EQRX, INC. Throughout this section, unless otherwise noted, "we," "us," "EQRx" and the
"Company" refer to
You should read the following discussion and analysis of our financial condition and results of operations together with our audited consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those discussed below and as set forth under "Risk Factors." Please also refer to the section under the heading "Cautionary Note Regarding Forward-Looking Statements."
Overview
We are a new type of pharmaceutical company committed to developing and
expanding access to innovative medicines for some of the most prevalent disease
areas, including cancer and immune-inflammatory conditions. Launched in
Today, we have more than 10 programs in our pipeline including clinical, preclinical and drug engineering targets for the treatment of oncology and immune-inflammatory conditions. We will continue to evaluate opportunities to add to our pipeline by in-licensing additional programs, leveraging our drug engineering collaborations and exploring combination partnerships. Select late-stage programs, each in-licensed in 2020, include: aumolertinib (EQ143), a third-generation epidermal growth factor receptor (EGFR) inhibitor; lerociclib (EQ132), a cyclin-dependent kinase (CDK) 4/6 inhibitor; and sugemalimab (EQ165, also known as CS1001), an anti-programmed death-ligand 1 (PD-L1) antibody.
We are in ongoing discussions with regulatory authorities in several
geographies. Our marketing authorization applications for aumolertinib for the
1L treatment of adult patients with locally advanced or metastatic NSCLC with
activating EGFR mutations and those with locally advanced or metastatic EGFR
T790M mutation-positive NSCLC were accepted for review by the
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wide license in
On
Since inception, Legacy EQRx has, and following the Business Combination, we
have focused primarily on organizing and staffing, business planning, raising
capital, acquiring product candidates, conducting research and development
activities for our programs, securing related intellectual property, and
establishing strategic collaborations with payers and health systems. Since
inception until the closing of the Business Combination, Legacy EQRx funded its
operations through private equity financings. To date, it has raised an
aggregate of approximately
Since inception, we have incurred significant operating losses. Our operating
losses were
We do not currently have, and may never have, any product candidates approved
for sale and have not generated any revenue to date. We will not generate
revenue from product sales unless and until we complete clinical development for
our product candidates and successfully obtain regulatory approval therefor. We
may never generate revenues that are sufficient to achieve profitability.
Additionally, our pipeline and areas of focus may change as we further the
development of our current programs and identify new targets that meet the
criteria for inclusion in our portfolio. For example, in
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Response to COVID-19
The full extent to which the ongoing COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition, including expenses, clinical trials and research and development costs, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19, ongoing emergence of additional COVID-19 variants and where outbreaks occur, and the actions taken to contain or treat COVID-19, as well as the economic impact on local, regional, national and international markets. These situations, or others associated with COVID-19, could cause delays in our clinical trial plans, and our ability to obtain regulatory approvals, and could increase expected costs, all of which could have a material adverse effect on our business and financial condition. We implemented work-from-home and other policies, and are continuing to adapt to evolving federal, state and local health regulations. Because of the nature of our current operations, COVID-19 has not had a significant impact on our operations or financial results to date.
Business Combination Transaction
Pursuant to the terms of the Merger Agreement, on the Closing Date, each
outstanding share of issued and outstanding common stock and preferred stock of
Legacy EQRx was converted into the right to receive 0.627 shares (the Exchange
Ratio) of the combined company's common stock, par value
As of the Closing Date, each of the issued and outstanding shares of Class A common stock and Class B common stock of CMLS III was reclassified as Common Stock, and each of the issued and outstanding 8,693,333 private warrants and 11,039,957 public warrants became exercisable for shares of Common Stock.
