You should read the following discussion and analysis of our financial condition and results of operations together with the "Selected Consolidated Financial Data" section of this Quarterly Report on Form 10-Q (this "Quarterly Report") and our consolidated financial statements and related notes included elsewhere in this Quarterly Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business and related financing includes forward-looking statements that involve risks and uncertainties. Many factors, including those factors set forth in the "Risk Factors" section of this Quarterly Report, may materially and adversely affect our actual results, which may differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Overview We are a clinical-stage, microglia-focused biotechnology company dedicated to improving the lives of patients, caregivers, and families affected by rare and common neurodegenerative diseases by pursuing the development of disease-modifying therapeutics to restore the vigilance of microglia. Microglia are the sentinel immune cells of the brain and play a critical role in maintaining central nervous system (CNS) health and responding to damage caused by disease. Leveraging recent research implicating microglial dysfunction in neurodegenerative diseases, we utilize a precision medicine approach to develop a pipeline of therapeutic candidates, initially addressing genetically defined patient subpopulations, that we believe will activate and restore microglial function. Our first therapeutic candidates are designed to activate Triggering Receptor Expressed on Myeloid Cells 2 (TREM2), a key microglial receptor protein that mediates responses to environmental signals in order to maintain brain health and whose dysfunction is linked to neurodegeneration. We believe that each of the therapeutic candidates in our pipeline has the potential to be developed for multiple neurodegenerative diseases. Our precision medicine approach begins with rare, genetically defined diseases for which microglial dysfunction is believed to be a key driver of disease pathology and then utilizes findings from these efforts to inform expansion into larger and more common neurodegenerative diseases. Our strategy has the potential to mitigate downstream translational risk as we seek to advance our programs through early development and into the clinic. We believe this iterative, sequential approach is a key differentiator, potentially allowing us to generate clinical proof-of-concept (PoC) efficiently and leverage our initial development programs as well as research by others, in pursuing additional neurodegenerative disease opportunities. Our lead candidate, VGL101, is a fully human monoclonal antibody (mAb) that is designed to activate TREM2. We are initially developing VGL101 for the treatment of adult-onset leukoencephalopathy with axonal spheroids and pigmented glia (ALSP), a rare, genetically defined, and fatal neurodegenerative disease caused by microglial dysfunction. ALSP affects an estimated 10,000 people in theU.S. , with about 1,000 to 2,000 new cases annually. ALSP has been diagnosed in countries around the world, with major clusters inNorth America (U.S. andCanada ), Central andNorthern Europe , andAsia . InJuly 2022 , the FDA granted orphan drug designation for VGL101 for the treatment of ALSP. InOctober 2022 , the FDA granted Fast Track designation for VGL101 for the treatment of ALSP, further acknowledging the significant unmet need of ALSP patients. ALSP is caused by loss-of-function mutations in the Colony Stimulating Factor 1 Receptor (CSF1R), a receptor that shares a common downstream signaling pathway with TREM2. The therapeutic rationale for VGL101 is to compensate for CSF1R loss-of-function by activating TREM2. We have generated robust preclinical evidence that suggests TREM2 agonism can rescue CSF1R loss-of-function We initiated our Phase 1 trial inDecember 2021 and have completed dosing of the 20 mg/kg single ascending dose (SAD) cohort and the 20 mg/kg multiple ascending dose (MAD) cohort in theU.S. , without any safety signals. Although we believe that 20 mg/kg is a clinically-relevant dose in ALSP, we continue to engage with the FDA regarding the partial clinical hold at doses above 20 mg/kg to maintain optionality to support patients with rare and common neurodegenerative diseases. Further, we received approval from theAustralian Human Research Ethics Committee (HREC) to initiate a Phase 1 trial of VGL101 in healthy volunteers without dosing restrictions and have completed dosing of 30 mg/kg and 40 mg/kg SAD cohorts and are cleared to initiate a 60 mg/kg SAD cohort inAustralia . InNovember 2022 , we reported interim topline data from the Phase 1 trial from the SAD cohorts up to and including 40 mg/kg as well as the 20 mg/kg MAD cohort. Based on these data, VGL101 demonstrated favorable safety, tolerability and PK profiles. Further, VGL101 achieved dose dependent, robust and durable decreases in CSF sTREM2 and demonstrated proof of target engagement further supporting its expected mechanism of action. We believe these interim Phase 1 results support the planned initiation of a Phase 2 trial in ALSP patients at 20 mg/kg. We believe engagement with patients and the scientific and provider communities is central to our approach in rare neurodegenerative diseases. InSeptember 2021 , we began a natural history study of ALSP patients to better characterize the patient journey, inform our clinical trial design, and facilitate recruitment into our clinical trials. We also actively support a patient advocacy organization and have established the world's first patient-facing ALSP informational website to build disease awareness. In addition, we launched a global ALSP patient registry to further understand patient and caregiver journey, disease burden, and health economic outcomes. 21 -------------------------------------------------------------------------------- We are also developing novel small molecule TREM2 agonist product candidates suitable for oral delivery to treat common neurodegenerative diseases associated with microglial dysfunction, with an initial focus on Alzheimer's disease (AD) in genetically defined subpopulations. In the first quarter of 2022, we initiated IND-enabling studies for certain of these product candidates. Our small molecule product candidates have a different mechanism of action and bind to a different location than VGL101, providing potential additional optionality in positioning these molecules in different patient populations and potential differentiation from TREM2 antibody therapeutics.
