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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the quarterly period ended March 31, 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: 001-37519

AIMMUNE THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

Delaware

45-2748244

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

8000 Marina Blvd., Suite 300

Brisbane, California 94005

(Address of principal executive offices including zip code)

Registrant’s telephone number, including area code: (650) 614-5220

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

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

AIMT

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 April 30, 2020, the registrant had 65,250,758 shares of common stock, $0.0001 par value per share, outstanding.

AIMMUNE THERAPEUTICS, INC.

TABLE OF CONTENTS

		Page


PART I. – FINANCIAL INFORMATION		3
Item 1.	Condensed Consolidated Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019	3
	Condensed Consolidated Statements of Comprehensive Loss for the Quarters Ended March 31, 2020 and 2019	4
	Condensed Consolidated Statements of Stockholders’ Equity as of March 31, 2020 and 2019	5
	Condensed Consolidated Statements of Cash Flows for the Quarters Ended March 31, 2020 and 2019	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.	Controls and Procedures	28

PART II. – OTHER INFORMATION		30
Item 1.	Legal Proceedings	30
Item 1A.	Risk Factors	30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	74
Item 3.	Defaults Upon Senior Securities	74
Item 4.	Mine Safety Disclosures	74
Item 5.	Other Information	74
Item 6.	Exhibits	75
SIGNATURES		77

PART I. – FINANCIAL INFORMATION

Item 1. Financial Statements

AIMMUNE THERAPEUTICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)

	March 31,			December 31,
	2020			2019
Assets
Current assets:
Cash and cash equivalents	$	298,418		$	79,880
Short-term investments		59,933			63,633
Trade receivables, net		772			—
Inventories		4,076			—
Prepaid expenses and other current assets		4,621			5,564
Total current assets		367,820			149,077
Long-term investments		13,256			14,661
Property and equipment, net		27,506			28,604
Operating lease right-of-use assets		10,913			11,512
Prepaid expenses and other assets		557			515
Total assets	$	420,052		$	204,369
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	13,952		$	13,882
Accrued liabilities		29,128			31,286
Operating lease liabilities, current		2,315			2,257
Other current liabilities		24			23
Total current liabilities		45,419			47,448
Long term debt, net of discount		128,250			41,028
Operating lease liabilities		9,824			10,524
Other liabilities		1,512			1,345
Total liabilities		185,005			100,345
Commitments and contingencies (Note 7)
Stockholders’ equity:
Preferred stock, par value $0.0001 per share— 10,000 shares authorized at March 31, 2020 and December 31, 2019; 526 and 0 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively		—			—
Common stock, par value $0.0001 per share—290,000 shares authorized as of March 31, 2020 and December 31, 2019; 65,223 and 63,779 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively		7			6
Additional paid-in capital		1,045,989			828,618
Accumulated other comprehensive income		163			80
Accumulated deficit		(811,112	)		(724,680	)
Total stockholders’ equity		235,047			104,024
Total liabilities and stockholders’ equity	$	420,052		$	204,369

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

AIMMUNE THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands, except per share amounts)

(Unaudited)

	Quarter Ended March 31,
		2020			2019
Product revenue, net		$	575		$	—
Costs and operating expenses
Cost of revenue			257			—
Research and development			36,463			31,316
Selling, general and administrative			49,138			23,712
Total costs and operating expenses			85,858			55,028
Loss from operations			(85,283	)		(55,028	)
Interest income			978			1,901
Interest expense			(2,229	)		(1,144	)
Other income, net			221			34
Loss before provision for income taxes			(86,313	)		(54,237	)
Provision for income taxes			119			29
Net loss		$	(86,432	)	$	(54,266	)
Other comprehensive loss, net of tax:
Foreign currency translation adjustment		$	10		$	—
Unrealized gain on available-for-sale investments			73			171
Comprehensive loss		$	(86,349	)	$	(54,095	)

Net loss per share, basic and diluted		$	(1.34	)	$	(0.87	)
Weighted average shares used in computing net loss per common share, basic and diluted			64,514			62,022

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

AIMMUNE THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

											Accumulated
									Additional		Other					Total
	Preferred Stock				Common Stock				Paid-In		Comprehensive		Accumulated			Stockholders’
	Shares		Amount		Shares		Amount		Capital		Income		Deficit			Equity
Balance as of December 31, 2019		—	$	—		63,779	$	6	$	828,618	$	80	$	(724,680	)	$	104,024
Issuance of common stock pursuant to development arrangement		—		—		156		—		5,000		—		—			5,000
Issuance of preferred and common stock pursuant to financing arrangement		526		—		1,000		1		199,906		—		—			199,907
Issuance of common stock upon exercise of vested options and vesting of restricted stock units		—		—		288		—		2,098		—		—			2,098
Stock-based compensation expense		—		—		—		—		10,367		—		—			10,367
Foreign currency translation adjustment		—		—		—		—		—		10		—			10
Unrealized gain on available- for-sale investments		—		—		—		—		—		73		—			73
Net loss		—		—		—		—		—		—		(86,432	)		(86,432	)
Balance as of March 31, 2020		526	$	—		65,223	$	7	$	1,045,989	$	163	$	(811,112	)	$	235,047

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

AIMMUNE THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

							Accumulated
					Additional		Other						Total
	Common Stock				Paid-In		Comprehensive			Accumulated			Stockholders’
	Shares		Amount		Capital		Income (Loss)			Deficit			Equity

Balance as of December 31, 2018		62,142	$	6	$	775,283	$	(108	)	$	(476,234	)	$	298,947
Issuance of common stock upon exercise of vested options and vesting of restricted stock units		328		—		3,633		—			—			3,633
Stock-based compensation expense		—		—		7,765		—			—			7,765
Unrealized gain on available- for-sale investments		—		—		—		171			—			171
Accumulated depreciation upon adoption of ASU Topic 842		—		—		—		—			51			51
Net loss		—		—		—		—			(54,266	)		(54,266	)
Balance as of March 31, 2019		62,470	$	6	$	786,681	$	63		$	(530,449	)	$	256,301

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

AIMMUNE THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Quarter Ended March 31,
	2020			2019
Cash flows from operating activities:
Net loss	$	(86,432	)	$	(54,266	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization expense		1,298			666
Stock-based compensation expense		10,303			7,765
Non-cash interest expense		2,223			1,065
Amortization of premium on investment securities		(6	)		(542	)
Research and development expenses recognized from issuance of common stock		5,000			—
Changes in operating assets and liabilities:
Trade receivables, net		(772	)		—
Inventories		(4,012	)		—
Prepaid expenses and other assets		2,429			1,433
Accounts payable		191			1,945
Accrued liabilities		(2,159	)		(3,555	)
Other liabilities		125			(340	)
Net cash used in operating activities		(71,812	)		(45,829	)
Cash flows from investing activities:
Purchase of property and equipment		(319	)		(1,372	)
Purchase of investments		(32,457	)		(85,564	)
Maturities of investments		37,640			67,408
Net cash provided by (used in) investing activities		4,864			(19,528	)
Cash flows from financing activities:
Borrowings under debt agreement		85,000			40,000
Debt issuance costs		—			(3,856	)
Net proceeds from issuance of preferred and common stock		199,907			—
Net cash proceeds from exercise of stock options		1,996			3,250
Tax withholdings related to net share settlements of restricted stock units		(1,427	)		(490	)
Net cash provided by financing activities		285,476			38,904
Effects of changes in foreign exchange rates		10			—
Net increase (decrease) in cash and cash equivalents		218,538			(26,453	)
Cash and cash equivalents at the beginning of the period		79,880			107,511
Cash and cash equivalents at the end of the period	$	298,418		$	81,058

Supplemental disclosure of non-cash investing and financing activities:
Property and equipment purchases included in accounts payable and accrued liabilities	$	120		$	1,051
Receivable for stock option exercises	$	—		$	383

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

AIMMUNE THERAPEUTICS, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020

(Unaudited)

1. Formation and Business of the Company

Aimmune Therapeutics, Inc., or the Company, is a biopharmaceutical company focused on developing and commercializing new therapeutic approaches, including the development of proprietary product candidates, for the treatment of peanut and other food allergies. We are headquartered in Brisbane, California, and were incorporated in the state of Delaware on June 24, 2011.

