What changed in this filing

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Item 1. Financial Statements

2020-08-06 compared with 2020-05-07 · 257 added, 500 removed, 422 unchanged (64% of the section changed)

15 unchanged sentences

Deferred tax asset

Liabilities and Stockholders’

Liabilities and Stockholders’ Equity

Current liabilities:

8 unchanged sentences

Operating lease liability - noncurrent

Other liability - noncurrent

Total liabilities

Commitments and contingencies

Stockholders’

Stockholders’ equity:

Preferred stock, $ 0.00001 par value, 10,000,000 shares authorized;

1 unchanged sentence

Common stock, $ 0.00001 par value, 90,000,000 shares authorized;

27,434,705 and 27,217,649 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively

36,802,139 and 27,217,649 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively

Additional paid-in capital

Accumulated other comprehensive gain (loss)

Accumulated other comprehensive loss

Accumulated deficit

Total stockholders’

Total liabilities and stockholders’

Total stockholders’ equity

Total liabilities and stockholders’ equity

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

2 unchanged sentences

(In thousands, except share and per share data)

Three Months Ended March 31,

Three Months Ended

Six Months Ended

License and collaboration revenue - related party

6 unchanged sentences

Interest expense

Other expense, net

Loss before income tax expense

Income tax expense

Loss on early repayment of debt

Other income (expense), net

Loss before income tax (expense) benefit

Income tax (expense) benefit

Net loss per share, basic and diluted

4 unchanged sentences

(In thousands)

Three Months Ended March 31,

Three Months Ended

Six Months Ended

Other comprehensive loss:

Gain on translation of foreign operations

Unrealized (loss) gain on marketable securities

(Loss) gain on translation of foreign operations

Gain (loss) on marketable securities

Comprehensive loss

1 unchanged sentence

PROTAGONIST THERAPEUTICS, INC.

Condensed Consolidated Statements of Stockholders’

Condensed Consolidated Statements of Stockholders’ Equity

(In thousands, except share data)

1 unchanged sentence

Stockholders'

Three months ended March 31, 2020

Balance at December 31, 2019

Three months ended June 30, 2020

Balance at March 31, 2020

Issuance of common stock pursuant to public offering, net of issuance costs

Issuance of common stock pursuant to at-the-market offering, net of issuance costs

Issuance of common stock under equity incentive and employee stock purchase plans

Stock-based compensation expense

Other comprehensive gain

Other comprehensive gain (loss)

Balance at June 30, 2020

Comprehensive

Stockholders'

Three months ended June 30, 2019

Balance at March 31, 2019

Issuance of common stock pursuant to at-the-market offering, net of issuance costs

Issuance of common stock pursuant to exercise of Exchange Warrants

Issuance of common stock under equity incentive and employee stock purchase plans

Stock-based compensation expense

Other comprehensive gain (loss)

Balance at June 30, 2019

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

PROTAGONIST THERAPEUTICS, INC.

Condensed Consolidated Statements of Stockholders’ Equity (continued)

(In thousands, except share data)

Comprehensive

Stockholders'

Three months ended March 31, 2019

Six months ended June 30, 2020

Balance at December 31, 2019

Issuance of common stock pursuant to public offering, net of issuance costs

Issuance of common stock pursuant to at-the-market offering, net of issuance costs

Issuance of common stock under equity incentive and employee stock purchase plans

Stock-based compensation expense

Other comprehensive gain

Balance at March 31, 2019

Other comprehensive gain (loss)

Balance at June 30, 2020

Comprehensive

Stockholders'

Six months ended June 30, 2019

Balance at December 31, 2018

Issuance of common stock pursuant to at-the-market offering, net of issuance costs

Issuance of common stock pursuant to exercise of Exchange Warrants

Issuance of common stock under equity incentive and employee stock purchase plans

Stock-based compensation expense

Other comprehensive gain (loss)

Balance at June 30, 2019

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

2 unchanged sentences

(In thousands)

Three Months Ended March 31,

Six Months Ended June 30,

CASH FLOWS FROM OPERATING ACTIVITIES

1 unchanged sentence

Stock-based compensation

Change in deferred tax asset

Operating lease right-of-use asset amortization

Loss on early repayment of debt

Depreciation and amortization

1 unchanged sentence

Accretion of discount on marketable securities, net of premium amortization

Foreign currency remeasurement loss

Change in deferred tax asset

Changes in operating assets and liabilities:

7 unchanged sentences

Operating lease liability

Other liability

Net cash used in operating activities

CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of marketable securities

Proceeds from maturities of marketable securities

Purchase of marketable securities

Purchases of property and equipment

Net cash provided by investing activities

Net cash provided by (used) in investing activities

CASH FLOWS FROM FINANCING ACTIVITIES

Issuance costs related to issuance of long-term debt

Proceeds from issuance of common stock upon exercise of stock options and purchases under employee stock purchase plan

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

Proceeds from at-the-market offering, net of issuance costs

Proceeds from issuance of common stock upon under equity incentive and employee stock purchase plans

Issuance costs related to long-term debt

Early repayment of long-term debt

Net cash provided by financing activities

3 unchanged sentences

Cash, cash equivalents and restricted cash, end of period

SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING AND INVESTING INFORMATION:

SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING AND INVESTING INFORMATION:

Issuance costs related to public offering of common stock included in accrued liabilities and other payables

Issuance costs related to at-the-market offering of common stock included in prepaid expenses and other assets at the end of the previous year

Issuance costs related to public offering of common stock included in prepaid expenses and other assets at the end of the previous year

Purchases of property and equipment in accounts payable and accrued liabilities

5 unchanged sentences

Protagonist Therapeutics, Inc.

(the “Company”) was incorporated in the state of Delaware on August 22, 2006 and is headquartered in Newark, California.

The Company is a clinical-stage biopharmaceutical company that utilizes a proprietary technology platform to discover and develop novel peptide-based drugs to transform existing treatment paradigms for patients with significant unmet medical needs.

Protagonist Pty Limited (“Protagonist Australia”) is a wholly-owned subsidiary of the Company and is located in Brisbane, Queensland, Australia.

Protagonist Australia was incorporated in Australia in September 2001.

The Company manages its operations as a single operating segment.

The Company has incurred net losses from operations since inception and has an accumulated deficit of $237.7 million as of March 31, 2020.

The Company’s ultimate success depends on the outcome of its research and development and collaboration activities.

The Company has incurred net losses from operations since inception and has an accumulated deficit of $ 257.2 million as of June 30, 2020.

The Company’s ultimate success depends on the outcome of its research and development and collaboration activities.

The Company expects to incur additional losses in the future and anticipates the need to raise additional capital to continue to execute its long-range business plan.

Since the Company’s initial public offering in August 2016, it has financed its operations through offerings of common stock, payments received under license and collaboration agreements and proceeds received from long-term debt.

Since the Company’s initial public offering in August 2016, it has financed its operations primarily through offerings of common stock, payments received under license and collaboration agreements and proceeds received from long-term debt.

Risks and Uncertainties

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The extent of the impact of the COVID-19 pandemic on the Company's activities is highly uncertain and difficult to predict, as the response to the pandemic is in its early stages and information is rapidly evolving.

Capital markets and economies worldwide have also been negatively impacted by the COVID-19 pandemic, and it is possible that the pandemic could cause a local and/or global economic recession.

Capital markets and economies worldwide have also been negatively impacted by the COVID-19 pandemic, which has contributed to the current global economic recession.

Such economic disruption could have a material adverse effect on our business.

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The magnitude and overall effectiveness of these actions remains uncertain.

The severity of the impact of the COVID-19 pandemic on the Company's activities will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic and the extent and severity of the impact on the Company's existing and planned clinical trials and collaboration activities, all of which are uncertain and cannot be predicted.

The Company's future results of operations and liquidity could be adversely impacted by delays in existing and planned clinical trials and collaboration activities, difficulty in recruiting patients for these clinical trials, supply chain disruptions, the effect of the impact on employees, and the impact of any initiatives or programs that the Company may undertake to address financial and operational challenges.

The severity of the impact of the COVID-19 pandemic on the Company's activities will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic and the extent and severity of the impact on the Company's existing and planned clinical trials and collaboration activities and operations, all of which are uncertain and cannot be predicted.

The Company's future results of operations and liquidity could be adversely impacted by further and extended delays in existing and planned clinical trials and collaboration activities, difficulty in recruiting patients for these clinical trials, supply chain disruptions, the effect of the impact on employees, and the impact of any initiatives or programs that the Company may undertake to address financial and operational challenges.

As of the date of issuance of these condensed consolidated financial statements, the extent to which the COVID-19 pandemic may materially impact the Company's future financial condition, liquidity or results of operations is uncertain.

1 unchanged sentence

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and applicable rules and regulations of the SEC regarding interim financial reporting.

As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP have been condensed or omitted, and accordingly the condensed consolidated balance sheet as of December 31, 2019 has been derived from the Company’s audited consolidated financial statements at that date but does not include all of the information required by GAAP for complete consolidated financial statements.

These unaudited interim condensed consolidated financial statements have been prepared on the same basis as the Company’s annual consolidated financial statements and, in the opinion of

management, reflect all adjustments (consisting of normal recurring adjustments) that are necessary for a fair presentation of the Company’s consolidated financial statements.

The results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results to be expected for the year ending December 31, 2020 or for any other interim period or for any other future year.

The accompanying condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto for the year ended December 31, 2019 included in the Company’s Annual Report on Form 10‑K, filed with the SEC on March 10, 2020.

These unaudited interim condensed consolidated financial statements have been prepared on the same basis as the Company’s annual consolidated financial statements and, in the opinion of

management, reflect all adjustments (consisting of normal recurring adjustments) that are necessary for a fair presentation of the Company’s consolidated financial statements.

The results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the results to be expected for the year ending December 31, 2020 or for any other interim period or for any other future year.

Principles of Consolidation

4 unchanged sentences

On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, accruals for research and development activities, stock-based compensation, income taxes, marketable securities and leases.

Estimates related to revenue recognition include actual costs incurred versus total estimated costs of the Company’s deliverables to determine percentage of completion in addition to the application and estimates of potential revenue constraints in the determination of the transaction price under its license and collaboration agreements.

Management bases these estimates on historical and anticipated results, trends, and various other assumptions that the Company believes are reasonable under the circumstances, including assumptions as to forecasted amounts and future events.

Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets.

The Company is not aware of any specific event or circumstance that would require an update to its estimates or judgments or a revision of the carrying value of its assets or liabilities as of the date of issuance of this Quarterly Report on Form 10-Q.

The Company has taken into consideration any known COVID-19 impacts in its accounting estimates to date and is not aware of any additional specific events or circumstances that would require any additional updates to its estimates or judgments or a revision of the carrying value of its assets or liabilities as of the date of issuance of this Quarterly Report on Form 10-Q.

These estimates may change as new events occur and additional information is obtained.

2 unchanged sentences

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash, cash equivalents and marketable securities.

Substantially all of the Company’s cash is held by two financial institutions that management believes are of high credit quality.

Such deposits may, at times, exceed federally insured limits.

The primary focus of the Company’s investment strategy is to preserve capital and to meet liquidity requirements.

The Company’s cash equivalents and marketable securities are managed by external managers within the guidelines of the Company’s investment policy.

The Company’s investment policy addresses the level of credit exposure by limiting concentration in any one corporate issuer and establishing a minimum allowable credit rating.

