Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes and other financial information included elsewhere in this Annual Report on Form 10-K.
In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, beliefs, and expectations, and involve risks and uncertainties. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in the sections titled “Special Note Regarding Forward-Looking Statements” and “Risk Factors.”
Overview
We are a clinical-stage biopharmaceutical company developing a pipeline of novel therapies for patients with classical complement-mediated disorders of the body, brain and eye. Our pipeline is based on our platform technology addressing well-researched classical complement-mediated autoimmune and neurodegenerative disease processes, both of which are triggered by aberrant activation of C1q, the initiating molecule of the classical complement pathway. Evidence suggests that potent and selective inhibition of C1q can prevent tissue damage triggered in antibody-mediated autoimmune disease and preserve loss of functioning synapses associated with cognitive and functional decline in complement-mediated neurodegeneration. Our upstream complement approach targeting C1q acts as an “on/off switch” designed to block all downstream components of the classical complement pathway that lead to excess inflammation, tissue damage and patient disability in a host of complement-mediated disorders, while preserving the normal immune function of the lectin and alternative complement pathways involved in the clearance of pathogens and damaged cells.
Our pipeline of product candidates is designed to block the activity of C1q and the entire classical complement pathway in a broad set of complement-mediated diseases. Our first product candidate, ANX005, is a full-length monoclonal antibody formulated for intravenous administration in autoimmune and neurodegenerative disorders. Our second product candidate, ANX007, is an antigen-binding fragment, or Fab, formulated for intravitreal administration for the treatment of neurodegenerative ophthalmic disorders. We are also developing ANX009, an investigational, subcutaneous formulation of a Fab designed for the treatment of systemic autoimmune diseases. We have completed Phase 1b safety and dose-ranging clinical trials for ANX005 and ANX007 in patients with Guillain-Barré Syndrome, or GBS, and glaucoma, respectively. Both ANX005 and ANX007 were well-tolerated and showed full inhibition of C1q and the classical complement pathway in the Phase 1b trials.
We have advanced ANX005 into a Phase 2/3 trial in patients with GBS and a Phase 2 trial in patients with Huntington’s disease. We plan to advance ANX005 into Phase 2 trials in patients with warm autoimmune hemolytic anemia and amyotrophic lateral sclerosis in 2021. A Phase 2 trial of ANX007 is ongoing in patients with GA, and. ANX009 is being evaluated in a first-in-human trial. Based on learnings from our initial trials, we are evaluating additional orphan and large market indications that are driven by aberrant or excess classical complement activation. Additionally, we are developing novel product candidates designed to inhibit C1q and other components of the early classical complement cascade with the goal of further broadening our portfolio. Finally, we are leveraging our disciplined development strategy in early clinical trials utilizing established biomarkers to enhance patient selection, measure target engagement and assess our product candidates’ potential to meaningfully impact the disease process and improve the probability of technical success over shorter development timelines.
We hold worldwide development and commercialization rights, including through exclusive licenses, to all of our product candidates, which allows us to strategically maximize value from our product portfolio over time. Our patent portfolio includes patent protection for our upstream complement platform and each of our product candidates.
We were incorporated in March 2011 and commenced operations later that year. To date, we have focused primarily on performing research and development activities, hiring personnel and raising capital to support and expand these activities. Prior to our initial public offering, or IPO, we had funded our operations primarily from the
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issuance and sale of redeemable convertible preferred stock. In July 2020, we completed our IPO, pursuant to which we issued and sold 14,750,000 shares of our common stock at a public offering price of $17.00 per share and 2,139,403 shares of our common stock to the underwriters of the IPO pursuant to the partial exercise of their option to purchase additional shares at a price of $17.00 per share less underwriting discounts and commissions. We received net proceeds of approximately $262.4 million from the IPO, after deducting underwriting discounts and commissions of $20.1 million and offering costs of $4.6 million.
We do not have any products approved for sale, and we have not generated any revenue from product sales. We have incurred net losses each year since our inception. Our net losses were $63.4 million and $37.2 million for the year ended December 31, 2020 and 2019, respectively. As of December 31, 2020, we had an accumulated deficit of $166.0 million and cash and cash equivalents and short-term investments of $351.2 million.
We do not expect to generate revenue from any product candidates that we develop until we obtain regulatory approval for one or more of such product candidates and commercialize our products or enter into collaboration agreements with third parties. Until such time as we can generate significant revenue from sales of our product candidates, if ever, we expect to finance our operations through public or private equity offerings or debt financings, credit or loan facilities, collaborations or a combination of one or more of these funding sources. As a result, we will need to raise additional capital. Additional funds may not be available to us on acceptable terms or at all. If we fail to obtain necessary capital when needed on acceptable terms, or at all, it could force us to delay, limit, reduce or terminate our product development programs, commercialization efforts or other operations.
Impact of COVID-19 Pandemic
The COVID-19 pandemic continues to rapidly evolve, and its ultimate impact is highly uncertain and subject to change. We will continue to monitor the COVID-19 situation closely. The extent of the impact of the COVID-19 pandemic on our business, operations and clinical development timelines and plans remains uncertain, and will depend on the duration of the outbreak and its impact on our clinical trial enrollment, trial sites, contract research organizations, or CROs, third-party manufacturers, regulatory authorities and other third parties with whom we do business.
Components of Operating Results
Revenue
Our product candidates are not approved for commercial sale. We have not generated any revenue from sales of our product candidates and do not expect to do so in the foreseeable future and until we complete clinical development, submit regulatory filings and receive approvals from applicable regulatory bodies for such product candidates, if ever.
Operating Expenses
Research and Development
Research and development expenses account for a significant portion of our operating expenses. Research and development expenses consist primarily of direct and indirect costs incurred for the development of our product candidates.
Direct expenses include:
• contract manufacturing costs to produce clinical trial materials; and
• laboratory supplies and materials.
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Indirect expenses include:
• allocated expenses for facilities and depreciation; and
• other indirect costs.
We record research and development expenses as incurred. Payments made to other entities are under agreements that are generally cancelable by us. Advance payments for goods or services to be received in future periods for use in research and development activities are deferred as prepaid expenses. The prepaid amounts are then expensed as the related services are performed. At this time, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete the development of, and obtain regulatory approval for, any of our product candidates.
We expect our research and development expenses to increase substantially for the foreseeable future as we continue to invest in research and development activities related to developing our product candidates, particularly as they advance into later stages of development and as we conduct larger clinical trials, engage in other research and development activities and seek regulatory approvals for any product candidates that successfully complete clinical trials and as we incur expenses associated with hiring additional personnel and facility costs to support our research and development efforts. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, and the successful development of our product candidates is highly uncertain.
General and Administrative
General and administrative expenses consist primarily of compensation and personnel-related expenses (including stock-based compensation) for our personnel in executive, finance and other administrative functions. General and administrative expenses also include professional fees paid for accounting, legal and tax services, allocated expenses for facilities, infrastructure costs and depreciation and other general and administrative costs.
