You should read the following discussion and analysis of our financial condition and results of operations together with the "Selected Financial Data" section of this Quarterly Report on Form 10-Q (this "Quarterly Report") and our financial statements and the related notes appearing elsewhere in this Quarterly Report. This discussion and other parts of this Quarterly Report contain forward-looking statements that involve risks and uncertainties, such as statements regarding our plans, objectives, expectations, intentions and projections. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the "Risk Factors" section of this Quarterly Report. Overview We are a late-clinical stage, cell therapy company developing an innovative method of allogeneic hematopoietic stem cell transplantation ("allo-HSCT") that we believe has the potential to transform the standard of care in solid organ transplantation, certain severe autoimmune diseases and certain severe blood, immune and metabolic disorders. In the organ transplant setting, which is our initial focus, we believe our proprietary therapeutic approach, which we call Facilitated Allo-HSCT Therapy, could prevent organ rejection without the morbidity and mortality that has been associated with the use of lifelong anti-rejection medicines, also known as chronic immunosuppression. Beyond the organ transplant setting, our Facilitated Allo-HSCT Therapy also has the potential to treat a range of severe autoimmune diseases and severe blood, immune and metabolic disorders, in each case with potential for similar outcomes to what has previously been observed with HSCT, while mitigating the toxicities, morbidities and extended hospital stay associated with the conditioning regimen typically required by HSCT. We believe that our target indications, individually and collectively, represent a significant unmet need and commercial opportunity. We were incorporated asRegenerex, Inc. in 2018 under the laws of theState of Delaware , having converted from a limited liability company under the nameRegenerex LLC . In 2019, we changed our corporate name fromRegenerex, Inc. toTalaris Therapeutics, Inc. Since our inception, we have devoted substantially all of our resources to developing our lead product candidate, FCR001, building our intellectual property portfolio, business planning, raising capital and providing general and administrative support for these operations. To date, we have principally financed our operations through private placements of convertible preferred stock, payments under a former research collaboration withNovartis, Inc. , research grants and most recently, an initial public offering ("IPO"). ThroughSeptember 30, 2022 , we had received net proceeds of$186.2 million from sales of our convertible preferred stock and net proceeds of$137.2 million , after deducting underwriting discounts and commissions and other expenses, from our IPO. We have incurred significant operating losses since inception. Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of our product and any future product candidates. Our net loss was$55.4 million for the nine months endedSeptember 30, 2022 and$47.8 million for year endedDecember 31, 2021 . As ofSeptember 30, 2022 , we had an accumulated deficit of$146.2 million . We expect to continue to incur net losses for the foreseeable future, and we expect our research and development expenses, general and administrative expenses and capital expenditures to continue to increase. In particular, we expect our expenses to increase as we continue our development of, and seek regulatory approvals for, our product candidates, as well as hire additional personnel, pay fees to outside consultants, lawyers and accountants, and incur other increased costs associated with being a public company. In addition, if we obtain marketing approval for any product candidates, we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution. We may also incur expenses in connection with the in-licensing or acquisition of additional product candidates. Furthermore, we expect to incur additional costs associated with operating as a public company, including significant legal, accounting, investor relations, compliance and other expenses that we did not incur as a private company. 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 the sale of equity, debt financings, or other capital sources, which may include collaborations with other companies or other strategic transactions. 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, reduce or eliminate the development and commercialization of one or more of our product candidates or delay our pursuit of potential in-licenses or acquisitions. Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations. Based upon our current operating plan, we believe that our existing cash and cash equivalents and marketable securities of$193.9 million as ofSeptember 30, 2022 will be sufficient to fund our operating expenses and capital expenditure requirements through 2024. 18 -------------------------------------------------------------------------------- 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. To finance our operations beyond that point we will need to raise additional capital, which cannot be assured. Recent Developments OnOctober 20, 2022 , we announced a clinical update on our ongoing FREEDOM-1 Phase 3 clinical trial in living donor kidney transplant ("LDKT") recipients. OnOctober 18, 2022 , we received a report of a patient death, which triggered a temporary stopping requirement and review by the Data Monitoring Committee ("DMC"). After their review of this case, the DMC determined that trial enrollment and dosing may continue. We reported this event and the DMC's recommendation to theU.S. Food and Drug Administration (the "FDA"). The deceased patient was one of three study subjects reported inJune 2022 to have been diagnosed with grade II acute graft-vs-host disease ("aGvHD"). As reported, this patient was also diagnosed with moderate chronic GvHD that was responding