The primary focus of the Company’s investment strategy is to preserve capital and to meet liquidity requirements.

The Company’s cash equivalents and marketable securities are managed by external managers within the guidelines of the Company’s investment policy.

The Company’s investment policy addresses the level of credit exposure by limiting concentration in any one corporate issuer and establishing a minimum allowable credit rating.

To manage its credit risk exposure, the Company maintains its portfolio of cash equivalents and marketable securities in fixed income securities denominated and payable in U.S.

1 unchanged sentence

government and its agencies, money market instruments including commercial paper and negotiable certificates of deposit, and highly rated corporate debt obligations and money market funds.

As of the date of issuance of these condensed consolidated financial statements, the extent to which the COVID-19 pandemic may materially impact the Company's level of credit exposure is uncertain.

As of the date of issuance of these condensed consolidated financial statements, the COVID-19 pandemic has not had a material impact on the Company’s credit exposure, and the extent to which the COVID-19 pandemic may materially impact the Company's future level of credit exposure is uncertain.

Cash Equivalents

2 unchanged sentences

Restricted Cash

Restricted cash consists of cash balances primarily held as security in connection with a letter of credit related to the Company’s facility lease entered into in March 2017 and the Company’s corporate credit card.

Cash as Reported in Condensed Consolidated Statements of Cash Flows

6 unchanged sentences

Marketable Securities

All marketable securities have been classified as “available-for-sale”

and are carried at estimated fair value as determined based upon quoted market prices or pricing models for similar securities.

All marketable securities have been classified as “available-for-sale” and are carried at estimated fair value as determined based upon quoted market prices or pricing models for similar securities.

Management determines the appropriate classification of its marketable securities at the time of purchase and reevaluates such designation as of each balance sheet date.

6 unchanged sentences

Revenue Recognition

The Company follows Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“ASC 606”).

Under ASC 606, the Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services.

8 unchanged sentences

The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligations when (or as) the performance obligations are satisfied.

The Company constrains its estimate of the transaction price up to the amount (the “variable consideration constraint”) that a significant reversal of recognized revenue is not probable.

Licenses of intellectual property:

If a license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in an arrangement, the Company recognizes revenue from non-refundable, upfront fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license.

For licenses that are bundled with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring proportional performance for purposes of recognizing revenue from non-refundable, upfront fees.

17 unchanged sentences

Upfront payments and fees are recorded as deferred revenue upon receipt or when due and may require deferral of revenue recognition to a future period until the Company performs its obligations under these arrangements.

Amounts payable to the Company are recorded as accounts receivable when the Company’s right to consideration is unconditional.

Amounts payable to the Company and not yet billed to the collaboration partner are recorded as contract assets.

4 unchanged sentences

When contract modifications create new performance obligations and the increase in consideration approximates the standalone selling price for goods and services related to such new performance obligations as adjusted for specific facts and circumstances of the contract, the modification is considered to be a separate contract.

were a termination of the existing contract and the creation of a new contract, if the remaining goods or services are distinct from the goods or services transferred on or before the date of the contract modification.

If a contract modification is not accounted for as a separate contract, the Company accounts for the promised goods or services not yet transferred at the date of the contract modification (the remaining promised goods or services) prospectively, as if it were a termination of the existing contract and the creation of a new contract, if the remaining goods or services are

distinct from the goods or services transferred on or before the date of the contract modification.

The Company accounts for a contract modification as if it were a part of the existing contract if the remaining goods or services are not distinct and, therefore, form part of a single performance obligation that is partially satisfied at the date of the contract modification.

In such case the effect that the contract modification has on the transaction price, and on the entity’s measure of progress toward complete satisfaction of the performance obligation, is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) at the date of the contract modification (the adjustment to revenue is made on a cumulative catch-up basis).

The period between when the Company transfers control of promised goods or services and when the Company receives payment is expected to be one year or less, and that expectation is consistent with the Company’s historical experience.

Upfront payment contract liabilities resulting from the Company’s license and collaboration agreements do not represent a financing component as the payment is not financing the transfer of goods and services, and the technology underlying the licenses granted reflects research and development expenses already incurred by the Company.

As such, the Company does not adjust its revenues for the effects of a significant financing component .

7 unchanged sentences

The Company has not experienced any material differences between accrued liabilities and actual costs incurred.

However, the status and timing of actual services performed, number of patients enrolled, the rate of patient enrollment and number of locations of sites activated may vary from the Company’s estimates, resulting in adjustments to expense in future periods.

Changes in these estimates that result in material changes to the Company’s accruals could materially affect the Company’s results of operations.

The Company has received orphan drug designation from the U.S.

Food and Drug Administration (“FDA”) for its clinical asset PTG-300 for the treatment of polycythemia vera and beta-thalassemia and may qualify for a 25% U.S.

Federal income tax credit on qualifying clinical study expenditures.

Research and Development Tax Incentive

The Company is eligible under the AusIndustry research and development tax incentive program to obtain either a refundable cash tax incentive or a taxable credit in the form of a non-cash tax incentive from the Australian Taxation Office (“ATO”).

The refundable cash tax incentive is available to the Company on the basis of specific criteria with which the Company must comply.

6 unchanged sentences

Net Loss per Share

Basic net loss per share is calculated by dividing the Company’s net loss by the weighted average number of shares of common stock and Exchange Warrants outstanding during the period, without consideration of potentially dilutive securities.

In accordance with Accounting Standards Codification Topic 260, Earnings Per Share , the Exchange Warrants are included in the computation of basic net loss per share because the exercise price is negligible, and they are fully vested and exercisable after the original issuance date.

Diluted net loss per share is the same as basic net loss per share for all periods presented since the effect of potentially dilutive securities is anti-dilutive given the net loss of the Company in each period.

Stockholder’s Equity for additional information regarding the Exchange Warrants.

Recently Adopted Accounting Pronouncements

In August 2018, the FASB issued ASU No.

2018-13, Fair Value Measurement (Topic 820) –

Disclosure Framework –

Changes to the Disclosure Requirements for Fair Value Measurement , which modifies the disclosure requirements on fair value measurements and is intended to improve the effectiveness of disclosures, including the consideration of costs and benefits.

2018-13, Fair Value Measurement (Topic 820) – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement , which modifies the disclosure requirements on fair value measurements and is intended to improve the effectiveness of disclosures, including the consideration of costs and benefits.

The Company adopted this guidance as of January 1, 2020.

The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements or disclosures.

In November 2018, the FASB issued ASU No.

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The Company adopted this guidance as of January 1, 2020.

The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements and disclosures.

Recently Issued Accounting Pronouncements Not Yet Adopted as of March 31, 2020

The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements and disclosures.

Recently Issued Accounting Pronouncements Not Yet Adopted as of June 30, 2020

In June 2016, the FASB issued ASU No.

3 unchanged sentences

In November 2019, the FASB issued ASU No.

2019-10, Financial Instruments –

Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842):

2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842):

Effective Dates , which amended the mandatory effective date of ASU No.

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Agreement Terms

On May 26, 2017, the Company and Janssen Biotech, Inc., (“Janssen”), one of the Janssen Pharmaceutical Companies of Johnson & Johnson, entered into an exclusive license and collaboration agreement (the “Janssen License and Collaboration Agreement”) for the development, manufacture and potential commercialization of PTG-200 worldwide for the treatment of Crohn’s disease (“CD”) and ulcerative colitis (“UC”).

Janssen is a related party to the Company as Johnson & Johnson Innovation - JJDC, Inc., a significant stockholder of the Company, and Janssen are both subsidiaries of Johnson & Johnson.

PTG-200 is the Company’s orally delivered gut-restricted Interleukin 23 receptor (“IL 23R”) antagonist drug candidate currently in development.

The Janssen License and Collaboration Agreement became effective on July 13, 2017.

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The Company was responsible, at its own expense, for the conduct of the Phase 1 clinical trial for PTG-200, and Janssen is responsible for the conduct of the Phase 2 clinical trial for PTG-200 in CD, including filing the U.S.

Investigational New Drug application (“IND”).

Development costs for the Phase 2 clinical trial are shared between the parties on an 80 / 20 basis, with Janssen assuming the larger share.

1 unchanged sentence

The Company initiated a Phase 2 clinical study for PTG-200 in CD with Janssen in the fourth quarter of 2019.

The Company entered into an amendment (the “First Amendment”) to the Janssen License and Collaboration Agreement effective May 7, 2019.

The First Amendment builds upon the Company’s ongoing development collaboration with Janssen for PTG-200 and, upon the effectiveness of the First Amendment, the Company became eligible to receive a $25.0 million payment from Janssen, which was received during the second quarter of 2019.

The First Amendment expanded the scope of the Janssen License and Collaboration Agreement by supporting research efforts towards identifying and developing second-generation IL-23R antagonists (“second-generation compounds”).

As part of the services added in the First Amendment, Janssen will pay certain costs and milestones related to advancing pre-clinical candidates from the second-generation research program through Phase 1 studies, including funding of a certain number of full-time equivalent employees (“FTEs”) at the Company for a set period of time.

The Company entered into an amendment (the “First Amendment”) to the Janssen License and Collaboration Agreement effective May 7, 2019.

The First Amendment builds upon the Company’s ongoing development collaboration with Janssen for PTG-200 and, upon the effectiveness of the First Amendment, the Company became eligible to receive a $ 25.0 million payment from Janssen, which was received during the second quarter of 2019.

The Company will pay 100 % of the costs for the Phase 1 studies for the first second-generation compound, and 50 % of the costs of the Phase 1 studies for the second and third second-generation compounds;

1 unchanged sentence

Development costs for the Phase 2 clinical trials for second-generation compounds are shared between the parties on an 80 / 20 basis, with Janssen assuming the larger share.

The Company’s Phase 1 and Phase 2 development costs are also limited by overall spending caps.

In December 2019, the Company became eligible to receive a $ 5.0 million payment trigged by the successful nomination of a second-generation development compound, which was received during the first quarter of 2020.

The Company will be eligible to receive a $ 7.5 million milestone payment at the completion of a Phase 1 study for the first second-generation compound.

Prior to the effectiveness of the First Amendment, the Company had been eligible to receive a $25.0 million milestone payment upon Janssen’s filing of the IND.

Prior to the effectiveness of the First Amendment, the Company had been eligible to receive a $ 25.0 million milestone payment upon Janssen’s filing of the IND.

This amount had been considered constrained until a time at which the Company would have become eligible to receive the $ 25.0 million payment from Janssen.

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Milestone payments are received after the related milestones are achieved.

Pursuant to the First Amendment, the Company will be eligible to receive clinical development, regulatory and sales milestones, if and as achieved, and/or payments relating to Janssen’s elections to maintain or expand its license rights.

The next anticipated such payment is a $ 50.0 million payment based on Phase 2a clinical trial results, as follows:

Janssen can elect to advance PTG-200 into Phase 2b following receipt of the top line results of the CD Phase 2a clinical trial for PTG-200 by paying a $50.0 million maintenance fee (the “Amended First Opt-in Election”);

● Janssen can elect to advance PTG-200 into Phase 2b following receipt of the top line results of the CD Phase 2a clinical trial for PTG-200 by paying a $ 50.0 million maintenance fee (the “Amended First Opt-in Election”);

● Janssen would make a $ 50.0 million milestone payment following dosing of the third patient in first Phase 2b clinical trial for CD for a second-generation product.

