SEC Filing | Kiniksa Pharmaceuticals

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2020

☐ 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 No.)

Kiniksa Pharmaceuticals, Ltd.

Clarendon House

2 Church Street

Hamilton HM11, Bermuda

(808) 451-3453

(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)

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	The Nasdaq Global Select Market

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 ☒

As of July 31, 2020, there were 67,873,886 common shares outstanding in aggregate, comprised of:

31,328,731 Class A common shares, par value $0.000273235 per share

2,463,011 Class B common shares, par value $0.000273235 per share

18,024,526 Class A1 common shares, par value $0.000273235 per share

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

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Kiniksa Pharmaceuticals, Ltd.

FORM 10-Q

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2020

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	Page
PART I — FINANCIAL INFORMATION	6
Item 1. Financial Statements (unaudited)	6
Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019	6
Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2020 and 2019	7
Consolidated Statements of Shareholders’ Equity for the three and six months ended June 30, 2020 and 2019	8
Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019	9
Notes to Consolidated Financial Statements	10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Item 3. Quantitative and Qualitative Disclosures About Market Risk	47
Item 4. Controls and Procedures	47

PART II — OTHER INFORMATION	49
Item 1. Legal Proceedings	49
Item 1A. Risk Factors	49
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	122
Item 3. Defaults Upon Senior Securities	122
Item 4. Mine Safety Disclosures	122
Item 5. Other Information	122
Item 6. Exhibits	123

SIGNATURES	125

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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, expected timeline for our cash, cash equivalents and short-term investments, business strategy, product development, prospective products and product candidates, their expected properties, performance, market opportunity and competition, drug product supply, collaborators, license and other strategic arrangements, the expected timeline for achievement of our clinical milestones, the timing of, and potential results from, clinical and other trials, potential marketing authorization from the FDA or regulatory authorities in other jurisdictions, potential coverage and reimbursement for our product candidates, if approved, commercial strategy and pre-commercial activities, research and development costs, timing of regulatory filings and feedback, timing and likelihood of success, plans and objectives of management for future operations and funding requirements 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 and uncertainties, including, without limitation, the following:

●

the impact of the coronavirus disease 2019, or COVID-19, pandemic on our business, including our clinical trials and operations;

●

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, including due to the COVID-19 pandemic;

●

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 in accordance with regulatory requirements;

●

the market acceptance of our product candidates;

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●

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

●

competitive and potentially competitive products and technologies;

●

physician awareness and adoption of our product candidates;

●

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;

●

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

●

our ability to attract and retain skilled personnel; and

●

our ability to execute on our strategy.

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

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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.

ARCALYST® is a registered trademark of Regeneron Pharmaceuticals, Inc. and Yescarta® is a registered trademark of Gilead Sciences, Inc., or its related companies.

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Part I — Financial Information

Item 1. Financial Statements (unaudited)

KINIKSA PHARMACEUTICALS, LTD.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)


	June 30,		December 31,
	2020		2019
Assets
Current assets:
Cash and cash equivalents	$	123,456	$	46,928
Short-term investments		128,942		186,452
Prepaid expenses and other current assets		12,095		8,247
Total current assets		264,493		241,627
Property and equipment, net		5,210		6,398
Operating lease right-of-use assets		1,323		1,927
Restricted cash		210		210
Deferred offering costs		205		—
Deferred tax assets		—		4,372
Total assets	$	271,441	$	254,534

Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	2,373	$	5,693
Accrued expenses		16,499		20,415
Operating lease liabilities		1,680		1,697
Other current liabilities		—		25
Total current liabilities		20,552		27,830
Non-current liabilities:
Non-current operating lease liabilities		139		955
Other long-term liabilities		334		326
Total liabilities		21,025		29,111
Commitments and contingencies (Note 12)
Shareholders’ equity:
Class A common shares, par value of $0.000273235 per share; 25,369,973 shares and 19,245,201 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively		7		6
Class B common shares, par value of $0.000273235 per share; 2,463,011 shares and 4,638,855 shares issued and outstanding as of June 30, 2020 and December 31, 2019		1		1
Class A1 common shares, $0.000273235 par value; 16,595,954 shares and 14,995,954 issued and outstanding as of June 30, 2020 and December 31, 2019, respectively		4		4
Class B1 common shares, $0.000273235 par value; 16,057,618 shares issued and outstanding as of June 30, 2020 and December 31, 2019		4		4
Additional paid-in capital		670,371		581,467
Accumulated other comprehensive income		9		33
Accumulated deficit		(419,980)		(356,092)
Total shareholders’ equity		250,416		225,423
Total liabilities and shareholders’ equity	$	271,441	$	254,534