We expect our general and administrative expenses to increase substantially for the foreseeable future as we continue to support our research and development activities, grow our business and, if any of our product candidates receive marketing approval, commercialization activities. We will also incur additional expenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the SEC, Sarbanes-Oxley Act and the Nasdaq Stock Market, additional insurance expenses, investor relations activities and other administrative and professional services. We also expect to increase the size of our administrative function and facility costs to support the growth of our business.
Loss on Remeasurement of Redeemable Convertible Preferred Stock Liability
Loss on remeasurement of redeemable convertible preferred stock liability consists of gains and losses from the remeasurement to fair value of the redeemable convertible preferred stock liability related to our Series C redeemable convertible preferred stock. We remeasured the liability each reporting period from the date of issuance (December 2018) until the second closing of our Series C redeemable convertible preferred stock which occurred in August 2019.
Other Income, Net
Other income, net, primarily consists of interest income earned on our cash equivalents and short-term investments.
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Results of Operations
Comparison of the Year Ended December 31, 2020 and 2019
The following tables summarize our results of operations for the periods presented:
Year Ended December 31,
(in thousands)
Operating expenses:
Provision for income taxes — 4 (4 ) *
* Not meaningful
Research and Development Expenses
Year Ended December 31,
(in thousands)
Direct costs:
Indirect costs:
Research and development expenses increased by $24.7 million, or 101%, for the year ended December 31, 2020 compared to the year ended December 31, 2019. The increase was primarily due to an increase of $8.8 million in direct clinical outside services related to our ongoing and planned clinical trials for ANX005, ANX007 and ANX009 as well as preclinical outside services to support pre-IND activities for our ANX105 and small molecule program. Contract manufacturing expense increased by $7.4 million related to the production of clinical trial materials to support our ongoing and planned clinical trials using ANX005 as well as pre-IND manufacturing activities to support ANX105. Compensation and personnel-related expenses increased by $6.5 million due to an increase in headcount and related employee costs. Direct professional services costs increased by $1.8 million related to external research and development during the year ended December 31, 2020.
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General and Administrative Expenses
Year Ended December 31,
(in thousands)
\
General and administrative expenses increased by $6.2 million, or 78%, for the year ended December 31, 2020 compared to the year ended December 31, 2019. The increase was primarily due to an increase of $3.4 million in professional services for public company readiness efforts including accounting, legal and audit fees and directors and officers liability insurance required for a public corporation. Compensation and personnel-related expenses increased by $2.3 million due to an increase in headcount and related employee costs.
Loss on Remeasurement of Redeemable Convertible Preferred Stock Liability
For the year ended December 31, 2019, we recorded a loss on remeasurement of redeemable convertible preferred stock liability of $5.7 million related to the change in fair value of the liability. The liability was recognized in connection with the initial closing of our Series C redeemable convertible preferred stock financing in December 2018 and was settled upon completion of the second closing in August 2019.
Other Income, Net
Other income, net, decreased by $1.0 million for the year ended December 31, 2020 compared to the year ended December 31, 2019. The decrease was primarily due to a decrease of $0.6 million in interest income and a $0.2 million grant received in 2019.
Liquidity and Capital Resources
Sources of Liquidity
Due to our significant research and development expenditures, we have generated operating losses since our inception.
We have funded our operations primarily through the sale of equity securities. From our inception through December 31, 2020, we have raised net cash proceeds of $233.9 million from private placements of our redeemable convertible preferred stock and $262.4 million from the IPO. As of December 31, 2020, we had available cash and cash equivalents and short-term investments of $351.2 million and an accumulated deficit of $166.0 million.
Cash Flows
Year Ended December 31,
(in thousands)
Cash used in operating activities $ (53,087 ) $ (28,358 )
Cash used in investing activities (83,164 ) (267 )
Net increase (decrease) in cash and cash equivalents $ 224,625 $ (230 )
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Cash Flows from Operating Activities
Cash used in operating activities for the year ended December 31, 2020 was $53.1 million, which consisted of a net loss of $63.4 million, partially offset by $5.6 million in non-cash charges and a net change of $4.7 million in our net operating assets and liabilities. The non-cash charges consisted of stock-based compensation of $4.9 million and depreciation and amortization of $0.7 million.
Cash used in operating activities for the year ended December 31, 2019 was $28.4 million, which consisted primarily of a net loss of $37.2 million and a net change of $0.6 million in our net operating assets and liabilities, partially offset by $8.2 million in non-cash charges. The non-cash charges pertained to the loss on remeasurement of the redeemable convertible preferred stock liability of $5.7 million, stock-based compensation of $2.0 million and depreciation and amortization of $0.5 million.
Cash Flows from Investing Activities
Cash used in investing activities for the year ended December 31, 2020was $83.2 million, which consisted of $82.7 million of purchases of available-for-sale securities and $0.5 million of purchases of property and equipment.
Cash used in investing activities for the year ended December 31, 2019 was $0.3 million related to purchases of property and equipment.
Cash Flows from Financing Activities
Cash provided by financing activities for the year ended December 31, 2020 was $360.9 million, which consisted of the net proceeds of $262.4 million from the IPO, net of underwriting discounts and expenses, the net proceeds received from sale and issuance of our Series D redeemable convertible preferred stock of approximately $96.8 million, and proceeds of $0.5 million from the Paycheck Protection Program loan which was repaid in full.
Cash provided by financing activities for the year ended December 31, 2019 was $28.4 million, which consisted of net proceeds received from the sale and issuance of our Series C redeemable convertible preferred stock of $30.0 million, partially offset by payments for deferred offering costs of $1.6 million.
Funding Requirements
We use our cash to fund operations, primarily to fund our clinical trials, research and development expenditures and related personnel costs. We expect our research and development expenses to increase substantially for the foreseeable future as we continue to invest in research and development activities related to our product candidates, particularly as they advance into later stages of development and as we conduct larger clinical trials, engage in other research and development activities, seek regulatory approvals for any product candidates that successfully complete clinical trials and as we incur expenses associated with hiring additional personnel to support our research and development efforts. In addition, we expect our general and administrative expenses to increase substantially for the foreseeable future as we continue to support our research and development activities and to grow our business and as we expect to engage in commercialization activities, if any of our product candidates receive marketing approval. We will also incur additional expenses as a result of operating as a public company and also expect to increase the size of our administrative function to support the growth of our business. The timing and amount of our operating expenditures will depend on many factors, including:
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• any product liability or other lawsuits related to our products;
• the expenses needed to attract, hire and retain skilled personnel;
• the costs associated with operating as a public company;
• the timing, receipt and amount of sales of any future approved products.
Based upon our current operating plan, we believe that our existing cash and cash equivalents will enable us to fund our operating expenses and capital expenditure requirements through 2023. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect. We expect to continue to expend significant resources for the foreseeable future. Until such time, if ever, as we can generate substantial product revenue, we will be required to seek additional funding in the future and currently intend to do so through public or private equity offerings or debt financings, credit or loan facilities, collaborations or a combination of one or more of these funding sources. Additional funds may not be available to us on acceptable terms or at all. If we fail to obtain necessary capital when needed on acceptable terms, or at all, we could be forced to delay, limit, reduce or terminate our product development programs, commercialization efforts or other operations. If we raise additional funds by issuing equity securities, our stockholders will suffer dilution and the terms of any financing may adversely affect the rights of our stockholders. In addition, as a condition to providing additional funds to us, future investors may demand, and may be granted, rights superior to those of existing stockholders. Debt financing, if available, is likely to involve restrictive covenants limiting our flexibility in conducting future business activities, and, in the event of insolvency, debt holders would be repaid before holders of our equity securities received any distribution of our corporate assets.
