Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations and the unaudited interim condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q should be read in conjunction with the financial statements and related notes thereto as of and for the year ended December 31, 2023 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in the Prospectus dated June 27, 2024, filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended (Securities Act), with the Securities and Exchange Commission (SEC) on June 28, 2024 (Prospectus). This discussion and analysis and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements based upon current beliefs, plans and expectations related to future events and our future financial performance that involve risks, uncertainties and assumptions, such as statements regarding our intentions, plans, objectives and expectations for our business. Our actual results and the timing of selected events could differ materially from those described in or implied by these forward-looking statements as a result of several factors, including those set forth under “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q. See also the section titled “Special Note Regarding Forward-Looking Statements.”
Overview
Our mission is to significantly improve the lives of patients by replacing broad immunosuppression with targeted therapies. Our name, Alumis, captures our mission to enlighten immunology, and is inspired by the words “allumer”—French for illuminate—and “immunis”—Latin for the immune system.
We are a clinical stage biopharmaceutical company with an initial focus on developing our two Tyrosine Kinase 2 (TYK2) inhibitors: ESK-001, a second-generation inhibitor that we are developing to maximize target inhibition and optimize tolerability, and A-005, a central nervous system (CNS) penetrant molecule. ESK-001 has demonstrated significant therapeutic effect in our Phase 2 program in patients with PsO, which we define as moderate-to-severe plaque psoriasis (PsO), and is currently being evaluated in an additional Phase 2 clinical trial in patients with systemic lupus erythematosus (SLE), for which we expect to report results in 2026. With the favorable results in our Phase 2 clinical trial in PsO, we intend to initiate multiple Phase 3 clinical trials of ESK-001 in the second half of 2024 in this indication, and announced in July 2024, that patient dosing has commenced in the ONWARD Phase 3 clinical program. TYK2 genetic mutations are associated with a strong protective effect in multiple sclerosis, motivating us to develop our second product candidate, A-005, as a CNS-penetrant, allosteric TYK2 inhibitor for neuroinflammatory and neurodegenerative diseases. In April 2024, we initiated our Phase 1 program of A-005 in healthy volunteers and expect to report initial results by the end of 2024.
Alumis was incubated by Foresite Labs and incorporated on January 29, 2021, as a Delaware corporation under the name FL2021-001, Inc. FL2021-001, Inc.’s name was changed to Esker Therapeutics, Inc. in March 2021 and to Alumis Inc. in January 2022.
Since our inception, we have devoted substantially all of our efforts to organizing our company, hiring personnel, business planning, acquiring and developing our product candidates, performing research and development, conducting preclinical studies and clinical trials, establishing and protecting our intellectual property portfolio, raising capital and providing general and administrative support for these activities. We do not have any products approved for sale and have not generated any revenue from product sales. We expect to continue to incur significant and increasing expenses and increasing substantial losses for the foreseeable future as we continue our development of and seek regulatory approvals for our product candidates and commercialize any approved products, seek to expand our product pipeline and invest in our organization. Our ability to achieve and sustain profitability will depend on our ability to successfully develop, obtain regulatory approval for and commercialize our product candidates. There can be no assurance that we will ever earn revenue or achieve profitability, or if achieved, that the revenue or profitability will be sustained on a continuing basis.
To date, we have primarily funded our operations with proceeds from sales of shares of our common stock and redeemable convertible preferred stock and the issuance of convertible promissory notes in private placements. In July 2024, we closed our initial public offering (IPO) and a Concurrent Private Placement (defined below) and received 233.2 million in net
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proceeds, after deducting underwriting discounts and commissions and offering expenses payable by the Company. As of June 30, 2024, we had $209.5 million in cash, cash equivalents and marketable securities.
We have incurred significant operating losses and negative cash flows since our inception. Our net loss for the three months ended June 30, 2024 and 2023 was $56.5 million and $36.3 million, respectively. Our net loss for the six months ended June 30, 2024 and 2023 was $106.4 million and $72.3 million, respectively. As of June 30, 2024, we had an accumulated deficit of $470.7 million. Substantially all of our net losses have resulted from costs incurred in connection with our research and development efforts, including acquisitions of in-process research and development assets, and, to a lesser extent, from general and administrative costs associated with our operations. Our net losses and operating losses may fluctuate from quarter to quarter and year to year depending primarily on the timing of acquisition of any new product candidates, the timing of our preclinical studies and clinical trials, our other research and development expenses, and the timing and amount of any milestone or royalty payments due under our existing or future license agreements. In addition, we have incurred and will continue to incur additional costs associated with operating as a public company, including significant legal, audit, accounting, regulatory and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, director and officer liability insurance costs, investor and public relations costs, and other expenses that we did not incur as a private company.
