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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, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from           to
Commission File Number: 001-37449
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)
Securities registered pursuant to Section 12(b) of the Act:
 
 
 
 
 
Title of each class
 
Trading symbol(s)
 
Name of each exchange on which registered
Common Stock, par value $0.001 per share
 
ALPN
 
The Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
 
 
Accelerated filer
 
 
 
 
 
Non-accelerated Filer
 
 
Smaller reporting company
 
 
 
 
 
 
 
 
Emerging growth company
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
As of November 1, 2019, the registrant had 18,587,768 shares of common stock, $0.001 par value per share, outstanding.




ALPINE IMMUNE SCIENCES, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2019
 
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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. 





PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
ALPINE IMMUNE SCIENCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
 
 
 
September 30, 2019
 
December 31, 2018
 
 
(unaudited)
 
 
Assets
 
 

 
 

Current assets:
 
 

 
 

Cash and cash equivalents
 
$
17,395

 
$
10,711

Short-term investments
 
29,193

 
41,592

Restricted cash, current
 
132

 

Prepaid expenses and other current assets
 
5,734

 
1,242

Total current assets
 
52,454

 
53,545

Restricted cash, noncurrent
 
254

 
132

Property and equipment, net
 
1,201

 
1,196

Operating lease, right-of-use asset
 
10,830

 

Total assets
 
$
64,739

 
$
54,873

Liabilities and stockholders’ equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
5,778

 
$
1,716

Accrued liabilities
 
5,825

 
4,363

Deferred revenue
 
2,069

 

Current portion of long-term debt
 

 
2,048

Total current liabilities
 
13,672

 
8,127

Operating lease liability, noncurrent
 
11,350

 

Long-term debt
 
4,886

 
2,155

Total liabilities
 
29,908

 
10,282

Commitments and contingencies
 


 


Stockholders’ equity:
 
 
 
 
Common stock, $0.001 par value per share; 200,000,000 shares authorized at September 30, 2019 and December 31, 2018; 18,638,235 shares issued and 18,587,768 shares outstanding at September 30, 2019; 13,904,672 shares issued and 13,854,205 shares outstanding at December 31, 2018
 
19

 
14

Treasury stock, at cost; 50,467 shares at September 30, 2019 and December 31, 2018
 

 

Additional paid-in capital
 
116,591

 
90,664

Accumulated other comprehensive gain (loss)
 
7

 
(13
)
Accumulated deficit
 
(81,786
)
 
(46,074
)
Total stockholders’ equity
 
34,831

 
44,591

Total liabilities and stockholders’ equity
 
$
64,739

 
$
54,873

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

1



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,
 
2019
 
2018
 
2019
 
2018
 
(unaudited)
Collaboration revenue
$
289

 
$

 
$
856

 
$
705

Operating expenses:
 
 
 
 
 
 
 
Research and development
9,532

 
10,529

 
30,048

 
20,039

General and administrative
2,467

 
1,857

 
7,365

 
5,848

Loss on sale of intangible asset

 

 

 
1,203

Total operating expenses
11,999

 
12,386

 
37,413

 
27,090

Loss from operations
(11,710
)
 
(12,386
)
 
(36,557
)
 
(26,385
)
Other income (expense):
 
 
 
 
 
 
 
Interest expense
(66
)
 
(82
)
 
(197
)
 
(243
)
Interest and other income
301

 
329

 
1,042

 
971

Loss before taxes
(11,475
)
 
(12,139
)
 
(35,712
)
 
(25,657
)
Income tax benefit

 

 

 
305

Net loss
$
(11,475
)
 
$
(12,139
)
 
$
(35,712
)
 
$
(25,352
)
Comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gain on investments
5

 
30

 
37

 
34

Unrealized loss on foreign currency translation
(7
)
 

 
(17
)
 

Comprehensive loss
$
(11,477
)
 
$
(12,109
)
 
$
(35,692
)
 
$
(25,318
)
Weighted-average shares used to compute basic and diluted net loss per share
18,586,950

 
13,851,336

 
18,281,707

 
13,848,371

Basic and diluted net loss per share
$
(0.62
)
 
$
(0.88
)
 
(1.95
)
 
$
(1.83
)
 
The accompanying notes are an integral part of these condensed consolidated financial statements.


2



ALPINE IMMUNE SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited)
(in thousands, except share amounts)
 
Common Stock
 
Treasury
 
Additional
Paid-in Capital
 
Accumulated
Other Comprehensive Loss
 
Accumulated Deficit
 
Total
Stockholders’ Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Balance, December 31, 2017
13,831,178

 
$
14

 
50,467

 
$

 
$
88,346

 
$
(59
)
 
$
(9,384
)
 
$
78,917

Cumulative effect of changes related to adoption of new revenue standard

 

 

 

 

 

 
(202
)
 
(202
)
Exercise of stock options
14,906

 

 

 

 
7

 

 

 
7

Stock-based compensation

 

 

 

 
511

 

 

 
511

Unrealized loss on investments

 

 

 

 

 
(46
)
 

 
(46
)
Net loss

 

 

 

 

 

 
(5,306
)
 
(5,306
)
Balance, March 31, 2018
13,846,084

 
14

 
50,467

 

 
88,864

 
(105
)
 
(14,892
)
 
73,881

Exercise of stock options
4,678

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 
523

 

 

 
523

Unrealized gain on investments

 

 

 

 

 
50

 

 
50

Net loss

 

 

 

 

 

 
(7,907
)
 
(7,907
)
Balance, June 30, 2018
13,850,762

 
14

 
50,467

 

 
89,387

 
(55
)
 
(22,799
)
 
66,547

Exercise of stock options
1,702

 
 
 
 
 
 
 
2

 
 
 
 
 
2

Stock-based compensation
 
 
 
 
 
 
 
 
544

 
 
 
 
 
544

Unrealized gain on investments
 
 
 
 
 
 
 
 
 
 
30

 
 
 
30

Net loss
 
 
 
 
 
 
 
 
 
 
 
 
(12,139
)
 
(12,139
)
Balance, September 30, 2018
13,852,464

 
$
14

 
50,467

 
$

 
$
89,933

 
$
(25
)
 
$
(34,938
)
 
$
54,984

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2018
13,854,205

 
$
14

 
50,467

 
$

 
$
90,664

 
$
(13
)
 
$
(46,074
)
 
$
44,591

Issuance of Units in Private Placement, net of offering costs
4,706,700

 
5

 

 

