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 September 30, 2018

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)

 

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

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

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

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

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

As of November 5, 2018, the registrant had 19,108,221 shares of common stock, $0.001 par value per share, outstanding.

 

 

 

 


 

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

Item 1.

Financial Statements (Unaudited)

2

 

Condensed Consolidated Balance Sheets

2

 

Condensed Consolidated Statements of Operations

3

 

Condensed Consolidated Statements of Comprehensive Loss

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

21

Item 4.

Controls and Procedures

21

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

22

Item 1A.

Risk Factors

22

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,” “would,” “project,” “plan,” “expect,” or similar expressions, or the negative or plural of these words or expressions. These forward-looking statements include statements concerning the following:

 

our plans to develop and commercialize our product candidates;

 

the initiation, timing, progress and 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 on reasonable terms;

 

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

 

our ability to obtain 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;

 

our intellectual property position and the duration of our patent rights;

 

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

 

our failure to remediate the material weakness in our internal control over financial reporting;

 

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

 

our ability to compete in the markets we serve;

 

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.

 


 

1


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

KEZAR LIFE SCIENCES, INC.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share amounts)

 

 

 

September 30, 2018

 

 

December 31, 2017

 

 

 

(Unaudited)

 

 

(Note 2)

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

39,594

 

 

$

51,033

 

Marketable securities

 

 

73,161

 

 

 

 

Prepaid expenses

 

 

1,676

 

 

 

785

 

Other current assets

 

 

894

 

 

 

508

 

Total current assets

 

 

115,325

 

 

 

52,326

 

Restricted cash

 

 

 

 

 

13

 

Property and equipment, net

 

 

4,660

 

 

 

1,540

 

Other assets

 

 

282

 

 

 

343

 

Total assets

 

$

120,267

 

 

$

54,222

 

Liabilities, Redeemable Convertible Preferred Stock and Stockholders'

   Equity (Deficit)

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

662

 

 

$

547

 

Accrued liabilities

 

 

2,345

 

 

 

911

 

Deferred rent, current

 

 

343

 

 

 

 

Other liabilities, current

 

 

152

 

 

 

26

 

Total current liabilities

 

 

3,502

 

 

 

1,484

 

Deferred rent, noncurrent

 

 

2,638

 

 

 

494

 

Total liabilities

 

 

6,140

 

 

 

1,978

 

Redeemable convertible preferred stock, $0.001 par value, zero and 75,533,240 shares

   authorized as of September 30, 2018 and December 31, 2017, respectively; zero and

   12,263,126 shares issued and outstanding as of September 30, 2018 and

   December 31, 2017, respectively

 

 

 

 

 

77,931

 

Stockholders' equity (deficit):

 

 

 

 

 

 

 

 

Common stock, $0.001 par value, 125,000,000 and 96,000,000 shares authorized as of

   September 30, 2018 and December 31, 2017, respectively; 19,108,221 and

   948,578 shares issued and outstanding as of September 30, 2018 and

   December 31, 2017, respectively

 

 

19

 

 

 

5

 

Preferred stock, $0.001 par value, 10,000,000 and zero shares authorized as of

   September 30, 2018 and December 31, 2017, respectively; zero shares issued and

   outstanding as of September 30, 2018 and December 31, 2017

 

 

 

 

 

 

Additional paid-in capital

 

 

157,681

 

 

 

447

 

Accumulated other comprehensive loss

 

 

(160

)

 

 

(111

)

Accumulated deficit

 

 

(43,413

)

 

 

(26,028

)

Total stockholders' equity (deficit)

 

 

114,127

 

 

 

(25,687

)

Total liabilities, redeemable convertible preferred stock and stockholders'

   equity (deficit)

 

$

120,267

 

 

$

54,222

 

 

See accompanying notes to the unaudited interim condensed consolidated financial statements

 

 

2


 

KEZAR LIFE SCIENCES, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except share and per share amounts)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

4,664

 

 

$

1,557

 

 

$

13,463

 

 

$

4,833

 

General and administrative

 

 

1,600

 

 

 

635

 

 

 

4,837

 

 

 

1,497

 

Total operating expenses

 

 

6,264

 

 

 

2,192

 

 

 

18,300

 

 

 

6,330

 

Loss from operations

 

 

(6,264

)

 

 

(2,192

)

 

 

(18,300

)

 

 

(6,330

)

Interest income

 

 

601

 

 

 

112

 

 

 

915

 

 

 

113

 

Net loss

 

$

(5,663

)

 

$

(2,080

)

 

$

(17,385

)

 

$

(6,217

)

Net loss per common share, basic and diluted

 

$

(0.30

)

 

$

(3.31

)

 

$

(2.38

)

 

$

(10.92

)

Weighted-average shares used to compute net loss per common

   share, basic and diluted

 

 

18,955,384

 

 

 

628,435

 

 

 

7,319,012

 

 

 

569,417

 

 

See accompanying notes to the unaudited interim condensed consolidated financial statements

 

3


 

KEZAR LIFE SCIENCES, INC.

