ALPINE IMMUNE SCIENCES, INC. - Quarter Report: 2017 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2017

OR

For the transition period from           to

Commission File Number: 001-37449

ALPINE IMMUNE SCIENCES, INC.

(Exact Name of Registrant as Specified in its Charter)

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

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

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

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

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

As of November 8, 2017, the registrant had 13,881,645 shares of common stock, $0.0001 par value per share, outstanding.

ALPINE IMMUNE SCIENCES, INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2017

TABLE OF CONTENTS

In this report, unless otherwise stated or as the context otherwise requires, references to “Alpine,” “the Company,” “we,” “us,” “our” and similar references refer to Alpine Immune Sciences, Inc. “Variant Immunoglobulin Domain”, “vIgD”, “Transmembrane Immunomodulatory Protein”, “TIP”, “Secreted Immunomodulatory Protein”, and “SIP” are registered trademarks of Alpine Immune Sciences, Inc. All rights reserved. This report also contains registered marks, trademarks, and trade names of other companies. All other trademarks, registered marks, and trade names appearing in this report are the property of their respective holders. 

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ALPINE IMMUNE SCIENCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

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

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ALPINE IMMUNE SCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except share and per share amounts)

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

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ALPINE IMMUNE SCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENT OF CONVERTIBLE PREFERRED STOCK AND

STOCKHOLDERS’ EQUITY

(unaudited)

(in thousands, except share amounts)

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

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ALPINE IMMUNE SCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

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

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ALPINE IMMUNE SCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Information as of September 30, 2017 and for the three and nine months ended September 30, 2017 and 2016 is unaudited)

1. Description of the Business

Alpine Immune Sciences, Inc. (the “Company”, “Alpine”, “we”, “us”, or “our”) is focused on discovering and developing modern, protein-based immunotherapies targeting the immune synapse to treat cancer, inflammation, and other diseases. Our proprietary scientific platform uses a process known as directed evolution, or an iterative scientific engineering process purposefully conducted to “evolve” a protein to create therapeutics potentially capable of modulating immune system interactions. In our pre-clinical animal studies, our platform has proven capable of identifying novel molecules, including single domains capable of modulating multiple targets. We were incorporated on December 30, 2014 under the laws of the State of Delaware and are headquartered in Seattle, Washington.

Significant estimates inherent in the preparation of the accompanying financial statements include recoverability and useful lives of intangible assets and the fair value of equity based awards.

Reverse Merger and Subscription Agreement

On April 18, 2017, we entered into a merger agreement with Nivalis Therapeutics, Inc. (“Nivalis”), a public biotechnology company, and one of its wholly-owned subsidiaries pursuant to which, the subsidiary merged with and into Alpine, with Alpine continuing as a wholly owned subsidiary of Nivalis and the surviving corporation of the merger (the “Merger Agreement”). The merger is intended to qualify for federal income tax purposes as a tax-free reorganization under the provisions of Section 368(a) of the Internal Revenue Code of 1986, as amended. At the closing of the merger, each outstanding share of our capital stock (common stock and preferred stock) was converted into the right to receive shares of Nivalis common stock (subject to the payment of cash in lieu of fractional shares and after giving effect to a 1:4 reverse stock split of Nivalis common stock) such that, immediately following the effective time of the merger, preexisting Nivalis stockholders, optionholders, and warrantholders owned, or held rights to acquire, approximately 26% of the fully-diluted common stock of Nivalis, which changed its name to “Alpine Immune Sciences, Inc.” following the completion of the merger and Alpine’s preexisting stockholders, optionholders, and warrantholders owned, or held rights to acquire approximately 74% of the fully-diluted common stock of Nivalis. The issuance of the shares to our pre-existing stockholders was registered under the Securities Act of 1933, as amended, pursuant to a registration statement on Form S-4 (No. 333-218134) (the “Registration Statement”) declared effective by the Securities and Exchange Commission (the “SEC”) on June 6, 2017.

Contemporaneously with the execution and delivery of the Merger Agreement, certain of our pre-existing stockholders entered into a subscription agreement with us pursuant to which such stockholders purchased, immediately prior to the closing of the merger, 1,335,118 shares of our capital stock at a purchase price of $12.74 per share for an aggregate purchase price of approximately $17.0 million.

The merger and the subscription described above were consummated on July 24, 2017.

Exchange Ratio

At the effective time of the merger, each share of Alpine’s common stock and preferred stock was converted into the right to receive 0.4969 shares of Nivalis’ common stock, adjusted to account for the Nivalis reverse stock split. All issued and outstanding stock and per share amounts contained in the financial statements have been retroactively adjusted to reflect this exchange ratio for all periods presented.

2. Summary of Significant Accounting Policies

Basis of Presentation and Use of Estimates

The accompanying unaudited condensed financial statements have been prepared in accordance with the rules and regulations of the SEC and generally accepted accounting principles in the United States of America (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make judgments, estimates and assumptions that affect the amounts reported in the unaudited condensed financial statements and accompanying notes. We base our estimates and assumptions on historical experience when available and on various factors we believe to be reasonable under the circumstances. Actual results could differ materially from those estimates. The results of our operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the results to be expected for the full year.

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Principles of Consolidation

Our condensed consolidated financial statements include the financial position and results of operations of Alpine and AIS Operating Co., Inc., our wholly owned subsidiary and operating company. On July 24, 2017, we closed the merger on the terms described in more detail in Note 1. In connection with the merger, Nivalis effected a 1:4 reverse stock split of its common stock. Upon the closing of the merger, (1) a wholly-owned subsidiary of Nivalis merged with and into Alpine, with Alpine (renamed as “AIS Operating Co., Inc.”) remaining as the surviving entity; and (2) Nivalis was renamed as “Alpine Immune Sciences, Inc.”

Unaudited Interim Financial Information

The accompanying unaudited condensed consolidated financial statements as of September 30, 2017, and for the three and nine months ended September 30, 2017 and 2016 and the related interim information contained within the notes to the condensed consolidated financial statements are unaudited. The unaudited interim financial statements have been prepared on the same basis as the audited financial statements and in the opinion of management, reflect all normal recurring adjustments necessary for a fair statement of our financial position for the interim periods presented. The accompanying unaudited condensed financial statements should be read in conjunction with our audited financial statements and accompanying notes for the years ended December 31, 2016 and 2015, as filed with the SEC in our Registration Statement.

Unless indicated otherwise, all amounts presented in financial tables are presented in thousands, except for share, per share and par value amounts.

Short-Term Investments

Our short-term investments include funds invested in highly liquid money market funds, U.S. Treasury securities, commercial paper, and corporate debt securities with a final maturity of each security of less than one year. All investments are classified as available-for-sale securities and are recorded at fair value based on quoted prices in active markets, with unrealized gains and losses excluded from earnings and reported in other comprehensive income (loss). Purchase premiums and discounts are recognized as interest income using the interest method over the terms of the securities. Realized gains and losses and declines in fair value deemed to be other than temporary are reflected in the condensed consolidated statements of operations and comprehensive income (loss) using the specific-identification method.

Business Combination

We use our best estimates and assumptions to accurately assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date. Our estimates are inherently uncertain and subject to refinement. During the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed, with the corresponding offset to bargain purchase gain. In addition, uncertain tax positions and tax-related valuation allowances are initially established in connection with a business combination as of the acquisition date. Our management collects information and reevaluates these estimates and assumptions quarterly and records any adjustments to our preliminary estimates to bargain purchase gain during the measurement period. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our condensed consolidated statements of operations and comprehensive income (loss).

We allocated the preliminary purchase price to the acquired tangible and intangible assets and assumed liabilities of Nivalis based on their estimated fair values as of the acquisition date. The fair value of our identifiable intangible asset is based on detailed valuations using information and assumptions provided by management.

