Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Unless the context otherwise requires, all references in this section to “we,” “our,” “us” or “eFFECTOR” refer to the business of eFFECTOR Therapeutics, Inc. prior to the consummation of the Business Combination, which is our business following the consummation of the Business Combination. The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K, filed with the SEC on March 8, 2023.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts contained in this Quarterly Report, including statements regarding our future results of operations or financial condition, research and development plans, the anticipated timing, costs, design and conduct of our ongoing and planned preclinical studies and planned clinical trials for our product candidates, the timing and likelihood of regulatory filings and approvals for our product candidates, our ability to commercialize our product candidates, if approved, the impact of the COVID-19 pandemic on our business, the potential to develop future product candidates, the potential benefits of strategic collaborations, the timing and likelihood of success, plans and objectives of management for future operations, and future results of anticipated product development efforts, are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “expect,” “intend,” "target," “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” or the negative of these terms or other similar expressions. These forward-looking statements are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report and are subject to a number of risks, uncertainties and assumptions, including those described in Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q and in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K, filed with the SEC on March 8, 2023. The events and circumstances reflected in our forward-looking statements may not be achieved or occur, and actual results could differ materially from those projected in the forward-looking statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.
Overview
We are a clinical-stage biopharmaceutical company focused on pioneering the development of a new class of oncology drugs we refer to as STRIs. Translation is the process in cells whereby the synthesis of proteins is directed by information contained in genetic sequences. We utilized our proprietary selective translation regulation technology platform to internally discover a portfolio of small molecule STRI product candidates. Our product candidates target the eIF4F complex and its activating kinase, mitogen-activated protein interacting kinase (“MNK”). The eIF4F complex is a central node where two of the most frequently mutated signaling pathways in cancer, the PI3K-AKT and RAS-MEK pathways, converge to activate the translation of select mRNA into proteins that are frequent culprits in key disease-driving processes. Inhibition of any one of these targets simultaneously downregulates multiple disease-driving proteins before they are synthesized. Each of our product candidates is designed to act on a single protein that drives the expression of a network of multiple functionally related proteins, including oncoproteins, which are proteins whose aberrant function can cause cancer, immunosuppressive proteins in T cells and proteins known to drive drug resistance that together control tumor growth, survival and immune evasion.
Our lead product candidate, tomivosertib, is an oral small-molecule inhibitor of MNK that we are developing in combination with inhibitors of anti-PD-(L)1 therapy, for the treatment of patients with solid tumors. In the second quarter of 2021, we initiated dosing in KICKSTART, our randomized Phase 2b clinical trial evaluating tomivosertib in combination with pembrolizumab in patients with metastatic non-small cell lung cancer (“NSCLC”) with PD-L1 expression level greater than or equal to 50% (“PD-L1≥50%”). Pembrolizumab is owned and marketed by Merck for frontline NSCLC and several other indications. We anticipate reporting topline data from the KICKSTART trial in the second half of 2023. Our second product candidate, zotatifin, is an inhibitor of eIF4A, a component of the eIF4F complex, and is currently being evaluated in a Phase 1/2 clinical trial in patients with certain solid tumors. We have completed the initial dose escalation portion of this trial and are currently evaluating zotatifin in combination with fulvestrant and abemaciclib (Z+F+A) in a Phase 2a open-label expansion cohort in patients with ER+ breast cancer. In light of the favorable safety results observed in the Phase 1/2 clinical trial and target engagement data generated to date, we have also resumed dose escalation of zotatifin in combination with fulvestrant in patients with ER+ breast cancer to determine if a higher dose of zotatifin can be utilized in future clinical studies. To date, we’ve reported initial data from four cohorts including patients with ER+ breast cancer, which demonstrated that zotatifin appeared to be safe, well tolerated and showed signals of activity, including partial responses in heavily pretreated ER+ breast cancer patients. We anticipate reporting topline results for the fully enrolled Z+F+A triplet cohort in ER+ breast cancer at the American Society of Clinical Oncology ("ASCO") 2023 Annual Meeting. Data from the dose escalation portion of the trial is anticipated in the second half of 2023. We have also completed a Phase 1b clinical trial evaluating
20
zotatifin as an antiviral agent against SARS-CoV-2. The study was a double-blind, randomized, placebo-controlled trial evaluating the safety and antiviral activity of a single dose of zotatifin. In this trial, zotatifin was found to be safe and well-tolerated, and demonstrated favorable trends in several assessments of viral clearance compared to placebo. We have entered into a global collaboration and license agreement with Pfizer for our earliest stage program, inhibitors of eIF4E, and Pfizer is currently conducting investigational new drug application (“IND”) enabling studies for this program.
