alpn-10q_20170930.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 September 30, 2017

OR

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

For the transition period from           to

Commission File Number: 001-37449

 

ALPINE IMMUNE SCIENCES, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

20-8969493

(State or other jurisdiction of

incorporation or organization)

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

 

201 Elliott Avenue West, Suite 230

Seattle, WA  98119

(206) 788-4545

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

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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

 

  (Do not check if a smaller reporting company)

  

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 November 8, 2017, the registrant had 13,881,645 shares of common stock, $0.0001 par value per share, outstanding.

 

 


ALPINE IMMUNE SCIENCES, INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2017

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements

3

 

Condensed Consolidated Balance Sheets

3

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

4

 

Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)

5

 

Condensed Consolidated Statements of Cash Flows

6

 

Notes to Condensed Consolidated Financial Statements

7

 

 

 

Item 2.

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

19

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

28

Item 4.

Controls and Procedures

28

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

29

Item 1A.

Risk Factors

29

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

58

Item 3.

Defaults Upon Senior Securities

58

Item 4.

Mine Safety Disclosure

58

Item 5.

Other Information

58

Item 6.

Exhibits

59

 

Signatures

60

 

In this report, unless otherwise stated or as the context otherwise requires, references to “Alpine,” “the Company,” “we,” “us,” “our” and similar references refer to Alpine Immune Sciences, Inc. “Variant Immunoglobulin Domain”, “vIgD”, “Transmembrane Immunomodulatory Protein”, “TIP”, “Secreted Immunomodulatory Protein”, and “SIP” are registered trademarks of Alpine Immune Sciences, Inc. All rights reserved. This report also contains registered marks, trademarks, and trade names of other companies. All other trademarks, registered marks, and trade names appearing in this report are the property of their respective holders. 


2


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ALPINE IMMUNE SCIENCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

 

 

 

September 30,

2017

 

 

December 31,

2016

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

11,982

 

 

$

11,819

 

Short-term investments

 

 

75,219

 

 

 

 

Prepaid expenses and other current assets

 

 

884

 

 

 

36

 

Total current assets

 

 

88,085

 

 

 

11,855

 

Restricted cash

 

 

132

 

 

 

 

Property and equipment, net

 

 

1,116

 

 

 

740

 

Intangible assets

 

 

1,453

 

 

 

 

Total assets

 

$

90,786

 

 

$

12,595

 

Liabilities, convertible preferred stock, and stockholders’ deficit

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,076

 

 

$

127

 

Accrued liabilities

 

 

642

 

 

 

170

 

Income taxes payable

 

 

67

 

 

 

66

 

Deferred revenue

 

 

405

 

 

 

2,008

 

Deferred rent, current portion

 

 

44

 

 

 

33

 

Current portion of long-term debt

 

 

490

 

 

 

 

Total current liabilities

 

 

2,724

 

 

 

2,404

 

Deferred rent, long-term portion

 

 

81

 

 

 

113

 

Deferred tax liability

 

 

509

 

 

 

 

Long-term debt

 

 

4,500

 

 

 

 

Total liabilities

 

 

7,814

 

 

 

2,517

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Convertible preferred stock, $0.0001 par value per share; 10,000,000 and 22,081,852

   shares authorized at September 30, 2017 and December 31, 2016, respectively;

   zero and 4,311,770 shares issued and outstanding at September 30, 2017 and

   December 31, 2016, respectively; aggregate liquidation preference of zero and

   $11,583 at September 30, 2017 and December 31, 2016, respectively

 

 

 

 

 

11,535

 

Stockholders’ deficit:

 

 

 

 

 

 

 

 

Common stock, $0.0001 par value per share; 200,000,000 and 46,500,000 shares

   authorized at September 30, 2017 and December 31, 2016, respectively;

   13,881,645 and 608,701 shares issued and outstanding at September 30,

   2017 and December 31, 2016, respectively

 

 

1

 

 

 

 

   Additional paid-in capital

 

 

88,049

 

 

 

144

 

   Accumulated other comprehensive loss

 

 

(12

)

 

 

 

   Accumulated deficit

 

 

(5,066

)

 

 

(1,601

)

Total stockholders’ equity (deficit)

 

 

82,972

 

 

 

(1,457

)

Total liabilities, convertible preferred stock, and stockholders’ equity

 

$

90,786

 

 

$

12,595

 

 

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

3


ALPINE IMMUNE SCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except share and per share amounts)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(unaudited)

 

Collaboration revenue

 

$

128

 

 

$

737

 

 

$

1,603

 

 

$

2,212

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

2,750

 

 

 

819

 

 

 

6,916

 

 

 

1,639

 

General and administrative

 

 

1,932

 

 

 

299

 

 

 

4,872

 

 

 

774

 

Total operating expenses

 

 

4,682

 

 

 

1,118

 

 

 

11,788

 

 

 

2,413

 

Loss from operations

 

 

(4,554

)

 

 

(381

)

 

 

(10,185

)

 

 

(201

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bargain purchase gain

 

 

6,539

 

 

 

 

 

 

6,539

 

 

 

 

Interest expense

 

 

(75

)

 

 

 

 

 

(76

)

 

 

 

Interest and other income

 

 

216

 

 

 

7

 

 

 

261

 

 

 

16

 

Income (loss) before taxes

 

 

2,126

 

 

 

(374

)

 

 

(3,461

)

 

 

(185

)

Income tax expense

 

 

(4

)

 

 

 

 

 

(4

)

 

 

 

Basic and diluted net income (loss) attributable to common

   stockholders

 

$

2,122

 

 

$

(374

)

 

$

(3,465

)

 

$

(185

)

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss on investments

 

 

(12

)

 

 

 

 

 

(12

)

 

 

 

Comprehensive income (loss)

 

$

2,110

 

 

$

(374

)

 

$

(3,477

)

 

$

(185

)

Weighted-average shares used to compute basic net

   income (loss) per share attributable to common stockholders

 

 

10,577,772

 

 

 

608,701

 

 

 

3,989,747

 

 

 

550,080

 

Basic net income (loss) per share attributable to

   common stockholders

 

$

0.20

 

 

$

(0.61

)

 

$

(0.87

)

 

$

(0.34

)

Weighted-average shares used to compute diluted net

   income (loss) per share attributable to common stockholders

 

 

11,586,795

 

 

 

608,701

 

 

 

3,989,747

 

 

 

550,080

 

Diluted net income (loss) per share attributable to

   common stockholders

 

$

0.18

 

 

$

(0.61

)

 

$

(0.87

)

 

$

(0.34

)

 

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

4


ALPINE IMMUNE SCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENT OF CONVERTIBLE PREFERRED STOCK AND

STOCKHOLDERS’ EQUITY

(unaudited)

