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75

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended June 30, 2021

OR

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

For the transition period from ______________ to ______________

Commission File Number: 001-38542

 

Kezar Life Sciences, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

47-3366145

(State or other jurisdiction of

incorporation or organization)

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

4000 Shoreline Court, Suite 300

South San Francisco, CA, 94080

(650) 822-5600

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

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading symbol

Name of each exchange on which registered

Common Stock, $0.001 par value

KZR

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

☒  

  

Smaller reporting company

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of August 6, 2021, the registrant had 48,192,840 shares of common stock, $0.001 par value per share, outstanding.

 

 

 

 


 

 

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

Item 1.

Financial Statements (Unaudited)

1

 

Condensed Consolidated Balance Sheets

1

 

Condensed Consolidated Statements of Operations

2

 

Condensed Consolidated Statements of Comprehensive Loss

3

 

Condensed Consolidated Statement of Stockholders’ Equity

4

 

Condensed Consolidated Statements of Cash Flows

5

 

Notes to Unaudited Condensed Consolidated Financial Statements

6

Item 2.

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

15

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

23

Item 4.

Controls and Procedures

23

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

24

Item 1A.

Risk Factors

24

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

58

Item 3.

Defaults Upon Senior Securities

58

Item 4.

Mine Safety Disclosures

58

Item 5.

Other Information

58

Item 6.

Exhibits

59

 

 

 

 

 

i


 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “should,” “would,” “potential,” “project,” “plan,” “expect,” “seek,” “should,” “target” or similar expressions, or the negative or plural of these words or expressions. These forward-looking statements include statements concerning the following:   

 

statements regarding the impact of the COVID-19 pandemic and its effects on our operations, research and development, clinical trials and financial position, and its potential effects on the operations of third-party manufacturers, contract research organizations, other service providers, and collaborators with whom we conduct business;

 

our plans to develop and commercialize our product candidates;

 

the initiation, timing, progress and expected results of our current and future clinical trials and our research and development programs;

 

our estimates regarding expenses, future revenue, capital requirements and needs for additional financing;

 

our ability to successfully acquire or in-license additional product candidates or other technology on reasonable terms;

 

our ability to maintain and establish collaborations or strategic relationships or obtain additional funding;

 

the timing and likelihood of obtaining regulatory approval of our current and future product candidates;

 

our expectations regarding the potential market size and the rate and degree of market acceptance of such product candidates;

 

our ability to fund our working capital requirements and expectations regarding the sufficiency of our capital resources;

 

the implementation of our business model and strategic plans for our business and product candidates;

 

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

 

developments or disputes concerning our intellectual property or other proprietary rights;

 

the scalability and commercial viability of our manufacturing methods and processes;

 

our expectations regarding government and third-party payor coverage and reimbursement;

 

our ability to compete in the markets for our product candidates;

 

the impact of government laws and regulations;

 

developments relating to our competitors and our industry; and

 

the factors that may impact our financial results.

These statements are only current predictions and are subject to known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from those anticipated by the forward-looking statements. We discuss many of these risks in greater detail under the heading “Risk Factors” and elsewhere in this report. You should not rely upon forward-looking statements as predictions of future events.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by law, we are under no duty to update or revise any of the forward-looking statements in this report, whether as a result of new information, future events or otherwise, after the date of this report.

Unless the context otherwise requires, the terms “Kezar,” “Kezar Life Sciences,” “the Company,” “we,” “us,” “our” and similar references in this Quarterly Report on Form 10-Q refer to Kezar Life Sciences, Inc. and our wholly owned Australian subsidiary, Kezar Life Sciences Australia Pty Ltd.


 

ii


 

 

SUMMARY OF SELECTED RISKS ASSOCIATED WITH OUR BUSINESS

Our business is subject to numerous risks and uncertainties, including those discussed at length in the section titled “Risk Factors.” These risks include, among others, the following:

 

The ongoing COVID-19 pandemic may cause disruptions to our business and negatively affect our ability to enroll and conduct our clinical trials.