In connection with the Business Combination, CMLS III entered into agreements
with existing and new investors to subscribe for and purchase an aggregate of
120.0 million shares of Common Stock (the PIPE Financing) that resulted in gross
proceeds of
Following the Closing Date, former holders of Legacy EQRx common stock,
preferred stock and options (collectively, the Earn-Out Service Providers) may
receive a pro rata share of up to 35.0 million additional shares of Common Stock
if at any time between the 12-month anniversary of the Closing Date and the
36-month anniversary of the Closing Date (the Earn-Out Period), the Common Stock
price is greater than or equal to
The Business Combination has been accounted for as a "reverse recapitalization"
in accordance with
Restructuring
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In
Financial Overview Revenue
To date, we have not recognized any revenue, including from product sales. If our development efforts for our product candidates are successful and result in regulatory approval, or we out-license (including sublicense) our products through agreements with third parties, we may generate revenue in the future. However, there can be no assurance as to when we will generate such revenue, if at all.
Operating Expenses
Research and Development Expenses
Research and development expenses consist primarily of costs incurred for our research activities, including our drug discovery efforts and the development of our product candidates, salaries and benefits, and third-party license fees. We expense research and development costs as incurred, which include:
employee-related expenses, including salaries, bonuses, benefits, stock-based
? compensation, and other related costs for those employees involved in our
research and development efforts;
external research and development expenses incurred under agreements with CROs
? as well as consultants that conduct our preclinical studies and development
services;
? costs incurred under our collaboration agreements;
? costs related to manufacturing material for our preclinical and clinical
studies;
? costs related to compliance with regulatory requirements; and
? facilities, depreciation and other allocated expenses, which include direct and
allocated expenses for rent, utilities and insurance.
We track external research and development costs on a program-by-program basis once we have identified a product candidate. We do not allocate employee costs, facilities costs, including depreciation, or other indirect costs, to specific programs because these costs are, in many cases, deployed across multiple programs and, as such, are not separately classified. We use internal resources primarily to conduct our research activities as well as for managing our preclinical development, clinical development and manufacturing activities.
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The following table summarizes our research and development expenses for
the years ended
December 31,
2022 2021
Aumolertinib $ 24,678 $ 12,279
Lerociclib 10,879 8,557
Sugemalimab 36,311 21,805
Nofazinlimab 3,771 2,654
EQ121 13,040 12,035
Preclinical assets 33,899 15,719Unallocated other research and development expense 43,863 16,439 Unallocated compensation expense
62,054 28,621
Total research and development expense $ 228,495 $ 118,109 The successful development of our product candidates is highly uncertain. For example, we recently decided not to pursue U.S. market approval for sugemalimab in certain indications. We anticipate continuing to incur significant research and development expenses for the foreseeable future for indications in markets we continue to pursue, as we continue the development of such product candidates and manufacturing processes and conduct discovery and research activities for our preclinical programs. We cannot determine with certainty the timing of initiation, the duration or the completion costs of current or future preclinical studies and clinical trials of our product candidates due to the inherently unpredictable nature of preclinical and clinical development. Clinical and preclinical development timelines, the probability of success and development costs can differ materially from expectations. We anticipate that we will make determinations as to which product candidates to pursue and how much funding to direct to each product candidate on an ongoing basis in response to the results of ongoing and future preclinical studies and clinical trials, regulatory developments and our ongoing assessments as to each product candidate's commercial potential. We expect that our expenses for indications in markets we continue to pursue will increase substantially, particularly due to the numerous risks and uncertainties associated with developing product candidates, including the uncertainty of:
the scope, rate of progress, and expenses of our ongoing research activities as
? well as any preclinical studies, clinical trials and other research and
development activities;
? establishing an appropriate safety profile with investigational new drug (IND)
enabling studies;
? successful enrollment in and completion of clinical trials;
? whether our product candidates show safety and efficacy in our clinical trials;
? receipt of marketing approvals from applicable regulatory authorities;
? the progress of our discovery collaborations with strategic partners;
? establishing commercial manufacturing capabilities or making arrangements with
third-party manufacturers;
? obtaining and maintaining patent and trade secret protection and regulatory
exclusivity for our product candidates;
? commercializing product candidates, if and when approved, whether alone or in
collaboration with others; and
? continued acceptable safety and efficacy profile of products following any
regulatory approval.
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Any changes in the outcome of any of these variables with respect to the development of our product candidates in preclinical and clinical development could mean a significant change in the costs and timing associated with the development of these product candidates. We may never succeed in achieving regulatory approval for any of our product candidates. We may obtain unexpected results from our clinical trials. We may elect to discontinue, delay or modify clinical trials of some product candidates or focus on other product candidates. See Item 1A, "Risk Factors" for additional information on risk factors that could impact the discovery, development and regulatory approval of our product candidates.
General and Administrative Expenses
General and administrative expenses consist primarily of employee-related costs, including salaries, bonuses, benefits, stock-based compensation and other related costs for our executive and administrative functions. General and administrative expenses also include professional services, including legal, accounting and audit services and other consulting fees, costs associated with the partnership contracts we have in place with certain payers and health systems, as well as facility costs not otherwise included in research and development expenses, insurance and other general administrative expenses.
We expect that we will incur additional accounting, audit, legal, regulatory, compliance and director and officer insurance costs as well as investor and public relations expenses associated with operating as a public company. In addition, if and when we obtain regulatory approval for our product candidates, we expect to incur additional expenses related to the building of our team to support product sales and distribution activities.
Other Income (Expense)
Change in Fair Value of Contingent Earn-Out Liability
Change in fair value of contingent earn-out liability includes the changes in fair value of the Earn-Out Shares, which were classified as liabilities as part of the Business Combination consideration.
Change in Fair Value of Warrant Liabilities
Change in fair value of warrant liabilities includes the changes in fair value of the Private Warrants and the public warrants, which are classified as liabilities, and were assumed as part of the Business Combination.
Interest Income (Expense), Net
Interest income (expense), net primarily consists of income earned on our cash, cash equivalents and short-term investments.
Other Income (Expense), Net
Other income (expense) consists of miscellaneous income and expense unrelated to our core operations.
Results of Operations
Comparison of the Years Ended
The following table summarizes our results of operations for the years ended
December 31,
2022 2021 Change
Operating expenses:
Research and development $ 228,495 $ 118,109 $ 110,386
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General and administrative 127,382 78,266 49,116
Total operating expenses 355,877 196,375 159,502
Loss from operations (355,877) (196,375) (159,502)
Other (expense) income:
Change in fair value of contingent
earn-out liability 145,881 87,065 58,816
Change in fair value of warrant
liabilities 15,822 8,880 6,942
Interest income, net 25,150 436 24,714
Other (expense) income, net (65) (15) (50)
Total other income, net 186,788 96,366 90,422
Net loss $ (169,089) $ (100,009) $ (69,080) Research and Development Expenses
Research and development expense was
General and Administrative Expenses
General and administrative expense was
Other Income, Net
Total other income, net was
Liquidity and Capital Resources
Sources of Liquidity
Since our inception, we have generated recurring net operating losses. We have
not yet commercialized any products, and we do not expect to generate revenue
from sales of any products until 2024 at the earliest, if at all. Since our
inception, we have funded our operations primarily through proceeds from the
issuance of preferred stock and common stock. To date, we have raised an
aggregate of approximately
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Funding Requirements
We believe that, prior to the consideration of revenue and associated costs from
the potential future sales of any of our investigational products that may
receive regulatory approval, our existing cash, cash equivalents and short-term
investments of
We expect to incur significant expenses and operating losses for the foreseeable future as we seek regulatory approvals, advance our product candidates, pursue commercialization of any approved product candidates and advance other candidates in our pipeline through preclinical and clinical development. In addition, we expect to incur additional costs associated with operating as a public company. Because of the numerous risks and uncertainties associated with research, development and commercialization of our product candidates, we are unable to estimate the exact amount of our working capital requirements. Our future capital requirements will depend on many factors, including:
? the outcome, timing and costs of meeting regulatory requirements established by
the FDA, the EMA, the MHRA and other regulatory authorities;
? the progress of our efforts to acquire, in-license or sub-license rights to, or
otherwise discover (alone or in partnership) additional product candidates;
the timing and amount of milestone and royalty payments that we are required to
? make or eligible to receive under our current or future collaboration and
license agreements;
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;
? the costs and timing of completion of commercial-scale manufacturing
activities;
? efforts to develop and maintain our commercialization strategy by which payers
and health systems can access our future product candidates;
? the scope, progress, results and costs of our research programs and development
of any additional product candidates that we may pursue;
? our headcount growth and associated costs as we expand our research and
development and establish our commercial infrastructure;
the costs of expanding, maintaining and enforcing our intellectual property
? portfolio, including filing, prosecuting, defending and enforcing our patent
claims and other intellectual property rights;
the costs of defending potential intellectual property disputes, including
? patent infringement actions brought by third parties against us or any of our
product candidates;
? the effect of competing technological and market developments;
the revenue, if any, received from commercial sales of aumolertinib,
? sugemalimab and lerociclib (subject to receipt of marketing approvals therefor)
and any other product candidates for which we receive marketing approval; and
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? the costs of operating as a public company.
Until such time, if ever, as we generate substantial product revenues to support our cost structure, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations and other similar arrangements. To the extent that we raise additional capital through the sale of equity or convertible securities, the ownership interest of our stockholders will be or could be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing and equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise funds through collaborations, or other similar arrangements with third parties, we may have to relinquish valuable rights to our intellectual property, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us and/or may reduce the value of our Common Stock and other securities. Market volatility resulting from global economic and financial markets uncertainty, such as high inflation and the ongoing COVID-19 pandemic or other factors could also adversely impact our ability to access capital as and when needed. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant third parties rights to develop and market our product candidates even if we would otherwise prefer to develop and market such product candidates ourselves.
Cash Flows
The following table sets forth the major sources and uses of cash for each of the periods (in thousands):
December 31,
2022 2021
Net cash used in operating activities $ (287,268) $ (183,180)
Net cash used in investing activities (897,277) (4,448)
Net cash provided by financing activities 139 1,376,488
Net (decrease) increase in cash, cash equivalents
and restricted cash $ (1,184,406) $ 1,188,860
Operating Activities
Cash flows from operating activities represent the cash receipts and disbursements related to all of our activities other than investing and financing activities. Operating cash flow is derived by adjusting our net loss for non-cash operating items such as depreciation, and stock-based compensation, as well as changes in operating assets and liabilities, which reflect timing differences between the receipt and payment of cash associated with transactions and when they are recognized in our results of operations.
Cash used in operating activities for the year ended
Cash used in operating activities for the year ended
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Investing Activities
Cash used in investing activities for the year ended
Cash used in investing activities for the year ended
Financing Activities
Cash provided by financing activities for the year ended
Cash provided by financing activities for the year ended
Critical Accounting Policies and Significant Judgments and Estimates
Our consolidated financial statements have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make judgments and estimates that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities in our 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. On an ongoing basis, we evaluate our judgments and estimates in light of changes in circumstances, facts, and experience. The effects of material revisions in estimates, if any, will be reflected in the consolidated financial statements prospectively from the date of change in estimates.
While our significant accounting policies are described in more detail in note 2 to our audited annual consolidated financial statements appearing elsewhere 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 financial statements.
Contingent
In connection with the Business Combination, the Earn-Out Service Providers are entitled to receive as additional merger consideration up to 50,000,000 additional shares of common stock if certain stock price triggers are achieved during the Earn-Out Period.
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Shares are not indexed to the Company's common stock. Pursuant to ASC 815, these
Warrant Liabilities
We do not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. We evaluate all of our financial instruments, including issued stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives, pursuant to ASC 480 and ASC 815. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period.
We have 11,039,957 public warrants and 8,693,333 private warrants that were
issued by CMLS III. Each warrant entitles the holder to purchase one share of
Common Stock, at an exercise price of
The warrants contain provisions that require them to be classified as derivative liabilities in accordance with ASC 815. Accordingly, at the end of each reporting period, changes in fair value during the period are recognized as a change in fair value of warrant liabilities within our consolidated statements of operations and comprehensive loss. We adjust the warrant liability for changes in the fair value until the earlier of (a) the exercise or expiration of the warrants and (b) the redemption of the warrants, at which time the warrants will be reclassified to additional paid-in capital.
The fair value of the public warrants is based on observable listed prices for such warrants at the end of each reporting period, and the fair value of the private warrants is equivalent to that of the public warrants as they have substantially the same terms; however, they are not actively traded.
As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued research and development and manufacturing expenses. This process involves reviewing open contracts, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated costs incurred for the services when we have not yet been invoiced or otherwise notified of the actual costs. The majority of our service providers invoice us in arrears for services performed on a pre-determined schedule or when contractual milestones are met; however,
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some require advance payments. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time. At each period end, we corroborate the accuracy of these estimates with the service providers and make adjustments, if necessary. Examples of estimated accrued research and development expenses include fees paid to:
? CROs in connection with performing research and development activities on our
behalf, including preclinical studies and clinical trials;
? Investigative sites or other service providers in connection with preclinical
or clinical trials;
? CMOs and other vendors related to product manufacturing and development and
distribution of preclinical and clinical supplies; and
Companies with whom we have a collaboration or in-licensing agreement, that
? perform research and development activities on our behalf, including
preclinical studies and clinical trials.
We base our expenses related to preclinical studies and clinical trials on our estimates of the services received and efforts expended pursuant to quotes and contracts from CROs that conduct and manage studies on our behalf. The financial terms of these contracts are subject to negotiation and vary from contract to contract, which may result in uneven payment flows. 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 accruing fees, the Company estimates preclinical study and clinical trial expenses based on the services performed pursuant to contracts with research institutions, contract research organizations, and clinical manufacturing organizations, that conduct and manage preclinical studies and clinical trials on the Company's behalf based on actual time and expenses incurred by them. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or amount of prepaid expense 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 may result in us reporting amounts that are too high or too low in any particular period. To date, we have not made any material adjustments to our prior estimates of accrued research and development expenses.
Stock-Based Compensation
We measure stock-based awards granted to employees, non-employees and directors based on their fair value on the date of grant and recognize compensation expense over the requisite service period, which is generally the vesting period. We apply the straight-line method of expense recognition to all awards with only service-based vesting conditions. For awards with performance-based vesting conditions, we assess the probability that the performance conditions will be achieved at each reporting period. We use the accelerated attribution method to expense the awards over the requisite service period when the performance conditions are deemed probable of achievement.
We estimate the fair value of each stock option grant on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model uses as inputs the fair value of our common stock and assumptions we make for the volatility of our common stock, the expected term of our common stock options, the risk-free interest rate for a period that approximates the expected term of our common stock options, and our expected dividend yield. We estimate the fair value of each restricted common stock granted based upon the difference between the fair value of our common stock on the grant date and the price per share paid by the purchasers.
As there was not a public market for our common stock prior to becoming publicly traded, the estimated fair value of our common stock was determined by the Board as of the date of grant of each option or restricted stock award, considering our most recently available third-party valuations of common stock and the Board's assessment of additional objective and subjective factors that it believed were relevant and which may have changed from the date of the most recent valuation through the date of the grant. These third-party valuations
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were performed in accordance with the guidance outlined in the
In addition to the results of these third-party valuations, the Board also considered a number of objective and subjective factors to determine the fair value of our common stock on each grant date, including: (i) our stage of development and our business strategy; (ii) the progress of our research and development programs; (iii) the progress of our collaboration and licensing efforts; (iv) the illiquid nature of our common stock; (v) the prices at which we sold convertible preferred stock and the superior rights and preferences of the convertible preferred stock relative to our common stock at the time of each grant; (vi) external market conditions affecting the biotechnology industry, and trends within the biotechnology industry; (vii) our financial position, including cash on hand, and our historical and forecasted performance and operating results; and (viii) the likelihood of achieving a liquidity event.
Subsequent to the closing of the Business Combination, the Board determines the fair value of each share of common stock underlying stock-based awards based on the closing price of our common stock as reported by the Nasdaq on the date of grant.
Recently Adopted Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position, results of operations or cash flows is disclosed in note 2 to our audited annual consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.
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