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

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KINIKSA PHARMACEUTICALS, LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share amounts)

(Unaudited)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2020		2019		2020		2019
Operating expenses:
Research and development	$	22,324	$	30,848	$	43,225	$	90,101
General and administrative		9,536		8,441		18,022		16,835
Total operating expenses		31,860		39,289		61,247		106,936
Loss from operations		(31,860)		(39,289)		(61,247)		(106,936)
Interest income		266		1,724		1,055		3,533
Loss before (provision) benefit for income taxes		(31,594)		(37,565)		(60,192)		(103,403)
(Provision) benefit for income taxes		(5,875)		374		(3,696)		391
Net loss	$	(37,469)	$	(37,191)	$	(63,888)	$	(103,012)
Net loss per share attributable to common shareholders—basic and diluted	$	(0.65)	$	(0.68)	$	(1.13)	$	(1.94)
Weighted average common shares outstanding—basic and diluted		57,914,105		54,475,476		56,618,397		53,225,710
Comprehensive loss:
Net loss	$	(37,469)	$	(37,191)	$	(63,888)	$	(103,012)
Other comprehensive income:
Unrealized gain (loss) on short-term investments and currency translation adjustments, net of tax		(231)		93		(24)		105
Total other comprehensive income		(231)		93		(24)		105
Total comprehensive loss	$	(37,700)	$	(37,098)	$	(63,912)	$	(102,907)

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

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KINIKSA PHARMACEUTICALS, LTD.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands, except share amounts)

(Unaudited)


	Common Shares			Additional		Accumulated				Total
	(Class A, B, A1 and B1)			Paid-In		Other Comprehensive		Accumulated		Shareholders'
	Shares	Amount		Capital		Income		Deficit		Equity
Balances at December 31, 2019	54,937,628	$	15	$	581,467	$	33	$	(356,092)	$	225,423
Exercise of options	643,867		—		2,414		—		—		2,414
Share-based compensation expense	—		—		4,209		—		—		4,209
Unrealized gain on short-term investments and currency translation adjustments	—		—		—		207		—		207
Net loss	—		—		—		—		(26,419)		(26,419)
Balances at March 31, 2020	55,581,495	$	15	$	588,090	$	240	$	(382,511)	$	205,834
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 other offering costs	2,760,000		1		46,900		—		—		46,901
Issuance of Class A1 common shares upon completion of private placement, net of placement agent fees	1,600,000		—		27,594		—		—		27,594
Issuance of Class A common shares in connection with the release of escrow from the acquisition of all issued and outstanding equity securities of Primatope Therapeutics, Inc.	59,469		—		—		—		—		—
Exercise of options and issuance of shares under the employee share purchase plan	485,592		—		2,936		—		—		2,936
Share-based compensation expense	—		—		4,851		—		—		4,851
Unrealized loss on short-term investments and currency translation adjustments	—		—		—		(231)		—		(231)
Net loss	—		—		—		—		(37,469)		(37,469)
Balances at June 30, 2020	60,486,556	$	16	$	670,371	$	9	$	(419,980)	$	250,416

	Common Shares			Additional		Accumulated				Total
	(Class A, B, A1 and B1)			Paid-In		Other Comprehensive		Accumulated		Shareholders'
	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 other offering costs	2,816,110		2		48,474		—		—		48,476
Issuance of Class A1 common shares upon completion of private placement, net of placement agent fees	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
Class A common shares issued or to be issued in connection with a milestone payment due to Primatope Therapeutics, Inc.	94,284		—		1,800		—		—		1,800
Exercise of options and issuance of shares under the employee share purchase plan	70,573		—		512		—		—		512
Share-based compensation expense	—		—		3,464		—		—		3,464
Unrealized gain on short-term investments	—		—		—		93		—		93
Net loss	—		—		—		—		(37,191)		(37,191)
Balances at June 30, 2019	54,857,692	$	15	$	572,318	$	101	$	(297,237)	$	275,197

