IKENA ONCOLOGY, INC. The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and the related notes appearing elsewhere in this Annual Report on Form 10-K. This discussion contains 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 Annual Report on Form 10-K, our actual results could differ materially from the results described in or implied by these forward-looking statements. For convenience of presentation some of the numbers have been rounded in the text below. Please also see the section entitled "Special Note Regarding Forward-Looking Statements." We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Overview
We are a targeted oncology company developing precision medicines tailored to biomarker-defined patient groups with specific unmet needs. With our robust biomarker and translational approach, we aim to develop targeted treatments and define patient populations who are most likely to respond to treatment. Our current programs are across the Hippo pathway, RAS pathway, and key immune signaling pathways in the TME. Our approach in each of our programs is to target both cancer-driving targets and mechanisms of resistance to other targeted therapies. Our most advanced targeted oncology program, IK-930, is a paralog-selective inhibitor of TEAD. The TEAD transcription factors execute the ultimate step in the Hippo signaling pathway, a known tumor suppressor pathway that also drives resistance to multiple targeted and chemo therapies. Our first program in the RAS pathways, IK-595, is designed to trap MEK and RAF in an inactive complex, more completely inhibiting RAS signals than existing inhibitors. In addition, we are developing IK-175, an AHR antagonist in collaboration with Bristol Myers Squibb. Our focus on patient-driven development allows us to research both known and novel targets, with a shared guiding principle of aiming to address the unmet needs of biomarker-defined patient populations. Since we commenced operations in 2016, we have advanced multiple product candidates into clinical development. In addition, we have a robust discovery engine and a portfolio of early stage targeted oncology programs. Across the entirety of our pipeline, we aim to utilize our depth of institutional knowledge and breadth of tools to efficiently develop the right drug using the right modality for the right patient. Our most advanced targeted oncology product candidate, IK-930, is an oral, paralog-selective, small molecule inhibitor of TEAD, a transcription factor in the Hippo signaling pathway. The Hippo pathway is genetically altered in approximately 10% of human cancers and is widely accepted as a prevalent driver of cancer pathogenesis and a mediator of poor outcomes for patients. In our ongoing first-in-human Phase 1 clinical trial, we are focusing on indications that provide the potential to achieve rapid proof-of-concept, such as NF2 deficient mesothelioma and solid tumors with YAP1 or TAZ gene fusions, including EHE. Approximately 40% of mesothelioma patients are genetically deficient for the tumor suppressor NF2 and 100% of EHE patients have oncogenic YAP1 or TAZ gene fusions. InOctober 2021 , our IND for IK-930 was cleared by the FDA and we subsequently initiated a first-in-human Phase 1 clinical trial to evaluate the safety, tolerability, pharmacokinetics, pharmacodynamics, and preliminary antitumor activity of IK-930 as a monotherapy in patients with advanced solid tumors with or without gene alterations in the Hippo pathway. The first patient was dosed inJanuary 2022 . IK-930 received orphan drug designation for the treatment of mesothelioma from the FDA inMarch 2022 . InJune 2022 , IK-930 was granted fast track designation from the FDA for the treatment of unresectable NF2-deficient mesothelioma. In addition to the monotherapy approach, we plan to assess IK-930 in combination with other targeted therapies across several indications with multiple targeted therapies. Based on the role that the Hippo pathway plays in resistance to other targeted therapies, we believe that IK-930 may expand the patient populations that could benefit from therapies like EGFR inhibitors, KRAS inhibitors, and MEK inhibitors among others. We have an established clinical collaboration with AstraZeneca for the evaluation of osimertinib in combination with IK-930 for patients with EGFR-mutant lung cancers as a cohort in the clinical program. Initial data from the monotherapy IK-930 clinical program is expected in the second half of 2023. We nominated a development candidate in our RAS pathway program inNovember 2022 . The RAS pathway is implicated in at least half a million new cancer diagnoses each year inthe United States alone. We aim to target the pathway on multiple levels, including preventing known resistance mechanisms to achieve deep and sustained responses. Our first program in the space, IK-595, is designed to achieve novel inhibition of MEK-RAF by trapping MEK and RAF in an inactive complex, more completely inhibiting RAS signals than existing inhibitors. IK-595's potential ability to complex CRAF, in particular, prevents a well-recognized signaling bypass mechanism that cancer cells employ to drive therapeutic resistance to other drugs in this class. In addition, trapping CRAF in an inactive complex prevents the kinase independent anti-apoptotic function in RAS and RAF mutant cancers, a mechanism that cannot be addressed with first generation MEK inhibitors or pan-RAF inhibitors. We are developing IK-595 as an oral therapy, with a half-life designed to enable a pharmacokinetic profile that we believe can be potentially superior to other pathway inhibitors, with the goal of optimizing the therapeutic window for patients. We plan to submit an IND to the FDA for IK-595 in the second half of 2023. These two programs, IK-930 and IK-595, stemmed from our internal discovery engine, which continues its focus on discovering and developing novel targeted oncology programs. Our early research follows our philosophy of designing treatments for selected patient 107 --------------------------------------------------------------------------------
populations identified through the genetic make-up of their tumors and with the potential to expand the patient population that can benefit from targeted oncology through tackling mechanisms of therapeutic resistance.
