ALX Oncology(ALXO)

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ALX Oncology(ALXO) - 2020 Q3 - Quarterly Report
2020-11-12 21:38
[PART I. FINANCIAL INFORMATION](index=4&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) This section presents the company's unaudited financial statements and management's analysis of its financial condition and operational results [Financial Statements (Unaudited)](index=4&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) This section presents the company's unaudited condensed consolidated financial statements for the quarterly period ended September 30, 2020, including balance sheets, statements of operations, and cash flows, highlighting the impact of the July 2020 IPO [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) The balance sheet as of September 30, 2020, shows a substantial increase in assets, primarily driven by a significant rise in cash and cash equivalents to $259.5 million from $9.0 million at the end of 2019, mainly due to IPO proceeds, shifting total stockholders' equity from a deficit to a surplus Condensed Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | $259,484 | $9,017 | | Total current assets | $262,404 | $9,809 | | **Total assets** | **$262,449** | **$10,676** | | Total current liabilities | $7,197 | $4,984 | | **Total liabilities** | **$10,433** | **$10,952** | | **Total stockholders' equity (deficit)** | **$252,016** | **($70,639)** | [Condensed Consolidated Statements of Operations and Comprehensive Loss](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Loss) The company reported a net loss of $10.2 million for the third quarter of 2020 and $27.0 million for the nine months ended September 30, 2020, primarily driven by increased Research and Development (R&D) and General and Administrative (G&A) expenses, alongside the cessation of related-party revenue Statement of Operations Summary (in thousands) | Metric | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Related-party revenue | $0 | $1,256 | $1,182 | $3,583 | | Research and development | $5,328 | $2,210 | $16,819 | $9,571 | | General and administrative | $4,481 | $938 | $9,126 | $2,205 | | **Loss from operations** | **($9,809)** | **($3,034)** | **($25,838)** | **($11,450)** | | **Net loss** | **($10,181)** | **($3,044)** | **($26,966)** | **($11,479)** | | **Net loss per share** | **($0.36)** | **($1.33)** | **($2.67)** | **($4.72)** | [Condensed Consolidated Statements of Cash Flows](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) For the nine months ended September 30, 2020, net cash used in operating activities increased to $24.7 million, while net cash provided by financing activities substantially increased to $274.5 million, primarily due to IPO proceeds, resulting in a net increase in cash and cash equivalents of $250.5 million Cash Flow Summary for Nine Months Ended September 30 (in thousands) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash used in operating activities | ($24,674) | ($11,375) | | Net cash provided by (used in) investing activities | $621 | ($415) | | Net cash provided by financing activities | $274,520 | $9,430 | | **Net increase (decrease) in cash** | **$250,467** | **($2,360)** | | **Cash and cash equivalents at end of period** | **$259,484** | **$5,902** | [Notes to Condensed Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) The notes provide crucial context to the financial statements, detailing the company's organization, significant accounting policies, and key financial events, including its July 2020 IPO, term loan, and termination of related-party revenue - In July 2020, the company completed its IPO, issuing 9,775,000 shares of common stock for net proceeds of approximately **$169.5 million**, and all outstanding convertible preferred stock was converted into common stock[20](index=20&type=chunk)[87](index=87&type=chunk) - As of September 30, 2020, the company had cash and cash equivalents of **$259.5 million**, which management believes is sufficient to fund planned operations for at least twelve months[22](index=22&type=chunk) - The company has a Loan and Security Agreement for a **$6.0 million** term loan, which bears interest at a floating rate (**7.0%** as of Sep 30, 2020) and matures in September 2022[75](index=75&type=chunk)[77](index=77&type=chunk)[78](index=78&type=chunk) - Related-party revenue from a services agreement with Tollnine (now Tallac Therapeutics) was terminated effective July 1, 2020, with a new agreement established for Tallac to provide preclinical research services to the company[108](index=108&type=chunk)[110](index=110&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=26&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 and results of operations, detailing its focus on developing ALX148, the significant increase in operating expenses due to advancing clinical trials and public company costs, and its liquidity position following the July 2020 IPO [Overview](index=26&type=section&id=Overview) ALX Oncology is a clinical-stage immuno-oncology company focused on developing ALX148, a CD47 checkpoint inhibitor, and has incurred net losses since inception, with a pivotal July 2020 IPO raising $169.5 million to fund further development - The company is a clinical-stage immuno-oncology company focused on developing therapies that block the CD47 checkpoint pathway, with its lead product candidate being **ALX148**[123](index=123&type=chunk) - In July 2020, the