Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this Quarterly Report on Form 10-Q, our actual results could differ materially from the results described in, or implied by, the forward-looking statements contained in the following discussion and analysis.
Overview
We are a clinical-stage biotechnology company with a mission to develop next-generation immunotherapies that transform patients’ lives. We have leveraged our expertise in innate immunity and are focused on discovering and developing potentially differentiated immunotherapies that address the major challenges with current cancer therapy.
We have established our Innate Immunity Development Platform aimed at developing fully human antibodies to address the major mechanisms of cancer immune resistance:
•Poor tumor immunogenicity
Utilization of our Innate Immunity Development Platform is designed to result in novel, well-characterized immuno-oncology lead antibody therapeutics that can be efficiently advanced into investigational new drug (“IND”)-enabling preclinical studies and clinical trials.
Our pipeline of assets and research interests includes (i) KVA12123 (formerly referred to as KVA12.1), a monoclonal antibody (“mAb”) immunotherapy targeting VISTA (V-domain Ig suppressor of T cell activation), (ii) an anti-CD27 agonist mAb immunotherapy and (iii) an anti-CD24 antagonist mAb immunotherapy discovery program. These immunotherapies have the potential to address disease areas with unmet medical needs and significant commercial potential.
We initiated a Phase 1 clinical trial of KVA12123 in the United States in the fourth quarter of 2022. KVA12123 is engineered to be a differentiated VISTA blocking immunotherapy to address the problem of immunosuppression in the tumor microenvironment. It is a fully human engineered IgG1 monoclonal antibody that was designed to bind to VISTA through a unique epitope. KVA12123 may be an effective immunotherapy for many types of cancer including non-small cell lung cancer (“NSCLC”), colorectal cancer (“CRC”), ovarian cancer (“OC”), renal cell carcinoma (“RCC”) and head and neck squamous cell carcinoma (“HNSCC”). These indications represent a significant unmet medical need with a large worldwide commercial opportunity for KVA12123.
We are also conducting preclinical studies on our lead anti-CD27 agonist mAb immunotherapy that was discovered utilizing our Innate Immunity Development Platform. This lead candidate is a fully human mAb that demonstrates low nanomolar (“nM”) binding affinity to CD27 in humans. In preclinical studies, our lead anti-CD27 agonist mAb was observed to induce T cell proliferation and secretion of cytokines involved in T cell priming and recruitment, suggesting the ability to potentiate new anti-tumor responses. CD27 is a clinically validated target that may be an effective immunotherapy for advanced solid tumors including RCC, CRC and OC. We continue to conduct preclinical studies to optimize its lead anti-CD27 agonist mAb clinical candidate.
According to Market Data Forecast, the immuno-oncology market generated sales of approximately $99 billion in 2022 and is forecast to reach $179 billion in 2027. If we successfully complete the clinical trial program for KVA12123 and we subsequently obtain regulatory approval for KVA12123, we will focus on initial target indications in NSCLC, CRC and OC. Clinical development of KVA12123 will be as a second-line therapy in these indications. These three cancer therapy segments represent a forecasted $48 billion market opportunity in 2027 according to GlobalData.
We are a leader in the field of innate immunity and are focused on developing potentially differentiated immunotherapies. With drug candidates expected to enter the clinic and additional immuno-oncology assets in preclinical development, we believe we are positioned to achieve multiple value-driving catalysts. We have assembled an experienced management team, a seasoned research and development team, an immuno-oncology focused scientific advisory board, an enabling technology platform and a leading intellectual property position to advance our pipeline of potential novel immunotherapies for cancer patients.
Since our inception in 2007, we have devoted substantially all of our resources to raising capital, licensing certain technology and intellectual property rights, identifying and developing potential product candidates, conducting research and development activities, including preclinical studies and clinical trials, organizing and staffing operations and providing general and administrative support for these operations.
We have no products approved for commercial sale and have not generated any revenue from product sales. To date, revenue has been generated from the out-licensing of certain rights to third parties, providing research services under licensing and collaboration agreements as well as revenue from government grants.
20
We have never been profitable and have incurred operating losses in each period since inception. Our net losses were $6.5 million for the three months ended March 31, 2023 and $5.0 million for the three months ended March 31, 2022. As of March 31, 2023 we had an accumulated deficit of $158.1 million.