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)

(In thousands)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net loss

 

$

(5,663

)

 

$

(2,080

)

 

$

(17,385

)

 

$

(6,217

)

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(14

)

 

 

(3

)

 

 

(23

)

 

 

42

 

Unrealized loss on marketable securities

 

 

(26

)

 

 

 

 

 

(26

)

 

 

 

Total other comprehensive (loss) income, net of tax

 

 

(40

)

 

 

(3

)

 

 

(49

)

 

 

42

 

Comprehensive loss

 

$

(5,703

)

 

$

(2,083

)

 

$

(17,434

)

 

$

(6,175

)

 

See accompanying notes to the unaudited interim condensed consolidated financial statements

 

4


 

KEZAR LIFE SCIENCES, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(17,385

)

 

$

(6,217

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

486

 

 

 

130

 

Stock-based compensation

 

 

1,544

 

 

 

112

 

Amortization of premiums and discounts on marketable securities

 

 

(192

)

 

 

 

Loss on disposal of property and equipment

 

 

97

 

 

 

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Prepaid expenses & other current assets

 

 

(1,333

)

 

 

(965

)

Other assets

 

 

61

 

 

 

1

 

Accounts payable & accrued liabilities

 

 

1,628

 

 

 

443

 

Other liabilities, current

 

 

(9

)

 

 

(2

)

Deferred rent

 

 

(216

)

 

 

5

 

Net cash used in operating activities

 

 

(15,319

)

 

 

(6,493

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(1,003

)

 

 

(326

)

Purchases of marketable securities

 

 

(72,995

)

 

 

 

Proceeds from sale of property and equipment

 

 

10

 

 

 

 

Net cash used in investing activities

 

 

(73,988

)

 

 

(326

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock, net of issuance costs

 

 

77,695

 

 

 

 

Proceeds from issuance of preferred stock, net of issuance costs

 

 

 

 

 

49,755

 

Proceeds from the exercise of stock options

 

 

213

 

 

 

 

Net cash provided by financing activities

 

 

77,908

 

 

 

49,755

 

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

 

 

(53

)

 

 

42

 

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

 

 

(11,452

)

 

 

42,978

 

Cash, cash equivalents and restricted cash at the beginning of period

 

 

51,046

 

 

 

9,760

 

Cash, cash equivalents and restricted cash at the end of period

 

$

39,594

 

 

$

52,738

 

Supplemental disclosures of noncash financing information:

 

 

 

 

 

 

 

 

Reclassification of employee stock liability to equity upon vesting

 

$

29

 

 

$

14

 

Addition of tenant improvement paid by landlord

 

$

2,703

 

 

$

 

Purchase of property and equipment in accounts payable

 

$

7

 

 

$

 

Conversion of redeemable convertible preferred stock into common stock

 

$

77,931

 

 

$

 

 

See accompanying notes to the unaudited interim 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”) was incorporated in Delaware on February 19, 2015, and commenced operations in June 2015. The Company is a clinical-stage biotechnology company, discovering and developing novel small molecule therapeutics to treat unmet needs in autoimmunity and cancer. The Company’s lead product candidate, KZR-616, a first-in-class selective immunoproteasome inhibitor, has completed testing in healthy volunteers and is now enrolling a Phase 1b/2 clinical trial in lupus and lupus nephritis. The Company is also leveraging its protein secretion pathway platform to discover and develop small molecule therapies targeting cancer and immuno-oncology. To date, the Company’s primary activities have been related to the establishment of its facilities, recruitment of personnel and conducting development of its product candidates, including clinical trials. The Company’s principal operations are in South San Francisco, California, and it operates in one segment.

Reverse Stock Split

On June 8, 2018, the Company filed an Amended and Restated Certificate of Incorporation effecting a 1-for-5.62 reverse stock split of its issued and outstanding shares of common stock and redeemable convertible preferred stock. The par value of the authorized stock was not adjusted as a result of the reverse stock split. In connection with the reverse stock split, the filed Amended and Restated Certificate of Incorporation also adjusted the minimum price per share required in a firm-commitment underwritten public offering of the Company’s common stock in order for the preferred stock to automatically convert to common stock. The minimum price post-split was $15.884 and was adjusted to $7.942. The Company did not adjust the number of authorized shares of common stock or redeemable convertible preferred stock. Other than the par value and the number of authorized shares of common stock, all share and per share data shown in the accompanying condensed consolidated financial statements and related notes have been retroactively revised to reflect the reverse stock split.