Intangible Asset

Our intangible asset is our indefinite-life GSNOR inhibitor in-process research and development asset (“IPR&D”) acquired from Nivalis. The IPR&D represents the processes, expertise, and technology employed in the development of S-nitrosoglutathione reductase (“GSNOR”) inhibitors and Nivalis’ lead product candidate, cavosonstat. The IPR&D represents the estimated fair value as of the acquisition date of substantive in-process projects that have not reached technological feasibility. The primary basis for determining technological feasibility of these projects is obtaining regulatory approval. The valuation of IPR&D is determined using a discounted cash flow method. In determining the value of IPR&D, management considers, among other factors, the stage of completion of the projects, the technological feasibility of the projects, whether the projects have an alternative future use, and the estimated residual cash flows that could be generated from the various projects and technologies over their respective projected economic lives. The discount rate used is determined at the time of acquisition and includes a rate of return which accounts for the time value of money, as well as risk factors reflecting the economic risk that the projected cash flows may not be realized

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We review our IPR&D at least annually for possible impairment. IPR&D is reviewed for possible impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the IPR&D below their carrying values. We test our IPR&D each year on October 1. Our IPR&D asset totaled $1.5 million at September 30, 2017.

Derivative Financial Instruments

We evaluate all of our financial instruments, including issued stock purchase warrants, to determine if such instruments are derivatives or contain features qualifying as embedded derivatives. For derivative financial instruments accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the condensed consolidated statement of operations and comprehensive income (loss). We use the Black-Scholes option-pricing model to value the derivative instruments at inception and subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. We do not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks.

Revenue Recognition

We derive our revenue from collaboration and licensing agreements. We recognize revenue when each of the following four criteria are met: (1) persuasive evidence of an arrangement exists; (2) products have been delivered or services have been rendered; (3) the sales price is fixed or determinable; and (4) collectability is reasonably assured.

We recognize revenue under our License and Research Agreement (the “Collaboration Agreement”) with Kite Pharma, Inc. (“Kite”) in accordance with the guidance on multiple element arrangements. Multiple elements or deliverables may include (1) grants of, or options to obtain, intellectual property licenses; (2) research and development services; and/or (3) manufacturing or supply services. Payments typically received under these arrangements include one or more of the following: non-refundable upfront license fees, option exercise fees, payment for research and/or development efforts, amounts due upon the achievement of specified objectives, and/or royalties on future product sales.

The evaluation of multiple-element arrangements requires management to make judgments about (1) the identification of deliverables; (2) whether such deliverables are separable from other aspects of the contractual relationship; (3) the estimated selling price of each deliverable; and (4) the expected period of performance for each deliverable. To determine the units of accounting under a multiple-element arrangement, management evaluates certain separation criteria, including whether the deliverables have stand-alone value, based on the relevant facts and circumstances for each arrangement. Management then estimates the selling price for each unit of accounting and allocates the arrangement consideration to each unit using the relative selling price method. The allocated consideration for each unit of accounting is recognized based on the method most appropriate for that unit of account and in accordance with the revenue recognition criteria detailed above. If there are deliverables in an arrangement that are not separable from other aspects of the contractual relationship, they are treated as a combined unit of accounting, with the allocated revenue for the combined unit recognized in a manner consistent with the revenue recognition criteria applicable to the final deliverable in the combined unit. Payments received prior to satisfying the relevant revenue recognition criteria are recorded as deferred revenue in the accompanying condensed consolidated balance sheets and recognized as revenue when the related revenue recognition criteria are met.

The Collaboration Agreement provides for non-refundable milestone payments. We recognize revenue that is contingent upon the achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. A milestone is considered substantive when the consideration payable to us for such milestone (1) is consistent with our performance necessary to achieve the milestone or the increase in value to the collaboration resulting from our performance; (2) relates solely to our past performance; and (3) is reasonable relative to all of the other deliverables and payments within the arrangement. In making this assessment, we consider all facts and circumstances relevant to the arrangement, including factors such as the scientific, regulatory, commercial, and other risks that must be overcome to achieve the milestone, the level of effort and investment required to achieve the milestone and whether any portion of the milestone consideration is related to future performance or deliverables.

We will periodically review the estimated performance periods under the Collaboration Agreement which provides for non-refundable upfront payments and fees. We will adjust the periods over which revenue should be recognized when appropriate to reflect changes in assumptions relating to the estimated performance periods. We could accelerate revenue recognition in the event of early termination of programs or if our expectations change. Alternatively, we could decelerate revenue recognition if programs are extended or delayed. While such changes to our estimates have no impact on our reported cash flows, the timing of revenue recorded in future periods could be materially impacted.

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Comprehensive Income (Loss)

Comprehensive income (loss) is comprised of net income (loss) and certain changes in equity excluded from net income (loss). For the three and nine months ended September 30, 2017, other comprehensive loss consists of unrealized losses on our short-term investments. There was no difference between comprehensive income (loss) and net income (loss) for the three and nine months ended September 30, 2016.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, as amended, which amends the guidance for revenue recognition to replace numerous industry specific requirements. ASU 2014-09, as amended, implements a five-step process for customer contract revenue recognition focusing on transfer of control, as opposed to transfer of risk and rewards. ASU 2014-09, as amended, also requires enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenues and cash flows from contracts with customers. Other major provisions include ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. ASU 2014-09, as amended, is effective for reporting periods beginning after December 15, 2017. Early adoption is permitted, but not before December 15, 2016. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. We are currently expecting to use the modified retrospective method to adopt this standard and are continuing to assess all of the potential impacts of the new standard on our financial statements and related disclosures, although we do not expect the implementation to have a material impact.

In February 2016, the FASB issued ASU No. 2016-02, Leases. ASU 2016-02 requires a lessee to separate the lease components from the non-lease components in a contract and recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. It also aligns lease accounting for lessors with the revenue recognition guidance in ASU 2014-09. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and is to be applied at the beginning of the earliest period presented using a modified retrospective approach. We are continuing to evaluate the effect the standard will have on our financial statements and related disclosures.

In August 2016, the FASB issued ASU No. 2016-15 which provides new guidance on the classification of certain cash receipts and payments in the statement of cash flows. The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. We will be required to adopt the new guidance beginning with the first fiscal quarter of 2018; early adoption is permitted. We are currently assessing the impact the new guidance will have on our condensed consolidated statements of cash flows.

In January 2017, the FASB issued an ASU 2017-01, Business Combinations (Topic 805) Clarifying the Definition of a Business. The amendments in this update clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. We are currently evaluating the impact of adopting this guidance.

In May 2017, the FASB issued ASU No. 2017-09 to provide clarity and reduce both diversity in practice and cost and complexity when applying the guidance in Compensation - Stock Compensation (Topic 718) about a change to the terms and conditions of a share-based payment award. The amendments in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The amendments in this update are effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, and applied prospectively to modifications occurring on or after the adoption date. We are currently reviewing and evaluating this recent update and plan to adopt on the required adoption date. For the quarter ended September 30, 2017, there were no modifications to the terms or conditions of a share-based payment award.

Recently Adopted Accounting Pronouncements

In August 2014, the FASB issued ASU No.2014-15, Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern. Under the new guidance, management is required to assess an entity’s ability to continue as a going concern and to provide related footnote disclosures in certain circumstances. The provisions of this standard are effective for annual periods ending after December 31, 2016, and for annual and interim periods thereafter. We adopted this guidance this year and management believes our existing cash and cash equivalents as of September 30, 2017 are sufficient to fund our operations and do not raise substantial doubt about our ability to continue as a going concern.

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In March 2016, the FASB issued ASU No. 2016-09-Improvements to Employee Share-Based Payment Accounting, which simplified the accounting for share-based payment transactions, including the income tax consequences, the calculation of diluted earnings per share, the treatment of forfeitures, the classification of awards as either equity or liabilities, and the classification on the statement of cash flows. For public business entities, the amendments in this update are effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted for any entity in any interim or annual period. We adopted ASU 2016-09 with effect from January 1, 2015. The adoption of this standard did not have a material impact on our financial statements.

In November 2016, the FASB issued ASU No. 2016-18 relating to restricted cash. The new guidance requires amounts generally described as restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the condensed consolidated statement of cash flows. This guidance is required to be adopted beginning with the first fiscal quarter of 2018; early adoption is permitted. We adopted this guidance effective June 30, 2017, which required us to include restricted cash within the beginning and ending balance of cash and cash equivalents for the nine-month period ended September 30, 2017. We had no restricted cash prior to adopting this guidance, thus we were not required to revise prior period statements of cash flows. The adoption of this guidance does not impact our financial position or results of operations.