 
23,613

 

 

 
23,618

Exercise of stock options
124

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 
754

 

 

 
754

Unrealized gain on investments

 

 

 

 

 
15

 

 
15

Unrealized loss on foreign currency translation
 
 
 
 
 
 
 
 
 
 
(14
)
 
 
 
(14
)
Net loss

 

 

 

 

 

 
(12,381
)
 
(12,381
)
Balance, March 31, 2019
18,561,029

 
19

 
50,467

 

 
115,031

 
(12
)
 
(58,455
)
 
56,583

Offering costs associated with Private Placement

 

 

 

 
(20
)
 

 

 
(20
)
Exercise of stock options
23,701

 

 

 

 
11

 

 

 
11

Stock-based compensation

 

 

 

 
682

 

 

 
682

Unrealized gain on investments

 

 

 

 

 
17

 

 
17

Unrealized gain on foreign currency translation

 

 

 

 

 
4

 

 
4

Net loss

 

 

 

 

 

 
(11,856
)
 
(11,856
)
Balance June 30, 2019
18,584,730

 
19

 
50,467

 

 
115,704

 
9

 
(70,311
)
 
45,421

Issuance of warrants

 

 

 

 
60

 

 

 
60

Exercise of stock options
3,038

 

 

 

 
2

 

 

 
2

Stock-based compensation

 

 

 

 
825

 

 

 
825

Unrealized gain on investments

 

 

 

 

 
5

 

 
5

Unrealized loss on foreign currency translation

 

 

 

 

 
(7
)
 

 
(7
)
Net loss

 

 

 

 

 

 
(11,475
)
 
(11,475
)
Balance September 30, 2019
18,587,768

 
$
19

 
50,467

 
$

 
$
116,591

 
$
7

 
$
(81,786
)
 
$
34,831


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

3



ALPINE IMMUNE SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Nine Months Ended
September 30,
 
2019
 
2018
 
(unaudited)
Operating activities
 

 
 

Net loss
$
(35,712
)
 
$
(25,352
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Loss on sale of intangible asset

 
1,203

Amortization of right-of-use asset
699

 

Depreciation expense
344

 
279

Amortization of premium/discount on investments
(274
)
 
(453
)
Non-cash interest expense
99

 
131

Deferred income tax

 
(305
)
Stock-based compensation expense
2,261

 
1,578

Changes in operating assets and liabilities:
 
 
 
Prepaid expenses and other current assets
(4,492
)
 
210

Accounts payable and accrued liabilities
5,596

 
4,179

Deferred revenue
2,069

 
(479
)
Lease liabilities
(265
)
 

Deferred rent and other

 
(9
)
Net cash used in operating activities
(29,675
)
 
(19,018
)
Investing activities
 
 
 
Purchases of property and equipment
(335
)
 
(486
)
Proceeds from sale of intangible asset

 
250

Purchase of short-term investments
(54,306
)
 
(63,208
)
Maturities of short-term investments
65,625

 
86,426

Proceeds from the sale of short-term investments
1,391

 

Net cash provided by investing activities
12,375

 
22,982

Financing activities
 
 
 
Proceeds from borrowings, net of issuance costs
1,977

 

Proceeds from sale of common stock, net of offering costs
23,598

 

Repayment of debt
(1,333
)
 
(500
)
Proceeds from exercise of stock options
13

 
9

Net cash provided by (used in) financing activities
24,255

 
(491
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(17
)
 

Net increase (decrease) in cash and cash equivalents and restricted cash
6,938

 
3,473

Cash and cash equivalents and restricted cash, beginning of period
10,843

 
8,132

Cash and cash equivalents and restricted cash, end of period
$
17,781

 
$
11,605

Supplemental Information
 
 
 
Recognition of right-of-use asset
$
11,667

 
$

Cash paid for interest
$
97

 
$
111

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

4



ALPINE IMMUNE SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information as of September 30, 2019 and for the three and nine months ended September 30, 2019 and 2018 is unaudited)

1. Description of the Business
Alpine Immune Sciences, Inc. (the “Company”, “Alpine”, “we”, “us”, or “our”), together with its consolidated subsidiaries, is a clinical-stage immunotherapy company committed to leading a new wave of immune therapeutics, creating potentially powerful multifunctional immunotherapies to improve patients’ lives via unique protein engineering technologies. Alpine has two lead programs. The first, ALPN-101 for autoimmune/inflammatory diseases, is a selective dual T-cell costimulation blocker engineered to reduce pathogenic T and B cell immune responses by blocking ICOS and CD28. ALPN-101 has successfully completed enrollment in our phase 1 dose escalation safety trial in healthy volunteers and we are now planning initiation of a phase 1/2 clinical trial in steroid resistant or refractory acute graft versus host disease (“GVHD”) in the first quarter of 2020. The second, ALPN-202 for the treatment of cancer, is a conditional CD28 costimulator and dual checkpoint inhibitor, designed to activate a patient’s own immune system to fight cancer, which has the potential to improve upon the efficacy of combined checkpoint inhibition without worsened toxicities. We currently anticipate initiating enrollment in a phase 1 trial of ALPN-202, subject to authorization, in the first quarter of 2020. Our proprietary scientific platform uses a process known as directed evolution to convert native immune system proteins from the Immunoglobulin Super Family, or IgSF, into multi-targeted therapeutics potentially capable of modulating the human immune system. We were incorporated under the laws of the State of Delaware and are headquartered in Seattle, Washington.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“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 consolidated financial statements and accompanying notes. Significant estimates inherent in the preparation of the accompanying unaudited condensed consolidated financial statements include accruals for clinical trial activities and other accruals, and the estimated fair value of equity-based awards. 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 accompanying unaudited condensed consolidated financial statements as of September 30, 2019 and for the three and nine months ended September 30, 2019 and 2018 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 consolidated financial statements should be read in conjunction with our audited consolidated financial statements and accompanying notes for the years December 31, 2018 and 2017 included in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on March 18, 2019 (“Annual Report”). The results of our operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results to be expected for the full year.
Principles of Consolidation
Our unaudited condensed consolidated financial statements include the financial position and results of operations of Alpine and our wholly owned operating company and subsidiary, AIS Operating Co., Inc., and Alpine Immune Sciences Australia PTY LTD, respectively. All inter-company balances and transactions have been eliminated in consolidation. 
Restricted Cash
Restricted cash represents cash drawn on lines of credit used to establish collateral to support the security deposit on our leases to rent office and laboratory space in Seattle, Washington.
Short-Term Investments

