FORM10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
2020
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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Delaware | |||||
(State or other jurisdiction of incorporation or organization) | 27-3181608 (I.R.S. Employer Identification No.) | ||||
955 Massachusetts Avenue, 4th Floor Cambridge, Massachusetts | |||||
(Address of principal executive offices) | 02139 (Zip Code) |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Common Stock | XFOR | The Nasdaq |
Large accelerated filer | ☐ | Accelerated filer | ☒ | ||||||||||||
Non-accelerated filer | ☐ | Smaller reporting company | ☒ | ||||||||||||
Emerging growth company | ☒ |
On March 13, 2019, X4 Pharmaceuticals, Inc. (formerly Arsanis, Inc), or the Company, completed its business combination in accordance with the terms of the Agreement and Plan of Merger, dated as of November 26, 2018, as amended on December 20, 2018 and March 8, 2019, or the Merger Agreement, by and among the Company, X4 Therapeutics, Inc. (formerly X4 Pharmaceuticals, Inc.) and Artemis AC Corp., a Delaware corporation and a wholly owned subsidiary of the Company, or the Merger Sub, pursuant to which, among other matters, Merger Sub merged with and into X4 Therapeutics, Inc., with X4 Therapeutics, Inc. continuing as a wholly owned subsidiary of the Company and the surviving corporation of the merger, or the Merger. Following the Merger, on March 13, 2019, the Company effected a1-for-6 reverse stock split of its common stock, or the Reverse Stock Split, and changed its name to “X4 Pharmaceuticals, Inc.” Following the completion of the Merger, the business conducted by the Company became primarily the business conducted by X4 Therapeutics, Inc., which is a clinical-stage biopharmaceutical company focused on the discovery, development and commercialization of novel therapeutics for the treatment of rare diseases.
Unless otherwise noted, all references to common stock share and per share amounts in this Quarterly Report on Form10-Q have been retroactively adjusted to reflect the conversion of shares in the Merger based on an Exchange Ratio of 0.5702 and, the Reverse Stock Split. As used herein, the words “the Company,” “we,” “us,” and “our” refer to, for periods following the Merger, X4 Pharmaceuticals, Inc. (formerly Arsanis, Inc.), together with is direct and indirect subsidiaries, and for periods prior to the Merger, X4 Therapeutics, Inc. (formerly X4 Pharmaceuticals, Inc.), and its direct and indirect subsidiaries, as applicable. In addition, the word “Arsanis” refers to the Company prior to the completion of the Merger, and we sometimes refer to X4 Therapeutics, Inc. as “X4.”
•the timing, progress scope, cost, duration orand reporting of results of our development activities, nonclinicalcurrent trials of X4P-001 (mavorixafor), including our global Phase 3 clinical trial in patients with Warts, Hypogammaglobulinemia, Infections, and Myelokathexis, or WHIM, syndrome, our Phase 1b clinical trial in combination with ibrutinib in patients with Waldenström’s macroglobulinemia, and our Phase 1b clinical trial as monotherapy in patients with Severe Congenital Neutropenia, or SCN;
•the potential benefits that may be derived from any of our product candidates;
•the timing of and our ability to obtain and maintain regulatory approval of our existing product candidates or any product candidates that we may develop in the future, and any related restrictions, limitations, or warnings in the label of any approved product candidates;
•our plans to research, develop, manufacture and commercialize our product candidates;
•our strategies, prospects, plans, expectations or objectives.
Words such as, but not limited
In addition, anystatements, whether as a result of new information, future events or otherwise, except as required by law. You should, therefore, not rely on these forward-looking statement in this quarterly report represents our views only as of the date of this quarterly report and should not be relied uponstatements as representing our views as of any date subsequent date. We anticipate that subsequent events and developments may cause our views to change. Although we may elect to update these forward-looking statements publicly at some point in the future, we specifically disclaim any obligation to do so, except as required by applicable law. Our forward-looking statements do not reflect the potential impactdate of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.
March 31, 2019 | December 31, 2018 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 22,299 | $ | 8,134 | ||||
Research and development incentive receivable | 1,552 | — | ||||||
Prepaid expenses and other current assets | 2,372 | 1,205 | ||||||
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Total current assets | 26,223 | 9,339 | ||||||
Property and equipment, net | 271 | 241 | ||||||
Intangible assets | 4,900 | — | ||||||
Goodwill | 27,407 | — | ||||||
Right-of-use assets | 2,705 | — | ||||||
Restricted cash | 947 | 364 | ||||||
Other assets | 96 | — | ||||||
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Total assets | $ | 62,549 | $ | 9,944 | ||||
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Liabilities, Convertible Preferred Stock, Redeemable Common Stock and Stockholders’ Equity (Deficit) | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 6,132 | $ | 2,969 | ||||
Accrued expenses | 4,179 | 3,251 | ||||||
Current portion of lease liability | 841 | — | ||||||
Current portion of long-term debt | 5,298 | 1,687 | ||||||
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Total current liabilities | 16,450 | 7,907 | ||||||
Preferred stock warrant liability | — | 4,947 | ||||||
Long-term debt, including accretion, net of discount and current portion | 13,365 | 8,145 | ||||||
Deferred rent | — | 417 | ||||||
Lease liability | 3,275 | — | ||||||
Other liabilities | 18 | 205 | ||||||
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Total liabilities | 33,108 | 21,621 | ||||||
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Commitments and contingencies (Note 9) | ||||||||
Convertible preferred stock (Series Seed, A and B), $0.001 par value; 10,000,000 and 59,413,523 shares authorized as of March 31, 2019 and December 31, 2018, respectively; 0 and 40,079,567 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively | — | 64,675 | ||||||
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Redeemable common stock, $0.001 par value; 0 and 107,364 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively | — | 734 | ||||||
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Stockholders’ equity (deficit): | ||||||||
Common stock, $0.001 par value. 33,333,333 and 11,070,776 shares authorized as of March 31, 2019 and December 31, 2018, respectively: 6,724,511 and 351,652 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively | 7 | — | ||||||
Additionalpaid-in capital | 119,521 | 2,151 | ||||||
Accumulated other comprehensive income | 23 | — | ||||||
Accumulated deficit | (90,110 | ) | (79,237 | ) | ||||
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Total stockholders’ equity (deficit) | 29,441 | (77,086 | ) | |||||
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Total liabilities, convertible preferred stock, redeemable common stock and stockholders’ equity (deficit) | $ | 62,549 | $ | 9,944 | ||||
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March 31, 2020 | December 31, 2019 | ||||||||||
Assets | |||||||||||
Current assets: | |||||||||||
Cash and cash equivalents | $ | 115,054 | $ | 126,184 | |||||||
Accounts receivable | 3,000 | — | |||||||||
Research and development incentive receivable | 416 | 1,998 | |||||||||
Prepaid expenses and other current assets | 3,480 | 1,096 | |||||||||
Total current assets | 121,950 | 129,278 | |||||||||
Property and equipment, net | 475 | 403 | |||||||||
Goodwill | 27,109 | 27,109 | |||||||||
Right-of-use assets | 1,803 | 1,959 | |||||||||
Other assets | 2,380 | 1,949 | |||||||||
Total assets | $ | 153,717 | $ | 160,698 | |||||||
Liabilities, Convertible Preferred Stock, Redeemable Common Stock and Stockholders’ Equity | |||||||||||
Current liabilities: | |||||||||||
Accounts payable | $ | 1,248 | $ | 2,088 | |||||||
Accrued expenses | 5,786 | 6,461 | |||||||||
Current portion of lease liability | 916 | 898 | |||||||||
Total current liabilities | 7,950 | 9,447 | |||||||||
Long-term debt, including accretion, net of discount and current portion | 25,266 | 20,097 | |||||||||
Lease liability | 1,684 | 1,918 | |||||||||
Other liabilities | 26 | 16 | |||||||||
Total liabilities | 34,926 | 31,478 | |||||||||
Commitments and contingencies (Note 9) | |||||||||||
Stockholders’ equity: | |||||||||||
Common stock, $0.001 par value. 33,333,333 shares authorized as of March 31, 2020 and December 31, 2019, respectively; 16,141,868 and 16,128,862 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively | 16 | 16 | |||||||||
Additional paid-in capital | 262,076 | 261,367 | |||||||||
Accumulated other comprehensive loss | (119) | (119) | |||||||||
Accumulated deficit | (143,182) | (132,044) | |||||||||
Total stockholders’ equity | 118,791 | 129,220 | |||||||||
Total liabilities and stockholders’ equity | $ | 153,717 | $ | 160,698 |
AND COMPREHENSIVE LOSS
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Operating expenses: | ||||||||
Research and development | $ | 5,655 | $ | 4,744 | ||||
General and administrative | 4,783 | 1,366 | ||||||
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Total operating expenses | 10,438 | 6,110 | ||||||
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Loss from operations | (10,438 | ) | (6,110 | ) | ||||
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Other income (expense): | ||||||||
Interest income | 69 | 69 | ||||||
Interest expense | (399 | ) | (169 | ) | ||||
Change in fair value of preferred stock warrant liability | (288 | ) | (592 | ) | ||||
Change in fair value of derivative liability | 183 | (565 | ) | |||||
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Total other income (expense), net | (435 | ) | (1,257 | ) | ||||
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Net loss | (10,873 | ) | (7,367 | ) | ||||
Accruing dividends on Series A convertible preferred stock | (592 | ) | (740 | ) | ||||
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Net loss attributable to common stockholders | $ | (11,465 | ) | $ | (8,107 | ) | ||
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Net loss per share attributable to common stockholders—basic and diluted | $ | (6.67 | ) | $ | (17.70 | ) | ||
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Weighted average common shares outstanding—basic and diluted | 1,717,808 | 457,971 | ||||||
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Three Months Ended March 31, | |||||||||||||||||||||||||||||
2020 | 2019 | ||||||||||||||||||||||||||||
License revenue | $ | 3,000 | $ | — | |||||||||||||||||||||||||
Operating expenses: | |||||||||||||||||||||||||||||
Research and development | 8,911 | 5,655 | |||||||||||||||||||||||||||
General and administrative | 4,670 | 4,783 | |||||||||||||||||||||||||||
Total operating expenses | 13,581 | 10,438 | |||||||||||||||||||||||||||
Loss from operations | (10,581) | (10,438) | |||||||||||||||||||||||||||
Other expense: | |||||||||||||||||||||||||||||
Interest income | 296 | 69 | |||||||||||||||||||||||||||
Interest expense | (584) | (399) | |||||||||||||||||||||||||||
Change in fair value of preferred stock warrant liability | — | (288) | |||||||||||||||||||||||||||
Change in fair value of derivative liability | — | 183 | |||||||||||||||||||||||||||
Other income | 41 | — | |||||||||||||||||||||||||||
Loss on extinguishment of debt | (162) | — | |||||||||||||||||||||||||||
Total other expense, net | (409) | (435) | |||||||||||||||||||||||||||
Loss before provision for income taxes | (10,990) | (10,873) | |||||||||||||||||||||||||||
Provision for income taxes | 148 | — | |||||||||||||||||||||||||||
Net loss | (11,138) | (10,873) | |||||||||||||||||||||||||||
Accruing dividends on Series A convertible preferred stock | — | (592) | |||||||||||||||||||||||||||
Net loss attributable to common stockholders | $ | (11,138) | $ | (11,465) | |||||||||||||||||||||||||
Net loss per share attributable to common stockholders—basic and diluted | $ | (0.56) | $ | (6.67) | |||||||||||||||||||||||||
Weighted average common shares outstanding—basic and diluted | 20,014 | 1,718 |
Net loss | $ | (11,138) | $ | (10,873) | |||||||
Currency translation adjustments | — | 23 | |||||||||
Total comprehensive loss | $ | (11,138) | $ | (10,850) |
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Net loss | $ | (10,873 | ) | $ | (7,367 | ) | ||
Other comprehensive gain | ||||||||
Currency translation adjustments | 23 | — | ||||||
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Total comprehensive loss | $ | (10,850 | ) | $ | (7,367 | ) | ||
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The accompanying unaudited notes are an integral part of these condensed consolidated financial statements
CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK, REDEEMABLE COMMON
STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
Series Seed, A and B Convertible Preferred | Redeemable Common Stock | Common Stock | Additional Paid-In Capital | AOCI | Accumulated Deficit | Total Stockholders’ (Deficit) Equity | ||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||
Balances at December 31, 2018 | 40,079,567 | $ | 64,675 | 107,364 | $ | 734 | 351,652 | $ | — | $ | 2,151 | $ | — | $ | (79,237 | ) | $ | (77,086 | ) | |||||||||||||||||||||
Conversion of redeemable common stock into common stock | — | — | (107,364 | ) | (734 | ) | 107,364 | 1 | 733 | — | — | 734 | ||||||||||||||||||||||||||||
Conversion of convertible preferred shares into common stock | (40,079,567 | ) | (64,675 | ) | — | — | 3,808,430 | 4 | 64,671 | — | — | 64,675 | ||||||||||||||||||||||||||||
Exchange of common stock in connection with Merger | — | — | — | — | 2,440,582 | 2 | 45,539 | — | — | 45,541 | ||||||||||||||||||||||||||||||
Fair value of replacement equity awards | — | — | — | — | — | — | 817 | — | — | 817 | ||||||||||||||||||||||||||||||
Reclassification of warrant liability to permanent equity | — | — | — | — | — | — | 5,235 | — | — | 5,235 | ||||||||||||||||||||||||||||||
Exercise of stock options | — | — | — | — | 16,483 | — | 113 | — | — | 113 | ||||||||||||||||||||||||||||||
Stock-based compensation expense | — | — | — | — | — | — | 262 | — | — | 262 | ||||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | 23 | (10,873 | ) | (10,850 | ) | ||||||||||||||||||||||||||||
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Balances at March 31, 2019 | — | $ | — | — | $ | — | 6,724,511 | $ | 7 | $ | 119,521 | $ | 23 | $ | (90,110 | ) | $ | 29,441 | ||||||||||||||||||||||
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Series Seed, A and B Convertible Preferred | Redeemable Common Stock | Common Stock | Additional Paid-In Capital | AOCI | Accumulated Deficit | Total Stockholders’ (Deficit) | ||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||
Balances at December 31, 2017 | 38,018,968 | $ | 60,903 | 107,364 | $ | 734 | 350,607 | $ | — | $ | 1,385 | $ | — | $ | (45,930 | ) | $ | (44,545 | ) | |||||||||||||||||||||
Repurchase of Series Seed convertible preferred stock, net of issuance costs of $1 | (598,975 | ) | (517 | ) | — | — | — | — | — | — | (22 | ) | (22 | ) | ||||||||||||||||||||||||||
Stock-based compensation expense | — | — | — | — | — | — | 128 | — | — | 128 | ||||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | — | (7,367 | ) | (7,367 | ) | ||||||||||||||||||||||||||||
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Balances at March 31, 2018 | 37,419,993 | $ | 60,386 | 107,364 | $ | 734 | 350,607 | $ | — | $ | 1,513 | $ | — | $ | (53,319 | ) | $ | (51,806 | ) | |||||||||||||||||||||
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Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Loss | Accumulated Deficit | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2019 | 16,128,862 | $ | 16 | $ | 261,367 | $ | (119) | $ | (132,044) | $ | 129,220 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of stock options | 13,006 | — | 96 | 96 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | 613 | 613 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net loss | (11,138) | (11,138) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2020 | 16,141,868 | 16 | 262,076 | (119) | (143,182) | 118,791 |
Series Seed, A and B Convertible Preferred | Redeemable Common Stock | Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income | Accumulated Deficit | Total Stockholders’ (Deficit) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2018 | 40,079,567 | $ | 64,675 | 107,364 | $ | 734 | 351,652 | — | $ | 2,151 | — | $ | (79,237) | $ | (77,086) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Conversion of redeemable common stock into common stock | (107,364) | (734) | 107,364 | 1 | 733 | 734 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Conversion of convertible preferred shares into common stock | (40,079,567) | (64,675) | 3,808,430 | 4 | 64,671 | 64,675 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exchange of common stock in connection with Merger | 2,440,582 | 2 | 45,539 | 45,541 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair value of replacement equity awards | 817 | 817 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Reclassification of warrant liability to permanent equity | 5,235 | 5,235 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of stock options | 16,483 | 113 | 113 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | 262 | 262 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Currency translation adjustment | 23 | 23 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net loss | (10,873) | (10,873) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2019 | — | — | — | — | 6,724,511 | 7 | 119,521 | 23 | (90,110) | 29,441 |
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (10,873 | ) | $ | (7,367 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Stock-based compensation expense | 262 | 128 | ||||||
Depreciation expense | 20 | 26 | ||||||
Non-cash lease expense | 119 | — | ||||||
Non-cash interest expense | 153 | 27 | ||||||
Change in fair value of preferred stock warrant liability | 288 | 592 | ||||||
Change in fair value of derivative liability | (183 | ) | 565 | |||||
Changes in operating assets and liabilities: | ||||||||
Prepaid expenses and other current assets | (595 | ) | 170 | |||||
Accounts payable | 1,332 | (563 | ) | |||||
Accrued expenses | (2,072 | ) | 240 | |||||
Operating lease liabilities | (201 | ) | — | |||||
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Net cash used in operating activities | (11,750 | ) | (6,182 | ) | ||||
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Cash flows from investing activities: | ||||||||
Cash and restricted cash acquired in connection with the Merger | 26,406 | — | ||||||
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Net cash provided by investing activities | 26,406 | — | ||||||
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Cash flows from financing activities: | ||||||||
Proceeds from exercise of stock options | 113 | — | ||||||
Repurchase of Series Seed convertible preferred stock | — | (1,126 | ) | |||||
Repayments of borrowings under loan and security agreement | — | (500 | ) | |||||
Payments of issuance costs of convertible preferred stock | — | (34 | ) | |||||
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Net cash provided by (used in) financing activities | 113 | (1,660 | ) | |||||
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Effect of exchange rate changes on cash, cash equivalents and restricted cash | (21 | ) | — | |||||
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Net increase (decrease) in cash, cash equivalents and restricted cash | 14,748 | (7,842 | ) | |||||
Cash, cash equivalents and restricted cash at beginning of period | 8,498 | 27,048 | ||||||
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Cash, cash equivalents and restricted cash at end of period | $ | 23,246 | $ | 19,206 | ||||
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Supplemental disclosure of cash flow information: | ||||||||
Cash paid for interest | $ | 243 | $ | 146 | ||||
Supplemental disclosure ofnon-cash investing and financing activities: | ||||||||
Conversion of convertible preferred stock into common stock | $ | 64,675 | — | |||||
Conversion of redeemable common stock into common stock | $ | 734 | — | |||||
Conversion of convertible preferred stock warrants into common stock warrants | $ | 5,235 | — | |||||
Fair value of net assets acquired in Merger | $ | 46,358 | — |
Three Months Ended March 31, | |||||||||||||||||
2020 | 2019 | ||||||||||||||||
Cash flows from operating activities: | |||||||||||||||||
Net loss | $ | (11,138) | $ | (10,873) | |||||||||||||
Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||||||||
Stock-based compensation expense | 613 | 262 | |||||||||||||||
Depreciation and amortization expense | 36 | 20 | |||||||||||||||
Non-cash lease expense | 158 | 119 | |||||||||||||||
Accretion of debt discount | 119 | 153 | |||||||||||||||
Loss on extinguishment of debt | 162 | — | |||||||||||||||
Change in fair value of preferred stock warrant liability | — | 288 | |||||||||||||||
Change in fair value of derivative liability | — | (183) | |||||||||||||||
Other | 70 | — | |||||||||||||||
Changes in operating assets and liabilities: | |||||||||||||||||
Accounts receivable | (3,000) | — | |||||||||||||||
Prepaid expenses, other current assets and research and development incentive receivable | (869) | (595) | |||||||||||||||
Accounts payable | (800) | 1,332 | |||||||||||||||
Accrued expenses | (668) | (2,072) | |||||||||||||||
Lease liabilities | (210) | (201) | |||||||||||||||
Net cash used in operating activities | (15,527) | (11,750) | |||||||||||||||
Cash flows from investing activities: | |||||||||||||||||
Cash, cash equivalents and restricted cash acquired in connection with the Merger | — | 26,406 | |||||||||||||||
Acquisition of property, equipment and intangible assets | (555) | — | |||||||||||||||
Net cash provided by investing activities | (555) | 26,406 | |||||||||||||||
Cash flows from financing activities: | |||||||||||||||||
Proceeds from exercise of stock options and warrants | 96 | 113 | |||||||||||||||
Proceeds from borrowings under loan and security agreements, net of issuance costs | 4,888 | — | |||||||||||||||
Net cash provided by financing activities | 4,984 | 113 | |||||||||||||||
Effect of exchange rate changes on cash, cash equivalents and restricted cash | (34) | (21) | |||||||||||||||
Net (decrease) increase in cash, cash equivalents and restricted cash | (11,132) | 14,748 | |||||||||||||||
Cash, cash equivalents and restricted cash at beginning of period | 128,086 | 8,498 | |||||||||||||||
Cash, cash equivalents and restricted cash at end of period | $ | 116,954 | $ | 23,246 | |||||||||||||
Supplemental disclosure of non-cash investing and financing activities: | |||||||||||||||||
Issuance costs not yet paid | $ | 20 | $ | — | |||||||||||||
Conversion of convertible preferred stock into common stock | $ | — | $ | 64,675 | |||||||||||||
Conversion of redeemable common stock into common stock | $ | — | $ | 734 | |||||||||||||
Conversion of convertible preferred stock warrants into common stock warrants | $ | — | $ | 5,235 | |||||||||||||
Fair value of net assets acquired in the Merger | $ | — | $ | 46,358 |
(Amounts in thousands, except share
(Unaudited)
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Basis of Presentation
The accompanying condensed consolidated financial statements have been preparedbe successful in accordance with accounting principles generally accepted inobtaining sufficient funding on terms acceptable to the United States of America (“GAAP”) and include the accountsCompany to fund continuing operations, if at all.
the diversion of healthcare resources away from the conduct of the Company’s clinical trials as a result of the ongoing COVID-19 pandemic, including the diversion of hospitals serving as the Company’s clinical trial sites and hospital staff supporting the conduct of clinical trials.
