10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended June 30, 2022

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 001-39402

 

ANNEXON, INC.

(Exact name of Registrant as specified in its Charter)

 

 

Delaware

 

27-5414423

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

1400 Sierra Point Parkway, Bldg C, Suite 200

Brisbane, California 94005

(Address of principal executive offices including zip code)

Registrant’s telephone number, including area code: (650) 822-5500

 

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

ANNX

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

The number of shares of the Registrant’s Common Stock outstanding as of August 2, 2022 was 47,617,740. This number does not include 24,696,206 shares of Common Stock issuable upon the exercise of pre-funded warrants (which are immediately exercisable at an exercise price of $0.001 per share of Common Stock, subject to beneficial ownership limitations) sold in the Registrant’s private placement on July 11, 2022. See Note 10—Subsequent Events to the Registrant’s unaudited condensed consolidated financial statements.

 

 


 

Table of Contents

 

 

 

 

Page

 

 

PART I—FINANCIAL INFORMATION

 

Item 1.

 

Financial Statements

 

 

 

Condensed Consolidated Balance Sheets

3

 

 

Condensed Consolidated Statements of Operations

4

 

 

Condensed Consolidated Statements of Comprehensive Loss

5

 

 

Condensed Consolidated Statements of Stockholders’ Equity

6

 

 

Condensed Consolidated Statements of Cash Flows

8

 

 

Notes to Condensed Consolidated Financial Statements

9

Item 2.

 

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

19

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

26

Item 4.

 

Controls and Procedures

27

 

 

 

 

 

 

PART II—OTHER INFORMATION

 

Item 1.

 

Legal Proceedings

28

Item 1A.

 

Risk Factors

28

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

71

Item 3.

 

Defaults Upon Senior Securities

71

Item 4.

 

Mine Safety Disclosures

71

Item 5.

 

Other Information

71

Item 6.

 

Exhibits

72

SIGNATURES

74

 

In this Quarterly Report on Form 10-Q, “we,” “our,” “us,” “Annexon” and the “Company” refer to Annexon, Inc. and its consolidated subsidiary. Annexon, Annexon, Inc., the Annexon logo and other trade names, trademarks or service marks of Annexon are the property of Annexon, Inc. This report contains references to our trademarks and to trademarks belonging to other entities. Trade names, trademarks and service marks of other companies appearing in this report are the property of their respective holders. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

2


 

ANNEXON, INC.

Condensed Consolidated Balance Sheets

(in thousands)

 

 

 

June 30,
2022

 

 

December 31,
2021

 

 

 

(Unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

104,614

 

 

$

74,843

 

Short-term investments

 

 

72,980

 

 

 

167,872

 

Prepaid expenses and other current assets

 

 

3,778

 

 

 

4,978

 

Total current assets

 

 

181,372

 

 

 

247,693

 

Restricted cash

 

 

1,032

 

 

 

1,166

 

Property and equipment, net

 

 

17,418

 

 

 

17,848

 

Operating lease right-of-use assets

 

 

19,864

 

 

 

20,333

 

Other non-current assets

 

 

1,018

 

 

 

 

Total assets

 

$

220,704

 

 

$

287,040

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

10,301

 

 

$

11,153

 

Accrued liabilities

 

 

8,060

 

 

 

9,250

 

Operating lease liabilities, current

 

 

1,729

 

 

 

1,202

 

Other current liabilities

 

 

164

 

 

 

139

 

Total current liabilities

 

 

20,254

 

 

 

21,744

 

Operating lease liabilities, non-current

 

 

32,406

 

 

 

33,387

 

Total liabilities

 

 

52,660

 

 

 

55,131

 

Commitments and contingencies (Note 5)

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Common stock

 

 

39

 

 

 

39

 

Additional paid-in capital

 

 

537,269

 

 

 

528,365

 

Accumulated other comprehensive loss

 

 

(439

)

 

 

(180

)

Accumulated deficit

 

 

(368,825

)

 

 

(296,315

)

Total stockholders’ equity

 

 

168,044

 

 

 

231,909

 

Total liabilities and stockholders’ equity

 

$

220,704

 

 

$

287,040

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

3


 

ANNEXON, INC.

