Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed in “Risk Factors” and in other parts of this Annual Report on Form 10-K.
Company Overview
We are a biopharmaceutical company focused on the development and commercialization of innovative cardiovascular medicines. Our lead product candidate etripamil is a novel and, potent, calcium channel blocker that we designed as a rapid-onset nasal spray to be self-administered by patients. We are developing etripamil for the treatment of specific arrhythmias with a lead indication to treat paroxysmal supraventricular tachycardia, or PSVT, and a subsequent indication to treat atrial fibrillation with rapid ventricular rate, or AFib-RVR.
Etripamil - Pivotal Clinical Program in PSVT
PSVT is a rapid heart rate condition characterized by episodes of supraventricular tachycardia, or SVT, that start and stop without warning. Episodes of SVT are often experienced by patients with symptoms including palpitations, sweating, chest pressure or pain, shortness of breath, sudden onset of fatigue, lightheadedness or dizziness, fainting and anxiety. Calcium channel blockers have long been approved for the treatment of PSVT as well as other cardiac conditions. Calcium channel blockers available in oral form are frequently used prophylactically to control the frequency and duration of future episodes of SVT. For treatment of episodes of SVT, approved calcium channel blockers are administered intravenously under medical supervision, usually in the emergency department. The combination of convenient nasal-spray delivery, rapid-onset and short duration of action of etripamil has the potential to shift the current treatment paradigm for episodes of SVT away from the burdensome and costly emergency department setting. If approved, we believe that etripamil will be the first self-administered therapy for the rapid termination of episodes of SVT wherever and whenever they occur.
On October 17, 2022, we announced positive and statistically significant topline efficacy and safety data from the Phase 3 RAPID clinical trial of etripamil in patients with PSVT. These results were further presented shortly thereafter, on November 7, 2022, as a Late-Breaking Clinical Trial at the American Heart Association Scientific Meetings (Chicago, IL). RAPID, our multi-center, randomized, double-blind, placebo-controlled, event-driven Phase 3 trial, enrolled 706 patients across clinical sites in North America and Europe. Patients were randomized 1:1 to a regimen of self-administering a first dose etripamil nasal spray, with a repeat dose 10 minutes later if symptoms persisted, or a matching placebo regimen. Self-administration was prompted by a patient’s customary symptoms and was performed in the at-home setting without medical supervision. The RAPID trial achieved its primary endpoint, with patients taking the etripamil regimen demonstrating a highly statistically significant and clinically meaningful difference in time to SVT conversion as compared to placebo. A Kaplan Meier analysis demonstrated a significantly greater proportion of patients who took etripamil converted within thirty minutes compared to placebo (64.3% vs. 31.2%; hazard ratio, or HR, 2.62; 95% CI 1.66, 4.15; p<0.001). By 90 minutes post-study drug administration, 80.6% of etripamil patients converted versus 60.7% of placebo patients (HR = 1.93; 95% CI 1.349, 2.752; p<0.001) and statistical significance was maintained throughout the 5-hour observation window. Statistically significant reductions in time to conversion in patients who took etripamil were evident early and persisted throughout the observation window of the study compared to placebo. The median time to conversion for patients in RAPID who self-administered etripamil was 17.2 minutes compared to 53.3 minutes for patients on placebo. The safety and tolerability data from the RAPID trial continue to support the potential self-administration use of etripamil, with findings consistent with those observed in prior trials. The most common randomized-treatment emergent adverse events, or RTEAEs, adverse events, or AEs, which occurred within 24 hours of etripamil administration, were related to the nasal local administration site. Overall, the majority of RTEAEs were reported as mild (68%) or moderate (31%). There were no serious AEs related to etripamil.
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The use of additional medical interventions and emergency department utilization were important secondary measures of efficacy for both the RAPID and NODE-301 studies, although with the understanding that neither study was individually powered to expect statistical differences. In a pre-planned analysis across both studies, patients who self-administered etripamil sought additional medical interventions 43% less frequently (15% vs. 25%; p=0.013) and had 39% fewer emergency department visits (14% vs. 22%; p=0.035) than patients in the placebo arm.
NODE-303 is a Phase 3, multi-center, open-label safety trial, evaluating primarily the safety of etripamil when self-administered without medical supervision over multiple, separate SVT episodes. After consultation with the regulatory authorities, it was concluded that the test dose procedure was an unnecessary step for the self-administration of etripamil and it was removed from the requirements of the NODE-303 safety study. The NODE-303 trial was initiated with an etripamil 70 mg single-dose regimen and the 70 mg optional repeat-dose regimen was introduced into the trial starting in the second half of 2021 following FDA acceptance of the protocol amendment. The trial was sized in order to add to the safety data from the remainder of the development program, including those data already obtained from the RAPID, NODE-301 and NODE-302 trials, in order to fulfill the safety and exposure dataset needed for NDA filing. Following the results from the RAPID study, initially obtained in October 2022, and the assessment of the total exposures to etripamil in the development program to date, we believe we have the safety dataset needed for review of the NDA for PSVT and have closed the NODE-303 study.
We are conducting patient access programs to provide further access to etripamil to patients who have participated in the clinical development registration trials to treat their future SVT episodes. These programs are tailored to meet the regulatory requirements in the territories in which the clinical sites are located.
The NODE-301 trial is a placebo-controlled Phase 3 safety and efficacy trial and the first trial ever conducted to treat attacks of PSVT in the at-home setting. NODE-301 enrolled 431 patients across 65 sites in the United States and Canada. Although the study did not meet its primary endpoint of time to conversion of SVT to sinus rhythm compared to placebo over the five-hour period following study drug administration in which patients wore a cardiac monitor, both prespecified and post hoc analyses at earlier time periods, namely at 30 minutes, showed significant treatment effects in favor of etripamil. For example, in a post hoc analysis of the NODE-301 data, 54% of etripamil patients vs. 35% of placebo patients converted within 30 minutes (HR 1.87, p=0.02). The safety and tolerability data from the NODE-301 trial support the potential self-administration use of etripamil, with the most common randomized treatment emergent adverse events, or RTEAEs, adverse events, or AEs, which occurred within 24 hours of etripamil administration, being related to the nasal local administration site. Overall, the majority of RTEAEs were reported as mild (85%) to moderate (15%). There were no serious AEs related to etripamil. After reviewing the data from NODE-301 with the FDA in July 2020, the Agency indicated that an analysis period shorter than 5 hours would be appropriate to measure the efficacy of etripamil. The FDA indicated that two trials, the RAPID and NODE-301 trials could potentially fulfill the efficacy requirement for our planned NDA for etripamil in patients with PSVT, both using time to conversion over the first 30 minutes with a target p-value of less than 0.05 as the primary endpoint.
AFIB RVR Phase 2 Proof of Concept Trial
The Phase 2, double-blind, placebo-controlled, proof-of-concept study, Reduction of Ventricular Rate in Patients with Atrial Fibrillation (ReVeRA), in patients with atrial fibrillation with rapid ventricular response (AFib/RVR), is being conducted in Canada and the Netherlands in collaboration with the Montreal Heart Institute, the WCN network, and other research centers. The ReVeRA study is expected to enroll approximately 50 patients randomized 1:1 to receive either 70 mg of etripamil nasal spray or placebo to patients presenting with symptomatic AFib/RVR. The primary endpoint will assess reduction in ventricular rate, with key secondary endpoints including the time to achieve the maximum reduction in rate and the duration of the effect. The trial is being conducted in the emergency department setting under medical supervision.
Operations Overview
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Since the commencement of our operations in 2003, we have devoted substantially all of our resources to performing research and development activities in support of our product development efforts, hiring personnel, raising capital to support and expand such activities, providing general and administrative support for these operations and, more recently preparing for commercialization. We operate our business using a significant outsourcing model. As such, our team is composed of a relatively smaller core of employees who direct a significantly larger number of team members who are outsourced in the forms of vendors and consultants to enable execution of our operational plans. We do not currently have any products approved for sale, and we continue to incur significant research and development and general administrative expenses related to our operations.
Since inception, we have incurred significant operating losses. For the years ended December 31, 2022 and 2021, we recorded net losses of $58.4 million and $42.9 million, respectively. As of December 31, 2022, we had an accumulated deficit of $266.3 million. We expect to continue to incur significant losses for the foreseeable future. We anticipate that a substantial portion of our capital resources and efforts in the foreseeable future will be focused on completing the necessary development activities required for obtaining regulatory approval and preparing for potential commercialization of our product candidates. We had $7.6 million of cash and cash equivalents and $56.9 million of short-term investments at December 31, 2022.
We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. Our net losses may fluctuate significantly from period to period, depending on the timing of our planned clinical trials and expenditures on other research and development activities. We expect our expenses will increase substantially over time as we:
● continue our ongoing and planned development of etripamil, including our Phase 3 clinical trials of etripamil for the treatment of PSVT and our Phase 2 clinical trial of etripamil for the treatment of AFib-RVR;
● seek marketing approvals for etripamil for the treatment of PSVT, AFib-RVR and other cardiovascular indications;
● establish a sales, marketing, manufacturing and distribution capability, either directly or indirectly through third parties, to commercialize etripamil or any future product candidate for which we may obtain marketing approval;
● build a portfolio of product candidates through development, or the acquisition or in-license of drugs, product candidates or technologies;
● initiate preclinical studies and clinical trials for etripamil for any additional indications we may pursue, including the clinical trials for the treatment of atrial fibrillation and rapid ventricular rate as well as other areas of unmet medical need, and for any additional product candidates that we may pursue in the future;
● maintain, protect and expand our intellectual property portfolio;
● hire additional clinical, regulatory and scientific personnel;
● add operational, financial and management information systems and personnel, including personnel to support our product development and planned future commercialization efforts; and
● incur additional legal, accounting, insurance and other expenses associated with operating as a public company.
Recent Developments
Board Appointment
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On March 21, 2023, the board of directors voted to elect Seth H.Z. Fischer to the Board, effective as of March 21, 2023. Mr. Fischer brings to the Board over 40 years of experience in the pharmaceutical and medical device industry, including 29 years in various leadership roles at Johnson & Johnson. Mr. Fischer currently serves as a member of the Board of Directors of Agile Therapeutics, Inc. (AGRX), Marinus Pharmaceuticals, Inc. (MRNS), Spectrum Pharmaceuticals, Inc. (SPPI), and Esperion Therapeutics, Inc. (ESPR).
Exchange Agreement
On March 22, 2023, we entered into an exchange agreement, or the Exchange Agreement, with entities affiliated with RTW, or the Exchanging Stockholders, pursuant to which the Company exchanged an aggregate of 1,059,000 shares of the Company’s common shares owned by the Exchanging Stockholders for pre-funded warrants, or the Exchange Warrants, to purchase an aggregate of 1,059,000 common shares, with an exercise price of $0.001 per share and no expiration date. The Exchange Warrants are exercisable immediately. A holder of the Exchange Warrants (together with its affiliates and other attribution parties) may not exercise any portion of an Exchange Warrant to the extent that immediately prior to or after giving effect to such exercise the holder would beneficially own more than 9.99% of the Company’s outstanding common shares immediately after exercise, which percentage may be increased or decreased to any other percentage specified not in excess of 9.99% at the holder's election upon 61 days’ notice to the Company subject to the terms of the Exchange Warrants.
Strategic Financing Transactions
On March 27, 2023, we entered into a purchase and sale agreement, or the Royalty Purchase Agreement, and a note purchase agreement, or the Note Purchase Agreement, with RTW and certain of its affiliates.
Pursuant to the Royalty Purchase Agreement, RTW agreed to purchase, following the U.S. Food and Drug Administration approval of etripamil (subject to certain conditions), in exchange for a purchase price of $75.0 million, the right to receive a tiered quarterly royalty payments, or the royalty interest, on the annual net product sales of etripamil in the United States in an amount equal to: (i) 7%, or the Initial Tier Royalty, of annual net sales up to $500 million, (ii) 4% of annual net sales greater than $500 million and less than or equal to $800 million, and (iii) 1% of annual net sales greater than $800 million. If certain revenue thresholds for aggregate annual net sales in the United States are not met, the Initial Tier Royalty will increase to 9.5% beginning on January 1 of the following calendar year until a subsequent sales threshold is attained, at which time the Initial Tier Royalty would revert back to 7%.
The Royalty Purchase Agreement contains various representations and warranties, covenants, indemnification obligations and other provisions customary for transactions of this nature, including the grant of a back-up security interests in the purchased royalties and certain assets related to etripamil and restrictions on the incurrence of additional indebtedness.
Pursuant to the Note Purchase Agreement, we will issue and sell $50 million principal amount of 6.0% Convertible Senior Notes due 2029, or the 2029 Convertible Notes, to the holders, which is expected to close on March 29, 2023.
The 2029 Convertible Notes will be our senior secured obligations and will be guaranteed on a senior secured basis by our wholly owned subsidiary, Milestone Pharmaceuticals USA, Inc. Interest at the annual rate of 6.0% is payable quarterly in cash or, at our option, payable in kind for the first three years. The maturity date for the 2029 Convertible Notes will be March 31, 2029, or the Maturity Date. The obligations under the 2029 Convertible Notes will be secured by substantially all of our and our subsidiary guarantor’s assets.
Each $1,000 of principal of the 2029 Convertible Notes (including any interest added thereto as payment in kind) is convertible into 191.0548 shares of our common shares, equivalent to an initial conversion price of approximately $5.23 per share, subject to customary anti-dilution adjustments. In addition, following a notice of redemption or certain corporate events that occur prior to the Maturity Date, we will, in certain circumstances, increase the conversion rate for a Holder who elects to convert its 2029 Convertible Notes in connection with such notice of redemption or corporate event.
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Subject to specified conditions, on or after March 27, 2027, the 2029 Convertible Notes are redeemable by us if the closing sale price of the common shares exceeds 150% of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which we provide notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption, at a redemption price equal to 100% of the principal amount of the 2029 Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
The Note Purchase Agreement contains customary terms and covenants, including negative covenants, such as limitations on indebtedness, liens, disposition of royalty interest and mergers. The Note Purchase Agreement also contains customary events of default, including defaults related to payment compliance, material inaccuracy of representations and warranties, covenant compliance, bankruptcy and insolvency proceedings, cross defaults to certain other agreements, judgment default and certain clinical trial failures.
The descriptions of the Royalty Purchase Agreement and the Note Purchase Agreement are not complete and are qualified in its entirety by reference to the complete text of the Royalty Purchase Agreement and the Note Purchase Agreement, which will be filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ending March 31, 2023.
The Macroeconomic Climate
The recent trends towards rising inflation may also materially adversely affect our business and corresponding financial position and cash flows. Inflationary factors, interest rates and overhead costs may adversely affect our operating results. Rising interest and inflation rates also present a recent challenge impacting the U.S. economy and could make it more difficult for us to obtain traditional financing on acceptable terms, if at all, in the future. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, we may experience increases in the near future (especially if inflation rates continue to rise) on our operating costs, including our labor, due to supply chain constraints, consequences associated with COVID-19 and the Russia-Ukraine war, and employee availability and wage increases, which may result in additional stress on our working capital resources.
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Components of Results of Operations
Revenues
We have not generated any revenues from product sales to date and we do not expect to generate revenues from product sales in the near future. Our revenues of $5 million for the year ended December 31, 2022 compared to $15 million for the year ended December 31, 2021 are from the license agreement with Ji Xing and are comprised of upfront and milestone payments. For additional information about our Revenue, see “Note 2— Summary of Significant Accounting Policies, and Note 3 - Revenue.”
Research and Development Expenses
Research and development expenses consist primarily of salaries and fees paid to external service providers and also include personnel costs, including share-based compensation expense and other related compensation expenses. We expense research and development costs in the periods in which they are incurred. Costs for certain development activities are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors, collaborators and third-party service providers.
To date, substantially all of our research and development expenses have been related to the preclinical and clinical development of etripamil. As we advance etripamil or other product candidates for other indications, we expect to allocate our direct external research and development costs across each of the indications or product candidates. Further, we expect our research and development costs to increase for the development of etripamil in atrial fibrillation with rapid ventricular rate, and we expect our research and development expenses related to the development of etripamil for PSVT decrease as a percentage of our total research and development expenses.
The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming and is subject to uncertainties and delays. As a result of the uncertainties discussed above, we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will generate revenue from the commercialization and sale of our product candidates, if at all.
We recognize the benefit of Canadian research and development tax credits as a reduction of research and development costs for fully refundable investment tax credits. General and administrative expenses include personnel and related compensation costs, expenses for outside professional services, lease expense, insurance expense and other general administrative expenses. Personnel costs consist of salaries, bonuses, benefits, related payroll taxes and share-based compensation. Outside professional services consist of legal, accounting and audit services and other consulting fees.
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We expect to continue to incur expenses as a public company, including expenses related to compliance with the rules and regulations of the Securities and Exchange Commission, or SEC, and those of any national securities exchange on which our securities are traded, additional insurance expenses, investor relations activities, and other administrative and professional services.
Commercial Expenses
Commercial expenses consist primarily of personnel and related compensation costs, market and health economic research, and market development activities for PSVT and, to a lesser extent, AFib-RVR. The focus of these expenses is three-fold: first, we want to leverage rigorous primary and secondary research to fully understand our target disease states from the perspective of the patient, healthcare provider, and payer; second, we want to understand and document the burden of disease posed by PSVT and AFib-RVR from an epidemiology, healthcare resource use, and cost perspective; and third, we want to engage our target patient, physician, and payer stakeholders with evidence-based and compliant educational materials that serve to increase the awareness and understanding of the impact of PSVT and AFib-RVR on patients and the overall healthcare system.
We anticipate our commercial expenses will increase substantially as we invest in the infrastructure, personnel, and operational expenses required to launch our first product in the United States, if approved.
Interest Income
Interest income primarily consists of interest income from our cash equivalents and short-term investments.
Results of Operations
Comparison of the Years Ended December 31, 2022 and 2021
Year ended December 31,
(in thousands)
2022
2021
$ Change
% Change
Revenue
$
5,000
$
15,000
$
(10,000)
(66.7)%
Operating expenses
Research and development, net of tax credits
39,829
38,671
1,158
3.0%
General and administrative
15,718
12,399
3,319
26.8%
Commercial
9,095
7,003
2,092
29.9%
Total operating expenses
64,642
58,073
6,569
11.3%
Loss from operations
(59,642)
(43,073)
(16,569)
38.5%
Interest income, net
1,254
220
1,034
470.0%
Net loss
(58,388)
(42,853)
(15,535)
36.3%
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Revenue
We generated revenue of $5.0 million for the year ended December 31, 2022 compared to $15.0 million for the year ended December 31, 2021. This revenue is from the license agreement with Ji Xing and is comprised of upfront and milestone payments.
Research and Development Expenses
The following table shows our research and development expenses by type of activity for the periods indicated.
Year ended December 31,
(in thousands)
2022
2021
$ Change
% Change
Clinical
$
35,264
$
30,984
$
4,280
13.8%
Drug manufacturing and formulation
3,607
5,691
(2,084)
(36.6)%
Regulatory and other costs
1,414
2,454
(1,040)
(42.4)%
Less: R&D tax credits
(456)
(458)
2
(0.4)%
Total R&D expenses
$
39,829
$
38,671
$
1,158
3.0%
Research and development expenses increased by $1.2 million, or 3% for the year ended December 31, 2022 compared to the year ended December 31, 2021. Clinical expenses increased by $4.3 million mainly due to an increase of $4.2 million in clinical consulting fees and CRO costs due to the conduct of the RAPID Phase 3 trial. This increase was partially offset by a $2.1 million decrease in drug manufacturing and formulation mainly due to a decrease of $2 million in drug manufacturing and formulation consulting and CMO cost and further offset by a $1.0 million decrease in regulatory costs mainly due to $0.8 million decrease in regulatory consulting and employee related expenses.
General and Administrative
General and administrative expenses increased by $3.3 million, or 26.8% for the year ended December 31, 2022 compared to the year ended December 31, 2021. The primary contributors to the increase was due to the increase of personnel related costs and an increase in professional and consulting costs. Personnel related costs increased by $2.3 million, including a $1.6 million increase in non-cash compensation, as a result of hiring more full-time employees. Further, professional and consulting fees also increased by $1 million to meet the needs of the our growing operations.
Commercial
Commercial expenses increased by $2.1 million, or 29.9%, for the year ended December 31, 2022, compared to the same period in the December 31, 2021. The increase is due to marketing and personnel related costs, which includes an increase in non-cash compensation costs related to share-based compensation expense. This increase is a result of additional personnel and professional costs required to expand operations in anticipation of the potential market approval and commercialization.
Interest Income, net
Interest income, net, was $1.3 million and $0.2 million for the year ended December 31, 2022 and 2021, respectively. The increase in interest income was due to higher interest rates earned on investments in 2022 when compared to 2021.
Liquidity and Capital Resources
Sources of Liquidity
We have incurred operating losses and experienced negative operating cash flows since our inception, and we anticipate continuing to incur losses for at least the next several years. As of December 31, 2022, we had cash and cash equivalents of $7.6 million, short-term investments of $56.9 million and an accumulated deficit of $266.3 million.
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On May 15, 2021, pursuant to the License Agreement, we and affiliates of RTW Investments, LP, (RTW), or the Purchasers, entered into a securities purchase agreement pursuant to which we issued to the Purchasers, in a private placement, pre-funded warrants to purchase up to an aggregate of 910,746 of our common shares at a purchase price of $5.48 per pre-funded warrant, or the Private Placement. The gross proceeds to us from the Private Placement, excluding proceeds from the exercise price of the warrants, were approximately $5.0 million.
On July 29, 2020, we entered into an Open Market Sale Agreement℠, or the Sales Agreement, with Jefferies LLC, or Jefferies, with respect to an at-the-market offering program, or the ATM Program, under which we may issue and sell our common shares having an aggregate offering price of up to $50 million through Jefferies as our sales agent or principal. The common shares to be sold under the Sales Agreement, if any, will be offered and sold pursuant to our shelf registration statement on Form S-3 (File No. 333-239318), which was declared effective by the Securities and Exchange Commission on July 6, 2020. During the year ended December 31, 2022, we issued 361,236 shares under the Sales Agreement, resulting in net proceeds of $2.6 million (net of issuance costs of $0.1 million).
We expect that our current operating plan, existing cash and cash equivalents and the $50 million in funding contained within the Strategic Financing Agreement signed on March 27, 2023 to be sufficient to fund our operations for at least the next 12 months and determined that there are no events or conditions that may cast substantial doubt on our ability to continue as a going concern for at least the next 12 months from the date of this filing.
Funding Requirements
We use our cash primarily to fund research and development expenditures. We expect our research and development expenses to increase as we continue the development of etripamil and prepare to pursue regulatory approval. We expect to incur an increase in general and administrative expenses, and an increase in expenses related to commercial activities in 2023 as we focus our efforts on the clinical pathway and potential commercialization of etripamil. We expect to incur increasing operating losses for the foreseeable future as we continue the clinical development of our product candidate. At this time, due to the inherently unpredictable nature of clinical development, we cannot reasonably estimate the costs we will incur and the timelines that will be required to complete development, obtain marketing approval, and commercialize etripamil or any future product candidates, if at all. For the same reasons, we are also unable to predict when, if ever, we will generate revenue from product sales or whether, or when, if ever, we may achieve profitability. Clinical and preclinical development timelines, the probability of success, and development costs can differ materially from expectations.
In addition, we have exclusive development and commercialization rights for etripamil for all indications that we may pursue and as such have the potential to license development and or commercialization rights for etripamil to a potential partner in regions outside of Greater China. We plan to establish commercialization and marketing capabilities using a direct sales force to commercialize etripamil in the United States. Outside of the United States, we are considering commercialization strategies that may include collaborations with other companies.
For other new product candidates, our efforts are focused on licensing development and/or commercialization rights from potential partners. In the case of either in-licensing or out-licensing, we cannot forecast when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development and commercialization plans and capital requirements.
The timing and amount of our operating expenditures will depend largely on:
● the timing, progress and results of our ongoing and planned clinical trials and other development activities of etripamil in PSVT, AFib-RVR and in other cardiovascular indications;
● the scope, progress, results and costs of preclinical development, laboratory testing and clinical trials of etripamil for additional indications or any future product candidates that we may pursue;
● our ability to establish additional collaborations on favorable terms, if at all;
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● the ability of vendors and third-party service providers to accurately forecast expenses and deliver on expectations;
● the costs, timing and outcome of regulatory review of etripamil and any future product candidates;
● the costs and timing of future commercialization activities, including product manufacturing, marketing, sales and distribution, for etripamil and any future product candidates for which we receive marketing approval;
● the revenue, if any, received from commercial sales of etripamil and any future product candidates for which we receive marketing approval;
● the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending any intellectual property-related claims; and
● the extent to which we acquire or in-license other product candidates and technologies.
Until such time, if ever, as we can generate substantial revenue from product sales, we expect to fund our operations and capital funding needs through equity and/or debt financing. We may also consider entering into collaboration arrangements or selectively partnering for clinical development and commercialization. The sale of additional equity would result in additional dilution to our shareholders. The incurrence of debt financing would result in debt service obligations and the instruments governing such debt could provide for operating and financing covenants that restrict our operations or our ability to incur additional indebtedness or pay dividends, among other items. If we are not able to secure adequate additional funding, we may be forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible, and/or suspend or curtail planned programs. Any of these actions could materially and adversely affect our business, financial condition and results of operations.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
Year ended December 31,
(in thousands)
2022
2021
$ Change
% Change
Net cash (used in) provided by:
Operating activities
$
(52,469)
$
(33,224)
(19,245)
57.9%
Investing activities
(57,124)
70,000
(127,124)
(181.6)%
Financing activities
3,088
5,055
(1,967)
(38.9)%
Net increase (decrease) in cash and cash equivalents during the period
$
(106,505)
$
41,831
(148,336)
Operating Activities
Net cash used in operating activities during the year ended December 31, 2022 was $52.5 million, which consisted of a net loss of $58.4 million and a net cash decrease of $3.3 million in our operating assets and liabilities, in addition to non-cash charges of $9.2 million primarily related to share-based compensation.
Net cash used in operating activities during the year ended December 31, 2021 was $33.2 million, which consisted of a net loss of $42.9 million and a net change of $2.6 million in our operating assets and liabilities, in addition to non-cash charges of $7.4 million related to share-based compensation and depreciation expenses.
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Investing Activities
In the year ended December 31, 2022, we redeemed $29.0 million of short-term investments and we acquired $85.9 million of short-term investments, in addition we acquired $0.3 million in property and equipment. These short-term investment acquisitions resulted in a growth of $56.9 million in short term investments for the year ended December 31, 2022. In the year ended December 31, 2021, we redeemed $85.0 million of short-term investments and we acquired $15.0 million of short-term investments
Financing Activities
In the year ended December 31, 2022, our financing activities provided cash of $3.1 million from the issuance of common shares under the Sales Agreement for proceeds of $2.6 million (net of issuance costs of $0.1 million) and a de minimis amount of proceeds from the exercise of share options and warrants. In the year ended December 31, 2021, our financing activities provided $5.0 million, consisting of net proceeds from the Private Placement and a de minimis amount of proceeds from the exercise of share options.
Contractual Obligations
We enter into contracts in the normal course of business with clinical research organizations, or CROs, contract manufacturing organizations, or CMOs, and other third parties for clinical trials, preclinical research studies and testing and manufacturing services. These contracts are generally cancelable at our option with various notice requirements as defined in the contract. Payments due upon cancellation consist of payments for services provided or expenses incurred, including noncancelable obligations of our service providers, up to and through the date of cancellation. These payments are not included as the amount and timing of these payments are not known.
Critical Accounting Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements as at December 31, 2022, which have been prepared in accordance with United States generally accepted accounting principles, or U.S. GAAP and on a basis consistent with those accounting principles followed by us. The preparation of these consolidated financial statements requires our management to make judgments and estimates that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Significant estimates and judgments include, but are not limited to:
● Estimates of the percentage of work completed of the total work over the life of the individual trial in accordance with agreements established with CROs, CMOs and clinical trial sites which in turn impact the research & development expenses.
● Estimate of the grant date fair value share options granted to employees, consultants and direct, and the resulting share-based compensation expense, using the Black-Scholes option-pricing model.
Accordingly, actual results may differ from these judgments and estimates under different assumptions or conditions and any such differences may be material. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.
a) Research & Development Expenses — Accruals
Research and development costs are charged against income in the period of expenditure. Our research and development costs consist primarily of salaries and fees paid to CROs and to CMO.
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Clinical trial expenses include direct costs associated with CROs, direct CMO costs for the formulation and packaging of clinical trial material, as well as investigator and patient-related costs at sites at which our trials are being conducted. Direct costs associated with our CROs and CMOs are generally payable on a time-and-materials basis, or when milestones are achieved. The invoicing from clinical trial sites can lag several months. We record expenses for our clinical trial activities performed by third parties based upon estimates of the percentage of work completed of the total work over the life of the individual trial in accordance with agreements established with CROs and clinical trial sites. We determine the estimates through discussions with internal clinical personnel, CROs and CMOs as to the progress or stage of completion of trials or services and the agreed-upon fee to be paid for such services based on facts and circumstances known to us as of each consolidated balance sheet date. The actual costs and timing of clinical trials are highly uncertain, subject to risks and may change depending upon a number of factors, including our clinical development plan. If the actual timing of the performance of services of the level of effort varies from the estimate, we will adjust the accrual accordingly. Adjustments to prior period estimates have not been material. We recognize the benefit of Canadian research and development tax credits as a reduction of research and development costs for fully refundable investment tax credits and as a reduction of income taxes for investment tax credits that can only be claimed against income taxes payable when there is reasonable assurance that the claim will be recovered.
b) Share-Based Compensation
We recognize compensation costs related to share options granted to employees, consultants and directors based on the estimated fair value of the awards on the date of grant. We estimate the grant date fair value, and the resulting share-based compensation expense, using the Black-Scholes option-pricing model. This Black-Scholes option pricing model uses various inputs to measure fair value, including estimated fair value of our underlying common shares at the grant date, expected term, estimated volatility, risk-free interest rate and expected dividend yields of our common shares. The estimated volatility creates a critical estimate because we have not been a public company long enough to demonstrate our own historical volatility. The grant date fair value of the share-based awards is recognized on a straight-line basis over the requisite service periods, which are generally the vesting period of the respective awards. Forfeitures are accounted for as they occur.
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The following table summarizes, by grant date, the number of underlying common shares and the associated per-share exercise price, which was the fair value per share as determined by our board of directors on the applicable grant date, for share options granted during the years ended December 31, 2022 and 2021:
Estimated
Number of
Fair Value
Estimated
Common Shares
Exercise
per Common
Per-Share
Subject to
Price Per
Share at
Fair Value
Options Granted
Common Share
Grant Date
of Options
March 1, 2021
70,000
$
7.510
$
7.510
$
5.672
March 24, 2021
1,793,950
$
6.260
$
6.260
$
4.758
April 26, 2021
11,300
$
5.910
$
5.910
$
4.490
June 14, 2021
180,000
$
5.540
$
5.540
$
3.958
August 30, 2021
7,300
$
6.070
$
6.070
$
4.606
September 13, 2021
2,650
$
5.650
$
5.650
$
4.287
October 1, 2021
8,050
$
5.640
$
5.640
$
4.282
November 1, 2021
64,000
$
5.700
$
5.700
$
4.314
January 4, 2022
7,300
$
7.45
$
7.450
$
5.694
February 15, 2022
330,000
$
6.47
$
6.470
$
4.875
March 21, 2022
1,388,400
$
5.46
$
5.460
$
4.118
April 1, 2022
65,000
$
6.85
$
6.850
$
5.172
April 11, 2022
36,000
$
6.93
$
6.930
$
5.246
May 16, 2022
92,000
$
5.48
$
5.480
$
4.178
July 5, 2022
150,000
$
6.07
$
6.070
$
4.491
July 18, 2022
17,000
$
6.45
$
6.450
$
4.979
August 1, 2022
2,000
$
7.3
$
7.300
$
5.606
August 8, 2022
2,000
$
6.76
$
6.760
$
5.204
August 15, 2022
100,000
$
7.1
$
7.100
$
5.486
August 29, 2022
70,000
$
8.2
$
8.200
$
6.350
September 8, 2022
22,000
$
8.53
$
8.530
$
6.609
November 2, 2022
20,000
$
5.03
$
5.030
$
4.693
November 8, 2022
12,000
$
4.22
$
4.220
$
3.936
The intrinsic value of all outstanding options as of December 31, 2022 was $3.8 million, based on the fair value of our common shares of $3.96 per share at December 31, 2022.
Recent Accounting Pronouncements
Refer to Note 2, “Summary of Significant Accounting Policies,” in the accompanying notes to our consolidated financial statements for a discussion of recent accounting pronouncements.
Emerging Growth Company Status
The Jumpstart Our Business Startups Act of 2012 permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have irrevocably elected to “opt out” of this provision and, as a result, we comply with new or revised accounting standards when they are required to be adopted by public companies that are not emerging growth companies.
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