4D MOLECULAR THERAPEUTICS, INC.

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4D MOLECULAR THERAPEUTICS INC. Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

05/12/2022 | 04:34pm EDT
You should read the following discussion and analysis of our financial condition
and results of operations together with our financial statements and the related
notes included elsewhere in this Quarterly Report on Form 10-Q (this "report").
This discussion and analysis and other parts of this report contain
forward-looking statements based upon current beliefs, plans and expectations
related to future events and our future financial performance that involve
risks, uncertainties and assumptions, such as statements regarding our
intentions, plans, objectives, expectations, forecasts and projections. Our
actual results and the timing of selected events could differ materially from
those anticipated in these forward-looking statements as a result of several
factors, including those set forth under the section titled "Risk Factors" and
elsewhere in this report.

Overview

We are a clinical-stage gene therapy company pioneering the development of
product candidates using our targeted and evolved AAV vectors. We seek to unlock
the full potential of gene therapy using our platform, Therapeutic Vector
Evolution, which combines the power of directed evolution with our approximately
one billion synthetic capsid sequences to invent evolved vectors for use in
targeted gene therapy products. Our targeted and evolved vectors are invented
with the goal of being delivered through clinically routine, well-tolerated and
minimally invasive routes of administration, of transducing diseased cells in
target tissues efficiently, of having reduced immunogenicity and, where
relevant, of having resistance to pre-existing antibodies. We believe these key
design features will help us to potentially create targeted gene therapy product
candidates with improved therapeutic profiles, and address a broad range of
diseases from rare to large patient populations, including those that other gene
therapies are unable to address. Each of our product candidates is created with
our targeted and evolved AAV vectors. Our platform is designed to be modular, in
that an evolved vector invented for a given set of diseases can be equipped with
different transgene payloads to treat other diseases affecting the same tissue
types. We believe this modularity will help inform the clinical development of
subsequent product candidates using the same vector.

We have built a deep portfolio of gene therapy product candidates initially
focused in three therapeutic areas: ophthalmology (intravitreal vector),
cardiology (intravenous vector) and pulmonology (aerosol vector). We have five
product candidates that are in clinical trials: 4D-310 for the treatment of
Fabry disease in a Phase 1/2 clinical trial, 4D-150 for the treatment of wet AMD
in a Phase 1/2 clinical trial, 4D-125 for the treatment of X-linked retinitis
pigmentosa ("XLRP") in a Phase 1/2 clinical trial, 4D-110 for the treatment of
choroideremia in a Phase 1/2 clinical trial, and 4D-710 for the treatment of
cystic fibrosis in a Phase 1/2 clinical trial.

We have funded our operations primarily through the sale and issuance of equity securities and to a lesser extent from cash received pursuant to our collaboration and license agreements.


In November 2021, we completed our second underwritten public offering (the
"Follow-on Offering") in which 4,750,000 shares of our common stock were sold at
an offering price of $25.00 per share pursuant to an effective Registration
Statement on Form S-1. The net proceeds from the Follow-on Offering were $111.1
million after deducting underwriting discounts and commissions and offering
expenses. As of March 31, 2022, we had cash, cash equivalents and marketable
securities of $284.5 million.

We have incurred significant operating losses and expect that our operating
losses will increase significantly as we, among other things, continue to
advance our product candidates through preclinical and clinical development,
seek regulatory approval, and prepare for, and, if approved, proceed to
commercialization; broaden and improve our platform; acquire, discover, validate
and develop additional product candidates; maintain, protect and enforce our
intellectual property portfolio; and hire additional personnel. In addition, we
expect to incur additional costs associated with operating as a public company.

Our net losses were $26.3 million and $16.4 million for the three months ended
March 31, 2022 and 2021, respectively. As of March 31, 2022, we had an
accumulated deficit of $233.3 million. We do not expect positive cash flows from
operations in the foreseeable future. Our net losses may fluctuate significantly
from quarter-to-quarter and year-to-year, depending on the timing of our
clinical trials and our

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expenditures on other research and development activities, and due to other factors such as increased inflation.


We do not have any products approved for sale and have not generated any revenue
from product sales since our inception. Our ability to generate product revenue
will depend on the successful development, regulatory approval and eventual
commercialization of one or more of our product candidates, if approved.

