kalv-10q_20190131.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 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 January 31, 2019

OR

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

For the transition period from                      to                     .

Commission File No. 001-36830

 

KALVISTA PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

20-0915291

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

55 Cambridge Parkway

Suite 901E

Cambridge, Massachusetts

 

02142

(Address of principal executive offices)

 

(Zip Code)

857-999-0075

(Registrant’s telephone number, including area code)

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 and 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, 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 standard 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 March 10, 2019 the registrant had 17,247,348 shares of common stock, $0.001 par value per share, issued and outstanding.

 

 


 

Table of Contents

 

 

 

Page

PART I. FINANCIAL INFORMATION

 

 

 

Item 1.

Financial Statements (unaudited)

1

 

 

 

 

Condensed Consolidated Balance Sheets (unaudited)

1

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss (unaudited)

2

 

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity (unaudited)

3

 

 

 

 

Condensed Consolidated Statements of Cash Flows (unaudited)

4

 

 

 

 

Notes to the Condensed Consolidated Financial Statements (unaudited)

5

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

12

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

18

 

 

 

Item 4.

Controls and Procedures

19

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

20

 

 

 

Item 1A.

Risk Factors

20

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

20

 

 

 

Item 3.

Defaults Upon Senior Securities

20

 

 

 

Item 4.

Mine Safety Disclosures

20

 

 

 

Item 5.

Other Information

20

 

 

 

Item 6.

Exhibits

21

 

 

 

Signatures

22

 

 

 

 


 

PART I. FINANCIAL INFORMATION

Item 1.

FINANCIAL STATEMENTS

KalVista Pharmaceuticals, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share amounts)

 

 

 

 

January 31,

 

 

April 30,

 

 

 

2019

 

 

2018

 

Assets

 

(Unaudited)

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

56,345

 

 

$

51,055

 

Investments

 

 

54,802

 

 

 

 

Research and development tax credit receivable

 

 

8,970

 

 

 

6,834

 

Prepaid expenses and other current assets

 

 

3,946

 

 

 

1,491

 

Total current assets

 

 

124,063

 

 

 

59,380

 

Other assets

 

 

173

 

 

 

173

 

Property and equipment, net

 

 

2,289

 

 

 

1,836

 

Total assets

 

$

126,525

 

 

$

61,389

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,998

 

 

$

1,433

 

Accrued expenses

 

 

3,408

 

 

 

3,087

 

Deferred revenue - current portion

 

 

12,311

 

 

 

18,475

 

Capital lease liability - current portion

 

 

109

 

 

 

221

 

Total current liabilities

 

 

18,826

 

 

 

23,216

 

Long-term liabilities:

 

 

 

 

 

 

 

 

Deferred revenue - net of current portion

 

 

3,666

 

 

 

10,862

 

Capital lease liability - net of current portion

 

 

 

 

 

58

 

Total long-term liabilities

 

 

3,666

 

 

 

10,920

 

Commitments and contingencies (Note 5)

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

Common stock, $0.001 par value, 100,000,000 authorized

 

 

 

 

 

 

 

 

Shares issued and outstanding: 17,247,306 at January 31, 2019 and 10,799,895 at April 30, 2018

 

 

17

 

 

 

11

 

Additional paid-in capital

 

 

190,067

 

 

 

100,011

 

Accumulated deficit

 

 

(83,950

)

 

 

(71,660

)

Accumulated other comprehensive loss

 

 

(2,101

)

 

 

(1,109

)

Total stockholders’ equity

 

 

104,033

 

 

 

27,253

 

Total liabilities and stockholders’ equity

 

$

126,525

 

 

$

61,389

 

 

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

 

 

1


 

KalVista Pharmaceuticals, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except share and per share amounts)

(Unaudited)

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

January 31,

 

 

January 31,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenue

 

$

3,890

 

 

$

2,331

 

 

$

13,201

 

 

$

3,554

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

7,650

 

 

 

4,548

 

 

 

23,882

 

 

 

12,385

 

General and administrative

 

 

2,900

 

 

 

2,129

 

 

 

7,879

 

 

 

6,905

 

Total operating expenses

 

 

10,550

 

 

 

6,677

 

 

 

31,761

 

 

 

19,290

 

Operating loss

 

 

(6,660

)

 

 

(4,346

)

 

 

(18,560

)

 

 

(15,736

)

Other income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

723

 

 

14

 

 

 

1,016

 

 

17

 

Foreign currency exchange gain (loss)

 

 

248

 

 

 

(1,887

)

 

 

83

 

 

 

(1,836

)

Other income

 

 

1,733

 

 

985

 

 

 

5,171

 

 

 

2,407

 

Total other income

 

 

2,704

 

 

 

(888

)

 

 

6,270

 

 

 

588

 

Net loss

 

$

(3,956

)

 

$

(5,234

)

 

$

(12,290

)

 

$

(15,148

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(97

)

 

 

2,434

 

 

 

(1,224

)

 

 

2,507

 

Unrealized holding gains on available-for-sale securities

 

 

232

 

 

 

 

 

 

232

 

 

 

 

Other comprehensive income (loss)

 

 

135

 

 

 

2,434

 

 

 

(992

)

 

 

2,507

 

Comprehensive loss

 

$

(3,821

)

 

$

(2,800

)

 

$

(13,282

)

 

$

(12,641

)

Net loss per share to common stockholders, basic and diluted

 

$

(0.23

)

 

$

(0.49

)

 

$

(0.85

)

 

$

(1.49

)

Weighted average common shares outstanding, basic and diluted

 

 

17,231,449

 

 

 

10,788,556

 

 

 

14,379,872

 

 

 

10,168,520

 

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

 

 

 


2


 

KalVista Pharmaceuticals, Inc.

