What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-04 compared with 2020-08-06 · 103 added, 118 removed, 240 unchanged (48% of the section changed)

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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.

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 ongoing 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.

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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.

The American Society for Hematology has accepted four posters and one oral presentation

relating to PTG-300 for its virtual annual meeting to be held in December 2020, including updated Phase 2 results for PTG-300 in PV.

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.

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Food and Drug Administration granted orphan drug designation for PTG-300 for the treatment of PV.

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.

In October 2020, the European Medicines Agency granted orphan drug designation for PTG-300 for the treatment of PV.

We discontinued development of PTG-300 for anemia associated with beta-thalassemia and myelodysplastic syndromes during the first quarter of 2020 and are redirecting 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.

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(“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.

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 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.

Janssen initiated a global Phase 2 clinical study for PTG-200 in moderate-to-severe Crohn’s disease in the fourth quarter of 2019.

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

Joint research efforts are underway to identify second-generation oral IL-23 receptor antagonists for multiple indications.

Because of the COVID-19 pandemic, we have suspended guidance on a timeline for PTG-200 Phase 2 study completion.

In October 2020, we announced the selection of two second-generation IL-R antagonists for advancement into clinical development, PN-235 (also referenced as JNJ-77242113) and PN-232 (also referenced as JNJ-75105186).

We expect to initiate a Phase 1 study of PN-235 in the fourth quarter of 2020.

The advancement of three different oral co-development candidates provides us with several strategic options for development in multiple indications.

We are also continuing our joint research efforts to identify additional IL-23R antagonists.

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

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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.

IND for PN-943 in December 2019, which took effect in January 2020, and have initiated a Phase 2 proof of concept 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 progress and completion.

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

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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 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.

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, including the severity of any additional periods of increases or spikes in the number of cases in the areas we and our suppliers operate and areas where our clinical trial sites are located.

Accordingly, 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.

We have experienced delays in our existing and planned clinical trials due to the worldwide impacts of the pandemic.

Our future results of operations and liquidity could be adversely impacted by further delays in existing and planned clinical trials and collaboration activities, difficulty in recruiting patients for these clinical trials, supply chain disruptions, the ongoing impact on operating activities and employees and the ongoing 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 $19.4 million and $39.5 million for the three and six months ended June 30, 2020, respectively.

Our net loss was $29.2 million and $43.3 million for the three and six months ended

June 30, 2019, respectively.

As of June 30, 2020, we had an accumulated deficit of $257.2 million.

Our net loss was $7.8 million and $47.3 million for the three and nine months ended September 30, 2020, respectively.

Our net loss was $16.4 million and $59.7 million for the three and nine months ended September 30, 2019, respectively.

As of September 30, 2020, we had an accumulated deficit of $264.9 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.

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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.

These comparable companies are 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 and six months ended June 30, 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.

There have been no other material changes in our critical accounting policies during the three and nine months ended September 30, 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

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(In thousands)

Clinical and development expense — PN-943

Clinical and development expense — PTG-300

Clinical and development expense — PN-943

Clinical and development expense — PTG-200

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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.

We expect our clinical development expenses will increase as we progress our product candidates into later stage clinical trials, expand the number of ongoing clinical trials, advance 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.

We may never succeed in achieving marketing approval for our product candidates regardless of our costs and efforts.

The probability of success of our product candidates may be affected by numerous factors, including pre-clinical data, clinical data, competition, manufacturing capability, our ability to receive, and the timing of, regulatory approvals, market conditions, and our ability to successfully commercialize our products if they are approved for marketing.

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.

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

securities are traded, insurance expenses, investor relations, professional services and general overhead and administrative costs.

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

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Results of Operations

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

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

Three Months Ended

September 30,

(Dollars in thousands)

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Interest expense

Loss on early repayment of debt

Other income (expense), net

Loss before income tax (expense) benefit

Income tax (expense) benefit

(1) Includes $1.0 million of non-cash stock-based compensation expense for both the three months ended June 30, 2020 and 2019.

(2) Includes $1.0 million of non-cash stock-based compensation expense for both the three months ended June 30, 2020 and 2019.

Other expense, net

Loss before income tax benefit

Income tax benefit

(1) Includes $1.0 million and $1.1 million of non-cash stock-based compensation expense for the three months ended September 30, 2020 and 2019, respectively.

(2) Includes $0.9 million and $1.1 million of non-cash stock-based compensation expense for the three months ended September 30, 2020 and 2019, respectively.