We expect to incur significant expenses and continued operating losses for at least the next several years as we initiate and continue the clinical development of, and seek regulatory approval for, our product candidates and add personnel necessary to advance our pipeline of clinical-stage product candidates. In addition, operating as a publicly-traded company will involve the hiring of additional financial and other personnel, and the incurrence of substantial other costs associated with operating as a public company. We expect that our operating losses will fluctuate significantly from quarter to quarter and year to year due to timing of clinical development programs and efforts to achieve regulatory approval.
From inception to March 31, 2023, we have raised cash from sales and issuances of common stock and borrowings under notes payable. As of March 31, 2023, we had cash of $9.2 million. Our current capital resources, together with the $5.5 million net proceeds received in April 2023 from the registered direct offering plus the committed proceeds of $22.5 million pursuant to the second closing of the Private Placement, will be sufficient to fund operating expenses and capital expenditure requirements into early 2025. Our long term plans will require us to raise substantial additional capital to continue our clinical development and potential commercialization activities. Accordingly, we will need to raise substantial additional capital to continue to fund our long-term plans. The amount and timing of our future funding requirements will depend on many factors, including the pace and results of our clinical development efforts. Failure to raise capital as and when needed, on favorable terms or at all, would have a negative impact on our financial condition and our ability to develop our product candidates.
Private Placement
In connection and concurrently with the execution of the Merger Agreement, on June 5, 2022, we entered into a financing agreement, as amended on October 24, 2022, December 5, 2022, March 29, 2023 and May 1, 2023 (such financing agreement, as amended, the “Securities Purchase Agreement”), with certain investors to sell shares of our common stock to such investors in a private placement (the “Private Placement”). We and the investors entered into the amendment to the Securities Purchase Agreement on May 1, 2023 to, among other things: (i) extend the date of the second closing from May 31, 2023 to July 25, 2023.
The first closing of the Private Placement occurred on December 16, 2022 and we issued 649,346 shares of our common stock and received net proceeds of $7.4 million. The second closing of the Private Placement for an aggregate purchase price of $22.5 million is expected to occur on July 25, 2023.
The Merger has been accounted for as a reverse merger and asset acquisition in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). Under this method of accounting, Private Kineta was deemed to be the accounting acquirer for financial reporting purposes, primarily based on the fact that, immediately following the Merger: (i) Private Kineta’s shareholders own a majority (80%) of the common stock of the Company, (ii) Private Kineta designated a majority of the members of the initial board of directors of the combined organization and (iii) Private Kineta’s senior management hold all key positions in the senior management of the combined organization.
Geopolitical Developments
Geopolitical developments, such as the Russian invasion of Ukraine or deterioration in the bilateral relationship between the United States and China, may impact government spending, international trade and market stability, and cause weaker macro-economic conditions. The impact of these developments, including any resulting sanctions, export controls or other restrictive actions that may be imposed against governmental or other entities in, for example, Russia, have in the past contributed and may in the future contribute to disruption, instability and volatility in the global markets, which in turn could adversely impact our operations and weaken our financial results. Certain political developments may also lead to uncertainty to regulations and rules that may materially affect our business.
At-the-Market Offering Program
In February 2023, we entered into a sales agreement (the “Sales Agreement”) with Jefferies with respect to an at-the-market (“ATM”) offering program under which we may issue and sell, from time to time and at our sole discretion, shares of our common stock, in an aggregate offering amount of up to $17.5 million, subject to the offering limits in General Instruction I.B.6 to Form S-3. Jefferies acts as our sales agent and will use commercially reasonable efforts to sell shares of common stock from time to time, based upon instruction from us. We will pay Jefferies 3.0% of the gross proceeds from the sales of any common stock sold pursuant to the Sales Agreement.
On April 19, 2023, we delivered written notice to Jefferies that we were suspending and terminating the prospectus supplement (the “ATM Prospectus Supplement”) related to our common stock issuable pursuant to the Sales Agreement. We will not make any sales of our securities pursuant to the Sales Agreement, unless and until a new prospectus supplement is filed. Other than the termination and suspension of the ATM Prospectus Supplement, the Sales Agreement remains in full force and effect.
During the three months ended March 31, 2023, we sold 126,503 shares of our common stock to individual investors under the Sales Agreement and received net proceeds of $0.8 million in connection with the ATM equity offering program.