5



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.
Leases (effective January 1, 2019)
We account for our leases under Accounting Standards Codification (“ASC”) 842, Leases. Under this guidance, arrangements meeting the definition of a lease are classified as operating or financing leases, and are recorded on the condensed consolidated balance sheet as both a right-of-use asset and lease liability, calculated by discounting fixed lease payments over the lease term at the rate implicit in the lease or our incremental borrowing rate. As we do not know the lessor’s implicit rate, we use our incremental borrowing rate at the commencement date of the lease in determining the present value of lease payments. Lease liabilities are increased by interest and reduced by payments each period, and the right-of-use asset is amortized over the lease term. For operating leases, interest on the lease liability and the amortization of the right-of-use asset result in straight-line rent expense over the lease term. For finance leases, interest on the lease liability and the amortization of the right-of-use asset results is front-loaded expense over the lease term. Variable lease expenses are recorded when incurred.
In calculating the right-of-use asset and lease liability, we elected to combine lease and non-lease components. We exclude short-term leases having initial terms of 12 months or less from the new guidance as an accounting policy election, and recognize rent expense on a straight-line basis over the lease term. We continue to account for leases in the prior period financial statements under ASC Topic 840.
Revenue Recognition
Revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Our steps for recognizing revenue consist of; (1) identifying the contract, (2) identifying the performance obligations as either distinct or bundled goods and services, (3) determining the transaction price associated with each performance obligation for which we expect to be entitled in exchange for transferring such goods and services, (4) allocating the transaction price to the performance obligations in the contract and (5) recognizing revenue upon satisfaction of performance obligations.
Our collaboration agreements principally contain multiple performance obligations, which 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. Our revenue is primarily derived from our collaboration agreements with Adaptimmune Therapeutics plc (“Adaptimmune”) and Kite Pharma, a Gilead company (“Kite”). See further discussion of our collaboration agreements in Note 9.
We allocate revenue to each performance obligation based on its relative stand-alone selling price. We generally determine stand-alone selling prices at the inception of the contract based on our best estimate of what the selling price would be if the deliverable was regularly sold by us on a stand-alone basis. 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. We recognize revenue under our collaboration agreements based on employee hours contributed to each performance obligation.
Our collaboration agreements provide 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 review the contributed employee hours for each performance obligation under our collaboration agreements, and adjust the revenue recognized to reflect changes in assumptions relating to the estimated satisfaction of the performance

6



obligation. 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.
Revenue from Asset Purchase Agreement
In June 2018, we entered into an Asset Purchase Agreement (“Purchase Agreement”) with Laurel Venture Capital Ltd. (“Laurel”) and completed the sale of global rights to the indefinite-life GSNOR inhibitor in-process research and development asset acquired as part of the merger with Nivalis in 2017. As consideration under the Purchase Agreement, we received a non-refundable closing payment of $250,000, which was accounted for as a purchase of our intangible asset. Upon the sale of the GSNOR assets, we derecognized the full carrying value of the intangible asset on our accompanying Condensed Consolidated Balance Sheets and recognized a loss on the sale of the intangible asset of $1.2 million on the accompanying Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). In June 2019, we recognized as revenue an additional milestone payment of $425,000, related to the asset purchase.
Foreign Currency Translation
Our functional currency is the U.S. dollar. All assets and liabilities of our subsidiaries are translated using period-end exchange rates and revenues and expenses are translated at average exchange rates for the year. Translation adjustments are included as components of comprehensive gain (loss) in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
Recently Issued Accounting Pronouncements
In November 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-18, Collaborative Arrangements: Clarifying the Interaction between Topic 808 and Topic 606. This ASU clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue when the collaborative arrangement participant is a customer in the context of a unit of account and precludes recognizing as revenue consideration received from a collaborative arrangement participant if the participant is not a customer. This ASU is effective for public companies for annual reporting periods and interim periods within those annual periods beginning after December 15, 2019. We are currently evaluating the effect, if any, that ASU 2018-18 will have on our consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted for any eliminated or modified disclosures. We do not expect the adoption of this guidance to have any impact on our financial statements.
Recently Adopted Accounting Pronouncements
In June 2018, the FASB issued ASU No. 2018-07, which aligns the measurement and classification guidance for share-based payments to nonemployees with the guidance for share-based payments to employees, with certain exceptions. Under the guidance, the measurement of equity-classified nonemployee awards will be fixed at the grant date. Upon transition, nonemployee awards will be required to be measured at fair value as of the adoption date with a cumulative-effect adjustment recognized in retained earnings as of the beginning of the annual period of adoption. ASU 2018-07 is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. We adopted this standard on January 1, 2019 and it did not have a material impact on our financial statements and related disclosures.
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. We adopted this ASU effective January 1, 2019 and elected the modified retrospective method transition option, which permitted us not to restate the comparative period presented. Upon adoption, we recorded an operating lease right-of-use asset of $797,000, a corresponding operating lease liability of $883,000, and reduced our deferred rent balance by $86,000 to $0 on our accompanying Condensed Consolidated Balance Sheets; there was no effect on opening retained earnings, and we continue to account for leases in the prior period financial statements under ASC Topic 840. In adopting the new standard, we elected to apply the practical expedients regarding the identification of leases, lease classification, indirect costs, and the combination of lease and non-lease components.

7



3. Net Loss Per Share
Basic net loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. The net loss per share for the three and nine months ended September 30, 2019 reflects 4,706,700 shares of our common stock issued pursuant to a private placement financing completed in January 2019. The significant number of shares issued has affected the year-over-year comparability of our net loss per share calculations.
The common stock issuable upon the conversion or exercise of the following dilutive securities has been excluded from the diluted net loss per share calculation because their effect would have been anti-dilutive:
 
September 30,
 
2019
 
2018
 
(unaudited)
Warrants to purchase common stock
1,877,094

 
24,123

Options to purchase common stock
3,264,600

 
2,461,591

Total
5,141,694

 
2,485,714


4. 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, 2019
Assets:
(unaudited)
 
Amortized Cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Fair market value
Money market funds
$
16,514

 
$

 
$

 
$
16,514

U.S. treasury bills
2,506

 
3

 

 
2,509

Corporate debt securities and commercial paper
26,663

 
21

 

 
26,684

Total
$
45,683

 
$
24

 
$

 
$
45,707

 
December 31, 2018
Assets:
Amortized Cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Fair market value
Money market funds
$
6,405

 
$

 
$

 
$
6,405

U.S. treasury bills
13,966

 

 
(2
)
 
13,964

Corporate debt securities and commercial paper
31,331

 

 
(11
)
 
31,320

Total
$
51,702

 
$

 
$
(13
)
 
$
51,689


All short-term investments held as of September 30, 2019 and December 31, 2018 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.
5. Fair Value Measurements
Cash and cash equivalents, restricted cash, receivables, accounts payable and accrued liabilities, which are recorded at invoiced amount or cost, approximate fair value based on the short-term nature of these financial instruments. 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.