We anticipate that our expense will increase significantly in connection with our ongoing activities, particularly if and as we:
● continue to progress the development of our product candidates in multiple clinical trials in parallel;
● explore additional indications for our existing product candidates;
● hire additional clinical and scientific personnel;
● obtain, maintain, expand and protect our intellectual property rights;
● make royalty, milestone or other payments under our existing acquisition agreements and any future license or collaboration agreements;
● seek to identify, acquire or in-license new technologies or product candidates;
● seek regulatory and marketing approvals for any of our product candidates that successfully complete clinical trials, if any;
● procure manufacturing and supply chain capacity for our product candidates, including commercial manufacturing readiness and scale-up;
● experience any delays, challenges or other issues associated with the clinical development and regulatory approvals of our product candidates;
● add operational, legal, financial and management information systems and personnel to support our product development, clinical execution and planned future commercialization efforts, as well as to support our transition to a public company;
● establish a sales, marketing and distribution infrastructure to commercialize any product candidates for which we obtain marketing approval; and
● operate as a public company.
We do not have any products approved for sale and have not generated any revenue from product sales since our inception. We do not expect to generate revenue from any product candidates that we develop until we obtain regulatory approval
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for one or more of such product candidates and commercialize our products or enter into collaboration agreements with third parties. Because of the numerous risks and uncertainties associated with biopharmaceutical product development, we may never achieve or sustain profitability and, unless and until we are able to develop and commercialize our product candidates, we will need to continue to raise additional capital. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through public or private equity or debt financings, or potentially other capital sources, such as collaboration or licensing arrangements with third parties or other strategic transactions. There are no assurances that we will be successful in obtaining an adequate level of financing to support our business plans when needed on acceptable 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 and equity 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 collaboration or licensing arrangements with third parties or other strategic transactions, we may have to relinquish rights to our intellectual property, 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 capital as and when needed, or on attractive terms, we may have to significantly delay, reduce, or discontinue the development and commercialization of our product candidates or scale back or terminate our pursuit of new in-licenses and acquisitions.
We do not currently own or operate any manufacturing facility. We rely on contract manufacturing organizations (CMOs) to produce our product candidates in accordance with the U.S. Food and Drug Administration’s (the FDA) current Good Manufacturing Practices (cGMP) regulations for use in our clinical studies. We have entered into development and manufacturing agreements with various CMOs relating to process development, manufacturing of drug substance and drug product, and quality testing of our product candidates. We expect to rely on our CMOs in the future for the manufacturing of our product candidates in order to expedite readiness for future clinical trials. Most of these CMOs have demonstrated capability in preparation of materials for commercialization. Additionally, we may decide to build our own manufacturing facility in the future to provide us greater flexibility and control over our clinical or commercial manufacturing needs.
Given our stage of development, we do not yet have a marketing or sales organization or commercial infrastructure; however, we intend to build the necessary sales, marketing and commercialization capabilities and infrastructure over time as our product candidates advance through clinical development. We expect to spend a significant amount in commercial development and marketing costs prior to obtaining regulatory and marketing approval of one or more of our product candidates.
Initial Public Offering and Concurrent Private Placement
On June 28, 2024, our Registration Statement on Form S-1 for our IPO was declared effective and, on July 1, 2024, we completed our IPO, pursuant to which we issued and sold 13,125,000 shares of our common stock at $16.00 price per share to the public. Net proceeds from the IPO were approximately $193.2 million, after deducting underwriting discounts and commissions and other offering costs totaling approximately $16.8 million.
In connection with the IPO, an existing investor and a holder of more than 5% of our capital stock, purchased an additional 2,500,000 shares of our common stock at the IPO price per share for a total of $40.0 million in a private placement transaction (the “Concurrent Private Placement”). The closing of the Concurrent Private Placement was contingent on the closing of the IPO. The sale of such shares is not registered under the Securities Act, and as such, the shares may not be offered or sold absent registration or an applicable exemption from registration. The shares sold in connection with the Concurrent Private Placement are subject to existing resale registration rights and are subject to a 180-day lock-up agreement with the underwriters in the IPO. The Concurrent Private Placement closed on July 17, 2024.