21
Registered Direct Offering
On April 20, 2023, we entered into a Securities Purchase Agreement (the “Purchase Agreement”) with an institutional investor (the “Investor”), pursuant to which we issued and sold, in a registered direct offering priced at-the-market under the rules of The Nasdaq Stock Market (the “Registered Offering”), (i) an aggregate of 948,000 shares of our common stock, at a purchase price of $4.21 per share and (ii) pre-funded warrants exercisable for up to 477,179 shares of our common stock (the “Pre-Funded Warrants”) to the Investor at a purchase price of $4.209 per Pre-Funded Warrant, for aggregate gross proceeds from the Offering (as defined below) of approximately $6.0 million before deducting the placement agent fee (as described in greater detail below) and related offering expenses.
Each Pre-Funded Warrant represents the right to purchase one share of common stock at an exercise price of $0.001 per share. The Pre-Funded Warrants are exercisable immediately and may be exercised at any time until the Pre-Funded Warrants are exercised in full.
In a concurrent private placement (the “Private Placement” and, together with the Registered Offering, the “Offering”), we issued to the Investor warrants to purchase up to 1,425,179 shares of common stock (the “Common Warrants”) at an exercise price of $4.08 per share. The Common Warrants are exercisable immediately and will expire five and one-half years from the initial exercise date.
In connection with the Offering, we entered into an engagement letter (the “Engagement Letter”) with H.C. Wainwright & Co., LLC (“Wainwright”), pursuant to which Wainwright agreed to serve as the exclusive placement agent for the issuance and sale of securities of the Company pursuant to the Purchase Agreement. As compensation for such placement agent services, we paid Wainwright an aggregate cash fee equal to $420,000, a non-accountable expense of $35,000 and $50,000 for legal and other expenses as actually incurred. On April 24, 2023, we also issued to Wainwright or its designees warrants to purchase 71,259 shares of common stock (the “Wainwright Warrants”). The Wainwright Warrants have a term of five years from the commencement of sales in the Offering, and have an exercise price of $5.2625 per share.
Financial Operations Overview
Revenues
To date, we have not generated any revenue from product sales and do not expect to generate any revenue from product sales in the near future. Our revenues have been primarily derived from our collaboration, research and license agreements as well as grants awarded by government agencies.
Collaboration Revenues
In connection with the Merger, we became the successor in interest to an exclusive license and research collaboration agreement (the “Merck Collaboration Agreement”) with Merck & Co., Inc. to support research, development and commercialization of products for treatment of amyotrophic lateral sclerosis and frontotemporal lobar dementia. We recognize revenue using the cost-to-cost method, which we believe best depicts the transfer of control to the customer. Under the cost-to-cost method, the extent of progress towards completion is measured based on the ratio of actual costs incurred to the total estimated costs expected upon satisfying the identified performance obligation. Under this method, revenue is recognized as a percentage of actual cost incurred to the estimated costs to complete.
Licensing Revenues
Our license agreements may include the transfer of intellectual property rights in the form of licenses, promises to provide research and development services and promises to participate on certain development committees with the collaboration party. The terms of such agreements include payment to us of one or more of the following: nonrefundable upfront fees, payment for research and development services, development, regulatory and commercial milestone payments and sales-based milestones and royalties on net sales of licensed products.
Revenue associated with nonrefundable upfront license fees where the license fees and research and development activities cannot be accounted for as separate performance obligations is deferred and recognized as revenue over the expected period of performance based on a cost-based input method. Revenue from contingent development, regulatory and commercial milestones, when not deemed probable of significant reversal of cumulative revenue, is also recognized over the performance period based on a similar method. Where we have no remaining performance obligations, revenue from such milestones is recognized when the accomplishment of the milestones is deemed probable. Our license agreement with Genentech was terminated in December 2022 and we do not expect to recognize any revenue from the Genentech Agreement during 2023.
Grant Revenues
Under our grant agreements with government-sponsored and charitable organizations, we receive payment for providing research and development services. Revenue associated with grant arrangements is based on a cost-based reimbursement model that recognizes revenue over time as we perform work under the grants and incur qualifying research and development costs.
We have completed research and development services under the grant agreements and do not expect to recognize any revenue during 2023.
