Alector(ALEC) - 2019 Q2 - Quarterly Report

Form 10-Q Filing Information This section provides details on the company's filing status, classification, and compliance with SEC reporting requirements Registrant Information 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] - 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] Securities Information 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] - As of August 1, 2019, 68,831,857 shares of common stock, $0.0001 par value per share, were outstanding[2] Special Note Regarding Forward-Looking Statements 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][5] - Actual results may differ materially due to known and unknown risks and uncertainties, as detailed in the 'Risk Factors' section[4][6] - The company does not plan to publicly update or revise any forward-looking statements after the report distribution, except as required by law[7] PART I. FINANCIAL INFORMATION 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 This section presents the company's condensed consolidated financial statements, including balance sheets, statements of operations, equity, and cash flows Condensed Consolidated Balance Sheets 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] Condensed Consolidated Statements of Operations and Comprehensive Loss 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] Condensed Consolidated Statements of Stockholders' Equity 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] Condensed Consolidated Statements of Cash Flows 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][93][94] - 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][97] Notes to Condensed Consolidated Financial Statements 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 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][58] - 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][61] - All outstanding convertible preferred stock automatically converted into 45,374,836 shares of common stock upon the closing of the IPO[24] - 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] 2. Summary of Significant Accounting Policies 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] - 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] - 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][64] - Comprehensive loss includes net loss and net unrealized losses on marketable securities[38] 3. Fair Value Measurements 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][34] 4. Balance Sheet Components 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 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] - 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] | 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 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][52] - 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][51] 7. Related Party Transactions 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] - 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] 8. Net Loss Per Share 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] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition, strategic focus, and performance, emphasizing ongoing net losses and funding needs 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] - 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] - 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] - Completed an IPO in February 2019, receiving $168.2 million in net proceeds[61] - 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] Components of Results of Operations 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] - 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] - 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][69] - 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][71] Results of Operations 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 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][76] - 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] Comparison of the Six Months Ended June 30, 2019 and 2018 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][82] - 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] Liquidity and Capital Resources 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] - The February 2019 IPO generated $168.2 million in net proceeds[86] - 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] - 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] Cash Flows 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] - 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] Critical Accounting Polices and Estimates 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] - 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] Item 3. Quantitative and Qualitative Disclosures About Market Risk 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] - 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] - 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] Item 4. Controls and Procedures 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] - 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] PART II. OTHER INFORMATION This part includes information on legal proceedings, risk factors, unregistered sales of equity, and other required disclosures Item 1. Legal Proceedings 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] - 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] Item 1A. Risk Factors 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] - 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][118] - 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][125] - Drug development is highly uncertain, with risks including clinical trial failures, adverse events, and inability to obtain regulatory approval or market acceptance[120][151][168] - Faces significant competition in neurodegenerative disease treatment, with competitors potentially developing safer, more effective, or less expensive therapies, or obtaining regulatory approval sooner[156][157] - Manufacturing of product candidates is complex and relies on third parties, posing risks of production difficulties, regulatory non-compliance, and supply interruptions[160][162][226] - Inability to obtain and maintain patent protection or protect trade secrets could allow competitors to commercialize similar products, harming the business[234][266] - Reliance on third-party collaborators for R&D and clinical trials carries risks of unsatisfactory performance, delays, or termination of agreements[214][221] - 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][307] Risks Related to Our Business, Financial Condition, and Capital Requirements 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] - 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][118] - 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][125] - 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] Risks Related to the Discovery, Development, and Commercialization of Our Product Candidates 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][129][131] - 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][147][150] - Product candidates may cause undesirable side effects or fail to demonstrate sufficient safety and efficacy, preventing or limiting regulatory approval and commercial potential[151][185] - 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][157] - 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][162] - 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][167] - 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][169] - Products may face competition from biosimilar products sooner than anticipated, potentially reducing market exclusivity and commercial prospects[174][175] Risks Related to Regulatory Approval and Other Legal Compliance Matters 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][184] - 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][187] - 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][190] - 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][196] - Orphan drug designation for AL001 (FTD) may not guarantee market exclusivity or be obtained for other candidates, potentially reducing revenue[198][199] - Healthcare legislative measures aimed at reducing healthcare costs (e.g., ACA) could adversely affect product demand, pricing, reimbursement, and profitability[200][201] - 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][205][206] - 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][211] Risks Related to Our Reliance on Third Parties 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][216][218] - 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][223] - 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][227][228] - 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][233] Risks Related to Our Intellectual Property 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][236] - 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][239][240] - 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][245][246][250] - 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][267] - 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][272][275] - 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][260][262] Risks Related to Our Operations 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][286] - Requires significant organizational growth, posing challenges in managing new personnel, expanding controls, and effectively overseeing outsourced activities[288][290] - Internal computer systems and those of third-party collaborators are vulnerable to cyberattacks and breakdowns, risking data compromise, operational disruptions, and reputational harm[294][295] - 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][297] - 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][299] - 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] Risks Related to Ownership of Our Common Stock 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][303] - 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] - Raising additional capital through the sale of equity or convertible debt securities will dilute existing stockholders, and debt financing may involve restrictive covenants[310] - 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] - 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] - 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][316] - 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] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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] - 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] Item 3. Defaults Upon Senior Securities This item is not applicable to the company for the reported period - Not applicable[328] Item 4. Mine Safety Disclosures This item is not applicable to the company for the reported period - Not applicable[328] Item 5. Other Information There is no other information to disclose for this item - None[328] Item 6. Exhibits 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] - Contains XBRL Instance Document and Taxonomy Extension documents for electronic filing[330] 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]