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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2020

OR

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

For the transition period from                    to                       

Commission File Number: 001-38586

RUBIUS THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

Delaware

    

46-2688109

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

399 Binney Street, Suite 300
Cambridge, Massachusetts
(Address of principal executive offices)

02139
(Zip code)

(617679-9600

(Registrant’s telephone number, including area code)

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

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.001 per share

RUBY

The Nasdaq Global Select Market

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

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

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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

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

As of July 31, 2020, the registrant had 80,767,257 shares of common stock, $0.001 par value per share, outstanding.

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FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements, which reflect our current views with respect to, among other things, our operations and financial performance. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plan, objectives of management and expected market growth are forward-looking statements. You can identify these forward-looking statements by the use of words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. We believe these factors include but are not limited to those described under “Risk Factors” and include, among other things:

the success, cost and timing of our product development activities and clinical trials, including statements regarding the timing of initiation, enrollment in 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 to advance any product candidate into or successfully complete any clinical trial;
our ability or the potential to successfully manufacture our product candidates or obtain adequate and timely supply of our product candidates for clinical trials or for commercial use, if approved;
our ability to successfully operate our manufacturing facility and any plans for further renovation or expansion;
the potential for our identified research priorities to advance our technologies;
our ability to maintain regulatory approval, if obtained, of any of our current or future product candidates, and any related restrictions, limitations and/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;
developments relating to cellular therapies, including red blood cell therapies;
the success of competing therapies that are or become available;
our ability to obtain funding for our operations, including funding necessary to complete further development and commercialization of our product candidates;
the commercialization of our product candidates, if approved;
our plans to research, develop and commercialize our product candidates;
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;

i

Table of Contents

the impact of global economic and political developments on our business, including economic slowdowns or recessions that may result from the recent outbreak of COVID-19;
natural and manmade disasters, including pandemics such as COVID-19, and other force majeures, which could impact our operations, and those of our partners and other participants in the health care industry, and which could reduce demand for, or inhibit our ability to develop and manufacture, our product candidates;
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 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 expectations regarding our ability to obtain and maintain intellectual property protection for our product candidates; and
our expectations regarding the period during which we qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act.

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 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.

ii

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Rubius Therapeutics, Inc.

Table of Contents

Page No.

PART I - FINANCIAL INFORMATION

Item 1.

Condensed Consolidated Financial Statements

1

Condensed Consolidated Balance Sheets (Unaudited)

1

Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited)

2

Condensed Consolidated Statements of Cash Flows (Unaudited)

3

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)

4

Notes to (Unaudited) Condensed Consolidated Financial Statements

5

Item 2.

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

16

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28

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

97

Item 3.

Defaults Upon Senior Securities

97

Item 4.

Mine Safety Disclosures

97

Item 5.

Other Information

97

Item 6.

Exhibits

98

Signatures

99

iii

Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited)

RUBIUS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)

    

June 30, 2020

December 31, 2019

Assets

Current assets:

Cash and cash equivalents

$

129,164

$

91,898

Investments

 

107,374

 

191,389

Prepaid expenses and other current assets

 

7,537

 

5,979

Total current assets

 

 

244,075

 

289,266

Operating lease, right-of-use-asset

42,704

46,559

Property, plant and equipment, net

 

55,605

 

56,924

Restricted cash

 

1,735

 

1,735

Other assets

 

311

 

357

Total assets

$

344,430

$

394,841

Liabilities and Stockholders' Equity

 

 

Current liabilities:

 

 

Accounts payable

$

9,831

$

7,178

Accrued expenses and other current liabilities

 

9,591

 

16,042

Operating lease liabilities

 

9,509

 

10,540

Total current liabilities

 

28,931

 

33,760

Long-term debt, net of discount

 

74,741

 

49,596

Other long-term liabilities

630

405

Operating lease liabilities, net of current portion

 

34,654

 

36,867

Total liabilities

 

138,956

 

120,628

Commitments and contingencies (see Note 9)

 

 

Stockholders' equity:

 

 

Preferred stock, $0.001 par value; 10,000,000 shares authorized at June 30, 2020 and December 31, 2019; no shares issued or outstanding at June 30, 2020 and December 31, 2019

Common stock, $0.001 par value; 150,000,000 shares authorized at June 30, 2020 and December 31, 2019; 80,545,519 and 80,016,245 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively

 

80

 

80

Additional paid-in capital

 

604,280

 

586,798

Accumulated other comprehensive income

 

194

 

75

Accumulated deficit

 

(399,080)

 

(312,740)

Total stockholders' equity

 

205,474

 

274,213

Total liabilities and stockholders' equity

$

344,430

$

394,841

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

1

Table of Contents

RUBIUS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share amounts)

(Unaudited)

Three Months Ended June 30, 

Six Months Ended June 30, 

    

2020

    

2019

    

2020

    

2019

Revenue

$

$

$

$

Operating expenses:

Research and development

 

26,096

 

27,518

62,282

 

48,389

General and administrative

 

11,601

 

13,767

24,265

 

27,302

Total operating expenses

 

37,697

 

41,285

86,547

 

75,691

Loss from operations

 

(37,697)

 

(41,285)

(86,547)

 

(75,691)

Other income (expense):

 

  

 

  

 

  

Interest income

 

410

 

2,182

1,459

 

4,490

Interest expense

 

(828)

 

(539)

(1,813)

 

(1,122)

Other income, net

261

252

561

352

Total other income (expense), net

 

(157)

 

1,895

207

 

3,720

Net loss

 

(37,854)

 

(39,390)

(86,340)

 

(71,971)

Net loss per share, basic and diluted

$

(0.47)

$

(0.50)

$

(1.07)

$

(0.92)

Weighted average common shares outstanding, basic and diluted

 

80,481,756

 

78,396,714

80,376,830

 

77,972,757

 

  

 

  

  

 

Comprehensive loss:

 

  

 

  

  

 

  

Net loss

$

(37,854)

$

(39,390)

$

(86,340)

$

(71,971)

Other comprehensive income (loss):

 

  

 

  

  

 

  

Unrealized gains (losses) on investments, net of tax of $0

 

(337)

 

209

119

 

319

Comprehensive loss

$

(38,191)

$

(39,181)

$

(86,221)

$

(71,652)

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

2

Table of Contents

RUBIUS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

Six months ended June 30, 

    

