KARA THER The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10Q and our audited consolidated financial statements and related notes for the year endedDecember 31, 2020 included in our Annual Report on Form 10-K, or the Annual Report, filed with theSecurities and Exchange Commission , or theSEC , onFebruary 25, 2021 . This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements are often identified by the use of words such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "plan," "project," "will," "would" or the negative or plural of these words or similar expressions or variations. Such forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified and discussed in the section titled "Risk Factors," set forth in Part II, Item 1A of this Quarterly Report on form 10Q, Part I, Item 1A of our Annual Report, and in subsequentSEC filings. You should not rely upon forward-looking statements as predictions of future events. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. Overview We are a clinical-stage biopharmaceutical company driven to create and deliver transformative medicines for people living with psychiatric and neurological conditions. Our pipeline is built on the broad therapeutic potential of our lead product candidate, KarXT, an oral modulator of muscarinic receptors that are located both in the central nervous system, or CNS, and various peripheral tissues. KarXT is our proprietary product candidate that combines xanomeline, a novel muscarinic agonist, with trospium, an approved muscarinic antagonist, to preferentially stimulate muscarinic receptors in the CNS. We are initially developing our lead product candidate, KarXT, for the treatment of acute psychosis in patients with schizophrenia. KarXT combines xanomeline, a muscarinic receptor agonist that preferentially stimulates M1 and M4 muscarinic receptors, and trospium, an approved muscarinic receptor antagonist that does not measurably cross the blood-brain barrier, confining its effects to peripheral tissues. M1 and M4 muscarinic receptors are the receptor subtypes believed to mediate the antipsychotic and procognitive effects of xanomeline and other muscarinic agonists. InNovember 2019 , we announced positive results from the first trial in our EMERGENT program, the clinical program evaluating KarXT for the treatment of schizophrenia. In this Phase 2 trial, EMERGENT-1, we evaluated KarXT for the treatment of acute psychosis in adults with schizophrenia. KarXT met the trial's primary endpoint with a statistically significant (p<0.0001) and clinically meaningful 11.6 point mean reduction in total Positive and Negative Syndrome Scale, or PANSS, scores over placebo at week 5 (-17.4 KarXT vs. -5.9 placebo). Following the positive results of EMERGENT-1, we had an End-of-Phase 2 meeting with theU.S. Food and Drug Administration , or FDA, in which the FDA confirmed that our completed EMERGENT-1 trial, along with one successful Phase 3 efficacy and safety trial, and additional safety data to meet regulatory requirements, would be acceptable to support a New Drug Application, or NDA, filing. 16 -------------------------------------------------------------------------------- In addition to our completed positive Phase 2 EMERGENT-1 trial, our EMERGENT program includes two Phase 3 trials evaluating the efficacy and safety of KarXT compared to placebo (EMERGENT-2 & EMERGENT-3, which are similar in design to EMERGENT-1), and two Phase 3 trials evaluating the long-term safety of KarXT (EMERGENT-4 & EMERGENT-5). All Phase 3 trials within our EMERGENT program are currently enrolling, with details as follows: ? EMERGENT-2: A five-week inpatient trial evaluating the efficacy and safety of KarXT compared to placebo in 246 adults with schizophrenia in theU.S. Enrollment for this trial began inDecember 2020 and we anticipate reporting topline data in mid-2022. ? EMERGENT-3: A five-week inpatient trial evaluating the efficacy and safety of KarXT compared to placebo in 246 adults with schizophrenia in theU.S. andUkraine . Enrollment for this trial began in the second quarter of 2021 and we anticipate reporting topline data in the second half of 2022. ? EMERGENT-4: A 52-week outpatient, open-label extension trial evaluating the long-term safety and tolerability of KarXT in 350 adults with schizophrenia who completed EMERGENT-2 or EMERGENT-3. Enrollment for this trial began in the first quarter of 2021. ? EMERGENT-5: A 52-week outpatient, open-label trial evaluating the long-term safety and tolerability of KarXT in 400 adults with schizophrenia in theU.S. in patients who were not enrolled in EMERGENT-2 or EMERGENT-3. Enrollment for this trial began in the second quarter of 2021. We are on track to initiate our initial Phase 3 ARISE trial evaluating the safety and efficacy of KarXT compared to placebo as an adjunctive treatment in adults with schizophrenia who have an inadequate response to their current antipsychotic therapy in the fourth quarter of 2021. This six-week, 1:1 randomized, double-blind, placebo-controlled Phase 3 trial will enroll approximately 400 adults with schizophrenia who have not achieved an adequate response to their current atypical antipsychotic treatment. Participants in this trial will continue their currently prescribed atypical antipsychotic therapy at the same dose or regimen schedule as prior to entry in the study, and will receive a flexible dose of KarXT or placebo based on tolerability and clinical response as determined by a clinician. The primary outcome measure of the trial is change in Positive and Negative Syndrome Scale (PANSS) total score of KarXT compared to placebo at week 6. Upon completion of the trial at week 6, participants will have the opportunity to enroll in a 52-week outpatient, open-label Phase 3 extension trial evaluating the long-term safety and tolerability of KarXT when dosed with atypical antipsychotic treatment. InJune 2021 we announced results from our multi-cohort, placebo-controlled Phase 1b