Arsanis—
On November 26, 2018, Arsanis, Inc., a publicly held Delaware corporation (“Arsanis”), Artemis AC Corp., a Delaware corporation and aThe transaction was accounted for as a reverse merger in accordance with GAAP. Under this method of accounting, X4 was deemed to be the accounting acquirer for financial reporting purposes. This determination was primarily based on the facts that, immediately following the Merger: (i) the Company’s stockholders own a substantial majority of the voting rights in the combined organization, (ii) the Company designated a majority of the members of the initial board of directors of the combined organization and (iii) the Company’s senior management hold all key positions in the senior management of the combined organization. Accordingly, for accounting purposes, the business combination was treated as the equivalent of X4 issuing stock to acquire the net assets of Arsanis. As a result, as of the closing date of the Merger, the net assets of Arsanis were recorded at their acquisition-date fair values in the financial statements of the Company and the reported operating results prior to the business combination will be those of the Company. In addition, transaction costs incurred by the Company in connection with the business combination will be expensed as incurred.
Immediately following
Reverse Stock Split
On March 13, 2019, immediately followingCompany has implemented business continuity measures designed to address and mitigate the closingimpact of the Merger,COVID-19 pandemic on its business. The Company anticipates that the Company effected a6-for-1 reverse stock splitCOVID-19 pandemic will have an impact on the clinical development timelines for certain of its clinical programs. The extent to which the COVID-19 pandemic impacts the Company’s business, its clinical development and regulatory efforts, its corporate development objectives and the value of and market for its common stock, (the “Reverse Stock Split”). Accordingly, all sharewill depend on future developments that are highly uncertain and per share amounts for all periods presentedcannot be predicted with confidence at this time, such as the ultimate duration of the pandemic, travel restrictions, quarantines, social distancing and business closure requirements in the accompanyingUnited States, Europe and other countries, and the effectiveness of actions taken globally to contain and treat the disease. While the Company is experiencing limited financial impacts 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.
X4 PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
(Amounts in thousands, except share and per share amounts)
(Unaudited)
Going Concern Assessment
In accordance with Accounting Standards Update (“ASU”)No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic205-40) , the Company has evaluated whether there are certain conditions and events, 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 consolidated financial statements are issued. As of May 14, 2019, the issuance date of these condensed consolidated financial statements, the Company expects that its cash and cash equivalents, including approximately $79 million of net proceeds from the public sale of common stock,pre-funded warrants and Class A warrants in April 2019, will be sufficient to fund its forecasted operating expenses, capital expenditure requirements and debt service payments for at least the next twelve months from the issuance of these financial statements. The future viabilityaccounts of the Company beyond that pointand its wholly-owned subsidiaries, including X4 Pharmaceuticals (Austria) GmbH, which is dependent on its ability to raise additional capital to finance its operations.
If the Company is unable to obtain funding, the Company will be forced to delay, reduce or eliminate some or all of its researchincorporated in Vienna, Austria (“X4 GmbH”), and development programs, product portfolio expansion orpre-commercialization efforts, which could adversely affect its business prospects, or the Company may be unable to continue operations. 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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X4 Therapeutics, Inc. All significant intercompany accounts and transactions have been eliminated.
Statements—
The condensed consolidated balance sheet at December 31,2020.
Estimates—
The preparation of the Company’s condensed consolidated 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 condensed consolidated financial statements, and the reported amounts of expenses during the reporting period. Significant estimates and assumptions reflected in these condensed consolidated financialPrinciples of Consolidation
The condensed consolidated financial statements include the accounts of the Companyestimates, and its wholly owned subsidiaries, including Arsanis Biosciences GmbH, which is incorporated in Vienna, Austria (“Arsanis GmbH”), and X4 Therapeutics, Inc. All significant intercompany accounts and transactions have been eliminated.
Foreign Currency and Currency Translation
Management has determined that the functional currency forany such differences may be material to the Company’s wholly owned foreign subsidiary, Arsanis Biosciences GmbH, is the Euro. Management’s assessment considered the currency environment in which the entity operates, including inflows of
X4 PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
(Amounts in thousands, except share and per share amounts)
(Unaudited)
cash from research and development incentive programs and outflows of cash for operating expenditure. Accordingly, the assets and liabilities of Arsanis Biosciences GmbH are translated from the Euro into United States dollars at the exchange rate in effect on the balance sheet date and income and expenses are translated at the average exchange rate in effect during the period. Unrealized translation gains and losses are recorded as a cumulative translation adjustment, which is included in the consolidated balance sheet as a component of accumulated other comprehensive income (loss). Adjustments that arise from exchange rate changes on transactions denominated in a currency other than the Euro are included in other income (expense), net in the consolidated statements of operations as incurred.
Concentrations of Credit Risk and Significant Suppliers
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and research and development incentive receivables. The Company generally maintains cash balances in various operating accounts at financial institutions that management believes to be of high credit quality, in amounts that may exceed federally insured limits. The Company has not experienced any losses related to its cash and cash equivalents.
The Company is dependent on third-party manufacturers to supply products for research and development activities in its programs. The Company relies and expects to continue to rely on a small number of manufacturers to supply it with its requirements for the active pharmaceutical ingredients and formulated drugs related to these programs. These programs could be adversely affected by a significant interruption in these manufacturing services or in the supply of active pharmaceutical ingredients and formulated drugs.
statements.
Equivalents—
The Company considers all highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. Cash equivalents consisted of money market funds as of March 31,2019.
Cash—
(in thousands) | As of March 31, 2020 | As of December 31, 2019 | |||||||||
Letter of credit security: Cambridge lease | $ | 264 | $ | 264 | |||||||
Letter of credit security: Waltham lease | 250 | 250 | |||||||||
Letter of credit security: Vienna Austria lease | 92 | 94 | |||||||||
Letter of credit security: Allston lease | 1,144 | 1,144 | |||||||||
Corporate credit card collateral | 150 | 150 | |||||||||
Total restricted cash (non-current) | $ | 1,900 | $ | 1,902 |
The Company also maintains letters of credit for the benefit of the landlords in connection with the Company’s office, laboratory, parking and storage space leases in Waltham, MA and Vienna, Austria and another letter of credit in connection with Company’s corporate credit cards. As of March 31, 2019, long term restricted cash consisted of letters of credit related to the Company’s leases of office, laboratory, parking and storage space lease in Vienna, Austria, of $283 and leased office space acquired from Arsanis located in Waltham, MA, which expires on December 31, 2023, of approximately $250.
As of March 31, 2019, the Company was also required to maintain a separate cash balance of $150 to collateralize corporate credit cards with a bank, which was classified as restricted cash(non-current) on its consolidated balance sheets.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization expense is recognized using the straight-line method over the estimated useful life of each asset, as follows:
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Estimated useful lives are periodically assessed to determine if changes are appropriate. Maintenance and repairs are charged to expense as incurred. When assets are retired or otherwise disposed of, the cost of these assets and related accumulated depreciation or amortization are eliminated from the consolidated balance sheet and any resulting gains or losses are included in the consolidated statements of operations and comprehensive loss in the period of disposal. Costs for capital assets not yet placed into service are capitalized asconstruction-in-progress and depreciated once placed into service.
X4 PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
(Amounts in thousands, except share and per share amounts)
(Unaudited)
Right-of-Use Assets and Leases
Effective January 1, 2019, the Company adopted Accounting Standards Codification (“ASC”), Topic 842,Leases(“ASC 842”), using the modified retrospective approach through a cumulative-effect adjustment and utilizing the effective date as its date of initial application, with prior periods unchanged and presented in accordance with the guidance in Topic 840,Leases (“ASC 840”).
At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present. Leases with anon-cancellable term greater than one year are recognized on the balance sheet asright-of-use assets, lease liabilities and long-term lease liabilities. The Company has elected not to recognize on the balance sheet leases with terms of one year or less. Options to renew a lease are not included in the Company’s initial lease term assessment unless there is reasonable certainty that the Company will renew.
Operating lease liabilities and their correspondingright-of-use assets are recorded based on the present value of lease payments over the expected remaining lease term. However, certain adjustments to theright-of-use operating asset may be required for items, such as incentives received. The interest rate implicit in lease contracts is typically not readily determinable. As a result, the Company utilizes its incremental borrowing rates, which are the rates it incurs to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.
In accordance with the guidance in ASC 842, components of a lease are split into lease components andnon-lease components. A policy election is available pursuant to which an entity may elect to not separate lease andnon-lease components. Rather, each lease component and the relatednon-lease components would be accounted for together as a single component. For new and amended leases beginning in 2019 and after, the Company has elected to account for the lease andnon-lease components as a combined lease component for its office and laboratory building leases.
Impairment of Long-Lived Assets
Long-lived assets consist of property and equipment. Long-lived assets to be held and used are tested for recoverability whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Factors that the Company considers in deciding when to perform an impairment review include significant underperformance of the business in relation to expectations, significant negative industry or economic trends and significant changes or planned changes in the use of the assets. If an impairment review is performed to evaluate a long-lived asset group for recoverability, the Company compares forecasts of undiscounted cash flows expected to result from the use and eventual disposition of the long-lived asset group to its carrying value. An impairment loss would be recognized in loss from operations when estimated undiscounted future cash flows expected to result from the use of an asset group are less than its carrying amount. The impairment loss would be based on the excess of the carrying value of the impaired asset group over its fair value. To date, the Company has not recorded any impairment losses on long-lived assets.
Goodwill
Business combinations are accounted for under the acquisition method. The total purchase price of an acquisition is allocated to the underlying identifiable net assets, based on their respective estimated fair values as of the acquisition date. Determining the fair value of assets acquired and liabilities assumed requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, probabilities of success, discount rates, and asset lives, among other items. Assets acquired and liabilities assumed are recorded at their estimated fair values. The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill.
(in thousands) March 31, 2020 December 31, 2019 March 31, 2019 December 31, 2018 Cash and cash equivalents $ 115,054 $ 126,184 $ 22,299 $ 8,134 Restricted cash, non-current 1,900 1,902 947 364 Total cash, cash equivalents and restricted cash $ 116,954 $ 128,086 $ 23,246 $ 8,498
Thetest, whereby the Company compares the fair value of the reporting unit to its carrying value. If the fair value of the reporting unit exceeds the carrying value of theits net assets, goodwill is not impaired, and no further testing is required. If the fair value of the reporting unit is less than theits carrying value, the Company measures the amount of impairment loss, if any, as the excess of the carrying value over the fair value of the reporting unit. The Company has determined there were no indicators
X4 PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
(Amounts in thousands, except share and per share amounts)
(Unaudited)
Intangible Assets
2020. The Company acquired certainin-process research and development assets (“IPR&D”), which are classifieddetermined that goodwill was not impaired as indefinite-lived intangible assets. Acquired IPR&D represents the fair value assigned to research and development assets that the Company acquires and have not been completed at the acquisition date. The fair value of IPR&D acquired in a business combination is capitalized on the Company’s consolidated balance sheets at the acquisition-date fair value and is determined by estimating the costs to develop the technology into commercially viable products, estimating the resulting revenue from the projects, and discounting the projected net cash flows to present value. IPR&D is not amortized, but rather is reviewed for impairment on an annual basis or more frequently if indicators of impairment are present, until the project is completed or abandoned. If the Company determines that IPR&D becomes impaired or is abandoned, the carrying value is written down to its fair value with the related impairment charge recognized in the Company’s consolidated statement of operations in the period in which the impairment occurs. Upon successful completion of each project and launch of the product, the Company will make a separate determination of the estimated useful life of the IPR&D intangible asset and the related amortization will be recorded as an expense prospectively over its estimated useful life.
The projected discounted cash flow models used to estimate the Company’s IPR&D reflect significant assumptions regarding the estimates a market participant would make in order to evaluate a drug development asset, including the following:
Probability of successfully completing clinical trials and obtaining regulatory approval;
Market size, market growth projections, and market share;
Estimates regarding the timing of and the expected costs to advance the Company’s clinical programs to commercialization;
Estimates of future cash flows from potential product sales; and
A discount rate.
Additionally, to the extent the Company acquire other indefinite-lived intangible assets through its business combinations, these assets are reviewed for impairment on an annual basis or more frequently if indicators of impairment are present. If the Company determines that the asset becomes impaired, the carrying value is written down to its fair value with the related impairment charge recognized in its consolidated statements of operations in the period in which the impairment occurs.
Deferred Rent
The Company’s lease agreements include payment escalations and lease incentives (including a leasehold improvement tenant allowance). For periods prior to January 1, 2019, these payments were accrued or deferred as appropriate such that rent expense was recognized on a straight-line basis over the respective lease terms. Effective January 1, 2019, upon the adoption of ASC 842,deferred rent was reclassified as a reduction to the applicableright-of-use asset as further described in Note 8.
Fair Value Measurements
Certain assets and liabilities of the Company 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 that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.
Prior to the Merger, the Company’s preferred stock warrant liability, derivative liability and preferred stock repurchase liability were carried at fair value, determined according to Level 3 inputs in the fair value hierarchy described above (See Note 4). The Company’s cash equivalents, consisting of money market funds invested in U.S. Treasury securities, are carried at fair value, determined based on Level 2 inputs in the fair value hierarchy described above (see Note 4). 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 outstanding loan and security agreement (the “Hercules Loan Agreement”) with Hercules Capital, Inc. (“Hercules”) approximates its fair value at March 31, 2019 because the debt bears interest at a variable market rate and the Company’s credit risk has not materially
X4 PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
(Amounts in thousands, except share and per share amounts)
(Unaudited)
changed since the inception of the agreement. The carrying value of the Company’s loans under the funding agreements with Österreichische Forschungsförderungsgesellschaft mbH (“FFG”) were recorded at fair value on the opening balance sheet of Arsanis as of the date of the Merger, and approximates the fair value of the loans at March 31, 2019. (See Note 3).
Segment Information
The Company manages its operations as a single operating segment for the purposes of assessing performance and making operating decisions. The Company’s focus is on the discovery, development and commercialization of novel therapeutics for the treatment of rare diseases.
Revenue Recognition
Effective January 1, 2018, the Company adopted ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”), using the modified retrospective transition method. The modified retrospective method requires that the cumulative effect of initially applying ASC 606 be recognized as an adjustment to the opening balance of retained earnings or accumulated deficit of the annual period that includes the date of initial application. The Company did not have any arrangements that were in the scope of ASC 606 on January 1, 2018 and thus there was no impact to the condensed consolidated financial statements as a result of the adoption. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as collaboration arrangements and leases. Prior to completion of the Merger, Arsanis entered into a singleout-licensing agreement with Janssen Pharmaceuticals, Inc. (see Note 13) that was within the scope of ASC 606.
Research and Development Programs
Proceeds under the research and development incentive program from the Austrian government are recognized as other income in an amount equal to the qualifying expenses incurred in each period multiplied by the applicable reimbursement percentage. Incentive income recognized upon incurring qualifying expenses in advance of receipt of proceeds from research and development incentives is recorded in the consolidated balance sheet as research and development incentive receivables.
Research and Development Costs
Costs associated with internal research and development and external research and development services, including drug development and preclinical studies, are expensed as incurred. Research and development expenses include costs for salaries, employee benefits, subcontractors, facility-related expenses, depreciation and amortization, stock-based compensation, third-party license fees, laboratory supplies, and external costs of outside vendors engaged to conduct discovery, preclinical and clinical development activities and clinical trials as well as to manufacture clinical trial materials, and other costs. The Company recognizes external research and development costs based on an evaluation of the progress to completion of specific tasks using information provided to the Company by its service providers.
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. Such prepaid expenses are recognized as an expense when the goods have been delivered or the related services have been performed, or when it is no longer expected that the goods will be delivered or the services rendered.
Upfront payments, milestone payments and annual maintenance fees under license agreements are expensed in the period in which they are incurred.
Patent Costs
All patent-related costs incurred in connection with filing and prosecuting patent applications are expensed as incurred due to the uncertainty about the recovery of the expenditure. Amounts incurred are classified as general and administrative expenses.
Debt Issuance Costs
Debt issuance costs consist of payments made to secure commitments under certain debt financing arrangements. These amounts are recognized as interest expense over the period of the financing arrangement using the effective interest method. If the financing arrangement is canceled or forfeited, or if the utility of the arrangement to the Company is otherwise compromised, these costs are recognized as interest expense immediately. The Company’s consolidated financial statements present debt issuance costs related to a recognized debt liability as a direct reduction from the carrying amount of that debt liability.
Stock-Based Compensation
The Company measures all stock-based awards granted to employees and directors based on the fair value on the date of the grant and recognizes compensation expense for those awards, net of estimated forfeitures, over the requisite service period, which is generally the vesting period of the respective award. The Company issues stock-based awards with only service-based vesting conditions and records the expense for these awards using the straight-line method. The Company has not issued any stock-based awards with performance-based vesting conditions.
X4 PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
(Amounts in thousands, except share and per share amounts)
(Unaudited)
Effective January 1, 2019, the Company adopted ASU No.2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU2018-07”), which expands the scope of Topic 718 to include share-based payment awards to nonemployees. As a result, stock-based awards granted to consultants andnon-employees are accounted for in the same manner as awards granted to employees and directors as described above. The impact of adoption this new guidance did not have a material impact on the Company’s consolidated financial statements. Prior to the adoption of ASU2018-07, for stock-based awards granted tonon-employee consultants, compensation expense was recognized over the period during which services were rendered by suchnon-employee consultants until completed. At the end of each financial reporting period prior to completion of the service, the fair value of these awards was remeasured using the then-current fair value of the Company’s common stock and updated assumption inputs in the Black-Scholes option-pricing model.
The Company classifies stock-based compensation expense in its consolidated statement of operations and comprehensive loss in the same manner in which the award recipient’s payroll costs are classified or in which the award recipient’s service payments are classified.
The Company recognizes compensation expense for only the portion of awards that are expected to vest. In developing a forfeiture rate estimate, the Company has considered its historical experience to estimatepre-vesting forfeitures for service-based awards. The impact of a forfeiture rate adjustment will be recognized in full in the period of adjustment, and if the actual forfeiture rate is materially different from the Company’s estimate, the Company may be required to record adjustments to stock-based compensation expense in future periods.
The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. Prior to March 13, 2019, the Company had been a private company and lacked company-specific historical and implied volatility information for its stock. Therefore, the Company estimates its expected stock price volatility based on the historical volatility of publicly traded peer companies and expects to continue to do so until it has adequate historical data regarding the volatility of its own traded stock price. The expected term of the Company’s stock options has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options. The expected term of stock options granted tonon-employee consultants is equal to the contractual term of the option award. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that the Company has never paid cash dividends on common stock and does not expect to pay any cash dividends in the foreseeable future.
Preferred Stock Warrant Liability
Prior to the Merger with Arsanis, the Company classified warrants for the purchase of shares of its convertible preferred stock (see Note 10) as a liability on its consolidated balance sheets as these warrants are freestanding financial instruments that may have required the Company to transfer assets upon exercise. The warrant liability, which consisted of warrants for the purchase of Series A and Series B convertible preferred stock, was initially recorded at fair value upon the date of issuance of each warrant and is subsequently remeasured to fair value at each reporting date. Changes in the fair value of the warrant liability are recognized as a component of other income (expense), net in the consolidated statement of operations and comprehensive loss. Concurrent with the closing of the Merger, all X4 preferred stock was converted to Arsanis common stock and the X4 preferred stock warrants converted to warrants for the purchase of Arsanis common stock. The Company assessed the features of the warrants and determined that they qualify for classification as permanent equity. Accordingly, the Company remeasured the warrants to fair value upon the closing of the Merger and reclassified the resulting warrant liability to additionalpaid-in capital. (see Note 10).