to treatment at the time of the update. The patient was recently hospitalized with grade IV GvHD that was complicated by serious infections leading to respiratory and renal failure, and ultimately death. InJune 2022 , we provided a clinical update on the trial and summarized an amendment to the trial protocol following a review of all GvHD cases to date, spanning the Phase 2 and Phase 3 trials. We reported that the incidence of GvHD in FCR001 subjects was correlated with high CD34+ cell counts and high total nucleated cell counts in the FCR001 product. We also noted a correlation between the use of plerixafor as a donor mobilizing agent and an increased risk of GvHD, as plerixafor significantly increased CD34+ and total nucleated cell counts in the FCR001 product. We introduced two risk mitigation measures for GvHD in the amended trial protocol: (1) elimination of plerixafor as a donor mobilizing agent, and (2) addition of a second post-transplant dose of cyclophosphamide. The deceased patient had a related, same sex donor with an HLA mismatch of 2/6. Although plerixafor was not used to mobilize this donor, the starting FCR001 material contained a high number of CD34+ cells and total nucleated cells, both of which we had identified during our review as factors that correlated with an increased risk of GvHD. The patient had not received a second post-transplant dose of cyclophosphamide as the patient was treated prior to theJune 2022 protocol amendment. As ofOctober 20, 2022 , the other two patients who were previously reported to have had grade II aGvHD had experienced complete resolution of their aGvHD symptoms, although one patient experienced additional flares that were also responsive to treatment. After reviewing the facts of this case, the DMC concluded that the protocol modifications implemented inJune 2022 should be sufficient to mitigate the risk of GvHD going forward, and recommended continuation of the trial without further modifications.
Impact of COVID-19 on Our Business
The ongoing worldwide COVID-19 pandemic and recent emergence of variants of the virus have affected and may affect in the future our ability to initiate and complete preclinical studies, delay the initiation and completion of our current and planned clinical trials, disrupt regulatory activities or have other adverse effects on our business, results of operations, financial condition and prospects. For example, screening and enrollment in our ongoing FREEDOM-1 Phase 3 clinical trial inthe United States have been adversely impacted by the ongoing COVID-19 pandemic. In addition, we and the third-party manufacturers, contract research organizations ("CROs"), and academic collaborators that we engage may face future disruptions that could affect our ability to initiate and complete preclinical studies or clinical trials, including disruptions in procuring items that are essential for our research and development activities, such as, for example, raw materials used in the manufacture of our product candidates and laboratory supplies for our preclinical studies and clinical trials, in each case, for which there may be shortages because of ongoing efforts to address the ongoing COVID-19 pandemic. We cannot be certain what the overall impact of the ongoing COVID-19 pandemic will be on our business, and it has the potential to adversely affect our business, financial condition, results of operations and prospects. In response to recommendations from state and local government authorities, we have adopted a variety of workplace safety policies and procedures, including vaccination and masking policies, designed to maintain the health and safety of our workforce We plan to continue monitoring COVID-19 in the areas in which we operate and may change our policies and procedures from time to time in response to changing health conditions.
License Agreement
InOctober 2018 , we entered an amended and restated exclusive license agreement ("ULRF License Agreement") withUniversity of Louisville Research Foundation ("ULRF") related to certain licensed patent rights and know-how related to human facilitating cells for our Facilitated Allo-HSCT Therapy approach. Pursuant to the ULRF License Agreement, ULRF granted us an exclusive, worldwide license under such patents and a nonexclusive royalty-bearing, worldwide license for such know-how to research, develop, commercialize and manufacture FCR001 and products containing FCR001 in all fields, without limitation. ULRF also granted us the right to grant sublicenses in accordance with the ULRF License Agreement. Under the terms of the agreement, we are obligated to compensate ULRF three percent of net sales of all licensed products sold, one third of any non-royalty sublicensing income, and up to$1.625 million in regulatory and sales milestones on each licensed product upon the occurrence of specific events as outlined in the 19 --------------------------------------------------------------------------------
license agreement; and annual license maintenance fees. As of
In addition, upon execution of the ULRF License Agreement, we granted contingent equity consideration equal to 65,186 shares of common stock to ULRF. Pursuant to the ULRF License Agreement, on or prior to our first underwritten public offering or any transaction that is treated as a deemed liquidation event, we are required to either issue to ULRF the 65,186 shares in common stock or make a cash payment equal to the 65,186 shares of common stock multiplied by either the price per share of common stock in the underwritten public offering or by the price per share of common stock received in connection with such deemed liquidation event. Coincident with the completion of our IPO inMay 2021 , we issued to ULRF 48,889 shares of common stock in addition to$0.3 million in a cash payment to fully satisfy the contingent stock liability to ULRF (see Note 8 in the accompanying financial statements). As ofSeptember 30, 2022 andDecember 31, 2021 , we had no liability to ULRF for contingent common stock.