Janssen can also then elect to receive exclusive, world-wide commercial rights for both PTG-200 and second-generation products following the Phase 2b completion date for PTG-200 or a second-generation product by paying a $50.0 million payment (the “Amended Second Opt-in Election”).

Formerly, the first and second opt-in payments were $125.0 million and $200.0 million, respectively.

If Janssen does not make the Amended Second Opt-in Election, with respect to either PTG-200 or a second-generation compound, the Janssen License and Collaboration Agreement would terminate.

Janssen can also then elect to receive exclusive, world-wide commercial rights for both PTG-200 and second-generation products following the Phase 2b completion date for PTG-200 or a second-generation product by paying a $ 50.0 million payment (the “Amended Second Opt-in Election”).

The Company will also be eligible for certain additional milestone payments including a potential payment of either $ 100.0 million upon a Phase 3 CD clinical trial meeting a primary clinical endpoint with respect to PTG-200 or $ 115.0 million upon a Phase 3 CD clinical trial meeting a primary clinical endpoint with respect to a second-generation compound.

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Revenue Recognition

The Company has concluded that the amended Janssen License and Collaboration Agreement continues to contain a single performance obligation including the development license;

The Company concluded that the amended Janssen License and Collaboration Agreement continued to contain a single performance obligation including the development license;

second-generation compound research services;

Phase 1 development services for PTG-200 and potential second-generation compounds;

the Company’s services associated with Phase 2 development for PTG-200 until Phase 2a;

the Company’s services associated with Phase 2 development for a second-generation product until the dosing of the third patient in Phase 2b;

the Company’s services associated with Phase 2 development for PTG-200 until Phase 2a;

the Company’s services associated with Phase 2 development for a second-generation product until the dosing of the third patient in Phase 2b;

and all other such services that the Company may perform at the request of Janssen to support the development of PTG-200, second-generation research services, or the development of a second-generation compound.

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Therefore, the consideration payable to Janssen is accounted for as a reduction in the transaction price.

The Company determined that the transaction price of the Janssen License and Collaboration Agreement was $113.6 million as of March 31, 2020, an increase of $0.7 million from the transaction price of $112.9 million as of December 31, 2019.

The Company concluded that the transaction price of the initial performance obligation under the Janssen License and Collaboration Agreement was $ 113.9 million as of June 30, 2020, an increase of $ 0.3 million from the transaction price of $ 113.6 million as of March 31, 2020.

In order to determine the transaction price, the Company evaluated all payments to be received during the duration of the contract, net of Phase 2 development costs reimbursement expected to be payable to Janssen.

The Company determined that the transaction price includes the $50.0 million upfront payment, the $25.0 million payment received upon the effectiveness of the First Amendment, the $5.0 million payment triggered by the successful nomination of a second-generation compound, $18.3 million of reimbursement from Janssen for services performed for PTG-200 Phase 2 and for second-generation compound research costs and other services, and $15.3 million of estimated variable consideration, which includes a $7.5 million milestone payment subject to the completion of a Phase 1 study for a second-generation compound.

The Company evaluated whether the variable component of the transaction price should be constrained to ensure that a significant reversal of revenue recognized on a cumulative basis as of March 31, 2020 is not probable.

The Company concluded that the variable consideration constraint does not further decrease the estimated transaction price as of March 31, 2020.

The Company determined that the transaction price of the initial performance obligation as of June 30, 2020 includes the $ 50.0 million upfront payment, the $ 25.0 million payment received upon the effectiveness of the First Amendment, the $ 5.0 million payment triggered by the successful nomination of a second-generation compound, $ 18.4 million of reimbursement from Janssen for services performed for PTG-200 Phase 2 and for the initial year of second-generation compound research costs and other services, and $ 15.5 million of estimated variable consideration, which includes a $ 7.5 million milestone payment subject to the completion of a Phase 1 study for a second-generation compound.

The Company concluded that the variable consideration constraint does not further decrease the estimated transaction price as of June 30, 2020.

The additional potential development, regulatory and sales milestone payments after the completion of Phase 2b activities that the Company would be eligible to receive are currently outside the contract term as defined for revenue recognition purposes and as such have been excluded from the transaction price.

Janssen has also opted in for certain additional services to be performed by the Company that are outside the initial performance obligation, revenue is recognized as these services are delivered.

The Company re-evaluates the transaction price, including variable consideration, at the end of each reporting period and as uncertain events are resolved or other changes in circumstances occur.

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Revenue will be recognized based on actual costs incurred as a percentage of total estimated costs as the Company completes its performance obligations.

A cost-based input method of revenue recognition requires management to make estimates of costs to complete the Company’s performance obligations.

The Company believes this is the best measure of progress because other measures do not reflect how the Company transfers its performance obligation to Janssen.

In making such estimates, significant judgment is required to evaluate assumptions related to cost estimates.

The cumulative effect of revisions to estimated costs to complete the Company’s performance obligations will be recorded in the period in which changes are identified and amounts can be reasonably estimated.

A significant change in these assumptions and estimates could have a material impact on the timing and amount of revenue recognized in future periods.

For the three months ended March 31, 2020 and 2019, the Company recognized license and collaboration revenue of $3.6 million and $1.6 million, respectively, which was primarily related to the transaction price for the Janssen License and Collaboration Agreement recognized based on proportional performance.

The following tables present changes in the Company’s contract assets and liabilities during the periods presented (in thousands):

Three Months Ended March 31, 2020

For the three and six months ended June 30, 2020, the Company recognized license and collaboration revenue of $ 5.7 million and $ 9.4 million, respectively, which was primarily related to the transaction price for the Janssen License and Collaboration Agreement recognized based on proportional performance.

In addition, the Company recorded $ 0.5 million in revenue for the three and six months ended June 30, 2020 related to additional services provided by the Company under the Janssen Collaboration Agreement.

For the three months ended June 30, 2019, the Company recorded a $ 9.4 million cumulative catchup adjustment reducing license and collaboration revenue, partially offset by $ 1.2 million of license and collaboration revenue following the contract modification for the First Amendment.

no revenue for additional services was recognized for the three and six months ended June 30, 2019.

For the six months ended June 30, 2019, the Company recorded a $ 9.4 million cumulative catchup adjustment reducing license and collaboration revenue, partially offset $ 1.2 million of license and collaboration revenue following the contract modification for the First Amendment and $ 1.6 million of license and collaboration revenue recognized during the first quarter of 2019 under the original Janssen license and collaboration agreement.

The following tables present changes in the Company’s contract assets and liabilities during the periods presented (in thousands):

Six Months Ended June 30, 2020

Contract assets:

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Payable to collaboration partner - related party

Three Months Ended March 31, 2019

Six Months Ended June 30, 2019

Contract assets:

4 unchanged sentences

Payable to collaboration partner - related party

During the three months ended March 31, 2020 and 2019, the Company recognized revenue of $1.2 million for each period from amounts included in the deferred revenue contract liability balance at the beginning of each period.

During the three and six months ended June 30, 2020, the Company recognized revenue of $ 2.1 million and $ 3.3 million, respectively, from amounts included in the deferred revenue contract liability balance at the beginning of each period.

During the three and six months ended June 30, 2019, the Company recognized revenue of $ 1.6 million for each period from amounts included in the deferred revenue contract liability balance at the beginning of each period.

None of the costs to obtain or fulfill the contract were capitalized.

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The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value as follows:

Level 1 —Inputs are unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date.

Level 2—

Inputs (other than quoted market prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

Level 3 —Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.

Level 1 —Inputs are unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date.

Level 2— Inputs (other than quoted market prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

Level 3 —Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.

Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

In determining fair value, the Company utilizes quoted market prices, broker or dealer quotations, or valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible and considers counterparty credit risk in its assessment of fair value.

The following table presents the fair value of the Company’s financial assets determined using the inputs defined above (in thousands).

March 31, 2020

The following table presents the fair value of the Company’s financial assets determined using the inputs defined above (in thousands).

June 30, 2020

Money market funds

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Total financial assets

The Company’s commercial paper, corporate debt securities and U.S.

Treasury and agency securities are classified as Level 2 as they were valued based upon quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets.

Fair Value of Other Financial Instruments

The Company’s long-term debt is classified as Level 2 and its carrying value approximates fair value as there is no significant change in the credit worthiness or liquidity position of the Company as of March 31, 2020.

Cash Equivalents and Marketable Securities

Cash equivalents and marketable securities consisted of the following (in thousands):

March 31, 2020

June 30, 2020

Gross Unrealized

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Total cash equivalents and marketable securities

All marketable securities held as of March 31, 2020 and December 31, 2019 had contractual maturities of less than one year.

All marketable securities held as of June 30, 2020 and December 31, 2019 had contractual maturities of less than one year.

There were no material realized gains or realized losses on marketable securities for the periods presented.

The Company has not experienced any material credit losses on its investments.

The Company does not intend to sell its securities that are in an unrealized loss position, and it is unlikely that the Company will be required to sell its securities before recovery of their amortized cost basis, which may be maturity.

Factors considered in determining whether a loss is temporary include the length of time and extent to which the fair value has been less than the amortized cost basis and whether the Company intends to sell the security or whether it is more likely than not that the Company would be required to sell the security before recovery of the amortized cost basis.

Accrued Expenses and Other Payables

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Research Collaboration and License Agreement

In October 2013, the Company’s former collaboration partner decided to abandon a collaboration program with the Company and, pursuant to the terms of the agreement between the Company and the former collaboration partner, the Company elected to assume responsibility for the development and commercialization of the product.

Upon the former collaboration partner’s abandonment, it assigned to the Company certain intellectual property that relates to the products arising from the collaboration.

Milestone payments to collaboration partners are recorded as research and development expenses in the period that the expense is incurred.

No research and development expense was recorded under this agreement for the three months ended March 31, 2020 or March 31, 2019.

No research and development expense was recorded under this agreement for the three and six months ended June 30, 2020 and 2019.

Government Programs

Research and Development Tax Incentive

During the three months ended March 31, 2020 and 2019, the Company recognized AUD 0.3 million ($0.2 million) and AUD 0.6 million ($0.4 million), as a reduction of research and development expenses in connection with the research and development cash tax incentive from the ATO.

As of March 31, 2020, the research and development tax incentive receivable was AUD 0.3 million ($0.2 million).

During the three and six months ended June 30, 2020, the Company recognized AUD 0.2 million ($ 0.1 million) and AUD 0.4 million ($ 0.3 million), respectively, as a reduction of research and development expenses in connection with the research and development cash tax incentive from the ATO.

During the three and six months ended June 30, 2019, the Company recognized AUD 2.4 million ($ 1.7 million) and AUD 1.8 million ($ 1.2 million), respectively, of research and development expense in connection with the research and development tax incentive from the ATO because the Company determined that it had exceeded the annual turnover limit to claim such amounts following the receipt of certain payments under the Janssen License and Collaboration Agreement.

As of June 30, 2020, the research and development tax incentive receivable was AUD 0.4 million ($ 0.3 million).

There was no research and development tax incentive receivable as of December 31, 2019.

Small Business Innovation Research (“SBIR”) Grants

The Company has received SBIR grants from the National Institutes of Health (“NIH”) in support of research aimed at its product candidates.

Small Business Innovation Research (“SBIR”) Grants

The Company has received SBIR grants from the National Institutes of Health (“NIH”) in support of research aimed at its product candidates.

The Company recognizes a reduction to research and development expenses when expenses related to the grants have been incurred and the grant funds become contractually due from NIH.

