ARS Pharmaceuticals, 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 together with our unaudited financial statements and related notes thereto included in “Item 1. Financial Statements (Unaudited)” of this Quarterly Report on Form 10-Q and the audited financial statements and related notes thereto as of and for the year ended December 31, 2020 included in the Annual Report on Form 10-K, filed with the Securities and Exchange Commission (SEC), on March 29, 2021. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, 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 this Quarterly Report, 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. You should carefully read the “Risk Factors” section of this Quarterly Report to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Overview We are a clinical-stage biopharmaceutical company with one product candidate in a Phase 1/1b clinical trial, and we are focused on leveraging our proprietary ImmunoTAC technology platform to develop systemically delivered, tissue targeted therapeutics for the treatment of cancer, chronic viral infections, and other serious diseases. Our platform enables us to strategically pair proprietary linker-payloads that modulate key disease-modifying pathways with monoclonal antibodies directed to specific disease sites. Initially, we are applying our platform to create a new class of targeted immuno-oncology agents that direct a myeloid cell activator to the tumor microenvironment in solid tumors to promote cancer cell killing. Our lead product candidate, SBT6050, is comprised of a TLR8 agonist linker-payload conjugated to a HER2-directed monoclonal antibody that targets tumors such as certain breast, gastric and non-small cell lung cancers. SBT6050 is currently in a Phase 1/1b clinical trial as a monotherapy and in combination with pembrolizumab, in patients with advanced or metastatic HER2-expressing solid tumors. In this trial, we have observed changes in pharmacodynamic markers in the first dose cohort, and we anticipate providing an update on interim data from the Phase 1 single agent dose-escalation cohorts in the second half of 2021. SBT6290 is our second product candidate, expanding on the potential of a TLR8 agonist as a payload. SBT6290 is a TLR8 linker-payload conjugated to a monoclonal antibody that targets Nectin4, which is expressed in certain bladder, triple negative breast, head and neck, and non-small cell lung cancers. We anticipate submitting an investigational new drug application for SBT6290 in the fourth quarter of 2021. Our third TLR8 program, SBT8230, is comprised of a TLR8 linker-payload conjugated to an ASGR1 monoclonal antibody that is under development for the treatment of cHBV. We are also developing agents that localize therapies to modulate important pathways in additional oncology and fibrosis indications using TLR8 and other linker-payloads. 21 Table of Contents Our ImmunoTAC platform drives our development pipeline of tissue targeted therapeutic candidates as summarized in the chart below: We have incurred significant operating losses since our inception. As of March 31, 2021, we had an accumulated deficit of $115.6 million. Our net losses were $18.9 million and $5.3 million for the three months ended March 31, 2021 and 2020, respectively. Our losses have resulted primarily from costs incurred in connection with raising capital, research and development activities and general and administrative expenses. We do not have any products approved for sale and have not generated any revenue from product sales or otherwise. We expect our expenses will increase substantially and that we will continue to incur significant losses for the foreseeable future as we continue our development of, and seek regulatory approvals for, our product candidates and begin to commercialize any approved products, seek to expand our product pipeline, invest in our organization and technology platform, as well as incur expenses associated with operating as a public company. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on a variety of factors including the timing and scope of our preclinical studies and clinical trials. Accordingly, until such time as we can generate significant revenue from sales of our product candidates, if ever, we expect to finance our cash needs through public or private equity offerings, debt financings, collaborations and licensing arrangements or other capital sources. In December 2020, we completed our initial public offering in which we sold 13,225,000 shares of our common stock at $21.00 per share and received net proceeds, after underwriting discounts and offering costs, of $255.3 million. Further, in March, July, and September 2020, we raised net proceeds of $153.3 million from the sale of our redeemable convertible preferred stock. Components of Our Results of Operations Operating Expenses Our operating expenses consist of (i) research and development expenses and (ii) general and administrative expenses. Research and Development Our research and development expenses consist primarily of direct and indirect costs incurred in connection with the development of our ImmunoTAC technology platform, product candidates, discovery efforts and preclinical studies and clinical trial activities related to our program pipeline, including our lead product candidate, SBT6050. 