Components of Our Results of Operations
Revenue
We have not generated any revenue since our inception and do not expect to generate any revenue from the sale of products in the future, if at all. If our product candidates we are currently developing and that we may develop in the future are successful and result in marketing approval or if we enter into collaboration or license agreements with third parties, we may generate revenue in the future from a combination of product sales or payments from such collaboration or license agreements.
Operating Expenses
Research and Development Expenses
Research and development expenses consist primarily of costs incurred in connection with the development and research of our novel cell therapy, as well as unrelated discovery program expenses. We expense research and development costs as incurred. These expenses include:
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employee-related expenses, including salaries, related benefits and stock-based compensation expense, for employees engaged in research and development functions;
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external research and development expenses incurred under arrangements with third parties, such as CROs, investigational sites, and consultants;
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the cost of acquiring, developing, and manufacturing clinical study materials;
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costs associated with preclinical and clinical activities and regulatory operations;
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costs incurred in development of intellectual property; and
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an allocated portion of facilities and other infrastructure costs associated with our research and development activities.
The Company enters into consulting, research, and other agreements with commercial entities, researchers, universities, and others for the provision of goods and services. Such arrangements are generally cancelable upon reasonable notice and payment of costs incurred. Costs are considered incurred based on an evaluation of the progress to completion of specific tasks under each contract using information and data provided by the respective vendors, including the Company's clinical sites. These costs consist of direct and indirect costs associated with specific projects, as well as fees paid to various entities that perform certain research on behalf of the Company. Depending upon the timing of payments to the service providers, the Company recognizes prepaid expenses or accrued expenses related to these costs. These accrued or prepaid expenses are based on management's estimates of the work performed under service agreements, milestones achieved, and experience with similar contracts. The Company monitors each of these factors and adjusts estimates accordingly.
The successful clinical development and subsequent commercialization of product candidates is highly uncertain. This is due to the numerous risks and uncertainties with product development and commercialization, including significant variations in our clinical development costs as well as the following factors:
• per patient trial costs;
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the number of trials required for approval;
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the number of sites included in the trials;
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the countries in which the trials are conducted;
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the length of time required to enroll eligible patients;
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the number of patients that participate in the trials;
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the length of hospitalization of patients in our clinical trials
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the drop-out or discontinuation rates of patients;
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potential additional safety monitoring requested by regulatory agencies;
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the duration of patient participation in the trials and follow-up;
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the cost and timing of manufacturing our product candidates;
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the phase of development of our product candidates;
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the efficacy and safety profile of our product candidates. the timing and progress of nonclinical and clinical development activities;
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the number and scope of preclinical and clinical programs we decide to pursue and our ability to successfully advance those programs without holds or delays;
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raising necessary additional funds;
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the progress of the development efforts of parties with whom we may enter into collaboration arrangements;
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our ability to maintain our current development program and to establish new ones;
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our ability to establish new licensing or collaboration arrangements;
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the successful initiation and completion of clinical trials with safety,
tolerability and efficacy profiles that are satisfactory to the
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the receipt and related terms of regulatory approvals from applicable regulatory authorities;
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the availability of drug substance and drug product for use in production of our product candidate;
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the development of commercial scale manufacturing and distribution processes for our product candidates;
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establishing and maintaining agreements with third-party manufacturers for
commercial manufacturing, if we pursue a third party manufacturing strategy
outside of
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our ability to obtain and maintain patents, trade secret protection and
regulatory exclusivity, both in
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our ability to protect our rights in our intellectual property portfolio;
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the commercialization of our product candidate, if and when approved;
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obtaining and maintaining third-party insurance coverage and adequate reimbursement;
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the acceptance of our product candidate, if approved, by patients, the medical community and third-party payors;
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competition with other products; and
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a continued acceptable safety profile of our therapies following approval.
