knsa_Current_Folio_10Q

 

 

 

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: 001-38492

 


Kiniksa Pharmaceuticals, Ltd.

(Exact name of registrant as specified in its charter)

 


 

Bermuda

 

98-1327726

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification Number)

 

Kiniksa Pharmaceuticals, Ltd.

Clarendon House

2 Church Street

Hamilton HM11, Bermuda

+ (44) 808-189-6257 

(Address, zip code and telephone number, including area code of principal executive offices)

 

Kiniksa Pharmaceuticals Corp.

100 Hayden Avenue

Lexington, MA, 02421

(781) 431-9100

(Address, zip code and telephone number, including area code of agent for service)

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒ No 

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

 

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

  

 

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No  

 

 

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

 

 

 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Class A Common Shares

KNSA

NASDAQ

 

As of April 30, 2019, there were 54,704,361 common shares outstanding in aggregate, comprised of:

 

19,011,934 Class A common shares, par value $0.000273235 per share

 

4,638,855 Class B common shares, par value $0.000273235 per share

 

14,995,954 Class A1 common shares, par value $0.000273235 per share

 

16,057,618 Class B1 common shares, par value $0.000273235 per share

 

 

 

 


 

 

Kiniksa Pharmaceuticals, Ltd.

FORM 10‑Q

FOR THE THREE MONTHS ENDED MARCH 31, 2019

TABLE OF CONTENTS

 

Page

PART I — FINANCIAL INFORMATION 

5

Item 1. Financial Statements (unaudited) 

5

Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018 

5

Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2019 and 2018 

6

Consolidated Statements of Convertible Preferred Shares and Shareholders’ Equity (Deficit) 

7

Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018 

8

Notes to Consolidated Financial Statements 

9

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

30

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

41

Item 4. Controls and Procedures 

42

 

 

PART II — OTHER INFORMATION 

43

Item 1. Legal Proceedings 

43

Item 1A. Risk Factors 

43

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 

105

Item 3. Defaults Upon Senior Securities 

105

Item 4. Mine Safety Disclosures 

105

Item 5. Other Information 

105

Item 6. Exhibits 

106

 

 

SIGNATURES 

107

 

 

2


 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, or Quarterly Report, contains forward‑looking statements. All statements other than statements of historical facts contained in this Quarterly Report including statements regarding our future results of operations and financial position, business strategy, prospective products and product candidates, their expected properties, performance and impact on healthcare costs, the expected timeline for achievement of our clinical milestones, the timing of, and potential results from, clinical and other trials, marketing authorization from the FDA or regulatory authorities in other jurisdictions, coverage and reimbursement for procedures using our product candidates, if approved, research and development costs, timing of regulatory filings and feedback, timing and likelihood of success, plans and objectives of management for future operations and future results of anticipated products, are forward‑looking statements.

These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward‑looking statements.

In some cases, you can identify forward‑looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “goal,” “design,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of these terms or other similar expressions, although not all forward‑looking statements contain these identifying words. The forward‑looking statements in this Quarterly Report are only predictions. We have based these forward‑looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward‑looking statements speak only as of the date of this Quarterly Report and are subject to a number of risks, uncertainties and assumptions described under the sections in this Quarterly Report entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report. These forward‑looking statements are subject to numerous risks, including, without limitation, the following:

·

our status as a clinical‑stage biopharmaceutical company and our expectation to incur losses in the future;

·

our future capital needs and our need to raise additional funds;

·

our limited operating history;

·

the lengthy and expensive clinical development process with its uncertain outcome and potential for clinical failure or delay;

·

the decision by any applicable regulatory authority whether to clear our product candidates for clinical development and, ultimately, whether to approve them for marketing and sale;

·

our ability to anticipate and prevent adverse events caused by our product candidates;

·

our ability to identify, in‑license, acquire, discover or develop additional product candidates;

·

our ability to have our product candidates manufactured;

·

the market acceptance of our product candidates;

·

our ability to timely and successfully develop and commercialize our existing and future product candidates, if approved;

·

physician awareness and adoption of our product candidates;

3


 

 

·

the size of the market for our product candidates;

·

our ability to meet the quality expectations of physicians or patients;

·

our ability to improve our product candidates;

·

the decision of third‑party payors not to cover our product candidates or to require extensive or independently performed clinical trials prior to covering or maintaining coverage of our product candidates;

·

our ability to successfully manage our growth;

·

our ability to avoid product liability claims and maintain adequate product liability insurance;

·

our ability to obtain regulatory exclusivity;

·

our ability to obtain, maintain, protect and enforce our intellectual property rights related to our product candidates;

·

federal, state and foreign regulatory requirements applicable to our product candidates; and

·

ownership concentration of our executive officers and certain members of senior management may prevent our shareholders from influencing significant corporate decisions.

Because forward‑looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified and some of which are beyond our control, you should not rely on these forward‑looking statements as predictions of future events. The events and circumstances reflected in our forward‑looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward‑looking statements. Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties. As a result of these factors, we cannot assure you that the forward‑looking statements in this Quarterly Report will prove to be accurate. Except as required by applicable law, we do not plan to publicly update or revise any forward‑looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.

You should read this Quarterly Report and the documents that we reference in this Quarterly Report completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward‑looking statements by these cautionary statements.

Industry and other data

Unless otherwise indicated, certain industry data and market data included in this Quarterly Report were obtained from independent third‑party surveys, market research, publicly available information, reports of governmental agencies and industry publications and surveys. All of the market data used in this Quarterly Report involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. We believe that the information from these industry publications and surveys included in this Quarterly Report is reliable.

 

4


 

 

Part I — Financial Information

Item 1. Financial Statements (unaudited)

KINIKSA PHARMACEUTICALS, LTD.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

    

2019

    

2018

Assets

 

 

  

 

 

  

Current assets:

 

 

  

 

 

  

Cash and cash equivalents

 

$

82,629

 

$

71,976

Short-term investments

 

 

243,904

 

 

235,328

Prepaid expenses and other current assets

 

 

8,423

 

 

6,446

Total current assets

 

 

334,956

 

 

313,750

Property and equipment, net

 

 

6,190

 

 

6,356

Operating lease right-of-use assets

 

 

3,347

 

 

 —

Restricted cash

 

 

210

 

 

210

Deferred offering costs

 

 

 —

 

 

433

Deferred tax assets

 

 

1,456

 

 

1,216

Total assets

 

$

346,159

 

$

321,965

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

  

 

 

  

Current liabilities:

 

 

  

 

 

  

Accounts payable

 

$

6,890

 

$

10,918

Accrued expenses

 

 

15,618

 

 

16,418

Accrued milestones

 

 

13,000

 

 

15,000

Operating lease liabilities

 

 

1,384

 

 

 —

Other current liabilities

 

 

 —

 

 

218

Total current liabilities

 

 

36,892

 

 

42,554

Noncurrent liabilities:

 

 

  

 

 

  

Noncurrent operating lease liabilities

 

 

2,239

 

 

 —

Other long-term liabilities

 

 

509

 

 

144

Total liabilities

 

 

39,640

 

 

42,698

Commitments and contingencies (Note 12)

 

 

  

 

 

  

Shareholders’ equity:

 

 

 

 

 

 

Class A common shares, par value of $0.000273235 per share; 19,000,408 shares and 15,797,220 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively

 

 

 6

 

 

 4

Class B common shares, par value of $0.000273235 per share; 4,638,855 shares and 4,638,855 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively

 

 

 1

 

 

 1

Class A1 common shares, $0.000273235 par value; 14,995,954 shares and 12,995,954 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively

 

 

 4

 

 

 4

Class B1 common shares, $0.000273235 par value; 16,057,618 shares and 16,057,618 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively

 

 

 4

 

 

 4

Additional paid-in capital

 

 

566,542

 

 

473,483

Accumulated other comprehensive income (loss)

 

 

 8

 

 

(4)

Accumulated deficit

 

 

(260,046)

 

 

(194,225)

Total shareholders’ equity

 

 

306,519

 

 

279,267

Total liabilities and shareholders’ equity

 

$

346,159

 

$

321,965

 

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

5


 

 

KINIKSA PHARMACEUTICALS, LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

 

2019

 

2018

Operating expenses:

    

 

  

 

 

 

Research and development

 

$

59,253

 

 

12,630

General and administrative

 

 

8,394

 

 

3,710

Total operating expenses

 

 

67,647

 

 

16,340

Loss from operations

 

 

(67,647)

 

 

(16,340)

Interest income

 

 

1,809

 

 

305

Loss before benefit for income taxes

 

 

(65,838)

 

 

(16,035)

Benefit for income taxes

 

 

17

 

 

53

Net loss

 

$

(65,821)

 

$

(15,982)

Net loss per share attributable to common shareholders—basic and diluted

 

$

(1.27)

 

$

(6.45)

Weighted average common shares outstanding—basic and diluted

 

 

51,758,353

 

 

2,478,903

Comprehensive loss:

 

 

 

 

 

 

Net loss

 

$

(65,821)

 

$

(15,982)

Other comprehensive income:

 

 

 

 

 

 

Unrealized gain on short-term investments

 

 

12

 

 

 —

Total other comprehensive income

 

 

12

 

 

 —

Total comprehensive loss

 

$

(65,809)

 

$

(15,982)

 

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

 

 

6


 

 

KINIKSA PHARMACEUTICALS, LTD.

CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED SHARES AND SHAREHOLDERS’ EQUITY (DEFICIT)

(In thousands, except share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible Preferred Shares

 

 

Common Shares

 

Additional

 

Accumulated

 

 

 

 

Total

 

 

(Series A, B and C)

 

 

(Class A, B, A1 and B1)

 

Paid-In

 

Other Comprehensive

 

Accumulated

 

Shareholders'

 

    

Shares

    

Amount

  

  

Shares

    

Amount

    

Capital

    

Income (Loss)

    

Deficit

    

Equity

Balances at December 31, 2018

 

 

 

 

 

 

 

49,489,647

 

$

13

 

$

473,483

 

$

(4)

 

$

(194,225)

 

$

279,267

Issuance of Class A common shares upon completion of follow-on offering, inclusive of the over-allotment option exercise, net of underwriting discounts and commissions and offering costs

 

 —

 

 

 —

 

 

2,816,110

 

 

 2

 

 

48,474

 

 

 —

 

 

 —

 

 

48,476

Issuance of Class A1 common shares upon completion of private placement, net of underwriting discounts and commissions and offering costs

 

 —

 

 

 —

 

 

2,000,000

 

 

 —

 

 

34,511

 

 

 —

 

 

 —

 

 

34,511

Class A common shares issued or to be issued in connection with the acquisition of all issued and outstanding equity securities of Primatope Therapeutics, Inc.

 

 —

 

 

 —

 

 

337,008

 

 

 —

 

 

7,000

 

 

 —

 

 

 —

 

 

7,000

Exercise of options

 

 —

 

 

 —

 

 

50,070

 

 

 

 

 

181

 

 

 —

 

 

 —

 

 

181

Share-based compensation expense

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

2,893

 

 

 —

 

 

 —

 

 

2,893

Unrealized gain on short-term investments

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

12

 

 

 —

 

 

12

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(65,821)

 

 

(65,821)

Balances at March 31, 2019

 

 —

 

 

 —

 

 

54,692,835

 

$

15

 

$

566,542

 

$

 8

 

$

(260,046)

 

$

306,519

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible Preferred Shares

 

 

Common Shares

 

Additional

 

Accumulated

 

 

 

 

Total

 

 

(Series A, B and C)

 

 

(Class A, B, A1 and B1)

 

Paid-In

 

Other Comprehensive

 

Accumulated

 

Shareholders'

 

    

Shares

    

Amount

  

  

Shares

    

Amount

    

Capital

    

Income (Loss)

    

Deficit

    

Deficit

Balances at December 31, 2017

 

22,885,492

 

 

119,770

 

 

4,288,329

 

$

 1

 

$

1,289

 

$

 —

 

$

(90,998)

 

$

(89,708)

Issuance of Series C convertible preferred shares, net of issuance costs of $9,178

 

12,784,601

 

 

190,822

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Exercise of options

 

 —

 

 

 —

 

 

4,574

 

 

 —

 

 

17

 

 

 —

 

 

 —

 

 

17

Share-based compensation expense

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

558

 

 

 —

 

 

 —

 

 

558

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(15,982)

 

 

(15,982)

Balances at March 31, 2018

 

35,670,093

 

 

310,592

 

 

4,292,903

 

$

 1

 

$

1,864

 

$

 —

 

$

(106,980)

 

$

(105,115)

 

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

 

 

7


 

 

KINIKSA PHARMACEUTICALS, LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

    

2019

 

 

2018

Cash flows from operating activities:

 

 

  

 

 

 

Net loss

 

$

(65,821)

 

$

(15,982)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

  

 

 

  

Depreciation expense

 

 

471

 

 

 8

Share-based compensation expense

 

 

2,893

 

 

558

Class A common shares issued or to be issued as consideration for Primatope

 

 

7,000

 

 

 —

Loss on disposal of property and equipment

 

 

 —

 

 

66

Non-cash rent expense

 

 

 —

 

 

30

Accretion of discounts on short-term investments

 

 

(846)

 

 

 —

Deferred income taxes

 

 

(240)

 

 

(140)

Changes in operating assets and liabilities:

 

 

 

 

 

  

Prepaid expenses, right-of-use assets and other assets

 

 

(1,210)

 

 

204

Accounts payable

 

 

(3,343)

 

 

1,091

Accrued expenses and other liabilities

 

 

(376)

 

 

(807)

Accrued milestones

 

 

(2,000)

 

 

 —

Operating lease liabilities

 

 

(293)

 

 

 —

Other long-term liabilities

 

 

509

 

 

 —

Net cash used in operating activities

 

 

(63,256)

 

 

(14,972)

Cash flows from investing activities:

 

 

  

 

 

 

Purchases of property and equipment

 

 

(1,561)

 

 

(75)

Purchases of short-term investments

 

 

(181,807)

 

 

 —

Proceeds from the maturities of short-term investments

 

 

174,090

 

 

 —

Net cash used in investing activities

 

 

(9,278)

 

 

(75)

Cash flows from financing activities:

 

 

  

 

 

 

Proceeds from issuance of Series C convertible preferred shares, net of issuance costs

 

 

 —

 

 

190,822

Proceeds from issuance of Class A common shares from follow-on offering, net of underwriting commissions and discounts, inclusive of the over-allotment option exercise

 

 

48,595

 

 

 —

Proceeds from issuance of Class A1 common shares from private placement, net of underwriting commissions and discounts

 

 

34,511

 

 

 —

Payments of offering costs

 

 

(100)

 

 

(29)

Proceeds from exercise of options and employee share purchase plan

 

 

181

 

 

17

Net cash provided by financing activities

 

 

83,187

 

 

190,810

Net increase in cash and cash equivalents and restricted cash

 

 

10,653

 

 

175,763

Cash and cash equivalents and restricted cash at beginning of period

 

 

72,186

 

 

45,660

Cash and cash equivalents and restricted cash at end of period

 

$

82,839

 

$

221,423

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

Deferred offering costs included in accrued expenses and accounts payable

 

$

19

 

$

1,579

Property and equipment included in accrued expenses and accounts payable

 

$

37

 

$

 —

 

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

 

8


 

KINIKSA PHARMACEUTICALS, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except share and per share amounts)

(Unaudited)

 

 

1.           Nature of the Business and Basis of Presentation

Kiniksa Pharmaceuticals, Ltd. (the “Company”) is a biopharmaceutical company focused on discovering, acquiring, developing and commercializing therapeutic medicines for patients suffering from debilitating diseases with significant unmet medical need. The Company was incorporated in July 2015 as a Bermuda exempted company. The Company has a pipeline of product candidates across various stages of development, focused on autoinflammatory and autoimmune conditions.

The Company is subject to risks and uncertainties common to early‑stage companies in the biotechnology industry. There can be no assurance that the Company’s research and development will be successfully completed, that adequate protection for the Company’s technology will be obtained, that any products developed will obtain necessary government regulatory approval or that any products, if approved, will be commercially viable.  The Company does not currently generate revenue from sales of any products, and it may never be able to develop or commercialize a marketable product. The Company has not yet successfully completed any Phase 3 or other pivotal clinical trials, obtained any regulatory approvals, manufactured a commercial‑scale drug, or conducted sales and marketing activities. The Company operates in an environment of rapid technological innovation and substantial competition from pharmaceutical and biotechnology companies. In addition, the Company is dependent upon the services of its employees, consultants and service providers. Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales.

Principles of Consolidation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of the Company and its wholly owned subsidiaries, Kiniksa Pharmaceuticals Corp. (“Kiniksa US”), Kiniksa Pharmaceuticals (UK), Ltd. (“Kiniksa UK”), Kiniksa Pharmaceuticals (Germany) GmbH (“Kiniksa Germany”) and Primatope Therapeutics, Inc. (“Primatope”), after elimination of all significant intercompany accounts and transactions. 

In assessing the consolidation requirement for variable interest entities (“VIEs”), the Company focuses on identifying whether it has both the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits from the VIE. In the event that the Company is the primary beneficiary of a VIE, the assets, liabilities, and results of operations of the VIE would be included in the Company’s consolidated financial statements.  At December 31, 2018 and during the year then ended and at March 31, 2019 and during the three months then ended, the Company was not the primary beneficiary of a VIE.

Use of Estimates

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

9


 

KINIKSA PHARMACEUTICALS, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except share and per share amounts)

(Unaudited)

 

Reporting and Functional Currency

The financial results of the Company's global activities are reported in U.S. dollars (“USD”) and its foreign subsidiaries generally utilize their respective local currency to be their functional currency.

Transactions in other currencies are recorded in the functional currency at the rate of exchange prevailing when the transactions occur. Monetary assets and liabilities denominated in other currencies are re-measured into the functional currency at the rate of exchange in effect at the balance sheet date. Exchange gains and losses arising from re-measurement of foreign currency-denominated monetary assets and liabilities are included in income in the period in which they occur.

