KINETA, INC./DE - Quarter Report: 2020 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

For the quarterly period ended June 30, 2020

OR

For the transition period from           to           

Commission file number: 001-37695

Proteostasis Therapeutics, Inc.

(Exact name of registrant as specified in its charter)

(617) 225-0096

(Registrant’s telephone number, including area code)

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

Securities registered pursuant to the Section 12(g) of the Act: None

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 August 3, 2020, there were 52,175,861 shares of the registrant’s common stock, $0.001 par value per share, outstanding.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, or this report, including the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Statements that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are often identified by the words, “aim,” “anticipate,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “project,” “seek,” “should,” “target,”  “will,” “would” or the negative of these terms or other comparable terminology intended to identify forward-looking statements. These forward-looking statements include, but are not limited to, statements about:

2

You should refer to “Risk Factors” for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this report will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this report.

Any forward-looking statements in this report reflect our current views with respect to future events and with respect to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those described under Part II, Item 1A. Risk Factors and elsewhere in this report. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

This report contains estimates, projections and other information concerning our industry, the general business environment, and the markets for certain diseases, including estimates regarding the potential size of those markets and the estimated incidence and prevalence of certain medical conditions. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events, circumstances or numbers, including actual disease prevalence rates and market size, may differ materially from the information reflected in this report. Unless otherwise expressly stated, we obtained this industry, business information, market data, prevalence information and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data, and similar sources, in some cases applying our own assumptions and analysis that may, in the future, not prove to have been accurate.

Symdeko/Symkevi and Trikafta are trademarks of Vertex Pharmaceuticals Incorporated.

3

Proteostasis Therapeutics, Inc.

INDEX

4

PART I — FINANCIAL INFORMATION

Item 1. CONDENSED Financial Statements (Unaudited)

PROTEOSTASIS THERAPEUTICS, INC.

CONDENSED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)

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

5

PROTEOSTASIS THERAPEUTICS, INC.

CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share amounts)

(Unaudited)

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

6

PROTEOSTASIS THERAPEUTICS, INC.

CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share amounts)

(Unaudited)

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

7

PROTEOSTASIS THERAPEUTICS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

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

8

PROTEOSTASIS THERAPEUTICS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

Proteostasis Therapeutics, Inc. (the “Company”) was incorporated in Delaware on December 13, 2006. The Company is a clinical stage biopharmaceutical company committed to the discovery and development of novel therapeutics to treat cystic fibrosis (“CF”) through theratyping, or the process of matching modulators to individual response to treatment regardless of cystic fibrosis transmembrane conductance regulator (“CFTR”) mutations. CF is a disease caused by defects in the function or abundance of CFTR protein. Although, CF is defined as a monogenic recessive genetic disorder caused by mutations in the CFTR gene, there is a broad range of disease activity for different organ systems in CF, including lung disease, meconium ileus, diabetes, and liver disease, even for CF patients who are homozygous for the most common mutation, F508del mutation. In summary, CF genotype does not always match CF phenotype.

Since its inception, the Company has devoted substantially all of its efforts to organizing and staffing the Company, business planning, raising capital, acquiring and developing product and technology rights, and conducting research and development activities. It has funded its operations to date with proceeds from the sale of preferred stock, the issuance of convertible promissory notes, proceeds from its initial public offering in February 2016, proceeds from its follow-on public offerings, and payments received in connection with collaboration agreements and a research grant, as well as funds from the sale of stock under the at-the-market offering program described below. The Company does not have any products approved for sale and has not generated any revenue from product sales.

The Company has not generated any commercial revenue since inception. As a result, the Company has incurred recurring losses and requires significant cash resources to execute its business plans. In accordance with ASC 205-40, Going Concern (“ASC 205-40”), the Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financial statements are issued. As of June 30, 2020, the Company had an accumulated deficit of $355.4 million. The Company has incurred losses and negative cash flows from operations since its inception. During the six months ended June 30, 2020, the Company incurred losses of $18.8 million and used $21.4 million of cash in operations. The Company expects that its operating losses and negative cash flows will continue for the foreseeable future. The Company currently expects that its cash, cash equivalents and short-term investments of $48.9 million will be sufficient to fund its operating expenses and capital requirements, based upon its current operating plan, for at least 12 months from the date that these financial statements are issued. The Company will require additional funding to fund its proposed Phase 3 Modulator Options to RestorE CFTR (“MORE”) trial, its CHOICES program, and to advance its proprietary combination therapy candidates through regulatory approval and into commercialization, if approved. Accordingly, the Company is in the process of considering various financing alternatives to support its operating and capital needs, including public or private equity or debt financings, third-party funding, marketing and distribution arrangements, as well as other collaborations, strategic alliances and licensing arrangements, or any combination of these approaches. The Company is also considering strategic alternatives for its CF portfolio, including its proprietary combination therapy candidates posenacaftor, dirocaftor, and nesolicaftor, with the goal of maximizing stockholder value of these assets. However, the Company does not currently have any commitments for future external funding and additional financing may not be available on a timely basis, on acceptable terms, or at all.