Condensed Consolidated Statements of Operations

(in thousands, except share and per share amounts)

(Unaudited)

 

 

 

Three Months Ended
June 30,

 

 

Six Months Ended
June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

29,106

 

 

$

24,572

 

 

$

56,104

 

 

$

45,268

 

General and administrative

 

 

8,303

 

 

 

6,801

 

 

 

16,731

 

 

 

12,307

 

Total operating expenses

 

 

37,409

 

 

 

31,373

 

 

 

72,835

 

 

 

57,575

 

Loss from operations

 

 

(37,409

)

 

 

(31,373

)

 

 

(72,835

)

 

 

(57,575

)

Interest and other income, net

 

 

272

 

 

 

79

 

 

 

325

 

 

 

221

 

Net loss

 

 

(37,137

)

 

 

(31,294

)

 

 

(72,510

)

 

 

(57,354

)

Net loss attributable to common stockholders

 

$

(37,137

)

 

$

(31,294

)

 

$

(72,510

)

 

$

(57,354

)

Net loss per share attributable to common stockholders, basic
   and diluted

 

$

(0.96

)

 

$

(0.82

)

 

$

(1.88

)

 

$

(1.50

)

Weighted-average shares used in computing net loss per share
   attributable to common stockholders, basic and diluted

 

 

38,584,400

 

 

 

38,277,950

 

 

 

38,573,950

 

 

 

38,219,143

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

4


 

ANNEXON, INC.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

(Unaudited)

 

 

 

Three Months Ended
June 30,

 

 

Six Months Ended
June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Net loss

 

$

(37,137

)

 

$

(31,294

)

 

$

(72,510

)

 

$

(57,354

)

Other comprehensive gain (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(6

)

 

 

(1

)

 

 

(3

)

 

 

(2

)

Unrealized loss on available-for-sale securities

 

 

(60

)

 

 

39

 

 

 

(256

)

 

 

14

 

Comprehensive loss

 

$

(37,203

)

 

$

(31,256

)

 

$

(72,769

)

 

$

(57,342

)

 

See accompanying notes to unaudited condensed consolidated financial statements.

5


 

ANNEXON, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share amounts)

(Unaudited)

 

 

 

 

Common Stock

 

 

Additional
Paid-In

 

 

Accumulated Other
Comprehensive

 

 

Accumulated

 

 

Total
Stockholders’

 

 

 

Shares

 

 

Cost

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Equity

 

Balances as of December 31, 2021

 

 

38,560,854

 

 

$

39

 

 

$

528,365

 

 

$

(180

)

 

$

(296,315

)

 

$

231,909

 

Stock-based compensation

 

 

 

 

 

 

 

 

4,252

 

 

 

 

 

 

 

 

 

4,252

 

Stock option exercises

 

 

2,711

 

 

 

 

 

 

19

 

 

 

 

 

 

 

 

 

19

 

Foreign currency translation
  adjustment

 

 

 

 

 

 

 

 

 

 

 

3

 

 

 

 

 

 

3

 

Unrealized loss on available-for-sale
  securities

 

 

 

 

 

 

 

 

 

 

 

(196

)

 

 

 

 

 

(196

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(35,373

)

 

 

(35,373

)

Balances as of March 31, 2022

 

 

38,563,565

 

 

 

39

 

 

 

532,636

 

 

 

(373

)

 

 

(331,688

)

 

 

200,614

 

Stock-based compensation

 

 

 

 

 

 

 

 

4,520

 

 

 

 

 

 

 

 

 

4,520

 

Issuance of common stock per
  Employee Stock Purchase Plan
  purchase

 

 

40,341

 

 

 

 

 

 

113

 

 

 

 

 

 

 

 

 

113

 

Foreign currency translation
  adjustment

 

 

 

 

 

 

 

 

 

 

 

(6

)

 

 

 

 

 

(6

)

Unrealized loss on available-for-sale
  securities

 

 

 

 

 

 

 

 

 

 

 

(60

)

 

 

 

 

 

(60

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(37,137

)

 

 

(37,137

)

Balances as of June 30, 2022

 

 

38,603,906

 

 

$

39

 

 

$

537,269

 

 

$

(439

)

 

$

(368,825

)

 

$

168,044

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

6


 

ANNEXON, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share amounts)

(Unaudited)

 

 

 

Common Stock

 

 

Additional
Paid-In

 

 

Accumulated Other
Comprehensive

 

 

Accumulated

 

 

Total
Stockholders’

 

 

 

Shares

 

 

Cost

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Equity

 

Balances as of December 31, 2020

 

 

38,157,618

 

 

