PANDION THERAPEUTICS, INC. You should read the following discussion and analysis of our financial condition and results of operations together with the financial statements and related notes included 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 the section entitled "Risk Factors," 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 section entitled "Risk Factors" 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 developing novel therapeutics designed to address the unmet needs of patients living with autoimmune diseases. We have combined a network-based conceptualization of the immune system with expertise in advanced protein engineering to develop our TALON (Therapeutic Autoimmune reguLatOry proteiN) drug design and discovery platform. Our TALON platform enables us to employ a modular approach to create a pipeline of product candidates using immunomodulatory effector modules that act at known control nodes within the immune network. We are also able to combine an effector module with a tissue-targeted tether module in a bifunctional format to guide delivery of the effector to a targeted tissue. Our lead product candidate, PT101, a combination of our interleukin-2, or IL-2, mutein effector module with a protein backbone, is designed to selectively expand regulatory T cells, or Treg cells, systemically, without activating proinflammatory cells, such as conventional T cells and natural killer, or NK, cells. We are initially developing PT101 for the treatment of patients with moderate-to-severe ulcerative colitis, or UC, and for the treatment of patients with systemic lupus erythematosus, or SLE. We reported positive top-line data from a Phase 1a clinical trial of PT101 in healthy volunteers inJanuary 2021 . Leveraging our TALON platform, we continue to develop and expand our library of effector and tether modules as part of our early stage research and discovery pipeline. Our early stage research includes a suite of PD-1 agonists in preclinical development. PD-1 is an inhibitory receptor that is naturally expressed by T cells following their activation. We initiated investigational new drug, or IND, -enabling studies with our systemic PD-1 agonist, PT627, in the fourth quarter of 2020 and we plan to begin IND-enabling studies for our GI/liver-tethered PD-1 agonist, PT001, in the first half of 2021. We were formed under the laws of theState of Delaware inSeptember 2016 as a corporation under the nameImmunotolerance, Inc. and began operations inJanuary 2017 . We changed our name toPandion Therapeutics, Inc. inJune 2017 . OnJanuary 1, 2019 , we completed a series of transactions in whichPandion Therapeutics, Inc. became a direct wholly owned subsidiary ofPandion Therapeutics Holdco LLC , orPandion LLC , aDelaware limited liability company, and all outstanding equity securities ofPandion Therapeutics, Inc. were canceled and converted on a one-for-one basis into equity securities ofPandion LLC .
On
• we converted from a Delaware limited liability company to a Delaware
corporation by filing a certificate of conversion with the Secretary
of State of the State of Delaware ; and
• we changed our name from
Therapeutics, Inc.
As part of the Conversion:
• holders of Series A preferred shares of Pandion Therapeutics Holdco
LLC received one share of Series A preferred stock of Pandion
Therapeutics, Inc. for each Series A preferred share held immediately
prior to the Conversion;
• holders of Series A prime preferred shares of
Holdco LLC received one share of Series A prime preferred stock ofPandion Therapeutics, Inc. for each Series A prime preferred share held immediately prior to the Conversion; • holders of Series B preferred shares of Pandion Therapeutics Holdco LLC received one share of Series B preferred stock ofPandion Therapeutics, Inc. for each Series B preferred share held
immediately
prior to the Conversion;
• holders of common shares of Pandion Therapeutics Holdco LLC received
one share of common stock of Pandion Therapeutics, Inc. for each
common share held immediately prior to the Conversion; and
• holders of outstanding incentive shares in
Holdco LLC , all of which were intended to constitute profits interests forU.S. federal income tax purposes, received a number of shares of common stock ofPandion Therapeutics, Inc. based upon a conversion price determined by our board of directors
immediately
prior to the Conversion. Of the shares of common stock issued in
respect of incentive shares, 1,368,515 continue to be
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subject to vesting in accordance with the vesting schedule applicable
to such incentive shares. Based on the determined fair value of
$18.00 per common share, the incentive shares converted into an
aggregate of 1,504,586 shares of our common stock, and we granted
options to purchase an aggregate of 971,123 shares of our common
stock.
In connection with the Conversion, Pandion Therapeutics, Inc. continues to hold
all property and assets of Pandion Therapeutics Holdco LLC and has assumed all
of the debts and obligations of Pandion Therapeutics Holdco LLC . On July 16,
2020 , Pandion LLC converted into a corporation by filing a certificate of
conversion with the Secretary of State of the State of Delaware and we changed
our name to Pandion Therapeutics, Inc. On the effective date of the Conversion,
the members of the board of directors of Pandion Therapeutics Holdco LLC became
the members of the board of directors of Pandion Therapeutics, Inc. and the
officers of Pandion Therapeutics Holdco LLC became the officers of Pandion
Therapeutics, Inc.
Our lead product candidate, PT101, is in Phase 1 clinical development and our
other product candidates and our discovery stage programs are in preclinical or
earlier stages of development. Our ability to generate revenue from product
sales sufficient to achieve profitability will depend heavily on the successful
development and eventual commercialization of one or more of our product
candidates. To date, our operations have been financed primarily through the
issuance of redeemable convertible preferred shares, a simple agreement for
future equity, or SAFE, convertible notes and a term loan and, most recently,
common stock in our initial public offering, or IPO. On July 21, 2020 , we
completed an IPO of our common stock and issued and sold 7,500,000 shares of
common stock at a public offering price of $18.00 per share, resulting in net
proceeds of $122.0 million after deducting underwriting discounts and
commissions and estimated offering expenses. In addition, on August 11, 2020 , we
issued and sold an additional 994,166 shares of our common stock at the public
offering price of $18.00 per share upon the partial exercise of the
underwriters' option to purchase additional shares of common stock and received
additional net proceeds of $16.6 million after deducting underwriting discounts
and commissions.