22 Table of Contents Our direct costs include: • expenses incurred under agreements with CROs and other vendors that conduct our preclinical and clinical activities; • expenses associated with manufacturing our product candidates including under agreements with CDMOs and other vendors; and • consulting fees. Our indirect costs include: • personnel-related expenses, consisting of employee salaries, bonuses, benefits, and stock-based compensation expense and recruiting costs for personnel engaged in research and development activities; • facility and equipment related expenses, consisting of indirect and allocated expenses for rent, depreciation, and equipment maintenance; and • other unallocated research and development expenses incurred in connection with our research and development programs, including laboratory materials and supplies and license fees. We expense research and development costs as incurred. Non-refundable advance payments for goods and services that will be used over time for research and development are capitalized and recognized as goods are delivered or as the related services are performed. In-licensing fees and other costs to acquire technologies used in research and development that have not yet received regulatory approval and that are not expected to have an alternative future use are expensed when incurred. We track direct costs by stage of program, clinical or preclinical. However, we do not track indirect costs on a program specific or stage of program basis because these costs are deployed across multiple programs and, as such, are not separately classified. We expect that our research and development expenses will substantially increase for the foreseeable future as we continue the clinical development of SBT6050 and discovery and development of our other development candidates and discovery programs and development, particularly as our product candidates move into later stages of development which increases costs considerably. We cannot reasonably determine the timing of initiation, the duration or the completion costs of future clinical trials and preclinical studies of IND and development candidates due to the inherently unpredictable nature of preclinical and clinical development. Clinical and preclinical development timelines, the probability of success and development costs can differ materially from expectations. We anticipate that we will make determinations as to which development candidates and discovery programs to pursue and how much funding to direct to each product candidate or program on an ongoing basis in response to the results of ongoing and future preclinical studies and clinical trials, regulatory developments and our ongoing assessments as to each product candidate’s commercial potential. General and Administrative General and administrative expenses consist primarily of personnel-related expenses, including employee salaries, bonuses, benefits, and stock-based compensation, and recruiting costs for personnel in executive, finance, and other administrative functions. Other significant general and administrative expenses include legal fees relating to intellectual property and corporate matters, professional fees for accounting, tax and consulting services, insurance costs, travel expenses and facility related expenses. We expect that our general and administrative expenses will substantially increase for the foreseeable future as we continue to increase our general and administrative headcount to support our continued research and development activities and, if any product candidates receive marketing approval, commercialization activities, as well as to support our operations generally. We also expect to incur increased expenses associated with operating as a public company, including costs related to 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. 23 Table of Contents Interest Income (Expense), Net Interest income (expense), net includes interest earned on our cash and cash equivalents carried at fair value, and interest expense on our borrowings. Results of Operations Comparison of the Three Months Ended March 31, 2021 and 2020 The following table summarizes our results of operations for the three months ended March 31, 2021 and 2020: Three Months Ended March 31, Dollar % 2021 2020 Change Change (in thousands) Operating expenses: Research and development $ 12,239 $ 4,414 $ 7,825 177 % General and administrative 6,646 828 5,818 * Total operating expenses 18,885 5,242 13,643 260 Loss from operations (18,885 ) (5,242 ) (13,643 ) 260 Interest income (expense), net 18 (37 ) 55 149 Net loss and comprehensive loss $ (18,867 ) $ (5,279 ) $ (13,588 ) 257 % * Not meaningful Research and Development Expenses The following table summarizes our research and development expenses for the three months ended March 31, 2021 and 2020: Three Months Ended March 31, Dollar % 2021 2020 Change Change (in thousands) Direct costs: SBT6050 $ 2,226 $ 1,147 $ 1,079 94 % Preclinical programs 3,704 532 3,172 * Total direct costs 5,930 1,679 4,251 253 Indirect costs: Personnel-related expenses, including stock-based compensation 4,695 1,826 2,869 157 Facility and equipment related expenses 872 562 310 55 Other unallocated research and development expenses 742 347 395 114 Total research and development expenses $ 12,239 $ 4,414 $ 7,825 177 % * Not meaningful Research and development expenses were $12.2 million and $4.4 million for the three months ended March 31, 2021 and 2020, respectively. The increase of $7.8 million was due primarily to an increase in preclinical programs of $3.2 million as we continued to advance certain pipeline programs, including SBT6290 and SBT8230, through preclinical development. The increase was also due to an increase of $1.1 million in direct costs related to the development of SBT6050. The increase was also due to increases in personnel-related expenses of $2.9 million, and facility and equipment related expenses and other unallocated research and development expenses of $0.7 million. 24 Table of Contents General and Administrative Expenses General and administrative expenses were $6.6 million and $0.8 million for the three months ended March 31, 2021 and 2020, respectively. The increase of $5.8 million was due primarily to an increase of $3.8 million in personnel-related expenses due to increased headcount during the period, including new executives, as well as increases in salaries, bonuses, stock-based compensation, and recruiting expenses. To a lesser extent, the increase in general and administrative expenses was due to an increase in legal fees of $0.6 million, professional fees of $0.5 million, and $0.9 million in other various general and administrative expenses as we now operate as a public company. Interest Income (Expense), Net Interest income (expense), net was $18,000 and $(37,000) for the three months ended March 31, 2021 and 2020, respectively. The change of $55,000 was primarily due to a decrease in principal on our notes payable and an increase in our cash balance. Liquidity and Capital Resources We have incurred net losses and negative cash flows from operations since our inception and anticipate we will continue to incur net losses for the foreseeable future. Since our inception, we have funded our operations almost exclusively with proceeds from the sale and issuance of shares of our redeemable convertible preferred stock and debt financings. We will need to raise substantial additional capital in the future. As of March 31, 2021, we had $374.2 million in cash and cash equivalents. The following table sets forth a summary of the net cash flow activity for the years ended March 31, 2021 and 2020: Three Months Ended March 31, 2021 2020 (in thousands) Net cash provided by (used in): Operating activities $ (12,201 ) $ (7,628 ) Investing activities (35 ) (33 ) Financing activities (128 ) 21,315 Net increase (decrease) in cash, cash equivalents, and restricted cash $ (12,364 ) $ 13,654 Operating Activities During the three months ended March 31, 2021, net cash used in operating activities was $12.2 million. This consisted primarily of a net loss of $18.9 million, partially offset by non-cash charges of $4.8 million and a decrease in our operating assets and liabilities of $1.9 million. The non-cash charges primarily consisted of stock-based compensation expense of $4.3 million, non-cash lease expense of $0.3 million, and depreciation expense of $0.2 million. The decrease in our operating assets and liabilities was primarily due to an increase in accounts payable and accrued expenses of $2.2 million. This decrease was partially offset by a decrease in our lease liability of $0.2 million, and an increase in prepaid expenses and other assets of $0.1 million after adjusting for non-cash items. During the three months ended March 31, 2020, net cash used in operating activities was $7.6 million. This consisted primarily of a net loss of $5.3 million and an increase in our operating assets and liabilities of $2.8 million, partially offset by non-cash charges of $0.5 million. The non-cash charges primarily consisted of non-cash lease expense of $0.3 million and depreciation expense of $0.1 million. The increase in our operating assets and liabilities was primarily due to a decrease in accounts payable and accrued expenses of $2.7 million and a decrease in our lease liability of $0.2 million, partially offset by a decrease in prepaid expenses and other assets of $0.1 million. 25 Table of Contents Investing Activities During the three months ended March 31, 2021, cash used in investing activities was less than $0.1 million due to purchases of property and equipment. During the three months ended March 31, 2020, cash used in investing activities was less than $0.1 million due to purchases of property and equipment. Financing Activities During the three months ended March 31, 2021, cash used in financing activities was $0.1 million. This was primarily driven by $0.4 million of principal payments on the term loan payable, which was partially offset by $0.2 million in proceeds from exercises of common stock options. During the three months ended March 31, 2020, cash provided by financing activities was $21.3 million. This consisted primarily of $21.7 million of net proceeds from issuance of redeemable convertible preferred stock, which was partially offset by $0.4 million of principal payments on the term loan payable. Future Funding Requirements We believe that our cash and cash equivalents of $374.2 million at March 31, 2021 will be sufficient to fund our operating expenses and capital expenditure requirements through at least the next 24 months. However, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. We have based this estimate on assumptions that may prove to be wrong, and we could deplete our capital resources sooner than we expect. Additionally, the process of testing product candidates in clinical trials is costly, and the timing of progress and expenses in these trials is uncertain. Our future capital requirements will depend on many factors, including: • the initiation, trial design, progress, timing, costs and results of drug the discovery, preclinical studies and clinical trials of our product candidates, and in particular the clinical trials for SBT6050; • the number and characteristics of product candidates that we pursue; • the length of our clinical trials; • the outcome, timing and costs of seeking FDA, EMA and any other regulatory approvals; • the costs of manufacturing our product candidates, in particular for clinical trials in preparation for marketing approval and in preparation for commercialization; • the costs of any third-party products used in our combination clinical trials that are not covered by such third party or other sources; • the costs associated with hiring additional personnel and consultants as our preclinical, manufacturing and clinical activities increase; • the receipt of marketing approval and revenue received from any commercial sales of any of our product candidates, if approved; • the cost of commercialization activities for any of our product candidates, if approved, including marketing, sales and distribution costs; • the emergence of competing therapies and other adverse market developments; 26 Table of Contents • the ability to establish and maintain strategic collaboration, licensing or other arrangements and the financial terms of such agreements; • the extent to which we in-license or acquire other products and technologies; • the amount and timing of any payments we may be required to make pursuant to our current or future license agreements; • the costs involved in preparing, filing, prosecuting, maintaining, expanding, defending and enforcing patent claims, including litigation costs and the outcome of such litigation; • our need and ability to retain key management and hire scientific, technical, business, and medical personnel; • our implementation of additional internal systems and infrastructure, including operational, financial and management information systems; • or costs associated with expanding our facilities or building out our laboratory space; • the effects of the recent disruptions to and volatility in the credit and financial markets in the United States and worldwide from the COVID-19 pandemic; and • the costs of operating as a public company. Until such time, if ever, as we can generate substantial product revenues to support our cost structure, we expect to finance our cash needs through public or private equity offerings, debt financings, or other capital sources which may include strategic collaborations, licensing arrangements or other arrangements with third parties. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be or could be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing and equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, or declaring dividends. If we raise funds through strategic collaborations or other similar arrangements with third parties, we may have to relinquish valuable rights to our platform technology, future revenue streams, research programs or product candidates or may have to grant licenses on terms that may not be favorable to us and/or may reduce the value of our common stock. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts. Our ability to raise additional funds may be adversely impacted by potential worsening global economic conditions and disruptions to and volatility in the credit and financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic or otherwise. Because of the numerous risks and uncertainties associated with product development, we cannot predict the timing or amount of increased expenses and cannot assure you that we will ever be profitable or generate positive cash flow from operating activities. Contractual Obligations and Commitments During the three months ended March 31, 2021, there have been no material changes outside the ordinary course of business to our contractual obligations from those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K filed with the SEC on March 29, 2021. Off-Balance Sheet Arrangements Since our inception, we have not engaged in any off-balance sheet arrangements, as defined in the rules and regulations of the SEC. 27 Table of Contents 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 financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues 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 accrued expenses, stock-based compensation, and valuation allowances for deferred tax assets. We base our estimates on historical experience, known trends and events, and various other factors that are believed 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. During the three months ended March 31, 2021, there were no material changes to our critical accounting policies. Our critical accounting policies are described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Significant Judgments and Estimates” in our Annual Report on Form 10-K filed with the SEC on March 29, 2021 and Note 2 to our unaudited condensed financial statements appearing in Part I, Item 1 of this Quarterly Report on Form 10-Q. We believe that of our critical accounting policies, the following accounting policies involve the most judgment and complexity: • Research and Development Costs; • Stock-based Compensation; • Income Taxes. Recent Accounting Pronouncements See Note 2 to our unaudited condensed financial statements appearing in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information. Emerging Growth Company Status We are an emerging growth company, as defined in the JOBS Act. For so long as we remain an emerging growth company, we are permitted and intend to rely on certain exemptions from various public company reporting requirements, including not being required to have our internal control over financial reporting audited by our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and any golden parachute payments not previously approved. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to use this extended transition period for complying with certain new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates. We will remain an emerging growth company until the earliest to occur of: (i) the last day of the fiscal year in which we have at least $1.07 billion in annual revenue; (ii) the date upon which we are deemed to be a “large accelerated filer,” as defined in Rule 12b-2 under the Exchange Act; (iii) the date on which we have issued more than $1.0 billion in nonconvertible debt securities during the prior three-year period; and (iv) December 31, 2025. 28 Table of Contents Item 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable to a “smaller reporting company” as defined under Item 10(f)(1) of Regulation S-K of the Securities Act.