Y-mAbs Therapeutics, Inc. - Quarter Report: 2018 September (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10‑Q

☒      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

OR

☐      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from          to

Commission file number 001-38650

Y‑mAbs Therapeutics, Inc.

(Exact name of registrant as specified in its charter)

 

230 Park Avenue

33rd Floor

New York, NY 10169

(Address of principal executive offices)

(Zip Code)

(646)‑885‑8505

(Registrant’s telephone number, including area code)

 

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  ☒.

There were 34,193,666 shares of Common Stock ($0.0001 par value) outstanding as of November 12, 2018.

 

 

 

 

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, contained in this Quarterly Report on Form 10-Q, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans and objectives of management and expected market growth are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

These forward-looking statements include, among other things, statements about:

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q, particularly in the “Risk Factors” section, that could cause actual results or events to differ materially from the forward-looking statements that we make.  Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, collaborations, joint ventures or investments that we may make or enter into.

The forward-looking statements contained in this Quarterly Report on Form 10-Q are made as of the date of this Quarterly Report on Form 10-Q, and we undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

 

TABLE OF CONTENTS

You should read this Quarterly Report and the documents we have filed as exhibits to this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from the plans, intentions, and expectations disclosed in the forward-looking statements we may make.

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements.

Y‑MABS THERAPEUTICS, INC.

Consolidated Balance Sheets

(unaudited)

(in thousands, except share data)

The accompanying notes are an integral part of the consolidated financial statements

Y‑MABS THERAPEUTICS, INC.

Consolidated Statements of Net Loss and Comprehensive Loss

(unaudited)

(In thousands, except share and per share data)

The accompanying notes are an integral part of the consolidated financial statements

Y‑MABS THERAPEUTICS, INC.

Consolidated Statements of Changes in Stockholders’ Equity

(unaudited)

(In thousands, except share data)

The accompanying notes are an integral part of the consolidated financial statements

Y‑MABS THERAPEUTICS, INC.

Consolidated Statements of Cash Flows

(unaudited)

(In thousands)

The accompanying notes are an integral part of the consolidated financial statements

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1—ORGANIZATION AND DESCRIPTION OF BUSINESS

Y‑mAbs Therapeutics, Inc. (“we,” “us,” “our,” the “Company,” or “Y‑mAbs”) is a late-stage clinical biopharmaceutical company focused on the development and commercialization of novel, antibody-based therapeutic products for the treatment of cancer.

We have entered into a worldwide license and research collaboration agreement (the “MSK License Agreement”) with Memorial Sloan‑Kettering Cancer Center (“MSK”) our strategic partner, under which we have obtained the exclusive rights to MSK’s rights to two clinical stage antibody‑based product development programs for the treatment of neuroblastoma and other oncology indications. The MSK License Agreement also includes a protein Multimerization Platform Technology—MULTI TAGTM, and an option to obtain the rights to certain chimeric antigen receptor T‑cell, or CAR‑T, technologies, as well as rights to next‑generation humanized, affinity matured bispecific antibodies.

The Company is headquartered in New York and was incorporated on April 30, 2015 under the laws of the State of Delaware.

NOTE 2—BASIS OF PRESENTATION

The Company has not generated any revenue and has incurred losses since inception. Operations of the Company are subject to certain risks and uncertainties, including, among others, uncertainty of drug candidate development; technological uncertainty; uncertainty regarding patents and proprietary rights; uncertainty in obtaining FDA approval in the United States and regulatory approval in other jurisdictions; marketing or sales capability or experience; uncertainty in getting adequate payer coverage and reimbursement; and dependence on key personnel, compliance with government regulations and the need to obtain additional financing. Drug candidates currently under development will require significant additional research and development efforts, including extensive preclinical and clinical testing and regulatory approval, prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel infrastructure and extensive compliance‑reporting capabilities.

The Company’s drug candidates are in the development stage. There can be no assurance that the Company’s research and development will be successfully completed, that adequate protection for the Company’s intellectual property will be obtained, that any products developed will obtain necessary government regulatory approval or that any approved products will be commercially viable. Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the Company will generate significant revenue from product sales. The Company operates in an environment of rapid change in technology and substantial competition from pharmaceutical and biotechnology companies.

The Company’s financial statements have been prepared on the basis of continuity of operations, realization of assets and the satisfaction of liabilities in the ordinary course of business. The Company has experienced negative cash flows and had an accumulated deficit of $70.8 million as of September 30, 2018 and $41.6 million as of December 31, 2017. Through September 30, 2018, the Company has funded its operations through proceeds from sales of shares of its common stock, including its initial public offering, or IPO, in September 2018. As of September 30, 2018, the Company had cash and cash equivalents of $163.3 million, and as of December 31, 2017 the Company had cash and cash equivalents of $90.5 million. As of the issuance date of the quarterly financial statements for the three and nine months ended September 30, 2018, the Company expects that its cash and cash equivalents at September 30, 2018 will be sufficient to fund its operating expenses and capital expenditure requirements through at least the next twelve months. The future viability of the Company, until such time that the Company has commercialized any of its products, is dependent on its ability to raise additional capital to finance its operations. The Company’s failure to raise capital as and when needed could have a negative impact on its financial condition and ability to pursue its business strategies.

The accompanying unaudited consolidated financial statements reflect the accounts of the Company and its wholly‑owned subsidiary and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information, Accounting Standards Codification (ASC) Topic 270-10 and with the instructions to Form 10-Q. Accordingly, these financial statements do not include all of the information and notes required by GAAP for complete financial statements. The unaudited interim financial statements include all adjustments (consisting only of normal recurring nature) necessary in the judgment of management for a fair statement of the results for the periods presented. All intercompany balances and transactions have been eliminated. The Company has evaluated subsequent events through the date of this filing.  Operating results for the three and nine-month periods ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ended December 31, 2018, any other interim periods, or any future year or period. The December 31, 2017 consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.  You should read these unaudited interim condensed consolidated financial statements in conjunction with the consolidated financial statements and notes included in our final prospectus for our initial public offering, or IPO, filed pursuant to Rule 424(b)(4) under the Securities Act with the SEC on September 24, 2018.

NOTE 3—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 expenses during the reporting period. Significant estimates and assumptions reflected in these financial statements include, but are not limited to, the accrual for research and development expenses, the accrual of milestone and royalty payments, the valuation of shares of common stock and stock options. 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.

Cash, Cash Equivalents, and Restricted Cash

The Company considers all highly‑liquid investments with maturities of three months or less from date of purchase to be cash equivalents.

The Company primarily maintains its cash balances with financial institutions in federally insured accounts and cash held in an unrestricted escrow account. The Company has cash in financial institutions in excess of FDIC insurance limits.

Restricted cash represents a bank account with funds to cover the Company’s corporate credit card availability.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization expense is recognized using the straight‑line method over the estimated useful life of each asset as follows:

Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is included in loss from operations. Expenditures for repairs and maintenance are charged to expense as incurred.

Impairment of Long‑Lived Assets

ASC 360, Property, Plant and Equipment, addresses the financial accounting and reporting for impairment or disposal of long‑lived assets. The Company reviews the recorded values of long‑lived assets for impairment whenever events or changes in business circumstance indicate that the carrying amount of an asset or group of assets may not be fully recoverable.

Deferred Offering Costs

The Company capitalizes certain legal, professional accounting and other third‑party fees that are directly associated with in‑process equity financings as deferred offering costs within other assets until such financings are consummated. After consummation of the equity financing, these costs are recorded in shareholders’ equity as a reduction of proceeds generated as a result of the offering. Should the planned equity financing be abandoned, the deferred offering costs will be expensed immediately as a charge to operating expenses in the consolidated statement of comprehensive loss. The Company did not record any deferred offering costs as of September 30, 2018. The Company recorded deferred offering costs of $0.8 million as of December 31, 2017. Accounts payable and accrued liabilities at December 31, 2017 included $0.2 million of deferred offering costs. These deferred offering costs were reclassified to shareholders’ equity upon the successful completion of the Company’s IPO during the quarter ended September 30, 2018.