3. Business Combination

On July 24, 2017, we closed the merger on the terms described in more detail in Note 1. In connection with the merger, Nivalis effected a 1:4 reverse stock split of its common stock. Upon the closing of the merger, (1) a wholly-owned subsidiary of Nivalis merged with and into Alpine, with Alpine (renamed as “AIS Operating Co., Inc.”) remaining as the surviving entity; and (2) Nivalis was renamed as “Alpine Immune Sciences, Inc.”

Under the terms of the Merger Agreement, Nivalis issued shares of its common stock to Alpine’s stockholders, at an exchange rate of 0.4969 shares of Nivalis common stock, after taking into account the 1:4 reverse stock split, for each share of Alpine’s common stock and preferred stock outstanding immediately prior to the merger. The exchange rate was determined through arms’-length negotiations between Nivalis and Alpine. Nivalis also assumed all of the stock options outstanding under Alpine’s Amended and Restated 2015 Stock Plan, as amended (the “Alpine Plan”), and stock warrants for Alpine’s capital stock outstanding immediately prior to the merger, with such stock options and warrants henceforth representing the right to purchase a number of shares of the Nivalis common stock equal to 0.4969 multiplied by the number of shares of Alpine’s common stock or preferred stock previously represented by such options and warrants. Nivalis also assumed the Alpine Plan. Immediately after the merger, there were 13,881,645 shares of Nivalis common stock outstanding. Immediately after the merger, Alpine’s former stockholders, warrantholders, and optionholders owned, or held rights to acquire, approximately 74% of the fully-diluted common stock of Nivalis, which for these purposes is defined as the outstanding common stock of Nivalis, plus “in the money” options and warrants to purchase shares of Nivalis’ common stock, assuming all “in the money” options and warrants of Nivalis outstanding immediately prior to the merger are exercised on a cashless basis immediately prior to the closing of the merger, with Nivalis’ stockholders, optionholders, and warrantholders immediately prior to the merger owning, or holding rights to acquire, approximately 26% of the fully diluted common stock of Nivalis. More than 74% of Nivalis’ common stock outstanding immediately after the merger was held by stockholders party to lock-up agreements, pursuant to which such stockholders have agreed, except in limited circumstances, not to sell, transfer, or engage in swap or similar transactions with respect to shares of Nivalis’ common stock, including, as applicable, shares received in the merger and issuable upon exercise of certain warrants and options, for a period of 180 days following the completion of the merger.

The issuance of shares of Nivalis’ common stock to our pre-existing stockholders was registered with the SEC pursuant to the Registration Statement. Immediately prior to the merger, we issued and sold an aggregate of approximately $17.0 million of shares of our common stock to certain existing stockholders. For accounting purposes, our historical financial statements were not adjusted to reflect the merger, other than adjustments to the capital structure to reflect the historical capital structure of Nivalis. No other adjustments to our historical assets and liabilities were made as a result of the merger.

In addition to the operating assets and liabilities of Nivalis, we also acquired Nivalis’ tax attributes, which primarily consisted of net operating losses which begin to expire in 2032. Our ability to utilization the tax attributes of Nivalis may be limited under Section 382 of the U.S. Internal Revenue Service and as such, have been reserved. We recorded a deferred tax liability related to future tax benefits arising from IPR&D acquired in the Merger. The combined organization is focusing on the development and commercialization of our innovative immunotherapies. Following the merger, the increased cash resources and increased access to capital of the combined organization will help to support the clinical development of our products.

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Consideration Transferred

The fair value of the consideration transferred was based on the most reliable measure, which was determined to be the market price of Nivalis shares of common stock as of the acquisition date. The fair value of the consideration transferred consisted of the following (in thousands except share and per share amounts):

Pursuant to the Merger Agreement, unvested Nivalis stock options immediately vested as of the closing of the business combination and were adjusted to give effect to the recapitalization.

Preliminary Purchase Price Allocation

As Alpine was the accounting acquirer in the merger, we allocated the preliminary purchase price to the acquired tangible and intangible assets and assumed liabilities of Nivalis based on their estimated fair values as of the acquisition date. The excess of the estimated fair values of net assets acquired over the acquisition consideration paid was recorded as a bargain purchase gain in the condensed consolidated statements of operations and comprehensive income (loss). The determination of the preliminary fair values of the assets acquired and liabilities assumed requires significant judgment, including third party valuation estimates relating to the value of the acquired IPR&D. The allocation of the purchase consideration to the assets acquired and liabilities assumed in our financial statements is preliminary and subject to change as management gathers additional information regarding these items.

The initial allocation of the purchase consideration is as follows (in thousands):

We relied on significant Level 3 unobservable inputs to estimate the fair value of our acquired IPR&D using management’s estimate of future royalties and expected earnings of the assets after taking into account an estimate of future expenses necessary to bring the products to completion. These projected cash flows were then discounted to their present values using a discount rate of 17%, which was considered commensurate with the risks and stages of development of the IPR&D.

The bargain purchase gain resulted from expenses incurred by Nivalis between the time the purchase price was negotiated and the close of the transaction, and changes in the Nivalis stock price during that period as the exchange ratio was fixed when the purchase price was negotiated.

We recognized acquisition-related costs of $1.3 million for the nine months ended September 30, 2017. These costs are included within general and administrative expense in our condensed consolidated statements operations and of comprehensive income (loss).

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Pro Forma Financial Information

The following pro forma consolidated results of net loss for the nine months ended September 30, 2017 and 2016 assume the business combination was completed as of January 1, 2016 (in thousands, except per share amounts):

For purposes of the pro forma disclosures above, the primary adjustments for the nine months ended September 30, 2017 include the elimination of acquisition related costs and acceleration of stock compensation expense upon the change in control.

4. Net Income (Loss) Per Share

We compute net income (loss) per share attributable to common stockholders using the two-class method required for participating securities. We consider our convertible preferred stock to be participating securities. In accordance with the two-class method, earnings allocated to these participating securities, which include participation rights in undistributed earnings, are subtracted from net income to determine total undistributed earnings to be allocated to common stockholders. Net loss is not allocated to participating securities as there is no contractual obligation to share in net losses.

Basic net income (loss) per share attributable to common stockholders is computed by dividing net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding during the period. All participating securities are excluded from basic weighted-average common shares outstanding. In computing both basic net income (loss) per share attributable to common stockholders and diluted net income (loss) per share attributable to common stockholders, undistributed earnings are re-allocated to reflect the potential impact of dilutive securities, including stock options and warrants. Diluted net income (loss) per share attributable to common stockholders is computed by dividing net income (loss) attributable to common stockholders by the weighted-average number of common equivalent shares outstanding for the period. Diluted net income (loss) per share attributable to common stockholders includes any dilutive effect from outstanding stock options and warrants using the treasury stock method.

The common stock issuable upon the conversion or exercise of the following dilutive securities has been excluded from the diluted net loss per share attributable to common stockholders calculation because their effect would have been antidilutive for the periods presented:

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The following is a reconciliation of the numerator (net income or loss) and the denominator (number of shares) used in the calculation of basic and diluted net income (loss) per share attributable to common stockholders (in thousands, except share and per share amounts):

5. Cash Equivalents and Short-Term Investments

The amortized cost and fair value of our cash equivalents and short-term investments are as follows (in thousands):

All short-term investments held as of September 30, 2017 were classified as available-for-sale securities and had contractual maturities of less than one year. There were no realized gains and losses on these securities for the periods presented. There were no short-term investments as of December 31, 2016.

6. Fair Value Measurements

Fair value is defined as the exchange price received for an asset or paid to transfer a liability, or an exit price, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value, is as follows:

Level 1: Quoted prices in active markets for identical assets or liabilities.

Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3: Unobservable inputs supported by little or no market activity and significant to the fair value of the assets or liabilities.

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At December 31, 2016, we had cash of $11.8 million and no assets measured using Level 1, Level 2, or Level 3 inputs. As of September 30, 2017, cash of $2.0 million is excluded from the fair value table below.

The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis (in thousands):

Our Level 2 assets consist of commercial paper and corporate debt securities. We review trading activity and pricing for our available-for-sale securities as of the measurement date. When sufficient quoted pricing for identical securities is not available, we use market pricing and other observable market inputs for similar securities obtained from various third-party data providers. These inputs either represent quoted prices for similar assets in active markets or have been derived from observable market data.

On June 30, 2017, we issued Series A-1 preferred stock warrants in connection with long-term debt. The warrant liability was classified as a Level 3 liability and the fair value was determined using the Black-Scholes option-pricing model with the following key assumptions: (1) stock price of $9.64; (2) a risk-free rate of 2.31%; (3) an expected volatility of 78%; and (4) a term of 9.5 years. Both observable and unobservable inputs are used to determine the fair value of the warrant liability. As a result, the unrealized gains and losses of the warrant liability may include changes in fair value attributable to both observable inputs (e.g., changes in market interest rates) and unobservable inputs (e.g., probabilities of the occurrence of an early termination event).

In July 2017, in connection with the closing of the merger, our preferred stock warrants converted to common stock warrants. As a result of the change in the underlying shares, the warrants were equity-classified beginning on July 24, 2017. As of the date of conversion, we remeasured the fair value of the warrants, which resulted in a $1,000 decrease in fair value, which was recorded as other income in our accompanying condensed consolidated statements of operations and comprehensive income (loss). See Note 11 for additional discussion of the warrants.

The following table shows the reconciliation of the Level 3 warrant liability measured and recorded at fair value on a recurring basis, using significant unobservable inputs (in thousands):

7. Accrued Liabilities

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

8. Long-term Debt

On June 30, 2017, we drew down a term loan of $5.0 million from Silicon Valley Bank with whom we had entered into a long-term financing arrangement on December 16, 2016. The loan has an interest-only period that expires on July 1, 2018, at which point

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we will be obligated to make thirty consecutive equal monthly payments of principal (each in an amount that will fully amortize the loan), plus accrued interest. Interest accrues at a floating per annum rate equal to the lender’s prime rate minus 1.75%. As a condition to the loan, we agreed to pay a final payment fee of 7.5%, or $375,000, upon repayment of the loan. The final payment fee was recorded in long-term debt with an offsetting reduction in long-term debt and was accounted for as a debt discount.

The obligations under the loan agreement are subject to acceleration upon the occurrence of specified events of default, including a material adverse change in our business, operations, financial, or other condition. We assessed the likelihood of the lender accelerating payment of the loan due to a material adverse change in our business, operations, financial, or other condition as remote. As such, as of September 30, 2017, the classification of the loan is split between current and noncurrent based on the timing of payment obligations.  The term loan agreement contains customary conditions to borrowings, events of default and negative covenants, including covenants that could limit our ability to, among other things, incur additional indebtedness, liens or other encumbrances; make dividends or other distributions; buy, sell or transfer assets; engage in any new line of business; and enter into certain transactions with affiliates. We were in compliance with our covenants as of September 30, 2017.

Also, in connection with the drawdown of the loan, we also granted the financial institution 7,069 Series A-1 Preferred Stock warrants at an exercise price of $12.38 per share. The fair value of the warrants on the date of issuance was $53,000, determined using the Black-Scholes option-pricing model, and was recorded as a discount to the note and as a warrant liability on the accompanying condensed consolidated balance sheets. In connection with the merger and conversion of all outstanding Series A-1 preferred stock, the warrants became exercisable for 7,069 fully vested shares of our common stock.  As a result of the change in the underlying shares, the warrants were equity-classified beginning on July 24, 2017.  See Note 11 for further details of these warrants.  

The debt discount is being amortized to interest expense using the effective interest method over the repayment term of the initial loan amount. Non-cash interest expense associated with the amortization of the discount was $43,000 for the three and nine months ended September 30, 2017. The unamortized discount was $385,000 as of September 30, 2017.  

9. Commitments and Contingencies

Operating Lease

On April 1, 2017, we entered into an amendment to our existing lease pursuant to which we agreed to lease additional premises adjacent to our existing leased premises for an annual base rent of $38,000. The amendment is effective on April 12, 2017. The amendment does not alter the December 31, 2019 expiry date of the existing lease. As required by the terms of the lease, in May 2017, we entered into a line of credit to establish collateral to support the security deposit in an amount of $132,000. This is recorded as restricted cash in the accompanying condensed consolidated balance sheets.

10. License and Collaboration Agreement

In October 2015, we entered into the Collaboration Agreement with Kite to discover and develop protein-based immunotherapies targeting the immune synapse to treat cancer. Under our agreement, we are to perform certain research services and grant to Kite an exclusive license to two programs from our TIP technology, which Kite is planning to further engineer into chimeric antigen receptor (“CAR”) and T cell receptor (“TCR”) product candidates.

Under the terms of the Collaboration Agreement, Kite made upfront payments to us of $5.5 million, which were initially recorded as deferred revenue. We will also be eligible to receive milestone payments based upon the successful achievement of pre-specified research, clinical, and regulatory milestones totaling up to $530.0 million plus royalty payments on product sales, if any. Kite will receive an exclusive, worldwide license to research, develop, and commercialize engineered autologous T cell therapies incorporating two programs coming from our platform.

On October 20, 2017, we entered into an amendment with Kite to extend the research term of the Collaboration Agreement. Under the amended agreement, we are eligible to receive an additional $450,000 research support payment from Kite in two tranches (instead of a single tranche as previously contemplated by the original Collaboration Agreement) (the “Amendment”). The Amendment also amended and restated the original research plan. We adjusted our estimated service period over the extended term and have adjusted the revenue recognition accordingly.

We recorded revenue of $128,000 and $737,000 for the three months ended September 30, 2017 and 2016, respectively, and $1.6 million and $2.2 million for the nine months ended September 30, 2017 and 2016, respectively.

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11. Convertible Preferred Stock

In March 2017, we issued and sold 707,330 shares of Series A convertible preferred stock and received a total of $4.0 million. In April 2017, prior to the execution and delivery of the Merger Agreement certain holders of our Series A-1 convertible preferred stock purchased 2,947,211 shares of Series A-1 preferred stock for $16.7 million in proceeds. Contemporaneously with the execution and delivery of the Merger Agreement certain of our pre-existing stockholders entered into a subscription agreement with us pursuant to which such stockholders purchased immediately prior to the closing of the merger 1,335,118 shares of our convertible preferred stock at a purchase price of $12.74 per share for an aggregate purchase price of approximately $17.0 million.

The rights, preferences, and privileges of convertible preferred stock are summarized in our audited financial statements and accompanying notes for the years ended December 31, 2016 and 2015, as filed with the SEC in the Registration Statement.

Upon the closing of the merger, all outstanding shares of our convertible preferred stock converted into 9,301,433 shares of common stock. As of September 30, 2017, we do not have any convertible preferred stock outstanding.

Preferred Stock Warrants

In connection with our draw down of a term loan on June 30, 2017, we granted the lender 7,069 of fully vested Series A-1 preferred stock warrants at an exercise price of $12.38 per share and a term of ten years. The fair value of the warrants on the date of issuance was $53,000 and was recorded as a discount to the note and as a warrant liability within the accompanying condensed consolidated balance sheets. The warrants were initially classified as a liability because the underlying to the warrants were puttable shares.

On July 24, 2017, in connection with the merger and conversion of all outstanding Series A-1 preferred stock, the warrants became exercisable for 7,069 fully vested shares of our common stock. As a result of the change in the underlying shares, the warrants were equity-classified beginning on July 24, 2017. As a result of the equity classification, the warrant liability was remeasured as of July 24, 2017 and the change in fair value was recognized within other (income) expense in our condensed consolidated statements of operations and comprehensive income (loss) and the carrying value of the revised warrant liability was reclassified to additional paid-in capital within stockholders’ deficit.

12. Stockholders’ Deficit

Stock-Based Compensation Expense

We use the Black-Scholes option pricing model to estimate the fair value of stock options granted to employees at the grant date. We recognize the fair value of stock-based compensation as compensation expense over the requisite service period, which is the vesting period. We also record stock options and other stock-based compensation issued to non-employees at their fair value as of their date of grant using the Black-Scholes option pricing model. Non-employee awards are then periodically remeasured to reflect the current fair value at each reporting period and expense is recognized over the related vesting period. Assumptions used in valuing non-employee stock options are generally consistent with those used for employee stock options with the exception that the expected term is over the contractual life.

Stock-based compensation expense is classified in the condensed consolidated statements of operations and comprehensive income (loss) as follows (in thousands):

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13. Income Taxes

We are subject to income taxes in the United States and our effective tax rate is calculated quarterly based upon current assumptions relating to the full year’s estimated operating results and various tax-related items. Our effective tax rate for the three and nine-month periods ended September 30, 2017 was (0.04) %. The difference between the effective tax rate of (0.04) % and the U.S. federal statutory rate of 35% for the three and nine-month periods ended September 30, 2017 was primarily due to recognizing a full valuation allowance on deferred tax assets.  

