Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Information
The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the corresponding notes included in this Quarterly Report on Form 10-Q, as well as the audited condensed consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. This discussion contains forward-looking statements that involve significant risks and uncertainties. As a result of many factors, such as those referenced or set forth under “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q, our actual results may differ materially from those anticipated in these forward-looking statements.
Overview
We are a clinical-stage biopharmaceutical company focused on discovering, developing and commercializing innovative medicines for people with serious diseases of the CNS, including cognitive and neurodegenerative disorders. Our current lead asset, CY6463, is a pioneering CNS-penetrant sGC stimulator in clinical development for ADv, CIAS and MELAS. sGC stimulators are small molecules that act synergistically with NO on sGC to boost production of cyclic guanosine monophosphate, or cGMP. cGMP is a key second messenger that, when produced by sGC, regulates diverse and critical biological functions in the CNS including blood flow and vascular dynamics, inflammatory and fibrotic processes, bioenergetics, metabolism and neuronal function.
We operate in one reportable business segment—human therapeutics.
Financial Overview
Research and Development Expense. Research and development expenses are incurred in connection with the discovery and development of our product candidates. These expenses consist primarily of the following costs: compensation, benefits and other employee-related expenses, research and development related facilities, third-party contracts relating to nonclinical study and clinical trial activities. All research and development expenses are charged to operations as incurred.
CNS assets. The core of our portfolio is CY6463, an orally administered CNS-penetrant sGC stimulator that is being developed as a symptomatic and potentially disease-modifying therapy for CNS diseases associated with cognitive impairment. NO-sGC-cGMP is a fundamental signaling network, that is widely used in the nervous system. CY6463 enhances the brain’s natural ability to produce cGMP, an important second messenger in the CNS, by stimulating sGC, a key node in the NO-sGC-cGMP pathway. This pathway is critical to basic CNS functions, and deficient NO-sGC-cGMP signaling is believed to play an important role in the pathogenesis of many CNS diseases. Agents that stimulate sGC to produce cGMP may compensate for deficient NO signaling.
In January 2020, we announced positive results from our Phase 1 first-in-human study that provided the foundation for continued development of CY6463. The results from this study indicate that CY6463 was well tolerated. Pharmacokinetic data, obtained from both blood and cerebral spinal fluid, support once-daily dosing with or without food and demonstrated CY6463 penetration of the blood-brain-barrier with CSF concentrations expected to be pharmacologically active.
In October 2020, we announced positive topline results from our CY6463 Phase 1 translational pharmacology study in healthy elderly participants. Treatment with CY6463 for 15 days in this 24-subject study confirmed and extended results seen in the earlier first-in-human Phase 1 study: once-daily oral treatment demonstrated blood-brain-barrier penetration with expected CNS exposure and target engagement. Results also showed significant improvements in neurophysiological and objective performance measures as well as in inflammatory biomarkers associated with aging and neurodegenerative diseases. CY6463 was safe and generally well tolerated in this study. Significant effects on cerebral blood flow and markers of bioenergetics were not observed in this study of healthy elderly participants. We believe that these results, together with nonclinical data, support continued development of CY6463 as a potential new medicine for serious CNS diseases.
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We have initiated exploratory clinical trials with CY6463 ADv, CIAS, and MELAS. The ADv study will be supported in part by a grant from the Alzheimer's Association’s Part the Cloud-Gates Partnership Grant Program, which provides Cyclerion with $2 million of funding over two years.
Our next-generation CNS asset, CY3018, is a differentiated CNS-penetrant sGC stimulator with greater CSF-to-plasma exposure relative to CY6463 based on nonclinical studies. CY3018 is intended to expand the potential of sGC stimulation for the treatment of disorders of the CNS.