(in thousands, except share amounts)

 

 

 

Convertible

Preferred Stock

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

Other Comprehensive

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2016

 

 

4,311,770

 

 

$

11,535

 

 

 

608,701

 

 

$

 

 

$

144

 

 

$

 

 

$

(1,601

)

 

$

10,078

 

Issuance of Series A-1 convertible preferred stock

 

 

4,989,663

 

 

 

37,666

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

37,666

 

Conversion of convertible preferred stock to common stock

 

 

(9,301,433

)

 

 

(49,201

)

 

 

9,301,433

 

 

 

1

 

 

 

49,200

 

 

 

 

 

 

 

 

 

 

Common stock acquired in business combination

 

 

 

 

 

 

 

 

3,914,058

 

 

 

 

 

 

38,103

 

 

 

 

 

 

 

 

 

38,103

 

Conversion of warrant liability to equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

52

 

 

 

 

 

 

 

 

 

52

 

Exercise of stock options and common stock warrants

 

 

 

 

 

 

 

 

57,453

 

 

 

 

 

 

22

 

 

 

 

 

 

 

 

 

22

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

528

 

 

 

 

 

 

 

 

 

528

 

Unrealized loss on investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12

)

 

 

 

 

 

(12

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,465

)

 

 

(3,465

)

Balance, September 30, 2017

 

 

 

 

$

 

 

 

13,881,645

 

 

$

1

 

 

$

88,049

 

 

$

(12

)

 

$

(5,066

)

 

$

82,972

 

 

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

 

5


ALPINE IMMUNE SCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

 

Nine Months Ended

September 30,

 

 

 

2017

 

 

2016

 

 

 

(unaudited)

 

Operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(3,465

)

 

$

(185

)

Adjustments to reconcile net income (loss) to net cash used in operating activities:

 

 

 

 

 

 

 

 

Bargain purchase gain

 

 

(6,539

)

 

 

 

Depreciation and amortization

 

 

165

 

 

 

30

 

Non-cash interest expense

 

 

43

 

 

 

 

Stock-based compensation and warrant expense

 

 

528

 

 

 

57

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses

 

 

(848

)

 

 

(4

)

Accounts payable

 

 

924

 

 

 

253

 

Deferred revenue

 

 

(1,603

)

 

 

(2,212

)

Accrued liabilities

 

 

82

 

 

 

10

 

Deferred rent and other

 

 

(22

)

 

 

21

 

Net cash used in operating activities

 

 

(10,735

)

 

 

(2,030

)

Investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(509

)

 

 

(459

)

Purchase of short-term investments

 

 

(72,239

)

 

 

 

Proceeds from the sale of short-term investments

 

 

9,960

 

 

 

 

Cash and cash equivalents acquired in connection with merger

 

 

31,130

 

 

 

 

Net cash used in investing activities

 

 

(31,658

)

 

 

(459

)

Financing activities

 

 

 

 

 

 

 

 

Proceeds from sale of preferred stock

 

 

37,666

 

 

 

10,973

 

Proceeds from borrowings

 

 

5,000

 

 

 

 

Proceeds from exercise of stock options and common stock warrants

 

 

22

 

 

 

49

 

Net cash provided by financing activities

 

 

42,688

 

 

 

11,022

 

Net increase in cash and cash equivalents and restricted cash

 

 

295

 

 

 

8,533

 

Cash and cash equivalents and restricted cash, beginning of period

 

 

11,819

 

 

 

5,423

 

Cash and cash equivalents and restricted cash, end of period

 

$

12,114

 

 

$

13,956

 

Supplemental Information

 

 

 

 

 

 

 

 

Discount in connection with issuance of debt

 

$

428

 

 

$

 

Convertible preferred stock exchanged for common stock

 

$

49,201

 

 

$

 

Reclass of preferred stock warrant liability to equity

 

$

52

 

 

$

 

 

 

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

 

6


ALPINE IMMUNE SCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Information as of September 30, 2017 and for the three and nine months ended September 30, 2017 and 2016 is unaudited)

1. Description of the Business

Alpine Immune Sciences, Inc. (the “Company”, “Alpine”, “we”, “us”, or “our”) is focused on discovering and developing modern, protein-based immunotherapies targeting the immune synapse to treat cancer, inflammation, and other diseases. Our proprietary scientific platform uses a process known as directed evolution, or an iterative scientific engineering process purposefully conducted to “evolve” a protein to create therapeutics potentially capable of modulating immune system interactions. In our pre-clinical animal studies, our platform has proven capable of identifying novel molecules, including single domains capable of modulating multiple targets. We were incorporated on December 30, 2014 under the laws of the State of Delaware and are headquartered in Seattle, Washington.

Significant estimates inherent in the preparation of the accompanying financial statements include recoverability and useful lives of intangible assets and the fair value of equity based awards.

Reverse Merger and Subscription Agreement

On April 18, 2017, we entered into a merger agreement with Nivalis Therapeutics, Inc. (“Nivalis”), a public biotechnology company, and one of its wholly-owned subsidiaries pursuant to which, the subsidiary merged with and into Alpine, with Alpine continuing as a wholly owned subsidiary of Nivalis and the surviving corporation of the merger (the “Merger Agreement”). The merger is intended to qualify for federal income tax purposes as a tax-free reorganization under the provisions of Section 368(a) of the Internal Revenue Code of 1986, as amended. At the closing of the merger, each outstanding share of our capital stock (common stock and preferred stock) was converted into the right to receive shares of Nivalis common stock (subject to the payment of cash in lieu of fractional shares and after giving effect to a 1:4 reverse stock split of Nivalis common stock) such that, immediately following the effective time of the merger, preexisting Nivalis stockholders, optionholders, and warrantholders owned, or held rights to acquire, approximately 26% of the fully-diluted common stock of Nivalis, which changed its name to “Alpine Immune Sciences, Inc.” following the completion of the merger and Alpine’s preexisting stockholders, optionholders, and warrantholders owned, or held rights to acquire approximately 74% of the fully-diluted common stock of Nivalis. The issuance of the shares to our pre-existing stockholders was registered under the Securities Act of 1933, as amended, pursuant to a registration statement on Form S-4 (No. 333-218134) (the “Registration Statement”) declared effective by the Securities and Exchange Commission (the “SEC”) on June 6, 2017.

Contemporaneously with the execution and delivery of the Merger Agreement, certain of our pre-existing stockholders entered into a subscription agreement with us pursuant to which such stockholders purchased, immediately prior to the closing of the merger, 1,335,118 shares of our capital stock at a purchase price of $12.74 per share for an aggregate purchase price of approximately $17.0 million.