Condensed Consolidated Statement of Changes in Stockholders’ Equity

(in thousands, except share amounts)

(Unaudited)

 

 

Nine Months Ended January 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

Total

 

 

Common Stock

 

 

Paid-in

 

 

Accumulated

 

 

Comprehensive

 

 

Stockholders'

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Income (Loss)

 

 

Equity

 

Balance at May 1, 2018

 

10,799,895

 

 

$

11

 

 

$

100,011

 

 

$

(71,660

)

 

$

(1,109

)

 

$

27,253

 

Cash received pursuant to common stock subscription agreement

 

 

 

 

 

 

 

5,000

 

 

 

 

 

 

 

 

 

5,000

 

Stock-based compensation

   expense

 

 

 

 

 

 

 

347

 

 

 

 

 

 

 

 

 

347

 

Net loss

 

 

 

 

 

 

 

 

 

 

(5,030

)

 

 

 

 

 

(5,030

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,320

)

 

 

(1,320

)

Balance at July 31, 2018

 

10,799,895

 

 

 

11

 

 

 

105,358

 

 

 

(76,690

)

 

 

(2,429

)

 

 

26,250

 

Issuance of common stock from public offerings, net of issuance costs

 

6,378,320

 

 

 

6

 

 

 

82,805

 

 

 

 

 

 

 

 

 

82,811

 

Issuance of common stock from exercise of stock options

 

4,452

 

 

 

 

 

 

25

 

 

 

 

 

 

 

 

 

25

 

Issuance of common stock from vesting of performance stock units

 

42,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

   expense

 

 

 

 

 

 

 

976

 

 

 

 

 

 

 

 

 

976

 

Net loss

 

 

 

 

 

 

 

 

 

 

(3,304

)

 

 

 

 

 

(3,304

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

193

 

 

 

193

 

Balance at October 31, 2018

 

17,225,167

 

 

 

17

 

 

 

189,164

 

 

 

(79,994

)

 

 

(2,236

)

 

 

106,951

 

Issuance of common stock from exercise of stock options

 

22,139

 

 

 

 

 

 

106

 

 

 

 

 

 

 

 

 

106

 

Stock-based compensation

   expense

 

 

 

 

 

 

 

797

 

 

 

 

 

 

 

 

 

797

 

Net loss

 

 

 

 

 

 

 

 

 

 

(3,956

)

 

 

 

 

 

(3,956

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

135

 

 

 

135

 

Balance at January 31, 2019

 

17,247,306

 

 

$

17

 

 

$

190,067

 

 

$

(83,950

)

 

$

(2,101

)

 

$

104,033

 

 

 

Nine Months Ended January 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

Total

 

 

Common Stock

 

 

Paid-in

 

 

Accumulated

 

 

Comprehensive

 

 

Stockholders'

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Income (Loss)

 

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at May 1, 2017

 

9,713,042

 

 

$

10

 

 

$

89,815

 

 

$

(55,855

)

 

$

(2,643

)

 

$

31,327

 

Stock-based compensation

   expense

 

 

 

 

 

 

 

221

 

 

 

 

 

 

 

 

 

221

 

Net loss

 

 

 

 

 

 

 

 

 

 

(4,928

)

 

 

 

 

 

(4,928

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

115

 

 

 

115

 

Balance at July 31, 2017

 

9,713,042

 

 

 

10

 

 

 

90,036

 

 

 

(60,783

)

 

 

(2,528

)

 

 

26,735

 

Issuance of common stock

 

1,070,589

 

 

 

1

 

 

 

9,102

 

 

 

 

 

 

 

 

 

 

 

9,103

 

Stock-based compensation

   expense

 

 

 

 

 

 

 

 

 

273

 

 

 

 

 

 

 

 

 

 

 

273

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,986

)

 

 

 

 

 

 

(4,986

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(43

)

 

 

(43

)

Balance at October 31, 2017

 

10,783,631

 

 

 

11

 

 

 

99,411

 

 

 

(65,769

)

 

 

(2,571

)

 

 

31,082

 

Stock-based compensation

   expense

 

 

 

 

 

 

 

 

 

285

 

 

 

 

 

 

 

 

 

 

 

285

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,234

)

 

 

 

 

 

 

(5,234

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,434

 

 

 

2,434

 

Balance at January 31, 2018

 

10,783,631

 

 

$

11

 

 

$

99,696

 

 

$

(71,003

)

 

$

(137

)

 

$

28,567

 

 

3


 

KalVista Pharmaceuticals, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands, unaudited)

 

 

Nine Months Ended

 

 

January 31,

 

 

2019

 

 

2018

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

Net loss

$

(12,290

)

 

$

(15,148

)

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

 

 

 

 

 

 

 

Depreciation and amortization

 

256

 

 

 

129

 

Stock-based compensation expense

 

2,120

 

 

 

779

 

Foreign currency remeasurement loss

 

(20

)

 

 

(500

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Research and development tax credit receivable

 

(2,409

)

 

 

(2,383

)

Prepaid expenses and other current assets

 

(2,475

)

 

 

(1,206

)

Grants and other receivables

 

 

 

 

281

 

Other Assets

 

 

 

 

(123

)