 

We have incurred significant operating losses since inception and anticipate that we will continue to incur substantial operating losses for the foreseeable future and may never achieve profitability.

 

We have a limited operating history and have never generated revenue from product sales, which may make it difficult to evaluate the success of our business to date and to assess our future viability.

 

We will require substantial additional capital to finance our operations, which may not be available on acceptable terms, if at all. Failure to obtain this necessary capital when needed may force us to delay, reduce or terminate certain of our product development programs. Raising additional capital may cause dilution to our stockholders, restrict our operations or require us to relinquish proprietary rights.

 

Our future success is substantially dependent on the successful clinical development, regulatory approval and commercialization of KZR-616, KZR-261 and any future product candidates.

 

Success in preclinical studies or earlier clinical trials may not be indicative of future clinical trial results, and we cannot assure you that any clinical trials will lead to results sufficient for the necessary regulatory approvals.

 

We may encounter substantial delays or difficulties in enrolling and retaining patients in our clinical trials.

 

Clinical trials are very expensive, time consuming and difficult to design and implement.

 

We may not be able to obtain or maintain orphan drug designations or exclusivity for our product candidates, which could limit the potential profitability of our product candidates.

 

Enrollment and retention of patients in clinical trials is an expensive and time-consuming process and could be delayed, made more difficult or rendered impossible by multiple factors outside our control.

 

Our product candidates may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval, limit the commercial potential or result in significant negative consequences following any potential marketing approval.

 

Interim top-line and preliminary data from our clinical trials that we announce or publish from time to time may change as more patient data become available and are subject to audit and verification procedures that could result in material changes in the final data.

 

If the market opportunities for KZR-616 are smaller than we believe they are, our business may suffer.

 

We face substantial competition, which may result in others developing or commercializing drugs before or more successfully than us.

 

Even if our product candidates receive marketing approval, they may fail to achieve market acceptance by physicians, patients, third-party payors or others in the medical community necessary for commercial success.

 

Our relationships with customers, physicians, and third-party payors may be subject, directly or indirectly, to federal and state healthcare fraud and abuse laws, transparency laws, false claims laws, health information privacy and security laws, and other healthcare laws and regulations. If we are unable to comply, or have not fully complied, with such laws, we could face substantial penalties.

 

We rely on third parties to manufacture clinical supplies of our product candidates and to conduct, support and monitor our preclinical studies and clinical trials. If those third parties perform in an unsatisfactory manner, it may harm our business.

 

If we are unable to obtain and maintain patent protection for KZR-616 and KZR-261, if the scope of patent protection is not sufficiently broad, or if our patents are insufficient to protect our product candidates for an adequate amount of time, we may not be able to compete effectively in our markets.

 

Patent terms may be inadequate to protect our competitive position on our product candidates for an adequate amount of time.

 

iii


 

 

Licensing of intellectual property is of critical importance to our business and involves complex legal, business and scientific issues. If we breach our exclusive license agreement with Onyx Therapeutics, Inc., we could lose the ability to continue the development and commercialization of KZR-616.

 

We are highly dependent on the services of our Chief Executive Officer, John Fowler, and our President and Chief Scientific Officer, Dr. Christopher Kirk, and if we are not able to retain these members of our management team or recruit and retain additional management, clinical and scientific personnel, our business will be harmed.

 

If securities or industry analysts do not publish research or reports, or publish unfavorable research or reports, about our business or our market, our stock price and trading volume could decline.

 

We have broad discretion in the use of our cash and cash equivalents and may use them in ways in which you do not agree or in ways that do not increase the value of your investment.

