Candel Therapeutics, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes and other financial information included elsewhere in this Form 10-Q. Some of the information contained in this discussion and analysis contains forward-looking statements that involve risks and uncertainties. You should review the section titled “Risk factors” in this Form 10-Q for a discussion of important factors that could cause actual results to differ materially from the results described below. Overview We are a late clinical stage biopharmaceutical company focused on helping patients fight cancer with oncolytic viral immunotherapies. Our engineered viruses are designed to induce immunogenic death through direct viral-mediated cytotoxicity in cancer cells, thus releasing tumor neo-antigens and creating a pro-inflammatory microenvironment at the site of injection. Our approach combines an in-depth knowledge of viral immunotherapy with extensive clinical experience across a wide range of indications. Based on the broad range of data that we have generated from our preclinical models and clinical trials using our approach, we have observed what we believe to be systemic immune response against locally injected tumors and their distant metastases. We have established two oncolytic viral immunotherapy platforms based on novel, genetically modified adenovirus and herpes simplex virus (HSV) constructs. In our clinical results to date from CAN-2409, our lead product from our adenovirus platform, and CAN-3110, our lead product candidate from our HSV platform, we have observed that these candidates may have the potential to address significant unmet patient need and improve clinical outcomes in novel indications across broader patient populations. Since our formation, we have devoted substantially all our resources to developing our oncolytic viral immunotherapy and our adenovirus platform, conducting research and development activities, including product candidate development, recruiting skilled personnel, establishing our intellectual property portfolio, raising capital and providing general and administrative support for these operations. We have financed our operations primarily through proceeds from the sale of convertible notes, common stock and our convertible preferred stock. We have raised approximately $160.4 million through a combination of convertible notes, common stock financings, convertible preferred stock financings, and government grants, including the $79.1 million of gross proceeds of the IPO in which we issued and sold 9,887,994 shares of common stock at a price of $8.00 per share, including the partial exercise of the underwriters’ overallotment option. We were incorporated under the laws of the State of Delaware in June 2003. Our principal executive office is located at 117 Kendrick St, Suite 450, Needham, Massachusetts 02494. On November 30, 2020, we formally changed our name to Candel Therapeutics, Inc., previously Advantagene, Inc. Since our formation, we have incurred significant operating losses and have not generated any revenue from the sale of products. Our ability to generate any product revenue or product revenue sufficient to achieve profitability will depend on the successful development and eventual commercialization of one or more of our product candidates. Our net losses were $21.6 million and $17.7 million for the six months ended June 30, 2021 and for the year ended December 31, 2020, respectively. As of June 30, 2021, we had an accumulated deficit of $65.7 million. We will not generate revenue from product sales unless and until we successfully complete clinical development, obtain regulatory approval for, and successfully commercialize our product candidates. The lengthy process of securing marketing approvals for new drugs requires the expenditure of substantial resources. Any significant delay or failure to obtain regulatory approvals would materially adversely affect our product candidates development efforts and our business overall. In addition, if we obtain regulatory approval for any of our product candidates, we expect to incur significant expenses related to developing our commercialization capability to support product sales, marketing, manufacturing and distribution activities. In addition, we expect to incur significant additional costs associated with operating as a public company. We anticipate that our expenses will increase significantly as we: ∎ advance the development of our product candidate pipeline; ∎ initiate and continue research and preclinical and clinical development of potential new product candidates; ∎ maintain, expand and protect our intellectual property portfolio; ∎ acquire or in-license additional product candidates and technologies; ∎ expand our infrastructure and facilities to accommodate our growing employee base and ongoing development activities; ∎ establish agreements with contract research organizations, or CROs, and third-party contract manufacturing organizations, or CMOs, in connection with our preclinical studies and clinical trials; ∎ develop the manufacturing process and capabilities for future clinical trials and commercialization; 18 ∎ manufacture larger quantities of our product candidates for clinical development and potential commercialization; ∎ seek marketing approvals for our product candidates that successfully complete clinical trials, if any; ∎ establish a sales, marketing and distribution infrastructure to commercialize any products for which we may obtain marketing approval; and ∎ add operational, financial and management information systems and personnel, including personnel to support our research and development programs, any future commercialization efforts and our transition to operating as a public company following the completion of the IPO. As a result of these anticipated expenditures, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time, if ever, as we can generate significant revenue from product sales, we expect to finance our cash needs through a combination of public or private equity or debt financings and other sources, which may include collaborations, strategic alliances and licensing arrangements with third parties. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. Our inability to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy. We cannot assure you that we will ever generate sufficient revenue to achieve profitability. Because of the numerous risks and uncertainties associated with the development of therapeutics, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we can generate revenue from product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be required to raise additional capital on terms that are unfavorable to us or we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations. Collaborations We are a party to a number of license and collaboration agreements under which we license patents, patent applications and other intellectual property to and from third parties. Periphagen . On December 9, 2019, we entered into a series of agreements, including an exclusive license agreement, a novation agreement, an equipment purchase agreement and an intellectual property assignment agreement, collectively the Periphagen Agreements, with Periphagen, whereby we acquired certain assets and licensed certain rights (including specified patent rights and know-how, or the Licensed IP Rights) of Periphagen, primarily consisting of exclusive rights to their technology platform and a portfolio of pre-clinical, development stage virus vectors. The primary classes of assets are HSV-derived assets expressing neurotrophin-3 (or NT-3 Assets) and other HSV-derived assets (Gene Transfer Neuro-Assets). Under the license agreement, Periphagen granted us a worldwide exclusive license with the right to grant sublicenses through multiple tiers under the Licensed IP Rights to conduct research and to develop, make, have made, use, have used, offer for sale, have sold, export and import products incorporating the Licensed IP Rights in all fields of use except the treatment, diagnosis, and prevention of nononcologic skin diseases and conditions (including use as an aesthetic). BWH . On January 20, 2018, we entered into an exclusive option agreement, or the Option Agreement, with BWH. Pursuant to the Option Agreement, we obtained the exclusive right from BWH to negotiate a world-wide, royalty-bearing license to develop and commercialize products covered by certain BWH patents, including those patents covering CAN-3110, in the field of gene therapy and oncolytic vector therapy for the treatment or prevention of cancerous tumors in humans or animals, as such field is further detailed in the Option Agreement, or the Licensed Field. In consideration for BWH’s granting of the exclusive option, we paid BWH a non-refundable fee of $40,000. Under the Option Agreement, we were required to use reasonable efforts to enter into a clinical trial agreement with BWH. We entered into such clinical trial agreement with BWH, or the BWH Clinical Trial Agreement, on June 19, 2018. Under the BWH Clinical Trial Agreement, we have committed to remitting financial support for the performance of a specified Phase 1 clinical trial by BWH pursuant to a protocol summary contained in the Option Agreement. On September 15, 2020, we exercised our option and entered into an exclusive patent license agreement with BWH, or the BWH License Agreement. Under the BWH License Agreement, BWH granted to us (a) an exclusive, royalty-bearing license under certain of BWH’s patents to make, have made, use, have used, sell and have sold certain products covered by such licensed patents, or the Licensed Products and otherwise practice processes covered by such licensed patents, or Licensed Processes; and (b) a non-exclusive, royalty-bearing license under certain other of BWH’s patents to make, 19 have made, use, have used, sell and have sold Licensed Products, but not to sell or have sold Licensed Processes. The foregoing rights are sublicensable, subject to sublicensing terms set forth in the BWH License Agreement. In connection with executing the BWH License Agreement, we paid a license issue fee and also agreed to reimburse BWH for all reasonable fees and expenses BWH had incurred and will incur for the preparation, filing, prosecution and maintenance of the licensed patent rights. Ventagen . On March 1, 2014, we entered into an exclusive license agreement, or the Ventagen Agreement, with Ventagen, a related party. The Ventagen Agreement provides Ventagen an exclusive license, with rights to grant sublicense (subject to certain terms and conditions) under any worldwide patent rights and know-how owned or controlled by us during the term of the Ventagen Agreement which cover applicable technology utilizing the delivery method of the herpes derived TK protein to tumors or other tissues via a viral vector (as further specified therein), to research, use, have used, import, have imported, export, have exported, offer for sale, have sold, sell, distribute and market certain products for the prevention or treatment of cancer in humans and any use in animals (or the Field of Use), or the Licensed Products, for commercial sale and distribution within Mexico, Belize, Guatemala, Honduras, El Salvador, Costa Rica, Nicaragua, Panama, Colombia and Bolivia. Ventagen is 49.5% owned by certain of our shareholders. As of June 30, 2021, we had cash and cash equivalents of $24.3 million. Subsequent to June 30, 2021, the Company completed the IPO, at which time the Company issued 9,887,994 shares of its common stock at a price to the public of $8.00 per share including the partial exercise of the underwriters’ overallotment option, resulting in net proceeds to the Company of $71.5 million, after deducting underwriting discounts and commissions and offering expenses. We believe the existing cash and cash equivalents on hand as of June 30, 2021, together with the net proceeds from the IPO, will enable us to fund our operating expenses and capital expenditure requirements through the first quarter of 2023. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. See “—Liquidity and Capital Resources.” Impact of COVID-19 Pandemic In March 2020, the World Health Organization declared the outbreak of the novel coronavirus, or COVID-19, a global pandemic, or the COVID-19 pandemic, which continues to spread throughout the United States and worldwide. The ultimate extent of the impact of the COVID-19 pandemic on our business, financial condition and results of operations is highly uncertain and will depend on future developments that cannot be predicted, including new information that may emerge concerning the severity of COVID-19 and actions taken by government authorities and businesses to contain or prevent the further spread of COVID-19. For instance, a recurrence or continuation of COVID-19 cases could cause a more widespread or severe impact on commercial activity depending on where infection rates are highest. If we or any of the third parties with whom we engage were to experience any additional shutdowns or other prolonged business disruptions, our ability to conduct our business in the manner and on the timelines presently planned could be materially or negatively affected, which could have a material adverse impact on our business, results of operations and financial condition. To date, we have been carefully monitoring the COVID-19 pandemic and its potential impact on our business and have taken important steps to help ensure the safety of our employees and their families and to reduce the spread of COVID-19. We have established a work-from-home policy for all employees, other than those performing or supporting business-critical operations, such as certain members of our laboratory and facilities staff. For those employees, we have implemented stringent safety measures designed to comply with applicable federal, state and local guidelines instituted in response to the COVID-19 pandemic. We have also maintained efficient communication with our partners and clinical sites as the COVID-19 pandemic has progressed. We have taken these precautionary steps while maintaining business continuity so that we can continue to progress our programs. While we have experienced some delays in enrollment and site closures at certain of our third-party clinical trial sites, these delays have not had a material impact on our development timelines for our product candidates. We will continue to monitor developments as we address the disruptions and uncertainties relating to the COVID-19 pandemic. See “Risk Factors” for a discussion of the potential adverse impact of the COVID-19 pandemic on our business, financial condition and results of operations. Components of Our Results of Operations Revenue To date, we have not generated any revenue from product sales and do not expect to generate any revenue from sales of products in the foreseeable future. We are recognizing as research and development service revenue $1.0 million that we received in 2014 and 2015 from Ventagen for an exclusive license to develop products for commercial sale and development within certain countries. The $1.0 million is being recognized as revenue over the period during which we provide services under the license agreement. 