We may never succeed in obtaining regulatory approval for any of our current and future product candidates, including FCR001. We may obtain unexpected or adverse results from our preclinical studies and clinical trials including FREEDOM-1, FREEDOM-2, and FREEDOM-3. We may elect or regulatory authorities may require us to discontinue, delay or modify clinical trials of some product candidates or focus on others. 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 another regulatory authority were to require us to conduct clinical trials for FCR001 beyond those that we currently anticipate will be required for the completion of clinical development, or if we experience significant delays in execution of any of our preclinical studies or execution or enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of preclinical and clinical development. A change in the outcome of any of these variables with respect to the development of our product candidates could 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. Research and development activities account for a significant portion of our operating expenses. We expect our research and development expenses to increase for the foreseeable future as we continue to implement our business strategy, which includes 21 --------------------------------------------------------------------------------
advancing FCR001 through clinical development of FREEDOM-1, FREEDOM-2 and FREEDOM-3 as well as other product candidates into clinical development, expanding our research and development efforts, including hiring additional personnel to support our research efforts, our clinical and product development efforts, and seeking regulatory approvals for our product candidates that successfully complete clinical trials.
We use our personnel and infrastructure resources across multiple research and development programs directed toward identifying and developing product candidates. Our direct research and development expenses are tracked on a program-by-program basis and consist primarily of external costs, including fees paid to consultants, contractors and CROs in connection with our development activities and the cost of acquiring, developing, and manufacturing clinical study materials. At this time, we do not fully allocate personnel costs to individual programs as many of our personnel are deployed across multiple programs.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and related costs for personnel in executive, finance, corporate and business development, and administrative functions. General and administrative expenses also include legal fees relating to patent and corporate matters, professional fees for accounting, auditing, tax and administrative consulting services, insurance costs and other operating costs, including an allocated portion of facilities and other infrastructure costs associated with our general and administrative activities. We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support development of our product candidates and our continued research activities. We also anticipate that we will incur increased accounting, audit, legal, regulatory, compliance and director and officer insurance costs as well as investor and public relations expenses associated with being a public company.
Other Income (Expense), Net
Other income (expense), net is comprised of interest income earned on cash reserves in our operating account and on our marketable securities, amortization expense and accretion income on our marketable securities and expense incurred in relation to the change in fair value of our contingent stock liability with ULRF. Results of Operations
Comparison of Three Months Ended
The following table summarizes our results of operations for the three months
ended
Three months ended September 30, 2022 2021 Change (in thousands) Operating expenses Research and development $ 14,981 $ 9,183$ 5,798 General and administrative 4,842 3,874 968 Total operating expenses 19,823 13,057 6,766 Loss from operations (19,823 ) (13,057 ) (6,766 ) Interest and other income (expense), net 812 116 696 Net loss$ (19,011 ) $ (12,941 ) $ (6,070 ) 22
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Research and Development Expenses
The following table summarizes our research and development expenses for the
three months ended
Three months ended September 30, 2022 2021 Change (in thousands) Direct research and development program expense: FCR001 clinical and pre-clinical programs $ 4,294 $ 2,431$ 1,863 Indirect research and development expenses: Personnel related (including stock-based compensation) 7,301 4,893 2,408 Facilities and other operating costs 3,386 1,859 1,527 Total research and development expenses $ 14,981 $ 9,183$ 5,798 Research and development activities are central to our business model. We expect that our research and development expenses will continue to increase substantially for the foreseeable future as we advance FCR001 through clinical trials, including our FREEDOM-1 Phase 3 clinical trial, and we continue to develop additional product candidates.
Research and development expenses were
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An increase of
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An increase of$1.9 million in direct FCR001 clinical program expenses related to increased activity in our FREEDOM-1 Phase 3 trial resulting from treating additional subjects and activating additional clinical sites and activating additional clinical sites in our FREEDOM-2 and FREEDOM-3 Phase 2 clinical trials; and
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An increase of$1.5 million in other costs related to patient advocacy efforts, medical communications development, consulting, research collaborations, increased medical conference activity other services in support of ongoing and planned clinical trials.
General and Administrative Expenses
The following table summarizes our general and administrative expenses to support our business activities for the three months endedSeptember 30, 2022 and 2021: Three months ended September 30, 2022 2021 Change (in thousands) Personnel related (including stock-based compensation) $ 2,699 $ 1,567$ 1,132 Professional and consulting fees 817 942 (125 ) Facility-related and other 1,326 1,365 (39 )
Total general and administrative expenses $ 4,842 $
3,874$ 968 General and administrative expenses were$4.8 million for the three months endedSeptember 30, 2022 compared to$3.9 million for the three months endedSeptember 30, 2021 . The increase in general and administrative costs of$0.9 million was primarily due to:
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An increase of$1.1 million in personnel costs primarily due to hiring in our general and administrative functions as we continued to expand our operations to support the organization, which includes increased stock compensation expense stemming from additional stock option and RSU grants;
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A decrease of
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An immaterial decrease in facility-related and other expenses primarily due to a decrease in director and officer insurance expense that was offset by an increase in information technology infrastructure costs for additional personnel, as compared to same quarter in 2021.
