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OFFON

ITEOS THERAPEUTICS, INC.

(ITOS)
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ITEOS THERAPEUTICS, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

11/10/2021 | 04:15pm EST

Management's discussion and analysis of financial condition and results of operation

The following discussion and analysis of our financial condition and results of operations should be read together 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 ended December 31, 2020 included in our Annual Report on Form 10-K filed with the SEC. Some of the information contained in this discussion includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the "Risk factors" section of this Quarterly Report on Form 10-Q, 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

On June 11, 2021, our affiliate, iTeos Belgium S.A. and GlaxoSmithKline Intellectual Property (No. 4) Limited, or GSK, executed a Collaboration and License Agreement, or the GSK Collaboration Agreement, which became effective on July 26, 2021. Pursuant to the GSK Collaboration Agreement, we agree to grant GSK a license under certain of our intellectual property rights to develop, manufacture, and commercialize products comprised of or containing EOS-448, which license is exclusive in all countries outside of the United States and co-exclusive, with ITEOS, in the United States. Under the GSK Collaboration Agreement, GSK made an upfront payment of $625 million to us, or the Upfront Payment. Additionally, we are eligible to receive up to $1.45 billion in milestone payments, contingent upon the EOS-448 program achieving certain development and commercial milestones. Within the collaboration, GSK and we agree to share responsibility and costs for the global development of EOS-448 and will jointly commercialize and equally split profits in the United States. Outside of the United States, GSK will receive an exclusive license for commercialization, and we are eligible to receive tiered double digit royalty payments up to 20% during a customary royalty term. GSK and iTeos intend to develop EOS-448 in combination with certain other oncology assets of GSK, and iTeos and GSK will jointly own the intellectual property created under the GSK Collaboration Agreement that covers such combinations. Subject to certain limited exceptions, other than under the Collaboration Agreement, GSK and iTeos each agree not to, alone or with or for any Third Party, (i) develop a monospecific, monoclonal antibody that inhibits or is an antagonist of TIGIT through direct physical interaction for a period of time following the first regulatory approval of a Licensed Product in the United States, Germany, France, United Kingdom, Spain, or Italy or (ii) commercialize any such a product during the term of the GSK Collaboration Agreement.

In September 2021, we dosed the first patients in a Phase 1/2 clinical trial of EOS-448 in combination with pembrolizumab and with inupadenant in patients with solid tumors.

We are also advancing inupadenant, a next-generation adenosine A2A receptor, or A2AR, antagonist tailored to overcome cancer immunosuppression. Inupadenant, formerly referred to as EOS-850, is designed as a highly selective small molecule antagonist of the A2AR, in the adenosine pathway, a key driver of immunosuppression in the tumor microenvironment across a broad range of tumors. We are investigating inupadenant in an open-label multi-arm Phase 1/2a clinical trial in adult cancer patients with advanced solid tumors and in the dose escalation portion of the trial, it has shown encouraging preliminary single-agent activity. In June 2021, we reported additional data from monotherapy expansion cohorts at the American Society of Clinical Oncology, or ASCO, annual meeting. These data from the single-agent dose-escalation and expansion portions of our Phase 1/2a clinical trial of inupadenant provided evidence of durable antitumor activity in patients with advanced solid tumors and indicated safety consistent with previously reported results.

We have completed enrollment in the safety evaluation portion of the clinical trial of inupadenant in combination with chemotherapy and with pembrolizumab, as well as the monotherapy expansion cohort in prostate cancer. We have also initiated an expansion arm evaluating inupadenant in combination with pembrolizumab in patients with PD-1-resistant melanoma. In addition, we are evaluating a salt form of inupadenant in a Phase 1 study. We plan to advance inupadenant into randomized controlled clinical trials in combination.

We are using our expertise in tumor immunology to select additional targets for other novel, differentiated programs. We continue to progress research programs focused on additional targets that complement our TIGIT and A2AR programs or address additional pathways immunosupression. In September 2021, we nominated an additional product candidate in the adenosine pathway for Investigational New Drug, or IND, enabling studies.


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Since our inception in August 2011, we have devoted substantially all of our resources to organizing and staffing our company, business planning, raising capital, conducting discovery and research activities, filing patent applications, identifying potential product candidates, undertaking preclinical studies and clinical trials and establishing arrangements with third parties for the manufacture of initial quantities of our product candidates and component materials. To date, we have financed our operations through license revenue generated through the GSK Collaboration Agreement and through our Initial Public Offering, or IPO. Through September 30, 2021, we had raised an aggregate of $210.6 million of net proceeds from the IPO and $177.1 million from the sale of preferred stock. For the three and nine months ended September 30, 2021, we have earned $104.3 from license revenue. As of September 30, 2021, our principal source of liquidity was cash and cash equivalents, which totaled $899.7 million.

