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Item 7. Management’s Discussion and Analysis

2021-03-16 compared with 2020-03-30 · 95 added, 88 removed, 196 unchanged (48% of the section changed)

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Please also see the section entitled “Special Note Regarding Forward-Looking Statements.” We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

We are a clinical-stage biotechnology company focused on the discovery and development of engineered T cell therapies for B cell-mediated autoimmune diseases.

Our proprietary technology utilizes CAAR T cells that are designed to selectively bind and eliminate B cells that produce disease-causing autoantibodies, or pathogenic B cells, while sparing normal B cells.

Our lead CAAR T cell product candidate was designed based on or CAR T cell technology that has been successfully developed and is marketed for the treatment of B cell cancers.

We believe our technology, in combination with our proprietary Cabaletta Approach for selective B cell Ablation platform, called our CABA platform, has applicability across over two dozen B cell-mediated autoimmune diseases that we have identified, reviewed and prioritized.

In order to accelerate product development for our lead program and to access a proven cell therapy manufacturing platform, we have entered into a collaboration with the Trustees of the University of Pennsylvania, or Penn.

We are a clinical-stage biotechnology company focused on the discovery and development of engineered T cell therapies, and exploring their potential to provide a deep and durable, perhaps curative, treatment, for patients with B cell-mediated autoimmune diseases.

Our proprietary technology utilizes C himeric A uto A ntibody R eceptor, or CAAR, T cells that are designed to selectively bind and eliminate only specific B cells that produce disease-causing autoantibodies, or pathogenic B cells, while sparing normal B cells.

Our lead CAAR T cell product candidate was designed based on the clinically validated and commercially approved Chimeric Antigen Receptor, or CAR, T cell technology that is marketed for the treatment of B cell cancers.

By harnessing the power of targeted cell therapy, we believe our CAAR T product candidates have the potential to provide responses that may be a safer and more effective option than current treatments.

We believe our technology, in combination with our proprietary C abaletta A pproach for selective B cell A blation platform, called our CABA platform, has applicability across over two dozen B cell-mediated autoimmune diseases that we have identified, evaluated and prioritized.

In order to accelerate product development for our lead program and to access a proven cell therapy manufacturing platform, we have entered into a collaboration with the University of Pennsylvania, or Penn.

We hold multiple agreements with Penn to develop CAAR T cell therapies for the treatment of these diseases.

Our goal is to leverage our team’s expertise in autoimmunity and engineered T cell therapy and our collaboration with Penn to rapidly discover and develop our portfolio of CAAR T product candidates.

Our initial focus is on pemphigus vulgaris, or PV, which is an autoimmune blistering skin disease.

We submitted an IND to the FDA in August 2019.

Our IND was cleared in September 2019, and we plan to initiate our DesCAARTes TM Trial in 2020.

In January 2020, the FDA granted DSG3-CAART orphan drug designation for the treatment of PV.

We are also advancing additional product candidates currently in discovery-stage or preclinical development for the treatment of muscle-specific kinase myasthenia gravis, or MuSK MG, mucocutaneous PV, or mcPV, and Hemophilia A with FVIII alloantibodies.

Our initial focus is mucosal pemphigus vulgaris, or mPV, which is an autoimmune blistering disease.

We submitted an Investigational New Drug, or IND, application for our lead product candidate, DSG3-CAART, to the U.S.

Food and Drug Administration, or the FDA, in August 2019 and our IND was cleared in September 2019.

The FDA granted DSG3-CAART orphan drug designation for the treatment of PV in January 2020, and fast track designation for improving healing of mucosal blisters in patients with mucosal pemphigus vulgaris, or mPV, in May 2020.

Our lead product candidate, DSG3-CAART, designed to treat patients with mPV, is currently enrolling patients for a Phase 1 trial, or the DesCAARTes TM trial.

In December 2020, we announced that the first patient had been dosed in the DesCAARTes TM trial.

We expect to report the acute safety data from the first cohort of patients in the DesCAARTes TM trial in the first half of 2021, with additional topline data from any completed dose cohorts throughout the second half of 2021 .

Our lead preclinical product candidate is designed for the treatment of muscle-specific kinase myasthenia gravis, or MuSK MG, and is currently in IND enabling studies, with an IND submission expected in the second half of 2021.

We are also advancing additional product candidates currently in discovery-stage or preclinical development for the treatment of mucocutaneous PV, or mcPV, and Hemophilia A with Factor VIII, or FVIII, alloantibodies in addition to three undisclosed targets.

We were incorporated in April 2017.

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Our operations to date have been financed primarily by net proceeds of $86.4 million from the sale of convertible notes and convertible preferred stock and net proceeds of $71.0 million from the sale of common stock in our initial public offering, or IPO, in October 2019.

As of December 31, 2019, we had $136.2 million in cash and cash equivalents.