 

 

 

iv


 

 

 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

KEZAR LIFE SCIENCES, INC.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share amounts)

 

 

 

June 30, 2021

 

 

December 31, 2020

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

26,382

 

 

$

21,228

 

Marketable securities

 

 

102,593

 

 

 

119,219

 

Prepaid expenses

 

 

3,456

 

 

 

2,733

 

Other current assets

 

 

915

 

 

 

1,631

 

Total current assets

 

 

133,346

 

 

 

144,811

 

Property and equipment, net

 

 

3,017

 

 

 

3,435

 

Operating lease right-of-use asset

 

 

3,027

 

 

 

3,314

 

Other assets

 

 

282

 

 

 

282

 

Total assets

 

$

139,672

 

 

$

151,842

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,633

 

 

$

2,358

 

Accrued liabilities

 

 

3,186

 

 

 

3,021

 

Operating lease liabilities, current

 

 

1,118

 

 

 

1,042

 

Other liabilities, current

 

 

7

 

 

 

21

 

Total current liabilities

 

 

5,944

 

 

 

6,442

 

Operating lease liabilities, noncurrent

 

 

3,842

 

 

 

4,422

 

Total liabilities

 

 

9,786

 

 

 

10,864

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock, $0.001 par value, 125,000,000 shares authorized as of June 30,

   2021 (unaudited) and December 31, 2020; 48,146,308 and 46,359,743 shares issued

   and outstanding as of June 30, 2021 (unaudited) and December 31, 2020,

   respectively

 

 

48

 

 

 

46

 

Preferred stock, $0.001 par value, 10,000,000 shares authorized, zero shares issued

   and outstanding as of June 30, 2021 (unaudited) and December 31, 2020

 

 

 

 

 

 

Additional paid-in capital

 

 

281,973

 

 

 

267,093

 

Accumulated other comprehensive loss

 

 

(155

)

 

 

(137

)

Accumulated deficit

 

 

(151,980

)

 

 

(126,024

)

Total stockholders' equity

 

 

129,886

 

 

 

140,978

 

Total liabilities and stockholders' equity

 

$

139,672

 

 

$

151,842

 

 

See accompanying notes to the unaudited condensed consolidated financial statements

 

 

1


 

 

KEZAR LIFE SCIENCES, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except share and per share amounts)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

9,341

 

 

$

7,148

 

 

$

18,627

 

 

$

14,605

 

General and administrative

 

 

3,668

 

 

 

2,705

 

 

 

7,430

 

 

 

5,726

 

Total operating expenses

 

 

13,009

 

 

 

9,853

 

 

 

26,057

 

 

 

20,331

 

Loss from operations

 

 

(13,009

)

 

 

(9,853

)

 

 

(26,057

)

 

 

(20,331

)

Interest income

 

 

47

 

 

 

353

 

 

 

101

 

 

 

819

 

Net loss

 

$

(12,962

)

 

$

(9,500

)

 

$

(25,956

)

 

$

(19,512

)

Net loss per common share, basic and diluted

 

$

(0.25

)

 

$

(0.22

)

 

$

(0.50

)

 

$

(0.51

)

Weighted-average shares used to compute net loss per common

   share, basic and diluted

 

 

51,904,701

 

 

 

42,936,991

 

 

 

51,483,709

 

 

 

37,902,294

 

 

See accompanying notes to the unaudited condensed consolidated financial statements

 

2


 

KEZAR LIFE SCIENCES, INC.

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

(In thousands)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Net loss

 

$

(12,962

)

 

$

(9,500

)

 

$

(25,956

)

 

$

(19,512

)

Other comprehensive (loss) income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(13

)

 

 

97

 

 

 

(24

)

 

 

(20

)

Unrealized gain on marketable securities

 

 

(2

)

 

 

50

 

 

 

6

 

 

 

241

 

Total other comprehensive (loss) income, net of tax

 

 

(15

)

 

 

147

 

 

 

(18

)

 

 

221

 

Comprehensive loss

 

$

(12,977

)

 

$

(9,353

)

 

$

(25,974

)

 

$

(19,291

)

 

See accompanying notes to the unaudited condensed consolidated financial statements

 

 

 

3


 

 

KEZAR LIFE SCIENCES, INC.