Since inception, we have had significant operating losses. Our net loss was
$38.1 million and $21.9 million for the years ended December 31, 2020 and 2019,
respectively. As of December 31, 2020 , we had an accumulated deficit of $86.0
million .
Cash used to fund operating expenses is impacted by the timing of when we pay
these expenses, as reflected in the change in our accounts payable and accrued
expenses. We expect to continue to incur net losses for the foreseeable future,
and we expect our research and development expenses, general and administrative
expenses, and capital expenditures will continue to increase. In particular, we
expect our expenses to increase as we continue our development of, and seek
regulatory approvals for, our product candidates, as well as hire additional
personnel, pay fees to outside consultants, lawyers and accountants, and incur
other increased costs associated with being a public company. In addition, if
and when, if ever, we seek and obtain regulatory approval to commercialize any
product candidate, we will also incur increased expenses in connection with
commercialization and marketing of any such product. Our net losses may
fluctuate significantly from quarter-to-quarter and year-to-year, depending on
the timing of our clinical trials and our expenditures on other research and
development activities.
Based upon our current operating plan, we believe that our existing cash and
cash equivalents of $219.9 million as of December 31, 2020 will be sufficient to
fund our operating expenses and capital expenditure requirements through the
first half of 2024. We have based this estimate on assumptions that may prove to
be wrong, and we could exhaust our available capital resources sooner than we
expect. To finance our operations beyond that point we will need to raise
additional capital, which cannot be assured.
To date, we have not had any products approved for sale and, therefore, have not
generated any product revenue. 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 of our product candidates. If we obtain
regulatory approval for any of our product candidates, we expect to incur
significant commercialization expenses related to product sales, marketing,
manufacturing and distribution. As a result, until such time, if ever, that we
can generate substantial product revenue, we expect to finance our cash needs
through equity offerings, debt financings or other capital sources, including
collaborations, licenses or similar arrangements. However, we may be unable to
raise additional funds or enter into such other arrangements when needed or on
favorable terms, if at all. Any failure to raise capital as and when needed
could have a negative impact on our financial condition and on our ability to
pursue our business plans and strategies, including our research and development
activities. If we are unable to raise capital, we will need to delay, reduce or
terminate planned activities to reduce costs.
In March 2020 , the World Health Organization declared the COVID-19 outbreak a
pandemic. To date, our financial condition and operations have not been
significantly impacted by the COVID-19 pandemic. However, we cannot at this time
predict the specific extent, duration, or full impact that the COVID-19 pandemic
will have on our financial condition and operations, including planned clinical
trials. The impact of the COVID-19 pandemic on our financial performance will
depend on future developments, including the duration and spread of the pandemic
and related governmental advisories and restrictions. These developments and the
impact of the COVID-19 pandemic on the financial markets and the overall economy
are highly uncertain and cannot be predicted. If the financial markets and/or
the overall economy are impacted for an extended period, our results may be
materially adversely affected.
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On February 24, 2021 , we entered into the Merger Agreement with Merck. Pursuant
to the Merger Agreement, and upon the terms and subject to the conditions
thereof, a wholly owned acquisition subsidiary of Merck will commence a cash
tender offer, or the Tender Offer, to acquire all of the issued and outstanding
shares of our common stock at a price per share of $60 , net to the seller of
such shares in cash, without interest, subject to any withholding of taxes
required by applicable law. The completion of the Tender Offer will be
conditioned on at least a majority of the shares of our outstanding common stock
having been validly tendered into and not withdrawn from the offer, receipt of
certain regulatory approvals and other customary conditions. Following the
completion of the Tender Offer, the acquisition subsidiary will merge with and
into our company, with our company surviving as a wholly owned subsidiary of
Merck. The merger will be governed by Section 251(h) of the General Corporation
Law of the State of Delaware , with not stockholder vote required to consummate
the merger. In the merger, each outstanding share of our common stock (other
than shares of common stock held by us as treasury stock or held by stockholders
who are entitled to demand, and who properly demand, appraisal rights under
Delaware law) will be converted into the right to receive $60 per share in cash,
without interest, subject to any withholding of taxes required by applicable
law. The transaction is expected to close in the first half of 2021.
Components of Operating Results
Revenue
We have not generated any revenue from product sales and do not expect to generate revenue from the sale of products for several years, if at all. If our development efforts for our current or future product candidates are successful and result in regulatory marketing approval, we may generate revenue in the future from product sales. However, we cannot predict if, when or to what extent we will generate revenue from the commercialization and sale of our product candidates, and we may never succeed in obtaining regulatory approval for, or commercializing, any of our product candidates. InOctober 2019 , we entered into a license and collaboration agreement, or the Astellas agreement, with Astellas Pharma Inc., or Astellas, to develop locally acting immunomodulators for autoimmune diseases of the pancreas. Under the terms of the Astellas agreement, we are responsible for the design and discovery of bifunctional product candidates based on our TALON platform, and Astellas will conduct preclinical, clinical and commercialization activities for any candidates developed in the collaboration. The initial research plan is focused on three tissue-selective tether targets in the pancreas. The primary indication for which we and Astellas are seeking to develop compounds is type 1 diabetes. We received an upfront payment of$10.0 million and have the right to receive research, development and regulatory milestone payments under the collaboration. We also have the right to receive tiered royalties on worldwide net sales of any commercial products developed under the collaboration.
We may also in the future enter into additional license or collaboration agreements for our product candidates or intellectual property, and we may generate revenue in the future from payments as a result of such license or collaboration agreement.