Operating Expenses
Research and Development Expenses
22
Research and development expenses represent costs incurred in connection with the discovery, research, preclinical and clinical development, and manufacture of our product candidates. We recognize all research and development costs as they are incurred. Research and development expenses consist primarily of the following:
•salaries, bonuses, benefits, stock-based compensation, research and consulting arrangements and other related costs for individuals involved in research and development activities;
•external clinical trial costs to enroll clinical sites and patients to conduct phase 1 clinical trials;
•external research and development expenses incurred under agreements with contract research organizations, investigative sites and other scientific development services;
•costs incurred under agreements with contracted research and manufacturing organizations for developing and manufacturing materials for preclinical studies, clinical trials and laboratory supplies;
•licensing agreements and associated costs;
•costs related to compliance with regulatory requirements;
•facilities and other allocated expenses for rent and insurance; and
•other expenses incurred to advance research and development activities including manufacturing costs associated with production, scale up, testing and optimization of methods associated with the production of materials.
The largest component of our operating expenses has historically been our investment in research and development activities. We expect our research and development expenses will increase in the future as we advance our product candidates into and through clinical trials and pursue regulatory approvals, which will require a significant investment in costs of clinical trials, regulatory support and contract manufacturing. In addition, we continue to evaluate opportunities to acquire or in-license other product candidates and technologies, which may result in higher research and development expenses due to license fee and/or milestone payments, as well as added clinical development costs.
As we are working on multiple research and development programs at any one time, we track our external expenses by the stage of program, clinical or preclinical. However, our internal expenses, including unallocated costs, personnel costs and infrastructure costs, are not directly related to any one program and are deployed across multiple programs. As such, we do not track internal expenses on a specific program basis.
The process of conducting clinical trials necessary to obtain regulatory approval is costly and time consuming. We may never succeed in timely developing and achieving regulatory approval for our product candidates. The probability of success of our product candidates may be affected by numerous factors, including clinical data, competition, manufacturing capability and commercial viability. As a result, we are unable to determine the duration and completion costs of our development projects or when and to what extent we will generate revenue from the commercialization and sale of any of our future product candidates.
General and Administrative Expenses
General and administrative expenses consist primarily of employee-related expenses, including salaries, benefits and stock-based compensation for personnel in executive, finance and accounting, and other administrative functions, as well as fees paid for legal, accounting and tax services, consulting fees and facilities costs not otherwise included in research and development expenses. Legal costs include general corporate legal fees and patent costs. We expect to incur additional expenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the SEC and Nasdaq, additional insurance, investor relations and other administrative expenses and professional services.
Other (Expense) Income
Interest Expense
Interest expense consists of interest charged on outstanding borrowings associated with our debt arrangements primarily consisting of borrowings under several notes payable agreements.
Change in Fair Value Measurement of Notes Payable
Change in fair value of notes payable relates to the remeasurement of the notes payable that we elected to account for under the fair value option. Until settlement, these notes payable are remeasured at fair value at each reporting period with the changes in fair value recorded through the statement of operations.
(Loss) Gain on Extinguishments of Debt, Net
(Loss) gain on extinguishments of debt, net consists of the (loss) gain upon settlement of our notes payable and other debt.
23
Other (Expense) Income, Net
Other (expense) income, net consists of items that are of a non-recurring nature and primarily relate to items that are immaterial.
Net (Loss) Income Attributable to Noncontrolling Interest
Net (loss) income attributable to noncontrolling interest reflects investors’ share of net (loss) income in our majority owned subsidiaries.