Our pipeline also includes our immune-signaling program targeting AHR with our novel inhibitor, IK-175. The ongoing Phase 1a/1b clinical trial is evaluating IK-175 as a monotherapy and in combination with nivolumab in patients with advanced or metastatic solid tumors, including urothelial carcinomas, for which current standard-of-care therapy is no longer effective or is intolerable. Initial clinical data from the program was presented inNovember 2022 at theSociety for Immunotherapy of Cancer Annual Meeting. These initial data included a 40% disease control rate and 20% overall response rate in urothelial carcinoma patients who received IK-175 in combination with nivolumab, with the majority of combination patients experiencing reduction in their target lesions. The study is ongoing, and we plan to share updates from the program in 2023. We were incorporated as aDelaware corporation onMarch 2, 2016 , and our headquarters is located inBoston, Massachusetts . Since our inception, we devoted all of our efforts to organizing and staffing our company, acquiring intellectual property, business planning, raising capital, conducting discovery, research and development activities, and providing general and administrative support for these operations. OnMarch 30, 2021 , we completed an IPO, in which we issued and sold 8,984,375 shares of our common stock at a public offering price of$16.00 per share, including 1,171,875 shares of common stock sold pursuant to the underwriters' exercise of their option to purchase additional shares of common stock, for aggregate gross proceeds of$143.8 million (or$131.3 million after deducting our discounts, commissions and offering expenses).
To date, we have not had any products approved for sale and have not generated any revenue from product sales.
We have incurred significant net losses in every year since our inception and expect to continue to incur significant expenses and increasing net losses for the foreseeable future. Our net losses may fluctuate significantly from quarter to quarter and year to year and could be substantial. Our ability to generate product revenue sufficient to achieve profitability will depend on the successful development and eventual commercialization of one or more of our current or future product candidates. Our net losses were$68.8 million and$34.1 million for the years endedDecember 31, 2022 and 2021, respectively. As ofDecember 31, 2022 , we had an accumulated deficit of$214.2 million . We expect to continue to incur significant expenses and operating losses for at least the next several years as we:
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advance the development of our product candidate pipeline;
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initiate and continue research and preclinical and clinical development of potential new product candidates;
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maintain, expand and protect our intellectual property portfolio;
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acquire or in-license additional product candidates and technologies;
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expand our infrastructure and facilities to accommodate our growing employee base and ongoing development activities;
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establish agreements with CROs and CMOs in connection with our preclinical studies and clinical trials;
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require the manufacture of larger quantities of our product candidates for clinical development and potential commercialization;
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seek marketing approvals for our product candidates that successfully complete clinical trials, if any;
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establish a sales, marketing and distribution infrastructure to commercialize any products for which we may obtain marketing approval; and
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add operational, financial and management information systems and personnel,
including personnel to support our research and development programs, any future
commercialization efforts and our continued operations as a public company.
As a result, we will need substantial additional funding to support our
continuing operations and pursue our growth strategy. Until such time as we can
generate significant revenue from product sales, if ever, we expect to finance
our operations through the sale of equity instruments, debt financings, or other
capital sources, which may include collaborations with other companies or other
strategic transactions. We may be unable to raise additional funds or enter into
such other agreements or arrangements when needed on favorable terms, or at all.
If we fail to raise capital or enter into such agreements as and when needed, we
may have to significantly delay, reduce or eliminate the development and
commercialization of one or more of our product candidates.
