METACRINE, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, or Quarterly Report, and the audited financial statements and related notes and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 filed with theSecurities and Exchange Commission , orSEC , onMarch 30, 2022 , or our Annual Report. 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, as well as our expectations, beliefs, plans, intentions and strategies related to our proposed merger with Equillium, Inc., including the expected closing, 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 currently focused on developing differentiated therapies for patients with gastrointestinal, or GI, diseases. Our most advanced program, MET642, targets the farnesoid X receptor, or FXR, which is central to modulating GI and liver diseases. Prior toFebruary 2022 , we were developing another FXR agonist, MET409, for the treatment of non-alcoholic steatohepatitis, or NASH, a liver disease characterized by excess liver fat, inflammation and fibrosis. While we believe these two compounds demonstrate potential for differentiated treatments in both monotherapy and combination treatment for NASH, given recent clinical outcomes of our programs relative to competing programs, reduced investor sentiment in NASH, and the significant resources required to pursue further development in NASH, we elected to discontinue future development of our FXR program in NASH while prioritizing our resources and efforts toward the development of MET642 for the treatment of Ulcerative Colitis, or UC, one of the two primary types of Inflammatory Bowel Disease, or IBD. We were also developing small molecule inhibitors of HSD17?13 for the treatment of NASH. HSD17?13 is a genetically validated target for advanced liver disease. InApril 2022 , we completed a corporate restructuring plan, or Restructuring Plan, that resulted in the reduction of approximately 50% of our workforce, primarily consisting of our research organization, which consequently resulted in the discontinued development of our hydroxysteroid dehydrogenase, or HSD, program. InSeptember 2022 , we entered into a License Agreement, or the HSD License Agreement, with a portfolio company ofForesite Labs , pursuant to which we granted the licensee an exclusive license to research, manufacture, develop and commercialize pharmaceutical products containing our proprietary HSD inhibitors in all fields of use and on a worldwide basis. We received an upfront payment of$1.25 million inOctober 2022 in connection with our entry into the HSD License Agreement, and we are eligible to receive up to an aggregate of$4.25 million in milestone payments upon the achievement of certain regulatory milestone events, and we will also be entitled to receive royalties on tiers of annual net sales of pharmaceutical products sold pursuant to the HSD License Agreement at rates in the low single digits until the expiration of the patent rights in each country sales are made. We believe FXR plays a key role in the treatment of IBD, including UC. FXR is highly expressed by intestinal epithelial cells and plays a key role in healthy intestinal function by maintaining the epithelial barrier, reducing bacterial translocation into the intestinal wall and regulating the innate immune response. FXR-based therapies in IBD address multiple aspects of IBD pathogenesis without the immunosuppression inherent to other advanced-line therapies. IBD is a significant global health issue and is thought to occur due to a maladaptive immune response to gut microbes. UC and Crohn's disease are the two primary types of IBD. Patients with IBD can suffer from abdominal pain and bloody diarrhea and also be at increased risk of colorectal cancer. The global incidence of IBD is increasing and as of 2015, it was estimated that there were 3.1 million people inthe United States with IBD. Our first clinical investigation of FXR therapy in IBD will be focused on patients with UC. We believe an oral, once-daily therapy with FXR agonists could be an attractive treatment option for UC patients that may prefer oral administration instead of injectable biologics that are cumbersome to administer chronically. In preclinical animal studies with our current and previous FXR agonist product candidates, we have observed statistically significant improvements in colon histology and at levels similar to that of a mouse antibody which targets IL-12/23. The IL-12/23 pathway is the target of current approved biologic therapies. To date, we have devoted substantially all of our resources to organizing and staffing our company, business, planning, raising capital, researching, discovering and developing our pipeline in FXR and other drug targets and general and administrative support for these operations. We do not have any products approved for sale and have not generated any product sales. We have funded our operations primarily through the private placement of convertible preferred stock, the issuance of long-term debt, and the sale of common stock from our initial public offering, or IPO, and our at-the-market equity offering program, or ATM offering program. ThroughSeptember 30, 2022 , we have raised gross proceeds of approximately$124.8 million from the issuance of convertible preferred stock,$15.0 million under our K2 Loan Agreement (as defined below) and$107.7 million from the sale of common stock from our IPO and our ATM offering program. As ofSeptember 30, 2022 andDecember 31, 2021 , we had cash, cash equivalents, and short-term investments of$52.8 million and$76.4 million , respectively. 