The Company recorded $0.3 million and $0.2 million as a reduction of research and development expenses for the three months ended March 31, 2020 and 2019, respectively.

The Company recorded a receivable for $0.3 million as of March 31, 2020 and December 31, 2019, respectively, to reflect the eligible costs incurred under the grants that are contractually due to the Company.

The Company recorded $ 0.1 million and $ 0.3 million as a reduction of research and development expenses for the three and six months ended June 30, 2020, respectively.

The Company recorded $ 0 and $ 0.1 million as a reduction of research and development expenses for the three and six months ended June 30, 2019, respectively.

The Company recorded a receivable for $ 0.1 million and $ 0.3 million as of June 30, 2020 and December 31, 2019, respectively, to reflect the eligible costs incurred under the grants that are contractually due to the Company.

This receivable is included in prepaid expenses and other current assets on the condensed consolidated balance sheets.

On October 30, 2019, the Company entered into a Credit and Security Agreement, dated as of October 30, 2019 (the “Closing Date”) by and among the Company, MidCap Financial Trust, as a lender, Silicon Valley Bank, as a lender, the other lenders party thereto from time to time and MidCap Financial Trust, as administrative agent and collateral agent (“Agent”) (the “Term Loan Credit Agreement”), which provides for a $50.0 million term loan facility.

The Term Loan Credit Agreement provides for (i) on the Closing Date, $10.0 million aggregate principal amount of term loans, (ii) at the Company’s option, until December 31, 2020, an additional $20.0 million term loan facility subject to the satisfaction of certain conditions, including clinical milestone achievement, and (iii) at the Company’s option, until September 30, 2021, an additional $20.0 million term loan facility subject to the satisfaction of certain conditions, including clinical milestone achievement, (collectively, the “Term Loans”).

The Company intends to use the proceeds of the Term Loans for general corporate purposes

The Term Loan Credit Agreement provides for (i) on the Closing Date, $ 10.0 million aggregate principal amount of term loans, (ii) at the Company’s option, until December 31, 2020, an additional $ 20.0 million term loan facility subject to the satisfaction of certain conditions, including clinical milestone achievement, and (iii) at the Company’s option, until September 30, 2021, an additional $ 20.0 million term loan facility subject to the satisfaction of certain conditions, including clinical milestone achievement, (collectively, the “Term Loans”).

The Company intends to use any proceeds from drawdowns on the Term Loans for general corporate purposes

The Term Loans are subject to an origination fee of 0.25 % for each funded tranche under the Term Loan Credit Agreement and bear interest at an annual rate based on prime rate plus 2.91 %, subject to a prime rate floor of 4.94 %.

The Company will make interest-only payments on the Term Loans for 24 months, followed by 24 months of principal and interest payments.

At the Company’s option, the Company may prepay the outstanding principal balance of the Term Loans in whole or in part, subject to a prepayment premium of 3.0% of any amount prepaid if the prepayment occurs through and including the first anniversary of the Closing Date, 2.0% of the amount prepaid if the prepayment occurs after the first anniversary of the closing date through and including the second anniversary of the closing date, and 1.0% of any amount prepaid after the second anniversary of the closing date and prior to October 1, 2023.

The Company will make interest-only payments on the Term Loans outstanding during the initial 24 months , followed by 24 months of principal and interest payments.

At the Company’s option, the Company may prepay the outstanding principal balance of the Term Loans in whole or in part, subject to a prepayment premium of 3.0 % of any

amount prepaid if the prepayment occurs through and including the first anniversary of the Closing Date, 2.0 % of the amount prepaid if the prepayment occurs after the first anniversary of the closing date through and including the second anniversary of the closing date, and 1.0 % of any amount prepaid after the second anniversary of the closing date and prior to October 1, 2023.

An additional fee of 2.85 % of the amount of Term Loans advanced by the Lenders will be due upon prepayment or repayment of the Term Loans.

The Term Loan Credit Agreement requires the Company to maintain cash and cash equivalents of at least 35 % of the outstanding Term Loans at all times and is secured by a perfected security interest in all of the Company's assets except for intellectual property and certain other customary excluded property pursuant to the terms of the Term Loan Credit Agreement.

The Term Loan Credit Agreement contains other covenants that limit the Company’s ability and the ability of its subsidiaries to perform certain actions, including obligations to not pay dividends and to maintain unrestricted cash balance above certain threshold, non-occurrence of material adverse change, non-occurrence of change of control and other customary affirmative and negative covenants.

The violation of any provision of covenants will result in default for the Company.

The Term Loan Credit Agreement includes a clause which allows lenders to accelerate repayment upon the occurrence of certain events of default.

As of March 31, 2020, the Company was in compliance with the debt covenants, no event of default occurred and the probability of occurrence of event of default was considered remote.

As of March 31, 2020, the Company’s long-term debt balance was as follows (dollars in thousands):

In June 2020, the Company prepaid the outstanding $ 10.0 million balance on the term loan as well as $ 0.6 million for related prepayment and exit fees.

Accordingly, the company accelerated amortization of $ 0.1 million related to capitalized and unamortized debt issuance costs, which is included as part of the $ 0.6 million loss on early repayment of debt.

As of June 30, 2020, the Company was in compliance with the debt covenants, no event of default occurred and the probability of occurrence of event of default was considered remote.

The Company’s long-term debt balance was as follows for the periods presented (dollars in thousands):

Interest Rate

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Long-term debt, net

As of March 31, 2020 and December 31, 2019, the carrying value of debt issuance costs was $208,000 and $222,000, respectively, and was presented as a direct deduction from the carrying amount of long-term debt.

For the three months ended March 31, 2020, $21,000 of debt issuance costs were amortized and recognized as interest expense in the statement of operations.

In addition, $24,000 of accreted final payment fees were recognized as interest expense in the statement of operations and included in the carrying amount of long-term debt for the three months ended March 31, 2020.

The effective interest rate on long-term debt was 9.77% for the three months ended March 31, 2020.

The following table summarizes the Company’s minimum future debt payment obligations including principal and final payment fee as of March 31, 2020 (in thousands):

Year Ending December 31:

2020 (remaining nine months)

Stockholders’

Stockholders’ Equity

In September 2017, the Company filed a registration statement on Form S-3 with the Securities and Exchange Commission (File No.

333-220314) that was declared effective as of October 5, 2017 and permits the offering, issuance, and sale by the Company of up to a maximum aggregate offering price of $200.0 million of its common stock, preferred stock and certain debt securities (the “2017 Form S-3”).

Up to a maximum of $50.0 million of the maximum aggregate offering price of $200.0 million may be issued and sold pursuant to an at-the-market (“ATM”) financing facility under a sales agreement (the “2017 Sales Agreement”).

333-220314) that was declared effective as of October 5, 2017 and permits the offering, issuance, and sale by the Company of up to a maximum aggregate offering price of $ 200.0 million of its common stock, preferred stock and certain debt securities (the “2017 Form S-3”).

Up to a maximum of $ 50.0 million of the maximum aggregate offering price of $ 200.0 million may be issued and sold pursuant to an ATM financing facility under a sales agreement (the “2017 Sales Agreement”).

The 2017 Sales Agreement was terminated in 2019.

No shares of the Company’s common stock were sold under the 2017 Sales Agreement during the three months ended March 31, 2019.

As of March 31, 2020, $72.0 million of common stock remained available for sale under the 2017 Form S-3.

In August 2018, the Company entered into a Securities Purchase Agreement with certain accredited investors (each, an “Investor”

and, collectively, the “Investors”), pursuant to which the Company sold an aggregate of 2,750,000 shares of its common stock at a price of $8.00 per share, for aggregate net proceeds of $21.7 million, after deducting offering expenses payable by the Company.

In a concurrent private placement, the Company issued the Investors warrants to purchase an aggregate of 2,750,000 shares of its common stock (each, a “Warrant”

and, collectively, the “Warrants”).

The Company sold 921,684 shares of its common stock pursuant to the 2017 Sales Agreement during the three and six months ended June 30, 2019 for net proceeds of $ 10.5 million, after deducting issuance costs.

As of June 30, 2020, $ 72.0 million of common stock remained available for sale under the 2017 Form S-3, which expires in October 2020.

In August 2018, the Company entered into a Securities Purchase Agreement with certain accredited investors (each, an “Investor” and, collectively, the “Investors”), pursuant to which the Company sold an aggregate of 2,750,000 shares of its common stock at a price of $ 8.00 per share, for aggregate net proceeds of $ 21.7 million, after deducting offering expenses payable by the Company.

In a concurrent private placement, the Company issued the Investors warrants to purchase an aggregate of 2,750,000 shares of its common stock (each, a “Warrant” and, collectively, the “Warrants”).

Each Warrant is exercisable from August 8, 2018 through August 8, 2023.

Warrants to purchase 1,375,000 shares of the Company’s common stock have an exercise price of $10.00 per share and Warrants to purchase 1,375,000 shares of the Company’s common stock have an exercise price of $15.00 per share.

The exercise price and number of shares of common stock issuable upon the exercise of the Warrants (the “Warrant Shares”) are subject to adjustment in the event of any stock dividends and splits, reverse stock split, recapitalization, reorganization or similar transaction, as described in the Warrants.

Under certain circumstances, the Warrants may be exercisable on a “cashless”

In connection with the issuance and sale of the common stock and Warrants, the Company granted the Investors

certain registration rights with respect to the Warrants and the Warrant Shares.

The common stock and warrants are classified as equity in accordance with Accounting Standards Codification Topic 480 , Distinguishing Liabilities from Equity (“ASC 480”) , and the net proceeds from the transaction were recorded as a credit to additional paid-in capital.

As of March 31, 2020, none of the Warrants have been exercised.

In December 2018, the Company entered into an exchange agreement (the “Exchange Agreement”) with an Investor and its affiliates (the “Exchanging Stockholders”), pursuant to which the Company exchanged an aggregate of 1,000,000 shares of the Company’s common stock, par value $0.00001 per share, owned by the Exchanging Stockholders for pre-funded warrants (the “Exchange Warrants”) to purchase an aggregate of 1,000,000 shares of common stock (subject to adjustment in the event of any stock dividends and splits, reverse stock split, recapitalization, reorganization or similar transaction, as described in the Exchange Warrants), with an exercise price of $0.00001 per share.

Warrants to purchase 1,375,000 shares of the Company’s common stock have an exercise price of $ 10.00 per share and Warrants to purchase 1,375,000 shares of the Company’s common stock have an exercise price of $ 15.00 per share.

Under certain circumstances, the Warrants may be exercisable on a “cashless”

In connection with the issuance and sale of the common stock and Warrants, the Company granted the Investors certain registration rights with respect to the Warrants and the Warrant Shares.

As of June 30, 2020, none of the Warrants have been exercised.

In December 2018, the Company entered into an exchange agreement (the “Exchange Agreement”) with an Investor and its affiliates (the “Exchanging Stockholders”), pursuant to which the Company exchanged an aggregate of 1,000,000 shares of the Company’s common stock, par value $ 0.00001 per share, owned by the Exchanging Stockholders for pre-funded warrants (the “Exchange Warrants”) to purchase an aggregate of 1,000,000 shares of common stock (subject to adjustment in the event of any stock dividends and splits, reverse stock split, recapitalization, reorganization or similar transaction, as described in the Exchange Warrants), with an exercise price of $ 0.00001 per share.

The Exchange Warrants will expire ten years from the date of issuance.