The merger and the subscription described above were consummated on July 24, 2017.

Exchange Ratio

At the effective time of the merger, each share of Alpine’s common stock and preferred stock was converted into the right to receive 0.4969 shares of Nivalis’ common stock, adjusted to account for the Nivalis reverse stock split. All issued and outstanding stock and per share amounts contained in the financial statements have been retroactively adjusted to reflect this exchange ratio for all periods presented.

2. Summary of Significant Accounting Policies

Basis of Presentation and Use of Estimates

The accompanying unaudited condensed financial statements have been prepared in accordance with the rules and regulations of the SEC and generally accepted accounting principles in the United States of America (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make judgments, estimates and assumptions that affect the amounts reported in the unaudited condensed financial statements and accompanying notes. We base our estimates and assumptions on historical experience when available and on various factors we believe to be reasonable under the circumstances. Actual results could differ materially from those estimates. The results of our operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the results to be expected for the full year.

7


Principles of Consolidation

Our condensed consolidated financial statements include the financial position and results of operations of Alpine and AIS Operating Co., Inc., our wholly owned subsidiary and operating company. On July 24, 2017, we closed the merger on the terms described in more detail in Note 1. In connection with the merger, Nivalis effected a 1:4 reverse stock split of its common stock. Upon the closing of the merger, (1) a wholly-owned subsidiary of Nivalis merged with and into Alpine, with Alpine (renamed as “AIS Operating Co., Inc.”) remaining as the surviving entity; and (2) Nivalis was renamed as “Alpine Immune Sciences, Inc.”

Unaudited Interim Financial Information

The accompanying unaudited condensed consolidated financial statements as of September 30, 2017, and for the three and nine months ended September 30, 2017 and 2016 and the related interim information contained within the notes to the condensed consolidated financial statements are unaudited. The unaudited interim financial statements have been prepared on the same basis as the audited financial statements and in the opinion of management, reflect all normal recurring adjustments necessary for a fair statement of our financial position for the interim periods presented. The accompanying unaudited condensed financial statements should be read in conjunction with our audited financial statements and accompanying notes for the years ended December 31, 2016 and 2015, as filed with the SEC in our Registration Statement.

Unless indicated otherwise, all amounts presented in financial tables are presented in thousands, except for share, per share and par value amounts.

Short-Term Investments

Our short-term investments include funds invested in highly liquid money market funds, U.S. Treasury securities, commercial paper, and corporate debt securities with a final maturity of each security of less than one year. All investments are classified as available-for-sale securities and are recorded at fair value based on quoted prices in active markets, with unrealized gains and losses excluded from earnings and reported in other comprehensive income (loss). Purchase premiums and discounts are recognized as interest income using the interest method over the terms of the securities. Realized gains and losses and declines in fair value deemed to be other than temporary are reflected in the condensed consolidated statements of operations and comprehensive income (loss) using the specific-identification method.

Business Combination

We use our best estimates and assumptions to accurately assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date. Our estimates are inherently uncertain and subject to refinement. During the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed, with the corresponding offset to bargain purchase gain. In addition, uncertain tax positions and tax-related valuation allowances are initially established in connection with a business combination as of the acquisition date. Our management collects information and reevaluates these estimates and assumptions quarterly and records any adjustments to our preliminary estimates to bargain purchase gain during the measurement period. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our condensed consolidated statements of operations and comprehensive income (loss).

We allocated the preliminary purchase price to the acquired tangible and intangible assets and assumed liabilities of Nivalis based on their estimated fair values as of the acquisition date. The fair value of our identifiable intangible asset is based on detailed valuations using information and assumptions provided by management.

Intangible Asset

Our intangible asset is our indefinite-life GSNOR inhibitor in-process research and development asset (“IPR&D”) acquired from Nivalis. The IPR&D represents the processes, expertise, and technology employed in the development of S-nitrosoglutathione reductase (“GSNOR”) inhibitors and Nivalis’ lead product candidate, cavosonstat. The IPR&D represents the estimated fair value as of the acquisition date of substantive in-process projects that have not reached technological feasibility. The primary basis for determining technological feasibility of these projects is obtaining regulatory approval. The valuation of IPR&D is determined using a discounted cash flow method. In determining the value of IPR&D, management considers, among other factors, the stage of completion of the projects, the technological feasibility of the projects, whether the projects have an alternative future use, and the estimated residual cash flows that could be generated from the various projects and technologies over their respective projected economic lives. The discount rate used is determined at the time of acquisition and includes a rate of return which accounts for the time value of money, as well as risk factors reflecting the economic risk that the projected cash flows may not be realized

8


We review our IPR&D at least annually for possible impairment. IPR&D is reviewed for possible impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the IPR&D below their carrying values. We test our IPR&D each year on October 1. Our IPR&D asset totaled $1.5 million at September 30, 2017.

Derivative Financial Instruments

We evaluate all of our financial instruments, including issued stock purchase warrants, to determine if such instruments are derivatives or contain features qualifying as embedded derivatives. For derivative financial instruments accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the condensed consolidated statement of operations and comprehensive income (loss). We use the Black-Scholes option-pricing model to value the derivative instruments at inception and subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. We do not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks.

Revenue Recognition

We derive our revenue from collaboration and licensing agreements. We recognize revenue when each of the following four criteria are met: (1) persuasive evidence of an arrangement exists; (2) products have been delivered or services have been rendered; (3) the sales price is fixed or determinable; and (4) collectability is reasonably assured.

We recognize revenue under our License and Research Agreement (the “Collaboration Agreement”) with Kite Pharma, Inc. (“Kite”) in accordance with the guidance on multiple element arrangements. Multiple elements or deliverables may include (1) grants of, or options to obtain, intellectual property licenses; (2) research and development services; and/or (3) manufacturing or supply services. Payments typically received under these arrangements include one or more of the following: non-refundable upfront license fees, option exercise fees, payment for research and/or development efforts, amounts due upon the achievement of specified objectives, and/or royalties on future product sales.

The evaluation of multiple-element arrangements requires management to make judgments about (1) the identification of deliverables; (2) whether such deliverables are separable from other aspects of the contractual relationship; (3) the estimated selling price of each deliverable; and (4) the expected period of performance for each deliverable. To determine the units of accounting under a multiple-element arrangement, management evaluates certain separation criteria, including whether the deliverables have stand-alone value, based on the relevant facts and circumstances for each arrangement. Management then estimates the selling price for each unit of accounting and allocates the arrangement consideration to each unit using the relative selling price method. The allocated consideration for each unit of accounting is recognized based on the method most appropriate for that unit of account and in accordance with the revenue recognition criteria detailed above. If there are deliverables in an arrangement that are not separable from other aspects of the contractual relationship, they are treated as a combined unit of accounting, with the allocated revenue for the combined unit recognized in a manner consistent with the revenue recognition criteria applicable to the final deliverable in the combined unit. Payments received prior to satisfying the relevant revenue recognition criteria are recorded as deferred revenue in the accompanying condensed consolidated balance sheets and recognized as revenue when the related revenue recognition criteria are met.