The novel coronavirus (“COVID-19”) pandemic continues to rapidly evolve and has already resulted in a significant disruption of global financial markets. If the disruption persists and deepens, the Company could experience an inability to access additional capital, when and if needed. If the Company is unable to implement any strategic or financing alternative and adequate funds are not available in the future, the Company may be required to delay, limit, reduce or terminate its clinical development or future commercialization efforts or obtain funds through arrangements with collaborators or others that may require it to relinquish rights to develop and market product candidates that it would otherwise prefer to develop and market themselves.

Unaudited Interim Financial Information

The condensed balance sheet as of December 31, 2019 was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). The accompanying condensed financial statements, as of June 30, 2020 and for the three and six months ended June 30, 2020, are unaudited and have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The Company believes that the disclosures are adequate to make the information presented not misleading. These unaudited condensed financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto for the year ended December 31, 2019 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on March 10, 2020. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, as necessary for the fair statement of the Company’s financial position as of June 30, 2020, results of its operations for the three and six months ended June 30, 2020, stockholders’ equity for the three and six months ended June 30, 2020, and cash flows for the six months ended June 30, 2020,

9

have been made. The results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the results of operations to be expected for the year ending December 31, 2020.

Summary of Significant Accounting Policies

The Company’s significant accounting policies, which are disclosed in the audited financial statements for the year ended December 31, 2019 and the notes thereto, are included in the Company’s Annual Report on Form 10-K that was filed with the SEC on March 10, 2020. There were no changes to significant accounting policies during the three and six months ended June 30, 2020.

Risks and Uncertainties

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

In addition, the Company is subject to other challenges and risks specific to its business and its ability to execute on its business plan and strategy, as well as risks and uncertainties common to companies in the biopharmaceutical industry with development and commercial operations, including, without limitation, risks and uncertainties associated with: obtaining regulatory approval of its late-stage product candidates; delays or problems in obtaining clinical supply, loss of single source suppliers or failure to comply with manufacturing regulations; identifying, acquiring or in-licensing additional products or product candidates; biopharmaceutical product development and the inherent uncertainty of clinical success; and the challenges of complying with applicable regulatory requirements. In addition, to the extent the ongoing COVID-19 pandemic adversely affects our business and results of operations, it may also have the effect of heightening many of the other risks and uncertainties discussed above.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. Significant estimates and assumptions reflected in these condensed financial statements include, but are not limited to, revenue recognition, the accrual for research and development expenses, and the valuation the derivative liability. Estimates are periodically reviewed in light of changes in circumstances, facts, and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates.

Reclassifications

Certain prior year amounts have been reclassified for consistency with the current year presentation. An adjustment has also been made to the condensed statement of cash flows for the period ended June 30, 2019, to reclassify non-cash lease expense out of depreciation and amortization.

Recently Issued and Adopted Accounting Pronouncements

ASU No. 2018-13, Fair Value Measurement (Topic 820): Changes to the Disclosure Requirements for Fair Value Measurement

In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). The new standard modifies the disclosure requirements on fair value measure in Topic 820, including removals of existing disclosures, modifications of existing disclosures, and additions of new disclosures. Certain amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair values measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim of annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted for any removed or modified disclosure. The new standard is effective for the Company on January 1, 2020. The adoption of this standard did not have a material impact on the Company’s condensed financial statements.

Recently Issued Accounting Pronouncements

ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). The FASB subsequently issued amendments to ASU 2016-13, which have the same effective date and transition date of January 1, 2022, as the Company is a smaller reporting company. These standards require that credit losses be reported using an expected losses model rather than the incurred losses model that is currently used, and establishes additional disclosures related to credit risks. For available-for-sale debt securities with unrealized losses, these standards

10

now require allowances to be recorded instead of reducing the amortized cost of the investment. These standards limit the amount of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and requires the reversal of previously recognized credit losses if fair value increases. Based on the composition of the Company’s investment portfolio and other financial assets, current market conditions and historical credit loss activity, the adoption of these standards is not expected to have a material impact on the Company’s condensed financial statements.

The following table summarizes the Company’s short-term investments as of June 30, 2020 and December 31, 2019 (in thousands):

Short-term investments represent holdings of available-for-sale debt securities and are reported at fair value with unrealized gains and losses reported net of taxes, if material, in other comprehensive income. The Company did not have any realized gains or losses on its short-term investments for the three and six months ended June 30, 2020 and 2019. There were no other-than-temporary impairments recognized for the three and six months ended June 30, 2020 and 2019.

11

The following tables present information about the Company’s financial assets and liabilities measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values (in thousands):

During the periods ended June 30, 2020 and December 31, 2019, there were no transfers between Level 1, Level 2 and Level 3.

The derivative liability relates to a cash settlement option associated with the change of control provision in the Company’s Cystic Fibrosis Foundation, Inc. (“CFF”) agreement, which meets the definition of a derivative. The fair value of the derivative liability is based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The fair value of the derivative instrument was originally determined using the Monte-Carlo simulation analysis. In determining the fair value of the derivative liability, the inputs impacting fair value include the fair value of the Company’s common stock, expected term of the derivative instrument, expected volatility of the common stock price, risk-free interest rate, expected sales-based milestone payments, discount rate, probability of a change of control event, and the probability that the counterparty would elect to accept the alternative cash payment in lieu of its right to the future sales-based milestone payments.

The fair value of the derivative liability was not material at June 30, 2020 and December 31, 2019.

Prepaids and other current assets consisted of the following (in thousands):

12

Accrued expenses consisted of the following (in thousands):

As of June 30, 2020, the Company had short-term borrowings of $0.7 million consisting of a Commercial Insurance Premium Finance and Security Agreement (the “Finance and Security Agreement”) entered into on February 27, 2020. The Finance and Security Agreement has a ten-month repayment period with an annual interest rate of 2.59% and a maturity of December 11, 2020. Collateral under the Finance and Security Agreement includes the right, title, and interest in the underlying business insurance policies. As of June 30, 2020, the Company has paid less than $0.1 million in interest on short-term borrowings.

2016 Stock Option and Incentive Plan

On February 3, 2016, the Company’s stockholders approved the 2016 Stock Option and Incentive Plan (the “2016 Plan”), which became effective on February 9, 2016. The 2016 Plan provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock units, restricted stock awards and other stock-based awards. The number of shares initially reserved for issuance under the 2016 Plan was 1,581,839 shares. The number of shares of common stock that may be issued under the 2016 Plan will automatically increase each January 1, beginning January 1, 2017, by the lesser of 3% of the shares of the Company’s common stock outstanding on the immediately preceding December 31, or an amount determined by the Company’s board of directors or the compensation committee of the board of directors. The shares of common stock underlying any awards that are forfeited, canceled, repurchased, or are otherwise terminated by the Company under the 2016 Plan and the 2008 Equity Incentive Plan, as amended (the “2008 Plan”) will be added back to the shares of common stock available for issuance under the 2016 Plan. On January 1, 2020, an additional 1,563,498 shares were reserved for issuance under the 2016 Plan. As of June 30, 2020, the total number of shares of the Company’s common stock reserved for issuance under the 2016 Plan was 6,914,838, of which 1,275,795 shares are available for future issuance under the 2016 Plan.

2016 Employee Stock Purchase Plan

On February 3, 2016, the Company’s stockholders approved the 2016 Employee Stock Purchase Plan (the “2016 ESPP”), which became effective in connection with the completion of the Company’s initial public offering. A total of 138,757 shares of common stock were initially reserved for issuance under the 2016 ESPP. In addition, the number of shares of common stock that may be issued under the 2016 ESPP will automatically increase each January 1, beginning January 1, 2017, by the lesser of (i) 138,757 shares of common stock, (ii) 1% of the Company’s shares of common stock outstanding on the immediately preceding December 31, or (iii) an amount determined by the Company’s board of directors or the compensation committee of the board of directors.

During the six months ended June 30, 2020, 31,027 shares of common stock were issued pursuant to the 2016 ESPP. As of June 30, 2020, the total number of shares reserved under the 2016 ESPP was 580,742 shares. The Company recognized less than $0.1 million of stock-based compensation during the three and six months ended June 30, 2020 related to the 2016 ESPP.

Restricted Stock Units (RSUs)

On February 4, 2020, the Company’s board approved payment to be made to a nonemployee through a grant of RSUs based on the February 4, 2020 closing share price of the Company’s common stock. The requisite service period for the awards is from February 4, 2020 to August 4, 2020 (the vesting period). The Company recognized employee stock-based compensation expense for the RSU grant on a straight-line basis over the vesting period of the awards. As of June 30, 2020, 4,519 RSUs were granted and the Company recognized less than $0.1 million of stock-based compensation expense during the three and six months ended June 30, 2020.

On June 29, 2020, the Company’s board approved the grant of RSU awards with an aggregate fair market value equal to the RSU value of $1.2 million (each an “Award”) to two consultants (each, a “Grantee”) in consideration for services. Each Award shall vest in full immediately prior to, but subject to the occurrence of, a specific strategic event (the “Vesting Date”), so long as the

13

respective Grantee remains in service to the Company through the Vesting Date. If the Awards vest as provided for above, the Company shall issue a number of shares of stock equal to the RSU value, divided by the volume-weighted average price per share of the Company’s stock for the 10-day period ending on the Vesting Date. The Company also has the option to issue each Grantee the respective cash equivalent of the Award in part or in full satisfaction of the delivery of the stock in connection with the vesting of each Award. As of June 30, 2020, the Company recognized no compensation costs associated with the Awards as the performance condition of the completion of certain strategic events is not considered probable.

The following table summarizes the Company’s RSU activity for the six months ended June 30, 2020:

Stock-Based Compensation

Stock-based compensation expense, including shares issued to consultants for services, was classified in the statements of operations as follows (in thousands):

The following table summarizes the Company’s stock option activity for the six months ended June 30, 2020 (in thousands except share and per share amounts):

The grant date fair value of options granted during the period was $1.8 million, or $1.09 per share on a weighted-average basis, and will be recognized as compensation expense over the requisite service period of four years.

As of June 30, 2020, there was $4.9 million of unrecognized compensation cost related to employee and nonemployee unvested stock options granted under the 2016 Plan, which is expected to be recognized over a weighted-average remaining service period of 2.4 years. Stock compensation costs have not been capitalized by the Company.

14

Prior to 2013, the Company issued options to purchase 203,964 shares of common stock to nonemployees, primarily members of the Company’s scientific advisory board, that vest upon the achievement of specified development and clinical milestones. As of June 30, 2020, options for the purchase of 83,250 shares held by nonemployees remained unvested, pending achievement of the specified milestones.

Genentech

In December 2018, the Company entered into a Technology Transfer and License Agreement (the “Genentech Agreement”) with Genentech, Inc. (“Genentech”) under which the Company granted Genentech an exclusive worldwide license for technology and materials relating to potential therapeutic small molecule modulators of an undisclosed target within the proteostasis network. The rights do not include CFTR modulators and are unrelated to the Company’s investigational medicines or other ongoing research programs in cystic fibrosis. In connection with the terms of the Genentech Agreement, the Company was entitled to a nonrefundable cash payment of $5.0 million following the successful completion of the technology and materials transfer to Genentech and future milestone payments in the aggregate of approximately $96.0 million upon the achievement of specified development, regulatory, and commercial milestones. In addition, Genentech is obligated to pay the Company tiered royalties in the low single-digits based on net sales of products covered by the licenses granted under the Genentech Agreement. There are no cancellation, termination, or refund provisions in the Genentech Agreement that contain material financial consequences to the Company. Unless earlier terminated, the Genentech Agreement continues in full force and effect until the passing or expiration of all royalty payment obligations. Reciprocal termination rights under the agreement include termination for breach and termination for bankruptcy. Genentech may terminate the Genentech Agreement in its entirety, for convenience, upon thirty days’ notice to the Company.

The Company evaluated the Genentech Agreement in accordance with the provisions of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“ASC 606”). The Company’s obligations under the Genentech Agreement are the following promises: (i) exclusive license to certain intellectual property associated with a specific target, and (ii) technology and materials transfer related to the intellectual property underlying the licensed technology. The Company determined that the exclusive license is not distinct from the associated technology and materials transfer because the customer cannot benefit from, or utilize, the license without the technology and materials transfer. Specifically, the Company concluded that the exclusive license is not capable of being distinct from the associated technology and materials transfer because Genentech does not have the knowledge or expertise to fully exploit potential product candidates without the accompanying technology and materials provided pursuant to the transfer, and no other third party can perform the transfer due to the Company’s proprietary knowledge and specialized expertise with respect to the licensed intellectual property. Accordingly, the Company concluded that these promises should be combined into a single performance obligation (the “License and Transfer Performance Obligation”).

The Company measured the transaction price solely in reference to the $5.0 million payment due upon receipt of notice from Genentech regarding the satisfactory completion of the technology and materials transfer. None of the variable consideration payable under the arrangement has been included in the transaction price. As of June 30, 2020, the Company has not achieved any research, development, regulatory, or commercial milestones, or earned any royalties under the Genentech Agreement. The Company utilizes “the most likely” amount method to estimate the amount of research, development, and regulatory milestone payments to be received. As part of the evaluation for the research and development milestone payments, the Company considers several factors including the stage of research and development of the compounds included in the arrangement, the risk associated with the remaining research and development work required to achieve the milestone, and the Company’s level of involvement in the research and development activities.