Our main therapeutic approach, which we refer to as Characterized Oral Desensitization Immunotherapy, or CODIT^TM, is designed to desensitize patients to food allergens and thereby reduce the risk of having an allergic reaction upon accidental exposure or reduce symptom severity should an allergic reaction occur.

PALFORZIA^TM (Peanut (Arachis hypogaea) Allergen Powder-dnfp) (formerly AR101) is our lead internally developed product utilizing CODIT and was approved by the FDA for marketing and sale in the United States in January 2020. PALFORZIA is an oral immunotherapy indicated for the mitigation of allergic reactions, including anaphylaxis, that may occur with accidental exposure to peanut. Initiation of PALFORZIA is approved in patients aged 4 through 17 years with a confirmed diagnosis of peanut allergy. PALFORZIA may be continued in patients 18 years of age and older. PALFORZIA is to be used in conjunction with a peanut-avoidant diet. We are currently commercializing PALFORZIA in the United States through a specialty sales force of approximately 80 Practice Account Managers targeting practicing allergists.

Since inception, we have incurred net losses and negative cash flows from operations. During the quarter ended March 31, 2020, we incurred a net loss of $86.4 million and we used $71.8 million of cash in operations. As of March 31, 2020, we had an accumulated deficit of $811.1 million, and we do not expect to experience positive cash flows in the near future. As of March 31, 2020, we had cash, cash equivalents and investments of $371.6 million. In February 2020, we received gross proceeds from Nestlé Health Science’s $200.0 million equity investment and the draw of the second loan tranche from KKR of $85.0 million. In light of the launch delay caused by COVID-19, we are taking numerous active steps to conserve financial resources. We anticipate that based on our current business plan, our financial resources will fully fund us. We have financed our operations to date primarily through private placements of our equity securities, our initial public offering, or IPO, of common stock in August 2015, an underwritten public offering of common stock in February and March 2018 and our loan agreement entered into in January 2019. Our ability to continue to meet our obligations and to achieve our business objectives is dependent upon a number of factors, which include commercializing PALFORZIA, obtaining European Medicines Agency, or EMA, approval of our Marketing Authorization Application for PALFORZIA, raising additional capital, the successful and timely completion of our clinical trials, our ability to control expenses and generating sufficient revenue in the United States and Europe. Failure to generate sufficient revenue in the United States, manage discretionary expenditures, or raise additional financing, as required, may adversely impact our ability to achieve our intended business objectives.

2. Summary of Significant Accounting Policies

Basis of Preparation

The accompanying condensed consolidated financial statements have been prepared in accordance with Generally Accepted Accounting Principles, or GAAP, in the United States and applicable rules and regulations of the Securities and Exchange Commission, or SEC, regarding interim financial reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP have been condensed or omitted, and accordingly the balance sheet as of December 31, 2019, has been derived from audited consolidated financial statements at that date but does not include all of the information required by U.S. GAAP for complete financial statements. These condensed consolidated financial statements have been prepared on the same basis as our annual financial statements and, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair presentation of our financial information. The results of operations for the quarter ended March 31, 2020, are not necessarily indicative of the results to be expected for the year ending December 31, 2020, or for any other interim period or for any other future year. We operate in one reportable segment.

The accompanying condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto for the year ended December 31, 2019, included in our Annual Report on Form 10-K filed with the SEC.

Basis of Consolidation

The accompanying condensed consolidated financial statements include the accounts of our wholly-owned subsidiaries. All significant intercompany transactions have been eliminated.

Use of Estimates

The preparation of the accompanying condensed consolidated financial statements in accordance with U.S. GAAP requires us 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 condensed consolidated financial statements, as well as the reported revenue, costs and expenses recognized during the reporting periods. We base our estimates and assumptions on historical experience when available and on various factors that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results could differ from these estimates under different assumptions or conditions.

Significant Accounting Policies

There have been no significant changes to the accounting policies during the three months ended March 31, 2020, as compared to the significant accounting policies described in Note 2 of the “Notes to Consolidated Financial Statements” in our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019, except as noted below.

Foreign Currency Translation

The functional currency of our foreign subsidiaries is either the U.S. dollar or the Euro. For foreign subsidiaries with the functional currency of the Euro, assets and liabilities are translated to U.S. dollars using the exchange rates at the balance sheet date and expenses are translated using the monthly average exchange rates in effect during the period in which the transactions occur. Foreign currency translation adjustments are recorded as a component of accumulated other comprehensive income within stockholders’ equity.

Monetary assets and liabilities in the non-functional currency of our subsidiaries are remeasured using exchange rates in effect at the end of the period. Costs in the non-functional currency are remeasured using average exchange rates for the period, except for costs related to those balance sheet items that are remeasured using historical exchange rates. The resulting transaction gains and losses are included in the consolidated statements of comprehensive loss as incurred and have not been material for all periods presented.

Concentration of Risk

Financial instruments that potentially subject us to concentrations of credit risk consist of cash, cash equivalents, trade receivables, and investments. Our investment policy limits investments to certain types of debt securities issued by the U.S. government, its agencies and institutions with investment-grade credit ratings and places restrictions on maturities and concentration by type and issuer. We are exposed to credit risk in the event of a default by the financial institutions holding our cash, cash equivalents and investments and issuers of investments to the extent recorded on the consolidated balance sheets.

We are dependent on a small number of third-party manufacturers to manufacture our drugs and drug candidates. We could be adversely affected by a significant interruption in the supply of bulk drug substances and the manufacturing activities to produce, package and distribute PALFORZIA.

During the quarter ended March 31, 2020, we had four customers, of whom three accounted for approximately 75%, 13% and 12% of total net revenues. We had no such concentration during the three months ended March 31, 2019.

In March 2020, the World Health Organization declared the global novel coronavirus, or COVID-19, outbreak a pandemic. To date, our operations have been significantly impacted by the COVID-19 pandemic, including with respect to the commercial launch of PALFORZIA and enrollment in our Phase 2 clinical trial for AR201. However, we cannot at this time predict the specific extent, duration or full impact that the COVID-19 pandemic will have on our financial condition and results of operations. The impact of the COVID-19 pandemic on our financial performance will depend on future developments, including the duration and spread of the COVID-19 pandemic and related governmental advisories and restrictions. These developments and the impact of COVID-19 on the financial markets and the overall economy are also highly uncertain. If the financial markets and/or the overall economy are impacted for an extended period, our business, financial condition, results of operations and prospects may be adversely affected.

Trade Receivables, net

Trade receivables are recorded net of estimates for which reserves are established for distributor fees, prompt pay discounts and other distributor costs that are offered within contracts between us and a limited number of specialty distributors and pharmacies in the United States, which we refer to herein as Customers. These reserves are classified as reductions of trade receivables. Refer to our Revenue Recognition policy for additional information.

Accounts outstanding longer than the contractual payment terms are considered past due. We write off accounts receivable when they are deemed uncollectible and such write-offs, net of payments received, are recorded as a reduction to the allowance. As of March 31, 2020, and March 31, 2019, we did not have any allowances for doubtful accounts.

Inventories

Inventories are stated at the lower of cost or estimated net realizable value, on a first-in, first-out, or FIFO, basis. We use actual costs to determine our cost basis for inventories. Inventories consist of raw materials, work-in-process and finished goods.

Prior to regulatory approval of our product candidates, expenses incurred to manufacture drug products are recorded as research and development expense. We begin capitalizing these expenses as inventory upon regulatory approval.