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Other Income (Expense), Net Other income (expense), net in the three months endedSeptember 30, 2022 was comprised of$0.2 million in interest income from our marketable securities and operating cash balance and$0.6 million of net accretion income on our marketable securities. Other income (expense), net in the three months endedSeptember 30, 2021 was comprised of$0.2 million in interest income from our marketable securities and operating cash balance offset by$0.1 million of net amortization expense on our marketable securities.
Comparison of Nine Months Ended
The following table summarizes our results of operations for the nine months
ended
Nine months ended September 30, 2022 2021 Change (in thousands) Operating expenses Research and development $ 42,364 $ 23,655$ 18,709 General and administrative 14,288 9,464 4,824 Total operating expenses 56,652 33,119 23,533 Loss from operations (56,652 ) (33,119 ) (23,533 ) Interest and other income (expense), net 1,286 (473 ) 1,759 Net loss$ (55,366 ) $ (33,592 ) $ (21,774 )
Research and Development Expenses
The following table summarizes our research and development expenses for the
nine months ended
Nine months ended September 30, 2022 2021 Change (in thousands) Direct research and development program expense: FCR001 clinical and pre-clinical programs$ 11,405 $ 6,220$ 5,185 Indirect research and development expenses: Personnel related (including stock-based compensation) 21,366 12,729 8,637 Facilities and other operating costs 9,593 4,706 4,887 Total research and development expenses$ 42,364 $ 23,655 $ 18,709 Research and development activities are central to our business model. We expect that our research and development expenses will continue to increase substantially for the foreseeable future as we advance FCR001 through clinical trials, including our FREEDOM- 1 Phase 3 clinical trial, and we continue to develop additional product candidates.
Research and development expenses were
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An increase of
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An increase of$5.2 million in direct FCR001 clinical program expenses related to increased activity in our FREEDOM-1 Phase 3 trial resulting from treating additional subjects and activating additional clinical sites, and activating additional clinical sites in our FREEDOM-2 and FREEDOM-3 Phase 2 clinical trials; and
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An increase of$4.9 million in other costs related to patient advocacy efforts, medical communications development, consulting, research collaborations, increased medical conference activity and other services in support of ongoing and planned clinical trials, and asset impairment. 24 --------------------------------------------------------------------------------
General and Administrative Expenses
The following table summarizes our general and administrative expenses to support our business activities for the nine months endedSeptember 30, 2022 and 2021: Nine months ended September 30, 2022 2021 Change (in thousands) Personnel related (including stock-based compensation) $ 7,418 $ 3,975$ 3,443 Professional and consulting fees 2,187 2,027 160 Facility-related and other 4,683 3,462 1,221 Total general and administrative expenses $ 14,288 $ 9,464$ 4,824 General and administrative expenses were$14.3 million for the nine months endedSeptember 30, 2022 compared to$9.5 million for the nine months endedSeptember 30, 2021 . The increase in general and administrative costs of$4.8 million was primarily due to:
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An increase of$3.4 million in personnel costs primarily due to hiring in our general and administrative functions as we continued to expand our operations to support the organization, which includes increased stock compensation expense stemming from additional stock option and RSU grants;
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An increase of$1.2 million in facility-related and other expenses primarily due to director and officer insurance expense for four additional months compared to 2021; and
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An increase of
Other Income (Expense), Net Other income (expense), net in the nine months endedSeptember 30, 2022 was comprised of$0.6 million in interest income from our marketable securities and operating cash balance and$0.7 million of net accretion income on our marketable securities. Other income (expense), net in the nine months endedSeptember 30, 2021 was comprised of$0.6 million in interest income from our marketable securities and operating cash balance, offset by$0.4 million of net amortization expense on our marketable securities, and$0.7 million in expense related to a fair value adjustment of our contingent stock liability.
