncertain and subject to rapid change in the current environment of healthcare reform, especially in light of the lack of applicable precedent and regulations. Federal and state enforcement bodies have recently increased their scrutiny of interactions between healthcare companies and healthcare providers, which has led to a number of investigations, prosecutions, convictions and settlements in the healthcare industry. Ensuring business arrangements comply with applicable healthcare laws, as well as responding to possible investigations by government authorities, can be time- and resource-consuming and can divert a company’s attention from the business.

 

The failure to comply with any of these laws or regulatory requirements subjects entities to possible legal or regulatory action. Depending on the circumstances, our failure to meet applicable regulatory requirements can result in civil, criminal and administrative penalties, damages, fines, disgorgement, individual imprisonment, possible exclusion from participation in federal and state funded healthcare programs, contractual damages and the curtailment or restricting of our operations, as well as additional reporting obligations and oversight if we become subject to a corporate integrity agreement or other agreement to resolve allegations of non-compliance with these laws. Any action for violation of these laws, even if successfully defended, could cause a pharmaceutical manufacturer to incur significant legal expenses and divert management’s attention from the operation of the business. Prohibitions, restrictions on sales or withdrawal of future marketed products could materially affect a pharmaceutical manufacturer’s business in an adverse way.

 

We have adopted a code of business conduct and ethics, a copy of which is available on the Investors section of our website. However, even after adopting and implementing appropriate corporate policies, it is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent inappropriate conduct may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with applicable laws or regulations. Our efforts to ensure that our business arrangements will comply with applicable healthcare laws may involve substantial costs. It is possible that governmental and enforcement authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law interpreting applicable fraud and abuse or other healthcare laws and regulations. If any actions of this nature are instituted against us, and if we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of civil, criminal and administrative penalties, damages, disgorgement, monetary fines, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings and curtailment of our operations, any of which could adversely affect our ability to operate our business, financial condition, prospects and results of operations. In addition, the approval and commercialization of any of our product candidates outside the United States will also likely subject us to foreign equivalents of the healthcare laws mentioned above, among other foreign laws.

 

We may not be successful in our efforts to identify additional product candidates. Due to our limited resources and access to capital, we must prioritize development of certain product candidates; these decisions may prove to be wrong and may adversely affect our business.

 

Although we intend to explore therapeutic opportunities beyond those that we are currently developing, we may fail to identify viable new product candidates for clinical development for a number of reasons, which could result in harm to our business.

 

Research programs to pursue the development of our existing and planned product candidates for additional indications and to identify new product candidates and disease targets require substantial technical, financial and human resources, whether or not they

 

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are ultimately successful. Our research programs may initially show promise in identifying potential indications and/or product candidates, yet fail to yield results for clinical development for a number of reasons, including:

 

·                  the research method used may not be successful in identifying potential indications and/or product candidates;

 

·                  potential product candidates may, after further study, be shown to have harmful adverse effects or other characteristics that indicate they are unlikely to be effective therapies; or

 

·                  it may take greater human and financial resources than we will possess to identify additional therapeutic opportunities for our product candidates or to develop suitable potential product candidates through internal research programs, thereby limiting our ability to develop, diversify and expand our product portfolio.

 

Because we have limited financial and human resources, we intend to initially focus on research programs and product candidates for a limited set of indications. As a result, we may forego or delay pursuit of opportunities with other product candidates or for other indications that later prove to have greater commercial potential or a greater likelihood of success. Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities.

 

Accordingly, there can be no assurance that we will ever be able to identify additional therapeutic opportunities for our product candidates or develop suitable potential product candidates through internal research programs, which could materially adversely affect our business, financial condition, prospects and results of operations. We may focus our efforts and resources on potential product candidates or other potential programs that ultimately prove to be unsuccessful.

 

Our business could be materially and adversely affected by a variety of risks associated with marketing our product candidates internationally.

 

We plan to seek regulatory approval of our product candidates outside of the United States and, accordingly, if we obtain necessary approvals, we expect that we will be subject to additional risks related to operating in foreign countries, including:

 

·                  differing regulatory requirements in foreign countries;

 

·                  unexpected changes in tariffs, trade barriers, price and exchange controls and other regulatory requirements;

 

·                  economic weakness, including inflation, or political instability in particular foreign economies and markets;

 

·                  compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;

 

·                  foreign taxes, including withholding of payroll taxes;

 

·                  foreign currency fluctuations, which could result in increased operating expenses and reduced revenue, and other obligations incident to doing business in another country;

 

·                  difficulties staffing and managing foreign operations;

 

·                  workforce uncertainty in countries where labor unrest is more common than in the United States;

 

·                  potential liability under the Foreign Corrupt Practices Act, or FCPA, or comparable foreign regulations;

 

·                  challenges enforcing our contractual and intellectual property rights, especially in those foreign countries that do not respect and protect intellectual property rights to the same extent as the United States;

 

·                  production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and

 

·                  business interruptions resulting from geo-political actions, including war and terrorism.

 

These and other risks associated with our international operations may materially adversely affect our ability to attain or maintain profitable operations.

 

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We currently have no marketing and sales organization and have no experience marketing products. If we are unable to establish marketing and sales capabilities or enter into agreements with third parties to market and sell our product candidates, we may not be able to generate product revenue.