Initial Public Offering

On June 25, 2018, the Company completed its initial public offering (“IPO”), whereby the Company issued 5,750,000 shares of its common stock (inclusive of 750,000 shares of common stock pursuant to the full exercise of an overallotment option granted to the underwriters in connection with the offering) at a price of $15.00 per share. The shares began trading on The Nasdaq Global Select Market on June 21, 2018. The net proceeds received by the Company from the offering were approximately $77.7 million, after deducting underwriting discounts and commissions and other offering expenses payable by the Company of $8.6 million. Upon the closing of the IPO, all outstanding shares of redeemable convertible preferred stock converted into 12,263,126 shares of common stock. Additionally, the Company is now authorized to issue 125,000,000 shares of common stock and 10,000,000 shares of preferred stock.

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 lead product candidate, KZR-616. The Company’s ultimate success depends on the outcome of the 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 $43.4 million as of September 30, 2018. 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.

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, 2017 and the notes thereto, which are included in the Company’s prospectus that forms a part of the Company’s Registration Statement on Form S-1 (File No. 333-225194), which was filed with the Securities and Exchange Commission (“SEC”) pursuant to Rule 424 on June 21, 2018 (the “Prospectus”), and have had no material changes during the three and nine months ended September 30, 2018.

 

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 (“U.S. 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.

Unaudited Interim Condensed Consolidated Financial Statements

The interim condensed consolidated balance sheet as of September 30, 2018, the condensed consolidated statements of operations and the condensed consolidated statements of comprehensive loss for the three and nine months ended September 30, 2017 and 2018, and the condensed consolidated statement of cash flows for the nine months ended September 30, 2017 and 2018 are unaudited. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and reflect, in the opinion of management, all adjustments of a normal and recurring nature that are necessary for the fair statement of the Company’s financial position as of September 30, 2018 and its results of operations for the three and nine months ended September 30, 2017 and 2018 and cash flows for the nine months ended September 30, 2017 and 2018. The financial data and the other financial information disclosed in these notes to the condensed consolidated financial statements related to the three and nine-month periods are also unaudited. The results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2018, or for any other future annual or interim period. The balance sheet as of December 31, 2017, included herein was derived from the audited consolidated financial statements as of that date. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements contained in the Company’s Prospectus.

Use of Estimates

The preparation of financial statements in conformity with U.S. 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.

Cash and Cash Equivalents and Restricted Cash

The Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. Cash equivalents consist of corporate debt securities and highly liquid money market funds.

Restricted cash consisted of deposits at the bank held as collateral for the Company’s credit card program. The collateral requirement was removed and released in May 2018.

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

 

 

 

September 30,

2018

 

 

December 31,

2017

 

Cash and cash equivalents

 

$

39,594

 

 

$

51,033

 

Restricted cash

 

 

 

 

 

13

 

Total cash, cash equivalents and restricted cash shown in the statements of cash flows

 

$

39,594

 

 

$

51,046

 

 

Marketable Securities

All marketable securities have been classified as “available-for-sale” in accordance with the Company’s investment policy and cash management strategy. Short-term marketable securities mature within one-year from the balance sheet date. Investments in marketable securities are recorded at fair value, with any unrealized gains and losses reported within accumulated other comprehensive income as a separate component of stockholders’ deficit until realized or until a determination is made that an other-than-temporary decline in market value has occurred. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion, together with interest on securities, are included in interest income on the Company’s condensed consolidated statements of operations.

 

7


 

Accounting Pronouncements Adopted in 2018

In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting. This ASU provides guidance about which changes to the terms or conditions of a share-based payment award requires the Company to apply modification accounting. This ASU will be effective for the Company for annual reporting periods, including interim reporting periods, beginning after December 15, 2017. The Company adopted this standard on January 1, 2018 noting it did not have a material impact on the Company’s financial statements.

New Accounting Pronouncements Not Yet Adopted

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842). ASU 2016-02 increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requires disclosing key information about leasing arrangements. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides entities the option to initially apply the transition provisions of ASU 2016-02 at its adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company plans to adopt ASU 2016-02 on January 1, 2019 using the effective date approach as allowed under ASU 2018-11. In addition, the Company plans to apply the practical expedients provided by the FASB. The Company expects that its recognition of expense on its statement of operations under ASU 2016-02 will be similar to its recognition of expense under the current accounting standard. Further, the Company expects to recognize lease liabilities and right-of use assets on its balance sheet.

In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718). ASU 2018-07 simplifies the accounting for nonemployee share-based payment transactions. This ASU is effective for public entities for interim and annual reporting periods beginning after December 15, 2018. The Company has evaluated the potential impact of this guidance and does not believe that it will have a material impact on the Company’s financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the effect the new guidance will have on its 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, restricted cash, 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.