20 Operating e xpenses Our operating expenses since inception have consisted solely of research and development costs and general and administrative costs. Research and development expenses Research and development expenses consist primarily of costs incurred for our product development activities for our two primary drug candidates, CAN-2409 and CAN-3110. We expense research and development costs as incurred. These include the following: ∎ employee-related costs, including salaries, benefits and stock-based compensation expense, for personnel engaged in research, development and clinical management functions; ∎ expenses incurred under agreements with third party clinical sites for the treatment and follow-up for patients enrolled in our clinical trials; ∎ the cost of acquiring and manufacturing preclinical study materials, including manufacturing registration and validation batches; ∎ acquisition of in-process research and development assets that have no alternative future use; ∎ payments made under third-party licensing agreements; ∎ costs incurred to develop the manufacturing process and capabilities for future clinical trials and commercialization. Our clinical trial material for use in our existing clinical trials was manufactured in prior years; ∎ costs related to compliance with quality and regulatory requirements; ∎ costs of outside consultants, primarily related to regulatory; and ∎ facility-related expenses, which include direct depreciation costs and expenses for rent and maintenance of facilities and insurance, and other operating costs if specifically identifiable to research and development activities. We expect that our research and development expenses will continue to increase substantially for the foreseeable future and will comprise a larger percentage of our total expenses as we complete our clinical trials and commence additional clinical trials, continue to discover and develop additional product candidates and develop and scale our in-house manufacturing capabilities. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to increased scale and duration of later stage clinical trials. We cannot determine with certainty the duration and costs of future clinical trials of CAN-2409 and CAN-3110 or any other product candidate we may develop or if, when, or to what extent we will generate revenue from the commercialization and sale of any product candidate for which we obtain marketing approval. At this time, we cannot accurately estimate or know the nature, timing and costs of the efforts that will be necessary to complete the clinical development of, or obtain regulatory approval for, any of our current or future product candidates. The duration, costs, and timing of clinical trials and development of CAN-2409 and CAN-3110 and any other product candidate we may develop will depend on a variety of factors, including: ∎ the scope, rate of progress, expense and results of clinical trials; ∎ our successful enrollment in and completion of clinical trials, including our ability to generate positive data from any such trials; ∎ our ability to add and retain key research and development personnel; ∎ the actual probability of success for our product candidates, including their safety and efficacy, early clinical data, competition, manufacturing capability, and commercial viability; ∎ significant and changing government regulation and regulatory guidance; ∎ the timing and receipt of any marketing approvals; ∎ the progress of the development efforts of parties with whom we may enter into collaboration agreements, and the terms and timing of any additional collaboration agreements, license or other arrangement, including the timing of any payments thereunder; ∎ our ability to complete development, construction and qualification of manufacturing facility; ∎ costs related to manufacturing of our product candidates or to account for any future changes in our manufacturing plans; 21 ∎ our ability to successfully commercialize our product candidates, if and when approved; ∎ raising additional funds necessary to complete clinical development of our product candidates; ∎ our ability to obtain and maintain third-party insurance coverage and adequate reimbursement for our product candidates, if and when approved; ∎ the acceptance of our product candidates, if approved, by patients, the medical community and third-party payors; ∎ effectively competing with other products if our product candidates are approved; ∎ the impact of any business interruptions to our operations, including the timing and enrollment of patients in our planned clinical trials, or to those of our manufacturers, suppliers, or other vendors resulting from the COVID-19 pandemic or similar public health crisis; ∎ our ability to maintain a continued acceptable safety profile for our therapies following approval; ∎ our ability to obtain and maintain patents, trade secret and other intellectual property protection and regulatory exclusivity for our product candidates, both in the United States and internationally; and ∎ the expense of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights. A change in the outcome of any of these variables with respect to the development of a product candidate could significantly change the costs and timing associated with the development of that product candidate. We may never succeed in obtaining regulatory approval for any of our product candidates. General and administrative expenses General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation, for personnel in our executive, finance, business development, and administrative functions. General and administrative expenses also include legal fees relating to intellectual property and corporate matters; professional fees for accounting, auditing, tax and consulting services; insurance costs; travel expenses; and facility-related expenses, which include direct depreciation costs and expenses for rent and maintenance of facilities, and other operating costs that are not specifically attributable to research and development activities. We expect that our general and administrative expenses will increase in