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

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KINIKSA PHARMACEUTICALS, LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Six Months Ended
	June 30,
	2020		2019
Cash flows from operating activities:
Net loss	$	(63,888)	$	(103,012)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation expense		1,189		979
Share-based compensation expense		9,060		6,357
Class A common shares issued or to be issued as consideration for Primatope, including milestone payments		—		8,800
Non-cash lease expense		603		635
Accretion of discounts on short-term investments		(313)		(2,055)
Deferred income taxes		4,372		(1,390)
Changes in operating assets and liabilities:
Prepaid expenses and other assets		(3,843)		(1,644)
Accounts payable		(3,228)		(1,663)
Accrued expenses and other liabilities		(4,146)		2,720
Accrued milestones		—		(15,000)
Operating lease liabilities		(833)		(602)
Other long-term liabilities		7		943
Net cash used in operating activities		(61,020)		(104,932)
Cash flows from investing activities:
Purchases of property and equipment		(223)		(767)
Purchases of short-term investments		(133,954)		(273,488)
Proceeds from the maturities of short-term investments		191,750		306,340
Net cash provided by investing activities		57,573		32,085
Cash flows from financing activities:
Proceeds from issuance of Class A common shares from follow-on offering, net of underwriting discounts and commissions, inclusive of the over-allotment option exercise		47,600		48,595
Proceeds from issuance of Class A1 common shares from private placement, net of placement agent fees		27,594		34,511
Payments of offering costs		(569)		(118)
Proceeds from exercise of options and employee share purchase plan		5,350		693
Net cash provided by financing activities		79,975		83,681
Net increase in cash, cash equivalents and restricted cash		76,528		10,834
Cash, cash equivalents and restricted cash at beginning of period		47,138		72,186
Cash, cash equivalents and restricted cash at end of period	$	123,666	$	83,020

Supplemental information:
Cash paid for income taxes	$	282	$	1,027

Supplemental disclosure of non-cash investing and financing activities:
Deferred offering costs included in accrued expenses and accounts payable	$	335	$	—
Property and equipment included in accrued expenses and accounts payable	$	—	$	253

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

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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 that are designed to modulate the immunological signaling pathways that are implicated across a spectrum of diseases.

The Company is subject to risks and uncertainties common to early-stage companies in the biopharmaceutical industry and global health, societal, economic and market conditions, including from the impact from the coronavirus disease 2019 (“COVID-19”) pandemic. 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 announced positive data from the global, pivotal Phase 3 clinical trial with rilonacept for the treatment of recurrent pericarditis, named RHAPSODY, and while it plans to submit a supplemental Biologics License Application (“sBLA”) to the U.S. Food and Drug Administration (“FDA”) to seek approval for the commercial marketing of rilonacept in the United States for recurrent pericarditis, the Company has never 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 other third parties, including contract research organizations (“CROs”), and contract manufacturing organizations (“CMOs”). 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.

Risk and Uncertainties Related to COVID-19

In addition to risks and uncertainties common to the Company’s industry, the Company is subject to global societal, healthcare, economic and market conditions, including from the impact of the COVID-19 pandemic and measures taken in response to the pandemic, which continue to evolve. In December 2019, COVID-19 surfaced in Wuhan, China. The virus spread globally, and was declared a pandemic by the World Health Organization. The impact of this pandemic has been and will likely continue to be extensive on many aspects of society, which has resulted in and will likely continue to result in significant disruptions to healthcare systems, the global economy, as well as businesses and capital markets around the world.

In an effort to halt the spread of the COVID-19 pandemic, federal and state governments in the United States and the governments of other countries around the globe have implemented various measures in response to the pandemic, including significant restrictions on businesses and travel as well as social-distancing measures. For example, in March 2020, the governors of Massachusetts and California, among other things, each enacted a stay-at-home advisory for workers in non-essential businesses. Because of the nature of the Company’s operations, it is currently considered to be an essential business so, to date, its operations have only been partially affected by this order. In response, the Company implemented work-place rules and temporarily closed access to its California office space and restricted access to its Massachusetts facility to only those employees that need to be in the office to execute their responsibilities and those employees who work in the research and development laboratory space, with most of the employees continuing to carry out their responsibilities working outside of its offices. Subsequently in May 2020, the Governor of Massachusetts announced a phased reopening plan for businesses and other organizations in Massachusetts. In response, the Company updated its work-place rules and designed a plan to reopen the Lexington office space to additional groups of employees in phases on an optional basis for now. The Company’s California office remains temporarily closed. Most of the employees continue to carry out their responsibilities working outside of its offices.

