UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2020 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 001-38792 Alector, Inc. (Exact name of Registrant as specified in its Charter) Delaware 82-2933343 (State or other jurisdiction ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2020 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 001-38792 Alector, Inc. (Exact name of Registrant as specified in its Charter) Delaware 82-2933343 (State or other jurisdiction of in ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2020 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 001-38792 Alector, Inc. (Exact name of Registrant as specified in its Charter) Delaware 82-2933343 (State or other jurisdiction of i ...

PART I [Business Overview](index=3&type=section&id=Item%201.%20Business%2E) Alector, Inc. is a clinical-stage biopharmaceutical company focused on immuno-neurology, developing therapies to treat neurodegenerative diseases by restoring healthy immune function in the brain - Alector is a clinical-stage biopharmaceutical company pioneering immuno-neurology to treat neurodegeneration by restoring healthy immune function in the brain[11](index=11&type=chunk) - The company's Discovery Platform has identified over **120 immune system targets**, progressed over **ten programs** into preclinical research, and advanced **four product candidates** (AL001, AL002, AL003, AL101) into clinical development within **six years**[11](index=11&type=chunk) Clinical Programs Overview | Candidate | Description | Indication | Partner | | :-------- | :------------------ | :----------------------- | :------ | | AL001 | Progranulin | FTD-GRN, FTD-C9orf72 | | | AL101 | Progranulin | Neurology | | | AL002 | TREM2 | Alzheimer's disease (AD) | AbbVie | | AL003 | SIGLEC3 | Alzheimer's disease (AD) | AbbVie | - AL001 received Orphan Drug and Fast Track designations from the FDA for FTD-GRN treatment, demonstrating proof-of-mechanism in Phase 1b by restoring PGRN levels and normalizing disease-associated proteins in CSF[13](index=13&type=chunk) - AL002, targeting TREM2 for Alzheimer's, completed Phase 1a with demonstrated safety, target engagement, and proof-of-mechanism in healthy volunteers, and is now in Phase 1b with Alzheimer's patients[16](index=16&type=chunk) - AL003, targeting SIGLEC 3 for Alzheimer's, initiated Phase 1a in healthy volunteers, showing dose-dependent target engagement, despite two treatment-related serious adverse events (aseptic hip monoarthritis, rash/fever/thrombocytopenia) in the highest dose cohorts Phase 1b in Alzheimer's patients commenced in January 2020[17](index=17&type=chunk)[109](index=109&type=chunk) - The collaboration with AbbVie for AL002 and AL003 included **$205.0 million** in upfront payments and eligibility for up to an additional **$985.6 million** in option exercise and milestone payments, plus global profit sharing[18](index=18&type=chunk)[120](index=120&type=chunk) - The company's intellectual property portfolio includes over **30 patent families**, with **three issued U.S. patents** and over **190 pending applications**, covering product candidates, methods of use, and manufacturing processes[150](index=150&type=chunk) [Risk Factors](index=48&type=section&id=Item%201A.%20Risk%20Factors%2E) The company faces substantial risks due to its early stage of clinical drug development, limited operating history, and anticipated continued net losses - The company is in early stages of clinical drug development with no products approved for commercial sale, leading to significant uncertainty in future success and viability[236](index=236&type=chunk) Net Losses (2017-2019) | Year Ended December 31 | Net Loss (in millions) | | :--------------------- | :--------------------- | | 2019 | $(105.4) | | 2018 | $(52.2) | | 2017 | $(32.5) | - As of December 31, 2019, the company had an accumulated deficit of **$219.8 million** and expects to incur increasingly higher operating losses for the foreseeable future[238](index=238&type=chunk)[239](index=239&type=chunk) - The company's ability to fund operations through the next 12 months relies on existing cash, cash equivalents, and marketable securities of **$353.1 million** as of December 31, 2019, but substantial additional funding will be required for future R&D and commercialization[247](index=247&type=chunk)[532](index=532&type=chunk)[534](index=534&type=chunk) - Clinical trials are expensive, time-consuming, and subject to uncertainty, with potential for substantial delays or termination due to various factors including safety concerns, regulatory holds, and patient enrollment difficulties[271](index=271&type=chunk)[273](index=273&type=chunk)[280](index=280&type=chunk)[281](index=281&type=chunk) - The biopharmaceutical industry, especially in neurodegenerative diseases, is highly competitive, with larger companies possessing greater financial resources and expertise, posing a risk to the commercial success of the company's product candidates[288](index=288&type=chunk)[289](index=289&type=chunk) - The company relies heavily on third parties for manufacturing, clinical trials, and collaborations (e.g., AbbVie, Adimab), which introduces risks related to performance, compliance, and potential termination of agreements[360](index=360&type=chunk)[362](index=362&type=chunk)[374](index=374&type=chunk) - Intellectual property protection is crucial, but patents may be challenged, narrowed, or invalidated, and the company may face claims of infringement or be unable to obtain necessary licenses, potentially harming its competitive position[381](index=381&type=chunk)[385](index=385&type=chunk)[387](index=387&type=chunk)[397](index=397&type=chunk) - The COVID-19 pandemic could adversely impact the business by causing delays in clinical trials, difficulties in patient enrollment, interruption of clinical site activities, and diversion of healthcare resources[454](index=454&type=chunk) [Unresolved Staff Comments](index=95&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments%2E) The company reported no unresolved staff comments from the SEC - There are no unresolved staff comments[484](index=484&type=chunk) [Properties](index=95&type=section&id=Item%202.%20Properties%2E) The company's corporate headquarters are in South San Francisco, California, with additional office and laboratory space in Milpitas - Corporate headquarters are in South San Francisco, California, leasing approximately **105,000 square feet** of office and laboratory space until May 2029[485](index=485&type=chunk) - An additional **8,763 square feet** of office and laboratory space is leased in Milpitas, California[485](index=485&type=chunk) [Legal Proceedings](index=95&type=section&id=Item%203.%20Legal%20Proceedings%2E) The company is not currently involved in material litigation but initiated arbitration against a former co-founder for alleged breaches - The company is not currently involved in any litigation or legal proceedings expected to have a material adverse effect on its business[486](index=486&type=chunk) - A confidential arbitration proceeding was initiated on June 18, 2019, against former consulting co-founder Dr. Asa Abeliovich, concerning alleged breaches of his consulting agreement and improper use of confidential information[486](index=486&type=chunk) - The outcome and potential financial recovery from the arbitration proceeding are currently uncertain[488](index=488&type=chunk) [Mine Safety Disclosures](index=96&type=section&id=Item%204.%20Mine%20Safety%20Disclosures%2E) This item is not applicable to the company - Mine Safety Disclosures are not applicable to Alector, Inc[488](index=488&type=chunk) PART II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=97&type=section&id=Item%205.%20Market%20for%20Registrant's%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities%2E) Alector's common stock trades on Nasdaq, with no cash dividends paid, and proceeds from public offerings invested in low-risk securities - Alector, Inc. common stock is publicly traded on the Nasdaq Global Select Market under the symbol 'ALEC'[488](index=488&type=chunk) - As of March 1, 2020, there were approximately **27 stockholders of record**[488](index=488&type=chunk) - The company has not declared or paid any cash dividends since inception and intends to retain future earnings for business expansion[489](index=489&type=chunk) Public Offering Proceeds | Offering Type | Date | Shares Sold | Price Per Share | Net Proceeds (in millions) | | :-------------- | :--------------- | :---------- | :-------------- | :------------------------- | | Initial Public | Feb 2019 | 9,739,541 | $19.00 | $168.2 | | Follow-on | Jan 2020 | 9,602,500 | $25.00 | $224.5 | - Proceeds from public offerings were invested in interest-bearing, investment-grade securities and government securities, corporate bonds, and commercial paper, with no material change in planned use[496](index=496&type=chunk) [Selected Financial Data](index=101&type=section&id=Item%206.