HOOKIPA PHARMA INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and related notes for the year endedDecember 31, 2019 included in our Annual Report on Form 10-K filed with theSecurities and Exchange Commission , or theSEC . As a result of many factors, including those factors set forth in the "Risk Factors" section of this Quarterly Report on Form 10-Q and the "Risk Factors" section of our Annual Report on Form 10-K for the year endDecember 31, 2019 , our actual results could differ materially from the results described in, or implied by, the forward-looking statements contained in the following discussion and analysis. Overview We are a clinical-stage biopharmaceutical company developing a new class of immunotherapeutics targeting infectious diseases and cancers based on our proprietary arenavirus platform that is designed to reprogram the body's immune system. We are using our "off-the-shelf" technologies, VaxWave and TheraT, to elicit directly within patients a powerful and durable response of antigen-specific killer T cells and antibodies, thereby activating essential immune defenses against infectious diseases and cancers. We believe that our technologies can meaningfully leverage this immune defense mechanism for prophylactic and therapeutic purposes by eliciting killer T cell response levels previously not achieved by other published immunotherapy approaches. Our lead infectious disease product candidate, HB101, is in a randomized, doubleblinded Phase 2 clinical trial in patients awaiting kidney transplantation who are at risk for pathology associated with Cytomegalovirus, or CMV, infections. InJune 2020 , we announced positive Phase 2 interim data on the trial's primary endpoints, safety and B cell and T cell immunogenicity. In this trial, HB-101 was observed to be well tolerated with a lower rate of adverse events in patients with end-stage kidney disease than in the Phase 1 healthy volunteer study. Patients who received three doses of HB-101 showed comparable immunogenicity levels to those measured in the Phase 1 healthy volunteer trial. We continue to accrue patients, and plan to report preliminary efficacy data and updated safety and immunogenicity data by the end of 2020. Our lead oncology product candidates, HB201 and HB202, are in development for the treatment of Human Papillomavirus 16positive (or HPV16+) cancers. InDecember 2019 , we initiated the Phase 1/2 clinical trial for HB-201. The open label, dose escalating Phase 1/2 clinical trial is evaluating HB-201 in HPV16+ cancers alone and in combination with an approved checkpoint inhibitor. We plan to enroll 100 patients in total with 20 patients in each dose escalation and expansion group, respectively. Enrollment of patients at the intravenously administered first and second dose levels has been completed. We expect to report preliminary safety and efficacy data in late 2020 or early 2021. InJune 2020 , we announced that the FDA cleared our IND application for HB-202. With the IND clearance, we will be able to examine not only the safety and efficacy of HB-201 alone but also HB-201 in combination with HB-202 as an alternating, two-vector therapy. The planned clinical trial combining HB-202 with HB-201 in patients with HPV16+ cancers is an open label, dose escalation Phase 1/2 trial with the primary endpoint to evaluate safety and tolerability, which is expected to commence later in 2020. We also have a strategic partnership with Gilead Sciences, Inc., or Gilead, to develop infectious disease product candidates intended to support functional cures for chronic Hepatitis B virus, or HBV, and human immunodeficiency virus, or HIV, infections. Since the start of the collaboration in 2018, we received$21.0 million in upfront and milestone payments from Gilead for the delivery of research vectors and for advancing the programs towards clinical trials, including a milestone payment of$4.0 million , that we received in early 2020. Based on preclinical data generated to date, Gilead committed to advancing the HBV and HIV vectors toward development. To enable the development activities and expanded research programs, Gilead has agreed to reimburse our expanded resources allocated to the Gilead collaboration and to reserve manufacturing capacity with clinical material manufacturers. 21
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We have funded our operations to date primarily from private placements of our redeemable convertible preferred stock, with aggregate gross proceeds of approximately$142.5 million , grant funding and loans from an Austrian government agency, and$21 million in upfront and milestone payments from Gilead in connection with a research collaboration and license agreement. OnApril 23, 2019 , we completed an initial public offering of our common stock, or IPO, in which we issued 6.0 million shares of our common stock, at$14.00 per share, for gross proceeds of$84.0 million , or net proceeds of$74.6 million . We do not expect to generate revenue from any product candidates that we develop until we obtain regulatory approval for one or more of such product candidates, if at all, and commercialize our products or enter into additional collaboration agreements with third parties. Substantially all of our net losses have resulted from costs incurred in connection with our research and development programs and from general and administrative costs associated with our operations. All of our product candidates, including our most advanced product candidate, HB-101, will require substantial additional development time and resources before we would be able to apply for and receive regulatory approvals and begin generating revenue from product sales. Before launching our first products, if approved, we plan to establish our own manufacturing facility to minimize or eliminate our reliance on contract manufacturing organizations, or CMOs, which will require substantial capital expenditures and cause additional operating expenses. We currently have no marketing and sales organization and have no experience in marketing products; accordingly, we will incur significant expenses to develop a marketing organization and sales force in advance of generating any commercial product sales. As a result, we will need substantial additional capital to support our operating activities. In addition, we expect to incur