Liquidity and Capital Resources
Since our inception, we have incurred significant operating losses. We have not yet commercialized any products and we do not expect to generate revenue from sales of products for several years, if at all. Since 2018, we have funded our operations primarily with proceeds from the sale of our convertible preferred stock and our IPO inMay 2021 . ThroughSeptember 30, 2022 , we had received net proceeds of$186.2 million from sales of our convertible preferred stock and net proceeds of$137.2 million , after deducting underwriting discounts and commissions and other expenses, from our IPO. Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with a view to liquidity and capital preservation. Our primary use of cash is to fund operating expenses, which consist primarily of research and development expenditures, and to a lesser extent, 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 accounts payable and accrued expenses. As ofSeptember 30, 2022 , we had cash and cash equivalents of$18.5 million and marketable securities of$175.4 million .
Cash Flows
The following table summarizes our sources and uses of cash for each of the periods presented: Nine months ended September 30, 2022 2021 Change (in thousands) Net cash used in operating activities$ (46,987 ) $ (30,158 ) $ (16,829 ) Net cash provided by (used in) investing activities 46,659 (97,108 ) 143,767 Net cash provided by financing activities 182 136,988 (136,806 ) Net increase in cash and cash equivalents and restricted cash $ (146 ) $ 9,722$ (9,868 ) 25
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Cash Flow from Operating Activities
During the nine months endedSeptember 30, 2022 , operating activities used$47.0 million of cash, due to our net loss of$55.4 million and$0.9 million of cash used from changes in our operating assets and liabilities, partially offset by non-cash charges of$9.3 million . Net cash used from changes in our operating assets and liabilities primarily consisted of a$1.7 million increase in prepaids and other current assets driven by annual director and officer insurance premiums, timing of CRO prepaids, and deferred offering costs related to our registration statement on Form S-3 and a$0.4 million decrease in operating lease liability driven by lease payments. These were offset by an increase of$0.6 million in accounts payable and accrued expenses driven by compensation related accruals and$0.1 million increase in other liabilities. Non-cash charges primarily consisted of$8.1 million of stock-based compensation expense,$0.4 million of depreciation on fixed assets and amortization of marketable securities,$0.6 million of amortization of right-of-use assets, and$0.2 million of asset impairment. During the nine months endedSeptember 30, 2021 , operating activities used$30.2 million of cash, due to our net loss of$33.6 million and$0.9 million of cash used from changes in our operating assets and liabilities, partially offset by non-cash charges of$4.3 million . Net cash used from changes in our operating assets and liabilities primarily consisted of a$2.2 million increase in prepaids and other current assets driven by annual director and officer insurance premiums and a$0.1 million increase in other assets related to deposits for ourWellesley, MA amended lease agreement. These were offset by a$1.4 million increase in accounts payable and accrued expenses driven by increased accrued CRO costs and increase compensation related accruals as a result of increased headcount. Non-cash charges primarily consisted of$2.8 million of stock-based compensation expense,$0.7 million of expense related to the fair value adjustment of our contingent stock liability and$0.8 million of depreciation expense on fixed assets and amortization of marketable securities.
Cash Flow from Investing Activities
During the nine months ended
During the nine months endedSeptember 30, 2021 , investing activities used$97.1 million of cash, due to purchases of marketable securities of$210.8 million and purchases of property and equipment of$1.2 million , partially offset by maturities of marketable securities of$114.9 million .
Cash Flow from Financing Activities
During the nine months endedSeptember 30, 2022 , net cash provided by financing activities was$0.2 million primarily consisting of proceeds from ESPP share issuances and exercise of stock options. During the nine months endedSeptember 30, 2021 , net cash provided by financing activities was$137.0 million , primarily consisting of net proceeds after deducting underwriting discounts and commissions of$139.5 million from our IPO and$0.1 million of proceeds from exercise of stock options partially offset by other IPO expenses paid of$2.4 million and payment in satisfaction of ULRF contingent stock liability of$0.3 million .
Future Funding Requirements
We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance the late-stage clinical development of our product candidates. In addition, we expect to incur additional costs associated with operating as a public company. The timing and amount of our operating expenditures will depend largely on:
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the initiation, progress, timing, costs and results of preclinical studies and clinical trials for our product candidates or any future product candidates we may develop;
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the outcome, timing and cost of seeking and obtaining regulatory approvals from the FDA and comparable foreign regulatory authorities, including the potential for such authorities to require that we perform more preclinical studies or clinical trials than those that we currently expect or change their requirements on studies that had previously been agreed to;
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the cost to establish, maintain, expand, enforce and defend the scope of our intellectual property portfolio, including the amount and timing of any payments we may be required to make, or that we may receive, in connection with licensing, preparing, filing, prosecuting, defending and enforcing any patents or other intellectual property rights;
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the effect of competing technological and market developments;
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the costs of continuing to grow our business, including hiring key personnel and maintaining or acquiring operating space;
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market acceptance of any approved product candidates, including product pricing, as well as product coverage and the adequacy of reimbursement by third-party payors;
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the cost of acquiring, licensing or investing in additional businesses, products, product candidates and technologies;
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the cost and timing of selecting, auditing and potentially validating or expanding a manufacturing site for commercial-scale manufacturing;
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the cost of establishing sales, marketing and distribution capabilities for any product candidates for which we may receive regulatory approval and that we determine to commercialize; and
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our need to implement additional internal systems and infrastructure, including financial and reporting systems.
We believe that our existing cash and cash equivalents and marketable securities as ofSeptember 30, 2022 , will enable us to fund our operating expenses and capital expenditure requirements through 2024. 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. We expect that we will require additional funding to (i) further develop FCR001 in our ongoing Phase 3 registrational trial, FREEDOM-1, through evaluation of its primary endpoint, including in-house manufacturing and quality assurance of clinical trial material, third-party clinical trials costs, clinical development and trial management, and personnel associated with each; (ii) continue research and development of FCR001 in additional pipeline programs such as living donor kidney transplant delayed tolerance induction and scleroderma in our FREEDOM-2 and FREEDOM-3 trials, respectively, through evaluation of their primary endpoints, including in-house manufacturing and quality assurance of clinical trial material, third-party clinical trials costs, clinical development and trial management, and personnel associated with each; (iii) develop expanded Chemistry Manufacturing and Controls ("CMC") operations to facilitate scale-up and commercialization of FCR001, or to engage a third-party manufacturer to undertake such commercialization; and (iv) develop our preclinical programs towards Investigational New Drug application ("IND") filings and/or into clinical trials. If we receive regulatory approval for any of product candidates, we expect to incur significant commercialization expenses related to product manufacturing, sales, marketing and distribution, depending on where we choose to commercialize those product candidates ourselves. Developing pharmaceutical products, including conducting preclinical studies and clinical trials, is a time-consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain marketing approval for any product candidates or generate revenue from the sale of any product candidate for which we may obtain marketing approval. In addition, our product candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of drugs that we do not expect to be commercially available for many years, if ever. Accordingly, we will need to obtain substantial additional funds to achieve our business objectives. Adequate additional funds may not be available to us on acceptable terms, or at all. We do not currently have any committed external source of funds. Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity offerings, royalty-based financings, debt financings, collaborations, strategic alliances, and marketing, distribution or licensing arrangements with third parties. To the extent that we raise additional capital through the sale of equity or convertible debt securities, ownership interest may be materially diluted, and the terms of such securities could include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing, royalty-based financing and preferred equity financing, if available, may involve agreements that include restrictive covenants that limit our ability to take specified actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise funds through royalty-based financings, 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, reduce or eliminate our 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. OnAugust 15, 2022 , we filed a registration statement on Form S-3 (the "registration statement") pursuant to which we may elect to issue and sell, from time to time, in one or more series or classes, up to$250.0 million in aggregate principal amount of common stock, preferred stock, debt securities, warrants and/or units, in any combination, together or separately, in one or more offerings in amounts and on such minimum prices and terms that we will determine at the time of offering. Each time we sell securities described in the registration statement, a supplemental prospectus will be provided to specify the terms of the securities being offered. OnAugust 15, 2022 , we also entered into the 2022 Sales Agreement with SVB, pursuant to which we may elect to issue and sell shares of common stock having an aggregate offering price of up to$75.0 million in such quantities and on such minimum price terms as we set from time to time through SVB as the sales agent. The Company agreed to pay SVB an aggregate commission rate of up to 3.0% of the gross proceeds of the sales price per share for common stock sold through SVB under the 2022 Sales Agreement. 27 --------------------------------------------------------------------------------
Contractual Obligations
We are currently a party to four operating leases for our manufacturing facility inLouisville, Kentucky , laboratory space inHouston, Texas , corporate office space inWellesley, Massachusetts , and additional corporate office space inLouisville, Kentucky . The future minimum lease obligations for these leases total$3.5 million over the next four years. Furthermore, as discussed elsewhere in this quarterly report, we are a party to the ULRF License Agreement. Under the terms of the ULRF License Agreement, the Company is obligated to compensate ULRF three percent of net sales of all licensed products sold, one third of any non-royalty sublicensing income, and up to$1.625 million in regulatory and sales milestones on each licensed product upon occurrence of specific events as outlined in the ULRF License Agreement; and annual license maintenance fees. We have entered into other contracts in the normal course of business with certain CROs and other third parties for nonclinical research studies and testing, as well as clinical trials. These contracts do not contain any minimum purchase commitments and are cancelable by us upon prior notice. Payments due upon cancellation consist only of payments for services provided and expenses incurred, including non-cancelable obligations of our service providers, up to the date of cancellation.