Accounts payable

 

1,748

 

 

 

548

 

Accrued expenses

 

417

 

 

 

332

 

Deferred revenue

 

(13,201

)

 

 

33,804

 

Net cash (used in) provided by operating activities

 

(25,854

)

 

 

16,513

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

Acquisition of property and equipment

 

(806

)

 

 

(343

)

Purchases of available for sale securities

 

(55,419

)

 

 

 

Sales of available for sale securities

 

850

 

 

 

 

Net cash used in investing activities

 

(55,375

)

 

 

(343

)

Cash Flows from Financing Activities

 

 

 

 

 

 

 

Capital lease principal payments

 

(155

)

 

 

(101

)

Issuance of common stock from stock option exercises

 

132

 

 

 

 

Issuance of common stock, net of offering expenses

 

87,811

 

 

 

9,100

 

Net cash from financing activities

 

87,788

 

 

 

8,999

 

Effect of exchange rate changes on cash and cash equivalents

 

(1,269

)

 

 

2,559

 

Net increase in cash and cash equivalents

 

5,290

 

 

 

27,728

 

Cash and cash equivalents at beginning of period

 

51,055

 

 

 

30,950

 

Cash and cash equivalents at end of period

$

56,345

 

 

$

58,678

 

 

 

 

 

 

 

 

 

Supplemental Disclosures of Non-cash Financing Activities

 

 

 

 

 

 

 

Capital leases

$

 

 

$

513

 

 

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

 

 

4


 

Notes to the Condensed Consolidated Financial Statements (unaudited)

 

 

1.

The Company

KalVista Pharmaceuticals, Inc. (“KalVista” or the “Company”) is a clinical stage pharmaceutical company focused on the discovery, development and commercialization of small molecule protease inhibitors for diseases with significant unmet need. The Company’s first product candidates are inhibitors of plasma kallikrein being developed for two indications: hereditary angioedema (“HAE”) and diabetic macular edema (“DME”). The Company applies its insights into the chemistry of proteases and, with current programs, the biology of the plasma kallikrein system, to develop small molecule inhibitors with high selectivity, potency and bioavailability that it believes will make successful treatments for disease.

 

KalVista has created a structurally diverse portfolio of oral plasma kallikrein inhibitors, and has advanced multiple drug candidates into Phase 1 clinical trials for HAE in order to create what it believes will be best-in-class oral therapies. The Company has advanced one of these candidates, KVD900, into later stage clinical development as a potential on-demand therapy for HAE attacks, with a Phase 2 clinical trial expected to complete in late 2019. The Company anticipates that this trial will evaluate the safety and efficacy of KVD900 as an on-demand treatment for HAE attacks in at least 50 type 1 and 2 HAE patients. In the case of DME, the Company is initially developing a plasma kallikrein inhibitor which is administered directly into the eye and anticipates ultimate development of orally delivered drugs. KalVista is currently enrolling a Phase 2 clinical trial of KVD001, the Company’s most advanced DME drug candidate, which it anticipates will be completed in the second half of 2019.

 

KalVista remains focused on also delivering oral plasma kallikrein inhibitors for prophylactic treatment of HAE and for DME. The Company has initiated a first-in-human clinical study for its next oral plasma kallikrein inhibitor, KVD824, and anticipates to provide a development update for that program early in the second half of 2019.

 

The Company’s headquarters is located in Cambridge, Massachusetts, with research activities located in Porton Down, United Kingdom and Boston, Massachusetts.

 

The Company has devoted substantially all of its efforts to research and development, including clinical trials of its product candidates. The Company has not completed the development of any product candidates or commenced commercial operations. Pharmaceutical drug product candidates, like those being developed by the Company, require approvals from the U.S. Food and Drug Administration (“FDA”) or foreign regulatory agencies prior to commercial sales. There can be no assurance that any product candidates will receive the necessary approvals and any failure to receive approval or delay in approval may have a material adverse impact on the business and financial results. The Company is subject to a number of risks and uncertainties similar to those of other life science companies developing new products, including, among others, the risks related to the necessity to obtain adequate additional financing, to successfully develop product candidates, to obtain regulatory approval of product candidates, to comply with government regulations, to successfully commercialize its potential products, to the protection of proprietary technology and to the dependence on key individuals.

The Company has funded operations primarily through the issuance and sale of capital stock, the option agreement that a subsidiary of the Company entered into with Merck Sharp & Dohme Corp. (the “Merck Option Agreement”) and grant income. As of January 31, 2019, the Company had an accumulated deficit of $84.0 million, $111.1 million of cash, cash equivalents and available for sale securities. To date, the Company has not generated any product sales and revenues and does not have any products that have been approved for commercialization. The Company does not expect to generate significant revenue unless and until it obtains regulatory approval for, and commercializes, one of its current or future product candidates. The Company anticipates that it will continue to incur losses for the foreseeable future, and it expects those losses to increase as it continues the development of, and seek regulatory approvals for, product candidates, and begins to commercialize any approved products. The Company is subject to all of the risks inherent in the development of new therapeutic products, and it may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect its business. The Company currently anticipates that, based upon its operating plans and existing capital resources, it has sufficient funding to operate for at least the next twelve months.