additional legal, accounting and other expenses in operating our business, including the additional costs associated with operating as a public company. We currently anticipate that we will seek to fund our operations through equity or debt financings or other sources, such as government grants and additional collaboration agreements with third parties. Adequate funding may not be available to us on acceptable terms, or at all. If sufficient funds on acceptable terms are not available when needed, we will be required to significantly reduce our operating expenses and delay, reduce the scope of, or eliminate one or more of our development programs. We have incurred net losses each year since our inception in 2011, including net losses of$7.1 million and$18.0 million for the three and six months endedJune 30, 2020 . As ofJune 30, 2020 , we had an accumulated deficit of$121.0 million and we do not expect positive cash flows from operations in the foreseeable future, if ever. We expect to continue to incur net operating losses for at least the next several years as we advance our product candidates through clinical development, seek regulatory approval, prepare for and, if approved, proceed to commercialization, continue our research and development efforts and invest to establish a commercial manufacturing facility.
Special Note About Coronavirus (COVID-19)
InMarch 2020 , we announced initial potential business impacts related to the outbreak of a novel strain of virus named SARS-CoV-2 (severe acute respiratory syndrome 2), or coronavirus, which causes coronavirus disease, or COVID-19. As a result of the COVID-19 pandemic, we have experienced, and may further experience, disruptions that have and could further adversely impact our business operations as well as our preclinical studies and clinical trials. Specifically, nearly all of the Phase 2 trial sites we utilize for our HB-101 Phase 2 trial had temporarily suspended enrollment of patients and while many of them have recently resumed patient enrollment, it is unclear when all of the trial sites will be fully reactivated. In addition, certain aspects of our supply chain had been temporarily impacted as certain of our third party suppliers and manufacturers have paused their operations in response to the COVID-19 pandemic or have otherwise encountered delays in providing their services. The uncertainties resulting from the COVID-19 pandemic have led us to focus on our core programs, HB-101, HB-201 and HB-202 as well as research and development activities under our collaboration with Gilead. Certain earlier stage programs, including HB-300, have been temporarily de-prioritized and were only allocated the ressources that could be made available without impacting our core programs. We continue to evaluate the extent to which these pauses and delays will impact our ability to manufacture our product candidates for 22
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our clinical trials and conduct other research and development operations and maintain applicable timelines. The ultimate impact of the coronavirus pandemic on our business operations as well as our preclinical studies and clinical trials remains uncertain and subject to change and will depend on future developments, which cannot be accurately predicted. We will continue to monitor the situation closely. Furthermore, in order to preserve resources and liquidity, all of our officers have waived at least 25% of their cash salaries for the three months endedJune 30, 2020 , and the vast majority of our employees agreed to a temporary salary reduction of 20% for the three months endedJune 30, 2020 . We compensated our officers and employees for the forgone cash salaries by issuing restricted stock units inJuly 2020 . Our directors have also accepted to receive equity instead of cash for their accrued board fees.
Components of Our Results of Operations
Revenue from collaboration and licensing
To date, we have not generated any revenue from product sales and do not expect to do so in the near future, if at all. All of our revenue to date has been derived from a research collaboration and license agreement with Gilead.
OnJune 4, 2018 , we entered into a Research Collaboration and License Agreement, or the Collaboration Agreement, with Gilead to evaluate potential vaccine products using or incorporating our TheraT technology and VaxWave technology for the treatment, cure, diagnosis or prevention of HBV and HIV. Under the Collaboration Agreement, we granted Gilead an exclusive, royalty-bearing license to our technology platform for researching, developing, manufacturing and commercializing products for HIV or HBV. We received a non-refundable$10.0 million upfront payment upon entering the Collaboration Agreement. Gilead is obligated to reimburse us for our costs, including all benefits, travel, overhead, and any other expenses, relating to performing research and development activities under the Collaboration Agreement. We are also eligible to receive up to$140.0 million in developmental milestone payments for each of the HBV and HIV programs and up to$50.0 million in commercialization milestone payments for each of the HBV and HIV programs. Additionally, Gilead is obligated to pay royalties of a high single-digit to low-teens percentage on the worldwide net sales of each HBV product, and royalties of a mid-single-digit to low-teens percentage of worldwide net sales of each HIV product. We determined that our performance obligations under the terms of the Collaboration Agreement included one combined performance obligation for each of the HBV and HIV research programs, comprised of the transfer of intellectual property rights and providing research and development services. Accordingly, we recognize these amounts as revenue over the performance period of the respective services on a percent of completion basis using total estimated research and development labor hours for each of the performance obligations. Since entering into the Collaboration Agreement, we have received from Gilead the non-refundable upfront payment of$10.0 million and$11.0 million in milestone payments for the achievement of pre-clinical research milestones. In addition, we have recognized$13.2 million of cost reimbursements for research and development services performed under the Collaboration Agreement.
