Immunome Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations, as well as other sections in this Quarterly Report on Form 10-Q, should be read in conjunction with our unaudited interim financial statements and related notes thereto included elsewhere herein. In addition to historical financial information, some of the information contained in the following discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts, including statements regarding our future results of operations and financial position, business strategy, current and prospective products, product approvals, research and development costs, current and prospective collaborations and strategic transactions, timing and likelihood of success, plans and objectives of management for future operations and future results of current and anticipated products, are forward-looking statements. These statements involve known and unknown risks, uncertainties, assumptions and other important factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplates,” “believes,” “estimates,””should,””seek,”“predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to a number of risks, uncertainties and assumptions that are difficult to predict. Factors that could cause actual results to differ include, but are not limited to, those risks and uncertainties associated with: the impact of the COVID-19 pandemic on Immunome’s business, operations, strategy, goals and anticipated milestones; the fact that research and development data are subject to differing interpretations and assessments, including during the peer review/publication process, in the scientific community generally, and by regulatory authorities; whether the data will be published in a scientific journal and, if so, when and with what modifications; the uncertainties inherent in research and development, including Immunome’s ability to execute on its strategy including with respect to the timing of its R&D efforts, IND filings, initiation and completion of any clinical studies and other anticipated milestones; the effectiveness of Immunome’s antibody cocktail, including the possibility that further preclinical data and any clinical trial data may be inconsistent with the data used for selection of the cocktail; Immunome’s ability to fund operations; the competitive landscape; and the additional risks and uncertainties set forth more fully under the caption “Risk Factors” in Immunome’s Annual Report on Form 10-K filed with the United States Securities and Exchange Commission (“SEC”) on March 25, 2021, and elsewhere in Immunome’s filings and reports with the SEC. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for us to predict all risk factors and uncertainties. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise. 17 Table of Contents Overview Since our inception in 2006, we have devoted substantially all our resources to research and development, raising capital, building our management team and building our intellectual property portfolio. To date, we have financed our operations through equity financing, convertible notes and DOD funding. We are a development stage company, and all our programs are in a preclinical stage of development. To date, we have not generated any revenue from product sales and do not expect to generate revenue from the sale of products for the foreseeable future. Since inception we have incurred significant operating losses. Our net losses for the three months ended September 30, 2021 and 2020 were $7.7 million and $8.4 million, respectively, and $16.9 million and $13.8 million for the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021, we had a cash balance of $56.2 million. We expect to continue to incur losses for the foreseeable future. We expect to continue to incur significant expenses and increasing operating losses in connection with ongoing research and development activities related to our portfolio of programs as we continue our preclinical development of product candidates; advance these product candidates toward clinical development; further develop our product candidates; continue to perform research activities as we seek to discover and develop additional product candidates; carry out maintenance, expansion, enforcement, defense, and protection of our intellectual property portfolio; and hire research and development, clinical and administrative personnel. If we cannot obtain the necessary funding on favorable terms, if at all, we will need to delay, scale back or eliminate some or all of our research and development programs. We would consider other various strategic alternatives, including a merger or sale of the Company; or cease operations. If we engage in collaborations, we may receive lower consideration upon commercialization of such products than if we had not entered into such arrangements or if we entered into such arrangements at later stages in the product development process. We currently have no sources of revenue, and our ability to continue as a going concern is dependent on our ability to raise capital to fund our present and future business plans. Additionally, volatility in the capital markets, the competitive landscape and general economic conditions in the United States may be a significant obstacle to raising the required funds. We expect to continue to incur significant expenses and increasing operating losses in connection with ongoing research and development activities, particularly if and as we: ● continue research activities and preclinical studies; ● pursue regulatory approvals and implement other regulatory strategies for our current and future product candidates; ● commence clinical trials for product candidates; ● take additional steps to advance our discovery engine and our existing and future pipeline; ● obtain, maintain, expand and protect our intellectual property portfolio; ● hire additional research and development, clinical and administrative personnel; ● scale up our clinical and regulatory capabilities; and ● add operational, financial and management information systems and infrastructure to support our research and development programs, and any future commercialization efforts. Furthermore, we expect to continue to incur additional costs associated with operating as a public company, including significant legal, accounting, investor relations, regulatory, insurance and other expenses. 18 Table of Contents As a result of these anticipated expenditures and potential unanticipated, we will need substantial additional financing to support our continuing operations and pursue our growth strategy. Until such time as we generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of any stockholder will be or could be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our stockholders. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making acquisitions or capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or drug candidates, or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings or other arrangements when needed, we may be required to delay, limit, reduce or terminate our research, product development or future commercialization efforts, or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves. We may be unable to raise additional funds or enter into such other agreements when needed on favorable terms or at all. The 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. On October 1, 2021, we entered into a new Open Market Sale Agreement (“ATM Agreement”) with Jefferies, which provides that, upon the terms and subject to the conditions and limitations in the ATM Agreement, the Company may elect, from time to time, to offer and sell common shares having an aggregate offering price of up to $75.0 million through Jefferies acting as sales agent. Through September 30, 2021, we raised an aggregate of $123.1 million in gross proceeds from sales of our common stock and warrants, Series A convertible preferred stock and warrants, the issuance of convertible promissory notes, the PPP loan and issuance of common stock through a Stock Purchase Agreement (“Stock Purchase Agreement”) with an individual investor. On October 6, 2020, we closed the IPO, in which we issued and sold 3,250,000 shares of our common stock at a public offering price of $12.00 per share. On October 13, 2020, the underwriters exercised their option to purchase an additional 487,500 shares of our common stock at a purchase price of $12.00 per share. We received net proceeds of $41.7 million after deducting underwriting discounts and commissions of $3.1 million but before deducting other offering expenses. On April 28, 2021, we sold 1,000,000 units, each comprising one share of our common stock and one warrant for one-half a share of common stock in a private placement and at a price of $27.00 per share for net proceeds of $26.4 million. In April 2020, we received a $0.5 million loan, or the PPP Loan, pursuant to the Paycheck Protection Program, or the PPP, under the Coronavirus Aid, Relief, and Economic Security Act implemented by the U.S. Small Business Administration, which loan was forgiven on May 21, 2021. We expect that our cash as of September 30, 2021 will be sufficient to fund our operations at least 12 months from the filing date of this Quarterly Report on Form 10-Q, including our planned Phase 1b studies for IMM-BCP-01 and IMM-ONC-01. We have based these estimates on assumptions that may prove to be imprecise, and we may exhaust our available capital resources sooner than we currently expect. See “— Liquidity and capital resources.” Due to the numerous risks and uncertainties associated with the research and development of our programs, we are unable to estimate the amounts of increased capital outlays and operating expenses associated with completing the research and development of our product candidates. Our Lead Discovery Programs SARS-CoV-2 (“IMM-BCP-01”) We are actively developing an antibody cocktail product candidate, comprising a combination of three effective anti-viral antibodies derived from the B cells of COVID-19 “super-responders.” The immune system employs multiple 19 Table of Contents viral clearance mechanisms to fight SARS-CoV-2 infection. Our research is focused on identifying the antibodies directed at multiple distinct viral antigens to which such antibodies can bind to most effectively, neutralize and clear the virus from circulation. If successful, we expect that our antibody cocktail product candidate could be used both as a treatment for individuals who have contracted SARS-CoV-2 and as a prophylactic to offer protection against the virus for individuals who are at risk of contracting SARS-CoV-2. In accordance with our published research, unbiased interrogations of “super-responders” shows that more than half of the antibodies they make appear to be directed at SARS-CoV-2 antigens other than the spike protein. We are conducting this program in collaboration with the DoD, which has asserted that this platform may be of strategic importance, due to its potential use in the current COVID-19 pandemic as well as in future viral outbreaks. The IMM-BCP-01 program is focused on the original SARS-CoV-2 isolate and emerging variants. We have identified a cocktail of three antibodies (“IMM-BCP-01”) based on preclinical testing and plan to submit an IND for the program in the fourth quarter of 2021. Oncology (“IMM-ONC-01”) Our lead oncology program is focused on IL-38, which we believe is a novel, tumor-derived immune checkpoint capable of promoting evasion of the immune system. Antibodies directed at IL-38 were identified in a hybridoma library generated from the memory B cells of a patient with squamous head and neck cancer. Data from cancer biopsy materials reveal that subsets of major solid tumors, including squamous cell cancers of the head and neck and of the lung, over-express IL-38. This correlates with low levels of tumor-infiltrating T cells, a hallmark of immune suppression in these patients’ tumors. Data obtained from our preclinical testing indicate that blocking IL-38 function using an inhibitory antibody appears to restore the immune response to the tumor and to result in anti-tumor activity in select animal models. Our data suggests that anti-IL-38 antibodies could have therapeutic utility as single agents or in combination with other therapeutic modalities. We have selected a lead anti-IL-38 antibody for initial clinical testing and plan to submit an IND for this program in the first quarter of 2022. COVID-19 Pandemic In response to the COVID-19 pandemic, we have taken, and continue to take, proactive measures to prioritize health and safety, including of our employees and other personnel. These measures included establishing a work-from-home policy for our employees, other than those performing or supporting business-critical operations, and implementing stringent safety measures designed to comply with applicable federal, state and local guidelines. We have begun to implement a back-to-work policy; our approach to transitioning back to the office is tailored to the role of each team member and evolves as the specific conditions associated with the COVID-19 pandemic continue to evolve. We will continue to monitor guidance and regulations from the Centers for Disease Control and local health authorities and will adjust our onsite rules and policies in accordance with this guidance and regulations. We have also taken, and continue to take, proactive measures to maintain business continuity in the face of the COVID-19 pandemic. Communication throughout our organization has remained active during the pandemic. In addition, as part of our vendor management processes, we have ongoing dialogues with third-party service providers, which are intended to ensure that they continue to meet our criteria for business continuity. The effect of the ongoing COVID-19 pandemic on our projected research and development timelines and activities is uncertain. Notwithstanding the measures taken, the future impact of COVID-19, including its variants, on our industry, the healthcare system and our current and future operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others. See “Risk Factors” in our Annual Report on Form 10-K filed with the SEC on March 25, 2021 and elsewhere in our filings with the SEC for a discussion of the potential adverse impact of COVID-19 on our business, results of operations and financial condition. 20 Table of Contents Components of our results of operations Research and development expenses Research and development expenses consist of costs incurred in performing research and development activities, which include: ● personnel-related expenses, including salaries, bonuses, benefits and share-based compensation for employees engaged in research and development functions; ● expenses incurred in connection with the advancement of our programs, including under agreements with consultants, contractors, contract research organizations and other third-party vendors and suppliers; ● the cost of developing and validating our quality and manufacturing processes for use in our preclinical studies and potential future clinical trials; ● laboratory supplies and research materials and other infrastructure-related expenses; and ● facilities, depreciation and amortization and other expenses which include direct and allocated expenses. We expense research and development costs as incurred. Advance payments that we make for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. The prepaid amounts are expensed as the benefits are consumed. Research and development activities are central to our business model. We expect that our research and development expenses will increase substantially in connection with our planned preclinical and future clinical development activities. In July 2020, we entered into an Other Transaction Authority for Prototype Agreement (“the DoD Agreement”) with the DoD to fund our efforts in developing an antibody cocktail to treat COVID-19. The DoD Agreement was modified in May 2021 to increase such funding. In connection with the DoD Agreement, as modified, we record expense reimbursements received from DoD as contra-research and development expenses in the same period the underlying expenses are incurred. General and administrative expenses General and administrative expenses consist primarily of salaries and other related costs, including share-based compensation for personnel in our executive, 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, direct and allocated facility related expenses and other operating costs. We anticipate that our general and administrative expenses will increase in the future to support increased research and development activities. We also expect to incur increased costs associated with being a public company, including costs of accounting, audit, legal, regulatory and tax-related services, director and officer insurance costs and investor and public relations costs, as well as other expenses associated with maintaining compliance with Nasdaq and SEC requirements and other public company requirements. Change in fair value of warrant liability Prior to our initial public offering, our outstanding warrants to purchase shares of our convertible preferred stock were classified as liabilities, recorded at fair value and were subject to remeasurement at each balance sheet date until they were exercised, expired or were otherwise settled. The change in fair value of our preferred stock warrant liability 21 Table of Contents reflects a non-cash charge primarily driven by changes in the fair value of our underlying Series A preferred stock. All outstanding warrants to purchase shares of our preferred stock were converted into warrants to purchase shares of our common stock upon consummation of our IPO. Interest income (expense), net Interest income (expense), net consists of interest expense related to our capital lease obligations and equipment loans payable, offset by interest income earned on our cash. Results of operations The ultimate extent of the impact of any epidemic, pandemic, outbreak, or other public health crisis on our results of operations will depend on future developments, which are highly uncertain, including new information that may emerge concerning the severity of COVID-19 and its variants or other public health crisis and actions taken to contain or prevent the further spread, among others. Accordingly, we cannot fully predict the extent to which our business and results of operations will be affected by the pandemic. For example, many clinical trial sites have been impacted by the pandemic, forcing them to delay enrollment in trials and it is unclear for how long this will last. This may therefore impact our ability to commence clinical trials in the future. Comparison of the three and nine months ended September 30, 2021 and 2020 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended September 30, ​ ​ ​ ​ Nine Months Ended September 30, ​ ​ ​ ​ ​ 2021 2020 Change 2021 2020 Change ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating expenses: ​ (in thousands) ​ (in thousands) Research and development ​ $ 4,513 ​ $ 1,644 ​ $ 2,869 ​ $ 9,725 ​ $ 5,651 ​ $ 4,074 General and administrative ​ 3,210 ​ 1,174 ​ 2,036 ​ 7,635 ​ 2,537 ​ 5,098 Total operating expenses ​ 7,723 ​ 2,818 ​ 4,905 ​ 17,360 ​ 8,188 ​ 9,172 Loss from operations ​ (7,723) ​ (2,818) ​ (4,905) ​ (17,360) ​ (8,188) ​ (9,172) Change in fair value of warrant liability ​ ​ — ​ ​ (5,549) ​ ​ 5,549 ​ ​ — ​ ​ (5,549) ​ ​ 5,549 Other income ​ 6 ​ — ​ 6 ​ ​ 506 ​ — ​ 506 Interest expense, net ​ (3) ​ (10) ​ 7 ​ (5) ​ (27) ​ 22 Net loss ​ $ (7,720) ​ $ (8,377) ​ $ 657 ​ $ (16,859) ​ $ (13,764) ​ $ (3,095) ​ Three months ended September 30, 2021 Research and development expenses Research and development expenses were $4.5 million and $1.6 million, net of DoD reimbursement for the three months ended September 30, 2021 and 2020, respectively. Research and development expenses increased by $7.5 million for the three months ended September 30, 2021. This increase is primarily as a result of $6.7 million increase in supplies and outsourced resources and an increase in $0.8 million in personnel-related costs due to an increase in headcount and stock-based compensation. Of this $7.5 million increase in research and development expenses, $4.6 million was offset due to an increase in contra-research and development expense for the three months ended September 30, 2021. Contra-research and development expenses offsets the expenses recognized in the period for the DoD Agreement. Research and development expenses are expected to increase in the future as we continue our current research programs, initiate new research programs, continue our preclinical development of product candidates and conduct future clinical trials for any of our product candidates. 22 Table of Contents General and administrative expenses General and administrative expenses increased by $2.0 million to $3.2 million for the three months ended September 30, 2021 from $1.2 million for the three months ended September 30, 2020. The increase was primarily a result of a $1.2 million increase in personnel-related costs due to an increase in headcount and stock-based compensation and a $0.8 million increase in professional fees, consulting services, insurance and legal expenses to support our operations as a public company. Change in fair value of warrant liability For the three months ended September 30, 2020, we recognized a non-cash charge of $5.5 million due to the change in the fair value of the convertible preferred stock warrant liability. The warrants became exercisable for shares of common stock upon the completion of the IPO in October 2020 as such, there was no change in fair value of warrant liability in 2021. Interest income (expense), net Interest expense consists of interest related to our capital lease obligations, equipment loan payables and long-term debt. Interest income consists of interest earned on our cash balances held with financial institutions. Nine Months Ended September 30, 2021 Research and development expenses Research and development expenses were $9.7 million and $5.7 million, net of DoD reimbursement for the nine months ended September 30, 2021 and 2020, respectively. Research and development expenses increased by $16.8 million for the nine months ended September 30, 2021. This increase was primarily as a result of $14.3 million increase in supplies and outsourced resources, an increase in $2.2 million in personnel-related costs due to an increase in headcount and stock-based compensation, and an increase in $0.3 million in facility-related costs. Of this $16.8 million increase in research and development expenses, $12.8 million was offset to due to an increase in contra-research and development expense for the nine months ended September 30, 2021. Contra-research and development expenses offsets the expenses recognized in the period for the DoD Agreement. Research and development expenses are expected to increase in the future as we continue our current research programs, initiate new research programs, continue our preclinical development of product candidates and conduct future clinical trials and other development activities for any of our product candidates. General and administrative expenses General and administrative expenses increased by $5.1 million to $7.6 million for the nine months ended September 30, 2021 from $2.5 million for the nine months ended September 30, 2020. The increase was primarily a result of a $2.3 million increase in personnel-related costs due to an increase in headcount and stock-based compensation and a $2.7 million increase in professional fees, consulting services, insurance and legal expenses to support our operations as a public company. Change in fair value of warrant liability For the nine months ended September 30, 2020, we recognized a non-cash charge of $5.5 million due to the change in the fair value of the convertible preferred stock warrant liability. The warrant liability was no longer outstanding after the October 2020 IPO. 23 Table of Contents Other income Other income consists of forgiveness of the PPP Loan. Other income increased $0.5 million for the nine months ended September 30, 2021 from $0 in the prior year period. Interest income (expense), net We recognized interest expense, net of income, of $5,000 during the nine months ended September 30, 2021 and attributable to the capital lease obligations and equipment loans offset by the increase in our cash balance resulting from our April 2021 common stock offering. We recognized interest expense of $27,000, net of interest income, during the nine months ended September 30, 2020 as a result of our capital lease obligations and equipment loans outstanding. Liquidity and capital resources Since our inception, we have incurred significant operating losses. We expect to incur significant expenses and operating losses for the foreseeable future as we advance the preclinical and, if successful, the clinical development of our programs. To date, we have funded our operations primarily with proceeds from the sales of common stock, preferred stock and warrants, the convertible promissory notes and the PPP Loan. Through September 30, 2021, we raised an aggregate of $123.1 million in gross proceeds from sales of our common stock and warrants, Series A convertible preferred stock and warrants, the issuance of convertible promissory notes, the PPP Loan and issuance of common stock through a Stock Purchase Agreement with an individual investor. As of September 30, 2021, we had $56.2 million in cash. The Company filed a shelf registration statement on Form S-3, which was declared effective by the SEC on October 14, 2021, pursuant to which the Company may issue from time to time securities with an aggregate value of up to $200.0 million. In October 2021 the Company entered into a new ATM Agreement with Jefferies LLC, which provides that, upon the terms and subject to the conditions and limitations in the ATM Agreement, the Company may elect, from time to time, to offer and sell common shares under the registration statement having an aggregate offering price of up to $75.0 million through Jefferies acting as sales agent. The Company has not yet sold any shares under the ATM Agreement. We will need to raise additional capital before we exhaust our current cash to continue to fund our research and development, including our plans for clinical and preclinical trials and new product development, as well as to fund operations generally. As and if necessary, we will seek to raise additional funds through various potential sources, such as equity and debt financings or through corporate collaboration and license agreements. We can give no assurances that we will be able to secure such additional sources of funds to support our operations, or, if such funds are available to us, that such additional financing will be sufficient to meet our needs. Cash flows The following table summarizes our sources and uses of cash for the nine months ended September 30, 2021 and 2020: ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended September 30, ​ 2021 2020 ​ ​ (in thousands) Cash used in operating activities ​ $ (11,421) ​ $ (6,072) Cash used in investing activities ​ (65) ​ (540) Cash provided by financing activities ​ 27,963 ​ 10,813 Net increase in cash and restricted cash ​ $ 16,477 ​ $ 4,201 ​ Operating activities Net cash used in operating activities for the nine months ended September 30, 2021 was $11.4 million, consisting primarily of our net loss of $16.9 million, offset by noncash charges of depreciation and amortization of $0.6 million, and shared-based compensation of $2.2 million and an increase in accrued expenses and other liabilities of $2.8 million 24 Table of Contents and accounts payable of $2.1 million and increased by forgiveness of PPP Loan of $0.5 million and an increase in prepaid expenses and other assets of $1.8 million. Net cash used in operating activities for the nine months ended September 30, 2020 was $6.1 million, consisting primarily of our net loss of $13.8 million offset by noncash charges of depreciation and amortization expense $0.5 million, share-based compensation expense of $0.3 million and change in fair value of warrant liability of $5.5 million and increases in accounts payable and accrued expenses and other liabilities of $1.5 million due to our growth in expenditures. Investing activities During the nine months ended September 30, 2021 and 2020, we used $65,000 and $0.5 million, respectively, for the purchase of property and equipment. Financing activities During the nine months ended September 30, 2021, financing activities provided $28.0 million of proceeds from the sale of common stock and common stock warrants, the exercise of common stock warrants and stock options, offset by the payment of issuance costs, and for payments related to our equipment loan. During the nine months ended September 30, 2020, financing activities provided $11.0 million from the sale of our Series A convertible preferred stock and warrants and $0.5 million from the PPP loan, offset by $0.4 million for payments related to our capital lease obligations and equipment loan payables, $27,000 for the payment of issuance costs related to the sale of Series A convertible preferred stock and warrants and $0.3 million for the payment of IPO costs. Funding requirements Our operating expenses are expected to increase substantially as we continue to advance our portfolio of programs. Specifically, our expenses will increase if and as we: ● further develop our discovery engine; ● continue our research and development programs for our current and any future product candidates from our current programs; ● seek to identify additional research programs and additional product candidates; ● initiate non-clinical testing and clinical trials for our product candidates; ● maintain, expand, enforce, defend, and protect our intellectual property portfolio and provide reimbursement of third-party expenses related to our patent portfolio; ● seek marketing approvals for any of our product candidates that successfully complete clinical trials; ● ultimately establish a sales, marketing, and distribution infrastructure to commercialize any medicines for which we may obtain marketing approval; ● hire additional personnel including research and development, clinical and administrative personnel; ● add operational, financial, and management information systems and personnel, including personnel to support our product development; 25 Table of Contents ● acquire or in-license products, intellectual property, and technologies; and ● continue to operate as a public company. We expect that our existing cash at September 30, 2021 will enable us to fund our current and planned operating expenses and capital expenditures at least 12 months from the filing date of this Quarterly Report on Form 10-Q. The Company will need additional financing to support its continuing operations and pursue its development strategy. We have based these estimates on assumptions that may prove to be imprecise, and we may exhaust our available capital resources sooner that we currently expect. Because of the numerous risks and uncertainties associated with the development of our programs, we are unable to estimate the amounts of increased capital outlays and operating expenses associated with completing the research and development of our product candidates. Our future funding requirements will depend on many factors including: ● the costs of continuing to develop our discovery engine; ● the costs of acquiring licenses, should we choose to do so, for the expansion of product development; ● the scope, progress, results, and costs of discovery, preclinical development, laboratory testing, manufacturing and clinical trials for the product candidates we are developing and may develop; ● the costs of preparing, filing, and prosecuting patent applications, maintaining and enforcing our intellectual property and proprietary rights, and defending intellectual property-related claims and the success of our intellectual property portfolio; ● the costs, timing, and outcome of regulatory review of the product candidates we may develop; ● the costs of future activities, including product sales, medical affairs, marketing, manufacturing, distribution, market access for any product candidates for which we receive regulatory approval; ● our ability to establish and maintain collaborations and strategic alliances on favorable terms, if at all, and achieve milestones or meet other requirements that trigger payments under those transactions; ● and achieve milestones or meet other requirements that trigger payments under those transactions; ● the extent to which we acquire or in-license products, intellectual property, and technologies and any payments required under those arrangements; and ● the costs of continuing to operate as a public company. Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances, and licensing arrangements. 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, the ownership interest of any purchaser will be or could be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing and equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making acquisitions or capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or drug candidates, or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings or other arrangements when needed, we may be required to delay, limit, reduce or terminate our research, product development or future commercialization efforts, or grant rights to develop and market product candidates that we would otherwise 26 Table of Contents prefer to develop and market ourselves. If we are unable to raise additional funds through equity or debt financings 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 product candidates that we would otherwise prefer to develop and market ourselves. Critical accounting policies and use of estimates Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which we have prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, and expenses and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on historical experience, known trends and events and 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 differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in Note 2 to our audited financial statements appearing in our Annual Report filed on Form 10-K with the SEC on March 25, 2021, we believe that the following accounting policies are the most critical to the judgments and estimates used in the preparation of our financial statements. Share-based compensation We recognize the grant-date fair value of share-based awards issued as compensation expense on a straight-line basis over the requisite service period, which is generally the vesting period of the award. The fair value of stock options is estimated at the time of grant using the Black-Scholes option pricing model, which requires the use of inputs and assumptions such as the estimated fair value of the underlying common stock, exercise price of the option, expected term, risk-free interest rate, expected volatility and dividend yield, the most critical of which is the estimated fair value of our common stock. The inputs and assumptions used to estimate the fair value of share-based payment awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and management uses different inputs and assumptions, our share-based compensation expense could be materially different for future awards. These subjective assumptions are estimated as follows: ● Expected volatility. The expected volatility was based on the historical stock volatility of several of our comparable publicly traded companies over a period of time equal to the expected term of the options, as we do not have sufficient trading history to use the volatility of our own common stock. ● Fair value of common stock. On October 2, 2020, we closed our IPO. Following the closing, the fair value of common stock was the closing price of our common stock on the Nasdaq Global Market as reported on the date of the grant. Prior to that, our common stock had not historically been publicly traded and we had to periodically estimate the fair value of common stock. Estimating the fair value of common stock Prior to May 2020, in valuing our common and preferred stock, we determined the equity value of our business by using a net asset approach. The net asset approach is predicated on the assumption that a prudent buyer would pay no more than it would cost to purchase the assets (tangible and intangible) of a company at current market prices. This approach requires estimating the individual market values of our assets and liabilities to derive an adjusted enterprise 27 Table of Contents value. The enterprise values determined by the net asset approach were then allocated to our common stock using the Option Pricing Method, or OPM. The OPM treats common stock and preferred stock as call options on a company’s enterprise value, with exercise prices based on the liquidation preferences of the preferred stock. Therefore, the common stock has value only if the funds available for distribution to the stockholders exceed the value of the liquidation preference at the time of an assumed liquidity event such as a merger, sale or initial public offering. The common stock is modeled as a call option with a claim on the enterprise at an exercise price equal to the remaining value immediately after the preferred stock is liquidated. The OPM uses the Black-Scholes option-pricing model to determine the price of the call option. The OPM is appropriate to use when the range of possible future outcomes is so difficult to predict that forecasts would be highly speculative. Beginning in May 2020, we used the probability-weighted expected return method to determine the value of our common stock. Under the probability-weighted expected return method, the value of an enterprise’s common stock is estimated based upon an analysis of future values assuming various possible future liquidity events, such as an initial public offering, a strategic sale or merger and remaining a private enterprise without a liquidity event. The fair market value of the stock is based upon the probability-weighted present value of expected future net cash flows as a result of distributions to stockholders considering each of the possible future events, as well as the rights and preferences of each class of stock. Given the absence of a public trading market for our capital stock at the time, our board of directors exercised reasonable judgment and considered a number of subjective factors to determine the best estimate of the fair value of our common stock, including: ● our business, financial condition and results of operations, including related industry trends affecting our operations; ● the likelihood of achieving a liquidity event, such as an initial public offering or the sale of the Company, given prevailing market conditions; ● the lack of marketability of our preferred and common stock; ● the market performance of comparable publicly traded companies; and ● United States and global economic and capital market conditions and outlook. Recently issued accounting standards In February 2016, the FASB issued ASC Topic 842, Leases, (“Topic 842”). This standard requires all entities that lease assets with terms of more than 12 months to capitalize the assets and related liabilities on the balance sheet. In June 2020, the FASB issued ASU 2020-05, which amended the effective date of Topic 842 until January 1, 2022. Upon adoption, the standard requires the use of a modified retrospective transition approach for its adoption. The Company is currently evaluating the effect Topic 842 will have on its consolidated financial statements and related disclosures. JOBS Act We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies, including reduced disclosure about our executive compensation arrangements, exemption from the requirements to hold non-binding advisory votes on executive compensation and golden parachute payments and exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting. 28 Table of Contents We may take advantage of these exemptions until the last day of the fiscal year following the fifth anniversary of this offering or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company earlier if we have more than $1.07 billion in annual revenue, we have more than $700.0 million in market value of our stock held by non-affiliates (and we have been a public company for at least 12 months and have filed one annual report on Form 10-K) or we issue more than $1.0 billion of non-convertible debt securities over a three-year period. For so long as we remain an emerging growth company, we are permitted, and intend, to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. We may choose to take advantage of some, but not all, of the available exemptions. In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected not to “opt out” of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we will adopt the new or revised standard at the time private companies adopt the new or revised standard and will do so until such time that we either (i) irrevocably elect to “opt out” of such extended transition period or (ii) no longer qualify as an emerging growth company. Therefore, the reported results of operations contained in our financial statements may not be directly comparable to those of other public companies. Off-balance sheet arrangements During the periods presented, we did not have, nor do we currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC. Item 3. Quantitative and Qualitative Disclosures About Market Risk The information under this item is not required to be provided by smaller reporting companies.