Until such time, if ever, as the Company can generate substantial revenues, it expects to finance its cash needs through a combination of equity or debt financings, collaborations, strategic partnerships or licensing arrangements. To the extent that additional capital is raised through the sale of stock or convertible debt securities, the ownership interest of existing stockholders will be diluted, and the terms of these newly issued securities may include liquidation or other preferences that adversely affect the rights of common stockholders. Debt financing, if available, may involve agreements that include increased fixed payment obligations and covenants limiting or restricting the Company’s ability to take specific actions, such as incurring additional debt, making capital expenditures, declaring dividends, selling or licensing intellectual property rights and other operating restrictions that could adversely impact its ability to conduct business. Additional fundraising through collaborations, strategic partnerships or licensing arrangements with third parties may require the Company to relinquish valuable rights to product candidates, including other technologies, future revenue

5


 

streams or research programs, or grant licenses on terms that may not be favorable to it. If the Company is unable to raise additional funds when needed, it may be required to delay, limit, reduce or terminate product development or future commercialization efforts or grant rights to develop and commercialize our other product candidates even if it would otherwise prefer to develop and commercialize such product candidates internally.

2.

Summary of Significant Accounting Policies

Principles of Consolidation: The accompanying unaudited interim condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All intercompany transactions and balances have been eliminated in consolidation.

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Such financial statements reflect all adjustments that are, in management’s opinion, necessary to present fairly, in all material respects, the Company’s consolidated financial position, results of operations, and cash flows. There were no adjustments other than normal recurring adjustments. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual financial statements. These unaudited interim condensed consolidated financial results are not necessarily indicative of the results to be expected for the year ending April 30, 2019, or for any other future annual or interim period. The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the audited financial statements as of and for the year ended April 30, 2018.

Segment Reporting: The Company’s Chief Operating Decision Maker, the CEO, manages the Company’s operations as a single operating segment for the purposes of assessing performance and making operating decisions.

Net Loss per Share: Basic net loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing net loss by the sum of the weighted average number of common shares and the number of dilutive potential common share equivalents outstanding during the period. Potential dilutive common share equivalents consist of the incremental common shares issuable upon the exercise of vested share options.

 

 Potential dilutive common share equivalents consist of:

 

 

January 31,

 

 

 

2019

 

 

2018

 

Stock Options

 

 

1,729,928

 

 

 

315,908

 

In computing diluted earnings per share, common share equivalents are not considered in periods in which a net loss is reported, as the inclusion of the common share equivalents would be anti-dilutive. As a result, there is no difference between the Company’s basic and diluted loss per share for the periods presented.

Revenue Recognition: The Company recognizes revenue from research and development arrangements and grant income. In accordance with Accounting Standards Codification (“ASC”) 606,”Revenue from Contracts with Customers,” revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods and services.

Performance obligations promised in a contract are identified based on the goods and services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the good or service either on its own or together with other available resources, and are distinct in the context of the contract, whereby the transfer of the good or service is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised goods and services, the Company must apply judgment to determine whether promised goods and services are capable of being distinct and distinct in the context of the contract. If these criteria are not met, the promised goods and services are accounted for as a combined performance obligation.

The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods and services to the customer. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing either the expected value method or the most likely amount method depending on the nature of the variable consideration. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the

6


 

contract will not occur. Any estimates, including the effect of the constraint on variable consideration, are evaluated at each reporting period for any changes.  

If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation on a relative standalone selling price basis unless the transaction price is variable and meets the criteria to be allocated entirely to a performance obligation or to a distinct service that forms part of a single performance obligation. The consideration to be received is allocated among the separate performance obligations based on relative standalone selling prices.

The Company satisfies performance obligations either over time or at a point in time. Revenue is recognized over time if either: (1) the customer simultaneously receives and consumes the benefits provided by the entity’s performance (2) the entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced or (3) the entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date. If the entity does not satisfy a performance obligation over time, the related performance obligation is satisfied at a point in time by transferring the control of a promised good or service to a customer. ASC 606 requires the Company to select a single revenue recognition method for the performance obligation that faithfully depicts the Company’s performance in transferring control of the goods and services. The guidance allows for two methods to measure progress toward complete satisfaction of a performance obligation, depending on the facts and circumstances:

Output methods - recognize revenue on the basis of direct measurements of the value to the customer of the goods or services transferred to date relative to the remaining goods or services promised under the contract (e.g., surveys of performance completed to date, appraisals of results achieved, milestones reached, time elapsed, and units of produced or units delivered); and

Input methods - recognize revenue on the basis of the entity’s efforts or inputs to the satisfaction of a performance obligation (e.g., resources consumed, labor hours expended, costs incurred, or time elapsed) relative to the total expected inputs to the satisfaction of that performance obligation.

Licenses of intellectual property: If the license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company must consider the nature of the intellectual property to which the customer will have rights (i.e., access at a point in time or benefit of intellectual property enhancements over time). The Company recognizes revenue from non-refundable, up-front fees allocated to the license at a point in time/over the period the license is transferred to the customer and the customer is able to use and benefit from the license. For licenses that are bundled with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, up-front fees. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.

Milestone payments: At the inception of each arrangement that includes development and regulatory milestone payments for promised goods and services, the Company evaluates the circumstances of whether the milestones will be reached and estimates the amount to be included in the transaction price that will not cause a significant revenue reversal. The Company will evaluate these types of payments for customer options once those options have been exercised. ASC 606 suggests two alternatives to use when estimating the amount of variable consideration: the expected value method and the most likely amount method. Under the expected value method, an entity considers the sum of probability-weighted amounts in a range of possible consideration amounts. Under the most likely amount method, an entity considers the single most likely amount in a range of possible consideration amounts. The Company will use the most likely amount method for development and regulatory milestone payments as management believes this method is the better predictor because the Company expects to be entitled to only one of two possible amounts. Additionally, management believes that the most likely amount of milestone consideration is its stated amount. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. The transaction price is then allocated to performance obligations on a specific basis or on a relative standalone selling price basis. The Company recognizes revenue as or when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, the Company re-evaluates whether it is probable that a significant revenue reversal will not occur in future periods, and if necessary, adjusts its estimates of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues and earnings in the period of adjustment.