trial evaluating the safety and tolerability of KarXT in healthy elderly volunteers. Results from the trial suggest that potentially therapeutic doses of KarXT can be administered to elderly adults while maintaining a favorable tolerability profile, and support the advancement of KarXT into a Phase 3 program. Our evaluation of KarXT for the treatment of dementia-related psychosis will initially focus on psychosis in Alzheimer's disease, the most prevalent subtype of dementia-related psychosis. Dementia affects an estimated 8.4 million people inthe United States , with Alzheimer's disease accounting for 60% to 80% of all cases. Up to 50% of Alzheimer's disease patients exhibit psychiatric symptoms. Our initial focus on the Alzheimer's disease dementia subtype reflects various strategic development, regulatory and commercial considerations, and we remain interested in exploring KarXT in other dementia subtypes in future development programs. Details of our Phase 3 Alzheimer's disease psychosis program will be available in the first half of 2022 prior to the program's initiation in mid-2022. Since our inception in 2009, we have focused substantially all of our efforts and financial resources on organizing and staffing our company, acquiring and developing our technology, raising capital, building our intellectual property portfolio, undertaking preclinical studies and clinical trials and providing general and administrative support for these activities. OnJuly 2, 2019 , we issued and sold 6,414,842 shares of our common stock, including full exercise of the underwriters' over-allotment option to purchase an additional 836,718 shares, at a public offering price of$16.00 per share, in our initial public offering, or IPO. The aggregate net proceeds to us from the IPO were$93.0 million . OnNovember 25, 2019 , we issued and sold 2,600,000 shares of our common stock at a public offering price of$96.00 per share in a follow-on offering in which we received net proceeds of$234.2 million . Prior to the IPO and follow-on public offering, we funded our operations primarily with proceeds from the sales of redeemable convertible preferred stock and the issuance of convertible notes. 17 -------------------------------------------------------------------------------- OnJuly 2, 2020 , we filed an automatically effective registration statement on Form S-3, or the Registration Statement, with theSEC which registered the offering, issuance and sale of an unspecified amount of common stock, preferred stock, debt securities, warrants and/or units of any combination thereof. We simultaneously entered into an equity distribution agreement withGoldman Sachs & Co. LLC , as sales agent, to provide for the issuance and sale by the Company of up to$150.0 million of common stock from time to time in "at-the-market" offerings under the Registration Statement and related prospectus filed with the Registration Statement, or the ATM Program. As ofSeptember 30, 2021 , no sales had been made pursuant to the ATM Program. OnMarch 4, 2021 , we issued and sold 2,395,834 shares of our common stock, including full exercise of the underwriters' over-allotment option to purchase an additional 312,500 shares, at a public offering price of$120 per share under the Registration Statement and a related prospectus supplement. The aggregate net proceeds from the offering were$270.0 million . We have never generated revenue and have incurred significant net losses since inception. Our net losses were$115.9 million and$44.6 million for the nine months endedSeptember 30, 2021 and 2020, respectively. As ofSeptember 30, 2021 , we had an accumulated deficit of$259.9 million . Our net losses may fluctuate significantly from quarter to quarter and year to year. We expect to incur significant expenses and increasing operating losses for the foreseeable future. We anticipate that our operating expenses and capital expenditures will increase substantially, particularly as we: ? invest significantly to further develop KarXT for our current and future indications; ? advance additional product candidates into preclinical and clinical development; ? seek regulatory approvals for any product candidates that successfully complete clinical trials; ? require the manufacture of larger quantities of our product candidates for clinical development and potential commercialization; ? hire additional clinical, scientific, management and administrative personnel; ? maintain, expand and protect our intellectual property portfolio; ? acquire or in-license other assets and technologies; and ? add additional operational, financial and management information systems and processes to support our ongoing development efforts, any future manufacturing or commercialization efforts and our ongoing operations as a public company. We do not expect to generate revenue from product sales unless and until we successfully complete development and obtain regulatory approval for a product candidate, which we expect will take a number of years, if ever, and the outcome of which is subject to significant uncertainty. Additionally, we currently use third parties such as contract research organizations, or CROs, and contract manufacturing organizations, or CMOs, to carry out our preclinical and clinical development activities, and we do not yet have a sales organization. If we obtain regulatory approval for any product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of private and public equity offerings, debt financings, collaborations, strategic alliances and marketing, distribution, or licensing arrangements with third parties. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements as and when needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more of our product candidates. As ofSeptember 30, 2021 , we had cash, cash equivalents and available-for-sale investments of$498.9 million . We believe that our existing cash, cash equivalents and available-for-sale investments will be sufficient to meet our anticipated operating and capital expenditure requirements for at least twelve months following the potential submission of a new drug application, or NDA, with theU.S. Food and Drug Administration for KarXT for the treatment of acute psychosis in patients with schizophrenia. 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." 18 --------------------------------------------------------------------------------