We will require substantial additional funding to support our continuing
operations and further the development of our product candidates. Until such
time as we can generate significant revenue from product sales, if ever, we
expect to finance our operations through the sale of equity, debt financings, or
other capital sources, which could include income from collaborations, strategic
partnerships or other strategic arrangements, for the foreseeable future.
Adequate funding may not be available when needed or on terms acceptable to us,
or at all. Our ability to raise additional funds may be adversely impacted by
potential worsening global economic conditions and the recent disruptions to,
and volatility in, the credit and financial markets in the United States and
worldwide resulting from the ongoing COVID-19 pandemic and otherwise. If we fail
to obtain necessary capital when needed on acceptable terms, or at all, it could
force us to delay, limit, reduce or terminate our product development programs,
commercialization efforts or other operations. Insufficient liquidity may also
require us to relinquish rights to product candidates at an earlier stage of
development or on less favorable terms than we would otherwise choose. We cannot
assure you that we will ever be profitable or generate positive cash flow from
operating activities.

The global COVID-19 pandemic continues to rapidly evolve and we will continue to
monitor the COVID-19 situation closely. The extent of the impact of the COVID-19
pandemic on our business, operations and clinical development timelines and
plans remains uncertain, and will depend on certain developments, including the
duration and spread of the outbreak and its impact on our clinical trial
enrollment, trial sites, CROs, third-party manufacturers, and other third
parties with whom we do business, as well as its impact on regulatory
authorities and our key scientific and management personnel. To the extent
possible, we are conducting business as usual, with necessary or advisable
modifications to employee travel and the majority of our employees working
remotely. We will continue to actively monitor the rapidly evolving situation
related to the COVID-19 pandemic and may take further actions that alter our
operations, including those that may be required by federal, state or local
authorities, or that we determine are in the best interests of our employees and
other third parties with whom we do business. At this point, the extent to which
the COVID-19 pandemic may affect our business, operations and clinical
development timelines and plans, including the resulting impact on our
expenditures and capital needs, remains uncertain.

Components of Results of Operations

Revenue


Our revenue to date has been generated through payments from our collaboration
and license agreements, primarily from upfront and milestone payments and
expense reimbursement. We have not generated any revenue from the sale of
approved products and do not expect to do so for the foreseeable future. The
primary driver for revenue consists of revenue recognized under the agreement
with uniQure. In August 2019, we amended our agreement with uniQure and entered
into a separate new collaboration and license agreement with uniQure. Neither
party was required to pay monetary consideration in connection with the
amendment or new agreement. We determined the incremental transaction price of
the amendment and new agreement to be $5.1 million and recorded the amount as
deferred revenue. We recognized revenue of $1.2 million related to this
collaboration agreement during the three months ended March 31, 2022. See Note 7
to our unaudited condensed financial statements included elsewhere in this
report for further discussion regarding the accounting treatment of this
transaction.

Future collaboration and license revenue is highly dependent on the successful
development and commercialization of products by our collaboration partners,
which is uncertain, and revenue may fluctuate significantly from period to
period. Additionally, we may never receive the consideration from our license
agreements that is contemplated for option fees, development and sales-based
milestone payments or royalties on sales of licensed products, given the
contingent nature of these payments. We expect that our collaboration and
license revenue in 2022 will primarily be from uniQure.

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Operating Expenses

Research and Development

Our research and development expenses primarily consist of costs incurred for
the discovery and preclinical and clinical development of our product
candidates. These expenses include salaries and personnel-related costs,
including stock-based compensation of our scientific personnel performing
research and development activities; laboratory supplies; research materials;
fees paid to CROs to execute preclinical studies and clinical trials; fees paid
to CMOs to manufacture materials for preclinical studies and clinical trials;
fees related to obtaining technology licenses; consulting costs; costs related
to seeking regulatory approval of our product candidates; and allocated
facility-related costs, information technology costs, depreciation expense and
other overhead.

We expense all research and development costs in the periods in which they are
incurred. We have entered into various agreements with CROs and CMOs. Costs of
certain activities are recognized based on an evaluation of the progress to
completion of specific tasks. Payments made prior to the receipt of goods or
services that will be used or rendered for future research and development
activities are deferred and capitalized as prepaid expenses and other current
assets on our balance sheet. The capitalized amounts are recognized as expense
as the goods are delivered or the related services are performed.

We do not allocate our costs by product candidate, as a significant amount of
research and development expenses includes internal costs, such as salary and
other personnel-related expenses, laboratory supplies and allocated overhead,
and external costs, such as fees paid to third parties to conduct research and
development activities on our behalf, none of which are tracked by product
candidate. In particular, with respect to internal costs, several of our
departments support multiple product candidate research and development programs
and, therefore, the costs cannot be allocated to a particular product candidate
or development program.

At this time, we cannot reasonably estimate or know the nature, timing or
estimated costs of the efforts that will be necessary to complete the
development of, and obtain regulatory approval for, any of our product
candidates. We expect our research and development expenses to increase
substantially for the foreseeable future as we continue to invest in research
and development activities related to developing our product candidates, as our
product candidates advance into later stages of development, as we begin to
conduct larger clinical trials, as we seek regulatory approvals for any product
candidates that successfully complete clinical trials, and incur expenses
associated with hiring additional personnel to support our research and
development efforts. The process of conducting the necessary clinical research
to obtain regulatory approval is costly and time-consuming, and the successful
development of our product candidates is highly uncertain. See the section
titled "Risk Factors" for additional risks regarding regulatory development and
approval.

General and Administrative

Our general and administrative expenses consist primarily of personnel-related
expenses, including salaries, employee benefit costs and stock-based
compensation expense for our personnel in executive, finance and accounting,
human resources, business development, legal and other administrative functions.
General and administrative expenses also include professional fees for legal,
patent, consulting, accounting and tax services, allocated overhead, including
rent, equipment, depreciation, information technology costs and utilities, and
other general operating expenses not otherwise classified as research and
development expenses.

We expect our general and administrative expenses to increase as a result of
increased personnel-related costs, patent costs for our product candidates,
consulting, legal and accounting services associated with maintaining compliance
with stock exchange listing and requirements of the SEC, investor relations
costs, director and officer insurance premiums and other costs associated with
being a public company.

Other Income (Expense), Net

Our other income (expense), net primarily consists of interest income earned on
our cash equivalents and marketable securities and adjustments for the change in
the fair value of our derivative liability which must be remeasured at each
reporting date.

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Results of Operations

Comparison of the Three Months Ended March 31, 2022 and 2021

The following tables summarize our results of operations for the periods indicated (dollars in thousands):


                                      Three Months Ended March 31,
                                        2022                 2021           $ Change       % Change
Revenue                            $        1,219       $        2,000     $     (781 )          (39 )%
Operating Expenses:
Research and development                   19,381               12,769          6,612             52 %
General and administrative                  8,230                5,543          2,687             48 %
Total operating expenses                   27,611               18,312          9,299             51 %
Loss from operations                      (26,392 )            (16,312 )      (10,080 )           62 %
Other Income (Expense), Net                    54                  (94 )          148           (157 )%
Net loss                           $      (26,338 )     $      (16,406 )   $   (9,932 )           61 %


Revenue

Revenue decreased $0.8 million, or 39%, from the three months ended March 31,
2021 to the three months ended March 31, 2022 due to a $1.6 million decrease in
revenue recognized under our collaboration and license agreement with Roche
offset by an increase in revenue recognized under the uniQure Agreement of $0.8
million.

Research and Development Expenses

The following table provides a breakout of research and development expenses for the periods indicated (dollars in thousands):


                                       Three Months Ended March 31,
                                         2022                 2021           $ Change        % Change
Research and development trials
and consumables expenses            $        7,291       $        6,312     $       979              16 %
Payroll and personnel expenses               9,763                5,101           4,662              91 %
Facilities and other research and
development expenses                         2,327                1,356             971              72 %
Total research and development
expenses                            $       19,381       $       12,769     $     6,612              52 %



Research and development expenses increased $6.6 million, or 52%, from the three
months ended March 31, 2021 to the three months ended March 31, 2022. The
increase was primarily due to a $4.7 million increase in payroll and personnel
expenses (including a $1.0 million increase in employee stock-based
compensation) due to increased headcount of research and development personnel,
and a $2.2 million increase in clinical trial costs driven by the start-up of
two additional clinical Phase 1/2 trials for 4-D-150 and 4D-7010.

General and Administrative Expenses


General and administrative expenses increased $2.7 million, or 48%, from the
three months ended March 31, 2021 to the three months ended March 31, 2022. The
increase was primarily due to:

a $1.8 million increase for payroll and personnel expenses (including a $0.7
million increase in employee stock-based compensation) due to increased
headcount of general and administrative personnel, and a $0.9 million increase
in other costs, including consulting and facilities costs.

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Liquidity and Capital Resources

Sources of Liquidity


We have funded our operations primarily through the sale and issuance of our
equity securities, including from the sale of our common stock in our IPO and
Follow-on Offering and the sale of our redeemable preferred stock and to a
lesser extent from cash received pursuant to our collaboration and license
agreements.

In December 2020, we completed our IPO and we issued and sold 9,660,000 shares
of common stock at an offering price of $23.00 per share. The aggregate net
proceeds from our IPO were $204.7 million after deducting underwriting discounts
and commissions and other offering costs.

In November 2021, we completed our Follow-on Offering in which 4,750,000 shares
of our common stock were sold at an offering price of $25.00 per share. The
aggregate net proceeds from the Follow-on Offering were $111.1 million after
deducting underwriting discounts and commissions and offering expenses. As of
March 31, 2022, we had cash, cash equivalents and marketable securities of
$284.5 million.

Future Funding Requirements


We have experienced recurring net losses and had an accumulated deficit of
$233.3 million as of March 31, 2022. Our transition to profitability is
primarily dependent upon the successful development, approval and
commercialization of our product candidates and achieving a level of revenue
adequate to support our cost structure. We expect to continue to incur losses
for the foreseeable future.

We expect that our research and development and general and administrative
expenses will continue to increase for the foreseeable future. Additionally, we
expect our capital expenditures will increase significantly in the future for
costs associated with building additional manufacturing capacity. As a result,
we will need significant additional capital to fund our operations, which we may
obtain through one or more equity offerings, debt financings or other
third-party funding, including potential strategic alliances and licensing or
collaboration arrangements.

Because of the numerous risks and uncertainties associated with the development
and commercialization of gene therapy product candidates, we are unable to
estimate the amount of increased capital we will need to raise to support our
operations and the outlays and operating expenditures necessary to complete the
development of our product candidates and build additional manufacturing
capacity, and we may use our available capital resources sooner than we
currently expect.

Our future capital requirements will depend on many factors, including:

the progress of our current and future product candidates through preclinical and clinical development;

potential delays in our preclinical studies and clinical trials, whether current or planned, due to the COVID-19 pandemic, or other factors;

expanding our manufacturing facilities and working with our contract manufacturers to scale up the manufacturing processes for our product candidates;

continuing our research and discovery activities;

continuing the development of our Therapeutic Vector Evolution platform;

initiating and conducting additional preclinical, clinical or other studies for our product candidates;

changing or adding additional contract manufacturers or suppliers;

seeking regulatory approvals and marketing authorizations for our product candidates;

establishing sales, marketing and distribution infrastructure to commercialize any products for which we obtain approval;

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acquiring or in-licensing product candidates, intellectual property and technologies;

making milestone, royalty or other payments due under any current or future collaboration or license agreements;

obtaining, maintaining, expanding, protecting and enforcing our intellectual property portfolio;

attracting, hiring and retaining qualified personnel;

potential delays or other issues related to our operations;

meeting the requirements and demands of being a public company;

defending against any product liability claims or other lawsuits related to our products; and

the impact of the COVID-19 pandemic and adverse macroeconomic conditions such
as, but not limited to, higher inflation and increased interest rates, each of
which may exacerbate the magnitude of the factors discussed above.

We believe that our existing cash and cash equivalents and marketable securities
will allow us to fund our planned operations for at least one year from the date
of the issuance of this Quarterly Report on Form 10-Q.

We have based our estimates as to how long we expect we will be able to fund our
operations on assumptions that may prove to be wrong, and we could use our
available capital resources sooner than we currently expect, in which case we
would be required to obtain additional financing sooner than currently
projected, which may not be available to us on acceptable terms, or at all. Our
failure to raise capital as and when needed would have a negative impact on our
financial condition and our ability to pursue our business strategy. See the
section titled "Risk Factors" for additional risks associated with our
substantial capital requirements.

We do not have any committed external sources of funds. Accordingly, we will be
required to obtain further funding through public or private equity offerings,
debt financings, collaborations and licensing arrangements or other sources to
complete the clinical development for the product candidates for treatment of
Fabry disease, XLRP, choroideremia, wet AMD, cystic fibrosis or any other
indication we may pursue. If we raise additional funds by issuing equity
securities, our stockholders may experience dilution. Any future debt financing
into which we enter would result in fixed payment obligations and may involve
agreements that include grants of security interests on our assets and
restrictive covenants that limit our ability to take specific actions, such as
incurring additional debt, making capital expenditures, granting liens over our
assets, redeeming stock or declaring dividends, that could adversely impact our
ability to conduct our business. Any debt financing or additional equity that we
raise may contain terms that could adversely affect our common stockholders.
Further, additional funds may not be available when we need them, on terms that
are acceptable to us, or at all. Our ability to raise additional capital may be
adversely impacted by potential worsening global economic conditions and the
recent disruptions to and volatility in the credit and financial markets in the
United States and worldwide resulting from the ongoing COVID-19 pandemic and the
war in Ukraine.

If we are unable to obtain additional funding, we expect to delay, reduce or
eliminate some or all of our research and development programs, product
portfolio expansion or investment in internal manufacturing capabilities, which
could adversely affect our business. If we raise additional funds through
collaborations or marketing, distribution or licensing arrangements with third
parties, we may have to relinquish valuable rights to future revenue streams or
product candidates or grant licenses on terms that may not be favorable to us.

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