Condensed Consolidated Statements of Stockholders' Equity

(Unaudited)

(In thousands, except share amounts)

 

 

 

COMMON STOCK

 

 

ADDITIONAL

PAID-IN

 

 

ACCUMULATED

OTHER

COMPREHENSIVE

 

 

ACCUMULATED

 

 

TOTAL

STOCKHOLDERS'

 

 

 

SHARES

 

 

AMOUNTS

 

 

CAPITAL

 

 

INCOME/(LOSS)

 

 

DEFICIT

 

 

EQUITY

 

Balance at December 31, 2020

 

 

46,359,743

 

 

$

46

 

 

$

267,093

 

 

$

(137

)

 

$

(126,024

)

 

$

140,978

 

Issuance of common stock under the ATM Agreement,

   net of offering costs of $330

 

 

1,705,800

 

 

 

2

 

 

 

10,671

 

 

 

 

 

 

 

 

 

10,673

 

Issuance of common stock under employee stock incentive plans

 

 

14,325

 

 

 

 

 

 

48

 

 

 

 

 

 

 

 

 

48

 

Vesting related to shares of common stock issued

   pursuant to early exercises

 

 

 

 

 

 

 

 

7

 

 

 

 

 

 

 

 

 

7

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

1,928

 

 

 

 

 

 

 

 

 

1,928

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(3

)

 

 

 

 

 

(3

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,994

)

 

 

(12,994

)

Balance at March 31, 2021

 

 

48,079,868

 

 

$

48

 

 

$

279,747

 

 

$

(140

)

 

$

(139,018

)

 

$

140,637

 

Issuance of common stock under employee stock incentive plans

 

 

66,440

 

 

 

 

 

 

282

 

 

 

 

 

 

 

 

 

282

 

Vesting related to shares of common stock issued

   pursuant to early exercises

 

 

 

 

 

 

 

 

7

 

 

 

 

 

 

 

 

 

7

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

1,937

 

 

 

 

 

 

 

 

 

1,937

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(15

)

 

 

 

 

 

(15

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,962

)

 

 

(12,962

)

Balance at June 30, 2021

 

 

48,146,308

 

 

$

48

 

 

$

281,973

 

 

$

(155

)

 

$

(151,980

)

 

$

129,886

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COMMON STOCK

 

 

ADDITIONAL

PAID-IN

 

 

ACCUMULATED

OTHER

COMPREHENSIVE

 

 

ACCUMULATED

 

 

TOTAL

STOCKHOLDERS'

 

 

 

SHARES

 

 

AMOUNTS

 

 

CAPITAL

 

 

LOSS

 

 

DEFICIT

 

 

EQUITY

 

Balance at December 31, 2019

 

 

19,208,077

 

 

$

19

 

 

$

162,505

 

 

$

(196

)

 

$

(84,282

)

 

$

78,046

 

Issuance of common stock and pre-funded warrants       through underwritten offering, net of offering costs of $3,447

 

 

18,965,385

 

 

 

19

 

 

 

53,341

 

 

 

 

 

 

 

 

 

53,360

 

Issuance of common stock under employee stock incentive plans

 

 

3,000

 

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

3

 

Vesting related to shares of common stock issued

   pursuant to early exercises

 

 

 

 

 

 

 

 

10

 

 

 

 

 

 

 

 

 

10

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

1,173

 

 

 

 

 

 

 

 

 

1,173

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

74

 

 

 

 

 

 

74

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,012

)

 

 

(10,012

)

Balance at March 31, 2020

 

 

38,176,462

 

 

$

38

 

 

$

217,032

 

 

$

(122

)

 

$

(94,294

)

 

$

122,654

 

Issuance of common stock and pre-funded warrants

   through underwritten offering, net of offering costs of $3,087

 

 

7,590,909

 

 

 

8

 

 

 

43,655

 

 

 

 

 

 

 

 

 

43,663

 