We assess our inventory levels each reporting period and write-down inventory that is expected to be at risk of expiration, that has a cost basis in excess of its expected net realizable value and inventory quantities in excess of expected requirements. In evaluating the sufficiency of our inventory reserves or liabilities for firm purchase commitments, we also take into consideration our firm purchase commitments for future inventory production. When we recognize a loss on such inventory or firm purchase commitments, such amounts are recognized as cost of revenues.

Revenue Recognition

Pursuant to ASC Topic 606, Revenue from Contracts with Customers, or ASC 606, we recognize revenue upon transfer of control of promised goods or services, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services.

To determine revenue recognition for arrangements that we determine are within the scope of ASC 606, we perform the following five steps:

(i)

identify the contract(s) with a customer;

(ii)

identify the performance obligations in the contract(s);

(iii)

determine the transaction price;

(iv)

allocate the transaction price to the performance obligations in the contract(s); and

(v)

recognize revenue when (or as) we satisfy a performance obligation.

We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer.

Product Revenue, Net

Our product revenue consists of U.S. sales of PALFROZIA, which we began shipping to Customers in March 2020. Prior to March 2020 we had no product revenue. We sell PALFROZIA to a limited number of Customers under a Risk Evaluation and Mitigation Strategy, a drug safety program that the FDA requires for certain medications with safety concerns to help ensure the benefits of the medication outweigh its risks. Revenue from product sales are recognized when the performance obligation under the agreements with our Customers are fulfilled, which is when the product has been delivered to our Customers. These Customers subsequently resell our products to patients and sometimes to hospitals, pharmacies and allergists.

Shipping and handling activities are considered to be fulfillment activities rather than a separate performance obligation and are recorded as cost of revenue.

Reserves for Variable Consideration

Revenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established and which result from distribution fees, prompt pay discounts, expected product returns, chargebacks, rebates, co-pay assistance and other allowances that are offered relating to our product sales. These reserves as detailed below are based on the amounts earned or to be claimed on the related sales and are classified as reductions of trade receivables or accrued liabilities. Where appropriate, these estimates take into consideration a range of possible outcomes that are probability-weighted in accordance with the expected value method under ASC 606 for relevant factors. These factors include current contractual and statutory requirements, specific known market events and trends, industry data, and/or forecasted customer buying and payment patterns. Overall, these reserves are factored into our net estimate of transaction price and reflect our best estimates of the amount of consideration to which we are entitled based on the terms of the respective underlying contracts.

The amount of variable consideration that is included in the transaction price may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur

in a future period. Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from our estimates, we will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known.

Distribution Fees: Under our inventory management agreements with our Customers, we pay them a fee primarily for compliance with certain contractually determined covenants such as the maintenance of agreed upon inventory levels. These distribution fees are based on a contractually determined fixed percentage of sales. We record these distribution fees as a reduction of trade receivables.

Prompt Pay Discounts: Our Customers receive a contractually agreed discount for prompt payment. We expect our Customers will earn 100% of their prompt pay discounts and we record these discounts as a reduction of trade receivables.

Product Returns: We generally offer our Customers a right of return based on the product’s expiration date or other market-based factors for product that has been purchased from us. We estimate the amount of our product sales that may be returned by our Customers and record the estimates as an accrued liability. We currently estimate product returns using available industry data, our own sales information and our visibility into the inventory remaining in the distribution channel.

Rebates: We are subject to government mandated rebates under the Medicaid Drug Rebate Program and other government health care programs in the United States. Rebate amounts are based upon contractual agreements or legal requirements with public sector benefit providers. We use the expected-value method for estimating these rebates based on statutory discount rates and expected utilization. The expected utilization of such rebates is estimated based on third party market research data and data received from our Customers. Estimates for these rebates are adjusted quarterly to reflect the most recent information. We record the estimated rebates as an accrued liability.

Co-Pay Assistance: Patients who have commercial insurance and meet certain eligibility requirements may receive co-pay assistance. We record the estimated amounts as an accrued liability. Co-pay assistance is based on actual program participation on a patient-by-patient basis and estimates of program redemption using our patient data provided by the third-party administrator of our co-pay program. Estimates for these rebates are adjusted quarterly to reflect the most recent information.

Other Customer Credits: We pay fees to the specialty distributors and pharmacies for account management, data management and other administrative services. We have determined such services received to date are not distinct from our sale of products to the specialty distributors and pharmacies and, therefore, a fair market value for these services may not be reasonably determined for accounting purposes. We record these fees as an accrued liability.

Cost of Revenue

Cost of revenue consists primarily of direct and indirect costs related to the manufacturing of PALFROZIA units sold, including raw materials, third-party contract manufacturing and packaging costs, freight costs, storage costs, allocation of overhead costs of employees involved with production of PALFORZIA and costs paid to our contract manufacturers, if any, for anticipated shortfall in product demand relative to committed volumes. Such product costs incurred prior to FDA approval of PALFORZIA in January 2020 have been recorded as research and development expense in our condensed consolidated statement of operations.

Income Taxes

On March 18, 2020, the Families First Coronavirus Response Act, or the FFCR Act, and on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, were each enacted in response to the COVID-19 pandemic. The FFCR Act and the CARES Act contain numerous income tax provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The FFCR Act and CARES Act did not have a material impact on our condensed consolidated financial statements as of March 31, 2020; however, we continue to examine the impacts the FFCR Act and CARES Act may have on our business, results of operations, financial condition and liquidity.

Recently Adopted Accounting Pronouncements

We adopted Accounting Standards Update, or ASU, No. 2018-15, Intangibles-Goodwill and Other – Internal Use Software: Subtopic 340-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, as of January 1, 2020. This guidance required companies to apply the internal-use software guidance in Accounting Standards Codification, or ASC, 340-40 to implementation costs incurred in a hosting arrangement that is a service contract to determine whether to capitalize certain implantation costs or expense them as incurred. The adoption of ASU No. 2018-15 did not have a material impact on our consolidated financial statements.

We adopted ASU No. 2018-13, Fair Value Measurement: Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, as of January 1, 2020. The ASU adds and modifies certain disclosure requirements for fair value measurements. Under the new guidance, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, or valuation processes for Level 3 fair value measurements. However, public companies will be required to disclose the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and related changes in unrealized gains and losses included in other comprehensive income. The adoption of ASU No. 2018-13 did not have a material impact on our consolidated financial statements.

We adopted ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as of January 1, 2020. The ASU requires measurement and recognition of expected credit losses for financial assets held. ASU 2016-13 modifies the other-than-temporary impairment model for available-for-sale debt securities and requires an estimate of expected credit losses when the fair value is below the amortized cost of the asset. The adoption of ASU No. 2016-13 did not have a material impact on our consolidated financial statements.

We adopted ASU No. 2019-12, Simplifying the Accounting for Income Taxes, in the fourth quarter of 2019. The ASU, as part of the Financial Accounting Standards Board’s Simplification Initiative to reduce the cost and complexity in accounting for income taxes, removes certain exceptions related to the approach for intraperiod tax allocation, which is the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also amends other aspects of the guidance to help simplify and promote consistent application of GAAP. The guidance is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. The adoption of ASU No. 2019-12 did not have a material impact on our consolidated financial statements.

3. Available-for-Sale Securities and Fair Value Measurements

We define fair value 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.

Our valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. We classify these inputs into the following hierarchy:

•

Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

•

Level 2—Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and

•

Level 3—Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.

The following tables set forth our financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands):

	March 31, 2020
	Level 1		Level 2		Level 3		Total
Cash and cash equivalents:
Cash and money market funds	$	298,418	$	—	$	—	$	298,418
Total cash and cash equivalents	$	298,418	$	—	$	—	$	298,418
Investments:
Agency securities	$	—	$	7,507	$	—	$	7,507
Corporate securities		—		30,970		—		30,970
Commercial paper		—		9,942		—		9,942
U.S. government securities		—		24,770		—		24,770
Total investments	$	—	$	73,189	$	—	$	73,189

	December 31, 2019
	Level 1		Level 2		Level 3		Total
Cash and cash equivalents:
Cash and money market funds	$	79,880	$	—	$	—	$	79,880
Total cash and cash equivalents	$	79,880	$	—	$	—	$	79,880
Investments:
Agency securities		—		8,862		—		8,862
Corporate securities		—		30,338		—		30,338
Commercial paper		—		7,949		—		7,949
U.S. government securities		—		31,145		—		31,145
Total investments	$	—	$	78,294	$	—	$	78,294

Our valuation techniques used to measure the fair value of money market funds were derived from quoted prices in active markets for identical assets. The valuation techniques used to measure the fair value of investments, all of which have counterparties with high credit ratings, were valued based on quoted market prices or model-driven valuations using significant inputs derived from or corroborated by observable market data. Investments are carried at fair value at March 31, 2020.

Available-for-sale investments are carried at fair value and are included in the tables above. The aggregate market value, cost basis, and gross unrealized gains and losses of available-for-sale investments by security type, classified in cash equivalents and investments, as of March 31, 2020 and December 31, 2019, are as follows (in thousands):

	March 31, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Total Fair Value
Agency securities	$	7,499	$	8	$	—		$	7,507
Corporate securities		9,942		—		—			9,942
Commercial paper		31,009		23		(62	)		30,970
U.S. government securities		24,586		184		—			24,770
Total available-for-sale investments	$	73,036	$	215	$	(62	)	$	73,189

	December 31, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Total Fair Value
Agency securities	$	8,856	$	6		—		$	8,862
Corporate securities		30,286		55		(3	)		30,338
Commercial paper		7,949		—		—			7,949
U.S. government securities		31,123		22		—			31,145
Total available-for-sale investments	$	78,214	$	83	$	(3	)	$	78,294

At March 31, 2020, all of the available-for-sale securities have contractual maturities within two years. During the quarters ended March 31, 2020 and 2019, we did not have any allowance for credit losses. All marketable securities with unrealized losses have been in a loss position for less than twelve months.

The carrying value of our long-term debt approximates its fair value at each balance sheet date due to its variable interest rate, which approximates a market interest rate.

4. Balance Sheet Components

Inventories

Inventories consists of the following (in thousands):

	March 31, 2020		December 31, 2019
Raw materials	$	30	$	—
Work in process		3,321		—
Finished goods		725		—
Total inventories	$	4,076	$	—

Property and Equipment, Net

Property and equipment, net consists of the following (in thousands):

	March 31, 2020			December 31, 2019
Furniture and equipment	$	2,679		$	2,660
Computer equipment		2,849			2,820
Manufacturing equipment		15,341			9,012
Leased equipment		102			100
Leasehold improvements		14,525			14,525
Construction in progress		470			6,649
Property and equipment, gross		35,966			35,766
Less: accumulated depreciation		(8,460	)		(7,162	)
Property and equipment, net	$	27,506		$	28,604

Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

	March 31, 2020		December 31, 2019
Compensation and benefits	$	8,151	$	13,286
Research and development		10,010		11,336
Professional and consulting		10,125		6,627
Other		842		37
Total accrued liabilities	$	29,128	$	31,286

5. Long-term Debt, net of Discounts

In January 2019, we entered into a loan agreement with an affiliate of KKR for up to $170.0 million in three tranches, or the KKR Loans. Of the total loan amount, $40.0 million was funded upon closing of the transaction in January 2019 and $85.0 million was funded in February 2020 following FDA approval of PALFORZIA and satisfaction of other customary borrowing conditions. The remaining $45.0 million is to be made available at our option in 2020 upon the satisfaction of certain borrowing conditions, including our achievement of aggregate net sales (as defined in the agreement) for PALFORZIA by July 31, 2020 in an amount of at least $30.0 million. The KKR Loans have a maturity date being the earliest of (a) January 3, 2025, or if Regulatory Approval has not occurred on or before December 31, 2020, January 15, 2021 and (b) the date that is 91 days prior to the earliest current maturity date of any other loans we might have in excess of $15.0 million prior to the funding of the third tranche of the KKR Loans or $25.0 million following the funding of the third tranche of the KKR Loans. The KKR Loans bear interest through maturity, at our election with respect to (a) Alternate Base Rate, or ABR Loans, ABR plus 6.50% per annum and (b) London Interbank Offered Rate, or LIBOR Loans, 30-day LIBOR plus 7.50% per annum. We have the option to elect to make interest payments from available funds or make interest payments in kind by capitalizing such interest amounts on the applicable interest payment date by adding the amounts to the outstanding principal amount of the loan. Any capitalized amounts also bear interest. To date, we have selected to pay in kind and capitalized the interest through the three months ending March 31, 2020. We began accruing interest on outstanding KKR Loans on March 31, 2019, and continue to accrue interest on the outstanding KKR loans on the last business day of each March, June, September and December thereafter while any KKR Loan is outstanding, as well as on the final maturity date of the KKR Loans, with each such date being referred to herein as an Interest Payment Date.

In connection with the KKR Loans, we paid direct fees of $3.9 million, including debt issuance costs. The fees are being amortized as interest expense over the term of the debt. As of March 31, 2020, $130.9 million was outstanding under the KKR Loans. As of March 31, 2020, the interest rate on the KKR Loans was 8.9% per annum.

The following table represents our short-term and long-term debt obligations (in thousands):

	March 31, 2020			December 31, 2019
Principal amount of long-term debt	$	130,868		$	44,004
Less: Current portion of long-term debt		—			—
Long-term debt, net of current portion		130,868			44,004
Unamortized discount relating to deferred financing costs, net		(3,064	)		(3,234	)
Accrued exit fee payment		446			258
Long-term debt, net of discount and current portion	$	128,250		$	41,028

Future principal payments of our long-term debt as of March 31, 2020 are as follows (in thousands):

Fiscal year ending December 31:
2020	$	—
2021		—
2022		—
2023		65,434
2024		65,434
Thereafter		—
Total	$	130,868

6. Leases

We lease facilities for office and manufacturing space under various operating leases and a security system under a financing lease. Our leases have remaining lease terms of approximately 1 year to 6 years, which represent the non-cancellable periods of the leases and include extension options that we determined are reasonably certain to be exercised. We exclude extension options that are not reasonably certain to be exercised from our lease terms. Our lease payments consist primarily of fixed rental payments for the right to use the underlying leased assets over the lease terms. We often receive customary incentives from our landlords, such as reimbursements for tenant improvements and rent abatement periods, which effectively reduce the total lease payments owed for these leases.

Operating lease right-of-use assets and liabilities on our condensed consolidated balance sheets represent the present value of our remaining lease payments over the remaining lease terms. We do not allocate lease payments to non-lease components. We use our incremental borrowing rate to calculate the present value of our lease payments, as the implicit rates in our leases are not readily determinable.

The maturities of our operating lease liabilities were as follows (in thousands):

Remaining Lease Payments at March 31, 2020
	Operating			Financing			Total
2020	$	2,839		$	26		$	2,865
2021		3,875			35			3,910
2022		3,929			9			3,938
2023		3,762			—			3,762
2024		1,857			—			1,857
Thereafter		227			—			227
Total lease payments	$	16,489		$	70		$	16,559
Less: Effects of discounting		(4,350	)		(9	)		(4,359	)
Present value of lease liabilities	$	12,139		$	61		$	12,200
Less: current portion		(2,315	)		(23	)		(2,338	)
Long-term lease liabilities	$	9,824		$	38		$	9,862
Weighted-average remaining lease term	4.3 years			2.0 years
Weighted-average incremental borrowing rate		11	%		23	%

The component of our lease costs included in our condensed consolidated statements of income were as follows (in thousands):

	Quarter Ended March 31,
Lease Cost	2020		2019
Operating lease cost	$	997	$	965
Finance lease cost
Amortization of leased assets		33		8
Interest on lease liabilities		16		4
Net lease cost	$	1,046	$	977

Other information related to our operating lease was as follows (in thousands):

	Quarter Ended March 31,
Other Information	2020		2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	997	$	965
Operating cash flows from finance leases	$	49	$	12

7. Commitments and Contingencies

In-Licensing Agreement

In February 2020, we entered into a license agreement, or the License Agreement, with Xencor, Inc., or Xencor, for the exclusive, worldwide, royalty-bearing license for the development, manufacture and commercialization of biopharmaceutical products containing or comprising the humanized monoclonal antibody AIMab7195 (formerly XmAb7195) or certain variants of AIMab7195, each of which is referred to as an AIMab7195 Product. Initially, AIMab7195 will be developed as an adjunctive treatment with our existing CODIT pipeline assets, including PALFORZIA, to explore treatment outcomes, including the potential path to remission, in patients with food allergies. AIMab7195 is designed to mediate the suppression of IgE and IgE-producing cells and originally was developed for the treatment of allergic asthma and other IgE-mediated diseases.