2020

    

2019

Cash flows from operating activities:

 

  

 

  

Net loss

$

(86,340)

$

(71,971)

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

 

  

Stock-based compensation expense

16,740

 

20,082

Depreciation and amortization expense

3,565

 

1,446

Amortization (accretion) of premium (discount) on investments

97

 

(1,215)

Loss on disposal of property and equipment

119

Non-cash interest expense

145

 

114

Changes in operating assets and liabilities:

 

  

Prepaid expenses and other current assets

(2,414)

 

(1,142)

Operating lease, right-of-use-asset

2,873

2,052

Other assets

(5)

Accounts payable

3,084

 

(4,741)

Accrued expenses and other current liabilities

(4,261)

 

2,214

Other long-term liabilities

293

398

Operating lease liabilities

(2,344)

(67)

Net cash used in operating activities

(68,567)

 

(52,711)

Cash flows from investing activities:

  

 

  

Purchases of property, plant and equipment

(3,946)

 

(17,415)

Purchases of investments

(57,465)

 

(176,899)

Sales and maturities of investments

141,502

54,174

Net cash provided by (used in) investing activities

80,091

 

(140,140)

Cash flows from financing activities:

  

 

  

Proceeds from borrowings under loan and security agreement

25,000

 

25,000

Proceeds from issuance of common stock upon exercise of stock options

742

 

1,371

Net cash provided by financing activities

25,742

 

26,371

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

37,266

 

(166,480)

Cash, cash equivalents and restricted cash at beginning of period

93,633

 

309,421

Cash, cash equivalents and restricted cash at end of period

$

130,899

$

142,941

Supplemental cash flow information:

Cash paid for interest, net of interest capitalized

$

1,655

$

1,033

Cash paid for leases

$

4,004

$

1,084

Supplemental disclosure of non-cash investing and financing information:

 

  

Lease assets obtained in exchange for new operating lease liabilities

$

$

27,944

Lease asset derecognized upon lease cancellation

$

982

$

Purchases of property, plant and equipment included in accounts payable or accrued expenses

$

556

$

4,739

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

3

Table of Contents

RUBIUS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share amounts)

(Unaudited)

Accumulated

Additional

other

Total

Common stock

paid-in

comprehensive

Accumulated

stockholders’

   

Shares

   

Amount

   

capital

   

income (loss)

   

deficit

   

equity

Balances at December 31, 2019

 

80,016,245

$

80

$

586,798

$

75

$

(312,740)

$

274,213

Issuance of common stock

upon exercise of stock

options

 

413,721

 

 

486

 

 

 

486

Stock-based compensation

expense

 

 

 

8,488

 

 

 

8,488

Unrealized gains on

investments

 

 

 

 

456

 

 

456

Net loss

 

 

 

 

 

(48,486)

 

(48,486)

Balances at March 31, 2020

80,429,966

 

80

 

595,772

 

531

 

(361,226)

 

235,157

Issuance of common stock

upon exercise of stock

options

 

115,553

256

 

256

Stock-based compensation

expense

 

8,252

 

8,252

Unrealized losses on

investments

 

(337)

 

(337)

Net loss

 

(37,854)

 

(37,854)

Balances at June 30, 2020

 

80,545,519

$

80

$

604,280

$

194

$

(399,080)

$

205,474

Accumulated

Additional

other

Total

Common stock

paid-in

comprehensive

Accumulated

stockholders’

   

Shares

   

Amount

   

capital

   

income (loss)

   

deficit

   

equity

Balances at December 31, 2018

 

79,234,853

$

79

$

543,040

$

(29)

$

(150,082)

$

393,008

Issuance of common stock

upon exercise of stock

options

 

619,342

 

1

 

798

 

 

 

799

Stock-based compensation

expense

 

 

 

9,478

 

 

 

9,478

Vesting of restricted

common stock

22

22

Unrealized gains on

investments

 

110

 

110

Cumulative effect adjustment

for adoption of ASC 842

800

800

Net loss

 

(32,581)

 

(32,581)

Balances at March 31, 2019

 

79,854,195

80

553,338

81

(181,863)

371,636

Issuance of common stock

upon exercise of stock

options

 

223,484

 

 

572

 

 

 

572

Stock-based compensation

expense

 

 

 

10,604

 

 

 

10,604

Vesting of restricted

common stock

13

13

Unrealized gains on

investments

 

209

 

209

Net loss

 

(39,390)

 

(39,390)

Balances at June 30, 2019

 

80,077,679

$

80

$

564,527

$

290

$

(221,253)

$

343,644

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

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RUBIUS THERAPEUTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Nature of the Business and Basis of Presentation

Rubius Therapeutics, Inc. (“Rubius” or the “Company”) is a therapeutics company focused on using its platform to develop red cell therapeutics for the treatment of patients with severe diseases. Rubius was incorporated in April 2013 as VL26, Inc. under the laws of the State of Delaware. In January 2015, the Company changed its name to Rubius Therapeutics, Inc.

The Company is subject to risks and uncertainties common to early-stage companies in the biotechnology industry, including, but not limited to, development by competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, compliance with government regulations, the ability to establish clinical- and commercial-scale manufacturing processes and the ability to secure additional capital to fund operations. In addition, the Company is subject to uncertainty regarding the performance and safety of red cell therapeutics in humans. 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 and infrastructure and extensive compliance-reporting capabilities. Even if the Company’s drug development efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales.

The Company is monitoring the potential impact of the novel coronavirus (“COVID-19”), if any, on the carrying value of certain assets. To date, the Company has not experienced material business disruption, nor has it incurred impairment of any assets as a result of COVID-19. The extent to which these events may impact the Company’s business will depend on future developments, which are highly uncertain and cannot be predicted at this time. The duration and intensity of these impacts and resulting disruption to the Company’s operations is uncertain and the Company will continue to assess the financial impact.

On July 20, 2018, the Company completed its initial public offering (“IPO”), pursuant to which it issued and sold 12,055,450 shares of common stock, inclusive of 1,572,450 shares sold by the Company pursuant to the full exercise of the underwriters’ option to purchase additional shares. The aggregate net proceeds received by the Company from the IPO were $254.3 million, after deducting underwriting discounts and commissions and other offering costs. Upon the closing of the IPO, all of the shares of the Company’s outstanding convertible preferred stock then outstanding automatically converted into 51,845,438 shares of common stock.