Components of Our Results of Operations
Revenue
To date, we have not generated any revenue and may not generate any revenue in
the foreseeable future, if at all. If our development efforts for our product
candidates are successful and result in regulatory approval, we may generate
revenue in the future from product sales. If we enter into license or
collaboration agreements for any of our product candidates or intellectual
property, we may generate revenue in the future from payments as a result of
such license or collaboration agreements. We cannot predict if, when, or to what
extent we will generate revenue from the commercialization and sale of our
product candidates. We may never succeed in obtaining regulatory approval for
any of our product candidates.
Operating Expenses
Research and Development Expenses
Research and development expenses consist primarily of costs incurred for the development of our product candidates and our drug discovery efforts, which include:
?
personnel costs, including salaries and the related costs, and stock-based
compensation expense for employees engaged in research and development
functions;
?
expenses incurred in connection with the preclinical and clinical development of
our product candidates, including under agreements with CROs;
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expenses incurred in connection with CMOs that manufacture drug products for use
in our preclinical and clinical trials;
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formulation costs and chemistry, manufacturing and controls, or CMC, costs; and
?
expenses incurred under agreements with consultants who supplement our internal
capabilities.
We expense all research and development costs in the periods in which they are
incurred. Costs for certain development activities are recognized based on an
evaluation of the progress to completion of specific tasks using information and
data provided to us by our vendors and third-party service providers.
Most research and development costs, such as fees paid to consultants, central
laboratories, contractors, CMOs and CROs in connection with our clinical
development activities, are tracked on an indication-by-indication basis.
Formulation and CMC, preclinical, and discovery expenses consist of costs
associated with activities to support our current and future clinical programs,
but are not allocated on an indication-by-indication basis due to the overlap of
the potential benefit of those efforts across multiple indications that utilize
KarXT and future product and development candidates. We similarly do not track
certain research and development expenses on an indication-by-indication basis
as they primarily relate to personnel or other consulting costs which are
deployed across multiple projects under development. These costs are included in
unallocated research and development expenses in the table below. The following
table summarizes our research and development expenses:
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
(in thousands) (in thousands)
Schizophrenia clinical trials $ 21,520 $ 4,020 $ 39,220 $ 6,716
Dementia-related psychosis clinical trials 198 537 1,596 1,020
Pain clinical trial (34 ) 465 143 1,255
Formulation and CMC 3,883 2,133 9,460 5,610
Preclinical 993 289 1,736 820
Discovery 3,538 1,608 9,680 3,529
Unallocated expenses 8,677 3,533 21,273 8,874
Total research and development expense
19
-------------------------------------------------------------------------------- We expect our research and development expenses to increase substantially for the foreseeable future as we continue to invest in research and development activities related to developing our product candidates, including investments in manufacturing, as our programs advance into later stages of development and we continue to conduct clinical trials. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, and the successful development of our product candidates is highly uncertain. Because of the numerous risks and uncertainties associated with conducting product development, we cannot determine with certainty the duration and completion costs of our 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 our product candidates. 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, if and as we: ? continue to develop and conduct clinical trials for KarXT for our current and future indications; ? initiate and continue research, preclinical and clinical development efforts for future product candidates; ? seek to identify additional product candidates; ? seek regulatory approvals for KarXT for our current and future indications as well as any other product candidates that successfully complete clinical development; ? add operational, financial and management information systems and personnel, including personnel to support our product development; ? hire and retain additional personnel, such as clinical, quality control, scientific, commercial and administrative personnel; ? maintain, expand and protect our intellectual property portfolio; ? establish sales, marketing, distribution, manufacturing, supply chain and other commercial infrastructure in the future to commercialize various products for which we may obtain regulatory approval, if any; ? continue to assess the impact of the ongoing and evolving COVID-19 pandemic on the ability to execute research and development activities; ? add equipment and physical infrastructure to support our research and development; and ? acquire or in-license other product candidates and technologies.
A change in the outcome of any of these variables with respect to the development of any of our product candidates would significantly change the costs and timing associated with the development of that product candidate. We may never succeed in obtaining regulatory approval for any of our product candidates.
We do not believe that it is possible at this time to accurately project total indication-specific expenses through commercialization. There are numerous factors associated with the successful commercialization of any of our product candidates, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development. Additionally, future commercial and regulatory factors beyond our control will impact our clinical development programs and plans.
General and Administrative Expenses
General and administrative expenses consist primarily of employee-related costs
for personnel in executive, finance, commercial, and administrative functions,
costs related to maintenance and filing of intellectual property,
facility-related costs, insurance costs, and other expenses for outside
professional services, including legal, human resources, data management, audit
and accounting services, and costs incurred as we prepare for commercialization.
Personnel costs consist of salaries, benefits, travel expense and stock-based
compensation expense.
We anticipate that our general and administrative expenses will increase in the
future as we increase our headcount to support our continued research activities
and development of our product candidates, and if and as we commercialize. We
will also continue to incur increased accounting, audit, legal, regulatory,
compliance and director and officer insurance costs as well as investor and
public relations expenses associated with operating as a public company.
20
--------------------------------------------------------------------------------Other Income (Loss), Net
Other income (loss), net, consists of interest income from our cash equivalents and available-for-sale investments and sublease income recognized in connection with the sublease of office space, offset by impairment loss on our right-of-use lease assets at ourArch Street facility, due to their carrying value exceeding their estimated fair value. Results of Operations
Comparison of the three months ended
Three Months Ended September 30,
2021 2020 Change
(in thousands)
Revenue $ - $ - $ -
Operating expenses:
Research and development 38,775 12,585 26,190
General and administrative 12,393 6,944 5,449
Total operating expenses 51,168 19,529 31,639
Loss from operations (51,168 ) (19,529 ) (31,639 )
Total other income, net 236 688 (452 )
Net loss attributable to common stockholders
(18,841 )
Research and Development Expenses
Three Months Ended September 30,
Change
2021 2020
(in thousands)
Direct research and development expenses:
Schizophrenia clinical trials $ 21,520 $ 4,020 $ 17,500
Dementia-related psychosis clinical trials 198 537 (339 )
Pain clinical trial (34 ) 465 (499 )
Formulation and CMC 3,883 2,133 1,750
Preclinical 993 289 704
Discovery 3,538 1,608 1,930
Unallocated expenses:
Personnel related expenses (including
stock-based compensation) 8,175 3,130 5,045
Consultant fees and other expenses 502 403 99
Total research and development expense
12,585
Expenses related to our schizophrenia clinical trials increased by$17.5 million in the three months endedSeptember 30, 2021 as compared to the three months endedSeptember 30, 2020 due to expenses related to ongoing enrollment activities for our EMERGENT Phase 3 trials as well as start-up activities related to our ARISE Phase 3 trials. The decrease of$0.3 million related to our dementia-related psychosis, or DRP, clinical trial is primarily due to unrepeated costs for enrollment and dosing activities for the Phase 1b trials incurred in the three months endedSeptember 30, 2020 , compared to close out costs incurred in the three months endedSeptember 30, 2021 . The decrease of$0.5 million in expenses related to our pain clinical trial is primarily due to unrepeated costs for enrollment and dosing activities for the Phase 1b trial incurred in the three months endedSeptember 30, 2020 , compared to a credit amount of less than$0.1 million due to the final reconciliation and overpayment compared to actual costs in the three months endedSeptember 30, 2021 . Formulation and CMC expenses increased by$1.8 million due to the timing of manufacturing activities necessary in the current period to support ongoing and future clinical trial activities as well as activities to support a potential future NDA filing. Preclinical expenses increased by$0.7 million due to the initiation of new studies in the three months endedSeptember 30, 2021 . The increase of$1.9 million in discovery costs is due to an increase in ongoing discovery efforts, including ongoing collaborations with Charles River Labs andPsychogenics, Inc. The increase of$5.1 million in personnel related costs was primarily a result of an increase in headcount and an increase of$2.0 million related to stock-based compensation expense. The increase of$0.1 million in consultant fees and other expenses was due to timing of consulting costs not specifically allocated to discovery, preclinical, clinical, formulation and CMC activities. 21