The Collaboration Agreement provides for non-refundable milestone payments. We recognize revenue that is contingent upon the achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. A milestone is considered substantive when the consideration payable to us for such milestone (1) is consistent with our performance necessary to achieve the milestone or the increase in value to the collaboration resulting from our performance; (2) relates solely to our past performance; and (3) is reasonable relative to all of the other deliverables and payments within the arrangement. In making this assessment, we consider all facts and circumstances relevant to the arrangement, including factors such as the scientific, regulatory, commercial, and other risks that must be overcome to achieve the milestone, the level of effort and investment required to achieve the milestone and whether any portion of the milestone consideration is related to future performance or deliverables.

We will periodically review the estimated performance periods under the Collaboration Agreement which provides for non-refundable upfront payments and fees. We will adjust the periods over which revenue should be recognized when appropriate to reflect changes in assumptions relating to the estimated performance periods. We could accelerate revenue recognition in the event of early termination of programs or if our expectations change. Alternatively, we could decelerate revenue recognition if programs are extended or delayed. While such changes to our estimates have no impact on our reported cash flows, the timing of revenue recorded in future periods could be materially impacted.

9


Comprehensive Income (Loss)

Comprehensive income (loss) is comprised of net income (loss) and certain changes in equity excluded from net income (loss). For the three and nine months ended September 30, 2017, other comprehensive loss consists of unrealized losses on our short-term investments. There was no difference between comprehensive income (loss) and net income (loss) for the three and nine months ended September 30, 2016.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, as amended, which amends the guidance for revenue recognition to replace numerous industry specific requirements. ASU 2014-09, as amended, implements a five-step process for customer contract revenue recognition focusing on transfer of control, as opposed to transfer of risk and rewards. ASU 2014-09, as amended, also requires enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenues and cash flows from contracts with customers. Other major provisions include ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. ASU 2014-09, as amended, is effective for reporting periods beginning after December 15, 2017. Early adoption is permitted, but not before December 15, 2016. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. We are currently expecting to use the modified retrospective method to adopt this standard and are continuing to assess all of the potential impacts of the new standard on our financial statements and related disclosures, although we do not expect the implementation to have a material impact.

In February 2016, the FASB issued ASU No. 2016-02, Leases. ASU 2016-02 requires a lessee to separate the lease components from the non-lease components in a contract and recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. It also aligns lease accounting for lessors with the revenue recognition guidance in ASU 2014-09. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and is to be applied at the beginning of the earliest period presented using a modified retrospective approach. We are continuing to evaluate the effect the standard will have on our financial statements and related disclosures.

In August 2016, the FASB issued ASU No. 2016-15 which provides new guidance on the classification of certain cash receipts and payments in the statement of cash flows. The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. We will be required to adopt the new guidance beginning with the first fiscal quarter of 2018; early adoption is permitted. We are currently assessing the impact the new guidance will have on our condensed consolidated statements of cash flows.

In January 2017, the FASB issued an ASU 2017-01, Business Combinations (Topic 805) Clarifying the Definition of a Business. The amendments in this update clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. We are currently evaluating the impact of adopting this guidance.

In May 2017, the FASB issued ASU No. 2017-09 to provide clarity and reduce both diversity in practice and cost and complexity when applying the guidance in Compensation - Stock Compensation (Topic 718) about a change to the terms and conditions of a share-based payment award. The amendments in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The amendments in this update are effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, and applied prospectively to modifications occurring on or after the adoption date. We are currently reviewing and evaluating this recent update and plan to adopt on the required adoption date. For the quarter ended September 30, 2017, there were no modifications to the terms or conditions of a share-based payment award.

Recently Adopted Accounting Pronouncements

In August 2014, the FASB issued ASU No.2014-15, Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern. Under the new guidance, management is required to assess an entity’s ability to continue as a going concern and to provide related footnote disclosures in certain circumstances. The provisions of this standard are effective for annual periods ending after December 31, 2016, and for annual and interim periods thereafter. We adopted this guidance this year and management believes our existing cash and cash equivalents as of September 30, 2017 are sufficient to fund our operations and do not raise substantial doubt about our ability to continue as a going concern.

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In March 2016, the FASB issued ASU No. 2016-09-Improvements to Employee Share-Based Payment Accounting, which simplified the accounting for share-based payment transactions, including the income tax consequences, the calculation of diluted earnings per share, the treatment of forfeitures, the classification of awards as either equity or liabilities, and the classification on the statement of cash flows. For public business entities, the amendments in this update are effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted for any entity in any interim or annual period. We adopted ASU 2016-09 with effect from January 1, 2015. The adoption of this standard did not have a material impact on our financial statements.

In November 2016, the FASB issued ASU No. 2016-18 relating to restricted cash. The new guidance requires amounts generally described as restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the condensed consolidated statement of cash flows. This guidance is required to be adopted beginning with the first fiscal quarter of 2018; early adoption is permitted. We adopted this guidance effective June 30, 2017, which required us to include restricted cash within the beginning and ending balance of cash and cash equivalents for the nine-month period ended September 30, 2017. We had no restricted cash prior to adopting this guidance, thus we were not required to revise prior period statements of cash flows. The adoption of this guidance does not impact our financial position or results of operations.

3. Business Combination

On July 24, 2017, we closed the merger on the terms described in more detail in Note 1. In connection with the merger, Nivalis effected a 1:4 reverse stock split of its common stock. Upon the closing of the merger, (1) a wholly-owned subsidiary of Nivalis merged with and into Alpine, with Alpine (renamed as “AIS Operating Co., Inc.”) remaining as the surviving entity; and (2) Nivalis was renamed as “Alpine Immune Sciences, Inc.”