In connection with the entry into the License Agreement, we paid Xencor an upfront payment of $5.0 million in cash, and we also issued to Xencor 156,238 shares of Common Stock.

Additionally, we are obligated to pay Xencor an aggregate of up to $380.0 million in milestone payments, which includes $17.0 million in development milestones, $53.0 million in regulatory milestones and $310.0 million in sales milestones, and to issue an additional number of shares of our Common Stock having an aggregate value of $5.0 million in connection with the achievement of the first development milestone with respect to a product containing an AIMab7195 Product. We will also pay a royalty to Xencor equal to a percentage of net sales of AIMab7195 Products in the high single-digit to mid-teen range.

The term of the License Agreement continues on a country-by-country and Product-by-Product basis until the expiration of our obligation to pay royalties with respect such Product and country. We may terminate the License Agreement in its entirety without cause on sixty days’ prior written notice. Xencor may terminate the License Agreement in its entirety if the we or our affiliates or sublicensees challenge the licensed patents. Either party may terminate the License Agreement for the other party’s material breach that is not cured within a specified time period or for the other party’s bankruptcy or insolvency-related events. We will be solely responsible for costs related to the development of AIMab7195.

In connection with our entry into the License Agreement, we also agreed to assume Xencor’s rights and obligations under its license of the AIMab7195 cell line from Catalent Pharma Solutions LLC, which manufactures AIMab7195 using their proprietary GPEx® technology.

Indemnifications

We indemnify each of our officers and directors for certain events or occurrences, subject to certain limits, while the officer or director is or was serving at our request in such capacity, as permitted under Delaware law and in accordance with its certificate of incorporation and bylaws. The term of the indemnification period lasts as long as an officer or a director may be subject to any proceeding arising out of acts or omissions of such officer or director in such capacity. The maximum amount of potential future indemnification is unlimited; however, we currently hold director and officer liability insurance. This insurance allows the transfer of risk associated with our exposure and may enable us to recover a portion of any future amounts paid. We believe that the fair value of these indemnification obligations is minimal. Accordingly, we have not recognized any liabilities relating to these obligations for any period.

Legal

We are currently not a party to any material legal proceedings. During the normal course of business, we may be a party to legal claims that may not be covered by insurance. We do not believe that any such claims would have a material impact on our consolidated financial statements.

8. Stockholders’ Equity

As of March 31, 2020 and December 31, 2019 we had authorized 10,000,000 shares of convertible preferred stock, and we had issued and outstanding 525,634 shares and no shares, respectively of convertible preferred stock.

In February 2020, we sold Nestlé Health Science an additional 525,634 shares of our Series A Convertible Preferred Stock at a price of $319.675 per share and 1,000,000 shares of our common stock at a price of $31.97 per share for aggregate gross proceeds of $200.0 million.

The significant provisions of the Series A convertible preferred stock are as follows:

Dividends: Shares of Series A preferred stock will be entitled to receive any dividends payable to holders of common stock, and will rank:

•

senior to all of the common stock;

•

senior to any class or series of capital stock of the Company created after the designation of the Series A preferred stock specifically ranking by its terms junior to the Series A preferred stock;

•

on parity with all shares of Series A preferred stock and any class or series of capital stock of the Company created after the designation of the Series A preferred stock specifically ranking by its terms on parity with the Series A preferred stock; and

•

junior to any class or series of capital stock of the Company created after the designation of the Series A preferred stock specifically ranking by its terms senior to the Series A preferred stock;

in each case, as to distributions of assets upon the Company’s liquidation, dissolution or winding up whether voluntarily or involuntarily and/or the right to receive dividends

Liquidation: In the event of the Company’s liquidation, dissolution, or winding up, holders of Series A preferred stock will be entitled to receive, before any proceeds are distributed to the holders of common stock or junior securities and pari passu with any distributions to the holders of the Series A preferred stock, (i) an amount equal to $0.0001 per share of Series A preferred stock, plus any dividends declared but unpaid on such shares, plus (ii) such amount per share as would have been payable to such holder if all shares of Series A preferred stock held by such holder had been converted to common stock immediately prior to such liquidation, dissolution or winding up of the Company; provided, however, that, in the event that the assets to be distributed pursuant to this clause (ii) constitute equity securities or convertible securities of the Company (or any successor thereof) and, following any such distribution, any holder would hold or have a right to acquire greater than 19.99% of the number of shares of common stock or voting power of the Company (or any successor thereof) outstanding immediately after giving effect to all such distributions (such amount of securities being referred to as the “Surplus Amount”), then (x) the Company shall use commercially reasonable efforts to promptly obtain the approval of stockholders of the Company for such distribution of such Surplus Amount and (y) unless such approval of the stockholders of the Company is obtained, such holder shall not be entitled to receive such Surplus Amount.

Conversion: Each share of Series A preferred stock is convertible into ten shares of common stock (subject to adjustment as provided in the Certificate of Designation) at any time at the option of the holder, provided that the holder will be prohibited from converting the Series A preferred stock into shares of common stock if, as a result of such conversion, the holder, together with its affiliates, would own more than 19.99% of the total number of shares of common stock then issued and outstanding, subject to certain exceptions.

Voting: Shares of Series A preferred stock will generally have no voting rights, except as required by law and except that the consent of holders of a majority of the then outstanding Series A preferred stock will be required to amend the terms of the Series A preferred stock.

Redemption: The Series A preferred stock is not redeemable.

In connection with the entry into the License Agreement, we issued to Xencor 156,238 shares of common stock, pursuant to a Securities Issuance Agreement dated February 4, 2020.

9. Stock-Based Compensation

Equity Incentive Plan

In July 2015, we adopted the 2015 Stock Plan, or the 2015 Plan. Under the 2015 Plan, 4,681,544 shares of our common stock were initially reserved for the issuance of stock options and restricted stock to employees, directors, and consultants under terms and provisions established by the Board of Directors, or the Board, and approved by our stockholders. As of March 31, 2020, and December 31, 2019, there were 4,330,534 and 4,599,005 shares available for future grant, respectively.

Under the terms of the 2015 Plan, options may be granted at an exercise price not less than fair market value. For employees holding more than 10% of the voting rights of all classes of stock, the exercise prices for incentive stock options may not be less than 110% of fair market value, as determined by the Board. The terms of options granted under the 2015 Plan may not exceed ten years. All options issued to date have had a ten-year life. To date, options granted generally vest in three ways: 1) over four years at a rate of 25% upon the first anniversary of the issuance date and 1/48^th per month thereafter, 2) over two years at a rate of 1/24^th per month, or 3) over four years at a rate of 1/48^th per month. The 2015 Plan contains certain change of control provisions and the employment offer letters of certain employees provide for varied acceleration of vesting in the event of a change of control and/or termination without cause. It also contains a net exercise provision and allows for cashless exercise upon the class of shares subject to the option becoming publicly traded in an established securities market.