For the first time since inception, we recognized revenue in the current period. All license revenue was all earned through the GSK Collaboration Agreement. Our net income was $69.6 million for the three months ended September 30, 2021 and our net losses were $10.7 million for the three months ended September 30, 2020, respectively. Our net income was $29.6 million for the nine months ended September 30, 2021 and our net losses were $23.1 million for the nine months ended September 30, 2020, respectively. As of September 30, 2021, we had an accumulated deficit of $44.2 million. Our ability to generate product revenue sufficient to achieve sustained profitability will depend heavily on the successful development and eventual commercialization of one or more of our current or future product candidates.

We expect to continue to incur significant expenses in connection with ongoing development activities, particularly if and as we:

• continue preclinical studies and clinical trials and initiate new clinical

trials for our product candidates;

• pursue regulatory approvals for our product candidates;

• advance the development of our product candidate pipeline;

• continue research activities as we seek to discover and develop additional

product candidates;

• obtain, maintain, expand and protect our intellectual property portfolio;

• hire additional research and development, clinical and commercial personnel;

• scale up our clinical and regulatory capabilities; and

• add operational, financial and management information systems and personnel,

   including personnel to support our research and development programs, any
   future commercialization efforts and our transition to operating as a public
   company.

The expenses will be offset by the license revenue earned and future collaboration revenue. For the three and nine months ended September 30, 2021 we have earned $104.3 million in license revenue and expect to earn additional deferred revenue in the upcoming year, which equaled $520.7 million for the period ended September 30, 2021. We are also eligible to receive up to $1.45 billion in milestone payments, contingent upon the EOS-448 program achieving certain development and commercial milestones.

As of September 30, 2021, we had cash and cash equivalents of $899.7 million. The significant increase in cash and cash equivalents is due to the GSK Upfront Payment received on August 5, 2021.We believe our existing cash and cash equivalents will enable us to fund our operating expenses and capital expenditure requirements into 2026. Our future viability beyond that point is dependent on our ability to raise additional capital to finance our operations and earn milestone payments, contingent upon the EOS-448 program achieving certain development and commercial milestones. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. See "Liquidity and capital resources." Because of the numerous risks and uncertainties associated with our programs, we are unable to estimate the amounts of increased capital outlays and operating expenses associated with completing the research and development of our product candidates.

We are also party to other collaboration and license agreements in addition to the GSK Collaboration Agreement with GSK pursuant to which we may be required to make future royalty and milestone payments. In January 2017, we entered into a collaboration agreement with Adimab, LLC, or Adimab, pursuant to which we paid $1.0 million to exercise an option to acquire certain licenses from Adimab. One of the antibodies licensed under this agreement is what we now refer to as EOS-448. In February 2021, we entered into an amendment to this agreement (the Amended Adimab Agreement). The Amended Adimab Agreement specifies different milestone payments for new products that are derived from research programs beginning after February 22, 2021 (the New Products). For New Products, on a per target basis, we may be required to pay development, regulatory and commercial milestone payments totaling up to an aggregate of $45.8 million for the first three products and additional milestone payments up to $14.5 million for each additional product. As of the date of this Quarterly Report on Form 10-Q, we have not pursued any additional targets under the Amended


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Adimab Agreement that could potentially result in such milestone payments. We will also pay Adimab low to mid single-digit percentage royalties on a country-by-country and product-by-product basis on worldwide net sales of licensed products. To date, we have paid a total of $3.4 million to Adimab pursuant the Adimab Agreement. We are also party to a biologics master services agreement with WuXi Biologics Hong Kong Limited, or WuXi, pursuant to which we will pay WuXi, at our election, either a low single-digit percentage royalty on global net sales of manufactured products or a one-time milestone payment in the low tens of millions.

On December 10, 2019, we entered into a Clinical Trial Collaboration and Supply Agreement (the MSD Agreement) with MSD International GmbH (MSD), a subsidiary of Merck & Co., Inc. Under the MSD Agreement, we sponsor a clinical trial in which both our compound and MSD's compound are dosed in combination. We conduct the research at our own cost and MSD contributes its compound towards the study at no cost to us. We will equally own the clinical data and inventions from the study, with the exception of inventions relating solely to each party's compound class. The MSD Agreement will expire upon the delivery of a written report on the results of the study, unless earlier terminated or agreed by the parties. We began receiving compounds from MSD on April 1, 2020 and we began the research study in the third quarter of 2020.

Impact of COVID-19

With the ongoing concern related to the COVID-19 pandemic during 2020 and in the first nine months of 2021, we have maintained and expanded our business continuity plans to address and mitigate the impact of the COVID-19 pandemic on our business. In March 2020, to protect the health of our employees, and their families and communities, we restricted access to our offices to personnel who performed critical activities that must be completed on-site, limited the number of such personnel that could be present at its facilities at any one time, and requested that most of our employees work remotely. In May 2020, as certain states eased restrictions, we established new protocols to better allow its full laboratory staff access to our facilities. These protocols included several shifts working over a seven-day-week protocol. We expect to continue incurring additional costs to ensure we adhere to the guidelines instituted by the Centers for Disease Control and Prevention, or CDC, and to provide a safe working environment to our onsite employees.

