Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations, as well as other sections in this Quarterly Report on Form 10 - Q, should be read in conjunction with (i) our unaudited interim financial statements and related notes thereto included elsewhere herein, (ii) Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the United States Securities and Exchange Commission (“SEC”) on March 16, 2023 and (iii) our other public reports filed with the SEC. 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 express or implied statements regarding Immunome’s beliefs and expectations regarding the advancement of its platform and programs, execution of its regulatory, research, clinical and strategic plans and anticipated upcoming milestones for its platform and programs, including expectations regarding, among other things, the timing and results of its preclinical studies and clinical trials, clinical plans, general regulatory actions, the translation of preclinical data into clinical safety and efficacy, the therapeutic potential and benefits of its programs and development candidates, the possible need and demand for its programs and development candidates , 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, financial trends and other matters 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: our expectations regarding the announced merger transaction with Morphimmune; the fact that research and development data are subject to differing interpretations and assessments; Immunome’s ability to execute on its strategy, including with respect to its R&D efforts, IND submissions and other regulatory filings, timing of these filings and the timing and nature of governmental authority feedback regarding the same, initiation, continuation and completion of any clinical studies, confirmatory testing and other anticipated milestones as and when anticipated; the effectiveness of Immunome’s programs and development candidates, including the possibility that further preclinical data and any clinical trial data may be inconsistent with the data used for advancing the programs and development candidates and that further variants of concern could emerge; Immunome’s ability to fund operations and raise capital; Immunome’s reliance on vendors; 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 SEC on March 16, 2023, 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. In addition, we may discuss our programs and development candidates that have not yet undergone clinical trials or been approved for marketing by the U.S. Food and Drug Administration or other governmental authority, including expectations about their therapeutic potential and benefits thereof. No representation is made as to the safety or effectiveness of these programs and development candidates for the use for which such programs and development candidates are being studied. 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.
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 and entering and executing on
21
Table of Contents
collaborations. To date, we have financed our operations primarily through sales of our common stock, Series A convertible preferred stock and warrants, warrant exercises, the issuance of convertible promissory notes, the Paycheck Protection Program loan, or the PPP loan, that was forgiven in May 2021, and strategic partnerships with AbbVie Global Enterprises Ltd., or AbbVie, and the Department of Defense, or the DoD.
To date, we have not generated any revenue from commercial sales and do not expect to generate revenue from commercial sale of products for the foreseeable future. Since inception we have incurred significant operating losses. Our net losses for the three months ended June 30, 2023 and 2022 were $5.6 million and $8.9 million, respectively, and $9.8 million and $20.6 million for the six months ended June 2023 and 2022, respectively.
As of June 30, 2023, we had cash and cash equivalents of $38.4 million. We expect to continue to incur significant expenses and operating losses for the foreseeable future as we continue advancement of our programs and develop product candidates. We also plan 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 to support these activities on favorable terms, if at all, we will need to delay, scale back or eliminate some or all of our research and development efforts. We may also need to consider various strategic alternatives, including a merger or sale of the Company; or reduce or cease operations. If we engage in collaborations, we may receive lower consideration upon commercialization of such products or technologies than if we had not entered into such arrangements or if we entered into such arrangements at later stages in the research and development process. Other than the current and potential future sources of funding under the Collaboration Agreement with AbbVie, we currently have no other sources of revenue, and our ability to continue to fund our future business plans 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 in connection with ongoing activities, particularly if and as we:
● continue research and development activities;
● pursue regulatory approvals and implement other regulatory strategies for our programs;
● 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 and expand our clinical and regulatory capabilities;
● add operational, financial and management information systems and infrastructure to support our research and development programs, and any future commercialization efforts;
● complete the Merger with Morphimmune
As a result of these anticipated expenditures and potential unanticipated expenditures, 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
22
Table of Contents
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 programs and development 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.
We expect that our cash as of June 30, 2023, exclusive of any potential proceeds received in connection with the potential closing of the Merger and concurrent PIPE transaction, will be sufficient to fund our operations at least 12 months from the filing date of this Quarterly Report on Form 10-Q. 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 programs and development candidates.
Merger Agreement
On June 29, 2023, we entered into an Agreement and Plan of Merger and Reorganization, or the Merger Agreement, with Morphimmune Inc., a Delaware corporation, or Morphimmune, a biotechnology company focused on developing targeted oncology therapeutics, and Ibiza Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of Immunome, or Merger Sub. Upon the terms and subject to the satisfaction of the conditions described in the Merger Agreement, Merger Sub will be merged with and into Morphimmune, with Morphimmune surviving as our wholly owned subsidiary, or the Merger. The Merger is intended to qualify as a tax-free reorganization for U.S. federal income tax purposes and is expected to close by the end of 2023.
At the Effective time, each share of Morphimmune capital stock outstanding immediately prior to the Effective Time will be automatically converted solely into the right to receive 0.3042 shares of the Company’s common stock, or the Exchange Ratio, and, if applicable, an amount in cash, rounded to the nearest whole cent, in lieu of any fractional share interest in the Company’s common stock to which such holder otherwise would have been entitled (after aggregating all fractional shares issuable to such holder). Each option to purchase shares of Morphimmune capital stock, or a Morphimmune Option, that is outstanding and unexercised immediately prior to the Effective Time under Morphimmune’s 2020 Equity Incentive Plan, or the Morphimmune Plan, whether or not vested, will be converted into and become an option to purchase the Company’s common stock using the Exchange Ratio, and the Company will assume the Morphimmune Plan and each such Morphimmune Option in accordance with the terms of the Morphimmune Plan and the terms of the stock option agreement by which such Morphimmune Option is evidenced.
Immediately following the Merger, the pre-Merger equityholders of the Company are expected to own approximately 55% of the shares of the Company’s common stock and the pre-Merger equityholders of Morphimmune are expected to own approximately 45% of the Company’s common stock, in each case, on a fully diluted basis, excluding out-of-the-money securities of the Company as of June 28, 2023, unallocated shares of the Company’s common stock available for issuance under the Company’s 2020 Equity Incentive Plan and employee stock purchase plan, and the grant of a stock option to Dr. Clay Siegall, Ph.D., in connection with his employment agreement to become Chief Executive Officer of the Company upon consummation of the Merger, and prior to giving effect to the PIPE financing as described below.
23
Table of Contents
Anticipated Accounting Treatment
The Merger is expected to be treated as an asset acquisition by Immunome of Morphimmune in accordance with U.S. GAAP. Upon completion of the Merger, Immunome will obtain control of Morphimmune’s assets consisting primarily of cash and in-process research and development (IPR&D) associated with Morphimmune’s potential primary product candidate, Mi-1001, and development program, 177 Lu-FAP.
In accordance with U.S. GAAP, Immunome must first assess whether an integrated set of assets and activities should be accounted for as an acquisition of a business or an asset acquisition. An initial screen test is completed to determine if substantially all of the fair value of the gross assets acquired of Morphimmune is concentrated in a single asset or group of similar assets. If that screen is met, the set is not considered a business and is accounted for as an asset acquisition. Immunome will account for the acquisition of Morphimmune as an asset acquisition as substantially all of the fair value of the gross assets being acquired of Morphimmune is concentrated within the FA-TLR7a and 177 Lu-FAP development programs which are considered a group of similar assets. These programs are deemed to be similar IPR&D assets being acquired based on the similarity of: (i) their current preclinical stage of development, (ii) solid tumor therapeutic indications, (iii) risks for development, (iv) regulatory pathway, and (v) economics of commercialization.
Since the IPR&D being acquired has no alternative future use, Immunome expects to record the amount of consideration allocated to the IPR&D assets as research and development expense in its statement of operations on the date of acquisition.
Subscription Agreements
In connection with the execution of the Merger Agreement, on June 29, 2023, the Company entered into subscription agreements, each, a Subscription Agreement, with certain investors, or the PIPE Investors, pursuant to which, among other things, the PIPE Investors have agreed to subscribe for and purchase, and the Company has agreed to issue and sell to the PIPE Investors, an aggregate of 21,690,871 shares of the Company’s common stock for an aggregate purchase price of approximately $125.0 million, on the terms and subject to the conditions set forth therein. The shares of the Company’s common stock were sold to the PIPE Investors at a price per share equal to $5.75 and, in the case of affiliate investors, $5.91 per share, the consolidated closing bid price per share immediately preceding the entry into the Subscription Agreement. The closing of the PIPE financing is expected to occur in connection with and immediately following the consummation of the Merger.
Our current programs and strategic collaboration
Oncology (IMM-ONC-01)
Our lead oncology program targets IL-38, which we believe is a novel, negative regulator of inflammation capable of promoting tumor evasion of the immune system. IL-38 was identified as the target of an antibody isolated from a hybridoma library generated from the memory B cells of a patient with squamous head and neck cancer. Query of public and proprietary (Tempus) databases of cancer gene expression revealed over-expression of IL-38 in multiple solid tumors. Further, a correlation with low levels of tumor-infiltrating immune effector cells, a hallmark of immune suppression in some of these patients’ tumors, and high IL-38 expression was also observed, suggesting a role for IL-38 as an immune modulator. Data obtained from preclinical testing indicated that blocking IL-38 function using inhibitory antibodies increased the immune response to the tumor and resulted in anti-tumor activity in select animal models, suggesting that anti-IL-38 antibodies could have therapeutic utility as single agents or in combination with other therapeutic modalities. Our recent analysis further confirms IL-38 expression is frequently elevated in samples of select patient tumor subtypes, in cancers such as head and neck, lung and gastroesophageal. We believe that this information could potentially guide patient selection for early clinical testing and may improve the overall probability of demonstrating clinical utility, thereby improving the probability of clinical success. We plan to submit our IND application for the IMM-ONC-01 program in the first quarter of 2024.
24
Table of Contents
SARS-CoV-2 (IMM-BCP-01)
We developed an antibody cocktail derived from the B cells of COVID-19 patients who exhibited high neutralizing titers. IMM-BCP-01 targets non-overlapping regions of the Spike protein of SARS-CoV-2 which include highly conserved, subdominant epitopes. The cocktail promotes both ACE2 and non-ACE2 dependent neutralization and induces natural viral clearance mechanisms such as antibody dependent cellular cytotoxicity, complement activation and phagocytosis in pre-clinical testing. We are conducting this program in collaboration with the DoD. The IMM-BCP-01 program is broadly focused on the emerging variants of SARS-CoV-2. We submitted an IND application for the IMM-BCP-01 program to the U.S. FDA in November 2021 and initiated the Phase 1b study of IMM-BCP-01 in patients infected with SARS-CoV-2 in June 2022 . On January 6, 2023, we announced that it successfully completed dosing of the first cohort of patients in a Phase 1b study with no significant treatment-related adverse events. We have decided to seek a partner in order to continue the trial and for any further development activities.
Other Programs and Platforms
In addition to the already described current programs, we will continue to invest in our proprietary discovery engine to expand our pipeline. The high output of antibody-target pairs resulting from our discovery engine may provide us with additional insights into the immune response against cancer and other diseases. We intend to continue to invest in this platform, to evaluate novel antibody-target pairs and to develop a pipeline of antibody therapeutics as single agents or in combination with other therapeutics or utilize technologies to yield development candidates with therapeutic modalities, such as Antibody-Drug Conjugates, or ADCs.
Additionally, we plan to expand our intellectual property estate and infrastructure needed to discover and advance our platform and programs. We may in-license or acquire complementary intellectual property as needed or required, and we may continue to build our know-how and trade secrets. As an example, we may pursue both therapeutic and diagnostic applications of our antibodies through composition of matter and/or method of use patents. While the focus area of our current programs is oncology, we may invest in intellectual property in other therapeutic areas as well.
We believe that our technology has broad utility and could enable the formation of attractive strategic partnerships, as exemplified by our OTA Agreement with the DoD and the Collaboration Agreement with AbbVie. Therefore, to maximize the value of our platform we may, from time to time, contemplate and enter into various forms of collaborative agreements related to our platform, our programs and/or development candidates with third parties, including other companies, government agencies, academic institutions and non-profit groups.
Collaboration Agreement with AbbVie
On January 4, 2023, we entered into a collaboration and option agreement, or the Collaboration Agreement with AbbVie. As part of the agreement, we will use our proprietary discovery engine to discover and validate targets derived from patients with three specified tumor types, and antibodies that bind to such targets, which may be the subject of further development and commercialization by AbbVie. The research term is at least 66 months, subject to extension in certain circumstances by specified extension periods. Pursuant to the terms of the Collaboration Agreement, with respect to each novel target-antibody pair we generate that meets certain mutually agreed criteria (each, a Validated Target Pair or VTP), we granted to AbbVie an exclusive option (up to a maximum of 10 in total) to purchase all rights in and to such Validated Target Pair, for all human and non-human diagnostic, prophylactic and therapeutic uses throughout the world, including without limitation the development and commercialization of certain products derived from the assigned Validated Target Pair and directed to the target comprising such VTP (Products). No rights are granted by us to AbbVie under any of our platform technology covering our discovery engine. Until the expiration of the research term, we are not permitted to conduct any activities in connection with targets or antibodies derived from patients with the specified tumor types, whether independently or with other third parties, except in limited circumstances with respect to certain target-antibody pairs that are no longer subject to the collaboration with AbbVie. In addition, during the term of the Collaboration Agreement, we are not permitted to develop products directed to targets that are included in VTPs purchased by AbbVie, or to which AbbVie still has rights under the Collaboration Agreement, whether independently or with other third parties.
25
Table of Contents
Under the Collaboration Agreement, AbbVie paid us an upfront payment of $30.0 million in January 2023 and may pay us certain additional platform access payments in the aggregate amount of up to $70.0 million based on our use of our discovery engine in connection with activities under each stage of the research plan, and delivery of VTPs to AbbVie. AbbVie will also pay an option exercise fee in the low single digit millions for each of the up to 10 VTPs for which it exercises an option. If AbbVie progresses development and commercialization of a Product, AbbVie will pay us development and first commercial sale milestones of up to $120.0 million per target, and sales milestones based on achievement of specified levels of net sales of Products of up to $150.0 million in the aggregate per target, in each case, subject to specified deductions in certain circumstances. On a Product-by-Product basis, AbbVie will pay us tiered royalties on net sales of Products at a percentage in the low single digits, subject to specified reductions and offsets in certain circumstances. AbbVie’s royalty payment obligation will commence, on a Product-by-Product and country-by-country basis, on the first commercial sale of such Product in such country and will expire on the earlier of (a) (i) the ten (10)-year anniversary of such first commercial sale for such Product in such country, or (ii) solely with respect to a Product that incorporates an antibody comprising a VTP (or certain other antibodies derived from such delivered antibody), the expiration of all valid claims of patent rights covering the composition of matter of any such antibody (whichever out of (i) or (ii) is later), and (b) the expiration of regulatory exclusivity for such Product in such country. We are potentially eligible to receive up to approximately $2.8 billion from AbbVie under the Collaboration Agreement from the sources described above.
The Collaboration Agreement will expire upon the expiration of the last to expire royalty payment obligation with respect to all Products in all countries, subject to earlier expiration if all option exercise periods for all Validated Target Pairs expire without AbbVie exercising any option. In addition, the research term will terminate if AbbVie does not elect to make certain platform access payments at specified points during the research term, in order for us to continue the target discovery activities under the collaboration. The Collaboration Agreement may be terminated by (a) either party upon the other party’s uncured material breach, or upon any insolvency event of the other party, (b) AbbVie for convenience upon a specified period prior written notice, or (c) AbbVie for our breach of representations and warranties with respect to debarment or compliance with anti-bribery and anti-corruption laws. If AbbVie has the right to terminate the Collaboration Agreement for our uncured material breach or a breach of representations and warranties with respect to debarment or compliance with anti-bribery and anti-corruption laws, AbbVie may elect to continue the Collaboration Agreement, subject to certain specified reductions applicable to certain of AbbVie’s payment obligations (with a specified floor on such reductions).
Components of our results of operations
Collaboration revenue
We have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products for the foreseeable future. To date, we have generated our revenue through the Collaboration Agreement with AbbVie. We recognize revenue over the expected performance period under this agreement. We expect that revenues for the foreseeable future will be derived primarily from this agreement and any additional collaborations that we may enter into. We have not received any royalties under the Collaboration Agreement with AbbVie to date.
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;
● expenses to conduct clinical trials including regulatory and quality assurance;
26
Table of Contents
● the cost of developing and validating our manufacturing process for use in our preclinical studies and 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.
In July 2020, we entered into the OTA Agreement with the DoD to fund the development of IMM-BCP-01 to treat COVID-19. The OTA Agreement was modified in May 2021 to increase such funding. In connection with the OTA Agreement, we record expense reimbursements received from the DoD as contra-research and development expenses in the same period the underlying expenses are incurred.
Under the provisions of the CARES Act signed into law on March 27, 2020 and the subsequent extension of the CARES Act, the Company was deemed eligible to receive the employee retention credit subject to certain criteria. The Company recognized the employee retention credit as contra-expense to personnel related costs in research and development expenses in the condensed statements of operations.
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.
Under the provisions of the CARES Act signed into law on March 27, 2020 and the subsequent extension of the CARES Act, the Company was deemed eligible to receive the employee retention credit subject to certain criteria. The Company recognized the employee retention credit as contra-expense to personnel related costs in general and administrative expenses in the condensed statements of operations.
Interest income
Interest income consists of interest earned on our cash balances held with a financial institution.
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 public health crises 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.
27
Table of Contents
Comparison of the three and six months ended June 30, 2023 and 2022
Three Months Ended June 30,
Six Months Ended June 30,
2023
2022
Change
2023
2022
Change
(in thousands)
(in thousands)
Collaboration revenue
$
4,263
$
—
$
4,263
$
6,627
$
—
$
6,627
Operating expenses:
Research and development
5,716
5,717
(1)
9,629
13,795
(4,166)
General and administrative
4,320
3,209
1,111
7,242
6,785
457
Total operating expenses
10,036
8,926
1,110
16,871
20,580
(3,709)
Loss from operations
(5,773)
(8,926)
3,153
(10,244)
(20,580)
10,336
Interest income
216
2
214
417
3
414
Net loss
$
(5,557)
$
(8,924)
$
3,367
$
(9,827)
$
(20,577)
$
10,750
Three months ended June 30, 2023 and 2022
Collaboration revenue
In January 2023, we entered into the Collaboration Agreement with AbbVie and recognized collaboration revenue of $4.3 million for the three months ended June 30, 2023. No collaboration revenue was recognized for the three months ended June 30, 2022.
Research and development expenses
Research and development expenses were $5.7 million for both the three months ended June 30, 2023 and 2022.
Research and development expenses were flat for the three months ended June 30, 2023. ONC-01 external program related expenses decreased by $1.2 million as a result of a decrease in product development activities. BCP-01 external program related expenses decreased by $1.0 million, net of contra expense, as a result of our decision to seek a partner in order to continue the BCP-01 trial and further development activities. These decreases were offset by an increase of $1.3 million in outsourced research and materials relating to the AbbVie collaboration. In addition, personnel related costs increased by $0.9 million for the three months ended June 30, 2023 primarily as a result of $0.6 million contra-expense to personnel related costs relating to the CARES Act employee retention credit recorded during the three months ended June 30, 2022 and a $0.3 million increase in fringe benefits.
General and administrative expenses
General and administrative expenses were $4.3 million and $3.2 million for the three months ended June 30, 2023 and 2022, respectively.
General and administrative expenses increased by $1.1 million for the three months ended June 30, 2023. The increase was primarily a result of a $1.6 million increase in professional fees including consulting and legal related costs associated with the Merger offset by a $0.4 million decrease in general expenses including insurance, and a $0.1 million decrease in personnel-related costs. Personnel-related costs decreased as a result of a $0.3 million decrease in share-based compensation offset by $0.2 million in contra-expense to personnel related costs relating to the CARES Act employee retention credit recorded during the three months ended June 30, 2023.
Interest income
Interest income was $0.2 million and $2,000 for the three months ended June 30, 2023 and 2022, respectively.
Interest income increased by $0.2 million for the three months ended June 30, 2023 as a result of increased interest rates on our cash balances held with a financial institution.
28
Table of Contents
Six months ended June 30, 2023 and 2022
Collaboration revenue
In January 2023, we entered into the Collaboration Agreement with AbbVie and recognized collaboration revenue of $6.6 million for the six months ended June 30, 2023. No collaboration revenue was recognized for the six months ended June 30, 2022.
Research and development expenses
Research and development expenses were $9.6 million and $13.8 million for the six months ended June 30, 2023 and 2022, respectively.
Research and development expenses decreased by $4.2 million for the six months ended June 30, 2023. Of the $4.2 million decrease in research and development expenses, ONC-01 external program related expenses decreased by $3.4 million as a result of a decrease in product development activities. BCP-01 external program related expenses decreased by $3.2 million, net of contra expense, as a result of our decision to seek a partner in order to continue the BCP-01 trial and further development activities. These decreases were offset by an increase of $1.7 million in outsourced research and materials relating to the AbbVie collaboration. In addition, personnel related costs increased by $0.7 million for the six months ended June 30, 2023 primarily as a result of $0.6 million contra-expense to personnel related costs relating to the CARES Act employee retention credit recorded during the six months ended June 30, 2023.
General and administrative expenses
General and administrative expenses were $7.2 million and $6.8 million for the six months ended June 30, 2023 and 2022, respectively.
General and administrative expenses increased by $0.4 million for the three months ended June 30, 2023. The increase was primarily a result of a $1.2 million increase in professional fees, including consulting and legal related costs associated with the Merger, offset by a $0.8 million decrease in general expenses including insurance.
Interest income
Interest income was $0.4 million and $3,000 for the six months ended June 30, 2023 and 2022, respectively.
Interest income increased by $0.4 million for the six months ended June 30, 2023 as a result of increased interest rates on our cash balances held with a financial institution.
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 continue advancement of our programs and development candidates. Through June 30, 2023, we raised an aggregate of $155.2 million in gross proceeds from sales of our common stock, Series A convertible preferred stock and warrants, warrant and stock option exercises, the issuance of convertible promissory notes, the Paycheck Protection Program, or PPP, loan that was forgiven in May 2021, and strategic partnerships with AbbVie Global Enterprises Ltd, or AbbVie. In January 2023, we received a $30.0 million upfront payment from AbbVie under the collaboration and option agreement, or the Collaboration Agreement. In addition, we received $17.6 million in expense reimbursement from the Department of Defense, or DoD under the Other Transaction Authority for Prototype Agreement, or the OTA Agreement, from inception through 2022.
On October 1, 2021, we entered into an Open Market Sale Agreement, or the ATM Agreement, with Jefferies Group LLC, which provides that, upon the terms and subject to the conditions and limitations in the ATM Agreement, we may elect, from time to time, to offer and sell shares of common stock under the registration statement having an aggregate offering price of up to $75.0 million through Jefferies Group LLC acting as sales agent. We filed a shelf registration
29
Table of Contents
statement on Form S-3, which was declared effective by the Securities and Exchange Commission, or the SEC, on October 14, 2021, pursuant to which we may issue from time-to-time securities with an aggregate value of up to $200.0 million. Through June 30, 2023, we sold 5,925 shares of common stock under the ATM Agreement resulting in net proceeds of approximately $34,000. We can elect to sell additional shares under the ATM Agreement or shelf registration statement.
In addition, on January 4, 2023, we entered into the Collaboration Agreement with AbbVie directed to the discovery of up to 10 novel target-antibody pairs leveraging our discovery engine. We are potentially eligible to receive up to approximately $2.8 billion from AbbVie under the Collaboration Agreement from the sources described in the section “Our current programs and strategic collaboration”. There are no assurances that we will receive additional payments from AbbVie beyond the $30.0 million upfront payment.
In connection with the execution of the Merger Agreement, on June 29, 2023, the Company entered into subscription agreements, each, a Subscription Agreement, with certain investors, or the PIPE Investors, pursuant to which, among other things, the PIPE Investors have agreed to subscribe for and purchase, and the Company has agreed to issue and sell to the PIPE Investors, an aggregate of 21,690,871 shares of the Company’s common stock for an aggregate purchase price of approximately $125.0 million, on the terms and subject to the conditions set forth therein. The shares of the Company’s common stock were sold to the PIPE Investors at a price per share equal to $5.75 and, in the case of affiliate investors, $5.91 per share, the consolidated closing bid price per share immediately preceding the entry into the Subscription Agreement. The closing of the PIPE financing is expected to occur in connection with and immediately following the consummation of the Merger.
We will need to raise additional capital before we exhaust our current cash to continue to fund our research and development, including our plans to continue advancement of our programs and development candidates and new product development, as well as to fund operations. As and if necessary, we will seek to raise additional funds through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements. 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 six months ended June 30, 2023 and 2022:
Six Months Ended June 30,
2023
2022
(in thousands)
Cash provided by (used in) operating activities
$
18,505
$
(14,436)
Cash used in investing activities
(446)
(176)
Cash provided by financing activities
34
32
Net increase (decrease) in cash and cash equivalents and restricted cash
$
18,093
$
(14,580)
Operating activities
Net cash provided by operating activities for the six months ended June 30, 2023 was $18.5 million, consisting primarily of increases in deferred revenue of $23.4 million, noncash charges of $2.6 million for share-based compensation expense, depreciation and amortization of right-of-use asset, increases in accounts payable of $1.3 million, and decreases in prepaid expenses and other assets of $1.2 million, offset by our net loss of $9.8 million.
Net cash used in operating activities for the six months ended June 30, 2022 was $14.4 million, consisting primarily of our net loss of $20.6 million and decreases in accrued expenses and other liabilities of $3.3 million, offset by noncash charges of $2.9 million for stock compensation expense, depreciation and amortization of right-of-use asset, decreases in prepaid expenses and other assets of $4.4 million, and increases in accounts payable of $2.2 million.
30
Table of Contents
Investing activities
During the six months ended June 30, 2023 and 2022, we used $0.4 million and $0.2 million, respectively, for the purchase of property and equipment.
Financing activities
During the six months ended June 30, 2023, financing activities provided approximately $34,000 in net proceeds from the sales of common stock under the ATM agreement.
During the six months ended June 30, 2022, financing activities provided $32,000 from exercise of stock options.
Funding requirements
Our operating expenses are expected to increase substantially as we continue to advance our discovery engine and programs.
Specifically, our expenses will increase if and as we:
● further develop our discovery engine;
● continue our research and development programs for our programs and development candidates;
● seek to identify additional programs and development 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 programs and development candidates that successfully complete clinical trials;
● 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;
● acquire or in-license products, intellectual property, and technologies;
● complete the Merger with Morphimmune; and
● continue to operate as a public company.
We expect that our existing cash at June 30, 2023, exclusive of any potential proceeds received in connection with the potential closing of the merger and concurrent PIPE transaction, 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. We will need additional financing to support its continuing operations and pursue its research and development strategy. 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. 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 programs and development candidates.
31
Table of Contents
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 programs and development candidates;
● 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 programs and development candidates we may develop;
● the costs of future activities, including product sales, medical affairs, marketing, manufacturing, distribution, coverage and reimbursement for any programs or development candidates for which we receive regulatory approval;
● the success of our license agreements and our collaborations;
● our ability to establish and maintain additional collaborations on favorable terms, if at all;
● the achievement of milestones or occurrence of other developments that trigger payments under any additional collaboration agreements we obtain;
● the extent to which we acquire or in-license products, intellectual property, and technologies; and
● the costs of operating 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. Other than in connection with the possible PIPE, 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 programs and development 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
32
Table of Contents
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 16, 2023, we believe that the following accounting policies are the most critical to the judgments and estimates used in the preparation of our financial statements.
Collaboration revenue
In January 2023, we entered into the Collaboration Agreement with AbbVie, which was determined to be within the scope of ASC 606.
We evaluate our collaborative arrangements pursuant to ASC 808, Collaborative Arrangements, or ASC 808, and ASC 606, Revenue from Contracts with Customers, or ASC 606. We consider the nature and contractual terms of collaborative arrangements and assesses whether the arrangement involves a joint operating activity pursuant to which we are an active participant and is exposed to significant risks and rewards with respect to the arrangement. If we are an active participant and are exposed to significant risks and rewards with respect to the arrangement, the we account for the arrangement as a collaboration under ASC 808. If we are not exposed to significant risks and rewards and the contract is with a customer, we account for the collaboration under ASC 606.
Payments pursuant to collaborative arrangements may include non-refundable upfront payments, research option and license option payments, milestone payments upon the achievement of significant regulatory and development events, commercial sales milestones, and royalties on product sales. The amount of variable consideration is constrained until it is probable that the revenue is not at a significant risk of reversal in a future period.
In determining the appropriate amount of revenue to be recognized as we fulfill our obligations under a collaboration arrangement, we apply the five-step model of ASC 606: (i) identify the contract with a customer; (ii) identify the performance obligations in the contract, including whether they are capable of being distinct; (iii) determine the transaction price, including the constraint on variable consideration; (iv) allocate the transaction price to the performance obligations; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.
We apply significant judgment when evaluating whether contractual obligations represent distinct performance obligations, allocating transaction price to performance obligations within a contract, determining when performance obligations have been met, and assessing the recognition of variable consideration. When consideration is received prior to us completing our performance obligation under the terms of a contract, a contract liability is recorded as deferred revenue. Deferred revenue expected to be recognized as revenue within the twelve months following the balance sheet date is classified as a current liability.
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 fair value of the underlying common stock, exercise price of the option, expected term, risk-free interest rate, expected volatility and dividend yield.
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.
33
Table of Contents
Expected volatility is a subjective assumption based on the historical stock volatility of several of our comparable publicly traded companies over a period of time equal to the expected term.
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 and communicating with personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual costs. The majority of our service providers invoice us on a pre-determined schedule or when contractual milestones are met. We make estimates of our accrued expenses as of each balance sheet date in the 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. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low in any particular period. To date, there have not been any material adjustments to our prior estimates of accrued research and development expenses.
Recently adopted accounting standard
On January 1, 2023, we adopted ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments . This standard amended its guidance on the recognition of impairment losses of certain financial instruments. The ASU established the current expected credit loss model, which is based on expected losses rather than incurred losses. Adoption of this standard had no impact on our condensed financial statements.
JOBS Act
We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or 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.
We may take advantage of these exemptions until the last day of the fiscal year following the fifth anniversary of our initial public 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The information under this item is not required to be provided by smaller reporting companies.
34
Table of Contents
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.