Since our inception in 2012 we have devoted substantially all of our resources to raising capital, identifying potential product candidates, establishing our intellectual property portfolio, conducting preclinical studies and clinical trials, establishing arrangements with third parties for the manufacture of our product candidates and related raw materials, and providing general and administrative support for these operations. We do not have any products approved for sale and have not generated any revenue from product sales. As of March 31, 2023, we have raised a total of $302.6 million to fund our operations, comprised of aggregate gross proceeds of $150.0 million from the sale and issuance of convertible preferred stock, gross proceeds of $67.0 million from the issuance of common stock in connection with the Business Combination in August 2021, $42.0 million in collaboration revenue under our research collaboration and license agreement with Pfizer ("Pfizer Agreement"), $35.0 million from loans under credit facilities, $3.1 million gross proceeds from the sale of common stock under the equity purchase agreement ("Purchase Agreement") with Lincoln Park Capital Fund, LLC ("Lincoln Park"), $5.0 million in grant revenue under the Research Subaward Agreement with The Regents of the University of California, on behalf of its San Francisco campus ("UCSF"), and $0.5 million in gross proceeds from the sale of common stock under our Controlled Equity Offering Sales Agreement (“Sales Agreement”) with Cantor Fitzgerald & Co ("Cantor") ("ATM Offering Program"). Other than with respect to the net income generated as a result of revenue under the Pfizer Agreement generated in 2020 and the net income generated in 2021 as a result of the change in valuation of the earn-out liability in 2021, we have incurred significant operating losses since our inception. Our net loss for the three months ended March 31, 2023 was $10.0 million and our net income for the three months ended March 31, 2022 was $3.1 million. As of March 31, 2023, we had an accumulated deficit of $153.6 million. Substantially all of our operating losses resulted from expenses incurred in connection with the research and development of our product candidates and general and administrative costs associated with our operations.
We expect to continue to incur significant expenses and losses for at least the next several years. We anticipate our expenses will increase substantially as we continue our development of, seek regulatory approval for and potentially commercialize any approved product candidates, hire additional personnel, protect our intellectual property and incur additional costs associated with being a public company. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of our clinical trials and preclinical studies and our expenditures on other research and development activities. As of March 31, 2023, we had $19.0 million in cash, cash equivalents and short-term investments. To fund further operations, we will need to raise additional capital. Our current capital resources will not be sufficient for us to complete the clinical development of any of our product candidates or, if applicable, to prepare for commercializing any product candidate which may receive approval from the FDA or comparable foreign regulatory authority. Accordingly, we expect to finance our cash needs through a combination of equity offerings, debt financings, or other capital sources, including potential additional collaborations, licenses, and other similar arrangements. Adequate funding may not be available to us on acceptable terms, if at all. Our failure to raise capital or enter into such other arrangements when needed would have a negative impact on our financial condition and could force us to delay, limit, reduce, or terminate our research and development programs or other operations, or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
Financial Operations Overview
Revenue
We currently have no products approved for sale, and all revenue generated has been from the Pfizer Agreement along with grant revenue. In the future, we may generate additional revenue from collaboration, grant or license agreements we have entered into, or may enter into, with respect to our product candidates, as well as product sales from any approved product. Our ability to generate product revenues will depend on the successful development and eventual commercialization of our product candidates. If we fail to complete the development of our product candidates in a timely manner or to obtain regulatory approval for our product candidates, our ability to generate future revenue and our results of operations and financial position would be materially adversely affected.