The extent to which the ongoing COVID-19 pandemic impacts our business, our corporate development objectives, results of operations and financial condition, and the value of and market for our common stock, will depend on future developments that are highly uncertain and cannot be predicted with confidence at this time, such as the ultimate duration of the pandemic, the severity of the COVID-19, the identification of additional variants of COVID-19, the availability and utilization of vaccines and treatments for COVID-19, or the effectiveness of actions taken globally to contain and address COVID-19, such as travel restrictions, quarantines, social distancing and business closure requirements but particularly in the geographies where we, our third party manufacturers, contract research organizations (CROs) or current and planned clinical trial sites operate. Disruptions to the global economy, disruption of global healthcare systems, and other significant impacts of the COVID-19 pandemic could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

While the ongoing COVID-19 pandemic did not significantly impact the our business or results of operations during the nine months ended September 30, 2021, the length and extent of the pandemic, its consequences, and containment efforts will determine the future impact on our operations and financial condition.

The future impact of the COVID-19 pandemic on our industry, the healthcare system and our current and future operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, and the impact of the available vaccines, among others. See "Risk factors" for a discussion of the potential adverse impact of COVID-19 on our business, results of operations and financial condition.

Components of our results of operations

Revenue

To date, our revenues have been derived from license revenues generated through collaboration and license agreements with GSK to further the development and commercialization of EOS-448.

For all collaboration agreements, no development or commercial milestones were included in the transaction price at inception, as all milestone amounts were fully constrained. As part of our evaluation of the constraint, we considered numerous factors, including that receipt of the milestones is outside our control and contingent upon success in future clinical trials and the licensee's efforts. Any consideration related to sales-based milestones will be recognized when the related sales occur as they were determined to relate predominantly to the license granted to GSK and therefore have also been excluded from the transaction price. We are applying the royalty exception for sales-based royalties and will not recognize revenue until the subsequent sale of product occurs.


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Research and development expenses

Research and development expenses consist primarily of costs incurred for the development of our product candidates, which include:

• costs to obtain licenses to intellectual property and related future payments

should certain success, development and regulatory milestones be achieved;

• employee-related expenses, including salaries, benefits and stock-based

compensation expense;

• expenses incurred under agreements with contract research organizations, or

   CROs, contract manufacturing organizations, or CMOs, and independent
   contractors that conduct research and development, preclinical and clinical
   activities on our behalf;

• costs of purchasing lab supplies and non-capital equipment used in our

preclinical activities and in manufacturing clinical study materials through

CMOs;

• consulting and professional fees related to research and development

activities; and

• facility costs, depreciation, and other expenses, which include direct and

allocated expenses for rent and maintenance of facilities, insurance, and

other supplies.

We expense research and development costs as incurred. We recognize costs for certain development activities, such as preclinical studies and clinical trials, based on an evaluation of the progress to completion of specific tasks using information provided to us by our vendors, such as patient enrollment or clinical site activations for services received and efforts expended.

Research and development activities are central to our business model. We expect research and development costs to increase significantly for the foreseeable future as our current development programs progress and new programs are added.

Because of the numerous risks and uncertainties associated with product development, we cannot determine with certainty the duration and completion costs of the current or future preclinical studies and clinical trials or if, when, or to what extent we will generate revenues from the commercialization and sale of any product candidates that receive regulatory approval. We may never succeed in achieving regulatory approval for our product candidates. The duration, costs and timing of preclinical studies and clinical trials and development of our product candidates will depend on a variety of factors, which could all be impacted by the ongoing COVID-19 pandemic, including, but not limited to:

• successful enrollment in, and completion of, clinical trials;

• receipt of marketing approvals from applicable regulatory authorities;

• successful completion of preclinical studies and IND-enabling studies;

• establishing commercial manufacturing capabilities or making arrangements with

third-party manufacturers;

• obtaining and maintaining patent and trade secret protection and non-patent

exclusivity;

• launching commercial sales of the product, if and when approved, whether alone

or in collaboration with others;

• acceptance of a product, if and when approved, by patients, the medical

community and third-party payors;

• effectively competing with other therapies and treatment options;

• a continued acceptable safety profile following approval;

• enforcing and defending intellectual property and proprietary rights and

claims; and

• achieving desirable medicinal properties for the intended indications.

A change in the outcome of any of these factors could mean a significant change in the costs and timing associated with the development of our current and future preclinical and clinical product candidates. For example, if the FDA or comparable foreign regulatory authority were to require us to conduct clinical trials beyond those that we currently anticipate will be required for the completion of clinical development, or if we experience significant delays in execution of or enrollment in any of our preclinical studies or clinical trials, we could be required to expend significant additional financial resources and time on the completion of preclinical and clinical development.