$

38

 

 

$

510,309

 

 

$

(77

)

 

$

(165,992

)

 

$

344,278

 

Stock-based compensation

 

 

 

 

 

 

 

 

2,962

 

 

 

 

 

 

 

 

 

2,962

 

Stock option exercises

 

 

74,930

 

 

 

 

 

 

268

 

 

 

 

 

 

 

 

 

268

 

Foreign currency translation
  adjustment

 

 

 

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

(1

)

Unrealized loss on available-for-sale
  securities

 

 

 

 

 

 

 

 

 

 

 

(25

)

 

 

 

 

 

(25

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(26,060

)

 

 

(26,060

)

Balances as of March 31, 2021

 

 

38,232,548

 

 

 

38

 

 

 

513,539

 

 

 

(103

)

 

 

(192,052

)

 

 

321,422

 

Stock-based compensation

 

 

 

 

 

 

 

 

4,517

 

 

 

 

 

 

 

 

 

4,517

 

Stock option exercises

 

 

82,805

 

 

 

 

 

 

534

 

 

 

 

 

 

 

 

 

534

 

Issuance of common stock per
  Employee Stock Purchase Plan
  purchase

 

 

6,759

 

 

 

 

 

 

118

 

 

 

 

 

 

 

 

 

118

 

Foreign currency translation
  adjustment

 

 

 

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

(1

)

Unrealized gain on available-for-sale
  securities

 

 

 

 

 

 

 

 

 

 

 

39

 

 

 

 

 

 

39

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(31,294

)

 

 

(31,294

)

Balances as of June 30, 2021

 

 

38,322,112

 

 

$

38

 

 

$

518,708

 

 

$

(65

)

 

$

(223,346

)

 

$

295,335

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

7


 

ANNEXON, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

 

 

Six Months Ended
June 30,

 

 

 

2022

 

 

2021

 

Operating activities:

 

 

 

 

 

 

Net loss

 

$

(72,510

)

 

$

(57,354

)

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

 

 

 

 

 

 

Depreciation and amortization

 

 

1,058

 

 

 

1,076

 

Accretion of discount on available-for-sale securities

 

 

601

 

 

 

480

 

Stock-based compensation

 

 

8,772

 

 

 

7,479

 

Reduction in the carrying amount of right-of-use assets

 

 

469

 

 

 

510

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

1,200

 

 

 

359

 

Other non-current assets

 

 

(1,018

)

 

 

 

Accounts payable

 

 

2,669

 

 

 

42

 

Accrued liabilities

 

 

736

 

 

 

(647

)

Operating lease liabilities

 

 

(454

)

 

 

(19

)

Other current liabilities

 

 

25

 

 

 

 

Net cash used in operating activities

 

 

(58,452

)

 

 

(48,074

)

Investing activities:

 

 

 

 

 

 

Purchases of property and equipment

 

 

(6,075

)

 

 

(32

)

Purchases of available-for-sale securities

 

 

(27,632

)

 

 

(159,616

)

Proceeds from sale of available-for-sale-securities

 

 

 

 

 

5,993

 

Proceeds from maturities of available-for-sale securities

 

 

121,667

 

 

 

33,000

 

Net cash provided by (used in) investing activities

 

 

87,960

 

 

 

(120,655

)

Financing activities:

 

 

 

 

 

 

Proceeds from the exercise common stock options

 

 

19

 

 

 

802

 

Proceeds from employee stock plan purchases

 

 

113

 

 

 

118

 

Net cash provided by financing activities

 

 

132

 

 

 

920

 

Increase (decrease) in cash, cash equivalents and restricted cash

 

 

29,640

 

 

 

(167,809

)

Effect of exchange rate changes on cash, cash equivalents and restricted cash

 

 

(3

)

 

 

(2

)

Cash, cash equivalents and restricted cash

 

 

 

 

 

 

Beginning of period

 

 

76,009

 

 

 

268,565

 

End of period

 

$

105,646

 

 

$

100,754

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

Cash paid for amounts included in the measurement of lease liability

 

$

1,892

 

 

$

744

 

Non-cash investing and financing activities:

 

 

 

 

 

 

Purchases of property and equipment included in accounts payable and accrued liabilities

 

$

93

 

 

$

408

 

Deferred offering costs included in accrued liabilities

 

$

704

 

 

$

 

Right-of-use assets obtained in exchange for lease liability

 

$

 

 

$

21,084

 

Construction-in-progress obtained in exchange for tenant improvement allowance from lessors

 

$

 

 

$

3,830

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

8


 

ANNEXON, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1. Organization

Annexon, Inc., or the Company, is a clinical-stage biopharmaceutical company pioneering a new class of complement medicines for patients with classical complement-mediated autoimmune, neurodegenerative and ophthalmic disorders. The Company is located in Brisbane, California and was incorporated in Delaware in March 2011.