Off-Balance Sheet Arrangements
Since our inception, we have not engaged in any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.
Emerging Growth Company Status
We are an “emerging growth company,” as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies.
We have elected to use this extended transition period to enable us to comply with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
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Critical Accounting Policies and Estimates
Management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions for the reported amounts of assets, liabilities, expenses and related disclosures. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions and any such differences may be material.
While our significant accounting policies are described in more detail in the notes to our consolidated financial statements appearing elsewhere in this Annual Report, we believe the following accounting policies are the most critical for fully understanding and evaluating our financial condition and results of operations.
Accrued and Prepaid Research and Development Costs
We estimate preclinical study 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 our behalf. In recording service fees as either prepaid or accrued costs, we estimate the period over which services will be performed and the level of effort to be expended in each period. These estimates of the expense are based on communications with and information provided by the third-party service providers at each balance sheet date. If the actual timing of the performance of services or the level of effort varies from the estimate, we will adjust the amounts recorded accordingly. The estimates are trued up to reflect the best information available at the time of the financial statement issuance. We have not experienced any material differences between accrued or prepaid costs and actual costs incurred since inception.
We defer and capitalize non-refundable advance payments for goods or services that will be used or rendered for future research and development activities as prepaid expenses until the related goods are delivered or services are performed. We evaluate such payments for current or long-term classification based on when such services are expected to be received.
Stock-Based Compensation
We maintain a stock-based compensation plan as a long-term incentive for employees, non-employee directors and consultants. The plan allows for the issuance of incentive stock options, non-qualified stock options, restricted stock units and other forms of equity awards.
We recognize stock-based compensation expense for stock options on a straight-line basis over the requisite service period and account for forfeitures as they occur. Our stock-based compensation costs are based upon the grant date fair value of options estimated using the Black-Scholes option pricing model.
This model utilizes inputs which are highly subjective assumptions and generally require significant judgment. These assumptions include:
Fair Value of Common Stock—Historically, for all periods prior to the IPO in July 2020, fair values of the shares of common stock underlying our share-based awards were estimated on each grant date by our board of directors. Our board of directors considered, among other things, valuations of our common stock which were prepared by an independent third- party valuation firm in accordance with the guidance provided by the American Institute of Certified Public Accountants 2013 Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. After the completion of the IPO in July 2020, the fair value of each share of underlying common stock will be based on the closing price of our common stock as reported on the date of grant on the Nasdaq Global Select Market.
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Expected Term—The expected term represents the period that the stock-based awards are expected to be outstanding and is determined using the simplified method (based on the mid-point between the vesting date and the end of the contractual term).
Expected Volatility—Because we were privately held and do not have sufficient trading history for our common stock, the expected volatility was estimated based on the average volatility for comparable publicly traded life sciences companies over a period equal to the expected term of the stock option grants. The comparable companies were chosen based on the similar size, stage in life cycle or area of specialty. We will continue to apply this process until a sufficient amount of historical information regarding the volatility of our own stock price becomes available.
Risk-Free Interest Rate—The risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of the option.
Dividend Yield—We have never paid dividends on our common stock and have no plans to pay dividends on our common stock. Therefore, we used an expected dividend yield of zero.
See Note 8—Equity Incentive Plan to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more information concerning certain of the specific assumptions we used in applying the Black-Scholes option pricing model to determine the estimated fair value of our stock options. Certain of such assumptions involve inherent uncertainties and the application of significant judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our stock-based compensation could be materially different.
Income Taxes
We recognize deferred income taxes for temporary differences between the basis of assets and liabilities for financial statement and income tax purposes. In evaluating our valuation allowance, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial performance. Due to our lack of earnings history and uncertainties surrounding our ability to generate future taxable income, the net deferred tax assets have been fully offset by a valuation allowance. The deferred tax assets were primarily comprised of federal and state tax net operating losses and tax credit carryforwards.
Recent Accounting Pronouncements Not Yet Adopted
See Note 2—Basis of Presentation and Significant Accounting Policies to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for information about recent accounting pronouncements, the timing of their adoption, and our assessment, to the extent we have made one yet, of their potential impact on our financial condition of results of operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not required for the Company as a smaller reporting company.
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Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm 104
Notes to Consolidated Financial Statements 110
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors
Annexon, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Annexon, Inc. and subsidiary (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive loss, redeemable convertible preferred stock and stockholders’ equity (deficit), and cash flows for each of the years in the two-year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2016.
San Francisco, California
March 24, 2021
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ANNEXON, INC.
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
December 31,
Assets
Current assets:
Short-term investments 82,641 —
Prepaid expenses and other current assets 2,805 1,475
Other long-term assets — 2,354
Current liabilities:
Commitments and contingencies (Note 6)
Stockholders’ Equity (Deficit):
Accumulated other comprehensive loss (77 ) (80 )
See accompanying notes to consolidated financial statements.
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ANNEXON, INC.
Consolidated Statements of Operations
(in thousands,except share and per share amounts)
Year Ended December 31,
Operating expenses:
Provision for income taxes — 4
Accretion on redeemable convertible preferred stock (705 ) (1,095 )
Net loss attributable to common stockholders $ (70,336 ) $ (38,278 )
See accompanying notes to consolidated financial statements.
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ANNEXON, INC.
Consolidated Statements of Comprehensive Loss
(in thousands)
Year Ended December 31,
Other comprehensive gain (loss):
Foreign currency translation adjustment 9 (14 )
Unrealized loss on available for sale securities (6 ) —
See accompanying notes to consolidated financial statements.
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ANNEXON, INC.
Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)
(in thousands, except share amounts)
Shares Cost Shares Cost Capital Loss Deficit Equity (Deficit)
Stock option exercises — — 1,440 — 3 — — 3
Stock-based compensation — — — — 2,037 — — 2,037
Foreign currency translation adjustment — — — — — (14 ) — (14 )
Accretion on redeemable convertible preferred stock — 705 — — (705 ) — — (705 )
Stock-based compensation — — — — 4,888 — — 4,888
Stock option exercises — — 9,528 — 22 — — 22
Foreign currency translation adjustment — — — — — 9 — 9
Unrealized loss on available-for-sale securities (6 ) (6 )
See accompanying notes to consolidated financial statements.
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ANNEXON, INC.