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The following table summarizes our principal product development programs,
including direct research and development expenses allocated to each clinical
product candidate:

                                                 Three Months Ended            Nine Months Ended
                                                    September 30,                September 30,
(in thousands)                                   2021           2020           2021          2020

Direct research and development expenses by

program:

EOS-448                                       $     4,566     $   1,196     $   10,757     $   3,661
Inupadenant                                         4,632         4,554         13,803         9,335
Other non-clinical programs                         2,368           553          5,178         2,311

Indirect research and development expenses(1) 4,536 2,423 12,245 5,381 Total research and development expense $ 16,102 $ 8,726 $ 41,983 $ 20,688

(1) The substantial majority of these costs relate to the EOS-448 and inupadenant

    programs. The majority of these costs are payroll and related costs for our
    employees performing in-house research and development activities and the
    remainder represents other research and development costs.

General and administrative expenses

General and administrative expenses consist primarily of employee-related expenses, including salaries, benefits and stock-based compensation, for personnel in executive, finance, business development, facility operations and administrative functions. Other significant costs include facility costs not otherwise included in research and development expenses, legal fees relating to patent and corporate matters and fees for accounting, tax and consulting services.

Grant income

We have agreements with granting agencies whereby we receive funding under grants that partially or fully reimburse us for eligible research and development expenditures. Certain grant agreements require us to repay the funding depending on whether we decide to pursue commercial development or out-licensing of any drug candidate that is produced from the research program. The repayment provision includes portion that is fixed (corresponding to 30% of the grant), payable in annual installments, which is effective unless we decide not to pursue commercial development or out licensing of the drug candidate. The repayment provision also includes a potential obligation to pay a royalty that is contingent upon achieving sales of a product developed through the program. The maximum amount payable to the granting agency under each grant, including the fixed repayments, the royalty on revenue and the interest thereon, is twice the amount of funding received.

Research and development tax credits

Our subsidiary iTeos Belgium SA, as a Belgian biotechnology company, qualifies for a cash-based tax credit on research and development expenses. The credit is calculated based on a percentage of eligible research and development expenses defined by the Belgian government for each fiscal year (13.5% for 2021 and 2020) and then applying the effective tax rate to that result. The research and development tax credits are refundable to us if we are unable to use the credits to offset income taxes for the five subsequent tax years. We record a receivable and other income as the qualified expenses are incurred, as we are reasonably assured that the credit will be received, based upon our history of filing for the tax credits. Research and development tax credits receivable where we expect to receive refunds more than one year after the balance sheet date are classified as noncurrent in the consolidated balance sheet.

Fair value adjustment for tranche rights

Prior to March 2020, we had an obligation to issue and our investors' had an obligation to purchase additional shares of Series B preferred stock. This obligation represented a freestanding financial instrument. The resulting preferred stock tranche right liabilities were initially recorded at fair value, with gains and losses arising from changes in fair value recognized in the statement of operations and comprehensive income (loss) during each period while such instruments were outstanding and the tranche rights were settled in the first quarter of 2020. Accordingly, we are no longer required to record liabilities for these obligations or changes in the fair value of those liabilities.


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Other income (expense), net

Other income (expense), net includes income and expenses that do not fall within other categories of the statement of operations and comprehensive income (loss). Items included are interest income, bank fees and gain or loss on foreign currency transactions.

Income taxes

We are subject to income taxes in the U.S. and Belgium. Belgium has a statutory tax rate different from the U.S. Accordingly, our effective tax rates will vary depending on the relative proportion of foreign to U.S. income, the utilization of foreign tax credits and changes in tax laws. Deferred tax assets are reduced through the establishment of a valuation allowance, if, based upon available evidence, it is determined that it is more likely than not that the deferred tax assets will not be realized.

Results of operations

Comparison of the nine months ended September 30, 2021 and 2020


The following table summarizes our results of operations for the nine months
ended September 30, 2021 and 2020, together with the dollar change in those
items:



                                                        Nine Months Ended          Period to
                                                          September 30,             period
(in thousands)                                         2021           2020          change
Revenue:
License Revenue                                     $  104,271     $        -     $   104,271
Total Revenue                                          104,271              -         104,271
Operating expenses:
Research and development expenses                       41,983         20,688          21,295
General and administrative expenses                     30,907          9,611          21,296
Total operating expenses                                72,890         30,299          42,591
Income (loss) from operations                           31,381        (30,299 )        61,680
Other income and expenses:
Grant income                                             8,936          4,969           3,967

Fair value adjustment for preferred stock tranche

 rights liability                                            -          1,265          (1,265 )
Research and development tax credits                       288            643            (355 )
Other income (expense), net                             (8,185 )          235          (8,420 )
Income (loss) before income taxes                       32,420        (23,187 )        55,607
Income tax benefit (expense)                            (2,771 )           58          (2,829 )
Net income (loss)                                   $   29,649     $  (23,129 )   $    52,778




License revenue

License revenue equaled $104.3 million for the nine months ended September 30, 2021, and was the first period we recognized operating revenue. The license revenue was due to the portion of the GSK Upfront Payment that was recognized in the third quarter of 2021.