The accompanying condensed consolidated financial statements have been prepared on the basis of continuity of operations, realization of assets and the satisfaction of liabilities and commitments in the ordinary course of business. The Company has incurred recurring losses since inception, including net losses of $86.3 million for the six months ended June 30, 2020 and $163.5 million for the year ended December 31, 2019. As of June 30, 2020, the Company had an accumulated deficit of $399.1 million. The Company expects to continue to generate operating losses in the foreseeable future. As of August 10, 2020, the issuance date of the interim condensed consolidated financial statements, the Company expects that its cash, cash equivalents and investments will be sufficient to fund its operating expenses and capital expenditure requirements for at least 12 months from the issuance date of the interim condensed consolidated financial statements. The Company will seek additional funding through private or public equity financings, debt financings, collaborations, strategic alliances and marketing, distribution or licensing arrangements. The Company may not be able to obtain financing on acceptable terms, or at all, and the Company may not be able to enter into collaborations or other arrangements. The terms of any financing may adversely affect the holdings or the rights of the Company's stockholders. 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. Although management continues to pursue these plans, there is no assurance that the Company will be successful in obtaining sufficient funding on terms acceptable to the Company to fund continuing operations, if at all.

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The Company’s condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All intercompany accounts and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current year presentation.

2. Summary of Significant Accounting Policies

Unaudited Interim Financial Information

The condensed consolidated balance sheet at December 31, 2019 was derived from audited financial statements but does not include all disclosures required by GAAP. The accompanying unaudited condensed consolidated financial statements as of June 30, 2020 and for the three and six months ended June 30, 2020 and 2019 have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the Company’s audited condensed consolidated financial statements and the notes thereto for the year ended December 31, 2019 included in the Company’s Annual Report on Form 10-K for the year-ended December 31, 2019, on file with the SEC. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of the Company’s condensed consolidated financial position as of June 30, 2020 and condensed consolidated results of operations for the three and six months ended June 30, 2020 and 2019 and the condensed consolidated cash flows for the six months ended June 30, 2020 and 2019 have been made. The Company’s condensed consolidated results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2020.

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 revenue and expenses during the reporting periods. Significant estimates and assumptions reflected in these condensed consolidated financial statements include, but are not limited to, the accrual of research and development expenses, the valuation of common stock prior to the IPO and the valuation of stock-based awards. The Company bases its estimates on historical experience, known trends and other market-specific or other relevant factors that 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.

The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition, including clinical trials, research and development costs and employee-related amounts, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain it or treat COVID-19. As of the date of issuance of these unaudited condensed consolidated financial statements, the Company is not aware of any specific event or circumstance that would require the Company to update estimates, judgments or revise the carrying value of any assets or liabilities. Actual results may differ from those estimates or assumptions.

Concentrations of Credit Risk and of Significant Suppliers

Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents and investments. The Company’s cash, cash equivalents and investments, as of June 30, 2020, consisted of U.S. government money market funds, U.S. government treasury bills and U.S. government treasury notes. The Company does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.

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The Company relies, and expects to continue to rely, on a small number of vendors to manufacture supplies and raw materials for its development programs. These programs could be adversely affected by a significant interruption in these manufacturing services or the availability of raw materials.

Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents.

Restricted Cash

As of both June 30, 2020 and December 31, 2019, the Company maintained letters of credit totaling $1.7 million for the benefit of the landlords of its leased properties. The Company was required to maintain separate cash balances of these amounts to secure the letters of credit. Related to these separate cash balances, the Company classified $1.7 million as restricted cash (non-current) in its condensed consolidated balance sheet as of both June 30, 2020 and December 31, 2019. The Company did not have any restricted cash (current) as of both June 30, 2020 and December 31, 2019.

Cash, cash equivalents and restricted cash presented in the accompanying condensed consolidated statement of cash flows was $130.9 million and $142.9 million for the six months ended June 30, 2020 and 2019, respectively, of which $1.7 million and $1.9 million was restricted cash, respectively.

Fair Value Measurements

Certain assets and liabilities are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:

Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.

The Company’s cash equivalents and investments are carried at fair value, determined according to the fair value hierarchy described above (see Note 3). The carrying values of the Company’s accounts payable and accrued expenses approximate their fair values due to the short-term nature of these liabilities. The carrying value of the Company’s long-term debt approximates its fair value due to its variable interest rate, which approximates a market interest rate.

Investments

The Company’s investments are classified as available-for-sale and are carried at fair value. Realized gains and losses and declines in value are based on the specific identification method and are included as a component of other income (expense), net in the condensed consolidated statements of operations and comprehensive loss. The Company classifies its investments with maturities beyond one year as short-term, based on their highly liquid nature and because such investments are available for current operations.

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In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses, which changes the impairment model for most financial assets, including the Company’s investments. The Company adopted the standard effective January 1, 2020 using a prospective transition method.

The Company evaluates its investments with unrealized losses for impairment. When assessing investments for unrealized declines in value, the Company considers whether the decline in value is related to a credit loss or non-credit loss. For credit losses, the Company reduces the investment to fair value through an allowance for credit losses recorded to the balance sheet and corresponding charge to the statement of operations. The allowance for credit losses and corresponding impairment charge is adjusted each period for changes in fair value. For non-credit losses, the Company reduces the investment to fair value through a charge to the statement of comprehensive loss, reported as a component of accumulated other comprehensive income (loss) in stockholders’ equity. No such adjustments were necessary during the periods presented.

Leases

At the inception of an arrangement as lessee or lessor, the Company determines whether the arrangement is or contains a lease. Operating lease cost is recognized over the lease term on a straight-line basis. Variable lease cost and short-term leases (lease terms less than 12 months) are recognized as incurred. For both lessee and lessor arrangements, variable lease payments are the amounts owed by the Company to a lessor that are not fixed, such as reimbursement for common area maintenance and utilities costs, and are expensed when incurred. When determining the lease term, the Company includes options to extend or terminate the lease when it is reasonably certain that it will exercise that option.

For lessee arrangements, operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected lease term. The interest rate implicit in lease contracts is typically not readily determinable. As such, the Company utilizes its incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received. Operating leases are recognized on the balance sheet as right-of-use assets, operating lease liabilities current and operating lease liabilities non-current.