Consolidated Statements of Cash Flows
(in thousands)
Year Ended December 31,
Operating activities:
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 667 493
Accretion of discount on available-for sale securities 53 —
Change in fair value of redeemable convertible preferred stock liability — 5,670
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (1,330 ) 56
Other long-term assets 96 —
Accrued liabilities 4,804 (20 )
Net cash used in operating activities (53,087 ) (28,358 )
Investing activities:
Purchases of property and equipment (464 ) (267 )
Purchase of available-for-sale securities (82,700 ) —
Net cash used in investing activities (83,164 ) (267 )
Financing activities:
Proceeds from the exercise of common stock options 22 3
Proceeds from Paycheck Protection Program loan 500 —
Repayments of Paycheck Protection Program loan (500 ) —
Payments of offering costs related to initial public offering (2,974 ) (1,605 )
Net cash provided by financing activities 360,876 28,395
Net increase (decrease) in cash and cash equivalents 224,625 (230 )
Effect of exchange rate changes on cash and cash equivalents 9 (14 )
Cash and cash equivalents at beginning of period 43,931 44,175
Cash and cash equivalents at end of period $ 268,565 $ 43,931
Supplemental disclosures of cash flow information:
Income taxes paid $ — $ 2
Non-cash investing and financing activities:
Accretion on redeemable convertible preferred stock $ 705 $ 1,095
Purchase of property and equipment included in accounts payable $ — $ 19
See accompanying notes to consolidated financial statements.
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ANNEXON, INC.
Notes to Consolidated Financial Statements
1. Organization
Annexon, Inc., or the Company, is a clinical-stage biopharmaceutical company targeting C1q and initiating molecules of the classical complement pathway to develop transformative therapies for autoimmune and neurodegenerative disorders of the body, brain and eye. The Company is located in South San Francisco, 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.
Initial Public Offering
On July 23, 2020, the Company’s registration statement on Form S-1 relating to its initial public offering, or the IPO, was declared effective by the Securities and Exchange Commission, or the SEC, and the shares of its common stock began trading on the Nasdaq Global Select Market on July 24, 2020. The IPO closed on July 28, 2020, pursuant to which the Company issued and sold 14,750,000 shares of its common stock at a public offering price of $17.00 per share. On August 4, 2020, the Company issued 2,139,403 shares of its common stock to the underwriters of the IPO pursuant to the partial exercise of their option to purchase additional shares.The Company received net proceeds of approximately $262.4 million from the IPO, after deducting underwriting discounts and commissions of $20.1 million and offering costs of $4.6 million. Immediately prior to the completion of the IPO, all shares of redeemable convertible preferred stock then outstanding were converted into 20,824,938 shares of common stock.
Reverse Stock Split
On July 17, 2020, the Company’s board of directors approved an amendment to the Company’s certificate of incorporation to effect a reverse split of shares of the Company’s common stock on a one-for-8.81 basis, or the Reverse Stock Split. The number of authorized shares and the par values of the common stock and redeemable convertible preferred stock were not adjusted as a result of the Reverse Stock Split. In connection with the Reverse Stock Split, the conversion ratio for the Company’s outstanding redeemable convertible preferred stock was proportionately adjusted such that the common stock issuable upon conversion of such preferred stock was decreased in proportion to the Reverse Stock Split. All references to common stock and options to purchase common stock share data, per share data and related information contained in the consolidated financial statements have been adjusted to reflect the effect of the Reverse Stock Split.
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 December 31, 2020, had an accumulated deficit of $166.0 million and cash and cash equivalents and short-term investments of $351.2 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 consolidated financial statements. Management expects to continue to incur losses and negative cash flows from operations for at least the next several years.
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2. Basis of Presentation and Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, or 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 the fair value of common stock, redeemable convertible preferred stock, redeemable convertible preferred stock liability, stock options, income taxes, clinical trial accruals and stock-based compensation. 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.
Principlesof Consolidation
The 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.
Segments
The Company’s chief operating decision maker is its Chief Executive Officer. The Chief Executive Officer reviews financial information on an aggregate basis for the purposes of evaluating financial performance and allocating the Company’s resources. Accordingly, the Company has determined that it operates in one segment.
Cash and Cash Equivalents
TheCompanyconsidersallhighlyliquidinstrumentswithanoriginalmaturityofthreemonthsorlessat timeofpurchasetobecashequivalents.Cashequivalents,whichincludesamountsinvestedinmoneymarket funds, are statedat fairvalue.
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 with original maturities beyond three months at the date of purchase 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.
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Property and Equipment, Net
Property and equipment are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets. Depreciation begins at the time the asset is placed in service. Maintenance and repairs are charged to operations as incurred. Upon sale or retirement of assets, the cost and related accumulated depreciation are removed from the balance sheet and the resulting gain or loss is reflected in operations in the period realized.
The usefullivesof the propertyand equipmentare as follows:
Laboratory equipment 5 years
Office and computer equipment 3 years
Leasehold improvements Shorter of remaining lease term or estimated useful life
Impairment of Long-Lived Assets
The Company evaluates its long-lived assets, including property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Recoverability of these assets is measured by comparison of the carrying amount of each asset to the future undiscounted cash flows the asset is expected to generate over its remaining life. When indications of impairment are present and the estimated undiscounted future cash flows from the use of these assets is less than the assets’ carrying value, the related assets will be written down to fair value. There were no impairments of the Company’s long-lived assets for the periods presented.
Deferred Offering Costs
Deferred offering costs, consisting of legal, accounting, audit and filing fees relating to an initial public offering, are capitalized. As of December 31, 2019, $2.3 million of deferred offering costs were capitalized, which are included in other long-term assets in the accompanying consolidated balance sheets. In July 2020, upon the closing of the IPO, all deferred offering costs were offset against the Company’s IPO proceeds within additional paid-in capital.
Redeemable Convertible Preferred Stock Liability
TheobligationtoissueadditionalsharesoftheCompany’sSeriesCredeemableconvertiblepreferredstock atafuturedatewasdeterminedtobeafreestandingfinancialinstrumentthatshouldbeaccountedforasa liability.Atinitialrecognition,theCompanyrecordedtheredeemableconvertiblepreferredstockliabilityonthe balancesheetatitsestimatedfairvalue.Theliabilitywassubjecttoremeasurementateachbalancesheetdate,withchangesinfairvaluerecognizedasgain(loss)onremeasurementofredeemableconvertiblepreferredstock liabilityontheconsolidatedstatementofoperations.Uponsettlementoftheredeemableconvertiblepreferred stockliabilityinAugust2019,theCompanyremeasuredtheliabilityandreclassifiedthefinalvalueassociated withtheredeemableconvertiblepreferredstockliabilitytothecarryingvalueoftheSeriesCredeemable convertiblepreferredstock.
Income Taxes
Incometaxesareaccountedforundertheassetandliabilitymethod.Deferredtaxassetsandliabilitiesare recognizedforthefuturetaxconsequencesattributabletodifferencesbetweenthefinancialstatementcarrying amountsofexistingassetsandliabilitiesandtheirrespectivetaxbasesandoperatinglossandtaxcreditcarry forwards.Deferredtaxassetsandliabilitiesaremeasuredusingenactedtaxratesexpectedtoapplytotaxable incomeintheyearsinwhichthosetemporarydifferencesareexpectedtoberecoveredorsettled.Theeffecton deferredtaxassetsandliabilitiesofachangeintaxratesisrecognizedinincomeintheperiodthatincludesthe enactmentdate.Valuationallowancesareestablishedwhennecessarytoreducedeferredtaxestotheamounts expectedto be realized.