Research and development expenses

Research and development expenses increased by $21.3 million to $42.0 million for the nine months ended September 30, 2021, from $20.7 million for the nine months ended September 30, 2020. This increase was primarily related to an increase of $5.0 million of payroll and related costs, a $14.6 million increase CRO and CMO fees and internal laboratory expenses, a $1.1 million increase in stock-based compensation, an increase of $0.6 million in professional fees and an increase of $0.4 million related to facilities. The increases were offset by a $0.4 million decrease in various other research and development expenses. The overall increase was due to an increase in activities related to clinical trials, with the commencement of a Phase 1/2a clinical trial for EOS-448 in February 2020, as well as increased clinical activities for inupadenant. In addition, there was an increase in spending related to our preclinical programs during the nine months ended September 30, 2021.


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General and administrative expenses

General and administrative expenses increased by $21.3 million to $30.9 million for the nine months ended September 30, 2021 from $9.6 million for the nine months ended September 30, 2020.

The increase was primarily attributable to an increase of $1.8 million of payroll and related costs resulting from additional executives and finance and administrative employees added to enable us to operate as a public company, a $6.4 million increase in stock-based compensation, an increase of $9.8 million in professional fees and an increase of $1.6 million for directors and officers insurance as a result of becoming a public company in July 2020. In addition, there was also a $1.7 million net increase related to various other general and administrative expenses. The overall increase in professional fees can be primarily attributed to the advisor fees incurred by us for the GSK Collaboration Agreement. The advisory fee equaled $6.3 million for the nine months ended September 30, 2021. In addition, we incurred additional professional fees related to SEC reporting, SOX compliance and consulting related to our corporate structure in Belgium.

Grant income

Grant income increased by $4.0 million to $9.0 million for the nine months ended September 30, 2021 from $5.0 million for the nine months ended September 30, 2020. The overall increase in grant income, driven by spending on qualified research and development activities, was primarily attributable to preclinical activities, which were approved in March 2021, and the inupadenant program. For the nine months ended September 30, 2021, we recognized $3.9 million in grant income related to preclinical activities and the grant income relating to the inupadenant program increased by $0.4 million. The remaining $0.3 million net decrease in grant income related to other grants.

Research and development tax credits

Research and development tax credits decreased by $0.3 million. The decrease was caused by a decrease in qualifying research and development expenses in Belgium.

Fair value adjustment for preferred stock tranche rights liability

As a result of changes in the fair value of the preferred stock tranche rights liability, we recognized other income of $1.3 million for the nine months ended September 30, 2020. As of September 30, 2020, the tranche rights have been settled and the remaining liability has been reclassified to additional paid-in capital.

Other income (expense), net

The other income (expense), net for the nine months ended September 30, 2021 primarily relates to foreign exchange losses recorded as a result of the change in euro to U.S. dollar exchange rate that occurred in the first nine months of 2021.

Income tax benefit (expense)

On a consolidated basis, we recognized income tax expense of $2.8 million for the nine months ended September 30, 2021, due to the generation of taxable income from the GSK Collaboration Agreement, partially offset by the utilization of net operating loss carryforwards in the U.S. and Belgium.

In the nine months ended September 30, 2020, we recorded a $0.1 million one-time tax benefit from the change in the tax law resulting from the enactment of the CARES Act in the first half of 2020.




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Results of operations

Comparison of the three months ended September 30, 2021 and 2020


The following table summarizes our results of operations for the three months
ended September 30, 2021 and 2020, together with the dollar change in those
items:

                                         Three Months Ended        Period to
                                            September 30,            period
(in thousands)                           2021          2020          change
Revenue:
License Revenue                        $ 104,271     $       -     $  104,271
Total Revenue                            104,271             -        104,271

Operating expenses: Research and development expenses 16,102 8,726 7,376 General and administrative expenses 8,761 4,799 3,962 Total operating expenses

                  24,863        13,525         11,338
Income (loss) from operations             79,408       (13,525 )       92,933
Other income and expenses:
Grant income                               1,320         2,299           (979 )
Research and development tax credits         169           273           (104 )
Other income, net                         (8,484 )         265         (8,749 )
Income (loss) before income taxes         72,413       (10,688 )       83,101
Income tax benefit (expense)              (2,771 )           8         (2,779 )
Net income (loss)                      $  69,642     $ (10,680 )   $   80,322


License revenue

License revenue equaled $104.3 million for the three months ended September 30, 2021, and was the first period we recognized operating revenue. The license revenue was due to the portion of the GSK Upfront Payment that was recognized in the third quarter of 2021.

Research and development expenses

Research and development expenses increased by $7.4 million to $16.1 million for the three months ended September 30, 2021, from $8.7 million for the three months ended September 30, 2020. This increase was primarily related to an increase of $0.9 million of payroll and related costs, a $4.7 million increase CRO and CMO fees and internal laboratory expenses, a $0.5 million increase in stock-based compensation, an increase of $0.7 million in professional fees and an increase of $0.1 million related to facilities. In addition, there was also a $0.5 million increase in various other research and development expenses. The overall increase was due to an increase in activities related to EOS-448 and inupadenant clinical trials. In addition, there was an increase in spending related to our preclinical programs during the three months ended September 30, 2021.

General and administrative expenses

General and administrative expenses increased by $4.0 million to $8.8 million for the three months ended September 30, 2021 from $4.8 million for the three months ended September 30, 2020.

The increase was primarily attributable to an increase of $0.2 million of payroll and related costs resulting from additional executives and finance and administrative employees added to enable us to operate as a public company, a $1.8 million increase in stock-based compensation, an increase of $1.5 million in professional fees and an increase of $0.3 million for directors and officers insurance as a result of becoming a public company in July 2020. In addition, there was also a $0.2 million increase related to various other general and administrative expenses. The increase in professional fees was related to SEC reporting, SOX compliance and consulting related to our corporate structure in Belgium.

Grant income

Grant income decreased by $1.0 million to $1.3 million for the three months ended September 30, 2021 from $2.3 million for the three months ended September 30, 2020. The overall decrease in grant income was driven by a reduction in spending on qualified research and development activities. The grant income relating to the inupadenant program decreased by $0.7 million. The remaining $0.3 million net decrease in grant income related primarily to EOS-448.


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Research and development tax credits

Research and development tax credits decreased by $0.1 million. The decrease was caused by a decrease in qualifying research and development expenses in Belgium.

Other income (expense), net

The other income (expense), net for the three months ended September 30, 2021 primarily relates to foreign exchange losses recorded as a result of the change in euro to U.S. dollar exchange rate that occurred in the third quarter of 2021.

Income tax benefit (expense)

On a consolidated basis, we recognized income tax expense of $2.8 million for the three months ended September 30, 2021, due to the generation of taxable income from the GSK Collaboration Agreement, partially offset by the utilization of net operating loss carryforwards in the U.S. and Belgium.

Liquidity and capital resources

In July 2020, we completed our IPO in which we issued and sold 10,586,316 shares of our common stock at a public offering price of $19.00 per share. We received net proceeds from our IPO of $184.0 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. In early August 2020, we sold an additional 1,505,359 shares of common stock pursuant to the underwriters' exercise of their option to purchase additional shares for net proceeds of $26.6 million.

In June, 2021, the Company and GSK executed the GSK Collaboration Agreement, pursuant to which we agreed to grant GSK a license under certain of our intellectual property rights to develop, manufacture, and commercialize products comprised of or containing our antibody product, EOS-448. Under the GSK Collaboration Agreement, GSK made an upfront payment of $625 million, which occurred on August 5, 2021.

To date, we have funded our operations primarily with proceeds from the IPO, the sales of preferred stock, grants and licenses and upfront payment from the GSK Collaboration Agreement. As of September 30, 2021, we had $899.7 million in cash and cash equivalents. To date we have not generated any revenue from product sales and do not expect to generate revenue from the sales of products for the foreseeable future.

Cash flows

The following table provides information regarding our cash flows for the nine months ended September 30, 2021 and 2020:



                                                               Nine Months Ended
                                                                 September 30,
(in thousands)                                               2021            2020
Net cash provided by (used in):
Operating activities                                      $   571,956     $   (19,712 )
Investing activities                                           (1,081 )          (243 )
Financing activities                                            1,303         339,506
Effects of exchange rate changes on cash, cash
equivalents and
  restricted cash                                              (8,728 )           566
Net increase in cash, cash equivalents and restricted
cash                                                      $   563,450     $   320,117



Net cash used in operating activities

Net cash provided by operating activities was $572.0 million during the nine months ended September 30, 2021. The increase was due to the GSK Upfront Fee received in August 2021, which equaled $625.0 million. The net increase in operating activities were partially offset by operating expenses, excluding stock based compensation, equaling $63.1 million and various prepayments made in 2021. Net cash used in operating activities was $19.7million during the nine months ended September 30, 2020, was primarily due to our net losses of $23.1 million, offset primarily by the decrease of $3.0 million in grants receivable.


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Net cash used in investing activities

Net cash used in investing activities increased $0.8 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. The increase in cash used in investing activities was primarily due to higher investments in laboratory and other equipment and software during the nine months ended September 30, 2021.

Net cash provided by financing activities

Net cash provided by financing activities was $1.3 million during the nine months ended September 30, 2021. This was due to the proceeds received from the exercise of stock options during the period. Net cash provided by financing activities was $339.5 million during the nine months ended September 30, 2020. We raised cash through the issuance of Series B-2 preferred stock, with net proceeds of $125.0 million and proceeds received from our IPO, with net proceeds of $210.6 million. In addition, we received $2.9 million under grant programs with a potential obligation for repayment and $0.6 million in proceeds received from the exercise of stock options during the period.

Effects of exchange rate changes on cash, cash equivalents and restricted cash

The $8.7 million reduction of cash, cash equivalents and restricted cash for the nine months ended September 30, 2021 was primarily caused by the reduction of the euro to dollar exchange rate between December 31, 2020 and September 30, 2021.

Funding requirements

We expect our expenses to increase in connection with our ongoing activities, particularly as we continue our Phase 1/2a clinical trial of EOS-448, continue our multi-arm Phase 1/2a clinical trial of inupadenant, advance the development of pipeline programs, initiate new research and preclinical development efforts and seek marketing approval for any product candidates that we successfully develop. In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to establishing sales, marketing, distribution and other commercial infrastructure to commercialize such products.

In July 2020, we completed our IPO in which we issued and sold 10,586,316 shares of our common stock at a public offering price of $19.00 per share. We received net proceeds from our IPO of $184.0 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. In early August 2020, we issued and sold an additional 1,505,359 shares of common stock pursuant to the underwriters' exercise of their option to purchase additional shares for net proceeds of $26.6 million. Going forward, we expect to continue to incur additional costs associated with operating as a public company.

In June, 2021, we and GSK executed the GSK Collaboration Agreement, pursuant to which we agreed to grant GSK a license under certain of our intellectual property rights to develop, manufacture, and commercialize products comprised of or containing our antibody product, EOS-448. Under the GSK Collaboration Agreement, GSK made an upfront payment of $625 million, which occurred on August 5, 2021. Additionally, we are eligible to receive up to $1.45 billion in milestone payments, contingent upon the EOS-448 program achieving certain development and commercial milestones.

We believe that our cash and cash equivalents as of September 30, 2021, will enable us to fund our operating expenses and capital expenditure requirements through the second half of 2026.

We have based our projections of operating capital requirements on assumptions that may prove to be incorrect and we may use all of our available capital resources sooner than we expect. Because of the numerous risks and uncertainties associated with the development and commercialization of EOS-448 and inupadenant, and the research, development and commercialization of other potential product candidates, we are unable to estimate the exact amount of our operating capital requirements. Our future capital requirements will depend on many factors, including:

   •  the scope, progress, timing, costs and results of clinical trials of product
      candidates;


   •  research and preclinical development efforts for any future product
      candidates that we may develop;


   •  our ability to enter into and the terms and timing of any collaborations,
      licensing agreements or other arrangements;


   •  the number of future product candidates that we pursue and their development
      requirements;


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  • the outcome, timing and costs of seeking regulatory approvals;


   •  the costs of commercialization activities for any of our product candidates
      that receive marketing approval to the extent such costs are not the
      responsibility of any future collaborators, including the costs and timing
      of establishing product sales, marketing, distribution and manufacturing
      capabilities;


   •  subject to receipt of marketing approval, revenue, if any, received from
      commercial sales of our current and future product candidates;


   •  our headcount growth and associated costs as we expand our research and
      development and establish a commercial infrastructure;


   •  the costs of preparing, filing and prosecuting patent applications,
      maintaining and protecting our intellectual property rights and defending
      against intellectual property related claims;


  • the costs of operating as a public company; and


  • the emergence of competing therapies and other adverse market developments.

Contractual obligations and commitments

We enter into contracts in the normal course of business with CROs and clinical sites for the conduct of clinical trials, professional consultants for expert advice and other vendors for clinical supply manufacturing or other services. These contracts provide for termination on notice, and therefore are cancelable contracts and do not include any minimum purchase commitments.

During the nine months ended September 30, 2021, we entered into an agreement to extend the Belgium lease, effective February 2021 with a termination date of January 2030, and increase the office and laboratory space by 201 square meters. In November 2021, we entered into a new lease for 9,068 square feet of office space in Watertown, Massachusetts, which terminates in February 2027. In October 2021, we entered into an agreement to increase the Belgium office space by 453 square meters. There were no other significant changes to our contractual obligations and commitments as of September 30, 2021, as described in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our final Annual Report on Form 10-K for the year ended December 31, 2020.

Critical accounting policies and significant judgments and estimates

Our management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which we have prepared in accordance with U.S. generally accepted accounting principles. We believe that several accounting policies are important to understanding our historical and future performance. We refer to these policies as critical because these specific areas generally require us to make judgments and estimates about matters that are uncertain at the time we make the estimate, and different estimates-which also would have been reasonable-could have been used. On an ongoing basis, we evaluate our estimates and judgments, including those described in greater detail below. We base our estimates on historical experience and other market-specific or other relevant assumptions that we believe to be 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. Actual results may differ from these estimates under different assumptions or conditions.

There have been no significant changes to our existing critical accounting policies discussed in our Annual Report on Form 10-K for the year ended December 31, 2020. We believe the following accounting policies to be most critical to the judgments and estimates used in the preparation of our financial statements:

Revenue Recognition

We generate revenue from our GSK Collaboration Agreement (see Note 5 to our unaudited consolidated financial statements in Part I, Item I). Financial Information. We recognize revenue in accordance with ASC 606, which applies to all contracts with customers, except for contracts that are within the scope of other standards. Under ASC 606, we recognize revenue when our customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that we determine are within the scope of ASC 606, we perform the following five steps:

  (i) identify the contract(s) with a customer;


  (ii) identify the performance obligations in the contract;


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  (iii) determine the transaction price;


   (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.



We only apply the five-step model to contracts when it is probable that the entity will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract and determine those that are performance obligations, and assess whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. We do not include a financing component in our estimated transaction price at contract inception unless we estimate that certain performance obligations will not be satisfied within one year. Additionally, we recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that we otherwise would have recognized is one year or less.

Research and development expenses

As part of the process of preparing our financial statements, we are required to estimate our accrued research and development expenses. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed for us 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. The majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met. 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, which we periodically confirm with the service providers and make adjustments if necessary. Examples of accrued research and development expenses include fees paid to:

  • CROs in connection with clinical trials;


   •  CMOs with respect to clinical materials, intermediates, drug substance and
      drug product;


   •  vendors in connection with research and preclinical development activities;
      and


   •  vendors related to manufacturing, development and distribution of clinical
      supplies.

We base our expenses related to clinical trials on our estimates of the services received and efforts expended pursuant to contracts with multiple CROs that conduct and manage clinical trials on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors for goods or services will exceed the level of services provided and result in a prepayment of the clinical expense. Payments under some of these contracts depend on factors such as the successful enrollment of subjects and the completion of clinical trial milestones. In accruing service fees, we determine the time period over which services will be performed, enrollment of subjects and the level of effort to be 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 prepaid expense accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, differences may cause us to report amounts that are too high or too low in any particular period. To date, there have been no material differences from our estimates to the amounts actually incurred.

Stock-based compensation expense

Prior to our IPO in July 2020, there had been no public market for our common stock. The estimated fair value of our common stock was determined by our board of directors as of the date of each option grant, with input from management, considering our most recently available third-party valuations of common stock, and our board of directors' 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 were performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants' Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. Our common stock valuations were prepared using an option pricing method, or OPM, which used market approaches to estimate our enterprise value. The OPM treats common stock and preferred stock as call options on the total equity value of a company, with exercise prices based on the value thresholds at which the allocation among the various holders of a company's securities changes. Under this method, the common stock has value only if the funds available for distribution to stockholders exceeded the value of the preferred stock liquidation preferences at the time of the liquidity event, such as a strategic sale or a merger. A discount for lack of marketability of the common stock is then applied 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 both objective and subjective factors, including:

   •  the prices at which we sold preferred stock and the superior rights and
      preferences of the preferred stock relative to our common stock at the time
      of each grant;


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   •  the progress of our research and development programs, including the status
      of preclinical studies and planned clinical trials for our product
      candidates;


  • our stage of development and our business strategy;


   •  external market conditions affecting the biotechnology industry, and trends
      within the biotechnology industry;


   •  our financial position, including cash and cash equivalents 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; and


   •  the likelihood of achieving a liquidity event, such as an initial public
      offering or a sale of our company in light of prevailing market conditions.

The assumptions underlying these valuations represented management's best estimate, which involved inherent uncertainties and the application of management judgement. As a result, if factors or expected outcomes changed and we used significantly different assumptions or estimates, our stock-based compensation could be materially different.

Following our IPO, the fair value of our common stock is determined based on the quoted market price of our common stock.

There were no significant changes to assumptions used to value options using the Black Scholes option pricing model in 2021, with the exception of the stock and exercise prices.

Government grant funding and potential repayment commitments under recoverable cash advance grants (RCAs)

We have agreements with granting agencies whereby we receive funding under grants, which partially or fully reimburse us for eligible research and development expenditures. Certain grant agreements require us to repay the funding wherein the repayment provision of the grants are predicated on whether we decide to pursue commercial development or out licensing of the drug candidate that is produced from the results of the research program. The repayment provision includes a portion that is fixed (corresponding to 30% of the grant) which is effective after we decide to pursue commercial development or out licensing of the drug candidate. The repayment provision also includes a potential obligation to pay a royalty that is contingent upon achieving sales of a product developed through the program. The maximum amount payable to the granting agency under each grant, including the fixed repayments, the royalty on revenue, and the interest thereon, is twice the amount of funding received.

Grant funding for research and development received under grant agreements where there is a repayment provision is recognized as other income to the extent there is no potential obligation to repay this funding. We record the present value of the liability as a grant repayable in the accompanying consolidated balance sheets. The grant repayable is subsequently recorded at amortized cost. There were no significant changes to assumptions in 2021.

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 under the applicable regulations of the SEC.

Recent accounting pronouncements

Refer to Note 2, "Summary of Significant Accounting Policies," in the accompanying notes to the consolidated financial statements for a discussion of recent accounting pronouncements.

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