We will not generate revenue from product sales unless and until we successfully
complete clinical development and obtain marketing approval for our product
candidates. The lengthy process of securing marketing approvals for new drugs
requires the expenditure of substantial resources. Any delay or failure to
obtain regulatory approvals would materially adversely affect the development
efforts of
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our product candidates and our business overall. Because of the numerous risks
and uncertainties associated with product development, we are unable to predict
the timing or amount of increased expenses or when or if we will be able to
achieve or maintain profitability. Even if we are able to generate revenue from
product sales, we may not become profitable. If we fail to become profitable or
are unable to sustain profitability on a continuing basis, then we may be unable
to continue our operations at planned levels and be forced to reduce or
terminate our operations.
If we raise additional funds through 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
programs or any future commercialization efforts or grant rights to develop and
market product candidates that we would otherwise prefer to develop and market
ourselves.
As of December 31, 2022 , we had cash, cash equivalents and marketable securities
of $156.9 million . We believe the existing cash and cash equivalents on hand as
of December 31, 2022 will enable us to fund our operating expenses and capital
expenditure requirements into 2025. To date, we have primarily financed our
operations through proceeds from private placements of preferred stock, payments
from a collaboration agreement, related party revenue and completion of the IPO.
We expect to incur substantial operating losses and negative cash flows from
operations for the foreseeable future as we continue to invest significantly in
research and development of our programs. Our belief with respect to our ability
to fund operations is based on estimates that are subject to risks and
uncertainties. If actual results are different from our estimates, we may need
to seek additional funding sooner that would otherwise be expected. There can be
no assurance that we will be able to obtain additional funding on acceptable
terms, if at all.
Impact of COVID-19 Pandemic
Since the onset of the global pandemic in 2020, we have been closely monitoring the spread of COVID-19 and its variants, and plan to continue taking steps to identify and mitigate the adverse impacts on, and risks to, our business posed by its spread and actions taken by governmental and health authorities to address the COVID-19 pandemic. In 2021, we adopted a permanent hybrid work model for those employees who are able to conduct their roles remotely. The ultimate extent of the impact of the COVID-19 pandemic on our business, financial condition and results of operations is highly uncertain and will depend on future developments that cannot be predicted, including new information that may emerge concerning the severity of the COVID-19 pandemic, existing and emerging variants and the level of acceptance of vaccines, and actions taken by government authorities and businesses to help contain or prevent the further spread of COVID-19. If we, or any of the third parties with whom we engage, were to experience any shutdowns or other prolonged business disruptions, our ability to conduct our business in the manner and on the timelines presently planned could be materially negatively affected, which could have a material adverse impact on our business, results of operations and financial condition. Accordingly, we cannot predict the extent to which our business, financial condition and results of operations will be affected. We remain focused on maintaining a strong balance sheet, liquidity and financial flexibility and continue to monitor developments as we deal with the disruptions and uncertainties from a business and financial perspective relating to COVID-19 and variants thereof. We will continue to work diligently with our partners and stakeholders to advance our clinical studies to the extent safe to do so for patients, caregivers and healthcare practitioners.
See "Risk Factors" for a discussion of the potential adverse impact of the COVID-19 pandemic on our business, financial condition, and results of operations.
Components of our Results of Operations
Revenue
We have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products in the foreseeable future. If our development efforts for our product candidates are successful and result in regulatory approval and successful commercialization efforts, we may generate revenue in the future from product sales. We cannot predict if, when, or to what extent we will generate revenue from the commercialization and sale of our product candidates. We may never succeed in obtaining regulatory approval for any of our product candidates.
All of our revenue has been derived from research and development revenue under our Bristol Myers Squibb Collaboration Agreement.
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--------------------------------------------------------------------------------Collaboration Agreement and Stock Purchase Agreement with Bristol Myers Squibb
InJanuary 2019 , we entered into the Bristol Myers Squibb Collaboration Agreement with Celgene Corporation (which was acquired by Bristol Myers Squibb inNovember 2019 ), pursuant to which Bristol Myers Squibb may elect in its sole discretion to exclusively license rights to develop and commercialize compounds (and products and diagnostic products containing such compounds) that modulate the activity of two collaboration targets, kynurenine and AHR excluding AHR agonists for inverse agonists, which we are developing as IK-412 and IK-175, respectively. On a program-by-program basis, through the completion of a Phase 1b clinical trial for each of IK-175 and IK-412, Bristol Myers Squibb has the exclusive option to exclusively license to develop, commercialize and manufacture the relevant product candidate worldwide. Concurrent with execution of the Bristol Myers Squibb Collaboration Agreement, we entered into a stock purchase agreement with Celgene Corporation (now Bristol Myers Squibb) inNovember 2019 ("the Stock Purchase Agreement") pursuant to which we issued Celgene Corporation 14,545,450 shares of Series A-1 preferred stock. Bristol Myers Squibb paid a total of$95.0 million in aggregate upfront consideration related to the Bristol Myers Squibb Collaboration Agreement and Stock Purchase Agreement. We are eligible to receive$50.0 million , in case of an exercise of its option with respect to IK-175, and$40.0 million , in case of an exercise of its option with respect to IK-412. If we do not complete a Phase 1b clinical trial by the end of the research term, we may elect to provide a data package to Bristol Myers Squibb upon which Bristol Myers Squibb may exercise the foregoing option for an additional$0.25 million fee. Upon the delivery of each license, we become eligible to receive up to$265.0 million in regulatory milestones and$185.0 million in commercial milestones as well as a tiered royalties at rates ranging from the high single to low teen digits percentages based on worldwide annual net sales by Bristol Myers Squibb, subject to specified gross sale reductions.
Operating Expenses
Our operating expenses since inception have consisted solely of research and development costs and general and administrative costs.
Research and Development Expenses
Research and development expenses consist primarily of costs incurred for our research and development activities. These efforts and costs include external research costs, personnel costs, consultants, supplies, license fees and facility-related expenses. We expense research and development costs as incurred. These expenses include:
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employee-related expenses, including salaries, related benefits and stock-based compensation expense, for employees engaged in research and development functions;
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expenses incurred under agreements with CROs which are primarily engaged to support our clinical trials;
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expenses incurred under agreements with CMOs, which are primarily engaged to provide drug substance and product for our preclinical research and development programs, nonclinical and clinical studies and other scientific development services;
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the cost of acquiring and manufacturing preclinical study materials, including manufacturing registration and validation batches;
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facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities and insurance;
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acquisition of in-process research and development assets that have no alternative future use;
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costs related to compliance with quality and regulatory requirements; and
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payments made under third-party licensing agreements.
Advance payments that we make for goods or services to be received in the future
for use in research and development activities are recorded as prepaid expenses.
Such amounts are recognized as an expense as the goods are delivered or the
related services are performed, or until it is no longer expected that the goods
will be delivered or the services rendered.
Product candidates in later stages of clinical development generally have higher
development costs than those in earlier stages of clinical development,
primarily due to the increased size and duration of later-stage clinical trials.
We expect that our research and development expenses will increase substantially
in connection with our planned clinical development activities in the near term
and in the future. At this time, we cannot accurately estimate or know the
nature, timing and costs of the efforts that will be necessary to
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complete the clinical development of, or obtain regulatory approval for, any of
our current or future product candidates. This is due to the numerous risks and
uncertainties associated with product development and commercialization,
including the following:
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our ability to add and retain key research and development personnel;
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our ability to successfully develop, obtain regulatory approval for, and then successfully commercialize our product candidates;
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our successful enrollment in and completion of clinical trials, including our ability to generate positive data from any such trials;
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the size and cost of any future clinical trials for existing or future product candidates in our pipeline;
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the costs associated with the development of any additional programs we identify in-house or acquire through collaborations and other arrangements and the success of such collaborations;
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the terms and timing of any additional collaborations, license or other arrangement, including the timing of any payments thereunder;
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our ability to establish and maintain agreements and operate with third-party manufacturers for clinical supply for our clinical trials and commercial manufacturing, if any of our product candidates are approved;
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costs related to manufacturing of our product candidates or to account for any future changes in our manufacturing plans;
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our ability to obtain and maintain patents, trade secret and other intellectual property protection and regulatory exclusivity for our product candidates, both inthe United States and internationally;
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our ability to obtain and maintain third-party insurance coverage and adequate reimbursement for our product candidates, if and when approved;
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the acceptance of our product candidates, if approved, by patients, the medical community and third-party payors;
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effectively competing with other products if our product candidates are approved;
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the impact of any business interruptions to our operations, including the timing and enrollment of patients in our planned clinical trials, or to those of our manufacturers, suppliers, or other vendors resulting from the ongoing COVID-19 pandemic or similar public health crisis; and
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our ability to maintain a continued acceptable safety profile for our therapies following approval.
A change in the outcome of any of these variables with respect to the development of our product candidates could significantly change the costs and timing associated with the development of that product candidate. We may never succeed in obtaining regulatory approval for any of our product candidates.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation, for personnel in executive, finance and administrative functions. General and administrative expenses also include direct and allocated facility-related costs as well as professional fees for legal, patent, consulting, investor and public relations, accounting, auditing, tax services and insurance costs. We expect that our general and administrative expenses will increase as our organization and headcount needed in the future to support continued research and development activities and potential commercialization of our product candidates. These increases will likely include increased costs related to the hiring of additional personnel and fees to outside consultants, attorneys and accountants, among other expenses. Additionally, we expect to incur increased expenses associated with being a public company, including costs of additional personnel, accounting, audit, legal, regulatory and tax-related services associated with maintaining compliance with exchange listing andSEC requirements, director and officer insurance costs, and investor and public relations costs. 111 --------------------------------------------------------------------------------
Results of Operations
Comparison of the Years Ended
The following table summarizes our results of operations:
Year Ended December 31,
(In thousands, except percentages) 2022 2021 Dollar Change Percent Change
Revenue:
Research and development revenue under
collaboration agreement $ 15,618 $ 30,985 $ (15,367 ) (50 )%
Operating expenses:
Research and development 64,321 47,108 17,213 37 %
General and administrative 22,201 18,015 4,186 23 %
Total operating expenses 86,522 65,123 21,399 33 %
Loss from operations (70,904 ) (34,138 ) (36,766 ) 108 %
Other income, net 2,139 23 2,116 9200 %
Net loss $ (68,765 ) $ (34,115 ) $ (34,650 ) 102 %
Revenue
The research and development revenue under collaboration agreement is related to
the Bristol Myers Squibb Collaboration Agreement for the IK-175 and IK-412
programs which was executed in January 2019 . The decrease in revenue during the
year ended December 31, 2022 , as compared to the same period in the prior year,
was primarily due to change in estimate of the total services to be performed on
the IK-412 program during the remainder of the Bristol Myers Squibb
Collaboration Agreement term. In December 2021 , the Company re-assessed the
IK-412 program, which experienced manufacturing delays. Considering these delays
and the timeline of the Bristol Myers Squibb partnership, the Company made the
strategic decision to pause IK-412 development activities, outside of the
committed manufacturing efforts, for the remainder of the Bristol Myers Squibb
research term. As a result of the decision to pause, the Company recorded a
change in estimate during the year ended December 31, 2021 and recognized $16.5
million of research and development revenue.
Research and Development Expenses
The following table summarizes our research and development expenses:
Year Ended December 31,
(In thousands, except percentages) 2022 2021 Dollar Change Percent Change
Direct research and development expenses
by program:
IK-930 $ 10,377 $ 8,351 $ 2,026 24 %
IK-175 6,829 5,844 985 17 %
IK-412 3,960 2,984 976 33 %
IK-007 1,732 2,632 (900 ) (34 )%
IK-595 7,499 1,793 5,706 318 %
Other discovery stage programs 9,192 9,915 (723 ) (7 )%
Research and development personnel and
overhead
expenses and unallocated 24,732 15,589 9,143 59 %
Total research and development expenses
17,213 37 %
The increase in research and development expense of
General and Administrative Expenses
The following table summarizes our general and administrative expenses:
Year Ended December 31,
(In thousands, except percentages) 2022 2021 Dollar Change Percent Change
General and administrative $ 22,201 $ 18,015 $ 4,186 23 %
112-------------------------------------------------------------------------------- The increase in general and administrative expense of$4.2 million was primarily attributable to an increase in compensation and benefit related expenses due to an increase in headcount.