The Company’s wholly-owned subsidiary, Annexon Biosciences Australia Pty Ltd, or the Subsidiary, is a proprietary limited company incorporated in 2016 and domiciled in Australia. The Subsidiary is also engaged in research and development activities in support of its parent company.

Liquidity

Since inception, the Company has been involved primarily in performing research and development activities, conducting clinical trials, hiring personnel, and raising capital to support and expand these activities. The Company has experienced losses and negative cash flows from operations since its inception and, as of June 30, 2022, had an accumulated deficit of $368.8 million and cash and cash equivalents and short-term investments of $177.6 million.

The Company has historically funded its operations through the issuance of shares of its redeemable convertible preferred stock and common stock. Based on projected activities, management projects that cash on hand is sufficient to support operations for at least the next 12 months following issuance of these condensed consolidated financial statements. Management expects to continue to incur losses and negative cash flows from operations for at least the next several years.

2. Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States, or GAAP, and applicable rules and regulations of the SEC regarding interim financial reporting.

The condensed consolidated balance sheet as of June 30, 2022, the condensed consolidated statements of operations, comprehensive loss, stockholders’ equity for the three and six months ended June 30, 2022 and 2021 and the condensed consolidated statements of cash flows for the six months ended June 30, 2022 and 2021 are unaudited. These unaudited condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s consolidated financial position, results of operations and cash flows for the interim period presented. The financial data and the other financial information contained in these notes to the condensed consolidated financial statements related to the three and six month periods are also unaudited. The results of operations for the three and six months ended June 30, 2022 are not necessarily indicative of the results to be expected for the year ending December 31, 2022 or for any other future annual or interim period. The condensed consolidated balance sheet as of December 31, 2021 included herein was derived from the audited financial statements as of that date. These unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 1, 2022.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported expenses during the reporting period. On an ongoing basis, management evaluates its estimates, including but not limited to fair value of investments, useful lives for property and equipment, incremental borrowing rate used in lease accounting, stock options, income taxes and certain accruals. The Company evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors and adjusts those estimates and assumptions when facts and circumstances dictate. Actual results could differ from those estimates.

9


ANNEXON, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Principles of Consolidation

The condensed consolidated financial statements include the operations of Annexon, Inc. and its wholly-owned subsidiary and include the results of operations and cash flows of these entities. All intercompany balances and transactions have been eliminated in consolidation.

Cash, Cash Equivalents and Restricted Cash

The Company considers all highly liquid instruments with an original maturity of three months or less at time of purchase to be cash equivalents. Cash equivalents, which includes amounts invested in money market funds, are stated at fair value.

Restricted cash as of June 30, 2022 relates to the letters of credit established for the Company’s office leases.

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same amounts shown in the condensed consolidated statements of cash flows:

 

 

 

June 30,
2022

 

 

December 31,
2021

 

Cash

 

$

651

 

 

$

734

 

Cash equivalents

 

 

103,963

 

 

 

74,109

 

Cash and cash equivalents

 

 

104,614

 

 

 

74,843

 

Restricted cash

 

 

1,032

 

 

 

1,166

 

Cash, cash equivalents and restricted cash

 

$

105,646

 

 

$

76,009

 

Short-Term Investments

Short-term investments have been classified as available-for-sale and are carried at estimated fair value as determined based upon quoted market prices or pricing models for similar securities. The Company determines the appropriate classification of its investments in debt securities at the time of purchase. Available-for-sale securities are classified as current based on their availability for use in current operations. Unrealized gains and losses are excluded from earnings and are reported as a component of other comprehensive loss. The Company periodically evaluates whether declines in fair values of its marketable securities below their book value are other-than-temporary. This evaluation consists of several qualitative and quantitative factors regarding the severity and duration of the unrealized loss as well as the Company’s ability and intent to hold the marketable security until a forecasted recovery occurs. Additionally, the Company assesses whether it has plans to sell the security or it is more likely than not it will be required to sell any marketable securities before recovery of its amortized cost basis. Impairment assessments are made at the individual security level each reporting period. When the fair value of an available-for-sale security is less than its cost at the balance sheet date, a determination is made as to whether the impairment is other-than-temporary and, if it is other-than-temporary, an impairment loss is recognized in other income, net, equal to the difference between the investment’s amortized cost and fair value at such date. The cost of investments sold is based on the specific-identification method. Interest on marketable securities is included in other income, net.

