Item 7. Management’s Discussion and Analysis
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 clinical trial in healthy volunteers and AV-101 was generally well-tolerated with no serious adverse events reported. In November 2023, we completed enrollment in the Phase 2b portion and enrolled our first patient in the Phase 3 portion of Inhaled iMatinib Pulmonary Arterial Hypertension Clinical Trial (IMPAHCT), our global Phase 2b/Phase 3 trial of AV-101 in adults with PAH. 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.
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Recent Developments
At-The-Market Offering
On April 5, 2023, we entered into an ATM Equity Offering SM Sales Agreement, or the Sales Agreement, with BofA Securities, Inc., or the Agent, pursuant to which we established an “at-the-market” offering program, or ATM Program, to sell, from time to time, at our option, up to an aggregate of $75.0 million of shares of our common stock, through the Agent, as our sales agent. During the year ended December 31, 2023, 2,662,721 shares were sold under the ATM Program, generating approximately $44.3 million of net proceeds after deducting Agent commissions and other offering costs. As of the date of this Annual Report on Form 10-K, approximately $30.0 million of shares remain available for sale from time to time under our ATM Program.
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.
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
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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.
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.
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Results of Operations
Comparison of the Years Ended December 31, 2023 and December 31, 2022
The following table summarizes our results of operations for the years ended December 31, 2023 and December 31, 2022 (in thousands):
Year Ended December 31,
2023
2022
Change
Operating expenses:
Research and development
$
64,219
$
38,622
$
25,597
General and administrative
17,190
14,615
2,575
Total operating expenses
81,409
53,237
28,172
Loss from operations
(81,409)
(53,237)
(28,172)
Other income (expense):
Interest income
5,945
1,830
4,115
Other expense
(1)
(79)
78
Total other income
5,944
1,751
4,193
Net loss before income taxes
(75,465)
(51,486)
(23,979)
Provision for income taxes
56
25
31
Net loss
$
(75,521)
$
(51,511)
$
(24,010)
Research and Development Expenses
Research and development expenses for the year ended December 31, 2023 were $64.2 million compared to $38.6 million for the year ended December 31, 2022. The increase of $25.6 million was primarily due to increases of $12.4 million in headcount related costs, $6.0 million in clinical trial costs, $5.6 million in manufacturing costs, and $1.9 million in other miscellaneous costs including travel and professional services, partially offset by lower pre-clinical and regulatory related costs of $0.3 million.
General and Administrative Expenses
General and administrative expenses for the year ended December 31, 2023 were $17.2 million compared to $14.6 million for the year ended December 31, 2022. The increase of $2.6 million was primarily due to a $3.2 million increase in headcount related costs and a $0.6 million increase in travel and other miscellaneous costs, offset by decreases of $0.5 million in insurance costs, $0.4 million in recruiting costs, and $0.3 million in consulting costs.
Total Other Income
Other income for the year ended December 31, 2023 was $5.9 million compared to $1.8 million of other income for the year ended December 31, 2022. The change was primarily due to interest earned on the Company’s cash and cash equivalents and short-term investments for the year ended December 31, 2023.
Liquidity and Capital Resources
From our inception through December 31, 2023, we have received aggregate net proceeds of $79.8 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 initial public offering, or IPO, with aggregate net proceeds from the offering of $126.9 million, after deducting underwriting discounts and commissions and offering costs.
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At-the-Market Offering
On April 5, 2023, we entered into the Sales Agreement with the Agent pursuant to which we can sell, from time to time, at our option, up to an aggregate of $75.0 million of shares of our common stock, through the Agent, as our sales agent. During the year ended December 31, 2023, 2,662,721 shares were sold under the ATM Program, generating approximately $44.3 million of net proceeds after deducting Agent commissions and other offering costs. Since establishment of our ATM Program, we have sold an aggregate of $44.3 million of shares of our common stock, and up to $30.0 million of shares of our common stock remain available for sale from time to time as of the date of this Annual Report on Form 10-K.
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 $122.4 million will be sufficient to fund our planned operations into 2026. 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.
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
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● 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.
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 term of the Waltham Lease is thirty-nine months, unless extended or earlier terminated pursuant to the terms of the Waltham Lease. In January 2024, we entered into the First Amendment to the Waltham Lease resulting in our lease expiring on December 31, 2025, and subject to scheduled annual increases of $1.00 per rentable square foot during this additional lease term. In obtaining this lease extension, we no longer have the option to extend the Waltham Lease for one additional period of three years.
In April 2022, we entered into a lease agreement, or the Foster City Lease, for approximately 3,500 square feet of office space in Foster City, California. The base rent under the Foster City Lease is $76.80 per rentable square foot, or approximately $22,600 per month and is subject to scheduled annual increases of 3% on each annual anniversary during the lease term. The term of the Foster City Lease is thirty-nine months, unless extended or earlier terminated pursuant to the terms of the Foster City Lease. We have the option to extend the Foster City Lease for one additional period of one year.
As of December 31, 2023, 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.
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Cash Flows
Comparison of the Years Ended December 31, 2023 and December 31, 2022
The following table sets forth a summary of the net cash flow activity for the years ended December 31, 2023 and December 31, 2022 (in thousands):
Year Ended December 31,
2023
2022
Net cash used in operating activities
$
(56,778)
$
(39,122)
Net cash provided by investing activities
11,876
6,926
Net cash provided by financing activities
45,996
396
Net increase (decrease) in cash and cash equivalents
$
1,094
$
(31,800)
Operating Activities
Net cash used in operating activities for the year ended December 31, 2023 was $56.8 million, consisting primarily of our net loss incurred during the period of $75.5 million adjusted for $8.9 million of noncash charges and $9.7 million for net changes in operating assets and liabilities. Noncash charges consisted primarily of $11.9 million in stock-based compensation expense, partially offset by $3.1 million of amortization of our investments. The net change in operating assets and liabilities related to a $9.8 million increase in accounts payables and accrued liabilities, a $0.5 million increase in prepaid expenses and other current assets, partially offset by a $0.4 million decrease in liabilities and $0.1 million decrease in other long-term assets.
Net cash used in operating activities for the year ended December 31, 2022 was $39.1 million, consisting primarily of our net loss incurred during the period of $51.5 million adjusted for $4.6 million of noncash charges and $7.8 million for net changes in operating assets and liabilities. Noncash charges consisted primarily of $5.5 million in stock-based compensation expense, partially offset by $0.9 million of amortization of our investments. The net change in operating assets and liabilities related to a $5.0 million increase in accounts payables and accrued liabilities, a $4.7 million increase in prepaid expenses and other current assets, partially offset by a $1.9 million decrease in other long-term assets.
Investing Activities
Net cash provided by investing activities for the year ended December 31, 2023 of $11.9 million consisted of maturities of short-term investments of $136.0 million, offset by purchases of short-term investments of $124.0 million and $0.1 million for purchases of property and equipment.
Net cash provided by investing activities for the year ended December 31, 2022 of $6.9 million was comprised of sales and maturities of investments of $154.7 million, offset by purchase of short-term investments of $147.6 million and purchases of property and equipment of $0.2 million to support our research activities and leasehold improvements, furniture and fixtures for our office spaces in Waltham, Massachusetts and Foster City, California.
Financing Activities
Net cash provided by financing activities for the year ended December 31, 2023 consisted of $44.9 million in net proceeds received from sales of common stock under the Sales Agreement, after deducting Agent commissions, $1.3 million of proceeds from stock option exercises and issuances of common stock under our employee stock purchase plan, offset by $0.2 million of payments made for offering costs.
Net cash provided by financing activities for the year ended December 31, 2022 was $0.4 million due to $0.8 million in net proceeds received from stock option exercises and issuances of common stock under our employee stock purchase plan, which were partially offset by $0.4 million of payments made for offering costs.
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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.
See 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
See 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 recently issued accounting pronouncements.