8



Level 3: Unobservable inputs supported by little or no market activity and significant to the fair value of the assets or liabilities.
As of September 30, 2019, and December 31, 2018, cash of $880,000 and $614,000, respectively, is excluded from the following fair value table below. The following tables summarize our financial assets and liabilities measured at fair value on a recurring basis (in thousands):
 
September 30, 2019
 
(unaudited)
Assets:
Level 1
 
Level 2
 
Level 3
 
Total
Money market funds
$
16,514

 
$

 
$

 
$
16,514

U.S. treasury bills
2,509

 

 

 
2,509

Corporate debt securities and commercial paper

 
26,684

 

 
26,684

Total
$
19,023

 
$
26,684

 
$

 
$
45,707

 
December 31, 2018
Assets:
Level 1
 
Level 2
 
Level 3
 
Total
Money market funds
$
6,405

 
$

 
$

 
$
6,405

U.S. treasury bills
13,964

 

 

 
13,964

Corporate debt securities and commercial paper

 
31,320

 

 
31,320

Total
$
20,369

 
$
31,320

 
$

 
$
51,689


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.
6. Additional Balance Sheet Information
Prepaid expenses and other current assets consist of the following (in thousands):
 
September 30, 2019
 
December 31, 2018
 
(unaudited)
 
 
Tenant improvement allowance receivable
$
4,423

 
$

Deferred financing costs

 
477

Prepaid insurance
433

 
300

Prepaid research and development
271

 
83

Prepaid other
179

 
145

Other receivables
428

 
237

Prepaid expenses and other current assets
$
5,734

 
$
1,242


Accrued liabilities consist of the following (in thousands):
 
September 30, 2019
 
December 31, 2018
 
(unaudited)
 
 
Research and development services
$
2,933

 
$
2,457

Employee compensation
1,417

 
1,009

Legal and professional fees
492

 
646

Accrued other
983

 
251

Total
$
5,825

 
$
4,363



9



7. Long-term Debt
In December 2016, we entered into a Loan and Security Agreement (the “Original Agreement”), with Silicon Valley Bank (“SVB”), under which we borrowed $5.0 million. The Original Agreement accrued interest at a floating per annum rate equal to the lender’s prime rate minus 1.75%. The Original Agreement had an interest-only period through July 2018.
On August 26, 2019 (the “Effective Date”), we entered into an Amended and Restated Loan and Security Agreement (the “Loan Agreement”) with SVB, pursuant to which SVB agreed to extend term loans to us with an aggregate principal amount of up to $15.0 million (the “Term Loans”). Borrowings under the Loan Agreement consist of up to three separate tranches. The initial tranche of $5.0 million was funded in August 2019, $3.0 million of which was used to repay amounts owing under our Original Agreement. We intend to use the remaining proceeds for potential working capital and other general corporate purposes, including the advancement of our development programs. The second tranche of up to $5.0 million is available at our option at any time through April 30, 2020. The third and final tranche of up to $5.0 million is available at our option at any time from the date on which SVB receives and approves evidence that we have initiated a phase 2a trial of ALPN-101 through July 31, 2020.
The Term Loans accrue interest at a floating per annum rate of 0.25% above the prime rate, subject to a floor of 5.75%, which interest is payable monthly commencing in September 2019. Upon the occurrence and during the continuance of an event of default, a default interest rate will apply that is 4.0% above the otherwise applicable interest rate. The Term Loans are interest only until September 30, 2020, after which the Term Loans will be payable in 34 equal monthly installments of principal plus interest, with the final installment due and payable on July 1, 2023.    
We may prepay all of the Term Loans subject to a prepayment fee equal to $75,000, which represents the deferred portion of the final payment due under the Original Agreement, plus the outstanding principal balance under the Term Loans at the time of such prepayment multiplied by a prepayment fee of 2.0%in the first year, 1.0% in the second year, and 0% in the third year and thereafter. Additionally, a final payment in the amount of 5.5% of the funded Term Loans is payable to SVB on the date on which the Term Loans are prepaid, paid or become due and payable in full. The final payment fees are recorded in long-term debt with an offsetting reduction to debt discount on our accompanying Condensed Consolidated Balance Sheets.
The Loan Agreement contains customary representations and warranties, events of default and affirmative and negative covenants, including, among others, covenants that limit or restrict our ability to, among other things, incur additional indebtedness, grant liens, merge or consolidate, make acquisitions, pay dividends or other distributions or repurchase equity, make investments, dispose of assets, engage in any new lines of business, and enter into certain transactions with affiliates, in each case subject to certain exceptions. 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. We were in compliance with our covenants as of September 30, 2019. As such, as of September 30, 2019, the classification of the loan is split between current and noncurrent based on the timing of payment obligations. As security for its obligations under the Loan Agreement, we granted SVB a first priority security interest on substantially all of our assets, except intellectual property, and subject to certain other exceptions.
In connection with the Loan Agreement, we issued a warrant to SVB to purchase up to 52,083 shares of our common stock at a price of $4.32 per share, 17,361 shares of which are currently exercisable. If we draw down the second and third tranches, additional shares will become exercisable. The fair value of the warrants on the date of issuance was $60,000, determined using the Black-Scholes option-pricing model, and was recorded as a component of equity and as a debt discount on our accompanying Condensed Consolidated Balance Sheets. In connection with Original Agreement, SVB also holds 7,069 fully vested common stock warrants at an exercise price of $12.38 per share.
The Term Loan was accounted for as a debt modification in a non-troubled debt restructuring, rather than a debt extinguishment, based on a comparison of the present value of the cash flows under the terms of the debt immediately before and after the Effective Date of the Term Loan, which resulted in a change of less than 10%. As a result, the remaining unamortized debt discount recorded in connection with the Original Agreement will be amortized to interest expense over the repayment term of Loan Agreement. In connection with the Loan Agreement, we recorded a total debt discount of $477,000, which is being amortized to interest expense using the effective interest method over the repayment term of the loan. Non-cash interest expense associated with the amortization of the discount was $32,000 and $43,000 for the three months ended September 30, 2019 and 2018, respectively, and $99,000 and $131,000 for the nine months ended September 30, 2019 and 2018, respectively. The unamortized discount was $463,000 as of September 30, 2019.  

10



Scheduled principal payments on our outstanding debt as of September 30, 2019 under our Loan Agreement, excluding final fee amounts, are as follows (in thousands):
Year ending December 31,
 
Total
2019 (remainder of year)
 

2020
 
441

2021
 
1,765

2022
 
1,765

2023
 
1,029

Total future principal payments
 
5,000


8. Commitments and Contingencies
Operating Leases
We lease office and laboratory space in Seattle, Washington, under an agreement classified as an operating lease that expires on December 31, 2019. This lease has two 12-month renewal options, which we did not include in the lease term when calculating our right-of-use asset and lease liability, as we are not reasonably certain to renew. This lease does not require any contingent rental payments, impose any financial restrictions, or contain any residual value guarantees. Variable expenses generally represent our share of the landlord’s operating expenses. We do not act as a lessor or have any leases classified as financing leases. In May 2017, as required by the terms of the lease, 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 current restricted cash in the accompanying Condensed Consolidated Balance Sheets.
In March 2019, we entered into a lease with ARE-Seattle No. 28, LLC (the “Landlord”) for 27,164 square feet of office and laboratory space located at 188 East Blaine Street, Seattle, Washington. The term of the lease is 10.8 years with one option to extend the term by 5 years. The lease term commenced in June 2019. The “Rent Commencement Date” will be nine months after the commencement date. The annual base rent under the lease is $1.7 million for the first year and will increase by 3.0% each year thereafter. We are not required to pay base rent from the Rent Commencement Date through the last day of the ninth month following the Rent Commencement Date. We will receive a maximum tenant improvement allowance of $5.4 million, which is included in our base rent, and a maximum additional tenant improvement allowance of $1.8 million, which will result in additional rent amortized over the term of the lease at an annual rate of 8.0%. The lease also requires us to pay additional amounts for operating and maintenance expenses. In March 2019, in connection with the lease, we provided a $254,000 letter of credit as a security deposit, which is recorded as noncurrent restricted cash in our accompanying Condensed Consolidated Balance Sheets.
At September 30, 2019, our operating lease right-of-use assets and operating lease liability associated with these leases were $10.8 million and $11.4 million, respectively, which are included in the accompanying Condensed Consolidated Balance Sheets.
The components of our lease expense were as follows (in thousands):
 
Three Months Ended
September 30, 2019
 
Nine Months Ended
September 30, 2019
 
(unaudited)
Lease cost:
 
 
 
Operating lease cost
$
679

 
$
1,251

Variable lease cost
95

 
266

Total lease cost
$
774

 
$
1,517

Other information:
 
 
 
Cash paid for amounts included in the measurement of lease liabilities
 
 
$
682

Right-of-use assets exchanged for new operating lease liabilities
 
 
$
11,667

Weighted-average remaining lease term (in years), operating leases
 
 
10.2

Weighted-average discount rate, operating leases
 
 
10.6
%


11



Maturities of our operating lease liabilities as of September 30, 2019 are as follows (in thousands):
2019 (remaining three months)
$
233

2020
214

2021
1,960

2022
2,011

2023
2,063

Thereafter
13,980

Total
20,461

Less: imputed interest
(9,111
)
Operating lease liabilities included in the Consolidated Balance Sheets at September 30, 2019
$
11,350


Rent expense, which is recorded on a straight-line basis, was $207,000 and $605,000 for the three and nine months ended September 30, 2018, respectively.
9. License and Collaboration Agreements
Adaptimmune
In May 2019, we entered into a collaboration and licensing agreement with Adaptimmune (the “Adaptimmune Collaboration Agreement”) to develop next-generation SPEAR T-cell products. Under the Adaptimmune Collaboration Agreement, we are to perform certain research services and grant Adaptimmune an exclusive license to programs from our secreted immunomodulatory protein (“SIP”) and transmembrane immunomodulatory protein (“TIP”) technologies, in order to further enhance Adaptimmune’s efforts to design and develop next-generation SPEAR T-cell therapies. In June 2019, under the terms of the Adaptimmune Collaboration Agreement, we received an upfront license payment of $2.0 million, and as of September 30, 2019 we have received an additional $500,000 in research support payments to fund ongoing programs. These payments were recorded as deferred revenue and will be recognized to revenue based on employee hours contributed to each performance obligation. We recorded revenue of $288,000 and $431,000 for the three and nine months ended September 30, 2019, respectively. In addition, we are eligible for additional research support payments, one-time payments and downstream development and commercialization milestones of up to $288.0 million, if all pre-specified milestones for each program are achieved. We are also eligible to receive low-single digit royalties on worldwide net sales of the applicable products.
Kite
In October 2015, we entered into a collaboration and licensing agreement (the “Kite Collaboration Agreement”) with Kite to discover and develop protein-based immunotherapies targeting the immune synapse to treat cancer. In May 2019, Kite provided us notice of termination of the Kite Collaboration Agreement following the expiration of the research term. Upon termination, the confidentiality and indemnity obligations of the parties survived and the licenses granted to Kite under the Kite Collaboration Agreement were terminated. Pursuant to the terms of the Kite Collaboration Agreement, the termination was effective in June 2019, thirty days after the effectiveness of Kite’s notice.
Under the terms of the Kite Collaboration Agreement, in 2015, Kite made upfront payments to us of $5.5 million, which were initially recorded as deferred revenue. Under the Kite Collaboration Agreement, we recorded no revenue for the three and nine months ended September 30, 2019, and revenue of $0 and $630,000 for the three and nine months ended September 30, 2018, respectively. In the second quarter of 2018, based on the completion of our research and development efforts in connection with the performance period, we recognized the remaining balance related to the Kite Collaboration Agreement in deferred revenue.
10. Stockholders’ Equity
Securities Offerings
In January 2019, we entered into a securities purchase agreement (the “Purchase Agreement”) with a limited number of accredited investors, pursuant to which we sold 4,706,700 units (the “Units”) for an aggregate purchase price of $25.3 million in a private placement (the “Private Placement”). Each Unit has a purchase price of $5.37 and consists of one share of our common stock and a warrant to purchase 0.39 shares of common stock. Pursuant to the terms of the Purchase Agreement, we issued 4,706,700 shares of common stock and warrants to purchase an aggregate of 1,835,610 shares of common stock. The warrants have an exercise price of $12.74 and have a term of five years.

