C4 THERAPEUTICS, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes to those statements included elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Some of the numbers included herein have been rounded for the convenience of presentation. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under Item 1A, Risk factors, in this Annual Report on Form 10-K.
Overview
We are a biopharmaceutical company focused on transforming the treatment of cancer and other diseases in collaboration with our partners 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 medicines 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. Our most advanced product candidate, CFT7455, is an orally bioavailable degrader of a protein target called IKZF1/3, for multiple myeloma, or MM, and non-Hodgkin lymphomas, or NHLs, including peripheral T-cell lymphoma, or PTCL, and mantle cell lymphoma, or MCL. We submitted an investigational new drug application, or IND, for this product candidate to theU.S. Food and Drug Administration , or the FDA, inDecember 2020 and received clearance from the FDA inJanuary 2021 ; we expect to begin a first-in-human Phase 1/2 clinical trial for this product candidate in the first half of 2021. We are also developing CFT8634, an orally bioavailable degrader of a protein target called BRD9, for synovial sarcoma and SMARCB1-delete solid tumors, and we expect to submit an IND for this product candidate to the FDA in the second half of 2021 and begin a first-in-human Phase 1/2 clinical trial for this product candidate in 2022. In addition to our lead product candidates, we are also developing degraders specifically targeting V600E mutant BRAF to treat melanoma, non-small cell lung cancer, colorectal cancer and other solid malignancies that harbor this mutation, as well as degraders targeting RET to treat lung cancer, sporadic medullary thyroid cancers and other solid malignancies that harbor oncogenic RET lesions. We expect to have product candidates from our two other lead programs, BRAF V600E and RET, in the clinic by the end of 2022.
Financial Operations Overview
General
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. ThroughDecember 31, 2020 , we have raised approximately$224.0 million in gross proceeds from the sale of our preferred stock,$209.8 million in gross proceeds from our initial public offering, and have received an aggregate of$167.5 million in payments from collaboration partners. 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$66.3 million and$34.1 million for the years endedDecember 31, 2020 and 2019, respectively. As ofDecember 31, 2020 , we had an accumulated deficit of$183.8 million . Our total operating expenses were$93.6 million and$56.8 million for the years endedDecember 31, 2020 and 2019, respectively. We anticipate that our expenses will increase substantially in the future 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 trial
in
for CFT755 and in 2022 for CFT8634;
• development activities associated with our other product candidates;
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• 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 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
our expenses and the execution of any additional collaboration, licensing or
similar arrangements, and the timing of payments we may make or receive under
these types of arrangements.
As a result of these anticipated expenditures, 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.
COVID-19
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, periodic shipping delays and resourcing constraints and, therefore, somewhat higher costs to compete our discovery activities on one or more of our lead projects, and one of our contract research organizations, or CROs, inIndia was forced to temporarily shut down due to local lockdown orders. In addition, we temporarily closed the office and laboratory spaces at our corporate headquarters inWatertown, Massachusetts , and we transitioned our employees to work from home. 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 helped mitigate the impact of these types of disruptions on our business. Given the breadth and duration of the global COVID-19 pandemic, it is possible that our directors or employees could, at any time, have been or become infected with this novel coronavirus, especially since methods and availability of testing are continuing to evolve. To date, we have not experienced or had to impose any material shutdowns as a result of positive test results for this novel coronavirus. 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 As previously discussed, 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 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 87 --------------------------------------------------------------------------------$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 Roche Agreement. Under the Roche Agreement, we have a more active role in the manufacturing and commercialization of the targets included in the collaboration, whereby 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 six potential targets, three of which had been nominated as of the execution of the 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 Roche Agreement. At the time of entry into the Roche Agreement, Roche maintained its option rights to license and commercialize these six targets. Under the Roche Agreement, we received additional upfront consideration of$40.0 million from Roche. Roche will make annual research plan payments of$1.0 million for each active research plan. Finally, adjustments were made to the option exercise fees, whereby 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 per target. 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. InNovember 2020 , we signed a further amendment to the Roche Agreement that provides a mechanism through which we and Roche can mutually agree to terminate the Roche Agreement on a target-by-target basis by the entry into a mutual target termination agreement. Upon a termination of this nature, the Roche Agreement, as amended, provides that all rights in know-how and intellectual property in support of products that use inhibition as their mode of action, referred to as the Roche Field, will revert to Roche and all rights in respect of know-how and intellectual property in support of products that use degradation as their mode of action, referred to as the C4T Field, will revert to us. Further, this amendment states that, following the entry into a mutual target termination agreement, Roche will have rights in and responsibility for any know-how and intellectual property generated as a result of the collaboration that fits within the Roche Field and we will have rights in and responsibility for any know-how and intellectual property generated as a result of the collaboration that fits within the C4T Field. In support of this allocation of rights, under the amendment, Roche provided us, and we provided Roche, with a perpetual, irrevocable, fully paid up, exclusive (even as to party granting the license), sublicensable (including in multiple tiers) license to the patents that are allocated to a party under the mutual target termination agreement and a perpetual, irrevocable fully paid up, non-exclusive, sublicensable (including in multiple tiers) license to the know-how that is allocable to a party under the mutual termination agreement. Finally, through the entry into this amendment, we and Roche mutually agreed to terminate the Roche Agreement as to the target EGFR. As a result, Roche is now free to pursue the target EGFR in the Roche Field and we are free to pursue the target EGFR in the C4T Field and all rights in and responsibility for know-how and intellectual property related to EGFR in the Roche Field reverted to the Roche parties and all rights in and responsibility for know-how and intellectual property related to EGFR in the C4T Field reverted to us, with Roche assigning the relevant patents in the C4T Field to us.
OnDecember 28, 2018 , we entered into the Biogen Agreement, with Biogen, whereby 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. InFebruary 2020 , we entered into an amendment to the Biogen Agreement that provided further clarity around Biogen's ownership of target binding moieties, which are portions of molecules, and any related intellectual property that are directed at or bind to collaboration targets. This amendment further provides that Biogen licenses to us rights to use these Biogen target binding moieties and any related intellectual property as needed in order to conduct the research and development activities contemplated under 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
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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. If Biogen elects to extend the term
of the Biogen Agreement, Biogen would be required to make an additional payment
of $62.5 million and 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; 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, whereby 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 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 our research and development activities for each target at specified levels through the identification of a development candidate, after which 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; 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 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 throughDecember 31, 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. 89
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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 contract
research organizations 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 of
equipment 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.
We expect that our research and development expenses will increase substantially in connection with our planned preclinical and clinical development activities.
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 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 and
Other (Expense) Income
Other income (expense) primarily consists of change in fair value of warrant liability. Prior to the closing of the IPO, a warrant issued in connection with our long-term debt was classified as a liability with changes in fair value of the liability recorded within other (expense) income. Upon closing of the IPO, the warrant was determined to be an equity instrument. Refer to Note 9, Long-term Debt and Warrant Liability, accompanying our consolidated financial statements for additional discussion. In addition to changes in the fair value of our warrant liability, other income (expense) also includes interest expense and amortization of the long-term debt, which is discussed in greater detail in Note 9, Long-term Debt and Warrant Liability, accompanying our consolidated financial statements.
Finally, other income (expense) also includes interest income earned on our cash, cash equivalents, and marketable securities and accretion of discount on marketable securities.
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Results of Operations
Comparison of years ended
Revenue
Revenue from our collaboration and license agreements consisted of the following
for the years ended
Years Ended December 31,
2020 2019 2018
Roche Agreement $ 9,051 $ 6,409 $ 9,112
Biogen License Agreement 9,913 2,432 -
Calico License Agreement 14,231 12,540 10,252
Total $ 33,195 $ 21,381 $ 19,364 The
•
increased effort made on three targets;
•
to the consideration to be recognized as revenue increasing by the
million milestone earned in
made on the initial three targets nominated and an increase in sandbox
related revenue of
•
primarily related to additional FTE reimbursement received in 2020 resulting
from increased effort made on Calico targets.
The
•
collaboration efforts conducted under Biogen agreement, which was executed
in
• A
due to additional collaboration efforts conducted in 2019;
• offset by a
Agreement executed in
modification of the Original Roche Agreement and upon its execution we
identified additional performance obligations that have yet to be
satisfied, resulting in additional revenue being deferred pending the
satisfaction of those performance obligations.
Research and Development Expenses
The following table summarizes our research and development expenses for the
years ended
Years Ended December 31,
2020 2019 2018
Preclinical and development expenses $ 42,025 $ 22,202 $ 8,504
Personnel expenses 20,135 14,085 9,734
Facilities and supplies 9,496 8,933 7,885
Professional fees 4,816 1,573 1,167
Intellectual property 1,599 798 866
Other expenses 369 468 436
Total $ 78,440 $ 48,059 $ 28,592 The
• a
our various programs, and $9.1 million of costs related to the IND
submission for our CFT7455 and CFT8634 programs;
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• a
benefit costs, including a
expense, primarily due to the buildout of our clinical development team; and
• a
consulting costs for our development activities.
The
• a
primarily by an
preclinical development of our various programs, and a
in external preclinical studies for our product candidates; and
• a
attributable to an increase in headcount.
General and Administrative Expenses
The following table summarizes our general and administrative expenses for the
years ended
Years Ended December 31,
2020 2019 2018
Personnel expenses $ 7,929 $ 5,587 $ 3,949
Professional fees 6,174 2,036 2,019
Facilities and supplies 351 454 471
Other expenses 750 697 722
Total $ 15,204 $ 8,774 $ 7,161 The
• a
benefit costs, including a
expenses, resulting from additional G&A personnel hired during the year; and
• a
million increase in consultant fees, and higher legal and audit and
insurance expenses, resulting from our transition to a public company.
The
• a
increase in stock-based compensation expense due to increase in personnel
expenses and a
Other (Expenses) Income
The following table summarizes our other (expense) income for the years ended
Years Ended
2020 2019 2018
Change in fair value of warrant liability-related party$ (5,676 ) $ - $ - Interest expense and amortization of long-term debt-related party (1,229 ) - - Interest and other income, net 393 2,157 678 Total other (expense) income$ (6,512 ) $ 2,157 $ 678
The
• a
associated with our long-term debt, which, prior to our IPO, was revalued at
each reporting period
• a
the discount related to our long-term debt; and
• a
interest rates earned on our investments.
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-------------------------------------------------------------------------------- The$1.5 million increase in interest and other income (expenses) for the years endingDecember 31, 2019 as compared to the year endingDecember 31, 2018 was primarily due to increased interest income resulting from a higher average cash balance. Income Taxes
The following table summarizes our income tax benefit (expense) for the years
ended
Years Ended December 31,
2020 2019 2018
Income tax benefit (expense) $ 626 $ (804 ) $ -
In the year ended December 31, 2020 , we recognized $0.6 million of income tax
benefit related to an anticipated refund to be received for federal taxes under
the corporate provisions of the CARES Act.
For the year ended December 31, 2019 , we recognized income tax expense of $0.8
million resulting from taxable income primarily caused by the Roche Agreement
and Biogen Agreement, both entered into in December 2018 .
Liquidity and Capital Resources
Sources of Liquidity
Since our inception in 2015, we have incurred significant operating losses. We expect to incur significant expenses and operating losses for the foreseeable future as we advance the preclinical and, if successful, the clinical development of our programs. 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, our IPO, and through payments from collaboration partners. ThroughDecember 31, 2020 , we have raised approximately$224.0 million in gross proceeds from the sale of preferred stock,$209.8 million in gross proceeds from our IPO, and have received an aggregate of$167.5 million in payments from collaboration partners. As ofDecember 31, 2020 , we had cash, cash equivalents and marketable securities of approximately$371.7 million . InJune 2020 andJuly 2020 , we closed our Series B Financing with both existing and new investors. 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 . Upon completion of the IPO, every 8.4335 shares of our preferred stock was automatically converted into one share of common stock. In addition, inJune 2020 , we secured a$20.0 million credit arrangement withPerceptive Credit Holdings III, LP , or Perceptive Credit, an affiliate of one of the Series B Financing investors, whereby we borrowed$12.5 million at closing, bearing a variable interest rate of 11.25%, and have the opportunity to draw down another$7.5 million subject to the satisfaction of certain milestones relating to the filing of an IND for certain of our pipeline targets, which was met with the filing of our IND for CFT7455 inDecember 2020 . Our ability to draw down on this second tranche expires onJune 30, 2021 . In connection with the Credit Agreement, we issued Perceptive Credit a warrant to purchase 2,857,142 shares of Series B Preferred Stock exercisable for$1.05 per share. Upon completion of the IPO, this warrant converted to a warrant to purchase 338,784 shares of our common stock for$8.86 per share. 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 throughJune 2024 . We paid a closing fee of$0.3 million related to the loan and have the right to prepay the loan in its entirety prior to the maturity date by paying the applicable prepayment fee. Per the terms of the Credit Agreement, the prepayment fee is$5.0 million , less any interest paid as of the prepayment date, which totaled$4.2 million as ofDecember 31, 2020 . If we do not prepay the loan, the entire unpaid principal balance becomes due on the maturity date, which isJune 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. InOctober 2020 , we completed our IPO in which we issued and sold 11,040,000 shares of common stock, including 1,440,000 shares of our common stock sold pursuant to the underwriters' full exercise of their option to purchase additional shares, at a price to the public of$19.00 . The proceeds from our IPO, including the full exercise of the underwriter's overallotment option, were approximately$191.2 million after deducting underwriting discounts and commissions of$14.7 million and expenses of$3.9 million . 93
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Cash Flows
The following table summarizes our sources and uses of cash for the period
presented (in thousands):
Years Ended December 31,
2020 2019 2018Net cash (used in) provided by operating
activities$ (67,249 ) $ 55,614
Net cash (used in) provided by investing
activities (190,505 ) (1,620
) 36,921
Net cash provided by financing activities 348,932 244
1,961
Net increase in cash, cash equivalents, and
restricted cash$ 91,178 $ 54,238 $ 21,901 Operating Activities
Net cash used in operating activities for the year ended
• our net loss of
• a
under our collaboration agreements in 2020; and
• a $3.3 million change in prepaid expenses and other current assets.
These were offset by:
• a
compensation expense, reduction in right-of-use asset, and change in fair
value of warrant liability; and
• a $2.6 million change in accrued expenses and other liabilities.
Net cash provided by operating activities for the year ended
• an
of up-front payments from our collaboration partners received in 2019;
•
increases in accounts payable and accrued expenses, stemming from increased
clinical and preclinical efforts to advance our product candidates in 2019;
and
•
expenses, depreciation expense, and reduction in right-of-use asset.
These were offset by:
• our net loss of
• a change in deferred revenue due to the recognition of revenue under our
collaboration agreements in 2019.
Net cash used in operating activities for the year ended
• our net loss of
• a change of
up-front payments due to us under the Roche Agreement and the Biogen
Agreement, both of which were recorded as accounts receivable and deferred
revenue as of
Investing Activities
The
• $189.9 million for the purchases of marketable securities, net of
maturities; and
• $0.7 million for the purchases of property and equipment.
The
•
•
The
•
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--------------------------------------------------------------------------------•$2.7 million for the purchases of property and equipment.
Financing Activities
The
•
offering costs paid in 2020;
•
costs; and
•
of issuance costs.
The$0.2 million of net cash provided by financing activities for the year endedDecember 31, 2019 was primarily attributable to net proceeds received from the issuance of common stock in conjunction with the exercise of stock options. The$2.0 million of net cash provided by financing activities for the year endedDecember 31, 2018 was primarily attributable to net proceeds received from the issuance of Series A redeemable convertible preferred stock inDecember 2018 .
Funding Requirements
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. In addition, subsequent to our IPO, we expect to incur additional costs associated with operating as a public company.
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 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 roles;
• 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 preclinical and clinical development. 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 on
favorable terms, if at all, for the development or commercialization of
current or additional future product candidates;
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• 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 December 31, 2020 , other than an additional
$7.5 million under our Credit Agreement, which we may elect to draw down at any
time prior to June 30, 2021 . 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.
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.
Contractual Obligations
The following is a summary of our significant contractual obligations as of
Less than 1 to 3 4 to 5 More than
Total 1 Year Years Years 5 Years
Operating lease commitments (1) $ 18,339 $ 2,272 $ 4,750 $ 5,040 $ 6,277
Long-term debt 12,500 - 3,000 9,500 -
Total $ 30,839 $ 2,272 $ 7,750 $ 14,540 $ 6,277 (1) Represents future minimum lease payments under our operating leases for
office and lab space in
We enter into contracts in the normal course of business with third-party CROs 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 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. While our significant accounting policies are described in more detail in Note 2, Summary of significant accounting policies, to our consolidated financial statements in this Annual Report on Form 10-K, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements. 96
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Revenues from Contracts
We account for our revenue in accordance with Accounting Standards Codification, or ASC, 606, Revenue from Contracts with Customers, or ASC 606. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the entity performs the following five steps at inception of the agreement or upon material modification of the agreement: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price, including variable consideration, if any; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.
Identify the Contract
In determining whether a contract is within the scope of ASC 606, we consider the following criteria:
• The parties to the contract have approved the contract, whether written,
orally, or in accordance with other customary business practices, and are
committed to perform their respective obligations.
• The entity can identify each party's rights regarding the goods or services
to be transferred.
• The entity can identify the payment terms for the goods or services to be
transferred.
• The contract has commercial substance (that is, the risk, timing, or amount
of the entity's future cash flows is expected to change because of the
contract).
• It is probable that the entity will collect substantially all the
consideration to which it will be entitled in exchange for the goods or
services that will be transferred to the customer.
In determining whether the criteria above have been met, management confirms
that the agreement has been signed by both parties or approved in another
acceptable manner, reviews that the agreement identifies rights and obligations
of each party, both written and implied, determines whether the contract has
economic consequences for all parties, and whether we will be able to collect
substantially all the consideration that is due or will become due under the
contract. The determination of collectability requires the most judgement and,
in establishing collectability, management considers payment terms, ability to
stop transferring goods or service to customer in the event of nonpayment,
experience with the customer, class of customer, and expectations about the
customer's financial stability, as well as other factors.
Identify the Performance Obligations
Once a contract is determined to be within the scope of ASC 606, we identify all
promised goods and services in the contract, which includes those that are
explicitly stated within the contract and those that are implied. Once all
promised goods and services within the contract are identified, we evaluate
whether each promised good or service is immaterial in the context of the
contract. In assessing materiality, management considers quantitative factors by
comparing standalone selling price of the promised good or service to the total
consideration in the contract and qualitative factors, such as the importance of
the promised good or service to the customer.
We assess whether each material promised good or service is distinct for the
purpose of identifying the performance obligations in the contract. This
assessment involves subjective determinations and requires management to make
judgments about the individual promised goods or services and whether such are
separable from the other aspects of the contractual relationship. Promised goods
and services are considered distinct provided that: (i) the customer can benefit
from the good or service either on its own or together with other resources that
are readily available to the customer (that is, the good or service is capable
of being distinct) and (ii) the entity's promise to transfer the good or service
to the customer is separately identifiable from other promises in the contract
(that is, the promise to transfer the good or service is distinct within the
context of the contract). In assessing whether a promised good or service is
distinct, we consider factors such as the research, manufacturing and
commercialization capabilities of the collaboration partner and the availability
of the associated expertise in the general marketplace. We also consider the
intended benefit of the contract in assessing whether a promised good or service
is separately identifiable from other promises in the contract. If a promised
good or service is not distinct, an entity is required to combine that good or
service with other promised goods or services until it identifies a bundle of
goods or services that is distinct.
Arrangements that include rights to additional goods or services that are
exercisable at a customer's discretion are generally considered options. We
assess if these options provide a material right to the customer and if so, they
are considered performance obligations. The identification of material rights
requires judgments related to the determination of the value of the underlying
license relative to the option exercise price, including assumptions about
technical feasibility and the probability of developing a candidate that would
be subject to the option rights. The exercise of a material right is accounted
for as a contract modification for accounting purposes.
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Determine the Transaction Price
In determining the transaction price, we consider fixed considerations, variable considerations, non-cash considerations, significant financing components, and any consideration payable to the customer. If the consideration promised in a contract includes a variable amount, we estimate the amount of consideration to which we will be entitled in exchange for transferring the promised goods or services to a customer. We determine the amount of variable consideration by using the expected value method or the most likely amount method. We include the unconstrained amount of estimated variable consideration in the transaction price. The amount included in the transaction price is constrained to the amount for which it is probable that a significant reversal of cumulative revenue recognized will not occur. At the end of each subsequent reporting period, we re-evaluate the estimated variable consideration included in the transaction price and any related constraint, and if necessary, adjust our estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis in the period of adjustment. If an arrangement includes development and regulatory milestone payments, we evaluate whether the milestones are considered probable of being reached and estimate the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within our control or the licensee's control, such as regulatory approvals, are generally not considered probable of being achieved until those approvals are received. In determining the transaction price, we adjust consideration for the effects of the time value of money if the timing of payments provides us with a significant benefit of financing. We do not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the licensees and the transfer of the promised goods or services to the licensees will be one year or less. We assess our revenue generating arrangements in order to determine whether a significant financing component exists.
Allocate the Transaction Price to the Performance Obligations
Once the transaction price is then determined, it is allocated to the identified performance obligations in proportion to their standalone selling prices, or SSP, on a relative SSP basis. SSP is determined at contract inception and is not updated to reflect changes between contract inception and when the performance obligations are satisfied. Determining the SSP for performance obligations requires significant judgment. In developing the SSP for a performance obligation, we consider applicable market conditions and relevant entity-specific factors, including factors that were contemplated in negotiating the agreement with the customer and estimated costs. We validate the SSP for performance obligations by evaluating whether changes in the key assumptions used to determine the SSP will have a significant effect on the allocation of arrangement consideration between multiple performance obligations.
Determine When to Recognize Revenue
We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) each performance obligation is satisfied, either at a point in time or over time, and if over time recognition is based on the use of an output or input method. For arrangements with licenses of intellectual property that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, we recognize royalty revenue and sales-based milestones at the later of (i) when the related sales occur, or (ii) when the performance obligation to which the royalty has been allocated has been satisfied. For arrangements with research and development services to be performed by us, revenue allocated to our performance obligation is generally recognized based on an appropriate measure of progress. We utilize judgment to determine the appropriate method of measuring progress for purposes of recognizing revenue, which is generally an input measure, such as costs incurred. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition. The measure of progress, and thereby periods over which revenue should be recognized, are subject to estimates by management and may change over the course of the arrangement.
As part of preparing the consolidated financial statements, we are required to
estimate our accrued research and development expenses. This process involves
reviewing quotations and contracts, identifying services that have been
performed on our behalf and estimating the level of service performed and the
associated cost incurred for the service when we have not yet been invoiced or
otherwise notified of the actual cost. We make estimates of the accrued expenses
as of each balance sheet date in our consolidated financial statements based on
facts and circumstances known to us at that time. In addition, there may be
instances in which payments made to our vendors will exceed the level of
services provided and result in a prepayment of the expense, in which case such
amounts are reflected as prepaid expenses and other current assets. In accruing
service fees, we estimate the time period over which services will be performed
and the level of effort to be
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expended in each period. If the actual timing of the performance of services or
the level of effort varies from our estimate, we adjust the accrual or the
amount of prepaid expenses accordingly. Although we do not expect our estimates
to be materially different from amounts actually incurred, our understanding of
the status and timing of services performed relative to the actual status and
timing of services performed may vary and could result in us reporting amounts
that are too high or too low in any particular period.
Non-refundable advance payments for goods or services to be received in the future for use in research and development activities are deferred and capitalized in prepaid expenses and other current assets. The capitalized amounts are expensed as the related goods are delivered or the services are performed.
Stock Options
We account for all stock-based compensation awards granted to employees and non-employees as stock-based compensation expense at fair value. Our stock-based payments include stock options and grants of common stock, including common stock subject to vesting. The measurement date for awards is the date of grant, and stock-based compensation costs are recognized as expense over the requisite service period, which is generally the vesting period, on a straight-line basis. Stock-based compensation expense is classified in the consolidated statements of operations and comprehensive loss based on the function to which the related services are provided. We recognize stock-based compensation expense for the portion of awards that have vested. Forfeitures are recorded as they occur. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes option pricing model includes various assumptions, including the expected term of the award, the expected volatility and the expected risk-free interest rate over the expected term of the award, expected dividend payments, and estimated forfeitures.
• Expected term: We use the "simplified method" as prescribed by Securities
and
Payments, to estimate the expected term of stock option grants. Under this
approach, the weighted-average expected life is presumed to be the average
of the contractual term of ten years and the weighted-average vesting term
of the stock options, taking into consideration multiple vesting tranches.
We utilize this method due to lack of historical data and the plain-vanilla
nature of our share-based awards.
• Volatility: We use a weighted-average of expected volatility for a period
equal to the expected term of the option grant, based on the volatilities of
a representative group of publicly traded biopharmaceutical companies. For
options granted subsequent to our IPO, the volatility is based on
volatilities of a representative group of publicly traded biopharmaceutical
companies and our own volatility.
• Risk-free rate: The risk-free rate is based on the yield curve of
options being valued.
• Dividends: We have never paid, and do not anticipate paying, any cash
dividends in the foreseeable future, and, therefore, use an expected
dividend yield of zero in the option-pricing model.
• Forfeitures: We account for forfeitures as they occur and, therefore, do not
estimate forfeitures.
In addition to the above, inputs, the fair value of the underlying common stock represents the exercise price utilized in the Black-Scholes option pricing model. These assumptions reflect our best estimates, but they involve inherent uncertainties based on market conditions generally outside our control. As a result, if other assumptions had been used, stock-based compensation cost could have been materially impacted. Furthermore, if we use different assumptions for future grants, stock-based compensation cost could be materially impacted in future periods.
Determination of the fair value of our common stock issued prior to our IPO
As there has been no public market for our common stock prior to our IPO, the estimated fair value of our common stock was determined by our board of directors as of the date of each stock award, with input from management, considering our most recently available third-party valuations of our common stock. Valuations were updated when facts and circumstances indicated that the most recent valuation was no longer valid, such as changes in the stage of our development efforts, various exit strategies and their timing, and other scientific developments that could be related to the valuation of our company or, at a minimum, annually. Third-party valuations were performed in accordance with the guidance outlined in theAmerican Institute of Certified Public Accountants' Accounting and Valuation Guide , Valuation of Privately-Held-Company Equity Securities Issued as Compensation. Our common stock valuations in 2019 were prepared using a market approach, specifically the guideline public company method, which "back-solves" to a common stock price. We allocated equity value to our common stock and shares of our redeemable convertible preferred stock, using either an option-pricing method, or OPM, or a hybrid method, which is a hybrid between the OPM and the probability-weighted expected return method. The hybrid method estimates the probability-weighted value across multiple scenarios. In addition to the OPM, the hybrid method considers liquidity scenarios in which the shares of our redeemable convertible preferred stock are assumed to convert into 99
-------------------------------------------------------------------------------- common stock. The future value of the common stock in the applicable scenario was discounted back to the valuation date at an appropriate risk-adjusted discount rate. In the hybrid method, the present value indicated for each scenario was probability-weighted to arrive at an indication of value for the common stock. In addition to considering the results of these third-party valuations, our board of directors considered various objective and subjective factors to determine the fair value of our common stock as of each grant date including:
• prices at which we sold shares of our preferred stock and the superior
rights and preferences of the preferred stock relative to our common stock
at the time of each grant;
• the progress of our preclinical and clinical development, including the
status and results of preclinical studies for our product candidates;
• our stage of development and our business strategy and the material risks
related to our business and industry;
• external market conditions affecting the biopharmaceutical industry and the
material risks related to our business and industry; and trends within the
biopharmaceutical industry;
• our financial position, including cash on hand, and our historical and
forecasted performance and operating results;
• the lack of an active public market for our common stock and our preferred
stock;
• the likelihood of achieving a liquidity event, such as an IPO or sale of our
company in light of prevailing market conditions; and
• the analysis of IPOs and the market performance of similar companies in the
biopharmaceutical industry.
The assumptions underlying these valuations represent management's best estimates, which involve inherent uncertainties and the application of management judgement. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our stock-based compensation could be materially different.
Determination of the fair value of our common stock issued subsequent to our IPO
Following our IPO, the fair value of our common stock was determined based on the quoted market price of our common stock.
New Accounting Pronouncements
For information on new accounting standards, see Note 2, Summary of significant accounting policies, to our consolidated financial statements in this Annual Report on Form 10-K.
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 to meet the requirements of our IPO, we determined that a material weakness in our internal control over financial reporting existed as ofDecember 31, 2019 . The material weakness identified 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. As ofDecember 31, 2020 , we remediated the material weakness by engaging system controls that prevent one person from initiating and approving the same journal entry. In addition, we implemented and performed additional reviews and other post-closing procedures. While we believe that this material weakness has now been remediated, we cannot assure you 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."
Emerging Growth Company Status
As an "emerging growth company," the Jumpstart Our Business Startups Act of
2012, or the JOBS Act, allows us to delay adoption of new or revised accounting
standards applicable to public companies until such standards are made
applicable to private companies. We have elected to avail ourselves of this
extended transition period for complying with new or revised accounting
standards until the earlier of the date that we (i) are no longer an emerging
growth company or (ii) affirmatively and irrevocably opt out of this extended
transition period. Accordingly, the information contained herein may be
different from the information you receive from other public companies that are
not emerging growth companies. in which you hold stock.
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In addition, as an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies. These provisions include:
• being permitted to only provide two years of audited financial statements in
addition to any required unaudited interim financial statements with
correspondingly reduced "Management's Discussion and Analysis of Financial
Condition and Results of Operations" disclosure;
• reduced disclosure about the compensation paid to our executive officers;
• not being required to submit to our stockholders' advisory votes on
executive compensation or golden parachute arrangements; and
• an exemption from the auditor attestation requirement in the assessment of
our internal control over financial reporting pursuant to the Sarbanes-Oxley
Act of 2002.
We may take advantage of these exemptions for up to the last day of 2025 or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company on the date that is the earliest of (1) the last day of the fiscal year in which we have total annual gross revenues of$1.07 billion or more; (2) the last day of 2025; (3) the date on which we have issued more than$1.0 billion in nonconvertible debt during the previous three years; or (4) the date on which we are deemed to be a large accelerated filer under the rules of theSecurities and Exchange Commission . We may choose to take advantage of some but not all of these exemptions.
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