Issuance of common stock under employee stock incentive plans

 

 

59,427

 

 

 

 

 

 

125

 

 

 

 

 

 

 

 

 

125

 

Vesting related to shares of common stock issued

   pursuant to early exercises

 

 

 

 

 

 

 

 

10

 

 

 

 

 

 

 

 

 

10

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

1,219

 

 

 

 

 

 

 

 

 

1,219

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

147

 

 

 

 

 

 

147

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,500

)

 

 

(9,500

)

Balance at June 30, 2020

 

 

45,826,798

 

 

$

46

 

 

$

262,041

 

 

$

25

 

 

$

(103,794

)

 

$

158,318

 

 

See accompanying notes to the unaudited condensed consolidated financial statements

 

 

4


 

 

KEZAR LIFE SCIENCES, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2021

 

 

2020

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(25,956

)

 

$

(19,512

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

745

 

 

 

731

 

Stock-based compensation

 

 

3,865

 

 

 

2,392

 

Amortization of premiums and discounts on marketable securities

 

 

1,045

 

 

 

(183

)

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Prepaid expenses, other current assets and other long-term assets

 

 

(21

)

 

 

(166

)

Accounts payable, accrued liabilities and other current liabilities

 

 

(576

)

 

 

(1,219

)

Operating lease liabilities

 

 

(504

)

 

 

(435

)

Net cash used in operating activities

 

 

(21,402

)

 

 

(18,392

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(24

)

 

 

(110

)

Purchases of marketable securities

 

 

(37,913

)

 

 

(143,780

)

Maturities of marketable securities

 

 

53,500

 

 

 

67,284

 

Net cash provided by (used in) investing activities

 

 

15,563

 

 

 

(76,606

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock and warrants, net of issuance costs

 

 

10,673

 

 

 

97,235

 

Proceeds from issuance of common stock under employee stock incentive plans

 

 

344

 

 

 

128

 

Net cash provided by financing activities

 

 

11,017

 

 

 

97,363

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(24

)

 

 

(20

)

Net increase in cash and cash equivalents

 

 

5,154

 

 

 

2,345

 

Cash and cash equivalents at the beginning of period

 

 

21,228

 

 

 

14,951

 

Cash and cash equivalents at the end of period

 

$

26,382

 

 

$

17,296

 

Supplemental disclosures of noncash investing and financing information:

 

 

 

 

 

 

 

 

Reclassification of employee stock liability to equity upon vesting

 

$

14

 

 

$

20

 

Unpaid offering costs in accrued liabilities

 

$

25

 

 

$

212

 

Purchase of property and equipment in accounts payable

 

$

16

 

 

$

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements 

 

 

 

5


 

 

Kezar Life Sciences, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

1. Organization and Description of the Business

Description of Business

Kezar Life Sciences, Inc. (the “Company,” “we,” “us,” or “our”) was incorporated in the state of Delaware in February 2015 and commenced operations in June 2015. The Company is a clinical-stage biotechnology company discovering and developing breakthrough treatments in immune-mediated and oncologic disorders. The Company’s principal operations are in South San Francisco, California, and it operates in one segment.

Liquidity

Since commencing operations in mid-2015, substantially all of the Company’s efforts have been focused on research, development, and the advancement of the Company’s product candidates, KZR-616 and KZR-261. The Company’s ultimate success depends on the outcome of these ongoing research and development activities. The Company has not yet generated product sales and as a result has experienced operating losses since inception and had an accumulated deficit of $152.0 million as of June 30, 2021. The Company expects to incur additional losses in the future to conduct research and development and will need to raise additional capital to fully implement management’s business plan. The Company intends to raise such capital through the issuance of additional equity, and potentially through borrowings, strategic alliances with partner companies and other licensing transactions. However, if such financing is not available at adequate levels, the Company may need to reevaluate its operating plans. Management believes that its existing cash, cash equivalents and marketable securities will be sufficient to fund the Company’s cash requirements for at least 12 months following the issuance of these financial statements.