Liquidity and Capital Resources
Sources of Liquidity
Since our inception, we have not generated any revenue from product sales and have incurred significant operating losses. We have not yet commercialized any products and we do not expect to generate revenue from sales of any product candidates for several years, if ever. To date, we have financed our operations primarily through private placements of preferred stock, from upfront payments from the Bristol Myers Squibb Collaboration Agreement, from cash obtained from acquisitions, and most recently, from common stock in our IPO. InMarch 2021 , we completed our IPO in which we received net proceeds, inclusive of the exercise by the underwriters of their option of purchase additional shares, of approximately$131.3 million , after deducting underwriting discounts and commissions and offering expenses. As ofDecember 31, 2022 , we had cash, cash equivalents and marketable securities of$156.9 million . Based upon our current operating plans, we expect that our existing cash and cash equivalents balances will enable us to meet our planned operating expenses and capital expenditure requirements into 2025.
Cash Flows
The following table summarizes our sources and uses of cash for the years endedDecember 31, 2022 and 2021: Year Ended December 31, (In thousands) 2022 2021 Net cash used in operating activities$ (74,109 ) $ (60,252 ) Net cash used in investing activities (99,284 ) (1,760 ) Net cash provided by financing activities 1,095
131,738
Net increase (decrease) in cash and cash equivalents
Operating Activities Cash flows from operating activities are greatly influenced by our use of cash for operating expenses and working capital requirements to support the business. We have historically experienced negative cash flows from operating activities as we invested in developing our platform, drug discovery efforts and related infrastructure. The increase in cash used in operating activities of$13.9 million was attributable to the increase in our net loss incurred in the year endedDecember 31, 2022 of$34.7 million , primarily a result of increased spending on research and development activities as we advance our preclinical and clinical programs. This was partially offset by a decrease in the realization of revenue previously deferred of$15.4 million as a result of the Bristol Myers Squibb collaboration agreement. Investing Activities
The increase in cash used investing activities of
Financing Activities
The decrease in cash provided by financing activities of
Funding Requirements
We expect our expenses to increase in connection with our ongoing activities,
particularly as we continue the research and development for, initiate clinical
trials for, and seek marketing approval for, our product candidates. In
addition, if we obtain marketing approval for any of our product candidates, we
expect to incur significant commercialization expenses related to product sales,
marketing, manufacturing and distribution. Furthermore, we expect to continue to
incur additional costs associated with
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operating as a public company. Accordingly, we will need to obtain substantial
additional funding in connection with our continuing operations. If we are
unable to raise capital when needed or on attractive terms, we would be forced
to delay, reduce or eliminate our research and development programs or future
commercialization efforts.
We expect that our existing cash, cash equivalents, and marketable securities as
of December 31, 2022 , will enable us to fund our operating expenses and capital
expenditure requirements into 2025. We have based this estimate on assumptions
that may prove to be wrong, and we may use our available capital resources
sooner than we currently expect. Our future capital requirements will depend on
many factors, including:
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the scope, progress, results and costs of discovery, preclinical development, laboratory testing and clinical trials for other potential product candidates we may develop, if any;
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the costs, timing and outcome of regulatory review of our product candidates;
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our ability to establish and maintain collaborations on favorable terms, if at all;
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the achievement of milestones or occurrence of other developments that trigger payments under any collaboration agreements we might have at such time;
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the costs and timing of future commercialization activities, including product sales, marketing, manufacturing and distribution, for any of our product candidates for which we receive marketing approval;
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the amount of revenue, if any, received from commercial sales of our product candidates, should any of our product candidates receive marketing approval;
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the costs of preparing, filing and prosecuting patent applications, obtaining, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims;
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the in-licensing or acquisition of assets in line with our strategy;
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our headcount growth and associated costs as we expand our business operations and our research and development activities; and
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the costs of operating as a public company.
Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements. We do not have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interests may be diluted, and the terms of these securities may include liquidation or other preferences that could adversely affect your rights as a common stockholder. Any debt financing, if available, may involve agreements that include restrictive covenants that limit our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends, that could adversely impact our ability to conduct our business. If we raise funds through 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 to 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 future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves. OnApril 27, 2022 , we filed a shelf registration statement on Form S-3 ("Shelf"), with theSEC , which covers the offering, issuance and sale by us of up to an aggregate of$300.0 million of our common stock, preferred stock, debt securities, warrants and/or units of any combination thereof. We simultaneously entered into a sales agreement withJefferies LLC , as sales agent, to provide for the issuance and sale by us of up to$100.0 million of our common stock from time to time in "at-the-market" offerings under the Shelf, which we refer to as the ATM Program. The Shelf was declared effective by theSEC onMay 5, 2022 . As of the date hereof, no sales have been made pursuant to the ATM Program.
Contractual Obligations
We have a non-cancelable operating lease agreement for our office, lab and animal care facility space in ourBoston, Massachusetts corporate headquarters. We expect lease payments under this commitment to total$1.8 million in 2023 and increase annually through the lease expiration in 2026. Our total future minimum lease payments for each of the next five years and in total are included in Note 14. 114 -------------------------------------------------------------------------------- We enter into contracts in the normal course of business with CROs and CMOs for clinical trials, preclinical research studies and testing, manufacturing and other services and products for operating purposes. These contracts typically, do not contain any minimum purchase commitments and are cancelable by us, typically upon prior notice of 30 days. Payments due upon cancelation consist only of payments for services provided and expenses incurred up to the date of cancelation. We may incur potential contingent payments upon our achievement of clinical, regulatory and commercial milestones, as applicable, or that we may be required to make royalty payments under license agreements we have entered into with various entities pursuant to which we have in-licensed certain intellectual property such as our patent license agreement with theUniversity of Texas at Austin and our license agreement withAskAt, Inc. Due to the uncertainty of the achievement and timing of the events requiring payment under these agreements, the amounts to be paid by us are not fixed or determinable at this time and have not been included in the table above.
Critical Accounting Policies and Use of 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 accounting principles generally accepted inthe United States ("GAAP"). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities in our consolidated financial statements during the reporting periods. These items are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on historical experience, known trends and events, and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ materially from these estimates under different assumptions or conditions. While our significant accounting policies are more fully described in the Notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, we believe the following accounting policies to be the most critical in understanding the judgments and estimates we use in preparing our consolidated financial statements:
Revenue Recognition
To determine revenue recognition we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance obligation. At contract inception, once the contract is determined to be within the scope of Topic 606, we assess the goods or services promised within each contract and determine those that are performance obligations, then assess whether each promised good or service is distinct. When we offer options for additional goods or services, such as to receive a license for intellectual property or for additional goods or services, we evaluate whether such options contain material rights that should be treated as additional performance obligations. Once performance obligations are identified, we then recognize as revenue the amount of the transaction price that the Company allocated to the respective performance obligation when (or as) each performance obligation is satisfied, either at a point in time or over time. If the performance obligation is satisfied over time, we recognize revenue based on the use of an input method. At each reporting date, we calculate the measure of progress for the performance obligations transferred over time. The calculation generally uses an input measure based on costs incurred to-date relative to estimated total costs to complete the transfer of the performance obligation. The measurement of progress is then used to calculate the total revenue earned, including any cumulative catch-up adjustment.
As part of the process of preparing our consolidated financial statements, we
are required to estimate our accrued research and development expenses. This
process involves reviewing open contracts and purchase orders, communicating
with our applicable personnel to identify services that have been performed on
our behalf and estimating the level of service performed and the associated cost
incurred for the service when we have not yet been invoiced or otherwise
notified of actual costs. The majority of our service providers invoice us in
arrears for services performed, on a pre-determined schedule or when contractual
milestones are met; however, some require advance payments. We make estimates of
our accrued expenses as of each balance sheet date in the consolidated financial
statements based on facts and circumstances known to us at that time. We
periodically confirm the accuracy of these
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--------------------------------------------------------------------------------estimates with the service providers and make adjustments, if necessary. Examples of estimated accrued research and development expenses include fees paid to:
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vendors, including research laboratories, in connection with preclinical development activities;
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CROs and investigative sites in connection with preclinical studies; and
•
CMOs in connection with drug substance and drug product formulation of preclinical studies.
We base the expense recorded related to external research and development on our estimates of the services received and efforts expended pursuant to quotes and contracts with multiple CMOs and CROs that supply, conduct and manage nonclinical studies on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the expense. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, we adjust the accrual or the amount of prepaid expenses accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low in any particular period. To date, there have not been any material adjustments to our prior estimates of accrued research and development expenses.