Operating Expenses
Our operating expenses since inception have only consisted of research and development costs and general administrative costs.
Research and Development Expenses
Since our inception, we have focused significant resources on our research and
development activities, including establishing our arenavirus platform,
conducting preclinical studies, developing a manufacturing process, conducting a
Phase 1 clinical trial and the ongoing Phase 2 clinical trial for HB-101 as well
as initiating a Phase 1/2 trial
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for HB-201 and preparing an IND for HB-202. Research and development activities account for a significant portion of our operating expenses. Research and development costs are expensed as incurred. These costs include:
? salaries, benefits and other related costs, including stock-based compensation,
for personnel engaged in research and development functions;
expenses incurred in connection with the preclinical development of our
? programs and clinical trials of our product candidates, including under
agreements with third parties, such as consultants, contractors, academic
institutions and contract research organizations, or CROs;
? the cost of manufacturing drug products for use in clinical trials, including
under agreements with third parties, such as CMOs, consultants and contractors;
? laboratory costs;
? leased facility costs, equipment depreciation and other expenses, which include
direct and allocated expenses; and
? intellectual property costs incurred in connection with filing and prosecuting
patent applications as well as third-party license fees.
The majority of our research and development costs are external costs, which we track on a program-by-program basis. We do not track our internal research and development expenses on a program-by-program basis as they primarily relate to shared costs deployed across multiple projects under development. We expect our research and development expenses to increase substantially in the future as we advance our existing and future product candidates into and through clinical studies and pursue regulatory approval. The process of conducting the necessary clinical studies to obtain regulatory approval is costly and time-consuming. Clinical studies generally become larger and more costly to conduct as they advance into later stages and, in the future, we will be required to make estimates for expense accruals related to clinical study expenses. At this time, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete the development of any product candidates that we develop from our programs. We are also unable to predict when, if ever, material net cash inflows will commence from sales of product candidates we develop, if at all. This is due to the numerous risks and uncertainties associated with developing product candidates, including the uncertainty of:
? successful completion of preclinical studies and clinical trials;
? sufficiency of our financial and other resources to complete the necessary
preclinical studies and clinical trials;
? acceptance of INDs for our planned clinical trials or future clinical trials;
? successful enrollment and completion of clinical trials;
? successful data from our clinical program that support an acceptable
risk-benefit profile of our product candidates in the intended populations;
? receipt and maintenance of regulatory and marketing approvals from applicable
regulatory authorities;
? scale-up of our manufacturing processes and formulation of our product
candidates for later stages of development and commercialization;
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establishing our own manufacturing capabilities or agreements with third-party
? manufacturers for clinical supply for our clinical trials and commercial
manufacturing, if our product candidate is approved;
? entry into collaborations to further the development of our product candidates;
? obtaining and maintaining patent and trade secret protection or regulatory
exclusivity for our product candidates;
? successfully launching commercial sales of our product candidates, if and when
approved;
? acceptance of the product candidate's benefits and uses, if and when approved,
by patients, the medical community and third-party payors;
? the prevalence and severity of adverse events experienced with our product
candidates;
? maintaining a continued acceptable safety profile of the product candidates
following approval;
? effectively competing with other therapies;
? obtaining and maintaining healthcare coverage and adequate reimbursement from
third-party payors; and
? qualifying for, maintaining, enforcing and defending intellectual property
rights and claims.
A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials beyond those that we anticipate will be required for the completion of clinical development of a product candidate, or if we experience significant delays in our clinical trials due to patient enrollment or other reasons, we would be required to expend significant additional financial resources and time on the completion of clinical development.
General and Administrative Expenses
Our general and administrative expenses consist primarily of personnel costs in our executive, finance and investor relations, business development and administrative functions. Other general and administrative expenses include consulting fees and professional service fees for auditing, tax and legal services, lease expenses related to our offices, premiums for directors and officers liability insurance, depreciation and other costs. We expect our general and administrative expenses to continue to increase in the future as we expand our operating activities and prepare for potential commercialization of our current and future product candidates, increase our headcount and investor relations activities and maintain compliance with requirements of the Nasdaq Global Select Market and theSEC .