For the Company’s foreign subsidiaries where the local currency is the functional currency, assets and liabilities denominated in local currencies are translated into USD at end-of-period exchange rates and the resulting translation adjustments are reported as a component of accumulated other comprehensive loss within shareholders' equity (deficit).

Unaudited Interim Consolidated Financial Information

The accompanying unaudited consolidated financial statements have been prepared in accordance with GAAP for interim financial information. The accompanying unaudited consolidated financial statements do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. The accompanying year-end consolidated balance sheet was derived from audited financial statements but does not include all disclosures required by GAAP.  The unaudited interim consolidated financial statements have been prepared on the same basis as the audited annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of March 31, 2019 and the results of its operations for the three months ended March 31, 2019 and 2018 and its cash flows for the three months ended March 31, 2019 and 2018. The results for the three months ended March 31, 2019 are not necessarily indicative of results to be expected for the year ending December 31, 2019, any other interim periods or any future year or period.

Reverse Stock Split

On May 11, 2018, the Company effected a 1-for-2.73235 reverse share split of its authorized, designated, issued and outstanding common shares and preferred shares. Accordingly, all share and per share amounts for all periods presented in the accompanying consolidated financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect this reverse share split.

Initial Public Offering

On May 23, 2018, the Company’s registration statement on Form S-1 relating to its initial public offering of its Class A common shares (the “IPO”) was declared effective by the Securities and Exchange Commission (“SEC”).  On May 29, 2018, the Company completed the IPO of 8,477,777 Class A common shares at a public offering price of $18.00 per share for gross proceeds of $152,600. In addition, on June 22, 2018, the Company completed the sale of 1,006,425 Class A common shares to the underwriters of the IPO following the exercise in part of their over-allotment option to purchase additional shares at a public offering price of $18.00 per share for gross proceeds of $18,116. The aggregate net proceeds to the Company from the IPO, inclusive of the over-allotment option exercise, was $155,536 after deducting underwriting discounts and commissions and other offering costs.

Upon the closing of the IPO, all convertible preferred shares then outstanding automatically converted into 5,546,019 Class A common shares, 1,070,502 Class B common shares, 12,995,954 Class A1 common shares and 16,057,618 Class B1 common shares. In connection with the closing of the IPO, the Company amended and restated its bye-laws (the “Amended & Restated Bye-Laws”).

10


 

KINIKSA PHARMACEUTICALS, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except share and per share amounts)

(Unaudited)

 

Follow-on Offering and Private Placement

On February 4, 2019, the Company completed a follow-on offering of 2,654,984 Class A common shares at a public offering price of $18.26 and a concurrent private placement of 2,000,000 Class A1 common shares at an offering price of $18.26 per share for aggregate gross proceeds of $85,000.  In addition, on March 1, 2019, the Company completed the sale of 161,126 Class A common shares to the underwriters of the follow-on offering following the exercise in part of their over-allotment option to purchase additional shares at a public offering price of $18.26 per share for gross proceeds of $2,942.  The aggregate net proceeds to the Company from the follow-on offering and concurrent private placement, inclusive of the over-allotment option exercise, was $82,985 after deducting underwriting discounts and commissions and other offering costs

Liquidity

In accordance with Accounting Standards Update (“ASU”) No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40), the Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the consolidated financial statements are issued. As of March 31, 2019, the Company had an accumulated deficit of $260,046. During the three months ended March 31, 2019, the Company incurred a net loss of $65,821 and used $63,256 of net cash in operating activities. The Company expects to continue to generate operating losses for the foreseeable future. As of March 31, 2019, the Company had cash, cash equivalents and short-term investments of $326,533.

Based on its current operating plan, the Company expects that its cash, cash equivalents and short-term investments will be sufficient to fund its operating expenses and capital expenditure requirements for at least 12 months from the issuance date of these consolidated financial statements. The future viability of the Company beyond that point is dependent on its ability to raise additional capital to finance its operations. Although the Company has been successful in raising capital in the past, there is no assurance that it will be successful in obtaining such additional financing on terms acceptable to the Company, if at all. If the Company is unable to obtain funding, the Company could be forced to delay, reduce or eliminate some or all of its research and development programs, product portfolio expansion or commercialization efforts, which could adversely affect its business prospects, or the Company may be unable to continue operations.

 

 

2.           Summary of Significant Accounting Policies

Cash and Cash Equivalents

The Company classifies deposits in banks, money market funds and cash invested temporarily in various instruments with maturities of three months or less at the time of purchase as cash and cash equivalents. At March 31, 2019 and December 31, 2018, cash and cash equivalents consisted principally of U.S. Treasury notes, amounts held in money market funds and cash on deposit at commercial banks.

Short-Term Investments

The Company generally invests its excess cash in money market funds and short-term investments in U.S. Treasury notes. Such investments included in short-term investments on the Company's consolidated balance sheets are considered available-for-sale debt securities and are reported at fair value with unrealized gains and losses included as a component of shareholders’ equity (deficit). Realized gains and losses, if any, on short-term investments are included in interest income (expense), net. 

The Company evaluates its short-term investments with unrealized losses for other-than-temporary impairment.  When assessing short-term investments for other-than-temporary declines in value, the Company considers such factors as, among other things, how significant the decline in value is as a percentage of the original cost, the Company’s ability

11


 

KINIKSA PHARMACEUTICALS, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except share and per share amounts)

(Unaudited)

 

and intent to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value and market conditions in general.  If any adjustment to fair value reflects a decline in the value of the investment that the Company considers to be “other than temporary,” the Company reduces the investment to fair value through a charge to the consolidated statement of operations and comprehensive loss.  No such adjustments were necessary during the periods presented.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents and short-term investments. At March 31, 2019 and December 31, 2018, substantially all of the Company’s cash, cash equivalents and short-term investments were held at two financial institutions.  The Company generally maintains balances in various operating accounts at financial institutions that management believes to be of high credit quality, in amounts that may exceed federally insured limits.  The Company has not experienced any losses related to its cash, cash equivalents and short-term investments and does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.

Restricted Cash

In conjunction with the Company’s lease agreement entered into in March 2018 (see Note 5), the Company maintains a letter of credit for the benefit of the landlord. As of March 31, 2019, the underlying cash balance of $210 securing this letter of credit, was classified as non‑current in its consolidated balance sheet.

Fair Value Measurements

Certain assets and liabilities of the Company are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:

·

Level 1—Quoted prices in active markets for identical assets or liabilities.

·

Level 2—Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.

·

Level 3—Unobservable inputs that are supported by little or no market activity that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.

The Company’s restricted cash, which is held in a money market fund, is carried at fair value, determined based on Level 1 inputs in the fair value hierarchy described above (see Note 3). The Company’s cash equivalents and short-term investments, consisting of money market funds and U.S. Treasury notes, are carried at fair value, determined based on Level 1 and 2 inputs in the fair value hierarchy described above (see Note 3). The carrying values of the Company’s prepaid expenses and other current assets, accounts payable and accrued expenses approximate their fair values due to the short‑term nature of these assets and liabilities.

12


 

KINIKSA PHARMACEUTICALS, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except share and per share amounts)

(Unaudited)

 

Leases

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which set forth the principles for recognition, measurement, presentation and disclosure of lease arrangements to enhance the transparency and comparability of financial reporting related to the arrangements. ASU 2016-02, including subsequently issued amendments, is collectively referred to as Accounting Standards Codification, Leases (Topic 842) (“ASC 842”). The Company adopted the new standard on January 1, 2019 using the modified retrospective transition approach as applied to leases existing as of the adoption date.  The standard will be applied to all leases entered into after the initial adoption date.

At the inception of an arrangement, the Company determines whether the arrangement is or contains a “lease” as defined by ASC 842. A lease is an arrangement, or part of an arrangement, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. The Company determines if the arrangement conveys the right to control the use of an identified asset for a period of time. It assesses throughout the period of use whether the Company has both of the following (1) the right to obtain substantially all of the economic benefits from use of the identified asset and (2) the right to direct the use of the identified asset. This determination is reassessed if the terms of the arrangement are changed. Leases are classified as operating or finance leases based on the terms of the lease agreement and certain characteristics of the identified asset. Right-of-use (“ROU”) assets and lease liabilities are recognized at lease commencement date based on the present value of the minimum future lease payments.

Most leases with a term greater than one year are recognized on the balance sheet as ROU assets with corresponding lease liabilities and, if applicable, long-term lease liabilities. The Company has elected not to recognize leases with a term of one year or less on its balance sheet. Operating leases, ROU assets and their corresponding lease liabilities are recorded based on the present value of lease payments over the expected remaining lease term. However, certain adjustments to the ROU assets may be required for items such as incentives received. The interest rate implicit in lease arrangements is typically not readily determinable. As a result, the Company utilizes its incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.

In accordance with the guidance in ASU 2016-02, components of a lease should be split into three categories: lease components (e.g., land, building, etc.), non-lease components (e.g., common area maintenance, consumables, etc.), and non-components (e.g., property taxes, insurance, etc.); then the fixed and in-substance fixed contract consideration (including any related to non-components) must be allocated based on fair values to the lease components and non-lease components.

Although separation of lease and non-lease components is required, certain practical expedients are available. Companies may elect the practical expedient to not separate lease and non-lease components. In which case, the Company would account for each lease component and the related non-lease component together as a single component. The Company has elected to account for the lease and non-lease components of each of its operating leases as a single lease component and allocate all of the arrangement consideration to the lease component only. The lease component results in an operating right-of-use asset being recorded on the balance sheet and amortized on a straight-line basis as lease expense.

Research and Development Costs

Research and development costs are expensed as incurred. Research and development expenses consist of costs incurred to discover, research and develop drug candidates, including personnel expenses, share‑based compensation expense, allocated facility‑related and depreciation expenses, third‑party license fees and external costs of outside vendors engaged to conduct pre-clinical and clinical development activities and clinical trials as well as to manufacture clinical trial materials. Non‑refundable prepayments for goods or services that will be used or rendered for future research and development activities are recorded as prepaid expenses. Such amounts are recognized as an expense as the

13


 

KINIKSA PHARMACEUTICALS, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except share and per share amounts)

(Unaudited)

 

goods are delivered or the related services are performed, or until it is no longer expected that the goods will be delivered, or the services rendered.

Research Contract Costs and Accruals

The Company has entered into various research and development-related contracts with companies both inside and outside of the United States. The related costs are recorded as research and development expenses as incurred. The Company records accruals for estimated ongoing research costs. When evaluating the adequacy of the accrued liabilities, the Company analyzes progress of the studies or clinical trials, including the phase or completion of events, invoices received and contracted costs. Significant judgments and estimates are made in determining the accrued balances at the end of any reporting period. Actual results could differ materially from the Company's estimates. The Company's historical accrual estimates have not been materially different from the actual costs.

Share‑Based Compensation

The Company measures all share-based awards granted to employees and directors based on their fair value on the date of the grant and recognizes compensation expense for those awards over the requisite service period, which is generally the vesting period of the respective award. Forfeitures are accounted for as they occur. The Company issues share-based awards with only service-based vesting conditions and records the expense for these awards using the straight-line method. The Company has not issued any share-based awards with performance-based vesting conditions.

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

The Company classifies share-based compensation expense in its consolidated statements of operations and comprehensive loss in the same manner in which the award recipient's payroll costs are classified or in which the award recipient's service payments are classified.

The fair value of each restricted share award is estimated on the date of grant based on the fair value of the Company’s Class A common shares or Class B common shares on that same date. The fair value of each option grant is estimated using the Black-Scholes option-pricing model, which requires inputs based on certain subjective assumptions, including the expected share price volatility, the expected term of the award, the risk-free interest rate, and expected dividends (see Note 9).  Prior to May 2018, the Company was a private company and, accordingly, lacks company-specific historical and implied volatility information for its shares. Therefore, it estimates its expected share price volatility based on the historical volatility of publicly traded peer companies and expects to continue to do so until such time as it has adequate historical data regarding the volatility of its own traded share price. The expected term of the Company’s options has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options. The expected term of options granted to non-employees is equal to the contractual term of the option award. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that the Company has never paid cash dividends on common shares and does not expect to pay any cash dividends in the foreseeable future. 

Comprehensive Loss

Comprehensive loss includes net loss as well as other changes in shareholders’ equity (deficit) that result from transactions and economic events other than those with shareholders. For the three months ended March 31, 2019, the Company’s only element of other comprehensive loss was unrealized gain on short-term investments. For the three months ended March 31, 2018, there was no difference between net loss and comprehensive loss.

14


 

KINIKSA PHARMACEUTICALS, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except share and per share amounts)

(Unaudited)

 

Net Income (Loss) per Share

The Company follows the two‑class method when computing net income (loss) per share as the Company has issued shares that meet the definition of participating securities. The two‑class method determines net income (loss) per share for each class of common and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings. The two‑class method requires income available to common shareholders for the period to be allocated between common and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed.

Basic net income (loss) per share attributable to common shareholders is computed by dividing the net income (loss) attributable to common shareholders by the weighted average number of common shares outstanding for the period. Diluted net income (loss) attributable to common shareholders is computed by adjusting net income (loss) attributable to common shareholders to reallocate undistributed earnings based on the potential impact of dilutive securities. Diluted net income (loss) per share attributable to common shareholders is computed by dividing the diluted net income (loss) attributable to common shareholders by the weighted average number of common shares outstanding for the period, including potential dilutive common shares. For purpose of this calculation, outstanding options, unvested restricted common shares and convertible preferred shares are considered potential dilutive common shares.

Prior to the closing of the IPO, when the Company’s convertible preferred shares converted to common shares, the Company's convertible preferred shares contractually entitled the holders of such shares to participate in dividends but did not contractually require the holders of such shares to participate in losses of the Company. Accordingly, for periods in which the Company reported a net loss attributable to common shareholders, such losses were not allocated to convertible preferred shareholders.  In periods in which the Company reports a net loss attributable to common shareholders, diluted net loss per share attributable to common shareholders is the same as basic net loss per share attributable to common shareholders, since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive. The Company reported a net loss attributable to common shareholders for the three months ended March 31, 2019 and 2018.

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02,  Leases. The standard, including subsequently issued amendments, collectively referred to as ASC 842, established principles of recognition, measurement, presentation and disclosure of lease arrangements applicable to lessees and lessors in order to enhance the transparency and compatibility of financial reporting related to the arrangements, including with respect to the amount, timing and uncertainty of cash flows arising from a lease. The Company adopted new accounting guidance regarding the accounting for leases as of January 1, 2019 using a modified retrospective transition approach that was applied to leases existing as of, or entered into prior to, January 1, 2019.  See Note 2, Summary of Significant Accounting Policies, “Leases” for a discussion of the Company’s policy with respect to this standard and Note 5, “Leases” for a discussion of the Company’s adoption of this standard and its impact on its consolidated financial statements and related disclosures.

Upon the adoption of ASC 842, the Company recorded operating lease right-of-use assets of $3,682 and operating lease liabilities of $3,917 for its leases which were in effect and had commenced prior to January 1, 2019 and had original lease terms of more than 12 months.

 

3.           Fair Value of Financial Assets and Liabilities

Short-term investments as of March 31, 2019 and December 31, 2018 consisted of U.S. Treasury notes which investments are each due within six months of such respective period.  As of March 31, 2019 and December 31, 2018, the fair value of short-term investments was $243,904 and $235,328, respectively.  As of March 31, 2019, the amortized

15


 

KINIKSA PHARMACEUTICALS, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except share and per share amounts)

(Unaudited)

 

cost was $243,896 and gross unrealized gain was $8.  As of December 31, 2018, the amortized cost was $235,332 and gross unrealized loss was $4.    

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements

 

 

as of March 31, 2019 Using:

 

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets:

 

 

  

 

 

  

 

 

  

 

 

  

Restricted cash — money market funds

 

$

210

 

$

 —

 

$

 —

 

$

210

Cash equivalents — money market funds

 

 

5,273

 

 

 —

 

 

 —

 

 

5,273

Cash equivalents — U.S. Treasury notes

 

 

 —

 

 

35,675

 

 

 —

 

 

35,675

Short-term investments — U.S. Treasury notes

 

 

 —

 

 

243,904

 

 

 —

 

 

243,904

 

 

$

5,483

 

$

279,579

 

$

 —

 

$

285,062

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements

 

 

as of December 31, 2018 Using:

 

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets:

 

 

  

 

 

  

 

 

  

 

 

  

Restricted cash — money market funds

 

$

210

 

$

 —

 

$

 —

 

$

210

Cash equivalents — money market funds

 

 

29,721

 

 

 —

 

 

 —

 

 

29,721

Cash equivalents — U.S. Treasury notes

 

 

 —

 

 

15,634

 

 

 —

 

 

15,634

Short-term investments — U.S. Treasury notes

 

 

 —

 

 

235,328

 

 

 —

 

 

235,328

 

 

$

29,931

 

$

250,962

 

$

 —

 

$

280,893

 

 

 

 

 

 

 

 

 

 

 

 

 

 

During the periods ended March 31, 2019 and December 31, 2018 there were no transfers between Level 1, Level 2 and Level 3.

The money market funds were valued using quoted prices in active markets, which represent a Level 1 measurement in the fair value hierarchy. The Company's cash equivalents and short-term investments as of March 31, 2019 and December 31, 2018 also consisted of U.S. Treasury notes, which are not traded on a daily basis and, therefore, represent a Level 2 measurement in the fair value hierarchy at each period end.

4.           Property and Equipment, Net

Property and equipment, net consisted of the following:

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

    

2019

    

2018

Furniture, fixtures and vehicles

 

$

91

 

$

91

Computer hardware and software

 

 

268

 

 

249

Leasehold improvements

 

 

3,225

 

 

2,676

Lab equipment

 

 

3,326

 

 

3,107

Construction in progress

 

 

70

 

 

552

Total property and equipment

 

 

6,980

 

 

6,675

Less: Accumulated depreciation

 

 

(790)

 

 

(319)

Total property and equipment, net

 

$

6,190

 

$

6,356

 

Construction in progress is primarily comprised of leasehold improvements and lab equipment which the Company anticipates will be placed into service by the end of 2019.