17 -------------------------------------------------------------------------------- We have incurred net losses since our inception. Our net losses were$24.7 million and$48.7 million for the nine months endedSeptember 30, 2022 and 2021, respectively. As ofSeptember 30, 2022 , we had an accumulated deficit of$207.6 million . Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of our clinical trials and preclinical studies and our expenditures on other development activities. We expect our expenses and operating losses will increase as MET642 or any future product candidates advance through clinical trials, and as we expand our clinical, regulatory, quality and manufacturing capabilities, incur significant commercialization expenses for marketing, sales, manufacturing and distribution, if we obtain marketing approval for MET642 or any future product candidate, and incur additional costs associated with operating as a public company. We do not expect to generate any revenues from product sales unless and until we successfully complete development and obtain regulatory approval for one or more product candidates, which will not be for many years, if ever. Accordingly, until such time as we can generate significant revenue from sales of MET642 or any future product candidate, if ever, we expect to finance our operations through a combination of equity offerings, debt financings, additional borrowings under the K2 Loan Agreement, strategic transactions, collaborations, and other similar arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. Our failure to raise capital or enter into such other arrangements when needed would have a negative impact on our financial condition and could force us to delay, reduce or terminate our development programs or other operations, or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
Proposed Merger with Equillium
OnSeptember 6, 2022 , we entered into an Agreement and Plan of Merger, as amended onOctober 26, 2022 , the Merger Agreement, with Equillium, Inc., aDelaware corporation, or Equillium,Equillium Acquisition Sub, Inc. , aDelaware corporation and a wholly owned subsidiary of Equillium, or Acquisition Sub,Triumph Acquisition Sub, Inc. , aDelaware corporation and wholly owned subsidiary of Acquisition Sub, or Acquisition Sub II, andTriumph Merger Sub, Inc. , aDelaware corporation and a wholly owned subsidiary of Acquisition Sub II, or Merger Sub, pursuant to which, among other matters, and subject to the satisfaction or waiver of certain closing conditions described in the Merger Agreement, Merger Sub will be merged with and into the Company, or the Merger, and the Company will continue as the surviving corporation and an indirect, wholly owned subsidiary of Equillium. Pursuant to the Merger Agreement, each share of our common stock issued and outstanding immediately prior to the closing of the Merger, or the Closing, will be cancelled and converted into the right to receive consideration per share consisting of (i) the exchange ratio, or the Exchange Ratio, determined by dividing (x) (a) 125% of our net cash as of the Closing, by (b) the price per share of Equillium's common stock, par value$0.0001 per share, or Equillium Common Stock, determined based on the 10 day trading volume weighted average price per share of Equillium Common Stock calculated 10 trading days prior to the date of the Closing, or the Closing Date, provided that the price per share of Equillium Common Stock shall be no less than$2.70 and no more than$4.50 by (y) the aggregate fully diluted shares of our common stock, plus (ii) any cash payable in lieu of fractional shares of Equillium Common Stock. The consummation of the Merger is subject to certain closing conditions, including (i) our net cash being no less than$23,000,000 , (ii) the absence of certain legal impediments, (iii) the effectiveness of a registration statement on Form S-4 filed with theSEC onOctober 27, 2022 , (iv) adoption of the Merger Agreement by the holders of a majority of our outstanding common stock at a meeting of our stockholders, and (v) approval of the issuance of shares of Equillium Common Stock in the Merger by the majority of the votes cast at a meeting of Equillium's stockholders (provided that a quorum exists). The Merger Agreement has been approved by our board of directors and Equillium's board of directors. The Merger Agreement contains certain termination rights for both Equillium and us and further provides that, in connection with the termination of the Merger Agreement by us under certain circumstances, including