Regulatory milestone payments are triggered upon the first commercial sale following receipt of regulatory approval from the FDA or other global regulatory authorities; therefore, such amounts will be excluded from the transaction price until the associated regulatory approval is received. The commercial milestone payments and royalties are subject to the royalty recognition constraint whereby such amounts will be recognized as revenue upon the later of: (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the payment has been allocated has been satisfied, or partially satisfied, because the exclusive license is deemed to be the sole or predominant item to which the payments relate. As all performance obligations are satisfied, the Company will recognize royalty revenue at the date the sales occur. The Company did not adjust the promised amount of consideration for the effects of a significant financing component because the Company expects that the period between when the promised goods and services are transferred and when the customer pays for those goods and services will be one year or less. There were no changes in the transaction price for the six months ended June 30, 2020.

15

The transaction price of $5.0 million allocated to the combined performance obligation was recognized as revenue in February 2019 at the point in time that Genentech provided notice regarding the satisfactory completion of the technology and materials transfer. Upon that successful execution of the technology and materials transfer, control was deemed to be transferred for both the exclusive license and the technology and materials transfer promises, therefore the risks and rewards of ownership had been conveyed. As of June 30, 2020, the Company did not have any receivables or deferred revenue related to the Genentech Agreement because no payments under the arrangement became due, nor had the underlying performance obligation been satisfied.

The Company did not record a federal or state income tax benefit for its losses for the three and six months ended June 30, 2020 and 2019, respectively, due to the conclusion that a full valuation allowance is required against the Company’s deferred tax assets. All the Company’s losses before income taxes were generated in the United States.

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

The following common stock equivalents have been excluded from the computation of diluted weighted-average shares outstanding, because such securities had an antidilutive impact:

12. Leases

The Company has an operating lease for office and laboratory space for its corporate headquarters in Boston, Massachusetts. The lease commenced in January 2018 and rent payments began in April 2018. This lease has a ten-year initial term with an option to extend for seven additional years.

The Company has the right to terminate the lease in the event of the inability to use the space due to substantial damage while the lessor has the right to terminate the lease if the Company defaults on the lease financial obligations. Per the terms of the lease agreement, the Company does not have any residual value guarantees. In calculating the present value of the lease payments, the Company utilized its incremental borrowing rate, which is based on rates that would be incurred to borrow on a collateralized basis over a term equal to the lease payments in a similar economic environment. The Company has allocated all the contract considerations to the one lease component. This may result in the initial and subsequent measurement of the balances of the right-of-use asset and lease liability for leases being greater than if the policy election was not applied. The Company’s real estate lease in Boston is considered a net lease, as the non-lease components (i.e., common area maintenance) are paid separately from rent, based on actual costs incurred. Therefore, the variable non-lease components were not included in the right-of-use asset and liability and are reflected as an expense in the period incurred.

16

As of June 30, 2020, and December 31, 2019, assets under operating lease were $12.0 million and $12.6 million, respectively. The elements of lease expense were as follows (in thousands): 

Future lease payments under noncancelable leases as of June 30, 2020 (in thousands):

17

The following discussion and analysis of our financial condition and the results of operations should be read in conjunction with our financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q, or Quarterly Report, and our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission, or the SEC, on March 10, 2020, or the Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business, includes forward looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section in our Annual Report and in this Quarterly Report, our actual results could differ materially from the results described, in or implied by, the forward-looking statements contained in the following discussion and analysis. Such factors may be amplified by the COVID-19 pandemic and its potential impact on our business and the global economy.

Overview

We are a clinical stage biopharmaceutical company committed to the discovery and development of novel therapeutics to treat CF through theratyping, or the process of matching modulators to individual response to treatment regardless of CFTR mutations. CF is a disease caused by defects in the function or abundance of CFTR protein. Although, CF is defined as a monogenic recessive genetic disorder caused by mutations in the CFTR gene, there is a broad range of disease activity for different organ systems in CF, including lung disease, meconium ileus, diabetes, and liver disease, even for CF patients who are homozygous for the most common mutation, F508del mutation. In summary, CF genotype does not always match CF phenotype.

CFTR modulators are compounds that affect the synthesis, folding, trafficking, function, and clearance of CFTR protein and are potentially disease modifying. However, these modulators are only available to certain patient subsets based on genotype or a classification based on the ways in which they affect CFTR protein. They have been found to substantially improve patient health outcomes compared to best supportive care, although these drugs have variable efficacy among individuals as has been observed for most drugs.

In a clinical setting, when treatment efficacy is uncertain for individuals and when high costs limit “trial and error” approaches to assessing potential benefit for a patient from a specific drug, the new focus has become matching individuals with drugs that are most likely to be effective. Thus, emerging evidence and increased use of CF patient-derived cells studied in a laboratory test, such as the organoid assay, have been shown to provide a patient-friendly and cost-effective approach to increasing access to treatment for patients with CF and to optimize the risk-benefit ratio and cost-effectiveness of CFTR modulators. Currently, in many geographies, access to CFTR modulators has been limited because the approved drugs failed to meet cost-effectiveness thresholds required by payors.