In September 2020, the Company entered into a Sales Agreement (the “ATM Agreement”) with Cowen and Company, LLC (“Cowen”), pursuant to which the Company can offer and sell, from time to time at its sole discretion through Cowen, as its sales agent, shares of its common stock having an aggregate offering price of up to $50.0 million. Any shares of its common stock sold will be issued pursuant to the Company’s shelf registration statement on Form S-3 (File No. 333-248752). The Company will pay Cowen a commission equal to 3.0% of the gross sales proceeds of any shares of its common stock sold through Cowen under the ATM Agreement and also has provided Cowen with indemnification and contribution rights. The Company has sold an aggregate of 1,705,800 shares of its common stock for gross proceeds of approximately $11.0 million at a purchase price of $6.45 per share pursuant to the ATM Agreement, all of which occurred in February 2021.

On June 11, 2020, the Company completed an underwritten public offering of 7,590,909 shares of its common stock and, to certain investors in lieu thereof, pre-funded warrants to purchase 909,091 shares of its common stock at an exercise price of $0.001 per share (the “June Offering”). The public offering price of our common stock was $5.50 per share and the public offering price of each pre-funded warrant was $5.499 per underlying share. In July 2020, the underwriters exercised an option to purchase an additional 427,707 shares of common stock. The net proceeds from the June Offering were approximately $45.8 million, after deducting underwriting discounts and commissions and other offering expenses paid by us. The Company’s existing stockholder, Equal Talent Investments Limited, and one of the Company’s directors purchased an aggregate of approximately $8.5 million of common stock in the June Offering.

On February 4, 2020, the Company completed an underwritten public offering of 18,965,385 shares of its common stock, which includes the full exercise of the underwriters’ option to purchase additional shares of common stock, and, to certain investors in lieu thereof, pre-funded warrants to purchase 2,884,615 shares of its common stock at an exercise price of $0.001 per share (the “February Offering”). The public offering price of our common stock was $2.60 per share and the public offering price of each pre-funded warrant was $2.599 per underlying share. The net proceeds from the February Offering were approximately $53.4 million, after deducting underwriting discounts and commissions and other offering expenses paid by us. The Company’s existing stockholder, Morningside Ventures Investments Ltd, and certain of the Company’s officers and directors purchased an aggregate of approximately $10.4 million of common stock in the February Offering.

2. Summary of Significant Accounting Policies

Significant Accounting Policies

The Company’s significant accounting policies are disclosed in the audited consolidated financial statements for the year ended December 31, 2020 and the notes thereto, which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the U.S. Securities and Exchange Commission (“SEC”) on March 11, 2021 (the “Annual Report”), and there have been no material changes during the six months ended June 30, 2021.

 

6


 

Basis of Presentation and Consolidation

The condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and include the Company’s accounts and those of its wholly owned Australian subsidiary, Kezar Life Sciences Australia Pty Ltd., which is a proprietary company limited by shares. All intercompany balances and transactions have been eliminated upon consolidation.

The condensed consolidated balance sheet at December 31, 2020 has been derived from the audited consolidated financial statements at that date but does not include all information and footnotes required by GAAP for complete financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements included in the Annual Report.

Unaudited Condensed Consolidated Financial Statements

The accompanying financial information as of June 30, 2021 is unaudited. The interim condensed consolidated financial statements included in this report reflect all adjustments (consisting only of normal recurring adjustments) that our management considers necessary for the fair statement of the results of operations for the interim periods covered and of our financial condition at the date of the interim balance sheet. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The results for interim periods are not necessarily indicative of the results for the entire year or any other interim period. The accompanying condensed consolidated financial statements and related financial information should be read in conjunction with the audited financial statements and the related notes thereto included in our Annual Report.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Significant items subject to such estimates and assumptions include the useful lives of fixed assets, stock-based compensation, and accrued research and development costs. Management bases its estimates on historical experience and on various other market-specific relevant assumptions that management believes to be reasonable under the circumstances. Actual results may differ from those estimates.