We believe our microglia focus, precision medicine approach, and pipeline, which spans multiple modalities, strongly position us to become a differentiated leader in the neurodegenerative therapeutic space.
Recent Developments
As part of a continuous evaluation of our programs, we have elected to prioritize VGL101 in ALSP and our small molecule TREM2 agonist programs. Based on our recent findings that VGL101 and our small molecule program candidates have different mechanisms of action and bind to different locations, we no longer believe that the originally planned Phase 1b biomarker trial of VGL101 will inform clinical development of the small molecule program candidates in AD and are no longer planning to conduct this biomarker trial. We also plan to defer the initiation of the planned Phase 2 clinical trial of VGL101 for the treatment of cerebral adrenoleukodystrophy (cALD). This strategic prioritization together with the proceeds of theAugust 2022 private placement is expected to extend our cash runway into the first quarter of 2025. Since our inception, we have devoted substantially all of our efforts to organizing and staffing our company, research and development activities, business planning, raising capital, building our intellectual property portfolio and providing general and administrative support for these operations. To date, we have funded our operations primarily through proceeds from our initial public offering of our common stock, the sale of shares of our convertible preferred stock and a Simple Agreement for Future Equity, or SAFE. As ofSeptember 30, 2022 , we had$203.9 million of cash and cash equivalents. As ofSeptember 30, 2022 , we raised aggregate gross proceeds of$313.0 million from the sale of equity securities as follows:
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During the period fromJune 22, 2020 (inception) toDecember 31, 2021 , we raised$5.0 million gross proceeds from the SAFE which was subsequently converted to 1,963,093 shares of Series A convertible preferred stock,$45.0 million gross proceeds from the issuance of 17,687,840 shares of Series A convertible preferred stock at a purchase price of$2.547 per share, and$90.0 million gross proceeds from the issuance of 25,657,096 shares of Series B convertible preferred stock at$3.5078 per share. Costs associated with these issuances were approximately$0.6 million .
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During the nine months endedSeptember 30, 2022 , we completed the initial public offering of our common stock, in which we issued an aggregate of 7,000,000 shares of common stock at a price of$14.00 per share, for gross cash proceeds of$98.0 million , before underwriting discounts and commissions. We received approximately$88.0 million in net proceeds, after deducting underwriting discounts, commissions and offering expenses. We also completed a private placement in which we issued 7,293,084 shares of common stock at a price of$7.30 per share and 2,980,889 pre-funded warrants at a purchase price of$7.2999 , for gross proceeds of$75.0 million , before deducting fees to the placement agent and other offering expenses. Based on our current operating plan, we believe that our existing cash and cash equivalents will be sufficient to fund our planned operating expenses and capital expenditure requirements into the first quarter of 2025. We have incurred significant operating losses since the commencement of our operations. Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of one or more of our current therapeutic candidates or any future therapeutic candidates. Our accumulated deficit was$71.8 million atDecember 31, 2021 and$121.7 million atSeptember 30, 2022 , respectively. We expect to continue to incur significant losses for the foreseeable future as we advance our current and future therapeutic candidates through preclinical and clinical development, continue to build our operations and transition to operating as a public company. Our net losses may fluctuate significantly from period to period, depending on the timing of expenditures on our research and development activities. Our primary use of cash is to fund operating expenses, which consist primarily of research and development and general and administrative expenses. The timing of payment of these expenses has an effect on cash used to fund operating expenses, as reflected in the change in our outstanding accounts payable and accrued expenses. 22 -------------------------------------------------------------------------------- We expect to continue to incur net operating losses for at least the next several years, and we expect our research and development expenses, general and administrative expenses, and capital expenditures will continue to increase. We expect our expenses and capital requirements will increase significantly in connection with our ongoing activities as we:
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continue our ongoing and planned research and development of our VGL101 and small molecule TREM2 agonist program;
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initiate preclinical studies and clinical trials for any additional therapeutic candidates that we may pursue in the future;
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expand our product pipeline based on TREM2 and other microglia targets across multiple therapeutic modalities, through internal discovery and development, or through strategic collaborations or alliances with academic organizations, pharmaceutical or biotechnology companies;
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seek regulatory approvals for any therapeutic candidates that successfully complete clinical trials;
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invest in capital equipment in order to expand our research and development activities;
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attract, hire and retain additional clinical, scientific, quality control, and manufacturing management and administrative personnel;
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add clinical, operational, financial and management information systems and personnel, including personnel to support our product development;
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develop, maintain, expand, protect and enforce our intellectual property portfolio, including patents, trade secrets and know-how;
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acquire or in-license other therapeutic candidates and technologies;
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expand our operations in
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incur additional legal, accounting, investor relations and other general and administrative expenses associated with operating as a public company; and
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establish a sales, marketing and distribution infrastructure, either ourselves or in partnership with others, to commercialize any therapeutic candidates, if approved. We will not generate revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for one or more of our therapeutic candidates. If we obtain regulatory approval for any of our therapeutic candidates, we expect to incur significant expenses related to product sales, marketing and distribution to the extent that such sales, marketing and distribution are not the responsibility of potential collaborators. We may also require additional capital to pursue in-licenses or acquisitions of other drug candidates. Further, we expect to incur additional costs associated with operating as a public company. We also expect to increase the size of our administrative function to support the growth of our business. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of our clinical trials and our expenses related to other research and development activities. As a result, we will require substantial additional funding to develop our therapeutic candidates and support our continuing operations. Until such time that we can generate significant revenue from product sales or other sources, we expect to finance our operations through the sale of equity, debt financings or other capital sources, which could include proceeds from potential collaborations, strategic partnerships or marketing, distribution, licensing or other strategic arrangements with third parties. We may be unable to raise additional funds or to enter into such agreements or arrangements on favorable terms, or at all. Our ability to raise additional funds may be adversely impacted by potential worsening global economic conditions and the recent disruptions to, and volatility in, the credit and financial markets inthe United States and worldwide resulting from the ongoing COVID-19 pandemic and otherwise. 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 or commercialization of our therapeutic candidates or grant rights to develop and market therapeutic candidates that we would otherwise prefer to develop and market ourselves. Our failure to obtain sufficient funds with acceptable terms could have a material adverse effect on our business, results of operations or financial condition, including requiring us to have to delay, reduce or eliminate our product development or future commercialization efforts. Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable to accurately predict the amount of increased expenses or timing, or if we will be able to achieve or maintain profitability. 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. We cannot provide assurance that we will ever be profitable or generate positive cash flow from operating activities. 23 --------------------------------------------------------------------------------
Impact of COVID-19 on Our Operations
InMarch 2020 , theWorld Health Organization declared the outbreak of COVID-19 a global pandemic. We are subject to a number of risks associated with the COVID-19 global pandemic, including potential delays associated with our ongoing preclinical studies and clinical trials. COVID-19 may have an adverse impact on our operations, supply chains and distribution systems or those of our third-party vendors and collaborators, and increase expenses, including as a result of impacts associated with preventive and precautionary measures that are being taken, such as restrictions on travel and border crossings, quarantine polices and social distancing. We and our third-party vendors and collaborators may experience disruptions in supply of items that are essential for our research and development activities. In addition, the spread of COVID-19 has disrupted global healthcare and healthcare regulatory systems which could divert healthcare resources away from, or materially delay, FDA approval and approval by other health authorities worldwide with respect to our therapeutic candidates. Furthermore, our clinical trials may be negatively affected by the COVID-19 outbreak. Site initiation, patient enrollment and patient follow-up visits may be delayed, for example, due to prioritization of hospital resources toward the COVID-19 outbreak, travel restrictions, the inability to access sites for initiation and monitoring, and difficulties recruiting or retaining patients in our planned clinical trials. The emergence of additional variants, as well as reduced efficacy of vaccines over time and the possibility that a large number of people decline to get vaccinated or receive booster shots, creates inherent uncertainty as to the future of our business, our industry and the economy in general in light of the pandemic. We cannot at this time predict the specific extent, duration, or full impact that the COVID-19 outbreak will have on our financial condition and operations. If we do not successfully commercialize any of our therapeutic candidates, we will be unable to generate product revenue or achieve profitability.
Exclusive License Agreement with Amgen Inc.
InJuly 2020 , we entered into an exclusive license agreement, or the Amgen Agreement, with Amgen Inc., or Amgen, pursuant to which we have been granted an exclusive, royalty-bearing license to certain intellectual property rights owned or controlled by Amgen, to commercially develop, manufacture, use, distribute and sell therapeutic products containing compounds that bind to TREM2. In addition, we are required to reimburse Amgen for amounts it paid to its contract manufacturers on our behalf. See Note 11 to the condensed consolidated financial statements appearing elsewhere in this Quarterly Report for more information on the Amgen Agreement. As initial consideration for the license, we paid an upfront payment of$0.5 million and also recognized an obligation to issue shares of Series A convertible preferred stock with an antidilution provision, or theRelated Party Antidilution Obligation. As Amgen reported in its Schedule 13G filed with theSEC onJanuary 11, 2022 , as of that date, Amgen owns approximately 11.3% of our outstanding shares of capital stock. As additional consideration for the license, we are required to pay Amgen up to$80.0 million in the aggregate upon the achievement of specified regulatory milestones for the first monoclonal antibody TREM2 agonist (mAb) product and the first small molecule TREM2 agonist product and aggregate milestone payments of up to$350.0 million upon the achievement of specific commercial milestones across all mAb products and small molecule products. No regulatory or commercial milestones have been achieved to date under the Amgen Agreement. We are also required to pay tiered royalties of low to mid single-digit percentages on annual net sales of the products covered by the license. In the event that the exploitation of a product is not covered by a valid claim within the licensed patent rights, then the royalty rate with respect to the net sales shall be subject to a customary reduction by a certain percentage. The royalty term will terminate on a country-by-country basis on the later of (i) the expiration date of the last valid claim within the licensed patent rights and (ii) the tenth (10th) anniversary of the first commercial sale of such product in such country. In connection with the license agreement, Amgen entered into certain stockholder agreements related to this investment. See "Certain Relationships and Related Party Transactions-Series A Preferred Stock Financings."