%20Selected%20Financial%20Data%2E) This section presents Alector's selected consolidated financial data, showing consistent net losses and increased liquidity from equity sales and collaboration agreements Consolidated Statement of Operations Data (in thousands, except per share data) | Metric | 2019 | 2018 | 2017 | 2016 | | :---------------------------------------- | :---------- | :---------- | :---------- | :---------- | | Collaboration revenue | $21,219 | $27,508 | $2,872 | $— | | Grant revenue | $— | $169 | $863 | $416 | | Total revenue | $21,219 | $27,677 | $3,735 | $416 | | Research and development | $100,528 | $73,031 | $29,911 | $13,674 | | General and administrative | $35,095 | $11,934 | $6,503 | $1,874 | | Total operating expenses | $135,623 | $84,965 | $36,414 | $15,548 | | Loss from operations | $(114,404) | $(57,288) | $(32,679) | $(15,132) | | Other income, net | $9,019 | $5,040 | $199 | $22 | | Net loss | $(105,385) | $(52,248) | $(32,480) | $(15,110) | | Net loss per share, basic and diluted | $(1.71) | $(4.62) | $(3.55) | $(2.11) | | Shares used in computing net loss per share | 61,734,492 | 11,302,788 | 9,142,688 | 7,173,411 | Consolidated Balance Sheet Data (in thousands) | Metric | 2019 | 2018 | 2017 | 2016 | | :---------------------------------------- | :---------- | :---------- | :---------- | :---------- | | Cash, cash equivalents, and marketable securities | $353,073 | $290,408 | $32,451 | $50,838 | | Working capital | $295,467 | $245,228 | $205,571 | $49,681 | | Total assets | $421,913 | $308,359 | $236,060 | $54,111 | | Deferred revenue | $153,401 | $174,620 | $202,128 | $— | | Total liabilities | $227,170 | $195,237 | $210,608 | $1,533 | | Convertible preferred stock | $— | $210,520 | $77,485 | $77,485 | | Accumulated deficit | $(219,820) | $(114,435) | $(62,187) | $(29,707) | | Total stockholders' equity (deficit) | $194,743 | $(97,398) | $(52,033) | $(24,907) | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=103&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations%2E) This section analyzes Alector's financial condition and operational results, detailing net losses, revenue from collaboration, and R&D expenses, with liquidity supported by equity offerings - Alector is a clinical-stage biopharmaceutical company with no product sales revenue to date, and expects to continue incurring net losses[505](index=505&type=chunk) Net Loss and Accumulated Deficit | Year Ended December 31 | Net Loss (in millions) | Accumulated Deficit (in millions) | | :--------------------- | :--------------------- | :-------------------------------- | | 2019 | $(105.4) | $(219.8) | | 2018 | $(52.2) | $(114.4) | | 2017 | $(32.5) | $(62.2) | - Total revenue decreased by **$6.5 million (23.5%)** from **$27.7 million** in 2018 to **$21.2 million** in 2019, primarily due to an increase in total expected costs for the AL002 and AL003 programs, leading to a cumulative reduction in recognized collaboration revenue[519](index=519&type=chunk) - Research and development expenses increased by **$27.5 million (37.7%)** from **$73.0 million** in 2018 to **$100.5 million** in 2019, driven by higher personnel-related expenses, facilities costs, and increased spending on AL101 and other early-stage programs[520](index=520&type=chunk)[521](index=521&type=chunk) - General and administrative expenses increased by **$23.2 million (194.4%)** from **$11.9 million** in 2018 to **$35.1 million** in 2019, mainly due to increased headcount, new headquarters lease expenses, and higher legal costs, including an ongoing arbitration proceeding[522](index=522&type=chunk) - Other income, net, increased by **$4.0 million (79.4%)** from **$5.0 million** in 2018 to **$9.0 million** in 2019, primarily due to higher interest income from investments of IPO proceeds[523](index=523&type=chunk) Cash Flows from Operating Activities (in thousands) | Year Ended December 31 | Net Cash Provided by (Used in) Operating Activities | | :--------------------- | :-------------------------------------------------- | | 2019 | $(99,308) | | 2018 | $127,464 | | 2017 | $(17,771) | - Cash used in operating activities in 2019 was **$99.3 million**, primarily due to net loss and decreased deferred revenue, partially offset by non-cash charges and increased accrued liabilities[539](index=539&type=chunk) - Cash provided by operating activities in 2018 was **$127.5 million**, mainly from a **$200.0 million** upfront payment from AbbVie, increasing deferred revenue[540](index=540&type=chunk) Contractual Obligations (as of December 31, 2019, in thousands) | Contractual Obligations | Less Than 1 Year | 1 to 3 Years | 3 to 5 Years | More Than 5 Years | Total | | :---------------------- | :--------------- | :----------- | :----------- | :---------------- | :------- | | Operating lease obligations | $6,882 | $14,268 | $15,010 | $35,512 | $71,672 | [Quantitative and Qualitative Disclosures About Market Risk](index=113&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk%2E) The company's market risks are primarily interest rate sensitivities and foreign currency risk, with investments focused on capital preservation - Primary market risks include interest rate sensitivities and foreign currency risk[565](index=565&type=chunk) - As of December 31, 2019, cash, cash equivalents, and marketable securities totaled **$353.1 million**, primarily in bank deposits, money market funds, and short-term government marketable securities[566](index=566&type=chunk) - An immediate **100 basis point** change in interest rates would not materially affect the fair market value of cash equivalents and marketable securities due to their short-term maturities and low-risk profile[566](index=566&type=chunk) - Foreign currency transaction gains and losses have not been material, and no formal hedging program is in place[567](index=567&type=chunk) [Financial Statements and Supplementary Data](index=114&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data%2E) This section presents Alector's audited consolidated financial statements, including balance sheets, statements of operations, cash flows, and detailed notes on accounting policies - The consolidated financial statements for Alector, Inc. as of December 31, 2019 and 2018, and for the three years ended December 31, 2019, were audited by Ernst & Young LLP, who issued an unqualified opinion[572](index=572&type=chunk) - The company adopted ASU No. 2016-02, Leases (Topic 842), on January 1, 2019, recording operating right-of-use assets of **$31.4 million** and lease liabilities of **$38.9 million**, with no material effect on accumulated deficit[573](index=573&type=chunk)[604](index=604&type=chunk) Consolidated Balance Sheets (in thousands) | Assets | Dec 31, 2019 | Dec 31, 2018 | | :----------------------------------------- | :----------- | :----------- | | Cash and cash equivalents | $89,641 | $65,470 | | Marketable securities | $263,432 | $224,938 | | Total current assets | $357,437 | $293,176 | | Property and equipment, net | $33,852 | $10,937 | | Operating lease right-of-use assets | $28,476 | $— | | Total assets | $421,913 | $308,359 | | Liabilities | | | | Total current liabilities | $61,970 | $47,948 | | Deferred revenue, long-term portion | $123,236 | $139,715 | | Operating lease liabilities, long-term portion | $41,471 | $— | | Total liabilities | $227,170 | $195,237 | | Total stockholders' equity (deficit) | $194,743 | $(97,398) | Consolidated Statements of Operations and Comprehensive Loss (in thousands) | Metric | 2019 | 2018 | 2017 | | :---------------------------------------- | :---------- | :---------- | :---------- | | Total revenue | $21,219 | $27,677 | $3,735 | | Total operating expenses | $135,623 | $84,965 | $36,414 | | Net loss | $(105,385) | $(52,248) | $(32,480) | | Comprehensive loss | $(105,201) | $(52,290) | $(32,480) | Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity | 2019 | 2018 | 2017 | | :---------------------------------------- | :---------- | :---------- | :---------- | | Net cash provided by (used in) operating activities | $(99,308) | $127,464 | $(17,771) | | Net cash used in investing activities | $(48,874) | $(224,119) | $(801) | | Net cash provided by (used in) financing activities | $172,353 | $131,146 | $(15) | | Net increase (decrease) in cash, cash equivalents, and restricted cash | $24,171 | $34,491 | $(18,587) | - The company recognized collaboration revenue of **$21.2 million** in 2019, **$27.5 million** in 2018, and **$2.9 million** in 2017, primarily from the AbbVie Agreement, with deferred revenue of **$153.4 million** as of December 31, 2019[613](index=613&type=chunk) - Total stock-based compensation expense was **$16.3 million** in 2019, **$6.9 million** in 2018, and **$5.4 million** in 2017[647](index=647&type=chunk) - As of December 31, 2019, the company had federal and state net operating loss (NOL) carryforwards of approximately **$10.4 million** and **$0.7 million**, respectively, and federal and California tax credit carryforwards of **$8.1 million** and **$2.0 million**, respectively, fully offset by a valuation allowance[662](index=662&type=chunk) - A related party transaction with Adimab, LLC, involved expenses of **$2.8 million** in 2019, **$2.3 million** in 2018, and **$0.4 million** in 2017 for research and development services[667](index=667&type=chunk) - In January 2020, the company completed a follow-on public offering, raising approximately **$224.5 million** in net proceeds[672](index=672&type=chunk) [Changes in and Disagreements With Accountants on Accounting and Financial Disclosure](index=136&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20With%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure%2E) The company reported no changes in or disagreements with accountants on accounting and financial disclosure matters - There were no changes in or disagreements with accountants on accounting and financial disclosure[674](index=674&type=chunk) [Controls and Procedures](index=136&type=section&id=Item%209A.%20Controls%20and%20Procedures%2E) Management concluded that disclosure controls and procedures were effective, with no material changes in internal control over financial reporting - As of December 31, 2019, disclosure controls and procedures were deemed effective at a reasonable assurance level[675](index=675&type=chunk) - No material changes in internal control over financial reporting occurred during the quarter ended December 31, 2019[676](index=676&type=chunk) - The company is exempt from the auditor attestation report on internal control over financial reporting due to its 'emerging growth company' status[677](index=677&type=chunk) [Other Information](index=136&type=section&id=Item%209B.%20Other%20Information%2E) The company reported no other information for this item - No other information is reported under this item[678](index=678&type=chunk) PART III [Directors, Executive Officers and Corporate Governance](index=137&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance%2E) Information on directors, executive officers, and corporate governance will be incorporated by reference from the definitive proxy statement - Information on directors, executive officers, and corporate governance is incorporated by reference from the definitive proxy statement, to be filed within **120 days** after December 31, 2019[679](index=679&type=chunk) [Executive Compensation](index=137&type=section&id=Item%2011.%20Executive%20Compensation%2E) Information regarding executive compensation will be incorporated by reference from the company's definitive proxy statement - Information on executive compensation is incorporated by reference from the definitive proxy statement, to be filed within **120 days** after December 31, 2019[680](index=680&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=137&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters%2E) Information on security ownership of certain beneficial owners and management will be incorporated by reference from the definitive proxy statement - Information on security ownership of certain beneficial owners and management is incorporated by reference from the definitive proxy statement, to be filed within **120 days** after December 31, 2019[681](index=681&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=137&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence%2E) Information on certain relationships, related transactions, and director independence will be incorporated by reference from the definitive proxy statement - Information on certain relationships and related transactions, and director independence, is incorporated by reference from the definitive proxy statement, to be filed within **120 days** after December 31, 2019[682](index=682&type=chunk) [Principal Accounting Fees and Services](index=137&type=section&id=Item%2014.%20Principal%20Accounting%20Fees%20and%20Services%2E) Information regarding principal accounting fees and services will be incorporated by reference from the company's definitive proxy statement - Information on principal accounting fees and services is incorporated by reference from the definitive proxy statement, to be filed within **120 days** after December 31, 2019[683](index=683&type=chunk) PART IV [Exhibits, Financial Statement Schedules](index=138&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules%2E) This section lists documents filed as part of the 10-K report, including consolidated financial statements and an exhibit index - Consolidated financial statements are filed as part of this report under Item 8[685](index=685&type=chunk) - All other financial statement schedules are omitted because they are not required, inapplicable, or the information is included in the consolidated financial statements or notes[685](index=685&type=chunk) - The exhibit index includes various documents such as the Amended and Restated Certificate of Incorporation, Bylaws, Registration Rights Agreement, Equity Incentive Plans, Offer Letters, Lease agreements, Collaboration Agreements (AbbVie, Adimab), List of subsidiaries, Consent of Independent Registered Public Accounting Firm, Power of Attorney, and Certifications of Principal Executive and Financial Officers[686](index=686&type=chunk)[688](index=688&type=chunk)[689](index=689&type=chunk)[691](index=691&type=chunk) [Form 10-K Summary](index=138&type=section&id=Item%2016.%20Form%2010-K%20Summary) The company reported no summary for Form 10-K - No Form 10-K Summary is provided[686](index=686&type=chunk) [Signatures](index=142&type=section&id=Signatures) This section contains the required signatures for the Annual Report on Form 10-K, affirming the report's submission to the SEC - The report is signed by the Co-Founder and Chief Executive Officer, Arnon Rosenthal, Ph.D., and the Vice President, Finance (Principal Financial and Accounting Officer), Calvin Yu, along with other directors[693](index=693&type=chunk)[696](index=696&type=chunk) - A Power of Attorney is included, designating Arnon Rosenthal, Ph.D., Shehnaaz Suliman, M.D., and Calvin Yu as attorneys-in-fact for filing amendments and other related documents[694](index=694&type=chunk)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2019 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 001-38792 Alector, Inc. (Exact name of Registrant as specified in its Charter) Delaware 82-2933343 (State or other jurisdiction ...

[Form 10-Q Filing Information](index=1&type=section&id=Form%2010-Q%20Filing%20Information) This section provides details on the company's filing status, classification, and compliance with SEC reporting requirements [Registrant Information](index=1&type=section&id=Registrant%20Information) Alector, Inc. is a Delaware corporation, a non-accelerated filer, and an emerging growth company, compliant with SEC filing requirements - **Alector, Inc.** is a Delaware corporation, a non-accelerated filer, and an emerging growth company, having elected not to use the extended transition period for new accounting standards[1](index=1&type=chunk) - The company has filed all required reports under Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and has been subject to such filing requirements for the past 90 days[1](index=1&type=chunk) [Securities Information](index=1&type=section&id=Securities%20Information) The company's Common Stock (ALEC) is traded on The NASDAQ Global Select Market, with 68,831,857 shares outstanding as of August 1, 2019 - **Common Stock (ALEC)** is registered on The NASDAQ Global Select Market[2](index=2&type=chunk) - As of August 1, 2019, **68,831,857 shares** of common stock, $0.0001 par value per share, were outstanding[2](index=2&type=chunk) [Special Note Regarding Forward-Looking Statements](index=2&type=section&id=SPECIAL%20NOTE%20REGARDING%20FORWARD-LOOKING%20STATEMENTS) This section cautions that the report contains forward-looking statements, and actual results may differ materially due to various risks and uncertainties - Report contains forward-looking statements regarding future financial results, business strategy, product candidates, clinical trials, and regulatory approvals[4](index=4&type=chunk)[5](index=5&type=chunk) - Actual results may differ materially due to known and unknown risks and uncertainties, as detailed in the 'Risk Factors' section[4](index=4&type=chunk)[6](index=6&type=chunk) - The company does not plan to publicly update or revise any forward-looking statements after the report distribution, except as required by law[7](index=7&type=chunk) [PART I. FINANCIAL INFORMATION](index=2&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) This part presents the company's condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations [Item 1. Financial Statements](index=5&type=section&id=Item%201.%20Financial%20Statements) This section presents the company's condensed consolidated financial statements, including balance sheets, statements of operations, equity, and cash flows [Condensed Consolidated Balance Sheets](index=5&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) The balance sheet shows a significant increase in total assets and a shift from a stockholders' equity deficit to a positive balance | Metric | Dec 31, 2018 (in thousands) | Jun 30, 2019 (in thousands) | Change (in thousands) | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------- | | Total Assets | $308,359 | $477,251 | +$168,892 | | Total Liabilities | $195,237 | $231,535 | +$36,298 | | Total Stockholders' Equity | $(97,398) | $245,716 | +$343,114 | | Cash and Cash Equivalents | $65,470 | $69,208 | +$3,738 | | Marketable Securities | $224,938 | $341,725 | +$116,787 | | Property and Equipment, net | $10,937 | $32,014 | +$21,077 | - Stockholders' equity transitioned from a deficit of **$97.4 million** at December 31, 2018, to a positive **$245.7 million** at June 30, 2019, largely due to the IPO[12](index=12&type=chunk) [Condensed Consolidated Statements of Operations and Comprehensive Loss](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Loss) The company reported increased net losses for both the three and six months ended June 30, 2019, driven by higher R&D and G&A expenses | Metric (in thousands) | 3 Months Ended Jun 30, 2019 | 3 Months Ended Jun 30, 2018 | Change (YoY) | 6 Months Ended Jun 30, 2019 | 6 Months Ended Jun 30, 2018 | Change (YoY) | | :------------------------------------ | :-------------------------- | :-------------------------- | :----------- | :-------------------------- | :-------------------------- | :----------- | | Total Revenue | $6,917 | $7,109 | $(192) | $12,522 | $12,029 | $493 | | Research and Development Expenses | $25,640 | $16,818 | +$8,822 | $46,247 | $28,542 | +$17,705 | | General and Administrative Expenses | $8,429 | $2,522 | +$5,907 | $14,188 | $4,943 | +$9,245 | | Loss from Operations | $(27,152) | $(12,231) | $(14,921) | $(47,913) | $(21,456) | $(26,457) | | Other Income, net | $2,592 | $1,110 | +$1,482 | $4,793 | $1,898 | +$2,895 | | Net Loss | $(24,560) | $(11,121) | $(13,439) | $(43,120) | $(19,558) | $(23,562) | | Net Loss Per Share (basic and diluted)| $(0.36) | $(1.00) | +$0.64 | $(0.77) | $(1.78) | +$1.01 | - Net loss per share improved from **$(1.00) to $(0.36)** for the three months ended June 30, 2019, and from **$(1.78) to $(0.77)** for the six months ended June 30, 2019, despite higher net losses, due to a significant increase in outstanding shares[13](index=13&type=chunk) [Condensed Consolidated Statements of Stockholders' Equity](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders'%20Equity) This statement reflects a substantial increase in total stockholders' equity, primarily due to the conversion of preferred stock and the IPO | Metric (in thousands) | Dec 31, 2018 | Jun 30, 2019 | Change | | :-------------------------------------------------- | :----------- | :----------- | :----- | | Convertible Preferred Stock Amount | $210,520 | $0 | $(210,520) | | Common Stock Shares | 13,764,829 | 68,831,857 | +55,067,028 | | Common Stock Amount | $1 | $7 | +$6 | | Additional Paid-In Capital | $17,078 | $402,823 | +$385,745 | | Accumulated Deficit | $(114,435) | $(157,555) | $(43,120) | | Total Stockholders' Equity (Deficit) | $(97,398) | $245,716 | +$343,114 | - The conversion of **45,374,836 shares** of convertible preferred stock into common stock and the issuance of **9,739,541 shares** of common stock from the IPO significantly boosted additional paid-in capital by **$210.5 million** and **$168.2 million**, respectively[15](index=15&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=9&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) The company experienced net cash outflow from operations and investing, offset by substantial inflow from financing activities due to its IPO | Cash Flow Category (in thousands) | 6 Months Ended Jun 30, 2019 | 6 Months Ended Jun 30, 2018 | Change (YoY) | | :-------------------------------- | :-------------------------- | :-------------------------- | :----------- | | Operating Activities | $(41,618) | $167,477 | $(209,095) | | Investing Activities | $(124,840) | $(219,638) | +$94,798 | | Financing Activities | $170,196 | $70,092 | +$100,104 | | Net Increase in Cash | $3,738 | $17,931 | $(14,193) | | Cash at End of Period | $70,680 | $50,382 | +$20,298 | - Cash used in operating activities shifted from a **$167.5 million inflow** in H1 2018 (due to AbbVie upfront payment) to a **$41.6 million outflow** in H1 2019, primarily due to net loss and deferred revenue recognition[20](index=20&type=chunk)[93](index=93&type=chunk)[94](index=94&type=chunk) - Financing activities provided **$170.2 million** in H1 2019, mainly from the IPO, compared to **$70.1 million** in H1 2018 from convertible preferred stock issuance[20](index=20&type=chunk)[97](index=97&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) These notes provide essential details and explanations for the financial statements, covering accounting policies, fair value, and balance sheet components [1. The Company and Liquidity](index=10&type=section&id=1.%20The%20Company%20and%20Liquidity) Alector, Inc. is a biotechnology company that completed an IPO in February 2019, but expects continued net losses requiring additional capital - **Alector** is a clinical-stage biopharmaceutical company focused on immuno-neurology to cure neurodegenerative diseases[23](index=23&type=chunk)[58](index=58&type=chunk) - Completed an initial public offering (IPO) on February 7, 2019, issuing **9,739,541 shares** of common stock at **$19.00 per share**, generating **$168.2 million** in net proceeds[24](index=24&type=chunk)[61](index=61&type=chunk) - All outstanding convertible preferred stock automatically converted into **45,374,836 shares** of common stock upon the closing of the IPO[24](index=24&type=chunk) - The company has incurred net losses since inception, with **$24.6 million** and **$43.1 million** for the three and six months ended June 30, 2019, respectively, and expects to continue incurring losses, requiring additional capital[62](index=62&type=chunk) [2. Summary of Significant Accounting Policies](index=10&type=section&id=2.%20Summary%20of%20Significant%20Accounting%20Policies) This section outlines key accounting policies, including GAAP conformity, use of estimates, lease accounting adoption, and revenue recognition - Financial statements are prepared in conformity with generally accepted accounting principles in the United States (GAAP) and include all normal, recurring adjustments for interim periods[25](index=25&type=chunk) - Adopted Accounting Standards Update No. 2016-02, Leases, on January 1, 2019, recording operating right-of-use assets of **$31.4 million** and lease liabilities of **$38.9 million**, with no effect on accumulated deficit[30](index=30&type=chunk) - Recognizes collaboration revenue from the AbbVie Agreement over time by measuring actual costs incurred to date compared to overall total expected costs to satisfy the performance obligation[37](index=37&type=chunk)[64](index=64&type=chunk) - Comprehensive loss includes net loss and net unrealized losses on marketable securities[38](index=38&type=chunk) [3. Fair Value Measurements](index=12&type=section&id=3.%20Fair%20Value%20Measurements) The company's financial assets measured at fair value primarily consist of Level 1 money market funds and U.S. government treasury securities | Asset Category (in thousands) | Fair Value Hierarchy | Amortized Cost (Jun 30, 2019) | Fair Market Value (Jun 30, 2019) | | :---------------------------- | :------------------- | :---------------------------- | :------------------------------- | | Money market funds | Level 1 | $68,958 | $68,958 | | U.S. government treasury securities | Level 1 | $341,284 | $341,725 | | Total | | $410,242 | $410,683 | - All cash equivalents and marketable securities are classified as **Level 1**, indicating valuation based on unadjusted quoted prices in active markets[39](index=39&type=chunk)[34](index=34&type=chunk) [4. Balance Sheet Components](index=12&type=section&id=4.%20Balance%20Sheet%20Components) This section details the composition of property and equipment, net, and accrued liabilities, both of which significantly increased | Property and Equipment, Net (in thousands) | Dec 31, 2018 | Jun 30, 2019 | Change | | :--------------------------------------- | :----------- | :----------- | :----- | | Leasehold improvements | $210 | $23,735 | +$23,525 | | Lab equipment | $4,599 | $7,733 | +$3,134 | | Construction-in-progress | $7,449 | $56 | $(7,393) | | Total property and equipment, net | $10,937 | $32,014 | +$21,077 | | Accrued Liabilities (in thousands) | Dec 31, 2018 | Jun 30, 2019 | Change | | :--------------------------------- | :----------- | :----------- | :----- | | Accrued research and development costs | $3,821 | $7,814 | +$3,993 | | Accrued property and equipment | $293 | $2,849 | +$2,556 | | Total accrued liabilities | $8,439 | $14,577 | +$6,138 | [5. Leases](index=13&type=section&id=5.%20Leases) The company entered a new headquarters lease in 2018, subleased a portion in 2019, and incurred a $1.2 million impairment charge - Signed a **10-year lease** for a new **105,000 square feet** office and laboratory space in South San Francisco in June 2018, with lease commencement in January 2019 and occupancy in May 2019[43](index=43&type=chunk) - Subleased approximately **25,000 square feet** of the new headquarters in May 2019, leading to a **$1.2 million impairment charge** on the right-of-use asset[43](index=43&type=chunk) | Lease Expense (in thousands) | 3 Months Ended Jun 30, 2019 | 6 Months Ended Jun 30, 2019 | | :--------------------------- | :-------------------------- | :-------------------------- | | Operating lease cost | $1,498 | $3,183 | | Variable lease cost | $294 | $478 | | Short-term lease cost | $34 | $68 | | Sublease income | $(183) | $(183) | | Total | $1,643 | $3,546 | [6. Stock-based Compensation](index=14&type=section&id=6.%20Stock-based%20Compensation) Stock-based compensation expenses significantly increased, and the company adopted new equity incentive and employee stock purchase plans | Stock-based Compensation (in thousands) | 3 Months Ended Jun 30, 2019 | 3 Months Ended Jun 30, 2018 | Change (YoY) | 6 Months Ended Jun 30, 2019 | 6 Months Ended Jun 30, 2018 | Change (YoY) | | :-------------------------------------- | :-------------------------- | :-------------------------- | :----------- | :-------------------------- | :-------------------------- | :----------- | | Research and development | $1,876 | $635 | +$1,241 | $3,580 | $1,244 | +$2,336 | | General and administrative | $1,818 | $526 | +$1,292 | $3,359 | $1,041 | +$2,318 | | Total | $3,694 | $1,161 | +$2,533 | $6,939 | $2,285 | +$4,654 | - Adopted the **2019 Equity Incentive Plan** and **2019 Employee Stock Purchase Plan (ESPP)** on February 6, 2019[50](index=50&type=chunk)[52](index=52&type=chunk) - As of June 30, 2019, total unrecognized stock-based compensation related to unvested restricted common stock was **$6.2 million** (remaining weighted-average period of **1.9 years**) and for unvested stock options was **$33.2 million** (remaining weighted-average period of **3.2 years**)[49](index=49&type=chunk)[51](index=51&type=chunk) [7. Related Party Transactions](index=15&type=section&id=7.%20Related%20Party%20Transactions) The company has a collaboration agreement with Adimab, LLC, incurring $0.8 million in expenses for milestone payments in H1 2019 - Has a collaboration agreement with **Adimab, LLC**, a related party (CEO is a Co-Founder and Chairperson of the board)[53](index=53&type=chunk) - Incurred **$0.8 million** in expenses for Adimab for the six months ended June 30, 2019, related to milestone payments for product candidate AL003[54](index=54&type=chunk) [8. Net Loss Per Share](index=16&type=section&id=8.%20Net%20Loss%20Per%20Share) Potentially dilutive shares were excluded from diluted net loss per share calculations due to their anti-dilutive effect for the periods presented | Potentially Dilutive Shares (in thousands) | 3 Months Ended Jun 30, 2019 | 6 Months Ended Jun 30, 2018 | | :--------------------------------------- | :-------------------------- | :-------------------------- | | Restricted stock subject to future vesting | 1,396 | 2,498 | | Options to purchase common stock | 5,666 | 287 | | Shares committed under ESPP | 53 | 0 | | Total | 7,115 | 43,728 | - All potentially dilutive shares were excluded from the calculation of diluted net loss per share due to their anti-dilutive effect[55](index=55&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=17&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the company's financial condition, strategic focus, and performance, emphasizing ongoing net losses and funding needs [Overview](index=17&type=section&id=Overview) Alector is a clinical-stage biopharmaceutical company focused on immuno-neurology, advancing multiple product candidates and recently completing an IPO - **Alector** is a clinical-stage biopharmaceutical company pioneering immuno-neurology, a novel therapeutic approach for neurodegenerative diseases[58](index=58&type=chunk) - **AL001** advanced into a Phase 1b study in FTD-GRN patients, demonstrating proof-of-mechanism by restoring PGRN levels; a Phase 2 study is planned for H2 2019 with proof-of-concept data expected in H1 2020[59](index=59&type=chunk) - Initiated a Phase 1b study with **AL002** in Alzheimer's disease patients (proof-of-mechanism data expected H2 2019) and a Phase 1 study with **AL003** in healthy subjects (Q1 2019). A Phase 1 study for **AL101** is expected in H2 2019[60](index=60&type=chunk) - Completed an IPO in February 2019, receiving **$168.2 million** in net proceeds[61](index=61&type=chunk) - Incurred net losses of **$24.6 million** for Q2 2019 and **$43.1 million** for H1 2019, with an accumulated deficit of **$157.6 million** as of June 30, 2019, and expects continued losses due to R&D and public company operations[62](index=62&type=chunk) [Components of Results of Operations](index=18&type=section&id=Components%20of%20Results%20of%20Operations) This section details revenue from the AbbVie collaboration, expensed R&D costs, rising G&A expenses, and other income from investments - Revenue is primarily derived from the **AbbVie Agreement**, recognized over time as research and development services are performed based on incurred costs[64](index=64&type=chunk) - Deferred revenue of **$162.1 million** as of June 30, 2019, from the AbbVie Agreement is expected to be recognized over the research and development period through the completion of Phase 2 clinical trials[65](index=65&type=chunk) - Research and development expenses are expensed as incurred, including third-party contract costs, clinical materials, lab expenses, personnel, and regulatory submissions, and are expected to increase substantially[66](index=66&type=chunk)[69](index=69&type=chunk) - General and administrative expenses include personnel, legal, professional fees, insurance, and facilities, and are anticipated to increase due to growth and public company operating costs, including legal expenses for an arbitration proceeding[70](index=70&type=chunk)[71](index=71&type=chunk) [Results of Operations](index=19&type=section&id=Results%20of%20Operations) This section compares the company's financial performance for the three and six months ended June 30, 2019, versus 2018, detailing changes in revenue and expenses [Comparison of the Three Months Ended June 30, 2019 and 2018](index=19&type=section&id=Comparison%20of%20the%20Three%20Months%20Ended%20June%2030,%202019%20and%202018) Revenue slightly decreased, while R&D and G&A expenses significantly increased, leading to a higher net loss, partially offset by increased other income | Metric (in thousands) | 3 Months Ended Jun 30, 2019 | 3 Months Ended Jun 30, 2018 | Dollar Change | | :------------------------------------ | :-------------------------- | :-------------------------- | :------------ | | Total Revenue | $6,917 | $7,109 | $(192) | | Research and Development Expenses | $25,640 | $16,818 | +$8,822 | | General and Administrative Expenses | $8,429 | $2,522 | +$5,907 | | Other Income, Net | $2,592 | $1,110 | +$1,482 | | Net Loss | $(24,560) | $(11,121) | $(13,439) | - The **$8.8 million increase** in R&D expenses was driven by a **$3.1 million increase** in personnel-related expenses, a **$1.9 million increase** for the AL101 program, a **$1.8 million increase** for other early-stage programs, and a **$1.5 million increase** in facilities and other unallocated R&D expenses[74](index=74&type=chunk)[76](index=76&type=chunk) - The **$5.9 million increase** in G&A expenses was due to a **$2.7 million increase** in facilities and general overhead (including new headquarters lease and sublease impairment), a **$2.2 million increase** in personnel-related expenses, and a **$0.8 million increase** in consulting expenses[77](index=77&type=chunk) [Comparison of the Six Months Ended June 30, 2019 and 2018](index=20&type=section&id=Comparison%20of%20the%20Six%20Months%20Ended%20June%2030,%202019%20and%202018) Revenue increased, but R&D and G&A expenses surged, resulting in a higher net loss, partially mitigated by increased other income from investments | Metric (in thousands) | 6 Months Ended Jun 30, 2019 | 6 Months Ended Jun 30, 2018 | Dollar Change | | :------------------------------------ | :-------------------------- | :-------------------------- | :------------ | | Total Revenue | $12,522 | $12,029 | +$493 | | Research and Development Expenses | $46,247 | $28,542 | +$17,705 | | General and Administrative Expenses | $14,188 | $4,943 | +$9,245 | | Other Income, Net | $4,793 | $1,898 | +$2,895 | | Net Loss | $(43,120) | $(19,558) | $(23,562) | - The **$17.7 million increase** in R&D expenses was driven by a **$6.4 million increase** in personnel-related expenses, a **$3.4 million increase** for the AL101 program, a **$3.2 million increase** in facilities and other unallocated R&D expenses, a **$1.7 million increase** for other early-stage programs, a **$1.7 million increase** for AL001, and a **$1.5 million increase** for AL002[81](index=81&type=chunk)[82](index=82&type=chunk) - The **$9.2 million increase** in G&A expenses was primarily due to a **$4.4 million increase** in personnel-related expenses, a **$3.6 million increase** in facilities and general overhead (including new headquarters lease and sublease impairment), and a **$1.3 million increase** in consulting expenses[83](index=83&type=chunk) [Liquidity and Capital Resources](index=21&type=section&id=Liquidity%20and%20Capital%20Resources) Operations have been financed by preferred stock and AbbVie payments, supplemented by a $168.2 million IPO, with existing capital expected to fund operations for at least 12 months - Operations have been financed primarily by **$210.5 million** from sales of convertible preferred stock and **$205.0 million** in upfront payments from the AbbVie Agreement since inception[85](index=85&type=chunk) - The February 2019 IPO generated **$168.2 million** in net proceeds[86](index=86&type=chunk) - As of June 30, 2019, the company had **$410.9 million** of cash, cash equivalents, and marketable securities, with an accumulated deficit of **$157.6 million**[86](index=86&type=chunk) - Existing cash, cash equivalents, and marketable securities are expected to fund operating expenses and capital expenditure requirements through at least the next 12 months, but substantial additional funding will be needed for future R&D and commercialization[88](index=88&type=chunk) [Cash Flows](index=23&type=section&id=Cash%20Flows) For H1 2019, operating and investing activities used cash, while financing activities provided substantial cash from the IPO | Cash Flow Category (in thousands) | 6 Months Ended Jun 30, 2019 | 6 Months Ended Jun 30, 2018 | | :-------------------------------- | :-------------------------- | :-------------------------- | | Operating Activities | $(41,618) | $167,477 | | Investing Activities | $(124,840) | $(219,638) | | Financing Activities | $170,196 | $70,092 | - Cash used in operating activities for H1 2019 was **$41.6 million**, primarily due to a net loss of **$43.1 million** and a **$12.5 million decrease** in deferred revenue, partially offset by non-cash stock-based compensation and increased accrued liabilities[93](index=93&type=chunk) - Cash provided by financing activities for H1 2019 was **$170.2 million**, primarily from the net proceeds of the IPO, compared to **$70.1 million** in H1 2018 from the issuance of Series E convertible preferred stock[97](index=97&type=chunk) [Critical Accounting Polices and Estimates](index=23&type=section&id=Critical%20Accounting%20Polices%20and%20Estimates) Financial statements rely on management estimates, and the leases policy was updated with the adoption of ASU No. 2016-02, Leases - The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities[100](index=100&type=chunk) - Adopted Accounting Standards Update No. 2016-02, Leases, on January 1, 2019, requiring recognition of right-of-use assets and lease liabilities for leases with terms greater than 12 months[102](index=102&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=24&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company is exposed to interest rate risk on its investments and limited foreign currency risk, neither of which has been material to date - Exposed to interest rate risk on **$410.9 million** in cash, cash equivalents, and marketable securities (bank deposits, money market funds, and short-term government marketable securities) as of June 30, 2019[106](index=106&type=chunk) - An immediate **100 basis point change** in interest rates would not have a material effect on the fair market value of cash equivalents and marketable securities due to their short-term maturities and low-risk profile[106](index=106&type=chunk) - Subject to foreign currency transaction gains or losses from limited contracts with vendors for research and development services denominated in foreign currencies (e.g., Euro), but these have not been material to financial statements[107](index=107&type=chunk) [Item 4. Controls and Procedures](index=24&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of June 30, 2019, with no material changes in internal control over financial reporting - Management concluded that the design and operation of disclosure controls and procedures were **effective at a reasonable assurance level** as of June 30, 2019[109](index=109&type=chunk) - There were no changes in internal control over financial reporting during the quarter ended June 30, 2019, that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting[110](index=110&type=chunk) [PART II. OTHER INFORMATION](index=25&type=section&id=PART%20II.%20OTHER%20INFORMATION) This part includes information on legal proceedings, risk factors, unregistered sales of equity, and other required disclosures [Item 1. Legal Proceedings](index=25&type=section&id=Item%201.%20Legal%20Proceedings) The company is not involved in material litigation but initiated a confidential arbitration against a former co-founder for alleged breaches and improper information use - Not currently a party to any litigation or legal proceedings that are likely to have a material adverse effect on the business[111](index=111&type=chunk) - Initiated a confidential arbitration proceeding on June 18, 2019, against **Dr. Asa Abeliovich**, a former consulting co-founder, related to alleged breaches of his consulting agreement and improper use of confidential information[111](index=111&type=chunk) [Item 1A. Risk Factors](index=25&type=section&id=Item%201A.%20Risk%20Factors) This section details significant risks related to the company's early-stage drug development, financial condition, regulatory approvals, and intellectual property - The company is in the early stages of clinical drug development and has a limited operating history with no products approved for commercial sale, making future success and viability highly uncertain[113](index=113&type=chunk) - Incurred significant net losses (**$24.6 million** for Q2 2019, **$43.1 million** for H1 2019) and expects continued losses due to substantial R&D investments and public company operating costs[116](index=116&type=chunk)[118](index=118&type=chunk) - Requires substantial additional financing to complete product development and commercialization; failure to obtain necessary capital could force delays, reductions, or termination of R&D programs[123](index=123&type=chunk)[125](index=125&type=chunk) - Drug development is highly uncertain, with risks including clinical trial failures, adverse events, and inability to obtain regulatory approval or market acceptance[120](index=120&type=chunk)[151](index=151&type=chunk)[168](index=168&type=chunk) - Faces significant competition in neurodegenerative disease treatment, with competitors potentially developing safer, more effective, or less expensive therapies, or obtaining regulatory approval sooner[156](index=156&type=chunk)[157](index=157&type=chunk) - Manufacturing of product candidates is complex and relies on third parties, posing risks of production difficulties, regulatory non-compliance, and supply interruptions[160](index=160&type=chunk)[162](index=162&type=chunk)[226](index=226&type=chunk) - Inability to obtain and maintain patent protection or protect trade secrets could allow competitors to commercialize similar products, harming the business[234](index=234&type=chunk)[266](index=266&type=chunk) - Reliance on third-party collaborators for R&D and clinical trials carries risks of unsatisfactory performance, delays, or termination of agreements[214](index=214&type=chunk)[221](index=221&type=chunk) - The market price of common stock may be volatile due to various factors, including clinical trial results, competitive developments, and sales by large stockholders[303](index=303&type=chunk)[307](index=307&type=chunk) [Risks Related to Our Business, Financial Condition, and Capital Requirements](index=25&type=section&id=Risks%20Related%20to%20Our%20Business,%20Financial%20Condition,%20and%20Capital%20Requirements) This section highlights the company's early stage, limited operating history, ongoing net losses, and the need for substantial additional financing - The company is a clinical-stage biopharmaceutical company with a limited operating history and no products approved for commercial sale, making any assessment of future success and viability subject to significant uncertainty[113](index=113&type=chunk) - Incurred net losses of **$24.6 million** for the three months and **$43.1 million** for the six months ended June 30, 2019, with an accumulated deficit of **$157.6 million**, and expects to continue incurring significant losses for the foreseeable future[116](index=116&type=chunk)[118](index=118&type=chunk) - Requires substantial additional financing to complete the development and commercialization of product candidates; failure to obtain necessary capital could force delays, reductions, or termination of R&D programs[123](index=123&type=chunk)[125](index=125&type=chunk) - Must prioritize development of certain product candidates due to significant resource requirements, risking the failure to capitalize on potentially more profitable or successful opportunities[128](index=128&type=chunk) [Risks Related to the Discovery, Development, and Commercialization of Our Product Candidates](index=28&type=section&id=Risks%20Related%20to%20the%20Discovery,%20Development,%20and%20Commercialization%20of%20Our%20Product%20Candidates) This section outlines inherent risks in biopharmaceutical development, including clinical trial failures, regulatory hurdles, competition, and manufacturing complexities - Drug development is inherently risky; product candidates may fail preclinical/clinical studies, show harmful side effects, or not meet regulatory criteria, potentially forcing abandonment of development efforts[120](index=120&type=chunk)[129](index=129&type=chunk)[131](index=131&type=chunk) - Clinical trials are expensive, time-consuming, and subject to delays or termination due to various factors, including inability to enroll patients, regulatory holds, or adverse events[144](index=144&type=chunk)[147](index=147&type=chunk)[150](index=150&type=chunk) - Product candidates may cause undesirable side effects or fail to demonstrate sufficient safety and efficacy, preventing or limiting regulatory approval and commercial potential[151](index=151&type=chunk)[185](index=185&type=chunk) - Faces significant competition from major pharmaceutical and biotechnology companies, which may develop safer, more effective, or less expensive therapies, or obtain regulatory approval sooner[156](index=156&type=chunk)[157](index=157&type=chunk) - Manufacturing processes are complex, expensive, and highly regulated; difficulties in scaling up production or complying with cGMPs could delay or stop supply for clinical trials or commercialization[160](index=160&type=chunk)[162](index=162&type=chunk) - Lack of internal sales and marketing infrastructure means commercial success depends on developing these capabilities or successful third-party partnerships, both of which carry significant risks[163](index=163&type=chunk)[167](index=167&type=chunk) - Even if approved, products may fail to achieve market acceptance by physicians, patients, and payors due to factors like efficacy, safety, pricing, or reimbursement[168](index=168&type=chunk)[169](index=169&type=chunk) - Products may face competition from biosimilar products sooner than anticipated, potentially reducing market exclusivity and commercial prospects[174](index=174&type=chunk)[175](index=175&type=chunk) [Risks Related to Regulatory Approval and Other Legal Compliance Matters](index=38&type=section&id=Risks%20Related%20to%20Regulatory%20Approval%20and%20Other%20Legal%20Compliance%20Matters) This section details the lengthy, unpredictable, and costly regulatory approval processes, ongoing scrutiny, and the critical need for compliance with healthcare laws - The regulatory approval processes are lengthy, time-consuming, and inherently unpredictable, potentially leading to failure to obtain marketing approval for product candidates, which would substantially harm the business[181](index=181&type=chunk)[184](index=184&type=chunk) - Product candidates may cause undesirable side effects or have other properties that could halt clinical development, prevent regulatory approval, limit commercial potential, or result in significant negative consequences post-marketing (e.g., recalls, lawsuits)[185](index=185&type=chunk)[187](index=187&type=chunk) - Obtaining regulatory approval in one jurisdiction does not guarantee approval in others, and data from clinical trials conducted outside the United States may not be accepted by the FDA or EMA[189](index=189&type=chunk)[190](index=190&type=chunk) - Approved products will remain subject to extensive ongoing regulatory scrutiny, including manufacturing, labeling, promotion, and post-marketing studies, with non-compliance leading to severe penalties[193](index=193&type=chunk)[196](index=196&type=chunk) - Orphan drug designation for **AL001 (FTD)** may not guarantee market exclusivity or be obtained for other candidates, potentially reducing revenue[198](index=198&type=chunk)[199](index=199&type=chunk) - Healthcare legislative measures aimed at reducing healthcare costs (e.g., ACA) could adversely affect product demand, pricing, reimbursement, and profitability[200](index=200&type=chunk)[201](index=201&type=chunk) - Employees, contractors, and partners may engage in misconduct (e.g., non-compliance with regulatory standards, fraud, kickbacks), leading to significant fines, sanctions, and reputational harm[204](index=204&type=chunk)[205](index=205&type=chunk)[206](index=206&type=chunk) - Failure to comply with environmental, health, and safety laws and regulations could result in fines, penalties, or costs that materially adversely affect the business[210](index=210&type=chunk)[211](index=211&type=chunk) [Risks Related to Our Reliance on Third Parties](index=45&type=section&id=Risks%20Related%20to%20Our%20Reliance%20on%20Third%20Parties) The company heavily relies on third-party collaborations for R&D, clinical trials, and manufacturing, posing risks of limited control and supply disruptions - Heavy reliance on third-party collaborations (e.g., **AbbVie, Adimab**) for R&D and commercialization carries risks of limited control, IP disputes, and potential termination, impacting revenue generation[214](index=214&type=chunk)[216](index=216&type=chunk)[218](index=218&type=chunk) - Dependence on third parties (CROs, medical institutions) to conduct clinical trials and preclinical testing reduces control and poses risks of unsatisfactory performance, missed deadlines, and non-compliance with regulatory