12



The issuance of the securities sold in the Private Placement was not registered under the Securities Act of 1933, as amended, or state securities laws and such securities could not be offered or sold in the United States absent registration with the SEC or an applicable exemption from such registration requirements. In March 2019, we filed a registration statement with the SEC covering the resale of the shares of common stock issuable in connection with the Private Placement and upon exercise of the warrants, which registration was declared effective by the SEC on April 4, 2019.
We have incurred legal, accounting and other direct costs related to our efforts to raise capital. These costs have been capitalized as deferred offering costs and are included within prepaid expenses and other current assets in our accompanying Condensed Consolidated Balance Sheets. These were deferred until completion of the Private Placement, at which time $1.7 million were reclassified to additional paid-in capital as a reduction of the proceeds.
In June 2018, we entered into an equity distribution agreement, (“Equity Distribution Agreement”), with Piper Jaffray & Co., (“Piper Jaffray”), pursuant to which we may sell shares of our common stock through an “at the market” equity offering program for up to $50.0 million, in gross cash proceeds. Piper Jaffray will be entitled to compensation for its services of up to 3.0% of the gross sales price per share of all shares sold through Piper Jaffray under the Equity Distribution Agreement. The Equity Distribution Agreement may be terminated by us upon written notice to Piper Jaffray for any reason or by Piper Jaffray upon written notice to us for any reason or at any time under certain circumstances, including but not limited to if we experience a material adverse change.
Under the Equity Distribution Agreement, we will set the parameters for the sale of shares, including the number of shares to be issued, the time period during which sales are requested to be made, limitation on the number of shares that may be sold in any one trading day and any minimum price below which sales may not be made. We have no obligation to sell any shares under the Equity Distribution Agreement, and may at any time suspend solicitation and offers under the Equity Distribution Agreement. In July 2019, our Registration Statement on Form S-3 (File No. 333-212404) expired pursuant to Rule 415(a)(5) under the Securities Act of 1933, as amended. We will be unable to sell shares under the Equity Distribution Agreement until a new Registration Statement on Form S-3 is filed and declared effective by the SEC and a prospectus supplement relating to any sales under the Equity Distribution Agreement is filed with the SEC. As of September 30, 2019, no sales under our Equity Distribution Agreement have occurred.
Stock-Based Compensation Expense 
We use the Black-Scholes option pricing model to estimate the fair value of stock options granted 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. Stock-based compensation and warrant 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,
 
2019
 
2018
 
2019
 
2018
 
(unaudited)
Employee:
 
 
 
 
 
 
 
Research and development
$
438

 
$
197

 
$
1,200

 
$
599

General and administrative
370

 
332

 
1,001

 
946

Non-Employee:
 
 
 
 
 
 
 
Research and development
16

 
11

 
56

 
19

General and administrative
1

 
4

 
4

 
14

Total stock-based compensation expense
$
825

 
$
544

 
$
2,261

 
$
1,578


11. Income Taxes
We are subject to income taxes in the United States and Australia 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. Each quarter an estimate of the annual effective tax rate is updated should we revise our forecast of earnings based upon our operating results. If there is a change in the estimated effective annual tax rate, a cumulative adjustment is made. Our effective tax rate was 0.0% for the three months ended September 30, 2019 and 2018, and 0.0% and 1.19% for the nine months ended September 30, 2019 and 2018, respectively. The difference between the effective tax rate of 0.0% and the U.S. federal statutory rate of 21% for the three and nine-month periods ended September 30, 2019 was primarily due to recognizing a full valuation allowance on deferred tax assets.  The difference between the effective tax rate of 0.0% and 1.19% and the U.S. federal statutory rate of 21% for the three and nine-month periods ended September 30, 2018 was primarily due to recognizing a full

13



valuation allowance on deferred tax assets, and the estimated annual benefit of the removal of the deferred tax liability of $305,000 recorded as a result of a previously acquired in-process research and development intangible asset.
As of September 30, 2019, we determined that, based on an evaluation of the four sources of income and 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 has been recorded in the financial statements.

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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 Operations for the year ended December 31, 2018, included in our Annual Report on Form 10-K, or the “Annual Report”, filed with the SEC on March 18, 2019.
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, develop and commercialize 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 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 ability to achieve milestones in our current and any future 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.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