Grant Income
Since inception, we have received grants from theAustrian Research Promotions Agency , either under funding agreements or under research incentive programs. In addition, we have received loans under funding agreements that bear interest at below market interest rate. We account for the grants received as other income and for the imputed benefits arising from the difference between a market rate of interest and the rate of interest as additional grant income, and record interest expense for the loans at a market rate of interest.
Interest Expense
Interest expense results primarily from loans under funding agreements with theAustrian Research Promotion Agency , recorded at a market rate of interest. The difference between interest payments payable pursuant to the loans, which rates are at below market interest rates, and the market interest rate, is accounted for as grant income. 25
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Income Taxes
Income tax expense results from foreign minimum income tax and profit on a legal entity basis. The losses that we have incurred since inception result primary from the losses of our Austrian subsidiary. We have considered that we will likely not realize the benefits of the deferred tax asset, and accordingly, established a full valuation allowance as ofJune 30, 2020 .
Results of Operations
Comparison of Three and Six Months Ended
The following table summarizes our results of operations for the three and six
months ended
Three months ended June 30, Six months ended June 30,
2020 2019 2020 2019
Revenue from collaboration and licensing $ 6,685 $ 4,051 $ 10,381 $ 6,286
Operating expenses:
Research and development (11,564) (13,929) (23,090) (24,108)
General and administrative (4,347) (3,751) (8,976) (6,462)
Total operating expenses (15,911) (17,680) (32,066) (30,570)
Loss from operations (9,226) (13,629) (21,685) (24,284)
Other income (expense):
Grant income 1,595 1,544 3,067 2,736
Interest income 59 511 371 575
Interest expense (166) (210) (393) (423)
Other income and expenses, net 646 (195) 622 88
Total other income (expense), net 2,134 1,650 3,667 2,976
Net loss before tax (7,092) (11,979) (18,018) (21,308)
Income tax expense (0) (100) (0) (100)
Net loss $ (7,092) $ (12,079) $ (18,018) $ (21,408) Revenue from Collaboration and Licensing
Revenue was$6.7 million and$10.4 million for the three and six months endedJune 30, 2020 , respectively, and$4.1 million and$6.3 million for the three and six months endedJune 30, 2019 , respectively. The increase of$2.6 million for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 was primarily due to higher cost reimbursements received under the Collaboration Agreement with Gilead and the partial recognition of a milestone payment we received from Gilead inFebruary 2020 . For the three months endedJune 30, 2020 , revenue included$4.1 million from reimbursement of research and development expenses,$1.6 million from partial recognition of revenue related to the upfront payment of$10.0 million that we received inJune 2018 and a milestone payment of$4.0 million that we received inFebruary 2020 , as well as$1.0 million of revenue that was recognized upon the achievement of a research milestone inJune 2020 . For the three months endedJune 30, 2019 , revenue from reimbursement of research and development expenses was$0.7 million , revenue from partial recognition of the upfront payment was$1.4 million and$2.0 million of revenue was recognized upon the achievement of a research milestone inMay 2019 . The increase of$4.1 million for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 was primarily due to higher cost reimbursements received under the Collaboration Agreement with Gilead and the partial recognition of a milestone payment we received from Gilead inFebruary 2020 . For the six months endedJune 30, 2020 , revenue included$6.8 million from reimbursement of research and development expenses,$2.6 million from partial recognition of revenue related to the upfront payment of$10.0 million that we received inJune 2018 and a milestone payment of$4.0 million that we received inFebruary 2020 , as well as$1.0 million of revenue that was 26
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recognized upon the achievement of a research milestone inJune 2020 . For the six months endedJune 30, 2019 , revenue from reimbursement of research and development expenses was$2.0 million , revenue from partial recognition of the upfront payment was$2.3 million and$2.0 million of revenue was recognized upon the achievement of a research milestone inMay 2019 .
Research and Development Expenses
For the three and six months ended
The primary drivers of the decrease of$2.3 million for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 were a decrease in manufacturing and quality control expenses of$2.0 million along with a general decrease in other direct R&D expenses of$1.1 million and a decrease in clinical operations expenses of$0.6 million , partially offset by an increase in personnel expenses and stock based compensation by$1.1 million and an overall increase of other R&D expenses. Manufacturing, quality control expenses and other direct R&D expenses decreased primarily due to the high level of expenses in the prior year period due to the preparation costs of clinical trials for our HB-201 and HB-202 programs and the expansion of earlier stage programs. Clinical operations expenses decreased due to the slow-down of recruitment in our clinical trials due to the COVID-19 pandemic. Personnel-related research and development expenses increased by$1.1 million , primarily resulting from our increased research and development headcount and an increase in stock compensation expenses. In addition, an increase in facility related costs of$0.2 million and in other internal costs of$0.1 million contributed to the overall increase in internal research and development expenses of$1.4 million for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 . The primary drivers of the decrease of$1.0 million for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 were a decrease in manufacturing and quality control expenses of$2.7 million along with a general decrease in other direct R&D expenses of$0.9 million , a decrease in clinical operations expenses of$0.7 million and a decrease in R&D services of$0.3 million , partially offset by an increase in personnel expenses and stock based compensation by$2.6 million and an overall increase of other R&D expenses. Manufacturing, quality control expenses and other direct R&D expenses primarily decreased due to the high level of expenses in the prior year period due to the preparation costs of clinical trials for our HB-201 and HB-202 programs and the expansion of earlier stage programs. Clinical operations expenses decreased due to the slow-down of recruitment in our clinical trials in the second quarter of 2020 due to the COVID-19 pandemic. Personnel-related research and development expenses increased by$2.6 million , primarily resulting from our increased research and development headcount and an increase in stock compensation expenses. In addition, an increase in facility related costs of$0.3 million and in other internal costs of$0.5 million contributed to the overall increase in internal research and development expenses of$3.4 million for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 . 27
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The following table summarizes our research and development expenses by product candidate or program (in thousands):
Three months ended June 30, Six months ended June 30,
2020 2019 2020 2019
Direct research and development
expenses by program:
HB-101 $ 904 $ 1,274 $ 2,249 $ 2,474
HB-201/202 2,134 3,681 4,088 6,746
Gilead partnered programs(1) 1,833 898 3,498 1,655
Other and earlier-stage programs 2,143 4,883 4,053 7,382
Sub-total direct expenses 7,014 10,736 13,888 18,257
Internal research and development
expenses:
Personnel related (including
stock-based compensation) 3,208 2,128 6,578 3,979
Facility related 537 382 1,046 729
Other internal costs 805 683 1,578 1,143
Sub-total internal expenses 4,550 3,193 9,202 5,851
Total research and development expenses
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(1) Expenses incurred by us in connection with Gilead partnered programs are reimbursed to us by Gilead and accounted for as revenue.
General and Administrative Expenses
General and administrative expenses for the three months endedJune 30, 2020 were$4.3 million , compared to$3.8 million for the three months endedJune 30, 2019 . The increase of$0.5 million was primarily due to an increase in personnel-related expenses, which increased mainly due to an increase in stock compensation expenses, an increase in salaries and the growth in headcount in our general and administrative functions. General and administrative expenses for the six months endedJune 30, 2020 were$9.0 million , compared to$6.5 million for the six months endedJune 30, 2019 . The increase of$2.5 million was primarily due to an increase in personnel-related expenses of$1.8 million , and an increase in other general administrative expenses of$1.1 million , partially offset by a decrease in professional and consulting fees of$0.4 million . The increase in personnel-related expenses resulted from increased stock compensation expenses, increased salaries and a growth in headcount in our general and administrative functions. The decrease in professional and consulting fees resulted from the prior-year effect related to our IPO closing inApril 2019 partially offset by an increase in costs associated with ongoing business activities and costs to operate as a public company. Grant Income In the three months endedJune 30, 2020 we recorded grant income of$1.6 million , compared to$1.5 million in the three months endedJune 30, 2019 from grants, research incentives and imputed benefits from below market interest rates on loans from governmental agencies. The increase of$0.1 million was primarily due to higher income from Austrian research and development incentives, which was partially offset by the expiry of two grants from theAustrian Research Promotion Agency , or FFG. In the six months endedJune 30, 2020 , we recorded grant income of$3.1 million , compared to$2.7 million in the six months endedJune 30, 2019 . The increase of$0.4 million was primarily due to higher income from Austrian research and development incentives, which was partially offset by the expiry of two grants from theAustrian Research Promotion Agency .
Interest Income and Expense
Interest income was$0.1 million and$0.4 million for the three and six months endedJune 30, 2020 , respectively, compared to interest income of$0.5 million and$0.6 million for the three and six months ended 28
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June 30, 2019 , respectively. The decrease in the six month endedJune 30, 2020 was due to the drop in interest rates in the US. Interest income represents interest from cash and cash equivalents held in US dollars resulting from the proceeds from the issuance of Series D Preferred Stock, our IPO, and payments received under our collaboration with Gilead. During the three and six months endedJune 30, 2020 our cash, cash equivalents and restricted cash were mainly held in dollars at US investment grade financial institutions or in money market funds. In addition smaller amounts were held in euros at our Austrian subsidiary which produced no material interest income due the low or zero interest rate policy in theEuropean Monetary Union . Interest expenses for loans from government agencies were$0.2 million for both the three months endedJune 30, 2020 and 2019 and$0.4 million for both the six months endedJune 30, 2020 and 2019. Interest expense was recorded at the market rate of interest, which exceeded the contractual interest.
Other Income and Expenses
InApril 2020 , we applied for support under the Corona Short-term Work Program inAustria to mitigate the financial impact of the COVID 19 pandemic. In the three months endedJune 30, 2020 , we recognized$0.2 million in other operating income from non-refundable subsidies under this support program.
Liquidity and Capital Resources
Since our inception in 2011, we have funded our operations primarily through private placements of our convertible preferred stock and proceeds from our IPO, from grants, research incentives and borrowings under various agreements with public funding agencies, from an upfront payment, milestone payments and reimbursement of research and development expenses pursuant to the Collaboration Agreement with Gilead. We have raised gross proceeds of approximately$142.5 million from the issuance of our convertible preferred stock and$21.0 million from non-refundable upfront and milestone payments pursuant to the Collaboration Agreement with Gilead. OnApril 23, 2019 , we completed our IPO by issuing 6.0 million shares of our common stock, at$14.00 per share, for gross proceeds of$84.0 million , or net proceeds of$74.6 million . As ofJune 30, 2020 , the principal amount outstanding under loans from government agencies was$6.0 million and we had cash, cash equivalents and restricted cash of$93.3 million . We have entered into various funding agreements with the FFG. The loans by FFG, or the FFG Loans, were made on a project-by-project basis and bear interest at rates ranging from 0.75% to 1.0% per annum. In the event that the underlying program research results in a scientific or technical failure, the principal then outstanding under any loan may be forgiven by FFG and converted to non-repayable grant funding on a project-by-project basis. The FFG Loans contain no financial covenants and are not secured by any of our assets. Because the FFG Loans bear interest at below market rates we account for the imputed benefit arising from the difference between an estimated market rate of interest and the contractual interest rate as grant funding from FFG, which is included in grant income. On the date that FFG Loan proceeds are received, we recognize the portion of the loan proceeds allocated to grant funding as a discount to the carrying value of the loan and as unearned income. As ofJune 30, 2020 , the unamortized debt discount related to FFG Loans was$2.2 million . We do not expect positive cash flows from operations in the foreseeable future, if at all. Historically, we have incurred operating losses as a result of ongoing efforts to develop our arenavirus technology platform and our product candidates, including conducting ongoing research and development, preclinical studies, clinical trials, providing general and administrative support for these operations and developing our intellectual property portfolio. We expect to continue to incur net operating losses for at least the next several years as we progress clinical development, seek regulatory approval, prepare for and, if approved, proceed to commercialization of our most advanced product candidates HB-101, HB-201 and HB-202, continue our research and development efforts relating to our other and future product candidates, and invest in our manufacturing capabilities and our own manufacturing facility. 29
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Future Funding Requirements
We have no products approved for commercial sale. To date, we have devoted substantially all of our resources to organizing and staffing our company, business planning, raising capital, undertaking preclinical studies and clinical trials of our product candidates. As a result, we are not profitable and have incurred losses in each period since our inception in 2011. As ofJune 30, 2020 , we had an accumulated deficit of$121.0 million . We expect to continue to incur significant losses for the foreseeable future. We anticipate that our expenses will increase substantially as we:
? pursue the clinical and preclinical development of our current and future
product candidates;
? leverage our technologies to advance product candidates into preclinical and
clinical development;
? seek regulatory approvals for product candidates that successfully complete
clinical trials, if any;
? attract, hire and retain additional clinical, quality control and scientific
personnel;
establish our manufacturing capabilities through third parties or by ourselves
? and scale-up manufacturing to provide adequate supply for clinical trials and
commercialization;
expand our operational, financial and management systems and increase
? personnel, including personnel to support our clinical development,
manufacturing and commercialization efforts and our operations as a public
company;
? expand and protect our intellectual property portfolio;
establish a sales, marketing, medical affairs and distribution infrastructure
? to commercialize any products for which we may obtain marketing approval and
intend to commercialize on our own or jointly;
? acquire or in-license other product candidates and technologies; and
incur additional legal, accounting and other expenses in operating our
? business, including the additional costs associated with operating as a public
company.
Even if we succeed in commercializing one or more of our product candidates, we will continue to incur substantial research and development and other expenditures to develop and market additional product candidates. We may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. The size of our future net losses will depend, in part, on the rate of future growth of our expenses and our ability to generate revenue. Our prior losses and expected future losses have had and will continue to have an adverse effect on our stockholders' equity and working capital.
We will require substantial additional financing and a failure to obtain this necessary capital could force us to delay, limit, reduce or terminate our product development programs, commercialization efforts or other operations.
Since our inception, we have invested a significant portion of our efforts and
financial resources in research and development activities for our VaxWave and
TheraT technologies and our product candidates derived from these technologies.
Preclinical studies and clinical trials and additional research and development
activities will require substantial funds to complete. We believe that we will
continue to expend substantial resources for the foreseeable future in
connection with the development of our current product candidates and programs
as well as any future product candidates we may choose to pursue, as well as the
gradual gaining of control over our required manufacturing capabilities and
other corporate uses. These expenditures will include costs associated with
conducting preclinical studies and clinical trials, obtaining regulatory
approvals, and manufacturing and supply, as well as marketing and selling any
products approved for sale. In addition, other unanticipated costs may arise.
Because the outcome of any
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preclinical study or clinical trial is highly uncertain, we cannot reasonably estimate the actual amounts necessary to successfully complete the development and commercialization of our current or future product candidates.
Our future capital requirements depend on many factors, including:
the scope, progress, results and costs of researching and developing our
? current and future product candidates and programs, and of conducting
preclinical studies and clinical trials;
the number and development requirements of other product candidates that we may
? pursue, and other indications for our current product candidates that we may
pursue;
the stability, scale and yields of our future manufacturing process as we
? scale-up production and formulation of our product candidates for later stages
of development and commercialization;
the timing of, and the costs involved in, obtaining regulatory and marketing
? approvals and developing our ability to establish sales and marketing
capabilities, if any, for our current and future product candidates we develop
if clinical trials are successful;
? the success of our collaboration with Gilead;
? our ability to establish and maintain collaborations, strategic licensing or
other arrangements and the financial terms of such agreements;
? the cost of commercialization activities for our current and future product
candidates that we may develop, whether alone or with a collaborator;
the costs involved in preparing, filing, prosecuting, maintaining, expanding,
? defending and enforcing patent claims, including litigation costs and the
outcome of such litigation;
? the timing, receipt and amount of sales of, or royalties on, our future
products, if any; and
? the emergence of competing oncology and infectious disease therapies and other
adverse market developments.
A change in the outcome of any of these or other variables with respect to the
development of any of our current and future product candidates could
significantly change the costs and timing associated with the development of
that product candidate. Furthermore, our operating plans may change in the
future, and we will need additional funds to meet operational needs and capital
requirements associated with such operating plans.
We do not have any committed external source of funds or other support for our
development efforts. Until we can generate sufficient product and royalty
revenue to finance our cash requirements, which we may never do, we expect to
finance our future cash needs through a combination of public or private equity
offerings, debt financings, collaborations, strategic alliances, licensing
arrangements and other marketing or distribution arrangements as well as grant
funding. Based on our research and development plans, we expect that our
existing cash and cash equivalents, will enable us to fund our operating
expenses and capital expenditure requirements for at least the next 12 months.
These estimates are based on assumptions that may prove to be wrong, and we
could utilize our available capital resources sooner than we expect.
If we raise additional capital through marketing and distribution arrangements
or other collaborations, strategic alliances or licensing arrangements with
third parties, we may have to relinquish certain valuable rights to our product
candidates, technologies, future revenue streams or research programs or grant
licenses on terms that may not be favorable to us. If we raise additional
capital through public or private equity offerings, the terms of these
securities may include liquidation or other preferences that adversely affect
our stockholders' rights. Further, to the extent that we raise additional
capital through the sale of common stock or securities convertible or
exchangeable into common stock, the
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ownership interest of our shareholders will be diluted. If we raise additional capital through debt financing, we would be subject to fixed payment obligations and may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we are unable to obtain additional funding on favorable terms when needed, we may have to delay, reduce the scope of or terminate one or more of our research and development programs or clinical trials.
