The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed financial statements and related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and our final prospectus for our initial public offering, or IPO, filed with theSecurities and Exchange Commission , or theSEC , pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended, onJune 11, 2020 , or the Prospectus. This discussion and analysis contains forward-looking statements based upon our current plans and expectations that involve risks, uncertainties and assumptions, such as statements regarding our plans, objectives, expectations, intentions and beliefs. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under the section entitled "Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q. You should carefully read the "Risk Factors" section of this Quarterly Report on Form 10-Q to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Please also see the section entitled "Special Note Regarding Forward-Looking Statements."
Overview
We are a next-generation vaccine company seeking to improve global health by developing superior and novel vaccines designed to prevent or treat some of the most common and deadly infectious diseases worldwide. Our cell-free protein synthesis platform enables us to design and produce protein carriers and antigens, the critical building blocks of vaccines, in ways that we believe conventional vaccine technologies currently cannot. Our pipeline includes pneumococcal conjugate vaccine, or PCV, candidates that we believe are the most broad-spectrum PCV candidates currently in development, targeting the$7 billion global pneumococcal vaccine market. Our lead vaccine candidate is VAX-24, a 24-valent investigational PCV. We anticipate submitting our initial investigational new drug, or IND, application to theU.S. Food and Drug Administration , or FDA, for VAX-24 and initiating our Phase 1/2 clinical proof-of-concept study in the second half of 2021. We expect to announce topline data from this study in 2022. Our second PCV, known as VAX-XP, leverages our scalable and modular platform and builds on the technical proof of concept established by VAX-24 and, if approved, would expand the breadth of coverage to at least 30 strains, including emerging strains responsible for invasive pneumococcal disease, or IPD, without compromising immunogenicity due to carrier suppression. In addition to our PCV franchise, we are developing a novel conjugate vaccine candidate for Group A Strep and a novel protein vaccine candidate targeting the keystone pathogen responsible for periodontitis.
Since
• In
17,968,750 shares of common stock, including 2,343,750 shares
issued in
connection with the full exercise by the underwriters of their
option
to purchase additional shares of common stock, at$16.00 per
share for
gross proceeds of$287.5 million . The net proceeds were
approximately
$264.1 million after deducting underwriting discounts and
commissions
and other offering costs. In connection with the IPO, we also completed a one-for-1.6870 reverse stock split inJune 2020 . • During and since the second quarter 2020, we achieved several key manufacturing milestones for VAX-24, including release of the good manufacturing practices or GMP batches of the eCRM protein carrier, completion of the GMP batches of the 24 polysaccharide antigens and initiation of the GMP batches of the conjugate drug substances in preparation of our anticipated IND filing and Phase 1/2 clinical study initiation in the second half of 2021. • InJuly 2020 , our agreement with CARB-X related to our VAX-A1 program for Group A Strep was amended to increase the funding percentage from 50% to 90% for reimbursable expenses during the initial funding period. As a result, the initial funding amount increased from$1.6
million to
$2.7 million . We anticipate that the increase in the funding
percentage
for reimbursable expenses may apply to future funding periods and, if so, the total funding amount over the four-year period, if the options to extend are exercised by CARB-X, would increase from the$15.1 million in the original agreement. • InMay 2020 , we appointedAndrew Guggenhime as Chief Financial Officer and Chief Business Officer. InApril 2020 , we appointedHalley Gilbert to our board of directors. 18
-------------------------------------------------------------------------------- Since our inception inNovember 2013 , we have devoted substantially all of our resources to performing research and development, undertaking preclinical studies and enabling manufacturing activities in support of our product development efforts, acquiring and developing our technology and vaccine candidates, organizing and staffing our company, performing business planning, establishing our intellectual property portfolio and raising capital to support and expand such activities. We do not have any products approved for sale and have not generated any revenue from product sales. To date, we have financed our operations primarily with proceeds from the sales of our redeemable convertible preferred stock and our IPO. ThroughJune 30, 2020 , we have raised approximately$569.5 million in gross proceeds from the sale of our capital stock. We will continue to require additional capital to develop our vaccine candidates and fund operations for the foreseeable future. Accordingly, until such time as we can generate significant revenue from sales of our vaccine candidates, if ever, we expect to finance our cash needs through public or private equity or debt financings, third-party (including government) funding and marketing and distribution arrangements, as well as other collaborations, strategic alliances and licensing arrangements, or any combination of these approaches. We have incurred net losses in each year since inception and expect to continue to incur net losses in the foreseeable future. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending in large part on the timing of our preclinical studies, clinical trials and manufacturing activities, and our expenditures on other research and development activities. Our net losses were$20.3 million and$47.5 million for the three and six months endedJune 30, 2020 , respectively. As ofJune 30, 2020 , we had an accumulated deficit of$156.8 million . As ofJune 30, 2020 , we had cash and cash equivalents of$410.0 million , which we believe will be sufficient to fund our operating expenses and capital expenditure requirements through at least the completion and announcement of the topline data from our Phase 1/2 clinical proof-of-concept study of VAX-24 in adults, which we expect in 2022, and to continue to advance our pipeline of other vaccine candidates. We do not expect to generate any revenue from commercial product sales unless and until we successfully complete development and obtain regulatory approval for one or more of our vaccine candidates, which we expect will take a number of years. We expect our expenses will increase substantially in connection with our ongoing activities, as we: • advance vaccine candidates through preclinical studies and clinical trials; • require the manufacture of supplies for our preclinical studies and
clinical trials, in particular our lead vaccine candidate,
VAX-24;
• pursue regulatory approval of vaccine candidates; • hire additional personnel; • operate as a public company;
• acquire, discover, validate and develop additional vaccine candidates; and
• obtain, maintain, expand and protect our intellectual property portfolio.
We rely and will continue to rely on third parties to conduct our preclinical studies and clinical trials and for manufacturing and supply of our vaccine candidates. We have no internal manufacturing capabilities, and we will continue to rely on third parties, of which the main suppliers are single-source suppliers, for our preclinical and clinical trial materials. Given our stage of development, we do not yet have a marketing or sales organization or commercial infrastructure. Accordingly, if we obtain regulatory approval for any of our vaccine candidates, we also would expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. Because of the numerous risks and uncertainties associated with vaccine development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate revenue from the sale of our vaccines, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and may be forced to reduce our operations. 19 --------------------------------------------------------------------------------
Certain Significant Relationships
Sutro Biopharma
Vaxcyte was formed through its relationship with Sutro Biopharma, Inc., or Sutro Biopharma, in 2013 by our co-founders with the goal of utilizing Sutro Biopharma's proprietary XpressCF platform for protein synthesis in the field of vaccines addressing infectious diseases. In addition to receiving funding, we entered into a license agreement with Sutro Biopharma, or the Sutro License, onAugust 1, 2014 . The Sutro License was amended onOctober 12, 2015 and again onMay 9, 2018 andMay 29, 2018 . Under this license, we received an exclusive, worldwide, royalty-bearing, sublicensable license under Sutro Biopharma's patents and know-how relating to cell-free expression of proteins to (i) research, develop, use, sell, offer for sale, export, import and otherwise exploit specified vaccine compositions, such rights being sublicensable, for the treatment or prophylaxis of infectious diseases, excluding cancer vaccines, and (ii) manufacture, or have manufactured by an approved contract manufacturing organization, such vaccine compositions from extracts supplied by Sutro Biopharma pursuant to the Sutro Biopharma Supply Agreement (as described below). We are obligated to use commercially reasonable efforts to develop, obtain regulatory approval for and commercialize the vaccine compositions. In consideration of the rights granted under the Sutro License, we are obligated to pay Sutro Biopharma a 4% royalty on worldwide aggregate net sales of vaccine products for human health and a 2% royalty on such net sales of vaccine products for animal health. Such royalty rates are subject to specified reductions, including standard reductions for third-party payments and for expiration of relevant patent claims. Royalties are payable on a vaccine composition-by-vaccine composition and country-by-country basis until the later of expiration of the last valid claim in the licensed patents covering such vaccine composition in such country and ten years after the first commercial sale of such vaccine composition. In addition, we are obligated to pay Sutro Biopharma a percentage in the low-double digits of any net sublicensing revenue received for sublicense agreements executed beforeJuly 2020 . Our obligation to pay sublicense fees to Sutro Biopharma expired inJuly 2020 . InMay 2018 , we entered into a supply agreement, which we refer to as the Sutro Biopharma Supply Agreement, with Sutro Biopharma pursuant to which we purchase from Sutro Biopharma extract and custom reagents for use in manufacturing non-clinical and certain clinical supply of vaccine compositions utilizing the technology licensed under the Sutro License at prices not to exceed a specified percentage above Sutro Biopharma's fully burdened manufacturing cost. If any extracts or custom reagents do not meet the specifications and warranties provided, then we will not have an obligation to pay for the non-conforming product, and Sutro Biopharma will be obligated to replace the non-conforming product within the shortest possible time with conforming product at our cost. For additional details regarding our relationship with Sutro Biopharma, see Note 13, "Related Party Transactions," to our condensed financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Lonza
InOctober 2016 , we entered into a development and manufacturing services agreement withLonza Ltd. , or Lonza, which we refer to, as amended, as the 2016 Lonza Agreement, pursuant to which Lonza is obligated to perform manufacturing process development and clinical manufacture and supply of components for VAX-24, including the manufacture of polysaccharide antigens, our proprietary eCRM protein carrier and conjugated drug substances. InOctober 2018 , we entered into a second development and manufacturing services agreement with Lonza, which we refer to as the 2018 Lonza Agreement, and together with the 2016 Lonza Agreement, as the Lonza Agreements, pursuant to which Lonza is obligated to perform manufacturing process development and clinical manufacture and supply of VAX-24 finished drug product. InJune 2018 , we entered into a letter agreement, or the Lonza Letter Agreement, with Lonza, pursuant to which we agreed to certain terms for potential future equity payments as partial satisfaction of future obligations to Lonza under the Lonza Agreements. Specifically, we and Lonza agreed that the initial pre-IND cash payments made by us to Lonza are subject to a specified dollar cap, which we refer to as the Initial Cash Cap. After the Initial Cash Cap has been reached, then at our election, we can make any further pre-IND payments owed to Lonza under the Lonza Agreements in cash, equity at then market prevailing prices, or a combination of both. Lonza may elect to receive up to 25% of pre-IND payments in equity, up to a maximum of$2.5 million , and no more than$10 million of pre-IND payments may be satisfied by issuances of our common stock. 20 -------------------------------------------------------------------------------- Under the Lonza Agreements, we will pay Lonza agreed upon fees for Lonza's performance of manufacturing services, and we will reimburse Lonza for its out-of-pocket costs associated with purchasing raw materials, plus a customary handling fee. Each Lonza Agreement is managed by a steering committee and any dispute at the steering committee will be resolved by senior executives of the parties.
For additional details regarding our relationship with Lonza, see Note 5, "Commitments and Contingencies," to our condensed financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Impact of COVID-19
We are continuing to closely monitor the impact of the global COVID-19 pandemic on our business and are taking proactive efforts designed to protect the health and safety of our employees and to maintain business continuity. We believe that the measures we are implementing are appropriate and we will continue to monitor and seek to comply with guidance from governmental authorities and adjust our activities as appropriate. Based on guidance issued by federal, state and local authorities, we transitioned to a remote work model for our non-lab based employees inMarch 2020 , while maintaining essential in-person laboratory functions in order to advance key research and development initiatives, supported by the implementation of updated onsite safety procedures. While the COVID-19 pandemic has not yet resulted in a significant impact to our development timelines, as the pandemic continues, we could see an impact on our ability to advance our programs, obtain supplies from our contract manufacturer or interact with regulators, ethics committees or other important agencies due to limitations in regulatory authority, employee resources or otherwise. In any event, if the COVID-19 pandemic continues and persists for an extended period of time, we could experience significant disruptions to our development timelines, which would adversely affect our business, financial condition, results of operations and growth prospects. In addition, while the potential economic impact brought by, and the duration of, the COVID-19 pandemic may be difficult to assess or predict, the pandemic could result in significant and prolonged disruption of global financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity. In addition, a recession or market correction resulting from the spread of COVID-19 could materially affect our business and the potential value of our common stock. The extent of the impact of the COVID-19 pandemic on our development and regulatory efforts, our ability to raise sufficient additional capital on acceptable terms, if at all, and the value of and market for our common stock will depend on future developments that are highly uncertain and cannot be predicted with confidence at this time, such as the ultimate duration of the pandemic, travel restrictions, quarantines, social distancing and business closure requirements inthe United States and in other countries, and the effectiveness of actions taken globally to contain and treat COVID-19. For additional information about risks and uncertainties related to the COVID-19 pandemic that may impact our business, financial condition and results of operations, see the section titled "Risk Factors."
Components of Results of Operations
Operating Expenses
Research and Development
Research and development expenses represent costs incurred in performing research, development and manufacturing activities in support of our own product development efforts and include personnel-related costs (such as salaries, employee benefits and stock-based compensation) for our personnel in research and development functions; costs related to acquiring, developing and manufacturing supplies for preclinical studies, clinical trials and other studies, including fees paid to contract manufacturing organizations; costs and expenses related to agreements with contract research organizations, investigative sites and consultants to conduct non-clinical and preclinical studies and clinical trials; professional and consulting services costs; research and development consumables costs; laboratory supplies and equipment costs; and facility and other allocated costs. Research and development expenses are expensed as incurred. Non-refundable advance payments for services that will be used or rendered for future research and development activities are recorded as prepaid expenses and recognized as expenses as the related services are performed. We do not allocate our costs by vaccine candidates, as our vaccine candidates are at an early stage of development and our research and development expenses include internal costs, such as payroll and other personnel expenses, which are not tracked by vaccine candidate. In particular, with respect to internal costs, several of our departments support multiple vaccine candidate research and development programs. 21 -------------------------------------------------------------------------------- We expect our research and development expenses to increase substantially in absolute dollars for the foreseeable future as we advance our vaccine candidates into and through preclinical studies and clinical trials, pursue regulatory approval of our vaccine candidates and expand our pipeline of vaccine candidates. The process of conducting the necessary preclinical and clinical research to obtain regulatory approval is costly and time-consuming. The actual probability of success for our vaccine candidates may be affected by a variety of factors, including the safety and efficacy of our vaccine candidates, early clinical data, investment in our clinical programs, competition, manufacturing capability and commercial viability. We may never succeed in achieving regulatory approval for any of our vaccine candidates. As a result of the uncertainties discussed above, we are unable to determine the duration and completion costs of our research and development projects or if, when and to what extent we will generate revenue from the commercialization and sale of our vaccine candidates.
Our clinical development costs may vary significantly based on factors such as:
• the costs and timing of our CMC activities, including fulfilling
GMP-related standards and compliance, and identifying and
qualifying a
second supplier;
• the cost of clinical trials of our vaccine candidates being greater
than we anticipate;
• changes in the standard of care on which a clinical development plan
was based, which may require new or additional trials; • the number of sites included in the trials; • the countries in which the trials are conducted;
• delays in adding a sufficient number of trial sites and recruiting
suitable volunteers to participate in our clinical trials; • the number of subjects that participate in the trials; • the number of doses that subjects receive; • subjects dropping out of a study or lost in follow-up;
• potential additional safety monitoring requested by regulatory agencies;
• the duration of subject participation in the trials and follow-up; • the cost and timing of manufacturing our vaccine candidates; • the phase of development of our vaccine candidates; and • the efficacy and safety profile of our vaccine candidates.
General and Administrative
General and administrative expenses consist primarily of costs and expenses related to personnel (including salaries, employee benefits and stock-based compensation) in our executive, legal, finance and accounting, human resources and other administrative functions; legal services, including relating to intellectual property and corporate matters; accounting, auditing, consulting and tax services; insurance; and facility and other allocated costs not otherwise included in research and development expenses. We expect our general and administrative expenses to increase substantially in absolute dollars for the foreseeable future as we increase our headcount to support our continued research and development activities and grow our business. We also anticipate that we will incur increased expenses as a result of operating as a public company, including expenses related to audit, legal, regulatory and tax-related services associated with maintaining compliance withSEC rules and regulations and those of any national securities exchange on which our securities are traded, additional insurance expenses, investor relations activities and other administrative and professional services. 22 --------------------------------------------------------------------------------
Other Income (Expense), Net
Other income (expense), net includes interest expense incurred on our capital leases for lab equipment, interest income earned from our cash and cash equivalents, grant income, foreign currency transaction gains (losses) related to our Swiss Franc cash and liability balances and changes in the fair value of our redeemable convertible preferred stock tranche liability (see Note 2, "Basis of Presentation and Summary of Significant Accounting Policies," Note 3, "Fair Value Measurements and Fair Value of Financial Instruments," and Note 6, "Redeemable Convertible Preferred Stock," to our condensed financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for more detail).
Grant Income
InJuly 2019 , CARB-X awarded us up to$1.6 million in initial funding to advance the development of a universal vaccine to prevent infections caused by Group A Strep Bacteria. InJuly 2020 , the CARB-X agreement was amended to increase the funding percentage for reimbursable expenses during the initial funding period from 50% to 90%. As a result, the initial funding amount increased from$1.6 million to$2.7 million . Income is recognized as we incur and pay qualifying expenses over a period that ends onDecember 31, 2020 . Qualifying expenses under this funding arrangement are recorded as a receivable when we have both incurred and paid the expenses. We recognized$1.0 million and$1.4 million in grant income for funding research and development under this award during the three and six months endedJune 30, 2020 , respectively. We did not recognize any grant income during the three and six months endedJune 30, 2019 . Grant income is included as a component of Other income (expense), net in the condensed statements of operations and comprehensive loss.
Results of Operations
Comparison of the Three Months Ended
The following table summarizes our results of operations for the periods presented: Three Months Ended June 30, Change 2020 2019 $ % Operating expenses: Research and development$ 18,178 $ 9,968 $ 8,210 82.4 % General and administrative 3,046 2,264 782 34.5 % Total operating expenses 21,224 12,232 8,992 73.5 % Loss from operations (21,224 ) (12,232 ) (8,992 ) 73.5 % Other income (expense), net: Interest expense - (11 ) 11 (100.0 )% Interest income 44 181 (137 ) (75.7 )% Grant income 1,036 - 1,036 * Foreign currency transaction losses (176 ) (53 ) (123 ) 232.1 % Change in fair value of the redeemable convertible preferred stock tranche liability - 1,450 (1,450 ) * Total other income (expense), net 904 1,567
(663 ) (42.3 )%
Net loss and comprehensive loss
* not meaningful 23
--------------------------------------------------------------------------------
Operating Expenses
Research and Development Expenses
The following table summarizes our research and development expenses for the periods presented: Three Months Ended June 30, Change 2020 2019 $ %
Product and clinical development (1)
$ 6,506 102.7 % Personnel related 2,142 1,483 659 44.4 % Professional and consulting services 980 1,137 (157 ) (13.8 )% Research and development consumables 603 (82 ) 685 * Facility related and other allocated 997 545 452 82.9 % Laboratory supplies and equipment 452 376 76 20.2 % Other (2) 164 175 (11 ) (6.3 )%
Total research and development expenses
$ 8,210 82.4 %
(1) Includes expenses for third-party manufacturing and outsourced contract
services, including preclinical studies and outsourced assays.
(2) Includes travel-related expenses, warrant expense and other miscellaneous
office expenses. * not meaningful Research and development expenses increased by$8.2 million , or 82.4%, during the three months endedJune 30, 2020 compared to the corresponding period in 2019. The increase was primarily attributable to an increase of$6.5 million in product and clinical development expenses mainly related to our lead vaccine candidate, VAX-24, driven by a$5.3 million increase in costs related to outsourced manufacturing activities and a$1.6 million increase related to outsourced research services as a result of the ramp up of eCRM and polysaccharide GMP campaigns in preparation of our anticipated IND filing and Phase 1/2 clinical study initiation in the second half of 2021. The increase in research and development consumables was due to the progression of our VAX-24 program. In addition, we received a credit of$0.2 million from Sutro Biopharma during the quarter endedJune 30, 2019 as a result of the efficiency they gained in making extracts and reagents. The increase in personnel-related expenses of$0.7 million was primarily related to the increase in the number of employees to support the expanded activities in research and development.
General and Administrative Expenses
General and administrative expenses increased by$0.8 million , or 34.5%, during the three months endedJune 30, 2020 compared to the corresponding period in 2019. The increase was mainly due to an increase in personnel-related costs of$0.6 million related to higher stock-based compensation expense resulting from an increase in the fair value of our common stock and an increase in the number of employees in our general and administrative functions to support our growth.
Other Income (Expense), Net
Other income (expense), net decreased by$0.7 million , or 42.3%, during the three months endedJune 30, 2020 compared to the corresponding period in 2019. The decrease was primarily due to a$1.5 million decrease in the gain resulting from a change in the fair value of the redeemable convertible preferred stock tranche liability, which was settled inDecember 2019 , partially offset by an increase of$1.0 million in grant income for the CARB-X program, which started inJuly 2019 . 24
--------------------------------------------------------------------------------
Comparison of the Six Months Ended
The following table summarizes our results of operations for the periods presented: Six Months Ended June 30, Change 2020 2019 $ % Operating expenses: Research and development$ 42,493 $ 22,595 $ 19,898 88.1 % General and administrative 6,327 3,580 2,747 76.7 % Total operating expenses 48,820 26,175 22,645 86.5 % Loss from operations (48,820 ) (26,175 ) (22,645 ) 86.5 % Other income (expense), net: Interest expense (7 ) (24 ) 17 (70.8 )% Interest income 179 418 (239 ) (57.2 )% Grant income 1,365 - 1,365 * Foreign currency transaction losses (179 ) (231 ) 52 (22.5 )% Change in fair value of the redeemable convertible preferred stock tranche liability - 1,676 (1,676 ) * Total other income (expense), net 1,358 1,839
(481 ) (26.2 )%
Net loss and comprehensive loss
* not meaningful
Research and Development Expenses
The following table summarizes our research and development expenses for the periods presented: Six Months Ended June 30, Change 2020 2019 $ %
Product and clinical development (1)
$ 17,606 117.7 % Personnel related 4,098 2,816 1,282 45.5 % Professional and consulting services 2,032 2,221 (189 ) (8.5 )% Research and development consumables 698 392 306 78.1 % Facility related and other allocated 1,740 1,072 668 62.3 % Laboratory supplies and equipment 811 614 197 32.1 % Other (2) 547 519 28 5.4 %
Total research and development expenses
$ 19,898 88.1 %
(1) Includes expenses for third-party manufacturing and outsourced contract
services, including preclinical studies and outsourced assays.
(2) Includes travel-related expenses, warrant expense and other miscellaneous
office expenses.
Research and development expenses increased by$19.9 million , or 88.1%, during the six months endedJune 30, 2020 compared to the corresponding period in 2019. The increase was primarily attributable to an increase of$17.6 million in product and clinical development expenses mainly related to our lead vaccine candidate, VAX-24, which was driven by a$14.8 million increase in costs related to outsourced manufacturing activities and a$3.7 million increase in contracted research services as a result of the ramp up of eCRM and polysaccharide GMP campaigns in preparation of our anticipated IND filing and Phase 1/2 clinical study initiation in the second half of 2021. The increase in personnel-related expenses of$1.3 million was primarily related to the increase in the number of employees to support the expanded activities in research and development.
General and Administrative Expenses
General and administrative expenses increased by$2.7 million , or 76.7%, during the six months endedJune 30, 2020 compared to the corresponding period in 2019. The increase was primarily attributable to increases of$1.4 million related to increases in audit, tax and legal fees, and$1.0 million in personnel-related costs due to higher stock-based compensation expense resulting from an increase in the fair value of our common stock and an increase in the number of employees in our general and administrative functions to support our growth. 25 --------------------------------------------------------------------------------
Other Income (Expense), Net
Other income (expense), net decreased by$0.5 million , or 26.2%, during the six months endedJune 30, 2020 compared to the corresponding period in 2019. The decrease was primarily attributable to a$1.7 million decrease in income resulting from a change in the fair value of the redeemable convertible preferred stock tranche liability, which was settled in 2019, partially offset by$1.4 million in grant income for the CARB-X program, which commenced inJuly 2019 .
Liquidity and Capital Resources
We have incurred losses since inception and have incurred negative cash flows from operations from inception throughJune 30, 2020 . We have funded our operations to date primarily through equity financings totaling approximately$569.5 million in aggregate gross proceeds and$545.3 million net of underwriting discounts, commissions and offering expenses, including our IPO that was completed inJune 2020 . As ofJune 30, 2020 , we had$410.0 million of cash and cash equivalents and an accumulated deficit of$156.8 million .
Future Funding Requirements
Our primary uses of cash are to fund our operations, which consist primarily of research and development expenditures related to our programs and, to a lesser extent, general and administrative expenditures. We anticipate that we will continue to incur significant expenses for the foreseeable future as we continue to advance our vaccine candidates, expand our corporate infrastructure, including the costs associated with being a public company, further our research and development initiatives for our vaccine candidates and scale our laboratory and manufacturing operations. We are subject to all of the risks typically related to the development of new drug candidates, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. We anticipate that we will need substantial additional funding in connection with our continuing operations. We believe that our existing cash and cash equivalents as of the date of this Quarterly Report on Form 10-Q, which includes the net proceeds from our IPO completed inJune 2020 , will be sufficient to fund our operating expenses and capital expenditure requirements through at least the completion and announcement of the topline data from our Phase 1/2 clinical proof-of-concept study of VAX-24 in adults, which we expect in 2022, and to continue to advance our pipeline of other vaccine candidates. However, we will need to raise additional capital prior to commencing pivotal trials for any of our vaccine candidates. Until we can generate a sufficient amount of revenue from the commercialization of our vaccine candidates or from collaboration agreements with third parties, if ever, we expect to finance our future cash needs through public or private equity or debt financings, third-party (including government) funding and marketing and distribution arrangements, as well as other collaborations, strategic alliances and licensing arrangements, or any combination of these approaches. The sale of equity or convertible debt securities may result in dilution to our stockholders and, in the case of preferred equity securities or convertible debt, those securities could provide for rights, preferences or privileges senior to those of our common stock. Debt financings may subject us to covenant limitations or restrictions on our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Our ability to raise additional funds may be adversely impacted by deteriorating global economic conditions and the recent disruptions to and volatility in the credit and financial markets inthe United States and worldwide resulting from the ongoing COVID-19 pandemic. There can be no assurance that we will be successful in acquiring additional funding at levels sufficient to fund our operations or on terms favorable or acceptable to us. If we are unable to obtain adequate financing when needed or on terms favorable or acceptable to us, we may be forced to delay, reduce the scope of or eliminate one or more of our research and development programs.
Our future capital requirements will depend on many factors, including:
• the timing, scope, progress, results and costs of research and
development, testing, screening, manufacturing, preclinical and non-clinical studies and clinical trials, including any impacts related to the COVID-19 pandemic;
• the outcome, timing and cost of seeking and obtaining regulatory
approvals from the FDA and comparable foreign regulatory
authorities,
including the potential for such authorities to require that we perform field efficacy studies for our PCV candidates, require more studies than those that we currently expect or change their requirements regarding the data required to support a marketing application;
• the cost of building a sales force in anticipation of any product
commercialization; • the costs of future commercialization activities, including product manufacturing, marketing, sales, royalties and distribution, for any of our vaccine candidates for which we receive marketing approval; 26
--------------------------------------------------------------------------------
• our ability to maintain existing, and establish new, strategic
collaborations, licensing or other arrangements and the
financial terms
of any such agreements, including the timing and amount of any
future
milestone, royalty or other payments due under any such
agreement;
• any product liability or other lawsuits related to our products; • the revenue, if any, received from commercial sales, or sales to foreign governments, of our vaccine candidates for which we may receive marketing approval;
• the costs to establish, maintain, expand, enforce and defend the scope
of our intellectual property portfolio, including the amount and
timing
of any payments we may be required to make, or that we may
receive, in
connection with licensing, preparing, filing, prosecuting, defending and enforcing our patents or other intellectual property rights; • expenses needed to attract, hire and retain skilled personnel; • the costs of operating as a public company; and
• the impact of the COVID-19 pandemic, which may exacerbate the magnitude
of the factors discussed above. A change in the outcome of any of these or other variables could significantly change the costs and timing associated with the development of our vaccine candidates. Furthermore, our operating plans may change in the future, and we may need additional funds to meet operational needs and capital requirements associated with such change.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
Six Months Ended June 30, 2020 2019 (in thousands) Net cash used in operating activities$ (22,805 ) $ (23,281 ) Net cash used in investing activities (404 ) (182 ) Net cash provided by (used in) financing activities 374,279
(153 )
Net increase (decrease) in cash and cash equivalents
Cash Flows from Operating Activities
Net cash used in operating activities for the six months endedJune 30, 2020 was$22.8 million , which primarily resulted from a net loss of$47.5 million , partially offset by a net change in our operating assets and liabilities of$21.8 million and non-cash charges of$2.9 million . The net change in operating assets and liabilities of$21.8 million was primarily due to increases in accrued manufacturing expenses of$20.5 million related to outsourced manufacturing activities and accrued expenses of$2.0 million related primarily to increases in legal fees associated with our IPO, Series D preferred stock financing and patent filings, which were partially offset by a$0.8 million decrease in accounts payable due to timing of payments. Non-cash charges primarily consisted of$1.7 million in stock-based compensation expense and$0.7 million in depreciation and amortization. Net cash used in operating activities for the six months endedJune 30, 2019 was$23.3 million , which primarily resulted from a net loss of$24.3 million , partially offset by a net change in operating assets and liabilities of$1.6 million . The net change in operating assets and liabilities of$1.6 million was primarily due to an increase of$3.3 million related to outsourced manufacturing activities, partially offset by an increase of$0.8 million in prepaid expenses and other current assets and a decrease of$0.6 million in accrued compensation resulting from a partial bonus payout inDecember 2019 . Non-cash charges primarily consisted of a$1.7 million decrease in the fair value of our Series C redeemable convertible preferred stock tranche liability, partially offset by$0.6 million in depreciation and amortization expense and$0.5 million in stock-based compensation expense. 27 --------------------------------------------------------------------------------
Cash Flows from Investing Activities
Cash used in investing activities for the six months endedJune 30, 2020 and 2019 was$0.4 million and$0.2 million , respectively, which related primarily to purchases of lab equipment.
Cash Flows from Financing Activities
Cash provided by financing activities for the six months endedJune 30, 2020 was$374.3 million , which primarily consisted of net proceeds from our IPO of$264.1 million and net proceeds from the issuance of our Series D redeemable convertible preferred stock of$109.9 million .
Cash used in financing activities for the six months ended
Contractual Obligations and Commitments
The following table summarizes our contractual obligations and commitments atJune 30, 2020 : Payments Due by Period Less More than 1 - 3 3 - 5 than 1 Year Years Years 5 Years Total (in thousands) Operating lease obligations(1)$ 725 $ 168 $ - $ -$ 893 Capital lease obligations - - -
- - Total$ 725 $ 168 $ - $ -$ 893
(1) Consists of our corporate headquarters lease in
expires in
expires in
that expires in
We have certain payment obligations under various license agreements. Under these agreements, we are required to make milestone payments upon successful completion and achievement of certain intellectual property, clinical, regulatory and sales milestones. The payment obligations under the license agreements are contingent upon future events such as our achievement of specified development, clinical, regulatory and commercial milestones, and we will be required to make development milestone payments and royalty payments in connection with the sale of products developed under these agreements. As the achievement and timing of these future milestone payments are not probable or estimable, such amounts have not been included in our balance sheets as ofDecember 31, 2019 andJune 30, 2020 , or in the contractual obligations table above. See Note 13, "Related Party Transactions," to our condensed financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. We enter into agreements in the normal course of business with vendors for preclinical and non-clinical studies, manufacturing and supply of our preclinical materials and for other services and products used for operating purposes. These contracts are generally cancelable following a certain period after written notice, and therefore, we believe that our non-cancelable obligations under these agreements are not material and have not been included in the table above. Legal Contingencies From time to time, we may become involved in legal proceedings arising from the ordinary course of business. We record a liability for such matters when it is probable that future losses will be incurred and that such losses can be reasonably estimated. Significant judgment by us is required to determine both probability and the estimated amount.
Off-Balance Sheet Arrangements
During the periods presented we did not have, nor do we currently have, any
off-balance sheet arrangements as defined in the rules and regulations of the
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Critical Accounting Policies and Significant Judgments and Estimates
Our management's discussion and analysis of our financial condition and results of operations are based on our condensed financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America . The preparation of these condensed financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities in our condensed financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses and stock-based compensation. We base our estimates on historical experience, known trends and events and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There have been no significant changes in our critical accounting policies and estimates as compared to the critical accounting policies and significant judgments and estimates disclosed in Note 2, "Basis of Presentation and Summary of Significant Accounting Policies" to our condensed financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Emerging Growth Company Status
We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act, or the JOBS Act. Under the JOBS Act, emerging growth companies can delay the adoption of new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. Other exemptions and reduced reporting requirements under the JOBS Act for emerging growth companies include presentation of only two years of audited financial statements in a registration statement for an initial public offering, an exemption from the requirement to provide an auditor's report on internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, as amended, an exemption from any requirement that may be adopted by thePublic Company Accounting Oversight Board regarding mandatory audit firm rotation and less extensive disclosure about our executive compensation arrangements. We have elected to use the extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that (i) we are no longer an emerging growth company or (ii) we affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. However, as described in Note 3 to our financial statements included elsewhere in this Quarterly Report on Form 10-Q, we early adopted certain accounting standards, as the JOBS Act does not preclude an emerging growth company from adopting a new or revised accounting standard earlier than the time that such standard applies to private companies to the extent early adoption is permitted. As a result, our financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates. We will remain an emerging growth company until the earliest of (i) the last day of our first fiscal year in which we have total annual gross revenues of$1.07 billion or more, (ii) the last day of our fiscal year following the fifth anniversary of the consummation of the IPO, (iii) the date on which we are deemed to be a "large accelerated filer," under the rules of theSEC , which means the market value of equity securities that is held by non-affiliates exceeds$700.0 million as of the priorJune 30th and (iv) the date on which we have issued more than$1.0 billion in non-convertible debt securities during the prior three-year period.
Recently Adopted Accounting Pronouncements
See Note 2, "Basis of Presentation and Summary of Significant Accounting Policies," to our condensed financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information.
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