As of September 30, 2017, we determined based on all available evidence, both positive and negative, including our latest forecasts and cumulative losses in recent years, it was more likely than not that none of our deferred tax assets would be realized and therefore we continued to record a full valuation allowance. No current tax liability or expense associated with our deferred tax assets have been recorded in the financial statements.

As part of the merger with Nivalis, we identified $1.5 million of acquired IPR&D. IPR&D acquired in a business combination is an indefinite-lived intangible asset until the completion or abandonment of the associated R&D efforts. Once the research and development efforts are completed or abandoned, the IPR&D will either be impaired or amortized over the asset life as a finite-lived intangible.

As the acquired IPR&D is not completed, and has not been abandoned, it is considered indefinite-lived for accounting purposes. Any future reversal of a deferred tax liability resulting from IPR&D costs cannot be scheduled for tax purposes and therefore cannot be considered as a source of future taxable income. Thus, we have recorded a deferred tax liability of $509,000 as a result of the acquired IPR&D having a financial reporting basis of $1.5 million and a tax basis of $0.

Under Section 382 of the Internal Revenue Code of 1986, substantial changes in Alpine Immune Sciences’ ownership may limit the amount of net operating loss carryforwards that could be utilized annually in the future to offset taxable income. Any such annual limitation may significantly reduce the utilization of the net operating losses before they expire.

Our net operating loss carry forward amounts expire starting in 2032. As of December 31, 2016, we had accumulated approximately $75.7 million of federal tax losses and $0 (tax effected) of state tax losses.

Due to our operating loss carryforwards, all tax years remain open to examination by the major taxing jurisdictions to which we are subject. In the event we are assessed interest or penalties at some point in the future, it will be classified in the financial statements as tax expense.

Under ASC 740, the benefit of an uncertain tax position that is more likely than not of being sustained upon audit by the relevant taxing authority must be recognized at the largest amount that is more likely than not to be sustained. No portion of the benefit of an uncertain tax position may be recognized if the position has less than a 50% likelihood of being sustained. We do have an uncertain tax position on our research and development credits as of the three and nine-month periods ended September 30, 2017. However, no deferred asset is recorded for the credits due to the full valuation allowance.

14. Related Party Transactions

We have a shared services agreement with Alpine BioVentures GP, LLC, pursuant to which we incurred no costs for the three and nine months ended September 30, 2017 and $3,000 and $12,000 for the three and nine months ended September 30, 2016, respectively. We had an accrual of $5,000 related to the shared services agreement at December 31, 2016, which was paid in April 2017.

15. Subsequent Events

On October 20, 2017, we entered into the Amendment of the Collaboration Agreement with Kite. Pursuant to the terms of the Amendment, the research term of the Collaboration Agreement was extended, providing us additional time to deliver the second of two program TIPs to Kite as set forth in the Collaboration Agreement. Kite previously paid us a research support payment of $450,000 and, pursuant to the terms of the Amendment, we are eligible to receive an additional $450,000 research support payment payable by Kite in two tranches (instead of a single tranche as previously contemplated by the Collaboration Agreement). The Amendment also amended and restated the original research plan.

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

You should read the following management’s discussion and analysis of financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our audited financial statements and related notes thereto and management’s discussion and analysis of financial condition and results of operation for the year ended December 31, 2016, included in our Registration Statement on Form S-4 (Reg No. 333-218134) (the “Registration Statement”), filed with the SEC.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements and information 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, which are subject to the “safe harbor” created by those sections. In some cases you can identify these statements by forward-looking words such as “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan,” “expect,” or similar expressions, or the negative or plural of these words or expressions. You should read these statements carefully because they discuss future expectations, contain projections of future results of operations or financial condition, or state other “forward-looking” information. These statements relate to our future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements. These forward-looking statements include, but are not limited to:

These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in this report in Part II, Item 1A — “Risk Factors,” and elsewhere in this report. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. These statements, like all statements in this report, speak only as of their date, and we undertake no obligation to update or revise these statements in light of future developments, except as required by law.

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Overview

We are a development-stage immunotherapy company focused on developing treatments for autoimmune/inflammatory diseases and cancer. Our proprietary Variant Immunoglobulin Domain^™ (“vIgD^™”) scientific platform uses a process known as directed evolution to create therapeutics potentially capable of modulating the human immune system.

Our goal is to create modern therapies targeting the immune synapse, using our directed-evolution based discovery platform to potentially treat patients with serious conditions such as cancer and inflammatory diseases. To achieve our goal, we currently plan to:

Our operations to date have been limited to business planning, raising capital, developing our platform technology, identifying potential immunotherapy candidates, and other research and development activities. To date, we have financed operations primarily through private placements of convertible preferred stock, funds received from a license and research agreement, debt, and assets acquired upon the close of our merger with Nivalis Therapeutics Inc. (“Nivalis”). We do not have any products approved for sale and have not generated any product sales. Since inception and through September 30, 2017, we have raised an aggregate of $103.8 million to fund operations, of which $49.2 million was from the sale of convertible preferred stock, $5.5 million was through a license and research agreement, $5.0 million advanced from a long-term loan, and $44.1 million in cash, cash equivalents, and marketable securities acquired through the merger with Nivalis. As of September 30, 2017, we had cash, cash equivalents, and marketable securities totaling $87.2 million.

Our net income was $2.1 million for the three months ended September 30, 2017 and our net loss was $3.5 million for the nine months ended September 30, 2017, compared to net losses of $0.4 million and $0.2 million for the three and nine months ended September 30, 2016, respectively. We expect to continue incurring significant expenses and operating losses for at least the next several years as we:

We do not expect to generate significant revenue unless and until we successfully complete development of, obtain marketing approval for and commercialize our product candidates, either alone or in collaboration with third parties. We expect these activities will take a number of years and our success in these efforts is subject to significant uncertainty. Accordingly, we will need to raise additional capital prior to the regulatory approval and commercialization of any of our product candidates. Until such time, if ever, as we can generate substantial product revenues, we expect to finance our operating activities through public or private equity or debt financings, collaborations or licenses, capital lease transactions, or other available financing transactions. However, additional capital may not be available on reasonable terms, if at all, and if we raise additional funds through the issuance of additional equity or debt securities, it could result in dilution to our existing stockholders and increased fixed payment obligations. Management’s discussion and analysis of financial condition and results of operations is based upon the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, which we prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim periods and with Regulation S-X promulgated under the Securities and Exchange Act of 1934, as amended, or the Exchange Act.

Business Combination with Nivalis

On April 18, 2017, we entered into a merger agreement (the “Merger Agreement”) with Nivalis, a public biotechnology company, and one of its wholly-owned subsidiaries, pursuant to which, the subsidiary merged with and into Alpine, with Alpine continuing as a wholly owned subsidiary of Nivalis and the surviving corporation of the merger. On July 24, 2017, the business

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combination of Alpine and Nivalis was completed. Under the terms of the Merger Agreement, Alpine’s preexisting stockholders, warrantholders and optionholders received approximately 76% of the fully-diluted shares of common stock of the combined organization in exchange for the transfer of all of Alpine’s common stock. This transaction was consummated to provide us with increased access to sources of capital and a broader range of investors to support the clinical development of our products. The acquired assets and liabilities of Nivalis are included in our condensed consolidated balance sheet as of September 30, 2017 and Nivalis’ results of operations and cash flows for the period from July 25, 2017 through September 30, 2017 are included in our condensed consolidated statement of comprehensive income and cash flows for the period from July 1, 2017 through September 30, 2017. See notes to the condensed consolidated financial statements included in this Form 10-Q for further information regarding the business combination.

Financial Overview

Revenue

Collaboration and Licensing Revenue

We derive all our revenue from our License and Research Agreement (the “Collaboration Agreement”), with Kite Pharma, Inc. (“Kite”). In October 2015, we entered into the Collaboration Agreement providing Kite with access to two transmembrane immunomodulatory protein (“TIP”) programs for use in Kite’s engineered cellular therapy programs. We received $5.5 million in upfront cash and are eligible to receive up to $530.0 million upon successful achievement of pre-specified research, clinical, and regulatory milestones in addition to royalties on any products containing our TIPs. In the collaboration, we provide the TIPs and perform in vitro testing, while Kite is responsible for in vivo testing, manufacturing, and clinical trials. Kite will receive an exclusive, worldwide license to research, develop, and commercialize engineered autologous T cell therapies incorporating two TIP programs coming from our platform.