Cash Flows
The following table sets forth a summary of the primary sources and uses of cash
(in thousands):
Six months ended June 30,
2020 2019
Net cash used in operating activities $ (17,673) $ (23,453)
Net cash used in investing activities (1,241)
(591)
Net cash provided by (used in) financing activities (1,434)
111,166
Net increase (decrease) in cash and cash equivalents (20,348)
87,122
Cash Used in Operating Activities
During the six months endedJune 30, 2020 , cash used in operating activities was$17.7 million , which consisted of a net loss of$18.0 million , adjusted by non-cash charges of$6.1 million and cash used due to changes in our operating assets and liabilities of$5.8 million . The non-cash charges consisted primarily of stock-based compensation of$4.2 million , depreciation and amortization expense of$0.9 million and operating lease expenses of$1.0 million . The change in our operating assets and liabilities was primarily due an increase in prepaid expenses and other current assets of$6.4 million , a decrease in operating lease liabilities of$0.9 million , a decrease of accrued expenses and other current liabilities of$1.7 million and an increase in accounts receivable of$3.0 million partially offset by an increase in deferred revenues of$1.4 million and an increase in accounts payable of$4.8 million . During the six months endedJune 30, 2019 , cash used in operating activities was$23.5 million , which consisted of a net loss of$21.4 million , adjusted by non-cash charges of$3.0 million and cash used due to changes in our operating assets and liabilities of$5.1 million . The non-cash charges consisted primarily of depreciation and amortization expense of$0.7 million , operating lease expenses of$0.7 million and stock-based compensation of$1.6 million . The change in our operating assets and liabilities was primarily due to an increase of$5.6 million in prepaid expenses and other current assets, a decrease in deferred revenues of$2.3 million , a decrease in operating lease liabilities of$1.7 million , partially offset by a decrease in accounts receivable of$1.9 million , a decrease in other non-current assets of$0.2 million , an increase in accounts payable of$1.0 million , and an increase in accrued expenses and current and non-current liabilities of$1.4 million .
Cash Used in Investing Activities
During the six months ended
During the six months ended
Cash Used in or Provided by Financing Activities
During the six months ended
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During the six months endedJune 30, 2019 , cash provided by financing activities was$111.2 million , which consisted of net proceeds of$37.3 million from the issuance of shares of our Series D convertible preferred stock inFebruary 2019 , and net proceeds of$75.3 million from our IPO closing inApril 2019 , partially offset by an upfront payment for embedded finance lease assets.
Off-Balance Sheet Arrangements
We did not have during the periods presented and we do not currently have any off-balance sheet arrangements, as defined in the rules and regulations of theSEC .
Contractual Obligations and Commitments
The following table summarizes our contractual obligations as ofJune 30, 2020 (in thousands): Payments Due by Calendar Year Less Than 1 - 3 4 - 5 More than Total 1 Year Years Years 5 Years Lease commitments$ 6,961 $ 1,985 $ 3,911 $ 1,065 $ - CMO commitments 7,675 4,787 2,888 - - Debt obligations 6,031 - 4,840 1,191 - Total$ 20,667 $ 6,772 $ 11,639 $ 2,256 $ - The contractual obligations table does not include any potential contingent payments upon the achievement by us of specified clinical, regulatory and commercial events, as applicable, or patent prosecution or royalty payments we may be required to make under license agreements we have entered into because the timing and likelihood of these contingent payments are not known. We enter into contracts in the normal course of business with CROs for clinical trials, preclinical research studies and testing, manufacturing and other services and products for operating purposes. These contracts generally provide for termination upon notice, and therefore we believe that our non-cancellable obligations under these agreements are not material.
Critical Accounting Policies
Our management's discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which we have prepared in accordance with the rules and regulations of theSEC , and generally accepted accounting principles inthe United States , or GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses during the reporting periods. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions.
There have been no material changes in our critical accounting policies during
the six months ended
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Results of Operations - Critical Accounting Policies" in our Annual Report on
Form 10-K for the year ended
Recently Issued Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 to our condensed consolidated financial statements appearing in this Form 10-Q.
Emerging Growth Company Status and Smaller Reporting Company
As an "emerging growth company," the Jumpstart Our Business Startups Act of 2012 allows us to delay adoption of new or revised accounting standards applicable to public companies until such standards are made applicable to private companies. However, we have irrevocably elected not to avail ourselves of this extended transition period for complying with new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. We are also a "smaller reporting company" meaning that the market value of our stock held by non-affiliates is less than$700 million and our annual revenue was less than$100 million during our most recently completed fiscal year. We may continue to be a smaller reporting company if either (i) the market value of our stock held by non-affiliates is less than$250 million or (ii) our annual revenue was less than$100 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than$700 million . If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. For so long as we remain a smaller reporting company, we are permitted and intend to rely on exemptions from certain disclosure and other requirements that are applicable to other public companies that are not smaller reporting companies.
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