Pfizer Agreement
In December 2019, we entered into the Pfizer Agreement, to research and develop small molecules that target eIF4E. Pursuant to the Pfizer Agreement, we granted Pfizer a worldwide, exclusive license, with a right to sublicense, under certain of our patents, know-how, and materials to use, develop, manufacture, commercialize, and otherwise exploit compounds or products targeting eIF4E, for any and all indications. Under the agreement, we were responsible for initial research in collaboration with Pfizer, and Pfizer is responsible for all further development of this development program, including submission of an IND and conducting all clinical development and commercialization activities.
Pursuant to the Pfizer Agreement, we received an upfront, one-time, non-refundable, non-creditable payment of $15 million dollars from Pfizer. Pfizer was obligated to reimburse us for costs incurred for research performed, up to a specified cap in the low
21
double-digit millions. Upon the achievement of specified development, regulatory and sales milestones, Pfizer will be obligated to pay us up to $480 million dollars in the aggregate, as well as to pay us high single-digit percentage royalties on annual net sales of each licensed product. See “Business — Our Collaboration and License Agreements” in our Annual Report on Form 10-K filed with the SEC on March 8, 2023, for additional information about this agreement, including with respect to potential payments to us thereunder.
DARPA Subaward Agreement
In April 2021, we entered into a Research Subaward Agreement with UCSF (the "Subaward Agreement"), whereby up to $5.0 million in allowable costs were reimbursable for clinical and manufacturing activities related to zotatifin for the treatment of COVID-19. Under the terms of Subaward Agreement, we were obligated to provide financial and technical reports to UCSF on a periodic basis. We have exhausted the full $5.0 million of allowable costs under the Subaward Agreement as of December 31, 2022.
Operating Expenses
Research and Development Expenses
Research and development expenses primarily consist of costs associated with the preclinical and clinical development of our product candidates. Our research and development expenses include:
•external costs, including:
•expenses incurred under arrangements with third parties, such as CROs and consultants and advisors that perform biology, chemistry, toxicology, clinical and regulatory functions;
•costs related to acquiring and manufacturing preclinical and clinical trial materials, including continued testing such as process validation and stability of drug product;
•costs related to toxicology testing and other research and preclinical studies; and
•costs related to compliance with regulatory requirements and license fees.
•internal costs, including:
•salaries and related overhead expenses, which include stock-based compensation and benefits, for personnel in research and development functions; and
•facilities, depreciation, insurance and other expenses related to research and development.
We expense research and development costs as incurred. We account for nonrefundable advance payments for goods and services that will be used in future research and development activities as expenses when the service has been performed or when the goods have been received. We track external expenses on a development program and other program specific basis. However, we do not track internal costs on a program specific basis because these costs primarily relate to personnel and facilities, which are deployed across multiple programs under development.
The following table summarizes our research and development expenses for the periods indicated (in thousands).
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
External development program expenses: |
|
|
|
|
|
|
tomivosertib (eFT508) |
|
$ |
2,552 |
|
|
$ |
906 |
|
zotatifin (eFT226) |
|
|
2,218 |
|
|
|
709 |
|
eIF4E |
|
|
— |
|
|
|
8 |
|
Unallocated internal research and development expenses: |
|
|
|
|
|
|
Personnel related |
|
|
1,305 |
|
|
|
1,117 |
|
Other |
|
|
534 |
|
|
|
372 |
|
Total research and development expenses |
|
$ |
6,609 |
|
|
$ |
3,112 |
|
We expect our research and development expenses to increase substantially for the foreseeable future as we continue the development of our product candidates, particularly as we move into later stages of clinical development which typically cost more. The process of conducting clinical trials and preclinical studies necessary to obtain regulatory approval is costly and time-consuming. We may never succeed in achieving marketing approval for any of our product candidates. At this time, we cannot reasonably estimate the nature, timing or costs of the efforts that will be necessary to complete the remainder of the development of any of our product candidates or the period, if any, in which material net cash inflows from these product candidates may commence. We anticipate we will make determinations as to which product candidates and programs to pursue and how much funding to direct to each product candidate and program on an ongoing basis in response to clinical and preclinical results, regulatory developments, ongoing
22
assessments as to each product candidate’s and program’s commercial potential, and our ability to enter into collaborations, to the extent we determine the resources or expertise of a collaborator would be beneficial for a given product candidate or program.
Our development costs may vary significantly based on factors such as:
•per patient trial costs;
•the number and scope of trials required for approval and preclinical and IND-enabling studies;
•the number of sites included in the trials;
•the length of time required to enroll suitable patients;
•the number of doses that patients receive;
•the number of patients that participate in the trials;
•the drop-out or discontinuation rates of patients;
•the duration of patient follow-up;
•the extent of reimbursement for the costs of approved therapies used in our combination trials;
•potential additional safety monitoring or other studies requested by regulatory agencies;
•the number and complexity of procedures, analyses and tests performed during the trial;
•the phase of development of the product candidate;
•the impact of any interruptions to our operations or to those of the third parties with whom we work due to any healthcare emergencies;
•the efficacy and safety profile of the product candidate; and
•the extent to which we establish additional collaboration, license or other arrangements.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation and benefits, and consulting fees for finance, accounting, and other administrative functions. Other costs include legal fees relating to patent and corporate matters, insurance, and facility costs not otherwise included in research and development expenses.
We expect our general and administrative expenses will increase substantially for the foreseeable future as we advance our product candidates through clinical development. We also will 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 the Nasdaq listing rules, additional insurance expenses, investor relations activities and other administrative and professional services. In addition, if we obtain regulatory approval for any of our product candidates, we expect to incur expenses associated with building a sales and marketing team if we choose to commercialize such product candidates on our own.
Other Income (Expense)
Interest Income
Interest income consists of interest earned on our cash equivalents and short-term investments.
Interest Expense
Interest expense recorded in the three months ended March 31, 2023 and 2022 consisted of amounts attributable to our outstanding term loan with Oxford Financial LLC (“Oxford”).
Other Income (Expense)
We assumed private placement warrants in connection with the Business Combination transaction that are required to be accounted for as liabilities and remeasured to fair value at each reporting date, with changes in the fair value reported as a component of other income (expense).
In January 2022, we entered into the Purchase Agreement with Lincoln Park and recorded other expense in connection with commitment shares of common stock issued to Lincoln Park in the transaction.
23
Change in Fair Value of Earn-Out Liability
We determined that the contingent obligation to issue Earn-Out Shares to existing Old eFFECTOR shareholders is not indexed to our stock under Accounting Standards Codification ("ASC") 815-40 and are therefore required to be accounted for as liabilities and remeasured at fair value each reporting period, with changes in fair value reported as a component of other income (expense).
Results of Operations
Comparison of the three months ended March 31, 2023 and 2022
The following table sets forth our results of operations for the three months ended March 31, 2023 and 2022 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
Period-to- Period |
|
|
2023 |
|
2022 |
|
Change |
|
Operating expenses: |
|
|
|
|
|
|
Research and development |
|
6,609 |
|
|
3,112 |
|
|
3,497 |
|
General and administrative |
|
2,927 |
|
|
3,436 |
|
|
(509 |
) |
Total operating expenses |
|
9,536 |
|
|
6,548 |
|
|
2,988 |
|
Loss from operations |
|
(9,536 |
) |
|
(6,548 |
) |
|
(2,988 |
) |
Other income (expense) |
|
(478 |
) |
|
9,617 |
|
|
(10,095 |
) |
Net income (loss) |
$ |
(10,014 |
) |
$ |
3,069 |
|
$ |
(13,083 |
) |
Research and Development Expenses
Research and development expenses were $6.6 million and $3.1 million for the three months ended March 31, 2023 and 2022, respectively. The increase in research and development expenses of $3.5 million was primarily due to a $1.7 million increase for the tomivosertib program due to increased costs associated with the KICKSTART trial, and a $1.5 million increase for the zotatifin program due to increased costs associated with the COVID-19 and oncology trials, along with increased costs related to drug product manufacturing. Further, there was a $0.2 million increase in personnel-related costs and a $0.1 million increase in consultant costs in the three months ended March 31, 2023 as compared to the same period in 2022.
General and Administrative Expenses
General and administrative expenses were $2.9 million and $3.4 million for the three months ended March 31, 2023 and 2022, respectively. The decrease in general and administrative expenses of $0.5 million was primarily due to a $0.4 million decrease in consultant and audit related costs in the three months ended March 31, 2023 as compared to the three months ended March 31, 2022. Further, there was a $0.2 million decrease in directors and officers insurance costs. These decreases were partially offset by a $0.1 million increase in personnel-related costs in the three months ended March 31, 2023 as compared to the same period in 2022.
Other Income (Expense)
Other expense was $0.5 million for the three months ended March 31, 2023 and other income was $9.6 million for the three months ended March 31, 2022. The decrease of $10.1 million was mostly due to the change in fair value of the earn-out liability and warrant liability during the three months ended March 31, 2022, partially offset by $1.1 million in other expense recorded in the three months ended March 31, 2022 related to the equity purchase agreement with Lincoln Park.
Liquidity and Capital Resources
Sources of Liquidity
From our inception through March 31, 2023, we have raised a total of $302.6 million to fund our operations, comprised of aggregate gross proceeds of $150.0 million from the sale and issuance of convertible preferred stock, gross proceeds of $67.0 million from the issuance of common stock in connection with the Business Combination in August 2021, $42.0 million in collaboration revenue under our research collaboration and license agreement with Pfizer, $35.0 million from loans under credit facilities, $3.1 million in gross proceeds from the sale of common stock to Lincoln Park under the equity purchase agreement ($46.9 million remaining available for sale under the equity purchase agreement as of March 31, 2023), $5.0 million in grant revenue under the Research Subaward Agreement with UCSF, and $0.5 million in gross proceeds from the sale of common stock under the ATM Offering Program.
24
Prior to the Business Combination, our operations were funded primarily from the issuance of convertible preferred stock and common stock. Upon the closing of the Business Combination in August 2021, we received net proceeds totaling approximately $52.9 million.
Our cash and cash equivalents and short-term investments totaled $19.0 million as of March 31, 2023. Until required for use in our business, we typically invest our cash in investments that are highly liquid, readily convertible to cash with original maturities of 1 year or less at the date of purchase. We attempt to minimize the risks related to our cash and cash equivalents and investments by maintaining balances in accounts only with accredited financial institutions and, consequently, we do not believe we are subject to unusual credit risk beyond the normal credit risk associated with ordinary commercial banking relationships.
Oxford Loan Facility
In March 2021, we entered into a Loan and Security Agreement (“Oxford LSA”) with Oxford, pursuant to which we may borrow up to $30.0 million, issuable in two separate tranches of $20.0 million (“Term A Loan”) and $10.0 million (“Term B Loan”), collectively referred to as the Oxford Loans. The Term A Loan became available at the effective date of the Oxford LSA and $12.5 million of the proceeds were used to pay off the previously outstanding Silicon Valley Bank term loans. The remaining net proceeds from the Term A Loan of $7.4 million, after taking into effect specified issuance and legal fees designated within the distribution letter, were distributed in March 2021. The Term A Loan had an interest-only period that commenced upon the borrowing with interest due and payable upon the first day of each month. The interest-only period initially was planned to end May 1, 2023, provided that upon the funding of the Term B Loan the end date would be extended to May 1, 2024.
On February 22, 2022, we entered into an amendment to the Oxford LSA whereby the interest only period for the Term A Loans will end on March 1, 2024, instead of May 1, 2023. In connection with the amendment, the maturity of the Term A Loans was extended from March 18, 2026 to February 1, 2027. The principal payments due under the Oxford Loans, and the related accrued final payment, have been classified as current liabilities as of December 31, 2022 and March 31, 2023, due to our assessment that the material adverse change clause under the Oxford Loans is not within our control. We have not been notified of an event of default by the lender as of the date of this report.
The Term B Loan would have become available upon achievement of certain clinical development milestones, and remain available until the earlier of (i) June 30, 2023, (ii) forty-five days after the occurrence of such clinical development milestone, and (iii) the occurrence of an event of default. As a result of the discontinuation of one of the cohorts in our KICKSTART trial, which was previously announced in January 2023, we do not expect to achieve the clinical development milestones by June 30, 2023 and therefore do not expect to have access to the additional $10.0 million under the Term B Loan.
We are required to make a final payment equal to 5.5% of each funded tranche at maturity, which has been recorded as a debt discount and is being amortized over the term of the debt arrangements. In connection with the Oxford LSA, we issued warrants to purchase a total of 37,575 shares of Series C Preferred Stock at an exercise price of $5.33 per share. The warrants were automatically cashless exercised on August 25, 2021, in connection with the completion of the Business Combination, for 17,575 shares of common stock.
Equity Purchase Agreement with Lincoln Park
On January 24, 2022, we entered into the Purchase Agreement with Lincoln Park which provides for the sale to Lincoln Park up to $50.0 million of shares of our common stock over the thirty-six (36) month term of the Purchase Agreement, subject to certain conditions. In connection with the Purchase Agreement, Lincoln Park made an initial purchase of $3.0 million of shares of common stock, which equated to 557,610 shares of common stock, and we issued 142,939 shares of common stock to Lincoln Park as a commitment fee in connection with entering into the Purchase Agreement. As of March 31, 2023, a total of 30,000 shares of common stock have been sold in addition to the upfront amount, with such shares sold during the three months ended June 30, 2022. As of the date of this report, we were unable to sell additional shares under the Purchase Agreement because our shares are trading at less than $1.00 per share, which is the minimum price that we can sell shares to Lincoln Park. No assurance can be given that we will sell any additional shares of common stock under the Purchase Agreement, or, if we do, as to the price or amount of shares of common stock that we sell or the dates when such sales will take place. See Note 9 to our consolidated financial statements contained elsewhere in this Form 10-Q for information concerning the Purchase Agreement.
At-the-Market Offering Program with Cantor
In September 2022, we entered into the Sales Agreement with Cantor, under which we may, from time to time, sell shares of our common stock having an aggregate offering price of up to $15.0 million (the "ATM Offering Program"). Sales of the shares of common stock will be made at prevailing market prices at the time of sale, or as otherwise agreed with Cantor. We will pay a commission to Cantor of 3.0% of the gross proceeds of any shares of common stock sold under the Sales Agreement. During the three months ended March 31, 2023, we sold an aggregate of 410,836 shares of common stock at a weighted-average price of $0.56 per share for gross proceeds of approximately $0.2 million under the ATM Offering Program. We incurred offering costs in connection
25
with the ATM Offering Program, including commissions, of approximately $0.1 million during the three months ended March 31, 2023.
