Praxis Precision Medicines, Inc. 10-Q

Item 2. 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 condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and the audited financial information and the notes thereto included in our Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission, or SEC, on March 17, 2021. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2020, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Overview We are a clinical-stage biopharmaceutical company translating genetic insights into the development of therapies for central nervous system, or CNS, disorders characterized by neuronal imbalance. Normal brain function requires a delicate balance of excitation and inhibition in neuronal circuits, which, when dysregulated, leads to abnormal function and disease. We are applying insights from genetic epilepsies to broader neurological and psychiatric disorders, using our understanding of shared biological targets and circuits in the brain. We apply a deliberate and pragmatic precision approach, leveraging a suite of translational tools including novel transgenic and predictive translational animal models and electrophysiology markers, to enable an efficient path to proof-of-concept in patients. Through this approach, we have established a broad portfolio, including multiple disclosed programs across CNS disorders, including depression, epilepsy, movement disorders and pain syndromes, with three clinical-stage product candidates. We expect multiple topline clinical trial readouts from all three programs in the next year and anticipate the launch of a new clinical development program in the next year. We intend to develop differentiated therapies that can deliver long-term benefits to human health by meaningfully impacting patients and society. Our most advanced programs, PRAX-114 and PRAX-944, are currently in Phase 2/3 and Phase 2 development, respectively. PRAX-114 is currently being developed for the treatment of major depressive disorder and perimenopausal depression. Together, these conditions affect more than 22 million patients in the United States. We are finalizing the market assessment, including key opinion leader interactions and market research analysis, to inform plans for a Phase 2b trial in women with menopausal and mood symptoms and facilitate discussions with regulatory agencies. We expect to disclose plans for the Phase 2b study in the second half of 2021. We plan to initiate a Phase 2 trial of PRAX-114 in post-traumatic stress disorder and a Phase 2 trial of PRAX-114 in essential tremor, or ET, in the second half of 2021. PRAX-944 is a selective small molecule inhibitor of T-type calcium channels, currently being developed for the treatment of ET, a progressive and debilitating movement disorder affecting up to seven million people in the United States. We plan to initiate a PRAX-944 Phase 2 trial for the treatment of Parkinson's disease in the first half of 2022. In addition, we completed a Phase 1 trial of PRAX-562, a persistent sodium current blocker, for the potential treatment of a broad range of rare, devastating CNS disorders, such as severe pediatric epilepsies and rare adult cephalgias and plan to initiate a first-in-patient trial in rare adult cephalgias in the fourth quarter of 2021. In addition to our clinical programs, we have multiple disclosed preclinical product candidates in development for severe genetic epilepsies. We were incorporated in 2015 and commenced operations in 2016. Since inception, we have devoted substantially all of our resources to developing our preclinical and clinical product candidates, building our intellectual property portfolio, business planning, raising capital and providing general and administrative support for these operations. We employ a “virtual” research and development model, relying heavily upon external consultants, collaborators and contract research organizations to conduct our preclinical and clinical activities. Since inception, we have financed our operations primarily with proceeds from the issuances of convertible debt, redeemable convertible preferred stock, and common stock from our initial public offering, or IPO, in October 2020 and follow-on public offering in May 2021. On May 18, 2021, we completed a follow-on public offering in which we issued and sold 5,750,000 shares of our common stock at a public offering price of $18.25 per share, including 750,000 shares of common stock issued and sold pursuant to the underwriters' exercise, in full, of their option to purchase additional shares of common stock, for aggregate gross proceeds of $104.9 million. We received approximately $98.4 million in net proceeds after deducting discounts, commissions, and offering expenses payable by us. 16 We are a development stage company and we have not generated any revenue from product sales, and do not expect to do so for several years, if at all. All of our programs are still in preclinical and clinical development. Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of one or more of our product candidates, if approved. We have incurred recurring operating losses since inception, including a net loss of $63.8 million for the six months ended June 30, 2021. As of June 30, 2021, we had an accumulated deficit of $213.3 million. We expect to incur significant expenses and operating losses for the foreseeable future as we expand our research and development activities. In addition, our losses from operations may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of our clinical trials and our expenditures on other research and development activities. We anticipate that our expenses will increase significantly in connection with our ongoing activities, as we: • advance our lead product candidates, PRAX-114 and PRAX-944, to and through late stage clinical trials; • advance our PRAX-562 product candidate to Phase 2 clinical trials; • advance our preclinical programs to clinical trials; • further invest in our pipeline; • further invest in our manufacturing capabilities; • seek regulatory approval for our investigational medicines; • maintain, expand, protect and defend our intellectual property portfolio; • acquire or in-license technology; • secure facilities to support continued growth in our research, development and commercialization efforts; • increase our headcount to support our development efforts and to expand our clinical development team; • incur additional costs and general and administrative headcount growth associated with our continued operations as a public company; and • incur additional costs as a public company as we transition out of emerging growth company status at the end of 2021. In addition, as we progress toward potential marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution. As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through the sale of equity, debt financings or other capital sources, including potential collaborations with other companies or other strategic transactions. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more of our product candidates or delay our pursuit of potential in-licenses or acquisitions. Because of the numerous risks and uncertainties associated with drug development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations. As of June 30, 2021, we had cash, cash equivalents and marketable securities of $339.2 million. We believe that our existing cash, cash equivalents and marketable securities will enable us to fund our operating expenses and capital expenditure requirements into the second quarter of 2023. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. See “—Liquidity and Capital Resources.” 17 COVID-19 Business Update In light of the ongoing COVID-19 pandemic, we have implemented business continuity plans designed to address and mitigate the impact of the COVID-19 pandemic on our employees and our business, including our preclinical studies and clinical trials. We are continuing to operate during this period and have taken measures to secure our research and development activities. While we are experiencing limited financial impacts at this time, given the global economic slowdown, the overall disruption of global healthcare systems and the other risks and uncertainties associated with the pandemic, our business, financial condition and results of operations could be materially adversely affected. We continue to closely monitor the COVID-19 pandemic as we evolve our business continuity plans, clinical development plans and response strategy. In addition, while we have taken and are continuing to take steps to mitigate against possible delays, our planned clinical trials may be affected by the COVID-19 pandemic, including (i) delays or difficulties in enrolling and retaining patients in our planned clinical trials, including patients that may not be able or willing to comply with clinical trial protocols if quarantines impede patient movement or interrupt healthcare services; (ii) delays or difficulties in clinical site initiation, including difficulties in recruiting and retaining clinical site investigators and clinical site staff; (iii) diversion or prioritization of healthcare resources away from the conduct of clinical trials and towards the COVID-19 pandemic, including the diversion of hospitals serving as our clinical trial sites and hospital staff supporting the conduct of our clinical trials, and because, who, as healthcare providers, may have heightened exposure to COVID-19 and adversely impact our clinical trial operations; (iv) interruption of our future clinical supply chain or key clinical trial activities, such as clinical trial site monitoring, due to limitations on travel imposed or recommended by federal, state/provincial or municipal governments, employers and others; and (v) limitations in outsourced third-party resources that would otherwise be focused on the conduct of our planned clinical trials, including because of sickness of third-party personnel or their families, or the desire of third-party personnel to avoid contact with large groups of people. Financial Operations Overview Revenue We have not generated any revenue since inception and do not expect to generate any revenue from the sale of products for several years, if at all. If our development efforts for our current or future product candidates are successful and result in marketing approval or collaboration or license agreements with third parties, we may generate revenue in the future from a combination of product sales or payments from collaboration or license agreements that we may enter into with third parties. Operating Expenses Research and Development Expenses The nature of our business and primary focus of our activities generate a significant amount of research and development costs. Research and development expenses represent costs incurred by us for the following: • costs to develop our portfolio; • discovery efforts leading to development candidates; • clinical development costs for our programs; and • costs to develop our manufacturing technology and infrastructure. The costs above comprise the following categories: • personnel-related expenses, including salaries, benefits and stock-based compensation expense; • expenses incurred under agreements with third parties, such as consultants, investigative sites and contract research organizations, that conduct our preclinical and clinical studies and in-licensing arrangements; • costs incurred to maintain compliance with regulatory requirements; • costs incurred with third-party contract development and manufacturing organizations to acquire, develop and manufacture materials for preclinical and clinical studies; and 18 • depreciation, amortization and other direct and allocated expenses, including rent, insurance and other operating costs, incurred as a result of our research and development activities. We expense research and development costs as incurred. We recognize external development costs based on an evaluation of the progress to completion of specific tasks using information provided to us by our vendors and our clinical investigative sites. Payments for these activities are based on the terms of the individual agreements, which may differ from the pattern of costs incurred, and are reflected in our consolidated balance sheets as prepaid expenses or accrued research and development expenses. Non-refundable advance payments for goods or services to be received in the future for use in research and development activities are deferred and capitalized, even when there is no alternative future use for the research and development. The capitalized amounts are expensed as the related goods are delivered or the services are performed. A significant portion of our research and development costs have been external costs. We track direct external research and development expenses to specific programs upon commencement. Due to the number of ongoing programs and our ability to use resources across several projects, indirect or shared operating costs incurred for our research and development programs, such as personnel, facility costs and certain consulting costs, are not recorded or maintained on a program-specific basis. Our major programs, PRAX-114, PRAX-944 and PRAX-562, are those for which we have initiated clinical activities. Our discovery-stage programs are those which are at an earlier point in the development process. The following table reflects our research and development expenses, including direct program-specific expenses summarized by major program, discovery-stage program costs and indirect or shared operating costs recognized as research and development expenses during each period presented (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 PRAX-114 $ 6,590 $ 3,113 $ 9,791 $ 5,060 PRAX-944 3,005 861 4,333 1,577 PRAX-562 3,398 706 6,152 1,642 Discovery-stage programs 4,318 1,287 7,590 1,896 Personnel-related (including stock-based compensation) 6,745 2,298 13,250 4,345 Other indirect research and development expenses 1,622 785 2,491 1,398 Total research and development expenses $ 25,678 $ 9,050 $ 43,607 $ 15,918 Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect that our research and development expenses will continue to increase in the foreseeable future as we advance our product candidates through the development phase, and as we continue to discover and develop additional product candidates, build manufacturing capabilities and expand into additional therapeutic areas. At this time, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete the development of, and obtain regulatory approval for, any of our product candidates. We are also unable to predict when, if ever, material net cash inflows will commence from sales or licensing of our product candidates. This is due to the numerous risks and uncertainties associated with drug development, including the uncertainty of: • our ability to add and retain key research and development personnel; • the timing and progress of preclinical and clinical development activities; • the number and scope of preclinical and clinical programs we decide to pursue; 19 • our ability to successfully complete clinical trials with safety, tolerability and efficacy profiles that are satisfactory to the U.S. Food and Drug Administration, or FDA, or any comparable foreign regulatory authority; • our ability to successfully develop, obtain regulatory approval for, and then successfully commercialize, our product candidates; • our successful enrollment in and completion of clinical trials; • the costs associated with the development of any additional product candidates we identify in-house or acquire through collaborations; • our ability to discover, develop and utilize biomarkers to demonstrate target engagement, pathway engagement and the impact on disease progression of our product candidates; • our ability to establish and maintain agreements with third-party manufacturers for clinical supply for our clinical trials and commercial manufacturing, if our product candidates are approved; • the terms and timing of any collaboration, license or other arrangement, including the terms and timing of any milestone payments thereunder; • our ability to obtain and maintain patent, trade secret and other intellectual property protection and regulatory exclusivity for our product candidates if and when approved; • our receipt of marketing approvals from applicable regulatory authorities; • our ability to commercialize products, if and when approved, whether alone or in collaboration with others; and • the continued acceptable safety profiles of the product candidates following approval. A change in any of these variables with respect to the development of any of our product candidates would significantly change the costs, timing and viability associated with the development of that product candidate. For example, if the FDA or another regulatory authority were to delay our planned start of clinical trials or require us to conduct clinical trials or other testing beyond those that we currently expect, or if we experience significant delays in enrollment in any of our planned clinical trials, we could be required to expend significant additional financial resources and time to complete our clinical development activities. We may never obtain regulatory approval for any of our product candidates. Drug commercialization will take several years and millions of dollars in development costs. General and Administrative Expenses General and administrative expenses consist primarily of personnel-related costs, including salaries, benefits and stock-based compensation, for personnel in our executive, finance, legal, commercial and administrative functions. General and administrative expenses also include legal fees relating to corporate matters; professional fees for accounting, auditing, tax and administrative consulting services; insurance costs; administrative travel expenses; and facility-related expenses, which include direct depreciation costs and allocated expenses for office rent and other operating costs. These costs relate to the operation of the business, unrelated to the research and development function, or any individual program. Costs to secure and defend our intellectual property, or IP, are expensed as incurred and are classified as general and administrative expenses. We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support the expected growth in our research and development activities and the potential commercialization of our product candidates. We also expect to incur increased expenses associated with being a public company, including increased costs of accounting, audit, legal, regulatory and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, director and officer insurance costs and investor and public relations costs. We also expect to incur additional IP-related expenses as we file patent applications to protect innovations arising from our research and development activities. 20 Other Income Other Income, Net Other income, net consists of interest income from our cash, cash equivalents and marketable securities and amortization of investment premiums. Income Taxes Since our inception, we have not recorded any U.S. federal or state income tax benefits for the net losses we have incurred in each year or for our earned research and development tax credits due to our uncertainty of realizing a benefit from those items. Income taxes are determined at the applicable tax rates adjusted for non-deductible expenses, research and development tax credits and other permanent differences. Our income tax provision may be significantly affected by changes to our estimates. There was no income tax provision or benefit recognized for the three and six months ended June 30, 2021. The income tax benefit (provision) for the three and six months ended June 30, 2020 was not material. Results of Operations Comparison of the Three Months Ended June 30, 2021 and 2020 The following table summarizes our consolidated statements of operations for each period presented (in thousands): Three Months Ended June 30, Change 2021 2020 Operating expenses: Research and development $ 25,678 $ 9,050 $ 16,628 General and administrative 10,805 2,520 8,285 Total operating expenses 36,483 11,570 24,913 Loss from operations (36,483) (11,570) (24,913) Total other income: Other income, net 82 5 77 Total other income 82 5 77 Loss before income taxes (36,401) (11,565) (24,836) Provision for income taxes — (3) 3 Net loss $ (36,401) $ (11,568) $ (24,833) Research and Development Expense The following table summarizes our research and development expenses for each period presented, along with the changes in those items (in thousands): Three Months Ended June 30, Change 2021 2020 PRAX-114 $ 6,590 $ 3,113 $ 3,477 PRAX-944 3,005 861 2,144 PRAX-562 3,398 706 2,692 Discovery-stage programs 4,318 1,287 3,031 Personnel-related (including stock-based compensation) 6,745 2,298 4,447 Other indirect research and development expenses 1,622 785 837 Total research and development expenses $ 25,678 $ 9,050 $ 16,628 21 Research and development expenses increased approximately $16.6 million from approximately $9.0 million for the three months ended June 30, 2020 to $25.7 million for the three months ended June 30, 2021. The increase in research and development expenses was primarily attributable to the following: • $4.4 million increase in personnel-related costs due to increased headcount, including an increase of $1.9 million in stock-based compensation expense due to the increase in fair value of our stock options since becoming a public company; • $3.5 million increase in expense related to our PRAX-114 program, driven by an increase in clinical-related and toxicology spend for our Phase 2/3 clinical trial for this program; • $3.0 million increase in expense related to our discovery-stage programs, primarily driven by an increase in preclinical activities for such programs; • $2.7 million increase in expense related to our PRAX-562 program, primarily driven by an increase toxicology and clinical-related spend; • $2.1 million increase in expense related to our PRAX-944 program, driven primarily by an increase in toxicology and clinical-related spend; and • $0.8 million increase in other indirect research and development expenses, driven by an increase in technology spend. General and Administrative Expense General and administrative expenses increased $8.3 million from $2.5 million for the three months ended June 30, 2020 to $10.8 million for the three months ended June 30, 2021. The increase in general and administrative expenses was primarily attributable to the following: • $4.6 million increase in personnel-related costs, primarily driven by increased headcount, including an increase of $3.2 million in stock-based compensation expense due to the increase in fair value of our stock options since becoming a public company; • $2.2 million increase in professional fees including legal and consulting services, driven by a $1.9 million increase in consulting costs, including increased commercial-related spend to support assessments of our clinical-stage programs and a $0.2 million increase in audit and legal fees; and • $1.5 million increase in other general and administrative expenses, including a $1.1 million increase in insurance and related costs, primarily due to becoming a public company. Other Income Other income for the three months ended June 30, 2021 and 2020, comprised of interest income on our cash, cash equivalents and marketable securities and investment premium amortization, was not material. Comparison of the Six Months Ended June 30, 2021 and 2020 The following table summarizes our consolidated statements of operations for each period presented (in thousands): 22 Six Months Ended June 30, Change 2021 2020 Operating expenses: Research and development $ 43,607 $ 15,918 $ 27,689 General and administrative 20,295 4,121 16,174 Total operating expenses 63,902 20,039 43,863 Loss from operations (63,902) (20,039) (43,863) Total other income: Other income, net 128 133 (5) Total other income 128 133 (5) Loss before income taxes (63,774) (19,906) (43,868) Benefit from income taxes — 8 (8) Net loss $ (63,774) $ (19,898) $ (43,876) Research and Development Expense The following table summarizes our research and development expenses for each period presented, along with the changes in those items (in thousands): Six Months Ended June 30, Change 2021 2020 PRAX-114 $ 9,791 $ 5,060 $ 4,731 PRAX-944 4,333 1,577 2,756 PRAX-562 6,152 1,642 4,510 Discovery-stage programs 7,590 1,896 5,694 Personnel-related (including stock-based compensation) 13,250 4,345 8,905 Other indirect research and development expenses 2,491 1,398 1,093 Total research and development expenses $ 43,607 $ 15,918 $ 27,689 Research and development expenses increased approximately $27.7 million from $15.9 million for the six months ended June 30, 2020 to $43.6 million for the six months ended June 30, 2021. The increase in research and development expenses was primarily attributable to the following: • $8.9 million increase in personnel-related costs primarily due to increased headcount, including an increase of $4.1 million in stock-based compensation expense due to the increase in fair value of our stock options since becoming a public company; • $5.7 million increase in expense related to our discovery-stage programs, primarily driven by an increase in preclinical activities for such programs; • $4.7 million increase in expense related to our PRAX-114 program, driven by an increase in toxicology and clinical-related spend for our Phase 2/3 clinical trial for this program; • $4.5 million increase in expense related to our PRAX-562 program, primarily driven by an increase in toxicology and clinical-related spend; • $2.8 million increase in expense related to our PRAX-944 program, driven primarily by an increase in toxicology and clinical-related spend; and • $1.1 million increase in other indirect research and development expenses, driven by an increase in facility and other allocated overhead costs primarily attributable to increased research and development headcount, as well as an increase in technology spend. 23 General and Administrative Expense General and administrative expenses increased approximately $16.2 million from $4.1 million for the six months ended June 30, 2020 to $20.3 million for the six months ended June 30, 2021. The increase in general and administrative expenses was primarily attributable to the following: • $8.4 million increase in personnel-related costs, primarily driven by increased headcount, including an increase of $5.5 million in stock-based compensation expense due to the increase in fair value of our stock options since becoming a public company; • $4.5 million increase in professional fees including legal and consulting services, driven by a $3.7 million increase in consulting costs, including $2.5 million of increased commercial-related spend to support assessments of our clinical-stage programs and $0.8 million for general and administrative infrastructure costs, and a $0.8 million increase in audit and legal fees; and • $3.3 million increase in other general and administrative expenses, including a $2.1 million increase in insurance and related costs due to becoming a public company, a $0.5 million increase in donations and sponsorships and a $0.3 million increase in technology spend. Other Income Other income for the six months ended June 30, 2021 and 2020, comprised of interest income on our cash, cash equivalents and marketable securities and investment premium amortization, was not material. Liquidity and Capital Resources Sources of Liquidity Since our inception, we have incurred significant losses in each period. We have not yet commercialized any of our product candidates, which are in various phases of preclinical and clinical development, and we do not expect to generate revenue from sales of any products for several years, if at all. To date, we have financed our operations primarily with proceeds from the sale and issuance of our redeemable convertible preferred stock, the sale and issuance of convertible debt, and the sale and issuance of common stock in our IPO and follow-on public offering. From inception through June 30, 2020, we have raised $509.4 million in aggregate cash proceeds from these transactions, net of issuance costs. As of June 30, 2021, we had cash, cash equivalents and marketable securities of $339.2 million. Historical Cash Flows The following table provides information regarding our cash flows for each period presented (in thousands): Six Months Ended June 30, 2021 2020 Net cash (used in) provided by: Operating activities $ (55,735) $ (18,513) Investing activities (164,239) — Financing activities 99,661 (6,554) Net decrease in cash, cash equivalents and restricted cash $ (120,313) $ (25,067) Operating Activities Our cash flows from operating activities are greatly influenced by our use of cash for operating expenses and working capital requirements to support our business. We have historically experienced negative cash flows from operating activities as we have invested in developing our portfolio, drug discovery efforts and related infrastructure. The cash used in operating activities resulted primarily from our net losses adjusted for non-cash charges and changes in components of working capital, which are primarily the result of increased expenses and timing of vendor payments. 24 During the six months ended June 30, 2021, net cash used in operating activities of $55.7 million was primarily due to our $63.8 million net loss and $3.4 million in changes in operating assets and liabilities, partially offset by $11.4 million of non-cash charges primarily related to stock-based compensation. During the six months ended June 30, 2020, net cash used in operating activities of $18.5 million was primarily due to our $19.9 million net loss, partially offset by $0.6 million in changes in operating assets and liabilities and $0.8 million of non-cash charges. Investing Activities During the six months ended June 30, 2021, net cash used in investing activities of $164.2 million primarily related to the purchase of marketable securities. There were no cash flows from investing activities during the six months ended June 30, 2020. Financing Activities During the six months ended June 30, 2021, net cash provided by financing activities of $99.7 million consisted of net proceeds from our follow-on public offering of $98.6 million and net proceeds from the exercise of stock options of $1.7 million, partially offset by the payment of issuance costs for our IPO and for the issuance of redeemable convertible preferred stock. During the six months ended June 30, 2020, net cash used in financing activities of $6.6 million consisted of cash paid for the repurchase of our Series C redeemable convertible preferred stock and payment of issuance costs, partially offset by net proceeds from the issuance of Series C redeemable convertible preferred stock. Plan of Operation and Future Funding Requirements We expect our expenses to increase substantially in connection with our ongoing research and development activities, particularly as we advance the preclinical activities and clinical trials of our product candidates. In addition, we expect to incur additional costs associated with operating as a public company and as we transition from being an emerging growth company. As a result, we expect to incur substantial operating losses and negative operating cash flows for the foreseeable future. We anticipate that our expenses will increase substantially if and as we: • advance the clinical development of our PRAX-114, PRAX-944 and PRAX-562 product candidates; • advance the development of any additional product candidates; • conduct research and continue preclinical development of potential product candidates; • make strategic investments in manufacturing capabilities; • maintain our current intellectual property portfolio and opportunistically acquire complementary intellectual property; • seek to obtain regulatory approvals for our product candidates; • potentially establish a sales, marketing and distribution infrastructure and scale-up manufacturing capabilities to commercialize any products for which we may obtain regulatory approval; • add clinical, scientific, operational, financial and management information systems and personnel, including personnel to support our product development and potential future commercialization efforts and to support our transition to a public company; and • experience any delays or encounter any issues with any of the above, including but not limited to failed studies, complex results, safety issues or other regulatory challenges. We are unable to estimate the exact amount of our working capital requirements, but based on our current operating plan, we believe that our existing cash, cash equivalents and marketable securities will enable us to fund our operating expenses and capital expenditure requirements into the second quarter of 2023. However, we have based this estimate on assumptions that may prove to be wrong and we could exhaust our capital resources sooner than we expect. 25 Because of the numerous risks and uncertainties associated with product development, and because the extent to which we may enter into collaborations with third parties for the development of our product candidates is unknown, we may incorrectly estimate the timing and amounts of increased capital outlays and operating expenses associated with completing the research and development of our product candidates. Our funding requirements and timing and amount of our operating expenditures will depend on many factors, including, but not limited to: • the scope, progress, results and costs of preclinical studies and clinical trials for our programs and product candidates; • the number and characteristics of programs and technologies that we develop or may in-license; • the costs and timing of future commercialization activities, including manufacturing, marketing, sales and distribution, for any of our product candidates for which we receive marketing approval; • the costs necessary to obtain regulatory approvals, if any, for products in the United States and other jurisdictions, and the costs of post-marketing studies that could be required by regulatory authorities in jurisdictions where approval is obtained; • 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; • the continuation of our existing licensing arrangements and entry into new collaborations and licensing arrangements; • the costs we incur in maintaining business operations; • the costs associated with being a public company; • the revenue, if any, received from commercial sales of any product candidates for which we receive marketing approval; • the effect of competing technological and market developments; • the impact of any business interruptions to our operations or to those of our manufacturers, suppliers or other vendors resulting from the COVID-19 pandemic or similar public health crisis; and • the extent to which we acquire or invest in businesses, products and technologies, including entering into licensing or collaboration arrangements for product candidates, although we currently have no commitments or agreements to complete any such acquisitions or investments in businesses. Identifying potential product candidates and conducting preclinical testing and clinical trials is a time consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain marketing approval and achieve product sales. In addition, our product candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of products that we do not expect to be commercially available for many years, if ever. Accordingly, we will need to obtain substantial additional funds to achieve our business objectives. Adequate additional funds may not be available to us on acceptable terms, or at all. We do not currently have any committed external source of funds. Market volatility resulting from the COVID-19 pandemic or other factors could also adversely impact our ability to access capital as and when needed. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of holders of our common stock. Additional debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends and may require the issuance of warrants, which could potentially result in dilution to the holders of our common stock. If we raise additional funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit or terminate our product 26 development programs or any future commercialization efforts or grant rights to develop and market product candidates to third parties that we would otherwise prefer to develop and market ourselves. Contractual Obligations As of June 30, 2021, there have been no significant changes to our contractual obligations from those described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual Obligations and Commitments” included in our Annual Report on Form 10-K filed with the SEC on March 17, 2021, other than our new sublease agreement entered into in May 2021 for office space in Boston, Massachusetts. The space is to be used as our new corporate headquarters and the sublease expires on January 31, 2026, with no option to renew or terminate early. The base rent increases by 2% annually. Starting in January 2022, we are obligated to pay $5.2 million in total future lease payments over the remaining term of the lease. Off-Balance Sheet Arrangements We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC. Critical Accounting Policies and Significant Judgments and Estimates Our management’s discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, as well as the reported 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. Actual results may differ from these estimates under different assumptions or conditions. There have been no changes to our critical accounting policies from those described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Significant Judgments and Estimates” included in our Annual Report on Form 10-K filed with the SEC on March 17, 2021. JOBS Act and Emerging Growth Company Status In April 2012, the JOBS Act was enacted. As an emerging growth company, or EGC, under the JOBS Act, we may delay the adoption of certain accounting standards until such time as those standards apply to private companies. Other exemptions and reduced reporting requirements under the JOBS Act for EGCs include presentation of only two years of audited financial statements in a registration statement for an initial public offering, an exemption from the requirement to provide an auditor’s report on internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, an exemption from any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation and less extensive disclosure about our executive compensation arrangements. Additionally, the JOBS Act provides that an EGC can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an EGC to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of the extended transition period and, therefore, while we are an EGC we will not be subject to new or revised accounting standards at the same time that they become applicable to other public companies that are not EGCs, unless we choose to early adopt a new or revised accounting standard. We will remain an emerging growth company until December 31, 2021. 27 Recently Issued Accounting Pronouncements We have reviewed all recently issued standards and have determined that, other than as disclosed in Note 2 to our condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q, such standards will not have a material impact on our condensed consolidated financial statements or do not otherwise apply to our current operations. Item 3. Quantitative and Qualitative Disclosures About Market Risk. Reserved.