License and Collaboration Revenue

License and collaboration revenue increased $14.4 million, or 176%, from ($8.2) million for the three months ended June 30, 2019 to $6.2 million for the three months ended June 30, 2020.

The increase in license and collaboration revenue was primarily due to the previously reported 2019 one-time cumulative adjustment related to the application of revenue recognition principles following the May 2019 amendment of the Janssen License and Collaboration agreement that had reduced revenue by $9.4 million for the three months ended June 30, 2019.

The contract modification resulted in an increase in the transaction price and additional deliverables under the initial performance obligation, leading to an overall corresponding decrease in the cumulative percentage of completion of our performance obligation for the Janssen License and Collaboration Agreement during the second quarter of 2019.

In addition, revenue increased during the second quarter of 2020 due to an increase in services provided under the initial performance obligation, as well as additional services performed outside of the initial performance obligation.

We 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, 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 of the initial performance obligation 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 increase in transaction price from March 31, 2020 to June 30, 2020 was due primarily to an increase in variable consideration related to additional expected services to be delivered.

License and collaboration revenue increased $9.0 million, or 217%, from $4.1 million for the three months ended September 30, 2019 to $13.1 million for the three months ended September 30, 2020.

The increase in license and collaboration revenue was primarily due to an update in the amounts forecast for future services remaining to be performed under the Janssen License and Collaboration Agreement, correspondingly increasing our overall cumulative percentage of completion of our performance obligation during the third quarter of 2020, combined with continued performance and delivery of services under the ongoing Janssen License and Collaboration Agreement.

We have determined that the transaction price of the initial performance obligation under the Janssen License and Collaboration Agreement was $99.4 million as of September 30, 2020, a decrease of $14.5 million from the transaction price of $113.9 million as of June 30, 2020.

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

We determined that the transaction price of the initial performance obligation 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 second-generation compound research costs and other services, and estimated variable consideration consisting of a $7.5 million milestone payment subject to the completion of a Phase 1 study for a second-generation compound, offset by $6.5 million of net cost reimbursement to Janssen for services performed.

The decrease in transaction price from June 30, 2020 to September 30, 2020 was due primarily to a decrease in the forecast of remaining services to be provided under the initial performance obligation.

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 $0.9 million, or 5%, from $19.4 million for the three months ended June 30, 2019 to $20.3 million for the three months ended June 30, 2020.

The increase was primarily due to an increase of $4.7 million in pre-clinical and discovery research expense, including costs related to our second generation research collaboration efforts with Janssen, and an increase of $1.0 million in PN-943 clinical trial and development costs including Phase 2 trial costs.

These increases were partially offset by a decrease of $2.7 million in costs related to PTG-200 where Janssen is responsible for 80% of Phase 2 development costs, a $1.5 million increase in grant and incentive reimbursements, and a decrease of $0.3 million in PTG-300 clinical trial and development costs due primarily to the discontinuation of PTG-300 activities for beta-thalassemia.

Research and development expenses decreased $1.3 million, or 8%, from $17.3 million for the three months ended September 30, 2019 to $16.0 million for the three months ended September 30, 2020.

The decrease was primarily due to a $3.3 million decrease in costs related to PTG-200 where Janssen is responsible for 80% of Phase 2 development costs, a $1.3 million decrease in PTG-300 clinical trial and development costs due primarily to the discontinuation of PTG-300 activities for beta-thalassemia, and a decrease of $0.9 million in PN-943 clinical trial and development costs.

These decreases were partially offset by a $3.0 million increase in pre-clinical and discovery research expense, including pre-clinical costs related to our second-generation research collaboration efforts with Janssen, a $0.9 million increase in costs related to PTG-100 due to credit adjustments related to the winding down of activities recognized during the third quarter of 2019, and a $0.3 million increase in grant and incentive reimbursements.

General and Administrative Expenses

General and administrative expenses increased $0.3 million, or 8%, from $3.9 million for the three months ended June 30, 2019 to $4.2 million for the three months ended June 30, 2020 primarily due to increases of $0.3 million in insurance costs and $0.2 million in salaries expense to support the growth of our operations, partially offset by a $0.1 million decrease in employee-related costs and other expenses.