The Exchange Warrants are exercisable at any time prior to expiration except that the Exchange Warrants cannot be exercised by the Exchanging Stockholders if, after giving effect thereto, the Exchanging Stockholders would beneficially own more than 9.99% of the Company’s common stock, subject to certain exceptions.

The Exchange Warrants are exercisable at any time prior to expiration except that the Exchange Warrants cannot be exercised by the Exchanging Stockholders if, after giving effect thereto, the Exchanging Stockholders would beneficially own more than 9.99 % of the Company’s common stock, subject to certain exceptions.

In accordance with Accounting Standards Codification Topic 505, Equity , the Company recorded the retirement of the common stock exchanged as a reduction of common stock shares outstanding and a corresponding debit to additional paid-in-capital at the fair value of the Exchange Warrants on the issuance date.

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During the second quarter of 2019, Exchange Warrants to purchase 600,000 shares were net exercised, resulting in the issuance of 599,997 shares of common stock.

As of March 31, 2020, 400,000 of the Exchange Warrants remain unexercised

As of June 30, 2020, 400,000 of the Exchange Warrants remain unexercised

In October 2019, the Company filed a registration statement on Form S-3 (File No.

333-234414) that was declared effective as of November 22, 2019 and permits the offering, issuance, and sale by the Company of up to a maximum aggregate offering price of $250.0 million of its common stock, preferred stock, debt securities and warrants (the “2019 Form S-3”).

Up to a maximum of $75.0 million of the maximum aggregate offering price of $250.0 million may be issued and sold pursuant to an ATM financing facility under a sales agreement entered into by the Company on November 27, 2019 (the “2019 Sales Agreement”).

As of March 31, 2020, no offering, issuance or sale of common stock, preferred stock, debt securities or warrants was made under the 2019 Form S-3 or the 2019 Sales Agreement.

333-234414) that was declared effective as of November 22, 2019 and permits the offering, issuance, and sale by the Company of up to a maximum aggregate offering price of $ 250.0 million of its common stock, preferred stock, debt securities and warrants (the “2019 Form S-3”).

Up to a maximum of $ 75.0 million of the maximum aggregate offering price of $ 250.0 million may be issued and sold pursuant to an ATM financing facility under a sales agreement entered into by the Company on November 27, 2019 (the “2019 Sales Agreement”).

In May 2020, the Company completed an underwritten public offering of 7,000,000 shares of common stock at a public offering price of $ 14.00 per share, and issued an additional 1,050,000 shares of its common stock at a price of $ 14.00 per share following the underwriters’ exercise of their option to purchase additional shares.

Net proceeds, after deducting underwriting commissions and offering costs paid by the Company, were $ 105.3 million.

The Company sold 1,232,793 shares of its common stock pursuant to the 2019 Sales Agreement during the three and six months ended June 30, 2020 for net proceeds of $ 16.6 million, after deducting issuance costs.

As of June 30, 2020, a total of $ 120.0 million of common stock remained available for sale under the 2019 Form S-3, $ 57.7 million of which remained available for sale under the ATM financing facility.

Equity Incentive Plan

In July 2016, the Company’s board of directors and stockholders approved the Company’s 2016 Equity Incentive Plan (the “2016 Plan”) to replace the 2007 Stock Option Plan.

The 2016 Plan is administered by the board of directors or a committee appointed by the board of directors, which determines the types of awards to be granted, including the number of shares subject to the awards, the exercise price and the vesting schedule.

Awards granted under the 2016 Plan expire no later than ten years from the date of grant.

As of March 31, 2020, 632,901 shares were available for issuance under the 2016 Plan.

As of June 30, 2020, 655,250 shares were available for issuance under the 2016 Plan.

Inducement Plan

In May 2018, the Company’s board of directors approved the 2018 Inducement Plan, a non-stockholder approved stock plan, under which it reserved and authorized up to 750,000 shares of the Company’s common stock in order to award options and restricted stock unit awards to persons that were not previously employees or directors of the Company, or following a bona fide period of non-employment, as an inducement material to such persons entering into employment with the Company, within the meaning of Rule 5635(c)(4) of the NASDAQ Listing Rules.

order to award options and restricted stock unit awards to persons that were not previously employees or directors of the Company, or following a bona fide period of non-employment, as an inducement material to such persons entering into employment with the Company, within the meaning of Rule 5635(c)(4) of the NASDAQ Listing Rules.

The 2018 Inducement Plan is administered by the board of directors or the Compensation Committee of the board, which determines the types of awards to be granted, including the number of shares subject to the awards, the exercise price and the vesting schedule.

Awards granted under the 2018 Inducement Plan expire no later than ten years from the date of grant.

On February 18, 2020, the Compensation Committee of the board approved the amendment and restatement of

the 2018 Inducement Plan (the “Amended and Restated Inducement Plan”) to provide for the reservation of an additional 500,000 shares of the Company’s common stock for issuance under the Amended and Restated Inducement Plan.

As of March 31, 2020, 780,000 shares were available for issuance under the Amended and Restated Inducement Plan.

On February 18, 2020, the Compensation Committee of the board approved the amendment and restatement of the 2018 Inducement Plan (the “Amended and Restated Inducement Plan”) to provide for the reservation of an additional 500,000 shares of the Company’s common stock for issuance under the Amended and Restated Inducement Plan.

As of June 30, 2020, 730,000 shares were available for issuance under the Amended and Restated Inducement Plan.

Stock Options

Stock option activity under the Company’s equity incentive and inducement plans is set forth below:

(in millions)

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Options forfeited

Balances at March 31, 2020

Options exercisable –

March 31, 2020

Options vested and expected to vest –

March 31, 2020

The aggregate intrinsic values were calculated as the difference between the exercise price of the options and the closing price of the Company’s common stock on March 31, 2020.

The calculation excludes options with an exercise price higher than the closing price of the Company’s common stock on March 31, 2020.

During the three months ended March 31, 2020, the estimated weighted-average grant-date fair value of common stock underlying options granted to employees was $5.01 per share.

Balances at June 30, 2020

Options exercisable – June 30, 2020

Options vested and expected to vest – June 30, 2020

(1) The aggregate intrinsic values were calculated as the difference between the exercise price of the options and the closing price of the Company’s common stock on June 30, 2020.

The calculation excludes options with an exercise price higher than the closing price of the Company’s common stock on June 30, 2020.

During the six months ended June 30, 2020, the estimated weighted-average grant-date fair value of common stock underlying options granted to employees was $ 5.46 per share.

Stock Options Valuation Assumptions

The fair value of employee stock option awards was estimated at the date of grant using a Black-Scholes option-pricing model with the following assumptions:

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Expected term (in years)

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62.0 % - 62.7 %

72.1 % - 74.5 %

62.0 % - 62.7 %

Risk-free interest rate

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1.88 % - 2.20 %

0.39 % - 1.44 %

1.88 % - 2.58 %

Dividend yield

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Each of these inputs is subjective, and expected volatility generally requires significant judgment to determine.

Expected Term —The Company’s expected term represents the period that the Company’s options granted are expected to be outstanding and is determined using the simplified method (based on the mid-point between the vesting date and the end of the contractual term).

The Company has limited historical information to develop reasonable

expectations about future exercise patterns and post-vesting employment termination behavior for its stock option grants.

Expected Volatility —

Prior to January 1, 2020, the Company’s expected volatility was estimated based on the average volatility for comparable publicly traded biopharmaceutical companies over a period equal to the expected term of the stock option grants.

Beginning January 1, 2020, the Company’s expected volatility was estimated based upon a mix of 75% of the average volatility for comparable publicly traded biopharmaceutical companies over a period equal to the expected term of the stock option grants and 25% of the volatility of the Company’s stock price since its initial public offering in August 2016.

Risk-Free Interest Rate —The risk-free interest rate is based on the U.S.

The Company has limited historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior for its stock option grants.

Expected Volatility — Prior to January 1, 2020, the Company’s expected volatility was estimated based on the average volatility for comparable publicly traded biopharmaceutical companies over a period equal to the expected term of the stock option grants.

Beginning January 1, 2020, the Company’s expected volatility was estimated based upon a mix of 75 % of the average volatility for comparable publicly traded biopharmaceutical companies over a period equal to the expected term of the stock option grants and 25 % of the volatility of the Company’s stock price since its initial public offering in August 2016.

Risk-Free Interest Rate —The risk-free interest rate is based on the U.S.

Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of option.

Expected Dividend —The Company has never paid dividends on its common stock and has no plans to pay dividends on its common stock.

Therefore, the Company used an expected dividend yield of zero.

Restricted Stock Units

Restricted stock unit activity under the Company’s equity incentive plans is set forth below:

Unvested at December 31, 2019

Unvested at March 31, 2020

Unvested at June 30, 2020

Employee Stock Purchase Plan

The 2016 Employee Stock Purchase Plan (“2016 ESPP”) allows eligible employees to purchase shares of the Company’s common stock at a discount through payroll deductions of up to 15% of their eligible compensation.

At the end of each offering period, eligible employees are able to purchase shares at 85% of the lower of the fair market value of the Company’s common stock at the beginning of the offering period or at the end of each applicable purchase period.

During the three months ended March 31, 2020, a total of 56,742 shares of common stock were issued under the 2016 ESPP, and 793,427 shares remain available for issuance.

At the end of each offering period, eligible employees are able to purchase shares at 85 % of the lower of the fair market value of the Company’s common stock at the beginning of the offering period or at the end of each applicable purchase period.

During the six months ended June 30, 2020, a total of 56,742 shares of common stock were issued under the 2016 ESPP, and 793,427 shares remain available for issuance.

Stock-Based Compensation

Total stock-based compensation expense was as follows (in thousands):

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended

Research and development

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Total stock-based compensation expense

As of March 31, 2020, total unrecognized stock-based compensation expense was approximately $16.2 million, which the Company expects to recognize over a weighted-average period of approximately 3.1 years.

The Company recorded income tax expense of $0.2 million for both the three months ended March 31, 2020 and 2019, representing an effective income tax rate of (0.9%) and (1.3%), respectively.

Income tax expense for the

three months ended March 31, 2020 and 2019 was primarily related to foreign income tax.

The Company’s effective income tax rate for the three months ended March 31, 2020 and 2019 differs from the Company’s federal statutory rate of 21%, primarily because its U.S.

As of June 30, 2020, total unrecognized stock-based compensation expense was approximately $ 14.7 million, which the Company expects to recognize over a weighted-average period of approximately 2.9 years.

The Company recorded income tax expense of $ 1.1 million and $ 1.3 million for the three and six months ending June 30, 2020, respectively, representing an effective income tax rate of 6.2 % and 3.4 %, respectively.

The Company recorded income tax benefit of $ 1.6 million and $ 1.4 million for the three and six months ending June 30, 2019, respectively, representing an effective income tax rate of ( 5.3 )% and ( 3.2 )%, respectively.

Income tax expense for all periods presented was primarily related to foreign income tax.

During the second quarter of 2020, the Company’s Australia subsidiary sold beneficial rights to discovery intellectual property to its U.S.

entity, and the U.S.

entity reimbursed the Australia subsidiary for certain direct development costs.

Upon completion of the sale, the Company analyzed tax planning strategies and future income and concluded that a valuation allowance is necessary for its Australia subsidiary.

Income tax expense for the three and six months ended June 30, 2020 reflects this sale of intellectual property rights, cost reimbursements and related adjustments to the deferred tax asset, establishing a valuation allowance and certain uncertain tax position liabilities.