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General and Administrative Expenses
Three Months Ended September 30,
Change
2021 2020
(in thousands)
Personnel related expenses (including
stock-based compensation) $ 7,067 $ 4,380 $ 2,687
Professional and consultant fees 2,971 945 2,026
Other 2,355 1,619 736
Total general and administrative expense $ 12,393 $
6,944
The increase of$2.7 million in personnel related costs in the three months endedSeptember 30, 2021 as compared to the three months endedSeptember 30, 2020 was primarily a result of an increase in headcount and an increase of$2.0 million related to stock-based compensation expense. The increase of$2.0 million in professional and consultant fees was primarily due to an increase in recruiting fees, accounting fees, pre-commercial costs, legal costs and consulting fees related to our ongoing business activities. The increase of$0.7 million in other costs was primarily due to additional lease costs for ourHigh Street lease inBoston, Massachusetts as well as other infrastructure and administrative related costs to support increased headcount. Other Income, Net Three Months Ended September 30, Change 2021 2020 (in thousands) Interest income $ 114 $ 688$ (574 ) Sublease income 122 - 122 Total other income, net $ 236 $ 688$ (452 ) Interest income is attributable to interest earned on our cash equivalents and available-for-sale investments. The decrease of$0.6 million in interest income is primarily due to lower market interest rates.
Sublease income is due to the sublease of a portion of our
Comparison of the nine months ended
Nine Months Ended September 30,
Change
2021 2020
(in thousands)
Revenue $ - $ - $ -
Operating expenses:
Research and development 83,108 27,824 55,284
General and administrative 32,554 19,585 12,969
Total operating expenses 115,662 47,409 68,253
Loss from operations (115,662 ) (47,409 ) (68,253 )
Total other income (loss), net (183 )
2,864 (3,047 )
Net loss attributable to common stockholders
22
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Research and Development Expenses
Nine Months Ended September 30,
Change
2021 2020
(in thousands)
Direct research and development expenses:
Schizophrenia clinical trials $ 39,220 $ 6,716 $ 32,504
Dementia-related psychosis clinical trials 1,596 1,020 576
Pain clinical trial 143 1,255 (1,112 )
Formulation and CMC 9,460 5,610 3,850
Preclinical 1,736 820 916
Discovery 9,680 3,529 6,151
Unallocated expenses:
Personnel related expenses (including
stock-based compensation) 19,800 7,038 12,762
Consultant fees and other expenses 1,473 1,836 (363 )
Total research and development expense
27,824$ 55,284 Expenses related to our schizophrenia clinical trials increased by$32.5 million in the nine months endedSeptember 30, 2021 , as compared to the nine months endedSeptember 30, 2020 , due to expenses related to start-up and ongoing enrollment activities for our EMERGENT and ARISE Phase 3 trials. The increase of$0.6 million in expenses related to our DRP clinical trial during the nine months endedSeptember 30, 2021 is primarily driven by enrollment and dosing activities related to our completed Phase 1b clinical trial in healthy elderly volunteers. The decrease of$1.1 million in expenses related to our pain clinical trial is primarily due to unrepeated costs for enrollment and dosing activities incurred in the nine months endedSeptember 30, 2020 for our Phase 1b trial compared to close out costs for that trial incurred in the nine months endedSeptember 30, 2021 . Formulation and CMC expenses increased by$3.9 million due to an increase in manufacturing activities in 2021 to obtain sufficient supply to support current and future clinical trial activities as well as activities to support a potential future NDA filing. Preclinical expenses increased by$0.9 million due to the initiation of new studies in late 2020 and into 2021. The increase of$6.2 million in discovery costs is due to an increase in ongoing discovery efforts, including ongoing collaborations with Charles River Labs andPsychogenics, Inc. The increase of$12.8 million in personnel related costs was primarily a result of an increase in headcount and an increase of$5.7 million related to in stock-based compensation expense. The decrease of$0.4 million in consultant fees and other expenses was due to timing of consulting costs not specifically allocated to discovery, preclinical, clinical, formulation and CMC activities.
General and Administrative Expenses
Nine Months Ended September 30,
Change
2021 2020
(in thousands)
Personnel related expenses (including
stock-based compensation) $ 19,658 $ 11,619 $ 8,039
Professional and consultant fees 6,676 3,053 3,623
Other 6,220 4,913 1,307
Total general and administrative expense $ 32,554 $
19,585
The increase of$8.0 million in personnel related costs in the nine months endedSeptember 30, 2021 as compared to the nine months endedSeptember 30, 2020 was primarily a result of an increase in headcount and an increase of$6.8 million related to stock-based compensation expense. The increase of$3.6 million in professional and consultant fees was primarily due to an increase in recruiting fees, accounting fees, pre-commercial costs, legal costs and consulting fees related to our ongoing business activities. The increase of$1.3 million in other costs was primarily due to increased lease costs for ourArch Street lease and High Street Lease inBoston, Massachusetts as well as other infrastructure and administrative related costs to support increased headcount. 23 --------------------------------------------------------------------------------
Other Income (Loss), Net
Nine Months Ended September 30 ,
Change
2021 2020
(in thousands)Impairment loss on right-of-use assets $ (677 ) $
- $ (677 )
Interest income 363 2,864 (2,501 )
Sublease income 131 - 131
Total other income (loss), net $ (183 ) $
2,864
Impairment loss on right-of-use assets for the nine months endedSeptember 30, 2021 represents impairment recognized on our right-of-use lease assets to the extent their carrying value exceeded their estimated fair value for ourArch Street facility leases inBoston, Massachusetts . See Note 8 to our consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q. Interest income is attributable to interest earned on our cash equivalents and available-for-sale investments. The decrease of$2.5 million in interest income is primarily due to lower market interest rates.
Sublease income is due to the sublease of a portion of our
Liquidity and Capital Resources
Since our inception, we have incurred significant operating losses. We have not
yet commercialized any of our product candidates and we do not expect to
generate revenue from sales of any product candidates for several years, if at
all. To date, we have funded our operations primarily with proceeds from the
sale of redeemable convertible preferred stock, issuance of convertible notes,
and sales of our common stock. Through September 30, 2021 , our operations have
been financed by net proceeds of $25.7 million from the issuance of convertible
notes, $91.0 million from the sale of shares of our redeemable convertible
preferred stock, $93.0 million from the sale of our common stock in our IPO,
$234.2 million from the sale of our common stock in a follow-on public offering
in November 2019 , and $270.0 million from the sale of our common stock in a
follow-on public offering in March 2021 . As of September 30, 2021 , we had $498.9
million in cash, cash equivalents and available-for-sale investments, and an
accumulated deficit of $259.9 million .
On July 2, 2020 , we filed the Registration Statement with the SEC and
simultaneously entered into an equity distribution agreement with Goldman Sachs
& Co. LLC , as sales agent, for the ATM Program. As of September 30, 2021 , no
sales had been made pursuant to the ATM Program.
Our primary use of cash has been to fund operating expenses, which consist of
research and development and general and administrative expenditures. Cash used
to fund operating expenses is impacted by the timing of when we pay these
expenses, as reflected in the change in our outstanding prepaid expenses,
accounts payable and accrued expenses.