General and administrative expenses increased $0.9 million, or 22%, from $4.0 million for the three months ended September 30, 2019 to $4.9 million for the three months ended September 30, 2020 primarily due to increases of $0.8 million in legal expenses, $0.2 million in insurance costs and $0.2 million in salaries expense to support the growth of our operations, partially offset by a $0.3 million decrease in accounting fees.

Interest Income

Interest income decreased $0.4 million, or 68%, from $0.6 million for the three months ended June 30, 2019 to $0.2 million for the three months ended June 30, 2020.

This decrease was due primarily to the declining interest rate environment and a change in the mix of marketable securities compared to the prior year period, despite higher interest-earning asset balances held during the latter part of the second quarter of 2020 from the investment of funds from our May 2020 public offering and ATM sales.

Interest Expense

Interest expense of $0.2 million for the three months ended June 30, 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 and was repaid in full in June 2020.

We had no debt outstanding during the three months ended June 30, 2019.

Loss on Early Repayment of Debt

Loss on early repayment of debt of $0.6 million for the three months ended June 30, 2020 reflects prepayment and final payment fees paid in connection with the repayment of our term loan that was funded in October 2019 and was repaid in full in June 2020.

We had no debt outstanding during the three months ended June 30, 2019.

Other Income (Expense), Net

Other income (expense), net of $0.5 million for the three months ended June 30, 2020 reflects a foreign currency revaluation gain.

Income Tax Expense

Income tax expense increased $2.8 million, or 169%, from a tax benefit of $1.6 million for the three months ended June 30, 2019 to income tax expense of $1.1 million for the three months ended June 30, 2020.

Our effective income tax rate was 6.2% for the three months ended June 30, 2020 as compared to (5.3)% for the three months ended June 30, 2019.

During the second quarter of 2020, our Australia subsidiary sold beneficial rights to discovery intellectual property to our U.S.

entity, and the U.S.

entity reimbursed the Australia subsidiary for certain direct development costs.

Upon completion of the sale, we analyzed tax planning strategies and future income and concluded that a valuation allowance is necessary for our 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 valuation allowance and certain uncertain tax position liabilities.

Income tax benefit for the three months ended June 30, 2019 included a discrete tax benefit of approximately $1.1 million for the 2017 Australia refundable R&D tax offset.

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

Six Months Ended

Interest income decreased $0.7 million, or 89%, from $0.8 million for the three months ended September 30, 2019 to $0.1 million for the three months ended September 30, 2020.

Income Tax Benefit

Income tax benefit decreased $0.1 million, or 100%, from $0.1 million for the three months ended September 30, 2019 to zero for the three months ended September 30, 2020.

Our effective income tax rate was 0% for the three months ended September 30, 2020 as compared to (0.6)% for the three months ended September 30, 2019.

Comparison of the Nine Months Ended September 30, 2020 and 2019

Nine Months Ended

(Dollars in thousands)

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Loss on early repayment of debt

Other income (expense), net

Other expense, net

Loss before income tax (expense) benefit

Income tax (expense) benefit

(1) Includes $2.1 million and $1.0 million of non-cash stock-based compensation expense for the six months ended June 30, 2020 and 2019, respectively.

(2) Includes $2.0 million and $1.0 million of non-cash stock-based compensation expense for the six months ended June 30, 2020 and 2019, respectively.

(1) Includes $3.1 million and $3.2 million of non-cash stock-based compensation expense for the nine months ended September 30, 2020 and 2019, respectively.

(2) Includes $2.8 million and $3.0 million of non-cash stock-based compensation expense for the nine months ended September 30, 2020 and 2019, respectively.

License and Collaboration Revenue

License and collaboration revenue increased $16.5 million, or 249%, from ($6.6) million for the six months ended June 30, 2019 to $9.9 million for the six months ended June 30, 2020.

he contract modification resulted in an increase in the transaction price and additional deliverables under the initial performance obligation, leading to an overall corresponding decrease in the cumulative in percentage of completion of our performance obligation for the Janssen License and Collaboration Agreement during the second quarter of 2019.

In addition, revenue increased during the six months ended June 30, 2020 due to an increase in services provided under the initial performance obligation, as well as additional services performed outside of the initial performance obligation.

We 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 $1.0 million from the transaction price of $112.9 million as of December 31, 2019.

The increase in transaction price from December 31, 2019 to June 30, 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.

License and collaboration revenue increased $25.5 million, or 1,024%, from ($2.5) million for the nine months ended September 30, 2019 to $23.0 million for the nine months ended September 30, 2020.

