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Item 2. Management’s Discussion and Analysis

2024-08-13 compared with 2024-05-02 · 88 added, 44 removed, 182 unchanged (42% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q (Quarterly Report), our audited consolidated financial statements and accompanying notes thereto for the fiscal year ended December 31, 2023 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, which are contained in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission (SEC), on March 14, 2024 (2023 Annual Report).

The following discussion and analysis should be read in conjunction with our unaudited interim condensed consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q (Quarterly Report), our audited consolidated financial statements and accompanying notes thereto for the fiscal year ended December 31, 2023 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, which are contained in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission (SEC), on March 14, 2024 (2023 Annual Report).

This Quarterly Report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act).

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Efzofitimod was safe and well-tolerated at all doses administered with no serious drug-related adverse events or signal of immunogenicity.

Additionally, the study demonstrated consistent dose response for efzofitimod on key efficacy endpoints and improvements compared to placebo, including measures of steroid reduction, lung function, pulmonary sarcoidosis symptom measures

and inflammatory biomarkers.

These data were subsequently presented at the American Thoracic Society (ATS) International Conference and published in the peer-reviewed journal CHEST during 2022.

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The EFZO-FIT study is a 52-week study consisting of three parallel cohorts randomized equally to either 3.0 mg/kg or 5.0 mg/kg of efzofitimod or placebo dosed intravenously once a month for a total of 12 doses.

The study is currently enrolling and intends to enroll up to 264 subjects with pulmonary sarcoidosis at multiple centers in the United States, Europe, Brazil, and Japan.

We expected the study to enroll up to 264 subjects with pulmonary sarcoidosis at multiple centers in the United States, Europe, Brazil, and Japan.

The study design incorporates a forced steroid taper.

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Secondary endpoints include measures of lung function assessed by forced vital capacity (FVC) and health-related quality of life assessments and questionnaires (KSQ lung score).

In September 2022, we dosed the first patient in this study.

Additionally, during 2023, we had a data and safety monitoring board (DSMB) review of our EFZO-FIT study.

The DSMB concluded that the study could continue unmodified.

We expect to complete enrollment in the study in the second quarter of 2024.

In September 2022, we dosed the first patient in the study.

During 2023 and 2024, we have had data and safety monitoring board (DSMB) reviews of our EFZO-FIT study.

The DSMB reviews concluded that the study could continue unmodified.

In July 2024, we completed enrollment of 268 patients, exceeding target enrollment.

Topline data from the study are anticipated in the third quarter of 2025.

In February 2024, we announced an Individual Patient Expanded Access Program (Individual Patient EAP).

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Secondary endpoints include certain measures regarding safety and tolerability.

The study was initiated in the third quarter of 2023, and in October 2023, we dosed the first patient in this study.

In July 2024, we amended the study to add an open label extension (OLE) to patients.

Patients who complete the study and wish to receive ongoing treatment with efzofitimod are eligible to participate in the 24-week OLE.

Based on current enrollment projections, we expect to report interim data from the study in the second quarter of 2025.

In January 2020, we entered into a collaboration and license agreement (Kyorin Agreement) with Kyorin Pharmaceutical Co., Ltd.

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We have incurred losses and negative cash flows from operations since our inception.

As of March 31, 2024, we had an accumulated deficit of $483.5 million and we expect to continue to incur net losses for the foreseeable future.

As of March 31, 2024, we had cash, cash equivalents, restricted cash and available-for-sale investments of $87.7 million.

As of June 30, 2024, we had an accumulated deficit of $499.8 million and we expect to continue to incur net losses for the foreseeable future.

As of June 30, 2024, we had cash, cash equivalents, restricted cash and available-for-sale investments of $81.4 million.

We believe that our current cash, cash equivalents, restricted cash and available-for-sale investments will be sufficient to meet our material cash requirements from known contractual and other obligations for a period of at least one year from the date of this Quarterly Report.

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Sources of Cash

From our inception through March 31, 2024, we have financed our operations primarily through the sale of equity securities and convertible debt, venture debt, term loans and through license and collaboration agreement revenues.

From our inception through June 30, 2024, we have financed our operations primarily through the sale of equity securities and convertible debt, venture debt, term loans and through license and collaboration agreement revenues.

Public Offerings

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During the year ended December 31, 2023, we sold an aggregate of 10,530,795 shares of common stock at a weighted-average price of $1.82 per share for net proceeds of approximately $18.4 million under the Jefferies ATM Offering Program.