Cash Flows
The following table summarizes our sources and uses of cash for each of the
periods presented:
Nine Months Ended September 30,
2021 2020
(in thousands)
Net cash used in operating activities $ (93,880 ) $ (46,911 )
Net cash provided by (used in) investing activities 19,332 (119,311 )
Net cash provided by financing activities 273,825 2,114
Net increase (decrease) in cash, cash equivalents and
restricted cash $ 199,277 $ (164,108 )
24
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Cash Flows from Operating Activities
Cash used in operating activities for the nine months endedSeptember 30, 2021 was$93.9 million , consisting of a net loss of$115.9 million , partially offset by non-cash items, including stock-based compensation expense of$21.5 million , accretion of discounts, partially offset by amortization of premiums, on our available-for-sale investments of$0.7 million , and impairment loss on right-of-use assets of$0.7 million . The change in our net operating assets and liabilities was mainly due to an increase in prepaid expenses and other current assets of$8.4 million , primarily driven by upfront payments made to CROs and CMOs in connection with our clinical trials, offset by an increase in accounts payable and accrued expenses of$7.1 million , driven by the timing of payments to our vendors. Cash used in operating activities for the nine months endedSeptember 30, 2020 was$46.9 million , consisting of a net loss of$44.6 million , partially offset by non-cash items, including stock-based compensation expense of$9.0 million . The change in our net operating assets and liabilities was mainly due to an increase in prepaid expenses and other current assets of$12.6 million , which was primarily driven by upfront payments made to CROs and CMOs in connection with our clinical trials.
Cash Flows from Investing Activities
Cash provided by investing activities for the nine months endedSeptember 30, 2021 was$19.3 million , primarily attributable to maturities and sales of investment securities of$302.1 million and$9.0 million , respectively, which were partially offset by purchases of investment securities of$289.5 million .
Cash used in investing activities for the nine months ended
Cash Flows from Financing Activities
Cash provided by financing activities for the nine months endedSeptember 30, 2021 was$273.8 million , which was primarily attributable to$270.0 million in net proceeds received from the sale of our common stock in our follow-on public offering and$3.8 million attributable to proceeds received from the exercise of stock options.
Cash provided by financing activities for the nine months ended
Future Funding Requirements
We expect our expenses to increase substantially in connection with our ongoing activities, in particular as we continue to advance our product candidates through clinical trials and prepare for the potential commercialization of KarXT, if approved by the FDA. In addition, we expect to incur additional costs associated with operating as a public company. As ofSeptember 30, 2021 , we had cash and cash equivalents and available-for-sale investments of$498.9 million . Based on our current plans, we believe that our existing cash, cash equivalents and available-for-sale investments will be sufficient to meet our anticipated operating and capital expenditure requirements for at least twelve months following the potential submission of an NDA for KarXT for the treatment of acute psychosis in patients with schizophrenia. 25
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We have based this estimate on assumptions that may prove to be wrong, and we
could utilize our available capital resources sooner than we currently expect.
Because of the numerous risks and uncertainties associated with research,
development and commercialization of pharmaceutical product candidates, we are
unable to estimate the exact amount of our working capital requirements. Our
future funding requirements will depend on and could increase significantly as a
result of many factors, including:
?
the scope, progress, results and costs of researching and developing KarXT for
our current and future indications as well as other product candidates we may
develop;
?
the timing of, and the costs involved in, obtaining marketing approvals for
KarXT for our current and future indications as well as future product
candidates we may develop and pursue;
?
the number of future indications and product candidates that we pursue and their
development requirements;
?
if approved, the costs of commercialization activities for KarXT for the
approved indication, or any other product candidate that receives regulatory
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 regulatory approval, revenue, if any, received from
commercial sales of KarXT for any indication or revenue received from any future
product candidates;
?
the extent to which we in-license or acquire rights to other products, product
candidates or technologies;
?
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, and
maintaining and protecting our intellectual property rights, including enforcing
and defending intellectual property related claims; and
?
the ongoing costs of operating as a public company.
A change in the outcome of any of these or other variables with respect to the
development of any of our product candidates could significantly change the
costs and timing associated with the development of that product candidate.
Further, our operating plans may change in the future, and we may need
additional funds to meet operational needs and capital requirements associated
with such operating plans.
Until such time, if ever, as we can generate substantial product revenue, we
expect to finance our operations through a combination of equity financings,
debt financings, collaborations with other companies or other strategic
transactions. We do not currently have any committed external source of funds.
To the extent that we raise additional capital through the sale of equity or
convertible debt securities, our stockholders' ownership interest will be
diluted, and the terms of these securities may include liquidation or other
preferences that adversely affect their rights as common stockholders. Debt
financing and preferred equity financing, if available, may involve agreements
that include covenants limiting or restricting our ability to take specific
actions, such as incurring additional debt, making acquisitions or capital
expenditures or declaring dividends. If we raise additional funds through
collaborations, strategic alliances or marketing, distribution or licensing
arrangements with third parties, we may have to relinquish valuable rights to
our technologies, future revenue streams, research programs or product
candidates or grant licenses on terms that may not be favorable to us. If we are
unable to raise additional funds through equity or debt financings or other
arrangements when needed, we may be required to delay, limit, reduce or
terminate our research, product development or future commercialization efforts
or grant rights to develop and market product candidates that we would otherwise
prefer to develop and market ourselves.
Further, our operating plans may change, and we may need additional funds to
meet operational needs and capital requirements for clinical trials and other
research and development activities. We currently have no credit facility or
committed sources of capital. Because of the numerous risks and uncertainties
associated with the development and commercialization of our product candidates,
we are unable to estimate the amounts of increased capital outlays and operating
expenditures associated with our current and anticipated product development
programs.
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Contractual Obligations and Other Commitments
In January 2020 , we amended our current lease for 7,050 square feet of office
space in Boston, Massachusetts , or the Arch Street Original Premises, to acquire
approximately 4,175 in additional square feet, or the Arch Street Expansion
Premises, and to extend the original lease term through December 2023 . Remaining
lease payments from July 1, 2021 through the end of the lease term total $1.9
million for both the Arch Street Original Premises and the Arch Street Expansion
Premises, of which we took possession of 2,424 square feet and 1,751 square feet
in March 2020 and August 2020 , respectively.
In
InMarch 2021 , we entered into an agreement to sublease approximately 25,445 square feet of office space from a third party inBoston, Massachusetts as part of the relocation of our corporate headquarters. The term of the sublease extends fromApril 1, 2021 throughDecember 31, 2025 and provides for escalating annualized base rent payments starting at approximately$1.5 million and increasing to$1.6 million in the final year of the sublease. Remaining lease payments fromOctober 1, 2021 through the end of the lease term total$6.7 million . Simultaneously, inMarch 2021 , we entered into an agreement to sublease the Arch Street Original Premises to a third party. The term of the sublease extends fromJuly 1, 2021 throughDecember 31, 2023 .
In
During the nine months endedSeptember 30, 2021 , there were no other material changes to our contractual obligations and commitments described in our Annual Report, as filed with theSEC . Critical Accounting Polices and Estimates Our consolidated financial statements are prepared in accordance with generally accepted accounting principles inthe United States . The preparation of our consolidated financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amount of assets, liabilities, revenue, costs and expenses, and related disclosures. We believe that of our critical accounting policies described under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates" in our Annual Report, the following involves the most judgment and complexity: ?
Research and development contract costs and accruals
Accordingly, we believe the policies set forth above are critical to fully
understand and evaluate our financial condition and results of operations. If
actual results or events differ materially from the estimates, judgments and
assumptions used by us in applying these policies, our reported financial
condition and results of operations could be materially affected.
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 the
SEC .
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JOBS Act Accounting Election
As of June 30, 2020 , the market value of our common stock held by non-affiliates
exceeded $700 million , and as a result, as of January 1, 2021 , we qualified as a
"large accelerated filer" and no longer qualified as an "emerging growth
company," as defined in the Jumpstart Our Business Startups Act of 2012, or the
JOBS Act. As a large accelerated filer, we are subject to certain disclosure
requirements that are applicable to other public companies that were not
applicable to us as an emerging growth company, including compliance with the
auditor attestation requirements in the assessment of our internal control over
financial reporting imposed by the Sarbanes-Oxley Act of 2002, compliance with
any requirement that may be adopted by the Public Company Accounting Oversight
Board regarding mandatory audit firm rotation or a supplement to the auditor's
report providing additional information about the audit and the financial
statements and full disclosure obligations regarding executive compensation.
Additionally, we are no longer able to take advantage of transition periods for
complying with new or revised accounting standards that are available to
emerging growth companies.
Recently Issued or Adopted 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 consolidated financial statements appearing elsewhere in this Quarterly
Report on Form 10-Q.
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