Operating Expenses: Research and Development
Our research and development expenses consist primarily of costs incurred for the development of our product candidates and our drug discovery efforts, which include:
• personnel costs, which include salaries, benefits and equity-based
compensation expense;
• expenses incurred under agreements with consultants and third-party
contract organizations that conduct research and development activities
on our behalf;
• costs related to sponsored research service agreements;
• costs related to production of preclinical and clinical materials,
including fees paid to contract manufacturers;
• laboratory and vendor expenses related to the execution of preclinical
studies and planned clinical trials; and
• laboratory supplies and equipment used for internal research and
development activities.
We expense all research and development costs in the periods in which they are
incurred. Costs for certain research and development activities are recognized
based on an evaluation of the progress to completion of specific tasks using
information and data provided to us by our vendors and third-party service
providers.
We use our personnel and infrastructure resources across multiple research and
development programs directed toward identifying and developing product
candidates. Our direct research and development expenses are tracked on a
program-by-program basis and consist primarily of internal personnel costs and
external costs, such as fees paid to consultants, contractors and contract
research organizations, or CROs, in connection with our development activities.
We do not fully allocate costs to programs as many of our research and
development costs are indirect or are deployed across multiple programs.
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We expect our research and development expenses to increase substantially for
the foreseeable future as we continue to invest in research and development
activities related to developing our product candidates, including investments
in manufacturing, advancing our programs and conducting clinical trials. The
process of conducting the necessary clinical research to obtain regulatory
approval is costly and time-consuming and the successful development of our
product candidates is highly uncertain.
Because of the numerous risks and uncertainties associated with product
development and the current stage of development of our product candidates and
programs, we cannot reasonably estimate or know the nature, timing and estimated
costs necessary to complete the remainder of the development of our product
candidates or programs. The duration, costs and timing of preclinical studies
and clinical trials and development of our product candidates will depend on a
variety of factors, including:
• successfully completing preclinical studies and initiating clinical trials;
• successful enrollment and completion of clinical trials;
• data from our clinical program that support an acceptable risk-benefit
profile of our product candidates in the intended patient populations;
• any delays in our planned clinical trials as a result of the COVID-19
pandemic;
• acceptance by the
Medicines Agency ,Health Canada or other regulatory agencies of the investigational new drug applications, clinical trial applications or other regulatory filings for PT101 and future product candidates; • expanding and maintaining a workforce of experienced scientists and others to continue to develop our product candidates; • successfully applying for and receiving marketing approvals from applicable regulatory authorities;
• obtaining and maintaining intellectual property protection and regulatory
exclusivity for our product candidates;
• making arrangements with third-party manufacturers for, or establishing,
commercial manufacturing capabilities; and
• maintaining a continued acceptable safety profile of our products
following receipt of any marketing approvals.
We may never succeed in achieving regulatory approval for any of our product candidates. We may obtain unexpected results from our preclinical studies and clinical trials. We may elect to discontinue, delay or modify clinical trials of some product candidates or focus on others. A change in the outcome of any of these factors could mean a significant change in the costs and timing associated with the development of our current and future preclinical and clinical product candidates. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials beyond those that we currently anticipate will be required for the completion of clinical development, or if we experience significant delays in execution of or enrollment in any of our preclinical studies or clinical trials, we could be required to expend significant additional financial resources and time on the completion of preclinical and clinical development. Research and development activities account for a significant portion of our operating expenses. We expect our research and development expenses to increase for the foreseeable future as we continue to implement our business strategy, which includes advancing PT101 through clinical development and other product candidates into clinical development, expanding our research and development efforts, including hiring additional personnel to support our research and development efforts, and seeking regulatory approvals for our product candidates that successfully complete clinical trials. In addition, product candidates in later stages of clinical development generally incur higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. As a result, we expect our research and development expenses to increase as our product candidates advance into later stages of clinical development. However, we do not believe that it is possible at this time to accurately project total program-specific expenses through commercialization. There are numerous factors associated with the successful commercialization of any of our product candidates, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development.
Operating Expenses: General and Administrative Expenses
Our general and administrative expenses consist primarily of personnel costs,
insurance expense and other expenses for outside professional services,
including legal, human resources, audit and accounting services and
facility-related fees not otherwise included in research and development
expenses. Personnel costs consist of salaries, benefits and equity-based
compensation expense, for our personnel in executive, finance and accounting,
business operations and other administrative functions. We expect our general
and administrative expenses to increase over the next several years to support
our continued research and development activities, manufacturing activities,
increased costs of expanding our operations and operating as a public company.
These increases will likely include increases related to the hiring of
additional personnel and legal, regulatory and other fees and services
associated with
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maintaining compliance with Nasdaq listing rules and
Other Income (Expense), Net
Our other income (expense), net is comprised of interest income earned on cash reserves in our operating account, interest expense principally on our term loan, and fair value adjustments on the convertible note with theJuvenile Diabetes Research Foundation , or the JDRF Note, for which we have elected the fair value option of accounting.
Results of Operations
Comparison of the Years Ended
The following sets forth our results of operations for the years endedDecember 31, 2020 and 2019: Year Ended December 31, Change 2020 2019 Dollar Percent (dollars in thousands) Revenue$ 8,779 $ 967 $ 7,812 808 % Operating expenses Research and development 33,905 18,176 15,729 87 % General and administrative 12,803 5,010 7,793 156 % Total operating expenses 46,708 23,186 23,522 101 % Loss from operations (37,929 ) (22,219 ) (15,710 ) 71 % Non-operating (expense) income, net (176 ) 342 (518 ) (151 )% Net loss$ (38,105 ) $ (21,877 ) $ (16,228 ) 74 % Revenue For the years endedDecember 31, 2020 and 2019, we recognized$8.8 million and$1.0 million in revenue under the Astellas agreement. While the contractual term under the Astellas agreement is five years, based on the research plan and budget agreed to by the joint steering committee established under the Astellas agreement, we initially estimate our research and development commitments will be completed by the end of 2022. As ofDecember 31, 2020 , we estimated a total transaction price of$28.7 million , consisting of the fixed upfront payment of$10.0 million and estimated research funding and reimbursement of external costs of$18.7 million presently budgeted under the Astellas agreement to be incurred through 2022. As ofDecember 31, 2020 , we have no contract assets and short-term and long-term deferred revenues of$3.8 million and$3.8 million , respectively, which is presently estimated to be recognized through 2022. The aggregate amount of the transaction price that remained unsatisfied as ofDecember 31, 2020 is estimated to be$18.9 million , of which we expect to recognize$8.8 million in 2021 and$10.1 million in 2022.
Research and Development Expenses
Research and development expenses were comprised of:
Year Ended December 31, Change
2020 2019 Dollar Percent
(dollars in thousands)
Personnel $ 8,146 $ 3,279 $ 4,867 148 %
Services 19,330 10,683 8,647 81 %
Facilities and equipment 2,929 1,183 1,746 148 %
Supplies 3,420 2,727 693 25 %
Other 80 304 (224 ) (74 )%
Total research and development expenses $ 33,905 $ 18,176 $ 15,729 87 %
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Direct and allocated research and development expenses by program were comprised
of:
Year Ended December 31, Change
2020 2019 Dollar Percent
(dollars in thousands)
PT101 $ 12,492 $ 8,132 $ 4,360 54 %
PT002 649 1,708 (1,059 ) (62 )%
PT627 2,621 389 2,232 574 %
PT001 1,988 2,631 (643 ) (24 )%
All other programs 8,322 2,968 5,354 180 %
Non-program specific and unallocated
research and
development expenses 7,833 2,348 5,485 234 %
Total research and development expenses
$ 15,729 87 % Research and development expenses were$33.9 million for the year endedDecember 31, 2020 , compared to$18.2 million for the year endedDecember 31, 2019 . The increase of$15.7 million was primarily due to an increase in activities across all of our programs and across all cost categories. During 2020, we initiated a Phase 1 clinical trial of PT101, increased activities under the Astellas collaboration and continued to advance our preclinical pipeline. During 2019, we advanced our lead product candidate, PT101, through preclinical activities. We also advanced our pipeline of candidates engineered using our TALON platform, including PT002, PT627 and PT001. To support the continued advancement of our pipeline, we increased the number of internal employees devoted to research and development activities to 42 atDecember 31, 2020 from 29 atDecember 31, 2019 . Preclinical and consulting services and development activities outsourced to CROs increased$8.6 million , of which$4.4 million was with respect to PT101, for the year endedDecember 31, 2020 as compared to the year endedDecember 31, 2019 . Our facility and supply costs across all programs also increased$1.7 million and$0.7 million , respectively, during the year endedDecember 31, 2020 as compared to the year endedDecember 31, 2019 , commensurate with the expansion of our pipeline of research and development programs. We expect our research and development expenses will continue to increase as we advance our pipeline of product candidates through planned preclinical and clinical development.
General and Administrative Expenses
General and administrative expenses to support our business activities were
comprised of:
Year Ended December 31, Change
2020 2019 Dollar Percent
(dollars in thousands)
Personnel $ 4,736 $ 1,809 $ 2,927 162 %
Professional services 5,139 2,587 2,552 99 %
Facilities and travel 691 321 370 115 %
Insurance 1,645 - 1,645 -
Other 592 293 299 102 %
Total general and administrative expenses
$ 7,793 156 % The increase in general and administrative expenses of$7.8 million in the year endedDecember 31, 2020 as compared to the year endedDecember 31, 2019 was primarily attributable to a$2.6 million increase in third-party services to support our in-house personnel in various aspects of developing and supporting the business including human resources, information technology, audit, tax, public relations, communications and other general and administrative activities. It was also partially attributable to a$2.9 million increase in personnel costs from additions to general and administrative employees, including an increase of$1.6 million in non-cash equity-based compensation,$1.6 million in additional insurance premiums related to being a public company and a$0.4 million increase in allocated facilities and equipment costs in the year endedDecember 31, 2020 as compared to the year endedDecember 31, 2019 . 95
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Other Income (Expense), Net
Our other income (expense), net was comprised of:
Year Ended December 31, Change
2020 2019 Dollar Percent
(dollars in thousands)
Interest income $ 69 $ 258 $ (189 ) (73 )%
Interest expense (334 ) (26 ) (308 ) 1185 %
Fair value adjustments to convertible note 89 110 (21 ) -19 %
Other income (expense), net $ (176 ) $ 342 $ (518 ) (151 )%
Our other income (expense) consists primarily of interest income earned on our
cash balance and interest expense and other costs related to our term loan,
which was repaid in July 2020 . We have elected to account for the JDRF
convertible promissory note at fair value and have recorded a gain of
$0.1 million in the fair value of the convertible note for each of the years
ended December 31, 2020 and 2019.
Liquidity and Capital Resources
Sources of Liquidity
InJuly 2020 , we completed our IPO and issued and sold 8,494,166 shares of common stock at a public offering price of$18.00 per share which includes 994,166 shares sold upon the partial exercise of the underwriters' option inAugust 2020 to purchase additional shares of common stock, resulting in aggregate net proceeds of$138.6 million after deducting underwriting discounts and commissions and offering costs of$14.3 million . Prior to our IPO, we financed our operations primarily through the sales of our preferred stock and preferred shares, the sale of the SAFE, issuances of convertible promissory notes, a term loan and payments received under our collaboration agreement with Astellas. Since inception, we have had significant operating losses. Our net loss was$38.1 million and$21.9 million for the years endedDecember 31, 2020 and 2019, respectively. As ofDecember 31, 2020 , we had an accumulated deficit of$86.0 million and$219.9 million in cash and cash equivalents. InFebruary 2020 , we issued and sold an aggregate of 15,693,109 Series A preferred shares at a price per share of$1.147 in cash, for an aggregate purchase price of$18.0 million and incurred issuance costs of$20,000 . InMarch 2020 , we issued and sold an aggregate of 19,158,922 Series B preferred shares at a price per share of$2.0878 in cash, for an aggregate purchase price of$40.0 million and incurred issuance costs of$271,000 . InJune 2020 , we issued 20,116,868 additional Series B redeemable convertible preferred shares for gross proceeds of$42.0 million and incurred issuance costs of$136,000 . We also entered into the SAFE, pursuant to which we issued rights to one investor to receive shares of our capital stock for an aggregate purchase price of$6.0 million . Upon closing of our IPO inJuly 2020 , the SAFE converted, by its terms, into 333,333 shares of our common stock based on the initial public offering price of$18.00 per share. Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with a view to liquidity and capital preservation. Our primary use of cash is to fund operating expenses, which consist primarily of research and development expenditures, and to a lesser extent, general and administrative expenditures. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable and accrued expenses.
Cash Flows
The following table summarizes our cash flows:
Year Ended December 31,
2020 2019
(in thousands)
Net cash used in operating activities $ (34,988 ) $ (13,429 )
Net cash used in investing activities (2,788 ) (635 )
Net cash provided by financing activities 242,199 19,862
Net increase in cash, cash equivalents and restricted cash
$ 5,798 96
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Cash used in operating activities of$35.0 million during the year endedDecember 31, 2020 was attributable to our net loss of$38.1 million and a decrease of$2.9 million in our deferred revenue under the Astellas agreement, offset by a$2.2 million net increase in our working capital and non-cash charges of$3.3 million principally with respect to equity-based compensation and depreciation expense. Cash used in operating activities of$13.4 million during the year endedDecember 31, 2019 was attributable to our net loss of$21.9 million together with a$2.2 million net increase in our working capital, offset by a$10.4 million increase in our deferred revenue under the Astellas agreement and non-cash charges of$0.3 million principally with respect to equity-based compensation and depreciation expense.
Investing activities for all periods presented consist of purchases of property and equipment.
Net Cash Provided by Financing Activities
Cash provided by financing activities for the year endedDecember 31, 2020 was$242.2 million comprised of$138.6 million of aggregate net proceeds from the issuance of common stock in our IPO inJuly 2020 andAugust 2020 ,$6.0 million net proceeds from the SAFE inJune 2020 ,$81.6 million net proceeds from the sale and issuance of our Series B redeemable convertible preferred shares inMarch 2020 andJune 2020 and$18.0 million net proceeds from the sale and issuance of our Series A redeemable convertible preferred shares inFebruary 2020 . Cash provided by financing activities for the year endedDecember 31, 2019 was$19.9 million comprised of$18.0 million net proceeds upon the second issuance of our Series A redeemable convertible preferred shares inJanuary 2019 and$1.9 million of net proceeds on our term loan borrowing.
Loan and Security Agreement
InNovember 2019 , we entered into a secured term loan facility withSilicon Valley Bank in the amount of$10.0 million , or the Term Loan Facility, with an initial advance of$2.0 million . A second advance of$4.0 million was available to be drawn prior toJune 30, 2020 and a third advance of$4.0 million was available to be drawn based upon the achievement of certain events prior toJune 30, 2020 . The loans under the Term Loan Facility bore interest at the greater of (i) the prime rate less 1% and (ii) 4.25%. In response to the financial impact of the COVID-19 pandemic, inApril 2020 the lender extended monthly interest-only payments on the outstanding term loan throughNovember 2021 and the final maturity date on the term loan toMay 2024 . The Term Loan Facility was collateralized by a first priority perfected security interest in all of our tangible and intangible property, with the exception of our intellectual property, and by a negative pledge on our intellectual property. InJuly 2020 , we repaid the$2.0 million of principal outstanding under the Term Loan Facility and, in connection with such repayment, the facility was terminated pursuant to its terms. We have no further payment obligations under the Term Loan Facility and no amounts under the secured term loan facility are available for borrowing. Funding Requirements Any product candidates we may develop may never achieve commercialization and we anticipate that we will continue to incur losses for the foreseeable future. We expect that our research and development expenses, general and administrative expenses, and capital expenditures will continue to increase. As a result, until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity offerings, debt financings or other capital sources, including potentially collaborations, licenses and other similar arrangements. Our primary uses of capital are, and we expect will continue to be, compensation and related expenses, third-party clinical research, manufacturing and development services, costs relating to the build-out of our headquarters, laboratories and manufacturing facility, license payments or milestone obligations that may arise, laboratory and related supplies, clinical costs, manufacturing costs, legal and other regulatory expenses and general overhead costs. Based upon our current operating plan, we believe that our cash and cash equivalents of$219.9 million as ofDecember 31, 2020 will be sufficient to fund our operating expenses and capital expenditure requirements through the first half of 2024. To finance our operations beyond that point we will need to raise additional capital, which cannot be assured. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. We will continue to require additional financing to advance our current product candidates through clinical development, to develop, acquire or in-license other potential product candidates and to fund operations for the foreseeable future. We currently have no credit facility or committed sources of capital. We will continue to seek funds through equity offerings, debt financings or other capital sources, 97 -------------------------------------------------------------------------------- including potentially collaborations, licenses 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. If we do raise additional capital through public or private equity offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders' rights. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Any failure to raise capital as and when needed could have a negative impact on our financial condition and on our ability to pursue our business plans and strategies. If we are unable to raise capital, we will need to delay, reduce or terminate planned activities to reduce costs.
Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical products, we are unable to estimate the exact amount of our operating capital requirements. Our future funding requirements will depend on many factors, including, but not limited to:
• the progress, costs and results of our planned Phase 1b/2a clinical
trial of PT101 in UC and our planned Phase 2 clinical trial of PT101
in SLE;
• the scope, progress, results and costs of discovery research,
preclinical development, laboratory testing and clinical trials for
our product candidates;
• the number of, and development requirements for, other product
candidates that we pursue;
• the costs, timing and outcome of regulatory review of our product candidates;
• our ability to enter into contract manufacturing arrangements for
supply of active pharmaceutical ingredient and manufacture of our
product candidates and the terms of such arrangements;
• the success of our collaboration with Astellas;
• our ability to establish and maintain strategic collaborations,
licensing or other arrangements and the financial terms of such
arrangements;
• the payment or receipt of milestones and receipt of other
collaboration-based revenues, if any;
• the costs and timing of any future commercialization activities,
including product manufacturing, sales, marketing anddistribution,
for any of our product candidates for which we may receive marketing
approval;
• the amount and timing of revenue, if any, received from commercial
sales of our product candidates for which we receive marketing
approval;
• the costs and timing of preparing, filing and prosecuting patent
applications, maintaining and enforcing our intellectualproperty and
proprietary rights and defending any intellectual property-related
claims;
• the extent to which we acquire or in-license other products, product
candidates, technologies or data referencing rights;
• the impacts of the COVID-19 pandemic;
• the ability to receive additional non-dilutive funding, including
grants from organizations and foundations; and
• the costs of operating as a public company.
Further, our operating plans may change, and we may need additional funds to
meet operational needs and capital requirements for clinical trials and other
research and development activities. Because of the numerous risks and
uncertainties associated with the development and commercialization of our
product candidates, we are unable to estimate the amounts of increased capital
outlays and operating expenditures associated with our current and anticipated
product development programs.
Critical Accounting Policies and Significant Judgments and Estimates
Our management's discussion and analysis of our financial condition and results
of operations is based on our financial statements, which have been prepared in
accordance with generally accepted accounting principles, or GAAP. The
preparation of these financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements, as well as the reported expenses incurred during the reporting
periods. Our estimates are based on our historical experience and on various
other factors that we believe are reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying value of
assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions. We believe that the accounting policies discussed below are critical
to understanding our historical and future performance, as these policies relate
to the more significant areas involving management's judgments and estimates.
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Revenue Recognition
All of our revenue relates to the Astellas agreement. We account for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, or ASC 606. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine the appropriate amount of revenue to be recognized for arrangements determined to be within the scope of ASC 606, we perform the following five steps: (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) we satisfy each performance obligation. We only apply the five-step model to contracts when it is probable that we will collect consideration to which we are entitled in exchange for the goods or services we transfer to the customer. We are required to make a number of estimates and judgments in the process of recording our revenue. These estimates include determining the performance obligations, estimating the total transaction price, determining the period over which we record our revenue, estimating the total costs to completion and costs incurred to date. We have allocated the estimated$28.7 million accounting transaction price entirely to a single, bundled performance obligation comprised of the licenses provided to Astellas, our research services and other ancillary promises. We recorded the$10.0 million upfront payment from Astellas as deferred revenue inNovember 2019 and will record future invoices under the Astellas agreement as deferred revenue. While the contractual term under the Astellas agreement is five years, based on the research plan and budget agreed to by the joint steering committee established under the Astellas agreement, we will recognize the estimated total transaction price over the estimated period the research and development services are expected to be provided which, as ofDecember 31, 2020 , is approximately three years through 2022. We believe our performance obligation to Astellas is satisfied over the course of our performance of the research and development activities under the Astellas agreement and, depicting our performance in satisfaction of our performance obligation, we use input method as a measure of progress towards completion according to actual costs incurred compared to estimated total costs to estimate progress toward satisfaction of our performance. We will remeasure our progress towards completion of our performance obligation at the end of each reporting period.
For further discussion of revenue recognition, see Note 2 to our audited
consolidated financial statements for the years ended
Research and Development Costs
We estimate costs of research and development activities conducted by service providers, which include, the conduct of sponsored research, preclinical studies and contract manufacturing activities. We record the estimated costs of research and development activities based upon the estimated amount of services provided but not yet invoiced and include these costs in the accrued and other current liabilities or prepaid expenses on the balance sheets and within research and development expense on the consolidated statements of operations. We estimate these costs based on factors such as estimates of the work completed and budget provided and in accordance with agreements established with our collaboration partners and third-party service providers. We make significant judgments and estimates in determining the accrued liabilities and prepaid expense balances in each reporting period. As actual costs become known, we adjust our accrued liabilities or prepaid expenses. We have not experienced any material differences between accrued costs and actual costs incurred since our inception. Our expenses related to clinical trials are based on estimates of patient enrollment and related expenses at clinical investigator sites as well as estimates for the services received and efforts expended pursuant to contracts with multiple research institutions and CROs that may be used to conduct and manage clinical trials on our behalf. We generally accrue expenses related to clinical trials based on contracted amounts applied to the level of patient enrollment and activity. If timelines or contracts are modified based upon changes in the clinical trial protocol or scope of work to be performed, we modify our estimates of accrued expenses accordingly on a prospective basis.
Equity-based Compensation
We account for equity-based compensation in accordance with ASC 718, Compensation-Stock Compensation, or ASC 718. In accordance with ASC 718, compensation cost is measured at estimated fair value and is included as compensation expense over the vesting period during which service is provided in exchange for the award.