During the three months ended March 31, 2024, we sold an aggregate of 5,045,518 shares of common stock at a weighted-average price of $1.79 per share for net proceeds of approximately $8.6 million under the Jefferies ATM Offering Program of which $0.8 million was included in other receivables as of March 31, 2024.

During the six months ended June 30, 2024, we sold an aggregate of 12,448,319 shares of common stock at a weighted-average price of $1.77 per share for net proceeds of approximately $21.3 million under the Jefferies ATM Offering Program.

Kyorin Agreement Milestone Payments

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The following table sets forth a summary of the net cash flow activity for each of the periods indicated (in thousands):

Six Months Ended June 30,

Net cash provided by (used in):

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Operating activities.

Net cash used in operating activities for the three months ended March 31, 2024 and 2023 was $22.4 million and $0.6 million, respectively.

The net cash used during the three months ended March 31, 2024 was primarily due to increased costs for the on-going clinical trials for efzofitimod and upfront payments for manufacturing efforts and preparation toward a possible biologics license application (BLA) for efzofitimod.

The net cash used during the three months ended March 31, 2023 was lower primarily due to the receipt of a $10.0 million milestone from the Kyorin Agreement and lower clinical trial costs for the EFZO-FIT and EFZO-CONNECT studies.

Net cash used in operating activities for the six months ended June 30, 2024 and 2023 was $42.8 million and $12.6 million, respectively.

The net cash used during the six months ended June 30, 2024 was primarily due to increased costs for the EFZO-FIT and EFZO-CONNECT studies and upfront payments for manufacturing efforts toward and preparation for a possible biologics license application (BLA) for efzofitimod.

The net cash used during the six months ended June 30, 2023 was lower primarily due to the receipt of a $10.0 million milestone from the Kyorin Agreement and lower clinical trial costs for the EFZO-FIT and EFZO-CONNECT studies.

Investing activities.

Net cash used in investing activities for the three months ended March 31, 2024 and 2023 was $1.4 million and $38.2 million, respectively.

The fluctuation in net cash used in investing activities resulted primarily from the timing differences in investment purchases, sales and maturities, and the fluctuation of our portfolio mix between cash equivalents and investment holdings.

The average term to maturity in our investment portfolio is less than two years.

Net cash provided by (used in) investing activities for the six months ended June 30, 2024 and 2023 was $5.4 million and $(42.3) million, respectively.

The fluctuation in net cash provided by or used in investing activities resulted primarily from the timing differences in investment purchases, sales and maturities, and the fluctuation of our portfolio mix between cash equivalents and investment holdings.

The average term to maturity in our investment portfolio is less than one year.

Financing activities.

Net cash provided by financing activities for the three months ended March 31, 2024 and 2023 was $8.5 million and $49.5 million, respectively.

Net cash provided by financing activities for the three months ended March 31, 2024 consisted of $8.6 million in net proceeds from the issuance of common stock through the Jefferies ATM Offering Program, net of offering costs of which $0.8 million was included in accounts receivable as of March 31, 2024.

Net cash provided by financing activities for the three months ended March 31, 2023 consisted primarily of $48.1 million in net proceeds from the underwritten follow-on public offering and $1.5 million in net proceeds from the issuance of common stock through the Jefferies ATM Offering Program, net of offering costs.

Net cash provided by financing activities for the six months ended June 30, 2024 and 2023 was $21.1 million and $57.5 million, respectively.

Net cash provided by financing activities for the six months ended June 30, 2024 consisted primarily of $21.3 million in net proceeds from the issuance of common stock through the Jefferies ATM Offering Program.

Net cash provided by financing activities for the six months ended June 30, 2023 consisted primarily of $48.1 million in net proceeds from the underwritten follow-on public offering and $9.5 million in net proceeds from the issuance of common stock through the Jefferies ATM Offering Program, net of offering costs.

Material Cash Requirements

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If we are unable to raise additional funds, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market our product candidates even if we would otherwise prefer to develop and market such product candidates ourselves.

As of March 31, 2024, our material cash requirements from known contractual and other obligations consisted primarily of (i) operating leases for our corporate headquarters and laboratory space, and (ii) our master financing lease agreement for various research and development and informational technology equipment.

As of June 30, 2024, our material cash requirements from known contractual and other obligations consisted primarily of (i) an operating lease for our corporate headquarters, and (ii) our master financing lease agreement for various research and development and informational technology equipment.