TheCompanyrecognizesbenefitsofuncertaintaxpositionsifitismorelikelythannotthatsuchpositions willbesustaineduponexaminationbasedsolelyontheirtechnicalmerit,asthelargestamountofbenefitthatis
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morelikelythannottoberealizedupontheultimatesettlement.TheCompany’spolicyistorecognizeinterest andpenaltiesrelatedtotheunderpaymentofincometaxesasacomponentofincometaxexpenseorbenefit.To date, therehave been no interestor penaltieschargedin relationto the unrecognizedtax benefits.
Commitments and Contingencies
Liabilitiesforlosscontingenciesarisingfromclaims,assessments,litigation,fines,andpenaltiesandother sourcesarerecordedwhenitisprobablethataliabilityhasbeenincurredandtheamountcanbereasonably estimated.Legal costsincurredin connectionwith loss contingenciesare expensed as incurred.
Foreign Currencies
TheCompany’sreportingcurrencyistheU.S.dollar.ThefunctionalcurrencyoftheCompany’ssubsidiary locatedinAustraliaistheAustralianDollar.Balancesheetspreparedinthefunctionalcurrenciesaretranslatedto thereportingcurrencyatexchangeratesineffectattheendoftheaccountingperiod,exceptforstockholders’ equityaccounts,whicharetranslatedatratesineffectwhenthesebalanceswereoriginallyrecorded.Revenue andexpenseaccountsaretranslatedusinga weighted-averagerateduring the year. The resultingforeigncurrency translationadjustmentsarerecordedasaseparatecomponentofaccumulatedothercomprehensivelossinthe accompanyingconsolidatedbalancesheets.Foreignexchange translation gain for the year ended December31, 2020 was $9,000 and loss for the year ended December 31, 2019 was $14,000.
Gainsandlossesresultingfromexchangeratechangesontransactionsdenominatedinacurrencyotherthan the functionalcurrencyare includedin earningsas incurred.
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 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 adjusttheaccrualaccordinglytoreflectthebest informationavailableatthetimeofthefinancialstatementissuance.TheCompanyhasnotexperiencedany materialdifferencesbetween accruedcostsand actualcostsincurredsinceitsinception.
Stock-Based Compensation
TheCompanyaccountsforstock-basedcompensationarrangementswithemployeesandnon-employee directorsandconsultantsusing a fair value method which requires the recognition of compensation expense for costs
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related to all stock-based payments, including stock options. The fair value method requires the Company to estimate the fair value of stock-based payment awards to employees and non-employees on the date of grant using the Black- Scholes option pricing model.
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 forfeituresas they occur.
Accounting for Non-Recurring Grant Income
Non-recurring grant income is recognized when the research and development activities have been undertaken and the Company has completed its assessment of whether such activities meet the relevant qualifying criteria. Grants received from government and other agencies in advance of the specific research and development costs to which they relate are deferred and recognized in the consolidated statement of operations in the period they are earned and when the related research and development costs are incurred. Non-recurring grant income recognized in other income, net was $190,000 for the year ended December 31, 2019. No non-recurring grant income was recognized during 2020.
Net Loss Per Share Attributableto 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.
Emerging Growth Company Status
The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 or the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that it (i) is no longer an emerging growth company or (ii) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. As a result, these financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.
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Recently Adopted Accounting Pronouncements
In June 2018, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting (Topic 718). This standard simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. The Company adopted this standard on January 1, 2020 and the adoption of this standard did not have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820), which eliminates certain disclosure requirements for fair value measurements for all entities, requires public entities to disclose certain new information and modifies some disclosure requirements. This standard is effective for all entities for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company adopted this standard on January 1, 2020 and the adoption of this standard did not have a material impact on its consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). The guidance eliminates certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. This guidance also includes guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. ASU No. 2019-12 is effective for annual and interim periods in fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company early adopted this standard on January 1, 2020. The adoption of this standard did not have a material impact on the financial statements.
RecentlyIssued Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which supersedes the guidance in former ASC 840, Leases. This standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less may be accounted for similar to existing guidance for operating leases today. This standard is effective for the Company on January 1, 2022, early adoption is permitted. Originally, a modified retrospective transition approach was required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. In July 2018, the FASB issued guidance to permit an alternative transition method for Topic 842, which allows transition to the new lease standard by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Entities may elect to apply either approach. There are also a number of optional practical expedients that entities may elect to apply. The Company is currently assessing the impact of this standard on its consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires an entity to utilize a new impairment model that requires measurement and recognition of expected credit losses for most financial assets and certain other instruments, including but not limited to available-for-sale debt securities. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses rather than as a direct write-down to the security. The new guidance requires the use of forward-looking expected credit loss models based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount, which may result in earlier recognition of credit losses under the new guidance. The new guidance also modifies the impairment models for available-for-sale debt securities and for purchased financial assets with credit deterioration since their origination. Subsequent to the issuance of ASU 2016-13, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses. This ASU does not change the core principle of the guidance in ASU 2016-13, instead these amendments are intended to clarify and improve operability of certain topics included within the credit losses guidance. The FASB also subsequently issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Derivatives and Hedging (Topic 815), and Financial Instruments (Topic 825), which did not change the core principle of the guidance in ASU 2016-13 but clarified that expected recoveries of amounts previously written off and expected to be written off should be included
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in the valuation account and should not exceed amounts previously written off and expected to be written off. In March 2020, the FASB issued ASU No. 2020-3, Codification Improvements to Financial Instruments which makes narrow-scope improvements to various financial instruments topics, including the new credit losses standard and clarifies the following areas (i) the contractual term of a net investment in a lease should be the contractual term used to measure expected credit losses; (ii) when an entity regains control of financial assets sold, an allowance for credit losses should be recorded. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019 for public business entities, excluding smaller reporting companies. As a smaller reporting company, the guidance will be effective for the Company during the first quarter of 2023. The Company is in the process of assessing the impact adoption will have on its consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract (Topic 350). The standard requires implementation costs incurred by customers in cloud computing arrangements to be deferred over the noncancelable term of the cloud computing arrangements plus any optional renewal periods (1) that are reasonably certain to be exercised by the customer or (2) for which exercise of the renewal option is controlled by the cloud service provider. The effective date of this pronouncement is for fiscal years beginning after December 15, 2020, and interim periods within annual periods beginning after December 15, 2021, and early adoption is permitted. The standard can be adopted either using the prospective or retrospective transition approach. The Company is in the process of assessing the impact of this ASU on its future consolidated financial statements but does not expect this update to have a material impact on the Company's consolidated financial statements..
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:
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):
Assets:
Cash equivalents:
Short-term investments:
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Assets:
Cash equivalents:
All of the investments held as of December 31, 2020 had maturities of less than two years.
For the years ended December 31, 2020 and 2019, the Company recognized no material realized gains or losses on financial instruments.
In August 2019, the redeemable convertible preferred stock liability was settled upon the completion of the second closing of the Company’s Series C redeemable convertible preferred stock financing. In light of the Company’s progress towards an IPO, the liability was remeasured at the settlement date using a probability-weighted expected return method, or PWERM, whereby the Company’s total equity value was estimated under various exit scenarios and allocated to the Company’s different classes of equity. The PWERM included two scenarios, IPO or staying private, that considered an estimate of the timing of each scenario and were weighted based on the Company’s estimate of the probability of each event occurring. The equity value under the IPO scenario was based on recent IPO values of comparable companies and weighted 50%. The equity value under the staying private scenario was based on the recent Series C redeemable convertible preferred stock financing and was weighted 50%. The liability was remeasured to its fair value of $10.8 million upon settlement and the carrying value of the liability was reclassified to the carrying value of the Series C redeemable convertible preferred stock.
The Company recorded a loss of $5.7 million in the consolidated statements of operations for the year ended December 31, 2019, for the change in the fair value of the liability.The Company had no gain or loss for the change in the fair value of the liability as of December 31, 2020.
The changes in the carrying value of the liability were as follows (in thousands):
Change in fair value 5,670
Fair value as of December 31, 2019 $ —
4. Balance Sheet Components
Prepaid Expenses andOtherCurrent Assets
Prepaid expenses and other current assets consisted of the following (in thousands):
December 31,
Prepaid research and development costs 1,039 1,086
Other receivables 3 79
Total prepaid expenses and other current assets $ 2,805 $ 1,475
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Property andEquipment, Net
Property and equipment, net consisted of the following (in thousands):
December 31,
Computer equipment and software 27 27
Total property and equipment, gross $ 3,906 $ 3,442
Less: accumulated depreciation (1,971 ) (1,304 )
Total property and equipment, net $ 1,935 $ 2,138
Total depreciation expense recognized for the years ended December 31, 2020 and 2019 was $667,000 and $493,000, respectively.
Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
December 31,
Accrued research and development expenses $ 3,260 $ 459
Accrued professional services 524 733
Other accrued expenses 170 76
Total accrued liabilities $ 6,497 $ 2,194
5. Promissory Note
Pursuant to the Coronavirus Aid, Relief, and Economic Security Act, the Company obtained a $0.5 million promissory note from the U.S. Small Business Administration on April 21, 2020, which was repaid in full on May 1, 2020.
6. Commitments and Contingencies
Leases
The Company leases its offices and laboratory in South San Francisco, California under a 7-year noncancelable lease agreement that ends in June 2024 with a 5-year renewal option.
In December 2020, the Company entered into an agreement to lease office and laboratory space in Brisbane, California, or the Brisbane Lease, with an affiliate of its current landlord. The term of the Brisbane Lease is expected to begin in November 2021 and end in October 2031, with an option by the Company to extend for an additional ten years. Concurrent with the execution of the Brisbane Lease, the Company entered into an agreement to terminate its existing lease in South San Francisco, California effectiveupon the commencement of the Brisbane Lease. The base rent will be abated for three months and the landlord will provide the Company with a tenant improvement allowance of up to $10.8 million. In connection with the Brisbane Lease, the Company is required to maintain a letter of credit for the benefit of the landlord in the amount of $1.0 million, which was delivered in January 2021.
Rent expense is recognized on a straight-line basis over the non-cancelable term of the lease and, accordingly, the Company records the difference between cash rent payments and the recognition of rent expense as a deferred rent liability on the accompanying consolidated balance sheet.
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Total rent expense was$353,000 for each of the years ended December 31, 2020 and 2019.
Future minimum lease payments under noncancelable operating leases as of December 31, 2020 were as follows (in thousands):
License andOther Agreements
InNovember2011,theCompanyenteredintoanexclusivelicensingagreement, or theStanfordAgreement, withTheBoardofTrusteesoftheLelandStanfordJuniorUniversity, or Stanford,wherebytheCompanywas grantedanexclusive,worldwide,royalty-bearing,sublicensablelicense,undercertainpatentrights,or the LicensedPatents,tomake,use,offerforsale,sell,importandotherwisecommercializeproductscoveredby theLicensedPatentsforhumanoranimaldiseases,disordersorconditions.UndertheStanfordAgreement,the CompanymadeanupfrontpaymentandisobligatedtopayStanfordannuallicensemaintenancefees,potential futuremilestonepaymentstotalingupto$500,000,androyaltypaymentsatarateequaltoalowsingle-digit percentageof worldwide net salesof licensedproducts. In December 2020, the Company achieved one of the specified development milestones relating to the commencement of the ANX005 Phase 2/3 GBS study, pursuant to the Stanford Agreement. As such, the milestone payment of $0.1 million was expensed to research and development for the year ended December 31, 2020.
In December 2016, the Company entered into a Sponsored Research Agreement with a not-for-profit entity to perform research on multiple sclerosis. The Sponsored Research Agreement was amended in March 2019. Under the terms of the Sponsored Research Agreement, as amended, the Company may receive up to $651,000in funding. If, within 15 years of the end of the Sponsored Research Agreement, the Company files a marketing authorization application for a product treating multiple sclerosis, the Company will be obligated to pay milestone payments up to four times the amounts received under the Sponsored Research Agreement. The Company has received $455,000 in funding to date, including $190,000 received during the year ended December 31, 2019, which was recorded as other income. No income was recognized for the year ended December 31, 2020.
Guarantees andIndemnifications
In the normal course of business, the Company enters into agreements that contain a variety of representations and provide for general indemnification. The Company’s exposure under these agreements is unknown because it involves claims that may be made against the Company in the future. To date, the Company has not paid any claims or been required to defend any action related to its indemnification obligations. As of December 31, 2020, the Company did not have any material indemnification claims or guarantees that were probable or reasonably possible and consequently has not recorded related liabilities.
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7. Redeemable Convertible Preferred Stock and Stockholder’s Equity (Deficit)
RedeemableConvertiblePreferredStock
As of December 31, 2019, redeemable convertible preferred stock consisted of the following:
In June 2020, the Company completed its financing of Series D redeemable convertible preferred stock, which resulted in the Company issuing 71,719,859 shares of Series D redeemable convertible preferred stock, including 9,773,587 shares issued to related parties who were 10% or greater holders of the Company, at a price per share of $1.4222 for aggregate proceeds of $96.8 million, net of issuance costs of $5.2 million. The shares of Series D redeemable convertible preferred stock were convertible at any time, at the holders’ option, into shares of common stock.
In connection with the issuance and sale of the Series D redeemable convertible preferred stock, the Company recognized a beneficial conversion feature of approximately $6.3 million. A beneficial conversion feature represents the intrinsic value of the conversion feature, as determined by comparing the effective conversion price at the commitment date with the estimated fair value of the Company’s common stock. The beneficial conversion feature was recorded in additional paid-in capital on the issuance date resulting in a discount to the carrying value of the Series D redeemable convertible preferred stock.
In July 2020, immediately prior to the completion of the IPO (see Note 1), all outstanding shares of redeemable convertible preferred stock were automatically converted into 20,824,938 shares of common stock. Upon conversion of the redeemable convertible preferred stock, the unamortized balance of $6.2 million of the discount from the beneficial conversion feature was recorded as a deemed dividend to the preferred stockholders resulting in an increase to the carrying value of redeemable convertible preferred stock. Upon conversion into common stock, the carrying value of the redeemable convertible preferred stock of $241.4 million was reclassified to equity.
Common Stock
The holders of the Company’s common stock have one vote for each share of common stock. Common stockholders are entitled to dividends when, as, and if declared by the Board of Directors. The holders have no preemptive or other subscription rights and there are no redemption or sinking fund provisions with respect to such shares. As of December 31, 2020, no dividends had been declared by the Board of Directors.
The Company reserved the following shares of common stock for issuance as follows:
December 31,
Reserved for employee stock purchase plan 360,086 —
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8. Equity Incentive Plan
In July 2020, the Company’s board of directors and stockholders adopted and approved the 2020 Incentive Award Plan, or the 2020 Plan, and the Employee Stock Purchase Plan, or the ESPP, which became effective in connection with the IPO. The Company reserved 3,600,868 shares of common stock for future issuance under the 2020 Plan and 360,086 shares under the ESPP, respectively.
The Company may not grant any additional awards under the 2011 Equity Incentive Plan, or the 2011 Plan. The 2011 Plan will continue to govern outstanding equity awards granted thereunder.
2020 Equity Incentive Plan
The number of shares of common stock reserved for issuance under the 2020 Plan automatically increase on the first day of January, commencing on January 1, 2021 and ending in 2030, in an amount equal to 4% of the total number of shares of the Company’s capital stock outstanding on the last day of the preceding year, or a lesser number of shares determined by the Company’s board of directors.
Awards granted under the 2020 Plan expire no later than ten years from the date of grant. For the Incentive Stock Options, or ISOs, and Nonstatutory Stock Options, or NSOs, the option price shall not be less than 100% of the estimated fair value on the date of grant. Options granted typically vest over a four-year period but may be granted with different vesting terms. As of December 31, 2020, there were 2,707,947 shares available for issuance under the 2020 Plan.
Stock option activity under the 2011 Plan and the 2020 Plan was as follows:
Additional shares authorized 4,166,016 —
Stock options exercised — (9,528 ) $ 2.33
The total intrinsic value of options exercised during the years ended December 31, 2020 and 2019 was $181,000 and $8,000, respectively. The intrinsic value is the difference between the fair value of the Company’s common stock at the time of exercise and the exercise price of the stock option.
The weighted-average grant date fair value of options granted to employees during the years ended December 31, 2020 and 2019 was $12.33 and $5.72 per share, respectively.
Employee Stock Purchase Plan
The ESPP enables eligible employees to purchase shares of the Company's common stock at the end of each offering period at a price equal to 85% of the fair market value of the shares on the first business day or the last business day of the offering period, whichever is lower. Eligible employees generally included all employees. Share purchases are funded through payroll deductions of at least 1%, and up to 15% of an employee’s eligible compensation for each payroll period. The number of shares reserved for issuance under the ESPP increase automatically on the first day of each fiscal year, beginning on January 1, 2021, by a number equal to the least of 360,086 shares, 1% of the shares of common stock outstanding on the last day of the immediately preceding fiscal year, or such number of shares
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determined by the Company’s board of directors. As of December 31, 2020, 360,086 shares were available for future purchase.The ESPP generally provides for six-month consecutive offering periodsbeginning on December 15, 2020. The ESPP is a compensatory plan as defined by the authoritative guidance for stock compensation. As such, stock-based compensation expense has been recorded for the year ended December 31, 2020.
Stock-Based Compensation Expense
The total stock-based compensation expense recognized was as follows (in thousands):
Year Ended December 31,
Research and development $ 2,274 $ 713
Total stock-based compensation expense $ 4,888 $ 2,037
As of December 31, 2020, the total unrecognized stock-based compensation cost related to outstanding unvested stock options that are expected to vest was $25.8 million, which the Company expects to recognize over an estimated weighted-average period of 3.06 years.
To determine the value of stock option awards for stock-based compensation purposes, the Company uses the Black-Scholes option pricing model and the assumptions discussed below.
Fair Value of Common Stock—Historically, for all periods prior to the IPO in July 2020, fair values of the shares of common stock underlying the Company’s share-based awards were estimated on each grant date by the Company’s board of directors. The board of directors considered, among other things, valuations of the Company’s common stock which were prepared by an independent third- party valuation firm in accordance with the guidance provided by the American Institute of Certified Public Accountants 2013 Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. After the completion of the IPO in July 2020, the fair value of each share of underlying common stock will be based on the closing price of the Company’s common stock as reported on the date of grant on the Nasdaq Global Select Market.
Expected Term—The Company’s expected term represents the period that the Company’s stock-based awards are expected to be outstanding. The Company’s historical share option exercise information is limited due to a lack of sufficient data points, and did not provide a reasonable basis upon which to estimate an expected term.The expected term for option grants is therefore determined using the simplified method (based on the mid-point between the vesting date and the end of the contractual term).
Expected Volatility—Because the Company does not have sufficient trading history for its common stock, the expected volatility was estimated based on the average volatility for comparable publicly traded life science companies over a period equal to the expected term of the stock option grants. The comparable companies were chosen based on the similar size, stage in the life cycle, or area of specialty. The Company will continue to apply this process until a sufficient amount of historical information regarding the volatility of its own stock price becomes available and to align with the Company’s expected term.
Risk-Free Interest Rate—The risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of the option.
Dividend Yield—The Company has never paid dividends on its common stock and has no plans to pay dividends on its common stock. Therefore, the Company used an expected dividend yield of zero.
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The fair value of each award issued was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
Year Ended December 31,
Dividend yield — —
9. Income Taxes
For financial reporting purposes, loss before provision for income taxes, includes the following components (in thousands):
Year Ended December 31,
For each of the years ended December 31, 2020 and 2019, the Company incurred insignificant amounts for an income tax provision. The U.S. federal and California deferred tax assets generated from the Company’s net operating losses have been fully reserved, as the Company believes it is more likely than not that the benefit will not be realized.
Reconciliation of income tax computed at federal statutory rates to the reported provision for income taxes was as follows (in thousands):
Year Ended December 31,
Tax provision at U.S. statutory rate $ (13,316 ) $ (7,808 )
State income taxes — 4
Stock-based compensation 426 112
Redeemable convertible preferred stock liability — 1,191
Provision for income taxes $ — $ 4
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DeferredTaxAssets andLiabilities
The tax effects of temporary differences that give rise to significant portions of the Company’s deferred tax assets and liabilities are as follows (in thousands):
December 31,
Deferred Tax Assets:
Research and development credits 6,246 4,405
Other intangibles 5 6
Stock-based compensation 995 393
Tenant improvement allowances 257 325
Total deferred tax assets, net $ 263 $ 339
Deferred Tax Liabilities:
Total gross deferred tax liabilities (263 ) (339 )
Net deferred tax assets $ — $ —
As of December 31, 2020, the Company had $146.7 million of federal and $66.7 million of state net operating loss, or NOL, carryforwards available to offset future taxable income. Under the Tax Cuts and Jobs Act of 2017, or the Tax Act, NOLs generated after December 31, 2017 will be carried forward indefinitely with the yearly NOL utilization limited to 80 percent of taxable income. The Company had $103.6 million of such federal NOLs that do not expire. If not utilized, the federal carryforward losses generated prior to 2018 and the state carryforward losses will expire in various amounts beginning in 2031.