Results of Operations
Comparison of the Three Months Ended March 31, 2023 and 2022
The following table summarizes our results of operations for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
2023 |
|
|
2022 |
|
|
Change |
|
|
|
(in thousands) |
|
Revenues: |
|
|
|
|
|
|
|
|
|
Collaboration revenues |
|
$ |
281 |
|
|
$ |
— |
|
|
$ |
281 |
|
Licensing revenues |
|
|
— |
|
|
|
358 |
|
|
|
(358 |
) |
Grant revenues |
|
|
— |
|
|
|
75 |
|
|
|
(75 |
) |
Total revenues |
|
|
281 |
|
|
|
433 |
|
|
|
(152 |
) |
Operating expenses: |
|
|
|
|
|
|
|
|
|
Research and development |
|
|
2,843 |
|
|
|
4,023 |
|
|
|
(1,180 |
) |
General and administrative |
|
|
3,924 |
|
|
|
1,609 |
|
|
|
2,315 |
|
Total operating expenses |
|
|
6,767 |
|
|
|
5,632 |
|
|
|
1,135 |
|
Loss from operations |
|
|
(6,486 |
) |
|
|
(5,199 |
) |
|
|
(1,287 |
) |
Other (expense) income: |
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(23 |
) |
|
|
(584 |
) |
|
|
561 |
|
Change in fair value of measurement of notes payable |
|
|
(6 |
) |
|
|
142 |
|
|
|
(148 |
) |
Gain on extinguishments of debt expense |
|
|
— |
|
|
|
669 |
|
|
|
(669 |
) |
Other income (expense), net |
|
|
35 |
|
|
|
(3 |
) |
|
|
38 |
|
Total other (expense) income, net |
|
|
6 |
|
|
|
224 |
|
|
|
(218 |
) |
Net loss |
|
|
(6,480 |
) |
|
|
(4,975 |
) |
|
|
(1,505 |
) |
Net income (loss) attributable to noncontrolling interest |
|
|
(29 |
) |
|
|
1 |
|
|
|
(30 |
) |
Net loss attributable to Kineta, Inc. |
|
$ |
(6,451 |
) |
|
$ |
(4,976 |
) |
|
$ |
(1,475 |
) |
Revenues
Collaboration revenues were $281,000 for the three months ended March 31, 2023 and zero for the three months ended March 31, 2022 as a result of research services provided under the Merck Collaboration Agreement pursuant to which the Company became a successor in interest in connection with the Merger. Upon completion of the Merger, we had $442,000 in deferred revenue under the Merck Collaboration Agreement. As of March 31, 2023, we had $161,000 in deferred revenue under the Merck Collaboration Agreement and expect to provide services to complete this project and recognize the remaining $161,000 of revenue during the three months ending June 30, 2023.
Licensing revenues were zero for the three months ended March 31, 2023 and $358,000 for the three months ended March 31, 2022 as this license agreement was terminated in December 2022.
Grant revenues were zero for the three months ended March 31, 2023 and $75,000 three months ended March 31, 2022 as this grant was concluded in December 2022.
24
Research and Development Expenses
The following table summarizes our research and development expenses by program and category for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
2023 |
|
|
2022 |
|
|
Change |
|
|
|
(in thousands) |
|
Direct external program expenses: |
|
|
|
|
|
|
|
|
|
KVA12123 program |
|
$ |
1,784 |
|
|
$ |
2,504 |
|
|
$ |
(720 |
) |
CD27 program |
|
|
271 |
|
|
|
185 |
|
|
|
86 |
|
KCP-506 program |
|
|
104 |
|
|
|
34 |
|
|
|
70 |
|
Other programs |
|
|
— |
|
|
|
94 |
|
|
|
(94 |
) |
Internal and unallocated expenses: |
|
|
|
|
|
|
|
|
|
Personnel-related costs |
|
|
349 |
|
|
|
890 |
|
|
|
(541 |
) |
Facilities and related costs |
|
|
300 |
|
|
|
222 |
|
|
|
78 |
|
Other costs |
|
|
35 |
|
|
|
94 |
|
|
|
(59 |
) |
Total research and development expenses |
|
$ |
2,843 |
|
|
$ |
4,023 |
|
|
$ |
(1,180 |
) |
Research and development expenses decreased by $1.2 million, or 29%, to $2.8 million for the three months ended March 31, 2023 from $4.0 million for the three months ended March 31, 2022. The decrease in direct external program expenses of $0.7 million was primarily due to lower activities for KVA12123 as we began securing clinical trial sites and enrolling patients in advance of enrolling the first patient, which occurred in April 2023. We expect our direct external program expenses to increase over time this year as we enroll and dose additional patients. The decrease in our internal and unallocated research and development expenses of $0.5 million was primarily due to lower personnel costs as a result of reducing research and development staff in December 2022 as we transition to clinical trials.
General and Administrative Expenses
General and administrative expenses increased by $2.3 million, or 144%, to $3.9 million for the three months ended March 31, 2023 from $1.6 million for the three months ended March 31, 2022. The increase was primarily attributable to an increase of $1.1 million in personnel costs driven by stock-based compensation expense from RSUs with performance conditions contingent upon the closing of the Merger and higher headcount. There was $643,000 in stock-based compensation expense from RSUs for the three months ended March 31, 2023 and zero for the three months ended March 31, 2022 since performance conditions of closing the Merger were not met until December 2022. In addition, we incurred higher professional services and consultant fees, primarily driven by legal, accounting and consulting costs as we became a public company.
Interest Expense
Interest expense decreased by $563,000, or 96%, to $23,000 for the three months ended March 31, 2023 from $586,000 for the three months ended March 31, 2022, due to a significantly lower balance of notes in 2023 as the majority of notes were converted to equity in December 2022.
Change in Fair Value Measurement of Notes Payable
Change in fair value of notes payable was a $6,000 loss for the three months ended March 31, 2023 and was a gain of $142,000 for the three months ended March 31, 2022, due to a significantly lower balance of notes in 2023 as the majority of notes were converted to equity in December 2022.
Gain on Extinguishments of Debt
Gain on extinguishments of debt was zero for the three months ended March 31, 2023 and $669,000 for the three months ended March 31, 2022 due to the settlement of notes payable accounted for under the fair value election. There was no settlement of notes payable during the three months ended March 31, 2022.
Liquidity and Capital Resources
Sources of Liquidity
Since our inception through March 31, 2023, our operations have been financed primarily by net cash proceeds from the sale and issuance of our common stock and borrowings under notes payable. We have also received upfront payments from our license agreements. As of March 31, 2023, we had $9.2 million in cash and an accumulated deficit of $158.1 million. We expect that our operating expenses will increase, and, as a result, anticipate that we will continue to incur increasing losses for the foreseeable future. Therefore, we will need to raise additional capital to fund our operations, which may be through the issuance of additional equity or through borrowings.
During the three months ended March 31, 2023, we issued 127,000 shares of our common stock to individual investors and received net proceeds of $0.8 million in connection with the ATM equity offering program.
25
Future Funding Requirements
Our revenues to date have been primarily derived from our collaboration, research and license agreements as well as grants awarded by government agencies. We, however, have not generated any revenue from product sales, and do not know when, or if, we will generate any revenue from product sales. We do not expect to generate any revenue from product sales unless and until we obtain regulatory approval of and commercialize any of our product candidates. At the same time, we expect our expenses to increase in connection with our ongoing development activities, particularly as we continue the research, development and clinical trials of, and seeks regulatory approval for, our product candidates. In addition, subject to obtaining regulatory approval of any of our product candidates, we anticipate that we will need substantial additional funding in connection with our continuing operations. We plan to continue to fund our operations and capital requirements through equity and/or debt financing, but there are no assurances that we will be able to raise sufficient amounts of funding in the future on acceptable terms, or at all.
Our future funding requirements will depend on many factors, including:
•the progress, timing, scope, results and costs of the clinical trials of VISTA and preclinical studies or clinical trials of other potential product candidates we may choose to pursue in the future, including the ability to enroll patients in a timely manner for our clinical trials;
•the costs and timing of obtaining clinical and commercial supplies and validating the commercial manufacturing process for VISTA and any other product candidates we may identify and develop;
•the cost, timing and outcomes of regulatory approvals;
•the timing and amount of any milestone, royalty or other payments we are required to make pursuant to current or any future collaboration or license agreements;
•costs of acquiring or in-licensing other product candidates and technologies;
•the terms and timing of establishing and maintaining collaborations, licenses and other similar arrangements;
•the costs associated with attracting, hiring and retaining existing and additional qualified personnel as our business grows;
•efforts to enhance operational systems and hire additional personnel to satisfy our obligations as a public company, including enhanced internal controls over financial reporting; and
•the cost of preparing, filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights.
As of March 31, 2023, we had cash of $9.2 million. Our current capital resources, together with the $5.5 million net proceeds received in April 2023 from the registered direct offering plus the committed proceeds of $22.5 million pursuant to the second closing of the Private Placement, will be sufficient to fund our operating expenses and capital expenditure requirements into early 2025.
However, until we can generate a sufficient amount of product revenue to finance our cash requirements, we expect to finance our future cash needs primarily through the issuance of additional equity, borrowings and strategic alliances with partner companies. To the extent that we raise additional capital through the issuance of additional equity or convertible debt securities, the ownership interest of our shareholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of existing shareholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or commercialization efforts or grant rights to develop and market product candidates to third parties that we would otherwise prefer to develop and market ourselves.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
|
|
(in thousands) |
|
Net cash provided by (used in): |
|
|
|
Operating activities |
|
$ |
(4,940 |
) |
|
$ |
(5,376 |
) |
Investing activities |
|
|
285 |
|
|
|
(15 |
) |
Financing activities |
|
|
750 |
|
|
|
(1,509 |
) |
Net change in cash and cash equivalents |
|
$ |
(3,905 |
) |
|
$ |
(6,900 |
) |
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Operating Activities
Cash used in operating activities for the three months ended March 31, 2023 was $4.9 million, consisting of a net loss of $6.5 million, partially offset by noncash charges of $1.2 million and a change in other net operating assets and liabilities of $0.4 million. The noncash charges primarily consisted of $1.1 million in stock-based compensation and $0.2 million noncash operating lease expense, partially offset by a $0.1 million gain on disposal of fixed assets. Our change in net operating assets and liabilities primarily resulted from a $3.2 million increase in accounts payable, partially offset by a $2.5 million reduction in accrued expenses and other current liabilities, a $0.2 million decrease in operating lease liability and a $0.3 million decrease in deferred revenue due to recognition of collaboration revenue in connection with the Merck Collaboration Agreement.
Cash used in operating activities for the three months ended March 31, 2022 was $5.4 million, consisting of a net loss of $5.0 million and noncash charges of $0.2 million and a change in other net operating assets and liabilities of $0.2 million. The noncash charges primarily consisted of a $0.7 million gain on debt extinguishment and $0.1 million in change in fair value measurement of notes payable, partially offset by $0.3 million in stock-based compensation and $0.2 million in noncash operating lease expense. The change in net operating assets and liabilities primarily resulted from a $0.6 million reduction in accrued expenses, $0.4 million decrease in deferred revenue due to recognition of license revenue in connection with the Genentech Agreement and a $0.2 million decrease in operating lease liability, partially offset by a $1.1 million increase in accounts payable due to the timing of payments.
Investing Activities
Cash provided by investing activities for the three months ended March 31, 2023 was $0.3 million, consisting primarily of cash received from the sale of certain property and equipment. Cash used in investing activitites for the three months ended March 31, 2022 was insignificant.
Financing Activities
Cash provided by financing activities for the three months ended March 31, 2023 was $0.8 million, primarily related to net proceeds from the issuance of our common stock to investors pursuant to the Sale Agreement.
Cash used in financing activities for the three months ended March 31, 2022 was $1.5 million, primarily related to $4.0 million for partial repayment of notes payable, partially offset by $2.4 million in borrowing of notes payable.
Debt Obligations
Notes Payable
As of March 31, 2023, we had outstanding notes payable in an aggregate principal amount of $0.8 million at interest rates that range from 3.75% to 6%, of which no payments are due within the next 12 months. The principal amount of each note payable is due at a specified periodic repayment date and/or at maturity, with such dates ranging from June 2024 to on or after September 2050.
See Note 5 to our consolidated financial statements included in this Quarterly Report for additional information regarding our notes payable.
Other Contractual Obligations and Commitments
Our cash requirements greater than 12 months are related to other contractual obligations and commitments related to license agreements and leases.
We have entered into a number of strategic license agreements pursuant to which we have acquired rights to specific assets, technology and intellectual property. In accordance with these agreements, we are obligated to pay, among other items, future contingent payments that are dependent upon future events such as our achievement of certain development, regulatory and commercial milestones royalties, and sublicensing revenue in the future, as applicable. As of March 31, 2023, the timing and likelihood of achieving the milestones and generating future product sales, and therefore payments that may become payable to these third parties, are uncertain.
We lease office and laboratory space for our corporate headquarters in Seattle, Washington under a lease agreement that expires in July 2024. As of March 31, 2023, undiscounted future minimum lease payments of $1.3 million remain pursuant to the lease agreement.
In addition, we enter into agreements in the normal course of business with various third parties for preclinical research studies, clinical trials, testing and other research and development services. Such agreements generally provide for termination upon notice, although obligate us to reimburse vendors for any time or costs incurred through the date of termination.
Critical Accounting Estimates
Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses, and related disclosures. Our estimates are based on historical experience and on various assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of expenses that are not readily apparent from other sources. Actual
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results may differ materially from these estimates. Our critical accounting estimates used in the preparation of our financial statements for the three months ended March 31, 2023 were consistent with those in Part II, Item 7 of our Annual Report on Form 10-K.
We believe that the accounting principles used in the preparation of our financial statements for the three months ended March 31, 2023 were consistent with those in Part II, Item 7 of our Annual Report on Form 10-K.