Income tax benefit for the three and six months ended June 30, 2019 included a discrete tax benefit of approximately $ 1.1 million for the 2017 Australia refundable research and development tax offset.

The Company’s effective income tax rate for all periods presented differs from the Company’s federal statutory rate of 21 %, primarily because its U.S.

loss cannot be benefited due to the full valuation allowance position and reduced by foreign taxes.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was enacted and signed into law in response to the COVID-19 pandemic.

GAAP requires recognition of the tax effects of new legislation during the reporting period that includes the enactment date.

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The CARES Act also provides other non-tax benefits to assist those impacted by the pandemic.

The Company evaluated the impact of the CARES Act and determined that there is no material impact to the income tax provision for the three months ended March 31, 2020.

The Company evaluated the impact of the CARES Act and determined that there is no material impact to the income tax provision for the three and six months ended June 30, 2020.

On June 29, 2020, California Assembly Bill 85 was signed into law.

The legislation suspends the California net operating loss deductions for 2020, 2021, and 2022 for certain taxpayers and imposes a limitation of certain California tax credits for 2020, 2021, and 2022.

The legislation disallows the use of California net operating loss deductions if the taxpayer recognizes business income and its adjusted gross income is greater than $ 1,000,000 .

The carryover periods for net operating loss deductions disallowed by this provision will be extended.

Additionally, any business credit will only offset a maximum of $ 5,000,000 of California tax.

Given the Company’s expected loss position in the current year, the new legislation will not impact the current year provision.

The Company will continue to monitor possible California net operating loss and credit limitations in future periods.

Net Loss per Share

As the Company had net losses for the three months ended March 31, 2020 and March 31, 2019, respectively, all potential common shares were determined to be anti-dilutive.

As the Company had net losses for the three and six months ended June 30, 2020 and 2019, respectively, all potential common shares were determined to be anti-dilutive.

The following table sets forth the computation of basic and diluted net loss per share (in thousands, except share and per share data):

Three Months Ended March 31,

Three Months Ended

Six Months Ended

Weighted-average shares used to compute net loss per common share, basic and diluted

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The following outstanding shares of potentially dilutive securities have been excluded from diluted net loss per share computations for the periods presented because their inclusion would be anti-dilutive:

Three Months Ended March 31,

Options to purchase common stock

1 unchanged sentence

Restricted stock units

Subsequent Event

On May 7, 2020, the Company approved a limited reduction in force plan affecting approximately 12% of the Company’s employee base and informed the affected employees.

The Company expects the reduction in force plan to be substantially completed by the end of the second quarter of 2020.

Total cash expenditures for the reduction in force plan are estimated at $0.3 million, substantially all of which are related to employee severance and benefits costs.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our Unaudited Condensed Consolidated Financial Statements and related notes included in Part I, Item 1 of this quarterly report (this “Quarterly Report”) on Form 10‑Q and with our Audited Consolidated Financial Statements and related notes thereto for the year ended December 31, 2019, included in our Annual Report on Form 10‑K filed with the Securities and Exchange Commission (“SEC”) on March 10, 2020.

Forward-Looking Statements

This Quarterly Report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements.

In some cases, you can identify forward-looking statements by terms such as “anticipates,”

“believes,”

“could,”

“estimates,”

“expects,”

“intends,”

“may,”

“plans,”

“potential,”

“predicts,”

“projects,”

“should,”

“will,”

“would,”

and similar expressions intended to identify forward-looking statements.

Forward-looking statements reflect our current views with respect to future events, are based on assumptions, and are subject to risks, uncertainties and other important factors.

In particular, statements, whether expressed or implied, concerning, among other things, the potential for our programs, the timing of our clinical trials, the potential for eventual regulatory approval and commercialization of our product candidates and our potential receipt of milestone payments and royalties under our collaboration agreements, future operating results or the ability to generate sales, income or cash flow, and the impact of the recent and evolving COVID-19 pandemic are forward-looking statements.

They involve risks, uncertainties and assumptions that are beyond our ability to control or predict, including those discussed in Part II, Item 1A, of this Quarterly Report.

While we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information.

Given these risks, uncertainties and other important factors, you should not place undue reliance on these forward-looking statements.

Also, forward-looking statements represent our estimates and assumptions only as of the date of this Quarterly Report.

Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.

“Protagonist,”

the Protagonist logo and other trademarks, service marks and trade names of Protagonist are registered and unregistered marks of Protagonist Therapeutics, Inc.

in the United States and other jurisdictions.

We are a clinical-stage biopharmaceutical company that utilizes a proprietary technology platform to discover and develop novel peptide-based drugs to address significant unmet medical needs and transform existing treatment paradigms for patients.

We have three assets in various stages of clinical development derived from this platform.

Our Product Pipeline

Our most advanced clinical asset, PTG-300, is an injectable hepcidin mimetic in development for the potential treatment of erythrocytosis, iron overload and other blood disorders.

Hepcidin is a key hormone in regulating iron equilibrium and is critical to the proper development of red blood cells.

PTG-300 mimics the effect of the natural hormone hepcidin, but with greater potency, solubility and stability.

We initiated a Phase 2 study in polycythemia vera (“PV”) in the third quarter of 2019 and a Phase 2 study in hereditary hemochromatosis (“HH”) in January 2020.

Preliminary and early results from our initial Phase 2 PV efficacy data from a small number of patients demonstrates the ability of PTG-300 to eliminate the need for phlebotomy by controlling hematocrit levels below 45% on an individual patient basis.

PTG-300 has a unique mechanism of action in the potential treatment of PV, which allows it to decrease and maintain hematocrit levels within the range of recommended clinical guidelines without causing the iron deficiency that may occur with frequent phlebotomy.

We have announced the selection of PV as our first indication for a potential pivotal study to begin in 2021.

We are discontinuing development of PTG-300 for beta-thalassemia and myelodysplastic syndromes and will redirect the majority of our PTG-300 efforts to the PV indication, while also continuing our exploration of PTG-300 in HH.

Our clinical assets PTG-200 and PN-943 are orally delivered drugs currently in development for inflammatory bowel disease (“IBD”), a gastrointestinal (“GI”) disease consisting primarily of ulcerative colitis (“UC”) and Crohn’s disease (“CD”), that block biological pathways currently targeted by marketed injectable antibody drugs.

Our orally stable peptide approach offers targeted delivery to the GI tissue compartment.

We believe that, compared to antibody drugs, these product candidates have the potential to provide improved safety due to minimal exposure in the blood, increased convenience and compliance due to oral delivery, and the opportunity for the earlier introduction of targeted oral therapy.

As a result, if approved, they may transform the existing treatment paradigm for IBD.

PTG-200 (also referenced as JNJ-67864238) is an orally delivered gut-restricted Interleukin-23 receptor (“IL-23R”) antagonist for the treatment of IBD.

In May 2017, we entered into a worldwide license and collaboration agreement with Janssen Biotech, Inc.

(“Janssen”), a Johnson & Johnson company, to co-develop and co-detail PTG-200 and certain related compounds for all indications, including IBD.

The agreement with Janssen was amended in May 2019 to expand the collaboration by supporting efforts towards second-generation IL-23R antagonists, triggering a $25.0 million milestone payment to us.

In January 2020, as part of the expanded research collaboration, we announced the identification and nomination of an orally delivered, gut-restricted IL-23R antagonist peptide as a second-generation

development candidate, triggering a $5.0 million milestone payment to us.

See Note 3 to the condensed consolidated financial statements included elsewhere in this report for additional information.

In collaboration with Janssen, we initiated a Phase 2 clinical study for PTG-200 in CD in the fourth quarter of 2019.

Because of the COVID-19 pandemic, we have suspended guidance on a timeline for study completion.

PN-943 is an orally delivered, gut-restricted, alpha-4-beta-7 (“α4β7”) specific integrin antagonist.

We developed PN-943 as a potentially more potent orally delivered, gut-restricted α4β7 backup compound to PTG-100, our first-generation orally delivered gut-restricted α4β7 inhibitor that was being developed for treatment of IBD.

In 2019, we completed a Phase 1 single ascending dose (“SAD”) and multiple ascending dose (“MAD”) clinical study of PN-943 in healthy volunteers to evaluate safety, pharmacokinetics and pharmacodynamics.

The pharmacodynamic results indicated that the administration of PN-943 was well tolerated with results of target engagement that were supportive of the higher potency of PN-943 as compared to PTG-100.

We submitted a U.S.

IND for PN-943 in December 2019, which took effect in January 2020, and anticipate initiating a Phase 2 proof of concept (“POC”) study in UC.

In light of the COVID-19 pandemic, we are continuing to review all aspects of the planned Phase 2 study and are suspending guidance on a timeline for study initiation.

We are maintaining readiness to initiate the study as soon as conditions allow for safe accrual of subjects for the study.

Our clinical assets are all derived from our proprietary discovery platform.

Our platform enables us to engineer novel, structurally constrained peptides that retain key advantages of both orally delivered small molecules and injectable antibody drugs, while overcoming many of their limitations as therapeutic agents.

Importantly, constrained peptides can be designed to alleviate the fundamental instability inherent in traditional peptides to allow different delivery forms, such as oral, subcutaneous, intravenous, and rectal.

We continue to use our peptide technology platform to discover product candidates against targets in disease areas with significant unmet medical needs.

Impact of COVID-19 on Our Business

We are subject to risks and uncertainties as a result of the COVID-19 pandemic.

The extent of the impact of the COVID-19 pandemic on our activities is highly uncertain and difficult to predict, as the response to the pandemic is in its early stages and information is rapidly evolving.

Capital markets and economies worldwide have also been negatively impacted by the COVID-19 pandemic, and it is possible that the pandemic could cause a local and/or global economic recession.

Such economic disruption could have a material adverse effect on our business.

Policymakers around the globe have responded with fiscal policy actions to support the healthcare industry and economy as a whole.

The magnitude and overall effectiveness of these actions remains uncertain.

The severity of the impact of the COVID-19 pandemic on our activities will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic and the extent and severity of the impact on our existing and planned clinical trials and collaboration activities, all of which are uncertain and cannot be predicted.

Our future results of operations and liquidity could be adversely impacted by delays in existing and planned clinical trials and collaboration activities, difficulty in recruiting patients for these clinical trials, supply chain disruptions, the impact on employees and the impact of any initiatives or programs that we may undertake to address financial and operational challenges.

As of the date of issuance of this Quarterly Report on Form 10-Q, the extent to which the COVID-19 pandemic may materially impact our future financial condition, liquidity or results of operations is uncertain.

We have incurred net losses in each year since inception and we do not anticipate achieving sustained profitability in the foreseeable future.

Our net loss was $20.1 million and $14.1 million for the three months ended March 31, 2020 and March 31, 2019, respectively.

As of March 31, 2020, we had an accumulated deficit of $237.7 million.

Substantially all of our net losses have resulted from costs incurred in connection with our research and development programs and from general and administrative costs associated with our operations.

We expect to continue to incur significant research, development and other expenses related to our ongoing operations and product development, including clinical development activities under our worldwide license and collaboration agreement with Janssen, and, as a result, we expect to continue to incur losses in the future as we continue our development of, and seek regulatory approval for, our product candidates.

Janssen License and Collaboration Agreement

On May 26, 2017, we and Janssen, one of the Janssen Pharmaceutical Companies of Johnson & Johnson, entered into an exclusive license and collaboration agreement for the clinical development, manufacture and potential commercialization of PTG-200 worldwide for the treatment of CD and UC (the “Janssen License and Collaboration Agreement”), which was subsequently amended effective May 7, 2019 (the “First Amendment”).

Janssen is a related party to us as Johnson & Johnson Innovation - JJDC, Inc., a significant stockholder of ours, and Janssen are both subsidiaries of Johnson & Johnson.

During the third quarter of 2017, we received a non-refundable, upfront cash payment of $50.0 million from Janssen.

During the second quarter of 2019, we received a non-refundable cash payment of $25.0 million upon execution of the First Amendment.

During the fourth quarter of 2019, we became eligible to receive a cash payment of $5.0 million upon the successful nomination of a second-generation development candidate, which we received during the first quarter of 2020.

See Note 3 to the condensed consolidated financial statements included elsewhere in this report for additional information.

Critical Accounting Polices and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles.

The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods.

Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.

Actual results may differ from these estimates under different assumptions or conditions.

In making estimates and judgments, management employs critical accounting policies.

Use of Estimates

Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets.

We are not aware of any specific event or circumstance that would require an update to our estimates or judgments or a revision of the carrying value of our assets or liabilities as the date of issuance of this Quarterly Report on Form 10-Q.

These estimates may change, as new events occur and additional information is obtained.

Actual results could differ materially from these estimates under different assumptions or conditions.

Stock-Based Compensation

We recognize compensation costs related to stock options accounted for under Accounting Standards Codification Topic 718 –

Stock Compensation”

based on the estimated fair value of the awards on the date of grant.

We estimate the fair value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model.

The estimated fair value of the stock-based awards is generally recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the respective awards.

The Black-Scholes option-pricing model requires the use of subjective assumptions which determine the fair value of stock-based awards.

Expected volatility generally requires significant judgement to determine.

Prior to January 1, 2020, our expected volatility was estimated based on the average volatility for comparable publicly traded biopharmaceutical companies over a period equal to the expected term of the stock option grants.

Beginning January 1, 2020, our expected volatility was estimated based upon a mix of 75% of the average volatility for comparable publicly traded biopharmaceutical companies over a period equal to the expected term of the stock option grants and 25% of the volatility of our own stock price since our initial public offering in August 2016.

The comparable companies were chosen based on their similar size, stage in the life cycle, or area of specialty.

We will continue to apply this process until a longer period of historical information regarding the volatility of our own stock price becomes available.

There have been no other material changes in our critical accounting policies during the three months ended March 31, 2020, as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates”

in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on March 10, 2020.

Components of Our Results of Operations

License and Collaboration Revenue

Our license and collaboration revenue is derived from payments we receive under the Janssen License and Collaboration Agreement.

See Note 3 to the condensed consolidated financial statements included elsewhere in this report for additional information.

Research and Development Expenses

Research and development expenses represent costs incurred to conduct research, such as the discovery and development of our product candidates.

We recognize all research and development costs as they are incurred, unless there is an alternative future use in other research and development projects or otherwise.

Non-refundable advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when payment has been made.

In instances where we enter into agreements with third parties to provide research and development services to us, costs are expensed as services are performed.

Amounts due under such arrangements may be either fixed fee or fee for service and may include upfront payments, monthly payments, and payments upon the completion of milestones or the receipt of deliverables.

Research and development expenses consist primarily of the following:

expenses incurred under agreements with clinical study sites that conduct research and development activities on our behalf;

employee-related expenses, which include salaries, benefits and stock-based compensation;

laboratory vendor expenses related to the preparation and conduct of pre-clinical, non-clinical, and clinical studies;

costs related to production of clinical supplies and non-clinical materials, including fees paid to contract manufacturers;

license fees and milestone payments under license and collaboration agreements;

facilities and other allocated expenses, which include expenses for rent and maintenance of facilities, information technology, depreciation and amortization expense and other supplies.

We recognize the funds from grants under government programs as a reduction of research and development expenses when the related research costs are incurred.

In addition, we recognize the funds related to our Australian research and development tax incentive that are not subject to refund provisions as a reduction of research and development expenses.

The research and development tax incentives are recognized when there is reasonable assurance that the incentives will be received, the relevant expenditure has been incurred and the amount of the consideration can be reliably measured.

We evaluate our eligibility under the tax incentive program as of each balance sheet date and make accruals and related adjustments based on the most current and relevant data available.

We may alternatively be eligible for a taxable credit in the form of a non-cash tax incentive.

We allocate direct costs and indirect costs incurred to product candidates when they enter clinical development.

For product candidates in clinical development, direct costs consist primarily of clinical, pre-clinical, and drug discovery costs, costs of supplying drug substance and drug product for use in clinical and pre-clinical studies, including clinical manufacturing costs, contract research organization fees, and other contracted services pertaining to specific clinical and pre-clinical studies.

Indirect costs allocated to our product candidates on a program specific basis include research and development employee salaries, benefits, and stock-based compensation, and indirect overhead and other administrative support costs.

Program-specific costs are unallocated when the clinical expenses are incurred for our early stage research and drug discovery projects, our internal resources, employees and infrastructure are not tied to any one research or drug discovery project and are typically deployed across multiple projects.

As such, we do not provide financial information regarding the costs incurred for early stage pre-clinical and drug discovery programs on a program-specific basis prior to the clinical development stage.

The following table summarizes our research and development expenses incurred during the periods indicated:

Three Months Ended March 31,

Clinical and development expense —

Pre-clinical and drug discovery research expense

Grants and incentives reimbursement of expenses, net

Total research and development expenses

We expect our clinical development expenses will increase as we progress our product candidates, including development activities under the Janssen License and Collaboration Agreement, advance our discovery research projects into the pre-clinical stage and continue our early stage research.

The process of conducting research, identifying potential product candidates and conducting pre-clinical and clinical trials necessary to obtain regulatory approval is costly and time intensive.

We may never succeed in achieving marketing approval for our product candidates.

The probability of success of our product candidates may be affected by numerous factors, including pre-clinical data, clinical data, competition, manufacturing capability, market conditions and commercial viability.

As a result, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will generate revenue from the commercialization and sale of any of our product candidates.

Our research and development programs are subject to change from time to time as we evaluate our priorities and available resources.

General and Administrative Expenses

General and administrative expenses consist of personnel costs, allocated facilities costs and other expenses for outside professional services, including legal, human resources, audit and accounting services.

Personnel costs consist of salaries, benefits and stock-based compensation.

Allocated expenses consist of expenses for rent and maintenance of facilities, information technology, depreciation and amortization expense and other supplies.

We expect to continue to incur expenses to support our continued operations as a public company, including expenses related to existing and future compliance with rules and regulations of the SEC and those of the national securities exchange on which our securities are traded, insurance expenses, investor relations, professional services and general overhead and administrative costs.

Interest Income

Interest income consists of interest earned on our cash, cash equivalents, and marketable securities, which is comprised of contractual interest, premium amortization and discount accretion.

Interest Expense

Interest expense consists of interest recognized on our long-term debt, which is comprised of contractual interest, amortization of origination fees and other issuance costs, and accretion of final payment fees.

Other Income (Expense), Net

Other expense, net consists primarily of amounts related to foreign exchange gains and losses and related items.

Results of Operations

Comparison of the Three Months Ended March 31, 2020 and 2019

Three Months Ended

(Dollars in thousands)

License and collaboration revenue - related party

Operating expenses:

Research and development (1)

General and administrative (2)

Total operating expenses

Loss from operations

Interest income

Interest expense

Other expense, net

Loss before income tax expense

Income tax expense

Includes $1.0 million and $1.1 million of non-cash stock-based compensation expense for the three months ended March 31, 2020 and 2019, respectively.

Includes $1.0 million and $0.9 million of non-cash stock-based compensation expense for the three months ended March 31, 2020 and 2019, respectively.

License and Collaboration Revenue

License and collaboration revenue increased $2.1 million, or 134%, from $1.5 million for the three months ended March 31, 2019 to $3.6 million for the three months ended March 31, 2020.

The increase in license and collaboration revenue was primarily due to an increase in services provided during the first quarter of 2020 following the contract modification for the First Amendment to the Janssen License and Collaboration Agreement during the second quarter of 2019.

The contract modification resulted in an increase in the transaction price and additional deliverables under the performance obligation.

We determined that the transaction price of the Janssen License and Collaboration Agreement was $113.6 million as of March 31, 2020, an increase of $0.7 million from the transaction price of $112.9 million as of December 31, 2019.

In order to determine the transaction price, we evaluated all payments expected to be received during the duration of the contract, net of Phase 2 development costs reimbursement expected to be payable to Janssen.

We determined that the transaction price includes the $50.0 million upfront payment, the $25.0 million payment received upon the effectiveness of the First Amendment, the $5.0 million payment triggered by the successful nomination of a second-generation compound, $18.3 million of reimbursement from Janssen for services performed under the agreement, and $15.3 million of estimated variable consideration, which includes a $7.5 million milestone payment

subject to the completion of a Phase 1 study for a second-generation compound.

The increase in transaction price from December 31, 2019 to March 31, 2020 was due primarily to an increase in variable consideration related to additional expected services to be delivered.

We re-evaluate the transaction price each reporting period and as uncertain events are resolved or other changes in circumstances occur.

Research and Development Expenses

Research and development expenses increased $6.3 million, or 51%, from $12.5 million for the three months ended March 31, 2019 to $18.8 million for the three months ended March 31, 2020.

The increase was primarily due to an increase of $3.1 million in PN-943 clinical trial and development costs including work towards a Phase 2 study, an increase of $2.5 million in PTG-200 clinical trial and development costs and pre-clinical costs, some of which were incurred in relation to the research collaboration with Janssen, and an increase of $1.3 million in PTG-300 clinical trial and development costs following the additional trials undertaken for PV, which began in December 2019, and HH, which started in early 2020.

These increases were partially offset by a decrease of $0.5 million in PTG-100 clinical trial and development costs due to the winding down of development beginning in 2018 and a decrease of $0.1 million in other pre-clinical and discovery research expenses.

General and Administrative Expenses

General and administrative expenses increased $0.8 million, or 22%, from $3.8 million for the three months ended March 31, 2019 to $4.6 million for the three months ended March 31, 2020 primarily due to increases of $0.5 million in personnel costs to support the growth of our operations and $0.3 million in legal fees and other expenses.

Interest Income

Interest income decreased $0.2 million, or 28%, from $0.7 million for the three months ended March 31, 2019 to $0.5 million for the three months ended March 31, 2020.

This decrease was due primarily to the declining interest rate environment and lower balances in interest-earning assets held in comparison to the prior year period.

Interest Expense

Interest expense of $0.2 million for the three months ended March 31, 2020 reflects contractual interest, amortization of origination fees and other issuance costs, and accretion of final payment fees on our term loan that funded in October 2019.

We had no debt outstanding during the three months ended March 31, 2019.

Other Expense, Net

Other expense of $0.5 million for the three months ended March 31, 2020 reflects a foreign currency revaluation loss.

Liquidity and Capital Resources

As of March 31, 2020, we had $117.5 million of cash, cash equivalents and marketable securities and an accumulated deficit of $237.7 million.

Our operations have been financed by net proceeds from the sale of shares of our common stock, payments under the Janssen License and Collaboration Agreement and proceeds from our long-term debt.

During the third quarter of 2017 we received a non-refundable, upfront payment of $50.0 million from Janssen.

During the second quarter of 2019, we received a nonrefundable $25.0 million payment from Janssen upon execution of the First Amendment.