On October 20, 2017, we entered into an amendment (the “Amendment”) with Kite to extend the research term of the Collaboration Agreement. Under the Amendment, we are eligible to receive an additional $450,000 research support payment from Kite in two tranches (instead of a single tranche as previously contemplated by the Collaboration Agreement). The Amendment also amended and restated the original research plan. We have adjusted our expected recognition period of the remaining deferred upfront payments over the expected life of the amended research plan and will recognize the potential $450,000 in additional research support only when the stated milestones have been completed.

We have recognized $5.0 million in revenue from inception through September 30, 2017 related to the Collaboration Agreement. We may generate revenue in the future from milestone payments made pursuant to the Collaboration Agreement, or from payments from future license or collaboration agreements, product sales, or government contracts and grants. We expect any revenue we generate will fluctuate from quarter to quarter.

Research and Development Expenses

We focus our resources on research and development activities, including the conduct of preclinical studies and product development and expense such costs as they are incurred. Our research and development expenses consist of:

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The successful development of our platform and product candidates is highly uncertain. At this time, we cannot reasonably estimate the nature, timing, or costs of the efforts necessary to finish developing any of our product candidates or the period in which material net cash, if any, from these product candidates may commence. This is due to the numerous risks and uncertainties associated with developing therapeutics, including the uncertainty of:

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related costs for employees in executive, business development, and finance functions. Other significant general and administrative expenses include professional fees for accounting and legal services, expenses associated with obtaining and maintaining patents and other intellectual property, and allocation of facilities costs.

We expect general and administrative expenses will increase as we expand infrastructure to support operating as a public company. These increases will include increased costs for director and officer liability insurance, costs related to the hiring of additional personnel, and increased fees for directors, outside consultants, lawyers, and accountants. We expect to incur significant costs to comply with corporate governance, internal controls, and similar requirements applicable to public companies.

Bargain Purchase Gain

As Alpine was the accounting acquirer in the merger, we allocated the preliminary purchase price to the acquired tangible and intangible assets and assumed liabilities of Nivalis based on their estimated fair values as of the acquisition date. The excess of the estimated fair values of net assets acquired over the acquisition consideration paid was recorded as a bargain purchase gain in the condensed consolidated statements of operations and comprehensive income (loss). The determination of the preliminary fair values of the assets acquired and liabilities assumed requires significant judgment, including third party valuation estimates relating to the value of the acquired in-process research and development asset (“IPR&D”). Accordingly, should additional information become available, the preliminary purchase price allocation is subject to further adjustment.

Interest Expense

Interest expense consists of accrued interest and the amortization of the debt discount associated with our $5.0 million term loan.  

Interest and Other Income

Interest income consists of interest earned on our cash, cash equivalents, and short-term investments. We expect our interest income to increase following the completion of the merger as we have invested the net proceeds received from the merger.

Income Tax Expense

We had federal taxable income in 2016, due to acceleration of our deferred revenue balance under Rev. Proc. 2004-34. Consequently, we have recorded current federal and state income tax payable for the year ended December 31, 2016.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which we have prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions affecting the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. We evaluate these estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions. Our significant accounting policies are more fully described in Note 2 of the accompanying unaudited condensed consolidated financial statements and in Note 2 to the audited financial statements contained in our Registration Statement. There have

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been no significant or material changes in our significant accounting policies during the nine months ended September 30, 2017, as compared to those disclosed in our Registration Statement, except the following:

Principles of Consolidation

Our condensed consolidated financial statements include the financial position and results of operations of Alpine and AIS Operating Co., Inc., our wholly owned subsidiary and operating company. On July 24, 2017, we closed the merger on the terms described in more detail in Note 1. In connection with the merger, Nivalis effected a 1:4 reverse stock split of its common stock. Upon the closing of the merger, (1) a wholly-owned subsidiary of Nivalis merged with and into Alpine, with Alpine (renamed as “AIS Operating Co., Inc.”) remaining as the surviving entity; and (2) Nivalis was renamed as “Alpine Immune Sciences Inc.”

Short-Term Investments

Our short-term investments include funds invested in highly liquid money market funds, U.S. Treasury securities, commercial paper, and corporate debt securities with a final maturity of each security of less than one year. All investments are classified as available-for-sale securities and are recorded at fair value based on quoted prices in active markets, with unrealized gains and losses excluded from earnings and reported in other comprehensive income (loss). Purchase premiums and discounts are recognized as interest income using the interest method over the terms of the securities. Realized gains and losses and declines in fair value deemed to be other than temporary are reflected in the condensed consolidated statements of operations and comprehensive income (loss) using the specific-identification method.

Business Combination

We use our best estimates and assumptions to accurately assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date. Our estimates are inherently uncertain and subject to refinement. During the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed, with the corresponding offset to bargain purchase gain. In addition, uncertain tax positions and tax-related valuation allowances are initially established in connection with a business combination as of the acquisition date. Our management collects information and reevaluates these estimates and assumptions quarterly and records any adjustments to our preliminary estimates to bargain purchase gain during the measurement period. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our condensed consolidated statements of operations and comprehensive income (loss).

We allocated the preliminary purchase price to the acquired tangible and intangible assets and assumed liabilities of Nivalis based on their estimated fair values as of the acquisition date. The fair value of our identifiable intangible asset is based on detailed valuations using information and assumptions provided by management.

Intangible Asset

Our intangible asset is our indefinite-life GSNOR inhibitor IPR&D acquired from Nivalis. The IPR&D represents the processes, expertise, and technology employed in the development of S-nitrosoglutathione rectase (“GSNOR”) inhibitors and Nivalis’ lead product candidate, cavosonstat.  The IPR&D represents the estimated fair value as of the acquisition date of substantive in-process projects that have not reached technological feasibility. The primary basis for determining technological feasibility of these projects is obtaining regulatory approval. The valuation of IPR&D is determined using a discounted cash flow method. In determining the value of IPR&D, management considers, among other factors, the stage of completion of the projects, the technological feasibility of the projects, whether the projects have an alternative future use, and the estimated residual cash flows that could be generated from the various projects and technologies over their respective projected economic lives. The discount rate used is determined at the time of acquisition and includes a rate of return which accounts for the time value of money, as well as risk factors reflecting the economic risk the projected cash flows may not be realized

We review our IPR&D at least annually for possible impairment. IPR&D is reviewed for possible impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the IPR&D below their carrying values. We test our IPR&D each year on December 31. Our IPR&D totaled $1.5 million at September 30, 2017.

Comprehensive Income (Loss)

Comprehensive income (loss) is comprised of net income (loss) and certain changes in equity that are excluded from net income (loss). For the three and nine months ended September 30, 2017, other comprehensive loss consists of unrealized losses on our short-term investments.

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Results of Operations

Comparison of Three Months Ended September 30, 2017 and 2016

The following table summarizes our results of operations for the three months ended September 30, 2017 and 2016 (in thousands):

Revenues

The $0.6 million decrease in revenues was primarily attributable to the timing of revenue recognized under our Collaboration Agreement with Kite. Under the terms of the Collaboration Agreement, we received upfront payments of $5.5 million, which were initially recorded as deferred revenue and expensed over the period of the research term. During the current period, the expected research term was extended pursuant to the Amendment.

Research and Development Expenses

The $1.9 million increase in research and development expenses was primarily attributable to an increase of $1.0 million in direct research, contract manufacturing, and process development activities, an increase of $0.7 million in personnel-related expenses as a result of growth in headcount to support ongoing discovery and development programs, and an increase of $0.2 million in allocated overhead and facilities.

General and Administrative Expenses

The $1.6 million increase in general and administrative expenses was primarily attributable to a $0.9 million increase in professional and legal service fees to support the merger, a $0.6 million increase in personnel-related expenses primarily related to an increase in administrative headcount, and a $0.1 million increase in insurance and facility costs to support the growth and expansion of our business.

Bargain Purchase Gain

The bargain purchase gain relates solely to the excess of the estimated fair values of net assets acquired over the acquisition consideration paid for Nivalis.