We determine the fair value of Level 1 assets using quoted prices in active markets for identical assets. We review 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. There were no transfers between Level 1 and Level 2 securities in the periods presented.

 

8


 

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 does not have any assets or liabilities measured using Level 3 inputs as of September 30, 2018 or December 31, 2017.

As of September 30, 2018 and December 31, 2017, financial assets and liabilities measured and recognized at fair value on a recurring basis and classified under the appropriate level of the fair value hierarchy as described above were as follows (in thousands):

 

 

 

September 30, 2018

 

 

 

Amortized Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Fair Value

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

 

691

 

 

 

 

 

 

 

 

 

691

 

Money market funds

 

 

13,072

 

 

 

 

 

 

 

 

 

13,072

 

U.S. Treasury securities

 

 

53,597

 

 

 

 

 

 

(18

)

 

 

53,579

 

Subtotal

 

 

67,360

 

 

 

 

 

 

(18

)

 

 

67,342

 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

 

13,712

 

 

 

 

 

 

(1

)

 

 

13,711

 

Corporate debt securities

 

 

6,571

 

 

 

 

 

 

(1

)

 

 

6,570

 

Government agency bonds

 

 

25,137

 

 

 

 

 

 

(5

)

 

 

25,132

 

Subtotal

 

 

45,420

 

 

 

 

 

 

(7

)

 

 

45,413

 

Total

 

$

112,780

 

 

$

 

 

$

(25

)

 

$

112,755

 

Reported as:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

$

39,594

 

Marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

$

73,161

 

 

 

 

December 31, 2017

 

 

 

Amortized Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Fair Value

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

 

804

 

 

 

 

 

 

 

 

 

804

 

Money market funds

 

 

50,229

 

 

 

 

 

 

 

 

 

50,229

 

Restricted cash

 

 

13

 

 

 

 

 

 

 

 

 

13

 

Subtotal

 

 

51,046

 

 

 

 

 

 

 

 

 

51,046

 

Total

 

$

51,046

 

 

$

 

 

$

 

 

$

51,046

 

Reported as:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

$

51,033

 

Restricted cash

 

 

 

 

 

 

 

 

 

 

 

 

 

$

13

 

 

As of September 30, 2018, the amortized cost and estimated fair value of the Company’s available-for-sale securities by contractual maturity are shown below (in thousands):

 

 

 

Amortized

 

 

Estimated

 

 

 

Cost

 

 

Fair Value

 

Marketable securities maturing:

 

 

 

 

 

 

 

 

In one year or less

 

$

73,184

 

 

$

73,161

 

Total marketable securities

 

$

73,184

 

 

$

73,161

 

 

The Company determined that the gross unrealized losses on its marketable securities as of September 30, 2018 were temporary in nature. The Company currently does not intend to sell these securities prior to maturity and does not consider these investments to be other-than-temporarily impaired at September 30, 2018.

 

9


 

4. Balance Sheet Components

Property and Equipment, Net

Property and equipment consists of the following (in thousands):

 

 

 

September 30,

2018

 

 

December 31,

2017

 

Leasehold improvements

 

$

3,268

 

 

$

155

 

Furniture, laboratory and office equipment

 

 

1,984

 

 

 

1,242

 

Computer equipment

 

 

161

 

 

 

34

 

Construction in progress

 

 

 

 

 

464

 

Total property and equipment

 

 

5,413

 

 

 

1,895

 

Less accumulated depreciation and amortization

 

 

(753

)

 

 

(355

)

Property and equipment, net

 

$

4,660

 

 

$

1,540

 

 

Under the terms of its lease for office and laboratory space at 4000 Shoreline Court, South San Francisco, the Company received an incentive from the landlord for $3.2 million to construct leasehold improvements, which have been recorded in fixed assets and as deferred rent in other liabilities that will be amortized over the remaining lease term. During the three and nine months ended September 30, 2018, the Company disposed of leasehold improvements, laboratory equipment and office equipment resulting in a loss of $0 and $97,000, respectively. There was no such loss during the three and nine months ended September 30, 2017.

Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

 

 

 

September 30,

2018

 

 

December 31,

2017

 

Accrued preclinical and research costs

 

$

1,075

 

 

$

108

 

Accrued clinical costs

 

 

403

 

 

 

340

 

Accrued employee-related costs

 

 

722

 

 

 

422

 

Accrued professional services

 

 

74

 

 

 

 

Other

 

 

71

 

 

 

41

 

Accrued liabilities

 

$

2,345

 

 

$

911

 

 

5. Redeemable Convertible Preferred Stock

Redeemable convertible preferred stock as of December 31, 2017 consisted of the following (in thousands, except share amounts):

 

Redeemable Convertible Preferred Stock

 

Shares Authorized

 

 

Shares Issued and Outstanding

 

 

Net Proceeds After Issuance Costs

 

 

Liquidation Preference

 

Series A

 

 

33,533,240

 

 

 

5,966,753

 

 

$

28,176

 

 

$

28,369

 

Series B

 

 

42,000,000

 

 

 

6,296,373

 

 

 

49,755

 

 

 

50,000

 

Total

 

 

75,533,240

 

 

 

12,263,126

 

 

$

77,931

 

 

$

78,369

 

 

In connection with the completion of the Company’s IPO in June 2018, all outstanding shares of convertible preferred stock converted into 12,263,126 shares of common stock.

 

 

10


 

6. Stock-Based Compensation

Stock Incentive Plans

2018 Equity Incentive Plan

In June 2018, the Company’s board of directors adopted and its stockholders approved the 2018 Equity Incentive Plan (the “2018 Plan”), which became effective as of June 20, 2018, at which point no further grants will be made under the 2015 Equity Incentive Plan (the “2015 Plan”) described below. Under the 2018 Plan, the Company may grant incentive stock options (“ISOs”), nonstatutory stock options (“NSOs”), stock appreciation rights, restricted stock awards, restricted stock units (“RSUs”) and other stock-based awards for the purchase of that number of shares of common stock. As of September 30, 2018, 75,621 shares of options and 10,189 RSUs have been granted and 1,812,145 shares were available for future issuance under the 2018 Plan.

Initially, subject to adjustment as provided in the 2018 Plan, the aggregate number of shares of the Company’s common stock that may be issued pursuant to stock awards under the 2018 Plan will not exceed 4,000,000 shares, which is the sum of (i) 1,600,692 shares plus (ii) the number of shares reserved, and remaining available for issuance, under the 2015 Plan at the time the 2018 Plan became effective and (iii) the number of shares subject to stock options or other stock awards granted under the 2015 Plan that expire, terminate are forfeited or otherwise not issued, or are withheld to satisfy a tax withholding obligation in connection with an award or to satisfy a purchase or exercise price of an award (such as upon the expiration or termination of a stock award prior to vesting). The number of shares of the Company’s common stock reserved for issuance under the 2018 Plan will automatically increase on January 1 of each year, beginning on January 1, 2019 and continuing through and including January 1, 2028, by 5% of the total number of shares of capital stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares determined by the Company’s board of directors. The maximum number of shares that may be issued upon the exercise of ISOs under the 2018 Plan is 12,500,000 shares.

2015 Equity Incentive Plan

The Company’s 2015 Equity Incentive Plan provided for the granting of ISOs and NSOs to employees, directors and consultants at the discretion of the board of directors. The 2015 Plan was terminated as to future awards in June 2018, although it continues to govern the terms of options that remain outstanding under the 2015 Plan.

No additional stock awards will be granted under the 2015 Plan, and all outstanding stock awards granted under the 2015 Plan that are repurchased, forfeited, expire or are cancelled will become available for grant under the 2018 Plan in accordance with its terms.

Options granted under the 2015 Plan expire no later than 10 years from the date of grant. Options granted under the 2015 Plan vest over periods determined by the board of directors, generally over four years. The 2015 Plan allows for early exercise of certain options prior to vesting. Upon termination of employment, the unvested shares are subject to repurchase at the original exercise price. As of September 30, 2018, options to purchase 2,102,045 shares of common stock were outstanding under the 2015 Plan.

2018 Employee Stock Purchase Plan

In June 2018, the Company’s board of directors and its stockholders approved the 2018 Employee Stock Purchase Plan (the “ESPP”), which became effective as of June 20, 2018. The ESPP is intended to qualify as an “employee stock purchase plan” within the meaning of Section 423 of the U.S. Internal Revenue Code of 1986, as amended. The number of shares of common stock initially reserved for issuance under the ESPP was 200,000 shares. The ESPP provides for an annual increase on the first day of each year beginning in 2019 and ending in 2028, in each case subject to the approval of the board of directors, equal to the lesser of (i) 1% of the shares of common stock outstanding on the last day of the prior fiscal year or (ii) 375,000 shares; provided, that prior to the date of any such increase, the board of directors may determine that such increase will be less than the amount set forth in clauses (i) and (ii). As of September 30, 2018, no shares of common stock had been issued under the ESPP and 200,000 shares remained available for future issuance under the ESPP. The option price per share of common stock to be paid by a participant upon exercise of the participant’s option on the applicable exercise date for an offering period shall be equal to 85% of the lesser of the fair market value of a share of common stock on (a) the applicable grant date or (b) the applicable exercise date. The Board authorized an initial offering beginning on November 16, 2018 and ending on May 15, 2019. Following the end of the initial offering, a new offering will automatically begin on the day that immediately follows the conclusion of the preceding offering.