requirements[221](index=221&type=chunk)[223](index=223&type=chunk) - Reliance on third-party CDMOs for manufacturing materials for clinical trials and commercial supply carries risks of breach, termination, regulatory non-compliance, and inability to scale production or meet quality standards[226](index=226&type=chunk)[227](index=227&type=chunk)[228](index=228&type=chunk) - Dependence on third-party suppliers for key raw materials creates risks of supply interruptions, limited control over pricing/availability/quality, and potential delays in product development[232](index=232&type=chunk)[233](index=233&type=chunk) [Risks Related to Our Intellectual Property](index=49&type=section&id=Risks%20Related%20to%20Our%20Intellectual%20Property) The company's success depends on obtaining and maintaining robust patent protection, which is uncertain and vulnerable to challenges, infringement claims, and ownership disputes - Ability to obtain and maintain patent protection for product candidates and technologies is crucial but uncertain due to early development stage, prosecution costs, and potential for applications not issuing as patents[234](index=234&type=chunk)[236](index=236&type=chunk) - Patent scope may be insufficient, or patents could be challenged, narrowed, circumvented, or invalidated by third parties, adversely affecting the ability to prevent competitors[238](index=238&type=chunk)[239](index=239&type=chunk)[240](index=240&type=chunk) - Rights to develop and commercialize product candidates are subject to third-party agreements (e.g., **Adimab, AbbVie**), which may not provide exclusive rights or control over patent prosecution, risking loss of IP rights[244](index=244&type=chunk)[245](index=245&type=chunk)[246](index=246&type=chunk)[250](index=250&type=chunk) - Protecting trade secrets and unpatented know-how is critical but difficult, with risks of disclosure by employees or competitors, as evidenced by an ongoing arbitration proceeding[266](index=266&type=chunk)[267](index=267&type=chunk) - May face claims challenging inventorship or ownership of IP, or allegations of infringement from third parties, leading to costly litigation, delays, or loss of rights[269](index=269&type=chunk)[272](index=272&type=chunk)[275](index=275&type=chunk) - Changes in U.S. patent law (e.g., **America Invents Act**) and judicial rulings create uncertainty and increased costs for patent prosecution and enforcement[259](index=259&type=chunk)[260](index=260&type=chunk)[262](index=262&type=chunk) [Risks Related to Our Operations](index=58&type=section&id=Risks%20Related%20to%20Our%20Operations) The company faces risks related to attracting key personnel, managing growth, system vulnerabilities, business disruptions, international operations, and NOL carryforward limitations - Highly dependent on attracting, motivating, and retaining highly qualified managerial, scientific, and medical personnel in a competitive biotechnology and pharmaceutical industry[285](index=285&type=chunk)[286](index=286&type=chunk) - Requires significant organizational growth, posing challenges in managing new personnel, expanding controls, and effectively overseeing outsourced activities[288](index=288&type=chunk)[290](index=290&type=chunk) - Internal computer systems and those of third-party collaborators are vulnerable to cyberattacks and breakdowns, risking data compromise, operational disruptions, and reputational harm[294](index=294&type=chunk)[295](index=295&type=chunk) - Operations are subject to business disruptions (e.g., natural disasters, power shortages) and reliance on third-party manufacturers, which could seriously harm financial condition[296](index=296&type=chunk)[297](index=297&type=chunk) - International operations (e.g., CDMOs outside U.S.) expose the business to economic, political, and regulatory risks, including differing requirements, currency fluctuations, and enforcement challenges[298](index=298&type=chunk)[299](index=299&type=chunk) - Ability to use net operating loss (NOL) carryforwards may be limited due to 'ownership changes' under U.S. tax law, potentially increasing future tax liabilities[301](index=301&type=chunk) [Risks Related to Ownership of Our Common Stock](index=62&type=section&id=Risks%20Related%20to%20Ownership%20of%20Our%20Common%20Stock) The common stock market may be volatile, with potential price declines from restricted share sales, dilution from future capital raises, and significant influence by principal stockholders - An active trading market for common stock may not be sustained, and the market price may be highly volatile due to various factors, including clinical trial results, competitive products, and regulatory developments[302](index=302&type=chunk)[303](index=303&type=chunk) - Sales of a substantial number of restricted shares (approximately **85.9% of outstanding** as of June 30, 2019) upon expiration of lock-up agreements could significantly reduce the market price[307](index=307&type=chunk) - Raising additional capital through the sale of equity or convertible debt securities will dilute existing stockholders, and debt financing may involve restrictive covenants[310](index=310&type=chunk) - Principal stockholders and management own a significant percentage of stock, allowing them to exercise substantial influence over stockholder approval matters, potentially delaying changes in control[311](index=311&type=chunk) - As an 'emerging growth company,' reduced disclosure requirements may make common stock less attractive to investors, potentially leading to a less active trading market and more volatile stock price[312](index=312&type=chunk) - The company will incur increased costs and management time operating as a public company, particularly after no longer being an emerging growth company, due to compliance initiatives (e.g., **SOX Section 404**)[314](index=314&type=chunk)[316](index=316&type=chunk) - Does not expect to pay any dividends for the foreseeable future; investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any return on their investment[320](index=320&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=67&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section details the February 2019 IPO, which generated $168.2 million in net proceeds, invested in short-term, interest-bearing securities - The IPO became effective on February 6, 2019, selling **9,739,541 shares** of common stock at **$19.00 per share**, yielding **$168.2 million** in net proceeds[327](index=327&type=chunk) - The proceeds from the IPO were invested in short-term, interest-bearing, investment-grade, and government securities, with no material change from the planned use[328](index=328&type=chunk) [Item 3. Defaults Upon Senior Securities](index=67&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) This item is not applicable to the company for the reported period - Not applicable[328](index=328&type=chunk) [Item 4. Mine Safety Disclosures](index=67&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company for the reported period - Not applicable[328](index=328&type=chunk) [Item 5. Other Information](index=67&type=section&id=Item%205.%20Other%20Information) There is no other information to disclose for this item - None[328](index=328&type=chunk) [Item 6. Exhibits](index=68&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including the Amended and Restated Certificate of Incorporation and Bylaws, certifications of the Principal Executive Officer and Principal Financial Officer (pursuant to Rules 13a-14(a), 15d-14(a), and 18 U.S.C. Section 1350), and XBRL instance and taxonomy documents - Includes certifications of Principal Executive Officer and Principal Financial Officer (**Exhibits 31.1, 31.2, 32.1, 32.2**)[330](index=330&type=chunk) - Contains XBRL Instance Document and Taxonomy Extension documents for electronic filing[330](index=330&type=chunk) [Signatures](index=69&type=section&id=Signatures) The report is signed by Arnon Rosenthal, Ph.D., Co-Founder and Chief Executive Officer (Principal Executive Officer), and Calvin Yu, Vice President, Finance (Principal Financial and Accounting Officer), on August 12, 2019 - Report signed by **Arnon Rosenthal, Ph.D., Co-Founder and Chief Executive Officer**, and **Calvin Yu, Vice President, Finance**, on August 12, 2019[333](index=333&type=chunk)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2019 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 001-38792 Alector, Inc. (Exact name of Registrant as specified in its Charter) Delaware 82-2933343 (State or other jurisdiction of i ...