Non-CNS assets. We have other assets that are outside of our current strategic focus. These non-core assets are not being internally developed at this time. Praliciguat is an orally administered, once-daily systemic sGC stimulator. On June 3, 2021, we entered into the License Agreement with Akebia relating to the exclusive worldwide license to Akebia of our rights to the development, manufacture, medical affairs and commercialization of pharmaceutical products containing the pharmaceutical compound praliciguat and other related products and forms thereof enumerated in such agreement. Olinciguat is an orally administered, once-daily, vascular sGC stimulator that was evaluated in a Phase 2 study of participants with sickle cell disease. We released topline results from this study in October 2020. Olinciguat is available for licensing to a third party partner.
The following table summarizes our research and development expenses, employee and facility related costs allocated to research and development expense, and discovery and pre-clinical phase programs, for the three months ended March 31, 2022 and 2021. The product pipeline expenses relate primarily to external costs associated with nonclinical studies and clinical trial costs, which are presented by development candidate.
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Three Months Ended March 31, |
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2022 |
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2021 |
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|
(in thousands) |
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Product pipeline external costs: |
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CY6463 |
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4,452 |
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|
1,166 |
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CY3018 |
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|
933 |
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— |
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Olinciguat |
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20 |
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166 |
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Praliciguat |
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12 |
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|
(468 |
) |
Discovery research |
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146 |
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700 |
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Total product pipeline external costs |
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5,563 |
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|
1,564 |
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Personnel and related internal costs |
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3,284 |
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3,824 |
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Facilities and other |
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|
896 |
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|
2,704 |
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Total research and development expenses |
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$ |
9,743 |
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$ |
8,092 |
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Securing regulatory approvals for new drugs is a lengthy and costly process. Any failure by us to obtain, or any delay in obtaining, regulatory approvals would materially adversely affect our product development efforts and our business overall.
Given the inherent uncertainties of pharmaceutical product development, we cannot estimate with any degree of certainty how our programs will evolve, and therefore the amount of time or money that would be required to obtain regulatory approval to market them. As a result of these uncertainties surrounding the timing and outcome of any approvals, we are currently unable to estimate precisely when, if ever, our discovery and development candidates will be approved. We invest carefully in our pipeline, and the commitment of funding for each subsequent stage of our development programs is dependent upon the receipt of clear, supportive data.
The successful development of our product candidates is highly uncertain and subject to a number of risks including, but not limited to:
•The full impact of COVID-19 pandemic continues to develop and could continue to adversely affect our programs and operations, including our clinical trials, corporate development, and other activities.
•Cyclerion works closely with its clinical trial sites and investigators to deliver trials in a manner consistent with the safety of study participants and healthcare professionals.
•The duration of clinical trials may vary substantially according to the type and complexity of the product candidate and may take longer than expected.
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•The United States FDA and comparable agencies outside the United States. impose substantial and varying requirements on the introduction of therapeutic pharmaceutical products, which typically require lengthy and detailed laboratory and clinical testing procedures, sampling activities and other costly and time-consuming procedures.
•Data obtained from nonclinical and clinical activities at any step in the testing process may be adverse and lead to discontinuation or redirection of development activity. Data obtained from these activities also are susceptible to varying interpretations, which could delay, limit or prevent regulatory approval.
•The duration and cost of discovery, nonclinical studies and clinical trials may vary significantly over the life of a product candidate and are difficult to predict.
•The costs, timing and outcome of regulatory review of a product candidate may not be favorable, and, even if approved, a product may face post-approval development and regulatory requirements.
•The emergence of competing technologies and products and other adverse market developments may reduce or eliminate the potential value of our pipeline.
As a result of the factors listed in the “Risk Factors” section in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, and elsewhere in this Quarterly Report on Form 10-Q, we are unable to determine the duration and costs to complete current or future nonclinical and clinical stages of our product candidates or when, or to what extent, we will generate revenues from the commercialization and sale of our product candidates. Development timelines, probability of success and development costs vary widely. We anticipate that we will make determinations as to which additional programs to pursue and how much funding to direct to each program on an ongoing basis in response to the data from the studies of each product candidate, the competitive landscape and ongoing assessments of such product candidate’s commercial potential.
General and Administrative Expense. General and administrative expense consists primarily of compensation, benefits and other employee-related expenses for personnel in our administrative, finance, legal, information technology, business development, and human resource functions. Other costs include the legal costs of pursuing patent protection of our intellectual property, general and administrative related facility costs, insurance costs and professional fees for accounting and legal services. We record all general and administrative expenses as incurred.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements prepared in accordance with GAAP. The preparation of these financial statements requires us to make certain estimates and assumptions that may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the amounts of expenses during the reported periods. We base our estimates on our historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ materially from our estimates under different assumptions or conditions. Changes in estimates are reflected in reported results in the period in which they become known.
We believe that our application of accounting policies requires significant judgments and estimates on the part of management and is the most critical to aid in fully understanding and evaluating our reported financial results. Our significant accounting policies are more fully described in Note 2, Summary of Significant Accounting Policies, of the consolidated financial statements elsewhere in this Quarterly Report on Form 10-Q.
All research and development expenses are expensed as incurred. We defer and capitalize nonrefundable advance payments we make for research and development activities until the related goods are received or the related services are performed. A discussion of our critical accounting policies and estimates may be found in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations under the heading Critical Accounting Policies and Estimates.
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Results of Operations
The revenue and expenses reflected in the consolidated financial statements may not be indicative of revenue and expenses that will be incurred by us in the future. The following discussion summarizes the key factors we believe are necessary for an understanding of our consolidated financial statements.
Revenues and Expenses
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Three Months Ended March 31, |
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Change |
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2022 |
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2021 |
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$ |
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% |
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(dollars in thousands) |
|
Revenues: |
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Revenue from development agreement |
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225 |
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62 |
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163 |
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263 |
% |
Revenue from grants |
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486 |
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— |
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486 |
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100 |
% |
Total revenues |
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711 |
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62 |
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649 |
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1047 |
% |
Cost and expenses: |
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Research and development |
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9,743 |
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8,092 |
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1,651 |
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20 |
% |
General and administrative |
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3,952 |
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5,365 |
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(1,413 |
) |
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(26 |
)% |
Total cost and expenses |
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13,695 |
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13,457 |
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238 |
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2 |
% |
Loss from operations |
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(12,984 |
) |
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(13,395 |
) |
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411 |
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(3 |
)% |
Interest and other income (expenses), net |
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6 |
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(4 |
) |
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10 |
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(250 |
)% |
Net loss |
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$ |
(12,978 |
) |
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$ |
(13,399 |
) |
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$ |
421 |
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(3 |
)% |
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Revenues. The increase in revenue of approximately $0.6 million for the three months ended March 31, 2022, compared to the three months ended March 31, 2021, can be attributed primarily to the revenue from the PTC Grant, which was approved in August 2021, and revenue generated from the Akebia Supply Agreement, offset by a decrease in revenue generated from services performed under the development agreement (the "Development Agreement") with Ironwood, which ended on March 31, 2021.
Research and development expense. The increase in research and development expense of approximately $1.7 million for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 was driven by an increase of approximately $3.3 million in external research costs related to CY6463 clinical trials in CIAS, ADv, and MELAS, and approximately $0.9 million for CY3018 costs, and a refund of approximately $0.5 million received in 2021 related to praliciguat clinical trial, offset by a decrease of approximately $0.7 million in discovery research, a decrease of approximately $0.6 million in other employee-related expenses primarily due to the workforce reduction in November 2020, and a decrease of approximately $1.7 million in facilities and operating costs allocated to research and development primarily due to the reduction in the Company’s total leased premises.
General and administrative expense. The decrease in general and administrative expenses of approximately $1.4 million for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 was primarily driven by a decrease of approximately $0.9 million in salaries, stock-based compensation and other employee-related expenses due to lower average headcount, and a decrease of approximately $0.5 million in facilities and operating costs.
Liquidity and Capital Resources
After the Separation on April 1, 2019, we raised approximately $165 million net of direct financing expenses with the closing of the 2019 Equity Private Placement on April 2, 2019.
On July 29, 2020, we closed on a private placement of 6,062,500 shares of our common stock, pursuant to a Common Stock Purchase Agreement, for total gross proceeds of approximately $24.3 million. There were no material fees or commissions related to the transaction. The Company intends to use the proceeds to fund working capital and other general corporate purposes.
On September 3, 2020, the Company entered into the Sales Agreement with Jefferies with respect to the ATM Offering under the Shelf. Under the ATM Offering, the Company may offer and sell, from time to time at its sole discretion, shares of its common stock, having an aggregate offering price of up to $50.0 million through
23
Jefferies as its sales agent. The Company will pay to Jefferies cash commissions of 3.0 percent of the gross proceeds of sales of common stock under the Sales Agreement. The Company has sold 3,353,059 shares of its common stock for net proceeds of $12.5 million under the ATM Offering since entering into the Sales Agreement, with no shares of common stock issued or sold under the ATM Offering during the three months ended March 31, 2022.
On June 7, 2021, we closed on a private placement of 5,735,988 shares of our common stock, pursuant to a Common Stock Purchase Agreement, for total gross proceeds of approximately $18 million. There were no material fees or commissions related to the transaction. The Company intends to use the proceeds to fund working capital and other general corporate purposes.
Our ability to continue to fund our operations and meet capital needs will depend on our ability to generate cash from operations and access to capital markets and other sources of capital, as further described below. We anticipate that our principal uses of cash in the future will be primarily to fund our operations, working capital needs, capital expenditures and other general corporate purposes.
On March 31, 2022, we had approximately $41.1 million of unrestricted cash and cash equivalents. Our cash equivalents include amounts held in U.S. government money market funds. We invest cash in excess of immediate requirements in accordance with our investment policy, which requires all investments held by us to be at least “AAA” rated or equivalent, with a remaining final maturity when purchased of less than twelve months, so as to primarily achieve liquidity and capital preservation.
Going Concern
Based on the timing expectations of our research and development plans, including our clinical trials, we expect that our existing cash and cash equivalents as of March 31, 2022 will be sufficient to fund our planned operating expenses and capital expenditure requirements at least through the next 12 months following the date of this Quarterly Report on Form 10-Q. We have based this estimate on assumptions that may prove to be wrong, particularly as the process of testing drug candidates in clinical trials is costly and the timing of progress in these trials is uncertain.
Cash Flows
The following is a summary of cash flows for the three months ended March 31, 2022 and 2021:
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Three Months Ended March 31, |
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Change |
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2022 |
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2021 |
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$ |
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% |
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(dollars in thousands) |
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Net cash used in operating activities |
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$ |
(12,835 |
) |
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$ |
(14,455 |
) |
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$ |
1,620 |
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|
(11 |
)% |
Net cash provided by (used in) investing activities |
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$ |
— |
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|
$ |
1,462 |
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|
$ |
(1,462 |
) |
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|
(100 |
)% |
Net cash provided by financing activities |
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$ |
— |
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|
$ |
27 |
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|
$ |
(27 |
) |
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|
(100 |
)% |
Cash Flows from Operating Activities
Net cash used in operating activities was $12.8 million for the three months ended March 31, 2022 compared to $14.5 million for the three months ended March 31, 2021. The decrease in net cash used in operations of $1.6 million primarily relates to a decrease in our net loss of $0.4 million, a decrease in working capital accounts of $1.9 million, partially offset by a decrease of stock-based compensation and other non-cash items of $0.7 million.
Cash Flows from Investing Activities
Net cash provided by investing activities was de minimis for the three months ended March 31, 2022 compared to net cash used in investing activities of $1.5 million for the three months ended March 31, 2021. The decrease in net cash provided by investing activities of $1.5 million was primarily from an increase in cash received from sale of lab equipment in 2021.
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Cash Flows from Financing Activities
Net cash provided by financing activities for the three months ended March 31, 2022 was de minimis.
Net cash provided by financing activities for the three months ended March 31, 2021 was de minimis.
Debt – Paycheck Protection Program
On April 21, 2020, we received loan proceeds in the amount of approximately $3.5 million pursuant to a promissory note agreement (the "Promissory Note") with a bank under the Paycheck Protection Program ("PPP"), of which certain key terms were adjusted by the Paycheck Protection Program Flexibility Act ("PPPFA"). The Promissory Note had an initial loan maturity of April 20, 2022, a stated interest rate of 1.0% per annum, and had payments of principal and interest that were due monthly after an initial deferral period where interest accrued, but no payments were due. Under the PPPFA, the initial deferral may be extended from six up to ten months and the loan maturity may be extended from two to five years. The Promissory Note provided for customary events of default, including, among others, those relating to failure to make payment when due and breaches of representations. The loan is subject to all the terms and conditions applicable under the PPPFA and is subject to review by the Small Business Association ("SBA") for compliance with program requirements.
In August 2021, the Company applied with the SBA for forgiveness of the PPP loan and was notified on November 4, 2021 that the SBA has approved our application to forgive the entire amount of the loan and accrued interest. In November 2021, the Company recorded a gain on extinguishment of debt of $3.6 million representing the principal and accrued interest for the PPP Loan.
Funding Requirements
We expect our expenses to fluctuate as we advance the preclinical activities and clinical trials of our product candidates.
We believe that our existing cash and cash equivalents as of March 31, 2022 will enable us to fund our planned operating expenses and capital expenditure requirements at least through the next 12 months following the date of this Quarterly Report on Form 10-Q, excluding net cash flows from potential business development activities. We based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect.
Because of the many risks and uncertainties associated with research, development and commercialization of product candidates, we are unable to estimate the exact amount of our working capital requirements. Our expenses will fluctuate, and our future funding requirements will depend on, and could increase or decrease significantly as a result of many factors, including the:
•scope, progress, results and costs of researching and developing our product candidates, and conducting preclinical studies and clinical trials;
•costs, timing and outcome of regulatory review of our product candidates;
•costs of future activities, including medical affairs, manufacturing and distribution, for any of our product candidates for which we receive marketing approval;
•cost and timing of necessary actions to support our strategic objectives;
•costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims; and
•timing, receipt and amount of sales of, or milestone payments related to or royalties on, our current or future product candidates, if any.
A change in any of these or other variables with respect to the development of any of our product candidates could significantly change the costs and timing of the development of that product candidate. Further, our operating plans may change in the future, and we may need additional funds to meet operational needs and capital requirements associated with such operating plans.
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Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of public or private equity offerings, debt financings, collaborations, strategic alliances or licensing arrangements with third parties. To the extent that we raise additional capital through the sale of equity or convertible debt securities, outstanding equity ownership may be materially diluted, and the terms of securities sold in such transactions could include liquidation or other preferences that adversely affect the rights of holders of common stock. Debt financing and preferred equity financing, if available, may involve agreements that include restrictive covenants that limit our ability to take specified actions, such as incurring additional debt, making capital expenditures or declaring dividends. In addition, debt financing would result in increased fixed payment obligations.
If we raise funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us.
If we are unable to raise additional funds when needed, we may be required to delay, reduce or eliminate our product development or future commercialization efforts, or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
Contractual Commitments and Obligations
Tax-related Obligations
We exclude assets, liabilities or obligations pertaining to uncertain tax positions from our summary of contractual commitments and obligations as we cannot make a reliable estimate of the period of cash settlement with the respective taxing authorities. As of March 31, 2022, we had no uncertain tax positions.
Other Funding Commitments
As of March 31, 2022, we had, and continue to have, several ongoing studies in various clinical trial stages. Our most significant clinical trial spending is with clinical research organizations, or CROs. The contracts with CROs generally are cancellable, with notice, at our option and do not have any significant cancellation penalties.
Off-Balance Sheet Arrangements
We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, that would have been established for the purpose of facilitating off-balance sheet arrangements (as that term is defined in Item 303(a)(4)(ii) of Regulation S-K) or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in those types of relationships. We enter into guarantees in the ordinary course of business related to the guarantee of our own performance.
New Accounting Pronouncements
For a discussion of new accounting pronouncements see Note 2, Summary of Significant Accounting Policies, of the consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.