Amended and Restated License Agreement with the Trustees of the University of Pennsylvania and the Children’s Hospital of Philadelphia

In August 2018, we entered into a license agreement with Penn, which was amended and restated in July 2019 to include the Children’s Hospital of Philadelphia, or CHOP, collectively, the Institutions, and collectively with such amendment, the License Agreement, pursuant to which we obtained (a) a non-exclusive, non-sublicensable, worldwide research license to make, have made and use products in two subfields of use, (b) effective as of October 2018, an exclusive, worldwide, royalty-bearing license, with the right to sublicense, under certain of the Institutions’ intellectual property to make, use, sell, offer for sale and import products in the same two subfields of use, and (c) effective as of October 2018, a non-exclusive, worldwide, royalty-bearing license, with limited rights to sublicense, under certain of Penn’s know-how to make, have made, use, sell, offer for sale, import and have imported products in the same two subfields of use.

As of December 31, 2020, we had $108.7 million in cash and cash equivalents and investments.

Amended and Restated License Agreement with t he Trustees of the University of Pennsylvania and the Children’s Hospital of Philadelphia

In August 2018, we entered into a license agreement with Penn, which was amended and restated in July 2019 to include the Children’s Hospital of Philadelphia, or CHOP, collectively, the Institutions, and collectively with such amendment, as amended in May 2020, the License Agreement, pursuant to which we obtained (a) a non-exclusive, non-sublicensable, worldwide research license to make, have made and use products in two subfields of use, (b) effective as of October 2018, an exclusive, worldwide, royalty-bearing license, with the right to sublicense, under certain of the Institutions’ intellectual property to make, use, sell, offer for sale and import products in the same two subfields of use, and (c) effective as of October 2018, a non-exclusive, worldwide, royalty-bearing license, with limited rights to sublicense, under certain of Penn’s know-how to make, have made, use, sell, offer for sale, import and have imported products in the same two subfields of use.

Our rights are subject to the rights of the U.S.

government and certain rights retained by the Institutions.

Unless earlier terminated, the License Agreement will expire with respect to a product upon the later of (a) the expiration of the last to expire patent or patent application covering such product or (b) 10 years after the first commercial sale of such product.

We may terminate the License Agreement in its entirety or on a subfield-by-subfield basis at any time for convenience upon a certain number of days’ prior written notice.

Penn may terminate the License Agreement in its entirety or on a subfield-by-subfield basis for our uncured material breach, including for our failure to meet certain diligence obligations and milestone events.

We, however, may extend the achievement date of any milestone event for an additional period of time by making a payment in a certain amount, subject to certain limitations in the number of times each event may be extended.

Unless earlier terminated, the License Agreement expires on the expiration or abandonment or other termination of the last valid claim in Penn’s intellectual property licensed by us.

We may terminate the License Agreement at any time for convenience upon 60 days written notice.

In the event of an uncured, material breach, Penn may terminate the License Agreement upon 60 days written notice.

Sponsored Research Agreements.

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Payne and Milone.

Under the SRAs, we have

committed to funding a defined research plan for three years through April 2021.

We have estimated the three-year cost of the two SRAs to be $8.5 million, which satisfies the $2.0 million annual obligation under the License Agreement.

In May 2020, the Payne SRA was expanded to include CAAR design and optimization efforts in three additional B cell-mediated autoimmune diseases .

In August 2020, this agreement was further amended to extend the term of the original research plan.

Under the amended agreements, we are committed to funding a defined research plan through February 2023.

The total estimated cost of the agreements is $11.8 million, which satisfies the $2.0 million annual obligation under the License Agreement.

As of December 31, 2020, $7.1 million of cost has been incurred pursuant to these agreements.

Manufacturing agreements .

Under agreement with a manufacturer, we are progressing a staged plan for vector development and may incur up to $1,300 in committed spend.

In January 2021, we entered into a Development and Manufacturing Services Agreement (Wuxi Agreement) with WuXi Advanced Therapies, Inc.

(Wuxi) to serve as our cell processing manufacturing partner for the anticipated MuSK-CAART Phase 1 clinical trial.

We have the right to terminate the Wuxi Agreement for convenience or other reasons specified in the Wuxi Agreement upon prior written notice.

If we terminate the Wuxi Agreement, we will be obligated to pay an early termination fee of $1.5 million.

In February 2021, we entered into a research service agreement with CHOP for vector manufacturing, with a total cost of $0.7 million, expected to be incurred during 2021.

Other Purchase Commitments.

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Stock-based Compensation

We recognize compensation costs related to stock-based awards, including stock options and non-vested stock, based on the estimated fair value of the awards on the date of grant.

We estimate the grant date fair value, and the resulting stock-based compensation, using the Black-Scholes option-pricing model, or Black-Scholes.

date fair value of the stock-based awards is generally recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the respective awards.

We measure our stock-based awards granted to employees and non-employees and shares issued under our employee stock purchase plan based on the estimated fair values of the awards on the respective grant dates.

We use the Black-Scholes option-pricing model (Black-Scholes) to estimate the fair value of its stock-based awards and shares purchased under the employee stock purchase plan.

The Company recognizes compensation expense for time-based awards on a straight-line basis over the requisite service period, which is generally the vesting period of the award.

The Company accounts for forfeitures of stock option awards as they occur.