 

11


 

Stock Option Activity

The following table summarizes activity under the Company’s stock option plan and related information (in thousands, except share and per share amounts):

 

 

 

Number of Options Outstanding

 

 

Weighted Average Exercise Price

 

 

Weighted Average Remaining Contractual Term

 

 

Aggregate Intrinsic Value

 

Outstanding at December 31, 2017

 

 

1,213,010

 

 

$

1.54

 

 

 

8.7

 

 

$

999

 

Options granted

 

 

1,111,901

 

 

$

5.77

 

 

 

 

 

 

 

 

 

Options exercised

 

 

(136,328

)

 

$

1.56

 

 

 

 

 

 

$

237

 

Options cancelled

 

 

(10,917

)

 

$

0.90

 

 

 

 

 

 

 

 

 

Outstanding at September 30, 2018

 

 

2,177,666

 

 

$

3.70

 

 

 

8.7

 

 

$

38,559

 

Vested and exercisable at September 30, 2018

 

 

747,477

 

 

$

2.02

 

 

 

7.9

 

 

$

14,493

 

 

The weighted average grant date fair value of options granted during the nine months ended September 30, 2018 was $4.12 per share. The 2015 Plan allows for early exercisable option grants, which permit the grantee to exercise a stock option in exchange for stock before the requisite service is provided (e.g., before the award is vested under its original terms); however, such arrangements permit the Company to subsequently repurchase such shares at the exercise price if the vesting conditions are not satisfied. To date, the Company has made such grants only to non-employee board members. The total intrinsic value of exercised stock options during the three and nine months ended September 30, 2018 was $0 and $237,000, respectively. The aggregate intrinsic value is calculated as the difference between the exercise price and the estimated fair value of the Company’s common stock at the date of exercise.

Early Exercise Stock Purchase Agreements

As of September 30, 2018 and December 31, 2017, there were 92,466 and 45,224, respectively, of nonvested common shares outstanding that were exercised early and subject to repurchase by the Company at the original issuance price upon termination of the stockholder’s services. The right to repurchase these shares generally lapses with respect to 25% of the shares underlying the option after the applicable vesting commencement date and 1/48 of the shares underlying the original grant per month for 36 months thereafter. The shares purchased pursuant to the early exercise of stock options are not deemed, for accounting purposes, to be issued until those shares vest. The cash received in exchange for exercised and nonvested shares related to stock options granted is recorded as a liability for the early exercise of stock options on the balance sheets with the corresponding par value in common stock and an offset in additional paid-in capital. As of September 30, 2018 and December 31, 2017, the Company recorded in other current liabilities $152,000 and $18,000, respectively, associated with shares issued upon the early exercise of stock options that are subject to repurchase.

Restricted Stock Units Granted to Employees

There were no RSUs granted during the three months ended September 30, 2018. During the nine months ended September 30, 2018, the Company granted RSUs to certain employees to receive 10,189 shares of common stock pursuant to the 2018 Plan with a weighted-average estimated grant-date fair value of $17.75 per share. These RSUs were fully vested on the grant date. The valuation for these RSUs totaled $181,000 and was recognized as stock-based compensation expense in June 2018. There were no RSUs granted during the three and nine months ended September 30, 2017.

 

12


 

Stock Options Granted to Employees That Contain Performance Condition

There were no options granted that contained performance condition during the three months ended September 30, 2018. During nine months ended September 30, 2018, the Company granted options to two of its executive officers to purchase an aggregate 115,657 shares of common stock that vested fully upon the closing of the Company’s IPO on June 25, 2018. The aggregate fair value of these options was estimated at $474,000 and was recognized as stock-based compensation expense in June 2018.

Restricted Stock

In addition to the nonvested common shares outstanding described above at “Early Exercise Stock Purchase Agreements,” the Company issued restricted stock to its founders. The fair value of restricted stock on the issuance date is deemed equal to the cash consideration paid by the founders. Restricted stock vests over a four-year period from the applicable vesting commencement date. The following summarizes the activity of nonvested restricted stock:

 

 

 

Number of Shares

 

Nonvested—December 31, 2017

 

 

193,394

 

Vested

 

 

(156,806

)

Nonvested—September 30, 2018

 

 

36,588

 

 

Stock-Based Compensation Expense

Total stock-based compensation recognized by function was as follows (in thousands):

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

General and administrative

 

$

247

 

 

$

19

 

 

$

905

 

 

$

60

 

Research and development

 

 

183

 

 

 

17

 

 

 

639

 

 

 

52

 

Total stock-based compensation expense

 

$

430

 

 

$

36

 

 

$

1,544

 

 

$

112

 

 

As of September 30, 2018, the unrecognized stock-based compensation cost and the estimated weighted average amortization period, using the straight-line attribution method, was as follows (dollars in thousands):

 

 

 

Unrecognized

Compensation Cost

 

 

Weighted Average

Remaining

Amortization

Period (Years)

 

Employee options

 

$

4,236

 

 

 

2.9

 

Nonemployee options

 

 

6

 

 

 

0.7

 

Total unrecognized stock-based compensation expense

 

$

4,242

 

 

 

 

 

 

The fair value of the employee stock options granted is calculated using the Black-Scholes option-pricing model with the following weighted-average assumptions:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Expected term (years)

 

 

 

 

 

 

 

5.5 - 6.1

 

 

 

6.1

 

Expected volatility

 

 

 

 

 

 

 

82.0 - 82.8%

 

 

 

82.5

%

Risk-free interest rate

 

 

 

 

 

 

 

2.6 - 2.8%

 

 

 

2.1

%

Expected dividend yield

 

 

 

 

 

 

 

 

 

 

 

 

 

There were no stock options granted during the three months ended September 30, 2018 and 2017.

7. Income Taxes

For the three and nine months ended September 30, 2018 and 2017, respectively, the Company did not record an income tax provision. The U.S. federal deferred tax assets generated from the Company’s net operating losses have been fully reserved, as the Company believes it is not more likely than not that the benefit will be realized. The Tax Cuts and Jobs Act of 2017 (the “Tax Act”)

 

13


 

contains tax law changes that are effective in tax years 2018 and onward. The Company believes that these changes may alter the amount of tax loss generated, but does not believe that the changes will create a tax liability in 2018.

In December 2015, the Protecting Americans from Tax Hikes (PATH) Act of 2015 was signed into law, which created several new research and development (“R&D”) tax credit provisions, including allowing qualified small businesses to utilize the R&D credit against the employer’s portion of payroll tax up to a maximum of $250,000 per year. The Company qualified as a small business under PATH for both 2016 and 2017. During the three and nine months ended September 30, 2018, the Company has utilized $152,000 of R&D tax credits as a reduction of research and development costs to offset its payroll tax liabilities. The remaining R&D tax credits available for future payroll tax liabilities have been recorded as deferred tax assets and a full valuation allowance.

 

8. Net Loss Per Share

Net Loss Per Share

The following table sets forth the calculation of basic and diluted net loss per share during the periods presented (in thousands, except share and per share data):

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(5,663

)

 

$

(2,080

)

 

$

(17,385

)

 

$

(6,217

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares of common stock outstanding

 

 

18,955,384

 

 

 

628,435

 

 

 

7,319,012

 

 

 

569,417

 

Net loss per share, basic and diluted

 

$

(0.30

)

 

$

(3.31

)

 

$

(2.38

)

 

$

(10.92

)

 

The following outstanding shares of common stock equivalents were excluded from the computation of the diluted net loss per share for the periods presented because their effect would have been anti-dilutive:

 

 

 

Three and Nine Months Ended

September 30,

 

 

 

 

2018

 

 

2017

 

 

Redeemable convertible preferred stock on an if converted basis

 

 

 

 

 

12,263,126

 

 

Stock options to purchase common stock

 

 

2,177,666

 

 

 

734,663

 

 

Common stock subject to future vesting

 

 

129,054

 

 

 

297,902

 

 

Total

 

 

2,306,720

 

 

 

13,295,691

 

 

 

 

 

14


 

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

The following information should be read in conjunction with the unaudited financial information and the notes thereto included in this Quarterly Report on Form 10-Q and the audited financial information and the notes thereto included in our Prospectus that forms a part of our Registration Statement on Form S-1 (File No. 333-225194), which was filed with the Securities and Exchange Commission, or SEC, pursuant to Rule 424 on June 21, 2018, or the Prospectus.

Overview

We are a clinical-stage biotechnology company, discovering and developing novel small molecule therapeutics to treat unmet needs in autoimmunity and cancer. Our lead product candidate, KZR-616, a first-in-class selective immunoproteasome inhibitor, has completed testing in healthy volunteers and is now enrolling a Phase 1b/2 clinical trial in lupus and lupus nephritis. We believe that the immunoproteasome is a validated target for the treatment of a wide variety of autoimmune diseases, given the compelling published activity seen with proteasome inhibitors administered to patients with severe autoimmune diseases. Our Phase 1a clinical trial results provide evidence that KZR-616 avoids the side effects caused by non-selective proteasome inhibitors, side effects that prevent them from being developed as a treatment in autoimmunity. Initial top-line results from the Phase 1b portion of our trial are expected in the first half of 2019, and we plan to initiate up to four additional trials in autoimmune diseases in 2019. We are also leveraging our protein secretion pathway research platform to discover and develop small molecule therapies targeting cancer including immuno-oncology.