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Overview
We are a clinical-stage immunotherapy company committed to leading a new wave of immune therapeutics, creating potentially powerful multifunctional immunotherapies to improve patients’ lives via unique protein engineering technologies. Alpine has two lead programs.
The first, ALPN-101 for autoimmune/inflammatory diseases, is a selective dual T-cell costimulation blocker engineered to reduce pathogenic T and B cell immune responses by blocking ICOS and CD28. ALPN-101 has successfully completed enrollment in our phase 1 dose escalation safety trial in healthy volunteers and we are now planning initiation of a phase 1/2 clinical trial in steroid resistant or refractory acute graft versus host disease, or GVHD, which we expect to initiate in the first quarter of 2020. To date, ALPN-101 has been generally well-tolerated, without evidence of cytokine storm, cytokine release or clinical immunogenicity while being dosed as single or multiple doses, intravenously or subcutaneously. Additionally, ALPN-101 has exhibited favorable pharmacokinetic, or PK, and pharmacodynamic, or PD, characteristics and is a highly potent molecule capable of inhibiting both a T-cell and humoral response in humans as demonstrated by certain of our assays. We anticipate the phase 1/2 trial, which we have named BALANCE, will be an open-label, dose escalation and expansion study, with endpoints including safety, objective response rates, duration of responses, non-relapse mortality, and overall survival. We believe that preclinical data for ALPN-101 also strongly supports its potential as a treatment more broadly in other diseases -- especially connective tissue diseases like lupus and Sjogren’s syndrome as well as inflammatory arthritis conditions such as rheumatoid and psoriatic arthritis, which we continue to evaluate.
The second, ALPN-202 for the treatment of cancer, is a conditional CD28 costimulator and dual checkpoint inhibitor designed to activate a patient’s own immune system to fight cancer, which has the potential to improve upon the efficacy of combined checkpoint inhibition without worsened toxicities. We currently anticipate initiating, subject to authorization, enrollment in a phase 1 trial of ALPN-202, which we have named NEON-1, in the first quarter of 2020. We anticipate the phase 1 trial will evaluate patients who have failed available standard therapies, including checkpoint inhibitors when indicated, and will be designed as an open-label, dose escalation and expansion study. The primary endpoints of the study involve safety, but we also intend to assess other outcomes such as objective response rates, duration of responses, progression-free survival and overall survival.
Our proprietary scientific platform uses a process known as directed evolution to convert native immune system proteins from the Immunoglobulin Super Family, or IgSF, into multi-targeted 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 scientific platform to treat patients with serious conditions such as cancer and inflammatory diseases. To achieve our goal, we intend to: 
move our lead inflammation/autoimmune therapeutic ALPN-101 through clinical development for the treatment of GVHD, and evaluate other potential connective tissue and inflammatory diseases;
move our lead oncology program, ALPN-202, to clinical trials for the treatment of cancer; and
maximize the value of our pipeline and platform via partnering activities.
Our operations to date have been limited to business planning, raising capital, developing our platform technology, identifying potential immunotherapy candidates, and other research and development activities. To date, we have financed operations primarily through private placements of common stock and convertible preferred stock, funds received from license and research agreements, debt financing and assets acquired upon the close of our merger with Nivalis Therapeutics Inc., or Nivalis. We do not have any products approved for sale and have not generated any product sales. Since inception and through September 30, 2019, excluding amounts borrowed through debt financing, we have raised an aggregate of $125.0 million to fund operations, of which $23.6 million was from the sale of common stock, $49.2 million was from the sale of convertible preferred stock, $8.1 million was through our license and collaboration agreements, and $44.1 million in cash, cash equivalents, and marketable securities acquired through the merger with Nivalis. As of September 30, 2019, we had cash, cash equivalents, restricted cash, and short-term investments totaling $47.0 million.
Our net loss was $11.5 million and $12.1 million for the three months ended September 30, 2019 and 2018, respectively, and $35.7 million and $25.4 million for the nine months ended September 30, 2019 and 2018, respectively. We expect to continue incurring significant expenses and operating losses for at least the next several years as we:
 
initiate and complete clinical trials for product candidates, including ALPN-101, a dual ICOS/CD28 antagonist program targeting autoimmune/inflammatory disorders and ALPN-202, a CD80 vIgD-Fc that mediates PD-L1-dependent CD28 costimulation and inhibits the PD-L1 and CTLA-4 checkpoints targeting cancer;
contract to manufacture and perform additional process development for our product candidates; 
continue research and development efforts to build our pipeline beyond the current product candidates; 

16



maintain, expand, and protect our intellectual property portfolio; 
hire additional clinical, quality control, scientific, and management personnel; and 
add operational and financial personnel to support our product development efforts and operational capabilities applicable to operating as a public company.
We do not expect to generate product revenue unless and until we successfully complete development of, obtain marketing approval for and commercialize our product candidates, either alone or in collaboration with third parties. We expect these activities will take a number of years and our success in these efforts is subject to significant uncertainty. Accordingly, we will need to raise additional capital prior to the regulatory approval and commercialization of any of our product candidates. Until such time, if ever, as we can generate substantial product revenues, we expect to finance our operating activities through equity or debt financings, collaborations or licenses, capital lease transactions, or other available financing transactions. However, additional capital may not be available on reasonable terms, if at all, and if we raise additional funds through the issuance of additional equity or debt securities, it could result in dilution to our existing stockholders and increased fixed payment obligations.
Financial Overview
Collaboration Revenue
We derive our collaboration revenue primarily from our collaboration and licensing agreements. We may generate revenue in the future from milestone payments made pursuant to the Adaptimmune Collaboration Agreement, or from payments from future license or collaboration agreements, product sales, or government contracts and grants. We expect any revenue we generate, if any, will fluctuate from quarter to quarter.
Adaptimmune Therapeutics plc
In May 2019, we entered into a collaboration and licensing agreement, or the Adaptimmune Collaboration Agreement. with Adaptimmune Therapeutics plc, or Adaptimmune, a clinical-stage biopharmaceutical company primarily focused on providing novel cell therapies to patients, particularly for the treatment of solid tumors, to develop next-generation SPEAR T-cell products which incorporate the Company’s secreted and transmembrane immunomodulatory protein (termed SIP™ and TIP™) technology. Under the Adaptimmune Collaboration Agreement, we are to perform certain research services and grant Adaptimmune an exclusive license to programs from our SIP and TIP technologies. In June 2019, under the terms of the Adaptimmune Collaboration Agreement, we received an upfront license payment of $2.0 million and as of September 30, 2019 we have received an additional $500,000 in research support payments to fund ongoing programs. These payments were recorded as deferred revenue and will be recognized to revenue based on employee hours contributed to each performance obligation. We have recognized a total of $0.4 million in revenue through September 30, 2019 related to our collaboration agreement with Adaptimmune. In addition, we are eligible for additional research support payments, one-time payments and downstream development and commercialization milestones of up to $288.0 million, if all pre-specified milestones for each program are achieved. We are also eligible to receive low-single digit royalties on worldwide net sales of the applicable products.
Kite Pharma, a Gilead company
In October 2015, we entered into a collaboration and licensing agreement, or the Kite Collaboration Agreement, providing Kite Pharma, a Gilead company, or Kite, with access to two transmembrane immunomodulatory protein, or TIP, programs for use in Kite’s engineered cellular therapy programs. In May 2019, Kite provided us notice of termination of the Agreement following the expiration of the research term. Upon termination, the confidentiality and indemnity obligations of the parties survived and the licenses granted to Kite under the Agreement terminated. Pursuant to the terms of the Kite Collaboration Agreement, the termination was effective in June 2019, thirty days after the effectiveness of Kite’s notice. We have recognized a total of $5.6 million in revenue from inception through September 30, 2019 related to our collaboration agreement with Kite.
Research and Development Expenses
We focus our resources on research and development activities, including the conduct of preclinical and clinical studies and product development and expense such costs as they are incurred. Our research and development expenses consist of:
employee-related expenses, including salaries, benefits, taxes, travel, and stock-based compensation expense for personnel in research and development functions;