Royalties: For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of: (1) when the related sales occur, or (2) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).

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Up-front payments: Up-front payments and fees are recorded as deferred revenue upon receipt or when due and may require deferral of revenue recognition to a future period until the Company performs its obligations under these arrangements. Amounts payable to the Company are recorded as accounts receivable when the Company’s right to consideration is unconditional. The Company does not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the customer and the transfer of the promised goods or services to the customer will be one year or less.

Contract Balances: The Company recognizes a contract asset when the Company transfers goods or services to a customer before the customer pays consideration or before payment is due, excluding any amounts presented as a receivable (i.e., accounts receivable). A contract asset is an entity’s right to consideration in exchange for goods or services that the entity has transferred to a customer. The contract liabilities (i.e. deferred revenue) primarily relate to contracts where the Company has received payment but has not yet satisfied the related performance obligations. The advance consideration received from customers for R&D services and/or licenses is a contract liability, recorded as deferred revenue, until the underlying performance obligations are transferred to the customer.

Fair Value Measurement: The Company classifies fair value measurements using a three level hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows: Level 1, quoted market prices in active markets for identical assets or liabilities; Level 2, observable inputs other than quoted market prices included in Level 1, such as quoted market prices for markets that are not active or other inputs that are observable or can be corroborated by observable market data; and Level 3, unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities, including certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs. These fair values are obtained from independent pricing services which utilize Level 1 and Level 2 inputs.

The following table summarizes the cash and cash equivalents and marketable securities measured at fair value on a recurring basis as of January 31, 2019:

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Balance at January 31, 2019

 

Cash and cash equivalents

$

56,345

 

 

$

 

 

$

 

 

 

56,345

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

 

 

 

51,757

 

 

 

 

 

 

51,757

 

U.S. government agency securities

 

3,045

 

 

 

 

 

 

 

 

 

3,045

 

 

$

59,390

 

 

$

51,757

 

 

$

 

 

$

111,147

 

 

Recently Issued Accounting Pronouncements Not Yet Adopted: In February 2016, the FASB issued new lease accounting guidance in ASU No. 2016-02, “Leases” (Topic 842). Under the new guidance, lessees will be required to recognize for all leases (with the exception of short term leases) at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right of use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The new lease guidance is effective for the Company beginning May 1, 2019. See Note 5 for additional information regarding the Company’s lease obligations.

Recently Adopted Accounting Pronouncements: In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards update (“ASU”) 2014-09, “Revenue from Contracts with Customers,” requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard replaced most existing revenue recognition guidance in U.S. GAAP when it became effective and permits the use of either the retrospective or cumulative effect transition method. The Company adopted the updated standard May 1, 2018 using the modified retrospective method of adoption for all open contracts. The Company’s only significant revenue generating arrangement is the arrangement with Merck. The adoption of this guidance on the consolidated financial statements had no impact on the date of adoption and through January 31, 2019, other than the enhanced footnote disclosures.


8


 

3.       Investments

 

The objectives of the Company’s investment policy are to ensure the safety and preservation of invested funds, as well as to maintain liquidity sufficient to meet cash flow requirements. The Company invests its excess cash in securities issued by high credit quality financial institutions, commercial companies, and government agencies in order to limit the amount of its credit exposure. The Company has not realized any significant losses from its investments.

 

The Company classifies all of its debt securities as available-for-sale. Unrealized gains and losses on debt securities are recognized in comprehensive loss, unless an unrealized loss is considered to be other than temporary, in which case the unrealized loss is charged to operations. The Company periodically reviews its investments for other than temporary declines in fair value below cost basis and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company believes the individual unrealized losses represent temporary declines primarily resulting from interest rate changes. Realized gains and losses are reflected in interest and other income in the consolidated statements of operations and comprehensive loss and are determined using the specific identification method with transactions recorded on a trade date basis.

 

The following tables summarize the fair value of the Company’s investments by type:

 

 

January 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

Corporate debt securities

$

51,537

 

 

$

221

 

 

$

(1

)

 

$

51,757

 

Obligation of the U.S. Government and its agencies

 

3,041

 

 

 

4

 

 

 

 

 

 

3,045

 

Total investments

$

54,578

 

 

$

225

 

 

$

(1

)

 

$

54,802

 

 

 

The following table summarizes the scheduled maturity for the Company’s investments at January 31, 2019:

 

 

January 31,

 

 

2019

 

Maturing in one year or less

$

33,221

 

Maturing after one year through two years

 

12,897

 

Maturing after two years

 

8,684

 

Total investments

$

54,802

 

4.

Accrued Expenses

Accrued expenses consisted of the following as of January 31, 2019 and April 30, 2018 (in thousands):

 

 

 

January 31,

 

 

April 30,

 

 

 

2019

 

 

2018

 

Compensation expense

 

$

1,171

 

 

$

1,393

 

Research expense

 

 

1,918

 

 

 

1,192

 

Professional fees

 

 

86

 

 

 

164

 

Other expenses

 

 

233

 

 

 

338

 

 

 

$

3,408

 

 

$

3,087

 

 

 

 

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5.