termination by us to accept and enter into a definitive agreement with respect to a superior proposal, we must pay Equillium a termination fee of$1.25 million . In connection with the termination of the Merger Agreement by Equillium under certain circumstances, including termination by Equillium to accept and enter into a definitive agreement with respect to a superior proposal, Equillium must pay us a termination fee of$1.75 million . Although we have entered into the Merger Agreement and expect to devote significant time and resources to successfully consummate the proposed Merger, there can be no assurances that we will be able to do so on a timely basis, or at all. Further, the consummation of the Merger may not deliver the anticipated benefits or maximize stockholder value. If, for any reason, the Merger is not consummated, we will reconsider our strategic alternatives and could pursue a variety of strategic alternatives similar to the Merger, including, but not limited to, a merger, sale, or other business combination, a strategic partnership with one or more parties, or the licensing, sale or divestiture of our programs, with the ultimate goal of identifying the opportunity that would, in the opinion of our board of directors, maximize stockholder value, including a liquidation ofMetacrine and the distribution of any available cash. We retainedMTS Health Partners, L.P. , orMTS Partners , as our financial advisor in connection with the Merger, andMTS Securities, LLC , an affiliate ofMTS Partners , or MTS, performed a liquidation analysis ofMetacrine based upon information provided to MTS by our management. MTS computed the total equity value ofMetacrine in a liquidation to be approximately$27.3 million , calculated as approximately$55.5 million of cash as ofJune 30, 2022 , less wind-down costs of approximately$29.5 million , plus an assumed upfront cash value from the HSD License Agreement of$1.25 million , as compared to our then-current market capitalization of approximately$20.6 million . The analysis assumed a liquidation date ofNovember 30, 2022 , that all wind-down costs were paid in full, employees were severed byNovember 30, 2022 , all employee-related restructuring and severance costs are paid in full, and, to be conservative, that no funds were retained in reserve for unknown or contingent liabilities. MTS estimated a liquidation value of approximately$27.3 million to our stockholders in a potential liquidation, or$0.58 per share. 18 --------------------------------------------------------------------------------
Financial Operations Overview
Revenues
To date, we have not generated any revenues from the commercial sale of any products, and we do not expect to generate revenues from the commercial sale of any products for the foreseeable future, if ever. In the future, we may generate revenue pursuant to the HSD License Agreement in the form of milestone payments upon the achievement of certain regulatory milestone events and royalties on tiers of annual net sales at rates in the low single digits. InOctober 2022 , we received a one-time upfront payment of$1.25 million in connection with our entry into the HSD License Agreement.
Research and Development Expenses
To date, our research and development expenses have related primarily to discovery efforts and preclinical and clinical development of our product candidates. Research and development expenses are recognized as incurred and payments made prior to the receipt of goods or services to be used in research and development are capitalized until the goods or services are received.
Research and development expenses include:
• salaries, payroll taxes, employee benefits and stock-based compensation
charges for those individuals involved in research and development efforts;
• external research and development expenses incurred under agreements with
contract research organizations, or CROs, investigative sites and
consultants to conduct our preclinical, toxicology and clinical studies;
• costs related to manufacturing our product candidates for clinical trials
and preclinical studies, including fees paid to third-party manufacturers;
• laboratory supplies; • costs related to compliance with regulatory requirements; and
• facilities, depreciation and other allocated expenses, which include direct
and allocated expenses for rent, maintenance of facilities, insurance,
equipment and other supplies.
The following table summarizes our research and development expenses allocated by program for the three and nine months endedSeptember 30, 2022 and 2021 (in thousands): Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 2022 2021 Third-party research and development expenses: FXR program$ 799 $ 10,996 $ 6,916 $ 27,323 Other research programs 2 405 236 1,264 Total third-party research and development expenses 801 11,401 7,152 28,587 Unallocated expenses 521 2,671 3,159 7,710 Total research and development expenses$ 1,322 $ 14,072 $
10,311
Unallocated expenses consist primarily of our internal personnel related costs, facility costs, and lab supplies.
Our Restructuring Plan, which we completed inApril 2022 , resulted in the reduction of approximately 50% of our workforce, primarily consisting of our research organization, and as a result, we will not incur research expenses for the foreseeable future. We expect our development expenses will fluctuate in the future as we review the development plan and timeline of our FXR program in IBD and depending on whether the proposed Merger is consummated. We cannot determine with certainty the timing of initiation, the duration or the completion costs of current or future clinical trials of MET642 or any future product candidate 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 will need to raise substantial additional capital in the future if the proposed Merger with Equillium is not consummated. In addition, we cannot forecast whether MET642 or any future product candidate may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements.
Our development costs may vary significantly based on factors such as:
• per patient trial costs;
• the number and scope of preclinical studies;
• the number of trials required for approval;
• the number of sites included in the trials;
• the countries in which the trials are conducted;
• the length of time required to enroll eligible patients;
• the number of patients that participate in the trials;
• the number of doses that patients receive;
19--------------------------------------------------------------------------------
• the drop-out or discontinuation rates of patients;
• potential additional safety monitoring requested by regulatory agencies;
• the duration of patient participation in the trials and follow-up; • the phase of development of the product candidate; • the efficacy and safety profile of the product candidate; and
• the extent to which we collaborate with biopharmaceutical companies for the
development and potential commercialization of the product candidate.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and employee-related costs, including stock-based compensation, for personnel in executive, finance, and other administrative functions. Other significant costs include facility-related costs, legal fees relating to intellectual property and corporate matters, professional fees for accounting and consulting services, and insurance. We anticipate that our general and administrative expenses will increase in the future to support our development and other commercial activities if MET642 or any future product candidate receives marketing approval. We also expect that our general and administrative expenses will increase due to the transaction costs associated with the proposed Merger with Equillium and potential related litigation.
Restructuring Charges
Restructuring charges consist primarily of (i) one-time payments relating to severance obligations and other customary employee benefits and the acceleration of the vesting of certain equity awards in connection with the staff reduction conducted pursuant to our Restructuring Plan and (ii) third-party costs associated with the discontinuation of our HSD program. Refer to Note 9 in our unaudited condensed consolidated financial statements for further discussion.
Gain from Lease Termination and Asset Sale
Gain from lease termination and asset sale relates to the termination of our Corporate Lease (as defined below) inMarch 2022 and the sale of personal property toBelharra Therapeutics, Inc. , or Belharra. Refer to Note 3 in our unaudited condensed consolidated financial statements for further discussion.
Total Other Income (Expense)
Total other income (expense) consists primarily of interest income from our cash, cash equivalents, and short-term investments and interest expense under our K2 Loan Agreement.
Results of Operations
Comparison of the Three and Nine Months Ended
The following table summarizes our results of operations for the three and nine
months ended
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands) 2022 2021 Change 2022 2021 Change
Operating expenses:
Research and development $ 1,322 $ 14,072 $ (12,750 ) $ 10,311 $ 36,297 $ (25,986 )
General and administrative 3,842 4,007 (165 ) 12,736 11,695 1,041
Restructuring charges - - - 902 - 902
Gain from lease termination and
asset sale - - - (508 ) - (508 )
Total operating expenses 5,164 18,079 (12,915 ) 23,441 47,992 (24,551 )
Loss from operations (5,164 ) (18,079 ) 12,915 (23,441 ) (47,992 ) 24,551
Other income (expense):
Interest income 228 22 206 318 85 233
Interest expense (550 ) (252 ) (298 ) (1,475 ) (743 ) (732 )
Other expense, net (35 ) (19 ) (16 ) (65 ) (31 ) (34 )
Total other income (expense) (357 ) (249 ) (108 ) (1,222 ) (689 ) (533 )
Net loss $ (5,521 ) $ (18,328 ) $ 12,807 $ (24,663 ) $ (48,681 ) $ 24,018
Research and Development Expenses. Research and development expenses were $1.3
million and $14.1 million for the three months ended September 30, 2022 and
2021, respectively. The decrease in research and development expenses of $12.8
million when comparing the three months ended September 30, 2022 and 2021 was
primarily due to decreases of $8.4 million in clinical trial expenses and $1.4
million in manufacturing expenses related to our FXR program, $1.6 million in
personnel costs, including $0.5 million in non-cash stock-based compensation,
$0.5 million in facilities, information technology, and laboratory supplies
expenses, $0.5 million in preclinical and toxicology expenses, and $0.3 million
in third-party medicinal chemistry expenses.