The Company has elected the following lease policies at the inception of a lease: (1) for lessee and lessor arrangements within all asset classes, combine lease and non-lease components as a single component, with the lease expense recognized over the expected term on a straight-line basis and (2) for lessee arrangements, apply short-term lease exemption for all leases that qualify, where a right-of-use asset or lease liability will not be recognized for leases with terms of one year or less.

Recently Adopted Accounting Pronouncements

ASU No. 2016-02, Leases

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to classify leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification determines whether lease expense is recognized over the lease term based on an effective interest method for financing leases or on a straight-line basis for operating leases. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less may be accounted for similar to previous guidance for operating leases under ASC 840. For public entities, the guidance was effective for annual reporting periods beginning after December 15, 2018 and for interim periods within those fiscal years.

ASU 2016-02 initially required adoption using a modified retrospective approach, under which all years presented in the financial statements would be prepared under the revised guidance. In July 2018, the FASB issued ASU 2018-11, Leases

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(Topic 842), which added an optional transition method under which financial statements may be prepared under the revised guidance for the year of adoption, but not for prior years. Under the latter method, entities will recognize a cumulative catch-up adjustment to the opening balance of retained earnings in the period of adoption.

The Company adopted ASC 842 using the modified retrospective approach with an effective date of January 1, 2019 for leases that existed on that date. Prior period results continue to be presented under ASC 840 based on the accounting standards originally in effect for such periods. This standard provides a number of optional practical expedients in transition. The Company applied the package of practical expedients to leases that commenced prior to the effective date, whereby it elected not to reassess the following: (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and (iii) initial direct costs for any existing leases. The Company elected the short-term lease recognition exemption for all leases that qualify, where a right-of-use asset or lease liability will not be recognized for short term leases that have terms of one year or less. The most significant effects of adoption were the recognition of material new right-of-use assets and corresponding liabilities on its condensed consolidated balance sheet related to its existing facility operating leases. In addition, the Company has a material lease where the Company was deemed the owner during the construction period and for which the construction was not complete as of January 1, 2019. The Company took control of the leased space during the first quarter of 2019 at which time the lease commenced. Under ASC 842, as the commencement date of this material lease had not occurred, the new right-of-use assets and corresponding liabilities related to this lease were not recognized on the condensed consolidated balance sheet as of date of adoption, January 1, 2019, however, were recognized upon the commencement date of January 28, 2019. The adoption of this standard has had a material impact on the Company’s financial position but did not significantly affect the Company’s results of operations.

ASU No. 2018-15, Intangibles–Goodwill and Other–Internal-Use Software

In August 2018, the FASB issued ASU No. 2018-15, Intangibles–Goodwill and Other–Internal-Use Software (Topic 350): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. This new guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. For public entities, the guidance was effective for annual reporting periods beginning after December 15, 2019 and for interim periods within those fiscal years. Early adoption was permitted. The Company early-adopted this standard on January 1, 2019 on a prospective basis. The adoption did not have a material impact on the Company’s condensed consolidated financial statements.

ASU No. 2016-13, Financial Instruments—Credit Losses

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The standard amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. For available-for-sale debt securities, entities are required to recognize an allowance for credit losses rather than a reduction in carrying value of the asset. Entities are no longer permitted to consider the length of time that fair value has been less than amortized cost when evaluating when credit losses should be recognized. For public entities, the guidance was effective for annual reporting periods beginning after December 15, 2019 and for interim periods within those fiscal years. Early adoption was permitted. The Company adopted this standard as of January 1, 2020 on a prospective basis. The adoption did not have a material impact on the Company’s condensed consolidated financial statements.

ASU No. 2018-13, Fair Value Measurement

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of the FASB’s disclosure framework project. For all entities, this guidance was effective for annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption was permitted. The Company adopted this standard as of January 1,

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2020 on a prospective basis. The adoption did not have an impact on the Company’s condensed consolidated financial statements.

ASU No. 2020-04, Reference Rate Reform

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), which provides temporary optional expedients and exceptions to the US GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates. For all entities, this guidance is effective as of issuance, March 12, 2020, through December 31, 2022. The Company adopted this standard as of March 12, 2020 on a prospective basis and is currently evaluating its contracts referencing LIBOR for reference rate replacement.

Recently Issued Accounting Pronouncements

ASU No. 2019-12, Simplifying the Accounting for Income Taxes

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (ASC 740). The ASU enhances and simplifies various aspects of the income tax accounting guidance in ASC 740, including requirements related to hybrid tax regimes, the tax basis step-up in goodwill obtained in a transaction that is not a business combination, separate financial statements of entities not subject to tax, the intra-period tax allocation exception to the incremental approach, ownership changes in investments, changes from a subsidiary to an equity method investment, interim-period accounting for enacted changes in tax law, and the year-to-date loss limitation in interim-period tax accounting. This guidance is effective for the Company for annual and interim periods beginning after December 31, 2020; however, early adoption is permitted. The Company is currently in the process of evaluating the impact to its consolidated financial statements.

3. Investments and Fair Value of Financial Assets and Liabilities

Investments by security type consisted of the following (in thousands):

June 30, 2020

Amortized Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Credit Losses

Fair Value

U.S. treasury bills and notes (due within one year)

 

$

107,180

 

$

199

 

$

(5)

$

$

107,374

$

107,180

$

199

$

(5)

$

$

107,374

December 31, 2019

Amortized Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair Value

U.S. treasury bills and notes (due within one year)

 

$

189,816

 

$

91

 

$

(20)

$

189,887

U.S. government agency bonds (due within one year)

 

1,498

 

4

 

 

1,502

$

191,314

$

95

$

(20)

$

191,389

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The following tables present the Company’s fair value hierarchy for its assets and liabilities, which are measured at fair value on a recurring basis (in thousands):

Fair value measurements at June 30, 2020 using:

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets:

 

  

 

  

 

  

  

Cash equivalents:

 

  

 

  

 

  

  

Money market funds

 

$

117,062

 

$

 

$

$

117,062

Investments:

 

 

 

 

  

U.S. treasury bills and notes

 

 

107,374

 

 

107,374

$

117,062

$

107,374

$

$

224,436

Fair value measurements at December 31, 2019 using:

    

Level 1 

    

Level 2 

    

Level 3

    

Total 

Assets:

 

  

 

  

 

  

  

Cash equivalents:

 

  

 

  

 

  

  

Money market funds

 

$

91,898

 

$

 

$

$

91,898

Investments:

 

  

 

  

 

  

 

  

U.S. government agency bonds

 

 

1,502

 

 

1,502

U.S. treasury notes

 

 

189,887

 

 

189,887

$

91,898

$

191,389

$

$

283,287

U.S. government money market funds were valued by the Company based on quoted market prices, which represent a Level 1 measurement within the fair value hierarchy. U.S. treasury notes and U.S. government agency bonds were valued by the Company using quoted prices in active markets for similar securities, which represent a Level 2 measurement within the fair value hierarchy. There have been no changes to the valuation methods during the six months ended June 30, 2020. The Company evaluates transfers between levels at the end of each reporting period. There were no transfers between Level 1, Level 2 or Level 3 during the six months ended June 30, 2020.

4. Property, Plant and Equipment, Net

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

    

June 30, 2020

    

December 31, 2019

Manufacturing facility

$

30,539

$

Manufacturing equipment

8,587

Land

1,300

1,300

Laboratory equipment

 

15,942

16,079

Computer equipment

 

 

1,980

 

1,051

Furniture and fixtures

1,228

1,228

Leasehold improvements

 

 

445

 

445

Construction-in-progress

 

 

2,751

 

41,262

 

 

62,772

 

61,365

Less: Accumulated depreciation and amortization

 

 

(7,167)

 

(4,441)

$

55,605

$

56,924

Manufacturing Facility

On July 31, 2018, the Company completed its purchase of a 135,000 square foot manufacturing facility located in Smithfield, Rhode Island for a purchase price of $8.0 million. In August 2018, the Company began renovations to customize this facility to manufacture clinical supply of its product candidates. Of the total purchase price, $1.3 million

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was allocated to the value of land acquired based on the value of comparable assets, and $6.7 million was allocated to construction in progress, as the building was not ready for its intended use. During the years ended December 31, 2019 and 2018, the Company capitalized, as construction-in-progress, the design, demolition, construction and interest costs related to the renovation project, as well as costs for manufacturing equipment to be used in the facility. In January 2020, after achieving the regulatory qualifications required to bring it to its intended use, the Company placed the manufacturing facility and manufacturing equipment into service. In connection with placing the manufacturing facility into service, $30.5 million and $7.8 million of construction-in-progress was transferred to depreciating asset accounts classified as manufacturing facility and manufacturing equipment, respectively.

5. Accrued Expenses and Other Current Liabilities

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

    

June 30, 2020

    

December 31, 2019

Accrued employee compensation and benefits

 

$

3,361

$

5,045

Accrued external research and development expenses

 

 

4,018

 

6,715

Accrued manufacturing facility expenses

 

 

791

 

2,824

Accrued general and administrative expenses

1,135

1,136

Other

 

 

286

 

322

$

9,591

$

16,042

6. Debt

On December 21, 2018 (the “Closing Date”), the Company entered into a loan and security agreement (the “Loan Agreement”) with Solar Capital Ltd. as collateral agent for the lenders party thereto for an aggregate principal amount of $75.0 million. The aggregate principal amount will be funded in three tranches of term loans of $25.0 million each. On the Closing Date, the Company made an initial borrowing of $25.0 million. In June 2019, the Company made a second borrowing of $25.0 million. In June 2020, the Company made a third and final borrowing of $25.0 million.

Interest on the outstanding loan balance will accrue at a rate of the one-month U.S. LIBOR rate plus 5.50%. Monthly principal payments will commence 36 months after the Closing Date and will be amortized over the following 24 months. Certain backend fees are due to the lender at the time of final repayment based on the total funded term loans. The Company accrues the backend fees that will be due at final repayment to outstanding debt by charges to interest expense over the term of the loans using the effective-interest method. The term loans are subject to a prepayment fee of 1.00% in the first year, 0.50% in the second year and 0.25% in the third year. In conjunction with 2018 Credit Facility, the Company incurred issuance costs of $0.8 million.

The Loan Agreement contains financial covenants that require the Company to maintain either a certain minimum cash balance or a minimum market capitalization threshold. The Company was in compliance with all such covenants as of June 30, 2020. The Loan Agreement contains customary representations, warranties and covenants and also includes customary events of default, including payment defaults, breaches of covenants, change of control and a material adverse change default. Upon the occurrence of an event of default, a default interest rate of an additional 4.00% per annum may be applied to the outstanding loan balances, and the lenders may declare all outstanding obligations immediately due and payable. Borrowings under the Loan Agreement are collateralized by substantially all of the Company’s assets, other than its intellectual property.

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As of June 30, 2020, the estimated future principal payments due were as follows (in thousands):

Year ending December 31, 

    

  

2020 (six months ending December 31)

$

2021

 

2022

37,500

2023

37,500

2024 and thereafter

$

75,000

7. Equity

On July 20, 2018, the Company filed a restated certificate of incorporation in the State of Delaware, which, among other things, restated the number of shares of all classes of stock that the Company has authority to issue to 160,000,000 shares, consisting of (i) 150,000,000 shares of common stock, $0.001 par value per share, and (ii) 10,000,000 shares of preferred stock, $0.001 par value per share. The preferred stock will have such rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, as shall be determined by the Company’s board of directors upon issuance. The shares of preferred stock are currently undesignated.

Also on July 20, 2018, the Company completed its IPO, pursuant to which it issued and sold 12,055,450 shares of common stock, inclusive of 1,572,450 shares sold by the Company pursuant to the full exercise of the underwriters’ option to purchase additional shares. The aggregate net proceeds received by the Company from the IPO were $254.3 million, after deducting underwriting discounts and commissions and other offering costs. Upon the closing of the IPO, all of the shares of the Company’s outstanding convertible preferred stock then outstanding automatically converted into 51,845,438 shares of common stock.