17



expenses related to process development and production of product candidates paid to contract manufacturing organizations;
costs associated with preclinical activities and regulatory operations, including the cost of acquiring, developing, and manufacturing research material;
clinical trials and activities related to regulatory filings for our product candidates; and
allocation of facilities, overhead, depreciation, and amortization of laboratory equipment and other expenses.
We incurred $9.5 million and $10.5 million in research and development expenses for three months ended September 30, 2019 and 2018, respectively, and $30.0 million and $20.0 million for the nine months ended September 30, 2019 and 2018, respectively. We plan to increase our research and development activities for the foreseeable future as we continue to develop our platform and product candidates, and as a result, expect research and development expenses to continue to increase.
The successful development of our platform and product candidates is highly uncertain. At this time, we cannot reasonably estimate the nature, timing, or costs of the efforts necessary to finish developing any of our product candidates or the period in which material net cash, if any, from these product candidates may commence. This is due to the numerous risks and uncertainties associated with developing therapeutics, including the uncertainty of:
the scope, rate of progress, expense, and results of clinical trials;
the scope, rate of progress, and expense of process development and manufacturing;
preclinical and other research activities; and
the timing of regulatory approvals.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and related costs for employees in executive, business development, finance, and administrative functions. Other significant general and administrative expenses include professional fees for accounting and legal services, expenses associated with obtaining and maintaining patents and other intellectual property, and allocation of facility and overhead costs.
We expect general and administrative expenses will increase as we expand infrastructure and continue to prosecute our patents and other intellectual property. Other increases will likely include increased costs for director and officer liability insurance, costs related to the hiring of additional personnel, and increased fees for directors, outside consultants, lawyers, and accountants. We expect to incur significant costs to comply with corporate governance, internal controls, and similar requirements applicable to public companies.
Loss on Sale of Intangible Asset
Loss on sale of intangible asset relates solely to the sale of the GSNOR asset to Laurel in June 2018. For additional information regarding the sale of the GSNOR asset, please see Note 8 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on March 18, 2019.
Interest Expense
Interest expense consists of accrued interest and the amortization of the debt discount associated with our $5.0 million term loan.  
Interest and Other Income
Interest income consists of interest earned on our cash, cash equivalents, and short-term investments.
JOBS Act
On April 5, 2012, the JOBS Act was enacted. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised

18



accounting standards on the relevant dates on which adoption of such standards is required for other public companies. In addition, for so long as we are an “emerging growth company,” which is until as late as December 31, 2020, we will, among other things not be required to comply with the auditor attestation requirements of Section 404(b) of Sarbanes-Oxley.
Critical Accounting Policies and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which we have prepared in accordance with generally accepted accounting principles in the United States of America, or GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, as well as the reported revenues and expenses during the reporting periods. We evaluate these estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions. Our significant accounting policies are more fully described in Note 2 of the accompanying unaudited condensed consolidated financial statements and in Note 2 to the audited financial statements contained in our Annual Report. There have been no significant or material changes in our significant accounting policies during the nine months ended September 30, 2019, as compared to those disclosed in our Annual Report except the following:
Recently Adopted Accounting Pronouncements
In June 2018, the FASB issued ASU No. 2018-07, which aligns the measurement and classification guidance for share-based payments to nonemployees with the guidance for share-based payments to employees, with certain exceptions. Under the guidance, the measurement of equity-classified nonemployee awards will be fixed at the grant date. Upon transition, nonemployee awards will be required to be measured at fair value as of the adoption date with a cumulative-effect adjustment recognized in retained earnings as of the beginning of the annual period of adoption. ASU 2018-07 is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. We adopted this standard on January 1, 2019 and it did not have a material impact on our financial statements and related disclosures.
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. We adopted this ASU effective January 1, 2019 and elected the modified retrospective method transition option, which permitted us not to restate the comparative period presented. Upon adoption, we recorded an operating lease right-of-use asset of $797,000, a corresponding operating lease liability of $883,000, and reduced our deferred rent balance by $86,000 to $0 on our accompanying Condensed Consolidated Balance Sheets; there was no effect on opening retained earnings, and we continue to account for leases in the prior period financial statements under ASC Topic 840. In adopting the new standard, we elected to apply the practical expedients regarding the identification of leases, lease classification, indirect costs, and the combination of lease and non-lease components.
For information regarding recent accounting pronouncements, see Note 2 of the Notes to Condensed Consolidated Financial Statements under Part I, Item 1 of this report.

19



Results of Operations
Comparison of Three Months Ended September 30, 2019 and 2018
The following table summarizes our results of operations for the three months ended September 30, 2019 and 2018 (in thousands):
 
Three Months Ended
September 30,
 
Increase/
(Decrease)
 
2019
 
2018
 
 
(unaudited)
 
 
Collaboration revenue
$
289

 
$

 
$
289

Operating expenses:
 
 
 
 
 

Research and development
9,532

 
10,529

 
(997
)
General and administrative
2,467

 
1,857

 
610

Total operating expenses
11,999

 
12,386

 
(387
)
Loss from operations
(11,710
)
 
(12,386
)
 
676

Other income (expense):
 
 
 
 
 
Interest expense
(66
)
 
(82
)
 
16

Interest and other income
301

 
329

 
(28
)
Net loss
$
(11,475
)
 
$
(12,139
)
 
$
664

Collaboration Revenue
Revenue for the three months ended September 30, 2019 consists of $0.3 million related to the Adaptimmune Collaboration Agreement. We had no revenue during the three months ended September 30, 2018.
Research and Development Expenses
The $1.0 million decrease in research and development expenses was primarily attributable to a decrease of $3.8 million in contract manufacturing and process development of our product candidates and a decrease of $0.8 million in direct research activities. These decreases were partially offset by an increase of $2.2 million in clinical trial activity, an increase of $0.7 million in personnel-related expenses as a result of growth in headcount to support ongoing discovery and development programs, an increase of $0.2 million in stock-based compensation, and an increase of $0.5 million in allocated overhead and facilities.
General and Administrative Expenses
The $0.6 million increase in general and administrative expenses was primarily attributable to a $0.4 million increase in professional and legal services, an increase of $0.1 million in personnel-related expenses related to an increase in administrative headcount and an increase of $0.1 million in facility costs to support the growth and expansion of our business.

20



Comparison of Nine Months Ended September 30, 2019 and 2018
The following table summarizes our results of operations for the nine months ended September 30, 2019 and 2018 (in thousands):
 
Nine Months Ended
September 30,
 
Increase/
(Decrease)
 
2019
 
2018
 
 
(unaudited)
 
 
Collaboration revenue
$
856

 
$
705

 
$
151

Operating expenses:
 
 
 
 
 
Research and development