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KINIKSA PHARMACEUTICALS, LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

The COVID-19 pandemic, and measures undertaken in response to the pandemic, or the easing of any of such measures, could cause significant disruptions in the Company’s business or operations as well as in the business and operations of the Company’s CMOs, CROs and other third parties with whom the Company conducts business or otherwise engages now or in the future, including as a result of staffing shortages or reprioritizations, production slowdowns or stoppages, and disruptions in delivery systems. The COVID-19 pandemic may also adversely impact the Company’s preclinical studies and clinical trials, which could impede, delay, limit or prevent the clinical development of the Company’s product candidates and ultimately lead to the delay or denial of regulatory approval of its product candidates, which would materially adversely affect the Company’s business and operations, including its ability to generate revenue. Moreover, the COVID-19 pandemic is impacting the global economy, and the U.S. economy in particular, with the potential for the economic downturn to be severe and prolonged. A severe or prolonged economic downturn could result continued disruptions in the financial markets, which could adversely impact the Company’s ability to raise additional capital when needed or on acceptable terms, if at all.

While the Company continuously looks to identify business-critical activities and to develop contingencies and mitigation strategies for those activities to potentially minimize the impact of the COVID-19 pandemic on its business and operations, there can be no assurance that it will be able to identify all such activities or that any identified contingencies and mitigation strategies will be effective. Further, the COVID-19 pandemic, and measures undertaken in response to the pandemic continue to rapidly evolve. There is uncertainty relating to the potential effect of the pandemic on the Company’s business and operations. The extent of the impact on the Company’s business and operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the ultimate spread of the disease, duration of the pandemic, business and travel restrictions and social distancing measures, and the effectiveness of these and other actions taken to contain and treat the disease as well as the impact of the easement of any such restrictions, measures and actions.

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”), Primatope Therapeutics, Inc. (“Primatope”) and Kiniksa Pharmaceuticals (UK), Ltd. (“Kiniksa UK”) as well as the subsidiaries of Kiniksa UK, Kiniksa Pharmaceuticals (Germany) GmbH (“Kiniksa Germany”), Kiniksa Pharmaceuticals (France) SARL (“Kiniksa France”), and Kiniksa Pharmaceuticals GmbH (“Kiniksa Switzerland”), after elimination of all significant intercompany accounts and transactions.

In assessing the consolidation requirement for variable interest entities (“VIE”s), 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 June 30, 2020 and during the three and six months then ended and at December 31, 2019 and during the year 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

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KINIKSA PHARMACEUTICALS, LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates.

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 rate gains and losses arising from re-measurement of foreign currency-denominated monetary assets and liabilities are included in income or losses 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 gain (loss) within shareholders' equity.

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 June 30, 2020 and the results of its operations for the three and six months ended June 30, 2020 and 2019 and its cash flows for the six months ended June 30, 2020 and 2019. The results for the three and six months ended June 30, 2020 are not necessarily indicative of results to be expected for the year ending December 31, 2020, any other interim periods or any future year or period.

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 $82,988 after deducting underwriting discounts and commissions, placement agent fees and other offering costs.

On May 18, 2020, the Company completed a follow-on offering of 2,760,000 Class A common shares, inclusive of the exercise of the underwriters’ overallotment option at a public offering price of $18.25 and a concurrent private placement of 1,600,000 Class A1 common shares at an offering price of $18.25 per share for aggregate gross proceeds of $79,570. The aggregate net proceeds to the Company from the follow-on offering and concurrent private placement, inclusive of the over-allotment option exercise, was $74,495 after deducting underwriting discounts and commissions, placement agent fees and other offering costs.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

On July 24, 2020, the Company completed a follow-on offering of 5,952,381 Class A common shares, at a public offering price of $21.00 and a concurrent private placement of 1,428,572 Class A1 common shares at an offering price of $21.00 per share for aggregate gross proceeds of $155,000. The estimated aggregate net proceeds to the Company from the follow-on offering and concurrent private placement was approximately $145,925 after deducting underwriting discounts and commissions, placement agent fees 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 June 30, 2020, the Company had an accumulated deficit of $419,980. During the six months ended June 30, 2020, the Company incurred a net loss of $63,888 and used $61,020 of cash in operating activities. The Company expects to continue to generate operating losses for the foreseeable future. As of June 30, 2020, the Company had cash, cash equivalents and short-term investments of $252,398.