On August 1, 2019, the Company entered into a Distribution Agreement (the “Distribution Agreement”) with J.P. Morgan Securities LLC, Jefferies LLC and SVB Leerink LLC (the “Sales Agents”), pursuant to which the Company may issue and sell, from time to time, shares of its common stock having an aggregate offering price of up to $100.0 million through the Sales Agents. The Company’s registration statement on Form S-3 filed on August 1, 2019 was declared effective on August 21, 2019. The Sales Agents may sell common stock by any method permitted by law deemed to be an “at the market offering” as defined in Rule 415(a)(4) of the Securities Act of 1933, as amended, including sales made directly on or through the Nasdaq Global Select Market or any other existing trade market for the common stock, in negotiated transactions at market prices prevailing at the time of sale or at prices related to prevailing market prices, or any other method permitted by law. The Sales Agents will be entitled to receive 3.0% of the gross sales price per share of common stock sold pursuant to the Distribution Agreement. As of June 30, 2020, no shares of common stock have been issued and sold pursuant to the Distribution Agreement.

8. Stock-Based Compensation

Service-Based Stock Options

During the six months ended June 30, 2020, the Company granted options with service-based vesting conditions for the purchase of 3,571,221 shares of common stock with a weighted average exercise price of $7.56 per share and a weighted average grant-date fair value of $4.70 per share.

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Stock-Based Compensation

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

Three Months Ended June 30, 

Six Months Ended June 30, 

    

2020

    

2019

    

2020

    

2019

Research and development expenses

$

2,058

$

2,612

 

$

4,169

$

4,603

General and administrative expenses

 

6,194

 

7,992

 

12,571

 

15,479

$

8,252

$

10,604

$

16,740

$

20,082

As of June 30, 2020, total unrecognized compensation cost related to the unvested stock-based awards was $61.1 million, which is expected to be recognized over a weighted average period of 2.1 years.

9. Commitments and Contingencies

License Agreement with the Whitehead Institute for Biomedical Research

The Company has a license agreement with the Whitehead Institute for Biomedical Research (“WIBR”), as amended, under which the Company has been granted an exclusive, sublicensable, nontransferable license under certain patent families related to the development of the Company’s red cell therapies (the “WIBR License”). The Company is obligated to pay WIBR annual license maintenance fees of less than $0.1 million, as well as patent-related costs, including legal fees, and low single-digit royalties based on annual net sales of licensed products and licensed services by the Company and its sublicensees. Based on the progress the Company makes in the advancement of products covered by the licensed patent rights, the Company is required to make aggregate milestone payments of up to $1.6 million upon the achievement of specified preclinical, clinical and regulatory milestones. In addition, the Company is required to pay to WIBR a percentage of the non-royalty payments that it receives from sublicensees of the patent rights licensed by WIBR. This percentage varies from low single-digit to low double-digit percentages and will be based upon the clinical stage of the product that is the subject of the sublicense. Royalties shall be paid by the Company on a licensed product-by-licensed product and country-by-country basis, beginning on the first commercial sale of such licensed product in such country until expiration of the last valid patent claim covering such licensed product in such country.

The Company has the right to terminate the WIBR License in its entirety, on a patent-by-patent or country-by-country basis, at will upon three months’ notice to WIBR. WIBR may terminate the agreement upon breach of contract or in the event of the Company’s bankruptcy, liquidation, insolvency or cessation of business related to the license.

401(k) Plan

In January 2018, the Company established a defined-contribution plan under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”). The 401(k) Plan covers all employees who meet defined minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis. The Company will make matching contributions at a rate of 50% of each employee’s contribution up to a maximum employee contribution of 6% of eligible plan compensation. For the three and six months ended June 30, 2020, the Company made matching contributions of $0.2 million and $0.5 million, respectively.

Indemnification Agreements

In the ordinary course of business, the Company may provide indemnification of varying scope and terms to vendors, lessors, contract research organizations, business partners and other parties with respect to certain matters including, but not limited to, losses arising out of breach of such agreements or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with members of its board of directors and executive officers 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 or officers. The maximum potential amount of

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future payments the Company could be required to make under these indemnification agreements is, in many cases, unlimited. The Company has not incurred any material costs as a result of such indemnifications and is not currently aware of any indemnification claims.

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 such legal proceedings.

10. Net Loss per Share

Basic and diluted net loss per share was calculated as follows (in thousands, except share and per share amounts):

Three Months Ended June 30, 

Six Months Ended June 30, 

    

2020

    

2019

    

2020

    

2019

Numerator:

 

  

 

  

 

  

 

  

Net loss

$

(37,854)

$

(39,390)

$

(86,340)

$

(71,971)

 

  

 

 

  

 

  

Denominator:

 

  

 

  

 

  

 

  

Weighted average common shares outstanding, basic and diluted

 

80,481,756

 

78,396,714

 

80,376,830

 

77,972,757

Net loss per share, basic and diluted

$

(0.47)

$

(0.50)

$

(1.07)

$

(0.92)

The Company’s potential dilutive securities have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per share. Therefore, the weighted average number of common shares outstanding used to calculate both basic and diluted net loss per share is the same. The Company excluded the following potential common shares from the periods in the table above, presented based on amounts outstanding at each period end, from the computation of diluted net loss per share for the periods indicated because including them would have had an anti-dilutive effect:

June 30, 

    

2020

    

2019

Unvested restricted common stock

 

252,000

 

1,401,858

Stock options to purchase common stock

 

16,948,843

 

16,066,547

 

17,200,843

 

17,468,405

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission, or SEC, on March 12, 2020. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this Quarterly Report on Form 10-Q, our actual results could differ materially from the results described in, or implied by, the forward-looking statements contained in the following discussion and analysis.

Overview

We are developing a new class of cellular medicines, Red Cell Therapeutics, or RCTs. Based on our vision that human red blood cells are the foundation of the next significant innovation in medicine, we have designed a proprietary platform to genetically engineer and culture RCTs that are selective, potent and ready-to-use cellular therapies. We believe that our RCTs can provide life-changing or life-saving benefits for patients with cancer and autoimmune diseases.

We have generated hundreds of RCTs using our RED PLATFORM®, a highly versatile and proprietary cellular therapy platform. We are utilizing our universal engineering and manufacturing processes to advance a broad pipeline of RCT product candidates into clinical trials in cancer and autoimmune diseases. Common design and manufacturing elements of our RCTs should enable us to achieve significant advantages in product development. Recognizing the importance of controlling our own manufacturing capabilities to produce consistent and reproducible product at greater scale, we acquired and began renovating a manufacturing facility in Smithfield, RI, in July 2018. As of January 2020, this manufacturing facility is operational. We are currently providing cGMP supply for our RTX-240 clinical trial in advanced solid tumors and plan to provide supply for our future RTX-240 clinical trial in acute myeloid leukemia and RTX-321 clinical trial for HPV-16-positive cancers from this site, and have the potential to significantly expand our manufacturing capabilities at this facility. We plan to stage additional investments at this site based on future supply needs.