Our CF-focused pipeline consists of novel CFTR modulators including correctors, potentiators and amplifiers. Upon discovery of amplifiers, a novel class of CFTR modulators, we utilized their novel mechanism of action as a drug screening tool and subsequently identified correctors and potentiators that we are now developing as combination therapies. We have completed double blind, randomized, placebo-controlled Phase 2 clinical trials with the combination of all three of our investigational CFTR modulators (PTI-801, or posenacaftor, a third generation CFTR corrector; PTI-808, or dirocaftor, a CFTR potentiator; and PTI-428, or nesolicaftor, a CFTR amplifier) in patients with the most common F508del mutations. We are currently investigating combinations of posenacaftor, dirocaftor, and nesolicaftor in an ex vivo study to identify potential clinical responders among subjects with CF who have rare CFTR mutations. Based on the functional response to our investigational CFTR modulators in the ex vivo assay, we will invite select patients to participate in clinical trials with the drug candidates to validate the ability of the ex vivo response to predict clinical benefit. If approved, we intend to commercialize our combination therapy for CF patients with rare CF mutations and as well as those who have at least a single copy of the F508del mutation.

In February 2019, we joined the HIT-CF consortium, a pan-European strategic initiative which seeks to validate a personalized therapy approach for CF patients with rare genetic mutations and genotypes that make them ineligible for approved CFTR modulator therapies. As of February 2020, HIT-CF has collected rectal biopsies from over 500 subjects across European Cystic Fibrosis Society, or ECFS, Clinical Trial Network, or CTN, clinical sites out of a population of approximately 2,300 adults in Europe alone who have rare CFTR genotypes. These tissue samples from CF subjects with less-common genotypes are currently assayed as organoids and we are able to use these organoids to test responsiveness to our investigational CFTR modulators. We intend to initiate the CHOICES (Crossover trial based on Human Organoid Individual response in CF - Efficacy Study) trial, which we expect will be the first-ever personalized medicine-based trial in CF, in the second half of 2020. We plan to enroll patients in Europe with CF who are ineligible for current standard of care CFTR modulator therapies due to their genotype. This trial, which is financially supported by the European Commission, is contemplated to be a placebo-controlled, double blind, crossover study. Beyond HIT-CF, other groups in multiple regions have created repositories of patient-derived cells, including organoids, that offer additional pools of patients for ex vivo profiling for response to PTI compounds and possible confirmatory clinical trials that would mirror the CHOICES study design. We have completed scientific advice meetings with Medicines and Healthcare Products Regulatory Agency (MHRA), in the United Kingdom and the Dutch Medicines Evaluation Board (MEB) on the CHOICES program for the treatment of people living with CF.  In addition to the positive scientific advice from the MHRA and MEB, we received a High Strategic Fit score from the Clinical Trials Network (CTN) for the HIT-CF – CHOICES protocol.

18

Equity Financings and Research Funding

In addition to our wholly owned CF programs, in December 2018, we entered into a Technology Transfer and License Agreement, or the Genentech Agreement, with Genentech, Inc., or Genentech. We granted Genentech a worldwide, exclusive license for technology and materials relating to potential therapeutic small molecule modulators of an undisclosed target within the proteostasis network. The rights do not include CFTR modulators and are unrelated to our investigational products or other ongoing research programs in cystic fibrosis. In connection with the Genentech Agreement, we received an upfront payment, and are eligible to receive additional milestone payments, which are approximately $96.0 million in the aggregate, subject to the achievement of specified development, regulatory, and commercial milestones. In addition, Genentech is obligated to pay us tiered royalties in the low single-digits based on net sales of products covered by the licenses granted under the Genentech Agreement. As of June 30, 2020, we have not achieved any research, development, regulatory, or commercial milestones, or earned any royalties under the Genentech Agreement.

Since our inception in 2006, we have devoted substantially all our resources to organizing and staffing our company, business planning, raising capital, acquiring and developing product and technology rights, and conducting research and development activities for our product candidates. We do not have any products approved for sale and have not generated any revenue from product sales. We have funded our operations to date with proceeds received from equity offerings, the issuance of convertible promissory notes and, to a lesser extent, payments received in connection with collaboration agreements and a research grant.

In May 2019, we entered into a sales agreement with H.C. Wainwright & Co., LLC, or HCW, with respect to an at-the-market, or ATM, offering program, or the HCW ATM program, under which we may issue and sell, from time to time at our sole discretion, shares of our common stock, in an aggregate offering amount of up to $56.6 million. HCW acts as our sales agent and will use commercially reasonable efforts to sell shares of common stock from time to time, based upon instruction from us. Common stock will be sold at prevailing market prices at the time of the sale, and as a result, prices may vary. We will pay HCW up to 3% of the gross proceeds from any common stock sold under the sales agreement. As of December 31, 2019, we had sold 987,653 shares of our common stock for total net proceeds of approximately $3.5 million under the HCW ATM program. We did not sell any shares of our common stock under the ATM program during the six months ended June 30, 2020.