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Comparison of Nine Months Ended September 30, 2017 and 2016

The following table summarizes our results of operations for the nine months ended September 30, 2017 and 2016 (in thousands):

Revenues

The $0.6 million decrease in revenues was primarily attributable to the timing of revenue recognized under our Collaboration Agreement with Kite. Under the terms of the Collaboration Agreement, we received upfront payments of $5.5 million, which were initially recorded as deferred revenue and expensed over the period of the research term. During the current period, the expected research term was extended pursuant to the Amendment.

Research and Development Expenses

The $5.3 million increase in research and development expenses was primarily attributable to an increase of $2.0 million in direct research, contract manufacturing and process development activities, an increase of $2.7 million in personnel-related expenses as a result of growth in headcount to support ongoing discovery and development programs, and an increase of $0.5 million in allocated overhead and facilities

General and Administrative Expenses

The $4.1 million increase in general and administrative expenses was primarily attributable to a $2.8 million increase in professional and legal service fees to support the merger, a $1.1 million increase in personnel-related expenses primarily related to an increase in administrative headcount, and a $0.2 million increase in insurance and facility costs to support the growth and expansion of our business.

Bargain Purchase Gain

The bargain purchase gain relates solely to the excess of the estimated fair values of net assets acquired over the acquisition consideration paid for Nivalis.

Liquidity and Capital Resources

As of September 30, 2017, we had cash, cash equivalents, and marketable securities totaling $87.2 million. We have raised an aggregate of $103.8 million to fund operations, of which $49.2 million was from the sale of convertible preferred stock, $5.5 million was through a license and research agreement, $5.0 million advanced from a long-term loan, and $44.1 million in cash, cash equivalents, and marketable securities acquired through the merger with Nivalis. In addition to our existing cash, cash equivalents, and marketable securities, we are eligible to receive research and development funding and to earn milestone and other contingent payments for the achievement of defined collaboration objectives and certain development and regulatory milestones and royalty payments under the Collaboration Agreement. Our ability to earn these milestone and contingent payments and the timing of achieving these milestones is primarily dependent upon the outcome Kite’s research and development activities and is uncertain at this time.

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We have incurred operating losses since inception. We expect to continue to incur significant expenses and operating losses for the foreseeable future as we continue our research and preclinical and clinical development of our product candidates; expand the scope of our current studies for our product candidates; initiate additional preclinical, clinical or other studies for our product candidates, including under any collaboration agreements; change or add additional manufacturers or suppliers; seek regulatory and marketing approvals for any of our product candidates that successfully complete clinical studies; seek to identify, evaluate and validate additional product candidates; acquire or in-license other product candidates and technologies; maintain, protect and expand our intellectual property portfolio; attract and retain skilled personnel; and experience any delays or encounter issues with any of the above.

Until such time as we can generate substantial product revenue, if ever, we expect to finance our cash needs through a combination equity or debt financings and collaboration agreements. Except for any obligations of our collaborator to make milestone payments under our agreement with them, we do not have any committed external sources of capital. To the extent that we raise additional capital through the future sale of equity or debt, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing common stockholders. If we raise additional funds through collaboration agreements in the future, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Our future capital requirements are difficult to forecast and will depend on many factors, including:

Based on our research and development plans and our timing expectations related to the progress of our programs, we expect that our existing cash, cash equivalents and marketable securities as of the date of this report and research funding that we expect to receive under our existing collaboration, will enable us to fund our operating expenses and capital expenditure requirements for at least the next 12 months. We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we expect. Additionally, the process of testing drug candidates in preclinical and clinical studies is costly, and the timing of progress in these studies remains uncertain.

Financing Agreements

Prior to execution and delivery of the Merger Agreement certain holders of our Series A-1 convertible preferred stock purchased shares of our Series A-1 convertible preferred stock.  In March 2017, we issued and sold 707,330 shares of Series A convertible preferred stock and received a total of $4.0 million. In April 2017, we issued and sold 2,947,211 shares of our Series A-1 convertible preferred stock for an aggregate of $16.7 million in net proceeds. In addition, contemporaneously with the execution and delivery of the Merger Agreement certain existing stockholders of Alpine entered into the subscription agreement with Alpine to purchase 1,335,118 additional shares of Alpine’s capital stock for an aggregate of $17.0 million in net proceeds.

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Long-Term Financing

In December 2016, we entered into a term loan agreement with Silicon Valley Bank pursuant to which up to $5.0 million could be borrowed.  On June 30, 2017, we drew down a term loan of $5.0 million pursuant to the agreement. The loan has an interest-only period expiring on July 1, 2018, at which point we will make thirty consecutive equal monthly payments of principal (each in an amount that will fully amortize the loan), plus accrued interest. Interest accrues at a floating per annum rate equal to the lender’s prime rate minus 1.75%. As a condition to the loan, we agreed to pay a final payment fee of 7.5%, or $375,000, upon repayment of the loan. The final payment fee was recorded in long-term debt with an offsetting reduction in long-term debt and was accounted for as a debt discount.

The obligations under the loan agreement are subject to acceleration upon the occurrence of specified events of default, including a material adverse change in our business, operations or financial or other condition.  The term loan agreement contains customary conditions to borrowings, events of default and negative covenants, including covenants that could limit our ability to, among other things, incur additional indebtedness, liens or other encumbrances, make dividends or other distributions; buy, sell or transfer assets; engage in any new line of business; and enter into certain transactions with affiliates. We were in compliance with our covenants as of September 30, 2017.

Cash Flows

The following is a summary of our cash flows (in thousands):

Net Cash Used in Operating Activities:

Net cash used in operating activities was $10.7 million during the nine months ended September 30, 2017 compared to $2.0 million during the nine months ended September 30, 2016.  The increase in cash used in operations in 2017 as compared to the 2016 period was primarily attributable to personnel-related expenses as a result of increased headcount, increased direct contract research costs to support product development, and cash used to support the merger.  

Net Cash Used in Investing Activities:

Net cash used in investing activities was $31.7 million during the nine months ended September 30, 2017 and consisted primarily of our purchase of short-term investments in U.S. Treasury securities, commercial paper, and corporate debt securities. Net cash used in investing activities was $0.5 million during the nine months ended September 30, 2016 and primarily related to the purchase of property and equipment to build out our laboratory at our Seattle facility.

Net Cash Provided by Financing Activities:

Net cash provided by financing activities was $42.7 million during the nine months ended September 30, 2017 and consisted primarily of $37.7 million in proceeds from the sale of preferred stock and $5.0 million from the advance of a long-term loan.  Net cash provided by financing activities was $11.0 million for the nine months ended September 30, 2016 and consisted primarily of the sale of preferred stock.

Contractual Obligations and Contingent Liabilities

As of September 30, 2017, there have been no material changes to our contractual obligations and commitments from December 31, 2016 as described under the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Contractual Obligations and Commitments” in the Registration Statement.

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Inflation

We do not believe that inflation has had a material effect on our business, financial condition or results of operations in the last three fiscal years.

Off-Balance Sheet Arrangements

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

Recent Accounting Pronouncements

For information regarding recent accounting pronouncements, see Note 2 of the Notes to Condensed Consolidated Financial Statements under Item 1 of this report.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

We are exposed to market risk related to changes in interest rates. As of September 30, 2017, we had cash, cash equivalents, and short-term investments of $87.2 million, consisting of deposits with commercial banks in checking, money market funds, U.S. Treasury securities, commercial paper, and corporate debt securities with a final maturity of each security of less than one year. The primary objectives of our investment policy are to preserve principal and maintain liquidity to meet operating needs, while also maximizing total returns in a manner that complies with our primary two objectives.

Our investment policy specifies credit quality standards for our investments and limits the amount of credit exposure to any single issue, issuer, or type of investment. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because our investments are in short-term securities. We believe that we do not have any material exposure to changes in the fair value of these assets as a result of changes in interest rates due to the short-term nature of our cash equivalents and marketable securities. Declines in interest rates, however, would reduce future investment income. Due to the short-term duration of our investment portfolio and the low risk profile of our investments, an immediate 10% change in interest rates during any of the periods presented would not have had a material effect on the fair market value of our portfolio, or on our financial statements.