Commitments and Contingencies

Clinical Studies: The Company enters into contractual agreements with contract research organizations in connection with preclinical and toxicology studies and clinical trials. Amounts due under these agreements are invoiced to the Company on predetermined schedules during the course of the toxicology studies and clinical trials and are not refundable regardless of the outcome. The Company has contractual obligations related to the expected future costs to be incurred to complete the ongoing toxicology studies and clinical trials. The remaining commitments, which have cancellation provisions, total $5.9 million at January 31, 2019.

Lease Commitments: The Company is party to several operating leases for office and laboratory space as well as certain lab equipment. Rent expense was $0.5 million and $0.4 million for the nine months ended January 31, 2019 and 2018, respectively. Rent expense is reflected in general and administrative expenses and research and development expenses as determined by the underlying activities.

Future minimum lease payments under these leases as of January 31, 2019 are as follows (in thousands):

Fiscal Year

 

Capital

Leases

 

 

Operating

Leases

 

2019

 

$

54

 

 

$

112

 

2020

 

 

55

 

 

 

324

 

2021

 

 

 

 

 

 

327

 

2022

 

 

 

 

 

329

 

2023 and thereafter

 

 

 

 

 

713

 

Total minimum lease payments

 

 

109

 

 

$

1,805

 

Less amounts representing interest

 

 

(1

)

 

 

 

 

Present value of minimum payments

 

$

108

 

 

 

 

 

Contingencies: From time to time, the Company may have certain contingent liabilities that arise in the ordinary course of business activities. The Company accrues a liability for such matters when it is probable and that such expenditures can be reasonably estimated. There are no contingent liabilities requiring accrual at January 31, 2019.

As a result of the terms of grant income received in prior years, upon successful regulatory approval and following the first commercial sale of certain products, the Company will be required to pay royalty fees of up to $1.0 million within 90 days of the first commercial sale of the product subject to certain limitations, and follow on payments depending upon commercial success and type of product. Given the stage of development of the current pipeline of products it is not possible to predict with certainty the amount or timing of any such liability.

 

6.      Merck Arrangement

On October 6, 2017, the Company’s wholly-owned U.K. based subsidiary KalVista Pharmaceuticals Limited (“KalVista Limited) and Merck Sharp & Dohme Corp. (“Merck”) entered into an option agreement (the “Merck Option Agreement”). The Company is the guarantor of KalVista Limited’s obligations under the Merck Option Agreement. Under the terms of the Merck Option Agreement, the Company, through KalVista Limited, has granted to Merck an option to acquire KVD001 through a period following completion of a Phase 2 clinical trial. The Company, through KalVista Limited, has also granted to Merck a similar option to acquire investigational orally delivered molecules for DME that the Company will continue to develop as part of its ongoing research and development activities, through a period following the completion of a Phase 2 clinical trial. The Company, through KalVista Limited, also granted to Merck a non-exclusive license to use the compounds solely for research purposes, and is required to use its diligent efforts to develop the two compounds through the completion of Phase 2 clinical trials. The Company will fund and retain control over the planned Phase 2 clinical trial of KVD001 as well as development of the investigational oral DME compounds through Phase 2 clinical trials unless Merck determines to exercise its options earlier, at which point Merck will take responsibility for all development and commercialization activities for the compounds. The Company’s development efforts under the Merck Option Agreement are governed by a joint steering committee consisting of equal representatives from the Company and Merck.

Under the terms of the Merck Option Agreement, Merck paid a non-refundable upfront fee of $37.0 million to KalVista Limited in November 2017. If Merck exercises both options under the Merck Option Agreement, KalVista Limited could receive up to an

10


 

additional $715.0 million composed of option exercise payments and clinical, regulatory, and sales-based milestone payments. In addition, the Company is eligible for tiered royalties on global net sales ranging from mid-single digits to double digit percentages. Merck may terminate the Merck Option Agreement at any time upon written notice to the Company. KalVista Limited may terminate the Merck Option Agreement in the event of Merck’s material breach of the Merck Option Agreement, subject to cure.

Concurrent with the Merck Option Agreement, the Company and Merck also entered into a stock purchase agreement (the “Stock Purchase Agreement”) pursuant to which Merck paid approximately $9.1 million to purchase 1,070,589 new shares of the Company’s common stock at a price of $8.50 per share.

The Company determined that the Merck Option Agreement and the Stock Purchase Agreement were negotiated and executed contemporaneously, are for a single commercial objective and therefore should be combined as one arrangement for accounting purposes. The aggregate proceeds from the arrangement were allocated to the equity arrangement and to the revenue arrangement.

The Company evaluated the revenue arrangement in accordance with the provisions of ASC 606 upon the adoption of this guidance on May 1, 2018. The Company determined that the revenue arrangement contains the following promised services: (i) a non-exclusive license to use the two compounds solely for research purposes, (ii) research and development services related to the development of KVD001 through completion of a Phase 2 clinical trial, and (iii) research and development services related to the development of the Oral DME Compounds.

The Company has determined that Merck’s options to acquire KVD001 and the Oral DME Compounds are customer options. Merck is not contractually obligated to exercise the options. The Company has determined that Merck’s options to acquire KVD001 and the Oral DME Compounds are not priced below their standalone selling prices and do not grant the customer a material right. Consequently, the Company determined that Merck’s options are not performance obligations at the inception of the arrangement.