Since the commencement of our operations in mid-2015, we have devoted substantially all our resources to performing research and development activities in support of our product development efforts, hiring personnel, raising capital to support and expand such activities and providing general and administrative support for these operations. We do not have any products approved for sale and have not generated any revenue from product sales. We have funded our operations to date primarily from the issuance and sale of convertible preferred stock and from our initial public offering as described below.

On June 8, 2018, we effected a 1-for-5.62 reverse stock split of our issued and outstanding shares of common stock and redeemable convertible preferred stock. Accordingly, all share and per share amounts for all periods presented in the accompanying condensed consolidated financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect this reverse stock split.

On June 25, 2018, we completed our initial public offering, or IPO, whereby we sold 5,750,000 shares of our common stock, which included 750,000 shares issued as a result of the underwriters exercising their over-allotment option in full. We received cash proceeds of approximately $77.7 million from the IPO, net of underwriting discounts and commissions and other offering expenses paid by us.

Since our inception, we have incurred significant operating losses. Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of one or more of our current or future product candidates and programs. Our net losses were $8.5 million and $17.4 million for the year ended December 31, 2017 and the nine months ended September 30, 2018, respectively, and we expect to continue to incur significant losses for the foreseeable future. As of September 30, 2018, we had an accumulated deficit of $43.4 million. We anticipate that a substantial portion of our capital resources and efforts in the foreseeable future will be focused on discovering, completing the necessary development, obtaining regulatory approval and preparing for potential commercialization of our product candidates.

We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. Our net losses may fluctuate significantly from period to period, depending on the timing of our planned clinical trials and expenditures on other research and development activities. We expect our expenses will increase substantially over time as we:

 

continue the ongoing and planned development of KZR-616;

 

seek to discover and develop additional product candidates;

 

initiate preclinical studies and clinical trials for any additional product candidates that we may pursue in the future;

 

establish a sales, marketing, manufacturing and distribution infrastructure to commercialize any product candidate for which we may obtain marketing approval;

 

continue to build a portfolio of product candidates through the acquisition or in-license of drugs, product candidates or technologies;

 

seek marketing approvals for KZR-616 and any future product candidates that successfully complete clinical trials;

 

maintain, protect and expand our portfolio of intellectual property rights, including patents, trade secrets and know-how;

 

15


 

 

implement operational, financial and management systems; and

 

attract, hire and retain additional administrative, clinical, regulatory and scientific personnel.

Financial Operations Overview

Research and Development Expenses

Research and development expenses consist primarily of costs incurred for the development of our product candidates, which include:

 

employee-related expenses, which include salaries, benefits and stock-based compensation;

 

fees paid to consultants for services directly related to our product development and regulatory effort;

 

expenses incurred under agreements with third-party contract organizations, investigative clinical trial sites and consultants that conduct research and development activities on our behalf;

 

costs associated with preclinical studies and clinical trials;

 

costs associated with technology and intellectual property licenses;

 

the costs related to production of clinical supplies; and

 

facilities and other allocated expenses, which include expenses for rent and other facility related costs and other supplies.

We expense all research and development costs in the periods in which they are incurred. Costs for certain development activities are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors, collaborators and third-party service providers.

We are eligible under the AusIndustry Research and Tax Development Tax Incentive Program to obtain a cash amount from the Australian Taxation Office. The tax incentive is available to us on the basis of specific criteria with which we must comply related to research and development expenditures in Australia. These research and development tax incentives are recognized as contra research and development expense when the right to receive has been attained and funds are considered to be collectible. The amounts are determined based on a cost-reimbursement basis, and the incentive is related to our research and development expenditures and is due to us regardless of whether any Australian tax is owed. Amounts related to the AusIndustry Research and Development Tax Incentive Program are recognized when there is reasonable assurance that the incentive will be received, the relevant expenditure has been incurred by our Australian subsidiary, Kezar Life Sciences Australia Pty Ltd, a proprietary company limited by shares, and the amount of the consideration can be reliably measured.

The following table summarizes our research and development expenses incurred during the respective periods (in thousands):

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(unaudited)

 

 

(unaudited)

 

Discovery research

 

$

2,891

 

 

$

1,181

 

 

$

8,920

 

 

$

3,787

 

Clinical development

 

 

978

 

 

 

226

 

 

 

2,879

 

 

 

1,228

 

Manufacturing related expenses

 

 

795

 

 

 

198