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 appearing elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, 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 “Item 1A. Risk Factors” of this Annual Report on Form 10-K, 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.
The Management's Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, describes principal factors affecting the results of our operations, financial condition and liquidity, as well as our critical accounting policies and estimates that require significant judgment and thus have the most significant potential impact on our Consolidated Financial Statements. This section provides an analysis of our financial results for the year ended December 31, 2022 compared to the same period in the prior year.
Company Overview
We are a biopharmaceutical company focused on the discovery, development, and commercialization of patient-, physician-, caregiver- and societal-friendly medicinal therapies intended to improve quality of life, increase potential duration of life, and resolve serious unmet medical needs. Our pipeline of product candidates is designed with the goal to become the patient-friendly, new-era standard-of-care medicines, in the therapeutic area of oncology.
On December 5, 2022, we entered into a Collaboration and License Agreement (the “License Agreement”) with Akeso, Inc. and its affiliates (“Akeso”) pursuant to which we are partnering with Akeso to in-license its breakthrough bispecific antibody, ivonescimab. Ivonescimab, known as AK112 in China and Australia, and also as SMT112 in the United States, Canada, Europe, and Japan, is a novel, potential first-in-class bispecific antibody intending to combine the benefits of immunotherapy via a blockade of PD-1 with the anti-angiogenesis benefits of an anti-VEGF into a single molecule. Ivonescimab was engineered to bring two well established oncology targeted mechanisms together. Through the License Agreement, we obtained the rights to develop and commercialize SMT112 in the United States, Canada, Europe, and Japan (the “Licensed Territory”). The License Agreement and transaction closed on January 17, 2023 following customary waiting periods.
The entry into the License Agreement represents a significant change in the Company’s strategy. All prior development and marketing activities relating to ridinilazole are being terminated. All business activities related to anti-infectives are being reviewed for partnership opportunities for potential further development. Our future operations will be focused on the development of ivonescimab and other future activities as the Company determines.
On September 28, 2022, we determined that we would seek partners or a divestiture of ridinilazole, our lead product candidate for treating patients suffering from Clostridioides difficile infection, also known as C. difficile infection, or CDI, as the path forward for the clinical development of the asset. As a result of this determination, we discontinued our only active study for
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ridinilazole, a pediatric clinical trial evaluating ridinilazole for treating adolescent patients with CDI. We are currently involved in activities related to closeout of ridinilazole clinical trials.
Our other product candidate, SMT-738, has been in development for combating multidrug resistant infections, specifically carbapenem-resistant Enterobacteriaceae (“CRE”) infections. SMT-738 is the first of a novel class of precision antibiotics that has been in preclinical development and has been undergoing investigational new drug (“IND”) enabling activities. We will continue to pursue partnerships for further development of SMT-738.
We have devoted substantially all of our efforts to research and development, including clinical trials. We have not completed the development of any drugs. We expect to continue to incur significant expenses and increasing operating losses for at least the next few years. The net losses we incur may fluctuate significantly from quarter to quarter and year to year, due to the nature and timing of our research and development activities. We expect that our research and development and general and administrative expenses will continue to be significant in connection with our ongoing research and development efforts.
As a result, we will need to seek additional funding in the future to fund operations. Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of some, or all, of the following: equity and debt offerings, collaborations, strategic alliances, grants and clinical trial support from government entities, philanthropic, non-government and not-for-profit organizations, and marketing, distribution or licensing arrangements. We may be unable to raise sufficient funds through equity or debt financings, or other arrangements when needed based on our liquidity needs acceptable terms, or at all.
Recent Developments
In addition to the events detailed in the Company Overview section above, the following other recent developments have occurred.
On February 15, 2023, the $20 million Zanganeh Note matured and the Company repaid the outstanding principal balance.
On March 1, 2023, we closed our Rights Offering, which was fully subscribed. We received aggregate gross proceeds from the Rights Offering of $500 million from the sale of 476,190,471 shares of our common stock at a price per share of $1.05. Issuance costs associated with the Rights Offering were approximately $0.5 million. In connection with the closing of the Rights Offering, a promissory note with the principal amount of $400 million, issued by us to our Executive Chairman and Chief Executive Officer, Mr. Duggan, matured and became due and we repaid the principal amounts and all outstanding accrued interest thereunder using a portion of the proceeds from the Rights Offering.
In conjunction with the significant change in our strategy and shift in focus to the therapeutic area of oncology, the Company is re-prioritizing its investments and financial resources towards the development of ivonescimab. This could result in reduced investment in our infectious diseases programs, including, subject to local legal process and approvals, reducing research and development employee compensation-related costs and facility-related costs incurred with respect to our laboratory and office space.
Key Components of our Results of Operations
Revenue
Revenue consists of amounts received from the license and commercialization agreement with Eurofarma Laboratórios S.A. ("Eurofarma"). We have not generated any revenue from product sales.
Under the terms of the license and commercialization agreement with Eurofarma, we received an upfront payment of $2.5 million in December 2017. In February 2020, we achieved the first enrollment milestone and received $1.0 million. In September 2021, we achieved the second enrollment milestone and received $1.3 million. The terms of the contract have been assessed under ASC 606 and currently only the upfront payment and the first two milestone payments are included in the transaction price. These payments were initially reported as deferred revenue in the balance sheet and were recognized as revenue ratably over the determined performance period.
Revenue recognized during the years ended December 31, 2022 and 2021 related to the upfront payment and the first two enrollment milestones earned in accordance with our revenue recognition policy. The revenue was recognized ratably over the determined performance period to reflect the transfer of control to the customer occurring over the time period that the research
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and development services were provided. This output method is, in management’s judgment, the best measure of progress towards satisfying the performance period.
Other Operating Income
Other operating income includes income received and recognized from grants and clinical trial support from government entities, philanthropic, non-government and not-for-profit organizations.
In September 2017, we were awarded a funding contract from the Biomedical Advanced Research and Development Authority ("BARDA"), part of the Office of the Assistant Secretary for Preparedness and Response at the United States Department of Health and Human Services, in support of our Ri-CoDIFy clinical trials and clinical development of ridinilazole. The awarded contract was originally worth up to $62.0 million. In June 2019 and again in January 2020, BARDA increased the value of the contract such that it is now worth up to $72.5 million and brought the total amount of committed funding to $62.4 million.
The remaining federal government funding is dependent on BARDA in its sole discretion exercising the final independent option work segment, upon the achievement by the Company of certain agreed-upon milestones for ridinilazole. This option work segment was never exercised by BARDA. The contract ran through April 2022 and was extended through December 2022 as a no cost contract, solely to close out open activities. As of December 31, 2022, based on translation of historical foreign currency amounts in the period, an aggregate of $59.2 million of cumulative income has been recognized since contract inception. As a result of our decision to not pursue further internal clinical development of ridinilazole and seek partners or a divestiture related to ridinilazole as a path forward for the clinical development of the asset, we recognized the remainder of the deferred income for BARDA during the third quarter of 2022.
We have also received income from research and development ("R&D") tax credits, which consist of the R&D tax credit received in the United Kingdom ("U.K."). We benefit from two U.K. research and development tax credit cash rebate regimes: Small and Medium Enterprise Program ("SME Program") and the Research and Development Expenditure Credit Program ("RDEC Program"). Qualifying expenditures largely comprise employment costs for research staff, consumables, a proportion of relevant, permitted sub-contract costs and certain internal overhead costs incurred as part of research projects for which we do not receive income. Tax credits related to the SME Program and RDEC Program are recorded as other operating income in the consolidated statements of operations and other comprehensive loss. Under both schemes, we receive cash payments that are not dependent on our pre-tax net income levels.
Based on criteria established by His Majesty’s Revenue and Customs ("HMRC"), a portion of expenditures being carried out in relation to our pipeline research and development, clinical trials management and third-party manufacturing development activities are eligible for the SME regime and we expect such elements of research and development expenditure incurred in our UK entities will also continue to be eligible for the SME regime for future periods.
In May 2021, we announced the selection of a new preclinical candidate, SMT-738, from the DDS-04 series for development in the fight against multi-drug resistant infections, specifically Carbapenem-resistant Enterobacteriaceae ("CRE") infections. Simultaneously, we received an award from the Trustees of Boston University under the Combating Antibiotic Resistant Bacteria Biopharmaceutical Accelerator program ("CARB-X") to progress this candidate through preclinical development and Phase Ia clinical trials. The award commits initial funding of up to $4.1 million with the possibility of up to another $3.7 million based on the achievement of future milestones. As of December 31, 2022, based on translation of historical foreign currency amounts in the period, $2.9 million of cumulative income has been recognized since contract inception. During the quarter ended September 30, 2022, CARB-X announced changes to its funding arrangements and terms and conditions. As a result, the current arrangement concluded as of June 30, 2022, however we have the ability to recognize reimbursements for any milestone payments related to work incurred subsequent to this date in accordance with this agreement.
Operating Expenses
The majority of our operating expenses since inception have consisted of research and development activities and general and administrative costs.
Research and Development Expenses
Research and development expenses consist of all costs associated with our research and development activities.
These include:
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• costs incurred in conducting our preclinical studies and clinical trials through contract research organizations, including preclinical toxicology, pharmacology, formulation and manufacturing work;
• laboratory and vendor expenses incurred in relation to our preclinical and non-clinical studies;
• costs incurred in supply chain development and scale up activities to support product registration;
• employee related expenses, which include salary, benefits and stock-based compensation, for our research and development staff; and
• facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance and other supplies.
We utilize our employee and infrastructure resources across multiple research projects. We track expenses related to our clinical programs and certain preclinical programs on a per project basis. We expect our research and development expenses to continue to be significant as we initiate our planned clinical trials of ivonescimab, and continue our activities to initiate preclinical programs for future product candidates. The timing and amount of these expenses will depend upon the outcome of our clinical trials and the associated costs. The timing and amount of these expenses will also depend on the costs associated with potential future clinical trials of our product candidates and the related expansion of our research and development organization, regulatory requirements, advancement of our preclinical programs and product candidate manufacturing costs.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and benefits related to our executive, finance, business development, human resources and other support functions. Other general and administrative expenses include stock-based compensation expenses, market research costs, facility-related costs, consulting costs and expenses associated with the requirements of being a publicly traded company in the United States, including insurance, legal, audit and taxation services fees.
We anticipate that our general and administrative expenses will continue to increase in the future as we increase our headcount to support our planned clinical trials of ivonescimab, continued research and development and potential commercialization of our product candidates. We also anticipate continued accounting, audit, regulatory, compliance, insurance and investor and public relations expenses associated with being a publicly traded company in the United States.
Other expense, net
Other expense, net primarily consists of foreign currency net gains and losses, cash and imputed interest expense incurred related to our promissory notes to related parties, investment income related to our money market fund and investments in highly liquid U.S. treasury securities and interest income on restricted cash.
Imputed interest is calculated as the difference between the expected interest payable and the deemed market rate of interest and is recorded as a debt discount at inception of the note payable with a credit to additional paid-in capital for notes payable to related parties. The debt discount is amortized to interest expense using an effective interest rate method. All highly liquid investments with a maturity date of 90 days or less at the date of purchase are considered to be cash equivalents and the related investment income is recognized in net loss. The appropriate classification of investments in securities is determined by the Company at the time of purchase.
Taxation
As a U.S. tax resident trading entity we are subject to U.S. corporate taxation. Our U.K. resident trading subsidiaries are individually subject to U.K. corporate taxation. Due to the nature of our business, we have generated losses since inception. We have recorded a full valuation allowance against the deferred tax assets with respect to these tax losses in excess of our deferred tax liabilities in each jurisdiction because we do not consider it probable that there will be suitable taxable profits in the foreseeable future based on the evidence available against which to offset these losses.
Jumpstart Our Business Startups Act of 2021
As of January 1, 2021, we are no longer an “emerging growth company” as defined in the Jumpstart our Business Startups Act of 2012, or the JOBS Act. Formerly, as an emerging growth company, we were able to take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies. The last day of the fiscal year following the fifth anniversary of our initial public offering in March 2015 was December 31, 2020, hence we have ceased to be an emerging growth company.
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Results of Operations
Comparison of the Year Ended December 31, 2022 to the Year Ended December 31, 2021
(in millions) Year Ended
December 31, 2022 December 31, 2021 $ Change
Revenue $ 0.7 $ 1.8 $ (1.1)
Operating expenses:
Research and development 52.0 85.4 (33.4)
General and administrative 26.7 23.6 3.1
Impairment of intangible assets 8.5 — 8.5
Total operating expenses 87.2 109.0 (21.8)
Other operating income 14.4 21.0 (6.6)
Operating loss (72.1) (86.2) 14.1
Other expense, net (6.7) (2.4) (4.3)
Loss before income taxes (78.8) (88.6) 9.8
Net loss $ (78.8) $ (88.6) $ 9.8
Revenue
Revenue for the years ended December 31, 2022 and 2021 relates to revenue from our license and commercialization agreement with Eurofarma Laboratórios S.A ("Eurofarma"). This revenue was recognized ratably over the performance period the research and development services were provided. The decrease for the year ended December 31, 2022 compared to the same period in the prior year is attributed to the achievement of a milestone related to this agreement in September of 2021. The total milestone of $1.3 million was recognized ratably over the determined performance period the research and development service were provided.
Operating Expenses
Research and Development Expenses
(in millions) Year Ended
December 31, 2022 December 31, 2021 $ Change
CDI program $ 25.3 $ 53.9 $ (28.6)
Antibiotic pipeline research and development costs 3.3 1.9 1.4
Other research and development expenses 23.4 29.6 (6.2)
Total $ 52.0 $ 85.4 $ (33.4)
Investment in our CDI program decreased by $28.6 million for the year ended December 31, 2022, compared to the same period in the prior year, primarily due to a decrease in clinical and manufacturing activity spend associated with the ridinilazole Phase III clinical program as a result of our decision to seek partners or a divestiture related to ridinilazole as the path forward for the clinical development of the asset.
Investment in our antibiotic pipeline development activities increased by $1.4 million for the year ended December 31, 2022, compared to the same period in the prior year, primarily due to increased development activity spend, specifically IND-enabling activities, associated with the development of our preclinical candidate, SMT-738, from the DDS-04 series for development in the fight against multi-drug resistant infections, specifically Carbapenem-resistant Enterobacteriaceae ("CRE") infections.
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Other research and development expenses are comprised of the following:
(in millions) Year Ended
December 31, 2022 December 31, 2021 $ Change
Compensation related costs $ 16.3 $ 19.4 $ (3.1)
Stock-based compensation 4.3 5.9 (1.6)
Other research and development costs 2.8 4.3 (1.5)
Total $ 23.4 $ 29.6 $ (6.2)
Other research and development expenses decreased by $6.2 million for the year ended December 31, 2022, compared to the same period in the prior year, primarily due to a decrease of $3.1 million in compensation related costs, a decrease of $1.6 million in stock-based compensation due to a lower headcount as compared to the same period in the prior year, and recognition of a $1.3 million gain on the remeasurement of assumed contingent liabilities.
General and Administrative Expenses
(in millions) Year Ended
December 31, 2022 December 31, 2021 $ Change
Compensation related costs $ 11.5 $ 9.7 $ 1.8
Stock-based compensation 7.6 6.9 0.7
Legal and professional fees 3.7 2.6 1.1
Other general and administrative expenses 3.9 4.4 (0.5)
Total $ 26.7 $ 23.6 $ 3.1
General and administrative expenses increased by $3.1 million, compared to the same period in the prior year, primarily due to an increase of $1.8 million in compensation related costs and an increase of $0.7 million in stock-based compensation as the Company is focused on building our executive management team to support the growth of the Company, and an increase of $1.1 million in legal and professional fees to support our financings and business development efforts during the year.
Impairment of Intangible Assets
In December 2017, we expanded our activities in the field of infectious diseases with the acquisition of Discuva Limited, a privately held United Kingdom-based company. Through this acquisition, we obtained a bacterial genetics platform and a suite of software-based technologies (collectively termed our “Discuva Platform”), which facilitates the discovery and development of new mechanism antibiotics. In conjunction with the significant change in the Company’s strategy and shift in focus to the therapeutic area of oncology, the Company determined that it will cease further investment in the Discuva Platform and evaluate further options for the use of the Discuva Platform. Management have concluded that this indicated the carrying amount of the acquired Discuva Platform intangible asset may not be recoverable and hence performed an assessment using a probability-weighted approach to determine the undiscounted cash flows of the asset, which indicated that an impairment exists. Based on the assessment to compare the fair value of the asset to its carrying amount, an impairment charge of $8.5 million was recognized during the year ended December 31, 2022, representing the aggregate carrying amount of the intangible asset. This impairment charge is presented as impairment of intangible assets in the consolidated statements of operations and comprehensive loss.
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Other Operating Income
Other operating income is comprised of the following:
(in millions) Year Ended
December 31, 2022 December 31, 2021 $ Change
Funding income from BARDA $ 8.1 $ 4.6 $ 3.5
Research and development tax credits 4.5 15.2 (10.7)
Grant income from CARB-X 1.8 1.2 0.6
Total $ 14.4 $ 21.0 $ (6.6)
Funding income from BARDA increased by $3.5 million for the year ended December 31, 2022, compared to the same period in the prior year, primarily due to the accrual of the remaining clinical trial costs associated with ridinilazole as a result of our decision to seek partners or a divestiture related to ridinilazole as the path forward for the clinical development of the asset. The recognition of the remaining clinical trial costs resulted in the acceleration of deferred other income for costs that had been billed and collected from BARDA prior to the expense being recognized.
U.K. research and development tax credits decreased by $10.7 million for the year ended December 31, 2022, compared to the same period in the prior year, due to a decrease in clinical and manufacturing activity spend associated with the ridinilazole Phase III clinical program, which was ceased during the third quarter of 2022, and resulted in a decrease in tax credits claimed, coupled with a decrease in eligible expenses claimed due to recent changes in tax legislation.
Grant income received from CARB-X increased by $0.6 million for the year ended December 31, 2022, compared to the same period in the prior year due to an increase in spend to progress the preclinical candidate SMT-738 from the DDS-04 series for development in the fight against multidrug resistant infections, specifically CRE infections.
Other Expense, Net
Other expense, net is comprised of the following:
(in millions) Year Ended
December 31, 2022 December 31, 2021 $ Change
Foreign currency loss $ (4.1) $ (2.1) $ (2.0)
Interest expense on promissory notes payable to related parties (4.4) (0.2) (4.2)
Investment income 1.5 — 1.5
Other income (expense), net 0.3 (0.1) 0.4
Total $ (6.7) $ (2.4) $ (4.3)
Other expense, net primarily increased by $4.3 million for the year ended December 31, 2022, compared to the same period in the prior year, due to unfavorable changes in foreign currency of $2.0 million, increase in loan interest expense of $4.2 million related to the $25.0 million and $520.0 million promissory notes issued to related parties during the year (as described below), partially offset by $1.5 million of investment income related to increased balances and yields in our money-market fund and highly liquid U.S. government treasury securities.
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Liquidity and Capital Resources
Sources of Liquidity
To date, we have financed our operations primarily through issuances of our common stock, payments to us under license, collaboration, and commercialization arrangements, for example, our license and commercialization agreement with Eurofarma Laboratórios SA, or Eurofarma, and development funding and other assistance from government entities, philanthropic, non-government and not-for-profit organizations for our product candidates. In particular, we have received funding from BARDA, CARB-X, Innovate UK, Wellcome Trust and a number of not-for-profit organizations.
On March 24, 2021, pursuant to an unsecured promissory note we received net proceeds of $55.0 million. Such note was later repaid without interest or penalty, rescinded and replaced by a new note on April 20, 2021, pursuant to a second unsecured promissory note we received net proceeds of $55.0 million. Subsequently, on May 12, 2021, we received proceeds of $75.0 million in the aggregate from the sale of 14,312,976 shares of Common Stock at a price per share of $5.24 from our 2021 rights offering ("2021 Rights Offering), the proceeds of which were used in part to repay amounts outstanding on the second unsecured promissory note. On March 10, 2022, we received net proceeds of $25.0 million from the issuance of an unsecured promissory notes. On August 8, 2022, we received net proceeds of $99.9 million from the sale of 103,092,783 share of Common Stock at a price of $0.97 per share from our 2021 Rights Offering, the proceeds of which were used in part to repay amounts outstanding on the March 2022 Note.
On December 6, 2022, the Company entered into a Note Purchase Agreement, with Mr. Duggan and Dr. Zanganeh, pursuant to which the Company agreed to sell to each of Mr. Duggan and Dr. Zanganeh unsecured promissory notes in the aggregate amount of $520 million. Pursuant to the Note Purchase Agreement, the Company issued to Mr. Duggan and Dr. Zanganeh the unsecured Duggan February Note in the amount of $400 million and $20 million Zanganeh Note, respectively, which would mature and become due on February 15, 2023 and an unsecured Duggan September Note to Mr. Duggan in the amount of $100 million, which will mature and become due on September 15, 2023. The maturity dates of the December 2022 Notes could be extended one or more times at the Company’s election, but in no event to a date later than September 6, 2024. In addition, if the Company shall consummate a public offering, then upon the later to occur of (i) five business days after the Company receives the net cash proceeds therefrom or (ii) May 15, 2023, the Duggan February Note and the Zanganeh Note shall be prepaid by an amount equal to the lesser of (a) 100% of the amount of the net proceeds of such offering and (b) the outstanding principal amount on such Notes. On January 19, 2023, the Company provided notice to extend the term of the Duggan February Note and Duggan September Note to a maturity date of September 6, 2024. Furthermore, on January 19, 2023, the Company and Mr. Duggan rectified the Duggan February Note and Duggan September Note in order to correctly reflect the parties’ intent that the Company may only prepay (i) the Duggan February Note following the completion of a public rights offering to be conducted by Summit in the approximate amount of $500 million (the “Rights Offering”), or a similar capital raise, in an amount equal to the lesser of (x) the net proceeds of the Rights Offering or such capital raise or (y) the full amount outstanding of the Duggan February Note, and (ii) Duggan September Note following the completion of a capital raising transaction subsequent to the Rights Offering in an amount equal to the lesser of (i) the net proceeds of such capital raise or (ii) the full amount outstanding of the Duggan September Note. Following the issuance of the “Duggan Promissory Notes, the Duggan February Note and Duggan September Note were marked as “cancelled” on their face and replaced in their entirety by the Notes. The Notes accrue interest at an initial rate of 7.5%. All interest on the Notes shall be paid on the date of signing for the period through February 15, 2023. Such prepaid interest shall be paid in a number of shares of the Company’s Common Stock, equal to the dollar amount of such prepaid interest, divided by $0.7913 (the consolidated closing bid price immediately preceding the time the Company entered into the Note Purchase Agreement, plus $.01), which was 9,720,291 shares. For all applicable periods following the February 15, 2023, interest shall accrue on the outstanding principal balance of the Notes at the US prime interest rate, as reported in the Wall Street Journal, plus 50 basis points, as adjusted monthly, for three months immediately following February 15, 2023, and thereafter at the US prime rate plus 300 basis points, as adjusted monthly. On February 15, 2023, the $20 million Zanganeh Note matured and the Company repaid the outstanding principal balance. In connection with the closing of the Rights Offering, the $400 million Duggan Promissory Note matured and became due, and the Company repaid all principal and accrued interest thereunder using a portion of the proceeds from this Rights Offering. Following the repayment of this note, only the $100 million Duggan September Note remains outstanding.
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We have devoted substantially all of our efforts to research and development, including clinical trials. We have not completed the development of any drugs. We expect to continue to incur significant expenses and increasing operating losses for at least the next few years. The net losses we incur may fluctuate significantly from quarter to quarter and year to year, due to the nature and timing of our research and development activities. We expect that our research and development and general and administrative expenses will continue to be significant in connection with our ongoing research and development efforts. In addition, if we obtain marketing approval for any of our product candidates in the United States or other jurisdictions where we retain commercial rights, and if we choose to retain those rights, we would expect to incur significant sales, marketing, distribution and outsourced manufacturing expenses, as well as ongoing research and development expenses. In addition, our expenses will increase if and as we:
• Invest in clinical development of ivonescimab in our Licensed Territory;
• conduct research and continue development of additional product candidates;
• maintain and augment our intellectual property portfolio and opportunistically acquire complimentary intellectual property;
• seek further regulatory advancement for ivonescimab;
• invest in our manufacturing capabilities for ivonescimab and any other products for which we may obtain regulatory approval;
• seek marketing approvals for any product candidates that successfully complete clinical development;
• ultimately establish a sales, marketing and distribution infrastructure in jurisdictions where we have retained commercialization rights and scale up external manufacturing capabilities to commercialize any product candidates for which we receive marketing approval;
• perform our obligations under our collaboration agreements;
• pursue business development opportunities, including investing in other businesses, products and technologies;
• 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
• hire additional clinical, regulatory, scientific and administrative personnel;
• expand our physical presence;
• add operational, financial and management information systems and personnel, including personnel to support our product development and planned future commercialization efforts; and
• borrow capital to fund our resources and have to pay interest expenses on such borrowings.
During the year ended December 31, 2022, we incurred a net loss of $78.8 million, and cash flows used in operating activities was $41.6 million. As of December 31, 2022 we had an accumulated deficit of $378.3 million, cash and cash equivalents of $348.6 million, restricted cash of $300.0 million, research and development tax credits of $5.8 million and accounts receivable of $0.3 million. These losses could continue for the next several years as we invest in clinical development of ivonescimab. We believe that our financial resources as of December 31, 2022, after considering the payments made to Akeso in January and March 2023 totaling $474.9 million, the net proceeds of $499.5 million from the Rights Offering that closed on March 1, 2023, and repayments of the promissory notes payable to related parties in February and March 2023 totaling $420 million, will fund our operating costs and working capital needs for our planned clinical trials for ivonescimab into the second half of 2024. In addition to the payments already made to Akeso, under the License Agreement there are additional potential milestone payments of $4.5 billion, as Akeso will be eligible to receive regulatory milestones of up to $1.05 billion and commercial milestones of up to $3.45 billion. In addition, Akeso will be eligible to receive low double-digit royalties on net sales. Until we can generate substantial revenue and achieve profitability, we will need to raise additional capital to fund ongoing operations and capital needs, including the payment of the milestone payments referenced above.
We have based the foregoing estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we currently expect. This estimate assumes, among other things, that we do not obtain any additional funding through grants and clinical trial support or through new collaboration arrangements. Our future capital requirements will depend on many factors, including:
• the costs, timing and outcome of clinical trials required for clinical development of ivonescimab;
• the number and development requirements of other future product candidates that we pursue;
• the costs, timing and outcome of regulatory review of ivonescimab and/or our other product candidates we develop;
• the costs and timing of commercialization activities, including product sales, marketing, distribution and manufacturing, for any of our product candidates that receive marketing approval;
• the extent to which we become liable for milestone payments under our Licensing Agreement for ivonescimab;
• subject to receipt of marketing approval, revenue received from commercial sales of any product candidates;
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• the costs and timing of preparing, filing and prosecuting patent applications, maintaining and protecting our intellectual property rights and defending against any intellectual property-related claims;
• our ability to establish and maintain collaborations, licensing or other arrangements and the financial terms of such arrangements;
• the extent to which we acquire or invest in other businesses, products and technologies;
• the rate of the expansion of our physical presence; and
• the extent to which we change our physical presence.
Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of some, or all, of the following: equity and debt offerings, collaborations, strategic alliances, grants and clinical trial support from government entities, philanthropic, non-government and not-for-profit organizations, and marketing, distribution or licensing arrangements.
We will need to seek additional funding in the future to fund operations. Additional capital, when needed, may not be available to us on acceptable 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 existing stockholders may be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing stockholders. Additional debt 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 or other distributions. If we raise additional funds through collaborations, strategic alliances or marketing, distribution, or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us.
If we are unable to raise additional funds through equity or debt financings or other arrangements when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
Cash Flows
The following table summarizes the results of our cash flows for the years ended December 31, 2022 and 2021.
(in millions) Year Ended December 31, 2022 Year Ended December 31, 2021
Net cash used in operating activities $ (41.6) $ (72.6)
Net cash used in investing activities $ (0.6) $ (0.3)
Net cash provided by financing activities $ 620.2 $ 77.9
Operating Activities
Net cash used in operating activities for the year ended December 31, 2022 was $41.6 million and resulted from a net loss of $78.8 million, which included non-cash charges of $37.2 million, which is primarily comprised of $11.9 million of stock-based compensation, $8.5 million impairment charge, $4.3 million non-cash interest expense, $2.5 million of amortization and depreciation charges, $2.6 million unrealized foreign exchange loss and a $8.6 million net decrease in working capital. The net decrease in working capital was primarily due to a $8.4 million decrease in the research and development tax credit receivable, a $4.8 million increase in accrued liabilities and accrued compensation, a $5.1 million decrease in prepaid expenses, partially offset by a $7.3 million decrease in deferred revenue and other income and a $4.1 million decrease in accounts payable.
Net cash used in operating activities for the year ended December 31, 2021 was $72.6 million and resulted from a net loss of $88.6 million, which included non-cash charges of $16.1 million, which is primarily comprised of $12.8 million of stock-based compensation, and a $0.1 million net increase in working capital. The net increase in working capital was primarily due to a $6.0 million increase in the research and development tax credit receivable, a $1.7 million decrease in accounts payable, a $1.1 million increase in accounts receivable, a $1.1 million decrease in lease liabilities and a $0.8 million decrease in deferred revenue, partially offset by a $8.2 million increase in accrued liabilities and accrued compensation and a $2.3 million decrease in prepaid expenses.
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Investing Activities
Net cash used in investing activities for the years ended December 31, 2022 and 2021of $0.6 million and $0.3 million, respectively, was for the purchase of property and equipment.
Financing Activities
Net cash provided by financing activities for the year ended December 31, 2022 was $620.2 million and primarily resulted from net proceeds of $99.9 million from the rights offering in August 2022, proceeds from promissory notes from related parties of $545.0 million, partially offset by the repayment of a promissory note from a related party of $25.0 million and $0.4 million of net proceeds from the exercise of stock options.
Net cash provided by financing activities for the year ended December 31, 2021, was $77.9 million and primarily resulted from net proceeds of $74.8 million from the rights offering in May 2021, proceeds from the promissory notes from a related party of $110.0 million, partially offset by repayments of the promissory notes from a related party of $110.0 million and $3.1 million of net proceeds received from the exercise of stock options.
Contractual Obligations and Commitments
Fixed asset purchase commitments
At December 31, 2022 and 2021, we had no capital commitments.
Lease commitments
The following table summarizes our lease contractual obligations as of December 31, 2022.
Payment due by period
(in millions) Total Less than 1 year Between 1 and 3 years Between 3 and 5 years More than 5 years
Operating lease obligations $4.9 $1.5 $3.4 $ — $ —
Debt commitments
December 2022 Promissory Notes
On December 6, 2022, we entered into the Note Purchase Agreement, with Mr. Duggan and Dr. Zanganeh, pursuant to which we agreed to sell to each of Mr. Duggan and Dr. Zanganeh unsecured promissory notes in the aggregate amount of $520 million. Pursuant to the Note Purchase Agreement, we issued to Mr. Duggan and Dr. Zanganeh the Duggan February Note and the Zanganeh Note, respectively, which would mature and become due on February 15, 2023 and the Duggan September Note to Mr. Duggan, which will mature and become due on September 15, 2023.
On January 19, 2023, we provided notice to extend the term of the Duggan February Note and Duggan September Note to a maturity date of September 6, 2024. Furthermore, on January 19, 2023, we and Mr. Duggan rectified the Duggan February Note and Duggan September Note in order to correctly reflect the parties’ intent regarding prepayment terms. Please see "Liquidity and Capital Resources-Sources of Liquidity" section for further details of the Company's debt commitments.
On February 15, 2023, the $20 million Zanganeh Note matured and the Company repaid the outstanding principal balance. In connection with the closing of the Rights Offering, the $400 million Duggan Promissory Note matured and became due, and the Company repaid all principal and accrued interest thereunder using a portion of the proceeds from this Rights Offering.
Other commitments
We enter into contracts in the normal course of business with various third parties for clinical trials, preclinical research studies and testing, manufacturing and other services and products for operating purposes. Most contracts provide for termination upon notice, and therefore are cancellable contracts. As of December 31, 2022, total contractual commitments, excluding leases
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commitments and debt commitments, are estimated to be approximately $11.5 million and the majority of these commitments are due within one year.
We have certain commitments under our agreements with Akeso, Wellcome Trust, the University College London and certain employees, former employees and former directors of Discuva, pursuant to which we will be required to pay royalties or make milestone payments. The License Agreement with Akeso also contains certain manufacturing and purchase commitments. As of December 31, 2022, we are unable to estimate the amount, timing or likelihood of achieving the milestones, making future product sales or assessing estimated forecasts for manufacturing and supplied materials which these contingent payment obligations relate to.
Indemnifications
Our certificate of incorporation provides that it will indemnify the directors and officers to the fullest extent permitted by Delaware law. In addition, we have entered into indemnification agreements with all of the directors and executive officers. These indemnification agreements may require us, among other things, to indemnify each such director or executive officer for some expenses, including attorneys’ fees, judgments, fines, and settlement amounts incurred by him or her in any action or proceeding arising out of his or her service as one of our directors or executive officers. We believe the fair value for these indemnification obligations is minimal. Accordingly, we have not recognized any liabilities relating to these obligations as of December 31, 2022.
Legal Proceedings
We are not currently subject to any material legal proceedings.
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Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses and the disclosure of contingent assets and liabilities in our financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, intangible assets, accrued research and development expenses, stock-based compensation and income taxes. We base our estimates on historical experience, known trends and events, and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect the most significant judgments, assumptions and estimates we use in preparing the consolidated financial statements:
Revenue Recognition
The Company accounts for revenue using Accounting Standards Codification ("ASC") 606 ("ASC 606"). This standard applies to all contracts with customers, except for contracts that are within the scope of other standards.
The Company enters into out-licensing agreements within the scope of ASC 606 under which it licenses certain rights to its product candidates to third parties. Such agreements may include the transfer of intellectual property rights in the form of licenses, transfer of technological know-how, delivery of drug substances, research and development services, and participation on certain committees with the counterparty. Payments made by the customers may include one or more of the following: non-refundable, up-front license fees; development, regulatory, and commercial milestone payments; payments for manufacturing supply services the Company provides through its contract manufacturers; and royalties on net sales of licensed products if they are successfully approved and commercialized. Each of these payments may result in license, collaboration, or other revenue, except revenue from royalties on net sales of licensed products, which would be classified as royalty revenue.
In determining the appropriate amount of revenue to be recognized as the Company fulfills its obligations under each of its out-licensing agreements, the following steps are performed: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. Revenue is then recognized in respect of the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. As part of the accounting for these arrangements, the Company must use significant judgment to determine: (a) the performance obligations based on the determination under step (ii) above; (b) the transaction price under step (iii) above; and (c) the standalone selling price for each performance obligation identified in the contract for the allocation of transaction price in step (iv) above. The Company also uses judgment to determine whether milestone payments or other variable consideration, except for royalties and sales-based milestones, should be included in the transaction price, as described below. The transaction price is allocated to each performance obligation based on the relative standalone selling price of each performance obligation in the contract, and the Company recognizes revenue based on those amounts when, or as, the performance obligations under the contract are satisfied.
Exclusive Licenses
If the license to the Company’s intellectual property is determined to be distinct from the other promises or performance obligations identified in the arrangement, the Company recognizes revenue from nonrefundable, upfront fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license. In assessing whether a promise or performance obligation is distinct from the other promises, the Company considers factors such as the research, development, manufacturing and commercialization capabilities of the collaboration partner and the availability of the associated expertise in the general marketplace. In addition, the Company considers whether the collaboration partner can benefit from a promise for its intended purpose without the receipt of the remaining promises, whether the value of the promise is dependent on the unsatisfied promises, whether there are other vendors that could provide the remaining promises, and whether it is separately identifiable from the remaining promises. For licenses that are combined with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined
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performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of progress and related revenue recognition. The measure of progress, and the resulting periods over which revenue should be recognized, are subject to estimates by management and may change over the course of the research, development and licensing arrangement. Such a change could have a material impact on the amount of revenue the Company records in future periods. Under the Company’s existing license and collaboration agreements, the Company has concluded that the transfer of control to the customer occurs over the time period that the research and development services are to be provided by the Company, and this output method is, in management’s judgment, the best measure of progress towards satisfying the performance obligation.
Milestone Payments
At the inception of each arrangement that includes potential research, development or regulatory milestone payments, the Company evaluates whether the milestones are considered likely to be met and estimates the amount to be considered for inclusion in the transaction price using the most-likely-amount method. If it is probable that a significant reversal in the amount of cumulative revenue recognized would not occur, the associated milestone payment value is included in the transaction price. For milestone payments due upon events that are not within the control of the Company or the licensee, such as regulatory approvals, the Company is not able to assert that it is likely that the regulatory approval will be granted and that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur until those approvals are received. In making this assessment, the Company evaluates factors such as the scientific, clinical, regulatory, commercial and other risks that must be overcome to achieve the particular milestone. There is considerable judgment involved in determining whether it is probable that a significant reversal in the amount of cumulative revenue recognized would not occur. At the end of each subsequent reporting period, the Company reevaluates the probability of achievement of all milestones subject to constraint and, if necessary, adjusts its estimate of the overall transaction price of the arrangement. Any such adjustments are recorded on a cumulative catch-up basis, which would affect the amounts of revenue and earnings in the period of adjustment.
Royalties
For arrangements that include sales-based royalties, including milestone payments due upon first commercial sales or based on a level of sales, that are the result of a customer-vendor relationship and for which the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) the occurrence of the related sales or (ii) the date upon which the performance obligation to which some or all of the royalty has been allocated has been satisfied or partially satisfied. To date, the Company has not recognized any royalty revenue from any of its licensing arrangements.
Intangible Assets
Intangible assets are estimated by management based on the fair value of assets acquired. These include acquired technology, patents, licenses, an option over non-financial assets and a research and development discovery platform ("Discuva Platform"). Intangible assets are amortized from one to eighteen years on a straight-line basis which represents the estimated periods of benefit and the expected pattern of consumption.
Our intangible assets are recorded at fair value at the time of their acquisition, assigned an estimated useful life, and amortized primarily on a straight-line basis over their estimated useful lives or over the period of the relevant agreement for an option over non-financial assets. Intangible assets are stated in our consolidated balance sheets net of accumulated amortization and impairments, if applicable.
The Company evaluates the recoverability of its intangible and long-lived assets whenever events and changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. If events and circumstances indicate that the carrying amount may not fully be recoverable, the carrying values of the asset are evaluated in relation to their operating performance and future undiscounted cash flows of the underlying business. If the future undiscounted cash flows are less than their carrying value, impairment exists. The impairment is measured as the difference between the carrying value and the fair value of the underlying asset. Fair values are based on estimates of market prices and assumptions concerning the amount and timing of estimated future cash flows and assumed discount rates, reflecting varying degrees of perceived risk.
Amortization of intangible assets is included as part of the research and development expense line shown on the face of the consolidated statement of operations and comprehensive loss.
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Research and Development Costs
Research and development costs are expensed as incurred. Research and development expenses consist of costs incurred to discover, research and develop product candidates, including personnel expenses, stock-based compensation expense, allocated facility-related and depreciation expenses, third-party license fees and external costs of outside vendors engaged to conduct preclinical and clinical development activities and clinical trials as well as to manufacture clinical trial materials. Non - refundable prepayments for goods or services that will be used or rendered for future research and development activities are recorded as prepaid expenses. Such amounts are recognized as an expense as the goods are delivered or the related services are performed, or until it is no longer expected that the goods will be delivered, or the services rendered. The significant estimates in our accrued research and development expenses include the costs incurred for services performed by our vendors in connection with research and development activities for which we have not yet been invoiced. Milestone and other payments made to third-parties with respect to in-process research and development, in accordance with the Company’s license, acquisition and other similar agreements are expensed when determined to be probable and estimable.
The Company has entered into various research and development contracts with other companies. These agreements are generally cancellable, and related payments are recorded as research and development expenses as incurred. The Company records accruals for estimated ongoing research and development costs or prepaid expenses where the payments made exceeds the estimated costs. When evaluating the adequacy of these balances, the Company analyzes progress of the studies, including the estimated costs to complete each study or activity, the estimation of the current stage of completion and the invoices received, as well as predetermined milestones which are not reflective of the current stage of development for prepaid expenses. Actual results could differ from the Company’s estimates. In all cases, the full cost of each study or activity is expensed by the time the final report or where applicable, product, has been received. The Company’s historical estimates have not been materially different from the actual costs.
Stock-Based Compensation
The Company measures and recognizes compensation expense for all stock option and restricted stock unit awards based on the estimated fair value of the award on the grant date. The Company uses the Black-Scholes option pricing model to estimate the fair value of stock option awards. Additionally, the Company uses a Monte Carlo simulation model to calculate the estimated fair value on the date of grant related to awards with market-based service conditions. The fair value is recognized as expense, over the requisite service period, which is generally the vesting period of the respective award, on a straight-line basis for each separately vesting portion of the award when the only condition to vesting is continued service. If vesting is subject to a market or performance condition, recognition is based on the derived service period of the award. Expense for awards with performance conditions is estimated and adjusted on a quarterly basis based upon the assessment of the probability that the performance condition will be met. Use of the Black-Scholes option-pricing model requires management to apply judgment under highly subjective assumptions. These assumptions include:
• Expected term—The expected term of stock options represents the weighted-average period the stock options are expected to be outstanding. The Company uses the simplified method for estimating the expected term as provided by the Securities and Exchange Commission. The simplified method calculates the expected term as the average of the time-to-vesting and the contractual life of the options.
• Expected volatility—The expected volatility is calculated based on historical volatility of the Company's share price.
• Risk-free interest rate—The risk-free rate assumption is based on the U.S. Treasury instruments, the terms of which were consistent with the expected term of the Company’s stock options.
• Expected dividend—The expected dividend assumption is based on the Company’s history and expectation of dividend payouts. The Company has not paid and does not intend to pay dividends.
The Company estimates expected forfeitures at the time of grant instead of accounting for forfeitures as they occur. Stock option and restricted stock unit awards have been granted at fair value to non-employees, in connection with research and consulting services provided to the Company, to non-employees in connection with corporate activities, and to employees, in connection with Stock Purchase and Restriction Agreements. Equity awards generally vest over terms of 3 or 4 years.
The Company classifies stock-based compensation expense in the consolidated statements of operations in the same manner in which the award recipient’s payroll costs are classified.
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Income Taxes
The provision for income taxes is determined using the asset and liability approach. Tax laws may require items to be included in tax filings at different times than the items are reflected in the financial statements. A current asset or liability is recognized for the estimated taxes receivable or payable for the current year. Deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. Deferred taxes are initially recognized at enacted tax rates in force at the time of initial recognition and are subsequently adjusted for any enacted changes in tax rates and tax laws. Subsequent changes to deferred taxes originally recognized in equity are recognized in income. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. The Company has recorded a full valuation allowance against the deferred tax assets in excess of its deferred tax liabilities, as the deferred tax liability represents future reversals of existing taxable temporary differences. The Company records interest and penalties related to income tax matters as part of income tax expense.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, please see Note 5 to our consolidated financial statements contained in this Annual Report on Form 10-K.
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