company consummated its IPO, raising net proceeds of **$169.5 million**[125](index=125&type=chunk) - The company has incurred net losses each year since inception, with an accumulated deficit of **$99.7 million** as of September 30, 2020[126](index=126&type=chunk) [Results of Operations](index=29&type=section&id=Results%20of%20Operations) The company's operating loss increased significantly for the three and nine months ended September 30, 2020, compared to the same periods in 2019, primarily driven by higher R&D expenses for the ALX148 program and increased G&A costs related to higher headcount and public company expenses, with related-party revenue ceasing in July 2020 Comparison of Operating Results (in thousands) | Metric | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Research and development | $16,819 | $9,571 | $7,248 | 76% | | General and administrative | $9,126 | $2,205 | $6,921 | 314% | | Related-party revenue | $1,182 | $3,583 | ($2,401) | (67)% | | **Loss from operations** | **($25,838)** | **($11,450)** | **($14,388)** | **126%** | - The increase in R&D expenses was primarily due to higher costs for clinical development of **ALX148**, increased personnel costs, and higher stock-based compensation[151](index=151&type=chunk)[152](index=152&type=chunk) - The increase in G&A expenses was driven by higher personnel costs, stock-based compensation, and increased professional service fees and D&O insurance costs associated with being a public company[153](index=153&type=chunk)[154](index=154&type=chunk) [Liquidity and Capital Resources](index=32&type=section&id=Liquidity%20and%20Capital%20Resources) The company has historically funded operations through equity sales and a term loan, and following its July 2020 IPO, it had **$259.5 million** in cash and cash equivalents as of September 30, 2020, which management believes is sufficient to fund operations through 2023 - As of September 30, 2020, the company had cash and cash equivalents of **$259.5 million**[156](index=156&type=chunk) - Management believes existing cash and cash equivalents will be sufficient to fund operating expenses and capital expenditure requirements through **2023**[168](index=168&type=chunk) - The company has a **$6.0 million** term loan, with interest-only payments through the end of 2020, followed by principal and interest payments through the maturity date of September 1, 2022[158](index=158&type=chunk)[160](index=160&type=chunk) [Contractual Obligations and Commitments](index=35&type=section&id=Contractual%20Obligations%20and%20Commitments) As of September 30, 2020, the company had total material contractual obligations of **$14.9 million**, primarily composed of manufacturing and service contracts, a term loan, and operating lease obligations for its office space Contractual Obligations as of September 30, 2020 (in thousands) | Obligation Type | Total | 2020 (Remaining) | 2021 - 2022 | 2023 - 2024 | Thereafter | | :--- | :--- | :--- | :--- | :--- | :--- | | Operating lease obligations | $380 | $34 | $284 | $62 | $0 | | Manufacturing and service contracts | $7,622 | $6,238 | $1,384 | $0 | $0 | | Term loan | $6,856 | $106 | $6,750 | $0 | $0 | | **Total** | **$14,858** | **$6,378** | **$8,418** | **$62** | **$0** | [Quantitative and Qualitative Disclosures About Market Risk](index=37&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company is exposed to market risks, primarily interest rate risk on its cash and cash equivalents, financial institution risk due to holding substantial cash at a single institution, and foreign currency risk from contracts denominated in foreign currencies, though management believes these risks would not have a material effect on its financial results - The company's primary market risk is interest rate sensitivity on its **$259.5 million** in cash and cash equivalents, where a **100 basis point** change in interest rates is not expected to have a material effect[185](index=185&type=chunk) - Substantially all cash is held at a single financial institution, with **$259.2 million** in excess of the **$250,000** FDIC insurance limit as of September 30, 2020[186](index=186&type=chunk) - The company has limited exposure to foreign currency risk from contracts denominated primarily in Euros, and a **10%** change in exchange rates is not expected to have a material effect[187](index=187&type=chunk) [Controls and Procedures](index=38&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and procedures were not effective as of September 30, 2020, due to a material weakness in internal control over financial reporting stemming from a lack of sufficient qualified personnel, for which remediation efforts including key hires have been undertaken - Management concluded that as of September 30, 2020, the company's disclosure controls and procedures were **not effective** at a reasonable assurance level[191](index=191&type=chunk) - The ineffectiveness is due to a material weakness in internal control over financial reporting resulting from a lack of sufficient qualified personnel, specifically related to review of journal entries, account reconciliations, and technical accounting matters[192](index=192&type=chunk) - Remediation actions include hiring a full-time **CFO** (Jan 2020), a **VP of Finance and Chief Accounting Officer** (Mar 2020), and a **Controller** (Aug 2020) to establish more robust processes[192](index=192&type=chunk) [PART II. OTHER INFORMATION](index=39&type=section&id=PART%20II.