In August 2015, we adopted the 2015 ESPP, which commenced on January 1, 2018. Under the 2015 ESPP our employees may purchase common stock through payroll deductions at a price equal to 85% of the lower of the fair market value of the stock at the beginning of the offering period or at the end of each applicable purchase period. The 2015 ESPP generally provides for offering periods of six months in duration with purchase periods ending on either May 15 or November 15. Contributions under the 2015 ESPP are limited to a maximum of 15% of an employee’s eligible compensation. ESPP purchases are settled with common stock from the ESPP’s previously authorized and available pool of shares. As of March 31, 2020, 2,303,797 shares under the ESPP remain available for purchase. We issued 101,989 shares at a weighted average price of $17.67 per share during the year ended December 31, 2019.

Our 2013 Stock Plan, or the 2013 Plan, which was originally adopted during January 2013, was terminated upon consummation of our IPO in August 2015. As a terminated plan, no further options can be granted from the 2013 Plan, and no further shares are reserved for issuance under the 2013 Plan.

Option activity under the 2015 Plan and 2013 Plan is set forth below:

	Options Outstanding
	Number of Options			Weighted- Average Exercise Price		Weighted Average Remaining Contractual Life (in years)		Aggregate Intrinsic Value (in thousands)
Balance, December 31, 2019		7,629,823		$	21.52		8.0	$	91,745
Options granted		2,440,500		$	25.44
Options exercised and shares vested		(133,844	)	$	15.67
Options cancelled		(153,343	)	$	25.28
Balance, March 31, 2020		9,783,136		$	22.52		8.0	$	7,946
Options vested and expected to vest as of March 31, 2020		8,797,886		$	22.24		7.8	$	7,928
Options exercisable as of March 31, 2020		3,715,158		$	18.71		6.3	$	7,820

The aggregate intrinsic values of options outstanding, exercisable, and vested and expected to vest were calculated as the difference between the exercise price of the options and the market price for shares of our common stock as of March 31, 2020. The 2013 Plan provided for early exercise, therefore, all our outstanding stock options issued under that plan are exercisable. The total intrinsic value of options exercised during the quarter ended March 31, 2020 was $2.0 million.

Restricted stock unit, or RSU, activity under the 2015 Plan is set forth below:

	Shares			Weighted Average Grant Date Fair Value
Unvested Balance, December 31, 2019		530,795		$	25.79
Awarded		553,800		$	24.31
Released		(154,324	)	$	27.60
Forfeited		(21,346	)	$	24.83
Unvested Balance, March 31, 2020		908,925		$	24.68

RSUs are measured based on the fair market value of the underlying stock on the date of grant and recognized as expense on a straight-line basis over the employee’s requisite service period (generally the vesting period).

In connection with the expansion and extension of our long-term exclusive commercial supply agreement with GPC, we issued 300,000 shares of restricted common stock in January 2018. The restricted common stock vests in four tranches over a 3.5 year period and is measured based on the fair market value of our common stock on December 31, 2018. As of March 31, 2020, 150,000 shares

had vested, and the remaining shares were restricted. As of March 31, 2020, total estimated unrecognized expense related to these restricted shares was $2.3 million based upon the fair market value of our common stock on December 31, 2018, which is expected to be recognized over the remaining vesting period of 1.3 years as general and administrative expense. Stock-based compensation expense recognized during the quarters ended March 31, 2020 and 2019 related to these shares was $0.4 million and $0.4 million, respectively.

As of March 31, 2020, we had issued 58,000 RSUs with a grant date fair value of approximately $1.4 million, to certain key employees that include service and performance vesting conditions related to the achievement of certain regulatory approvals for PALFORZIA. During the quarter-ended March 31, 2020, we recognized $1.1 million of stock-based compensation expense for 36,000 of such shares that vested upon the satisfaction of a performance condition.

Valuation Assumptions

The weighted-average assumptions used to estimate the fair value of stock options using the Black-Scholes option valuation model and the resulting weighted average fair value of stock options granted were as follows:

	Quarter Ended March 31,
	2020			2019
Expected term (in years)		6.0			6.0
Expected volatility		57.2	%		63.5	%
Risk free interest rate		1.7	%		2.5	%
Dividend yield		—	%		—	%
Weighted average estimated fair value	$	13.81		$	13.89

The weighted-average assumptions used to estimate the fair value of ESPP using the Black-Scholes option valuation model were as follows:

	Quarter Ended March 31,
	2020			2019
Expected term (in years)		0.5			0.8
Expected volatility		51.2	%		50.2	%
Risk free interest rate		1.6	%		2.0	%
Dividend yield		—	%		—	%
Weighted average estimated fair value	$	7.88		$	11.06

Stock-Based Compensation Expense

Stock-based compensation expense, net of estimated forfeitures, reflected in the condensed consolidated statements of comprehensive loss is as follows (in thousands):

	Quarter Ended March 31,
	2020		2019
Cost of revenue	$	4	$	—
Research and development		4,061		2,743
Selling, general and administrative		6,238		5,022
Total stock-based compensation expense	$	10,303	$	7,765

During the quarter ended March 31, 2020, stock-based compensation expense of $0.1 million was capitalized into inventory. During the quarters ended March 31, 2020 and 2019, we recorded approximately $0.2 million and $0.4 million, respectively, of stock-based compensation expense related to the acceleration of certain former executives’ stock options.

As of March 31, 2020, total unrecognized stock-based compensation expense and expected period over which such compensation will be recognized were as follows ($ in thousands):

	As of March 31, 2020
Stock-option
Unrecognized stock compensation expense	$	68,129
Weighted-average remaining vesting period (years)		3.0
RSU
Unrecognized stock compensation expense	$	16,304
Weighted-average remaining vesting period (years)		2.6
ESPP
Unrecognized stock compensation expense	$	156
Weighted-average remaining vesting period (years)		0.1

10. Net Loss per Share

Basic net loss per share is calculated based on the weighted-average number of common shares outstanding during the periods presented. For periods in which we have generated a net loss, basic and diluted net loss per share are the same due to the requirement to exclude potentially dilutive securities, consisting of common shares underlying outstanding stock options and restricted stock units, which would have an anti-dilutive effect on net loss per share.

The following common stock equivalents were excluded from the computation of diluted net loss per share for the periods presented because their inclusion would have been antidilutive:

	Quarter Ended March 31,
	2020		2019
Stock options		9,783,136		8,309,613
RSUs		908,925		670,000
Preferred stock		5,256,340		—

11. Related Party Transaction

In June 2017, Mark McDade, a member of our Board of Directors, joined the Board of Directors of MyHealthTeams, a private company that creates social networks for people living with chronic conditions by partnering with pharmaceutical and healthcare companies. We entered into an agreement with MyHealthTeams in 2015 under which they provide services to us. During the quarters ended March 31, 2020 and 2019, there were payments of $0 and $0.1 million, respectively, to MyHealthTeams pursuant to such agreement. At March 31, 2020 and December 31, 2019, there were no accrued liabilities due under the MyHealthTeams agreement.

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

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and related notes included in Part 1, Item 1 of this Quarterly Report on Form 10-Q and with our audited financial statements and related notes thereto for the year ended December 31, 2019, included in our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission on February 27, 2020. This discussion and other parts of this report contain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section of this report titled “Risk Factors.” Except as may be required by law, we assume no obligation to update these forward-looking statements or the reasons that results could differ from these forward-looking statements.

Overview

We are a biopharmaceutical company developing and commercializing treatments for potentially life-threatening food allergies. It is estimated that over 30 million people in the United States and Europe have a food allergy, with peanut allergy being the most prevalent and most commonly associated with severe outcomes and life-threatening events.

Patients with food allergies are typically counseled to practice strict dietary avoidance. When accidental exposure to food allergens invokes a serious allergic reaction, rescue therapies, such as antihistamines or injectable epinephrine, are the only recourse available.