Since our inception, we have not generated significant revenue and have incurred significant operating losses. Our net losses were $8.9 million and $18.8 million for the three and six months ended June 30, 2020, respectively. As of June 30, 2020, we had an accumulated deficit of $355.4 million. We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. We expect our expenses and capital requirements will increase substantially in connection with our development activities, as we:

We will not generate revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for our product candidates. If we obtain regulatory approval for any of our product candidates, we expect to incur significant expenses related to developing our internal commercialization capability to support product sales, marketing, and distribution. In addition, we will continue to incur additional costs associated with operating as a public company.

As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through the sale of public or private equity, debt financings, or other capital sources, including potential collaborations with other companies, or other strategic transactions. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back, or discontinue the development and commercialization of one or more of our product candidates.

19

As of June 30, 2020, we had cash, cash equivalents and short-term investments of $48.9 million. We believe that our existing cash, cash equivalents, and short-term investments are sufficient to fund our projected operating expenses and capital requirements for at least 12 months from the date of this filing. However, the expenditures that will be necessary to execute our business plan, and upon which our current liquidity and capital resources estimate is based, are subject to numerous uncertainties, which may adversely affect our liquidity and capital resources. Although we have been successful in raising capital in the past, there is no assurance that we will be successful in obtaining such additional financing on terms acceptable to us, if at all, nor is it considered probable under the accounting standards.

Recent Developments

In June 2020, we announced results from in vitro studies evaluating the use of PTI-129 as a treatment for COVID-19. PTI-129 is a pre-clinical, once-daily, oral small molecule originally designed to treat protein misfolding disorders involving the unfolded protein response, or UPR. In in vitro studies conducted at Calibr, the drug discovery division of Scripps Research, PTI-129 demonstrated the potential to reduce viral protein production in host cells by activating the adaptive branches of the UPR pathway and reducing the levels of misfolded proteins.

COVID-19 Business Update

With the global spread of the ongoing COVID-19 pandemic in the first half of 2020, we implemented business continuity plans designed to address and mitigate the impact of the COVID-19 pandemic on our employees and our business, including our clinical trials, supply chains, and third-party providers. We continue to closely monitor the COVID-19 situation as we evolve our business continuity plans and response strategy. In March 2020, the Governor of Massachusetts ordered all individuals living in the Commonwealth of Massachusetts to stay at their place of residence for an indefinite period of time (subject to certain exceptions to facilitate authorized necessary activities) to mitigate the impact of the COVID-19 pandemic so our workforce transitioned to working remotely. We are currently evaluating plans to reopen our office to allow employees to return to the office, which will be based on a phased approach that is principles-based and local in design, with a focus on patient continuity, employee safety and optimal work environment. While we are experiencing limited financial impacts at this time, given the global economic slowdown, the overall disruption of global healthcare systems and the other risks and uncertainties associated with the pandemic, our business, financial condition, results of operations, and growth prospects could be materially adversely affected.

Clinical Development

With respect to clinical development, we have taken measures to implement remote and virtual approaches, where possible, to maintain patient safety and trial continuity and to preserve study integrity. As the COVID-19 pandemic continues, we anticipate a potential impact on future patient enrollment. We could also see an impact on the ability to supply study drug, report trial results, or interact with regulators, ethics committees or other important agencies due to limitations in regulatory authority employee resources or otherwise. In addition, we rely on contract research organizations or other third parties to assist us with clinical trials and we cannot guarantee that they will continue to perform their contractual duties in a timely and satisfactory manner as a result of the COVID-19 pandemic. If the COVID-19 pandemic continues and persists for an extended period of time, we could experience significant disruptions to our clinical development timelines, which would adversely affect our business, financial condition, results of operations and growth prospects.

Regulatory Activities

With respect to regulatory activities, it is possible that we could experience delays in the timing of review and/or our interactions with the FDA or the European Commission, or EC, due to, for example, absenteeism by governmental employees, inability to conduct planned physical inspections related to regulatory approval, or the diversion of efforts of the FDA or EC and attention to approval of other therapeutics or other activities related to COVID-19, which could delay approval decisions with respect to the preparation and submission to the FDA of a new drug application, or NDA, or the preparation and submission to the EC of a Marketing Authorization Application, or MAA, and otherwise delay or limit our ability to make planned regulatory submissions or obtain new product approvals.