%20OTHER%20INFORMATION) This section covers legal proceedings, comprehensive risk factors, equity sales, and other required disclosures [Legal Proceedings](index=39&type=section&id=Item%201.%20Legal%20Proceedings) The company reports that it is not currently a party to any material legal proceedings, acknowledging that it may face various claims in the ordinary course of business but believes it has adequate insurance for many types of liabilities - As of the report date, the company is **not a party to any material legal proceedings**[195](index=195&type=chunk) [Risk Factors](index=39&type=section&id=Item%201A.%20Risk%20Factors) This section provides a comprehensive overview of the significant risks and uncertainties facing the company, including its substantial dependence on the success of its single lead product candidate, ALX148, a history of net losses, the need for substantial additional capital, inherent uncertainties of clinical development and regulatory approval, reliance on third parties for manufacturing and preclinical research, potential intellectual property disputes, and risks associated with being a newly public company, including a previously identified material weakness in internal controls, with the COVID-19 pandemic also highlighted as a significant risk [Risks Related to Our Financial Position and Need for Additional Capital](index=40&type=section&id=Risks%20Related%20to%20Our%20Financial%20Position%20and%20Need%20for%20Additional%20Capital) This subsection outlines financial risks, including a history of significant net losses that are expected to continue, the need for substantial additional capital to finance operations, and a limited operating history which makes future success difficult to predict, noting that the company's ability to raise capital may be hindered by unfavorable market conditions or restrictive terms in its existing loan agreement - The company has incurred **significant net losses** since inception and expects to continue incurring them for the foreseeable future[200](index=200&type=chunk) - Substantial additional capital will be required to finance operations, and if unavailable, the company may be forced to delay, reduce, or eliminate development programs[202](index=202&type=chunk) - The company has a **limited operating history** with no products approved for commercial sale, making it difficult to evaluate its business and likelihood of success[207](index=207&type=chunk) [Risks Related to the Discovery, Development and Commercialization of Our Product Candidates](index=42&type=section&id=Risks%20Related%20to%20the%20Discovery,%20Development%20and%20Commercialization%20of%20Our%20Product%20Candidates) This subsection details the risks associated with product development, including the company's heavy dependence on the success of its single lead product candidate, ALX148, the significant risks of clinical trial failure or delay, reliance on third parties for critical functions like preclinical research and manufacturing, substantial competition in the immuno-oncology space, and the significant threat posed by the COVID-19 pandemic to clinical trials and research - The company is substantially dependent on the success of its lead product candidate, **ALX148**, which is still in clinical development[212](index=212&type=chunk) - The company relies solely on a third-party service provider, **Tallac Therapeutics**, for all of its preclinical research activities, creating dependence and risk[235](index=235&type=chunk) - The **COVID-19 pandemic** could adversely impact business, including ongoing and planned clinical trials and preclinical research, by causing delays, enrollment difficulties, and supply chain interruptions[367](index=367&type=chunk) [Risks Related to Government Regulation](index=53&type=section&id=Risks%20Related%20to%20Government%20Regulation) This subsection covers the risks related to the complex and lengthy regulatory landscape, including the unpredictable and time-consuming approval processes of the FDA and foreign authorities, extensive ongoing regulatory obligations even if a product is approved, and the necessity to comply with healthcare fraud and abuse laws, data privacy regulations (like GDPR and CCPA), and anti-corruption laws, violations of which could result in substantial penalties - The regulatory approval processes of the **FDA** and comparable foreign authorities are lengthy, time-consuming, and inherently unpredictable[273](index=273&type=chunk) - Even if approved, products will be subject to significant ongoing regulatory obligations and review, which could result in restrictions or withdrawal from the market[271](index=271&type=chunk) - The business is subject to complex healthcare laws, including anti-kickback statutes, false claims acts, and data privacy laws (**GDPR**, **CCPA**), with non-compliance leading to significant penalties[291](index=291&type=chunk)[302](index=302&type=chunk)[303](index=303&type=chunk) [Risks Related to Intellectual Property](index=61&type=section&id=Risks%20Related%20to%20Intellectual%20Property) This subsection highlights the risks associated with the company's intellectual property, including the critical and uncertain ability to obtain, maintain, and enforce patent protection for its product candidates, the risk of infringing on third-party patents, and the potential compromise of trade secrets, noting awareness of a competitor's (Trillium Therapeutics) patent application that could potentially limit its ability to pursue ALX148 in certain indications or geographies - The company's ability to obtain, maintain, and enforce patent protection for its product candidates is critical and uncertain, and its patent portfolio is relatively small[306](index=306&type=chunk) - The company may be subject to claims that it infringes on third-party patents, and is aware of a competitor's (**Trillium Therapeutics**) licensed patent application that may encompass certain therapies using soluble human SIRPα, which could potentially limit ALX148's development[335](index=335&type=chunk) - The company relies on confidentiality agreements to protect trade secrets, but these can be breached, and enforcing claims of misappropriation is difficult and expensive[324](index=324&type=chunk)[325](index=325&type=chunk) [Risks Related to Our Operations](index=69&type=section&id=Risks%20Related%20to%20Our%20Operations) This subsection discusses operational risks, including the challenges of managing organizational growth, high dependency on key personnel in a competitive talent market, reliance on third-party organizations for critical services like clinical management and manufacturing, risks from business disruptions such as those caused by the COVID-19 pandemic, and potential product liability claims - The company needs to manage significant organizational growth and is highly dependent on its ability to attract and retain qualified key personnel in a competitive environment[349](index=349&type=chunk)[355](index=355&type=chunk) - The company's product candidates are based on novel technology, making it difficult to predict the time and cost of development[354](index=354&type=chunk) - The terms of the company's Loan Agreement contain restrictive covenants that limit operational and financial flexibility, including restrictions on mergers, acquisitions, and incurring additional debt[380](index=380&type=chunk)[381](index=381&type=chunk) [Risks Related to Ownership of Our Common Stock](index=76&type=section&id=Risks%20Related%20to%20Ownership%20of%20Our%20Common%20Stock) This subsection outlines risks for investors in the company's common stock, including potential stock price volatility, the lack of a sustained trading market, and significant control exerted by principal stockholders and management who own a majority of the stock, highlighting the previously identified material weaknesses in internal control over financial reporting which, if not effectively remediated, could lead to inaccurate financial reporting and loss of investor confidence, and noting the company's status as an "emerging growth company" allowing for reduced disclosure - As of November 6, 2020, executive officers, directors, and **5%+ stockholders** beneficially owned approximately **61.5%** of the company's voting stock, allowing them to exert significant control[408](index=408&type=chunk) - The company has identified **material weaknesses** in its internal control over financial reporting, and if remediation is not effective, it may not be able to report financial results accurately or on a timely basis, which could harm the stock price[420](index=420&type=chunk)[422](index=422&type=chunk) - The company is an "**emerging growth company**" and has elected to use the extended transition period for complying with new accounting standards, which may make its financial statements not comparable to other public companies[407](index=407&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=86&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section states there were no unregistered sales of equity securities during the period and confirms the consummation of the company's IPO in July 2020, which raised approximately **$169.5 million** in net proceeds, with no material change in the planned use of these proceeds from what was described in its final prospectus Initial Public Offering (IPO) Use of Proceeds | Item | Amount | | :--- | :--- | | Aggregate offering price | $185.7 million | | Underwriting discounts and commissions | ($13.0 million) | | Offering-related expenses | ($3.2 million) | | **Net proceeds** | **~$169.5 million** | - There has been no material change in the planned use of proceeds from the initial public offering as described in the final prospectus[441](index=441&type=chunk) [Defaults Upon Senior Securities](index=86&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) The company reports that there were no defaults upon senior securities during the period - Not applicable[442](index=442&type=chunk) [Mine Safety Disclosures](index=86&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) The company reports that this item is not applicable - Not applicable[442](index=442&type=chunk) [Other Information](index=86&type=section&id=Item%205.%20Other%20Information) The company reports that there is no other information to disclose for the period - None[442](index=442&type=chunk) [Exhibits](index=87&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including certifications by the Principal Executive Officer and Principal Financial Officer as required by the Sarbanes-Oxley Act of 2002, as well as XBRL data files - The report includes CEO and CFO certifications pursuant to Sarbanes-Oxley Sections **302** and **906**[444](index=444&type=chunk)[445](index=445&type=chunk) - XBRL Instance Document and related taxonomy files are also filed as exhibits[445](index=445&type=chunk)