Based on its current operating plan, the Company expects that its cash, cash equivalents and short-term investments, including the net proceeds from the July 2020 follow-on offering and concurrent private placement, will be sufficient to fund its operating expenses and capital expenditure requirements for at least twelve 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. The Company will need to finance its operations through public or private securities offerings, debt financings, government funding or grants, or other sources, which may include licensing, collaborations or other strategic transactions or arrangements. 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 for product candidates, 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 June 30, 2020 and December 31, 2019, cash and cash equivalents consisted principally of U.S. Treasury notes, amounts held in money market accounts 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. Realized gains and losses, if any, on short-term investments are included in interest income.

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 and intent to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value and

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

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.

Reclassifications

The Company reclassified certain prior year balances on its consolidated statements of cash flows to conform to current year presentation. The balances related to prepaid expenses and other assets and non-cash lease expense. The reclassifications had no effect on net cash used by operating activities or the Company’s consolidated statements of operations and comprehensive loss.

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 June 30, 2020 and December 31, 2019, 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 June 30, 2020 and December 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-

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

term investments, consisting of money market accounts 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.

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 standard on January 1, 2019 using the modified retrospective transition approach as applied to leases existing as of the adoption date. The standard is 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 ROU asset being recorded on the balance sheet and amortized on a straight-line basis as lease expense.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

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 product 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 preclinical 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 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. Milestone and other payments made to third parties with respect to in-process research and development, in accordance with the Company’s license, acquisition and other similar agreements are expensed when determined to be probable and estimable.

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 and development costs. When evaluating the adequacy of the accrued liabilities, the Company analyzes progress of the studies or clinical trials, including the phase or completion of events, invoices received and contracted costs. 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 grant. The Company issues share-based awards with both service-based vesting conditions and performance-based vesting conditions. The Company recognizes compensation expense for awards with service conditions on a straight-line basis over the requisite service period. For awards with performance conditions, the Company recognizes compensation expense when the achievement of the performance milestone is probable and estimable through the vest date.

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.

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 option grant is estimated on the date of grant 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 8). 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

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

(Unaudited)

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.

The fair value of each restricted share unit award is based on the closing price of the Company’s Class A common shares on the date of grant. Restricted share unit awards with an associated performance condition are evaluated on a regular basis for probability of achievement, to determine the timing of recording share-based compensation expense in the Company’s consolidated statements of operations and comprehensive loss.

Comprehensive Loss

Comprehensive loss includes net loss as well as other changes in shareholders’ equity that result from transactions and economic events other than those with shareholders. For the three and six months ended June 30, 2020 and 2019, the Company’s other comprehensive loss was comprised of unrealized gain (loss) on short-term investments as well as cumulative translation adjustments, net of tax.

Net Loss per Share

The Company follows the two-class method when computing net loss per share as the Company has issued shares that meet the definition of participating securities. The two-class method determines net loss per share for each class of common shares 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 loss per share attributable to common shareholders is computed by dividing the net loss attributable to common shareholders by the weighted average number of common shares outstanding for the period. Diluted net loss attributable to common shareholders is computed by adjusting net loss attributable to common shareholders to reallocate undistributed earnings based on the potential impact of dilutive securities. Diluted net loss per share attributable to common shareholders is computed by dividing the diluted net 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 and unvested restricted common shares are considered potential dilutive common shares.

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 and six months ended June 30, 2020 and 2019.

Income Taxes

As an exempted company incorporated under the laws of Bermuda, the Company is principally subject to taxation in Bermuda. Under the current laws of Bermuda, tax on a company’s income is assessed at a zero percent tax rate. As a result, the Company has not recorded any income tax benefits from losses incurred in Bermuda during each reporting period, and no net operating loss carryforwards will be available to the Company for those losses. The Company’s wholly owned U.S. subsidiaries, Kiniksa US and Primatope, are subject to federal and state income taxes in the United States. The Company’s wholly owned subsidiary Kiniksa UK, and its wholly owned subsidiaries, Kiniksa Germany, Kiniksa France, and Kiniksa Switzerland, are subject to taxation in their respective countries. Certain of the Company’s subsidiaries, primarily Kiniksa US, operate under cost-plus arrangements.

The Company’s provision for income taxes relates to current tax expense associated with the taxable income in the United States of its wholly owned subsidiary, Kiniksa US, as well as discrete tax events such as the recognition of a

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

valuation allowance. The current income tax expense is a result of the taxable income earned by Kiniksa US under its cost-plus arrangement offset in part by tax benefits from the U.S. federal and state research and development tax credits, the Foreign Derived Intangible Income (“FDII”) deduction and share-based compensation taxable events. FDII was enacted as part of the tax reform enacted by the United States in December 2017, generally referred to as the U.S. Tax Cuts and Jobs Act.

The Company provides for income taxes on an interim basis according to management’s estimate of the effective tax rate expected to be applicable for the full fiscal year. Subsidiaries with losses for which no benefit can be claimed are excluded from this calculation, and their tax is recorded discretely in the period it arises. Certain other items such as changes in tax rates, tax benefits or expense related to settlements of share-based payment awards, changes in the valuation allowance against deferred tax, and uncertain tax positions are treated as discrete items and are recorded in the period in which they arise.

Recently Adopted Accounting Pronouncements

In June 2016, the FASB, issued ASU 2016-13, Financial Instruments: Credit Losses (Topic 326), as clarified in ASU 2019-04 and ASU 2019-05. The objective of the standard is to provide information about expected credit losses on financial instruments at each reporting date and to change how other-than-temporary impairments on investment securities are recorded. The standard became effective for the Company beginning on January 1, 2020. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other— Internal-Use Software (Subtopic 350-40) (“ASU 2018-15”), which amends ASC 350-40 to address a customer’s accounting for implementation costs incurred in a cloud computing arrangement (“CCA”) that is a service contract. ASU 2018-15 aligns the accounting for costs incurred to implement a CCA that is a service contract with the guidance on capitalizing costs associated with developing or obtaining internal-use software. Specifically, the ASU amends ASC 350 to include in its scope implementation costs of a CCA that is a service contract and clarifies that a customer should apply ASC 350-40 to determine which implementation costs should be capitalized in a CCA that is considered a service contract. The standard became effective for the Company beginning on January 1, 2020. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements and related disclosures.

Recently Issued Accounting Pronouncements

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740)(“ASU 2019-12”). The objective of the standard is to improve areas of GAAP by removing certain exceptions permitted by ASC Topic 740 Income Taxes and clarifying existing guidance to facilitate consistent application. The standard will become effective for the Company beginning on January 1, 2021. The Company is currently evaluating the new standard to determine the potential impact of ASU 2019-12 on its consolidated financial statements and related disclosures.

3. Fair Value of Financial Assets and Liabilities

Short-term investments as of June 30, 2020 and December 31, 2019 consisted of U.S. Treasury notes which investments were each due within six months of such date. As of June 30, 2020 and December 31, 2019, the fair value of short-term investments was $128,942 and $186,452, respectively. As of June 30, 2020, the amortized cost was $128,933

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

(Unaudited)

and gross unrealized gain was $9. As of December 31, 2019, the amortized cost was $186,415 and gross unrealized gain was $37.

The following tables present information about the Company’s financial instruments 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 June 30, 2020 Using:
	Level 1		Level 2		Level 3		Total
Assets:
Restricted cash — money market funds	$	210	$	—	$	—	$	210
Cash equivalents — money market funds		44,473		—		—		44,473
Cash equivalents — U.S. Treasury notes		—		32,896		—		32,896
Short-term investments — U.S. Treasury notes		—		128,942		—		128,942
	$	44,683	$	161,838	$	—	$	206,521


	Fair Value Measurements
	as of December 31, 2019 Using:
	Level 1		Level 2		Level 3		Total
Assets:
Restricted cash — money market funds	$	210	$	—	$	—	$	210
Cash equivalents — money market funds		25,207		—		—		25,207
Cash equivalents — U.S. Treasury notes		—		10,192		—		10,192
Short-term investments — U.S. Treasury notes		—		186,452		—		186,452
	$	25,417	$	196,644	$	—	$	222,061

As of June 30, 2020, the Company held seventeen securities that were in an unrealized loss position. The aggregate fair value of securities held by the Company in an unrealized loss position was $113,682 at June 30, 2020. As of December 31, 2019, the Company held seven securities that were in an unrealized loss position. The aggregate fair value of securities held by the Company in an unrealized loss position was $43,107 at December 31, 2019. As of both June 30, 2020 and December 31, 2019, these securities were held by the Company in an unrealized loss position for less than 12 months. The Company determined that there was no material change in the credit risk of these securities. As a result, the Company determined it did not hold any investments with an other-than-temporary impairment as of June 30, 2020 and December 31, 2019.

During the six months ended June 30, 2020 and the year ended December 31, 2019 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 June 30, 2020 and December 31, 2019 included 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

4. Property and Equipment, Net

Property and equipment, net consisted of the following:


	June 30,		December 31,
	2020		2019
Furniture, fixtures and vehicles	$	47	$	47
Computer hardware and software		344		344
Leasehold improvements		3,627		3,627
Lab equipment		4,706		4,685
Construction in progress		—		20
Total property and equipment		8,724		8,723
Less: Accumulated depreciation		(3,514)		(2,325)
Total property and equipment, net	$	5,210	$	6,398

Depreciation expense was $595 and $508 during the three months ended June 30, 2020 and 2019, respectively, and $1,189 and $979 during the six months ended June 30, 2020 and 2019, 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 less than 2 years.

On March 13, 2018, Kiniksa US entered into an operating lease in Lexington, Massachusetts for office and laboratory space that comprises the 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 were 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 is $138 per month as of 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. On July 17, 2020, Kiniksa US entered into an amendment to extend the lease through January 31, 2022. Monthly lease payments for base rent are $13 and increase to $14 in accordance with the extension. Additional fees for ancillary charges such as the share of operating expenses, parking and real estate taxes are not included in the base rent.

The components of lease cost consisted of the following:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2020		2019		2020		2019
Operating lease cost	$	341	$	361	$	681	$	762
Variable lease cost		52		87		102		109
Total lease cost	$	393	$	448	$	783	$	871

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)


	June 30,
	2020
Weighted-average remaining lease term (years)		0.98
Weighted-average discount rate		7.16%

Maturities of operating leases liabilities were as follows:


As of June 30,
2020	$	911
2021		972
2022 and thereafter		—
Total future minimum lease payments	$	1,883
Less imputed interest		(64)
Present value of lease liabilities	$	1,819

6. Accrued Expenses

Accrued expenses consisted of the following:


	June 30,		December 31,
	2020		2019
Accrued research and development expenses	$	8,854	$	11,813
Accrued employee compensation and benefits		5,064		7,089
Accrued legal and professional fees		2,005		1,087
Other		576		426
	$	16,499	$	20,415

7. Common Shares

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(Unaudited)

Company from the follow-on offering and concurrent private placement was approximately $145,925 after deducting underwriting discounts and commissions, placement agent fees 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, transferability and conversion, as described below. As of June 30, 2020, 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. 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. Holders of Class A1 common shares and Class B1 common shares have no voting rights.

Dividends

Common shareholders are entitled to receive dividends, as may be declared by the Company’s board of directors. Through June 30, 2020, 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 (subject to certain exceptions). Each Class B1 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 B1 common share is convertible into one Class A common share or one Class B common share at the holder’s election (subject to certain exceptions). There are no conversion rights associated with the Class A common shares.

8. Share-Based Compensation

2018 Incentive Award Plan

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 share options, nonqualified share 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”).