The increase in license and collaboration revenue was primarily due to an update in the amounts forecast for future services remaining to be performed under the Janssen License and Collaboration Agreement, correspondingly increasing our overall cumulative percentage of completion of our performance obligation during the third quarter of 2020, coupled with continued performance and delivery of services under the ongoing Janssen License and Collaboration Agreement.

The increase in license and collaboration revenue also included the impact of a previously reported one-time cumulative adjustment related to the application of revenue recognition principles following the May 2019 amendment of the Janssen License and Collaboration Agreement that reduced revenue by $9.4 million for the nine months ended September 30, 2019.

In addition, revenue increased during the nine months ended September 30, 2020 due to an increase in services provided under the initial performance obligation, as well as additional services performed outside of the initial performance obligation.

Research and Development Expenses

Research and development expenses increased $7.2 million, or 23%, from $31.8 million for the six months ended June 30, 2019 to $39.0 million for the six months ended June 30, 2020.

The increase was primarily due to an increase of $7.6 million in pre-clinical and discovery research expense, including costs related to our second generation research collaboration efforts with Janssen, an increase of $3.7 million in PN-943 clinical trial and development costs including Phase 2 trial costs, and an increase of $0.7 million in PTG-300 clinical trial and development costs.

These increases were partially offset by a decrease of $2.9 million in costs related to PTG-200 where Jansen is responsible for 80% of Phase 2 development costs, a $1.3 million increase in grant and incentive reimbursements and a decrease of $0.7 million in PTG-100 clinical trial and development costs as we moved our development efforts to PN-943, our more potent backup compound to PTG-100.

Research and development expenses increased $5.9 million, or 12%, from $49.1 million for the nine months ended September 30, 2019 to $55.0 million for the nine months ended September 30, 2020.

The increase was primarily due to an increase of $10.6 million in pre-clinical and discovery research expense, including pre-clinical costs related to our second generation research collaboration efforts with Janssen and an increase of $2.9 million in PN-943 clinical trial and development costs including Phase 2 trial costs.

These increases were partially offset by a decrease of $6.2 million in costs related to PTG-200 where Jansen is responsible for 80% of Phase 2 development costs, a $1.0 million increase in grant and incentive reimbursements and a decrease of $0.5 million in PTG-300 clinical trial and development costs due primarily to the discontinuation of PTG-300 activities for beta-thalassemia.

General and Administrative Expenses

General and administrative expenses increased $1.1 million, or 15%, from $7.6 million for the six months ended June 30, 2019 to $8.8 million for the six months ended June 30, 2020 primarily due to increases of $0.5 million in insurance costs, $0.4 million in salaries expense to support the growth of our operations and $0.2 million in legal fees and other expenses.

General and administrative expenses increased $2.0 million, or 17%, from $11.6 million for the nine months ended September 30, 2019 to $13.6 million for the nine months ended September 30, 2020 primarily due to increases of $1.1 million in legal expenses, $0.7 million in insurance costs and $0.6 million in salaries expense to support the growth of our operations, partially offset by a $0.3 million decrease in accounting fees.

Interest Income

Interest income decreased $0.6 million, or 47%, from $1.4 million for the six months ended June 30, 2019 to $0.7 million for the six months ended June 30, 2020.

This decrease was due primarily to the declining interest rate environment and a change in the mix of marketable securities compared to the prior year period, despite higher interest-

earning asset balances held during the latter part of the second quarter of 2020 from the investment of funds from our May 2020 public offering and ATM sales.

Interest income decreased $1.3 million, or 62%, from $2.1 million for the nine months ended September 30, 2019 to $0.8 million for the nine months ended September 30, 2020.

Interest Expense

Interest expense of $0.5 million for the six months ended June 30, 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 and was repaid in full in June 2020.

We had no debt outstanding during the six months ended June 30, 2019.

Interest expense of $0.5 million for the nine months ended September 30, 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 and was repaid in full in June 2020.

We had no debt outstanding during the nine months ended September 30, 2019.

Loss on Early Repayment of Debt

Loss on early repayment of debt of $0.6 million for the six months ended June 30, 2020 reflects prepayment and final payment fees paid incurred in connection with the repayment of our term loan that was funded in October 2019 and was repaid in full in June 2020.

We had no debt outstanding during the six months ended June 30, 2019.

Loss on early repayment of debt of $0.6 million for the nine months ended September 30, 2020 reflects prepayment and final payment fees paid incurred in connection with the repayment of our term loan that was funded in October 2019 and was repaid in full in June 2020.

We had no debt outstanding during the nine months ended September 30, 2019.

Income Tax Expense

Income tax expense increased $2.8 million, or 190%, from an income tax benefit of $1.4 million for the six months ended June 30, 2019 to income tax expense of $1.3 million for the six months ended June 30, 2020.

Our effective interest rate was 3.4% for the six months ended June 30, 2020 as compared to (5.3)% for the six months ended June 30, 2019.

Income tax expense increased $2.8 million, or 184%, from an income tax benefit of $1.5 million for the nine months ended September 30, 2019 to income tax expense of $1.3 million for the nine months ended September 30, 2020.

Our effective interest rate was 2.8% for the nine months ended September 30, 2020 as compared to (2.5)% for the nine months ended September 30, 2019.

During the second quarter of 2020, our Australia subsidiary sold beneficial rights to discovery intellectual property to our U.S.

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Upon completion of the sale, we analyzed tax planning strategies and future income and concluded that a valuation allowance is necessary for our 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 six months ended June 30, 2019 included a discrete tax benefit of approximately $1.1 million for the 2017 Australia refundable R&D tax offset.

Income tax expense for the nine months ended September 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 nine months ended September 30, 2019 included a discrete tax benefit of approximately $1.1 million for the 2017 Australia refundable R&D tax offset.

Liquidity and Capital Resources

As of June 30, 2020, we had $208.7 million of cash, cash equivalents and marketable securities and an accumulated deficit of $257.2 million.

As of September 30, 2020, we had $200.0 million of cash, cash equivalents and marketable securities and an accumulated deficit of $264.9 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.

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The 2017 Sales Agreement was terminated in 2019.

We sold 921,684 shares of our 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.

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

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, 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.

We sold 1,924,957 and 2,846,641 shares of our common stock pursuant to the 2017 Sales Agreement during the three and nine months ended September 30, 2019, respectively, for net proceeds of $23.9 million and $34.5 million, respectively, after deducting issuance costs.

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

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”).

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

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.

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

As of September 30, 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.

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

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

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

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

We sold 1,232,793 shares of 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.

We sold 333,047 and 1,565,840 shares of common stock pursuant to the 2019 Sales Agreement during the three and nine months ended September 30, 2020, respectively, for net proceeds of $6.4 million and $23.0 million, respectively, after deducting issuance costs.

As of September 30, 2020, a total of $113.5 million of common stock remained available for sale under the 2019 Form S-3, $51.2 million of which remained available for sale under the ATM financing facility.

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 conditions.

During 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 final payment fees.

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.

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.

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.

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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.

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’ rights.

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

Six Months Ended June 30,

Nine Months Ended September 30,

(In thousands)

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Cash Flows from Operating Activities

Cash used in operating activities for the six months ended June 30, 2020 was $37.3 million, consisting of our net loss of $39.5 million and a net change of $5.0 million in net operating assets, partially offset by $7.1 million in non-cash charges.

Cash used in operating activities for the nine months ended September 30, 2020 was $53.6 million, consisting of our net loss of $47.3 million and a net change of $16.0 million in net operating assets, partially offset by $9.7 million in non-cash charges.

Non-cash charges were primarily comprised of $5.9 million of stock-based compensation, a $1.4 million change in net deferred tax asset, $1.3 million of operating lease ROU asset amortization, a $0.6 million loss on early prepayment of long-term debt and $0.6 million of depreciation and amortization, 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 $7.5 million in deferred revenue related to the Janssen License and Collaboration Agreement, a $1.0 million decrease in operating lease liability, a $0.3 million increase in Australia research and development incentive receivable, a $0.3 million decrease in payable to collaboration partner and a $0.3 million increase in prepaid expenses and other assets, partially offset by a decrease of $3.8 million in receivable from collaboration partner and an increase of $0.4 million in accrued expenses and other payables.

Cash used in operating activities for the six months ended June 30, 2019 was $13.0 million, consisting of our net loss of $43.2 million, partially offset by a net change of $26.7 million in net operating assets and non-cash charges of $3.6 million.