The Company further determined that the research license granted is not distinct from the respective research and development services, as the license could not be used on its own by Merck for its intended purpose of developing and commercializing KVD001 and the Oral DME Compounds and is significantly interdependent with the respective research and development services. As a result, the research license has been combined with the respective research and development services for KVD001 and the Oral DME Compounds as two performance obligations (the “KVD001 Performance Obligation” and the “Oral DME Performance Obligation”).

Therefore, the Company has identified two performance obligations under the revenue arrangement as follows: (i) the KVD001 Performance Obligation, and (ii) the Oral DME Performance Obligation. The transaction price that is allocable at inception of the arrangement is comprised of the non-refundable upfront payment of $37.0 million and the payment for the common stock of $9.1 million. The Company allocated the $9.1 million payment to the common stock, as this represented the fair value of the shares issued based on arms length negotiations between the Company and Merck. The amount allocated to the common stock was recorded in stockholders’ equity at the date of issuance. The Company allocated the remaining transaction price of $37.0 million to the remaining performance obligations using the relative standalone selling price.

There is uncertainty that the events to obtain and the development and regulatory milestones will be achieved given the nature of clinical development and the stage of the research. The development and regulatory milestones will be constrained until the Company is sure that a significant revenue reversal will not occur. The royalties and sales-based milestones relate predominantly to a license of intellectual property and are determined by sales or usage-based thresholds. The royalties and sales-based milestones will be accounted for under the sales-based royalty recognition exception and the Company will not recognize revenue until the subsequent sale of a licensed product (achievement of sales-based milestone) occurs.

The Company developed the standalone selling price for the KVD001 Performance Obligation and Oral DME Performance by applying an analysis of discounted cash flows and the transaction price was allocated among the separate performance obligations using the relative standalone selling price method. The amount allocated to each Performance Obligation will be recognized as revenue using an input method of performance completed to date comparing the total effort incurred with the Company’s estimate of total effort required to perform the R&D services for each respective performance obligation. For the three and nine month periods ended January 31, 2019, the Company recognized approximately $3.9 million and $13.2 million of revenue with respect to the arrangement with Merck, all of which was recognized from the deferred revenue balance. As of January 31, 2019, deferred revenue on the consolidated balance sheet is $16.0 million, which is related to the remaining unsatisfied performance obligations in this arrangement. Approximately $12.3 million related to the unsatisfied performance obligation is expected to be satisfied in the next 12 months and the remaining $3.7 million will be satisfied in the four years thereafter. Upon adoption of ASC 606 on May 1, 2018, the Company concluded that there was no change in the amount or timing of revenue recognition as compared to its historical practices for this arrangement. Accordingly, there was no adjustment upon adoption.

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Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion in conjunction with our unaudited interim condensed financial statements and related notes included elsewhere in this report. This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. All statements other than statements of historical facts contained in this report are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “could,” “will,” “would,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “intend,” “predict,” “seek,” “contemplate,” “potential” or “continue” or the negative of these terms or other comparable terminology. These forward-looking statements, include, but are not limited to, the success, cost and timing of our product development activities and clinical trials as well as other activities we may undertake. Any forward-looking statements in this Quarterly Report on Form 10-Q reflect our current views with respect to future events or our future financial performance, are based on assumptions, and involve known and unknown risks, uncertainties and other factors which 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. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under “Risk Factors” in our Annual Report on Form 10-K or described elsewhere in this Quarterly Report on Form 10-Q. These forward-looking statements speak only as of the date hereof. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future. Unless the context indicates otherwise, in this Quarterly Report on Form 10-Q, the terms “KalVista,” “Company,” “we,” “us” and “our” refer to KalVista Pharmaceuticals, Inc. and, where appropriate, its consolidated subsidiary.

Management Overview

We are a clinical stage pharmaceutical company focused on the discovery, development and commercialization of small molecule protease inhibitors for diseases with significant unmet need. Our first product candidates are inhibitors of plasma kallikrein being developed for two indications: hereditary angioedema (“HAE”) and diabetic macular edema (“DME”). We apply our insights into the chemistry of proteases and, with our current programs, the biology of the plasma kallikrein system, to develop small molecule inhibitors with high selectivity, potency and bioavailability that we believe will make them successful treatments for disease.

 

We have created a structurally diverse portfolio of oral plasma kallikrein inhibitors and advanced multiple drug candidates into Phase 1 clinical trials for HAE in order to create what we believe will be best-in-class oral therapies. Based on the results of a first-in-human study conducted in early 2018, we have advanced one of these candidates, KVD900, into later stage clinical trials as a potential on-demand therapy for HAE attacks. Our Phase 2 clinical trial of KVD900 has commenced the regulatory filing process and is expected to complete in late 2019. In the case of DME, we are initially developing a plasma kallikrein inhibitor which is administered directly into the eye and we anticipate ultimate development of orally delivered drugs. We are currently enrolling a Phase 2 clinical trial of KVD001, our most advanced DME drug candidate, which we anticipate will be completed in the second half of 2019.

 

The Phase 2 trial for KVD900 is intended to evaluate the program as a potential on-demand treatment for HAE attacks. We intend to investigate efficacy in at least 50 type 1 and 2 HAE patients who have had three attacks in the 90 days prior to enrollment. This study will be conducted at 10-15 sites in the UK, Germany and several other European countries. During the first part of this two-part study, patients will receive a single 600 mg dose of KVD900 while not having an attack to explore pharmacokinetic and pharmacodynamics properties. All patients will then enter part two of the study, which is a crossover investigation in which the efficacy of KVD900 will be assessed versus placebo across two attacks. Patients experiencing an attack will take a single dose of 600 mg of KVD900 or placebo within one hour of the start of the attack. The second attack will be dosed with the other treatment. Patients will have access to their normal, on-demand treatment as required. For all attacks, data will be collected for 24 hours on endpoints including symptom severity using visual analog scale (VAS) and the Likert scale, as well as patient use of their standard of care therapy. Data is expected from this trial in late 2019.

 

Plasma kallikrein is a clinically relevant and validated target in treatment of HAE. We designed KVD900 for oral on-demand treatment for HAE attacks with a rapid onset of exposure to high levels and sustained inhibition of plasma kallikrein for up to more than 10 hours. Efficacy of acute injectable treatments is often undermined by late dosing and we believe that treating at the first sign of an attack rather than once swelling has begun, will maximize effectiveness. We believe that a safe, conveniently administered tablet which halts attack progression represents a currently unmet patient need.

 

We remain focused on delivering oral plasma kallikrein inhibitors for prophylactic treatment of HAE and for DME. Our next oral plasma kallikrein inhibitor, KVD824, has commenced a first-in-human clinical study and we expect to provide a development update early in the second half of 2019.

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We have devoted substantially all of our efforts to research and development, including clinical trials of our product candidates. We have not completed the development of any product candidates. Pharmaceutical drug product candidates, like those we are developing, require approvals from the FDA or foreign regulatory agencies prior to commercial sales. There can be no assurance that any product candidates will receive the necessary approvals and any failure to receive approval or delay in approval may have a material adverse impact on our business and financial results. We are subject to a number of risks and uncertainties similar to those of other life science companies developing new products, including, among others, the risks related to the necessity to obtain adequate additional financing, to successfully develop product candidates, to obtain regulatory approval of product candidates, to comply with government regulations, to successfully commercialize our potential products, to the protection of proprietary technology and to our dependence on key individuals.

Financial Overview

Revenue

Our revenue consists primarily of a portion of the upfront fees from the Merck Option Agreement, which is recognized as revenue using an input method of performance completed to date comparing the total effort incurred with the Company’s estimate of total effort required to perform the R&D activities. All of the revenues recognized in the accompanying financial statements have been recognized from deferred revenue that existed at the beginning of the period.

Research and Development Expenses

Research and development expenses primarily consist of costs associated with our research activities, including the preclinical and clinical development of product candidates. We contract with clinical research organizations to manage our clinical trials under agreed upon budgets for each study, with oversight by our clinical program managers. We account for all goods and services, including non-refundable advance payments, as expenses, and all research and development costs are expensed as incurred.

We expect to continue to incur substantial expenses related to development activities for the foreseeable future as we conduct clinical development, manufacturing and toxicology studies. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials, additional drug manufacturing requirements, and later stage toxicology studies such as carcinogenicity studies. The process of conducting preclinical studies and clinical trials necessary to obtain regulatory approval is costly and time consuming. The probability of success for each product candidate is affected by numerous factors, including preclinical data, clinical data, competition, manufacturing capability and commercial viability. Accordingly, we may never succeed in achieving marketing approval for any of our product candidates.

Completion dates and costs for clinical development programs as well as our research program can vary significantly for each current and future product candidate and are difficult to predict. As a result, we cannot estimate with any degree of certainty the costs associated with development of our product candidates at this point in time. We anticipate making determinations as to which programs and product candidates to pursue and how much funding to direct to each program and product candidate on an ongoing basis in response to the scientific success of early research programs, results of ongoing and future clinical trials, our ability to enter into collaborative agreements with respect to programs or potential product candidates, as well as ongoing assessments as to the commercial potential of each current or future product candidate.

General and Administrative Expenses

General and administrative expenses consist primarily of the costs associated with general management, obtaining and maintaining our patent portfolio, professional fees for accounting, auditing, consulting and legal services, and general overhead expenses.

We expect ongoing general and administrative expenses to increase in the future as we expand our operating activities, maintain and expand the patent portfolio, incur additional costs associated with the management of a public company and maintain compliance with exchange listing and requirements of the Securities and Exchange Commission. These potential increases will likely include management costs, legal fees, accounting fees, directors’ and officers’ liability insurance premiums, and expenses associated with investor relations, among others.

13


 

Other Income

Other income consists of bank and investment interest, research and development tax credits from the United Kingdom government’s tax incentive programs set up to encourage research and development in the United Kingdom and realized and unrealized exchange rate gains/losses on cash held in foreign currencies.

Income Taxes

We historically have incurred net losses and have no corporation tax liabilities. We file U.S. federal tax returns, as well as certain state returns. We also file returns in the United Kingdom. Under the U.K. government’s research and development tax incentive scheme, we have incurred qualifying research and development expenses and filed claims for research and development tax credits in accordance with the relevant tax legislation. The research and development tax credits are paid out to us in cash and reported as other income. Because of the operating losses and the full valuation allowance provided on all deferred tax assets, including the net operating losses, no tax provision has been recognized in the periods presented.

Results of Operations

Comparison of three months ended January 31, 2019 and 2018

The following table sets forth the key components of our results of operations for the three months ended January 31, 2019 and 2018 (in thousands):

 

 

 

Three Months Ended