Financial Impact

The COVID-19 pandemic continues to rapidly evolve and has already resulted in a significant disruption of global financial markets. If the disruption persists and deepens, we may experience an inability to access additional capital, when and if needed. If we are unable to obtain funding, we would be forced to delay, reduce or eliminate our research and development programs, product portfolio expansion or commercialization efforts, which could adversely affect our business prospects, or we may be unable to continue operations. Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability.

20

Components of our Results of Operations

Revenue

To date, we have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products in the foreseeable future. We did not recognize any revenue during the three and six months ended June 30, 2020. All our revenue during the six months ended June 30, 2019 was derived from our Genentech Agreement.

Operating Expenses

Research and Development Expenses

Research and development expenses, which include costs of research services incurred in connection with our collaboration agreements and research grant, consist primarily of costs incurred in connection with the discovery and development of our product candidates, which include:

We expense research and development costs as incurred. We recognize external development costs based on an evaluation of the progress to completion of specific tasks using information provided to us by our service providers.

Our direct research and development expenses are tracked on a program-by-program basis and consist primarily of external costs, such as fees paid to consultants, central laboratories, contractors, CROs, and CMOs in connection with our clinical trials and preclinical development activities. We do not allocate employee costs, costs associated with our platform technology, facility expenses, including depreciation, or other indirect costs, to specific product development programs because these costs are deployed across multiple product development programs and, as such, are not separately classified. We use internal resources to manage our preclinical development activities and perform data analysis for such activities. These employees work across multiple development programs and, therefore, we do not track their costs by program.

The table below summarizes our research and development expenses incurred by program (in thousands):

21

If our ongoing studies and clinical trials are successful, and if we can raise adequate funding, we expect that our expenses will increase substantially in connection with our ongoing and anticipated clinical trials, preclinical development, and commercialization activities. At this time, we cannot reasonably estimate the costs for completing the clinical development of posenacaftor, dirocaftor, nesolicaftor, or our proprietary combination therapies for the treatment of CF, or the cost associated with the development of any of our other product candidates. The successful development and commercialization of our product candidates is highly uncertain. This is due to the numerous risks and uncertainties associated with product development and commercialization, including the uncertainty of:

Any changes in the outcome of any of these variables, or others identified within this filing, with respect to the development of our product candidates in preclinical and clinical development could mean a significant change in the costs and timing associated with the development of these product candidates. For example, if the FDA or another regulatory authority were to delay our planned start of clinical trials or require us to conduct clinical trials or other testing beyond those that we currently expect, or if we experience significant delays in enrollment in any of our planned clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development of that product candidate.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related benefits, travel, and stock-based compensation for personnel in executive, finance, and administrative functions. General and administrative expenses also include facilities, which include direct and allocated expenses for rent and maintenance of facilities, depreciation, insurance, and supplies, as well as professional fees for legal, consulting, accounting, and audit services.

We anticipate that our general and administrative expenses will increase in the future to support our continued research activities and development of our product candidates. We also anticipate that we will continue to incur increased accounting, audit, legal, patent, regulatory, compliance, director and officer insurance costs, and director expenses, as well as investor and public relations expenses associated with being a public company.

Interest Income

Interest income consists of interest earned on cash equivalents and short-term investments held by us during the reporting periods.

Interest Expense

Interest expense consists of interest paid on our short-term borrowings during the reporting periods.

Other Income (Expense), Net

Other income (expense), net, primarily consists of the amortization of premiums and discounts on our short-term investments and the gains or losses associated with the changes in the fair values of our derivative liability. The derivative liability relates to a cash settlement option associated with the change of control provision in our CFF collaboration agreement. We remeasure the fair value of our derivative liability at each reporting period and record the change in fair value in other income (expense), net.

22

Critical Accounting Policies and Significant Judgments and Estimates

Our financial statements are prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of our financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on historical experience, known trends and events and various other factors that 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 that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions. These unaudited condensed financial statements should be read in conjunction with the audited financial statements, and notes thereto, which are contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on March 10, 2020.  

During the six months ended June 30, 2020, there were no material changes to our critical accounting policies. Our critical accounting policies are described under the heading, “Management’s Discussion and Analysis of Financial Condition and Results of Operations— Critical Accounting Policies and Significant Judgments and Estimates,” in our Annual Report on Form 10-K for the year ended December 31, 2019 and the notes to the financial statements appearing elsewhere in this Quarterly Report. We believe that of our critical accounting policies, the following accounting policies involve the most judgment and complexity:

Accordingly, we believe the policies set forth above are critical to fully understanding and evaluating our financial condition and results of operations. If actual results or events differ materially from the estimates, judgments and assumptions used by us in applying these policies, our reported financial condition and results of operations could be materially affected.

Results of Operations

Comparison of Three Months Ended June 30, 2020 and 2019

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