As of December 31, 2020, the Company had $4.3 million of federal and $3.5 million of state credit carryforwards available to offset future taxable income. If not utilized, these credit carryforwards will expire in various amounts for federal purposes beginning in 2031. The state credits do not expire.
In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. Management believes that, based on available evidence, both positive and negative, it is more likely than not that the deferred tax assets will not be utilized; therefore, a full valuation allowance has been recorded. The Company’s valuation allowance increased by $14.8 million and $10.4 million for the years ended December 31, 2020 and 2019, respectively. The changes in the 2020 and 2019 valuation allowance were primarily due to the addition of the current year loss carryforwards and research and development credits.
Utilization of the net operating loss carryforwards and credits may be subject to an annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. Any annual limitation may result in the expiration of net operating losses and credits before utilization.
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Uncertain TaxBenefits
The Company has the following activity relating to the gross amount of unrecognized tax benefits (in thousands):
Year Ended December 31,
Additions based on tax positions related to current year 460 333
None of these uncertain tax positions will impact the Company’s effective tax rate if assessed. The Company’s policy is to classify interest and penalties associated with unrecognized tax benefits as income tax expense. The Company had no interest or penalty accruals associated with uncertain tax benefits in its consolidated balance sheet and consolidated statement of operations for the year ended December 31, 2020. The Company files income tax returns in California, Massachusetts, Pennsylvania and in Australia. The Company is not currently under examination by any major tax jurisdictions nor has it been in the past. The tax years 2011 through 2020 remain effectively open for examination by the Internal Revenue Service and most state tax authorities.
Although it is reasonably possible that certain unrecognized tax benefits may increase or decrease within the next 12 months due to tax examination changes, settlement activities, expirations of statute of limitations, or the impact on recognition and measurement considerations related to the results of published tax cases or other similar activities, the Company does not anticipate any significant changes to unrecognized tax benefits over the next 12 months.
10. Net Loss Per Share Attributable to Common Stockholders
As the Company was in a loss position for all periods presented, basic net loss per share is the same as diluted net loss per share for all periods as the inclusion of all potential common securities outstanding would have been anti-dilutive.
The following outstanding potentially dilutive shares have been excluded from the calculation of diluted net loss per share due to their anti-dilutive effect:
Year Ended December 31,
Redeemable convertible preferred stock on an as-converted basis — 12,684,214
Shares subject to employee stock purchase plan 275 —
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Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As of December 31, 2020, our management, with the participation and supervision of our Chief Executive Officer and our Chief Financial Officer, have evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act). Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of the December 31, 2020, our disclosure controls and procedures are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered bythe year ended December 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
The Annual Report on Form 10-K does not include a report of management’s assessment regarding internal control over financial reporting due to a transition period established by the rules of the SEC for newly public companies.
Attestation Report of Registered Public Accounting Firm
This Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting due to an exemption established by the JOBS Act for “emerging growth companies.”
Inherent Limitation on the Effectiveness of Internal Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Item 9B. Other Information.
None.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Information required by this item will be contained in our definitive proxy statement to be filed with the Securities and Exchange Commission on Schedule 14A in connection with our 2021 Annual Meeting of Stockholders, or the Proxy Statement, which will be filed no later than 120 days after the end of our fiscal year ended December 31, 2020, and is incorporated herein by reference.
We have adopted a Code of Business Conduct and Ethics that applies to our officers, directors and employees which is available on our website at ir.annexonbio.com. The Code of Business Conduct and Ethics is intended to qualify as a “code of ethics” within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002 and Item 406 of Regulation S-K. In addition, we intend to promptly disclose (1) the nature of any amendment to our Code of Business Conduct and Ethics that applies to our directors or our principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions and (2) the nature of any waiver, including an implicit waiver, from a provision of our code of ethics that is granted to a director one of these specified officers, the name of such person who is granted the waiver and the date of the waiver on our website in the future.
Item 11. Executive Compensation.
The information required by this item regarding executive compensation will be incorporated by reference to the information set forth in our Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this item regarding security ownership of certain beneficial owners and management and our equity compensation plans will be incorporated by reference to the information set forth in our Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this item regarding security ownership of certain beneficial owners and management and our equity compensation plans will be incorporated by reference to the information set forth in our Proxy Statement.
Item 14. Principal Accountant Fees and Services.
The information required by this item regarding principal accountant fees and services will be incorporated by reference to the information set forth in our Proxy Statement.
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PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a) The following documents are filed as part of this report:
1. Financial Statements
Information in response to this Item is included in Part II, Item 8 of this Annual Report on Form 10-K.
2. Financial Statement Schedules
All schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
3. Exhibits
Exhibit Index
Exhibit No Description of Exhibit Incorporated by Reference
Form File No. Exhibit Filing Date Filed Herewith
4.1 Reference is made to Exhibits 3.1 through 3.2.
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Exhibit No Description of Exhibit Incorporated by Reference
Form File No. Exhibit Filing Date Filed Herewith
23.1 Consent of KPMG LLP, independent registered public accounting firm. X
24.1 Power of Attorney (included in the signature page hereto). X
101.INS XBRL Instance Document X
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Exhibit No Description of Exhibit Incorporated by Reference
Form File No. Exhibit Filing Date Filed Herewith
101.SCH XBRL Taxonomy Extension Schema Document X
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document X
101.DEF XBRL Taxonomy Extension Definition Linkbase Document X
101.LAB XBRL Taxonomy Extension Label Linkbase Document X
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document X
+ Indicates management contract or compensatory plan.
Item 16. Form 10-K Summary
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Annexon, Inc.
Date: March 25, 2021 By: /s/ Douglas Love, Esq.
Douglas Love, Esq.
President and Chief Executive Officer
(Principal Executive Officer)
Date: March 25, 2021 By: /s/ Jennifer Lew
Jennifer Lew
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POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of Douglas Love and Jennifer Lew his or her true and lawful attorney-in-fact and agent, with full power of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his or her substitutes or substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Name Title Date
Douglas Love, Esq. (Principal Executive Officer)
Jennifer Lew (Principal Financial and Accounting Officer)
/s/ Thomas G. Wiggans Chairman & Director March 25, 2021
Thomas G. Wiggans
/s/ William H. Carson, M.D. Director March 25, 2021
William H. Carson, M.D.
/s/ Jung E. Choi Director March 25, 2021
Jung E. Choi
/s/ Muneer A. Satter Director March 25, 2021
Muneer A. Satter
/s/ Ricky Sun, Ph.D. Director March 25, 2021
Ricky Sun, Ph.D.
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