Under the terms of the Merger Agreement, Nivalis issued shares of its common stock to Alpine’s stockholders, at an exchange rate of 0.4969 shares of Nivalis common stock, after taking into account the 1:4 reverse stock split, for each share of Alpine’s common stock and preferred stock outstanding immediately prior to the merger. The exchange rate was determined through arms’-length negotiations between Nivalis and Alpine. Nivalis also assumed all of the stock options outstanding under Alpine’s Amended and Restated 2015 Stock Plan, as amended (the “Alpine Plan”), and stock warrants for Alpine’s capital stock outstanding immediately prior to the merger, with such stock options and warrants henceforth representing the right to purchase a number of shares of the Nivalis common stock equal to 0.4969 multiplied by the number of shares of Alpine’s common stock or preferred stock previously represented by such options and warrants. Nivalis also assumed the Alpine Plan. Immediately after the merger, there were 13,881,645 shares of Nivalis common stock outstanding. Immediately after the merger, Alpine’s former stockholders, warrantholders, and optionholders owned, or held rights to acquire, approximately 74% of the fully-diluted common stock of Nivalis, which for these purposes is defined as the outstanding common stock of Nivalis, plus “in the money” options and warrants to purchase shares of Nivalis’ common stock, assuming all “in the money” options and warrants of Nivalis outstanding immediately prior to the merger are exercised on a cashless basis immediately prior to the closing of the merger, with Nivalis’ stockholders, optionholders, and warrantholders immediately prior to the merger owning, or holding rights to acquire, approximately 26% of the fully diluted common stock of Nivalis. More than 74% of Nivalis’ common stock outstanding immediately after the merger was held by stockholders party to lock-up agreements, pursuant to which such stockholders have agreed, except in limited circumstances, not to sell, transfer, or engage in swap or similar transactions with respect to shares of Nivalis’ common stock, including, as applicable, shares received in the merger and issuable upon exercise of certain warrants and options, for a period of 180 days following the completion of the merger.

The issuance of shares of Nivalis’ common stock to our pre-existing stockholders was registered with the SEC pursuant to the Registration Statement. Immediately prior to the merger, we issued and sold an aggregate of approximately $17.0 million of shares of our common stock to certain existing stockholders. For accounting purposes, our historical financial statements were not adjusted to reflect the merger, other than adjustments to the capital structure to reflect the historical capital structure of Nivalis. No other adjustments to our historical assets and liabilities were made as a result of the merger.

In addition to the operating assets and liabilities of Nivalis, we also acquired Nivalis’ tax attributes, which primarily consisted of net operating losses which begin to expire in 2032. Our ability to utilization the tax attributes of Nivalis may be limited under Section 382 of the U.S. Internal Revenue Service and as such, have been reserved. We recorded a deferred tax liability related to future tax benefits arising from IPR&D acquired in the Merger. The combined organization is focusing on the development and commercialization of our innovative immunotherapies. Following the merger, the increased cash resources and increased access to capital of the combined organization will help to support the clinical development of our products.

11


Consideration Transferred

The fair value of the consideration transferred was based on the most reliable measure, which was determined to be the market price of Nivalis shares of common stock as of the acquisition date. The fair value of the consideration transferred consisted of the following (in thousands except share and per share amounts):

 

Outstanding Nivalis common stock

 

 

3,914,058

 

Per share fair value of Nivalis common stock

 

$

9.60

 

Outstanding Nivalis stock options

 

 

421,992

 

Weighted average per share fair value of Nivalis stock options

 

$

1.25

 

Total fair value of consideration (in 000's)

 

$

38,103

 

 

Pursuant to the Merger Agreement, unvested Nivalis stock options immediately vested as of the closing of the business combination and were adjusted to give effect to the recapitalization.

Preliminary Purchase Price Allocation

As Alpine was the accounting acquirer in the merger, we allocated the preliminary purchase price to the acquired tangible and intangible assets and assumed liabilities of Nivalis based on their estimated fair values as of the acquisition date. The excess of the estimated fair values of net assets acquired over the acquisition consideration paid was recorded as a bargain purchase gain in the condensed consolidated statements of operations and comprehensive income (loss). The determination of the preliminary fair values of the assets acquired and liabilities assumed requires significant judgment, including third party valuation estimates relating to the value of the acquired IPR&D. The allocation of the purchase consideration to the assets acquired and liabilities assumed in our financial statements is preliminary and subject to change as management gathers additional information regarding these items.

The initial allocation of the purchase consideration is as follows (in thousands):

 

 

Preliminary

Fair Value

 

Assets:

 

 

 

 

Cash and cash equivalents

 

$

31,130

 

Marketable securities

 

 

12,952

 

IPR&D

 

 

1,453

 

Total assets acquired

 

 

45,535

 

Liabilities:

 

 

 

 

Accrued expenses

 

 

(384

)

Deferred tax liability

 

 

(509

)

Total liabilities assumed

 

 

(893

)

Bargain purchase gain

 

 

(6,539

)

Total

 

$

38,103

 

We relied on significant Level 3 unobservable inputs to estimate the fair value of our acquired IPR&D using management’s estimate of future royalties and expected earnings of the assets after taking into account an estimate of future expenses necessary to bring the products to completion. These projected cash flows were then discounted to their present values using a discount rate of 17%, which was considered commensurate with the risks and stages of development of the IPR&D.

The bargain purchase gain resulted from expenses incurred by Nivalis between the time the purchase price was negotiated and the close of the transaction, and changes in the Nivalis stock price during that period as the exchange ratio was fixed when the purchase price was negotiated.

We recognized acquisition-related costs of $1.3 million for the nine months ended September 30, 2017. These costs are included within general and administrative expense in our condensed consolidated statements operations and of comprehensive income (loss).

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Pro Forma Financial Information

The following pro forma consolidated results of net loss for the nine months ended September 30, 2017 and 2016 assume the business combination was completed as of January 1, 2016 (in thousands, except per share amounts):

 

 

 

Nine Months Ended

September 30,

 

 

 

2017

 

 

2016

 

Pro forma revenues

 

$

1,603

 

 

$

2,212

 

Pro forma net loss

 

 

(13,634

)

 

 

(23,935

)

Pro forma basic and diluted net loss per share

 

$

(0.98

)

 

$

(1.74

)

 

For purposes of the pro forma disclosures above, the primary adjustments for the nine months ended September 30, 2017 include the elimination of acquisition related costs and acceleration of stock compensation expense upon the change in control.

4. Net Income (Loss) Per Share

We compute net income (loss) per share attributable to common stockholders using the two-class method required for participating securities. We consider our convertible preferred stock to be participating securities. In accordance with the two-class method, earnings allocated to these participating securities, which include participation rights in undistributed earnings, are subtracted from net income to determine total undistributed earnings to be allocated to common stockholders. Net loss is not allocated to participating securities as there is no contractual obligation to share in net losses.

Basic net income (loss) per share attributable to common stockholders is computed by dividing net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding during the period. All participating securities are excluded from basic weighted-average common shares outstanding. In computing both basic net income (loss) per share attributable to common stockholders and diluted net income (loss) per share attributable to common stockholders, undistributed earnings are re-allocated to reflect the potential impact of dilutive securities, including stock options and warrants. Diluted net income (loss) per share attributable to common stockholders is computed by dividing net income (loss) attributable to common stockholders by the weighted-average number of common equivalent shares outstanding for the period. Diluted net income (loss) per share attributable to common stockholders includes any dilutive effect from outstanding stock options and warrants using the treasury stock method.