During the first quarter of 2020, we received a nonrefundable $5.0 million payment from Janssen.

In 2017, we filed a registration statement on Form S-3 with the Securities and Exchange Commission (File No.

333-220314) that was declared effective as of October 5, 2017 and permits the offering, issuance, and sale by us of up to a maximum aggregate offering price of $200.0 million of our common stock, preferred stock and certain debt securities (the “2017 Form S-3”).

Up to a maximum of $50.0 million of the maximum aggregate offering price of

$200.0 million may be issued and sold pursuant to an at-the-market (“ATM”) financing facility under a sales agreement (the “2017 Sales Agreement”).

The 2017 Sales Agreement was terminated in 2019.

No shares of common stock were sold under the 2017 Sales Agreement during the three months ended March 31, 2019.

As of March 31, 2020, $72.0 million of common stock remained available for sale under the 2017 Form S-3.

In August 2018, we entered into a Securities Purchase Agreement with certain accredited investors (each, an “Investor”

and, collectively, the “Investors”), pursuant to which we sold an aggregate of 2,750,000 shares of our common stock at a price of $8.00 per share, for aggregate net proceeds of $21.7 million, after deducting offering expenses payable by us.

In a concurrent private placement, we issued the Investors warrants to purchase an aggregate of 2,750,000 shares of our common stock (each, a “Warrant”

and, collectively, the “Warrants”).

Each Warrant is exercisable from August 8, 2018 through August 8, 2023.

Warrants to purchase 1,375,000 shares of our common stock have an exercise price of $10.00 per share and Warrants to purchase 1,375,000 shares of our common stock have an exercise price of $15.00 per share.

Under certain circumstances, the Warrants may be exercisable on a “cashless”

In connection with the issuance and sale of the common stock and Warrants, we granted the Investors certain registration rights with respect to the Warrants and the Warrant Shares.

The common stock and Warrants are classified as equity in accordance with Accounting Standards Codification Topic 480 , Distinguishing Liabilities from Equity (“ASC 480”) , and the net proceeds from the transaction were recorded as a credit to additional paid-in capital.

As of March 31, 2020, none of the Warrants have been exercised.

In December 2018, we entered into an exchange agreement (the “Exchange Agreement”) with an Investor and its affiliates (the “Exchanging Stockholders”), pursuant to which we exchanged an aggregate of 1,000,000 shares of our common stock, par value $0.00001 per share, owned by the Exchanging Stockholders for pre-funded warrants (the “Exchange Warrants”) to purchase an aggregate of 1,000,000 shares of common stock (subject to adjustment in the event of any stock dividends and splits, reverse stock split, recapitalization, reorganization or similar transaction, as described in the Exchange Warrants), with an exercise price of $0.00001 per share.

The Exchange Warrants will expire ten years from the date of issuance.

In accordance with Accounting Standards Codification Topic 505, Equity , we recorded the retirement of the common stock exchanged as a reduction of common stock shares outstanding and a corresponding debit to additional paid-in-capital at the fair value of the Exchange Warrants on the issuance date.

The Exchange Warrants are classified as equity in accordance with ASC 480 , and fair value of the Exchange Warrants was recorded as a credit to additional paid-in capital and is not subject to remeasurement.

We determined that the fair value of the Exchange Warrants is substantially similar to the fair value of the retired shares on the issuance date due to the negligible exercise price for the Exchange Warrants.

During second quarter of 2019, Exchange Warrants to purchase 600,000 shares were net exercised, resulting in the issuance of 599,997 shares of common stock.

As of March 31, 2020, 400,000 of the Exchange Warrants remain unexercised.

In October 2019, we filed a registration statement on Form S-3 (File no.

333-234414) that was declared effective as of November 22, 2019 and permits the offering, issuance, and sale by us of up to a maximum aggregate offering price of $250.0 million of our common stock, preferred stock, debt securities and warrants (the “2019 Form S-3”).

Up to a maximum of $75.0 million of the maximum aggregate offering price of $250.0 million may be issued and sold pursuant to an ATM financing facility under a sales agreement we entered into on November 27, 2019 (the “2019 Sales Agreement”).

As of March 31, 2020, no offering, issuance or sale of common stock, preferred stock, debt securities or warrants was made under the 2019 Form S-3 or the 2019 Sales Agreement.

In October 2019, we entered into a credit and security agreement pursuant to which the lenders party thereto agreed to make term loans available to us for working capital and general business purposes, in a principal amount of up to $50.0 million, including a $10.0 million term loan which was funded at closing (October 30, 2019), with the ability to access the remaining $40.0 million in two additional tranches of $20.0 million, subject to specified availability periods, the achievement of certain clinical development milestones, minimum cash requirements and other customary

Additional information about this credit facility and our long-term debt is presented in Note 9 to the condensed consolidated financial statements included elsewhere in this report.

Our primary uses of cash are to fund operating expenses, primarily our research and development expenditures.

Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable and accrued expenses.

We believe, based on our current operating plan and expected expenditures, that our existing cash, cash equivalents and marketable securities and access to our debt facility will be sufficient to meet our anticipated operating and capital expenditure requirements for at least the next 12 months from the date of this filing.

We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect.

If our planned pre-clinical and clinical trials are successful, or our other product candidates enter clinical trials or advance beyond the discovery stage, we will need to raise additional capital as well as seek additional collaborative or other arrangements with corporate sources in order to further advance our product candidates towards potential regulatory approval.

We will continue to require additional financing to advance our current product candidates through clinical development, to develop, acquire or in-license other potential product candidates and to fund operations for the foreseeable future.

We will continue to seek funds through equity or debt financings, collaborative or other arrangements with corporate sources, or through other sources of financing, but such financing may not be available at terms acceptable to us, if at all.

We anticipate that we will need to raise substantial additional capital, the requirements of which will depend on many factors, including:

the progress, timing, scope, results and costs of our pre-clinical studies and clinical trials for our product candidates, including the ability to enroll patients in a timely manner for our clinical trials;

the costs of and ability to obtain clinical and commercial supplies and any other product candidates we may identify and develop;

our ability to successfully commercialize the product candidates we may identify and develop;

the selling and marketing costs associated with our current product candidates and any other product candidates we may identify and develop, including the cost and timing of expanding our sales and marketing capabilities;

the achievement of development, regulatory and sales milestones resulting in payments to us from Janssen under the Janssen License and Collaboration Agreement, and the timing of receipt of such payments, if any;

the timing, receipt and amount of royalties under the Janssen License and Collaboration Agreement on worldwide net sales of PTG‑200, including any second-generation compounds, upon regulatory approval or clearance, if any;

the amount and timing of sales and other revenues from our current product candidates and any other product candidates we may identify and develop, including the sales price and the availability of adequate third-party reimbursement;

the cash requirements of any future acquisitions or discovery of product candidates;

additional costs or delays we may incur related to the ongoing COVID-19 pandemic;

the time and cost necessary to respond to technological and market developments;

the extent to which we may acquire or in-license other product candidates and technologies;

costs necessary to attract, hire and retain qualified personnel;

the costs of maintaining, expanding and protecting our intellectual property portfolio;

the costs of ongoing general and administrative activities to support the growth or our business.

Adequate additional funding may not be available to us on acceptable terms, or at all.

Any failure to raise capital as and when needed could have a negative impact on our financial condition and on our ability to pursue our business plans and strategies.

Further, our operating plans may change, and we may need additional funds to meet operational needs and capital requirements for clinical trials and other research and development activities.

If we do raise additional capital through public or private equity offerings or convertible debt securities, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders’

If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.

Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated product development programs.

The following table summarizes our cash flows for the periods indicated (in thousands):

Three Months Ended March 31,

(In thousands)

Cash used in operating activities

Cash provided by investing activities

Cash provided by financing activities

Cash Flows from Operating Activities

Cash used in operating activities for the three months ended March 31, 2020 was $15.8 million, consisting of our net loss of $20.1 million, partially offset by $3.3 million in non-cash charges and a net change of $0.9 million in net operating assets.

Non-cash charges were primarily comprised of $2.0 million of stock-based compensation, a $0.5 foreign currency measurement loss, $0.4 million of operating lease ROU asset amortization, $0.2 million of depreciation and amortization and a $0.2 million change in deferred tax asset, partially offset by $0.2 million of net accretion of discount on marketable securities.

The change in net operating assets and liabilities was primarily due to a decrease of $3.2 million in receivable from collaboration partner, an increase of $0.9 million in accounts payable and a decrease of $0.8 million in prepaid expenses and other current assets, partially offset by a decrease of $2.5 million in deferred revenue related to the Janssen License and Collaboration Agreement, a decrease of $0.7 million in accrued expenses and other payables, a decrease of $0.5 million in operating lease liability, an increase of $0.2 million in research and development tax incentive receivable and a decrease of $0.1 million in payable to collaboration partner.

Cash used in operating activities for the three months ended March 31, 2019 was $16.7 million, consisting of our net loss of $14.1 million and a net change of $5.2 million in net operating assets, partially offset by non-cash charges of $2.7 million.

The change in net operating assets and liabilities was due primarily to a decrease of $3.1 million in accrued expenses and other payables, a net decrease of $1.2 million in deferred revenue related to the Janssen License and Collaboration Agreement, an increase of $0.5 million in receivable from collaboration partner, a decrease of $0.5 million in operating lease liability, an increase of $0.4 million in the Australia research and development tax incentive receivable and an increase of $0.4 million in prepaid expenses and other current assets, partially offset by a $0.7 million increase in accounts payable and a $0.2 million increase in payable to collaboration partner.

Non-cash charges were primarily comprised of $2.0 million of stock-based compensation, $0.5 million of operating lease ROU asset amortization, $0.2 million of deferred tax expense and $0.1 million of depreciation and amortization, partially offset by $0.1 million of net accretion of discount on available-for-sale securities.

Cash Flows from Investing Activities

Cash provided by investing activities for the three months ended March 31, 2020 was $42.7 million, consisting of proceeds from maturities of marketable securities of $63.8 million, partially offset by purchases of marketable securities of $20.9 million and purchases of property and equipment of $0.1 million.

Cash provided by investing activities for the three months ended March 31, 2019 was $4.1 million, consisting proceeds from maturities of marketable securities of $26.0 million, partially offset by purchases of marketable securities of $21.7 million and purchases of property and equipment of $0.2 million,.

Cash Flows from Financing Activities

Cash provided by financing activities for the three months ended March 31, 2020 was $0.4 million, consisting primarily of proceeds from the issuance of common stock upon exercise of stock options and purchases of common stock under our employee stock purchase plan.

Cash provided by financing activities for the three months ended March 31, 2019 was $0.4 million, consisting of net proceeds from the issuance of common stock upon exercise of stock options and purchases of common stock under our employee stock purchase plan.

Contractual Obligations and Other Commitments

During the three months ended March 31, 2020, there were no material changes to our contractual obligations and commitments described under Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10‑K for the year ended December 31, 2019 filed with the SEC on March 10, 2020.

Off-Balance Sheet Arrangements

We have not entered into any off-balance sheet arrangements, as defined under SEC rules, including the use of structured finance, special purpose entities or variable interest entities.

Restructuring

On May 7, 2020, the Company approved a limited reduction in force plan affecting approximately 12 % of the Company’s employee base and informed the affected employees.

The reduction-in-force plan was completed by the end of the second quarter of 2020.

Total cash expenditures for the reduction in force plan were $ 0.3 million, substantially all of which were related to employee severance and benefits costs.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements