C4 THERAPEUTICS, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our interim condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our final prospectus filed with theU.S. Securities and Exchange Commission (the "SEC") pursuant to Rule 424(b) under the Securities Act of 1933, as amended (the "Securities Act") onOctober 1, 2020 . As discussed in the section titled "Special Note Regarding Forward-Looking Statements," the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those identified below and those discussed in the section titled "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q and in our Prospectus. We are a biopharmaceutical company focused on transforming the treatment of cancer, serious neurodegenerative conditions and other diseases by developing novel therapeutic candidates engineered to harness the body's natural regulation of protein levels to target and destroy disease-causing proteins. We leverage our proprietary technology platform, TORPEDO (Target ORiented ProtEin Degrader Optimizer), to synthesize a new class of small molecule protein degraders that selectively and efficiently destroy disease-causing proteins. We are using our TORPEDO platform to build a robust pipeline of orally administered protein degradation drug candidates, with an initial focus on oncology indications. Our approach to medicine harnesses the innate machinery of the cell to attack disease and potentially bring deep and durable responses to patients. We commenced operations inOctober 2015 , and our operations to date have been limited to organizing and staffing our company, business planning, raising capital, establishing development collaborations with Roche, Biogen and Calico, conducting discovery and research activities, filing patent applications, identifying potential product candidates, undertaking preclinical studies and establishing arrangements with third parties for the manufacture of initial quantities of our product candidates. To date, we have not generated any revenue from product sales and have financed our operations primarily through sales of our equity interests and proceeds from our collaborations. ThroughSeptember 30, 2020 , we had raised approximately$224.0 million in gross proceeds from the sale of Series seed redeemable convertible preferred stock, Series A redeemable convertible preferred stock and Series B redeemable convertible preferred stock and have received an aggregate of$163.4 million in payments from collaboration partners. InOctober 2020 , we completed an initial public offering, or IPO, pursuant to which we issued 11,040,000 shares of our common stock (including 1,440,000 shares that were issued upon the exercise by the underwriters of their over-allotment option), at a price to the public of$19.00 . Net proceeds from the IPO, including the exercise of the underwriter's overallotment option, were$191.1 million after deducting underwriting discounts and commissions of$14.7 million and expenses of$ 4.0 million . Our ability to generate revenue from product sales sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of one or more of our product candidates. Since inception, we have incurred significant operating losses. We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. Our net losses were$21.8 million and$44.5 million for the three and nine months endedSeptember 30, 2020 , respectively, and$10.1 million and$24.1 million for the three and nine months endedSeptember 30, 2019 , respectively. As ofSeptember 30, 2020 , we had an accumulated deficit of$162.0 million .
We anticipate that our expenses will increase substantially due to costs including those associated with the following:
? our preclinical activities for our lead product candidates and the
advancement of these candidates into first-in-human Phase 1/2 clinical
trials in
of 2021 for CFT7455 and by the end of 2021 for CFT8634;
? development activities associated with our other product candidates;
? research activities in oncology, neurological and other disease areas to
expand our pipeline;
? hiring additional personnel in research, clinical trials, quality and
other functional areas;
? increased activities by our contract manufacturing organizations, or CMOs,
to supply us with product for our preclinical studies and clinical trials;
? the management of our intellectual property portfolio; and
? operating as a public company.
In addition, our net losses and cash flows may fluctuate significantly from
period to period depending on, among other things, variations in the level of
expense related to the ongoing development of our product candidates, our
TORPEDO platform or future development programs; the delay, addition or
termination of clinical trials; and the execution of any additional
collaboration, licensing or similar arrangements, and the timing of payments we
may make or receive under such arrangements.
We will not generate any revenue from product sales unless and until we
successfully complete clinical development and obtain regulatory approval for
one or more of our product candidates. If we obtain regulatory approval for any
of our product candidates, to the extent we decide to commercialize that product
ourselves, we would expect to incur significant expenses related to developing
our internal commercialization capability to support product sales, marketing
and distribution.
20
-------------------------------------------------------------------------------- As a result, we will need substantial additional funding to support our operating activities as we advance our product candidates through clinical development, seek regulatory approval and prepare for and, if any of our product candidates are approved, proceed to commercialization. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operating activities through a combination of equity offerings, debt offerings, reimbursements and potential milestones earned under our existing collaboration agreements and potential license and development agreements with third parties, including but not limited to our existing collaboration partners. Adequate funding may not be available to us on acceptable terms, or at all. If we are unable to raise capital when needed or on attractive terms, we could be forced to delay, reduce or eliminate our research, product development or future commercialization efforts, relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. Although we continue to pursue these capital raising plans, there is no assurance that we will be successful in obtaining sufficient funding on terms acceptable to us to fund continuing operations, if at all. As ofSeptember 30, 2020 , we had cash and cash equivalents and short-term investments of$199.4 million . We expect that our existing cash and cash equivalents, short-term investments and the net proceeds of our IPO will be sufficient to fund our operations for at least the next twelve months. The impact of the COVID-19 coronavirus outbreak on our financial performance will depend on future developments, including the duration and spread of the outbreak and related governmental advisories and restrictions. There are multiple causes of these delays, including laboratory closures, reluctance of patients to enroll or continue in trials for fear of exposure to COVID-19, local and regional shelter-in-place and work from home orders and regulations that discourage, hamper or prohibit patient visits, healthcare providers and health systems shifting away from clinical trials toward the acute care of COVID-19 patients and the FDA and other regulators making product candidates for the treatment of COVID-19 a priority over product candidates unrelated to the pandemic. In terms of the impact on our operations, we have seen increased risk of delays in production of components used to manufacture our lead degrader candidates due to previous delays at one of ourChina -based manufacturers, and one of our clinical research organizations, or CROs, inIndia was forced to temporarily shut down due to local lockdown orders. In addition, earlier this year, we temporarily closed the office and laboratory spaces at our corporate headquarters inWatertown, Massachusetts and transitioned our employees to work from home. While we have had a subset of our employees back in our office and lab facilities sinceJune 2020 , the majority of our employees currently continue to work from home and we expect this situation will continue into next year. We are working closely with our CROs, manufacturers, investigators and preclinical and clinical trial sites to assess the full impact of the COVID-19 pandemic on the timelines and expected costs for each of our programs. While the ongoing impact of the pandemic is uncertain, we believe our CRO redundancies inChina ,India andBoston and the transition of the majority of our employees to remote work arrangements have mitigated the impact of these types of disruptions on our business. We note the high level of difficulty in projecting the effects of COVID-19 on our programs and our company, given the rapid and dramatic evolution in the course and impact of the pandemic and the societal and governmental response to it.
Financial Operations Overview
Revenues
To date, we have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products for the foreseeable future. Our revenues to date have been generated through research collaboration and license agreements. We recognize revenue over our expected performance period under each agreement. We expect that our revenue for the next several years will be derived primarily from our current collaboration agreements and any additional collaborations that we may enter into in the future. To date, we have not received any royalties under any of our existing collaboration agreements.
Roche Collaboration and License Agreement
InMarch 2016 , we entered into a collaboration and license agreement, or the Original Roche Agreement, with Roche, whereby Roche provided us with a non-refundable upfront payment of$15.0 million , which was creditable against our target initiation fees of either$1.0 million or$4.0 million , depending on the compound selected. Pursuant to the terms of the Original Roche Agreement, we collaborated on research activities to develop novel treatments in the field of targeted protein degradation using our degrader technology. We initially developed therapeutics that utilize degrader technology for up to ten target proteins. On a target-by-target basis, after successful completion of a defined preclinical development phase, Roche had an exclusive option to pursue a license from us for further clinical development and commercialization. OnDecember 22, 2018 , we amended and restated the Original Roche Agreement, or the Restated Roche Agreement. Under the Restated Roche Agreement, we have a more active role in the manufacturing and commercialization of the targets included in the collaboration, such that if we opt into certain co-development and co-detailing rights, the parties will split future development costs in return for our having rights to a larger share of future earnings from commercialization of the relevant target. The target structure was revised to nine potential targets, three of which had been nominated as of the execution of the Restated Roche Agreement and represent continuations of the initial preclinical research and development efforts begun under the Original Roche Agreement, and three additional targets that were not nominated as of the date of execution of the Restated Roche Agreement. At the time of entry into the Restated Roche Agreement, Roche maintained its option rights to license and commercialize these nine targets. 21 -------------------------------------------------------------------------------- Under the Restated Roche Agreement, we received additional upfront consideration of$40.0 million from Roche. In addition, under the Restated Roche Agreement, will make annual research plan payments of$1.0 million for each active research plan. Finally, adjustments were made to the option exercise fees such that targets that have progressed through GLP toxicology studies at the time of exercise now have option exercise fees of$7.0 million to$12.0 million and those progressed through Phase 1 trials have option exercise fees of$20.0 million . For certain targets, Roche is required to pay us fees of$2.0 million and$3.0 million upon the identification of a lead series and the commencement of GLP toxicology studies, respectively. For each target option exercised by Roche, we are eligible to receive up to$275 million in research, development and commercial milestone payments. Roche is also required to pay us up to$150 million per target in one-time sales-based payments if the target achieves certain levels of net sales. Roche is also required to pay us royalties, at percentages from the mid-single digits to the low double-digits, on a licensed product-by licensed product basis, on worldwide net product sales.
OnDecember 28, 2018 , we entered into aCollaboration Research and License Agreement, or the Biogen Agreement, with Biogen, pursuant to which we agreed to collaborate on research and development efforts for up to five targets to discover and develop potential new treatments for neurological conditions such as Alzheimer's disease and Parkinson's disease. The Biogen Agreement also has an option for Biogen to nominate additional targets and extend the Biogen Agreement. We granted Biogen a non-exclusive research license under our intellectual property to perform research activities, select and optimize degraders and develop products including the degraders, as well as a commercial license to manufacture and commercialize the targets once the initial research and development work is complete. The research under the Biogen Agreement will take place over a 54-month research term with Biogen having an option to extend the Biogen Agreement for up to four additional years in exchange for the payment by Biogen of an additional$62.5 million . If Biogen were to elect to extend the term of the Biogen Agreement, Biogen would be entitled to nominate up to five additional targets. The Biogen Agreement provides for three initial targets, with Biogen having the right to initiate up to an additional two targets and to control all post-discovery activities. Biogen paid us a nonrefundable upfront payment of$45.0 million for access to our technology and research services through the discovery research phase. The nonrefundable upfront cash payment of$45.0 million is not creditable against any of the target development milestone fees. Following the achievement of development candidate criteria, prior to any IND-enabling study, for any target, Biogen will bear all costs and expenses of and will have sole discretion and decision-making authority with respect to the performance of further activities with respect to any degrader under development under the Biogen Agreement and all products that incorporate that degrader. Biogen is also required to pay us up to$35.0 million per target in development milestones and$26.0 million per target in one-time sales-based payments for the first product to achieve certain levels of net sales. In addition, Biogen is required to pay us royalties on a licensed product-by-licensed product basis, on worldwide net product sales, at percentages in the mid-single digits. All milestone and sales-based payments are made after we have met the defined criteria in the joint research plan for that target, at which time Biogen will have control of the targets for commercialization. Under the Biogen Agreement, the receipt of these payments is contingent on the further development of the targets to commercialization by Biogen, without any additional research and development efforts from us. Biogen also has the option to fund additional discovery activities, in which case we will perform discovery-type research at Biogen's election to develop other potential targets that may be used as replacement targets for the initially nominated targets or two additional targets under the Biogen Agreement. Revenues earned under this option, if initiated, will be recognized as services are performed and are not included in the transaction price at the outset of the arrangement. These research activities will be reimbursed on a full-time equivalent, or FTE, basis at specified market rates. These additional discovery activities can be purchased up to a maximum amount by Biogen on an à la carte basis at an amount consistent with standalone selling price. If Biogen were to exercise these options, we would recognize revenue as those options are exercised. Calico License Agreement InMarch 2017 , we entered into a Collaboration and License Agreement, or the Calico Agreement, with Calico whereby we agreed to collaborate to develop and commercialize a set number of targets for small molecule protein degraders for diseases of aging, including cancer, for a five-year period ending inMarch 2022 , or the research term. We provided Calico with a non-exclusive research license under our intellectual property to perform research activities and select and optimize degraders and develop products including the degraders. We also granted Calico a commercial license for any licensed products resulting from the development candidates supplied by us. We are required to perform research and development activities for the nominated targets over the research term, with the intent to provide a development candidate for each target to Calico once the agreed-upon research is complete. Calico is obligated to reimburse us for our research and development activities for each target at specified levels through the identification of a development candidate, after which time Calico shall assume full responsibility for candidate development. After the initiation of each target, the Calico Agreement does not contain any options for Calico to license the individual targets. Instead, once we complete the initial research and development activities required, Calico controls and directs the targets with no additional work required to be performed by us. There is no exercise price or incremental fee payable to us to progress the research further, though Calico is required to pay an initiation fee with the commencement of each research plan. Once Calico 22
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nominates a target and pays the applicable target initiation fee, we will commence research and development activities for that target. The Calico Agreement provides for up to five initial targets. Research activities performed are reimbursed at specified levels for the five-year term of the Calico Agreement.
Under this agreement, Calico paid us a nonrefundable upfront amount of$5.0 million and certain annual payments of$5.0 million throughSeptember 30, 2020 . Upon our completion of the required discovery research and development services on any target, Calico is entitled to pursue commercial development of that target. For each target, we are eligible to receive potential research, development and commercial milestone payments aggregating up to$132.0 million . Calico is also required to pay one-time sales-based payments aggregating up to$65.0 million for the first product to achieve certain levels of net sales. In addition, Calico is required to pay us royalties, on a licensed product-by-licensed product basis, on worldwide net product sales, at percentages in the mid-single digits. All milestone and sales-based payments are made after we have met the defined criteria in the joint research plan for that target, at which time Calico will have control of the targets for commercialization; the receipt of these payments by us is contingent on the further development of the targets to commercialization by Calico, without any additional research and development efforts required by us.
Operating Expenses
Our operating expenses since inception have consisted solely of research and development costs and general and administrative costs.
Research and Development Expenses
Research and development expenses consist primarily of costs incurred for our research activities, including our discovery efforts and the development of our product candidates, and include:
? salaries, benefits and other related costs, including stock-based
compensation expense, for personnel engaged in research and development
functions;
? expenses incurred under agreements with third parties, including CROs and
other third parties that conduct research and preclinical activities on
our behalf, as well as third parties that manufacture our product
candidates for use in our preclinical and potential future clinical
trials;
? costs of outside consultants, including their fees, unit-based
compensation and related travel expenses;
? the costs of laboratory supplies and acquiring materials for preclinical
studies and clinical trials;
? facility-related expenses, which include direct depreciation costs ofequipment and allocated expenses for rent and maintenance of facilities
and other operating costs; and
? third-party licensing fees.
We expense research and development costs as incurred. Costs for external
development activities are recognized based on an evaluation of the progress to
completion of specific tasks using information provided to us by our vendors.
Payments for these activities are based on the terms of the individual
agreements, which may differ from the pattern of costs incurred, and are
reflected in our consolidated financial statements as prepaid or accrued
research and development expenses. Nonrefundable advance payments for goods or
services to be received in the future for use in research and development
activities are recorded as prepaid expenses and expensed as the related goods
are delivered or the services are performed.
Research and development activities are central to our business model. We expect
that our research and development expenses will continue to increase for the
foreseeable future as we continue to discover and develop additional product
candidates and advance our lead product candidates into clinical trials,
including our first-in-human Phase 1/2 trials. If any of our product candidates
enter into later stages of clinical development, they will generally have higher
development costs than those in earlier stages of clinical development,
primarily due to the increased size and duration of later-stage clinical trials.
We cannot reasonably estimate or determine with certainty the duration and costs
of future clinical trials of CFT7455, CFT8634 or any other product candidate we
may develop or if, when or to what extent we will generate revenue from the
commercialization and sale of any product candidate for which we obtain
marketing approval. We may never succeed in obtaining marketing approval for any
product candidate.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation, for personnel in our executive, finance, legal, business development and administrative functions. General and administrative expenses also include legal fees relating to intellectual property and corporate matters; professional fees for accounting, auditing, tax and consulting services; insurance costs; travel expenses; and facility-related expenses, which include direct depreciation costs and allocated expenses for rent and maintenance of facilities and other operating costs. We expect that our general and administrative expenses will increase in the future as we increase our headcount to support our growing operations, including additional personnel to support our operations as a publicly traded company. We also expect to incur increased expenses associated with being a public company, including higher costs of accounting, audit, legal, regulatory and tax-related services associated with maintaining compliance with Nasdaq andSEC requirements, director and officer insurance costs and investor and public relations costs. 23
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Interest Income
Interest income consists of interest income earned on our cash and cash equivalents and short-term investments. We expect interest income to vary each reporting period depending on our average bank deposit, money market fund and investment balances during the period and market interest rates.
Interest Expense
Interest expense consists of interest due under our credit agreement and the amortization of debt discount.
Other (Expense) Income, Net
Other (expense) income, net primarily consists of accretion of discount on short-term investments.
Provision (benefit) for income taxes
The provision for income taxes primarily consists of reserves for unrecognized tax benefits and minimum state taxes. The benefit for income taxes consists of a discrete tax benefit arising from the provisions of the CARES Act, that permits net operating loss carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. We have generated net operating losses since inception and have established a full valuation allowance against our deferred tax assets due to the uncertainty surrounding the realization of such assets. Results of Operations
Comparison of the Three Months Ended
The following table summarizes our results of operations for the three months
ended
THREE MONTHS ENDED
SEPTEMBER 30,
2020 2019
Revenue from collaboration agreements
Operating expenses:
Research and development 23,935 12,948
General and administrative 2,861 2,417
Total operating expenses 26,796 15,365
Operating loss (18,349 ) (10,001 )
Other income (expense), net:
Change in fair value of warrant liability (3,141 ) -
Other income (expense), net (512 ) 557
Total other income (expense), net (3,653 ) 557
Loss before income taxes (22,002 ) (9,444 )
Income tax expense (benefit) (167 )
650
Net loss $ (21,835 ) $ (10,094 )
Revenue
Revenue from our collaboration and license agreements consisted of the following
for the three months ended
THREE MONTHS ENDED
SEPTEMBER 30,
2020 2019
Restated Roche Agreement $ 1,395 $ 1,762
Biogen License Agreement 3,525 642
Calico License Agreement 3,527 2,960
$ 8,447 $ 5,364
Revenue was $8.4 million , for the three months ended September 30, 2020 compared
with $5.4 million for the three months ended September 30, 2019 . The increase in
revenue of $3.0 million primarily relates primarily to increased FTE
reimbursement revenue from Calico and increased revenue recognized in connection
with the Biogen Agreement due to progress in programs and sandbox related
revenue, offset by lower revenue recognized under the Restated Roche Agreement.
24--------------------------------------------------------------------------------
Research and Development Expenses
The following table summarizes our research and development expenses for the
three months ended
THREE MONTHS ENDED SEPTEMBER 30,
INCREASE
2020 2019 (DECREASE)
Preclinical and development expenses $ 14,454 $ 6,392 $ 8,062
Personnel expenses 5,436 3,648 1,788
Facilities and supplies 2,653 2,292 361
Consulting 1,129 402 727
Intellectual property 242 117 125
Other expenses 21 97 (76 )
$ 23,935 $ 12,948 $ 10,987
Research and development expenses were $23.9 million for the three months ended
September 30, 2020 , compared with $12.9 million for the three months ended
September 30, 2019 . The increase of $11.0 million was primarily due to an
increase in the use of FTE resources for chemistry and biology of $5.7 million ,
an increase in preclinical studies for our product candidates of $2.4 million ,
an increase of $1.8 million in personnel expenses to support our growing
clinical development activities and an increase in consulting costs of $0.7
million to support our clinical development activities.
General and Administrative Expenses
The following table summarizes our general and administrative expenses for the
three months ended
THREE MONTHS ENDED SEPTEMBER 30,
INCREASE
2020 2019 (DECREASE)
Legal and professional fees $ 1,636 $ 425 $ 1,211
Personnel expenses 912 1,611 (699 )
Facilities and supplies 166 191 (25 )
Other expenses 147 190 (43 )
$ 2,861 $ 2,417 $ 444
General and administrative expenses were $2.9 million for the three months ended
September 30, 2020 , compared with $2.4 million for the three months ended
September 30, 2019 . The increase of $0.4 million was primarily due to an
increase in legal and professional fees of $1.2 million due to the utilization
of external counsel and consultants offset by a decrease in personnel expenses
of $0.7 million , primarily resulting from the termination of the senior
executives in March 2020 .
Other Income (Expense), Net
Other income (expense), net was$3.7 million in expense for the three months endedSeptember 30, 2020 , compared with$0.6 million in income for the three months endedSeptember 30, 2019 . The decrease of$4.3 million was primarily due to the change in fair value of warrant liability of$3.1 million , decreased interest income of$0.6 million resulting from lower market interest rates earned on cash and short-term investments and interest expense and amortization of the debt discount related to the Perceptive Debt Agreement of$0.6 million .
Income Taxes
The provision for income taxes was a benefit during the three months endedSeptember 30, 2020 as compared to an expense for the three months endedSeptember 30, 2019 . For the three months endedSeptember 30, 2020 , we recognized an income tax benefit of$0.2 million resulting from the expected tax benefit to be recognized as a result of the full-year 2020 projected tax loss carryback to fiscal year 2019 allowed under the CARES Act, which was signed into law inMarch 2020 .
For the nine months ended
We will recognize interest and/or penalties related to uncertain tax benefits in income tax expense as they arise. As ofDecember 31, 2018 and 2019 andSeptember 30, 2019 and 2020, we had no accrued interest or penalties related to uncertain tax benefits. 25
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Comparison of the Nine Months Ended
The following table summarizes our results of operations for the nine months
ended
NINE MONTHS ENDED
SEPTEMBER 30,
2020 2019
Revenue from collaboration agreements
Operating expenses:
General and administrative 58,007 32,042
Research and development 8,472 6,083
Total operating expenses 66,479 38,125
Operating loss (41,546 ) (24,953 )
Other income (expense), net:
Change in fair value of warrant liability (3,141 ) -
Other income (expense), net (355 ) 1,777
Total other income (expense), net (3,496 ) 1,777
Loss before income taxes (45,042 ) (23,176 )
Income tax expense (benefit) (502 )
900
Net loss $ (44,540 ) $ (24,076 )
Revenue
Revenue from our collaboration and license agreements consisted of the following
for the nine months ended
NINE MONTHS ENDED
SEPTEMBER 30,
2020 2019
Restated Roche Agreement $ 7,424 $ 3,875
Biogen License Agreement 6,827 1,707
Calico License Agreement 10,682 7,590
24,933 13,172
Revenue was $24.9 million for the nine months ended September 30, 2020 , compared
with $13.2 million for the nine months ended September 30, 2019 . The increase in
revenue of $11.7 million reflects a $3.5 million increase in the revenue related
to the Restated Roche Agreement due to additional progress made on the three
active targets, a $5.1 million increase in the revenue related to the Biogen
Agreement due to the additional progress made on the initial three targets
nominated and an increase in Sandbox related revenue of $1.9 million , and a $3.1
million increase in the revenue related to the Calico Agreement primarily
related to additional FTE reimbursement received in 2020.
Research and Development Expenses
The following table summarizes our research and development expenses for the
nine months ended
NINE MONTHS ENDED SEPTEMBER 30,
INCREASE
2020 2019 (DECREASE)
Personnel expenses $ 14,605 $ 10,331 $ 4,274
Preclinical and development expenses 32,225 13,399 18,826
Facilities and supplies 7,155 6,419 736
Intellectual property 886 570 316
Consulting 2,969 978 1,991
Other expenses 167 345 (178 )
$ 58,007 $ 32,042 $ 25,965
26
-------------------------------------------------------------------------------- Research and development expenses for the nine months endedSeptember 30, 2020 were$58.0 million , compared to$32.0 million for the nine months endedSeptember 30, 2019 . The increase of$26.0 million was primarily due to an increase in the use of FTE resources for chemistry and biology of$14.8 million , an increase in preclinical studies for our product candidates of$4.0 million , an increase of$4.3 million in personnel expenses to support our growing clinical development activities and
an increase in consulting costs of
General and Administrative Expenses
The following table summarizes our general and administrative expenses for the
nine months ended
NINE MONTHS ENDED SEPTEMBER 30,
INCREASE
2020 2019 (DECREASE)
Personnel expenses $ 4,012 $ 3,979 $ 33
Facilities and supplies 472 488 (16 )
Legal and professional fees 3,609 1,255 2,354
Other expenses 379 361 18
$ 8,472 $ 6,083 $ 2,389
General and administrative expenses were $8.5 million for the nine months ended
September 30, 2020 , compared with $6.1 million for the nine months ended
September 30, 2019 . The increase of $2.4 million was primarily due to a $2.4
million increase in legal and professional costs due to the utilization of
external counsel and consultants.
Other Income (Expense), Net
Other income (expense), net was$3.5 million expense for the nine months endedSeptember 30, 2020 , compared with$1.8 million income for the nine months endedSeptember 30, 2019 . The decrease of$5.3 million was primarily due to the change in fair value of warrant liability of$3.1 million , lower interest earned on short-term investments in 2020 of$1.5 million and interest expense and amortization of debt discount related to the Perceptive Debt Agreement of$0.7 million . Income Taxes For the nine months endedSeptember 30, 2020 , we recognized an income tax benefit of$0.5 million resulting from the expected tax benefit to be recognized as a result of the full-year 2020 projected tax loss carryback to fiscal year 2019 allowed under the CARES Act, which was signed into law inMarch 2020 . For the nine months endedSeptember 30, 2019 , we recognized income tax expense of$0.9 million for the pro-rated annual tax estimated as ofSeptember 30, 2019 . We will recognize interest and/or penalties related to uncertain tax benefits in income tax expense as they arise. As of andSeptember 30, 2020 and 2019, we had no accrued interest or penalties related to uncertain tax benefits.
Liquidity and Capital Resources
Sources of Liquidity
We do not currently have any approved products and have never generated any revenue from product sales. To date, we have financed our operations primarily through the sale of preferred stock and through payments from collaboration partners. We had cash and cash equivalents and short-term investments of$199.4 million as ofSeptember 30, 2020 . InJune 2020 andJuly 2020 , we closed a financing in which we sold shares of our Series B preferred stock with both existing and new investors, which we refer to as the Series B Financing. As part of the Series B Financing, we issued 142,857,142 shares of redeemable convertible Series B preferred stock, or Series B Preferred Stock, at a purchase price of$1.05 per share, for aggregate gross proceeds of$150.0 million or net proceeds of$145.5 million when taking into account offering costs of$4.5 million . All shares of our preferred stock were automatically converted into shares of our common stock onOctober 6, 2020 upon the completion of the IPO at a conversion rate of 8.4335 shares of preferred stock to one share of common stock. In addition, we secured a$20.0 million credit arrangement withPerceptive Credit Holdings III, LP , or Perceptive Credit, an affiliate of one of the investors who participated in the Series B Financing , which we refer to as the Credit Agreement ,pursuant to which we borrowed an initial amount of$12.5 million , bearing a variable interest rate of 11.25%. We have the opportunity to draw down another$7.5 million under the Credit Facility, subject to the satisfaction of certain milestones relating to the filing of an Investigational New Drug application for certain of our pipeline targets. The loans extended under the Credit Agreement will be repaid beginning inDecember 2022 in monthly installments of interest plus principal equal to 2.0% of the initial principal amount throughSeptember 2024 . We paid a closing fee of$0.3 million related to the establishment of the Credit Agreement and Perceptive Credit's issuance of the loan and have the right to prepay the loan in its entirety prior to the maturity date by paying the applicable prepayment fee. If we do not prepay the loan, the entire unpaid principal balance becomes due on the maturity date,September 5, 2024 . We are also subject to customary financial covenants in the Credit Agreement that dictate accelerated repayment upon the occurrence of certain events of default, none of which are expected to occur based on our current liquidity. 27 -------------------------------------------------------------------------------- OnOctober 1, 2020 , theSecurities and Exchange Commission declared our registration statement on Form S-1 (Registration No. 333-248719) for our IPO effective. The IPO closed onOctober 6, 2020 , at which time we issued 11,040,000 shares of our common stock at a price to the public of$19.00 , which total includes 1,440,000 shares of our common stock issued to the underwriters for the IPO to the public when they exercised in full their overallotment option. The proceeds from our IPO, including the full exercise of the underwriter's overallotment option, were approximately$191.1 million after deducting underwriting discounts and commissions of$14.7 million and expenses of$4.0 million . Funding Requirements We believe that our cash and cash equivalents and short-term investments of$199.4 million as ofSeptember 30, 2020 , combined with the net proceeds from our IPO of$191.1 million , which closed onOctober 6, 2020 , will be sufficient to fund our operating expenses and capital expenditure requirements for at least the next twelve months. Since our inception, we have incurred significant operating losses. We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future as we advance the preclinical and clinical development of our product candidates
Specifically, we anticipate that our expenses will increase substantially in the future, if and as we:
? initiate planned first-in-human Phase 1/2 trials of our lead product
candidates, CFT7455 and CFT8634;
? Advance additional product candidates into preclinical and clinical
development;
? continue to invest in our proprietary TORPEDO platform;
? expand, maintain and protect our intellectual property portfolio;
? hire additional clinical, regulatory and scientific personnel;
? add operational, financial, legal and management information systems and
personnel to support our ongoing research, product development, potential
future commercialization efforts, operations as a public company and
general and administrative responsibilities;
? seek marketing approvals for any product candidates that successfully
complete clinical trials; and
? ultimately establish a sales, marketing and distribution infrastructure
and scale up external manufacturing capabilities to commercialize any
products for which we may obtain marketing approval.
Because of the numerous risks and uncertainties associated with development and
commercialization of our product candidates, we are unable to estimate the
amounts of increased capital and operating costs associated with our current and
anticipated pre-clinical studies and clinical trials. Our future capital
requirements will depend on many factors, including:
? the progress, costs and results of our planned first-in-human Phase 1/2
trials for our lead product candidates and any future clinical development
of those lead product candidates;
? the scope, progress, costs and results of preclinical and clinicaldevelopment for our other product candidates and development programs;
? the number and development requirements of other product candidates that
we pursue;
? the success of our collaborations with Roche, Biogen and Calico, including
whether or not we receive additional research support or milestone
payments from our collaboration partners upon the achievement of
milestones;
? the costs, timing and outcome of regulatory review of our product candidates;
? the costs and timing of preparing, filing and prosecuting patent
applications, maintaining and enforcing our intellectual property rights
and defending any intellectual property-related claims;
? our willingness and ability to establish additional collaboration
arrangements with other biotechnology or pharmaceutical companies onfavorable terms, if at all, for the development or commercialization of
current or additional future product candidates;
? the costs and timing of future commercialization activities, including
product manufacturing, marketing, sales and distribution, for any of our
product candidates for which we receive marketing approval; and
? the revenue, if any, received from commercial sales of our product
candidates for which we receive marketing approval.
As a result of the anticipated expenditures described above, we will need to
obtain substantial additional financing to support our continuing operations and
pursue our long-term business plan. Until such time, if ever, as we can generate
substantial revenue from product sales, we expect to finance our cash needs
through a combination of equity offerings, debt offerings, collaborations,
strategic alliances and marketing, distribution or licensing arrangements.
Although we may receive potential future milestone and royalty payments under
our collaborations with Roche, Biogen and Calico, we do not have any committed
external source of funds, as of September 30, 2020 , other than an additional
$7.5 million under our Credit Agreement. Adequate additional funds may not be
available to us on acceptable terms, or at all. If we are unable to raise
capital when needed or on attractive terms, we may be required to delay, limit,
reduce or terminate our research, product development or future
commercialization efforts or grant rights to develop and market product
candidates that we would otherwise prefer to develop and market ourselves.
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To the extent that we raise additional capital through the sale of equity
securities, each investor's ownership interest will be diluted, and the terms of
these securities may include liquidation or other preferences that adversely
affect your rights as a common stockholder. Preferred equity financing, if
available, may involve agreements that include covenants limiting or restricting
our ability to take specific actions, such as making acquisitions or capital
expenditures or declaring dividends.
If we raise additional funds through collaborations, strategic alliances or
marketing, distribution or licensing arrangements with third parties, we may
have to relinquish valuable rights to our technologies, future revenue streams,
research programs or product candidates or grant licenses on terms that may not
be favorable to us.
Cash Flows
The following table summarizes our sources and uses of cash for the period
presented (in thousands):
NINE MONTHS ENDED SEPTEMBER 30,
2020 2019
Net cash provided by (used in) by operating
activities $ (45,710 ) $ 65,918
Net cash used in investing activities (136,284 ) (1,422 )
Net cash provided by financing activities 154,879 166
Net increase (decrease) in cash and cash equivalents
and restricted cash $ (27,115 ) $ 64,662
Operating Activities
Net cash used in operating activities for the nine months ended September 30,
2020 was $45.7 million , primarily consisting of our net loss of $44.5 million ,
an increase in deferred revenue of $8.4 million , due to the recognition of
revenue under our collaboration agreements offset in part by non-cash change in
fair value of warrant liability of $3.1 million and timing of working capital.
Net cash provided by operating activities for the nine months ended September
30, 2019 was $65.9 million , primarily consisting of a decrease of $83.8 million
in accounts receivable, primarily from the receipt of upfront payments from
Roche and Biogen of $85.0 million , partially offset by our net loss of $24.1
million .
Investing Activities
Net cash used in investing activities for the nine months ended September 30,
2020 was $136.3 million , primarily attributable to the purchase of short-term
investments.
Net cash used in investing activities for the nine months ended
Financing Activities
Net cash provided by financing activities for the nine months endedSeptember 30, 2020 was$154.9 million , primarily attributable to the net proceeds received from the issuance of Series B redeemable convertible preferred stock in June and July, 2020 of$145.5 million and the net proceeds from the issuance of long-term debt of$12.0 million . Net cash provided by financing activities for the nine months endedSeptember 30, 2020 is also comprised of financing costs paid related to the IPO of$2.5 million , repurchases of$0.1 million related to common stock issued upon the exercise of our former Chief Executive Officer's stock options and$0.8 million related to a settlement with our former Chief Executive Officer related to his vested but unexercised stock options.
Net cash provided by financing activities for the nine months ended
Contractual Obligations
The following is a summary of our significant contractual obligations as of
PAYMENTS DUE BY PERIOD
LESS THAN 1 TO 3 4 TO 5 MORE THAN
TOTAL 1 YEAR YEARS YEARS 5 YEARS
Operating lease commitments (1) $ 18,889 $ 2,255 $ 4,715 $ 5,003 $ 6,916
Long-term debt 12,500 - 12,500 - -
Total $ 31,389 $ 2,255 $ 17,215 $ 5,003 $ 6,916 (1) Represents future minimum lease payments under our operating leases and
equipment for office and lab space in
in April 2028 .
29
-------------------------------------------------------------------------------- We enter into contracts in the normal course of business with third-party CROs and CMOs for clinical trials, preclinical studies, manufacturing and other services and products for operating purposes. These contracts generally provide for termination following a certain period after notice and therefore we believe that our non-cancelable obligations under these agreements are not material and they are not included in the table above. We have not included milestone or royalty payments or other contractual payment obligations in the table above if the timing and amount of such obligations are unknown or uncertain.
Critical Accounting Policies and Use of Estimates
This management's discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles inthe United States . The preparation of our consolidated financial statements and related disclosures requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues, costs and expenses and the disclosure of contingent assets and liabilities in our consolidated financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are 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. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions. Our significant accounting policies are described in more detail in the notes to our condensed consolidated financial statements elsewhere in Form 10-Q. Our critical accounting policies and more significant areas involving management's judgements and estimates used in the preparation of our condensed consolidated financial statements are discussed in the section titled " Management's Discussion and Analysis of Financial Condition and Results of Operations in our prospectus related to our initial public offering ("IPO"), filed with theSEC onOctober 2, 2020 , pursuant to Rule 424(b) under the Securities Act (the "Prospectus"). New Accounting Pronouncements
For information on new accounting standards, see Note 2 to our consolidated audited financial statements appearing in our prospectus.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements and do not have any holdings in variable interest entities.
Internal control over financial reporting
In the preparation of our consolidated financial statements, we determined that a material weakness in our internal control over financial reporting existed as ofDecember 31, 2019 . This identified material weakness in our internal control over financial reporting arose because we did not maintain effective segregation of duties in the process and recording of journal entries. We have undertaken a plan to remediate the material weakness during 2020, including additional system controls that prevent one person from initiating and approving the same journal entry. In addition, we have performed additional reviews and other post-closing procedures but until such measures have been validated and tested, we cannot assure you that this material weakness has been resolved or that these measures will be sufficient to prevent future material weaknesses or significant deficiencies in our internal control over financial reporting from occurring. See "Risk Factors-We will incur increased costs as a result of operating as a public company and our management will be required to devote substantial time to new compliance initiatives and corporate governance practices."
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