Derivative Liability
The Company’s license agreement with Genzyme Corporation (“Genzyme”) (see Note 13) contained a contingent payment obligation that required the Company to make a cash payment to Genzyme upon a change of control event of the Company. The contingent payment obligation met the definition of a derivative instrument as the contingent payment obligation was not clearly and closely related to its host instrument and was a cash-settled liability. Accordingly, the Company classified this derivative as a liability within other liabilities(non-current) on its condensed consolidated balance sheet. The derivative liability was initially recorded at fair value on the date of entering into the license agreement and was subsequently remeasured to fair value at each reporting date. Changes in the fair value of this derivative liability were recognized as a component of other income (expense), net in the condensed consolidated statement of operations and comprehensive loss. The Merger with Arsanis (see Note 1) qualified as a change of control event, as defined in the license agreement, but resulted in no payment being due to Genzyme under the license agreement. As a result, on March 13, 2019, the closing date of the Merger with Arsanis, the derivative liability was remeasured to fair value, which was $0, and subsequent changes in fair value will no longer be recognized in the consolidated statements of operations and comprehensive loss because the contingent payment obligation to Genzyme expired at that time.
X4 PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
(Amounts in thousands, except share and per share amounts)
(Unaudited)
In addition, the Company’s Hercules loan (see Note 7) contains a redemption feature that, upon an event of default, provides Hercules the option to accelerate and demand repayment of the debt, including a prepayment premium. The redemption feature meets the definition of a derivative instrument as the repayment of the debt contains a substantial premium, resulting in the redemption feature not being clearly and closely related to its host instrument. Accordingly, the Company classifies this derivative as a liability within other liabilities(non-current) on its condensed consolidated balance sheet. The derivative liability was initially recorded at fair value on the date of entering into the Hercules Loan Agreement and is subsequently remeasured to fair value at each reporting date. Changes in the fair value of this derivative liability are recognized as a component of other income (expense), net in the condensed consolidated statement of operations and comprehensive loss. Changes in the fair value of this derivative liability will continue to be recognized until all amounts outstanding under the Hercules Loan Agreement are repaid or until the Hercules Loan Agreement is terminated.
Comprehensive Loss
Comprehensive loss includes net loss as well as other changes in stockholders’ equity (deficit) that result from transactions and economic events other than those with stockholders. For the three months ended March 31, 2019, comprehensive loss included $23 of foreign currency translation gain adjustments.
Income Taxes
The Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the consolidated financial statements or in the Company’s tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it believes, based upon the weight of available evidence, that it is more likely than not that all or a portion of the deferred tax assets will not be realized, a valuation allowance is established through a charge to income tax expense. Potential for recovery of deferred tax assets is evaluated by estimating the future taxable profits expected and considering prudent and feasible tax planning strategies.
The Company accounts for uncertainty in income taxes recognized in the consolidated financial statements by applying atwo-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination by the taxing authorities. If the tax position is deemedmore-likely-than-not to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the consolidated financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. The provision for income taxes includes the effects of any resulting tax reserves, or unrecognized tax benefits, that are considered appropriate as well as the related net interest and penalties.
Net Income (Loss) per Share
The Company follows thetwo-class method when computing net income (loss) per share as the Company has issued shares that meet the definition of participating securities. Thetwo-class method determines net income (loss) per share for each class of common and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings. Thetwo-class method requires income available to common stockholders for the period to be allocated between common and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed.
Basic net income (loss) per share attributable to common stockholders is computed by dividing the net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net income (loss) attributable to common stockholders is computed by adjusting net income (loss) attributable to common stockholders to reallocate undistributed earnings based on the potential impact of dilutive securities. Diluted net income (loss) per share attributable to common stockholders is computed by dividing the diluted net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding for the period, including potential dilutive common shares. For purpose of this calculation, outstanding stock options, convertible preferred stock and warrants to purchase shares of convertible preferred stock are considered potential dilutive common shares.
The Company’s convertible preferred stock contractually entitles the holders of such shares to participate in dividends but does not contractually require the holders of such shares to participate in losses of the Company. Accordingly, in periods in which the Company reports a net loss attributable to common stockholders, such losses are not allocated to such participating securities. In periods in which the Company reports a net loss attributable to common stockholders, diluted net loss per share attributable to common stockholders is the same as basic net loss per share attributable to common stockholders, since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive. The Company reported a net loss attributable to common stockholders for the three months ended March 31, 2019 and 2018.
X4 PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
(Amounts in thousands, except share and per share amounts)
(Unaudited)
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASUNo. 2016-02, Leases (Topic 842) (“ASU2016-02” or “ASC 842”)), 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 apply a dual approach, classifying 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 will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record aright-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 prior guidance for operating leases. The Company adopted the new leasing standard as of the required effective date of January 1, 2019 using a modified retrospective transition approach to be applied to leases existing as of, or entered into after, January 1, 2019. The adoption had no impact on accumulated deficit. The new lease 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 will elect to not 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 also elected the short-term lease recognition exemption for all leases that qualify, where aright-of-use asset or lease liability will not be recognized for short-term leases. Upon the adoption of ASC 842, the Company recorded $2.5 million of operating lease liabilities and $2.0 million ofright-of-use assets on its consolidated balance. The adoption did not have a material impact on the Company’s statement of operations, statement of comprehensive loss or statement of cash flows.
In January 2017, the FASB issued ASUNo. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The new standard simplifies the subsequent measurement of goodwill by eliminating the second step of the goodwill impairment test. This ASU will be applied prospectively and is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019 with early adoption permitted. The Company has adopted this guidance on January 1, 2019 and will apply it to its annual impairment test, and any interim impairment tests during the year ending December 31, 2019.
In April 2017, the FASB issued ASU2017-08, Receivables – Nonrefundable Fees and Other Costs (“Subtopic310-20”). The new standard amends the amortization period for certain purchased callable debt securities held at a premium by shortening the amortization period for the premium to the earliest call date. Subtopic310-20 calls for a modified retrospective application under which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The new standard will be effective beginning January 1, 2019 and early adoption is permitted for public entities. The Company adopted this guidance, effective January 1, 2019, and its adoption had no impact on the Company’s financial position, results of operations or cash flows.
In July 2017, the FASB issued ASUNo. 2017-11,Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815) (Part I) Accounting for Certain Financial Instruments with Down Round Features (Part 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 (“ASU2017-11”). Part I applies to entities that issue financial instruments such as warrants, convertible debt or convertible preferred stock that contain down-round features. Part II 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. For public entities, ASU2017-11 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years. The Company adopted ASU2017-11 as of the required effective date of January 1, 2019. The adoption of ASU2017-11 had no impact on the Company’s financial position, results of operations or cash flows.
In June 2018, the FASB issued ASUNo. 2018-07,Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting(“ASU2018-07”). These amendments expand the scope of Topic 718, Compensation—Stock Compensation (which previously only included share-based payments to employees) to include share-based payments issued tonon-employees for goods or services. Consequently, the accounting for share-based payments tonon-employees and employees will be substantially aligned. The ASU supersedesSubtopic 505-50, Equity—Equity-Based Payments toNon-Employees. The Company adopted ASU2018-07 on January 1, 2019. The adoption of this standard had no impact on the Company’s financial statements.
Recently Issued Accounting Pronouncements
X4 PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
(Amounts in thousands, except share and per share amounts)
(Unaudited)
measurements. However, the Company will be required to additionally disclose the changes in unrealized gains and losses included in other comprehensive income for recurring Level 3 fair value measurements and the range and weighted average of assumptions used to develop significant unobservable inputs for Level 3 fair value measurements. ASU2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments relating to additional disclosure requirements will be applied prospectively for only the most recent interim or annual period presented in the initial year of adoption. All other amendments will be applied retrospectively to all periods presented upon their effective date. The Company is currently evaluating the impact that the adoption of ASU2018-13 will have on its consolidated financial statements.
In August 2018, the FASB issued ASU2018-15, Intangibles-Goodwill andOther-Internal-Use Software (Subtopic350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, (“(“ASU2018-15”). The amendments in this update align 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 obtaininternal-use software (and hosting arrangements that include aninternal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update. The new standard will bewas effective beginning January 1, 2020 and earlywas adopted by the Company on that date. The adoption is permitted. The amendmentsof ASU 2018-15 did not have an impact on the Company's consolidated financial statements and related disclosures.
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Basedstatements and related disclosures.
In addition, pursuantnotes to the terms of the Merger Agreement, the Company, for accounting purposes, assumed all outstanding stock options to purchase shares of Arsanis common stock at the closing of the Merger. At the closing of the Merger, such stock options became options to purchase an aggregate of 271,230 sharesconsolidated financial statements.
The total purchase price paid in the Merger has been allocated to the tangible and intangible assets acquired and liabilities assumed of Arsanis based on their fair values as of the completion of the Merger, with the excess allocated to goodwill. The following summarizes the preliminary estimate of the purchase price paid in the Merger:
Number of shares of the combined organization owned by Arsanis stockholders (1) | 2,440,582 | |||
Multiplied by the fair value per share of Arsanis common stock (2) | $ | 18.66 | ||
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Fair value of consideration issued it effect the Merger | $ | 45,541 | ||
Fair value of replacement awards held by former employees, board of directors and consultants of Arsanis that were vested as of the Merger. | $ | 817 | ||
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Purchase price: | $ | 46,358 | ||
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X4 PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
(Amounts in thousands, except share and per share amounts)
(Unaudited)
The following summarizes the allocation of the purchase price to the net tangible and intangible assets acquired:
Cash and cash equivalents and restricted cash | $ | 26,406 | ||
Other current assets | 2,147 | |||
Property and equipment, net | 68 | |||
IPR&D indefinite-lived intangible assets | 4,900 | |||
Other assets,non-current | 879 | |||
Current liabilities | (5,221 | ) | ||
Loans payable | (8,713 | ) | ||
Other liabilities,non-current | (1,515 | ) | ||
Goodwill | 27,407 | |||
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Purchase price | $ | 46,358 | ||
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The goodwill of $27,407 is not tax deductible and represents the excess of the consideration paid over the fair value of assets acquired and liabilities assumed. Goodwill is mainly attributable to the enhanced value of the combined company, as reflected in the increase in market value of the Arsanis common shares following the announcement of the Merger with X4. The Company incurred costs directly related to the Merger of approximately $1 million forlicense, collaboration or funding agreements during the three months ended March 31, 2019.
2020.
The following supplemental unaudited pro forma information presents the Company’s financial results as if the acquisition of Arsanis had occurred on January 1, 2018:
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
(unaudited) | ||||||||
Revenue | $ | 0 | $ | 0 | ||||
Net loss | $ | (16,258 | ) | $ | (20,235 | ) |
The above unaudited pro forma information was determined based on the historical GAAP results ofthree months ended
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2020, Abbisko has not completed any additional development or regulatory operational milestones, other than as noted above and, therefore, the Company continues to fully constrain the value of associated milestone payments. The Company will continue to re-evaluate the transaction price and associated constrained amounts in each reporting period and as uncertain events are resolved or other changes in circumstances occur.
Fair Value Measurements as of March 31, 2019 Using: | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets: | ||||||||||||||||
Cash equivalents—money market funds | $ | — | $ | 22,299 | $ | — | $ | 22,299 | ||||||||
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$ | — | $ | 22,299 | $ | — | $ | 22,299 | |||||||||
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Liabilities: | ||||||||||||||||
Preferred stock warrant liability | $ | — | $ | — | $ | — | $ | — | ||||||||
Derivative liability | — | — | 18 | $ | 18 | |||||||||||
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$ | — | $ | — | $ | 18 | $ | 18 | |||||||||
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Fair Value Measurements as of March 31, 2020 Using: (in thousands) Level 1 Level 2 Level 3 Total Assets: Cash equivalents—money market funds $ 48,770 $ 6,417 $ — $ 55,187 $ 48,770 $ 6,417 $ — $ 55,187 Liabilities: None
(Amounts in thousands, except share and per share amounts)
Fair Value Measurements as of December 31, 2018 Using: | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets: | ||||||||||||||||
Cash equivalents—money market fund | $ | — | $ | 8,134 | $ | — | $ | 8,134 | ||||||||
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$ | — | $ | 8,134 | $ | — | $ | 8,134 | |||||||||
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Liabilities: | ||||||||||||||||
Preferred stock warrant liability | $ | — | $ | — | $ | 4,947 | $ | 4,947 | ||||||||
Derivative liability | — | — | 201 | $ | 201 | |||||||||||
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$ | — | $ | — | $ | 5,148 | $ | 5,148 | |||||||||
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As of March 31, 2019 and December 31, 2018, there were no transfers between Level 1, Level 2 and Level 3.
Fair Value Measurements as of December 31, 2019 Using: | |||||||||||||||||||||||||||||||||||||||||
(in thousands) | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||||||||||||||||
Cash equivalents—money market funds | $ | 23,638 | $ | 39,999 | $ | — | $ | 63,637 | |||||||||||||||||||||||||||||||||
$ | 23,638 | $ | 39,999 | $ | — | $ | 63,637 | ||||||||||||||||||||||||||||||||||
Liabilities: None |
Valuation of Preferred Stock Warrant Liabilities
Note 7) with Hercules Capital Inc. (“Hercules”). The preferred stock warrant liability in the table above consistsdebt refinancing was deemed to be an extinguishment of the fair values of (i) warrants to purchase shares of Series A convertible preferred stock that were issuedJune 2019 Amended and Restated Loan and Security Agreement (the “previous debt”) in 2015 and shares of Series B convertible preferred stock that were issued in 2017 and 2018 in connection withexchange for the Company’s Series A and Series B convertible preferred stock financings, respectively (see Notes 10), (ii) warrants to purchase shares of Series A convertible preferred stock that were issued in 2016 in connection with the Company’s entering into a loan and security agreement with Silicon Valley Bank (see Note 7) and (iii) warrants to purchase shares of Series B convertible preferred stock that were issued or were issuable in 2018 in connection with the Company’s entering into the HerculesAmended Loan Agreement (see(the “new debt”) as further described in Note 7).7. The liability associated withloss on extinguishment was calculated as the warrants was recorded at fair value ondifference between the dates the warrants were issued and exercisable and was subsequently remeasured to fair value at each reporting date through December 31, 2018. Upon the closingcarrying amount of the Merger, all X4 preferred stock warrants were converted to warrants for Company’s common stockprevious debt and as a result, the warrants were adjusted to fair value and reclassified to permanent equity. The aggregate fair value of the warrant liability was determined based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy.
The Company used various valuation methods, including the Monte Carlo method, the option-pricing method and the hybrid method (which is a combination of an option-pricing method and a probability-weighted expected return method), all of which incorporate assumptions and estimates, to value the preferred stock warrants. Estimates and assumptions impacting the fair value measurement include the fair value per share of the underlying shares of the Company’s Series A and Series B convertible preferred stock, risk free interest rate, expected dividend yield, expected volatility of the price of the underlying preferred stock, and either the remaining contractual term of the warrants (except for warrants that would be automatically exercised upon an initial public offering, in which case the remaining estimated term to automatic exercise was used). The most significant assumption in the Monte Carlo method, the option-pricing method and the hybrid method impacting the fair value of the preferred stock warrantsnew debt, which is a non-recurring Level 3 measure. The fair value of the new debt was calculated based on the cash flows of the new debt, including end-of-term payments, interest payments, principal payments and lender fees, discounted to present value using the appropriate market rate. The market rate is a significant unobservable input. The Company developed a range of market rates in reference to the Company's recent borrowing activities with this lender, which are deemed to be reflective of the market rate. The Company considered a range from 10.5% to 12.5% and determined that 11.5% represented a reasonable rate for purposes of determining the fair value of the Company’s convertible preferred stock as of each remeasurement date. The Company determines the fair value per share of the underlying preferred stock by taking into consideration the most recent sales of its convertible preferred stock, results obtained from third-party valuations and additional factors that are deemed relevant. As of December 31, 2018, the fair value of the Series A convertible preferred stock was $1.70 per share the fair value of the Series B convertible preferred stock was $1.86 per share. There were no warrants for the purchase of convertible preferred shares as of March 31, 2019 as all such warrants were converted to warrants for the purchase of common stock upon the Merger. The Company has been a private company prior to the Merger and lacks company-specific historical and implied volatility information of its stock. Therefore, it estimates its expected stock volatility based on the historical volatility of publicly traded peer companies for a term equal to the estimated remaining term of the warrants. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve for time periods approximately equal to the estimated remaining term of the warrants. The Company estimated a 0% expected dividend yield based on the fact that the Company has never paid or declared dividends and does not intend to do so in the foreseeable future.
Valuation of Derivative Liability
The fair value of the derivative liability recognized in connection with the Company’s July 2014 license agreement with Genzyme (see Note 13) was determined based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The fair value of this derivative liability is reported within other liabilities on the consolidated balance
X4 PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
(Amounts in thousands, except share and per share amounts)
(Unaudited)
sheets. The fair value of this derivative liability was estimated by the Company at each reporting date based, in part, on the results of third-party valuations, which were prepared using the option-pricing method or the hybrid method, each of which considered as inputs the type, timing and probability of occurrence of a change of control event, the potential amount of the payment under potential exit scenarios, the fair value per share of the underlying common stock and the risk-adjusted discount rate. As of December 31, 2018, the fair value of this derivative liability was $183. The Merger with Arsanis (see Note 1) qualified as a change of control event, as defined in the license agreement, but results in no payment being due to Genzyme under the license agreement. As a result, on March 13, 2019, the closing date of the Merger with Arsanis, this derivative liability was remeasured to fair value,new debt, which was $0,$25.3 million.
The fair value of the derivative liability recognized in connection with the Hercules Loan Agreement (see Note 7) was determined based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The fair value of this derivative liability is reported within other liabilities on the consolidated balance sheets. The fair value of this derivative liability was estimated by the Company at each reporting date based, in part, on the results of third-party valuations, which were prepared based on a discounted cash flow model that considered the timing and probability of occurrence of a redemption upon an event of default, the potential amount of prepayment upon an event of default and the risk-adjusted discount rate. As of March 31, 2019 and December 31, 2018, the fair value of this derivative liability was immaterial.
The following table provides a roll-forward of the aggregate fair values of the Company’s warrant liability, derivative liability and preferred stock repurchase liability, for which fair values are determined using Level 3 inputs:
Preferred Stock Warrant Liability | Derivative Liability | |||||||
Balance as of December 31, 2018 | $ | 4,947 | $ | 201 | ||||
Change in fair value | 288 | (183 | ) | |||||
Conversion of convertible preferred stock warrant into common stock warrant in connection with Merger | (5,235 | ) | — | |||||
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Balance as of March 31, 2019 | $ | — | $ | 18 | ||||
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Equipment, Net
March 31, 2019 | December 31, 2018 | |||||||
Leasehold improvements | $ | 299 | $ | 299 | ||||
Furniture and fixtures | 53 | 53 | ||||||
Computer equipment | 19 | 56 | ||||||
Software | 9 | 9 | ||||||
Lab equipment | 67 | — | ||||||
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448 | 417 | |||||||
Less: Accumulated depreciation and amortization | (177 | ) | (176 | ) | ||||
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$ | 271 | $ | 241 | |||||
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(in thousands) | March 31, 2020 | December 31, 2019 | |||||||||
Leasehold improvements | $ | 299 | $ | 299 | |||||||
Furniture and fixtures | 139 | 139 | |||||||||
Computer equipment | 37 | 37 | |||||||||
Software | 33 | 33 | |||||||||
Lab equipment | 267 | 159 | |||||||||
775 | 667 | ||||||||||
Less: Accumulated depreciation and amortization | (300) | (264) | |||||||||
$ | 475 | $ | 403 |
X4 PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
(Amounts in thousands, except share and per share amounts)
(Unaudited)
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March 31, 2019 | December 31, 2018 | |||||||
Accrued employee compensation and benefits | $ | 1,239 | 924 | |||||
Accrued external research and development expenses | 819 | 754 | ||||||
Accrued professional fees | 1,850 | 1,324 | ||||||
Deferred rent, current portion | — | 93 | ||||||
Other | 271 | 156 | ||||||
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$ | 4,179 | $ | 3,251 | |||||
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(in thousands) | March 31, 2020 | December 31, 2019 | |||||||||
Accrued employee compensation and benefits | $ | 2,289 | 2,916 | ||||||||
Accrued external research and development expenses | 1,287 | 1,977 | |||||||||
Accrued professional fees | 1,160 | 1,347 | |||||||||
Accrued lease construction costs | 682 | — | |||||||||
Other | 368 | 221 | |||||||||
$ | 5,786 | $ | 6,461 |
March 31, 2019 | December 31, 2018 | |||||||
Principal amount of long-term debt | $ | 19,546 | $ | 10,000 | ||||
Less: Current portion of long-term debt | (5,298 | ) | (1,687 | ) | ||||
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Long-term debt, net of current portion | 14,248 | 8,313 | ||||||
Debt discount, net of accretion | (1,019 | ) | (226 | ) | ||||
Cumulative accretion of final payment due at maturity | 136 | 58 | ||||||
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Long-term debt, including accretion, net of current portion | $ | 13,365 | $ | 8,145 | ||||
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SVB Loan Agreement
In October 2016, the Company entered into a loan and security agreement with Silicon Valley Bank (“SVB”), which the Company refers to as the SVB Loan Agreement, pursuant to which SVB made certain term loans available to the Company. The SVB Loan Agreement provided for a term loan of up to $6,000, which was borrowed by the Company in June 2017. Borrowings under the SVB Loan Agreement bore interest at a variable rate equal to 5.5% plus the greater of (i) 3.5% or (ii) The Wall Street Journal prime rate. In October 2018, in connection with entering into the
(in thousands) | March 31, 2020 | December 31, 2019 | |||||||||
Principal amount of long-term debt | $ | 25,000 | $ | 20,000 | |||||||
Debt discount, net of accretion | 238 | (317) | |||||||||
Cumulative accretion of final payment due at maturity | 28 | 414 | |||||||||
Long-term debt, including accretion | $ | 25,266 | $ | 20,097 |
Hercules Loan Agreement
Agreements
a term loan. In December 2018,June 2019, the Company entered into the First Amendment torefinanced the Hercules Loan Agreement and entered into an Amended and Restated Loan and Security Agreement (the “First Amendment”), which amended the available borrowing dates of the second tranche from between January 1, 2019“Amended and March 31, 2019 to between December 11, 2018Restated Loan Agreement”) with Hercules. The Amended and December 14, 2018 and amended the term loan maturity date to November 1, 2021. In December 2018, the Company borrowed the additional $2,000 provided under the HerculesRestated Loan Agreement as amended by the First Amendment.
In March 2019, the conditions necessaryprovided for borrowing the remaining $3,000aggregate maximum borrowings of $35.0 million, under the Hercules Loan Agreement were not metwhich $20.0 million was borrowed, including $10.0 million that was previously outstanding and the borrowing capacity expired at that time.
X4 PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
(Amounts$10.0 million in thousands, except share and per share amounts)
(Unaudited)
new borrowings. Borrowings under the Hercules LoanAmended and Restated Agreement bear interest at variable rates, with the first tranche bearing interest at a variable rate equal to the greater of (i) 9.5% or (ii) 9.5% plus The Wall Street Journal prime rate minus 5.25%, the second tranche bearing interest at a variable rate, subject to completion of specified financing conditions, equal to either (A) the greater of (i) 9.5% or (ii) 9.5% plus The Wall Street Journal prime rate minus 5.25% or (B) the greater of (i) 8.75% or (ii) 8.75% plus The Wall Street Journal prime rate minus 5.25%, and the third tranche bearingaccrued interest at a variable rate equal to the greater of (i) 8.75% or (ii) 8.75% plusThe Wall Street Journal prime rate minus 5.25%plus 2.75%. In an event of default as defined, and until such event is no longer continuing, the interest rate applicable to borrowings under the Hercules LoanAmended and Restated Agreement would be increased by 4.0%. As
In addition, the HerculesAmended Loan Agreement contains a redemption feature that, upon an event of default, provides Hercules the option to accelerate and demand repayment of the debt, including a prepayment premium. The Company concluded that the redemption feature meets the definition of a derivative instrument asor the repayment in full of all obligations under the debt contains a substantial premium, resulting in the redemption feature not being clearly and closely related to the host instrument. The Company recorded the issuance-date fair value of the derivative liability of $18 as a debt discount and as a derivative liability on its consolidated balance sheet.
Amended Loan Agreement.
In connection with entering intoaddition, under the Amended Loan Agreement, Hercules has the right to participate, in a cumulative amount of up to $3.0 million in the aggregate, of which $1.0 million has already been exercised, and subject to exceptions as provided in the Amended Loan Agreement, in October 2018, the Company issued to Hercules warrants for the purchase of 210,638 shares of Series B convertible preferred stock at an exercise price of $1.88 per share. These warrants were immediately exercisable and expire in October 2028.
In connection with entering into the First Amendment in December 2018, the Company agreed to issue to Hercules warrants for the purchase of a specified number of shares of convertible preferred stock or, if issued following the Merger with Arsanis, a specified number of shares of common stock of the combined organization, at an aggregate exercise price of $99. The warrants were to be issued at the earliest of (i) June 30, 2019, (ii) the earlier to occur of (a) the date the Company prepays the outstanding borrowings or (b) the date the outstanding borrowings become due and payable, or (iii) on or before the fifth business day following the closing of or the announcement of the terminationany future offering of the Company’s Merger with Arsanis. equity securities for cash that is solely for financing purposes and is broadly marketed to multiple investors.
On October 19, 2018 and December 11, 2018, the dates the Company entered into the Hercules Loan Agreement and the First Amendment, respectively, the Company recorded the aggregate initial fair value of the warrants of $132 as a preferred stock warrant liability, with a corresponding amount recorded as aunamortized debt discount, on the Company’s consolidated balance sheet. As of March 13, 2019 and December 31, 2018, the fair value of the warrants was $326 and $282, respectively. Uponnew debt under the closing of the Merger, the warrants were converted to warrants for common stock and are no longer adjusted to fair value.
X4 PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
(Amounts in thousands, except share and per share amounts)
(Unaudited)
In connection with entering into the HerculesAmended Loan Agreement and the First Amendment, the Company also paid Hercules $92 of upfront fees, including facility, due diligence and legal fees associated with entering into the agreement, which were alsowas recorded as a $162 thousand loss on extinguishment of debt discount. Thefor the three months ended March 31, 2020. Legal and consulting fees paid to third parties directly related to the new debt discount is reflected as a reduction of the carrying value of long-term debt on the Company’s consolidated balance sheethave been deferred and is beingwill be amortized to interest expense over the termlife of the loannew debt arrangement using the effective interest method.
2020 is 10.7%. There were no0 principal payments due or paid under the loan agreements with Hercules Loan Agreement during the three months ended March 31, 2019. Principal payments begin in September 2019.
FFG Loan Agreement
Between September 2011 and March 2017, Arsanis GmbH, a subsidiary of Arsanis, entered into a series of funding agreements with Österreichische Forschungsförderungsgesellschaft mbH (“FFG”) that provided for loans and grants to fund qualifying research and development expenditures of Arsanis GmbH on aproject-by-project basis, as approved by FFG. Amounts due under the FFG loans bear interest at rates ranging from 0.75% to 2.0% per annum. 2020.
As of March 31, 2019, the outstanding principal amount under loans from FFG was $9,546, including $2,914 of current portion.
On March 8, 2019, Arsanis, Merger Sub, X4 and Arsanis GmbH, a wholly owned subsidiary of Arsanis, entered into the Settlement Agreement with FFG (the “Settlement Agreement”) in respect to allegations by FFG in February 2019 that Arsanis and Arsanis GmbH breached certain reporting, performance and other obligations in connection with grants and loans made by FFG to Arsanis GmbH between September 2011 and March 2017 to fund qualifying research and development expenditures. Pursuant to the terms of the Settlement Agreement, in exchange for FFG’s waiver of all claims against Arsanis and Arsanis GmbH (except for its claims for repayment of the loans and regular interest but including its waiver of claims for repayment of grants and interest exceeding regular interest), subject to compliance by Arsanis and Arsanis GmbH with the terms of the Settlement Agreement, Arsanis GmbH agreed to repay the outstanding loan principal (plus regular interest accrued thereon) on an accelerated payment schedule of three years instead of five years, with the final accelerated installment due and payable on June 30, 2021. The parties also agreed, among other things, that (i) the portion of such loans to be repaid in 2019 is $2,914on the first business day following March 31, 2019 and (ii) until all of the loans have been repaid and subject to other terms specified in the Settlement Agreement, commencing April 30, 2019, a minimum cash balance equal to 70% of the then-outstanding principal amount of the loans will be maintained at Arsanis GmbH in an account held with an Austrian bank.
As of March 31, 2019,2020, future principal payments and the final payment due under the Company’s loan agreementsAmended Loan Agreement were as follows:
Year Ending December 31, | Hercules | FFG | Total | |||||||||
2019 | $ | 1,345 | $ | 2,914 | $ | 4,259 | ||||||
2020 | 4,305 | 4,462 | 8,767 | |||||||||
2021 | 4,350 | 2,170 | 6,520 | |||||||||
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Long-term debt | $ | 10,000 | $ | 9,546 | $ | 19,546 | ||||||
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Effective January 1, 2019, the Company adopted ASC 842 using the modified retrospective approach through a cumulative-effect adjustment and utilizing the effective date as its date of initial application, with prior periods unchanged and presented in accordance with the previous lease accounting guidance. Upon adoption, the Company recordedright-of-use assets of $2,026 and lease liabilities of $2,538, of which $1,925 was classified asnon-current and $613 as current. The difference between the value of theright-of-use asset and the lease liabilities relates to $512 of net deferred, accrued and prepaid rent that was reclassified against theright-of-use asset upon adoption of ASC 842 on January 1, 2019. follows (in thousands):
Year Ending December 31, | Total | |||||||||||||
2020 | $ | — | ||||||||||||
2021 | — | |||||||||||||
2022 | 14,871 | |||||||||||||
2023 | 10,129 | |||||||||||||
Long-term debt | $ | 25,000 |
X4 PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
(Amounts in thousands, except share and per share amounts)
(Unaudited)
Cambridge Lease
Lease—In August 2017, the Company entered into a non-cancellable operating lease agreement for office space of approximately thirteen13 thousand square feet in Cambridge, Massachusetts (“Cambridge Lease”) which expires on July 31, 2022. The Cambridge leaseLease includes an annual rent escalation clause and the Company has the option to extend the lease for one period of five additional years. Base rent is approximately $810$825 thousand annually and the monthly rent expense is being recognized on a straight-line basis over the term of the lease.lease as the Company amortizes the associated operating lease right-of-use asset. In addition to the base rent, the Company is also responsible for its share of operating expenses, electricity and real estate taxes, in accordance with the terms of lease. These costs are classified as variable lease payments and are not included in the determination of the leases’right-of-use operating assets or lease operating liabilities.
On March 13, 2019, as part of its Merger with Arsanis, theLease—
The Company is subleasing the space to a third party for the duration of the lease. The right-of-use asset is being amortized to rent expense over the 5-year term of the lease.
On March 13, 2019, as part of its Merger with Arsanis, theAustria Lease—
Lease Cost | For the three months ended March 31, 2019 | |||
Fixed operating lease cost | $ | 187 | ||
Short-term lease costs | 8 | |||
|
| |||
Total lease expense | $ | 195 | ||
|
| |||
Other information | ||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||
Operating cash flows from operating leases | $ | 201 | ||
Leased assets obtained in exchange for new operating lease liabilities (1) | $ | 781 | ||
Weighted-average remaining lease term—operating leases | 3.9 years | |||
Weighted-average discount rate—operating leases | 9.0 | % |
|
X4 PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
(Amountsfollows (dollars in thousands, except share and per share amounts)thousands):
For the three months ended March 31, | |||||||||||||||||
Lease Cost | 2020 | 2019 | |||||||||||||||
Fixed operating lease cost | $ | 218 | $ | 187 | |||||||||||||
Short-term lease costs | 38 | 8 | |||||||||||||||
Total lease expense | $ | 256 | $ | 195 | |||||||||||||
Other information | |||||||||||||||||
Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||||||||
Operating cash flows from operating leases | $ | 242 | $ | 201 | |||||||||||||
Sublease income | $ | 48 | $ | — | |||||||||||||
Leased assets obtained in exchange for new operating lease liabilities (1) | $ | 484 | |||||||||||||||
Weighted-average remaining lease term—operating leases | 2.8 years | 3.9 years | |||||||||||||||
Weighted-average discount rate—operating leases | 9.0 | % | 9.0 | % |
(Unaudited)
Maturity of lease liabilities | Operating Leases | |||
2019 (remainder of 2019) | $ | 837 | ||
2020 | 1,281 | |||
2021 | 1,304 | |||
2022 | 970 | |||
2023 | 489 | |||
Thereafter | — | |||
|
| |||
Total lease payments | 4,880 | |||
Less: interest | (764 | ) | ||
|
| |||
Total operating lease liabilities as of March 31, 2019 | $ | 4,116 | ||
|
|
follows (in thousands):
Maturity of lease liabilities | Operating Leases | ||||
2020 | $ | 853 | |||
2021 | 1,098 | ||||
2022 | 754 | ||||
2023 | 263 | ||||
2024 | — | ||||
Total lease payments | 2,968 | ||||
Less: interest | (365) | ||||
Total operating lease liabilities as of March 31, 2020 | $ | 2,603 |
Year Ending December 31, | Operating Leases | |||
2019 | $ | 810 | ||
2020 | 823 | |||
2021 | 835 | |||
2022 | 492 | |||
|
| |||
Total | �� | $ | 2,960 | |
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Sponsored Research Agreement Commitments
In April 2017, the Company entered into a sponsoredhas agreements with clinical research agreement with a university that the Company refers to as the Sponsored Research Agreement,organizations (“CROs”) pursuant to which the Company and the university intend to conduct a research program related to understanding the mechanismsCROs are conducting clinical trial of failed long-term adaptive immunity in WHIM patients. Under the terms of the Sponsored Research Agreement, the Company agreed to provide fundingmavorixafor for the research programtreatment of up to $499 over a three-year period. The Sponsored Research Agreement will remain in effect for three years, unless earlier terminated in the event that (i) either party materially breaches any representation, obligation or covenantWHIM syndrome, WM and fails to remedy such breach within 30 days after receipt of notice or (ii) the Principal Investigator, as defined in the agreement, is unable or unwilling to conduct the research or perform his or her obligations under the agreement, at which time the Company may terminate the agreement upon 30 days’ prior written notice to the university.SCN. The Company may terminate the agreement at any time upon at least 60 days’ prior written notice.
During the three months ended March 31, 2019 and 2018, the Company incurred $42, respectively, of research and development expenses related to its payment obligationsthese agreements by providing notice pursuant to the university under the Sponsored Research Agreement. Ascontractual provisions of March 31, 2019, thesuch agreements and would incur early termination fees. The Company hadnon-cancelable purchase commitments under this agreement totaling $181, with $125 committed in 2019 and $56 committed in 2020.
Manufacturing Commitments
As of March 31, 2019, the Company entered intohas agreements with several contract manufacturing organizations to provide preclinical and(“CMOs”) for the production of mavorixafor for use in clinical trial materials. As of March 31, 2019, and December 31, 2018, the Company hadnon-cancelable purchase commitments under these agreements totaling approximately $250, all committed in 2019.
trials.
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 including, but not limited to, losses arising out of breach of such agreementsX4 PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
(Amounts in thousands, except share and per share amounts)
(Unaudited)
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 its executive officers that will require the Company to, among other things, indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. 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 material costs as a result of such indemnification obligations. The Company is not currently aware of any indemnification claims and has not0t accrued any liabilities related to such obligations in its consolidated financial statements as of March 31, 20192020 or December 31, 2018.
2019.
Agreements—
In February 2017, Arsanis entered into an option and license agreementAdimab.
Proceedings—
The Company is not a party to any litigation and does not have contingency reserves established for any litigation liabilities. 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 toproceedings. 10. Preferred |
As of March 31, 2019, the Company’s outstanding warrants to purchase shares of common stock consisted of the following:
Issuance Date | Number of Shares of Common Stock Issuable | Exercise Price | Classification | Expiration Date | ||||||||||||
August 14, 2015 | 81,228 | $ | 21.78 | Equity | August 14, 2020 | |||||||||||
August 21, 2015 | 69,603 | $ | 21.78 | Equity | August 21, 2020 | |||||||||||
October 25, 2016 | 5,155 | $ | 19.78 | Equity | October 24, 2026 | |||||||||||
November 1, 2017 | 130,609 | $ | 19.78 | Equity | October 31, 2020 | |||||||||||
November 17, 2017 | 8,442 | $ | 19.78 | Equity | November 16, 2020 | |||||||||||
December 4, 2017 | 5,661 | $ | 19.78 | Equity | December 3, 2020 | |||||||||||
December 28, 2017 | 6,925 | $ | 19.78 | Equity | December 27, 2020 | |||||||||||
December 28, 2017 | 115,916 | $ | 19.78 | Equity | December 28, 2027 | |||||||||||
September 12, 2018 | 25,275 | $ | 19.78 | Equity | September 12, 2021 | |||||||||||
September 12, 2018 | 20,220 | $ | 19.78 | Equity | September 12, 2028 | |||||||||||
October 19, 2018 | 20,016 | $ | 19.78 | Equity | October 19, 2028 | |||||||||||
December 11, 2018 | 5,004 | $ | 19.80 | Equity | October 19, 2028 | |||||||||||
|
| |||||||||||||||
494,054 | ||||||||||||||||
|
|
X4 PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
(Amounts in thousands, except share and per share amounts)
(Unaudited)
As of December 31, 2018, the Company’s outstanding warrants to purchase shares of preferred stock (which converted into warrants to purchase common stock upon close of the Merger) consisted of the following (not adjusted for the ReverseCommon Stock Split or Exchange Ratio):
December 31, 2018 | ||||||||||||||||||||||||
Warrant Name | Issuance Date | Number of Shares of Preferred Stock Issuable | Exercise Price | Exercisable for | Classification | Expiration Date | ||||||||||||||||||
Series A warrants | August 14, 2015 | 854,785 | $ | 2.07 | Series A | Liability | August 14, 2020 | |||||||||||||||||
Series A warrants | August 21, 2015 | 732,453 | $ | 2.07 | Series A | Liability | August 21, 2020 | |||||||||||||||||
SVB warrants | October 25, 2016 | 54,256 | $ | 1.88 | Series A | Liability | October 24, 2026 | |||||||||||||||||
Series B warrants | November 1, 2017 | 1,374,435 | $ | 1.88 | Series B | Liability | October 31, 2020 | |||||||||||||||||
Series B warrants | November 17, 2017 | 88,845 | $ | 1.88 | Series B | Liability | November 16, 2020 | |||||||||||||||||
Series B warrants | December 4, 2017 | 59,576 | $ | 1.88 | Series B | Liability | December 3, 2020 | |||||||||||||||||
Series B warrants | December 28, 2017 | 72,875 | $ | 1.88 | Series B | Liability | December 27, 2020 | |||||||||||||||||
Series B warrants | December 28, 2017 | 1,219,815 | $ | 1.88 | Series B | Liability | December 28, 2027 | |||||||||||||||||
Series B warrants | September 12, 2018 | 265,957 | $ | 1.88 | Series B | Liability | September 12, 2021 | |||||||||||||||||
Series B warrants | September 12, 2018 | 212,765 | $ | 1.88 | Series B | Liability | September 12, 2028 | |||||||||||||||||
Series B warrants | October 19, 2018 | 210,638 | $ | 1.88 | Series B | Liability | October 19, 2028 | |||||||||||||||||
|
| |||||||||||||||||||||||
5,146,400 | ||||||||||||||||||||||||
|
|
Warrants
|
Common Stock
Number of warrants | Weighted Average Exercise Price | Weighted Average Contractual Term (Years) | |||||||||||||||
Outstanding and exercisable warrants to purchase preferred shares as of December 31, 2018 | 5,146,400 | $ | 1.94 | 4.23 | |||||||||||||
Conversion of warrant to purchase preferred shares to warrants for the purchase of common stock and adjusted for the Exchange Ratio and Reverse Stock Split | (4,657,350) | 1.94 | |||||||||||||||
Issuance of warrants for the purchase of common stock | 5,000 | 19.80 | |||||||||||||||
Exercised | — | — | |||||||||||||||
Cancelled | — | — | |||||||||||||||
Outstanding warrants to purchase common shares as of March 31, 2019 | 494,050 | $ | 20.39 | 3.04 |
Number of warrants | Weighted Average Exercise Price | Weighted Average Contractual Term (Years) | ||||||||||||||||||
Outstanding and exercisable warrants to purchase common shares as of December 31, 2019 | 13,656,871 | $13.68 | 4.59 | |||||||||||||||||
Issued | — | |||||||||||||||||||
Exercised | — | |||||||||||||||||||
Cancelled | — | |||||||||||||||||||
Outstanding and exercisable warrants to purchase common shares as of March 31, 2020 | 13,656,871 | $13.68 | 4.34 |
Issuance Date | Number of Shares of Common Stock Issuable | Exercise Price | Classification | Expiration Date | ||||||||||||||||||||||
August 14, 2015 | 81,228 | $ | 21.78 | Equity | August 14, 2020 | |||||||||||||||||||||
August 21, 2015 | 69,603 | $ | 21.78 | Equity | August 21, 2020 | |||||||||||||||||||||
October 25, 2016 | 5,155 | $ | 19.78 | Equity | October 24, 2026 | |||||||||||||||||||||
November 1, 2017 | 130,609 | $ | 19.78 | Equity | October 31, 2020 | |||||||||||||||||||||
November 17, 2017 | 8,442 | $ | 19.78 | Equity | November 16, 2020 | |||||||||||||||||||||
December 4, 2017 | 5,661 | $ | 19.78 | Equity | December 3, 2020 | |||||||||||||||||||||
December 28, 2017 | 6,925 | $ | 19.78 | Equity | December 27, 2020 | |||||||||||||||||||||
December 28, 2017 | 115,916 | $ | 19.78 | Equity | December 28, 2027 | |||||||||||||||||||||
September 12, 2018 | 25,275 | $ | 19.78 | Equity | September 12, 2021 | |||||||||||||||||||||
September 12, 2018 | 20,220 | $ | 19.78 | Equity | September 12, 2028 | |||||||||||||||||||||
October 19, 2018 | 20,016 | $ | 19.78 | Equity | October 19, 2028 | |||||||||||||||||||||
March 13, 2019 | 5,000 | $ | 19.80 | Equity | March 12, 2029 | |||||||||||||||||||||
April 16, 2019 | 3,866,154 | $ | 13.20 | Equity | April 15, 2024 | |||||||||||||||||||||
April 16, 2019 | 2,130,000 | $ | 11.00 | Equity | n/a | |||||||||||||||||||||
November 29, 2019 | 5,416,667 | $ | 15.00 | Equity | November 28, 2024 | |||||||||||||||||||||
November 29, 2019 | 1,750,000 | $ | 12.00 | Equity | n/a | |||||||||||||||||||||
13,656,871 |
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 board of directors, if any. Through March 31, 2019 and December 31, 2018, noNaN cash dividends hadhave been declared or paid.
Redeemable Common Stock
Pursuantpaid to date. The Company’s board of directors has approved and recommended that its shareholders approve an amendment to the requirementsRestated Certificate to increase the number of the July 2014 license agreement with Genzyme (see Note 13), in August 2015, the Company issued to Genzyme for no additional consideration 107,371, as adjusted for the Reverse Stock Split and Exchange Ratio,authorized shares of common stock which had an aggregate fair value of $734 on the date of issuance. Genzyme had the rightfrom 33,333,333 shares to require the Company to repurchase all, but not less than all, of these shares of common stock at any time during the term of the license agreement for a price of $0.01 per share. Because of this redemption feature, the shares of common stock issued to Genzyme were classified outside of stockholders’ deficit on the consolidated balance sheets. As a result of the Merger, these shares were exchanged for common stock.
(Amounts in thousands, except share and per share amounts)
Convertible Preferred Stock (converted to Common Stock)
The Company has issued Series Seed convertible preferred stock (the “Series Seed preferred stock”), Series A convertible preferred stock (the “Series A preferred stock”) and Series B convertible preferred stock (the “Series B preferred stock”). As of March 31, 2019 and December 31, 2018,
The holders of Preferred Stock have liquidation rights in the event of a deemed liquidation that, in certain situations, are not solely within the control of the Company. Therefore, the Preferred Stocksoon as practicable after approval is classified outside of stockholders’ deficit on the consolidated balance sheet.
As of March 31, 2019, there were no preferred stock outstanding. As of December 31, 2018, the Preferred Stock consisted of the following:
December 31, 2018 | ||||||||||||||||||||
Preferred Stock Designated | Preferred Stock Issued and Outstanding | Carrying Value | Liquidation Preference | Common Stock Issuable Upon Conversion(1) | ||||||||||||||||
Series Seed preferred stock | 2,313,523 | 1,516,136 | $ | 1,310 | $ | 1,444 | 143,630 | |||||||||||||
Series A preferred stock | 22,000,000 | 19,946,862 | 32,480 | 47,624 | 1,895,610 | |||||||||||||||
Series B preferred stock | 25,100,000 | 18,616,569 | 30,885 | 34,999 | 1,769,190 | |||||||||||||||
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49,413,523 | 40,079,567 | $ | 64,675 | $ | 84,067 | 3,808,430 | ||||||||||||||
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obtained.
Plans—
Upon completion of the Merger with Arsanis on March 13, 2019, X4’s 2015 Employee, Director and Consultant Equity Incentive Plan, as amended (the “2015 Plan”), Arsanis’ 2017 Equity Incentive Plan (the “2017 Plan”) and Arsanis’ 2017 Employee Stock Purchase Plan (the “2017 ESPP”)Plan—
In 2015, theThe total number of shares of common stock that may be issued under the 2015 Plan was 1,700,000 shares, adjusted for the reverse stock split as of December 31, 2018 and March 31, 2019.is 969,340 shares. Shares that are expired, forfeited, canceled or otherwise terminated without having been fully exercised will be available for future grant under the 2015 Plan. As of March 31, 2020, approximately 106,000 shares were available for future issuance under the 2015 Plan. In addition, shares of common stock that are tendered to the Company by a participant to exercise an award are added to the number of shares of common stock available for future grants.
X4 PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
(Amounts in thousands, except share and per share amounts)
(Unaudited)
2017 Equity Incentive Plan
In 2017, the board of directors and shareholders of Arsanis adoptedPlan— Under the 2017 Plan, which provided for the Company tomay grant incentive stock options,non-qualified options, stock appreciation rights, restricted stock awards, restricted stock units and other stock-based awards. Incentive stock options may be granted only to the Company’s employees, including officers and directors who are also employees. Awards other than incentive stock options may be granted to employees, officers, members of the board of directors, advisors and consultants of the Company. The number of shares of common stock reserved for issuance under this plan will automatically increaseincreases on January 1 of each year, through January 1, 2027, in an amount equal to the lowest of 1,025,490170,915 shares of the Company’s common stock, 4%4.0% of the number of shares of the Company’s common stock outstanding on January 1 of each year and an amount determined by the Company’s boardBoard of directors.
Directors. As of March 31, 2020, approximately 114,000 shares were available for future issuance under the 2017 Plan. On March 25, 2020, the Board of Directors approved amendments tothe 2017 Plan, subject to stockholder approval. If approved by the stockholders, the amendments would increase the number of shares of common stock reserved for issuance under the 2017 Plan by an additional 474,465 shares (subject to adjustment for certain corporate events) and would amend the “evergreen provision” of the 2017 Plan to eliminate the fixed number of new shares that may be added to the 2017 Plan’s share reserve each year pursuant to the evergreen provision, such that the amended evergreen provision will provide for an automatic increase in the share reserve on the first day of each year, beginning on January 1, 2021 and ending on January 1, 2027, by an amount equal to the lesser of (a) 4% of the Company's outstanding shares on such date and (b) a number of shares determined by the Board of Directors.
In 2017, the board of directors and shareholders of Arsanis adopted the 2017 ESPP. Plan—
The fair value of stock option grants is estimated using the Black-Scholes option-pricing model. The Company has historically been a private company prior to March 13, 2019, and as a result, lacked company-specific historical and implied volatility information. The Company estimated expected stock volatility based on the historical volatility of a publicly traded set of peer companies and expects to continue to do so until it has adequate historical data regarding the volatility of its own traded stock price. For options with service-based vesting conditions, the expected term of the Company’s stock options has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options. The expected term of stock options grantedto non-employee consultants is equal to the contractual term of the option award. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future.
Valuation—
The following table presents, on a weighted average basis, the assumptions used in the Black-Scholes option-pricing model to determine the grant-date fair value of stock options granted to employees, directors andnon- employees:Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Risk-free interest rate | 2.4 | % | 2.8 | % | ||||
Expected term (in years) | 5.90 | 5.94 | ||||||
Expected volatility | 90.6 | % | 86.0 | % | ||||
Expected dividend yield | 0 | % | 0 | % |
Three Months Ended March 31, | |||||||||||||||||||||||||||||
2020 | 2019 | ||||||||||||||||||||||||||||
Risk-free interest rate | 1.0 | % | 2.4 | % | |||||||||||||||||||||||||
Expected term (in years) | 6.01 | 5.90 | |||||||||||||||||||||||||||
Expected volatility | 94.1 | % | 90.6 | % | |||||||||||||||||||||||||
Expected dividend yield | 0 | % | 0 | % |
Number of Shares | Weighted Average Exercise Price | Weighted Average Contractual Term (Years) | Aggregate Intrinsic Value | |||||||||||||
Outstanding as of December 31, 2018 | 797,931 | $ | 8.29 | 8.42 | $ | 6,486 | ||||||||||
Assumed as part of Merger with Arsanis | 271,230 | 62.60 | ||||||||||||||
Granted | 136,913 | 17.22 | ||||||||||||||
Exercised | (16,483 | ) | 6.85 | |||||||||||||
Forfeited | (22,378 | ) | 8.43 | |||||||||||||
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Outstanding as of March 31, 2019 | 1,167,213 | $ | 21.97 | 7.65 | $ | 7,168 | ||||||||||
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| |||||||||||||||
Exercisable as of March 31, 2019 | 556,774 | $ | 30.13 | |||||||||||||
|
| |||||||||||||||
Vested and expected to vest as of March 31, 2019 | 979,466 | $ | 48.79 | |||||||||||||
|
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X4 PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
(Amounts in thousands, except share and per share amounts)
(Unaudited)
Number of
SharesWeighted
Average
Exercise
PriceWeighted
Average
Contractual
Term (Years)Aggregate
Intrinsic
ValueOutstanding as of December 31, 2019 1,297,029 $ 17.05 8.4 $ 1,286 Granted 206,775 10.22 Exercised (13,006) 7.38 Forfeited (22,593) 17.46 Outstanding as of March 31, 2020 1,468,205 $ 16.17 8.4 $ 958 Exercisable as of March 31, 2020 543,825 $ 21.17 7.1 $ 771 Vested and expected to vest as of March 31, 2020 1,270,027 $ 16.32 8.3 $ 938
Stock-Based Compensation
Effective January 1, 2019, the Company adopted ASU2018-07 which required the Company to adjust compensation expense for the three months ended March 31, 2019 for an immaterial amount for the unvestednon-employee share options outstanding. The Company no longer remeasures the fair value of options granted tonon-employees at each reporting period end (see Note 2).
$7.75 and $12.88, respectively.
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Research and development expense | $ | 84 | $ | 38 | ||||
General and administrative expense | 178 | 90 | ||||||
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| |||||
Total stock-based compensation | 262 | 128 | ||||||
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Genzyme Agreement
In July 2014, the Company entered into a license agreement (the “Genzyme Agreement”) with Genzyme pursuant to which the Company was granted an exclusive license to certain patents and intellectual property owned or controlled by Genzyme related to the CXCR4 receptor to develop and commercialize products containing licensed compounds (including but not limited toX4P-001) for all therapeutic, prophylactic and diagnostic uses, with the exception of autologous and allogenic human stem cell therapy. Under the terms of the Genzyme Agreement, the Company is obligated to use commercially reasonable efforts to develop and commercialize licensed products for use in the field in the United States and at least one other major market country. The Company has the right to grant sublicenses of the licensed rights that coverX4P-001 to third parties.
In exchange for these rights, in August 2014, the Company made an upfront payment of $50 to Genzyme. The Company accounted for the acquisition of technology as an asset acquisition because it did not meet the definition of a business. The Company recorded the upfront payment as research and development expense in the consolidated statement of operations and comprehensive loss because the acquired technology representedin-process research and development and had no alternative future use. In August 2015, as a result of the closing of the Company’s Series A preferred stock financing, the Company made an additional cash payment of $300 to Genzyme and issued to Genzyme 107,371 shares of its common stock, as adjusted for the 6 for 1 Reverse Stock Split and Exchange Ratio (see Note 11), each as required by the Genzyme Agreement. The $300 payment and the $734 fair value of the 107,371 shares of common stock issued to Genzyme were recorded as research and development expense in the consolidated statements of operations and comprehensive loss for the year ended December 31, 2015. Prior to the Merger with Arsanis, Genzyme has the right to require the Company to repurchase all, but not less than all, of these shares of common stock at any time during the term of the Genzyme Agreement for a price of $0.01 per share. Due to this redemption feature, the shares of common stock issued to Genzyme were classified outside of stockholders’ deficit on the consolidated balance sheets as of December 31, 2018. On March 13, 2019, the closing date of the Merger with Arsanis, these redeemable common shares were exchanged for common shares and, as a result, the fair value of the shares was reclassified to permanent equity.
Under the Genzyme Agreement, the Company is obligated to pay Genzyme milestone payments in the aggregate amount of up to $25,000, contingent upon the achievement by the Company of certain late-stage regulatory and sales milestones with respect to
(Amounts in thousands, except share and per share amounts)
licensed products. In addition, the Company may be required to make aone-time milestone payment to Genzyme upon the consummation by the Company of a change of control transaction, in an amount equal to 5.5% of the consideration paid to equity holders of the Company, other than Genzyme, in connection with such change of control transaction, after deducting outstanding debt obligations of the Company and the aggregate cash investments made by equity holders into the Company prior to the closing of the change of control transaction. The Merger with Arsanis qualifies as a change of control transaction, as defined in the license agreement, but results in no payment being due to Genzyme under the license agreement.
The Company concluded that this contingent payment obligation meets the definition of a derivative instrument as the contingent payment obligation is not clearly and closely related to its host instrument and is a cash-settled liability (see Note 2). Accordingly, the Company classifies this derivative as a liability within other liabilities(non-current) on its consolidated balance sheet (see Note 2), and changes in the fair value of the derivative liability are recognized as a component of other income (expense), net in the consolidated statement of operations and comprehensive loss (see Note 4). On March 13, 2019, the closing date of the Merger with Arsanis, this derivative liability was remeasured to fair value, which was $0, and subsequent changes in fair value will no longer be recognized in the consolidated statements of operations and comprehensive loss because the contingent payment obligation expired at that time.
Under the Genzyme Agreement, the Company is obligated to pay Genzyme tiered royalties based on net sales of licensed products that the Company commercializes under the agreement. The obligation to pay royalties for each licensed product expires on acountry-by-country basis on the latest of (i) the expiration of licensed patent rights that cover that licensed product in that country, (ii) the expiration of regulatory exclusivity in that country and (iii) ten years after the first commercial sale of such licensed product in that country. Royalty rates are subject to reduction under the agreement in specified circumstances, including in any country if the Company is required to obtain a license from any third party to the extent the Company’s patent rights might infringe the third party’s patent rights, if a licensed product is not covered by a valid claim in that country or if sales of generic products reach certain thresholds in that country. If the Company enters into a sublicense under the agreement, the Company will be obligated to pay Genzyme a percentage of certain upfront fees, maintenance fees, milestone payments and royalty payments paid to the Company by the sublicensee.
Under the Genzyme Agreement, the Company will itself manufacture and supply, or enter into manufacturing or supply agreements with Genzyme or third parties to manufacture and supply, clinical and commercial supplies of licensed compounds and each licensed product. During the three months ended March 31, 2019 and 2018, the Company did not enter into any third-party manufacturing or supply agreements in connection with the Genzyme Agreement. The Company is also responsible for all costs related to the filing, prosecution and maintenance of the licensed patent rights.
The Genzyme Agreement will remain in effect until the expiration of the royalty term in all countries for all licensed products. The agreement may be terminated by either party with at least 90 days’ notice in the event of material breach by the other party that remains uncured for 90 days, by either party for insolvency or bankruptcy of the other party, immediately by Genzyme if the Company challenges the licensed patents, or immediately by the Company if a material safety issue arises.
During the three months ended March 31, 2019 and 2018, the Company did not incur any payment obligations to Genzyme under the Genzyme Agreement.
Georgetown Agreement
In December 2016, the Company entered into a license agreement (the “Georgetown Agreement”) with Georgetown University (“Georgetown”) pursuant to which the Company obtained an exclusive, worldwide license to make, have made, use, sell, offer for sale and import of products covered by patent rightsco-owned by Georgetown. The rights licensed to the Company are for all therapeutic, prophylactic and diagnostic uses in all disease indications in humans and animals.
Under the terms of the Georgetown Agreement, the Company paid aone-time only, upfront fee of $50 and the Company may be required to pay milestone payments of up to an aggregate of $800 related to commercial sales of a product. The Company accounted for the acquisition of technology as an asset acquisition because it did not meet the definition of a business. The Company recorded the upfront payment as research and development expense in the consolidated statement of operations and comprehensive loss because the acquired technology representedin-process research and development and had no alternative future use.
Under the Georgetown Agreement, the Company is solely responsible for all development and commercialization activities and costs in its respective territories. The Company is also responsible for all costs related to the filing, prosecution and maintenance of the licensed patent rights.
X4 PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
(Amounts in thousands, except share and per share amounts)
(Unaudited)
The term of the Georgetown Agreement will continue until the expiration of the last valid claim within the patent rights covering the product. Georgetown may terminate the agreement in the event (i) the Company fails to pay any amount and fails to cure such failure within 30 days after receipt of notice, (ii) the Company defaults in its obligation to obtain and maintain insurance and fails to remedy such breach within 45 days after receipt of notice, or (iii) the Company declares insolvency or bankruptcy. The Company may terminate the agreement at any time upon at least 60 days’ written notice.
During the three months ended March 31, 2019 and 2018, the Company did not incur any payment obligations to Georgetown under the Georgetown Agreement and no milestone payments were made or due under the Georgetown Agreement.
Beth Israel Deaconess Medical Center Agreement
In December 2016, the Company entered into a license agreement (the “BIDMC Agreement”) with Beth Israel Deaconess Medical Center (“BIDMC”), pursuant to which the Company obtained an exclusive, worldwide license to make, have made, use, sell, offer for sale and import of products covered by patent rightsco-owned by BIDMC. The rights licensed to the Company are for all fields of use.
Under the terms of the BIDMC Agreement, the Company paid aone-time only, upfront fee of $20 and the Company is responsible for all future patent prosecution costs. The Company accounted for the acquisition of technology as an asset acquisition because it did not meet the definition of a business. The Company recorded the upfront payment as research and development expense in the consolidated statement of operations and comprehensive loss because the acquired technology representedin-process research and development and had no alternative future use.
The term of the BIDMC Agreement will continue until the expiration of the last valid claim within the patent rights covering the licensed products. BIDMC may terminate the agreement in the event (i) the Company fails to pay any amount and fails to cure such failure within 15 days after receipt of notice, (ii) the Company is in material breach of any material provision of the agreement and fails to remedy such breach within 60 days after receipt of notice, or (iii) the Company declares insolvency or bankruptcy. We may terminate the agreement at any time upon at least 90 days’ written notice.
Three Months Ended
March 31,2020 2019 Research and development expense $ 196 $ 84 General and administrative expense 417 178 Total stock-based compensation $ 613 $ 262
Adimab Option and License Agreement
In February 2017, Arsanis entered into an option and license agreement with Adimab, a related party (the “Adimab Option Agreement”). Under the Adimab Option Agreement, Adimab has provided to Arsanis certain proprietary antibodies against respiratory syncytial virus (“RSV antibodies”) for its evaluation during a specified option period and has granted Arsanis an exclusive,non-sublicensable license in a specified field under certain Adimab patent rights andknow-how during the option period. Under the Adimab Option Agreement, the Company has an exclusive option, exercisable during the option period upon payment of an option fee to Adimab, to require Adimab to assign to the Company all rights in up to a specified number of RSV antibodies selected by the Company and certain patent rights owned by Adimab that cover these antibodies, and to obtain from Adimab anon-exclusive license in a specified field, with the right to grant sublicenses, under certain other patent rights andknow-how owned by Adimab.
If the Company exercises its option under the Adimab Option Agreement, the Company is required to use commercially reasonable efforts to develop and commercialize at least one product based on a licensed RSV antibody in major markets and is obligated to pay Adimab an option fee of $0.3 million and make future milestone payments upon the achievement of specified clinical and regulatory milestones in the aggregate amount of up to $24.4 million. The Company is obligated to pay Adimab royalties at a mid single-digit percentage of net sales of products based on the initial RSV antibodies (including modified or derivative forms of those antibodies created by or for the Company) by the Company or any of its affiliates, licensees or sublicensees, regardless of whether these products practice any of the assigned or licensed patents orknow-how. If the Company materially breaches these diligence obligations, Adimab will have the right to terminate the Adimab Option Agreement.
The Company has no payment obligations under the Adimab Option Agreement with respect to sales of products based on licensed RSV antibodies to the extent they are sold at cost in developing countries under the February 2017 Gates Foundation grant agreement, as amended and restated in August 2018, and the August 2018 Gates Foundation grant agreement (which are described in further detail below). However, if such products are sold in developing countries for an amount that exceeds cost, then the amount of such excess will be subject to the royalty payment obligations described in the preceding paragraph.
X4 PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
(Amounts in thousands, except share and per share amounts)
(Unaudited)
If the Company does not exercise its option, the Adimab Option Agreement will expire on the Company’s achievement of specified preclinical milestones under the grant agreements with the Gates Foundation, but in any event no later thanmid-2019. If the Company does exercise its option, the Adimab Option Agreement will expire on thelast-to-expire royalty term (defined, on aproduct-by-product andcountry-by-country basis, as the period ending on the later of twelve years after the first commercial sale of such product in such country and the expiration of the last of a specified set of patents and patent applications covering such product in such country) for any and all products for which the Company is obligated to pay Adimab royalties under the Adimab Option Agreement. The Company has the right to terminate the Adimab Option Agreement for any reason by providing Adimab with a specified amount of prior written notice. Adimab has the right to terminate the Adimab Option Agreement if the Company materially breaches the agreement and fails to cure such breach within a specified cure period, including for the Company’s failure to use commercially reasonable efforts to develop and commercialize at least one product based on a licensed RSV antibody in major markets. If Adimab terminates the Adimab Option Agreement for the Company’s breach, if the Company terminates the agreement for convenience or if the agreement expires before the Company exercises its option, then the Company must return or destroy certainknow-how, including all initial RSV antibodies, and all modified or derivative forms of those antibodies, in its possession other than those for which the Company has made all payments required under the Adimab Option Agreement, assign certain patents covering certain RSV antibodies to Adimab, grant Adimab anon-exclusive, royalty-free license under certain other patents, and grant Adimab a time-limited right of first negotiation to obtain an exclusive license to certain patents andknow-how and the transfer and assignment of certain regulatory filings and approvals and other related assets related to products based on licensed RSV antibodies. Certain of the Company’s payment obligations relating to specified products and patents arising from the agreement survive expiration or termination of the agreement.
During the three months ended March 31, 2019, the Company recognized no research and development expense in connection with the Adimab Option Agreement.
Adimab Collaboration Agreement
In May 2011, Arsanis entered into a collaboration agreement with Adimab, LLC (“Adimab”) and together with certain applicable option exercise letters the Company has sent to Adimab, the “Adimab Collaboration Agreement”). Under the Adimab Collaboration Agreement, the Company and Adimab were required to use reasonable efforts to conduct certain research, which was funded by the Company, to discover and optimize antibodies directed against targets selected by the Company. With respect to each target that was the subject of the research, the Company had an exclusive option to obtain, with respect to a specified number of antibodies directed against such target and discovered or optimized by Adimab, (i) ownership of certain patent rights relating to such antibodies and (ii) exclusive andnon-exclusive licenses in a specified field, with the right to grant sublicenses, under certain patent rights andknow-how.
Under the Adimab Collaboration Agreement, for each target for which the Company has exercised an option, the Company is required to use commercially reasonable efforts to develop and commercialize at least one product in major markets. If the Company does not fulfill these diligence obligations, Adimab may consider it a material breach, allowing Adimab to terminate the Adimab Collaboration Agreement with respect to such target and all associated products.
The Company is obligated to pay Adimab royalties at a mid single-digit percentage of net sales made by the Company or its affiliates of products based on antibodies for which the Company exercised its option, or products that use or are based on any antibody discovered or optimized under the agreement, any derivative or modified version of any such antibody, or any sequence information as to any such antibody. In addition, if the Company sells or licenses to any third party, or otherwise grants rights to any third party to, any of the products for which the Company is obligated to pay Adimab royalties, either alone or as part of a package including specified patents not directed to these antibodies, the Company is obligated to pay Adimab either (i) the same royalties on net sales of such products by such third party or (ii) a percentage, ranging from the low double digits to a maximum of less than 30%, of the payments the Company receives from such third parties that are attributable to such grant of rights. In April 2017, the Company entered into a letter agreement with the Gates Foundation, pursuant to which the Company licensed to the Gates Foundation certain rights under its ASN100 program. The Company has no payment obligations under the Adimab Collaboration Agreement with respect to sales of certain antibody products if they are sold at cost in developing countries under its letter agreement with the Gates Foundation. However, if such products are sold in developing countries for an amount that exceeds cost, then the amount of such excess over cost will be subject to the royalty payment obligations described above.
If the Company (or one of its affiliates with rights under the agreement) undergoes a change in control and, at the time of such change in control, the Company has not sold or licensed to third parties all of its rights in antibodies for which the Company is obligated to pay Adimab royalties under the agreement, then the Company is obligated to either (i) pay Adimab a percentage, in the mid double digits, of the payments it receives from that change in control that are reasonably attributable to those rights and certain patents arising
X4 PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
(Amounts in thousands, except share and per share amounts)
(Unaudited)
from the collaboration or (ii) require the Company’s acquirer and all of its future third-party collaborators to pay to Adimab the royalties at a mid single-digit percentage of net sales based on those rights. If the Company grants rights to a third party under certain patents that are not directed to the antibodies for which the Company is obligated to pay Adimab royalties (as described above), the Company is also obligated to pay Adimab, in place of royalties or a percentage of payments received from the third party, a lump sum in the high six digits.
The Adimab Collaboration Agreement will expire on acountry-by-country basis twelve years after the first commercial sale in such country of the last product for which the Company is obligated to pay Adimab royalties in such country under the Adimab Collaboration Agreement. The Company has the right to terminate the Adimab Collaboration Agreement for any reason by providing Adimab with a specified amount of prior written notice. Adimab has the right to terminate the Adimab Collaboration Agreement if the Company materially breaches the agreement and fails to cure such breach within a specified cure period, including for its failure to use commercially reasonable efforts to develop and commercialize at least one product directed at a target for which the Company has exercised an option in major markets. If Adimab terminates the Adimab Collaboration Agreement for the Company’s breach, or if the Company terminates the agreement for convenience, then the Company must transfer or license to Adimab certain rights and assets relating to targets and antibodies for which the Company has exercised its option. Adimab is then obligated to make payments to the Company with respect to these targets and antibodies that are similar to the payments the Company is required to make to Adimab during the term of the agreement. Certain of the Company’s payment obligations relating to specified products and patents arising from the agreement survive expiration or termination of the agreement.
During the three months ended March 31, 2019, the Company did not recognize any research and development under the Adimab Collaboration Agreement.
Gates Foundation Grant Agreements
In February 2017, Arsanis entered into a grant agreement with the Gates Foundation (“Grant Agreement”), under which the Gates Foundation agreed to provide the Company up to approximately $9,300 to conduct preclinical development of monoclonal antibodies for the prevention of RSV infection in newborns (the “RSV project”).
In connection with this Grant Agreement, the Company has granted to the Gates Foundation anon-exclusive, perpetual, royalty-free, fully paid up, sublicensable license to make, use, sell, offer to sell, import, distribute, copy, modify, create derivative works, publicly perform and display the funded developments and, to the extent incorporated into a funded development or required to use a funded development, any other technology created outside of the RSV project that was used as part of the RSV project, for the benefit of people in developing countries. This license survives any expiration or termination of the grant agreement. The Grant Agreement expires on October 31, 2019. The Gates Foundation can modify, suspend or discontinue any payment under the grant agreement, or terminate the grant agreement, if it is not reasonably satisfied with the Company’s progress on the RSV project; if there are significant changes to the Company’s leadership or other factors that the Gates Foundation reasonably believes may threaten the RSV project’s success; if the Company undergoes a change in control; if there is a change in the Company’s tax status; if the RSV project is no longer aligned with the Gates Foundation’s programmatic strategy; or if the Company fails to comply with the grant agreement. Any grant funds that have not been used for, or committed to, the RSV project upon the expiration or termination of the grant agreement must be returned to the Gates Foundation or otherwise used as directed by the Gates Foundation.In August 2018, Arsanis entered into an amended and restated grant agreement which replaced the February 2017 grant agreement in its entirety. The amended and restated grant agreement includes amendments to conform to current Gates Foundation audit, reporting, and other administrative requirements, as well as to make the perpetual Gates Foundation license grant described below irrevocable.
During the three months ended March 31, 2019, the Company did not incur qualifying expenses under the letter agreement with the Gates Foundation.
Research and Development Incentive Program
The Company participates in a research and development incentive program provided by the Austrian government whereby the Company is entitled to reimbursement by the Austrian government for a percentage of qualifying research and development expenses incurred by the Company’s subsidiary in Austria. Under the program, the reimbursement rate for qualifying research and development expenses incurred by the Company through its subsidiary in Austria is 14% for the current year .
The Company recognizes incentive income from Austrian research and development incentives when qualifying expenses have been incurred, there is reasonable assurance that the payment will be received, and the consideration can be reliably measured. Management has assessed the Company’s research and development activities and expenditures to determine which activities and expenditures are likely to be eligible under the research and development incentive program described above. At each reporting date, management estimates the reimbursable incentive income available to the Company based on available information at the time.
X4 PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
(Amounts in thousands, except share and per share amounts)
(Unaudited)
As of March 31, 2019, the Company recorded receivables for amounts due under the program of $1.6 million, which amounts were included in grant and incentive receivables in the consolidated balance sheet.
Janssen License and Option Agreement
On December 12, 2018, Arsanis entered into a patent license and option agreement with Janssen Pharmaceuticals, Inc. (“Janssen”), (the “Janssen License and Option Agreement”). Pursuant to the Janssen License and Option Agreement, Arsanis granted to Janssen (i) anon-exclusive license to specified patents in Arsanis’s portfolio related to the ASN200 E. coli program, and (ii) an option for Janssen to acquire these patents in the future if specified conditions are met. Janssen agreed to pay Arsanis $3.5 million within 15 business days after the December 12, 2018 effective date of the Janssen License and Option Agreement, in addition to a future $0.5 million payment in the event Janssen exercises its option to acquire the relevant patents. Arsanis received the $3.5 million payment from Janssen in December 2018 and recognized this amount as revenue. Such revenue is not reflected in the consolidated financial statements of the Company as it occurred prior to the Merger. Janssen’s option to the relevant patents will be recognized as revenue in full in the period in which the option exercise occurs.
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The Company did not0t record a federal or state income tax benefit for its losses for the three months ended March 31, 2020 and 2019, and 2018respectively, due to the conclusion that a full valuation allowance is required against the Company’s deferred tax assets.
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assets in all jurisdictions. The Company recorded a tax provision of $148 thousand related to local withholdings on a milestone payment received from a customer (see Note 3) in a foreign jurisdiction.
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Numerator: | ||||||||
Net loss | $ | (10,873 | ) | $ | (7,367 | ) | ||
Accruing dividends on Series A convertible preferred stock | (592 | ) | (740 | ) | ||||
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Net loss attributable to common stockholders | $ | (11,465 | ) | $ | (8,107 | ) | ||
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Denominator: | ||||||||
Weighted average common shares outstanding—basic and diluted | 1,717,808 | 457,971 | ||||||
Net loss per share attributable to common stockholders—basic and diluted | $ | (6.67 | ) | $ | (17.70 | ) |
Three Months Ended March 31, | |||||||||||||||||||||||||||||
(in thousands, except per share data) | 2020 | 2019 | |||||||||||||||||||||||||||
Numerator: | |||||||||||||||||||||||||||||
Net loss | $ | (11,138) | $ | (10,873) | |||||||||||||||||||||||||
Accruing dividends on Series A convertible preferred stock | — | (592) | |||||||||||||||||||||||||||
Net loss attributable to common stockholders | $ | (11,138) | $ | (11,465) | |||||||||||||||||||||||||
Denominator: | |||||||||||||||||||||||||||||
Weighted average common shares outstanding—basic and diluted | 20,014 | 1,718 | |||||||||||||||||||||||||||
Net loss per share attributable to common stockholders— basic and diluted | $ | (0.56) | $ | (6.67) |
Basic and diluted weighted average common shares outstanding for the three months ended March 31, 2020 also includes the weighted average effect of 3,880,000 pre-funded warrants for the purchase of common shares for which the remaining unfunded exercise price is less than $0.01 per share.
X4 PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIALS STATEMENTS
(AmountsThree Months Ended
March 31,2020 2019 Options to purchase common stock 1,468,205 1,037,089 Unvested restricted stock units 101,519 — Warrants to purchase common stock (excluding prefunded warrants, which are included in basic shares outstanding) 9,776,871 493,927 11,346,595 1,531,016
(Unaudited)
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Options to purchase common stock | 1,037,089 | 538,429 | ||||||
Convertible preferred stock (as converted to common stock) | — | 3,556,147 | ||||||
Warrants to purchase common stock (presented on anas-converted, as exchanged, split-adjusted basis. | 493,927 | 423,416 | ||||||
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1,531,016 | 4,517,992 | |||||||
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On April 12, 2019, the Company entered into an underwriting agreementconjunction with Cowen and Company, LLC and Stifel, Nicolaus & Company, Incorporated, as representatives of the several underwriters named therein pursuant to which it sold 5,670,000 shares of common stock and, in lieu of common stock,pre-funded warrants to purchase 2,130,000 shares of common stock, and accompanying Class A warrants to purchase 3,900,000 shares of its common stock, at a price to the public of $11.00 per share and accompanying Class A warrants (or $10.999 perpre-funded warrant and accompanying Class A warrants). The Class A warrants have an exercise price of $13.20, will expire five years from the date of issuance, and are immediately exercisable with certain restrictions. The gross proceeds from the offering were $85.8 million before deducting underwriting discounts and estimated offering expenses. The offering closed on April 16, 2019.
X4 PHARMACEUTICALS, INC.
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You should read the following discussion and analysis of our financial condition and results of operations together with ourunaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form10-Q. Some of 10-Q and the audited financial information containedand the notes thereto included in thisour Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission, or the SEC, on March 12, 2020, or the Annual Report. This discussion and analysis or set forth elsewhere in this Quarterly Report on Form10-Q, including information with respect to our plans and strategy for our business and related financing, includescontains forward-looking statements that involve significant risks uncertainties and assumptions.uncertainties. Our actual results, performance or experience could differ materially from what is indicated by any forward-looking statement due to various important factors, risks and uncertainties, including, but not limited to, those set forth under “Cautionary Note Regarding Forward-Looking Statements”“Risk Factors” included elsewhere in this Quarterly Report on Form10-Q or under “Risk Factors” in Item 1A of Part I of 10-Q.Such factors may be amplified by the COVID-19 pandemic and its potential impact on our Annual Report on Form10-K forbusiness and the fiscal year ended December 31, 2018, as updated by our Current Report on Form8-K filed on April 11, 2019 and our subsequent filings under the Exchange Act.
global economy.
Recent Developments
Reverse Merger
On March 13, 2019, X4 Pharmaceuticals, Inc., formerly Arsanis, Inc. (the “Company”), completed a business combination with X4 Therapeutics, Inc., formerly X4 Pharmaceuticals, Inc. (“X4”),ibrutinib, in accordancepatients with Waldenström’s macroglobulinemia, or WM. We continue to expect to report initial data from the terms of the Agreement and Plan of Merger, dated as of November 26, 2018, as amended on December 20, 2018 and March 8, 2019 (the “Merger Agreement”), by and among the Company, X4 and Artemis AC Corp., a Delaware corporation and a wholly owned subsidiary of the Company (“Merger Sub”), pursuant to which, among other matters, Merger Sub merged with and into X4 with X4 continuing as a wholly owned subsidiary of the Company and the surviving corporation of the merger (the “Merger”). Following the completion of the Merger on March 13, 2019, the the Company effected a1-for-6 reverse stock split of its common stock (the “Reverse Stock Split”) and changed its name to “X4 Pharmaceuticals, Inc.” Following the completion of the Merger, the business conductedWM trial by the combined organization became primarilyend of 2020.
Under the terms of the Merger Agreement, at the closing of the Merger, the Company issued an aggregate of approximately 25.7 million shares of its common stock to X4 stockholders, based on a common stock exchange ratio of 0.5702 shares of the Company’s common stock for each share of X4’s common stock outstanding immediately prior to the Merger and a preferred stock exchange ratio of 0.5702 shares of the Company’s common stock for each share of X4 preferred stock outstanding prior to the Merger, in each case before taking into account of the Reverse Stock Split (each such exchange ratio, the “Exchange Ratio”). The Company also assumed all of the outstanding and unexercised stock options and warrants to purchase shares of X4 capital stock, with the number of shares subject to such options or warrants representing the right to purchase a number of shares of the Company’s common stock equal to 0.5702 multiplied by the number of shares of X4 capital stock previously represented by such options or warrants, before taking into account the Reverse Stock Split. The exercise prices of such options and warrants were also appropriately adjusted to reflect the Exchange Ratio of 0.5702, before taking into account the Reverse Stock Split. As a result of the Reverse Stock Split, the number of shares subject to such options and warrants and the exercise prices of such options and warrants were further adjusted by decreasing the number of shares subject to such options and warrants and increasing the exercise price of such options and warrants on a1-for-6
X4 PHARMACEUTICALS, INC.
Reverse Stock Split basis. The assumed options continue to be governed by the terms of the X4 Therapeutics, Inc. 2015 Employee, Director and Consultant Equity Incentive Plan, as amended, under which the options were originally granted (the “X4 Therapeutics Plan”). Upon the closing of the Merger, X4 Pharmaceuticals, Inc. also assumed the X4 Therapeutics Plan.
Immediately following the Merger and the Reverse Stock Split, there were approximately 6.7 million shares of the X4 Pharmaceuticals, Inc. common stock outstanding, and the former X4 Therapeutics, Inc. stockholders owned approximately 4.3 million shares, or 63.7% of the combined organization’s common stock outstanding. In addition, immediately following the Merger and the Reverse Stock Split, the former X4 Pharmaceuticals, Inc. optionholders held options to purchase approximately 0.8 million shares of the combined organization’s common stock and the former X4 Pharmaceuticals, Inc. warrantholders held warrants to purchase approximately 0.5 million shares of the combined organization’s common stock. Approximately 24.3% of our common stock outstanding immediately after the Merger is held by stockholders subject tolock-up restrictions, pursuant to which such stockholders have agreed, except in limited circumstances, not to sell or transfer, or engage in swap or similar transactions with respect to, shares of the combined organization’s common stock, including, as applicable, shares received in the Merger and issuable upon exercise of certain warrants and options, for a period of 180 days following the closing of the Merger.
The business combination has been accounted for as a “reverse merger” in accordance with GAAP. Under this method of accounting, X4 Therapeutics, Inc. is deemed to be the accounting acquirer for financial reporting purposes. This determination was primarily based on the facts that, immediately following the Merger: (i) the stockholders of X4 own a substantial majority of the voting rights in the combined organization, (ii) X4 designated a majority of the members of the initial board of directors of the combined organization and (iii) X4’s senior management hold all key positions in the senior management of the combined organization. Accordingly, for accounting purposes, the business combination has been treated as the equivalent of X4 issuing stock to acquire the net assets of Arsanis. As a result, as of the closing date of the Merger, the net assets of Arsanis have been recorded at their acquisition-date fair values in the financial statements of the combined entity and the reported operating results prior to the business combination will be those of X4. Subsequent to the closing of the Merger, the reported operating results will reflect those of the combined organization. In addition, transaction costs incurred by X4 in connection with the business combination have been expensed as incurred.
Our common stock remained listed on the Nasdaq Stock Market, with trading having commenced on a post-Reverse Stock Split basis and under the new name as of March 14, 2019. The trading symbol also changed on that date from “ASNS” to “XFOR.”
Equity Financing
On April 16, 2019, we sold 5,670,000 shares of common stock and, in lieu of common stock,pre-funded warrants to purchase 2,130,000 shares of common stock, and accompanying Class A warrants to purchase 3,900,000 shares of our common stock at a price to the public of $11.00 per share and accompanying Class A warrants (or $10.999 perpre-funded warrant and accompanying Class A warrants). The Class A warrants have an exercise priceenhanced pharmacokinetic profile relative to mavorixafor, potentially enabling improved patient compliance and ease of $13.20, will expire five years from the date of issuance,use; and are immediately exercisable with certain restrictions. The gross proceeds from the offering were $85.8 million before deducting underwriting discountsX4P-002, a CXCR4 antagonist designed to cross blood-brain barrier and estimated offering expenses.
Operating History
Since our inception in 2012, we have devoted substantially all of our efforts and financial resourcesprovide appropriate therapeutic exposures to organizing and staffing the company, business planning, raising capital, acquiring or discovering product candidates and securing related intellectual property rights and conducting discovery, research and development activities for our product candidates. We do not have any products approved for sale and have not generated any revenue from product sales. Through December 31, 2018, we have funded our operations primarily with proceeds from sales of preferred stock and proceeds from the issuance of convertible debt and borrowings under loan and security agreements. Through December 31, 2018, we had received net proceeds of $73.7 million from sales of our preferred stock (including proceeds from convertible debt, which converted into preferred stock) and gross proceeds of $16.0 million from borrowings under loan and security agreements, net of amounts used to repay prior loan and security agreements. During the three months ended March 31, 2019 as a result of our Merger with Arsanis, we acquired $25.8 million of cash and short-term marketable securities of Arsanis.
We have incurred significant operating losses since inception. Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of one or more of our current or future product candidates. Our net losses were $10.9 million and $6.2 million for the three months ended March 31, 2019 and 2018, respectively. As of March 31, 2019, we had an accumulated deficit of $90.1 million. We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. We expect that our expenses and capital requirements will increase substantially in connection with our ongoing activities, particularly if and as we:
conduct additional clinical trials for our product candidates;
continue to discover and develop additional product candidates;
acquire orin-license other product candidates and technologies;
X4 PHARMACEUTICALS, INC.
maintain, expand and protect our intellectual property portfolio;
hire additional clinical, scientific and commercial personnel;
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;
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 support our efforts as a public reporting 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 and do not enter into a commercialization partnership, we expect to incur significant expenses related to developing our internal 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 the sale of equity, debt financings or other capital sources, which may include collaborations with other companies or other strategic transactions. We may not be able 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, reduce or eliminate the development and commercialization of one or more of our product candidates or delay our pursuit of potentialin-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 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.
We expect that our existing cash and cash equivalents of $22.3 million as of March 31, 2019, together with the $78.9 million of net proceeds from our equity financing in April 2019, will be sufficient to fund our operating expenses, capital expenditure requirements and debt service payments for at least the next 12 months. See “ —Liquidity and Capital Resources.” We will need to raise additional capital to finance our operations, which cannot be assured. See Note 1 of our consolidated financial statements included elsewhere in this Quarterly Report on Form10-Q for additional information on our assessment.
Components of Results of Operations
Revenue
To date, we have not generated any revenue from product sales and do not expect to generate anysignificant revenue from the sale of our products in the foreseeable future. If our development efforts for our product candidates are successful and result in regulatory approval, we may generate revenue in the future from product sales. We cannot predict if, when, or to what extent we will generate revenue from the commercialization and sale of our product candidates. We may never succeed in obtaining regulatory approval for any of our product candidates.
Operating Expenses
Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||||||||||||||
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License revenue | $ | 3,000 | $ | — | $ | 3,000 | |||||||||||||||||||||||||||||||||||||||||
Operating expenses: | |||||||||||||||||||||||||||||||||||||||||||||||
Research and development | 8,911 | 5,655 | 3,256 | ||||||||||||||||||||||||||||||||||||||||||||
General and administrative | 4,670 | 4,783 | (113) | ||||||||||||||||||||||||||||||||||||||||||||
Total operating expenses | 13,581 | 10,438 | 3,143 | ||||||||||||||||||||||||||||||||||||||||||||
Loss from operations | (10,581) | (10,438) | (143) | ||||||||||||||||||||||||||||||||||||||||||||
Other expense: | |||||||||||||||||||||||||||||||||||||||||||||||
Interest income | 296 | 69 | 227 | ||||||||||||||||||||||||||||||||||||||||||||
Interest expense | (584) | (399) | (185) | ||||||||||||||||||||||||||||||||||||||||||||
Change in fair value of preferred stock warrant and derivative liabilities | — | (105) | 105 | ||||||||||||||||||||||||||||||||||||||||||||
Loss on extinguishment of debt | (162) | — | (162) | ||||||||||||||||||||||||||||||||||||||||||||
Other income | 41 | — | 41 | ||||||||||||||||||||||||||||||||||||||||||||
Total other expense, net | (409) | (435) | 26 | ||||||||||||||||||||||||||||||||||||||||||||
Loss before provision for income taxes | (10,990) | $ | (10,873) | $ | (117) | ||||||||||||||||||||||||||||||||||||||||||
Provision for income taxes | 148 | $ | — | $ | 148 | ||||||||||||||||||||||||||||||||||||||||||
Net loss | $ | (11,138) | $ | (10,873) | $ | (265) |
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, including under agreements with third parties, such as consultants and contract research organizations, or CROs;
X4 PHARMACEUTICALS, INC.
the cost of manufacturing drug products for use in our preclinical studies and clinical trials, including under agreements with third parties, such as consultants and contract manufacturing organizations, or CMOs;
facilities, depreciation and other expenses, which include direct or allocated expenses for rent and maintenance of facilities and insurance;
costs related to compliance with regulatory requirements; and
payments made under third-party licensing agreements.
We recognize externalexpense research and development costs based on an evaluation of the progress to completion of specific tasks using information provided to us by our service providers. This process involves reviewing open contractsas incurred.
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Direct research and development expenses by product candidate: | |||||||||||||||||||||||||||||||||||||||||||||||
Mavorixafor (X4P-001) | $ | 4,539 | $ | 2,851 | $ | 1,688 | |||||||||||||||||||||||||||||||||||||||||
X4P-002 | 359 | 84 | 275 | ||||||||||||||||||||||||||||||||||||||||||||
X4P-003 | 102 | 8 | 94 | ||||||||||||||||||||||||||||||||||||||||||||
Unallocated expense | 3,911 | 2,712 | 1,199 | ||||||||||||||||||||||||||||||||||||||||||||
Total research and development expenses | $ | 8,911 | $ | 5,655 | $ | 3,256 |
Our directWM. In addition, research and development expenses are tracked by product candidate and consist primarily of external costs, such as fees paidincreased due to outside consultants, CROs, CMOs and research laboratoriesa $1.3 million increase in connection withcompensation expenses due to additional personnel within our preclinical development, process development, manufacturing, regulatory and clinical development activities. Our direct research and development expenses by product candidate also include fees incurred under third-party license agreements. We do not allocate employee costs and costs associated with our discovery efforts, laboratory supplies and facilities, including depreciation or other indirect costs, to specific product candidates because these costs are deployed across multiple programs and, as such, are not separately classified. We use internal resources primarily to conduct our research and discoveryoperations functions as well as for managing our preclinical development, process development, manufacturing and clinical development activities. These employees work across multiple programs and, therefore, we do not track our costs by product candidate.
The table below summarizescompensation expenses related to our research and development expenses incurredfacility in Vienna,
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Mavorixafor | $ | 2,851 | $ | 3,010 | ||||
X4P-002 | 84 | — | ||||||
X4P-003 | 8 | — | ||||||
Unallocated research and development expenses | 2,712 | 1,734 | ||||||
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Total research and development expenses | $ | 5,655 | $ | 4,744 | ||||
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Research and development activities are central to our business model. Product candidatesa decrease in later stages of clinical development generally have higher developmentoutside contractor 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 that our research and development expenses will increase substantially over the next several years as we planhave hired company personnel to initiate a Phase 3 pivotal clinical trial of mavorixafor for the treatment of patients with WHIM syndrome in the second quarter of 2019 and to initiate a Phase 1 clinical trial of mavorixafor in SCN and a Phase 1/2 clinical trial of mavorixafor in WM in 2019. In addition, we expect research and development expenses to increase related to conducting preclinical development and pursuing initial clinical stages of our product candidatesX4P-002 andX4P-003.
The successful development and commercialization of our product candidates is highly uncertain. At this time, we cannot reasonably 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. 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 that we decide to pursue;
our ability to maintain our current research and development programs and to establish new ones;
establishing an appropriate safety profile with Investigational New Drug, or IND,-enabling studies;
successful patient enrollment in, and the initiation and completion of, clinical trials;
X4 PHARMACEUTICALS, INC.
the receipt of regulatory approvals from applicable regulatory authorities;
the successful 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 timing, receipt and terms of any marketing approvals from applicable regulatory authorities;
our ability to establish new licensing or collaboration arrangements;
establishing agreements with third-party manufacturers for clinical supply for our clinical trials and commercial manufacturing, if any of our product candidates is approved;
development and timely delivery of clinical-grade and commercial-grade drug formulations that can be used in our clinical trials and for commercial launch;
obtaining, maintaining, defending and enforcing patent claims and other intellectual property rights;
launching commercial sales of our product candidates, if approved, whether alone or in collaboration with others; and
maintaining a continued acceptable safety profile of the product candidates following approval.
A change in the outcome of any ofreplace these variables with respect to the development 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.
prior outside resources.
We anticipate that our general
Other Income (Expense), Net
Interest Income
Interest income consists of interest earned on our cash equivalents, which consist of money market funds. Our interest income has not been significant due to low interest rates earned on invested balances.
Interest Expense
For the three months ended March 31, 2019, interest expense primarily consists of interest on outstanding borrowings under our Hercules Loan Agreement, which was entered into with Hercules Capital, Inc., or Hercules, in October 2018. Interest expense in the current period also includes interest on loans acquired from Arsanis (see discussion of the FFG loan agreement in “Liquidity and Capital Resources”). For the three months ended March 31, 2018, interest expense consisted of interest on outstanding borrowing under the 2016 loan and security agreement with Silicon Valley Bank, or SVB, which we refer to as the SVB Loan Agreement, as well as amortization of debt issuance costs and accretion of a final payment payable upon the maturity or the repayment in full of all obligations under the SVB Loan Agreement. In October 2018, in connection with entering into the Hercules Loan Agreement, all amounts due under the SVB Loan Agreement, including unpaid principal of $4.3 million and a final payment $0.3 million, were repaid with proceeds from the Hercules Loan Agreement, and the SVB Loan Agreement was terminated. We expect that our interest expense will increase in 2019 as compared to 2018 in connection with our Hercules Loan Agreement, under which we borrowed $8.0 million in October 2018 and an additional $2.0 million in December 2018, and as a result of the FFG loan agreement, under which borrowings were $9.5 million as of March 31, 2019.
Change in Fair Value of Preferred Stock Warrant Liability
In connection with our Series A and Series B preferred stock financings in 2015, 2017 and 2018, and entering into the SVB Loan Agreement in 2016 and in connection with entering into the Hercules Loan Agreement in October 2018, we issued warrants to purchase shares of our preferred stock. Due to the liquidation requirements of these preferred shares, we classified these warrants as a liability on our consolidated balance sheet, which was remeasured to fair value at each reporting date with changes in the fair value reported as a component of other income (expense), net in our consolidated statements of operations and comprehensive loss. Upon the closing of the Merger on March 13, 2019, all of our outstanding preferred stock warrants become exercisable for Arsanis common
X4 PHARMACEUTICALS, INC.
stock; accordingly, the liability as of March 13, 2019 for these warrants was remeasured to fair value and reclassified to additionalpaid-in capital. As a result, following the closing of the Merger, we will no longer recognize changes in the fair value of the warrant liability as other income (expense), net in our consolidated statements of operations and comprehensive loss.
Change in Fair Value of Derivative Liability
Our license agreement with Genzyme, a Sanofi company, contains a contingent payment obligation that requires that we make a payment to Genzyme upon a change of control event. The contingent payment obligation meets the definition of a derivative instrument. We classify this derivative as a liability on our consolidated balance sheet that we remeasure to fair value at each reporting date, and we recognize changes in the fair value of the derivative liability as a component of other income (expense), net in our consolidated statement of operations and comprehensive loss. We will continue to recognize changes in the fair value of the derivative liability until a change of control event occurs or until the license agreement is terminated. The Merger with Arsanis qualifies as a change of control event, as defined in the license agreement.
Loss on Preferred Stock Repurchase Liability
In October 2017, we entered into a stock repurchase agreement with a holder of Series Seed preferred stock for the repurchase of shares of Series Seed preferred stock. We concluded that the arrangement was a freestanding financial instrument that was required to be recorded as a liability at fair value. Upon entering into the repurchase agreement, we recorded a preferred stock repurchase liability on our consolidated balance sheet of $587 for the fair value of the financial instrument and recognized a corresponding expense as a component of other income (expense), net in our consolidated statements of operations and comprehensive loss. We subsequently remeasured the repurchase liability to fair value at each reporting date through the settlement date of the repurchase agreement in January 2018 and recognized changes in the fair value of the preferred stock repurchase liability as a component of other income (expense), net in our consolidated statements of operations and comprehensive loss for the three months ended March 31, 2018.
Income Taxes
Since our inception, we have not recorded any income tax benefit for the net losses we have incurred in each year or for our earned research and development tax credits, as we believe, based upon the weight of available evidence, that it is more likely than not that all of our net operating loss carryforwards and tax credits will not be realized. Accordingly, 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 March 31, 2019 and 2018
The following table summarizes our results of operations for the three months ended March 31, 2019 and 2018:
Three Months Ended March 31, | ||||||||||||
2019 | 2018 | Change | ||||||||||
(in thousands) | ||||||||||||
Operating expenses: | ||||||||||||
Research and development | $ | 5,655 | $ | 4,744 | $ | 911 | ||||||
General and administrative | 4,783 | $ | 1,366 | 3,417 | ||||||||
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Total operating expenses | 10,438 | 6,110 | 4,328 | |||||||||
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Loss from operations | (10,438 | ) | (6,110 | ) | (4,328 | ) | ||||||
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Other income (expense): | ||||||||||||
Interest income | 69 | 69 | — | |||||||||
Interest expense | (399 | ) | (169 | ) | (230 | ) | ||||||
Change in fair value of preferred stock warrant and derivative liabilities | (105 | ) | (1,157 | ) | 1,052 | |||||||
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Total other income (expense), net | (435 | ) | (1,257 | ) | 822 | |||||||
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Net loss | $ | (10,873 | ) | $ | (7,367 | ) | $ | (3,506 | ) | |||
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Research and Development Expenses
Three Months Ended March 31, | ||||||||||||
2019 | 2018 | Change | ||||||||||
(in thousands) | ||||||||||||
Direct research and development expenses by product candidate: | ||||||||||||
Mavorixafor(X4P-001) | $ | 2,851 | $ | 3,010 | $ | (159 | ) | |||||
X4P-002 | 84 | — | 84 | |||||||||
X4P-003 | 8 | — | 8 | |||||||||
Unallocated research and development expenses: | ||||||||||||
Personnel related (including stock-based compensation) | 2,200 | 1,034 | 1,166 | |||||||||
Other | 512 | 699 | (187 | ) | ||||||||
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Total research and development expenses | $ | 5,655 | $ | 4,744 | $ | 911 | ||||||
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Research and development expenses were $5.7 million for the three months ended March 31, 2019, compared to $4.7 million for the three months ended March 31, 2018. The increase of $1.0 million was primarily due to an increase of $1.0 million in unallocated research and development costs, primarily associated with personnel and other costs associated with the research and development site in Vienna, Austria, acquired in the Merger and an increase of $0.2 million in direct expenses of our mavorixafor development program, partially offset by a net decrease of $0.2 million in external costs related to our product candidates.
Direct expenses of our mavorixafor product candidate decreased by $0.2 million in the three months ended March 31, 2019,2020, compared to the three months ended March 31, 2018. The decrease was primarily due to a decrease in costs associated with product manufacturing and clinical trials as the WHIM Phase 2 and Phase 1/2 for the treatment of patients with clear cell renal cell carcinoma, or ccRCC, wind down. We expect that our research and development expenses for mavorixafor will increase substantially over the next several years as we plan to initiate a Phase 3 pivotal clinical trial of mavorixafor for the treatment of patients with WHIM syndrome in the second quarter of 2019 and to initiate a Phase 1 clinical trial of mavorixafor in SCN and a Phase 1/2 clinical trial of mavorixafor in WM in 2019.
Direct expenses of ourX4P-002 product candidate increased $0.1 million in three months ended March 31, 2019, compared to the three months ended March 31, 2018. We had no direct costs related to theX4P-002 product candidate during the three months ended March 31, 2018 as we paused the development ofX4P-002 in favor of focusing our resources on the development of our mavorixafor product candidate. We expect that our research and development expenses forX4P-002 will increase over the next several years as we resume work onX4P-002’s preclinical development and initial clinical stage activities.
Unallocated research and development expenses were $2.7 million for the three months ended March 31, 2019, compared to $1.7 million for the three months ended March 31, 2018. The increase of $1.0 million was primarily due to an increase of $1.2 million in personnel-related costs due to the hiring of additional personnel in our research and development function, partially offset by a net decrease of $0.2 million in external costs related to our product candidates.
General and Administrative Expenses
General and administrative expenses were $4.8 million for the three months ended March 31, 2019, compared2019. We expect general and administrative expenses will grow during 2020 as we continue to $1.4 millionbuild out the general and administrative functions.
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Interest income | $ | 296 | $ | 69 | $ | 227 | |||||||||||||||||||||||||||||||||||||||||
Interest expense | (584) | (399) | (185) | ||||||||||||||||||||||||||||||||||||||||||||
Change in fair value of preferred stock warrant and derivative liabilities | — | (105) | 105 | ||||||||||||||||||||||||||||||||||||||||||||
Loss on extinguishment of debt | (162) | — | (162) | ||||||||||||||||||||||||||||||||||||||||||||
Other expense | 41 | — | 41 | ||||||||||||||||||||||||||||||||||||||||||||
Total other expense, net | $ | (409) | $ | (435) | $ | 26 |
X4 PHARMACEUTICALS, INC.
Other Income (Expense), Net
Other income (expense), net was $0.4 million of expensethese liabilities during the three months ended March 31, 2019, compared to $1.3 million of expense2019.
a foreign jurisdiction.
June 2019, we received $4.9 million and $9.8 million, respectively, in net proceeds as a result of refinancing our loan facility with Hercules Capital Inc., or Hercules. Under this facility, as amended most recently in March 2020, we have borrowed $25.0 million in term loans to date and may borrow an additional $15.0 million in term loans upon the achievement of certain operational milestones through June 2022 and an additional $10.0 million in term loans through December 2022, at the sole discretion of Hercules. Principal payments under the loan facility with Hercules commence in February 2022 and the agreement matures in July 2023.
Three Months Ended March 31, | ||||||||
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Net cash used in operating activities | $ | (11,750 | ) | $ | (6,182 | ) | ||
Net cash provided by investing activities | 26,406 | — | ||||||
Net cash provided by (used in) financing activities | 113 | (1,660 | ) | |||||
Impact of foreign exchange on cash and restricted cash | (21 | ) | — | |||||
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Net increase (decrease) in cash, cash equivalents and restricted cash | $ | 14,748 | $ | (7,842 | ) | |||
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Net loss | $ | (11.1) | $ | (10.9) | |||||||||||||
Adjustments to reconcile net loss to net cash used in operating activities | 1.1 | 0.7 | |||||||||||||||
Changes in operating assets and liabilities | (5.5) | (1.5) | |||||||||||||||
Net cash used in operating activities | (15.5) | (11.7) | |||||||||||||||
Net cash (used in) provided by investing activities | (0.6) | 26.4 | |||||||||||||||
Net cash provided by financing activities | 5.0 | — | |||||||||||||||
Net (decrease) increase in cash, cash equivalents and restricted cash | $ | (11.1) | $ | 14.7 | |||||||||||||
Cash, cash equivalents and restricted cash, beginning of period | $ | 128.1 | $ | 8.5 | |||||||||||||
Cash, cash equivalents and restricted cash, end of period | $ | 117.0 | $ | 23.2 |
$1.5 million.
X4 PHARMACEUTICALS, INC.
Investing Activities
center in Vienna, Austria. During the three months ended March 31, 2019, net cash provided by investing activities consisted primarily of $26.4 million of cash and restricted cash acquired in connection with theour Merger. There was no net cash provided by investing activities during
Financing Activities
2020, net cash provided by financing activities was $5.0 million, consisting primarily of proceeds from the refinancing of our loan facility with Hercules. During the three months ended March 31, 2019, net cash provided by financing activities was $0.1 million, consisting primarily of proceeds from the exercise of stock options.
During the three months ended March 31, 2018, net cash used in financing activities was $1.7 million, consisting primarily of $1.1 million in the repurchase of Series Seed convertible preferred stock, principal repayments of $0.5 million under the SVB Loan Agreement, and $0.1 million in payments of issuance costs related to convertible preferred stock.
Loan and Security Agreements
Loan and Security Agreement with Silicon Valley Bank
In October 2016, we entered into the SVB Loan Agreement, which provided for aggregate maximum borrowings of up to $10.0 million, consisting of a term loan of up to $6.0 million, which we borrowed in June 2017, and, subject to specified conditions, an additional term loan of up to $4.0 million available for borrowing until December 31, 2017. In October 2018, in connection with entering into the Hercules Loan Agreement as described below, we terminated the SVB Loan Agreement and repaid all amounts due under the SVB Loan Agreement, including unpaid principal of $4.3 million, a final payment of $0.3 million, a prepayment premium of $87 thousand and accrued interest of $23 thousand. We accounted for the repayment of amounts as an extinguishment of the SVB Loan Agreement and recognized a loss on extinguishment of debt of $0.2 million within other income (expense), net in the consolidated statement of operations and comprehensive loss. The loss on extinguishment of debt was calculated as the difference between the reacquisition price of the borrowings under the SVB Loan Agreement of $4.7 million and the carrying value of the debt under the SVB Loan Agreement of $4.5 million. Our annual effective interest rate of the SVB Loan Agreement was approximately 11.8% the period from January 1, 2018 through the date of repayment of all borrowings under the SVB Loan Agreement.
Loan and Security Agreement with Hercules Capital, Inc.
In October 2018, we entered into the Hercules Loan Agreement, which provided for aggregate borrowings of up to $13.0 million, consisting of (i) a term loan of up to $8.0 million, which was available upon entering into the agreement, (ii) subject to specified financing conditions, an additional term loan of up to $2.0 million, available for borrowing from January 1, 2019 to March 31, 2019, and (iii) subject to specified financing conditions and the receipt of the second tranche $2.0 million term loan described above, an additional term loan of up to $3.0 million, available for borrowing until March 31, 2019. In October 2018, we borrowed $8.0 million under the Hercules Loan Agreement.
In December 2018, we entered into the First Amendment to the Hercules Loan Agreement (the “First Amendment”), which amended the available borrowing dates of the second tranche from between January 1, 2019 and March 31, 2019 to between December 11, 2018 and December 14, 2018 and amended the term loan maturity date to November 1, 2021. In December 2018, we borrowed the additional $2.0 million provided under the Hercules Loan Agreement, as amended by the First Amendment.
In March 2019, the conditions necessary for borrowing the remaining $3.0 million under the Hercules Loan Agreement were not met and the borrowing capacity expired at that time.
Borrowings under the Hercules Loan Agreement bear interest at variable rates, with the first tranche bearing interest at a variable rate equal to the greater of (i) 9.5% or (ii) 9.5% plus The Wall Street Journal prime rate minus 5.25%, the second tranche bearing interest at a variable rate, subject to completion of specified financing conditions, equal to either (A) the greater of (i) 9.5% or (ii) 9.5% plus The Wall Street Journal prime rate minus 5.25% or (B) the greater of (i) 8.75% or (ii) 8.75% plus The Wall Street Journal prime rate minus 5.25%, and the third tranche bearing interest at a variable rate equal to the greater of (i) 8.75% or (ii) 8.75% plus The Wall Street Journal prime rate minus 5.25%. In an event of default, as defined, and until such event is no longer continuing, the interest rate applicable to borrowings under the Hercules Loan Agreement would be increased by 4.0%. As of March 31, 2019 and December 31, 2018, the interest rate applicable to borrowings under the Hercules Loan Agreement was 9.75%.
Borrowings under the Hercules Loan Agreement are repayable in monthly interest-only payments through August 2019, or a later date upon achievement of specified conditions, and in equal monthly payments of principal and accrued interest from September 2019 until the maturity date of the loan, which is either, (i) if the second tranche is not borrowed, November 2021 or, (ii) if the second tranche is
X4 PHARMACEUTICALS, INC.
borrowed, May 2022. At our option, we may prepay all, but not less than all, of the outstanding borrowings, subject to a prepayment premium of up to 2.0% of the principal amount outstanding as of the date of repayment. The Hercules Loan Agreement also provides for a final payment, payable upon maturity or the repayment in full of all obligations under the agreement, of up to $953. An aggregate final payment of $794 payable in connection with the $8,000 term loan and the $2,000 term loan is being accreted to interest expense to increase the carrying value of the debt over the term of the loan using the effective interest method.
In addition, the Hercules Loan Agreement contains a redemption feature that, upon an event of default, provides Hercules the option to accelerate and demand repayment of the debt, including a prepayment premium. We concluded that the redemption feature meets the definition of a derivative instrument as the repayment of the debt contains a substantial premium, resulting in the redemption feature not being clearly and closely related to the host instrument. We recorded the issuance-date fair value of the derivative liability of $18 as a debt discount and as a derivative liability on our consolidated balance sheet.
Borrowings under the Hercules Loan Agreement are collateralized by substantially all of our personal property and other assets, including our intellectual property until a specified financing condition is met. Under the Hercules Loan Agreement, we have agreed to affirmative and negative covenants to which we will remain subject until maturity or repayment in full. The covenants include maintaining a minimum liquidity amount of the lesser of (i) 125% of outstanding borrowings under the Hercules Loan Agreement and (ii) 100% of our cash and cash equivalents in an account in which Hercules has a first priority security interest as well as restrictions on our ability to incur additional indebtedness, pay dividends, encumber our intellectual property, or engage in certain fundamental business transactions, such as mergers or acquisitions of other businesses. Obligations under the Hercules Loan Agreement are subject to acceleration upon occurrence of specified events of default, including payment default, insolvency and a material adverse change in our business, operations or financial or other condition.
In connection with entering into the Hercules Loan Agreement in October 2018, we issued to Hercules warrants for the purchase of 210,638 shares of Series B convertible preferred stock at an exercise price of $1.88 per share. These warrants were immediately exercisable and expire in October 2028.
In connection with entering into the First Amendment in December 2018, we agreed to issue to Hercules warrants for the purchase of a specified number of shares of convertible preferred stock or, if issued following the Merger with Arsanis, a specified number of shares of common stock of the combined organization, at an aggregate exercise price of $99,000. The warrants were to be issued at the earliest of (i) June 30, 2019, (ii) the earlier to occur of (a) the date we prepay the outstanding borrowings or (b) the date the outstanding borrowings become due and payable, or (iii) on or before the fifth business day following the closing of or the announcement of the termination of our merger with Arsanis. The number of shares of convertible preferred stock issuable upon exercise of these warrants was determined to be 52,659 shares, calculated by dividing $99,000 by the $1.88 price per share paid by investors that purchased shares of Series B convertible preferred stock in September 2018. On March 18, 2019, as a result of the closing of the Merger with Arsanis on March 13, 2019, we issued to Hercules warrants for the purchase of 5,000 shares of common stock of the combined organization at an exercise price of $19.80 per share, each of which reflected the share Exchange Ratio of1-for-0.5702 applied in the Merger as well as the6-for-1 reverse stock split effected by the combined organization on March 13, 2019.
On October 19, 2018 and December 11, 2018, the dates we entered into the Hercules Loan Agreement and the First Amendment, respectively, we recorded the aggregate initial fair value of the warrants of $0.1 million as a preferred stock warrant liability, with a corresponding amount recorded as a debt discount on our consolidated balance sheet. As of March 13, 2019, the fair value of the warrants was $0.3 million.
In connection with entering into the Hercules Loan Agreement and the First Amendment, we also paid Hercules $92,000 of upfront fees, including facility, due diligence and legal fees associated with entering into the agreement, which were also recorded as a debt discount. The debt discount is reflected as a reduction of the carrying value of long-term debt on our consolidated balance sheet and is being amortized to interest expense over the term of the loan using the effective interest method.
We recognized aggregate interest expense under the Hercules Loan Agreement of $0.3 million and $0 during three months ended March 31, 2019 and 2018, respectively, which includednon-cash interest expense of $0.1 million related to the accretion of the debt discount and the final payment. As of March 31, 2019, and December 31, 2018, the unamortized debt discount was $0.2 million and $0.2 million, respectively. The annual effective interest rate of the Hercules Loan Agreement as of March 31, 2019 and December 31, 2018 was approximately 14.2%, respectively.
FFG Borrowings
Between September 2011 and March 2017, Arsanis GmbH, a subsidiary of Arsanis, entered into a series of funding agreements with Österreichische Forschungsförderungsgesellschaft mbH, or FFG, that provided for loans and grants to fund qualifying research and development expenditures of Arsanis GmbH on aproject-by-project basis, as approved by FFG. As of March 31, 2019, the outstanding principal amount under loans from FFG was $9.5 million, including $2.9 million of current portion.
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On February 4, 2019, Arsanis GmbH, received letters from counsel to FFG alleging that we breached reporting, performance and other obligations in connection with the grants and loans made by FFG to Arsanis GmbH between September 2011 and March 2017 to fund qualifying research and development expenditures. The letters demanded the immediate repayment of all such subsidies. On March 8, 2019, Arsanis announced that it had entered into a settlement agreement, or the Settlement Agreement, with FFG in respect of these allegations and demands for repayment. Pursuant to the terms of the Settlement Agreement, in exchange for FFG’s waiver of all claims against Arsanis and Arsanis GmbH except for its claims for repayment of the loans and regular interest, including its waiver of claims for repayment of grants and interest exceeding regular interest, subject to compliance by us and Arsanis GmbH with the terms of the Settlement Agreement, Arsanis GmbH has agreed to repay the outstanding loan principal (plus regular interest accrued thereon) on an accelerated payment schedule of three years instead of the original five years, with the final accelerated installment due and payable on June 30, 2021. The Settlement Agreement also contains certain other restrictive covenants, including a requirement to maintain, as of April 30, 2019, a minimum cash balance equal to 70% of the then-outstanding principal amount of the loans at Arsanis GmbH in an account held with an Austrian bank, until all of the loans have been repaid and subject to other terms specified in the Settlement Agreement.
Amounts due under the FFG loans bear interest at varying fixed rates ranging from 0.75% to 2.0% per annum. Interest is payable semi-annually in arrears, with all accrued interest and principal due upon maturity. After giving effect to the Settlement Agreement, the FFG loans mature at varying dates between March 2019 and June 2021. The FFG loans are not secured by any of our assets. We may be required to return all or a portion of the FFG loans and/or grants if we do not comply with the terms of the related FFG funding agreements and related guidelines, including specified requirements as to continued operations with respect to certain locations and funded projects, or if we fail to comply with the terms of the Settlement Agreement.
Funding Requirements
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•the scope, number, initiation, progress, timing, costs, design, duration, any potential delays, and results of clinical trials and nonclinical studies for our current or future product candidates, particularly our Phase 3
•the number and characteristics of product candidates and programs that we develop or mayin-license;
•the outcome, timing and cost of regulatory reviews, approvals or other actions to meet regulatory requirements established by the FDA and comparable foreign regulatory authorities, including the potential for the FDA or comparable foreign regulatory authorities to require that we perform more studies for our product candidates than those that we currently expect;
•our ability to obtain marketing approval for our product candidates;
•the cost of filing, prosecuting, defending and enforcing our patent claims and other intellectual property rights covering our product candidates, including any such patent claims and intellectual property rights that we have licensed from Genzyme pursuant to the terms of our license agreement with Genzyme;
•our ability to maintain, expand and defend the scope of our intellectual property portfolio, including the cost of defending intellectual property disputes, including patent infringement actions brought by third parties against us or our product candidates;
•the cost and timing of completion of commercial-scale outsourced manufacturing activities with respect to our product candidates;
•our ability to establish and maintain licensing, collaboration or similar arrangements on favorable terms and whether and to what extent we retain development or commercialization responsibilities under any new licensing, collaboration or similar arrangement;
•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;
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•the success of any other business, product or technology that we acquire or in which we invest;
•the costs of acquiring, licensing or investing in businesses, product candidates and technologies;
•our need and ability to hire additional management and scientific and medical personnel;
•the costs to continue to operate as a public company, in the United States, including the need to implement additional financial and reporting systems and other internal systems and infrastructure for our business;
•market acceptance of our product candidates, to the extent any are approved for commercial sale; and
•the effect of competing technological and market developments.
We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our capital resources sooner than we expect.
While
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Accrued Research and Development Expenses
As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued research and development expenses. This process involves reviewing open contracts and purchase orders, communicating with our applicable personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual costs. The majority of our service providers invoice us in arrears for services performed, on apre-determined schedule or when contractual milestones are met; however, some require advance payments. We make estimates of our accrued expenses as of each balance sheet date in the consolidated financial statements based on facts and circumstances known to them at that time. We periodically confirm the accuracy of these estimates with the service providers and makes adjustments, if necessary. Examples of estimated accrued research and development expenses include fees paid to:
vendors in connection with preclinical development activities;
CROs and investigative sites in connection with preclinical studies and clinical trials; and
CMOs in connection with the production of preclinical and clinical trial materials.
We base the expense recorded related to external research and development on our estimates of the services received and efforts expended pursuant to quotes and contracts with multiple CMOs and CROs that supply, conduct and manage preclinical studies and clinical trials on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the expense. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, we adjust the accrual or the amount of prepaid expenses accordingly.
Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low in any particular period. To date, there have not been any material adjustments to our prior estimates of accrued research and development expenses.
Stock-Based Compensation
Historically, we measured all stock-based awards granted to employees and directors based on the fair value on the date of the grant and recognize compensation expense for those awards, net of estimated forfeitures, over the requisite service period, which is generally the vesting period of the respective award. We issue stock-based awards with only service-based vesting conditions and record the expense for these awards using the straight-line method. We have not issued any stock-based awards with performance-based vesting conditions.
For stock-based awards granted tonon-employee consultants, compensation expense is recognized over the period during which services are rendered by suchnon-employee consultants until completed. At the end of each financial reporting period prior to completion of the service, the fair value of these awards is remeasured using the then-current fair value of our common stock and updated assumption inputs in the Black-Scholes option-pricing model.
The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model, which uses as inputs the fair value of our common stock and assumptions we make for the volatility of our common stock, the expected term of the stock options, the risk-free interest rate for a period that approximates the expected term of our stock options and their expected dividend yield.
Prior to the closing of the Merger and the listing of our common stock on the Nasdaq Capital Market, our board of directors historically determined, as of the date of each option grant, with input from our management, the assistance of a third-party valuation specialist and the guidance outlined in the American Institute of Certified Public Accountants’ Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, the estimated fair value of our common stock on the date of grant based on a number of objectives and subjective factors
Since the Merger and the listing of our common stock on the Nasdaq Capital Market, we have relied on the market price of our common stock to determine the fair value on the date of grant for purposes of determining our stock-based compensation expense.
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The assumptions underlying these valuations represent the best estimates of our management, which involve inherent uncertainties and the application of our judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, the resulting share-based compensation expense could be materially different.
Valuation of Preferred Stock Warrant Liability
In connection with our preferred stock financings in 2015, 2017, and 2018, and entering into the SVB Loan Agreement in 2016, we issued warrants to purchase shares of our preferred stock. We classify these warrants as liabilities on our consolidated balance sheets because these warrants are freestanding financial instruments that may require us to transfer assets upon exercise. The warrant liability was initially recorded at fair value upon the date of issuance of each warrant and is subsequently remeasured to fair value at each reporting date. Changes in the fair value of the warrant liability are recognized as a component of other income (expense), net in our consolidated statements of operations and comprehensive loss. Upon the closing of the Merger onthree months ended March 13, 2019, all of our outstanding preferred stock warrants become exercisable for Arsanis common stock; accordingly, the liability as of March 13, 2019 for these warrants was remeasured to fair value and reclassified to additionalpaid-in capital. As a result, following the closing of the Merger, we no longer recognize changes in the fair value of the warrant liability as other income (expense), net in our consolidated statement of operations and comprehensive loss.
To value the preferred stock warrants, we used various valuation methods, including the Monte Carlo method, the option-pricing method and the hybrid method, all of which incorporate assumptions and estimates, We assess these assumptions and estimates on a quarterly basis as additional information impacting the assumptions is obtained. Estimates and assumptions impacting the fair value measurement include the fair value per share of the underlying shares of our Series A and Series B preferred stock, risk-free interest rate, expected dividend yield, expected volatility of the price of the underlying preferred stock, and the remaining contractual term of the warrants (except for the warrants that would be automatically exercised upon an initial public offering, in which case the remaining estimated term to automatic exercise was used). The most significant assumption in the Monte Carlo method, the option-pricing method and the hybrid method impacting the fair value of the preferred stock warrants is the fair value of our preferred stock as of each remeasurement date. We determine the fair value per share of the underlying preferred stock by taking into consideration the most recent sales of our preferred stock, results obtained from third-party valuations and additional factors that are deemed relevant.
Upon the closing of the Merger, pursuant to the Merger Agreement, all of our outstanding preferred stock warrants have become exercisable for Arsanis common stock; accordingly, the fair value of the warrant liability for these warrants at that time will be reclassified to additionalpaid-in capital. As a result, following the closing of the Merger, we will no longer recognize changes in the fair value of the warrant liability as other income (expense), net in our consolidated statement of operations and comprehensive loss.
Valuation of Derivative Liability
Our license agreement with Genzyme contains a contingent payment obligation that requires that we make a cash payment to Genzyme upon a change of control event. The contingent payment obligation meets the definition of a derivative instrument as the contingent payment obligation is not clearly and closely related to our host instrument and is a cash-settled liability. Accordingly, we classify this derivative as a liability on our consolidated balance sheet. The derivative liability was initially recorded at fair value on the date of entering into the license agreement and is subsequently remeasured to fair value at each reporting date. Changes in the fair value of the derivative liability are recognized as a component of other income (expense), net in our consolidated statement of operations and comprehensive loss. The Merger qualifies as a change of control event, as defined in the license agreement, but results in no payment being due to Genzyme under the license agreement. On March 13, 2019, the closing date of the Merger with Arsanis, this derivative liability was remeasured to fair value, which was $0, and subsequent changes in fair value will no longer be recognized in the consolidated statements of operations and comprehensive loss because the contingent payment obligation expired at that time.
The fair value of the derivative liability was estimated at each reporting date based, in part, on the results of third-party valuations, which were prepared using the option-pricing method or the hybrid method, each of which considered as inputs the type, timing and probability of the occurrence of a change of control event, the potential amount of the payment under potential exit scenarios, the fair value per share of the underlying common stock and the risk-adjusted discount rate.
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Valuation of Preferred Stock Repurchase Liability
In October 2017, we entered into a stock repurchase agreement with a holder of Series Seed preferred stock for the repurchase of shares of Series Seed preferred stock. We classified this repurchase agreement as a liability on our consolidated balance sheet as the repurchase agreement was a freestanding financial instrument that required us to transfer assets upon settlement. The preferred stock repurchase liability was initially recorded at fair value on the date of entering into the repurchase agreement and was subsequently remeasured to fair value at each reporting date and upon the settlement date until the settlement of the repurchase agreement, which occurred in January 2018. Changes in the fair value of the preferred stock repurchase liability were recognized as a component of other income (expense), net in our consolidated statement of operations and comprehensive loss. The fair value of the preferred stock repurchase liability was estimated by multiplying (i) the 598,975 shares of Series Seed preferred stock that we agreed to repurchase by (ii) the difference between the agreed repurchase price of $1.88 per share and the fair value per share of the Series Seed preferred stock, which result approximated the fair value of the preferred stock repurchase liability given the short duration of the contract. We determined the fair value per share of the Series Seed preferred stock by taking into consideration the most recent sales of our preferred stock, results obtained from third-party valuations and additional factors that were deemed relevant. In January 2018, the Series Seed preferred stock repurchase agreement was settled through our repurchase of the shares.
company. We may take advantage of certain of the scaled disclosures available to smaller reporting companies and will be able to take advantage of these scaled disclosures for so long as (i) our voting and non-voting common stock held by non-affiliates is less than $250.0 million measured on the last business day of our second fiscal quarter or (ii) our annual revenue is less than $100.0 million during the most recently completed fiscal year and our voting and non-voting common stock held by non-affiliates is less than $700.0 million measured on the last business day of our second fiscal quarter.
Recently Issued Accounting Pronouncements
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 consolidated financial statements included elsewhere in this quarterly report on Form10-Q.
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Not required for
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company, as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item.
Our principal executive officer
During the three months ended March 31, 2019, we implemented certain internal controls as a result of our adoption of the new lease standard on January 1, 2019 as well as internal controls related to the business combination. Control Over Financial Reporting
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proceedings and we are not aware of any pending or threatened legal proceedings against us that we believe could have a material adverse effect on our business, operating results or financial condition.
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Unregistered Sales of Equity Securities
PursuantCompany, which may be beneficial to our loanstockholders, more difficult and security agreement, dated asmay prevent attempts by our stockholders to replace or remove our current management.
Issuer Purchases of Equity Securities
We did not repurchaseCompany or our stockholders, any of our equity securities duringaction asserting a claim against the quarter ended March 31, 2019.
Use of Proceeds from Registered Securities
On November 20, 2017, Arsanis closed its initial public offering, in which Arsanis issued and sold 666,667 shares of common stock at a public offering price of $60.00 per share, and issued an additional 100,000 shares of common stock at a price of $60.00 per shareCompany arising pursuant to the exerciseDelaware General Corporation Law or as to which the Delaware General Corporation Law confers jurisdiction on the Court of Chancery of the underwriters’ over-allotment option. The aggregate gross proceeds to Arsanis from the initial public offering, inclusiveState of the over-allotment exercise, were $46.0 million. All of the shares of common stock issued and sold in the initial public offering were registered under the Securities Act of 1933, as amended,Delaware, or any action asserting a claim arising pursuant to a registration statement on Form S-1 (Registration No. 333-221050), which was declared effectiveour certificate of incorporation or by-laws or governed by the SEC on November 15, 2017.
The aggregate net proceedsinternal affairs doctrine. This provision may limit a stockholder’s ability to Arsanis from the public offering, inclusive of the over-allotment exercise, were approximately $39.5 million, after deducting underwriting discounts and commissions and offering expenses payable by Arsanis of approximately $6.5 million. No offering expenses were paid directly or indirectly to any of Arsanis’s directors or officers (or their associates) or persons owning 10% or more of any class of our equity securities or to any other affiliates.
As of March 31, 2019, we have used all of the net proceeds from the initial public offering to advance product candidates through clinical trial programs andbring a claim in a judicial forum that it finds favorable for working capital and general corporate purposes. There have been no material changes in the planned use of proceeds from the initial public offering as described in Arsanis’s final prospectus fileddisputes with the SEC on November 17, 2017 pursuantCompany or our directors, officers, employees or stockholders, which may discourage such lawsuits against the Company and our directors, officers, employees or stockholders.
Exhibit No. | Exhibit Description | Form | Exhibit No. | Filing Date | File No. | |||||||||||||||||||||||||||
3.1 | 8-K | 3.1 | 11/20/2017 | 001-38295 | ||||||||||||||||||||||||||||
3.2 | 8-K | 3.1 | 3/13/2019 | 001-38295 | ||||||||||||||||||||||||||||
3.3 | 8-K | 3.2 | 3/13/2019 | 001-38295 | ||||||||||||||||||||||||||||
3.4 | 8-K | 3.2 | 11/20/2017 | 001-38295 | ||||||||||||||||||||||||||||
10.1+* | ||||||||||||||||||||||||||||||||
10.2+ | 10-K | 10.19 | 03/12/2020 | 001-38295 | ||||||||||||||||||||||||||||
10.3+ | 10-K | 10.21 | 03/12/2020 | 001-38295 | ||||||||||||||||||||||||||||
10.4+ | 10-K | 10.23 | 03/12/2020 | 001-38295 | ||||||||||||||||||||||||||||
10.5+ | 8-K | 10.1 | 03/20/2020 | 001-38295 | ||||||||||||||||||||||||||||
10.6 | 8-K | 10.1 | 03/17/2020 | 001-38295 | ||||||||||||||||||||||||||||
10.7 | 10-K | 10.37 | 03/12/2020 | 001-38295 | ||||||||||||||||||||||||||||
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31.2* | ||||||||||||||||||||||||||||||||
32.1** | ||||||||||||||||||||||||||||||||
101.INS* | Inline XBRL Instance Document | |||||||||||||||||||||||||||||||
101.SCH* | Inline XBRL Taxonomy Extension Schema Document | |||||||||||||||||||||||||||||||
101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||||||||||||||||||||||||||
101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document |
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101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document |
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Date: May | By: | /s/ Paula Ragan, Ph.D. | ||||||||||||||
Paula Ragan, Ph.D.
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Date: May | By: | /s/ Adam S. Mostafa | ||||||||||
Adam S. Mostafa
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