Critical Accounting Policies and Estimates
Our management's discussion and analysis of financial condition and results of operations is based on our financial statements, which are prepared in accordance with generally accepted accounting principles ("GAAP") inthe United States . The preparation of our financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, costs and expenses, and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in Note 2 to our accompanying financial statements, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our financial statements.
Research and Development Contract Costs and Accruals
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 applicable personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual costs. The majority of our service providers invoice us in arrears for services performed, on a pre-determined schedule or when contractual milestones are met; however, some require advance payments. We makes estimates of our accrued expenses as of each balance sheet date in the financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of these estimates with the service providers and make adjustments, if necessary. Examples of estimated accrued research and development expenses include fees paid to vendors in connection with clinical development activities and CROs and investigative sites in connection with pre-clinical, non-clinical, and human clinical trials. We base the expense recorded related to external research and development on our estimates of the services received and efforts expended pursuant to quotes and contracts with multiple CROs that supply, 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 will exceed the level of services provided and result in a prepayment of the expense. In accruing service fees, we estimate the time period over which services will be performed 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 the estimate, we adjust the accrual or the amount of prepaid expenses accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low in any particular period. To date, there have not been any material adjustments to our prior estimates of accrued research and development expenses. There have been no changes to our process of determining external research and development expense accruals during the three and nine months endedSeptember 30, 2022 .
Stock Based Compensation Expense
We measure stock-based awards granted to employees, directors, and nonemployees based on their fair value on the date of the grant and recognize compensation expense for those awards over the requisite service period, which is generally the vesting period of the respective award. For stock-based awards with service-based vesting conditions, we recognize compensation expense using the straight-line method. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model, which requires inputs based on certain subjective assumptions, including the expected stock price volatility, the expected term 28 -------------------------------------------------------------------------------- of the option, the risk-free interest rate for a period that approximates the expected term of the option, and our expected dividend yield. The fair value of each option to purchase common stock award is estimated on the date of grant based on the fair value of our common stock on that same date. As there had been no public market for our common stock prior to the closing of our IPO, 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 independent third-party valuations of our equity instruments were performed contemporaneously with identified value inflection points. Our common stock valuation was prepared using the option-pricing method ("OPM"), which used a market approach to estimate our enterprise value, as well as the probability-weighted expected return method ("PWERM") and the hybrid method, a combination of OPM and PWERM. For all stock-based awards granted after the closing of our IPO, we have not had to estimate the fair value of our common stock as it has been determined based on the quoted market price of our common stock. For the three and nine months endedSeptember 30, 2022 , the quoted market price of our common stock was used in determining the fair value of our stock based compensation awards and no other significant estimates were used in determining those amounts.
Emerging Growth Company and Smaller Reporting Status
InApril 2012 , the Jumpstart Our Business Startups Act of 2012 ("JOBS Act") was enacted. Section 107 of the JOBS Act provides that an "emerging growth company" ("EGC") can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended ("Securities Act"), for complying with new or revised accounting standards. Thus, an EGC can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to use the extended transition period for new or revised accounting standards during the period in which we remain an emerging growth company; however, we may adopt certain new or revised accounting standards early to the extent allowed by the standard. We will remain an emerging growth company until the earliest to occur of: (i) the last day of the fiscal year in which we have more than$1.235 billion in annual revenue; (ii) the date we qualify as a "large accelerated filer," with at least$700.0 million of equity securities held by non-affiliates; (iii) the date on which we have issued more than$1.0 billion in non-convertible debt securities during the prior three-year period; and (iv) the last day of the fiscal year ending after the fifth anniversary of our initial public offering. We are also a "smaller reporting company" meaning that the market value of our stock held by non-affiliates is less than$700 million and our annual revenue was less than$100 million during the most recently completed fiscal year. We may continue to be a smaller reporting company if either (i) the market value of our stock held by non-affiliates is less than$250 million or (ii) our annual revenue was less than$100 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than$700 million . If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation.
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 theSecurities and Exchange Commission .
Recently Issued and 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 financial statements appearing at the beginning of this Quarterly Report. 29
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