Immediately prior to the closing of the IPO on July 1, 2024, all of the shares of our redeemable convertible preferred stock then outstanding converted into 28,855,656 shares of Class A common stock and 7,184,908 shares of Class B common stock at a 1-for-4.675 conversion ratio. All outstanding Class A common stock shares and all outstanding Class B common stock shares were redesignated immediately thereafter into the same number of shares of common stock and non-voting common stock, respectively.
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Macroeconomic Trends
Unfavorable conditions in the economy in the United States and abroad may negatively affect the growth of our business and our results of operations. For example, macroeconomic events, including, rising inflation, tensions in U.S.-China relations, the U.S. Federal Reserve raising interest rates, recent and potential future disruptions in access to bank deposits and lending commitments due to bank failures and the effects of the ongoing geopolitical conflicts in Ukraine and Israel and the surrounding areas, have led to economic uncertainty and volatility globally. The effect of macroeconomic conditions may not be fully reflected in our results of operations until future periods. Moreover, negative macroeconomic conditions could adversely impact our ability to obtain financing in the future on terms acceptable to us, or at all. In addition, the geopolitical instability and related sanctions could continue to have significant ramifications on global financial markets, including volatility in the U.S. and global financial markets. To date, the macroeconomic trends discussed above have not had a material adverse impact on our business, financial condition or results of operations. If, however, economic uncertainty increases or the global economy worsens, our business, financial condition and results of operations may be harmed.
Components of Results of Operations
Operating Expenses
Our operating expenses consist of (i) research and development expenses and (ii) general and administrative expenses.
Research and Development Expenses
Research and development expenses consist of external and internal costs primarily related to acquiring and developing our research pipeline and technologies and clinical development of our product candidates.
External costs include:
● costs associated with acquiring technology and intellectual property licenses that have no alternative future uses and costs incurred under in-license or assignment agreements, including milestone payments;
● expenses incurred in connection with the discovery and preclinical development of our pipeline programs;
● costs incurred in connection with the clinical development of our product candidates, including under agreements with clinical research organizations (CROs), CMOs and other third parties that conduct clinical trials and manufacture clinical supplies, product candidates and components on our behalf; and
● costs for third-party professional research and development consulting services.
Internal costs include:
● research and development personnel-related costs, including salaries, annual bonuses, benefits, travel and meals expenses and stock-based compensation expense; and
● allocated facilities and other overhead costs, including software licenses, computer supplies and accessories and other miscellaneous expenses.
We have acquired and may continue to acquire the rights to develop and commercialize new product candidates. Upfront and milestone payments are accrued for and expensed as in process research and development (IPRD) assets expense when the achievement of the milestone is probable up to the point of regulatory approval and, absent obtaining such approval, have no alternative future use. Milestone payments made after a product’s regulatory approval will be capitalized and amortized over the remaining useful life of the related product.
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We expense research and development costs as incurred. Costs of certain activities are recognized based on an evaluation of the progress to completion of specific tasks. However, payments made prior to the receipt of goods or services that will be used or rendered for future research and development activities are deferred and capitalized as research and development prepaid expenses on our consolidated balance sheets. The capitalized amounts are recognized as expense as the goods are delivered or services are performed. Since our inception and through June 30, 2024, our external research and development expenses were primarily related to the discovery and advancement of programs under our TYK2 platform, including our two most advanced product candidates, ESK-001 and A-005. We use internal resources primarily for managing our research, process development, manufacturing and clinical development activities. In particular, with respect to internal costs, we deploy our personnel across all of our research and development activities as our employees work across multiple programs, and therefore the costs cannot be allocated to a particular product candidate or research program. In 2023, we began tracking external costs by program.
We expect our research and development expenses to increase substantially for the foreseeable future as we advance our product candidates into and through clinical trials, pursue regulatory approval of our product candidates, build our operational and commercial capabilities for marketing our products, if approved, and expand our pipeline of product candidates. The process of conducting the necessary clinical research to obtain regulatory approval is time-consuming, expensive and uncertain. The actual probability of success for our product candidates may be affected by a variety of factors, including the safety and efficacy of our product candidates, clinical data, investment in our clinical programs, competition, manufacturability and commercial viability. It is possible that we may never receive regulatory approval for any of our product candidates. As a result of the uncertainties discussed above, we are unable to determine the duration and completion of costs of our research and development projects or if, when and to what extent we will generate revenue from the commercialization and sale of our product candidates, if approved by the FDA and other comparable foreign regulatory authorities.