The common stock issuable upon the conversion or exercise of the following dilutive securities has been excluded from the diluted net loss per share attributable to common stockholders calculation because their effect would have been antidilutive for the periods presented:

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(unaudited)

 

Convertible preferred stock

 

 

-

 

 

 

4,311,770

 

 

 

-

 

 

 

4,311,770

 

Warrants to purchase common stock

 

 

7,069

 

 

 

12,422

 

 

 

19,491

 

 

 

12,422

 

Options to purchase common stock

 

 

280,992

 

 

 

520,739

 

 

 

1,791,066

 

 

 

520,739

 

Total

 

 

288,061

 

 

 

4,844,931

 

 

 

1,810,557

 

 

 

4,844,931

 

 

13


The following is a reconciliation of the numerator (net income or loss) and the denominator (number of shares) used in the calculation of basic and diluted net income (loss) per share attributable to common stockholders (in thousands, except share and per share amounts):

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(unaudited)

 

Numerator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net income (loss) attributable to common stockholders

 

$

2,122

 

 

$

(374

)

 

$

(3,465

)

 

$

(185

)

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used in computing basic net income (loss) per share attributable to common stockholders

 

 

10,577,772

 

 

 

608,701

 

 

 

3,989,747

 

 

 

550,080

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options to purchase common stock

 

 

1,002,472

 

 

 

 

 

 

 

 

 

 

Warrants to purchase common stock

 

 

6,551

 

 

 

 

 

 

 

 

 

 

Shares used in computing diluted net income (loss) per share attributable to common stockholders

 

 

11,586,795

 

 

 

608,701

 

 

 

3,989,747

 

 

 

550,080

 

Basic net income (loss) per share attributable to

   common stockholders

 

$

0.20

 

 

$

(0.61

)

 

$

(0.87

)

 

$

(0.34

)

Diluted net income (loss) per share attributable to

   common stockholders

 

$

0.18

 

 

$

(0.61

)

 

$

(0.87

)

 

$

(0.34

)

 

5. Cash Equivalents and Short-Term Investments

The amortized cost and fair value of our cash equivalents and short-term investments are as follows (in thousands):

 

 

September 30, 2017

 

Assets:

 

(unaudited)

 

 

 

Amortized Cost

 

 

Gross unrealized gains

 

 

Gross unrealized losses

 

 

Fair market value

 

Money market funds

 

$

4,736

 

 

$

 

 

$

 

 

$

4,736

 

U.S. treasury bills

 

 

17,155

 

 

 

2

 

 

 

 

 

 

17,157

 

Corporate debt securities and commercial paper

 

 

63,323

 

 

 

 

 

 

(14

)

 

 

63,309

 

Total

 

$

85,214

 

 

$

2

 

 

$

(14

)

 

$

85,202

 

All short-term investments held as of September 30, 2017 were classified as available-for-sale securities and had contractual maturities of less than one year. There were no realized gains and losses on these securities for the periods presented. There were no short-term investments as of December 31, 2016.

6. Fair Value Measurements

Fair value is defined as the exchange price received for an asset or paid to transfer a liability, or an exit price, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value, is as follows:

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

Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3: Unobservable inputs supported by little or no market activity and significant to the fair value of the assets or liabilities.

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At December 31, 2016, we had cash of $11.8 million and no assets measured using Level 1, Level 2, or Level 3 inputs. As of September 30, 2017, cash of $2.0 million is excluded from the fair value table below.

The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis (in thousands):

 

 

 

September 30, 2017

 

Assets:

 

(unaudited)

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Money market funds

 

$

4,736

 

 

$

 

 

$

 

 

$

4,736

 

U.S. treasury bills

 

 

17,157

 

 

 

 

 

 

 

 

 

17,157

 

Corporate debt securities and commercial paper

 

 

 

 

 

63,309

 

 

 

 

 

 

63,309

 

Total

 

$

21,893

 

 

$

63,309

 

 

$

 

 

$

85,202

 

Our Level 2 assets consist of commercial paper and corporate debt securities. We review trading activity and pricing for our available-for-sale securities as of the measurement date. When sufficient quoted pricing for identical securities is not available, we use market pricing and other observable market inputs for similar securities obtained from various third-party data providers. These inputs either represent quoted prices for similar assets in active markets or have been derived from observable market data.

On June 30, 2017, we issued Series A-1 preferred stock warrants in connection with long-term debt. The warrant liability was classified as a Level 3 liability and the fair value was determined using the Black-Scholes option-pricing model with the following key assumptions: (1) stock price of $9.64; (2) a risk-free rate of 2.31%; (3) an expected volatility of 78%; and (4) a term of 9.5 years. Both observable and unobservable inputs are used to determine the fair value of the warrant liability. As a result, the unrealized gains and losses of the warrant liability may include changes in fair value attributable to both observable inputs (e.g., changes in market interest rates) and unobservable inputs (e.g., probabilities of the occurrence of an early termination event).

In July 2017, in connection with the closing of the merger, our preferred stock warrants converted to common stock warrants. As a result of the change in the underlying shares, the warrants were equity-classified beginning on July 24, 2017. As of the date of conversion, we remeasured the fair value of the warrants, which resulted in a $1,000 decrease in fair value, which was recorded as other income in our accompanying condensed consolidated statements of operations and comprehensive income (loss). See Note 11 for additional discussion of the warrants.

The following table shows the reconciliation of the Level 3 warrant liability measured and recorded at fair value on a recurring basis, using significant unobservable inputs (in thousands):

 

 

Estimated

Fair Value

 

Balance as of January 1, 2017

 

$

 

Fair value of warrants at issuance (June 30, 2017)

 

 

53,000

 

Change in fair value of warrant liability in connection

   with merger

 

 

(1,000

)

Conversion of warrant liability to equity

 

 

(52,000

)

Balance as of September 30, 2017

 

$

 

 

7. Accrued Liabilities

Accrued expenses and other current liabilities consisted of the following (in thousands):

 

 

 

September 30,

2017

 

 

December 31,

2016

 

 

 

(unaudited)

 

 

 

 

 

Accrued taxes and licenses

 

$

354

 

 

$

61

 

Accrued professional fees

 

 

50

 

 

 

5

 

Deferred compensation

 

 

 

 

 

61

 

Accrued other

 

 

238

 

 

 

43

 

Total

 

$

642

 

 

$

170

 

 

8. Long-term Debt

On June 30, 2017, we drew down a term loan of $5.0 million from Silicon Valley Bank with whom we had entered into a long-term financing arrangement on December 16, 2016. The loan has an interest-only period that expires on July 1, 2018, at which point

15


we will be obligated to make thirty consecutive equal monthly payments of principal (each in an amount that will fully amortize the loan), plus accrued interest. Interest accrues at a floating per annum rate equal to the lender’s prime rate minus 1.75%. As a condition to the loan, we agreed to pay a final payment fee of 7.5%, or $375,000, upon repayment of the loan. The final payment fee was recorded in long-term debt with an offsetting reduction in long-term debt and was accounted for as a debt discount.

The obligations under the loan agreement are subject to acceleration upon the occurrence of specified events of default, including a material adverse change in our business, operations, financial, or other condition. We assessed the likelihood of the lender accelerating payment of the loan due to a material adverse change in our business, operations, financial, or other condition as remote. As such, as of September 30, 2017, the classification of the loan is split between current and noncurrent based on the timing of payment obligations.  The term loan agreement contains customary conditions to borrowings, events of default and negative covenants, including covenants that could limit our ability to, among other things, incur additional indebtedness, liens or other encumbrances; make dividends or other distributions; buy, sell or transfer assets; engage in any new line of business; and enter into certain transactions with affiliates. We were in compliance with our covenants as of September 30, 2017.

Also, in connection with the drawdown of the loan, we also granted the financial institution 7,069 Series A-1 Preferred Stock warrants at an exercise price of $12.38 per share. The fair value of the warrants on the date of issuance was $53,000, determined using the Black-Scholes option-pricing model, and was recorded as a discount to the note and as a warrant liability on the accompanying condensed consolidated balance sheets. In connection with the merger and conversion of all outstanding Series A-1 preferred stock, the warrants became exercisable for 7,069 fully vested shares of our common stock.  As a result of the change in the underlying shares, the warrants were equity-classified beginning on July 24, 2017.  See Note 11 for further details of these warrants.  

The debt discount is being amortized to interest expense using the effective interest method over the repayment term of the initial loan amount. Non-cash interest expense associated with the amortization of the discount was $43,000 for the three and nine months ended September 30, 2017. The unamortized discount was $385,000 as of September 30, 2017.  

9. Commitments and Contingencies

Operating Lease

On April 1, 2017, we entered into an amendment to our existing lease pursuant to which we agreed to lease additional premises adjacent to our existing leased premises for an annual base rent of $38,000. The amendment is effective on April 12, 2017. The amendment does not alter the December 31, 2019 expiry date of the existing lease. As required by the terms of the lease, in May 2017, we entered into a line of credit to establish collateral to support the security deposit in an amount of $132,000. This is recorded as restricted cash in the accompanying condensed consolidated balance sheets.

10. License and Collaboration Agreement

In October 2015, we entered into the Collaboration Agreement with Kite to discover and develop protein-based immunotherapies targeting the immune synapse to treat cancer. Under our agreement, we are to perform certain research services and grant to Kite an exclusive license to two programs from our TIP technology, which Kite is planning to further engineer into chimeric antigen receptor (“CAR”) and T cell receptor (“TCR”) product candidates.

Under the terms of the Collaboration Agreement, Kite made upfront payments to us of $5.5 million, which were initially recorded as deferred revenue. We will also be eligible to receive milestone payments based upon the successful achievement of pre-specified research, clinical, and regulatory milestones totaling up to $530.0 million plus royalty payments on product sales, if any. Kite will receive an exclusive, worldwide license to research, develop, and commercialize engineered autologous T cell therapies incorporating two programs coming from our platform.

On October 20, 2017, we entered into an amendment with Kite to extend the research term of the Collaboration Agreement. Under the amended agreement, we are eligible to receive an additional $450,000 research support payment from Kite in two tranches (instead of a single tranche as previously contemplated by the original Collaboration Agreement) (the “Amendment”). The Amendment also amended and restated the original research plan. We adjusted our estimated service period over the extended term and have adjusted the revenue recognition accordingly.

We recorded revenue of $128,000 and $737,000 for the three months ended September 30, 2017 and 2016, respectively, and $1.6 million and $2.2 million for the nine months ended September 30, 2017 and 2016, respectively.

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11. Convertible Preferred Stock

In March 2017, we issued and sold 707,330 shares of Series A convertible preferred stock and received a total of $4.0 million. In April 2017, prior to the execution and delivery of the Merger Agreement certain holders of our Series A-1 convertible preferred stock purchased 2,947,211 shares of Series A-1 preferred stock for $16.7 million in proceeds. Contemporaneously with the execution and delivery of the Merger Agreement certain of our pre-existing stockholders entered into a subscription agreement with us pursuant to which such stockholders purchased immediately prior to the closing of the merger 1,335,118 shares of our convertible preferred stock at a purchase price of $12.74 per share for an aggregate purchase price of approximately $17.0 million.

The rights, preferences, and privileges of convertible preferred stock are summarized in our audited financial statements and accompanying notes for the years ended December 31, 2016 and 2015, as filed with the SEC in the Registration Statement.

Upon the closing of the merger, all outstanding shares of our convertible preferred stock converted into 9,301,433 shares of common stock. As of September 30, 2017, we do not have any convertible preferred stock outstanding.

Preferred Stock Warrants

In connection with our draw down of a term loan on June 30, 2017, we granted the lender 7,069 of fully vested Series A-1 preferred stock warrants at an exercise price of $12.38 per share and a term of ten years. The fair value of the warrants on the date of issuance was $53,000 and was recorded as a discount to the note and as a warrant liability within the accompanying condensed consolidated balance sheets. The warrants were initially classified as a liability because the underlying to the warrants were puttable shares.

On July 24, 2017, in connection with the merger and conversion of all outstanding Series A-1 preferred stock, the warrants became exercisable for 7,069 fully vested shares of our common stock. As a result of the change in the underlying shares, the warrants were equity-classified beginning on July 24, 2017. As a result of the equity classification, the warrant liability was remeasured as of July 24, 2017 and the change in fair value was recognized within other (income) expense in our condensed consolidated statements of operations and comprehensive income (loss) and the carrying value of the revised warrant liability was reclassified to additional paid-in capital within stockholders’ deficit.

12. Stockholders’ Deficit

Stock-Based Compensation Expense

 

We use the Black-Scholes option pricing model to estimate the fair value of stock options granted to employees at the grant date. We recognize the fair value of stock-based compensation as compensation expense over the requisite service period, which is the vesting period. We also record stock options and other stock-based compensation issued to non-employees at their fair value as of their date of grant using the Black-Scholes option pricing model. Non-employee awards are then periodically remeasured to reflect the current fair value at each reporting period and expense is recognized over the related vesting period. Assumptions used in valuing non-employee stock options are generally consistent with those used for employee stock options with the exception that the expected term is over the contractual life.