Corporate Headquarters Facility Lease

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Under the terms of the Lease, the base rent during the first 12 months of the Lease Term was $5.75 per square foot of rentable area per month, and the base rent following the first 12 months of the Lease Term is subject to certain upward adjustments of approximately 3.0% annually.

As of March 31, 2024, we received a $5.3 million allowance for tenant improvements, which represents the full allowance to which we were entitled under the Lease.

We provided a $0.7 million security deposit in the form of a letter of credit which is included in restricted cash as of March 31, 2024.

As of June 30, 2024, we received $5.3 million in allowance payments for tenant improvements, which represents the full allowance to which we were entitled under the Lease.

We provided a $0.7 million security deposit in the form of a letter of credit which is included in restricted cash as of June 30, 2024.

During the second quarter of 2023, additional common area amenities were completed by the Landlord which provided us with access to an estimated 1,500 additional rentable square feet.

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Financing Lease

In April 2022, we entered into a financing lease to lease various research and development and information technology equipment over a 48-month term.

Financing lease liabilities total $1.8 million as of March 31, 2024.

Additionally, as of March 31, 2024, we have $2.5 million in cash collateral for the financing lease, and this amount is included in restricted cash.

We did not have any off-balance sheet arrangements as of March 31, 2024.

In April 2022, we entered into a master financing lease to lease various research and development and information technology equipment over a 48-month term.

Financing lease liabilities totaled $1.7 million as of June 30, 2024.

Additionally, as of June 30, 2024, we have $2.2 million in cash collateral for the financing lease, and this amount is included in restricted cash.

We did not have any off-balance sheet arrangements as of June 30, 2024.

Financial Operations Overview

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was incorporated in the State of Delaware in September 2005.

The unaudited condensed consolidated financial statements in this Quarterly Report include our accounts and our 98% majority-owned subsidiary in Hong Kong, Pangu BioPharma, as of March 31, 2024.

The unaudited interim condensed consolidated financial statements in this Quarterly Report include our accounts and our 98% majority-owned subsidiary in Hong Kong, Pangu BioPharma, as of June 30, 2024.

All intercompany transactions and balances are eliminated in consolidation.

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• costs to acquire, develop and manufacture preclinical study and clinical trial materials with contracted development and manufacturing organizations (CDMOs);

• costs incurred under clinical trial agreements with CROs and investigative sites;

• costs incurred under clinical trial agreements with contract research organizations (CROs) and investigative sites;

• costs for laboratory supplies;

• allocated facilities, depreciation and other allocable expenses.

Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials.

Product candidates in later stages of clinical development, such as efzofitimod, generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials.

We primarily outsource our clinical trial administration to CROs, and we outsource our manufacturing of clinical trial materials to CDMOs.

These outsourced expenses are typically substantially higher than the expenses we incur on our other product candidates which are all currently in preclinical development.

As such, we separately track and report on the majority of our research and development expenses associated with the advancement of efzofitimod.

For our candidates in preclinical development, the nature of the research and development expenses incurred to advance these candidates is primarily internal personnel and laboratory supply expenses.

We do not fully track or allocate these internal expenses between preclinical product candidates because the expenses can often be shared between candidates.

We also incur other shared expenses to support our research and development efforts such as facilities expenses, and these expenses are not allocated to efzofitimod or our preclinical product candidates.

Additionally, non-cash research and development expenses such as depreciation and stock-based compensation are not tracked or allocated between product candidates and are shared among all product candidates.

We expect that the levels of our research and development expenses will continue to increase in future years and will consist primarily of costs related to our clinical development and manufacturing of efzofitimod for patients with pulmonary sarcoidosis and SSc-ILD, and other potential therapeutics based on tRNA synthetase biology.

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Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of financial condition and results of operations is based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.

The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the unaudited condensed consolidated financial statements, as well as the reported expenses during the reporting periods.

Our management’s discussion and analysis of financial condition and results of operations is based on our unaudited interim condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.

The preparation of these unaudited interim condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the unaudited interim condensed consolidated financial statements, as well as the reported expenses during the reporting periods.

We monitor and analyze these items for changes in facts and circumstances, and material changes in these estimates could occur in the future.

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Results of Operations

Comparison of the Three Months Ended March 31, 2024 and 2023

The following table summarizes our results of operations for the three months ended March 31, 2024 and 2023 (in thousands):

Three Months Ended March 31,

Comparison of the Three Months Ended June 30, 2024 and 2023

The following table summarizes our results of operations for the three months ended June 30, 2024 and 2023 (in thousands):

Three Months Ended June 30,

Research and development expenses:

Efzofitimod expenses

Preclinical development and other shared research and development expenses

Non-cash expenses (depreciation and stock-based compensation)

Total research and development expenses

General and administrative expenses:

Non-cash expenses (depreciation and stock-based compensation)

Other general and administrative expenses

Total general and administrative expenses

Other income (expense), net

Research and development expenses.