Stock-Based Compensation
We account for stock-based compensation awards in accordance with ASC 718, Compensation-Stock Compensation (ASC 718). ASC 718 requires all stock-based payments, including grants of stock options, to be recognized in the consolidated statement of operations and comprehensive loss based on their grant date fair values. We estimate the fair value of each stock option grant using the Black-Scholes option-pricing model. Calculating the fair value of stock-based awards requires that we make subjective assumptions. Pursuant to ASC 718, we measure stock-based awards at fair value on the date of grant and recognize the corresponding stock-based compensation expense of those awards on a straight-line basis over the requisite service period, which is generally the vesting period of the respective award. We have historically granted stock options with exercise prices equivalent to the fair value of our common stock as of the date of grant. The Black-Scholes option-pricing model uses the following inputs: the fair value of our common stock, the expected volatility of our common stock, the expected term of our stock options, the risk-free interest rate for a period that approximates the expected term of our stock options and our expected dividend yield. Due to the lack of a public market for our common stock and a lack of company-specific historical and implied volatility data, we have based our computation of expected volatility on the historical volatility of a representative group of public companies with similar characteristics to us, including stage of product development, life science industry focus, length of trading history and similar vesting provisions. The historical volatility data is calculated based on a period of time commensurate with the expected term assumption. We will continue to apply this process until a sufficient amount of historical information regarding the volatility of our own stock price becomes available or until circumstances change, such that the identified entities are no longer representative companies. In the latter case, more suitable, similar entities whose share prices are publicly available would be utilized in the calculation. We use the simplified method as prescribed by theSEC Staff Accounting Bulletin No. 107, Share-Based Payment, to calculate the expected term for options granted to employees as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. Under this approach, the weighted-average expected option term is presumed to be the average of the contractual term (ten years) and the vesting term (generally four years) of our stock options. We utilize this method due to lack of historical exercise data and the "plain-vanilla" nature of our stock-based awards. The expected term is applied to the stock option grant group as a whole, as we do not expect substantially different exercise or post-vesting termination behavior among our employee population. For options granted to non-employees, we utilize the contractual term of the arrangement as the basis for the expected term assumption. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected term of the stock options. The expected dividend yield is assumed to be zero as we have never paid cash dividends and have no current plans to pay any cash dividends on our common stock. The fair value of each restricted common stock award is estimated on the date of grant based on the fair value of our common stock on that same date.
Determination of Fair Value of Common Stock contractual obligation
Historically, the fair value of the shares of common stock underlying the stock
options was determined by the Company's board of directors. Because there was no
public market for the Company's common stock prior to the Company's IPO, the
board of directors determined fair value of common stock at the time of grant of
the option by considering a number of objective and subjective factors
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including independent third-party valuations of the Company's common stock,
sales of convertible preferred stock to unrelated third parties, operating and
financial performance, the lack of liquidity of capital stock and the general
and industry specific economic outlook, among other factors. Following the
Company's IPO, the fair value of the Company's common stock has been determined
based on the closing price of the Company's common stock on the Nasdaq Global
Select Market.
Emerging Growth Company
In April 2012 , the JOBS Act, was enacted. Section 107 of the JOBS Act provides
that an "emerging growth company" ("EGC"), can take advantage of the extended
transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933,
as amended, (the "Securities Act") for complying with new or revised accounting
standards. Thus, an EGC can delay the adoption of certain accounting standards
until those standards would otherwise apply to private companies. We have
elected to use the extended transition period for new or revised accounting
standards during the period in which we remain an emerging growth company;
however, we may adopt certain new or revised accounting standards early.
We will remain an emerging growth company until the earliest to occur of: (1)
the last day of the fiscal year in which we have more than $1.235 billion in
annual revenue; (2) the date we qualify as a "large accelerated filer," with at
least $700.0 million of equity securities held by non-affiliates; (3) the date
on which we have issued more than $1.0 billion in non-convertible debt
securities during the prior three-year period; and (4) the last day of the
fiscal year ending after the fifth anniversary of our initial public offering.
We are also a "smaller reporting company" as defined in the Exchange Act. We may
continue to be a smaller reporting company even after we are no longer an
emerging growth company. We may take advantage of certain of the scaled
disclosures available to smaller reporting companies until the fiscal year
following the determination that our voting and non-voting common stock held by
non-affiliates is more than $250.0 million measured on the last business day of
our second fiscal quarter, or our annual revenues are more than $100.0 million
during the most recently completed fiscal year and our voting and non-voting
common stock held by non-affiliates is more than $700.0 million measured on the
last business day of our second fiscal quarter.
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