Stock-based compensation expense is classified in the condensed consolidated statements of operations and comprehensive income (loss) as follows (in thousands):

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(unaudited)

 

Employee:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

38

 

 

$

4

 

 

$

93

 

 

$

5

 

General and administrative

 

169

 

 

5

 

 

386

 

 

46

 

Non-Employee:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

16

 

 

1

 

 

40

 

 

3

 

General and administrative

 

6

 

 

2

 

 

9

 

 

3

 

Total stock-based compensation expense

 

$

229

 

 

$

12

 

 

$

528

 

 

$

57

 

 

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13. Income Taxes

We are subject to income taxes in the United States and our effective tax rate is calculated quarterly based upon current assumptions relating to the full year’s estimated operating results and various tax-related items. Our effective tax rate for the three and nine-month periods ended September 30, 2017 was (0.04) %. The difference between the effective tax rate of (0.04) % and the U.S. federal statutory rate of 35% for the three and nine-month periods ended September 30, 2017 was primarily due to recognizing a full valuation allowance on deferred tax assets.  

As of September 30, 2017, we determined based on all available evidence, both positive and negative, including our latest forecasts and cumulative losses in recent years, it was more likely than not that none of our deferred tax assets would be realized and therefore we continued to record a full valuation allowance. No current tax liability or expense associated with our deferred tax assets have been recorded in the financial statements.

As part of the merger with Nivalis, we identified $1.5 million of acquired IPR&D. IPR&D acquired in a business combination is an indefinite-lived intangible asset until the completion or abandonment of the associated R&D efforts. Once the research and development efforts are completed or abandoned, the IPR&D will either be impaired or amortized over the asset life as a finite-lived intangible.

As the acquired IPR&D is not completed, and has not been abandoned, it is considered indefinite-lived for accounting purposes. Any future reversal of a deferred tax liability resulting from IPR&D costs cannot be scheduled for tax purposes and therefore cannot be considered as a source of future taxable income. Thus, we have recorded a deferred tax liability of $509,000 as a result of the acquired IPR&D having a financial reporting basis of $1.5 million and a tax basis of $0.

Under Section 382 of the Internal Revenue Code of 1986, substantial changes in Alpine Immune Sciences’ ownership may limit the amount of net operating loss carryforwards that could be utilized annually in the future to offset taxable income. Any such annual limitation may significantly reduce the utilization of the net operating losses before they expire.

Our net operating loss carry forward amounts expire starting in 2032. As of December 31, 2016, we had accumulated approximately $75.7 million of federal tax losses and $0 (tax effected) of state tax losses.

Due to our operating loss carryforwards, all tax years remain open to examination by the major taxing jurisdictions to which we are subject. In the event we are assessed interest or penalties at some point in the future, it will be classified in the financial statements as tax expense.

Under ASC 740, the benefit of an uncertain tax position that is more likely than not of being sustained upon audit by the relevant taxing authority must be recognized at the largest amount that is more likely than not to be sustained. No portion of the benefit of an uncertain tax position may be recognized if the position has less than a 50% likelihood of being sustained. We do have an uncertain tax position on our research and development credits as of the three and nine-month periods ended September 30, 2017. However, no deferred asset is recorded for the credits due to the full valuation allowance.

14. Related Party Transactions

We have a shared services agreement with Alpine BioVentures GP, LLC, pursuant to which we incurred no costs for the three and nine months ended September 30, 2017 and $3,000 and $12,000 for the three and nine months ended September 30, 2016, respectively. We had an accrual of $5,000 related to the shared services agreement at December 31, 2016, which was paid in April 2017.

15. Subsequent Events

On October 20, 2017, we entered into the Amendment of the Collaboration Agreement with Kite. Pursuant to the terms of the Amendment, the research term of the Collaboration Agreement was extended, providing us additional time to deliver the second of two program TIPs to Kite as set forth in the Collaboration Agreement. Kite previously paid us a research support payment of $450,000 and, pursuant to the terms of the Amendment, we are eligible to receive an additional $450,000 research support payment payable by Kite in two tranches (instead of a single tranche as previously contemplated by the Collaboration Agreement). The Amendment also amended and restated the original research plan.


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

You should read the following management’s discussion and analysis of financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our audited financial statements and related notes thereto and management’s discussion and analysis of financial condition and results of operation for the year ended December 31, 2016, included in our Registration Statement on Form S-4 (Reg No. 333-218134) (the “Registration Statement”), filed with the SEC.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements and information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the “safe harbor” created by those sections. In some cases you can identify these statements by forward-looking words such as “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan,” “expect,” or similar expressions, or the negative or plural of these words or expressions. You should read these statements carefully because they discuss future expectations, contain projections of future results of operations or financial condition, or state other “forward-looking” information. These statements relate to our future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements. These forward-looking statements include, but are not limited to:

 

 

our ability to identify additional products or product candidates;

 

our estimates regarding our expenses, revenues, anticipated capital requirements and our needs for additional financing;

 

our ability to obtain funding for our operations;

 

the implementation of our business model and strategic plans for our business and technology;

 

the timing of the commencement, progress and receipt of data from any of our preclinical and potential clinical trials;

 

the expected results of any preclinical or clinical trial and the impact on the likelihood or timing of any regulatory approval;

 

the scope of protection we are able to establish and maintain for intellectual property rights covering our technology and product candidates;

 

the timing or likelihood of regulatory filings and approvals;

 

the therapeutic benefits, effectiveness and safety of our product candidates;

 

the rate and degree of market acceptance and clinical utility of any future products

 

our ability to maintain and establish collaborations;

 

our expectations regarding market risk, including interest rate changes;

 

developments relating to our competitors and our industry; and

 

our expectations regarding licensing, acquisitions and strategic operations.

 

These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in this report in Part II, Item 1A — “Risk Factors,” and elsewhere in this report. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. These statements, like all statements in this report, speak only as of their date, and we undertake no obligation to update or revise these statements in light of future developments, except as required by law.


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Overview

We are a development-stage immunotherapy company focused on developing treatments for autoimmune/inflammatory diseases and cancer. Our proprietary Variant Immunoglobulin Domain (“vIgD”) scientific platform uses a process known as directed evolution to create therapeutics potentially capable of modulating the human immune system.

Our goal is to create modern therapies targeting the immune synapse, using our directed-evolution based discovery platform to potentially treat patients with serious conditions such as cancer and inflammatory diseases. To achieve our goal, we currently plan to: