Jade Biosciences, Inc. 10-K

Item 7. 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 should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report. This discussion contains forward-looking statements that reflect our plans, estimates and beliefs, and involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those discussed in the section titled “Risk Factors” included under Part I, Item 1A and elsewhere in this Annual Report. See “Special Note Regarding Forward-Looking Statements” in this Annual Report. Overview We are a clinical stage biopharmaceutical company focused on developing drugs that meaningfully improve the lives of patients with rare cardiopulmonary disease. Our initial focus is on advancing AV-101, our dry powder inhaled formulation of imatinib for the treatment of pulmonary arterial hypertension, or PAH, a devastating disease impacting approximately 70,000 people in the United States and Europe. Imatinib, marketed as Gleevec tablets, was originally developed for the treatment of multiple cancers. Oral imatinib also demonstrated statistically significant improvement on the primary endpoint, six-minute walk distance, and multiple secondary hemodynamic endpoints in PAH patients in an international Phase 3 trial conducted by Novartis but was poorly tolerated due to adverse events, or AEs, and never approved for the treatment of PAH. AV-101, delivered using a dry powder inhaler, is designed to provide lung concentrations at or above those observed with the oral dose while limiting systemic levels of the drug. We have completed a Phase 1 study in healthy volunteers and AV-101 was generally well-tolerated with no serious adverse events reported. We announced the initiation of Inhaled iMatinib Pulmonary Arterial Hypertension Clinical Trial (IMPAHCT), our Phase 2b/Phase 3 trial of AV-101 in PAH patients in December 2021, and we have assembled a team with deep expertise in developing innovative PAH and inhaled therapies and commercializing novel drugs. We do not have any products approved for sale and have incurred significant operating losses since our inception and expect to continue to incur significant operating losses for the foreseeable future. 91 Recent Developments Initial Public Offering In July 2021, we completed our initial public offering, or IPO, of 9,984,463 shares of our common stock at a price to the public of $14.00 per share, including the exercise in full by the underwriters of their option to purchase 1,302,321 additional shares of our common stock. Including the option exercise, our aggregate net proceeds from the offering were $126.9 million after deducting underwriting discounts and commissions and other offering costs. Immediately prior to the closing of our IPO, all outstanding shares of our redeemable convertible preferred stock were converted into 14,182,854 shares of our common stock. COVID-19 Pandemic The global coronavirus disease 2019, or COVID-19, pandemic continues to evolve, and we will continue to monitor the COVID-19 situation. The extent of the impact of the ongoing COVID-19 pandemic and its variants on our business, operations and clinical development timelines, supply chain and plans remains uncertain, and will depend on certain developments, including the duration and spread of the outbreak, including the identification of new variants of the virus, and its impact on our clinical trial enrollment, trial sites, contract research organizations, or CROs, third-party manufacturers, and other third parties with whom we do business, as well as its impact on regulatory authorities and our key scientific and management personnel. The ultimate impact of the ongoing COVID-19 pandemic or a similar health epidemic is highly uncertain and subject to change. To the extent possible, we are conducting business as usual, with only necessary or advisable modifications to employee travel. We will continue to actively monitor the rapidly evolving situation related to COVID-19 and may take further actions that alter our operations, including those that may be required by federal, state or local authorities, or that we determine are in the best interests of our employees and other third parties with whom we do business. At this point, the extent to which the ongoing COVID-19 pandemic may affect our business, operations and clinical development timelines and plans, including the resulting impact on our expenditures and capital needs, remains uncertain and is subject to change. Components of Results of Operations Revenue We currently have no products approved for sale, and we have not generated any revenue to date. In the future, we may generate revenue from collaboration or license agreements we may enter into with respect to our drug candidate, as well as product sales from any approved product, which approval we do not expect to occur for at least the next several years, if ever. Our ability to generate product revenue will depend on the successful development and eventual commercialization of AV-101 and any other drug candidates we may pursue. If we fail to complete the development of AV-101 in a timely manner, or to obtain regulatory approval, our ability to generate future revenue and our results of operations and financial position would be materially adversely affected. 92 Operating Expenses Research and Development To date, our research and development expenses have related to the development of AV-101. Research and development expenses are recognized as incurred and payments made prior to the receipt of goods or services to be used in research and development are capitalized until the goods or services are received. Research and development expenses include: ● external research and development expenses incurred under agreements with contract research organizations, or CROs, and consultants to conduct and support clinical trials of AV-101 and our preclinical studies; ● costs related to manufacturing AV-101 for use in clinical trials; and ● personnel-related costs, including salaries, payroll taxes, employee benefits, and stock-based compensation charges for those individuals involved in research and development efforts. Our research and development expenses consist principally of direct costs, such as fees paid to CROs, investigative sites and consultants in connection with our clinical trials, preclinical and non-clinical studies, and costs related to manufacturing clinical trial materials. We deploy our personnel related resources across all of our research and development activities. We track direct expenses on a clinical and non-clinical basis. We plan to substantially increase our research and development expenses for the foreseeable future as we continue the development of AV-101. We cannot determine with certainty the timing of initiation, the duration or the completion costs of current or future clinical trials and nonclinical studies of AV-101 or any future product candidates due to the inherently unpredictable nature of clinical and preclinical development. Clinical and preclinical development timelines, the probability of success and development costs can differ materially from expectations. We will need to raise substantial additional capital in the future. Our future clinical development costs may vary significantly based on factors such as: ● per patient trial costs; ● the number of trials required for approval; ● the number of sites included in the trials; ● the countries in which the trials are conducted; ● the length of time required to enroll eligible patients; ● the number of patients that participate in the trials; ● the number of doses evaluated in the trials; ● the drop-out or discontinuation rates of patients; ● potential additional safety monitoring requested by regulatory agencies; ● the duration of patient participation in the trials and follow-up; and ● the efficacy and safety profile of the product candidate. 93 General and Administrative General and administrative expenses consist primarily of personnel-related costs, including salaries, payroll taxes, employee benefits, and stock-based compensation charges for those individuals in executive, finance and other administrative functions. Other significant costs include legal fees relating to intellectual property and corporate matters, professional fees for accounting and consulting services, and insurance costs. We anticipate that our general and administrative expenses will increase for the foreseeable future to support our continued research and development activities, pre-commercial preparation activities and commercialization activities for AV-101. We also anticipate increased expenses related to audit, legal, regulatory, and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, director and officer insurance premiums, and investor relations costs associated with operating as a public company. Interest Income (Expense) Interest income consists of interest earned on our cash and cash equivalents and short-term investments. Interest expense consisted of interest on our convertible promissory notes at a per annum interest rate of 6%. All convertible promissory notes converted into shares of our Series A redeemable convertible preferred stock in August 2020. Change in Fair Value of Convertible Promissory Notes We issued convertible promissory notes in 2020 and 2019 for which we elected the fair value option. We adjusted the carrying value of our convertible promissory notes to their estimated fair value at each reporting date, with any change in fair value of the convertible promissory notes recorded as an increase or decrease to change in fair value of convertible promissory notes in our statements of operations and comprehensive loss. All convertible promissory notes and related accrued interest converted into shares of Series A redeemable convertible preferred stock in August 2020. Prior to their conversion into our Series A redeemable convertible preferred stock issued in August 2020, the fair value of convertible promissory notes issued through July 2020 was estimated using a scenario-based analysis that estimated the fair value of the convertible promissory notes based on the probability-weighted present value of expected future investment returns, considering possible outcomes available to the noteholders, including conversions in subsequent equity financings, change of control transactions, settlement and dissolution. Results of Operations Comparison of the Years Ended December 31, 2021 and December 31, 2020 The following table summarizes our results of operations for the years ended December 31, 2021 and December 31, 2020 (in thousands): Years Ended December 31, 2021 2020 Change Operating expenses: Research and development $ 14,987 $ 7,940 $ 7,047 General and administrative 8,035 949 7,086 Total operating expenses 23,022 8,889 14,133 Loss from operations (23,022 ) (8,889 ) (14,133 ) Other income (expense): Interest income (expense) 65 (75 ) 140 Change in fair value of convertible promissory notes - (644 ) 644 Other expense (3 ) (3 ) - Total other income (expense) 62 (722 ) 784 Net loss before income taxes (22,960 ) (9,611 ) (13,349 ) Provision for income taxes 3 - 3 Net loss $ (22,963 ) $ (9,611 ) $ (13,352 ) 94 Research and Development Expenses Research and development expenses for the year ended December 31, 2021 were $15.0 million compared to $7.9 million for the year ended December 31, 2020. The increase of $7.0 million was primarily due to increases of $4.1 million in clinical trial costs, $2.8 million in manufacturing costs, $0.8 million in payroll, $0.4 million in stock-based compensation and $0.1 million in professional fees, partially offset by lower pre-clinical related costs of $1.2 million. General and Administrative Expenses General and administrative expenses for the year ended December 31, 2021 were $8.0 million compared to $0.9 million for the year ended December 31, 2020. The increase of $7.1 million was primarily due to increases of $1.5 million in payroll, $1.6 million in stock-based compensation, $2.1 million in professional services related to other consulting expenses, corporate legal fees and audit and accounting services, $1.4 million in insurance expense and $0.5 million in other operating expenses. Total Other Income (Expense) Other income for the year ended December 31, 2021 was $0.1 million compared to $0.7 million of other expense for the year ended December 31, 2020. The change of $0.8 million was due to the change in fair value of the convertible promissory notes and interest expense on the convertible promissory notes for the year ended December 31, 2020 and interest earned on the Company’s cash and cash equivalents and short-term investments for the year ended December 31, 2021. Liquidity and Capital Resources From our inception through December 31, 2021, we have received aggregate net proceeds of $79.4 million from the sale of shares of our convertible preferred stock and $5.0 million from convertible promissory notes to related parties. In July 2021, we completed our IPO with aggregate net proceeds from the offering of $126.9 million, after deducting underwriting discounts and commissions and offering costs. Future Funding Requirements We have prepared operating plans and cash flow forecasts which indicate that our existing cash and cash equivalents and short-term investments on-hand of $167.4 million will be sufficient to fund our planned operations into the second half of 2025. However, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. We have based this estimate on assumptions that may prove to be wrong, and we could deplete our capital resources sooner than we expect. Additionally, the process of conducting clinical trials is costly, and the timing of progress and expenses in these trials is uncertain. 95 Our future capital requirements will depend on many factors, including: ● the type, number, scope, results, costs and timing of preclinical studies and clinical trials of AV-101, including changes to our development plan based on feedback received from regulatory authorities, and preclinical studies or clinical trials of other potential drug candidates or indications we may choose to pursue in the future; ● the costs and timing of manufacturing for AV-101 or any other product candidates, including commercial scale manufacturing; ● the costs, timing and outcome of regulatory review and approval of AV-101 or any other drug candidates; ● the costs of obtaining, maintaining and enforcing our patents and other intellectual property rights; ● our efforts to enhance operational systems and hire additional personnel to satisfy our obligations as a public company, including enhanced internal controls over financial reporting; ● the costs associated with hiring additional personnel and consultants as our business grows, including additional clinical development personnel; ● the terms and timing of establishing and maintaining collaborations, licenses and other similar arrangements; ● the timing and amount of the milestone or other payments we must make to any future licensors, if we enter into any license agreements; ● the costs and timing of establishing or securing sales and marketing capabilities if AV-101 or any other product candidate is approved; ● our ability to achieve sufficient market acceptance, coverage and adequate reimbursement from third- party payors and adequate market share and revenue for any approved products; ● patients’ ability and willingness to pay out-of-pocket costs for any approved products in the absence of coverage and/or adequate reimbursement from third-party payors; and ● costs associated with any products or technologies that we may in-license or acquire. Until such time, if ever, as we can generate substantial product revenue to support our cost structure, we expect to finance our cash needs through equity offerings, debt financings, or other capital sources, potentially including collaborations, licenses and other similar arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders 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 capital expenditures or declaring dividends. If we raise funds through collaborations, or other similar 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 and/or may reduce the value of our common stock. Our failure to raise capital or enter into such other arrangements when needed could have a negative impact on our financial condition and on our ability to pursue our business plans and strategies. 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 our drug candidates even if we would otherwise prefer to develop and market such drug candidates ourselves. 96 Contractual Obligations and Commitments In August 2021, we entered into a lease agreement, or the Waltham Lease, for approximately 5,000 square feet of office space in Waltham, Massachusetts. The base rent under the Waltham Lease is $43.00 per rentable square foot, or approximately $18,000 per month and is subject to scheduled annual increases of $1.00 per rentable square foot during the lease term. The term of the Waltham Lease is thirty-nine months, unless extended or earlier terminated pursuant to the terms of the Waltham Lease. We have the option to extend the Waltham Lease for one additional period of three years. As of December 31, 2021, we do not have any other operating lease obligations, long-term debt obligations, capital lease obligations, purchase obligations or long-term liabilities. We enter into contracts in the normal course of business for contract research services, contract manufacturing services, professional services and other services and products for operating purposes. These contracts generally provide for termination after a notice period, and, therefore, are cancelable contracts and not included above. Cash Flows Comparison of the Years Ended December 31, 2021 and December 31, 2020 The following table sets forth a summary of the net cash flow activity for the years ended December 31, 2021 and December 31, 2020 (in thousands): Years Ended December 31, 2021 2020 Net cash used in operating activities $ (27,399 ) $ (7,859 ) Net cash used in investing activities (113,434 ) - Net cash provided by financing activities 190,457 8,918 Net increase in cash $ 49,624 $ 1,059 Operating Activities Net cash used in operating activities for the year ended December 31, 2021 was $27.4 million, consisting primarily of our net loss incurred during the period of $23.0 million adjusted for $2.1 million of noncash charges and $6.5 million for net changes in operating assets and liabilities. Noncash charges consisted primarily of $2.0 million in stock-based compensation expense. The net change in operating assets and liabilities related to a $6.8 million increase in prepaid expenses and other current assets and a $0.3 million increase in other long-term assets partially offset by a $0.6 million increase in accounts payable. Net cash used in operating activities for the year ended December 31, 2020 was $7.9 million, consisting primarily of our net loss incurred during the period of $9.6 million adjusted for $0.8 million of noncash charges and $1.0 million for net changes in operating assets and liabilities. Noncash charges consisted primarily of $0.6 million in change in fair value of convertible promissory notes to related party. The net change in operating assets and liabilities related to a $1.0 million increase in accounts payable and accrued and other current liabilities partially offset by a $0.1 million increase in prepaid and other current assets. Investing Activities Net cash used by investing activities for the year ended December 31, 2021 of $113.4 million was comprised of purchases of short-term investments of $113.2 million using the proceeds from our initial public offering in July 2021 and purchases of property and equipment of $0.2 million for purchases of property and equipment to support our research activities and leasehold improvements, furniture and fixtures for our office space in Waltham, Massachusetts. Financing Activities Net cash provided by financing activities for the year ended December 31, 2021 was $190.5 million due to $63.6 million in net proceeds received from the First Milestone Closing, Second Milestone Closing and Third Milestone Closing of Series A redeemable convertible preferred stock, net of issuance of costs, and $126.9 million in net proceeds from the issuance of common stock, net of issuance costs, in connection with the closing of the Company’s IPO on July 2, 2021. Net cash provided by financing activities for the year ended December 31, 2020 was $8.9 million, primarily related to $6.4 million in net proceeds received from the sale of Series A redeemable convertible preferred stock and through the issuance and conversion of $2.5 million of convertible promissory notes to related parties issued in July 2020. 97 Critical Accounting Policies and Estimates Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP . The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, expenses and the related disclosures of contingent liabilities in our consolidated financial statements and accompanying notes. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. We evaluate our estimates and judgments on an ongoing basis. Actual results may differ significantly from these estimates under different assumptions, judgments or conditions. S ee Note 2 to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for a summary of significant accounting policies and the effect on our consolidated financial statements. Research and Development Expenses We are required to estimate our expenses resulting from obligations under contracts with vendors, consultants and CROs, in connection with conducting research and development activities. The financial terms of these contracts are subject to negotiations, which vary from contract to contract and may result in payment flows that do not match the periods over which materials or services are provided under such contracts. We reflect research and development expenses in our consolidated financial statements by matching those expenses with the period in which services and efforts are expended. We account for these expenses according to the progress of the preclinical or clinical study as measured by the timing of various aspects of the study or related activities. We determine clinical trial cost estimates through review of the underlying contracts along with preparation of financial models taking into account discussions with research and other key personnel and outsider service providers as to the progress of studies or other services being conducted. During the course of a study, we adjust our rate of expense recognition if actual results differ from our estimates. Emerging Growth Company Status As an emerging growth company under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, we 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 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 public companies adopt the new or revised standard. The decision to opt out of the extended transition period under the JOBS Act is irrevocable. Recently Issued Accounting Pronouncements We have reviewed all recently issued accounting pronouncements by the FASB and other standard-setting bodies and have determined that such standards that do not require adoption until a future date are not expected to have a material impact on our consolidated financial statements, if adopted, or do not otherwise apply to our operations.