Our main therapeutic approach, which we refer to as Characterized Oral Desensitization Immunology Therapy, or CODIT^TM, is designed to desensitize patients to food allergens and thereby reduce the risk of having an allergic reaction upon allergen exposure or reduce symptom severity should an allergic reaction occur. As a result, we believe CODIT could contribute to reducing the burden and anxiety experienced by food-allergic patients and their families.

PALFORZIA^TM (Peanut (Arachis hypogaea) Allergen Powder-dnfp) (formerly AR101) is our lead internally developed product utilizing CODIT and was approved by the FDA for marketing and sale in the United States in January 2020. PALFORZIA is indicated for the mitigation of allergic reactions, including anaphylaxis, after accidental exposure to peanut. PALFORZIA is approved for use in patients with a confirmed diagnosis of peanut allergy. Initial Dose Escalation may be administered to patients aged 4 through 17 years. Up-dosing and maintenance may be continued in patients 4 years of age and older. PALFORZIA is to be used in conjunction with a peanut-avoidant diet. We are currently commercializing PALFORZIA in the United States through a specialty sales force of approximately 80 Practice Account Managers targeting practicing allergists. We commenced commercial sales in the first quarter of 2020.

In addition to the approved indication, we are developing PALFORZIA for use in young children aged one to less than four years old in a randomized, double-blind, placebo controlled multinational Phase 3 trial called POSEIDON. We submitted a Marketing Authorization Application, or MAA, for PALFORZIA with the European Medicines Agency, or EMA, in June 2019 and the application is currently under review. If approved in the European Union, or EU, and the United Kingdom, we currently intend to commercialize PALFORZIA in Europe by developing a specialty sales force targeting allergy-focused clinicians in major European markets, beginning with Germany.

We are developing additional CODIT product candidates beyond peanut allergy. In August 2019, we commenced a Phase 2 clinical trial in subjects with hen egg allergy for our product candidate, AR201. Regarding our multi-tree nut program, we recently had a positive pre-investigational new drug meeting with the FDA, which helped define a clear path forward for clinical development.

Since commencing our operations in 2011, substantially all of our efforts have been focused on research, development and commercialization of PALFORZIA. We started generating revenue from product sales in the first quarter of 2020, and, as a result, we have incurred significant losses in the past. We incurred net losses of $86.4 million and $54.3 million for the quarters ended March 31, 2020 and 2019, respectively, and used $71.8 million of cash in operations for the quarters ended March 31, 2020. As of March 31, 2020, our accumulated deficit was $811.1 million. We expect to continue to incur losses for the foreseeable future, and we anticipate these losses will increase as we begin to commercialize PALFORZIA and as we continue to develop other product candidates

In January 2019, we entered into a loan agreement with an affiliate of KKR for up to $170.0 million in three tranches. Of the total loan amount, $40.0 million was funded upon the closing of the transaction in January 2019 and $85.0 million was funded in February 2020 upon FDA approval of PALFORZIA and satisfaction of other customary borrowing conditions. The remaining $45.0 million is to be made available at our option in 2020, upon the satisfaction of certain borrowing conditions, including our achievement of aggregate net sales (as defined in the agreement) for PALFORZIA by July 31, 2020 in an amount of at least $30.0 million.

In February 2020, we sold Nestlé Health Science an additional 525,634 shares of our Series A Preferred Stock at a price of $319.675 per share and 1,000,000 shares of our common stock at a price of $31.97 per share for aggregate gross proceeds of $200.0 million.

We rely exclusively on the Golden Peanut Company, or GPC, to provide standard food-grade peanut flour pursuant to a long-term exclusive commercial supply agreement. We currently utilize contract manufacturers for all our manufacturing activities. In June 2015, we entered into a lease for a manufacturing facility in Clearwater, Florida. In June 2017, we completed the construction of the manufacturing facility within the leased building, which we intend to handle full-scale cGMP (current Good Manufacturing Practices) commercial production of PALFORZIA, if approved, and supply future clinical trials of AR101. This manufacturing facility became operational in November 2018. We plan to continue to rely on the contract manufacturer that is located at the same site to manage the operations of this manufacturing facility. Additionally, we currently utilize specialized clinical vendors, clinical trial sites, consultants, and clinical research organizations, or CROs, to ensure the proper and timely conduct of our clinical trials. We expect to continue to significantly increase our investment in our manufacturing process and commercial organization as we launch of PALFORZIA commercially in the United States and as we prepare for the potential approval of the MAA with the EMA for PALFORZIA.

COVID-19 Update

To date, COVID-19 has had, and may continue to have, an adverse impact on our operations and the commercialization of PALFORZIA, our clinical trials, as well as on our clinical trial material distribution system and our expenses, including as a result of preventive and precautionary measures that we, other businesses and governments are taking.

In particular, we have experienced significant business disruptions, including delaying the commercialization of PALFORZIA in the United States as a result of a reduction in access to our customers due to the reduced business hours of medical facilities as local, state, federal, and foreign governments institute prolonged shelter-in-place and/or self-quarantine mandates. Under the Risk Evaluation and Mitigation Strategy, or REMS, for PALFORZIA, the first dose of each up-dosing level must be administered in a certified healthcare setting and, due to the strains placed on the providers of healthcare services by COVID-19, including shelter-in-place restrictions, many patients are not able to access physicians in a manner sufficient to commence treatment with PALFORZIA. Similarly, patients who have commenced treatment, but who have not yet advanced through the up-dosing phase, have been restricted from accessing the necessary healthcare settings and, as a result, are being maintained at their existing dose levels.

Formulary adoption conversations with payers regarding PALFORZIA are proceeding virtually. As of April 30, 2020, there were 15 plans in the United States that have either interim or permanent policies written that cover PALFORZIA. These plans cover approximately 43 million lives. The Company anticipates that these interactions will continue and lead to additional formulary coverage decisions by payers later this year. However, the impact of the COVID-19 pandemic on formulary coverage for PALFORZIA is hard to assess due the rapidly evolving nature of the situation and it is possible that formulary coverage may be delayed. Until the product is formally covered on formularies, allergists can initiate patients on treatment via the use of the medical exception processes provided by payers.

In regards to clinical trials of PALFORZIA, our POSEIDON (ARC005) Phase 3 clinical trial to explore the efficacy and safety of PALFORZIA in young peanut-allergic children ages 1 to <4 years is ongoing although enrollment has paused. Assuming clinical sites are able to resume operations and enroll patients, we expect to complete enrollment in the second half of 2020 and data in the first half of 2021. However, the impact of the COVID-19 pandemic on the timing of study enrollment and completions is hard to assess due the rapidly evolving nature of the situation and it is possible that the study enrollment and completion may be delayed.

In regards to AR201, while we saw an increase in enrollment in our Phase 2 clinical trial in the first quarter of 2020, we experienced a significant decline in enrollment following the spread of COVID-19 in the United States. As a result, as a cost saving measure and in light of the ongoing impacts of COVID-19, we have decided to end enrollment in the study. For those patients who had enrolled in the clinical trial and begun receiving treatment, we are continuing to deliver maintenance doses of AR201, and all patients presently enrolled in the study will be able to complete the trial once possible. We then intend to review the data from these subjects and determine the best path forward. We also follow FDA guidance on clinical trial conduct during the COVID-19 pandemic, including the remote monitoring of clinical data.

In regards to our supply chain and distribution model, we have initiated direct-to-patient shipment of clinical trial materials in Europe and, more recently, in the United States, to permit uninterrupted supply of clinical trial materials to our clinical trial subjects. This measure became necessary as clinical trial subjects were unable to visit their physician offices to receive re-supply of clinical trial materials due to the COVID-19 pandemic. Other than this shift in our distribution model for clinical trial materials, there have been no disruptions in our supply chain of drug manufacturers necessary to conduct our clinical trials and we believe that we will be able to supply the clinical material needs of our ongoing clinical studies. In addition, our supply chain for PALFORZIA has not been significantly impacted to date by the COVID-19 pandemic. Further, we do not believe that the pandemic has to date caused, or will going forward cause, a significant delay in the review and potential approval of our MAA by the EMA or our MAA by Swissmedic.