the future as we increase our personnel headcount to support our continued clinical development and manufacturing activities. We also expect to incur increased expenses associated with being a public company as a result of the IPO, including costs of accounting, audit, legal, regulatory, and tax-related services associated with maintaining compliance with exchange listing and Securities and Exchange Commission, or SEC, requirements; director and officer insurance costs; and investor and public relations costs. Grant income Grant income consists of amounts received under a grant from the National Institute of Health for development of CAN-2409 for use as a therapy for pancreatic cancer and in the three and six months ended June 30, 2021 also includes the forgiveness of the PPP loan. Interest, dividend, and investment income Interest, dividend and investment income consists of amounts earned on investment of cash equivalents and short-term investments. Change in fair value of warrant liability We issued two warrants to PBM ADV Holdings, LLC, one of our Series B preferred stockholders, to purchase up to 7,344,968 shares of our common stock with an exercise price of $6.81 per share, and a warrant to the NC Incorporated Ohio Trust, an irrevocable trust funded by us, to purchase 162,740 shares of our common stock, $0.01 par value, at an exercise price of $1.46 per share, subject to adjustments as specified in the warrant agreement. Certain of those warrants are recorded as a liability on our balance sheet. The warrants recorded as a liability are remeasured to their fair value at each reporting date with changes in the fair value recognized as a component of other income (expense), net in the statements of operations and comprehensive loss. We will continue to recognize changes in the fair value of the warrant liability until the warrants are exercised, expire or qualify for equity classification. The fair value of the warrant liability is determined based on significant inputs not observable in the market. The fair value of the warrant liability uses various valuation methods, including the Monte Carlo method, the option-pricing method, probability-weighted expected return 22 and the hybrid method, all of which incorporate assumptions and estimates, to value the common stock warrants. The hybrid method is often used when a company is expecting a liquidity event in the near future and is a combination of the option-pricing and probability-weighted expected return methods. Estimates and assumptions impacting the fair value measurement include the fair value per share of the underlying shares of common stock, risk-free interest rate, expected dividend yield, expected volatility of the price of the underlying preferred stock, and the remaining contractual term of the warrants. Therefore, the fair value may not be appropriately captured by simple models. Income taxes Since our inception, we have generated cumulative federal and state net operating loss and research and development credit carryforwards for which we have not recorded any net tax benefit due to uncertainty around utilizing these tax attributes within their respective carryforward periods. As of December 31, 2020, we had federal net operating loss carryforwards, or NOLs, of approximately $28.5 million and state NOLs of approximately $27.6 million which may be available to offset future taxable income. Our federal NOLs include $8.8 million available to reduce future taxable income through 2028 and approximately $19.7 million of NOLs that do not expire and are available to reduce future taxable income indefinitely. The state NOLs are available to offset future taxable income through 2032. As of December 31, 2020, we also had federal and state research and development tax credit carryforwards of $1.2 million and $0.7 million, respectively, which are available to offset federal and state tax liabilities through 2036 and 2028, respectively. Realization of future tax benefits is dependent on many factors, including our ability to generate taxable income within the NOL period. Our management has evaluated the positive and negative evidence bearing upon the realizability of our deferred tax assets, which are comprised principally of net operating loss carryforwards and certain tax credits. Management has considered our history of cumulative net losses incurred since inception, as well as our lack of product revenue since inception, and has determined that it is more likely than not that we will not realize the benefits of its deferred tax assets. As a result, a full valuation allowance has been established at June 30, 2021 and December 31, 2020. NOL and tax credit carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant shareholders over a three-year period in excess of 50%, as provided under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, or the Code, as well as under similar state provisions. These ownership changes may limit the amount of NOLs that can be utilized annually to offset future taxable income. In general, an ownership change, as defined under Section 382 of the Code, or Section 382, results from transactions increasing the ownership of certain shareholders or public groups in the stock of a corporation by more than 50% over a three-year period. We have completed several financings and not yet determined if such a limitation would be placed against our NOL. We will make such a determination prior to the utilization of any NOL. Results of Operations The following table summarizes our results of operations for the three and six month periods ended June 30, 2021 and 2020 (in thousands): THREE MONTHS ENDED JUNE 30, INCREASE/ SIX MONTHS ENDED JUNE 30, INCREASE/ 2021 2020 (DECREASE) 2021 2020 (DECREASE) Research and development service revenue $ 31 $ 31 $ — $ 63 $ 63 $ — Operating expenses: Research and development 3,292 1,795 1,497 6,048 3,417 2,631 General and administrative 2,040 855 1,185 3,972 1,583 2,389 Total operating expenses 5,332 2,650 2,682 10,020 5,000 5,020 Loss from operations (5,301 ) (2,619 ) (2,682 ) (9,957 ) (4,937 ) (5,020 ) Grant income 605 156 449 796 319 477 Interest, dividend and investment income, net (15 ) 94 (109 ) (28 ) 22 (50 ) Change in fair value of warrant liability (12,369 ) (507 ) (11,862 ) (12,369 ) (52 ) (12,317 ) Net loss $ (17,080 ) $ (2,876 ) $ (14,204 ) $ (21,558 ) $ (4,648 ) $ (16,910 ) 23 Comparison of three months ended June 30, 2021 and 2020 Revenue We had research and development service revenue of $31,000 for each of the three month periods ended June 30, 2021 and 2020. This represents the recognition as research and development service revenue of a portion of the $1.0 million that we received in 2014 and 2015 from Ventagen, a related party, which is being recognized over the period during which we provide the services. Research and development expenses The following table summarizes our research and development expenses for the three months ended June 30, 2021 and 2020 (in thousands): THREE MONTHS ENDED JUNE 30, INCREASE 2021 2020 (DECREASE) Employee-related $ 2,165 $ 1,089 $ 1,076 Clinical development costs 659 510 149 Search fees 77 — 77 