The change in net operating assets and liabilities was due primarily to a net increase of $33.3 million in deferred revenue related to the Janssen License and Collaboration Agreement, partially offset by a decrease of $3.0 million in accounts payable, an increase of $1.8 million in prepaid expenses and other current assets, a decrease of $0.9 million in operating lease liability, an increase of $0.3 million in receivable from collaboration partner, a decrease of $0.3 million in accrued expenses and other payables, and a decrease of $0.3 million in payable to collaboration partner.

Non-cash charges were primarily comprised of $4.0 million of stock-based compensation, $0.9 million of operating lease ROU asset amortization and $0.3 million of depreciation and amortization, partially offset by $1.4 million of deferred tax benefit and $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 $20.7 million in deferred revenue related to the Janssen License and Collaboration Agreement, a $1.6 million increase in prepaid expenses and other assets, a $1.5 million decrease in operating lease liability, and a $0.5 million increase in Australia research and development incentive receivable, partially offset by a decrease of $4.0 million in receivable from collaboration partner, an increase of $3.1 million in accrued expenses and other liabilities, an increase of $0.8 million in accrued expenses and other payables, and an increase of $0.2 million in other liability.

Cash used in operating activities for the nine months ended September 30, 2019 was $27.2 million, consisting of our net loss of $59.7 million, partially offset by a net change of $26.4 million in net operating assets and non-cash charges of $6.1 million.

The change in net operating assets and liabilities was primarily due to a net increase of $30.5 million in deferred revenue related to the Janssen License and Collaboration Agreement, a decrease of $2.6 million in receivable from collaboration partner and a decrease of $1.2 million in research and development tax incentive receivable, net, partially offset by a decrease of $4.2 million in accounts payable, an increase of $1.6 million in prepaid expenses and other current assets, a decrease of $1.4 million in operating lease liability and a decrease of $0.8 million in accrued expenses and other payables.

Noncash charges were primarily comprised of $6.2 million of stock-based compensation, $1.3 million of operating lease ROU asset amortization and $0.5 million of depreciation and amortization, partially offset by $1.5 million of deferred tax benefit and $0.4 million of net accretion of discount on available-for-sale securities.

Cash Flows from Investing Activities

Cash provided by investing activities for the six months ended June 30, 2020 was $37.6 million, consisting of proceeds from maturities of marketable securities of $104.6 million, partially offset by purchases of marketable securities of $66.8 million and purchases of property and equipment of $0.3 million.

Cash used in investing activities for the six months ended June 30, 2019 was $9.1 million, consisting of purchases of marketable securities of $52.4 million and purchases of property and equipment of $1.1 million, partially offset by proceeds from maturities of available for sale securities of $44.4 million.

Cash used in investing activities for the nine months ended September 30, 2020 was $16.6 million, consisting of purchases of marketable securities of $147.6 million and purchases of property and equipment of $0.3 million, partially offset by proceeds from maturities of marketable securities of $131.4 million.

Cash used in investing activities for the nine months ended September 30, 2019 was $41.2 million, consisting of purchases of available-for-sale securities of $117.8 million and purchases of property and equipment of $0.8 million, partially offset by proceeds from maturities of available for sale securities of $77.4 million

Cash Flows from Financing Activities

Cash provided by financing activities for the six months ended June 30, 2020 was $113.0 million, consisting primarily of cash proceeds from our public offering of common stock of $105.7 million, cash proceeds from ATM sales of $16.8 million, and proceeds from the issuance of common stock upon exercise of stock options and purchases of common stock under our employee stock purchase plan of $1.0 million, partially offset by early repayment of long-term debt of $10.5 million.

Cash provided by financing activities for the six months ended June 30, 2019 was $11.0 million, consisting of $10.5 million of net proceeds from the sale of common stock under our ATM facility, and $0.5 million 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.

Cash provided by financing activities for the nine months ended September 30, 2020 was $120.6 million, consisting primarily of cash proceeds from our public offering of common stock of $105.5 million, cash proceeds from ATM sales of $23.2 million, and proceeds from the issuance of common stock upon exercise of stock options and purchases of common stock under our employee stock purchase plan of $2.5 million, partially offset by early repayment of long-term debt of $10.5 million.

Cash provided by financing activities for the nine months ended September 30, 2019 was $36.3 million, consisting of $34.5 million of net proceeds from the sale of common stock under our ATM financing facility and $1.8 million of 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 June 30, 2020, with the exception of early repayment of debt, 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.

During the three and nine months ended September 30, 2020, with the exception of early repayment of debt during the three months ended June 30, 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

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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 2. Management’s Discussion and Analysis