We used a Black-Scholes option pricing model to determine fair value of our
previously issued incentive shares and use a Black-Scholes option pricing model
to determine fair value of our stock options. The Black-Scholes option pricing
model includes various assumptions, including the fair value of common shares,
expected life of equity awards, the expected volatility and the
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expected risk-free interest rate. These assumptions reflect our best estimates,
but they involve inherent uncertainties based on market conditions generally
outside our control. As a result, if other assumptions had been used,
equity-based compensation cost could have been materially impacted. Furthermore,
if we use different assumptions for future grants, share-based compensation cost
could be materially impacted in future periods.
The fair value of each of our equity awards has been estimated using Black-Scholes based on the following assumptions:
Year Ended December 31,
2020 2019
Expected term (years) 2.0 1.2 - 1.4
Expected volatility 82.7%-83.7% 71.5 - 77.0%
Risk-free interest rate 0.17% 1.9%
Expected dividend yield - % - %
We will continue to use judgment in evaluating the assumptions utilized for our
equity-based compensation expense calculations on a prospective basis. In
addition to the assumptions used in Black-Scholes, the amount of equity-based
compensation expense we recognize in our financial statements includes equity
award forfeitures as they occurred.
As there was no public market for our common shares prior to our IPO in July
2020 , our board of directors, with input from management, has determined the
estimated fair value of our common shares as of the date of each equity award
grant considering our then-most recently available third-party valuation of
common shares. Valuations are updated when facts and circumstances indicate that
the most recent valuation is no longer valid, such as changes in the stage of
our development efforts, various exit strategies and their timing, and other
scientific developments that could be related to the valuation of our company,
or, at a minimum, annually. Third-party valuations were performed in accordance
with the guidance outlined in the American Institute of Certified Public
Accountants' Accounting and Valuation Guide , Valuation of Privately-Held-Company
Equity Securities Issued as Compensation. Our common share valuations in 2019:
• For awards of incentive shares in January through June 2019 we
utilized the back-solve method for inferring the equity value
predicated on the likely second closing of our Series A redeemable
convertible preferred shares financing and employed anoption-pricing
method, or OPM, framework to allocate equity to our common shares.
• For awards of incentive shares in September, October and December
2019 we utilized a guideline transactions market approach for
inferring the equity value implied by a selection of guideline
transactions and employed an OPM framework to allocate equity to our
common shares.
• For awards of incentive shares in May and June 2020 we utilized a
hybrid methodology that employed a probability-weighted value across
multiple scenarios including an OPM framework and an IPO scenario.
The total value of equity under each scenario was allocated among
equity classes and the estimated probabilities for eachscenario were
then applied to derive the fair value per common share.
The estimates of fair value of our common shares are highly complex and
subjective. There are significant judgments and estimates inherent in the
determination of the fair value of our common shares. These judgments and
estimates include assumptions regarding our future operating performance, the
time to completing an IPO or other liquidity event, the related valuations
associated with these events, and the determinations of the appropriate
valuation methods at each valuation date. The assumptions underlying these
valuations represent our best estimates, which involve inherent uncertainties
and the application of management judgment. If we had made different
assumptions, our equity-based compensation expense, net loss and net loss per
share applicable to common shareholders could have been materially different.
Following the completion of our IPO, the fair value of our incentive stock option grants and awards has been estimated using Black-Scholes based on the following assumptions
2020
Expected Term (years) 3.5 - 6.6
Expected Volatility 65.3% - 77.5%
Risk Free Rate 0.21% - 0.52%
Dividend Yield - %
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Determination of the Fair Value of Convertible Note and Series A Prime Convertible Preferred Shares
We have elected the fair value option for the accounting for the JDRF convertible promissory note issued in 2018. Fair value adjustments to the convertible notes are included in our other income (expenses).
• The fair value of the initial closing of our convertible notes in
on issuance.
• The fair value of the convertible note as of
determined using a Monte Carlo simulation model. Application of the Monte
Carlo simulation model involves making assumptions for the expected time
to the applicable financing dates, probability of each respective
financing scenario versus holding to maturity, total value of equity as
of each valuation date, volatility, and risk-free rate. The
simulation model iteratively solves for the calibrated discount rate such
that the fair value of the convertible note as of the issuance date is
equivalent to the total proceeds on issuance. The selected discount rate
as of December 31, 2019 considers the calibrated discount rate as of the
issuance date, risk-free rate, and changes in the credit risk for the
company.
• The fair value of the JDRF convertible promissory note on conversion was
determined to be equal to the value of our Series A prime redeemable
convertible preferred shares into which the convertible note was
converted. In valuing our Series A prime redeemable convertible preferred
shares for purposes of accounting for the conversion of the JDRF
convertible promissory note, we utilized a probability-weighted hybrid
method combining (i) trade-sale scenario and the back-solve method for
inferring the equity value predicated on the likely closing of our Series
B redeemable convertible preferred shares financing, and (ii) an IPO
scenario with reference to guideline IPOs in the biotech sector. Underthe hybrid method, the per share value calculated under the two scenarios
is weighted based on expected exit outcomes and the quality of the
information specific to each allocation methodology to arrive at a final
estimated fair value per share value of the Series A prime redeemable
convertible preferred shares.
InFebruary 2020 , the outstanding principal and accrued interest under the JDRF Note automatically converted at a price of$2.294 per share into 948,225 Series A prime redeemable convertible preferred shares. The final fair value adjustment to the JDRF Note in the year endedDecember 31, 2020 was determined to be equal to the fair value of the Series A prime redeemable convertible preferred shares into which the JDRF Note was converted. We determine the fair value of our Series A prime redeemable convertible preferred shares using a probability-weighted hybrid method combining (i) an option pricing model, or OPM, and (ii) an IPO scenario with reference to guideline IPOs in the biotechnology sector. For purposes of the OPM the key inputs include an 80.3% volatility rate, a 1.6-year estimated term, a risk-free rate of 0.3% and dividends of zero. For our IPO scenario, the key inputs include a weighted average cost of capital of 25% and a 0.8-year term to a liquidity event. For the year endedDecember 31, 2020 , we recognized a$0.1 gain in the consolidated statements of operations as fair value adjustments on convertible note with respect to changes to the fair value of the JDRF Note.