Occupancy 128 172 (44 ) Other 263 24 239 $ 3,292 $ 1,795 $ 1,497 Research and development expenses for the three months ended June 30, 2021 were $3.3 million, compared with $1.8 million for the three months ended June 30, 2020 and consisted primarily of $2.2 million and $1.1 million, respectively, of employee-related costs, including $400,000 and $256,000, respectively, of non-cash stock compensation expense, $659,000 and $510,000, respectively, of clinical development costs related to our clinical trial sites and the cost of treating and following up on patients in our clinical trials, $77,000 and $0 respectively, of fees paid to employee search firms and $128,000 and $172,000, respectively, of facility and occupancy related costs. The increase of $1.5 million for the three months ended June 30, 2021, was primarily due to an increase of $1.1 million in employee-related costs, an increase of $149,000 in clinical development costs, an increase of $77,000 in employee search costs, a decrease of $44,000 in occupancy and facility costs, and an increase of $239,000 in other research costs consisting primarily of increases in manufacturing and regulatory expenses. The $1.1 million increase in employee-related costs was primarily due to the increase of $144,000 in non-cash compensation expense and an increase in the research and development headcount. General and administrative expenses The following table summarizes our general and administrative expenses for the three months ended June 30, 2021 and 2020 (in thousands): THREE MONTHS ENDED JUNE 30, INCREASE 2021 2020 (DECREASE) Employee-related $ 1,487 $ 355 $ 1,132 Professional and consulting 369 387 (18 ) Occupancy 63 64 (1 ) Other 121 49 72 $ 2,040 $ 855 $ 1,185 General and administrative expenses were $2.0 million for the three months ended June 30, 2021 compared with $855,000 for the three months ended June 30, 2020 and consisted primarily of $1.5 million and $355,000, respectively, of employee-related costs, including $669,000 and $47,000, respectively, of non-cash stock compensation expense, $369,000 and $387,000, respectively, of professional and consulting fees and $63,000 and $64,000, respectively, of facility and other occupancy related costs. The increase of $1.2 million was primarily due to an increase of $1.1 million in employee – related costs as we increased our general and administrative headcount to manage growth, including an increase of $622,000 in non-cash compensation expense, and a decrease of $18,000 in professional and consulting fees. 24 Grant income Grant income was $605,000 for the three months ended June 30, 2021 compared with $156,000 for the three months ended June 30, 2020. Grant income for the three months ended June 30, 2021 includes $464,000 for the forgiveness of the PPP loan in April 2021 and $141,000 received under a grant from the National Institutes of Health for development of CAN-2409 for use as a therapy for pancreatic cancer. Grant income for the three months ended June 30, 2020 includes $156,000 received under a grant from the National Institutes of Health for development of CAN-2409 for use as a therapy for pancreatic cancer. Interest, dividend and investment income, net Interest, dividend and investment income, net was an expense of $15,000 for the three months ended June 30, 2021 compared with income of $94,000 for the three months ended June 30, 2020 and represents the earnings on our cash equivalents and short-term investments net of interest expense on our outstanding debt obligations. The decrease is primarily due to a decrease in the yields earned on cash equivalents and short - term investments and a decrease in funds available for investment. Change in fair value of warrant liability The change in fair value of our warrant liability was an increase in value of $12.4 million for the three months ended June 30, 2021 compared with an increase in value of $507,000 for the three months ended June 30, 2020. The increase in the warrant liability in the three months ended June 30, 2021 is due to the amendment to the warrants in June 2021which extended the exercisability period to November 2025 from November 2023 as well as an increase in the value of our common stock as of June 30, 2021. Comparison of six months ended June 30, 2021 and 2020 Revenue We had research and development service revenue of $63,000 for each of the six-month periods ended June 30, 2021 and 2020. This represents the recognition as research and development service revenue of a portion of the $1.0 million that we received in 2014 and 2015 from Ventagen, a related party, which is being recognized over the period during which we provide the services. Research and development expenses The following table summarizes our research and development expenses for the six months ended June 30, 2021 and 2020 (in thousands): SIX MONTHS ENDED JUNE 30, INCREASE 2021 2020 (DECREASE) Employee-related $ 3,661 $ 1,978 $ 1,683 Clinical development costs 1,246 1,016 230 Search fees 280 — 280 Occupancy 257 342 (85 ) Other 604 81 523 $ 6,048 $ 3,417 $ 2,631 Research and development expenses for the six months ended June 30, 2021 were $6.0 million, compared with $3.4 million for the six months ended June 30, 2020 and consisted primarily of $3.7 million and $2.0 million, respectively, of employee-related costs, including $516,000 and $172,000, respectively, of non-cash stock compensation expense, $1.2 million and $1.0 million, respectively, of clinical development costs related to our clinical trial sites and the cost of treating and following up on patients in our clinical trials, $280,000 and $0 respectively, of fees paid to employee search firms and $257,000 and $342,000, respectively, of facility and occupancy related costs. The increase of $2.6 million for the six months ended June 30, 2021, was primarily due to an increase of $1.6 million in employee-related costs, an increase of $230,000 in clinical development costs, an increase of $280,000 in employee search costs, a decrease of $85,000 in occupancy and facility costs, and an increase of $523,000 in other research costs consisting primarily of increases in manufacturing and regulatory expenses. The $1.7 million increase in employee-related costs was primarily due to the increase of $344,000 in non-cash compensation expense and an increase in the research and development headcount. 25 General and administrative expenses The following table summarizes our general and administrative expenses for the six months ended June 30, 2021 and 2020 (in thousands): SIX MONTHS ENDED JUNE 30, INCREASE 2021 2020 (DECREASE) Employee-related $ 2,517 $ 767 $ 1,750 Professional and consulting 1,118 568 550 Occupancy 127 127 - Other 210 121 89 $ 3,972 $ 1,583 $ 2,389 General and administrative expenses were $4.0 million for the six months ended June 30, 2021 compared with $1.6 million for the six months ended June 30, 2020 and consisted primarily of $2.5 million and $767,000, respectively, of employee-related costs, including $984,000 and $99,000, respectively, of non-cash stock compensation expense, $1.1 million and $568,000, respectively, of professional and consulting fees and $127,000, of facility and other occupancy related costs. The increase of $2.4 million was primarily due to an increase of $1.8 million in employee – related costs as we increased our general and administrative headcount to manage growth, including an increase of $885,000 in non-cash compensation expense, and an increase of $550,000 in professional and consulting fees. The increase in professional and consulting fees is primarily due to an increase in fees paid to personnel search firms, public relations consultants, commercial market research firms, legal firms and accounting firms. Grant income Grant income was $796,000 for the six months ended June 30, 2021 compared with $319,000 for the six months ended June 30, 2020. Grant income for the six months ended June 30, 2021 includes $464,000 for the forgiveness of the PPP loan in April 2021 and $332,000 received under a grant from the National Institutes of Health for development of CAN-2409 for use as a therapy for pancreatic cancer. Grant income for the three months ended June 30, 2020 includes $319,000 received under a grant from the National Institutes of Health for development of CAN-2409 for use as a therapy for pancreatic cancer. Interest, dividend and investment income, net Interest, dividend and investment income, net was an expense of $28,000 for the six months ended June 30, 2021 compared with income of $22,000 for the six months ended June 30, 2020 and represents the earnings on our cash equivalents and short-term investments net of interest expense on our outstanding debt obligations. The decrease is primarily due to a decrease in the yields earned on cash equivalents and short term investments, a decrease in funds available for investment and a decrease in outstanding debt obligations. Change in fair value of warrant liability The change in fair value of our warrant liability was an increase in value of $12.4 million for the six months ended June 30, 2021 compared with an increase in value of $52,000 for the six months ended June 30, 2020. The increase in the warrant liability in the six months ended June 30, 2021 is due to the amendment to the warrants in June 2021 which extended the exercisability period to November 2025 from November 2023 as well as an increase in the value of our common stock as of June 30, 2021. Liquidity and Capital Resources Since our inception, we have not generated any revenue from product sales and have incurred significant operating losses. We expect to continue to incur significant expenses and operating losses for the foreseeable future as we advance the clinical development of our product candidates. We expect that our research and development and general and administrative costs will continue to increase significantly, including in connection with conducting clinical trials for our product candidates, developing our manufacturing capabilities and building and qualifying our manufacturing facility to support clinical trials and commercialization and providing general and administrative support for our operations, including the cost associated with operating as a public company. As a result, we will need additional capital to fund our operations, which we may obtain from additional equity or debt financings, collaborations, licensing arrangements or other sources. 26 We do not currently have any approved products and have never generated any revenue from product sales. We have financed our operations primarily through proceeds from government grants and from the sale of our convertible preferred stock. As of June 30, 2021 , we have raised approximately $8 1.3 million, including $1 5.2 million of government grants and $66.1 million from the sale of convertible preferred stock. Our cash, cash equivalents and short-term investments totaled $2 4.3 million as of June 3 0 , 2021. We had $0.5 million of long-term debt as of June 30, 2021 with a maturity in November 2027. Subsequent to Ju ne 30 , 2021, we completed the IPO, at which time we issued 9, 887,994 shares of its common stock , including the partial exercise of the underwriters’ overallotment option at a price to the public of $8.00 per share, resulting in net proceeds of $ 71.5 million , after deducting underwriting discounts and commissions and offering expenses. Cash flows The following table summarizes our sources and uses of cash for the six months ended June 30, 2021 and 2020 (in thousands): SIX MONTHS ENDED JUNE 30, 2021 2020 Net cash (used in) operating activities $ (10,086 ) $ (4,150 ) Net cash (used in) provided by investing activities (939 ) 19,005 Net cash provided by financing activities 445 461 Net (decrease) increase in cash and cash equivalents $ (10,580 ) $ 15,316 Cash flows for the six months ended June 30, 2021 and 2020 Operating activities Net cash used in operating activities for the six months ended June 30, 2021 was $10.1 million, primarily consisting of a net loss of $21.6 million as we incurred expenses associated with our clinical programs and we increased our headcount, in particular our management team, and the impact of $1.1 million of non-cash charges for depreciation and amortization, non-cash stock compensation expense and non-cash interest expense partially offset by the non-cash credit for the forgiveness of our Paycheck Protection Plan loan. A non-cash charge of $12.4 million was also included in the net loss for the six months ended June 30, 2021 related to the increase in the fair value of our warrant liability. Net cash used in operating activities was also impacted by changes in operating assets and liabilities, including an increase in prepaids and other current assets, a decrease of $177,000 in accounts payable, a decrease of $1.2 million in accrued expenses, a decrease of $76,000 in deferred revenue and deferred rent and a $18,000 increase in prepaid expenses and a $506,000 increase in other long term assets. Net cash used in operating activities for the six months ended June 30, 2020 was $4.2 million, primarily consisting of a net loss of $4.6 million and the impact of non-cash charges for depreciation and amortization and stock compensation expense of $311,000 and a non-cash credit of $52,000 for an increase in the fair value of the warrant liability. Net cash used in operating activities was also impacted by changes in operating assets and liabilities which were insignificant. Investing activities Net cash used in investing activities for the six months ended June 30, 2021 was $939,000, and consisted of the purchase of fixed assets. Net cash provided by investing activities for the six months ended June 30, 2020 was $19.0 million consisting of $19.3 million of proceeds from the sale of available – for – sale securities and net of $297,000 for the purchase of fixed assets. Financing activities Net cash provided by financing activities for the six months ended June 30, 2021 was $445,000 and consisting of proceeds from the exercise of stock options and warrants. Net cash provided by financing activities for the six months ended June 30, 2020 was $1,000 and consisting of proceeds from the exercise of stock options. Funding requirements We expect our operating expenses to increase substantially in the future in connection with our ongoing activities, particularly as we advance CAN-2409 and CAN-3110 through research and development, clinical trials, develop our 27 manufacturing capabilities and build and qualify our manufacturing facility, as we research and develop additional product candidates including preclinical activities and as we prepare for marketing approval and commercialization. In addition, we expect to incur additional costs associated with operating as a public company as a result of the IPO . Specifically, our costs and expenses will increase as we: ∎ advance the clinical development of CAN-2409 and CAN-3110; ∎ pursue the preclinical and clinical development of other product candidates using our HSV platform; ∎ develop our manufacturing capabilities, including the construction and qualification of our manufacturing facility; and ∎ expand our operational, financial, and management systems and increase personnel, including personnel to support our operations as a public company. We expect to fund continued development and expansion of our manufacturing capabilities, including the construction and qualification of our manufacturing facility, which will include construction costs, equipment, software systems and the cost of engineering production runs, with proceeds from the IPO and future financing transactions. These transactions may include the issuance of additional equity or debt or the use of credit line or other bank-sponsored financing resources. We believe that our existing cash, cash equivalents, and short-term investments, together with the $71.5 of net proceeds from the IPO, will enable us to fund our operating expenses and capital expenditure requirements through the first quarter of 2023. We have based this estimate on assumptions that may prove to be incorrect, and we could utilize our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the research, development, and commercialization of therapeutics, it is difficult to estimate with certainty the amount of our working capital requirements. Our future funding requirements will depend on many factors, including: ∎ the progress, costs, and results of our clinical development and clinical trials for CAN-2409 and CAN-3110; ∎ the progress, costs, and results of our additional research and preclinical development programs; ∎ the costs, timing and outcome of regulatory review of our product candidates; ∎ our ability to establish and maintain collaborations on favorable terms, if at all; ∎ the outcome, timing and cost of meeting regulatory requirements established by the FDA and comparable foreign regulatory authorities, if applicable, for our product candidates; ∎ the costs and timing of internal process development for our manufacturing capabilities; ∎ the scope, progress, results, and costs of any product candidates that we may derive from our HSV platform or with collaborators; ∎ the costs of preparing, filing and prosecuting patent applications, obtaining, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims; hire additional personnel in research, manufacturing, and regulatory and clinical development, as well as management personnel; ∎ the extent to which we in-license or acquire rights to other products, product candidates, or technologies; ∎ additions or departures of key scientific or management personnel; ∎ the costs and timing of future commercialization activities, including product manufacturing, marketing, sales, and distribution for any of our product candidates for which we obtain 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; and ∎ the costs of operating as a public company. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our cash needs through a combination of public or private equity or debt financings and other sources, which may include collaborations strategic alliances and licensing arrangements with third parties. We do not have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest may be diluted, and the terms of these securities may include liquidation or other preferences that could adversely affect your rights as a common stockholder. Debt financing and preferred equity financing, if available, may involve agreements that include restrictive covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends, that could adversely impact our ability to conduct our business. If we raise additional funds through other sources, such as collaboration agreements, strategic alliances, licensing arrangements or marketing and distribution arrangements, we may have to relinquish valuable rights to our 28 technologies, future revenue streams, product development, and research programs or product candidates, or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds when needed, we may be required to delay, limit, reduce, or terminate our product development or future commercialization efforts or grant rights to develop and market products or product candidates that we would otherwise prefer to develop and market ourselves. Contractual obligations and commitments The following is a summary of our contractual obligations and commitments as of June 30, 2021: PAYMENTS DUE BY PERIOD (in thousands) TOTAL LESS THAN 1 YEAR 1 TO 3 YEARS 3 TO 5 YEARS Operating lease obligation (1) $ 2,373 $ 459 $ 1,378 $ 536 Total $ 2,373 $ 459 $ 1,378 $ 536 (1) Represents future minimum lease payments under our operating leases for office and laboratory space at our Needham, Massachusetts facility. We also enter into contracts in the normal course of business with hospitals, clinics, universities, and other third parties for clinical trials and testing and with construction contractors and process developers for the construction of our manufacturing facility. These contracts do not contain minimum purchase commitments and are cancelable by us upon prior written notice. Payments due upon cancelation consist only of payments for services provided or expenses incurred, including noncancelable obligations of our service providers, up to the date of cancelation. These payments are not included in the table above as the amount and timing of such payments are not known. Critical accounting policies and use of estimates Our management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements and related disclosures requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, costs and expenses, and the disclosure of contingent assets and liabilities in our financial statements. These items are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on historical experience, known trends and events, and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may materially differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in the notes to our condensed consolidated financial statements included elsewhere in this Form 10-Q, we believe that the following accounting policies are those most significant to the judgments and estimates used in the preparation of our consolidated financial statements. Accrued Research and Development Expenses As part of the process of preparing our financial statements, we are required to estimate our accrued research and development expenses. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf, and estimating the level of service performed and the associated costs incurred for the services when we have not yet been invoiced or otherwise notified of the actual costs. Most of our service providers invoice us in arrears for services performed, on a pre-determined schedule or when contractual milestones are met; however, some require advance payments. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of these estimates with the service providers and make adjustments, if necessary. Examples of estimated accrued research and development expenses include fees paid to the following: ∎ contractors and vendors working on the construction and development of our commercial-scale manufacturing facility; ∎ clinical trial sites where patients are being treated with our product candidates; and ∎ consultants providing services related to process development, regulatory and other services. 29 Stock-based compensation We measure stock options and other stock-based awards granted to our employees, directors, consultants, advisors based on the fair value on the date of the grant, awards, net of actual forfeitures, over the requisite service period, which is generally the vesting period of the respective award. For stock-based awards granted to non-employees, compensation expense is recognized over the vesting period which approximates the period over which services are rendered by such non-employees. We estimate the fair value of each stock option grant on the date of grant using the Black-Scholes option-pricing model, which uses as inputs the fair value of our common stock and assumptions we make for the expected volatility of our common stock, the expected term of our stock options, the risk-free interest rate for a period that approximates the expected term of our stock options, and our expected dividend yield. Determination of fair value of common stock As there was no public market for our common stock until the IPO in July 2021, the estimated fair value of our common stock has been determined by our board of directors as of the date of each option grant, with input from management, taking into consideration our most recently available third-party valuations of common stock at the time of the grants, as well as our board of directors’ assessment of additional objective and subjective factors that it believed were relevant and which may have changed from the date of the most recent valuation through the date of the grant. Third-party valuations, or valuation reports, were performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants’ Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. A valuation report was prepared by a third-party as of December 31, 2019 using an option pricing allocation method, or OPM, to allocate the total equity value across the various securities outstanding at the time of the valuation. The OPM treats common stock and preferred stock as call options on the total equity value of a company, with exercise prices based on the value thresholds at which the allocation among the various holders of a company’s securities changes. Third-party prepared valuation reports were prepared as of December 1, 2020, January 1, 2021 and June 15, 2021 using a probability-weighted expected return method to determine the fair value of the common stock. The present value of the common stock under each of these scenarios was weighted based on the probability of each scenario occurring to determine the value of the common stock. These third-party valuations resulted in a valuation of our common stock of $1.55, $3.96, $4.97 and $6.64 per share as of December 31, 2019, December 1, 2020, January 1, 2021 and June 15, 2021, respectively. Going forward, the public market value per share of our common stock will be used. In addition to considering the results of the valuation reports, our board of directors considered various objective and subjective factors to determine the fair value of our common stock as of each grant date, including: ∎ the prices at which we sold shares of convertible preferred stock and the superior rights and preferences of the convertible preferred stock relative to our common stock at the time of each grant; ∎ the progress of our research and development programs, including the status and results of preclinical studies and clinical trials for our product candidates; ∎ our stage of development and commercialization and our business strategy; ∎ external market conditions affecting the biotechnology industry and trends within that industry; ∎ our financial position, including cash on hand, and our historical and forecasted performance and operating results; ∎ the lack of an active public market for our common stock and our convertible preferred stock; ∎ the likelihood of achieving a liquidity event, such as an initial public offering, or IPO, or sale of our company considering prevailing market conditions; and ∎ the analysis of IPOs and the market performance of similar companies in the biotechnology industry. The assumptions underlying these valuations were highly complex and subjective and represented management’s best estimates, which involved inherent uncertainties and the application of management’s judgment. As a result, if we had used different assumptions or estimates, the fair value of our common stock and our stock-based compensation expense could be materially different. Now that a public trading market for our common stock has been established in connection with the IPO, it is no longer necessary for our board of directors to estimate the fair value of our common stock in connection with our accounting for 30 granted stock options and other such awards we may grant, as the fair value of our common stock will be determined based on the quoted market price of our common stock. Recent accounting pronouncements A description of recent accounting pronouncements that may potentially impact our financial position, results of operations, or cash flows is disclosed in Note 2 to our condensed consolidated financial statements included elsewhere in this 10-Q. Off-balance sheet arrangements We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under SEC rules. Emerging growth company status In April 2012, the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, was enacted. Section 107 of the JOBS Act provides that an “emerging growth company,” or an EGC, can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. Thus, an EGC can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to use the extended transition period for new or revised accounting standards during the period in which we remain an emerging growth company; however, we may adopt certain new or revised accounting standards early. We will remain an emerging growth company until the earliest to occur of: (1) the last day of the fiscal year in which we have more than $1.07 billion in annual revenue; (2) the date we qualify as a “large accelerated filer,” with at least $700.0 million of equity securities held by non-affiliates; (3) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period; and (4) December 31, 2026. 31