Our future research and development costs may vary significantly based on factors such as:
● the timing and progress of our preclinical and clinical development activities;
● the number and scope of preclinical and clinical programs we decide to pursue;
● the costs and timing of manufacturing of our product candidates;
● the amount and timing of any milestone payment due under our existing asset acquisition agreements and any future license or collaboration agreements;
● the number of patients that participate in our clinical trials, and per participant clinical trial costs;
● the number and duration of clinical trials required for approval of our product candidates;
● the number of sites included in our clinical trials, and the locations of those sites;
● delays or difficulties in adding trial sites and enrolling participants;
● patient drop-out or discontinuation rates;
● additional safety monitoring if requested by regulatory authorities;
● the phase of development of our product candidates;
● the timing, receipt and terms of any approvals from applicable regulatory authorities including the FDA and comparable foreign regulatory authorities;
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● maintaining a continued acceptable safety profile of our product candidates following approval, if any, of our product candidates;
● changes in the competitive outlook;
● the extent to which we establish additional strategic collaborations or other arrangements; and
● the impact of any business interruptions to our operations or to those of the third parties with whom we work.
A change in the outcome of any of these variables with respect to the development of any of our product candidates could significantly change the costs and timing associated with the development of that product candidate.
General and Administrative Expenses
Our general and administrative expenses consist primarily of personnel-related costs, legal and consulting services, including those relating to intellectual property and corporate matters, marketing expenses and allocated facilities and other overhead costs, including software licenses, computer supplies, insurance and other miscellaneous expenses. Personnel-related costs include salaries, annual bonuses, benefits, travel and meal expenses and stock-based compensation expense for our general and administrative personnel.
We expect that our general and administrative expenses will increase substantially in the future as a result of expanding our operations, including hiring personnel, preparing for potential commercialization of our product candidates and facility occupancy costs. We also expect an increase in costs associated with being a public company, including costs related to accounting, audit, legal, consulting fees, regulatory and tax-related services associated with maintaining compliance with applicable Nasdaq and SEC requirements, additional director and officer insurance costs, and investor and public relations costs.
Other Income (Expense)
Other income (expense) consists primarily of interest income, including amortization of premiums and accretion of discounts on marketable securities and change in fair value of derivative liability.
In May 2023 and in March 2024, in connection with our redeemable convertible preferred stock financings, we issued options to purchase additional shares of redeemable convertible preferred stock at a specified price, which were accounted for as derivative liabilities. Changes in fair value of these derivative liabilities are included in the other income (loss) in the interim condensed consolidated statement of operations and comprehensive loss for each reporting period until the derivatives were exercised or expired.
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Results of Operations and Comprehensive Loss
The following tables summarize our results of operations for the three and six months ended June 30, 2024 and 2023 (dollars in thousands):
Three Months Ended
June 30
Change
2024
2023
$
%
Operating expenses:
Research and development expenses
$
48,565
$
32,848
$
15,717
48
%
General and administrative expenses
7,575
4,775
2,800
59
%
Total operating expenses
56,140
37,623
18,517
49
%
Loss from operations
(56,140)
(37,623)
(18,517)
49
%
Other income (expense):
Interest income
1,977
913
1,064
117
%
Change in fair value of derivative liability
(2,311)
432
(2,743)
*
Other income (expense), net
(34)
(11)
(23)
209
%
Total other income (expense), net
(368)
1,334
(1,702)
(128)
%
Net loss
$
(56,508)
$
(36,289)
$
(20,219)
56
%
*
not meaningful
Six Months Ended
June 30
Change
2024
2023
$
%
Operating expenses:
Research and development expenses
$
90,526
$
65,283
$
25,243
39
%
General and administrative expenses
13,207
9,000
4,207
47
%
Total operating expenses
103,733
74,283
29,450
40
%
Loss from operations
(103,733)
(74,283)
(29,450)
40
%
Other income (expense):
Interest income
2,831
1,558
1,273
82
%
Change in fair value of derivative liability
(5,406)
432
(5,838)
*
Other income (expense), net
(49)
(23)
(26)
113
%
Total other income (expense), net
(2,624)
1,967
(4,591)
(233)
%
Net loss
$
(106,357)
$
(72,316)
$
(34,041)
47
%
*
not meaningful
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Research and Development Expenses
The following tables summarize our external and internal research and development expenses for the three and six months ended June 30, 2024 and 2023 (dollars in thousands):
Three Months Ended
Change
June 30, 2024
June 30, 2023
$
%
External costs:
CRO, CMO and clinical trials
26,849
16,937
9,912
59
%
Professional consulting services
4,765
3,063
1,702
56
%
Other research and development costs
3,597
2,695
902
33
%
Internal costs:
Personnel-related costs
10,134
7,835
2,299
29
%
Facilities and overhead costs
3,220
2,318
902
39
%
Total research and development expense
$
48,565
$
32,848
$
15,717
48
%
Six Months Ended
Change
June 30, 2024
June 30, 2023
$
%
External costs:
CRO, CMO and clinical trials
$
51,113
$
34,692
$
16,421
47
%
Professional consulting services
8,290
6,187
2,103
34
%
Other research and development costs
5,594
5,073
521
10
%
Internal costs:
Personnel-related costs
19,229
14,923
4,306
29
%
Facilities and overhead costs
6,300
4,408
1,892
43
%
Total research and development expense
$
90,526
$
65,283
$
25,243
39
%
Comparison of the three months ended June 30, 2024 and 2023
Research and development expenses increased by $15.7 million, to $48.6 million for the three months ended June 30, 2024, from $32.8 million for the three months ended June 30, 2023.
CRO, CMO and clinical trials expenses increased by $9.9 million for the three months ended June 30, 2024 compared to the three months ended June 30, 2023 primarily due to a $6.3 million increase in CMC expenses associated with manufacturing of clinical supplies to support our trials and a $3.6 million increase in CRO and clinical trial expenses due to the timing and progression of our clinical trials for ESK-001 and A-005.
Personnel-related costs increased by $2.3 million for the three months ended June 30, 2024 compared to the three months ended June 30, 2023, primarily due to increased research and development headcount and an increase in stock-based compensation expense of $0.6 million as a result of additional stock options granted.
Facilities and allocated overhead costs increased by $0.9 million, primarily as a result of an increase in depreciation and facilities expenses allocated to the research and development activities.
Comparison of the six months ended June 30, 2024 and 2023
Research and development expenses increased by $25.2 million, to $90.5 million for the six months ended June 30, 2024, from $65.3 million for the six months ended June 30, 2023.
CRO, CMO and clinical trials expenses increased by $16.4 million for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 due to a $14.0 million increase in CMC expenses primarily associated with manufacturing of clinical supplies to support our trials and a $2.4 million increase in CRO and clinical trial expenses due to the timing and progression of our clinical trials for ESK-001 and A-005.
Personnel-related costs increased by $4.3 million for the six months ended June 30, 2024 compared to the six months ended June 30, 2023, primarily due to increased research and development headcount and an increase in stock-based compensation expense of $1.0 million as a result of additional stock options granted.
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Facilities and allocated overhead costs increased by $1.9 million primarily as a result of an increase in depreciation, IT, and facilities expenses allocated to the research and development activities.
External Costs by Program
The following table summarizes our external costs by program for the three and six months ended June 30, 2024 and 2023 (dollars in thousands):
Three Months Ended
Six Months Ended
June 30,
June 30,
June 30,
June 30,
2024
2023
2024
2023
ESK-001
$
27,982
$
18,154
$
52,653
$
36,901
A-005
4,342
931
7,370
1,212
Other programs and research and development activities
2,887
3,610
4,974
7,839
Total external research and development expense
$
35,211
$
22,695
$
64,997
$
45,952
General and Administrative Expenses
Comparison of the three months ended June 30, 2024 and 2023
General and administrative expenses increased by $2.8 million, to $7.6 million for the three months ended June 30, 2024, from $4.8 million for the three months ended June 30, 2023.
Personnel-related expenses increased by $1.3 million, to $3.9 million for the three months ended June 30, 2024, from $2.6 million for the three months ended June 30, 2023, primarily due to increased headcount and included a stock-based compensation expense of $0.6 million resulting from additional stock options granted.
Expenses related to professional consulting services increased by $1.1 million, to $2.8 million for the three months ended June 30, 2024, from $1.7 million for the three months ended June 30, 2023, primarily due to an increase in consulting, accounting, audit and recruiting services to support our growth and business development.
Comparison of the six months ended June 30, 2024 and 2023
General and administrative expenses increased by $4.2 million, to $13.2 million for the six months ended June 30, 2024, from $9.0 million for the six months ended June 30, 2023.
Personnel-related expenses increased by $2.3 million, to $7.4 million for the six months ended June 30, 2024, from $5.1 million for the six months ended June 30, 2023, primarily due to increased headcount and included an increase in stock-based compensation expense of $1.7 million resulting from additional stock options granted.
Expenses related to professional consulting services increased by $1.7 million, to $4.8 million for the six months ended June 30, 2024, from $3.1 million for the six months ended June 30, 2023, primarily due to an increase in consulting, accounting, audit and recruiting services to support our growth and business development.
Total Other Income (Expense), Net
Total other income (expense), net decreased by $1.7 million, to $0.4 million other expense, net for the three months ended June 30, 2024, from $1.3 million other income, net for the three months ended June 30, 2023. Total other income (expense), net decreased by $4.6 million, to $2.6 million other expense, net for the six months ended June 30, 2024, from $2.0 million other income, net for the six months ended June 30, 2023.
Interest income increased by $1.1 million, to $2.0 million for the three months ended June 30, 2024, from $0.9 million for the three months ended June 30, 2023, primarily as a result of higher investments balances.
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Interest income increased by $1.3 million, to $2.8 million for the six months ended June 30, 2024, from $1.6 million for the six months ended June 30, 2023, primarily as a result of higher investments balances.
We recognized a change in fair value of a derivative liability loss of $2.3 million and $5.4 million for the three and six months ended June 30, 2024, respectively, related to the derivative liability recognized in connection with our Series C redeemable convertible preferred stock financing entered into in March 2024. The derivative liability was re-measured at fair value and settled in May 2024, when we closed the second tranche of the Series C financing.
We recognized a change in fair value of a derivative liability gain of $0.4 million for each of the three and six months ended June 30, 2023 related to the derivative liability recognized in connection with our Series B-2 redeemable convertible preferred stock financing entered into in May 2023. The derivative liability was re-measured at fair value and settled in October 2023, when we closed the second tranche of the Series B-2 financing. See Note 3 to our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information.
Liquidity, Capital Resources and Capital Requirements
Sources of Liquidity
Since our inception, we have not generated any revenue from product sales and have incurred significant operating losses and negative cash flows from our operations. To date, we have primarily funded our operations with proceeds from sales of shares of our common stock and redeemable convertible preferred stock and the issuance of convertible promissory notes in private placements and , more recently, from our IPO and Concurrent Private Placement.
In May 2024, we closed the second tranche of our Series C redeemable convertible preferred stock financing and received net cash proceeds of approximately $129.3 million.
In July 2024, we closed our IPO and the Concurrent Private Placement and received net proceeds of approximately $193.2 million and $40.0 million, respectively.
We expect that our existing cash, cash equivalents and marketable securities of $209.5 million as of June 30, 2024, together with aggregate net proceeds of approximately $233.2 million from our IPO and the Concurrent Private Placement, will be sufficient to fund our operating expenses and capital expenditure requirements for at least the next 12 months from the issuance of this Quarterly Report on Form 10-Q. We have based this estimate on our current assumptions, which may prove to be wrong, and we may exhaust our available capital resources sooner than we expect.
Under our stock purchase agreement to acquire FronThera U.S. Holdings, Inc. and its wholly owned subsidiary, FronThera U.S. Pharmaceuticals LLC, we are obligated to pay contingent consideration of up to an aggregate of $120.0 million based on the achievement of specified clinical and approval milestones, for up to an aggregate of $70.0 million payable for clinical milestones, and for up to an aggregate of $50.0 million payable for approval milestones, all related to technology acquired under the agreement. We incurred and made a $37.0 million milestone payment in 2022 for the first administration of ESK-001 to a patient enrolled in a Phase 2 clinical trial of ESK-001, which was recorded as research and development expenses in the consolidated statement of operations and comprehensive loss for the year ended December 31, 2022. In July 2024, we met a milestone in connection with the first administration of ESK-001 to a patient enrolled in a Phase 3 clinical trial of ESK-001 and became obligated to pay $23.0 million, which we expect to pay in the third quarter of 2024. No other milestones were achieved or probable as of June 30, 2024.
Future Funding Requirements
Our primary uses of cash are to fund our operations, which consist primarily of research and development expenditures related to our programs and, to a lesser extent, general and administrative expenditures. We anticipate that we will continue to incur significant and increasing expenses for the foreseeable future as we continue to advance our product candidates, expand our corporate infrastructure, including the costs associated with being a public company, further our research and development initiatives for our product candidates, and incur costs associated with potential commercialization. We are subject to all of the risks typically related to the development of new drug candidates, and we may encounter unforeseen
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expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. We anticipate that we will need substantial additional funding in connection with our continuing operations.