Recently Adopted Accounting Pronouncements
Refer to Note 2, "Summary of Significant Accounting Policies," in the accompanying notes to our consolidated financial statements for the years endedDecember 31, 2020 and 2019 appearing elsewhere in this Annual Report on Form 10-K for a discussion of recent accounting pronouncements.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations as ofDecember 31, 2020 : Payments due by period (in thousands) Less than one One
to three Three to five More than
Total year years years five years
Operating lease(1) 8,817 1,595 3,335 3,538 349
Total contractual obligations
3,335 $ 3,538 $ 349 (1) Represents our future minimum lease obligation under our non-cancelable
operating a lease for our corporate headquarters in
which expires in
In addition, under various licensing and related agreements to which we are a
party, we may be required to make milestone and earnout payments and to pay
royalties and other amounts to third parties. We have not included any such
contingent payment obligations in the table above as the amount, timing and
likelihood of such payments are not known. Such contingent payment obligations
are described below.
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-------------------------------------------------------------------------------- Pursuant to the antibody library subscription agreement, or Distributed Bio library agreement, withDistributed Bio, Inc. , or Distributed Bio, we obtained a non-exclusive license to use an antibody library of Distributed Bio, or theAntibody Library , anti-PD-1 antibodies isolated from theAntibody Library by Distributed Bio, or the Anti-PD-1 Antibodies, and certain software to conduct research and development related to the discovery of antibodies against biological targets of interest to us. We refer to theAntibody Library , the Anti-PD-1 Antibodies and the software collectively as the Deliverables. Distributed Bio has also agreed to assign to us and we own all rights in the sequences of any Anti-PD-1 Antibody and antibody sequences that we identify by panning theAntibody Library , or the Panned Antibodies, including any derivative sequences and any molecules or products containing or any method of manufacture or use of any of the foregoing, which we refer to collectively as the Assigned Antibody Rights. Under the Distributed Bio library agreement, we paid subscription fees to Distributed Bio in connection with the use of the Deliverables. We are also required to make milestone payments to Distributed Bio upon achievement of certain clinical and regulatory milestones with respect to any antibody that has a target recognition site derived from an Anti-PD-1 Antibody, a Panned Antibody or an antibody provided by Distributed Bio under any other agreement with us, and that is included in the Assigned Antibody Rights, which we refer to as an Antibody Product. We may be required to pay up to$4.3 million in clinical milestones and$12.0 million in regulatory milestones for each Antibody Product. Each such milestone payment will be paid only once with respect to any set of targets to which any Antibody Product is directed. The milestone payments may be offset by up to 50% of any amount paid by us to any third party for the achievement of the same or similar milestones with respect to any Antibody Product. We also pay Distributed Bio for antibody discovery services under a master services agreement that we entered into with Distributed Bio concurrently with the Distributed Bio library agreement, which we refer to as the Distributed Bio MSA. We are required to make the same milestone payments to Distributed Bio upon achievement of certain clinical and regulatory milestones as described in the Distributed Bio library agreement for any Antibody Product, but we will not owe milestone payments more than once for the same Antibody Product if such milestone is achieved under both of the Distributed Bio library agreement and the Distributed Bio MSA. We paid an aggregate of approximately$2.2 million in subscription fees and other fees under the Distributed Bio library agreement and Distributed Bio MSA throughDecember 31, 2020 . Beginning in 2020, we ceased subscribing to the Distributed Bio antibody library, and as a result are no longer obligated to pay subscription fees under such agreement. We continue to engage Distributed Bio for antibody discovery services pursuant to the Distributed Bio MSA and we pay for such services on a service-by-service basis. We enter into contracts in the normal course of business with CROs, contract manufacturing organizations and other third parties for clinical trials, preclinical research studies, chemistry and testing and manufacturing services. These contracts are generally cancelable by us upon up to 30 days' prior written notice. Payments due upon cancellation consist only of payments for services provided or expenses incurred, including noncancelable obligations of our service providers, up to and through the date of cancellation. These payments are not included in the table of contractual obligations and commitments above as the amount and timing of these payments are not known.
Off-Balance Sheet Arrangements
During the periods presented, we did not have, nor do we currently have, any
off-balance sheet arrangements as defined under
Emerging Growth Company Status
As an emerging growth company, or EGC, under the Jumpstart Our Business Startups Act of 2012, or JOBS Act, we may delay the adoption of certain accounting standards until such time as those standards apply to private companies. Other exemptions and reduced reporting requirements under the JOBS Act for EGCs include presentation of only two years of audited financial statements in a registration statement for an IPO, an exemption from the requirement to provide an auditor's report on internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, an exemption from any requirement that may be adopted by thePublic Company Accounting Oversight Board regarding mandatory audit firm rotation, and less extensive disclosure about our executive compensation arrangements. In addition, the JOBS Act provides that an EGC can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an EGC to delay the adoption of some accounting standards until those standards would otherwise apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date 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 new or revised accounting pronouncements as of public company effective dates. 102
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We may remain classified as an EGC untilDecember 31, 2025 , although if the market value of our common stock that is held by non-affiliates exceeds$700 million as of anyJune 30 before that time or if we have annual gross revenues of$1.07 billion or more in any fiscal year, we would cease to be an emerging growth company as ofDecember 31 of the applicable year. We also would cease to be an EGC if we issue more than$1 billion of non-convertible debt over a three-year period.
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