During 2019, the Investigational New Drug Application, or IND, for a Phase 1b clinical trial evaluating RTX-134 for the treatment of phenylketonuria, or PKU, was allowed to proceed by the FDA and in January 2020, we dosed the first patient in the trial. In March 2020, we announced that we are discontinuing the Phase 1b clinical trial for RTX-134 and deprioritizing our rare disease programs in order to focus on our oncology and autoimmunity pipeline. Future capital investments and improvements in manufacturing efficiency, together with enhancements to the RED PLATFORM®, may enable us to revisit chronic, high-dose rare diseases in the future.

The IND for our second product candidate, RTX-240, has been allowed to proceed by the FDA and we have completed dosing of the second cohort in the Phase 1/2 clinical trial in solid tumors with no observed adverse events to date attributed to RTX-240. We plan to submit an IND for RTX-321 for the treatment of HPV-16-positive cancers by the end of 2020.

Since our inception, we have focused substantially all of our resources on building our proprietary RED PLATFORM, establishing and protecting our intellectual property portfolio, conducting research and development activities, developing our manufacturing process and manufacturing drug product material, organizing and staffing our company, business planning, raising capital and providing general and administrative support for these operations. We do not have any products approved for sale and have not generated any revenue from product sales. To date, we have funded our operations with proceeds from the sale of preferred stock and issuance of debt and with proceeds from our initial public offering, or IPO. On July 20, 2018, we completed our IPO pursuant to which we issued and sold 12,055,450 shares of common stock, inclusive of 1,572,450 shares pursuant to the full exercise of the underwriters’ option to purchase additional shares. We received proceeds of $254.3 million after deducting underwriting discounts and commissions and other offering costs. In August 2019, we entered into a Distribution Agreement with J.P. Morgan Securities LLC,

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Jefferies LLC and SVB Leerink LLC with respect to an at-the-market, or ATM, offering program under which we may offer and sell, from time to time at our sole discretion, shares of our common stock, having aggregate gross proceeds of up to $100.0 million. We have not yet sold any shares of our common stock under the ATM offering program.

Since our inception, we have incurred significant operating losses. Our ability to generate any product revenue or product revenue sufficient to achieve profitability will depend on the successful development and eventual commercialization of one or more of our product candidates. We reported net losses of $86.3 million for the six months ended June 30, 2020 and $163.5 million for the year ended December 31, 2019. As of June 30, 2020, we had an accumulated deficit of $399.1 million. We expect to continue to incur significant expenses and operating losses for at least the next several years. We expect that our expenses and capital requirements will increase in connection with our ongoing activities, particularly if, and as, we:

conduct clinical trials for our product candidates and if we experience any delays, setbacks or disruptions to our preclinical studies, clinical trials or clinical supply chain due to the COVID-19 pandemic;
further develop our RED PLATFORM;
continue to discover and develop additional product candidates;
maintain, expand and protect our intellectual property portfolio;
hire additional clinical, scientific manufacturing and commercial personnel;
expand in-house manufacturing capabilities, including through the operation and any future renovation or expansion of our manufacturing facility;
establish a commercial manufacturing source and secure supply chain capacity sufficient to provide commercial quantities of any product candidates for which we may obtain regulatory approval;
acquire or in-license other product candidates and technologies;
seek regulatory approvals for any product candidates that successfully complete clinical trials;
establish a sales, marketing and distribution infrastructure to commercialize any products for which we may obtain regulatory approval; and
add operational, financial and management information systems and personnel, including personnel to support our product development and planned future commercialization efforts, as well as to continue to support the requirements of a public company.

We will not generate revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for our product candidates. If we obtain regulatory approval for any of our product candidates, we expect to incur significant expenses related to developing our commercialization capability to support product sales, marketing and distribution. Further, we expect to incur additional costs 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 a combination of equity offerings, debt financings, collaborations, strategic alliances and marketing, distribution or licensing arrangements. 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.

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Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable to accurately predict the timing or amount of increased expenses or 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.

As of June 30, 2020, we had cash, cash equivalents and investments of $236.5 million. We believe that our existing cash, cash equivalents and investments will enable us to fund our operating expenses, capital expenditure requirements and debt service payments into 2022. See “—Liquidity and Capital Resources.”

Recent Developments

In March 2020, we began precautionary measures to protect the health and safety of our employees and partners and prospective clinical trial participants during the novel coronavirus, or COVID-19, pandemic. Because COVID-19 infections have been reported throughout the United States and worldwide, certain national, state and local governmental authorities have issued orders, proclamations and/or directives aimed at minimizing the spread of COVID-19. Additional, more restrictive orders, proclamations and/or directives may be issued in the future. As a result, we have eliminated business travel and substantially reduced the number of employees working on-site at any one time at each of our facilities by shifting to remote work wherever possible and implementing rotating laboratory work schedules. In addition, the conduct of our clinical studies with our external partners has been adjusted to institute virtual clinical trial site training and site monitoring, along with partnering with sites to minimize patient visits and institute telemedicine to minimize patient exposure. We expect these precautionary measures to continue to be in place throughout the remainder of 2020 and likely into 2021.

While the COVID-19 pandemic did not significantly impact our results of operations during the first six months of 2020, the ultimate impact on our operations is unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that governments, or we, may direct, which may result in an extended period of continued business disruption, reduced patient traffic and reduced operations. In particular, the speed of the continued spread of COVID-19 globally, and the magnitude of interventions to contain the spread of the virus, such as government-imposed quarantines, including shelter-in-place mandates, sweeping restrictions on travel, mandatory shutdowns for non-essential businesses, requirements regarding social distancing, and other public health safety measures, will determine the impact of the pandemic on our business. We are continuing to monitor the latest developments regarding the COVID-19 pandemic and its impact on our business, financial condition, results of operations and prospects. However, any resulting financial impact cannot be reasonably estimated at this time and may have a material adverse impact on our business, financial condition and results of operations.