In addition, under current SEC regulations, as of the filing of this report, our public float is less than $75 million, and under SEC regulations for so long as our public float remains less than $75 million, the amount we can raise through primary public offerings of securities in any twelve-month period using shelf registration statements is limited to an aggregate of one-third of our public float, which is referred to as the baby shelf rules. As of April 30, 2023, our public float was approximately $19.2 million, based on 34,520,253 shares of outstanding common stock held by non-affiliates and at a price of $0.5550 per share, the closing price of our common stock on March 6, 2023 which is the highest reported sale price of our common stock on the Nasdaq Capital Market within 60 days of April 30, 2023. As a result of our public float being below $75 million, we will be limited by the baby shelf rules until such time as our public float exceeds $75 million, which means we only have the capacity to sell shares up to one-third of our public float under shelf registration statements in any twelve-month period. We will remain constrained by the baby shelf rules under our Form S-3 shelf registration statement until such time as our public float exceeds $75 million, at which time, the number of securities we may sell under a Form S-3 registration statement will no longer be limited by the baby shelf rules.
Funding Requirements
As of March 31, 2023, we had $19.0 million in cash and cash equivalents and short-term investments, which we estimate is sufficient to fund operations into the first quarter of 2024. However, we have prepared cash flow forecasts which indicate that based on our expected operating cash flows, without taking into account future projected cash inflows, there is substantial doubt about our ability to continue as a going concern within twelve months after the date that the financial statements for the three months ended March 31, 2023, are issued. We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we expect. Furthermore, our operating plans may change and we may need additional funds sooner than planned. Additionally, the process of testing product candidates in clinical trials is costly, and the timing of progress in these trials is uncertain. Our future capital requirements are difficult to forecast and will depend on many factors, including but not limited to:
•the type, number, scope, progress, expansions, results of and timing of clinical trials and preclinical studies of our product candidates which we are pursuing or may choose to pursue in the future;
•the costs, timing and outcome of regulatory review of our product candidates;
•the costs of obtaining, maintaining and enforcing our patents and other intellectual property rights;
•the costs and timing of manufacturing for our product candidates, including commercial manufacturing if any product candidate is approved;
•our efforts to enhance operational systems and hire additional personnel to satisfy our obligations as a public company, including enhanced internal controls over financial reporting;
•the costs associated with hiring additional personnel and consultants as our clinical and preclinical activities increase;
•the costs and timing of establishing or securing sales and marketing capabilities if any product candidate is approved;
•our ability to achieve sufficient market acceptance, coverage and adequate reimbursement from third-party payors and adequate market share and revenue for any approved products;
•any delays and cost increases that result from the COVID-19 pandemic or future epidemic diseases;
•the terms and timing of establishing and maintaining additional collaborations, licenses and other similar arrangements; and
•the costs associated with any products or technologies that we may in-license or acquire.
We have no other committed sources of capital, other than potential future sales under the Purchase Agreement with Lincoln Park and the ATM Offering Program with Cantor. Until we can generate a sufficient amount of product revenue to finance our cash requirements, if ever, we expect to finance our future cash needs primarily through equity offerings, debt financings or other capital sources, including potential additional collaborations, licenses and other similar arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be or could be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. 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 other collaborations 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,
26
reduce or terminate our research and development programs or other operations, or grant rights to develop and market product candidates to third parties that we would otherwise prefer to develop and market ourselves.
Public Warrants and Private Placement Warrants
LWAC issued public warrants and private placement warrants (collectively, the "Warrants") in its initial public offering in January 2021. The Warrants became exercisable beginning on January 12, 2022, which was 12 months from the closing of LWAC's initial public offering. Warrants may only be exercised for a whole number of shares. No fractional shares will be issued upon exercise of the warrants. Each whole warrant entitles the holder to purchase one share of common stock at an exercise price of $11.50 per share.
We will use commercially reasonable efforts to maintain the effectiveness of our registration statement and a current prospectus relating to those common shares issuable upon exercise of the warrants until the warrants expire or are redeemed, as specified in the Warrant Agreement, dated January 7, 2021, between the Company and Continental Stock Transfer & Trust Company (the "Warrant Agreement"). If the common stock at the time of any exercise of a warrant is not listed on a national securities exchange, we may, at our option, require holders of the warrants who exercise their warrants to do so on a “cashless basis.” We are not required to file or maintain in effect a registration statement. In no event will the Company be required to net cash settle any warrant.