A total of 4,466,500 Class A common shares were initially reserved for issuance under the 2018 Plan. The number of Class A common shares that may be issued under the 2018 Plan will automatically increase on each January 1, beginning in 2019 and continuing for each fiscal year until, and including, the fiscal year ending December 31, 2028, equal to the lesser of (1) 4% of the Class A common shares outstanding (on an as-converted basis) on the final day of the immediately preceding calendar year and (2) a smaller number of Class A common shares determined by the Company’s board of directors. In December 2019, the board of directors approved the automatic increase as of January 1, 2020 of 2,197,505 shares, equal to 4% of the as-converted Class A common shares outstanding on December 31, 2019. No more than 27,915,000 Class A common shares may be issued under the 2018 Plan upon the exercise of incentive options. The Class A common shares underlying any awards issued under the 2018 Plan or the 2015 Plan that on or after the effective date of the 2018 Plan expire, lapses unexercised or are terminated, exchanged for cash, surrendered, repurchased, canceled without having been fully exercised, or forfeited under the 2018 Plan or the

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KINIKSA PHARMACEUTICALS, LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

2015 Plan will be added back to the Class A common shares available for issuance under the 2018 Plan. As of June 30, 2020, 3,112,910 shares remained available for future grant.

2015 Equity Incentive Plan

Until May 23, 2018 (the effective date of the 2018 Plan), the 2015 Plan provided for the Company to grant incentive share options, nonqualified share options, share grants and other share-based awards to employees and non-employees to purchase the Company’s Class A common shares. On the effective date of the 2018 Plan, the Company ceased granting awards under the 2015 Plan. At that time, the 4,691,213 Class A common shares subject to outstanding awards under the 2015 Plan remained reserved for issuance under the plan pursuant such awards and the 92,170 Class A common shares that had been available for future grant under the 2015 Plan were no longer authorized and reserved for issuance or available for future grant under the 2015 Plan.

As of June 30, 2020, there were 3,001,826 Class A common shares subject to outstanding awards under the 2015 Plan and reserved for issuance under the 2015 Plan pursuant to such awards. On May 23, 2018, the effective date of the 2018 Plan, the Company ceased granting awards under the 2015 Plan and no Class A common shares were available for future grant under the 2015 Plan in connection with the 2018 Plan becoming effective. However, the 2015 Plan continues to govern the terms and conditions of the outstanding awards granted under it. Class A common shares subject to awards granted under the 2015 Plan that expire, lapse unexercised or are terminated, exchanged for cash, surrendered, repurchased, canceled without having been fully exercised, or forfeited become available for issuance under the 2018 Plan.

The exercise price for incentive share options was determined by the Company’s board of directors. All incentive share options granted to any person possessing 10% or less of the total combined voting power of all classes of shares could not have an exercise price of less than 100% of the fair market value of the Class A common shares on the grant date. All incentive share options granted to any person possessing more than 10% of the total combined voting power of all classes of shares could not have an exercise price of less than 110% of the fair market value of the Class A common shares on the grant date. The option term for incentive share options could not be greater than 10 years. Incentive share options granted to persons possessing more than 10% of the total combined voting power of all classes of shares could not have an option term of greater than five years. The vesting period for equity-based awards was determined by the board of directors, which was generally four to six years. For awards granted to employees and non-employees with four year vesting terms, 25% of the option vests on the first anniversary of the grant date and the remaining shares vest equally each month for three years thereafter. For awards granted to employees with six year vesting terms, 16% of the option vests on the first anniversary of the grant date and the remaining shares vest based on a predetermined vesting schedule for five years thereafter.

2018 Employee Share Purchase Plan

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. The number of Class A common shares that may be issued under the 2018 ESPP will automatically increase on each January 1, beginning in 2019 and continuing for each fiscal year until, and including, the fiscal year ending December 31, 2028, equal to the lesser of (i) 1% of the Class A common shares outstanding (on an as-converted basis) on the final day of the immediately preceding calendar year and (ii) a smaller number of Class A common shares determined by the Company’s board of directors, provided that no more than 6,420,000 Class A common shares may be issued under the 2018 ESPP. As of June 30, 2020, 549,300 Class A common shares were available for future issuance under the 2018 ESPP. In December 2019, the Company’s board of directors determined that the January 1, 2020 automatic increase in shares available under the 2018 ESPP would be zero shares.

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KINIKSA PHARMACEUTICALS, LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

Options

Share option activity under the Plans is summarized as follows:


		Weighted
	Number of	Average
	Shares	Fair Value
Outstanding as of December 31, 2019	8,491,734	$	7.68
Granted	1,956,670	$	11.66
Exercised	(1,080,425)	$	3.01
Forfeited	(684,599)	$	11.30
Outstanding as of June 30, 2020	8,683,380