We also anticipate that the COVID-19 pandemic will continue to have an impact on the clinical and preclinical development timelines for our clinical and preclinical programs.  Estimates and assumptions about future events and their effects cannot be determined with certainty and therefore require the exercise of judgment. As of the date of issuance of these financial statements, the Company is not aware of any specific event or circumstance that would require the Company to update its estimates, assumptions and judgments or revise the carrying value of its assets or liabilities. These estimates may change as new events occur and additional information is obtained and are recognized in the condensed consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to the Company’s condensed consolidated financial statements.

Significant Risks and Uncertainties

With the ongoing COVID-19 pandemic beginning in the first quarter of 2020, we implemented business continuity plans designed to address and mitigate the impact of the COVID-19 pandemic on our business.  The extent to which the COVID-19 pandemic impacts our business, our preclinical and clinical development and regulatory efforts, our corporate development objectives and the value of and market for our common stock, will depend on future developments that are highly uncertain and cannot be predicted with confidence at this time, such as the ultimate duration of the pandemic, travel restrictions, quarantines, social distancing, safety measures and business closure requirements in the United States, Europe and other countries, and the effectiveness of actions taken globally to contain and treat the disease.  The global economic slowdown, the overall disruption of global healthcare systems and the other risks and uncertainties associated with the pandemic could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

In addition, we are subject to other challenges and risks specific to our business and our ability to execute on our strategy, as well as risks and uncertainties common to companies in the biotechnology industry with development operations, including, without limitation, risks and uncertainties associated with: obtaining regulatory feedback regarding our product candidates; delays or problems in the supply of our product candidates; loss of single source suppliers or their failure to comply with manufacturing regulations; identifying, acquiring or in-licensing additional technologies or product candidates; clinical development and the inherent uncertainty of clinical success; the challenges of protecting and enhancing our intellectual property rights; and complying with applicable regulatory requirements. In addition, to the extent the ongoing COVID-19 pandemic adversely affects our business and results of operations, it may also have the effect of heightening many of the other risks and uncertainties discussed above.

 

7


 

Recent Accounting Pronouncements

The Company continues to monitor new accounting pronouncements issued by the Financial Accounting Standards Board and does not believe any accounting pronouncements issued through the date of this report will have a material impact on the Company’s condensed consolidated financial statements.

3. Fair Value Measurements

Financial assets and liabilities are recorded at fair value. The carrying amount of certain financial instruments, including cash and cash equivalents, marketable securities, other current assets, accounts payable and accrued liabilities, approximate fair value due to their relatively short maturities. Assets and liabilities recorded at fair value on a recurring basis in the condensed consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined as the exchange price that would be received for an asset or an exit price that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows:

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

Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

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

Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability.

The Company applies fair value accounting for all financial assets and liabilities and nonfinancial assets and liabilities that are required to be recognized or disclosed at fair value in the financial statements. The Company determines the fair value of Level 1 assets using quoted prices in active markets for identical assets. The Company reviews trading activity and pricing for Level 2 investments as of each measurement date. Level 2 inputs, which are obtained from various third-party data providers, represent quoted prices for similar assets in active markets and were derived from observable market data, or, if not directly observable, were derived from or corroborated by other observable market data.

In certain cases, where there is limited activity or less transparency around inputs to valuation, securities are classified as Level 3 within the valuation hierarchy. The Company did not have any assets or liabilities measured using Level 3 inputs as of June 30, 2021 or December 31, 2020.

The following table summarizes the Company’s financial assets measured at fair value on a recurring basis and classified under the appropriate level of the fair value hierarchy as described above (in thousands):

 

 

 

June 30, 2021

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

23,873

 

 

$

23,873

 

 

$

 

 

$

 

U.S. Treasury securities

 

 

68,133

 

 

 

68,133

 

 

 

 

 

 

 

Commercial paper