Income Taxes

The Company accounts for income taxes under the asset and liability approach for the financial accounting and reporting of income taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to net operating loss carry forwards and temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. These assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to reverse. A valuation allowance is established when management determines that it is more likely than not that some portion or all of the deferred tax assets will not be realized.

The Company prepares and files tax returns based on its interpretation of tax laws and regulations. In the normal course of business, the Company’s tax returns are subject to examination by various taxing authorities. Such examinations may result in future tax and interest assessments by these taxing authorities. In determining the Company’s tax provision for financial reporting purposes, the Company establishes a reserve for uncertain tax positions unless such positions are determined to be more likely than not of being sustained upon examination based on their technical merits. The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes. Accordingly, the Company will report a liability for unrecognized tax benefits resulting from any uncertain tax positions taken or expected to be taken on a tax return.

The Company’s policy is to recognize, when applicable, interest and penalties on uncertain tax positions as part of income tax expense.

In accordance with guidance issued by Financial Accounting Standards Board (“FASB”), companies should make and disclose a policy election as to whether they will recognize deferred taxes for basis differences expected to reverse as Global Intangible Low‑Taxed Income (“GILTI”) or whether they will account for GILTI as period costs if and when incurred. The Company has elected to recognize the resulting tax with respect to the GILTI provision as a period cost. No costs were incurred by the Company through September 30, 2018 as a result of GILTI.

Research and Development Costs

Research and development costs are charged to operations when incurred and are included in operating expenses. Research and development costs consist principally of compensation cost for our employees and consultants that perform our research activities, the fees paid to maintain our licenses, the payments to third parties for

manufacturing and clinical research organizations and additional product development, and consumables and other materials used in research and development. The Company records accruals for estimated ongoing research and development costs. When evaluating the adequacy of the accrued liabilities, the Company analyzes progress of the studies or clinical trials, including the phase or completion of events, invoices received and contracted costs. Actual results could differ from the Company’s estimates. The Company is obligated to make certain milestone and royalty payments in accordance with the contractual terms of its license agreement with MSK and MabVax based upon the resolution of certain contingencies. The Company records the milestone and royalty payment when the achievement of the milestone or payment of the milestone or royalty is probable and the amount of the payment is reasonably estimable. Research and development costs were $8.7 million and $3.1 million for the three months ended September 30, 2018 and 2017, respectively, and $23.2 million and $7.7 million for the nine months ended September 30, 2018 and 2017, respectively.

Patent Costs

The Company expenses the costs of obtaining and maintaining patents as general and administrative expenses.

Stock‑Based Compensation

The Company measures stock options granted to employees and directors based on the fair value on the date of the grant and recognizes compensation expense of those awards, over the requisite service period, which is the vesting period of the respective award. Forfeitures are accounted for as they occur. The Company issues stock options with only service‑based vesting conditions and records the expense for these awards using the straight‑line method over the requisite service period.

For share‑based awards granted to non‑employees, compensation expense is recognized over the period during which services are rendered by such non‑employees until completed. At the end of each financial reporting period prior to completion of the service, the fair value of these awards is remeasured using the then‑current fair value of the Company’s common shares and updated assumption inputs in the Black‑Scholes option‑pricing model.

The fair value of each stock option grant is estimated on the date of grant using the Black‑Scholes option pricing model. The Company historically has been a private company and lacks company‑specific historical and implied volatility information for its shares. Therefore, it estimates its expected share price volatility based on the historical volatility of a group of publicly‑traded peer companies and expects to continue to do so until such time as it has adequate historical data regarding the volatility of its own traded share price. The expected term of the Company’s stock options has been determined utilizing the “simplified” method for awards as the Company has limited historical data to support the expected term assumption. The expected term of stock options granted to non‑employees is equal to the contractual term of the option award. The risk‑free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. The expected dividend yield is based on the fact that the Company has never paid cash dividends on common shares and does not expect to pay any cash dividends in the foreseeable future.

Segment Information

The Company is engaged solely in the discovery and development of novel antibody-based therapeutic products for the treatment of cancer. Accordingly, the Company has determined that it operates in one operating segment.

Comprehensive Loss

Comprehensive loss includes net loss as well as other changes in stockholders’ equity that result from transactions and economic events other than those with shareholders. The difference between net loss and comprehensive loss for the period presented in the accompanying financial statements was due to foreign currency translation.

Foreign Currency

The financial statements of our Danish subsidiary with a functional currency other than the U.S. dollar are translated into U.S. dollars using period‑end exchange rates for assets and liabilities, historical exchange rates for stockholders’ equity and weighted average exchange rates for operating results. Translation gains and losses are included in accumulated other comprehensive income (loss), net of tax, in stockholders’ equity. Foreign currency transaction gains and losses are included in the results of operations in other income and expense.

Recently Issued Accounting Pronouncements

In June 2018, the FASB issued ASU No. 2018‑07, Compensation—Stock Compensation (Topic 718), Improvements to Nonemployee Share‑Based Payment Accounting (“ASU 2018‑07”). ASU 2018‑07 is intended to simplify aspects of share‑based compensation issued to non‑employees by making the guidance consistent with the accounting for employee share‑based compensation. ASU 2018‑07 is required to be adopted for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of ASU 2018‑07 to have a material effect on its consolidated financial statements.

In May 2017, the FASB issued Accounting Standards Update 2017‑09 (“ASU 2017‑09”), Compensation—Stock Compensation (Topic 718)—Scope of Modification Accounting. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award changes as a result of the change in terms or conditions. The guidance is effective prospectively for annual periods beginning on or after December 15, 2017 with early adoption permitted. The Company adopted ASU 2017‑09 on January 1, 2018 and will account for any modifications in accordance with ASU 2017‑09 subsequent to the effective date.

In November 2016, the FASB issued Accounting Standards Update 2016‑18 (“ASU 2016‑18”), Statement of Cash Flows (Topic 230)—Restricted Cash. Under the new guidance, it changes the presentation of restricted cash and cash equivalents on the statement of cash flows. Restricted cash and restricted cash equivalents will be included with cash and cash equivalents when reconciling the beginning‑of‑period and end‑of‑period total amounts shown on the statement of cash flows. This amendment is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The adoption of this standard on January 1, 2018 did not have a material impact on our consolidated financial statements and related disclosures.

In August 2016, the FASB issued Accounting Standards Update 2016‑15 (“ASU 2016‑15”), Classification of Certain Cash Receipts and Cash Payments. ASU 2016‑15 clarifies how certain cash receipts and payments should be presented in the statement of cash flows. The guidance is effective in 2018 with early adoption permitted. The adoption of this standard on January 1, 2018 did not have a material impact on our consolidated financial statements and related disclosures.

In February 2016, the FASB issued Accounting Standards Update No. 2016‑02 (“ASU 2016‑02”), Leases, which is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018 with early adoption permitted. Under ASU 2016‑02, lessees will be required to recognize for all leases, at the commencement date of the lease, a lease liability, which is a lessee’s obligation to make lease payments arising from a lease measured on a discounted basis, and a right‑to‑use asset, which is an asset that represents the lessee’s right to use or control the use of a specified asset for the lease term. For leases with a term of twelve months or less, the lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities.  The Company is currently evaluating the effect that the new guidance will have on its financial statements and related disclosures.

In July 2018, the FASB issued Accounting Standards Update No. 2018-11 which permits an entity to elect an optional transitional practical expedient to continue to apply ASC 840, Leases, including its disclosure requirements, in the comparative periods presented in the year of adoption of ASU 2016-02.  Under this optional practical expedient, which the Company expects to elect, the Company will apply the transition provisions on January 1, 2019 (the date of

adoption).  Upon adoption, the Company will be required to recognize a cumulative-effect adjustment to the opening accumulated deficit balance in the year of adoption.

In November 2015, the FASB issued Accounting Standards Update 2015‑17 (“ASU 2015‑17”), Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. ASU 2015‑17 simplifies current guidance and requires companies to classify all deferred tax assets and liabilities as noncurrent on the balance sheet. ASU 2015‑17 can be applied either prospectively or retrospectively and is effective for periods beginning after December 15, 2016, with early adoption permitted. The adoption of this standard on January 1, 2017 did not have a material impact on our consolidated financial statements and related disclosures.

 

 

NOTE 4—EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share (“EPS”) is calculated by dividing net income or loss attributable to common stockholders by the weighted average common stock outstanding. Diluted EPS is calculated by adjusting weighted average common shares outstanding for the dilutive effect of common stock options and warrants. In periods in which a net loss is recorded, no effect is given to potentially dilutive securities, since the effect would be antidilutive. Securities that could potentially dilute basic EPS in the future were not included in the computation of diluted EPS because to do so would have been antidilutive. The calculations of basic and diluted net loss per share are as follows:

Potentially dilutive securities excluded from the computation of diluted earnings per share relate to stock options outstanding and totaled 2,799,373 shares as of September 30, 2018 and 2,219,000 shares as of December 31, 2017.

NOTE 5—ACCRUED LIABILITIES

Accrued short‑term liabilities at September 30, 2018 and December 31, 2017 are as follows:

 

 

NOTE 6—LICENSE AGREEMENTS AND COMMITMENTS

The Company has entered into two license agreements and certain other agreements with MSK. The license agreements are further described below as the MSK License Agreement and the CD33 License Agreement. These license agreements with MSK grant the Company certain patent rights and intellectual property rights. In consideration of obtaining the patent rights and intellectual property rights, the Company agreed to make certain payments and issue shares of the Company’s common stock to MSK. Certain of the payments are contingent milestone and royalty payments, the terms of which are further described below. Amounts disclosed in the consolidated balance sheets for accrued milestone and royalty payments are inclusive of obligations under the MSK License Agreement and CD33 License Agreement, collectively.

MSK License Agreement

On August 20, 2015, we entered into the MSK License Agreement that grants us a worldwide, sublicensable license to MSK’s rights to certain patent rights and intellectual property rights related to certain know‑how to develop, make, and commercialize licensed products and to perform services for all therapeutic and diagnostic uses in the field of cancer diagnostics and cancer treatments.

The patents and patent applications covered by this agreement are directed, in part, to naxitamab, an anti GD2 antibody, and omburtamab, which is an anti B7‑H3 antibody, as well as affinity matured versions of certain antibodies and certain single chain variable fragments (Fv) constructs, and their use for immunotherapy, targeting the treatment of neuroblastoma and other oncology indications. Upon entering into the MSK License Agreement in 2015 and in exchange for the licenses, we paid MSK an upfront payment, issued 1,428,500 shares of our common stock to MSK and agreed to provide certain anti‑dilution rights to MSK. In addition, we are required to pay to MSK certain royalty and milestone payments. We expensed the upfront payment and the issuance of shares to MSK in 2015. We also recorded expense related to common stock issued related to certain anti‑dilution rights held by MSK.

The MSK License Agreement requires us to pay to MSK mid to high single digit royalties based on annual net sales of licensed products or the performance of licensed services by us and our affiliates and sublicensees. We are obligated to pay annual minimum royalties of $80,000 over the royalty term, commencing on the fifth anniversary of the license agreement. These amounts are non‑refundable but are creditable against royalty payments otherwise due under the MSK License Agreement. Total expensed minimum royalty payments in 2016 under the MSK License Agreement were $1,200,000, upon determination that the payment of such minimum royalties was probable and the amount was estimable in 2016. The accrued minimum royalties were recorded as long‑term accrued liabilities as of September 30, 2018 and December 31, 2017. We are also obligated to pay MSK certain clinical, regulatory and sales‑based milestone payments under the MSK License Agreement. Certain of the clinical and regulatory milestone payments become due at the earlier of completion of the related milestone activity or the date indicated in the MSK License Agreement. Total clinical and regulatory milestones potentially due under the MSK License Agreement are $2,450,000 and $9,000,000, respectively. There are also sales‑based milestones that become due should the Company achieve certain amounts of sales of licensed products resulting from the license arrangement with MSK, with total sales‑based milestones potentially due of $20,000,000. The Company records milestones in the period in which the contingent liability is probable and the amount is reasonably estimable. In addition, to the extent we enter into sublicense arrangements, we are obligated to pay to MSK a percentage of certain payments that we receive from sublicensees of the rights licensed to us by MSK, which percentage will be based upon the achievement of certain clinical milestones. The Company has not entered into any sublicenses related to the MSK License Agreement. Failure by the Company to meet certain conditions under the arrangement could cause the related license to such licensed product to be canceled and could result in termination of the entire arrangement with MSK. In addition, the Company may terminate the MSK License Agreement with prior written notice to MSK.

No milestones were expensed in the three and nine months ended September 30, 2018 and the three months ended 2017. The Company expensed $150,000 in milestones in the nine months ended September 30, 2017. As of both September 30, 2018 and December 31, 2017, $875,000 of accrued milestone obligations were recorded in accrued short term liabilities and $300,000 was recorded within long-term liabilities. These milestone‑related charges were recorded as research and development expense in 2016, upon determination that payment of these clinical milestone obligations was probable after satisfying the financing requirements described herein.

Research and development is inherently uncertain and as described above, should such research and development fail, the MSK License Agreement is cancelable at the Company’s option. The Company also considered the development risk and each party’s termination rights under the agreement when considering whether any regulatory‑based milestone payments, certain of which also contain time‑based payment requirements, were probable. Given the uncertainty associated with research and development and the Company’s ability to cancel the MSK License Agreement, such regulatory‑based obligations were determined not to be probable as of September 30, 2018 and December 31, 2017 and therefore have not been accrued.

CD33 License Agreement

On November 13, 2017, we entered into an exclusive license agreement for certain MSK rights in connection with certain CD33 antibodies, which we refer to as the CD33 License Agreement. The CD33 License Agreement obligates us to pay to MSK mid to high single digit royalties based on annual net sales of licensed products or the performance of licensed services by us and our affiliates and sublicensees. We are obligated to pay annual minimum royalties of $40,000 over the royalty term, increasing to $60,000 once a patent within the licensed rights is issued, and commencing on the tenth anniversary of the CD33 License Agreement. These amounts are non‑refundable but are creditable against royalty payments otherwise due under the CD33 License Agreement. We are also obligated to pay MSK certain fees under a sponsored research agreement under the CD33 License Agreement. In addition, milestone payments become due upon achievement of the related clinical, regulatory or sales‑based milestone defined in the CD33 License Agreement. Certain of the clinical and regulatory milestone payments become due at the earlier of completion of the related milestone activity or the date indicated in the CD33 License Agreement. Total potential clinical and regulatory milestones potentially due under the CD33 License Agreement are $550,000 and $500,000, respectively. There are also sales‑based milestones that become due should the Company achieve certain amounts of sales of licensed products resulting from the CD33 License Agreement with MSK, with total sales‑based milestones potentially due of $7,500,000. Failure by the Company to meet certain conditions under the CD33 License Agreement could cause the related license to such licensed product to be canceled and could result in termination of the arrangement with MSK. In addition, the Company may terminate the CD33 License Agreement with prior written notice to MSK. The Company records milestones in the period in which the contingent liability is probable and the amount is reasonably estimable. In addition, to the extent we enter into sublicense arrangements, we are obligated to pay to MSK a percentage of certain payments that we receive from sublicensees of the rights licensed to us by MSK, which percentage will be based upon the achievement of certain clinical milestones. The Company has not entered into any sublicenses related to the CD33 License Agreement.

No milestones were expensed in the three or nine months ended September 30, 2018 or 2017. None of the clinical milestone obligations previously accrued were paid in the nine months ended September 30, 2018 or 2017, and the total amount accrued in prior periods of $550,000 was recorded as accrued long‑term liabilities as of September 30, 2018 and December 31, 2017. These milestone‑related charges were recorded as research and development expense in 2017. Research and development is inherently uncertain and as described above, should such research and development fail, the CD33 License Agreement is cancelable at the Company’s option. The Company considered risks as well as each party’s termination rights under the CD33 License Agreement when considering whether any regulatory‑based milestone payments and minimum royalty payments, certain of which also contain time‑based payment requirements, were probable. Given the uncertainty associated with research and development and the Company’s ability to cancel the CD33 License Agreement, such obligations were determined not to be probable as of September 30, 2018 and December 31, 2017 and therefore have not been accrued.

MabVax sublicense agreement

On June 27, 2018, the Company has entered a sublicense agreement with MabVax Therapeutics Holding, Inc (“MabVax”) pursuant to which MabVax has sublicensed to the Company certain of MabVax’s patent rights and know-how for development and commercialization of products for the prevention or treatment of neuroblastoma by means of administering a bi-valent ganglioside vaccine, granted to MabVax pursuant to an exclusive license agreement between MabVax and MSK. Under the sublicense agreement, the Company has paid a license fee of $700,000 to MabVax and will pay an additional $600,000 at the first anniversary of the sublicense agreement, provided that no notice of termination has been made by the Company before such date. The initial license fee of $700,000 was expensed and paid upon execution of the agreement during the nine months ended September 30, 2018, and no expense was recorded in the three months ended September 30, 2018. The Company has agreed to become solely responsible for future amounts payable to MSK and to handle other of MabVax’ obligations applicable to the licensed indication towards MSK. This includes the obligation to pay development milestones totaling $1,400,000 and mid single-digit royalty payments to MSK. Research and development is inherently uncertain and as described above, should such research and development fail, the MabVax sublicense agreement is cancelable at the Company’s option. The Company considered risks as well as each party’s termination rights under the MabVax sublicense agreement when considering whether any milestone payments and minimum royalty payments were probable. Given the uncertainty associated with research and

development and the Company’s ability to cancel the MabVax sublicense agreement, such obligations were determined not to be probable as of September 30, 2018 and therefore have not been accrued.

Other agreements

On November 5, 2015, we entered into a sponsored research agreement, which we refer to as the SRA, with MSK pursuant to which we agreed to pay MSK to provide research services over a period of five years related to the intellectual property licensed under the MSK License Agreement. For the three month periods ended September 30, 2018 and 2017, we incurred research and development expenses of $297,000 and $288,000, respectively, under the SRA. In the nine months ended September 30, 2018 and 2017, we incurred research and development expenses of $891,000 and $865,000, respectively, under the SRA.

On September 20, 2016, we entered into a master data services agreement, which we refer to as the MDSA, with MSK pursuant to which we committed to provide make certain payments in exchange for services provided by approximately two full time employees at MSK, who are engaged in transferring clinical data, databases, regulatory files and other know‑how included in the MSK License Agreement to the Company. On October 11, 2017 the MDSA was amended to increase the resources to approximately three full time employees. During the three months ended September 30, 2018 and 2017, we incurred expenses of $60,000 and $36,000, respectively, under the MDSA, and in the nine months ended September 30, 2018 and 2017, we incurred expenses of $273,000 and $219,000, respectively, under the MDSA.

On June 21, 2017, we entered into a master clinical trial agreement, which we refer to as the CTA, with MSK pursuant to which we committed to fund certain clinical trials at MSK. Under the MSK License Agreement, the funding of clinical activities is limited to a five year period. During the three months ended September 30, 2018 and 2017, we incurred expenses of $363,000 and $47,000, respectively, under the CTA, and in the nine months ended September 30, 2018 and 2017, we incurred expenses of $2,504,000 and $47,000, respectively, under the CTA.

On June 27, 2017, we entered into two separate core facility service agreements, which we refer to as the CFAs, with MSK pursuant to which we committed to obtaining certain laboratory services from MSK. During the three months ended September 30, 2018 and 2017, we incurred expenses of $28,000 and $56,000, respectively, under the CFAs, and in the nine months ended September 30, 2018 and 2017, we incurred expenses of $223,000 and $126,000, respectively, under the CTA.

On November 13, 2017, we entered into a CD33‑sponsored research agreement, which we refer to as the CD33‑SRA, with MSK pursuant to which we agreed to pay MSK to provide research services over a period of two years related to the intellectual property licensed under the CD33 License Agreement. During the three and nine months ended September 30, 2018 we incurred research and development expenses of $167,000 and $501,000, respectively, under the CD33‑SRA.

Lease Agreements

In January 2018, the Company entered into a lease agreement in connection with its corporate headquarters in New York. The term of the lease is five years from date the Company begins to occupy the premises. Fixed rent payable under the lease is approximately $384,000 per annum and is payable in equal monthly installments of approximately $32,000, which are recognized on a straight‑line basis.

Additionally, the Company entered into a three‑year lease agreement for the lease of certain office space in Denmark in February 2018. The lease is payable in monthly installments of approximately $10,000, which are recognized on a straight‑line basis. Until the end of March 2018, the Company, maintained a lease for certain office space in Denmark as further described in Note 9, Related Party Transactions.

NOTE 7—STOCKHOLDERS’ EQUITY

Authorized Stock

As of September 30, 2018, the Company has authorized a total of 105,500,000 shares, 100,000,000 of which are to be common stock, par value $0.0001 per stock, and 5,500,000 of which are to preferred stock, par value $0.0001 per share.

As of December 31, 2017, the Company has authorized a total of 55,500,000 shares, 50,000,000 of which are to be common stock, par value $0.0001 per stock, and 5,500,000 of which are to preferred stock, par value $0.0001 per share.

Common Stock

Each share of common stock is entitled to one vote. Common stockholders are entitled to receive dividends, as may be declared by the board of directors, if any, subject to preferential dividend rights of the preferred stock, none of which have been issued. The Company had issued 34,193,666  shares of its common stock as of September 30, 2018 and 26,749,666 shares of its common stock as of December 31, 2017.

Preferred Stock

Preferred stock may be issued from time to time in one or more series with such designations, preferences and relative participating, optional or other special rights and qualifications, limitations or restrictions as approved by the Company’s Board of Directors. No preferred stock has been issued as of September 30, 2018 or December 31, 2017.

Issuances of common stock for MSK License Agreement

In connection with the MSK License Agreement, in August 2015 we issued to MSK 1,428,500 shares of our common stock. We also agreed to provide certain anti‑dilution rights to MSK. If at any time after such issuance, the Company issued any shares of its common stock, the Company was required to issue sufficient shares of common stock to MSK such that at all times prior to the Company obtaining equity financing equal to or greater than $25,000,000 in the aggregate, MSK shall hold shares of the Common Stock of the Company equal to 12.5% of the issued and outstanding shares of common stock. In 2016, our aggregate equity financing reached $25,000,000 since inception, and we issued to MSK an additional 999,929 shares of our common stock in order to maintain MSK’s 12.5% ownership of the Company. The additional shares were issued at the estimated fair market value of such shares at the time of issuance of $4.38 per share, and the total value of $4,380,000 was charged to expense in the period when the anti‑dilution rights were triggered, with $2,280,000 recognized in 2016. Subsequent to the issuance of such shares and upon achievement of the financing requirement, there are no further anti‑dilution rights due to MSK.

Stock grant agreements with non‑employees

In August 2015, we entered into certain stock grant agreements with non‑employees of the Company. We agreed to issue a total of 2,800,000 shares to two non‑employee researchers who were involved in the development of technology licensed from MSK in consideration for their prior service. These two researchers were employees of MSK. The shares are released according to a vesting schedule. A total of 560,000 shares were issued in 2015, and a total of 448,000 shares issued in each of 2016 and 2017. In 2018 a total of 448,000 shares were issued to the two researchers, and upon completion of the IPO we issued an additional 96,000 shares. The issuance was made pursuant to a stock grant agreement and did not result in proceeds to the Company. A total of 400,000 shares are to be issued each year thereafter until 2020, such that the total grant will have been issued. The total award was expensed at its estimated fair value in 2015, as no future service was required to continue to vest in and receive the shares of common stock. In August 2016, the Company repurchased and retired a total of 83,600 shares from the two non‑employees of the Company at an amount equal to the estimated fair value of $4.38 per share. The transaction reduced the Company’s shareholders’ equity by $366,000.

In April 2018, the Company granted 72,373 common stock options to a non‑employee physician employed by MSK under our 2015 Equity Incentive Plan (the 2015 Plan). The options become exercisable over a four‑year period, with the first twenty‑five percent (25%) exercisable twelve (months) from the date of grant and the remainder becoming exercisable ratably each month over the three years thereafter. The contractual term of the option award is 10 years from the date of grant. The total award was expensed at its estimated fair value in April 2018, as no future service was required by the non‑employee to continue to vest in the option grant. The shares will become immediately exercisable upon the occurrence of a change in control, as defined in the 2015 Plan as further described in Note 8, Stock Options.

Issuance of common stock

In September 2018, we completed an initial public offering and issued 6,900,000 shares of Common Stock at a purchase price of $16.00 per share for an aggregate consideration of $100,498,000, net of issuance costs. Upon completion of the IPO we also issued 96,000 shares of our common stock. The issuance was made pursuant to a stock grant agreement and did not result in proceeds to the Company.

In August 2018, we issued 448,000 shares of our common stock. The issuance was made pursuant to stock grant agreements and did not result in proceeds to the Company.

In November 2017, we issued 3,208,552 shares of Common Stock at a purchase price of $9.35 per share for an aggregate consideration of $28,887,000, net of issuance costs.

In October 2017, we issued 5,347,568 shares of Common Stock at a purchase price of $9.35 per share for an aggregate consideration of $49,812,000, net of issuance costs.

In August 2017, we issued 448,000 shares of our common stock. The issuance was made pursuant to stock grant agreements and did not result in proceeds to the Company.

In January and February 2017, we issued 1,192,662 shares of Common Stock at a purchase price of $8.50 per share for an aggregate consideration of $10,137,000, net of issuance costs.

NOTE 8—SHARE-BASED COMPENSATION

2015 Equity Incentive Plan

Our board of directors and stockholders have approved and adopted the 2015 Equity Incentive Plan, which provides for the grant of incentive stock options, within the meaning of Section 422 of the Code (the Internal Revenue Code), to our employees and any parent and subsidiary corporations’ employees, and for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock and restricted stock units to our employees, directors and consultants and our parent and subsidiary corporations’ employees and consultants. A total of 4,500,000 shares of our common stock are reserved for issuance pursuant to the 2015 Plan. In addition, the number of shares available for issuance under the 2015 Plan will also include an annual increase on the first day of each fiscal year beginning in 2016, equal to 6% of the outstanding shares of common stock as of the last day of our immediately preceding fiscal year. The exercise price of options granted under the plans must at least be equal to the fair market value of our common stock on the date of grant. The term of an incentive stock option may not exceed 10 years, except that with respect to any participant who owns more than 10% of the voting power of all classes of our outstanding stock, the term must not exceed five years and the exercise price must equal at least 110% of the fair market value on the grant date. The administrator will determine the methods of payment of the exercise price of an option, which may include cash, shares or other property acceptable to the administrator, as well as other types of consideration permitted by applicable law. Options granted under the 2015 Plan vest according to the schedule specified in the grant agreements, which is generally a four year period and generally become immediately exercisable upon the occurrence of a change in control, as defined. Upon the adoption of the 2018 Equity Incentive Plan in September 2018, no further grants are allowed under the 2015 Equity Incentive Plan.

During the nine month periods ended September 30, 2018 and 2017, stock-based compensation expenses for stock option grants were $1,471,000 and $446,000, respectively, for options granted to employees and non-employees under the 2015 Equity Incentive Plan. During the nine months ended September 30, 2018 the expenses were recorded as $192,000 in research and development expense and $694,000 in general and administrative expense for options granted to employees and $585,000 in research and development expense for options granted to non-employees. During the nine months ended September 30, 2017 the expenses were recorded as $114,000 in research and development expense and $332,000 in general and administrative expenses for options granted to employees.

During the three-month periods ended September 30, 2018 and 2017, stock-based compensation expenses for stock option grants were $395,000 and $151,000, respectively, for options granted to employees and non-employees under the 2015 Equity Incentive Plan. During the three months ended September 30, 2018 the expenses were recorded as $67,000 in research and development expense and $328,000 in general and administrative expense for options granted to employees. During the three months ended September 30, 2017 the expenses were recorded as $40,000 in research and development expense and $111,000 in general and administrative expenses for options granted to employees.

The following table summarizes common stock options issued and outstanding under the 2015 Equity Incentive Plan:

The weighted average grant-date fair value of stock options granted during the year ended December 31, 2017 was $5.59 per share. The weighted average grant-date fair value of stock options granted during the nine months ended September 30, 2018 was $6.77.

The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options and the fair value of the Company’s common stock for those stock options that had exercise prices lower than the fair value of the Company’s common stock.

As of December 31, 2017 we had $1,903,000 of unrecognized compensation related to employee stock options that are expected to vest over a period of 2.19 years. As of September 30, 2018 we had $4,360,000 of unrecognized compensation related to employee stock options that is expected to vest over a period of 2.39 years.

2018 Equity Incentive Plan

Our board of directors and stockholders approved and adopted the 2018 Equity Plan, which became effective upon the Company’s initial public offering in September 2018 and which provides for the grant of incentive stock options, within the meaning of Section 422 of the Code (the Internal Revenue Code), to our employees and any parent and subsidiary corporations’ employees, and for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock and restricted stock units to our employees, directors and consultants and our parent and subsidiary corporations’ employees and consultants. A total of 5,500,000 shares of our common stock, inclusive of the awards previously granted under the 2015 Equity Incentive Plan, are reserved for issuance pursuant to the 2018 Plan. In addition, the number of shares available for issuance under the 2018 Plan will also include an annual increase on the first day of each fiscal year beginning in 2019, equal to 4% of the outstanding shares of common stock as of the last day of our immediately preceding fiscal year. The exercise price of options granted under the plans must at least be equal to the fair market value of our common stock on the date of grant. The term of an incentive stock option may not exceed 10

years, except that with respect to any participant who owns more than 10% of the voting power of all classes of our outstanding stock, the term must not exceed five years and the exercise price must equal at least 110% of the fair market value on the grant date. The administrator will determine the methods of payment of the exercise price of an option, which may include cash, shares or other property acceptable to the administrator, as well as other types of consideration permitted by applicable law. Options granted under the 2018 Plan vest according to the schedule specified in the grant agreements, which is generally a four year period and generally become immediately exercisable upon the occurrence of a change in control, as defined. No awards have been issued under the 2018 Equity Incentive Plan as of September 30, 2018.

NOTE 9—RELATED PARTY TRANSACTIONS

MSK is a shareholder of the Company and under the MSK License Agreement, the CD33 License Agreement, CTA, CFAs, SRA and MDSA, we have expensed costs in the total amount of $914,000 and $434,000 in the three months ended September 30, 2018 and 2017, respectively, for milestones, minimum royalties, research and development costs and patent activities. We expensed costs in the total amounts of $4,526,000 and $1,395,000 in the nine months ended September 30, 2018 and 2017, respectively. Please refer to Note 6 for additional details on our various agreements with MSK. As of September 30, 2018 and December 31, 2017, we had a total of $4,052,000 and $4,587,000, respectively, recorded as accounts payable and accrued liabilities related to amounts due to MSK.

In July 2016, the Company entered into a lease agreement with a shareholder of the Company, Weco Group, in connection with the subsidiary in Denmark. The lease payable thereunder is approximately $4,000 per month and, as the lease can be terminated with three months’ notice, any future rent commitment thereunder will amount to approximately $12,000. The lease terminated in April 2018, when the Company moved to a new third‑party lease. In addition, the Company has reimbursed Weco Group for certain administrative expenses. The total expenses, including rent, equaled $6,000 and $44,000 during the three and nine months ended September 30, 2018, respectively, and $44,000 and $65,000 during the three and nine months ended September 30, 2017, respectively.

NOTE 10—INCOME TAXES

The Company provided no current and deferred income taxes on net losses of $19,161,000 and $17,057,000 for years ended December 31, 2017 and 2016, respectively.

The Tax Cuts and Jobs Act (TCJA) was enacted on December 22, 2017. The TCJA contains significant changes to corporate taxation, including but not limited to, a reduction in the U.S. federal corporate tax rate from a top marginal rate of 35% to 21%, a one‑time mandatory transition tax on accumulated foreign earnings, limitation of the deduction for net operating losses to 80% of annual taxable income while providing that the net operating loss carryovers for years after 2017 will not expire, limitation on the amount of research and development expenses deductible per year beginning in years after 2021 and reduction of the Orphan Drug Credit from 50% to 25% of qualified clinical testing expenditures. The TCJA also made changes to the U.S. federal taxation of foreign earnings and to the timing of recognition of certain revenue and expenses and the deductibility of certain business expenses.

In response to the TCJA, the staff of the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the TCJA.

As a result of the TCJA being signed into law, the Company recognized a provisional charge of $4,394,000 in the fourth quarter of 2017 related to the re‑measurement of its U.S. deferred tax assets at the lower enacted corporate tax rate. Due to the history of net operating losses, the Company is in a full valuation allowance position. As a result, the additional tax expense due to the TCJA was offset by an equal reduction to the valuation allowance, resulting in no net tax impact from the TCJA to the overall financial condition and results of operations of the Company.

The Company is still in the process of analyzing the impact to the Company of the TCJA.  Where the Company has been able to make reasonable estimates of the effects the Company has recorded provisional amounts. The ultimate

impact to the Company’s financial statements of the TCJA may differ from the provisional amounts due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the TCJA.  The accounting is expected to be completed in the fourth quarter of 2018.

As a result of the enactment of the Tax Cuts and Jobs Act, there was no impact to our financial position or results associated with a write‑off of deferred tax assets due to the rate change from 34% to 21% and their associated valuation allowance, and a one‑time mandatory transition tax.

The Company recognizes income tax benefits for tax positions determined more likely than not to be sustained upon examination, based on the technical merits of the positions. As of September 30, 2018 and December 31, 2017, the Company has determined that there were no uncertain tax positions. The Company’s tax returns for years 2018, 2017, and 2016 are open for tax examination by U.S. federal and state, and the Danish tax authorities.

The valuation allowance related primarily to net U.S. deferred tax assets from operating losses, research and development tax credit carryforwards, and acquired intangibles.

The Company maintains a full valuation allowance on its U.S. and foreign deferred tax assets. The assessment regarding whether a valuation allowance is required considers both positive and negative evidence when determining whether it is more‑likely‑than‑not that deferred tax assets are recoverable. In making this assessment, significant weight is given to evidence that can be objectively verified. In its evaluation, the Company considered its cumulative loss in recent years and its forecasted losses in the near‑term as significant negative evidence. Based upon review of available positive and negative evidence, the Company determined that the negative evidence outweighed the positive evidence and a full valuation allowance on its U.S. and foreign deferred tax assets will be maintained. The Company will continue to assess the realizability of its deferred tax assets and will adjust the valuation allowance as needed..

NOTE 11—OTHER BENEFITS

The Company has established a retirement program for employees of our Danish subsidiary pursuant to which all such employees can contribute an amount at their election from their base compensation and may receive contributions from our Danish subsidiary. Contributions from our Danish subsidiary were immaterial during the three and nine months ended September 30, 2018 and 2017. In addition, health insurance benefits for our Danish employees are fully paid for by such employees. Our Danish subsidiary does not incur any costs for these health insurance benefits.

On October 1, 2018, the Company adopted a defined contribution 401(k) savings plan (the 401(k) plan) covering all U.S. employees of the Company.  Participants may elect to defer a percentage of their pretax or after-tax compensation to the 401(k) plan, subject to defined limitations. The plan allows for a discretionary match by the Company. The Company made no matching contributions to the plan during the three or nine months ended September 30, 2018 and 2017.

 

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

You should read the following discussion and analysis of our financial condition and results of operations together with our accompanying financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and our final prospectus for our initial public offering filed pursuant to Rule 424(b)(4) under the Securities Act with the SEC on September 24, 2018. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business and related financing, 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 of this Quarterly Report on Form 10-Q, 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. For convenience of presentation some of the numbers have been rounded in the text below.

Overview

We are a late‑stage clinical biopharmaceutical company focused on the development and commercialization of novel, antibody‑based therapeutic products for the treatment of cancer. We have a broad and advanced product pipeline, including two pivotal‑stage product candidates—naxitamab and omburtamab—which target tumors that express GD2 and B7‑H3, respectively. We are developing naxitamab for the treatment of pediatric patients with relapsed or refractory, or R/R, high‑risk neuroblastoma, or NB, and radiolabeled omburtamab for the treatment of pediatric patients with central nervous system, or CNS, leptomeningeal metastases, or LM, from NB. NB is a rare and almost exclusively pediatric cancer that develops in the sympathetic nervous system and CNS/LM is a rare and usually fatal complication of NB in which the disease spreads to the membranes, or meninges, surrounding the brain and spinal cord in the CNS.

We expect to submit a Biologic License Application or BLA for each of our two lead product candidates in 2019, with a goal of receiving approval by the U.S. Food and Drug Administration, or FDA in 2020. We plan to commercialize both of our lead product candidates in the United States as soon as possible after obtaining FDA approval, if such approval occurs. Additionally, we have two omburtamab follow‑on product candidates in pre‑clinical development, omburtamab‑DTPA (diethylenetriamine pentaacetate) and huB7‑H3, a humanized version of omburtamab, each targeting indications with large adult patient populations. We are also advancing a pipeline of novel bispecific antibodies, or BsAbs, through late pre‑clinical development, including our huGD2‑BsAb product candidate for the treatment of refractory GD2‑positive adult and pediatric solid tumors and our huCD33‑BsAb product candidate for the treatment of hematological cancers expressing CD33, a transmembrane receptor expressed on cells of myeloid lineage. We believe our BsAbs have the potential to result in improved tumor‑binding, longer serum half‑life and significantly greater T‑cell mediated killing of tumor cells without the need for continuous infusion. Our mission is to become the world leader in developing better and safer antibody‑based pediatric oncology products addressing clear unmet medical needs and, as such, have a transformational impact on the lives of patients. We intend to advance and expand our product pipeline into certain adult cancer indications either independently or in collaboration with potential partners.

Since our inception in April 2015, we have devoted substantially all of our resources to organizing and staffing our company, business planning, identifying potential product candidates, conducting pre‑clinical studies of our product candidates and clinical trials of our lead product candidates, raising capital, and acquiring and developing our technology platform among other matters. We do not have any products approved for sale and have not generated any revenues from product sales.

To date, we have financed our operations primarily through private placements of our securities. In addition, on September 25, 2018, we completed the initial public offering, or IPO, of our common stock pursuant to which we issued and sold 6,900,000 shares at a price to the public of $16.00 per share which included the exercise in full of the underwriters’ option to purchase additional shares for gross proceeds of approximately $ 110.4 million, before deducting underwriting discounts and commissions and estimated offering expenses.  We have received aggregate gross proceeds of approximately $230.0 million through September 30, 2018 from the sale and issuance of our common stock.

As of September 30, 2018, we had an accumulated deficit of $70.8 million. Our net losses were $11.4 million and $3.8 million for the three months ended September 30, 2018 and 2017, respectively, and $29.2 million and $9.9 million for the nine months ended September 30, 2018 and 2017, respectively. We have incurred significant net operating losses in every year since our inception and expect to continue to incur increasing net operating losses and significant expenses for the foreseeable future. Our net losses may fluctuate significantly from quarter to quarter and year to year. We anticipate that our expenses will increase significantly as we:

We believe that our cash on hand will be sufficient to fund our operations through the fourth quarter of 2020. We do not expect to generate revenues from product sales unless and until we successfully complete development and obtain regulatory approval for a product candidate, which is subject to significant uncertainty and may never occur. Although no assurance can be given, our goal is to complete the development of our lead product candidates, naxitamab for the treatment of pediatric R/R high‑risk NB, and omburtamab for the treatment of CNS/LM from NB, by the end of 2019. Additionally, we currently use Contract Research Organizations or CROs and Contract Manufacturing Organizations or CMOs to carry out our pre‑clinical and clinical development activities and we do not yet have a sales organization.

Moreover, pursuant to the MSK License, we have obtained exclusive rights to MSK’s rights in our current product candidates. Under the MSK License, we have committed to funding scientific research and conducting certain clinical trial activities at MSK through 2020. As these product candidates progress through clinical development, regulatory approval and commercialization, certain milestone payments will come due either as a result of the milestones having been met or the passage of time even if the milestones have not been met. Also, we will owe MSK customary royalties on commercial sales of our approved products, including a fixed minimum royalty starting in 2020 whether or not product sales are ever achieved. In addition, we have committed to obtain certain personnel and laboratory services at MSK under our MDSA, and two separate CFAs. Also, under our CTA with MSK, we will provide drug product and funding for certain clinical trials at MSK. These MSK agreements are important to our business. For a more detailed discussion of the terms and conditions of these agreements, see note 6 “License Agreements and Commitments.”

If we obtain regulatory approval for our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. Accordingly, we may continue to fund our operations through public or private equity or debt financings or other sources, including strategic collaborations. We may, however, be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. Our failure to raise capital or enter into such other arrangements as and when needed would have a negative impact on our financial condition and our ability to develop our current product candidates, or any additional product candidates, if developed. Because of the numerous risks and uncertainties associated with the development of our existing product candidates and any future product candidates, our platform and technology and because the extent to which we may enter into collaborations with third parties for development of any of our product candidates is unknown, we are unable to estimate the amounts of increased capital outlays and operating expenses associated with completing

the research and development of our product candidates. If we raise additional funds through collaborations, strategic alliances, or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs, product candidates or grant licenses on terms that may not be favorable to us and could have a negative impact on our financial condition.

Components of Our Results of Operations

Revenue

To date, we have not generated any revenue from product sales and do not expect to do so in the near future. We expect that we will experience increasing losses as we continue our development of, and seek regulatory approvals for, our product candidates and begin to commercialize any approved products. Our ability to generate revenue for each product candidate for which we receive regulatory approval, if any, will depend on numerous factors, including reimbursement, coverage, competition, commercial manufacturing capability and market acceptance of such approved products.

Operating Expenses

Research and Development Expenses

Research and development expenses consist of expenses incurred in connection with the discovery and development of our product candidates. We expense research and development costs as incurred. These expenses include:

The successful development of our product candidates is highly uncertain. At this time, we cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the remainder of the development of, or when, if ever, material net cash inflows may commence from naxitamab and omburtamab or any future product candidates we may develop. This uncertainty is due to the numerous risks and uncertainties associated with the duration and cost of clinical trials, which vary significantly over the life of a project as a result of many factors, including:

Our expenditures are subject to additional uncertainties, including the terms and timing of regulatory approvals. We may never succeed in achieving regulatory approval for naxitamab, omburtamab or any other product candidates we may develop.

A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials beyond those that we anticipate will be required for the completion of clinical development of a product candidate, or if we experience significant delays in our clinical trials due to patient enrollment or other reasons, we would be required to expend significant additional financial resources and time on the completion of clinical development.

Research and development activities are central to our business model. Product candidates in later stages of clinical development, like naxitamab and omburtamab, generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later‑stage clinical trials. We expect our research and development expenses to increase significantly over the next several years as we increase personnel costs, including stock‑based compensation, conduct clinical trials and potentially prepare regulatory filings for naxitamab and omburtamab.

General and Administrative Expenses

General and administrative expenses consist primarily of employee related expenses, including salaries, bonus, benefits, and stock‑based compensation expenses for personnel in executive, finance and administrative functions. Other significant costs include facility costs not otherwise included in research and development expenses, legal fees relating to corporate matters, and fees for patent, accounting, tax, and consulting services.

We anticipate that our general and administrative expenses will increase in the future to support continued research and development activities, potential commercialization of our product candidates and increased costs associated with operating as a public company, including expenses related to services associated with maintaining compliance with exchange listing and the SEC requirements, regulatory expenses, director and officer insurance costs and investor and public relations costs. These increases will likely include increased costs related to the hiring of additional personnel and fees to outside consultants, lawyers and accountants, among other expenses. Additionally, if and when we believe a regulatory approval of a product candidate appears likely, we anticipate an increase in payroll and other employee‑related expenses as a result of our preparation for commercial operations, especially as it relates to the sales and marketing of that product candidate.

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 U.S. generally accepted accounting principles, or GAAP. We believe that several accounting policies are significant to understanding our historical and future performance. We refer to these policies as critical because these specific areas generally require us to make judgments and estimates about matters that are uncertain at the time we make the estimate, and different estimates—which also would have been reasonable—could have been used. On an ongoing basis, we evaluate our estimates and judgments, including those described in greater detail below. We base our estimates on historical experience and other market‑specific or other relevant assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail in the notes to our financial statements appearing elsewhere in this Quarterly Report on Form 10-Q, we believe the following accounting policies to be most critical to the judgments and estimates used in the preparation of our financial statements.

Research and Development Expenses

Research and development costs are charged to operations when incurred and are included in operating expenses. Research and development costs consist principally of compensation cost for our employees and consultants that perform our research activities, the fees paid to maintain our licenses, the payments to third parties for manufacturing and clinical research organizations and additional product development, and consumables and other materials used in research and development. We record accruals for estimated ongoing research costs. When evaluating the adequacy of the accrued liabilities, we analyze progress of the studies or clinical trials, including the phase or completion of events, invoices received and contracted costs. Actual results could differ from our estimates. We are obligated to make certain milestone and royalty payments in accordance with the contractual terms of the MSK License based upon the resolution of certain contingencies. Certain of these milestone payments are due and payable with the passage of time whether or not the milestones have actually been met. We record the milestone and royalty payment when the achievement of the milestone (including the passage of time) or payment of the milestone or royalty is probable and the amount of the payment is reasonably estimable.

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 expenses during the reporting period. Significant estimates and assumptions reflected in these financial statements include, but are not limited to, the accrual for research and development expenses, the accrual of milestone and royalty payments, the valuation of shares of common stock and stock options. 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.

Income Taxes

We account for income taxes under the asset and liability approach for the financial accounting and reporting of income taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to net operating loss carry forwards and temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. These assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to reverse. A valuation allowance is established when management determines that it is more likely than not that some portion or all of the deferred tax assets will not be realized.

We prepare and file tax returns based on its interpretation of tax laws and regulations. In the normal course of business, our tax returns are subject to examination by various taxing authorities. Such examinations may result in future tax and interest assessments by these taxing authorities. In determining our tax provision for financial reporting purposes, we establish a reserve for uncertain tax positions unless such positions are determined to be more likely than not of being sustained upon examination based on their technical merits. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes. Accordingly, we will report a liability for unrecognized tax benefits resulting from any uncertain tax positions taken or expected to be taken on a tax return.

Our policy is to recognize, when applicable, interest and penalties on uncertain tax positions as part of income tax expense.

Stock‑Based Compensation

We measure stock options granted to employees and directors based on the fair value on the date of the grant and recognize compensation expense of those awards, over the requisite service period, which is the vesting period of the respective award. Forfeitures are accounted for as they occur. We issue stock options to employees and directors with only service‑based vesting conditions and record the expense for these awards using the straight‑line method over the requisite service period.

For share‑based awards granted to non‑employees, compensation expense is recognized over the period during which services are rendered by such non‑employees until completed. At the end of each financial reporting period prior to completion of the service, the fair value of these awards is remeasured using the then‑current fair value of our shares of common stock and updated assumption inputs in the Black‑Scholes option‑pricing model.

The fair value of each stock option grant is estimated on the date of grant using the Black‑Scholes option pricing model. Historically, we have been a private company and lack company‑specific historical and implied volatility information for our shares. Therefore, we estimate our expected share price volatility based on the historical volatility of a group of publicly‑traded peer companies and we expect to continue to do so until such time as we have adequate historical data regarding the volatility of our own traded share price. The expected term of our stock options has been determined utilizing the “simplified” method for awards as we have limited historical data to support the expected term assumption. The expected term of stock options granted to non‑employees is equal to the contractual term of the option award. The risk‑free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. The expected dividend yield is based on the fact that we have never paid cash dividends on shares of our common stock and do not expect to pay any cash dividends in the foreseeable future.

Determination of the Fair Value of Common Stock

As there has been no public market for our common stock prior to September 21, 2018, the estimated fair value of our common stock has been determined by our board of directors as of the date of each award grant, with input from management, considering our most recently completed or ongoing private placement activities and most recently available third‑party valuation of our common stock. Third‑party valuations were performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants’ Accounting and Valuation Guide,

Valuation of Privately‑Held‑Company Equity Securities issued as Compensation. This process resulted in estimated fair value of our common stock of $0.20 per share as of June 6, 2015; $4.38 per share as of May 20, 2016; $4.38 per share as of October 21, 2016; $4.38 per share as of August 22, 2016; $8.50 per share as of December 14, 2016; $9.35 per share as of September 13, 2017; $9.35 per share as of December 5, 2017; $11.16 per share as of April 24, 2018 and $13.11 per share as of July 10, 2018. In addition to considering the results of such recently completed or ongoing private placements, our board of directors considered various objective and subjective factors to determine the fair value of our common stock as of each grant date including:

The assumptions underlying these valuations represent management’s best estimates, which involve inherent uncertainties and the application of management judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our stock‑based compensation expense could be materially different.

From the completion of the Company’s initial public offering on September 25, 2018, the fair value of our common stock will be determined based on the quoted market price of our common stock.

Stock Options Granted

The following table sets forth by grant date the number of shares of common stock subject to options granted in 2016, 2017 and 2018, the per share exercise price of the options, the fair value per share of common stock on each grant date, and the per share estimated fair value of the options:

Fair Value of Stock Options

The fair value of each stock option grant is estimated on the date of grant using the Black‑Scholes option pricing model.

The assumptions that the Company used to determine the fair value of the stock options granted to employees and directors for the nine months ended September 30, 2018 and 2017 were as follows, presented on a weighted average basis:

There were no stock options granted to non-employees for the nine months ended September 30, 2017. The assumptions that the Company used to determine the fair value of the stock options granted to non‑employees for the nine months ended September 30, 2018 were as follows, presented on a weighted average basis:

Results of Operations

Comparison of the Three Months Ended September 30, 2018 and 2017

The following table summarizes our results of operations for the three months ended September 30, 2018 and 2017:

Research and Development Expenses

We do not record our research and development expenses on a program‑by‑program or on a product‑by‑product basis as they primarily relate to personnel, research, manufacturing, license fees, non‑cash expense in connection with equity issuances to strategic partner and consumable costs, which are simultaneously deployed across multiple projects under development. These costs are included in the table below.

Research and development expenses increased by $5.6 million from $3.1 million for the three months ended September 30, 2017, to $8.7 million for the three months ended September 30, 2018. This was primarily due to a $3.4 million increase in outsourced manufacturing expenses for our lead product candidates, naxitamab and omburtamab. In addition, expenses for outsourced research and supplies increased by $1.3 million for the three months ended September 30, 2018, due to our increased need for clinical trial support. Employee-related costs including salary, benefits and non-cash stock-based compensation for personnel related to our research activities, increased by $0.7 million for the three months ended September 30, 2018, due to our expanding work force.

General and Administrative Expenses

General and administrative expenses increased by $1.9 million, from $0.8 million for the three months ended September 30, 2017, to $2.7 million for the three months ended September 30, 2018. The increase in general and administrative expenses was primarily attributable to a $1.1 million increase in employee related costs, including salary, benefits and non-cash stock-based compensation for personnel related to our business activities. In addition, fees for auditors, legal advice and other consultancy services increased by $0.5 million for the three months ended September 30,

2018. The increase in general and administrative expenses primarily relates to the infrastructure and administrative costs of becoming a public company.

Interest and Other Income (Expense)

Other income for the three months ended September 30, 2017 were $15,000 as compared to other expenses of $11,000 for the three months ended September 30, 2018. Our interest income has not been significant due to low investment balances and low interest earned on those balances.

Comparison of the Nine Months Ended September 30, 2018 and 2017

The following table summarizes our results of operations for the nine months ended September 30, 2018 and 2017:

Research and Development Expenses

We do not record our research and development expenses on a program‑by‑program or on a product‑by‑product basis as they primarily relate to personnel, research, manufacturing, license fees, non‑cash expense in connection with equity issuances to strategic partner and consumable costs, which are simultaneously deployed across multiple projects under development. These costs are included in the table below.

Research and development expenses increased by $15.5 million, from $7.7 million for the nine months ended September 30, 2017, to $23.2 million for the nine months ended September 30, 2018. This was primarily due to a $6.4 million increase in outsourced manufacturing expenses for our lead product candidates, naxitamab and omburtamab, and an increase of $3.5 million in outsourced research and supplies, primarily obtained from MSK and CROs for our lead product candidates, naxitamab and omburtamab. Other clinical trial costs increased by $2.1 million for the nine-month ended September 30, 2018. Employee-related costs including salary, benefits and non-cash stock-based compensation for personnel related to our research activities, increased by $2.4 million for the nine-month ended September 30, 2018. The costs for license arrangements increased by $0.6 million due to the entering of the MabVax Sublicense.

General and Administrative Expenses

General and administrative expenses increased by $3.6 million, from $2.3 million for the nine-month ended September 30, 2017, to $5.9 million for the nine-month ended September 30, 2018. The increase in general and administrative expenses was primarily attributable to a $1.4 million increase in employee related costs, including salary, benefits and non-cash stock-based compensation for personnel related to our business activities. In addition, fees for auditors, legal advice and other consultancy services increased by $1.3 million for the nine-month ended September 30, 2018.

Interest and Other Income (Expense)

Other income for the nine-month period ended September 30, 2017 was $62,000 as compared to other expense of $62,000 for the nine-month period ended September 30, 2018. Our interest income has not been significant due to low average investment balances and low interest earned on those balances.

Liquidity and Capital Resources

Overview

Since our inception we have incurred significant net operating losses and expect to continue to incur increasing net operating losses and significant expenses for the foreseeable future. Our net losses may fluctuate significantly from quarter to quarter and year to year. We do not currently have any approved products and have never generated any revenue from product sales. We have financed our operations through September 30, 2018 primarily through gross proceeds of approximately $230.0 million from the sale of our common stock, including the completion of our IPO on September 25, 2018, in which we issued and sold 6,900,000 shares of our common stock at a public offering price of $16.00 per share, resulting in gross proceeds of approximately $110.4 million before deducting underwriters discounts, commissions and estimated offering costs.

As of September 30, 2018, we had cash and cash equivalents of approximately $163.3 million. We will need additional capital to continue funding our operations, which we may obtain from additional equity or debt financings, collaborations, licensing arrangements, or other sources.

Cash Flows

The following table provides information regarding our cash flows for the nine months ended September 30, 2018 and 2017:

Net Cash Used in Operating Activities

The use of cash in all periods resulted primarily from our net losses adjusted for non-cash charges and changes in components of working capital. Net cash used in operating activities was $9.6 million for the nine months ended September 30, 2017, as compared to $27.7 million for the nine months ended September 30, 2018. The $18.1 million increase in net cash used in operations was primarily due to an increase of $19.3 million in our net loss for the nine months ended September 30, 2018. This increase was primarily due to our operational expenses in connection with the