As a result, we expect a standard overall review period for our MAA for PALFORZIA with a target action date in the fourth quarter of 2020. We also believe the Swissmedic review of PALFORZIA is ongoing and remains on track. The target action date is mid-2021.

We cannot at this time predict the specific extent, duration or full impact that the COVID-19 pandemic will have on our financial condition and results of operations. The impact of the COVID-19 pandemic on our financial performance will depend on future developments, including the duration and spread of the COVID-19 pandemic and related governmental advisories and restrictions. These developments and the impact of COVID-19 on the financial markets and the overall economy are also highly uncertain. If the financial markets and/or the overall economy are impacted for an extended period, our business, financial condition, results of operations and prospects may be adversely affected.

In late February 2020, our executive leadership team began to closely monitor the evolving COVID-19 crisis and advise on our response. In alignment with public health guidance designed to slow the spread of COVID-19, as of mid-March 2020, we implemented a remote work plan for all employees. We are supporting all of our employees by leveraging virtual meeting technology and encouraging employees to follow local health authority guidance. We may need to undertake additional actions that could impact our operations as required by applicable laws or regulations, or which we determine to be in the best interests of our employees.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles, or GAAP, in the United States. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the revenue, costs and expenses recognized during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

There have been no new policies or significant changes to our critical accounting policies as disclosed in the critical accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2019, except as noted below. Our significant accounting policies are more fully described in Note 2 of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Revenue Recognition

Pursuant to Accounting Standards Codification, or ASC, Topic 606, Revenue from Contracts with Customers, or ASC 606, we recognize revenue upon transfer of control of promised goods or services, in an amount that reflects the consideration to which we are entitled to in exchange for those goods or services. We calculate gross product revenues based on the price that we charge to the specialty pharmacies and distributors in the United States, which we refer to herein as Customers. We estimate our domestic net product revenues by deducting from our gross product revenues: (a) trade allowances, such as distribution fees and discounts for prompt payment; (b) estimated government rebates and chargebacks; (c) certain other fees paid to specialty pharmacies, distributors and commercial payors; and (d) product returns. Discounts and allowances are complex and require significant judgment by management. Management assesses estimates each period and updates them to reflect current information.

We initially record estimates for these deductions at the time we recognize the related gross product revenue, and revise these estimates in subsequent period as needed, resulting in net product revenue recognized. We base our estimates for the expected utilization on customer and payer data received from the specialty pharmacies and distributors and historical utilization rates as well as third-party market research data.

Inventories

Prior to regulatory approval of our product candidates, expenses incurred to manufacture drug products are recorded as research and development expense. Beginning in the first quarter of 2020, we began to capitalize inventory costs associated with PALFROZIA supply when it was determined that the inventory had a probable future economic benefit concurrent with FDA approval in January 2020.

Inventory costs are determined using the standard cost methodology, and this methodology approximates actual cost determined using a first-in, first-out, or FIFO, basis cost flow assumption for the purposes of matching such costs to the related product sale.

We periodically review our inventories for excess amounts or obsolescence and write down obsolete or otherwise unmarketable inventory to the estimated net realizable value. Our assessment of estimated excess, obsolete and non-sellable inventories are based on

assumptions about future demand, past usage, changes to manufacturing processes and overall market conditions, and also consider future firm purchase commitments, which require management to utilize judgement in formulating estimates and assumptions that we believe to be reasonable under the circumstances.

Recent Accounting Pronouncements

See Note 2, Summary of Significant Accounting Policies of the Notes to Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q for additional information.

Components of Results of Operations

Product Revenue, Net

Our product revenue, net consists of U.S. sales of PALFORZIA. Prior to March 2020, we had no product revenue.

Cost of Revenue

Cost of revenue relates to sales of PALFORZIA, which began in March 2020. Cost of revenue consists primarily of direct and indirect costs related to the manufacturing of PALFROZIA units sold, including raw materials, third-party contract manufacturing and packaging costs, freight costs, storage costs, allocation of overhead costs of employees involved with production of PALFORZIA and fixed costs to our contract manufacturers, if any, for anticipated shortfall in product demand relative to committed volumes. Prior to regulatory approval of PALFORZIA, expenses incurred to manufacture PALFORZIA were recorded as research and development expense.

Research and Development Expenses

The largest component of our total operating expenses has historically been our investment in research and development activities. Research and development expenses consist primarily of external-related expenses, employee-related expenses, stock-based compensation expense, and facilities and other costs, which include the following:

•

External costs include costs incurred to conduct research, such as the discovery and development of our product candidates; costs related to the production of clinical supplies and pre-approval inventory, including fees paid to contract manufacturers; fees paid to consultants and vendors, including clinical research organizations in conjunction with implementing and monitoring our clinical trials and acquiring and evaluating clinical trial data, including all related fees, such as for investigator grants, patient screening fees, laboratory work and statistical compilation and analysis; costs for scientific conferences and meetings; and costs related to compliance with drug development regulatory requirements.

•

Employee-related costs include salaries, bonuses, severance and benefits for personnel in our research and development functions.

•

Stock-based compensation expense is expense associated with our equity plans for awards to personnel in our research and development functions.

•

Facilities and other costs include facilities-related rent, depreciation and other allocable expenses, which include general and administrative support functions and general supplies for our research and development activities.

We recognize all research and development expenses as they are incurred. Clinical trial, contract manufacturing prior to FDA approval and other development costs incurred by third parties are expensed as the contracted work is performed.

Selling, General and Administrative Expenses

Selling, general and administrative expenses include employee-related costs, stock-based compensation expense, external professional services expenses, and facilities and other costs. Employee-related costs include salaries, bonuses, severance and benefits for personnel in our general and administrative functions, including medical affairs. Stock-based compensation expense is expense associated with our equity plans for awards to personnel in our general and administrative functions. External professional services expenses consist of legal, accounting, and audit services, certain medical affairs related-expenses and marketing expenses related to commercial launch preparation and execution. Facilities and other costs consist of allocable expenses, including facilities-related rent and depreciation, from our facilities and information technology departments, which are allocated between research and development and general and administrative functions based on headcount.

Results of Operations

Comparison of the Quarters Ended March 31, 2020 and 2019

	Quarter Ended March 31,
	2020			2019			$ Change			% Change
	(In thousands)
Product revenue, net	$	575		$	—		$	575		*
Costs and operating expenses:
Cost of revenue		257			—			257		*
Research and development		36,463			31,316			5,147			16	%
Selling, general and administrative		49,138			23,712			25,426			107	%
Total costs and operating expenses		85,858			55,028			30,830			56	%
Loss from operations		(85,283	)		(55,028	)		(30,255	)		55	%
Interest income		978			1,901			(923	)		(49	)%
Interest expense		(2,229	)		(1,144	)		(1,085	)		95	%
Other income, net		221			34			187			550	%
Loss before provision for income taxes		(86,313	)		(54,237	)		(32,076	)		59	%
Provision for income taxes		119			29			90			310	%
Net loss	$	(86,432	)	$	(54,266	)	$	(32,166	)		59	%

*Percentage not meaningful

Product Revenue, Net:

The following table summarizes our product revenue during the quarters ended March 31, 2020 and 2019:

	Quarter Ended March 31,
	2020		2019		$ Change		% Change
	(In thousands)
Product revenue, net	$	575	$	—	$	575	*

*Percentage not meaningful

Product revenue consists of sales of PALFORZIA, which was approved by FDA in January 2020. We first commenced commercial shipments of PALFORZIA in March 2020.

Cost of Revenue:

The following table summarizes our cost of revenue expenses incurred during the quarters ended March 31, 2020 and 2019:

Quarter Ended March 31,

Aimmune Therapeutics, Inc. 10-Q