We are subject to interest rate risk in connection with the borrowings under our term loan agreement.  As of September 30, 2017, we had $5.0 million outstanding principal amount under our term loan agreement.  The term loan bears interest at a rate equal to the lender’s prime rate minus 1.75%.  A 10% change in interest rates during any of the periods presented would not have had a material effect on our interest obligations under the term loan agreement.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures.

Management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act), as of the end of the period covered by this report. Based upon the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective, in design and operation, at the reasonable assurance level.

Changes in Internal Control over Financial Reporting.

Our management, including our principal executive and principal financial officers, evaluated any changes in our internal control over financial reporting during the period ended September 30, 2017, and has concluded that there were no changes that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except as follows:

On July 24, 2017, we completed the merger with Nivalis as described in Items 1 and 2 above.

Inherent Limitation on the Effectiveness of Internal Control.

The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the

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inability to eliminate misconduct completely. Accordingly, any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute assurances. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting.

PART II: OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business. We are not presently a party to any legal proceedings that, in the opinion of our management, would reasonably be expected to have a material adverse effect on our business, financial condition, operating results or cash flows if determined adversely to us. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

Item 1A. Risk Factors

You should carefully consider the following risk factors, in addition to the other information contained in this report, including the section of this report captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes. If any of the events described in the following risk factors and the risks described elsewhere in this report occurs, our business, operating results and financial condition could be seriously harmed. This report on Form 10-Q also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of factors that are described below and elsewhere in this report.

Risks Related to Our Financial Position, Capital Needs and Business

We will need to raise substantial additional funds to advance development of our therapeutic candidates, and we cannot guarantee we will have sufficient funds available in the future to develop and commercialize our current or future therapeutic candidates.

We will need to raise substantial additional funds to expand our development, regulatory, manufacturing, marketing, and sales capabilities or contract with other organizations to provide these capabilities to us. We have used substantial funds to develop our therapeutic candidates and will require significant funds to conduct further research and development, preclinical testing, and clinical trials of our therapeutic candidates, to seek regulatory approvals for our therapeutic candidates, and to manufacture and market products, if any are approved for commercial sale. As of September 30, 2017, we had $87.2 million in cash and cash equivalents. Based on our current operating plan, we believe our available cash and cash equivalents, will be sufficient to fund our planned level of operations for at least the next 12 months. Our future capital requirements and the period for which we expect our existing resources to support our operations may vary significantly from what we expect. Our monthly spending levels vary based on new and ongoing development and corporate activities. Because the length of time and activities associated with successful development of our therapeutic candidates are highly uncertain, we are unable to estimate the actual funds we will require for development and any approved marketing and commercialization activities. To execute our business plan, we will need, among other things:

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If we are unable to obtain necessary funding on a timely basis or on acceptable terms, we may have to delay, reduce, or terminate our research and development programs, preclinical studies, or clinical trials, if any, limit strategic opportunities, or undergo reductions in our workforce or other corporate restructuring activities. We also could be required to seek funds through arrangements with collaborators or others requiring us to relinquish rights to some of our technologies or therapeutic candidates we would otherwise pursue on our own. We do not expect to realize revenue from product sales, milestone payments, or royalties in the foreseeable future, if at all. Our revenue sources are, and will remain, extremely limited unless and until our therapeutic candidates are clinically tested, approved for commercialization, and successfully marketed.

To date, we have financed our operations primarily through the sale of equity securities and payments received under our license and research agreement with Kite, a Gilead company. We will be required to seek additional funding in the future and intend to do so through a combination of public or private equity offerings, debt financings, credit and loan facilities, research collaborations, and license agreements. Our ability to raise additional funds from these or other sources will depend on financial, economic, and other factors, many of which are beyond our control. Additional funds may not be available to us on acceptable terms or at all.

If we raise additional funds by issuing equity securities, our stockholders will suffer dilution, and the terms of any financing may adversely affect the rights of our stockholders. In addition, as a condition to providing additional funds to us, future investors may demand, and may be granted, rights superior to those of existing stockholders. Debt financing, if available, may involve restrictive covenants limiting our flexibility in conducting future business activities, and, in the event of a liquidation or insolvency, debt holders would be repaid before holders of equity securities receive any distribution of corporate assets. Our failure to raise capital or enter into such other arrangements within a reasonable timeframe would have a negative impact on our financial condition, and we may have to delay, reduce, or terminate our research and development programs, preclinical or clinical trials, or undergo reductions in our workforce or other corporate restructuring activities.

We are an early stage biopharmaceutical company with a history of losses, we expect to continue to incur significant losses for the foreseeable future, and we may never achieve or maintain profitability and we have a limited operating history that may make it difficult for investors to evaluate the potential success of our business.

We are a development-stage immunotherapy company, with a limited operating history, focused on developing treatments for autoimmune/inflammatory diseases and cancer. Since inception, we have devoted our resources to developing novel protein-based immunotherapies using our proprietary variant lg domain (vIgD) platform technology. We have had significant operating losses since inception. For the nine months ended September 30, 2017, our net loss was $3.5 million. Substantially all of our losses have resulted from expenses incurred in connection with our research programs and from general and administrative costs associated with our operations. Our technologies and therapeutic candidates are in early stages of development, and we are subject to the risks of failure inherent in the development of therapeutic candidates based on novel technologies.

We have historically generated revenue primarily from the receipt of research funding and upfront payments under our license and research agreement with Kite. We have not generated, and do not expect to generate, any revenue from product sales for the foreseeable future, and we expect to continue to incur significant operating losses for the foreseeable future due to the cost of research and development, preclinical studies, clinical trials, and the regulatory approval process for therapeutic candidates. The amount of future losses is uncertain. Our ability to achieve profitability, if ever, will depend on, among other things, our or our existing collaborators, or any future collaborators, successfully developing therapeutic candidates, obtaining regulatory approvals to market and commercialize therapeutic candidates, manufacturing any approved products on commercially reasonable terms, establishing a sales and marketing organization or suitable third party alternatives for any approved product, and raising sufficient funds to finance business activities. If we or our existing collaborators, or any future collaborators, are unable to develop and commercialize one or more of our therapeutic candidates or if sales revenue from any therapeutic candidate receiving approval is insufficient, we will not achieve profitability, which could have a material adverse effect on our business, financial condition, results of operations, and prospects.

Our approach to the discovery and development of innovative therapeutic treatments based on our technology is unproven and may not result in marketable products.

We plan to develop novel protein-based immunotherapies using our proprietary vIgD platform technology for the treatment of cancer and inflammatory diseases. The potential to create therapies capable of working within and/or modulating an immune synapse, forcing a synapse to occur, or preventing a synapse from occurring is an important, novel attribute of our vIgD platform. However, the scientific research forming the basis of our efforts to develop therapeutic candidates based on the vIgD platform is relatively new. Further, the scientific evidence to support the feasibility of developing therapeutic treatments based on our vIgD platform is both preliminary and limited.

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Relatively few therapeutic candidates based on immunoglobulin superfamily, or IgSF, domains have been tested in animals or humans, and a number of clinical trials conducted by other companies using IgSF domains technologies have not been successful. We may discover the therapeutic candidates developed using our vIgD platform do not possess certain properties required for the therapeutic to be effective, such as the ability to remain stable or active in the human body for the period of time required for the therapeutic to reach the target tissue and/or cell. We currently have only limited data, and no conclusive evidence, to suggest we can introduce these necessary therapeutic properties into vIgDs. We may spend substantial funds attempting to introduce these properties and may never succeed in doing so. In addition, vIgDs may demonstrate different chemical and pharmacological properties in human subjects or patients than they do in laboratory studies. Even if our programs, such as the ALPN-101 program, have successful results in animal studies, they may not demonstrate the same chemical and pharmacological properties in humans and may interact with human biological systems in unforeseen, ineffective, or harmful ways. For example, in the context of immunotherapies, in a Phase I clinical trial of TeGenero AG’s product candidate TGN1412, healthy volunteer subjects receiving the product candidate experienced a systemic inflammatory response resulting in renal and pulmonary failure requiring interventions such as dialysis and critical care support. Following this experience, regulatory agencies now ask for evaluation of immunomodulatory antibodies with a number of in vitro assays with human cells. While we are currently performing in vitro and in vivo proof of concept studies for several of our vIgDs preclinically, the risk profile in humans has yet to be assessed. As a result, we may never succeed in developing a marketable therapeutic, we may not become profitable, and the value of our common stock will decline.