Black-Scholes requires the use of subjective assumptions to determine the fair value of stock-based awards.

These assumptions include:

Fair Value of Common Stock —Historically, for all periods prior to our initial public offering in October 2019, the fair value of the shares of common stock underlying our stock-based awards was estimated on each grant date by our board of directors.

In order to determine the fair value of our common stock underlying option grants, our board of directors considered, among other things, valuations of our common stock prepared by an unrelated third-party valuation firm in accordance with the guidance provided by the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation , or the Practice Aid.

Fair value of common stock —Prior to our IPO in October 2019, the fair value of our common stock underlying stock-based awards was estimated on each grant date by our board of directors.

In order to determine the fair value of our common stock underlying stock-based awards, our board of directors considered, among other things, a valuation of our common stock prepared by an unrelated third-party valuation firm in accordance with the guidance provided by the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation .

Expected term —The expected term represents the period that stock-based awards are expected to be outstanding.

The expected term for option grants is determined using the simplified method.

The simplified method deems the expected term to be the midpoint between the vesting date and the contractual life of the stock-based awards.

Expected Volatility— As a privately held company historically, the Company has limited trading history for its common stock and, as such, the expected volatility is estimated based on the average volatility for comparable publicly traded biotechnology companies over a period equal to the expected term of the stock option grants.

The expected term for option grants is determined using the simplified method , which is the midpoint between the vesting period and the contractual term of the option.

Expected volatility —As a privately held company prior to our IPO in October 2019, we have a limited trading history for our common stock and, as such, the expected volatility is estimated based on the average volatility for comparable publicly traded biotechnology companies over a period equal to the expected term of the stock-based awards.

The comparable companies were chosen based on their similar size, stage in the life cycle or area of specialty.

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Risk-free interest rate —The risk-free interest rate is based on the U.S.

Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of option.

Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of a stock-based award.

Expected dividend —We have never paid dividends on our common stock and have no plans to pay dividends on our common stock.

Therefore, we use an expected dividend yield of zero.

Therefore, we used an expected dividend yield of zero.

We will continue to use judgment in evaluating the assumptions utilized for our stock-based compensation expense calculations on a prospective basis.

In addition to the assumptions used in Black-Scholes, the amount of stock-based compensation expense we recognize in our financial statements includes stock option forfeitures as they occurred.

Determination of the Fair Value of Convertible Notes

We have elected the fair value option for the accounting for our convertible notes issued in 2018.

Fair value adjustments to the convertible notes are included in our other income and (expenses).

The fair value of the initial closing of our convertible notes in May 2018 was determined to be equal to the proceeds of $12.5 million on issuance.

The fair value of the convertible notes on conversion and of the milestone-based closing in October 2018 was determined to be equal to the value of our Series A-1 convertible preferred stock and Series A-2 convertible preferred stock into which the convertible notes were converted, which was determined to be $3.39 per share of Series A-1 convertible preferred stock and Series A-2 convertible preferred stock, using an OPM framework and utilized the back-solve method for inferring and allocating the equity value predicated on the concurrent sale of Series A convertible preferred stock.

This method was selected as we concluded that the sale of the Series A convertible preferred stock was an arm’s-length transaction.

Application of the OPM back-solve method involves making assumptions for the expected time to liquidity, volatility and risk-free rate and then solving for the value of equity such that value for the most recent financing equals the amount paid.

The OPM allocation of total equity value was determined with reference to a recent financing transaction and we assumed a 71% volatility rate, a 1.3-year estimated term and a probability weighted average discount for lack of marketability of 35%.

All outstanding convertible notes converted to convertible preferred stock in October 2018.

There were no convertible notes outstanding as of December 31, 2019 and 2018.

In addition to the assumptions used in Black-Scholes, the amount of stock-based compensation expense we recognize in our financial statements includes stock option forfeitures as they occur.

Emerging Growth Company Status

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or (d) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.

Recently Issued Accounting Pronouncements

Recently Issued Accounting Pronouncements Not Yet Adopted

In February 2016, the Financial Accounting Standards Board, or the FASB, issued ASU 2016-02, Leases (Topic 842), with guidance regarding the accounting for and disclosure of leases.

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This guidance was effective for public companies for annual and interim periods beginning after December 15, 2018.

For all other entities this standard is effective for annual reporting periods beginning after December 15, 2020, and interim periods within annual periods beginning after December 15, 2021.

For all other entities, including Emerging Growth Companies, this standard is effective for annual reporting periods beginning after December 15, 2020, and interim periods within annual periods beginning after December 15, 2021.

Early adoption is permitted.

We will adopt Topic 842 for our annual period ending December 31, 2021, and we have yet to evaluate the effect that ASU 2016-02 will have on our financial statements or financial statement disclosures.

As an Emerging Growth Company, we will adopt Topic 842

for our annual period ending December 31 , 2021 , and have not yet finalized our assessment of the impact that ASU 2016-02 will have on our financial statements or financial statement disclosures.

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What changed 10-K

Item 7. Management’s Discussion and Analysis