16


 

KINIKSA PHARMACEUTICALS, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except share and per share amounts)

(Unaudited)

 

Depreciation expense was $471 and $8 during the three months ended March 31, 2019 and 2018, respectively.

5.           Leases

Kiniksa US leases office and laboratory space under operating leases.  Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. For lease agreements entered into or reassessed after the Company’s adoption of ASC 842, the Company will combine lease and non-lease components. Kiniksa US’s leases have remaining lease terms of up to 3 years.

On July 24, 2015, Kiniksa US entered into an operating lease in Wellesley Hills, Massachusetts for office space that comprised the former headquarters for Kiniksa US. In March 2016, effective August 1, 2016, Kiniksa US entered into an expansion and extension on its lease, which expanded its leased space to a total of 10,800 square feet. On March 31, 2017, Kiniksa US renewed this lease and extended the lease term to August 2018.  Monthly lease payments, inclusive of base rent and ancillary charges, were $27.

On March 13, 2018, Kiniksa US entered into an operating lease in Lexington, Massachusetts for office and laboratory space that comprises the new headquarters for Kiniksa US and on June 26, 2018, Kiniksa US entered into an amendment to the lease expanding the rentable space to a total of 27,244 square feet. On November 7, 2018, Kiniksa US entered into an amendment (the “Third Amendment”) to the lease expanding the rentable space to a total of 55,924 square feet which will be occupied in phases through December 2019. The lease expires on July 31, 2021. Monthly lease payments include base rent, as well as, ancillary charges such as the share of operating expenses and real estate taxes. Base rent under the Third Amendment increased from $73 to $101 as of January 1, 2019 and from $101 to $110 as of February 1, 2019.  Base rent will increase up to $138 by the earlier of occupation of certain additional expansion space or in December 2019.

On December 21, 2018, Kiniksa US entered into an operating lease in San Diego, California for office space comprising a total of 4,400 square feet. The lease commenced on January 1, 2019 and expires on December 31, 2020. Monthly lease payments for base rent are $13. Additional fees for ancillary charges such as the share of operating expenses, parking and real estate taxes are not included in the base rent.

For the three months ended March 31, 2019, the components of lease cost consisted of operating lease costs and variable lease costs of $401 and $22, respectively.  As of March 31, 2019, the weighted-average lease term was 2.21 years and the discount rate was 7.16%. 

Maturities of operating leases liabilities were as follows:

 

 

 

 

As of March 31, 2019

 

 

 

2019

 

$

1,137

2020

 

 

1,821

2021

 

 

972

2022 and thereafter

 

 

 —

Total future minimum lease payments

 

$

3,930

Less imputed interest

 

 

(307)

Present value of lease liabilities

 

$

3,623

 

 

 

 

17


 

KINIKSA PHARMACEUTICALS, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except share and per share amounts)

(Unaudited)

 

Prior to the adoption of the new lease accounting standard, undiscounted future minimum rents payable as of December 31, 2018 under non-cancelable leases with the initial term exceeding one year were as follows:

 

 

 

 

As of December 31, 2018

 

 

 

2019

 

$

1,394

2020

 

 

1,821

2021

 

 

972

2022 and thereafter

 

 

 —

Total future minimum lease payments

 

$

4,187

 

 

 

 

 

6.           Accrued Expenses

Accrued expenses consisted of the following:

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

    

2019

    

2018

Accrued employee compensation and benefits

 

$

2,910

 

$

5,678

Accrued research and development expenses

 

 

11,490

 

 

9,656

Accrued legal and professional fees

 

 

1,218

 

 

994

Other

 

 

 —

 

 

90

 

 

$

15,618

 

$

16,418

 

 

7.           Convertible Preferred Shares

As of December 31, 2017, the Company’s bye-laws, as amended and restated, designated 22,885,492 authorized shares to be issued as convertible preferred shares with a par value of $0.000273235 per share, of which 17,128,120 shares were further designated as Series A convertible preferred shares (the “Series A preferred shares”) and 5,757,372 shares were further designated as Series B convertible preferred shares (the "Series B preferred shares"). In February 2018, the Company’s bye-laws were further amended and restated to, among other things, effect an increase in the number of authorized convertible preferred shares with a par value of $0.000273235 per share to 35,670,093 shares, of which 12,784,601 shares were further designated as Series C convertible preferred shares (the "Series C preferred shares"). The holders of convertible preferred shares had liquidation rights in the event of a deemed liquidation that, in certain situations, was not solely within the control of the Company. Therefore, the Series A, Series B and Series C convertible preferred shares (collectively, the “Preferred Shares”) were classified outside of shareholders' equity (deficit).

In October 2015, the Company issued and sold 8,028,809 Series A preferred shares at a price of $4.6707 per share (the “Series A Original Issue Price”) for proceeds of $37,398, net of issuance costs of $102.

In September 2016, the Company issued and sold an additional 9,099,311 Series A preferred shares at a price of $4.6707 per share for proceeds of $42,499, net of issuance costs of $1.

In March 2017, the Company issued and sold 5,757,372 Series B preferred shares at a price of $6.9475 per share (the “Series B Original Issue Price”) for proceeds of $39,873, net of issuance costs of $127.

In February 2018, the Company issued and sold 12,784,601 Series C preferred shares at a price of $15.6438 per share (the “Series C Original Issue Price”) for proceeds of $190,822, net of issuance costs of $9,178.

In May 2018, upon the completion of the IPO (which qualified as a “Qualified IPO” under the Company’s bye-laws, as amended and restated), all of the outstanding Preferred Shares were converted into 5,546,019 Class A common shares, 1,070,502 Class B common shares, 12,995,954 Class A1 common shares and 16,057,618 Class B1 common shares in accordance with the Company’s bye-laws, as amended and restated.  In connection with the completion of the

18


 

KINIKSA PHARMACEUTICALS, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except share and per share amounts)

(Unaudited)

 

IPO in May 2018, the Company adopted the Amended & Restated Bye-Laws to, among other things, authorize the issuance of undesignated preferred shares. As of March 31, 2019, no preferred shares were designated or issued.

Prior to the conversion to common shares, the holders of the Preferred Shares had the following rights and preferences:

Voting

The holders of Preferred Shares were entitled to vote, together with the holders of common shares, on all matters submitted to shareholders for a vote. The holders of Series A preferred shares were entitled to the number of votes per Series A preferred share equal to the number of whole Class B common shares into which the Series A preferred shares were convertible at the time of such vote (which was ten votes for each Class B common share). The holders of Series B preferred shares were entitled to the number of votes per Series B preferred share equal to the number of whole Class A common shares into which the Series B preferred shares were convertible at the time of such vote (which was one vote for each Class A common share). The holders of Series C preferred shares were entitled to the number of votes per Series C preferred share equal to the number of whole Class A common shares into which the Series C preferred shares were convertible at the time of such vote (which was one vote for each Class A common share). Except as provided by law or by the other provisions of the Company’s bye-laws, holders of Preferred Shares voted together with the holders of common shares as a single class.

The holders of Preferred Shares, voting together as a single class, were entitled to elect two directors of the Company. The holders of Preferred Shares, voting together with the holders of common shares as a single class, were entitled to elect the remaining directors of the Company, except for the one director that the holders of Class A common shares and Class B common shares, voting together as a single class were entitled to elect.

Conversion

Each Series A preferred share was convertible, at the option of the holder, at any time and from time to time, and without the payment of additional consideration by the holder thereof, in such manner as permitted by Bermuda law, into such number of fully paid and non-assessable Class B common shares determined by dividing the Series A Original Issue Price by the Series A Conversion Price (as defined below) in effect at the time of conversion. Each Series B preferred share was convertible, at the option of the holder, at any time and from time to time, and without the payment of additional consideration by the holder thereof, in such manner as permitted by Bermuda law, into such number of fully paid and non-assessable Class A common shares determined by dividing the Series B Original Issue Price by the Series B Conversion Price (as defined below) in effect at the time of conversion. Each Series C preferred share was convertible, at the option of the holder, at any time and from time to time, and without the payment of additional consideration by the holder thereof, in such manner as permitted by Bermuda law, into such number of fully paid and non-assessable Class A common shares determined by dividing the Series C Original Issue Price by the Series C Conversion Price (as defined below) in effect at the time of conversion.

At the time of the IPO: the Series A Original Issue Price and Series A Conversion Price were equal to $4.6707; the Series B Original Issue Price and Series B Conversion Price were equal to $6.9475; and the Series C Original Issue Price and Series C Conversion Price were equal to $15.6438. Accordingly, each Series A preferred share was convertible into one Class B common share, each Series B preferred share was convertible into one Class A common share and each Series C preferred share was convertible into one Class A common share.

Further, upon either (i) the closing of the sale of Class A common shares or Class B common shares to the public at a price of at least $15.6438 per share (subject to appropriate adjustment in the event of any share dividend, share split, combination or other similar recapitalization with respect to the applicable class of common shares) in an initial public offering resulting in at least $100,000 of gross proceeds to the Company (a “Qualified IPO”) or (ii) the date and time, or the occurrence of an event, specified by vote or written consent of the holders of a majority of the outstanding Preferred Shares, voting together as a single class on an as if converted to Class A common shares basis, all outstanding Series A preferred shares would automatically be converted, in such manner as permitted pursuant to

19


 

KINIKSA PHARMACEUTICALS, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except share and per share amounts)

(Unaudited)

 

Bermuda law, into Class B common shares at the then effective conversion rate, and all outstanding Series B and Series C preferred shares would automatically be converted, in such manner as permitted pursuant to Bermuda law, into Class A common shares at the then effective conversion rate. Notwithstanding the foregoing, in the event of a mandatory conversion of preferred shares as a result of a Qualified IPO, (a) holders of Series A preferred shares could have elected to receive Class B1 common shares in lieu of Class B common shares and (b) holders of Series B and Series C preferred shares could have elected to receive Class A1 common shares in lieu of Class A common shares.

Dividends

The holders of the Preferred Shares were entitled to receive noncumulative dividends when and if declared by the Company’s board of directors. The Company was not permitted to declare, pay or set aside any dividends on any other class or series of shares of the Company, other than dividends on common shares payable in common shares, unless the holders of the Preferred Share first received, or simultaneously received, a dividend on each outstanding Preferred Share equal to (i) in the case of a dividend on any class of common shares or any class or series was convertible into common shares, that dividend per Preferred Share as would have equaled the product of (a) the dividend payable on each share of such class or series determined, if applicable, as if all shares of such class or series had been converted into common shares and (b) the number of common shares issuable upon conversion of a share of the applicable series of Preferred Shares, or (ii) in the case of a dividend on any class or series that was not convertible into common shares, at a rate per Preferred Share determined by (a) dividing the amount of the dividend payable on each share of such class or series of shares by the original issue price of such class or series (subject to appropriate adjustment in the event of any bonus share, share dividend, share split, combination of or other similar recapitalization with respect to such class or series) and (b) multiplying such fraction by an amount equal to the applicable Series A, Series B or Series C Original Issue Price. No cash dividends were declared or paid on the Preferred Shares.

Liquidation Preference

In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company or deemed liquidation event (as defined below), the holders of Preferred Shares then outstanding were entitled to be paid out of the assets of the Company available for distribution to its shareholders, on a pari passu basis, before any payment was made to the holders of common shares by reason of their ownership thereof, an amount per share equal to the greater of (i) one times the applicable Original Issue Price, plus any dividends declared but unpaid thereon, and (ii) such amount per share as would have been payable had all Preferred Shares been converted into common shares immediately prior to such liquidation, dissolution, winding up or deemed liquidation event. Thereafter, the remaining assets of the Company available for distribution to its shareholders would have been distributed among the holders of common shares, pro rata based on the number of shares held by each such holder.

If upon any such liquidation, dissolution or winding up of the Company or deemed liquidation event, the assets of the Company available for distribution to its shareholders were insufficient to pay the holders of Preferred Shares the full amount to which they were entitled, the holders of Preferred Shares would have shared ratably in any distribution of the assets available for distribution in proportion to the respective amounts which would otherwise have been payable in respect of the shares held by such holders of Preferred Shares upon such distribution if all amounts payable on or with respect to such shares were paid in full.

Unless a majority of the holders of the then outstanding Preferred Shares elected otherwise, a deemed liquidation event included a merger or consolidation (other than one in which shareholders of the Company owned a majority by voting power of the outstanding shares of the surviving or acquiring company or corporation) or a sale, lease, transfer, exclusive license or other disposition of all or substantially all of the assets of the Company.

Redemption

The Company’s bye-laws, as amended and restated, did not provide redemption rights to the holders of Preferred Shares.

20


 

KINIKSA PHARMACEUTICALS, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except share and per share amounts)

(Unaudited)

 

8.            Common Shares

As of December 31, 2017, the Company’s bye-laws, as amended and restated, authorized the Company to issue 43,918,239 total shares with a par value of $0.000273235, of which 5,507,938 and 3,568,353 shares were designated as Class A and Class B common shares, respectively. In February 2018, the Company’s bye-laws were further amended and restated to, among other things, effect an increase in the number of authorized common shares to 44,746,463 shares, of which 5,507,938 shares were designated as Class A common shares and 3,568,353 shares were designated as Class B common shares. The remaining 11,956,456 shares that were not designated as common shares or Preferred Shares as of December 31, 2017 could have been designated to any class at any time in the future by the Company’s board of directors. No Class A1 common shares or Class B1 common shares were designated as of December 31, 2017.

On May 23, 2018, the Company’s registration statement on Form S-1 relating to the IPO was declared effective by the SEC. On May 29, 2018, the Company completed the IPO of 8,477,777 Class A common shares at a public offering price of $18.00 per share for gross proceeds of $152,600. In addition, on June 22, 2018, the Company completed the sale of 1,006,425 Class A common shares to the underwriters of the IPO following the exercise in part of their over-allotment option to purchase additional shares at a public offering price of $18.00 per share for gross proceeds of $18,116. The aggregate net proceeds to the Company from the IPO, inclusive of the over-allotment option exercise, was $155,536 after deducting underwriting discounts and commissions and other offering costs.

In May 2018, upon completion of the IPO (which qualified as a “Qualified IPO” under the Company’s bye-laws, as amended and restated), all outstanding Preferred Shares were converted into 5,546,019 Class A common shares, 1,070,502 Class B common shares, 12,995,954 Class A1 common shares and 16,057,618 Class B1 common shares in accordance with the Company’s bye-laws, as amended and restated.  In connection with the completion of the IPO in May 2018, the Company increased the authorized capital of the Company to $54,647 consisting of 200,000,000 shares of $0.000273235 par value per share and, among other things, amended the description of different classes of shares under the Amended & Restated Bye-Laws.

On February 4, 2019, the Company completed a follow-on offering of 2,654,984 Class A common shares at a public offering price of $18.26 and a concurrent private placement of 2,000,000 Class A1 common shares at an offering price of $18.26 per share for aggregate gross proceeds of $85,000.  In addition, on March 1, 2019, the Company completed the sale of 161,126 Class A common shares to the underwriters of the follow-on offering following the exercise in part of their over-allotment option to purchase additional shares at a public offering price of $18.26 per share for gross proceeds of $2,942.  The aggregate net proceeds to the Company from the follow-on offering and concurrent private placement, inclusive of the over-allotment option exercise, was $82,985 after deducting underwriting discounts and commissions and other offering costs.

The rights of the holders of the Company’s Class A common shares, Class B common shares, Class A1 common shares and Class B1 common shares are identical, except with respect to voting and conversion, as described below. As of December 31, 2017, the voting, dividend and liquidation rights of the holders of the Company’s common shares were subject to and qualified by the rights, powers and preferences of the holders of the Preferred Shares as set forth above. In May 2018, following the conversion of the Preferred Shares into common shares, the voting, dividend and liquidation rights of the holders of the Company’s common shares were then subject to and qualified by the rights, powers and preferences of the holders of the preferred shares, if any.  As of March 31, 2019, no preferred shares were designated or issued.

Voting

Each Class A common share entitles the holder to one vote on all matters submitted to the shareholders for a vote. Each Class B common share entitles the holder to ten votes on all matters submitted to the shareholders for a vote. Holders of Class A1 common shares and Class B1 common shares have no voting rights. As of December 31, 2017, the holders of Class A and Class B common shares, voting together as a single class, were entitled to elect one director of the Company. The holders of Class A and Class B common shares, voting together as a single class with the holders of the Preferred Shares, were entitled to elect the remaining directors of the Company, except for the two directors of the

21


 

KINIKSA PHARMACEUTICALS, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except share and per share amounts)

(Unaudited)

 

Company that the holders of the Preferred Shares, voting together as a single class, were entitled to elect.  In May 2018, following the conversion of the Preferred Shares into common shares, the holders of Class A and Class B common shares, voting together as a single class, are entitled to elect the directors of the Company.

Dividends

Common shareholders are entitled to receive dividends, as may be declared by the Company’s board of directors. As of December 31, 2017, any such dividends would have been subject to the preferential dividend rights of the holders of the Preferred Shares. In May 2018, following the conversion of the Preferred Shares into common shares, any such dividends would be subject to the rights, powers and preferences of any preferred shares that may be issued by the Company.  As of March 31, 2019, no preferred shares were designated or issued. Through March 31, 2019, no cash dividends have been declared or paid.

Conversion

Each Class B common share shall automatically convert into one Class A common share upon certain transfers of such shares by the holder thereof (subject to certain exceptions). Each Class B common share is convertible, at the holder’s election into one Class A common share or one Class B1 common share. Each Class A1 common share is convertible into one Class A common share at the holder’s election. Each Class B1 common share is convertible into one Class A common share or one Class B common share at the holder’s election. There are no conversion rights associated with the Class A common shares.

9.           Share‑Based Compensation

In May 2018, the Company's board of directors and shareholders approved the 2018 Incentive Award Plan (the "2018 Plan"), which became effective on May 23, 2018. The 2018 plan provides for the grant of incentive options, nonqualified options, share appreciation rights, restricted shares, dividend equivalents, restricted share units and other share- or cash- based awards. Upon the effectiveness of the 2018 Plan, the Company ceased granting awards under its 2015 Equity Incentive Plan (as amended, the “2015 Plan” together with the 2018 Plan, the “Plans”).

In May 2018, the Company's board of directors and shareholders approved the 2018 Employee Share Purchase Plan (the "2018 ESPP"), which became effective on May 23, 2018. A total of 670,000 Class A common shares were initially reserved for issuance under the 2018 ESPP.  

Options

Stock option activity under the Plans is summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

Number of

 

Average

 

 

 

Shares

 

Fair Value

 

Outstanding as of December 31, 2018

 

5,960,939

 

$

6.98

 

Granted

 

1,379,163

 

$

12.81

 

Exercised

 

(50,070)

 

$

2.24

 

Forfeited

 

(94,531)

 

$

13.59

 

Outstanding as of March 31, 2019

 

7,195,501

 

$

8.05

 

22


 

KINIKSA PHARMACEUTICALS, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except share and per share amounts)

(Unaudited)

 

Option Valuation

The assumptions that the Company used to determine the grant-date fair value of options granted to employees and directors under the Plans during the three months ended March 31, 2019 and 2018 were as follows, presented on a weighted-average basis:

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2019

    

2018

 

Risk-free interest rate

 

2.58

%  

2.71

%

Expected term (in years)

 

6.25

 

6.56

 

Expected volatility

 

78.18

%  

75.25

%

Expected dividend yield

 

0

%  

0

%

Share‑Based Compensation

Share‑based compensation expense was classified in the consolidated statements of operations and comprehensive loss as follows:

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

    

2019

    

2018

Research and development expenses

 

$

1,187

 

$

202

General and administrative expenses

 

 

1,706

 

 

356

 

 

$

2,893

 

$

558

 

Restricted Shares

Under terms of the Class A and Class B restricted share agreements covering the Class A and Class B common shares, restricted common shares are subject to a vesting schedule. The restricted shares vest over a four‑year period during which time the Company has the right to repurchase up to all unvested shares at the amount paid if the relationship between the recipient and the Company ceases. Subject to the continued employment (or other engagement of the recipient by the Company as described in the restricted share agreements), all of the restricted common shares become fully vested within four years of the date of issuance.

The following table summarizes restricted share activity for the three months ended March 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A

 

Class B

 

    

 

    

Weighted

    

 

    

Weighted

 

 

 

 

Average

 

 

 

Average

 

 

Number of

 

Grant Date

 

Number of

 

Grant Date

 

 

Shares

 

Fair Value

 

Shares

 

Fair Value

Unvested restricted shares outstanding as of December 31, 2018

 

133,812

 

$

0.000273235

 

743,407

 

$

0.000273235

Granted

 

 —

 

 

 —

 

 —

 

 

 —

Vested

 

(44,604)

 

$

0.000273235

 

(223,022)

 

$

0.000273235

Unvested restricted shares outstanding as of March 31, 2019

 

89,208

 

$

0.000273235

 

520,385

 

$

0.000273235

 

 

23


 

KINIKSA PHARMACEUTICALS, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except share and per share amounts)

(Unaudited)

 

10.           License and Acquisition Agreements

Biogen Asset Purchase Agreement

In September 2016, the Company entered into an asset purchase agreement (the "Biogen Agreement") with Biogen MA Inc. ("Biogen") to acquire all of Biogen's right, title and interest in and to certain assets used in or relating to KPL-716 and other antibodies covered by certain patent rights, including patents and other intellectual property rights, clinical data, know-how, and clinical drug supply. In addition, Biogen granted to the Company a non-exclusive, sublicensable, worldwide license to certain background patent rights related to the KPL-716 program. The Company is obligated to use commercially reasonable efforts to develop and commercialize such acquired products.

In exchange for these rights, the Company made an upfront payment to Biogen of $11,500 and a technology transfer payment of $500. The Company accounted for the acquisition of technology as an asset acquisition because it did not meet the definition of a business. The Company recorded the upfront payment and technology transfer payment as research and development expense in the consolidated statement of operations and comprehensive loss because the acquired technology represented in‑process research and development and had no alternative future use.

Under the Biogen Agreement, the Company is obligated to make milestone payments to Biogen of up to $179,000 upon the achievement of specified clinical and regulatory milestones in multiple indications in various territories, including a  milestone payment of $4,000 paid in the year ended December 31, 2017 associated with the achievement of a specified clinical milestone event. Also included is a milestone payment of $10,000 due upon the achievement of a specified clinical milestone event which was met in the three months ended March 31, 2019.  Additionally, the Company could be obligated to make up to an aggregate of up to $150,000 of payments upon the achievement of specified annual net sales milestones and to pay tiered royalties on escalating tiers of annual net sales of licensed products starting in the high single-digit percentages and ending below the teens.

The Company also agreed to pay certain obligations under third‑party contracts retained by Biogen that relate to the KPL‑716 program. Under these retained contracts, the Company paid a one‑time upfront sublicense fee of $150 and is obligated to pay insignificant annual maintenance fees as well as clinical and regulatory milestone payments of up to an aggregate of $1,575.

The Biogen Agreement will terminate upon the expiration of all payment obligations with respect to the last product in all countries in the territory. The Company has the right to terminate the agreement with 90 days’ prior written notice. Both parties may terminate by mutual written consent or in the event of material breach of the agreement by the other party that remains uncured for 90 days (or 30 days for payment‑related breaches).

During the three months ended March 31, 2019, the Company recorded research and development expense of $10,002 primarily related to an accrued milestone associated with the achievement of a specified clinical milestone event due under the Biogen Agreement.  During the three months ended March 31, 2018, the Company recorded research and development expense of $11 in connection with annual maintenance fees for the retained contracts due under the Biogen Agreement.

Novo Nordisk License Agreement

In August 2017, the Company entered into a license agreement (the “Novo Nordisk Agreement”) with Novo Nordisk A/S (“Novo Nordisk”), pursuant to which the Company has been granted an exclusive, sublicensable, worldwide license under certain intellectual property rights controlled by Novo Nordisk to make, use, develop and commercialize KPL‑045 for all indications. The Company is obligated to use commercially reasonable efforts to develop and commercialize such licensed products.

In consideration for the license, the Company made an upfront payment of $1,500 to Novo Nordisk. The Company accounted for the acquisition of technology as an asset acquisition because it did not meet the definition of a

24


 

KINIKSA PHARMACEUTICALS, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except share and per share amounts)

(Unaudited)

 

business. The Company recorded the upfront payment as research and development expense in the consolidated statement of operations and comprehensive loss because the acquired technology represented in‑process research and development and had no alternative future use.

Under the Novo Nordisk Agreement, the Company was also required to make a payment of $150 upon completion of the technology transfer by Novo Nordisk. The technology was transferred during the three months ended March 31, 2018 and, as a result, this payment was made and is recorded in the Company's consolidated statement of operations for the three months ended March 31, 2018. In addition, the Company is obligated to make milestone payments upon the achievement of specified clinical, regulatory and initial sales milestones and upon the achievement of annual net sales thresholds, including a payment of $1,000 upon the earlier to occur of a specified regulatory milestone and January 2020, unless the Novo Nordisk Agreement is earlier terminated by either party. As of March 31, 2019 and December 31, 2018, the Company determined that the payment related to the milestone was not probable and, therefore, no amount was recorded in the Company's consolidated statement of operations and comprehensive loss during the three months ended March 31, 2019 and 2018. The Company has also agreed to pay royalties on annual net sales of products licensed under the agreement.

Under the Novo Nordisk Agreement, the Company is solely responsible for all development, regulatory and commercial activities and costs. The Company is also responsible for costs related to filing, prosecuting and maintaining the licensed patent rights.

The Novo Nordisk Agreement will terminate upon expiration of the last‑to‑expire royalty term for any licensed product in the territories, as defined in the agreement. Either party may terminate the agreement upon the other party’s insolvency or bankruptcy or for uncured material breach of the agreement by the other party. Novo Nordisk has the right to terminate the agreement if the Company challenges any of the licensed patent rights. The Company may also terminate the agreement for any reason upon prior written notice to Novo Nordisk.

The Company did not incur any research and development expense directly related to milestone payments due under the Novo Nordisk Agreement during the three months ended March 31, 2019.  During the three months ended March 31, 2018 the Company recorded research and development expense of $150, in connection with the completion of technology transfer payment due under the Novo Nordisk Agreement. 

Primatope Stock Purchase Option Agreement

In September 2017, the Company entered into a stock purchase option agreement (the “Primatope Agreement”) with Primatope Therapeutics, Inc. (“Primatope”), pursuant to which the Company was granted a license to certain intellectual property rights owned or controlled by Primatope to research, develop, and manufacture the pre‑clinical antibody, KPL‑404.

The agreement provided the Company with an exclusive call option to purchase 100% of the equity securities of Primatope. Upon execution of the agreement, the Company made $500 in upfront payments for the initial option period through April 2018 (the “Initial Option Period”). The Primatope Agreement allowed for up to three extensions of the Initial Option Period through January 2019 (including the initial option period, the “Option Period”) for total extension payments of up to $800. Through December 31, 2018, the Company made payments totaling $800 to extend the Option Period to January 15, 2019. During the Option Period, the Company could conduct research and pre‑clinical work to assess the viability of the asset.

The Company determined that the call option represented a variable interest in Primatope and that Primatope is a VIE. However, as the Company had no ability to control the board of directors or direct the ongoing activities of Primatope during the Option Period, the Company did not have power over the activities that most significantly impact Primatope’s economic performance and was not the primary beneficiary of Primatope. As a result, the Company did not consolidate the assets, liabilities, and results of operations of Primatope. 

25


 

KINIKSA PHARMACEUTICALS, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except share and per share amounts)

(Unaudited)

 

In January 2019, the Company exercised the call option and at the closing of the acquisition, Primatope became a wholly owned subsidiary of the Company. In March 2019, the Company acquired all of the issued and outstanding equity securities of Primatope (the “Primatope Acquisition”) in exchange for upfront consideration of $10,000 at closing as well as milestone payments of $5,000 which had been achieved as of the closing date and a milestone of $3,000 which we deemed to be probable and estimable and was accrued for as of March 31, 2019, each paid or payable in a combination of cash and Class A common shares (inclusive of escrow and holdback amounts) in accordance with the terms and conditions of the Primatope Agreement. The Primatope Acquisition was accounted for as an asset acquisition as it did not meet the definition of a business.  The Company recorded the upfront payment, milestone payments and the accrued milestone as research and development expense in the consolidated statement of operations and comprehensive loss because the acquired technology represented in‑process research and development and had no alternative future use.

During the three months ended March 31, 2019, the Company recorded research and development expense of $18,000 related to the Primatope Acquisition.  The Company did not incur any research and development expense in connection with the Primatope Agreement during the three months ended March 31, 2018.  

Beth Israel Deaconess Medical Center License Agreement

As a result of the Primatope Acquisition, the Company acquired the rights to an exclusive license to certain intellectual property rights controlled by Beth Israel Deaconess Medical Center, Inc. to make, use, develop and commercialize KPL-404 (the “BIDMC Agreement”).  Under the BIDMC Agreement, the licensee is obligated to pay an insignificant annual maintenance fee as well as clinical and regulatory milestone payments of up to an aggregate of $1,200.  The licensee is also obligated to pay a low single-digit royalty on annual net sales of products licensed under the agreement.

The Company did not incur any research and development expense in connection with the BIDMC Agreement during the three months ended March 31, 2019.

Regeneron License Agreement

In September 2017, the Company entered into a license agreement (the “Regeneron Agreement”) with Regeneron Pharmaceuticals, Inc. (“Regeneron”), pursuant to which the Company has been granted an exclusive, sublicensable license under certain intellectual property rights controlled by Regeneron to develop and commercialize rilonacept in certain fields and territories. The Company is obligated to use commercially reasonable efforts to develop and commercialize such licensed products.

In exchange for these rights, the Company made an upfront payment of $5,000. The Company accounted for the acquisition of technology as an asset acquisition because it did not meet the definition of a business. The Company recorded the upfront payment as research and development expense in the consolidated statement of operations and comprehensive loss because the acquired technology represented in‑process research and development and had no alternative future use.

Under the Regeneron Agreement, the Company is also obligated to make payments to Regeneron of up to an aggregate of $27,500 upon the achievement of specified regulatory milestones. Upon commercialization of the licensed products, the parties will share profits equally, after deducting certain commercialization expenses subject to specified limits.

Under the Regeneron Agreement, the Company is solely responsible for all development and commercialization activities and costs in its territories. The Company is also responsible for costs related to the filing, prosecution and maintenance of certain licensed patent rights.

The parties also entered into a clinical supply agreement under which Regeneron agreed to manufacture the developed product during the clinical phase. During the three months ended March 31, 2019 and 2018, the Company

26


 

KINIKSA PHARMACEUTICALS, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except share and per share amounts)

(Unaudited)

 

recorded research and development expense of $515 and $376 respectively, related to the purchase of drug materials under this agreement.  As of March 31, 2019 and December 31, 2018, the Company has non-cancelable purchase commitments under the clinical supply agreement (see Note 12).

The Regeneron Agreement will expire when the Company is no longer developing or commercializing any licensed product under the Regeneron Agreement. Either party may terminate the agreement upon the other party’s insolvency or bankruptcy or for material breach of the agreement by the other party that remains uncured for 90 days (or 30 days for payment‑related breaches). Regeneron has the right to terminate the agreement if the Company suspends its development or commercialization activities for a consecutive 12-month period or does not grant a sublicense to a third‑party to perform such activities, or if the Company challenges any of the licensed patent rights. The Company may terminate the agreement at any time that is 18 months after the effective date of the agreement with 180 days’ written notice or with one years’ written notice if the Company terminates the agreement following U.S. marketing approval of a rilonacept product developed by the Company. The Company may also terminate the agreement with three month’s written notice.

During the three months ended March 31, 2019 and 2018, the Company recorded research and development expense of $515 and $376, respectively, related to the purchase of drug materials under the clinical supply agreement with Regeneron.   During the three months ended March 31, 2019 and 2018, the Company did not record research and development expense in connection with milestone payments due under the Regeneron Agreement. 

MedImmune License Agreement

In December 2017, the Company entered into a license agreement (the “MedImmune Agreement”) with MedImmune, Limited (“MedImmune”), pursuant to which MedImmune granted the Company an exclusive, sublicensable, worldwide license to certain intellectual property rights to make, use, develop and commercialize mavrilimumab. Under the MedImmune Agreement, the Company also acquired reference rights to relevant manufacturing and regulatory documents and MedImmune’s existing supply of mavrilimumab drug substance and product. The Company is obligated to use commercially reasonable efforts to develop and commercialize the licensed products.

In exchange for these rights, the Company made an upfront payment of $8,000. The Company accounted for the acquisition of technology as an asset acquisition because it did not meet the definition of a business. The Company recorded the upfront payment as research and development expense in the consolidated statement of operations and comprehensive loss because the acquired technology represented in‑process research and development and had no alternative future use. In addition, the Company is obligated to make clinical, regulatory and initial sales milestone payments of up to $72,500 in aggregate for the first two indications, including, a $5,000 pass‑through payment due upon the achievement of a specified clinical milestone event which was met in the fourth quarter of 2018. Also included is a milestone payment of $10,000 due upon the earlier to occur of a specified regulatory milestone and December 31, 2018, unless the MedImmune Agreement is earlier terminated by either party. As of December 31, 2018 and 2017, the Company determined that the payment related to this milestone was probable and, therefore, recognized research and development expense and an accrued milestone of $10,000 during the year ended December 31, 2017. During the three months ended March 31, 2019, the Company made both the $5,000 and $10,000 milestone payments.  In addition, the Company is obligated to make clinical and regulatory milestone payments of up to $15,000 in the aggregate for each subsequent indication. The Company is obligated to make milestone payments to MedImmune of up to $85,000 upon the achievement of annual net sales thresholds up to, but excluding, $1,000,000 in annual net sales as well as additional milestone payments aggregating up to $1,100,000 upon the achievement of additional specified annual net sales thresholds starting at $1,000,000 and higher. The Company has also agreed to pay tiered royalties on escalating tiers of annual net sales of licensed products starting in the low double‑digit percentages and ending at twenty percent. Royalty rates are subject to reductions upon certain events.

The Company is solely responsible for all development, manufacturing, and commercial activities and costs of the licensed products, including clinical studies or other tests necessary to support the use of a licensed product. The Company is also responsible for costs related to the filing, prosecution and maintenance of the licensed patent rights.

27


 

KINIKSA PHARMACEUTICALS, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands, except share and per share amounts)

(Unaudited)

 

The MedImmune Agreement will expire upon the expiration of the royalty term in the last country for the last indication, as defined in the agreement. Either party may terminate the agreement upon the other party’s insolvency or bankruptcy or for material breach of the agreement by the other party that remains uncured for 90 days. MedImmune has the right to terminate the agreement if the Company challenges any of the licensed patent rights. The Company may terminate the agreement at any time upon 90 days’ prior written notice.

During the three months ended March 31, 2019 and 2018, the Company did not record research and development expense in connection with milestone payments due under the MedImmune Agreement.

11.         Net Loss per Share

Net Loss per Share Attributable to Common Shareholders

The rights, including the liquidation and dividend rights, of the holders of Class A, Class B, Class A1 and B1 common shares are identical, except with respect to voting rights, transferability and conversion (see Note  8). As the liquidation and dividend rights are identical, losses are allocated on a proportionate basis and the resulting net loss per share attributed to common shareholders will, therefore, be the same for both Class A and Class B common shares on an individual or combined basis.

Basic and diluted net loss per share attributable to common shareholders was calculated as follows:

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

    

2019

    

2018

Numerator:

 

  

 

 

  

 

Net loss attributable to common shareholders

 

$

(65,821)

 

$

(15,982)

Denominator:

 

 

  

 

 

  

Weighted average common shares outstanding—basic and diluted

 

 

51,758,353

 

 

2,478,903

Net loss per share attributable to common shareholders— basic and diluted

 

$

(1.27)

 

$

(6.45)

 

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