Components of Our Results of Operations

Revenue

To date, we have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products in the near future. If our development efforts for our product candidates are successful and result in regulatory approval or license or collaboration agreements with third parties, we may generate revenue in the future from product sales, payments from collaboration or license agreements that we may enter into with third parties, or any combination thereof.

Operating Expenses

Research and Development Expenses

Research and development expenses consist of costs incurred for our research activities, including our drug discovery efforts, and the development and manufacturing of our product candidates, which include:

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employee-related expenses, including salaries, related benefits and stock-based compensation expense for employees engaged in research and development functions;
expenses incurred in connection with the preclinical and clinical development of our product candidates and research programs, including under agreements with third parties, such as consultants, contractors and contract research organizations, or CROs;
the cost of developing and scaling our manufacturing process and manufacturing drug products for use in our preclinical studies and clinical trials, including under agreements with third parties, such as consultants, contractors and any contract manufacturing organizations, or CMOs, that we may engage, as well as in our manufacturing facility;
laboratory supplies and research materials;
facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities and insurance; and
payments made under third-party licensing agreements.

We expense research and development costs as incurred. Advance payments that we make for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. The prepaid amounts are expensed as the related goods are delivered or the services are performed.

Our direct research, manufacturing and development expenses are tracked on a program-by-program basis for clinical candidates. These consist mostly of fees, reimbursed materials, testing and other costs paid to consultants, contractors, CMOs and CROs as well as the cost of materials incurred for internal manufacturing. In addition, starting in the first quarter of 2020, we allocate the cost of operating our manufacturing facility to research and development program costs, consisting of associated personnel costs, other than stock-based compensation expense, and manufacturing facility costs, including depreciation. We do not allocate costs associated with our platform development, early stage research and shared research and development, including associated personnel costs, laboratory supplies, non-manufacturing facilities expenses and other indirect costs, to research and development programs, because these costs are deployed across multiple programs and our technology platform and, as such, are not separately classified.

Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, due to the increased size and duration of later-stage clinical trials. We expect that our research and development expenses will increase substantially in connection with our planned preclinical and clinical development activities in the future. At this time, we cannot accurately estimate or know the nature, timing and costs of the efforts that will be necessary to complete the preclinical and clinical development of any of our product candidates. The successful development and commercialization of our product candidates is highly uncertain. This is due to the numerous risks and uncertainties associated with product development and commercialization, including the following:

the timing and progress of preclinical and clinical development activities;
the number and scope of preclinical and clinical programs we decide to pursue;
raising additional funds necessary to complete preclinical and clinical development of and commercialize our drug candidates;
the progress of the development efforts of parties with whom we may enter into collaboration arrangements;
our ability to maintain our current research and development programs and to establish new ones;
our ability to establish new licensing or collaboration arrangements;
19
the successful initiation and completion of clinical trials with safety, tolerability and efficacy profiles that are satisfactory to the U.S. Food and Drug Administration, or FDA, or any comparable foreign regulatory authority;
the impact of the COVID-19 pandemic on our operations;
the receipt and related terms of regulatory approvals from applicable regulatory authorities;
the availability of specialty raw materials for use in production of our product candidates;
our ability to consistently manufacture our product candidates for use in clinical trials;
our ability to operate a manufacturing facility, or secure manufacturing supply through relationships with third parties;
our ability to obtain and maintain patents, trade secret protection and regulatory exclusivity, both in the United States and internationally;
our ability to protect our rights in our intellectual property portfolio;
the commercialization of our product candidates, if and when approved;
obtaining and maintaining third-party insurance coverage and adequate reimbursement;
the acceptance of our product candidates, if approved, by patients, the medical community and third-party payors;
competition with other products; and
a continued acceptable safety profile of our therapies following approval.

A change in the outcome of any of these 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. We may never succeed in obtaining regulatory approval for any of our product candidates.

General and Administrative Expenses

General and administrative expenses include salaries and related costs, including stock-based compensation, for personnel in executive, finance and administrative functions. General and administrative expenses also include direct and allocated facility-related costs as well as professional fees for legal, patent, consulting, investor and public relations, accounting and audit services. We anticipate that our general and administrative expenses may increase in the future as we continue to build infrastructure to support the expansion of our research activities, development of our product candidates and any expanded compliance requirements.

Other Income (Expense)

Interest Income

Interest income consists of interest earned on our invested cash balances.

Interest Expense

Interest expense consists of interest expense on outstanding borrowings under our loan and security agreements, as well as amortization of debt discount and debt issuance costs.

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Other Income, Net

Other income, net consists of income earned under a sublease agreement and miscellaneous income and expense unrelated to our core operations.

Income Taxes

Since our inception, we have not recorded any income tax benefits for the net losses we have incurred in each year or for our research and development tax credits generated, as we believe, based upon the weight of available evidence, that it is more likely than not that all of our net operating loss, or NOL, carryforwards and tax credits will not be realized. As of December 31, 2019, we had U.S. federal and state net operating loss carryforwards of $222.9 million and $227.0 million, respectively, which may be available to offset future taxable income. The federal NOLs include $37.2 million, which expire at various dates through 2037, and $185.7 million, which carryforward indefinitely. The state NOLs expire at various dates through 2039. As of December 31, 2019, we also had U.S. federal and state research and development tax credit carryforwards of $9.5 million and $5.1 million, respectively, which may be available to offset future tax liabilities and begin to expire in 2034 and 2026, respectively. We have recorded a full valuation allowance against our net deferred tax assets at each balance sheet date.

Results of Operations

Comparison of the Three Months Ended June 30, 2020 and 2019

The following table summarizes our results of operations for the three months ended June 30, 2020 and 2019:

 

Three Months Ended June 30, 

 

2020

    

2019

    

Change

(in thousands)

Revenue

$

$

$

Operating expenses:

Research and development

26,096

 

27,518

 

(1,422)

General and administrative

11,601

 

13,767

 

(2,166)

Total operating expenses

37,697

 

41,285

 

(3,588)

Loss from operations

(37,697)

 

(41,285)

 

3,588

Other income (expense):

  

 

  

 

  

Interest income

410

 

2,182

 

(1,772)

Interest expense

(828)

 

(539)

 

(289)

Other income, net

261

 

252

 

9

Total other income (expense), net

(157)

 

1,895

 

(2,052)

Net loss

$

(37,854)

$

(39,390)

$

1,536

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Research and Development Expenses