We do not have any products approved for sale and have not generated any revenue from product sales since our inception. We do not expect to generate revenue from any product candidates that we develop until we obtain regulatory approval for one or more of such product candidates and commercialize our products or enter into collaboration agreements with third parties. Because of the numerous risks and uncertainties associated with biopharmaceutical product development, we may never achieve or sustain profitability and, unless and until we are able to develop and commercialize our product candidates, we will need to continue to raise additional capital. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through public or private equity or debt financings, or potentially other capital sources, such as collaboration or licensing arrangements with third parties or other strategic transactions. There are no assurances that we will be successful in obtaining an adequate level of financing to support our business plans when needed on acceptable 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 and equity 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 collaboration or licensing arrangements with third parties or other strategic transactions, we may have to relinquish rights to our intellectual property, 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 capital as and when needed, or on attractive terms, we may have to significantly delay, reduce, or discontinue the development and commercialization of our product candidates or scale back or terminate our pursuit of new in-licenses and acquisitions.
Because of the numerous risks and uncertainties associated with research, development and commercialization of our products, we are unable to estimate the exact amount of our operating capital requirements. Our future funding requirements will depend on many factors, including the following:
● the timing, scope, progress and results of our preclinical studies and clinical trials for our current and future product candidates;
● the number, scope and duration of clinical trials required for regulatory approval of our current and future product candidates;
● the outcome, timing and cost of seeking and obtaining regulatory approvals from the FDA and comparable foreign regulatory authorities for our product candidates;
● the cost of manufacturing clinical and commercial supplies as well as scale up of our current and future product candidates;
● the increase in the number of our employees and expansion of our physical facilities to support growth initiatives;
● our ability to establish new, strategic collaborations, licensing or other arrangements;
● the cost of filing and prosecuting our patent applications, and maintaining and enforcing our patents and other intellectual property rights;
● the extent to which we acquire or in-license other product candidates and technologies;
● the cost of defending intellectual property disputes, including patent infringement actions brought by third parties against our product candidates;
● the timing of when we pay our operating expenses;
● the effect of competing technological and market developments;
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● the costs and timing of future commercialization activities, including product manufacturing, marketing, sales and distribution, for any of our product candidates for which we receive marketing approval;
● the amount of revenue, if any, received from commercial sales of our product candidates, should any of our product candidates receive marketing approval;
● our implementation of various computerized informational systems and efforts to enhance operational systems;
● the costs associated with being a public company; and
● other factors, including economic uncertainty and geopolitical tensions, which may exacerbate the magnitude of the factors discussed above.
Cash Flows
The following table summarizes our cash flows for the six months ended June 30, 2024 and 2023 (in thousands):
Six Months Ended
June 30,
2024
2023
Net cash used in operating activities
$
(96,548)
$
(63,002)
Net cash (used in) provided by investing activities
(51,551)
57,040
Net cash provided by financing activities
257,211
59,911
Net increase in cash, cash equivalents and restricted cash
$
109,112
$
53,949
Operating Activities
Net cash used in operating activities was $96.5 million and $63.0 million for the six months ended June 30, 2024 and 2023, respectively.
Net cash used in operating activities for the six months ended June 30, 2024 was due to our net loss for the period of $106.4 million and changes in operating assets and liabilities of $2.4 million, partially offset by non-cash items totaling $12.2 million. Non-cash items included $5.8 million related to stock-based compensation expense, $5.4 million related to the change in fair value of the derivative liability and $1.5 million related to depreciation and amortization, partially offset by net accretion of discounts on marketable securities of $0.5 million. The changes in operating assets and liabilities primarily include an increase of $10.5 million in research and development prepaid expenses, a decrease of $1.9 million in other accrued expenses and current liabilities, and a decrease of $1.0 million in operating lease liabilities, partially offset by an increase of $7.8 million in accounts payable and an increase of $3.6 million in research and development accrued expenses.
Net cash used in operating activities for the six months ended June 30, 2023 was primarily due to our net loss for the period of $72.3 million, partially offset by changes in operating assets and liabilities of $4.7 million and non-cash items of $4.6 million. Non-cash items primarily include $3.7 million related to stock-based compensation expense and $1.5 million related to non-cash lease expense. The changes in operating assets and liabilities primarily include an increase of $2.3 million in research and development accrued expenses, a decrease of $2.1 million in research and development prepaid expenses and an increase of $0.7 million in accounts payable.
Investing Activities
Net cash used in investing activities for the six months ended June 30, 2024 of $51.6 million was related to purchases of marketable securities of $59.0 million and purchases of property and equipment of $0.6 million, partially offset by proceeds from maturities of marketable securities of $8.0 million.