As the Warrants are now exercisable, we may redeem the outstanding warrants in whole and not in part at a price of $0.01 per warrant upon a minimum of 30 days’ prior written notice of redemption, and, if and only if the last sale price of our common stock equals or exceeds $18.00 per share for any 20 trading days within a 30-trading day period ending three business days before the Company sends the notice of redemption to the Warrant holders.
The private placement warrants are identical to the public warrants except that, so long as they are held by the Locust Walk Sponsor, LLC (the "Sponsor") or its permitted transferees: (i) they will not be redeemable by the Company; (ii) they may be exercised by the holders on a cashless basis; and (iii) they are subject to registration rights.
The Warrants will expire on August 25, 2026, which is five years after the completion of the Business Combination, or earlier upon redemption or liquidation.
Cash Flows
The following table sets forth a summary of the net cash flow activity for each of the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
Net cash provided by (used in): |
|
|
|
|
|
|
Operating activities |
|
$ |
(7,637 |
) |
|
$ |
(6,497 |
) |
Investing activities |
|
|
9,027 |
|
|
|
(28,274 |
) |
Financing activities |
|
|
212 |
|
|
|
2,733 |
|
Net increase (decrease) in cash and cash equivalents |
|
$ |
1,602 |
|
|
$ |
(32,038 |
) |
Operating Activities
During the three months ended March 31, 2023, net cash used in operating activities was $7.6 million, which resulted from a net loss of $10.0 million adjusted for changes in operating assets and liabilities and non-cash charges. Non-cash charges and other adjustments included $1.2 million in stock-based compensation, $0.1 million in accretion of discount and amortization of premium on investments, and $0.1 million in non-cash interest expense. Changes in operating assets and liabilities included a $2.2 million increase in accounts payable due to timing of invoices paid, a $0.9 million decrease in accrued expenses due to a decrease in accrued audit fees and decrease in accrued bonus, and a $0.1 million increase in prepaid expenses and other assets related to an increase in prepaid research and development balance offset by the amortization of prepaid public company insurance policies.
During the three months ended March 31, 2022, net cash used in operating activities was $6.5 million, which resulted from net income of $3.1 million adjusted for changes in operating assets and liabilities, non-cash charges and other adjustments. Non-cash charges and other adjustments included $10.8 million from a gain recorded from the change in fair value of the earn-out liability, $1.1 million in stock-based compensation, $1.1 million in other expense recorded in connection with the Purchase Agreement with Lincoln Park, $0.4 million from a gain recorded from change in fair value of liability-classified warrants and $0.1 million in non-cash interest expense. Changes in operating assets and liabilities included a $1.2 million decrease in accrued expenses primarily related to payment of bonuses from year-end and a $0.6 million decrease in prepaid expenses and other assets and other non-current assets related to the expensing of prepaid public company insurance policies.
27
Investing Activities
During the three months ended March 31, 2023, net cash provided by investing activities was $9.0 million as a result of the maturities of short-term investments, partially offset by purchases during the period.
During the three months ended March 31, 2022, net cash used in investing activities was $28.3 million as a result of short-term investment purchases.
Financing Activities
During the three months ended March 31, 2023, net cash provided by financing activities was $0.2 million, which was the result of net proceeds from the issuance of common stock under the ATM Offering Program during the period.
During the three months ended March 31, 2022, net cash provided by financing activities was $2.7 million, which was primarily the result of net proceeds from the issuance of common stock to Lincoln Park under the Purchase Agreement during the period.
Critical Accounting Policies and Estimates
There have been no material changes to our critical accounting policies and estimates during the three months ended March 31, 2023 as compared to those disclosed in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates," in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 8, 2023.
Recent Accounting Pronouncements
See Note 2 to our financial statements contained elsewhere in this Form 10-Q for information concerning recent accounting pronouncements.