 

We currently have no sales, marketing or distribution capabilities and have no experience marketing products. In the future, we intend to develop an in-house marketing organization and sales force, which will require significant capital expenditures, management resources and time. We will have to compete with other pharmaceutical and biotechnology companies to recruit, hire, train and retain marketing and sales personnel.

 

In addition to establishing internal sales, marketing and distribution capabilities, we may pursue collaborative arrangements regarding the sales and marketing of our products. However, there can be no assurance that we will be able to establish or maintain these types of collaborative arrangements, or if we are able to do so, that our partners will have effective sales forces. Any revenue we receive from collaboration partners will depend upon the efforts of these third parties, which may not be successful. We may have little or no control over the marketing and sales efforts that these third parties undertake and our revenue from product sales may be lower than if we had commercialized our product candidates ourselves. We also face competition in our search for third parties to assist us with the sales and marketing efforts of our product candidates.

 

There can be no assurance that we will be able to develop in-house sales and distribution capabilities or establish or maintain relationships with third-party collaborators to commercialize any, assuming they receive regulatory approval, in the United States or overseas.

 

Comprehensive tax reform legislation could adversely affect our business and financial condition.

 

In December 2017, the U.S. government enacted comprehensive tax legislation, referred to as the Tax Reform Act, that includes significant changes to the taxation of business entities. These changes include, among others, a permanent reduction to the corporate income tax rate, limiting interest deductions, limiting the deduction for net operating losses to 80% of annual taxable income and eliminating net operating loss carrybacks, in each case, for losses arising in taxable years beginning after December 31, 2017 (though any such tax losses may be carried forward indefinitely), allowing for the expensing of capital expenditures, putting into effect the migration from a “worldwide” system of taxation to a territorial system, and modifying or repealing many business deductions and credits (including reducing the business tax credit for certain clinical testing expenses incurred in the testing of certain drugs for rare diseases or conditions generally referred to as “orphan drugs”). The overall impact of this tax reform is uncertain, and it is possible that our business, financial condition prospects and results of operations could be adversely affected by the limitations imposed on certain tax deductions and credits. We continue to examine the impact this tax reform legislation may have on our business. We urge our stockholders to consult with their legal and tax advisors with respect to applicable tax laws, including this legislation, and the potential tax consequences of investing in our common stock.

 

Our ability to use net operating losses and research and development credits to offset future taxable income may be subject to certain limitations.

 

As of December 31, 2017, we had federal and state net operating loss carryforwards of $81.2 million and $79.8 million, respectively, which begin to expire in various amounts in 2034. As of December 31, 2017, we also had federal and state research and development tax credit carryforwards of $1.5 million and $0.8 million, respectively, which begin to expire in 2034 and 2029, respectively. These net operating loss and tax credit carryforwards could expire unused and be unavailable to offset future income tax liabilities. In addition, in general, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net operating losses or tax credits, or NOLs or credits, to offset future taxable income or taxes. For these purposes, an ownership change generally occurs where the aggregate stock ownership of one or more stockholders or groups of stockholders who owns at least 5% of a corporation’s stock increases its ownership by more than 50 percentage points over its lowest ownership percentage within a specified testing period. Our existing NOLs or credits may be subject to limitations arising from previous ownership changes, and if we are deemed to have undergone an ownership change in connection with or after our initial public offering, our ability to utilize NOLs or credits could be further limited by Sections 382 and 383 of the Code. In addition, future changes in our stock ownership, many of which are outside of our control, could result in an ownership change under Sections 382 and 383 of the Code. Our NOLs or credits may also be impaired under state law. Accordingly, we may not be able to utilize a material portion of our NOLs or credits. Furthermore, our ability to utilize our NOLs or credits is conditioned upon our attaining profitability and generating U.S. federal and state taxable income. As described above under “Risk Factors—Risks Related to Our Business, Technology and Industry,” we have incurred significant net losses since our inception and anticipate that we will continue to incur significant losses for the foreseeable future. Therefore, we do not know whether or when we will generate the U.S. federal or state taxable income necessary to utilize our NOL or credit carryforwards. Under the Tax Reform Act, NOLs generated after December 31, 2017 will not be subject to expiration. The Tax

 

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Reform Act also reduced the corporate income tax rate to 21%, from a prior rate of 35%. This may cause a reduction in the potential economic benefit of our NOLs and other available deferred tax assets.

 

Risks Related to Government Regulation

 

The regulatory approval process for our product candidates in the United States, European Union and other jurisdictions is currently uncertain and will be lengthy, time-consuming and inherently unpredictable and we may experience significant delays in the clinical development and regulatory approval, if any, of our product candidates.

 

The research, testing, manufacturing, labeling, approval, selling, import, export, marketing and distribution of drug products, including biologics, are subject to extensive regulation by the FDA in the United States and regulatory authorities in states and other countries. We are not permitted to market any biological product in the United States until we receive a biologics license from the FDA. We have not previously submitted a BLA to the FDA, or similar marketing application to comparable foreign authorities. A BLA must include extensive nonclinical and clinical data and supporting information to establish that the product candidate is safe, pure and potent for each desired indication. The BLA must also include significant information regarding the chemistry, manufacturing and controls for the product, and the manufacturing facilities must complete a successful pre-license inspection. We expect the novel nature of our product candidates to create further challenges in obta