Research and development expenses were $10.3 million and $36.3 million for the
nine months ended September 30, 2022 and 2021, respectively. The decrease in
research and development expenses of $26.0 million when comparing the nine
months ended September 30, 2022 and 2021 was primarily due to decreases of $16.6
million in clinical trial expenses and $1.5 million in manufacturing expenses
related to our FXR program, $3.4 million in personnel costs, including $1.0
million in non-cash stock-based compensation, $2.3 million in preclinical and
toxicology expenses, $1.5 million in facilities, information technology, and
laboratory supplies expenses, and $0.6 million in third-party medicinal
chemistry expenses.
20
--------------------------------------------------------------------------------
General and Administrative Expenses. General and administrative expenses were
$3.8 million and $4.0 million for the three months ended September 30, 2022 and
2021, respectively. The decrease in general and administrative expenses of $0.2
million when comparing the three months ended September 30, 2022 and 2021 was
primarily due to a decrease of $1.0 million in personnel costs, including $0.5
million in non-cash stock-based compensation, partially offset by an increase of
$0.8 million in consulting, professional services and other public company
related expenses.
General and administrative expenses were $12.7 million and $11.7 million for the
nine months ended September 30, 2022 and 2021, respectively. The increase in
general and administrative expenses of $1.0 million when comparing the nine
months ended September 30, 2022 and 2021 was primarily due to increases of $0.9
million in consulting, professional services and other public company related
expenses and $0.1 million in facilities and information technology expenses.
Restructuring Charges. Restructuring charges were none for each of the three
months ended September 30, 2022 and 2021, and were $0.9 million and none for the
nine months ended September 30, 2022 and 2021, respectively. The increase in
restructuring charges when comparing the nine months ended September 30, 2022
and 2021 was primarily related to one-time payments of severance obligations and
other customary employee benefits made in connection with the staff reduction
resulting from the Restructuring Plan. Refer to Note 9 in our unaudited
condensed consolidated financial statements for further discussion.
Gain from Lease Termination and Asset Sale. Gain from lease termination and
asset sale were none for each of the three months ended September 30, 2022 and
2021, and were $0.5 million and none for the nine months ended September 30,
2022 and 2021, respectively. The increase in the gain from lease termination and
asset sale when comparing the nine months ended September 30, 2022 and 2021 was
primarily related to the termination of our Corporate Lease and sale of personal
property to Belharra in March 2022 . Refer to Note 3 in our unaudited condensed
consolidated financial statements for further discussion.
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. As ofSeptember 30, 2022 andDecember 31, 2021 , we had cash, cash equivalents, and short-term investments of$52.8 million and$76.4 million , respectively. Cash Flows
The following table sets forth a summary of the net cash flow activity for each of the periods indicated (in thousands):
Nine Months Ended
September 30,
2022 2021
Net cash provided by (used in):
Operating activities $ (24,383 ) $ (35,326 )
Investing activities 28,224 26,757
Financing activities 1 1,205
Net increase (decrease) in cash and cash equivalents
Operating Activities Net cash used in operating activities was$24.4 million and$35.3 million for the nine months endedSeptember 30, 2022 and 2021, respectively. The net cash used in operating activities during the nine months endedSeptember 30, 2022 was primarily due to our net loss of$24.7 million and$4.6 million of non-cash charges, adjusted for$4.3 million in changes in operating assets and liabilities. Non-cash charges for the nine months endedSeptember 30, 2022 primarily consisted of$4.4 million of stock-based compensation,$0.5 million in debt amortization expense, and$0.2 million in other non-cash charges, partially offset by a$0.5 million gain from lease termination and asset sale related to the termination of our Corporate Lease. Net cash used in operating activities was$35.3 million for the nine months endedSeptember 30, 2021 and was primarily due to our net loss of$48.7 million , adjusted for$6.5 million of non-cash charges and$6.9 million from changes in operating assets and liabilities. Non-cash charges for the nine months endedSeptember 30, 2021 primarily consisted of$5.3 million of stock-based compensation,$0.5 million of amortization on our right-of-use asset,$0.3 million of amortization of premiums/discounts on investments, and$0.4 million in other non-cash charges. Investing Activities Net cash provided by investing activities of$28.2 million for the nine months endedSeptember 30, 2022 was primarily due to sales and maturities of short-term investments of$40.2 million and proceeds from asset sale of$0.7 million , partially offset by purchases of short-term investments of$12.7 million . Net cash provided by investing activities of$26.8 million for the nine months endedSeptember 30, 2021 was primarily due to sales and maturities of short-term investments of$65.9 million , partially offset by purchases of short-term investments of$39.2 million . 21 --------------------------------------------------------------------------------
Financing Activities
There was an immaterial amount of cash provided by financing activities for the
nine months ended
Net cash provided by financing activities of$1.2 million for the nine months endedSeptember 30, 2021 was primarily due to$1.1 million of proceeds from exercises of common stock options and$0.1 million of proceeds from the issuance of shares from our employee stock purchase plan.
Loan Agreement
InAugust 2019 , we borrowed$10.0 million in the first tranche under a loan and security agreement, or the K2 Loan Agreement, withK2 HealthVentures Equity Trust LLC , or K2, which was subsequently amended inMarch 2020 andOctober 2021 . InOctober 2021 , we amended the K2 Loan Agreement and thereby replaced and superseded the$10.0 million of existing term loan tranches with new term loan tranches that enable us to borrow up to an aggregate of$45.0 million upon the achievement of certain milestones. We have borrowed$15.0 million under the first tranche, or the 2021 Refinancing Term Loans, and currently have$20.0 million in term loan tranches available to us upon the achievement of certain milestones under the terms of the K2 Loan Agreement. Term loans under the K2 Loan Agreement bear interest at a floating annual rate equal to the greater of (i) the prime rate used by the lender plus 4.5% and (ii) 7.75%. The monthly payments on the 2021 Refinancing Term Loans are interest-only untilJuly 1, 2023 , and then subsequent to the interest-only period, the 2021 Refinancing Term Loans will be payable in equal monthly installments of principal plus accrued and unpaid interest, throughApril 1, 2025 , the maturity date. We are required to make final fee payments equal to$0.5 million onSeptember 1, 2023 and 5.75% of the aggregate original principal amount of the 2021 Refinancing Term Loans at the maturity date. We may elect to prepay all, but not less than all, of the 2021 Refinancing Term Loans prior to the maturity date, subject to a prepayment fee of up to 3.0% of the then outstanding principal balance. After repayment, no term loan amounts may be borrowed again. Our obligations under the K2 Loan Agreement are secured by a security interest in substantially all of our assets, other than our intellectual property. The K2 Loan Agreement includes customary affirmative and negative covenants and also includes standard events of default, including an event of default based on the occurrence of a material adverse event, and a default under any agreement with a third party resulting in a right of such third party to accelerate the maturity of any debt in excess of$0.3 million . The negative covenants include, among others, restrictions on us transferring collateral, incurring additional indebtedness, engaging in mergers or acquisitions, paying cash dividends or making other distributions, making investments, creating liens, selling assets and making any payment on subordinated debt, in each case subject to certain exceptions. Upon the occurrence and continuance of an event of default, the lender may declare all outstanding obligations immediately due and payable and take such other actions as set forth in the K2 Loan Agreement. As ofSeptember 30, 2022 , we were in compliance with all applicable covenants under the K2 Loan Agreement. Sales Agreement OnOctober 4, 2021 , we entered into a sales agreement, or the Sales Agreement, withSVB Leerink LLC , orSVB Leerink , to sell shares of common stock from time to time through our ATM offering program, under whichSVB Leerink will act as our sales agent. We have no obligation to sell any shares of common stock under the Sales Agreement and may at any time suspend solicitation and offers under the Sales Agreement.SVB Leerink will be entitled to compensation in an amount of up to 3.0% of the gross proceeds of any shares of common stock sold under the Sales Agreement. A maximum of$50.0 million of shares of common stock may be sold under the Sales Agreement. We did not sell any shares of our common stock under the Sales Agreement during the nine months endedSeptember 30, 2022 . As ofSeptember 30, 2022 , we may sell up to an additional$27.3 million of shares of our common stock under the Sales Agreement and pursuant to our ATM offering program, although we may not sell any shares under the Sales Agreement during the pendency of the proposed Merger with Equillium.
Material Cash Requirements
Other than transaction costs related to the proposed Merger, and the requirement under the Merger Agreement that we maintain a minimum net cash at the Merger Closing of$23.0 million , our material cash requirements from known contractual obligations have not changed materially since our Annual Report. OnMarch 11, 2022 , we entered into an Agreement for Termination of Lease and Voluntary Surrender of Premises, or Lease Termination Agreement, with ARE-SD Region No. 30, LLC, or Landlord, to accelerate the termination of the operating lease for our former corporate headquarters, or our Corporate Lease. Under the terms of the Lease Termination Agreement, our Corporate Lease would terminate on the later ofMarch 31, 2022 and the date that Landlord notifies us that it has executed a lease agreement with a third party for the premises. OnMarch 31, 2022 , or the Lease Termination Date, Landlord notified us that our Corporate Lease had been terminated pursuant to the terms of the Lease Termination Agreement. Since the Lease Termination Date, we have had no further obligations under our Corporate Lease and have transitioned to a fully remote work environment and no longer maintain a corporate headquarters. We believe that a fully remote work environment will be adequate to meet our needs for the immediate future, and that we will be able to obtain access to suitable physical office space in the future to the extent necessary. We believe that our existing cash, cash equivalents and short-term investments will be sufficient to meet our material cash requirements through at least the next twelve months based on our current operating plans. We expect to finance our long-term cash requirements and obligations beyond the next twelve months through a combination of existing cash and cash equivalents and equity offerings and debt financings, as well as business combinations, collaborations and other similar strategic alternatives. Our forecast of 22 -------------------------------------------------------------------------------- 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 or change, and we could expend our capital resources sooner than we expect. During the pendency of the proposed Merger, we are generally required to conduct our business in the ordinary course consistent with past practice, and preserve our business organization and material business relationships. Additionally, we are subject to a variety of operating covenants that impose liquidity and capitalization restrictions on the conduct of our business prior to the Closing. Unless we obtain Equillium's prior written consent (which shall not be unreasonably withheld, conditioned or delayed) and except (i) as expressly permitted or expressly contemplated by the Merger Agreement, (ii) as required by applicable laws or (iii) as set forth in the confidential disclosure letter we delivered to Equillium, we may not, among other things and subject to certain exceptions and aggregate limitations: pay any dividends, or repurchase, redeem or otherwise acquire shares of our common stock; issue additional shares of our common stock other than upon the exercise, settlement or vesting of outstanding equity-based awards granted under our equity incentive plans; increase the salary, compensation or benefits of our employees or hire, promote or terminate (without cause) any employee; acquire or sell, lease, license, encumber or dispose of any material properties, rights or assets; incur additional indebtedness; make certain additional capital expenditures; assign, transfer or license our intellectual property; amend, modify or enter into material contracts; or commence any clinical trial of any product candidate.
Without taking into account the proposed Merger, our future cash requirements will depend on many factors, including:
• the scope, rate of progress and costs of our drug discovery, preclinical
development activities, laboratory testing and clinical trials for MET642 or
any future product candidate;
• the number and scope of clinical programs we decide to pursue;
• the extent to which we collaborate with biopharmaceutical companies for the
development and potential commercialization of MET642 or any future product
candidates;
• the scope and costs of manufacturing for MET642 or any future product
candidate and commercial manufacturing activities;
• the cost, timing and outcome of regulatory review of MET642 or any future
product candidate;
• the costs of preparing, filing and prosecuting patent applications,maintaining and enforcing our intellectual property rights and defending
intellectual property-related claims;
• the terms and timing of establishing and maintaining collaborations,
licenses and other similar arrangements;
• the terms and timing of any strategic transaction we may enter into;
• our efforts to enhance operational systems and our ability to attract, hire
and retain qualified personnel, including personnel to support the
development of MET642 or any future product candidate;
• the costs associated with being a public company;
• the timing of any milestone and royalty payments to
Biological Studies, or other future licensors;
• the extent to which we acquire or in-license other product candidates and
technologies; and
• the cost associated with commercializing MET642 or any future product
candidate, if they receive marketing approval.
Without taking into account the proposed Merger, and until such time, if ever, as we can generate substantial product revenues to support our cost structure, we expect to finance our operations through a combination of equity offerings, debt financings, strategic transactions, license agreements, collaborations, and other similar arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be or could be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing and equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise funds through collaborations, or other similar arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or 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 sufficient capital when needed, we may be required to:
• delay, reduce or eliminate our development programs or other operations;
• enter into strategic transactions or grant rights to develop and market
product candidates that we would otherwise prefer to develop and market
ourselves, or on terms that are less favorable than might otherwise be
available;
• dispose of technology assets, or relinquish or license on unfavorable terms,
our rights to technologies or any future product candidates that we
otherwise would seek to develop or commercialize ourselves;
• pursue the sale of our company to a third party at a price that may result
in a loss on investment for our stockholders; or
• file for bankruptcy or cease operations altogether.
Any of these events could have a material adverse effect on our business, operating results and prospects.
Critical Accounting Estimates
Our management's discussion and analysis of our financial condition and results of operations are based on our unaudited condensed consolidated financial statements, which have been prepared in accordance withU.S. generally accepted accounting principles. The preparation of these unaudited condensed consolidated 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 unaudited condensed consolidated financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses and stock-based compensation. We base our estimates on historical experience, known trends and 23 -------------------------------------------------------------------------------- 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. While our significant accounting policies are described in more detail in Note 1 to our unaudited condensed consolidated financial statements appearing elsewhere in this Quarterly Report, we believe the following accounting policies and estimates to be most critical to the preparation of our unaudited condensed consolidated financial statements.
Accrued Expenses
We make estimates of our accrued research and development expenses for services performed by our vendors in connection with research and development activities for which we have not yet been invoiced. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. We make estimates of our accrued expenses as of each balance sheet date based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. 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. We base our expenses related to research and development activities on our estimates of the services received and efforts expended pursuant to quotes and contracts with vendors that conduct research and development on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the research and development expense. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid expense accordingly. Advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made. Although we do not expect our estimates to be materially different from amounts actually incurred, if our estimates of the status and timing of services performed differ from the actual status and timing of services performed, it could result in us reporting amounts that are too high or too low in any particular period. To date, there have been no material differences between our estimates of such expenses and the amounts actually incurred.
Stock-Based Compensation Expense
Stock-based compensation expense represents the cost of the grant date fair value of equity awards recognized over the requisite service period of the awards (usually the vesting period) on a straight-line basis. We estimate the fair value of all stock option grants using the Black-Scholes option pricing model and recognize forfeitures as they occur. Estimating the fair value of equity awards as of the grant date using valuation models, such as the Black-Scholes option pricing model, is affected by assumptions regarding a number of variables, including the fair value of the underlying common stock on the date of grant, the risk-free interest rate, the expected stock price volatility, the expected term of stock options, and the expected dividend yield. Changes in the assumptions can materially affect the fair value and ultimately how much stock-based compensation expense is recognized. These inputs are subjective and generally require significant analysis and judgment to develop. See Note 7 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report for information concerning certain of the specific assumptions we used in applying the Black-Scholes option pricing model to determine the estimated fair value of our stock options granted the three and nine months endedSeptember 30, 2022 and 2021.
© Edgar Online, source