Research and Development Expense

Research and development expenses consist primarily of direct and indirect costs incurred for the development of the Company’s product candidates.

Direct expenses include (i) preclinical and clinical outside service costs associated with discovery, preclinical and clinical testing of the Company’s product candidates; (ii) professional services agreements with third-party contract organizations, investigative clinical trial sites and consultants that conduct research and development activities on the Company’s behalf; (iii) contract manufacturing costs to produce clinical trial materials; and (iv) laboratory supplies and materials. Indirect expenses include (A) compensation and

10


ANNEXON, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

personnel-related expenses (including stock-based compensation); (B) allocated expenses for facilities and depreciation; and (C) other indirect costs.

Research and development costs are expensed as incurred. Payments made to third parties are under agreements that are generally cancelable by the Company. Advance payments for research and development activities are deferred as prepaid expenses. The prepaid amounts are expensed as the related services are performed.

The Company estimates preclinical studies and clinical trial expenses based on the services performed pursuant to contracts with research institutions and clinical research organizations that conduct and manage preclinical studies and clinical trials on the Company’s behalf. In accruing service fees, the Company estimates the period over which services will be performed and the level of effort to be expended in each period. These estimates are based on the Company’s communications with the third-party service providers and on information available at each balance sheet date. If the actual timing of the performance of services or the level of effort varies significantly from the estimate, the Company will adjust the accrual accordingly to reflect the best information available at the time of the financial statement issuance. The Company has not experienced any material differences between accrued costs and actual costs incurred since its inception.

Stock-Based Compensation

The Company accounts for stock-based compensation arrangements with employees, non-employee directors and consultants using a fair value method which requires the recognition of compensation expense for costs related to all stock-based payments, including stock options and restricted stock units, or RSUs. The fair value method requires the Company to estimate the fair value of stock options to employees and non-employee directors on the date of grant using the Black-Scholes option pricing model. The fair value of RSU awards is based on the fair value of the underlying common stock as of the grant date.

The Company grants certain employees performance-based stock options. For awards that include performance conditions, no compensation cost is recognized until the performance goals are probable of being met, at which time the cumulative compensation expense from the service inception date would be recognized.

Stock-based compensation costs are based on the fair value of the underlying option calculated using the Black-Scholes option pricing model and recognized as expense on a straight-line basis (for all but performance-based awards for which the accelerated method is used) over the requisite service period, which is the vesting period.

Determining the appropriate fair value model and related assumptions requires judgment, including estimating the fair value of the underlying common stock, expected term, expected stock price volatility, risk-free interest rate and dividend yield. The Company accounts for forfeitures as they occur.

Net Loss Per Share Attributable to Common Stockholders

Basic net loss per share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding for the period, without consideration for potential dilutive shares of common stock. As the Company was in a loss position for all periods presented, basic net loss per share attributable to common stockholders is the same as diluted net loss per share attributable to common stockholders because the effects of potentially dilutive securities are antidilutive.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and short-term investments. The Company’s cash and cash equivalents and short-term investments are held by high credit quality financial institutions in the United States. At times, such deposits may be in excess of the Federal Depository Insurance Corporation insured limits. Management believes that the financial institutions are financially sound, and accordingly, minimal credit risk exists with respect to the financial institutions.

11


ANNEXON, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Recently Adopted Accounting Pronouncements

The Company has implemented all new accounting pronouncements that are in effect and that may impact its condensed consolidated financial statements and does not believe that there are any other new pronouncements that have been issued that might have a material impact on its financial position or results of operations.

Recently Issued Accounting Pronouncements

The Company does not believe that any recently issued effective pronouncements, or pronouncements issued but not yet effective, if adopted, would have a material impact on its financial position or results of operations.

3. Fair Value Measurements

The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:

Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.
Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.

On a recurring basis, the Company measures certain financial assets and liabilities at fair value. The following tables summarize the fair value of the Company’s financial assets and liabilities measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands):