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F
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
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☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2024
OR
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☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-40708
ELIEM THERAPEUTICS, INC.
(Exact Name of Registrant as Specified in its Charter)
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Delaware |
83-2273741 |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer
Identification No.) |
PMB #117 2801 Centerville Road 1st Floor Wilmington, DE |
19808-1609 |
(Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including area code: 1-877-ELIEMTX (354-3689)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
Common Stock, par value $0.0001 per share |
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ELYM |
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The Nasdaq Stock Market LLC (The Nasdaq Global Market) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer |
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Accelerated filer |
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Non-accelerated filer |
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☒ |
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Smaller reporting company |
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☒ |
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Emerging growth company |
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☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of August 9, 2024, the registrant had 67,060,163 shares of common stock, $0.0001 par value per share, outstanding.
Table of Contents
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve substantial risk and uncertainties. All statements, other than statements of historical fact, contained in this Quarterly Report on Form 10-Q, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management and expected market growth, are forward-looking statements. The words “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” “would,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.
The forward-looking statements in this Quarterly Report on Form 10-Q include, among other things, statements about:
•the initiation, timing, progress and results of our research and development programs, preclinical studies and clinical trials;
•the anticipated timing of the submission and clearance of investigational new drug applications (INDs) and comparable foreign applications for budoprutug (previously referred to as TNT119) and any future product candidates we may develop;
•our estimates regarding the potential patient populations for budoprutug and any future product candidates we may develop;
•our estimates regarding expenses, future revenue, capital requirements, need for additional financing and the period over which we believe our cash and cash equivalents will be sufficient to fund our operating expenses and capital expenditure requirements;
•our plans to develop and, if approved, subsequently commercialize budoprutug and any future product candidates we may develop;
•the timing of and our ability to submit applications for, and obtain and maintain regulatory approvals for budoprutug and any future product candidates we may develop;
•our intellectual property position and our expectations regarding our ability to obtain, maintain and enforce intellectual property protection for budoprutug and any future product candidates we may develop;
•our estimates regarding the size of the potential markets for our product candidates and our ability to serve those markets;
•our commercialization, marketing and manufacturing capabilities and strategy;
•our competitive position and expectations regarding developments and projections relating to our competitors and any competing products that are or might become available;
•the impact of government laws and regulations;
•our ability to enter into future collaborations, strategic alliances, or option and license arrangements; and
•our expectations regarding the time during which we will be an emerging growth company under the Jumpstart Our Business Startups Act.
We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in this Quarterly Report on Form 10-Q, particularly in the “Risk Factor Summary” below and in Part II, Item 1A, “Risk Factors,” that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.
You should read this Quarterly Report on Form 10-Q and the documents that we reference herein and have filed or incorporated by reference hereto completely and with the understanding that our actual future results may be materially different from what we expect. The forward-looking statements contained in this Quarterly Report on Form 10-Q are made as of the date of this Quarterly Report on Form 10-Q, and we do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.
Risk Factor Summary
Our business is subject to numerous risks and uncertainties, including those risks discussed in further detail below. These risks include, among others, the following:
•We have incurred significant losses since our inception, anticipate that we will incur substantial losses for the foreseeable future, and may never achieve or maintain profitability.
•We will need substantial additional funding for our continuing operations, and if we are unable to access capital when needed, it could force us to delay, reduce or terminate our product development programs, commercialization efforts, or other operations.
•We have never generated revenue from product sales and may never achieve or maintain profitability.
•Our future success is dependent primarily on regulatory approval and commercialization of budoprutug and any future product candidates we may develop.
•Even if any of our product candidates receives marketing approval, we may fail to achieve the degree of market acceptance by physicians, patients, third-party payors and others in the medical community necessary for commercial success, and the market opportunity for any of our product candidates, if approved, may be smaller than we estimate.
•Preliminary, initial, or interim results from clinical trials that we announce, present, or publish from time to time may change as more data and information become available (or are updated based upon audit, validation and verification procedures of the data/information commonly performed for clinical trials) that could result in material changes in the final trial results.
•Preclinical and clinical development involves a lengthy, complex and expensive process with an uncertain outcome. The outcome of preclinical testing and early clinical trials may not be predictive of the success of later clinical trials, and the results of any future clinical trials may not satisfy the requirements of the U.S. Food and Drug Administration (the FDA) or comparable foreign regulatory authorities.
•We have never commercialized a product candidate and we may lack the necessary expertise, personnel and resources to successfully commercialize any of our products that receive regulatory approval on our own or together with collaborators.
•We face significant competition in an environment of rapid technological change, and there is a possibility that our competitors may achieve regulatory approval before us or develop therapies that are safer, less expensive or more advanced or effective than us, which may harm our financial condition and our ability to successfully market or commercialize our product candidates.
•We rely, and expect to continue to rely, on third parties to conduct, supervise, and monitor our preclinical studies and clinical trials. If these third parties do not properly and successfully carry out their contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval of or commercialize our product candidates.
•We rely heavily on certain in-licensed patents and other intellectual property rights in connection with our development of budoprutug and may be required to acquire or license additional patents or other intellectual property rights to continue to develop and commercialize budoprutug.
•We have four pending U.S. provisional patent applications with respect to budoprutug. We can provide no assurance that any of our other current or future patent applications will result in issued patents. If we are unable to obtain, maintain and protect sufficient patent and other intellectual property rights for our product candidates and technology, or if the scope of patent and other intellectual property rights obtained is not sufficiently broad, we may not be able to compete effectively in our market.
•We have identified material weaknesses in our internal control over financial reporting. If we are unable to remediate these material weaknesses, or if we identify additional material weaknesses in the future or otherwise fail to maintain effective internal control over financial reporting, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect our business.
•The trading price of the shares of our common stock may be volatile, and purchasers of our common stock could incur substantial losses.
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (unaudited)
Eliem Therapeutics, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except share and per share amounts)
(unaudited)
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Assets |
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June 30, 2024 |
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December 31, 2023 |
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Current assets: |
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Cash and cash equivalents |
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$ |
223,140 |
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$ |
93,112 |
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Short-term marketable securities |
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— |
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13,686 |
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Prepaid expenses and other current assets |
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2,857 |
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3,457 |
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Total current assets |
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$ |
225,997 |
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$ |
110,255 |
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Operating lease right-of-use assets |
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21 |
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199 |
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Other long-term assets |
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— |
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15 |
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Total assets |
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$ |
226,018 |
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$ |
110,469 |
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Liabilities and stockholders’ equity |
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Current liabilities: |
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Accounts payable |
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509 |
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66 |
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Accounts payable, related party |
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101 |
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— |
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Accrued expenses and other current liabilities |
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2,950 |
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2,433 |
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Accrued expenses and other current liabilities, related party |
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81 |
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— |
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Operating lease liabilities |
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100 |
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334 |
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Total current liabilities |
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$ |
3,741 |
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$ |
2,833 |
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Operating lease liabilities, net of current portion |
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— |
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22 |
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Other long-term liabilities |
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— |
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15 |
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Total liabilities |
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$ |
3,741 |
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$ |
2,870 |
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Commitments and contingencies (Note 7) |
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Stockholders’ equity |
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Common stock, $0.0001 par value per share, 250,000,000 shares authorized; 66,785,449 and 27,699,446 shares issued and outstanding at June 30, 2024 and December 31, 2023, respectively |
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7 |
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3 |
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Additional paid-in capital |
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434,835 |
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263,577 |
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Accumulated other comprehensive loss |
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— |
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(2 |
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Accumulated deficit |
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(212,565 |
) |
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(155,979 |
) |
Total stockholders’ equity |
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$ |
222,277 |
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$ |
107,599 |
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Total liabilities and stockholders’ equity |
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$ |
226,018 |
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$ |
110,469 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
Eliem Therapeutics, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(In thousands, except share and per share amounts)
(unaudited)
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2024 |
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2023 |
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2024 |
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2023 |
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Operating expenses: |
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Acquired in-process research and development, related party |
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$ |
51,659 |
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$ |
— |
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$ |
51,659 |
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$ |
— |
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Research and development |
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1,046 |
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3,688 |
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2,137 |
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9,408 |
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General and administrative |
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3,667 |
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3,026 |
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5,581 |
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20,744 |
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Total operating expenses |
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56,372 |
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6,714 |
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|
59,377 |
|
|
|
30,152 |
|
Loss from operations |
|
|
(56,372 |
) |
|
|
(6,714 |
) |
|
|
(59,377 |
) |
|
|
(30,152 |
) |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency gain (loss) |
|
|
(2 |
) |
|
|
384 |
|
|
|
(35 |
) |
|
|
632 |
|
Other income, net |
|
|
1,485 |
|
|
|
1,110 |
|
|
|
2,826 |
|
|
|
2,010 |
|
Total other income (expense) |
|
|
1,483 |
|
|
|
1,494 |
|
|
|
2,791 |
|
|
|
2,642 |
|
Net loss |
|
$ |
(54,889 |
) |
|
$ |
(5,220 |
) |
|
$ |
(56,586 |
) |
|
$ |
(27,510 |
) |
Net loss per share, basic and diluted |
|
$ |
(1.81 |
) |
|
$ |
(0.19 |
) |
|
$ |
(1.95 |
) |
|
$ |
(1.03 |
) |
Weighted-average number of shares outstanding used to compute net loss per share, basic and diluted |
|
|
30,349,562 |
|
|
|
26,840,555 |
|
|
|
28,994,045 |
|
|
|
26,667,458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(54,889 |
) |
|
$ |
(5,220 |
) |
|
$ |
(56,586 |
) |
|
$ |
(27,510 |
) |
Other comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on investments, net of tax of $0 |
|
|
— |
|
|
|
60 |
|
|
|
2 |
|
|
|
323 |
|
Comprehensive loss |
|
$ |
(54,889 |
) |
|
$ |
(5,160 |
) |
|
$ |
(56,584 |
) |
|
$ |
(27,187 |
) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Eliem Therapeutics, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(In thousands, except share amounts)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Additional Paid-in Capital |
|
|
Accumulated Other Comprehensive Loss |
|
|
Accumulated Deficit |
|
|
Total Stockholders' Equity |
|
Balance as of December 31, 2023 |
|
|
27,626,435 |
|
|
$ |
3 |
|
|
$ |
263,577 |
|
|
$ |
(2 |
) |
|
$ |
(155,979 |
) |
|
$ |
107,599 |
|
Vesting of restricted stock awards and units |
|
|
24,579 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Exercise of stock options |
|
|
10,999 |
|
|
|
— |
|
|
|
15 |
|
|
|
— |
|
|
|
— |
|
|
|
15 |
|
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
465 |
|
|
|
— |
|
|
|
— |
|
|
|
465 |
|
Other comprehensive income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2 |
|
|
|
— |
|
|
|
2 |
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,697 |
) |
|
|
(1,697 |
) |
Balance as of March 31, 2024 |
|
|
27,662,013 |
|
|
$ |
3 |
|
|
$ |
264,057 |
|
|
$ |
— |
|
|
$ |
(157,676 |
) |
|
$ |
106,384 |
|
Vesting of restricted stock awards and units |
|
|
32,453 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Exercise of stock options |
|
|
2,248,504 |
|
|
|
— |
|
|
|
8,652 |
|
|
|
— |
|
|
|
— |
|
|
|
8,652 |
|
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
512 |
|
|
|
— |
|
|
|
— |
|
|
|
512 |
|
Issuance of common stock in private placement, net of issuance costs of $250 |
|
|
31,238,282 |
|
|
|
3 |
|
|
|
119,747 |
|
|
|
— |
|
|
|
— |
|
|
|
119,750 |
|
Issuance of common stock for the acquisition of in-process research and development from a related party |
|
|
5,560,047 |
|
|
|
1 |
|
|
|
41,867 |
|
|
|
— |
|
|
|
— |
|
|
|
41,868 |
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(54,889 |
) |
|
|
(54,889 |
) |
Balance as of June 30, 2024 |
|
|
66,741,299 |
|
|
$ |
7 |
|
|
$ |
434,835 |
|
|
$ |
— |
|
|
$ |
(212,565 |
) |
|
$ |
222,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Additional Paid-in Capital |
|
|
Accumulated Other Comprehensive Loss |
|
|
Accumulated Deficit |
|
|
Total Stockholders' Equity |
|
Balance as of December 31, 2022 |
|
|
26,390,186 |
|
|
$ |
3 |
|
|
$ |
249,930 |
|
|
$ |
(358 |
) |
|
$ |
(120,860 |
) |
|
$ |
128,715 |
|
Vesting of restricted stock awards |
|
|
19,608 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Exercise of stock options |
|
|
406,194 |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
10,171 |
|
|
|
— |
|
|
|
— |
|
|
|
10,171 |
|
Other comprehensive income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
263 |
|
|
|
— |
|
|
|
263 |
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(22,290 |
) |
|
|
(22,290 |
) |
Balance as of March 31, 2023 |
|
|
26,815,988 |
|
|
$ |
3 |
|
|
$ |
260,102 |
|
|
$ |
(95 |
) |
|
$ |
(143,150 |
) |
|
$ |
116,860 |
|
Vesting of restricted stock awards and units |
|
|
44,038 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Exercise of stock options |
|
|
23,526 |
|
|
|
— |
|
|
|
24 |
|
|
|
— |
|
|
|
— |
|
|
|
24 |
|
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
777 |
|
|
|
— |
|
|
|
— |
|
|
|
777 |
|
Other comprehensive income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
60 |
|
|
|
— |
|
|
|
60 |
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5,220 |
) |
|
|
(5,220 |
) |
Balance as of June 30, 2023 |
|
|
26,883,552 |
|
|
$ |
3 |
|
|
$ |
260,903 |
|
|
$ |
(35 |
) |
|
$ |
(148,370 |
) |
|
$ |
112,501 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Eliem Therapeutics, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
2024 |
|
|
2023 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
Net loss |
|
$ |
(56,586 |
) |
|
$ |
(27,510 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
Stock-based compensation |
|
|
977 |
|
|
|
10,948 |
|
Right-of-use asset impairment |
|
|
— |
|
|
|
180 |
|
Non-cash operating lease expense |
|
|
178 |
|
|
|
232 |
|
Accretion of discounts and amortization of premiums on investments, net |
|
|
(63 |
) |
|
|
(1,232 |
) |
In-process research and development, related party |
|
|
51,659 |
|
|
|
— |
|
Foreign currency (gain) loss from remeasurement |
|
|
9 |
|
|
|
(630 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
Prepaid expenses and other assets |
|
|
2,425 |
|
|
|
(784 |
) |
Long-term assets |
|
|
15 |
|
|
|
(1,528 |
) |
Accounts payable |
|
|
(1,160 |
) |
|
|
128 |
|
Accounts payable and accrued liabilities, related party |
|
|
5 |
|
|
|
— |
|
Accrued liabilities |
|
|
326 |
|
|
|
(2,792 |
) |
Operating lease liabilities |
|
|
(249 |
) |
|
|
(209 |
) |
Long-term liabilities |
|
|
(22 |
) |
|
|
55 |
|
Net cash used in operating activities |
|
$ |
(2,486 |
) |
|
$ |
(23,142 |
) |
Cash flows from investing activities: |
|
|
|
|
|
|
Issuance of promissory loan in connection with asset acquisition |
|
|
(5,000 |
) |
|
|
— |
|
Cash paid in connection with asset acquisition, net of cash acquired |
|
|
(4,645 |
) |
|
|
— |
|
Purchase of marketable securities |
|
|
— |
|
|
|
(55,985 |
) |
Proceeds from maturities of marketable securities |
|
|
13,751 |
|
|
|
60,181 |
|
Net cash provided by investing activities |
|
$ |
4,106 |
|
|
$ |
4,196 |
|
Cash flows from financing activities: |
|
|
|
|
|
|
Proceeds from issuance of common stock in private placement, net of issuance costs |
|
|
119,750 |
|
|
|
— |
|
Proceeds from the exercise of stock options |
|
|
8,667 |
|
|
|
25 |
|
Net cash provided by financing activities |
|
$ |
128,417 |
|
|
$ |
25 |
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(9 |
) |
|
|
630 |
|
Net change in cash and cash equivalents |
|
$ |
130,028 |
|
|
$ |
(18,291 |
) |
Cash and cash equivalents at beginning of period |
|
|
93,112 |
|
|
|
43,585 |
|
Cash and cash equivalents at end of period |
|
$ |
223,140 |
|
|
$ |
25,294 |
|
Supplemental disclosure of cash operating activities: |
|
|
|
|
|
|
Cash paid for leases included in operating cash outflows |
|
$ |
263 |
|
|
$ |
244 |
|
Supplemental disclosure of non-cash investing and financing activities: |
|
|
|
|
|
|
Issuance of common stock in exchange for in-process research and development |
|
$ |
41,867 |
|
|
$ |
— |
|
Settlement of promissory loan in connection with asset acquisition |
|
$ |
5,036 |
|
|
$ |
— |
|
Right-of-use assets obtained in exchange for lease liabilities |
|
$ |
— |
|
|
$ |
313 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Eliem Therapeutics, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Description of Organization and Summary of Significant Accounting Policies
Organization
Eliem Therapeutics, Inc. (the Company) is a biotechnology company focused on developing therapeutics for autoimmune-driven inflammatory diseases, including budoprutug (previously referred to as TNT119), an anti-CD19 monoclonal antibody designed for a broad range of autoimmune diseases, including systemic lupus erythematosus and lupus nephritis (SLE/LN), immune thrombocytopenia (ITP), and membranous nephropathy (MN). The Company was incorporated on October 18, 2018 as a Delaware corporation and is headquartered in Delaware.
On June 27, 2024, the Company completed its acquisition of Tenet Medicines, Inc. (the Acquisition). In connection with the closing of the Acquisition, the Company issued and sold 31,238,282 shares of its common stock at a price of $3.84 per share in a private placement to several accredited institutional investors (the Private Placement). The Company received aggregate gross proceeds from the Private Placement of approximately $120.0 million, before deducting offering costs of $0.3 million.
For additional information on the Acquisition and Private Placement, please refer to Note 2, Asset Acquisition and Private Placement with a Related Party, in these interim condensed consolidated financial statements.
Previously, the Company focused primarily on developing novel therapies for neuronal excitability disorders to address unmet needs in psychiatry, epilepsy, chronic pain, and other disorders of the peripheral and central nervous systems, and the Company’s lead program was ETX-123, a Kv7.2/3 potassium channel opener. ETX-123 is designed to harness the efficacy of the Kv7.2/3 channel mechanism while attempting to improve the safety and tolerability relative to earlier molecules, based on the Company’s insights into the mechanisms of toxicity and the potency and selectivity profile. In July 2023, the Company made the determination to pause further development of its Kv7 program, and the Company continues to evaluate its Kv7 program, including seeking a partner for further development of both Kv7 and its clinical stage program ETX-155.
Basis of Presentation and Principles of Consolidation
The accompanying interim condensed consolidated financial statements of the Company and its wholly owned subsidiaries have been prepared in conformity with accounting principles generally accepted in the United States (U.S. GAAP) and accordance with the rules and regulations of the U.S. Securities and Exchange Commission (SEC) for Quarterly Reports on Form 10-Q. All intercompany transactions and balances have been eliminated in consolidation.
The accompanying condensed consolidated balance sheet as of June 30, 2024, and condensed consolidated statements of operations and comprehensive loss, condensed consolidated statements of cash flows, and condensed consolidated statements of stockholders’ equity for the three and six months ended June 30, 2024 and 2023, are unaudited. The consolidated balance sheet as of December 31, 2023 was derived from the audited financial statements as of and for the year ended December 31, 2023, but does not include all disclosures required by U.S. GAAP. The unaudited interim condensed financial statements have been prepared on a basis consistent with the audited annual financial statements as of and for the year ended December 31, 2023, and, in the opinion of management, reflect all adjustments, consisting solely of normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of June 30, 2024, the condensed results of its operations as of the three and six months ended June 30, 2024 and 2023, and its cash flows for the six months ended June 30, 2024 and 2023. The financial data and other information disclosed in these notes related to the three and six months ended June 30, 2024 and 2023 are also unaudited. The condensed consolidated results of operations for the three and six months ended June 30, 2024 are not necessarily indicative of the results to be expected for the full year ending December 31, 2024 or any other period. These interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in the Company’s Annual Report on Form 10-K filed with the SEC on March 28, 2024.
Liquidity
Since inception, the Company has experienced recurring losses from operations and generated negative cash flows from operations. The Company has an accumulated deficit of $212.6 million as of June 30, 2024 and expects to incur additional losses from operations in the future. The Company received net proceeds of $119.7 million from the sale and issuance of shares in the Private Placement.
The Company estimates the available cash and cash equivalents of $223.1 million as of June 30, 2024 will be sufficient to meet its projected operating requirements for at least the next twelve months from the filing date of these unaudited condensed consolidated financial statements and the Company anticipates that it will need to raise substantial financing in the future to fund its operations.
The Company may finance future cash needs through equity offerings, debt financings, collaborations, strategic alliances and marketing, distribution or licensing arrangements. In addition, the Company may continue to rely on capital markets for funding. There are no assurances that the Company will be able to raise sufficient amounts of funding in the future on acceptable terms, or at all.
Use of Estimates
The preparation of the interim condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Key management estimates include those related to the accrual of research and development expenses, recoverable research and development tax credits, and the valuation of stock-based awards. The Company evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors and adjusts those estimates and assumptions when facts and circumstances dictate. Actual results could differ from those estimates.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company’s cash is held by three financial institutions in the United States (U.S.) and two financial institutions in the United Kingdom (U.K.). The Company does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships. The Company’s deposits held in the U.S. and U.K. may exceed the insured limits of the Federal Depository Insurance Corporation and Financial Services Compensation Scheme, respectively. As of June 30, 2024, the Company has investments in money market funds which are held in segregated accounts at a third-party custodian. The Company has established guidelines relative to credit ratings and maturities intended to safeguard principal balances and maintain liquidity. Through June 30, 2024, and the date of this filing, the Company has not experienced any losses on such deposits.
Risks and Uncertainties
The Company is subject to risks and uncertainties common to early-stage companies in the biotechnology industry, including, but not limited to, development by competitors of new technological innovations, protection of proprietary technology, dependence on key personnel, reliance on single-source vendors and collaborators, availability of raw materials, patentability of the Company’s product candidates and processes and clinical efficacy and safety of budoprutug or any future product candidate the Company may develop, compliance with government regulations and the need to obtain additional financing to fund operations. Budoprutug or any future product candidate the Company may develop will require significant additional research and development efforts, including extensive preclinical studies, clinical trials, and regulatory approval, prior to commercialization. These efforts will require significant amounts of additional capital, adequate personnel infrastructure and extensive compliance and reporting.
There can be no assurance that any future research and development will be successfully completed, that adequate protection for the Company’s intellectual property will be obtained or maintained, that any product candidates developed will obtain necessary government regulatory approval or that any approved products will be commercially viable. Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the Company will generate revenue from product sales. The Company operates in an environment of rapid technological change and substantial competition from other pharmaceutical and biotechnology companies. In addition, the Company is dependent upon the services of its employees, consultants and other third parties.
Segments
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker (the CODM). The Company’s CODM is its chief executive officer who reviews financial information together with certain operating metrics principally to make decisions about how to allocate resources and to measure the Company’s performance. Management has determined that the Company operates as a single operating and reportable segment. The Company’s CODM evaluates financial information on a consolidated basis. As the Company operates as one operating segment, all required segment financial information is found in the interim condensed consolidated financial statements.
Fair Value Measurement
Assets and liabilities recorded at fair value on a recurring basis in the balance sheet are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined as the exchange price that would be received for an asset or an exit price that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The Company measures fair value based on a three-tier hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value as follows:
Level 1—Observable inputs such as unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
Level 2—Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the assets or liabilities. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
In determining fair value, the Company utilizes quoted market prices, or valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value.
There were no transfers into or out of Level 3 for any of the periods presented.
The Company’s fair value measurements as of June 30, 2024 and December 31, 2023 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2024 |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Balance |
|
Assets: |
|
|
|
|
|
|
|
|
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
218,118 |
|
|
$ |
— |
|
|
$ |
218,118 |
|
Total assets |
|
$ |
218,118 |
|
|
$ |
— |
|
|
$ |
218,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2023 |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Balance |
|
Assets: |
|
|
|
|
|
|
|
|
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
89,197 |
|
|
$ |
— |
|
|
$ |
89,197 |
|
Marketable securities: |
|
|
|
|
|
|
|
|
|
U.S. Treasury securities |
|
|
8,962 |
|
|
|
— |
|
|
|
8,962 |
|
U.S. government agency debt securities |
|
|
— |
|
|
|
4,724 |
|
|
|
4,724 |
|
Total marketable securities |
|
|
8,962 |
|
|
|
4,724 |
|
|
|
13,686 |
|
Total assets |
|
$ |
98,159 |
|
|
$ |
4,724 |
|
|
$ |
102,883 |
|
Summary of Significant Accounting Policies
Asset Acquisitions
In accordance with the guidance in Topic 805, Business Combinations, in the Financial Accounting Standards Board’s (the FASB) Accounting Standards Codification (ASC), the Company evaluates acquisitions of assets and related liabilities and other similar transactions to assess whether or not the transaction should be accounted for as a business combination or asset acquisition by first applying a screen test to determine if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If the screen test is met, the transaction is accounted for as an asset acquisition. If the screen test is not met, further determination is required as to whether or not the Company has acquired inputs and processes that have the ability to create outputs which would meet the requirements of a business. The Company accounts for an asset acquisition by recognizing net assets based on the cost to the acquiring entity on a relative fair value basis. Goodwill is not recognized in an asset acquisition; any excess consideration transferred over the fair value of the net assets acquired is allocated to the non-monetary identifiable assets and liabilities assumed based on relative fair values. In-process research and development acquired in an asset acquisition is expensed provided there is no alternative future use. The Company accounts for future payments such as those upon achievement of certain regulatory, development or sales milestones in such asset acquisitions when the underlying milestones are achieved. Milestone payments made to third parties subsequent to regulatory approval may be capitalized as intangible assets, if deemed to have alternative future use, and amortized over the estimated remaining useful life of the related product.
There have been no other material revisions in the Company’s significant accounting policies described in Note 2 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.
Recently Adopted Accounting Pronouncements
In August 2020, the FASB issued Accounting Standards Update (ASU) No. 2020-06 (ASU 2020-06), Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging —Contracts in Entity’s Own Equity (Subtopic 815-40)—Accounting For Convertible Instruments and Contracts in an Entity’s Own Equity. The standard simplifies accounting for convertible instruments by removing major separation models required under current GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. ASU 2020-06 removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The standard also simplifies the diluted net income per share calculation in certain areas. The effective date of this update for non-public companies is for fiscal years beginning after December 15, 2023, including interim periods therein. Early adoption is permitted for fiscal years beginning after December 15, 2020 and interim periods therein. The Company adopted ASU 2020-06 on January 1, 2024, which did not have a material impact on its consolidated financial statements.
Recent Accounting Pronouncements Not Yet Adopted
In November 2023, the FASB issued ASU No. 2023-07 (ASU 2023-07), Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures which requires, among other things, the following: (i) enhanced disclosures about significant segment expenses that are regularly provided to the CODM and included in a segment's reported measure of profit or loss; (ii) disclosure of the amount and description of the composition of other segment items, as defined in ASU 2023-07, by reportable segment; and (iii) reporting the disclosures about each reportable segment's profit or loss and assets on an annual and interim basis. The provisions of ASU 2023-07 are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024; early adoption is permitted. The Company expects ASU 2023-07 to require additional disclosures in the notes to its consolidated financial statements.
In December 2023, the FASB issued ASU No. 2023-09 (ASU 2023-09), Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires, among other things, the following for public business entities: (i) enhanced disclosures of specific categories of reconciling items included in the rate reconciliation, as well as additional information for any of these items meeting certain qualitative and quantitative thresholds; (ii) disclosure of the nature, effect and underlying causes of each individual reconciling item disclosed in the rate reconciliation and the judgment used in categorizing them if not otherwise evident; and (iii) enhanced disclosures for income taxes paid, which includes federal, state, and foreign taxes, as well as for individual jurisdictions over a certain quantitative threshold. The amendments in ASU 2023-09 eliminate the requirement to disclose the nature and estimate of the range of the reasonably possible change in unrecognized tax benefits for the 12 months after the balance sheet date. The effective date of this update for non-public companies is for fiscal years beginning after December 15, 2025; early adoption is permitted. The Company expects ASU 2023-09 to require additional disclosures in the notes to its consolidated financial statements.
There were no other significant updates to the recently issued accounting standards other than as disclosed herewith for the six months ended June 30, 2024. Although there are several other new accounting pronouncements issued or proposed by the FASB, the Company does not believe any of those accounting pronouncements have had or will have a material impact on its financial position or operating results.
2. Asset Acquisition and Private Placement with a Related Party
Background
The Company entered into (i) an Agreement and Plan of Merger and Reorganization, dated as of April 10, 2024 (the Acquisition Agreement), by and among the Company, Tango Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of the Company (Transitory Subsidiary), Tenet Medicines, Inc. (Tenet), a Delaware corporation, and, solely in his capacity as Tenet equityholder representative, Stephen Thomas, providing for the acquisition of Tenet by the Company through the merger of Transitory Subsidiary into Tenet, with Tenet surviving as a wholly owned subsidiary of the Company, (ii) a Securities Purchase Agreement, dated as of April 10, 2024 (the Securities Purchase Agreement), by and among the Company and several accredited institutional investors (the PIPE Investors) including funds affiliated with RA Capital Management, L.P. (RA Capital Management), pursuant to which the Company agreed to issue and sell to the PIPE Investors in the Private Placement an aggregate of 31,238,282 shares (the PIPE Shares) of the Company’s common stock , and (iii) a registration rights agreement with the PIPE Investors, pursuant to which the Company agreed to register for resale the PIPE Shares.
On June 27, 2024, the Company completed its acquisition of Tenet in accordance with the terms of the Acquisition Agreement. Tenet is a development stage biotechnology company that was majority-owned by funds affiliated with RA Capital Management prior to the closing of the Acquisition. Immediately prior to the closing of the Acquisition and Private Placement, RA Capital Management beneficially owned approximately 43.9% of the Company’s outstanding common stock. The Private Placement closed immediately following the closing of the Acquisition. The Company received aggregate gross proceeds from the Private Placement of approximately $120.0 million, before deducting offering costs of $0.3 million. The offering costs were recorded as a reduction of additional paid-in capital generated in connection with the Private Placement.
At the effective time of the Acquisition, by virtue of the Acquisition and without any action on the part of the holders of common stock of Tenet, (i) all issued and outstanding shares of the common stock of Tenet and (ii) all securities convertible into shares of common stock of Tenet were converted into the right to receive, in the aggregate, 5,560,047 shares of the Company’s common stock.
Basis of Presentation
In accordance with the ASC Topic 805, Business Combinations, the Company first evaluated the initial screen test to determine if substantially all of the fair value of the gross assets acquired of Tenet was concentrated in a single asset or a group of similar assets. The Company concluded that substantially all of the fair value of the gross assets being acquired of Tenet was concentrated in the in-process research and development related to the budoprutug asset (IPR&D). Accordingly, the Company accounted for the Acquisition as an asset acquisition. In accordance with the asset acquisition method of accounting, the cost of the asset acquisition, which reflects the consideration transferred, (i) was allocated to the assets acquired and liabilities assumed on a relative fair value basis, (ii) no goodwill was recorded and (iii) all direct transaction costs were included in the total consideration transferred.
As illustrated further below, the amount of the consideration transferred that was allocated to the IPR&D was $51.7 million, which was expensed on the condensed consolidated statements of operations and comprehensive loss, as the IPR&D was determined to have no future alternative use at the closing of the Acquisition.
Consideration Transferred
The fair value of the total consideration was approximately $52.8 million and is comprised of the following components (in thousands):
|
|
|
|
Equity consideration |
$ |
41,867 |
|
Settlement of pre-existing loan |
|
5,036 |
|
Direct transaction costs |
|
5,849 |
|
Total consideration |
$ |
52,752 |
|
•Equity consideration: Based on: (i) the issuance of 5,560,047 shares of the Company’s common stock issued to the equityholders of Tenet and (ii) the closing stock price of the Company’s common stock on the Nasdaq Global Market on June 27, 2024, which was $7.53 per share.
•Settlement of pre-existing loan: In May 2024, the Company and Tenet entered into a Senior Secured Promissory Note (the Note) providing for the Company to make short-term loans to Tenet up to an aggregate principal amount of $15.0 million. Pursuant to the Note, the Company made a loan (the Loan) of $5.0 million to Tenet in order to provide it with sufficient cash to fund its operations prior to the consummation of the Acquisition. The Loan included simple interest at a fixed rate per annum of 6%. Upon closing of the Acquisition, the Loan and accrued interest were eliminated in the interim condensed consolidated financial statements as the preexisting relationship was effectively settled and included in consideration transferred. Further, as the carrying value of the Loan was determined to approximate fair value at the time of the Acquisition, no gain or loss was recorded upon the effective settlement.
•Transaction costs: Represents the direct transaction costs, primarily legal and advisory services incurred by the Company in connection with the Acquisition.
Purchase Price Allocation
The following is the allocation of the purchase consideration for the Acquisition based on the fair value of the net assets acquired by the Company (in thousands):
|
|
|
|
Assets acquired |
|
|
In-process research and development |
$ |
51,659 |
|
Cash and cash equivalents |
|
1,204 |
|
Prepaid expenses and other current assets |
|
1,861 |
|
Total assets acquired |
$ |
54,724 |
|
Liabilities assumed |
|
|
Accounts payable |
|
(1,603 |
) |
Accounts payable, related party |
|
(101 |
) |
Accrued expenses and other current liabilities |
|
(192 |
) |
Accrued expenses, related party |
|
(76 |
) |
Total liabilities assumed |
$ |
(1,972 |
) |
Net assets acquired |
$ |
52,752 |
|
3. Investments
As of June 30, 2024, the Company had no available-for-sale securities.
As of December 31, 2023, investments consisted of the following available-for-sale securities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost |
|
|
Unrealized Loss |
|
|
Estimated Fair
Value |
|
Short-term marketable securities: |
|
|
|
|
|
|
|
|
|
U.S. Treasury securities |
|
$ |
8,962 |
|
|
$ |
— |
|
|
$ |
8,962 |
|
U.S. government agency debt securities |
|
|
4,726 |
|
|
|
(2 |
) |
|
$ |
4,724 |
|
Total short-term marketable securities |
|
$ |
13,688 |
|
|
$ |
(2 |
) |
|
$ |
13,686 |
|
There was no material realized gain or loss on available-for-sale securities during the period ended June 30, 2024 or December 31, 2023.
As of December 31, 2023, investments in a continual unrealized loss position for less than 12 months consist of the following (in thousands):
|
|
|
|
|
|
|
December 31, 2023 |
|
|
|
Fair Value |
|
U.S. Treasury securities |
|
$ |
5,967 |
|
U.S government agency debt securities |
|
|
2,234 |
|
Total available-for-sale securities |
|
$ |
8,201 |
|
4. Certain Balance Sheet Accounts
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, 2024 |
|
|
December 31, 2023 |
|
Research and development expenses |
|
|
1,858 |
|
|
|
34 |
|
Other assets |
|
|
696 |
|
|
|
552 |
|
Prepaid expenses |
|
|
303 |
|
|
|
847 |
|
Recoverable research and development tax credits |
|
|
— |
|
|
|
2,024 |
|
Total prepaid expenses and other current assets |
|
$ |
2,857 |
|
|
$ |
3,457 |
|
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, 2024 |
|
|
December 31, 2023 |
|
Accrued payroll expenses |
|
$ |
1,342 |
|
|
$ |
1,111 |
|
Other accrued expenses |
|
|
1,283 |
|
|
|
90 |
|
Other current liabilities |
|
|
231 |
|
|
|
138 |
|
Accrued expenses, related party |
|
|
81 |
|
|
|
— |
|
Accrued research and development expenses |
|
|
60 |
|
|
|
28 |
|
Accrued restructuring costs |
|
|
34 |
|
|
|
1,066 |
|
Total accrued expenses |
|
$ |
3,031 |
|
|
$ |
2,433 |
|
5. Related Party Transactions
As a result of the Acquisition, the following agreement of Tenet effectively became an agreement of the Company.
Services Agreement with Sera Services, Inc.
In November 2023, Tenet entered into an agreement (the Sera Services Agreement) with Sera Services, Inc. (Sera Services), a wholly-owned subsidiary of Sera Medicines, LLC (Sera Medicines), which was subsequently transferred to the Company by operation of law upon the closing of the Acquisition, pursuant to which Sera Services provides research and other services to the Company. Sera Medicines is an entity controlled by RA Capital Management. Dr. Stephen Thomas, a current board member of the Company, owns a minority ownership in and is also a board member of Sera Medicines.
Under the terms of the Sera Services Agreement, the Company compensates Sera Services on a fully burdened cost basis for personnel time devoted to Company projects. In addition, the Company reimburses Sera Services on a cost basis for any subcontractor costs incurred. The Company pays Sera Services on a monthly basis, in arrears, for services performed and costs incurred. The Sera Services Agreement has a term of two years and will automatically renew on its anniversary date for additional one-year terms. The Company may terminate the Sera Services Agreement by giving 30 days’ prior notice to Sera Services.
In connection with the closing of the Acquisition, the Company assumed accounts payable of $0.1 million and accrued liabilities of $0.1 million related to the Sera Services Agreement, which are reflected in the interim condensed consolidated balance sheet as of June 30, 2024. There were no material costs incurred under the Sera Services Agreement recorded in the interim condensed consolidated statement of operations.
Refer to Note 2, Asset Acquisition and Private Placement with a Related Party, in these interim condensed consolidated financial statements for additional related party transactions.
6. License Agreements
As a result of the Acquisition, the following agreements of Tenet effectively became agreements of the Company.
Acelyrin Asset Purchase Agreement
On January 11, 2024, Tenet entered into an asset purchase agreement (the Asset Purchase Agreement) with Acelyrin, Inc. (Acelyrin) and WH2, LLC, which was subsequently transferred to the Company by operation of law upon the closing of the Acquisition, providing for the acquisition of certain assets of Acelyrin related to budoprutug (the Transferred Assets), including certain assigned contracts. Under these assigned contracts, the Company (i) received worldwide licenses (with the right to sublicense) to certain patents, know-how and other intellectual property rights to develop, manufacture, use and commercialize budoprutug for any non-oncology indication, and (ii) assumed certain liabilities of Acelyrin arising from (1) governmental authority action or notification relating to budoprutug, (2) contracts assigned to the Company pursuant to the Asset Purchase Agreement and (3) the Company’s ownership, lease or operation of the Transferred Assets.
In addition, the Company inherited the rights and obligations, including financial obligations, under the CRH Agreement (as defined below) and the ProBioGen Agreement (as defined below). In consideration for the license and other rights the Company received under the Asset Purchase Agreement, the Company is obligated to (i) make total payments of up to $157.5 million to Acelyrin upon the achievement of various development, regulatory and commercial milestones, (ii) pay royalties in the single-digit percentages, subject to specified reductions, to Acelyrin on worldwide net sales in a given calendar year, and (iii) make non-refundable and non-creditable payments to Acelyrin on sublicense income with rates ranging from the low single digit to mid teen percent depending on the stage of development of the most advanced Products (as defined below) at the time of such sublicense. The royalty term continues for each licensed product incorporating or comprising budoprutug (a Product) on a country-by-country and Product-by-Product basis beginning on the first commercial sale of such Product and ending on the latest of (a) the date when such Product is no longer covered by a valid claim of a royalty-bearing patent in such country, (b) the expiration of any regulatory exclusivity period for such Product in such country, and (c) the twelfth anniversary of the first commercial sale of such Product in such country.
The Company is obligated to use commercially reasonable efforts to commercialize at least one Product in the United States and to achieve specified development, regulatory and commercial milestones set forth in the Asset Purchase Agreement. If Acelyrin asserts that the Company has failed to meet one or more of these diligence obligations within specified time periods, and such failure is finally determined through a dispute resolution process, Acelyrin shall have the right to repurchase the Transferred Assets at the then-fair market value of such Transferred Assets, as Acelyrin’s sole and exclusive remedy for such breach.
If, within a specified period, the Company receives a bona fide offer or proposal from a third party to sell, transfer or otherwise divest all or substantially all of the rights to the Transferred Assets or Products, or grant an exclusive license or exclusive sublicense to such third party to develop and commercialize Products under specified terms, then prior to entering into any discussions or negotiations with any third party in relation to such a transaction, the Company shall provide written notice to Acelyrin of such intent or receipt of proposal. Acelyrin shall have the right to negotiate with the Company the terms for a definitive agreement with respect to such sale, transfer or grant of the rights to Products for a specified period of time. If Acelyrin does not exercise its right to negotiate or the parties are unable to agree on the terms of a definitive agreement, the Company shall have the right to negotiate or enter into an agreement with a third party with respect to such transaction, subject to specified conditions.
For a specified period after the Asset Purchase Agreement closing date, the Company shall not solicit, induce, or attempt to induce any employees of Acelyrin to become employees or independent contractors of the Company. If the Company does hire or engage an employee of Acelyrin during such period, the Company is obligated to make a certain payment to Acelyrin.
The Company may not sell, assign or transfer all or substantially all of the rights to develop or commercialize a Product unless, as a condition to such sale, assignment or transfer, the purchaser, assignee or transferee (as applicable) assumes in writing all obligations of the Company as set forth in the Asset Purchase Agreement with respect to the applicable Products.
As of June 30, 2024, the Company has not recognized milestone payments under the Asset Purchase Agreement as the underlying milestones were not achieved and are not assessed as probable.
CRH Agreement
In connection with the Asset Purchase Agreement, in January 2024 Tenet was assigned a license agreement with Cancer Research Technology Limited (CRH) and, in connection with such assignment, Tenet entered into an amended and restated license agreement with CRH (the CRH Agreement) which was subsequently transferred to the Company by operation of law upon the closing of the Acquisition. The CRH Agreement granted the Company a worldwide exclusive license (other than specified patent rights and materials, which are licensed to the Company on a non-exclusive basis) under certain know-how, patents and materials, or the licensed rights, to research, develop, test, manufacture or sell certain licensed products related to budoprutug, for all therapeutic uses except for oncology indications. The Company is permitted to grant a sublicense under these licenses with CRH’s prior written consent.
CRH retains, on behalf of itself and the charitable company Cancer Research U.K., a worldwide, fully paid-up, perpetual and irrevocable right in the licensed rights and in certain intellectual property owned or controlled by the Company that is necessary to exploit the licensed products and used, conceived or generated in the course of exercising the license or exploiting any licensed product, or product-specific foreground intellectual property, for the purpose of non-commercial, non-clinical scientific research.
The Company is obligated to use commercially reasonable efforts to perform all activities set forth in a mutually agreed-upon development plan within the timelines set forth therein. The Company is also obligated to develop at least one licensed product in an autoimmune indication and to pursue worldwide regulatory authorization for licensed products. The Company must use commercially reasonable efforts to commercialize each licensed product throughout each of the specified major markets as soon as practicable following receipt of regulatory authorization for such product in such market. Additionally, the Company must make the licensed product available through the U.K. and negotiate with relevant regulatory authorities to make each licensed product available through the National Health Service in England and Wales within a specified time of the licensed product being made available elsewhere in the territory. If the Company fails to meet one or more of these diligence obligations, and such failure is not remedied within the specified cure period, CRH shall have the right to terminate the CRH Agreement with respect to the relevant licensed product.
The Company is obligated to pay CRH a mid-five figure digit fee on each anniversary of the effective date. The Company is obligated pay up to an aggregate of £106.8 million ($135.1 million) upon the achievement of specified development, regulatory, commercial and sales milestone events, including: (i) payments of up to mid-six figure digits in pounds sterling for certain development milestones, (ii) payments of up to low-eight figures in pounds sterling per indication (for up to three indications) for certain regulatory and commercial milestones and (iii) payments up to mid-eight figures in pounds sterling for certain sales milestones. The Company is also obligated to pay tiered royalties ranging from a rate in the mid-single digit to high-single digit percentage on net sales. The royalty term continues for each licensed product on a country-by-country basis beginning on the first commercial sale of such licensed product and ending on the latest of (a) the date when such licensed product is no longer covered by a valid claim of a licensed patent in such country, (b) the expiration of the exclusivity period for such licensed product in such country, and (c) the tenth anniversary of the first commercial sale of such licensed product in such country. The Company is also responsible for a sublicensing revenue payment ranging from a rate in the mid-single digit to mid-double digits for any sublicense revenue.
The CRH Agreement shall remain in effect in each country in the territory until the expiry of the Company’s obligation to pay royalties in such country. Either party may terminate the CRH Agreement if the other party is in material breach that has not been remedied within the specified cure period or if the other party becomes insolvent. CRH also has the right to terminate the CRH Agreement if the Company or one of the Company’s sublicensees or affiliates challenges a licensed patent, or if the Company is acquired by a tobacco company.
As of June 30, 2024, the Company has not recognized milestone payments under the CRH Agreement as the underlying milestones were not achieved and are not assessed as probable.
ProBioGen Agreement
Under the Asset Purchase Agreement, Tenet was assigned a cell line development, manufacturing services and license agreement (the ProBioGen Agreement) originally entered into by ValenzaBio, Inc. and ProBioGen AG (ProBioGen) in February 2021, which was subsequently transferred to the Company by operation of law upon the closing of the Acquisition.
The ProBioGen Agreement granted the Company a non-exclusive license under certain know-how, patents and materials, to use cell lines in which ProBioGen’s proprietary technology is applied, to research, develop, manufacture, use, sell, offer to sell, import or export budoprutug. This license includes a non-exclusive sublicense by ProBioGen of certain third-party patent rights, limited to the use of budoprutug.
The Company is obligated to (i) make payments of up to €10.0 million ($10.7 million) upon the achievement of certain development, manufacturing and commercial milestones, including the start of a Phase 2 clinical trial for budoprutug, and (ii) make milestone payments of up to €7.0 million ($7.5 million) upon the achievement of certain sales milestones. If the Company elects to contract ProBioGen to perform certain manufacturing services for budoprutug, the milestone payments would be reduced by €1.1 million ($1.1 million).
The ProBioGen Agreement will remain in effect until the services are completed for the service-related component and until the payment obligations expire in connection with the commercial license component. Both parties have the right to terminate the ProBioGen Agreement if the other party becomes insolvent, or materially breaches the ProBioGen Agreement and fails to remedy such default within the specified cure period.
As of June 30, 2024, the Company has not recognized milestone payments under the ProBioGen Agreement as the underlying milestones were not achieved and are not assessed as probable.
7. Commitments and Contingencies
Facility Leases
The Company leases office space in the U.S. under a non-cancelable operating lease and leased office space in Cambridge, U.K. from May 2021 until June 30, 2024.
In November 2021, the Company agreed to lease approximately 5,000 square feet of office space in Bellevue, Washington. The term of this lease is 39 months, which commenced on November 1, 2021. The lease contains rent escalation clauses and an option to extend the term of the lease for an additional 3-year period at a market rate determined according to the lease. At the lease's inception and as of December 31, 2023, the Company does not expect that it will exercise its option to extend the lease, and therefore the period covered by this option is not included in the lease term.
In July 2023, the Company entered into a non-cancellable sublease agreement for the Bellevue office space, under the terms of which the Company is entitled to receive $0.2 million in lease payments over the term of the sublease, which commenced in July 2023 and ends concurrently with the original lease in January 2025. In advance of the sublease, the Company ceased use of and vacated the Bellevue office space in June 2023. The Company considered these circumstances to be an indicator of impairment and recorded an ROU asset impairment loss during the second quarter of 2023 of $0.2 million, which was the amount by which the carrying value of the lease ROU asset exceeded the fair value. The fair value is based on the discounted cash flows of anticipated net rental income for the office space subleased.
As of June 30, 2024, the remaining lease term was 0.6 years and the incremental borrowing rate used to determine the operating lease liability was 7.5%.
For each of the three months ended June 30, 2024 and 2023, the Company incurred $0.1 million in rent expense. For the six months ended June 30, 2024 and 2023, the Company incurred $0.1 million and $0.2 million in rent expense, respectively. Sublease income for the three and six months ended June 30, 2024 was $33,000 and $66,000 respectively, which was classified as a reduction in rent expense.
As of June 30, 2024, the annual future minimum lease payments due under the Company’s non-cancelable operating lease were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Lease |
|
|
Sublease |
|
|
Net Operating |
|
Year Ending December 31, |
|
Payments |
|
|
Income |
|
|
Lease Payments |
|
2024 (remaining 6 months) |
|
$ |
87 |
|
|
|
(66 |
) |
|
|
21 |
|
2025 |
|
|
15 |
|
|
|
(11 |
) |
|
|
4 |
|
Total undiscounted lease payments |
|
$ |
102 |
|
|
$ |
(77 |
) |
|
$ |
25 |
|
Present value adjustment |
|
|
(2 |
) |
|
|
|
|
|
|
Total operating lease liabilities |
|
$ |
100 |
|
|
|
|
|
|
|
Legal Proceedings
From time to time, the Company may have certain contingent liabilities that arise in the ordinary course of its business activities. The Company accrues a liability for such matters when it is probable that future expenditures will be made and that such expenditures can be reasonably estimated. Significant judgment is required to determine both probability and the estimated amount. As of the date of these condensed consolidated financial statements, the Company is not party to any material legal matters or claims.
Indemnification
In the ordinary course of business, the Company enters into agreements that may include indemnification provisions. Pursuant to such agreements, the Company may indemnify, hold harmless, and defend an indemnified party for losses suffered or incurred by the indemnified party. Some of the provisions will limit losses to those arising from third-party actions. In some cases, the indemnification will continue after the termination of the agreement. The maximum potential amount of future payments the Company could be required to make under these provisions is not determinable. The Company has never incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. The Company intends to enter into indemnification agreements with its directors and officers that may require the Company to indemnify its directors and officers against liabilities that may arise by reason of their status or service as directors or officers to the fullest extent permitted by Delaware corporate law. The Company currently has directors’ and officers’ insurance coverage that reduces its exposure and enables the Company to recover a portion of any future amounts paid. The Company believes the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is immaterial.
8. Stock-Based Compensation
2019 Plan
In 2019, the Company adopted the 2019 Equity Incentive Plan (the 2019 Plan). The 2019 Plan provided for the Company to grant qualified stock options, non-qualified stock options, and restricted stock awards to employees, non-employee directors and consultants of the Company under terms and provisions established by the Company’s board of directors. Under the terms of the 2019 Plan, options were granted at an exercise price no less than fair value of the Company’s common stock on the grant date, except in certain cases related to employees outside of the U.S. Option awards granted typically had 10-year terms measured from the option grant date. While no shares are available for future issuance under the 2019 Plan, it continues to govern outstanding equity awards granted thereunder.
2021 Plan and ESPP
The compensation committee of the Company’s board of directors adopted and the Company’s stockholders approved the 2021 Equity Incentive Plan (the 2021 Plan) and the 2021 Employee Stock Purchase Plan (the ESPP), which became effective in August 2021. The 2021 Plan provides for the grant of incentive stock options, non-statutory stock options, restricted stock awards, restricted stock units, stock appreciation rights and other stock-based awards. The Company’s employees, officers, directors and consultants are eligible to receive awards under the 2021 Plan. Under the terms of the 2021 Plan, options are granted at an exercise price no less than fair value of the Company’s common stock on the grant date, except in certain cases related to significant corporate transactions. Option awards granted typically have 10-year terms measured from the option grant date. As of June 30, 2024, the total number of shares authorized for issuance under the 2021 Plan was 7,010,850. Any shares that are returned under the 2019 Plan as a result of cancellation or forfeiture become available under the 2021 Plan. Further, the number of shares of common stock reserved for issuance under the 2021 Plan automatically increases on January 1 of each year, beginning on January 1, 2022, and continuing through and including January 1, 2031, by 5% of the total number of shares of common stock outstanding on December 31 of the immediately preceding calendar year, or a lesser number of shares determined by the Company’s board of directors prior to the applicable January 1st.
The ESPP allows employees, including executive officers, to contribute up to