Components of Our Results of Operations
Operating Expenses
Our operating expenses since inception have consisted solely of research and development expenses and general and administrative expenses.
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Research and Development
Research and development expenses consist of costs incurred for our research activities, including our discovery efforts and the development of our programs. 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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expenses incurred in connection with the discovery, preclinical studies and clinical development of our VGL101 and small molecule TREM2 agonist program;
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expenses incurred under agreements with third parties, such as consultants, clinical investigators, contractors and contract research organizations, or CROs, that assist with (i) the preclinical studies and clinical development of VGL101 and (ii) identification of potential therapeutic candidates in our small molecule TREM2 agonist program;
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the cost of developing and scaling our manufacturing process and manufacturing therapeutic candidates for use in our research and preclinical studies, including under agreements with third parties, such as consultants, contractors, and contract manufacturing organizations, or CMOs; and
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other expenses incurred as a result of research and development activities.
Research and development expenses account for a significant portion of our operating expenses. We expense research and development costs as incurred. Nonrefundable advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made. When third-party service providers' billing terms do not coincide with our period-end, we are required to make estimates of our obligations to those third parties incurred in a given accounting period and record accruals at the end of the period. We base these estimates on our knowledge of the research and development programs, services performed for the period, past history for related activities and the expected duration of the third-party service contract, where applicable. If timelines or contracts are modified based upon changes in the scope of work to be performed, we modify our estimates of accrued expenses accordingly on a prospective basis. Actual results could differ from our estimates. Our direct research and development expenses are tracked on a program-by-program basis and consist primarily of external costs, such as fees paid to CROs, CMOs, central laboratories and outside consultants in connection with our research and discovery, preclinical development, process development, manufacturing, clinical development, regulatory and quality activities. We do not allocate employee costs or facility expenses, including depreciation or other indirect costs, to specific programs because these costs are deployed across multiple programs. Our internal resources conduct our research and discovery activities and manage our preclinical development and process development, manufacturing and clinical development activities. The table below summarizes our research and development expenses incurred by program: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 ($ in thousands) ($ in thousands) Direct, external research and development expenses by program: VGL101$ 5,177 $ 3,780$ 13,600 $ 12,082 Small molecule TREM2 2,791 1,128 8,268 3,487 Unallocated research and development expenses: External costs and other 1,373 985 3,113 2,635 Facilities, personnel-related, and other 3,450 1,917 10,272 5,007
Total research and development expenses
Research and development activities are central to our business model. Therapeutic candidates in later stages of clinical development generally have higher development costs than those in earlier stages, primarily due to the increased size and duration of later-stage clinical trials. As a result, we expect that our research and development expenses will increase substantially over the next several years as we expect to (i) advance VGL101 and our small molecule TREM2 agonist programs' initial clinical trials, (ii) develop VGL101 for other indications, including other rare leukodystrophies, and leukoencephalopathies, and (iii) expand our modality agnostic product pipeline to other microglia targets beyond TREM2. The successful development and commercialization of our therapeutic candidates is highly uncertain. At this time, we cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the preclinical and clinical 25 --------------------------------------------------------------------------------
development of any of our therapeutic candidates. This uncertainty is due to the numerous risks and uncertainties associated with product development and commercialization, including the uncertainty of:
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the timing, design and successful completion of preclinical studies and clinical development activities;
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the sufficiency of our financial and other resources to complete the necessary preclinical studies and clinical trials;
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effective INDs or comparable foreign applications that allow commencement of our planned clinical trials or future clinical trials for any therapeutic candidates we may develop;
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successful enrollment and completion of clinical trials, including under theFDA's Good Clinical Practices, Good Laboratory Practices, and any additional regulatory requirements from foreign regulatory authorities;
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positive results from our future clinical trials that support a finding of safety and effectiveness and an acceptable risk-benefit profile in the intended populations;
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the receipt of regulatory marketing approvals from applicable regulatory authorities;
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the establishment of arrangements with third-party manufacturers for clinical supply and, where applicable, commercial manufacturing capabilities;
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the establishment, maintenance, defense and enforcement of patent, trademark, trade secret and other intellectual property protection or regulatory exclusivity for any therapeutic candidates we may develop;
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patient recruitment and enrollment;
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commercial launch of any therapeutic candidates we may develop, if approved, whether alone or in collaboration with others;
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acceptance of the benefits and use of our therapeutic candidates we may develop, including method of administration, if and when approved, by patients, the medical community and third-party payors;
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our ability to compete effectively with other therapies and treatment options;
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maintenance of a continued acceptable safety, tolerability and efficacy profile of any therapeutic candidates we may develop following approval;
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establishment and maintenance of healthcare coverage and adequate reimbursement by payors;
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our ability to establish new licensing or collaboration arrangements;
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the performance of our future collaborators, if any;
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development and timely delivery of commercial-grade drug formulations that can be used in our planned clinical trials and, if approved, for commercial launch;
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obtaining, maintaining, defending and enforcing patent claims and other intellectual property rights;
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launching commercial sales of our therapeutic candidates, if approved, whether alone or in collaboration with others; and
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maintaining a continued acceptable safety profile of the therapeutic candidates following approval.
Any changes in the outcome of any of these variables with respect to the development of our therapeutic candidates in preclinical and clinical development could mean a significant change in the costs and timing associated with the development of these therapeutic candidates. For example, if the FDA or another regulatory authority were to delay our planned start of clinical trials or require us to conduct clinical trials or other testing beyond those that we currently expect, or if we experience significant delays in enrollment in any of our planned clinical trials, we could be required to expend significant additional financial resources and time to complete clinical development of that therapeutic candidate. We may never obtain regulatory approval for any of our therapeutic candidates, and, even if we do, drug commercialization takes several years and millions of dollars in development costs.
General and Administrative
General and administrative expenses consist primarily of personnel expenses, including salaries, benefits and stock-based compensation expense, for personnel in executive, accounting, business development, legal, human resources and administrative functions. General and administrative expenses also include corporate facility costs not otherwise included in research and development expenses, depreciation and other expenses, which include direct or allocated expenses for rent and maintenance of facilities and 26 --------------------------------------------------------------------------------
insurance, not otherwise included in research and development expenses, as well as professional fees for legal, consulting, investor and public relations, accounting and audit services.
We expect that our general and administrative expenses will increase in the foreseeable future as we increase our headcount to support the continued research and development of our programs and the growth of our business. We also anticipate incurring additional expenses associated with operating as a public company, including increased expenses related to audit, legal, regulatory, compliance, director and officer insurance, investor and public relations and tax-related services associated with maintaining compliance with the rules and regulations of theSecurities and Exchange Commission , orSEC , and standards applicable to companies listed on a national securities exchange, additional insurance expenses, investor relations activities and other administrative and professional services. Other Income (Expense)
Change in Fair Value of Related Party Antidilution Obligation
Pursuant to the Amgen Agreement, we agreed to issue Amgen equity in an amount equal to 25% of our capital stock on a fully diluted basis until such time as we have raised an aggregate of$45.0 million in net cash proceeds from financing activities relating to dilutive transactions including theRelated Party Antidilution Obligation. InSeptember 2020 , we completed the first closing pursuant to the Series A Convertible Preferred Stock Purchase Agreement, and as a result issued Amgen 6,928,566 shares of Series A convertible preferred stock such that Amgen's ownership represented 25% of the post-closing capitalization on a fully diluted basis. The Related Party Antidilution Obligation was separately exercisable from the Amgen Agreement and was classified as a liability and recorded at fair value in the consolidated balance sheet with a corresponding charge to research and development at inception of the license agreement in July of 2020. The Related Party Antidilution Obligation was remeasured at fair value at each reporting period, with changes in fair value recorded in change in fair value of Related Party Antidilution Obligation in the consolidated statement of operations and comprehensive loss. InSeptember 2020 , the Related Party Antidilution Obligation was partially settled through the issuance of 6,928,566 shares of Series A convertible preferred stock with a fair value of$17.5 million . InMay 2021 , we settled the remainingRelated Party Antidilution Obligation in full with the second closing pursuant to the Series A Convertible Preferred Stock Purchase Agreement. Amgen received an additional 1,963,093 shares of Series A convertible preferred stock with a fair value of$5.1 million . These shares were subsequently converted into common stock in connection with the Company's IPO.
Change in Fair Value of Series A Preferred Stock Tranche Obligation
InSeptember 2020 , we entered into the Series A Convertible Preferred Stock Purchase Agreement and issued 9,815,467 shares of Series A convertible preferred stock at a purchase price of$2.547 per share, for gross cash proceeds of$25.0 million . The gross proceeds were offset by$0.2 million of issuance costs and$0.2 million related to the Series A Preferred Tranche Obligation. As part of theSeptember 2020 Series A Convertible Preferred Stock Purchase Agreement, the investors were contingently obligated to purchase 7,852,373 additional shares of Series A convertible preferred stock at$2.547 per share upon the satisfaction of specified research and development milestones, collectively, the Series A Preferred Stock Tranche Obligation. The Series A Preferred Stock Tranche Obligation was legally detachable and separately exercisable from the Series A convertible preferred stock. As such, we allocated the proceeds from theSeptember 2020 issuance between the Series A Preferred Stock Tranche Obligation and the Series A convertible preferred stock. As the Series A convertible preferred stock is redeemable upon a deemed liquidation event at the election of the holder controlled Board, and therefore outside of the control of our company, the Series A Preferred Stock Tranche Obligation was classified as a liability and recorded at its fair value. The Series A Preferred Stock Tranche Obligation was remeasured at fair value at each reporting period, with changes in fair value recorded in change in fair value of Series A Preferred Stock Tranche Obligation in the condensed consolidated statement of operations and comprehensive loss. Interest Income, net Interest income, net primarily consists of interest earned from our cash and cash equivalents and restricted cash. We expect our interest income will increase slightly in 2022 as we invest the cash received from our sales of Series B preferred stock and the net proceeds from our IPO. Interest income was$163 thousand and$197 thousand the three and nine months endedSeptember 30, 2022 , respectively, and was$0 and$3 thousand for the three and nine months endedSeptember 30, 2021 , respectively.
Other Expense, net
Other expense, net includes gains and losses from the remeasurement of foreign currency transactions into our functional currency. Other expense, net was immaterial during the three and nine months endedSeptember 30, 2022 , and during the three and nine months endedSeptember 30, 2021 . 27 --------------------------------------------------------------------------------
Results of Operations
Three Months Ended
The following table summarizes our results of operations for the three months endedSeptember 30, 2022 compared with three months endedSeptember 30, 2021 : Three Months Ended September 30, 2022 2021 Change ($ in thousands) Operating expenses: Research and development $ 12,791 $ 7,810$ 4,981 General and administrative 4,846 2,928 1,918 Total operating expenses 17,637 10,738 6,899 Loss from operations (17,637 ) (10,738 ) (6,899 ) Other income (expense): Interest income 163 - 163 Other income (expense), net (26 ) (2 ) (24 ) Total other expense, net 137 (2 ) 139
Net loss and comprehensive loss
$ (6,760 )
Research and Development Expenses
Research and development expenses were
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$1.5 million of facilities, personnel-related and other expenses, of which$1.6 million related to personnel-related costs, including salaries, bonuses, and other compensation-related costs, including stock-based compensation of$0.4 million ; and
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General and Administrative Expenses
General and administrative expenses were
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$1.5 million of personnel-related costs, including salaries, bonuses, and other compensation-related costs, including stock-based compensation of$0.6 million ; and
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Nine Months Ended
The following table summarizes our results of operations for the nine months endedSeptember 30, 2022 compared with nine months endedSeptember 30, 2021 : Nine Months Ended September 30, 2022 2021 Change ($ in thousands) Operating expenses: Research and development $ 35,253 $ 23,211$ 12,042 General and administrative 14,758 6,221 8,537 Total operating expenses 50,011 29,432 20,579 Loss from operations (50,011 ) (29,432 ) (20,579 ) Other income (expense): Change in fair value of the related party antidilution obligation - (836 ) 836 Change in fair value of Series A preferred stock tranche obligation - (28 ) 28 Interest income 197 3 194 Other income (expense), net (35 ) (5 ) (30 ) Total other expense, net 162 (866 ) 1,028 Net loss and comprehensive loss$ (49,849 ) $ (30,298 ) $ (19,551 )
Research and Development Expenses
Research and development expenses were$35.3 million for the nine months endedSeptember 30, 2022 , as compared to$23.2 million for the nine months endedSeptember 30, 2021 . The increase of$12.1 million consisted primarily of the following:
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$5.3 million of facilities, personnel-related and other expenses, of which$4.6 million related to personnel-related costs, including salaries, bonuses, and other compensation-related costs, including stock-based compensation of$1.2 million ;
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$1.5 million of VIGL101 program expenses, which is primarily driven by$5.7 million of clinical trial related expenses and$0.4 million in patient advocacy increases, these are partially offset by a decrease of$2.9 million in external manufacturing expenses due to timing of manufacturing runs of VGL101 and$2.0 million in VGL101 related preclinical costs; and
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General and Administrative Expenses
General and administrative expenses were
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•
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Change in Fair Value of Related Party Antidilution Obligation
The change in fair value of Related Party Antidilution Obligation was$0 for the nine months endedSeptember 30, 2022 , as compared to$0.9 million for the nine months endedSeptember 30, 2021 . This decrease of$0.9 million was related to theMay 2021 settlement of the Related Party Antidilution Obligation associated with the Amgen Agreement. OnSeptember 18, 2020 , we completed the first closing pursuant to the Series A Convertible Preferred Stock Purchase Agreement which triggered the partial settlement of the Related Party Antidilution Obligation resulting in the issuance of 6,928,566 shares of its Series A convertible preferred stock to Amgen. The fair value of the Related Party Antidilution Obligation as ofDecember 31, 2020 was$4.2 million . OnMay 28, 2021 , we completed the second closing pursuant to the Series A Convertible Preferred Stock Purchase Agreement which resulted in our raising of net cash proceeds from financing activities in excess of the$45.0 million Related Party Antidilution Obligation cap. The second closing triggered the settlement of the remaining Related Party Antidilution Obligation, resulting in the issuance of 1,963,093 shares of Series A convertible preferred stock to Amgen with a fair value of$5.1 million .
Change in Fair Value of Series A Preferred Stock Tranche Obligation
The change in fair value of Series A Preferred Stock Tranche Obligation was$0 for the nine months endedSeptember 30, 2022 as compared to$28 thousand for the nine months endedSeptember 30, 2021 . This decrease of$28 thousand related to theMay 2021 settlement of the Series A Preferred Stock Tranche Obligation associated with the Series A Convertible Preferred Stock Purchase Agreement. InMay 2021 , we settled the Series A Tranche Obligation with the issuance of 7,852,373 shares of our Series A Convertible Preferred Stock.
Liquidity and Capital Resources
Sources of Liquidity
Since our inception, we have not generated any revenue from product sales and have incurred significant operating losses and negative cash flows from our operations. We expect to incur significant expenses and operating losses for the foreseeable future as we advance the clinical development of our therapeutic candidates. Since our inception throughSeptember 30, 2022 , we have funded our operations with net proceeds from sales of our convertible preferred stock, issuance of our common stock from our initial public offering, and SAFE. As ofSeptember 30, 2022 , we had cash and cash equivalents of$203.9 million . InJanuary 2022 , we completed the initial public offering of our common stock, in which we issued an aggregate of 7,000,000 shares of common stock, at a price of$14.00 per share, for gross cash proceeds of$98.0 million , before underwriting discounts and commissions. We received approximately$88.0 million in net proceeds, after deducting underwriting discounts, commissions and offering expenses of$10.0 million . InAugust 2022 , we also completed a private placement in which we issued 7,293,084 shares of common stock at a price of$7.30 per share and 2,980,889 pre-funded warrants at a purchase price of$7.2999 , for gross proceeds of$75.0 million , before deducting fees to the placement agent and other offering expenses. We received net proceeds of$71.3 million . Based on our current operating plan, we expect the net proceeds from our IPO and private placement, together with our existing cash, will be sufficient to fund our planned operating expenses and capital expenditure requirements into the first quarter of 2025. Cash Flows The following table summarizes our sources and uses of cash for each of the periods presented: Nine Months Ended September 30, 2022 2021 ($ in thousands) Net cash used in operating activities$ (48,062 ) $ (22,000 ) Net cash used by investing activities (649 ) (177 ) Net cash provided by financing activities 161,154 109,609
Net increase in cash, cash equivalents and restricted cash
Operating Activities
During the nine months ended
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During the nine months endedSeptember 30, 2021 , operating activities consisted primarily of our net loss of$30.3 million , partially offset by (i)$6.0 million of changes in operating assets and liabilities, (ii)$0.8 million change in Related Party Antidilution Obligation, and (iii)$1.3 million stock-based compensation expense. The net loss primarily consisted of$23.2 million of research and development expenses,$6.2 million of general and administrative expenses and a$0.8 million unfavorable change in fair value ofRelated Party Antidilution Obligation. Investing Activities
During the nine months ended
During the nine months ended
Financing Activities
During the nine months ended
During the nine months endedSeptember 30, 2021 , net cash provided by financing activities consisted primarily of$20.0 million gross proceeds from the issuance of 7,852,373 shares of Series A convertible preferred stock at a purchase price of$2.547 per share, and$90.0 million gross proceeds from the issuance of 25,657,096 shares of Series B convertible preferred stock at$3.5078 per share, offset by approximately$0.4 million of issuance costs. Our primary uses of cash are to fund our research and development activities related to our VGL101 and small molecule TREM2 agonist program, hiring personnel, raising capital and providing general and administrative support for these operations. We currently have no ongoing material financing commitments that are expected to affect our liquidity over the next five years, other than our lease obligations and a$0.9 million standby letter of credit we entered into inSeptember 2021 , in connection with a lease for laboratory and office space inWatertown, Massachusetts . The standby letter of credit expires inDecember 2032 .
Funding Requirements
To date, we have not generated any revenue from product sales. We do not expect to generate revenue from product sales unless and until we successfully complete clinical development of, receive regulatory approval for, and commercialize, VGL101, and we do not know when, or if at all, that will occur. We expect our expenses and capital requirements to increase significantly in connection with our ongoing activities, particularly as we continue the research and development of, initiate clinical trials of, and seek marketing approval for our VGL101 and small molecule TREM2 agonist program. In addition, if we obtain regulatory approval for any of our therapeutic candidates, we expect to incur significant expenses related to product sales, marketing, and distribution to the extent that such sales, marketing and distribution are not the responsibility of potential collaborators. We may also require additional capital to pursue in-licenses or acquisitions of other drug candidates. Further, we expect to incur additional costs associated with operating as a public company. Accordingly, we will require substantial additional funding to develop our therapeutic candidates and support our continuing operations. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate our product development or future commercialization efforts.
Our future capital requirements will depend on many factors, including:
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the initiation, scope, progress, timing, results and costs of product discovery, preclinical studies and clinical trials for our therapeutic candidates or any future candidates we may develop;
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our ability to maintain our relationship with Amgen and any other key licensors or collaborators;
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the scope, prioritization and number of our research and development programs;
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the costs, timing and outcome 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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our ability to establish and maintain collaborations on favorable terms, if at all;
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the achievement of milestones or occurrence of other developments that trigger payments under any collaboration agreements we enter into;
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the extent to which we are obligated to reimburse, or entitled to reimbursement of, clinical trial costs under collaboration agreements, if any;
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the costs to establish, maintain, expand, enforce and defend the scope of our intellectual property portfolio, including preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims;
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the extent to which we acquire or in-license other therapeutic candidates and technologies;
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the costs of securing manufacturing arrangements for commercial production;
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the costs of establishing or contracting for sales and marketing capabilities if we obtain regulatory approvals to market our therapeutic candidates; and
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our need to implement additional internal systems and infrastructure, including financial and reporting systems.
Identifying potential therapeutic candidates and 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 regulatory approval and commercialize our therapeutic candidates. In addition, our therapeutic candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of products that we do not expect to be commercially available for many years, if at all. Accordingly, we will need to continue to rely on additional financing to achieve our business objectives. Adequate additional financing may not be available to us on acceptable terms, or at all. Until such time, if ever, as we can generate significant revenue from product sales or other sources, we expect to finance our operations through the sale of equity, debt financings, or other capital sources, which could include proceeds from potential collaborations, strategic partnerships or marketing, distribution, licensing or other similar arrangements with third parties. However, we may be unable to raise additional funds or enter into such agreements or arrangements on favorable terms, or at all. Market volatility resulting from the COVID-19 pandemic or other factors could also adversely impact our ability to access capital as and when needed. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common stockholder. Any future 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, selling or licensing our assets, making capital expenditures, declaring dividends or encumbering our assets to secure future indebtedness. Such restrictions could adversely impact our ability to conduct our operations and execute our business plan. If we raise funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or therapeutic candidates or to grant licenses on terms that may not be favorable to us. 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 or commercialization of our therapeutic candidates or grant rights to develop and market therapeutic candidates that we would otherwise prefer to develop and market ourselves. We expect our existing cash, and cash equivalents will enable us to fund our operating expenses and capital expenditure requirements into the first quarter of 2025 at which point we would need to obtain substantial additional funding in connection with our continuing operations.
Contractual Obligations and Commitments
InSeptember 2021 , we entered into a lease for laboratory and office space inWatertown, Massachusetts with an initial term of ten years, and a five-year renewal option at the end of the initial lease term. The monthly lease payment is approximately$0.2 million with annual escalation of approximately 3%. The lease includes a$3.7 million construction allowance. As ofSeptember 30, 2022 , the Company paid$2.3 million , net of$0.8 million received or receivable pursuant to the construction allowance. The lease is expected to commence in the first quarter of 2023 when the leased space is expected to be made available for use, as such this lease is not included in the table above given the commencement date. 32 -------------------------------------------------------------------------------- InFebruary 2021 , we entered into a master services agreement withFUJIFILM Diosynth Biotechnologies UK Limited ,FUJIFILM Diosynth Biotechnologies Texas, LLC ,FUJIFILM Diosynth Biotechnologies U.S.A., Inc , and FUJIFILM Diosynth Biotechnologies Denmark AS, or collectively, FUJIFILM. InNovember 2021 , we entered into a statement of work with FUJIFILM for$3.8 million under our existing master services agreement for the manufacturing of VGL101. If we terminate the statement of work before completion, we may be required to pay fees ranging from 0% to 100%. The amount due upon an early termination depends on the length of time prior to the commencement of specific stages of the statement of work. As ofSeptember 30, 2022 , no significant work had begun. The statement of work is expected to be substantially completed by the end of 2024. Apart from the contracts with payment commitments noted above, we have entered into contracts in the normal course of business with CROs, CMOs and other third parties for preclinical research studies and testing, clinical trials and manufacturing services. These contracts do not contain any minimum purchase commitments and are cancelable by us upon prior notice and, as a result, are not included in the table of contractual obligations and commitments above. 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. We may in the future incur potential royalty payments under license and collaboration agreements we have entered and will enter into with various entities pursuant to which we have in-licensed certain intellectual property, such as our exclusive license agreement with Amgen. Due to the uncertainty of the achievement and timing of the events requiring payment under these agreements, the amounts to be paid by us are not fixed or determinable at this time.
Critical Accounting Policies and Significant Judgments and Estimates
Our management's discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance withUnited States generally accepted accounting principles, or GAAP. The preparation of our financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, expenses, and the disclosure of our contingent 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. There have been no other material changes to the significant accounting policies previously disclosed in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 .
Emerging Growth Company Status
The Jumpstart Our Business Startups Act of 2012, or JOBS, permits an "emerging growth company" such as us to take advantage of an extended transition to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have elected not to "opt out" of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we will adopt the new or revised standard at the time private companies adopt the new or revised standard and will do so until such time that we either (i) irrevocably elect to "opt out" of such extended transition period or (ii) no longer qualify as an emerging growth company. There are other exemptions and reduced reporting requirements provided by the JOBS Act that we are currently evaluating. For example, as an "emerging growth company," we are exempt from Sections 14A(a) and (b) of the Securities Exchange Act of 1934, as amended, which would otherwise require us to (1) submit certain executive compensation matters to shareholder advisory votes, such as "say-on-pay," "say-on-frequency," and "golden parachutes;" and (2) disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of our chief executive officer's compensation to our median employee compensation. We also intend to rely on an exemption from the rule requiring us to provide an auditor's attestation report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act. We will continue to remain an "emerging growth company" until the earliest of the following: (1) the last day of the fiscal year following the fifth anniversary of the date of the completion of our IPO; (2) the last day of the fiscal year in which our total annual gross revenue is equal to or more than$1.07 billion ; (3) the date on which we have issued more than$1 billion in nonconvertible debt during the previous three years; or (4) the date on which we are deemed to be a large accelerated filer under the rules of theSEC .
Recently Issued Accounting Pronouncements
There have been no other material changes to the significant accounting policies previously disclosed in the Company's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 . 33
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