Net cash provided by investing activities for the six months ended June 30, 2023 was related to proceeds from maturities of marketable securities of $66.5 million, partially offset by purchases of marketable securities of $8.3 million and purchases of property and equipment of $1.2 million.
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Financing Activities
Net cash provided by financing activities for the six months ended June 30, 2024 of $257.2 million was related to net proceeds of $258.5 million from the issuance of our Series C redeemable convertible preferred stock and related derivative liability, net of issuance costs, and proceeds from issuance of common stock upon exercise of stock options of $0.5 million, partially offset by payments of deferred offering costs of $1.8 million.
Net cash provided by financing activities for the six months ended June 30, 2023 of $59.9 million was primarily related to net proceeds from the issuance of our Series B-2 and Series B-2A redeemable convertible preferred stock and related derivative liability, net of issuance costs.
Contractual Obligations and Commitments
We enter into contracts in the normal course of business with suppliers, CROs, CMOs and clinical trial sites. These agreements provide for termination at the request of either party generally with less than one-year notice and are therefore cancellable contracts. We do not currently expect any of these agreements to be terminated and did not have any non-cancelable obligations under these agreements as June 30, 2024.
On March 5, 2021, we entered into a stock purchase agreement to acquire FronThera U.S. Holdings, Inc. and its wholly owned subsidiary, FronThera U.S. Pharmaceuticals LLC. The transaction was accounted for as an asset acquisition. Under the agreement, we are obligated to pay contingent consideration of up to an aggregate of $120.0 million based on the achievement of specified clinical and approval milestones, for up to an aggregate of $70.0 million payable for clinical milestones, and for up to an aggregate of $50.0 million payable for approval milestones, all related to technology acquired under the agreement. We incurred and paid a milestone of $37.0 million during the year ended December 31, 2022. In July 2024, we met and became obligated to make a $23.0 million milestone payment in the third quarter of 2024 in connection with the first administration of ESK-001 to a patient enrolled in a Phase 3 clinical trial of ESK-001. No other milestones were reached or probable as of June 30, 2024.
Leases
We have operating lease arrangements for office and laboratory space in South San Francisco, California. As of June 30, 2024, we had total lease payment obligations under non-cancelable leases of $31.6 million, including $2.6 million payable through December 31, 2024. See Note 7 to our unaudited condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Off-Balance Sheet Arrangements
During the periods presented, we did not have, nor do we currently have, any off-balance sheet arrangements as defined in the rules and regulations of the SEC.
Recently Issued Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position, results of operations or cash flows is disclosed in Note 2 to our unaudited condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported expenses during the reporting period. Our critical accounting policies are described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Significant Judgments and Estimates” in the Prospectus. If actual results or events differ materially from the estimates and assumptions used by us in applying these policies, our reported financial condition and results of operations could be materially affected. There have been no significant changes to our critical accounting policies from those described in the Prospectus.
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Emerging Growth Company and Smaller Reporting Company Status
We are an “emerging growth company” as defined in the JOBS Act. Under the JOBS Act, an emerging growth company can take advantage of the extended transition period for complying with new or revised accounting standards and delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of this exemption from complying with new or revised accounting standards and, therefore, will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
We are in the process of evaluating the benefits of relying on other exemptions and reduced reporting requirements under the JOBS Act. Subject to certain conditions, as an emerging growth company, we may rely on certain of these exemptions, including without limitation exemptions to the requirements for (i) providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and (ii) complying with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis. We will remain an emerging growth company until the earlier to occur of (a) the last day of the fiscal year (A) following the fifth anniversary of the completion of our IPO, (B) in which we have total annual gross revenues of at least $1.235 billion or (C) in which we are deemed to be a “large accelerated filer” under the rules of the SEC, which means the market value of our common stock and non- voting common stock that is held by non-affiliates exceeds $700.0 million as of the prior June 30th, or (b) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.
We are also a “smaller reporting company,” meaning that the market value of our common stock and non-voting common stock held by non-affiliates plus the proposed aggregate amount of gross proceeds to us as a result of this offering is less than $700.0 million and our annual revenue is less than $100.0 million during the most recently completed fiscal year. We may continue to be a smaller reporting company after our IPO if either (i) the market value of our common stock and non-voting common stock held by non-affiliates is less than $250.0 million or (ii) our annual revenue is less than $100.0 million during the most recently completed fiscal year and the market value of our common stock and non-voting common stock held by non-affiliates is less than $700.0 million. If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.