Research and development expenses were $14.0 million and $9.8 million for the three months ended June 30, 2024 and 2023, respectively.

The increase of $4.1 million was primarily attributable to an increase of $4.5 million in efzofitimod expenses, which was primarily due to the advancement of the EFZO-FIT study in patient enrollment activity as well as increased manufacturing efforts for preparation toward a possible BLA for efzofitimod.

Preclinical development and other shared research and development expenses decreased by $0.4 million, and this decrease was primarily attributable to reduced discovery costs for our preclinical product candidates.

Non-cash expenses were relatively consistent at $0.3 million in each period.

General and administrative expenses.

General and administrative expenses were $3.3 million and $3.7 million for the three months ended June 30, 2024 and 2023, respectively.

The decrease of $0.4 million was attributable to reduced facilities costs as we fully transitioned into our corporate headquarters facility in March 2023 as well as reduced costs of insurance.

Non-cash expenses were relatively consistent at $0.6 million and $0.5 million for the three months ended June 30, 2024 and 2023, respectively.

Other income, net.

Other income, net was $1.0 million and $1.2 million for the three months ended June 30, 2024 and 2023, respectively.

The change was primarily a result of lower cash balance as compared to the same period in the prior year.

Comparison of the Six Months Ended June 30, 2024 and 2023

The following table summarizes our results of operations for the six months ended June 30, 2024 and 2023 (in thousands):

Six Months Ended June 30,

License and collaboration agreement revenues

Research and development expenses:

Efzofitimod expenses

Preclinical development and other shared research and development expenses

Non-cash expenses (depreciation and stock-based compensation)

Total research and development expenses

General and administrative expenses:

Non-cash expenses (depreciation and stock-based compensation)

Other general and administrative expenses

Total general and administrative expenses

Other income (expense), net

License and collaboration agreement revenues.

Revenues of $0.2 million for the three months ended March 31, 2024 consisted of drug product material sold to Kyorin for the Japan portion of the EFZO-FIT study.

Revenues of $0.2 million for the six months ended June 30, 2024 consisted of drug product material sold to Kyorin for the Japan portion of the EFZO-FIT study.

There were no activities that triggered revenues during the same period in the prior year.

Research and development expenses.

Research and development expenses were $13.4 million and $9.4 million for the three months ended March 31, 2024 and 2023, respectively.

The increase of $4.0 million was due primarily to an increase of $3.7 million in clinical trial costs for the EFZO-FIT and EFZO-CONNECT studies and an increase of $0.8 million in manufacturing costs due to preparation toward a possible BLA for efzofitimod.

These increases were partially offset by a $0.4 million reduction in research and development costs.

Research and development expenses were $27.3 million and $19.2 million for the six months ended June 30, 2024 and 2023, respectively.

The increase of $8.1 million was due primarily to an increase of $9.1 million in efzofitimod expenses, which was primarily due to the advancement of the EFZO-FIT study in patient enrollment activity as well as increased manufacturing efforts for preparation toward a possible BLA for efzofitimod.

Preclinical development and other shared research and development expenses decreased by $1.1 million, and this decrease was primarily attributable to reduced discovery costs for our preclinical product candidates.

Non-cash expenses increased by $0.2 million primarily due to increased non-cash depreciation expense associated with tenant improvements to our corporate headquarters facility.

General and administrative expenses.

General and administrative expenses were consistent at $3.5 million and $3.4 million for each of the three months ended March 31, 2024 and 2023, respectively.

General and administrative expenses were $6.8 million and $7.1 million for each of the six months ended June 30, 2024 and 2023, respectively.

The decrease of $0.3 million was attributable to reduced facilities costs as we fully transitioned into our corporate headquarters facility in March 2023 as well as reduced costs of insurance.

Non-cash expenses increased by $0.1 million primarily due to increased non-cash stock-based compensation expenses.

Other income, net.

Other income, net was $1.1 million and $0.8 million for the three months ended March 31, 2024 and 2023, respectively.

The change was primarily a result of higher interest rates.

Other income, net was relatively consistent at $2.2 million and $2.1 million for the six months ended June 30, 2024 and 2023, respectively.

Recent Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis