You should read the following discussion and analysis together with our consolidated financial statements and related notes included in "Item 8. Financial Statements and Supplementary Data" in this Annual Report on Form 10-K. The following discussion contains forward-looking statements that involve risks and uncertainties. For a complete discussion of forward-looking statements, see the section above entitled "Forward Looking Statements." Our actual results could differ materially from those expressed or implied in any forward-looking statements as a result of various factors, including those set forth under the caption "Item 1A. Risk Factors."
Overview
We are a clinical-stage biopharmaceutical company focused on developing and
commercializing novel vaccines. Our initial program, HIL-214, is a virus-like
particle (VLP) based vaccine candidate for the prevention of moderate-to-severe
acute gastroenteritis (AGE) caused by norovirus infection. It is estimated that
norovirus causes nearly 700 million cases of illness and more than 200,000
deaths worldwide per year, as well as significant additional economic and social
burden. To date, HIL-214 has been studied in nine clinical trials conducted by
Takeda and LigoCyte, which collectively generated safety data from more than
4,500 subjects and immunogenicity data from more than 2,200 subjects, including
safety and immunogenicity data from more than 800 pediatric subjects. A
randomized, placebo-controlled Phase 2b field efficacy trial enrolled 4,712
adult subjects, and HIL-214 was well tolerated and demonstrated clinical proof
of concept in preventing moderate-to-severe cases of AGE from norovirus
infection. In
We commenced our operations in 2019 and have devoted substantially all of our
resources to date to organizing and staffing our company, business planning,
raising capital, in-licensing intellectual property related to our initial
vaccine candidate, HIL-214, preparing for and managing our clinical trials of
HIL-214, and providing other general and administrative support for our
operations. We have funded operations to date primarily through the issuance of
convertible promissory notes, commercial bank debt and the sale of common stock
in our initial public offering (IPO) which closed in
We do not have any products approved for sale, have not generated any revenue
and have incurred net losses since our inception. Our net losses for the years
ended
Based on our current operating plan, we believe that our existing cash and cash equivalents will be sufficient to meet our anticipated cash requirements through at least the next 12 months. We have never generated any revenue and do not expect to generate any revenue from product sales unless and until we successfully complete development of, and obtain regulatory approval for, HIL-214, which will not be for several years, if ever. Accordingly, until such time as we can generate significant revenue from sales of HIL-214, if ever, we expect to finance our cash needs through equity offerings, our existing Loan Agreement, debt financings, or other capital sources, including potential collaborations, licenses and other similar arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. Our failure to raise capital or enter into such other arrangements when needed would have a negative impact on our financial condition and could force us to delay, limit, reduce or terminate our product
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development or future commercialization efforts or grant rights to develop and market vaccine candidates that we would otherwise prefer to develop and market ourselves.
The global COVID-19 pandemic continues to evolve, and we will continue to monitor the COVID-19 situation closely. The extent of the impact of the COVID-19 pandemic on our business, operations and clinical development timelines and plans remains uncertain, and will depend on certain developments, including its impact on our clinical trial enrollment, trial sites, manufacturers, CROs and other third parties with whom we do business, as well as its impact on regulatory authorities and our key scientific and management personnel. The ultimate impact of the COVID-19 pandemic, including the impact of new variants of the virus that causes COVID-19, or a similar health epidemic is highly uncertain and subject to change. To the extent possible, we are conducting business as usual, with necessary or advisable modifications to employee travel and most of our non-lab-based employees working remotely. We will continue to actively monitor the evolving situation related to COVID-19 and may take further actions that alter our operations, including those that may be required by federal, state or local authorities, or that we determine are in the best interests of our employees and other third parties with whom we do business. At this point, the extent to which the COVID-19 pandemic may affect our business, operations and development timelines and plans, including the resulting impact on our expenditures and capital needs, remains uncertain and is subject to change.
Financial Operations Overview
Our financial statements include the accounts of
License Agreement with Takeda
On
We paid Takeda upfront consideration consisting of 840,500 shares of our common
stock and a warrant to purchase 5,883,500 shares of our common stock (the Takeda
Warrant). We further agreed that, in the event that Takeda's fully-diluted
ownership, including the Takeda Warrant, represents less than a certain
specified percentage of our fully-diluted capitalization, including shares
issuable upon conversion of outstanding convertible promissory notes, calculated
immediately prior to the closing of our IPO, we would issue an additional
warrant to purchase shares of common stock such that Takeda would hold a certain
specified percentage of the fully-diluted capitalization immediately before the
closing of our IPO (the Takeda Warrant Right). The Takeda Warrant was fully
exercised in
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Transitional Services Agreement with Takeda
As contemplated by the Takeda License, on
Components of Results of Operations
Operating Expenses
Research and Development
During 2022 and 2021, our research and development expenses have been related to the development of HIL-214. Research and development expenses are recognized as incurred, and payments made prior to the receipt of goods or services to be used in research and development are capitalized until the goods or services are received.
Research and development expenses include:
•
salaries, payroll taxes, employee benefits, and stock-based compensation charges for those individuals involved in research and development efforts;
•
external research and development expenses incurred under agreements with CROs and consultants to conduct and support our planned clinical trials of HIL-214; and
•
costs related to manufacturing HIL-214 for our planned clinical trials.
We plan to substantially increase our research and development expenses for the foreseeable future as we continue the development of HIL-214. We cannot determine with certainty the timing of initiation, the duration or the completion costs of current or future preclinical studies and clinical trials of HIL-214 or any future vaccine candidates due to the inherently unpredictable nature of clinical and preclinical development. Clinical and preclinical development timelines, the probability of success and development costs can differ materially from expectations. In addition, we cannot forecast whether HIL-214 or any future vaccine candidates may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements.
Our future development costs may vary significantly based on factors such as:
•
the number of trials required for approval;
•
the number of sites included in the trials;
•
the countries in which the trials are conducted;
•
the length of time required to enroll eligible subjects;
•
the number of subjects that participate in the trials;
•
the number of doses evaluated in the trials;
•
the costs and timing of manufacturing HIL-214 and placebo for use in our trials;
•
the drop-out or discontinuation rates of clinical trial subjects;
•
potential additional safety monitoring requested by regulatory agencies;
•
the duration of subject participation in the trials and follow-up;
•
the phase of development of the vaccine candidate;
•
the impact of any interruptions to our operations or to those of the third parties with whom we work due to the COVID-19 pandemic or other disease outbreaks; and
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•
the safety, purity, potency, immunogenicity and efficacy of the vaccine candidate.
In-process research and development expenses for the year ended
General and Administrative
General and administrative expenses consist of salaries and employee-related
costs for personnel in executive, finance and other administrative functions,
legal fees relating to intellectual property and corporate matters, and
professional fees for accounting, auditing and consulting services. We
anticipate that our general and administrative expenses will increase
substantially in the future to support our research and development activities,
pre-commercial preparation activities for HIL-214 and, if any vaccine candidate
receives marketing approval, commercialization activities. We also anticipate
increased expenses related to audit, legal, regulatory, and tax-related services
associated with maintaining compliance with exchange listing and
Interest Income
Interest income consists of interest on money market funds.
Interest Expense
Interest expense consists of interest on our outstanding convertible promissory notes and our term loan facility.
Change in Fair Value of Warrant Liabilities
In connection with the Takeda License, we issued the Takeda Warrant and Takeda
Warrant Right (together, the Takeda Warrants). The Takeda Warrants were
accounted for as liabilities until they met all the conditions for equity
classification due to (i) insufficient authorized shares for the Takeda Warrant
and (ii) the Takeda Warrant Right is not indexed to our own stock. Prior to our
IPO, we adjusted the carrying value of the Takeda Warrants to their estimated
fair value at each reporting date, with any change in fair value of the warrant
liabilities recorded as an increase or decrease to change in fair value of
warrant liabilities in the consolidated statements of operations. The Takeda
Warrant, which became exercisable upon our IPO, was for the purchase of
5,883,500 shares of our common stock at an exercise price of
Change in Fair Value of Convertible Promissory Notes
We issued convertible promissory notes in 2019, 2020 and 2021 for which we elected the fair value option. We adjusted the carrying value of our convertible promissory notes to their estimated fair value at each reporting date, with any change in fair value of the convertible promissory notes recorded as an increase or decrease to change in fair value of convertible promissory notes in our consolidated statements of operations. All outstanding convertible promissory notes and related accrued interest converted into shares of our common stock immediately prior to the closing of our IPO.
Prior to our IPO, the fair value of our convertible promissory notes was estimated using a scenario-based analysis that estimated the fair value of the convertible promissory notes based on the probability-weighted present value of expected future investment returns, considering possible outcomes available to the noteholders, including various IPO, settlement,
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equity financing, corporate transactions and dissolution scenarios. The conversion date fair value of the convertible promissory notes was reclassified to stockholders' equity using our publicly traded closing price on the date the convertible promissory notes were converted to common stock.
Results of Operations
Comparison of the Years Ended
The following table summarizes our results of operations for the periods indicated (in thousands): Year Ended December 31, 2022 2021 Change Operating expenses: Research and development$ 45,908 $ 10,014 $ 35,894 In-process research and development 2,500 37,656 (35,156 ) General and administrative 16,705 5,756 10,949 Total operating expenses 65,113 53,426 11,687 Loss from operations (65,113 ) (53,426 ) (11,687 ) Other income (expense): Interest income$ 3,875 - 3,875 Interest expense (3,414 ) (2,844 ) (570 ) Change in fair value of convertible promissory notes (51,469 ) (20,204 ) (31,265 ) Change in fair value of warrant liabilities (43,575 ) (25,911 ) (17,664 ) Other income (expense) (113 ) (23 ) (90 ) Total other income (expense) (94,696 ) (48,982 ) (45,714 ) Net loss$ (159,809 ) $ (102,408 ) $ (57,401 )
Research and development expenses. Research and development expenses were
In-process research and development expenses. We had
General and administrative expenses. General and administrative expenses were
Other income (expense). Other expense of
Liquidity and Capital Resources
We have incurred net losses and negative cash flows from operations since our inception and anticipate we will continue to incur net losses for the foreseeable future as we continue the development and potential commercialization of HIL-214,
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and may never become profitable. We have funded our operations to date primarily
through the issuance of convertible promissory notes, the net proceeds raised
from our IPO and borrowings under our term loan facility. As of
Term Loan Facility
On
The Term Loans bear (a) cash interest at a floating rate of the higher of (i)
the
The Loan Agreement contains certain customary affirmative and negative covenants and events of default. The affirmative covenants include, among others, covenants requiring us to maintain our legal existence and governmental approvals, deliver certain financial reports, maintain insurance coverage and satisfy certain requirements regarding our operating accounts. The negative covenants include, among others, limitations on our ability to incur additional indebtedness and liens, merge with other companies or consummate certain changes of control, acquire other companies or businesses, make certain investments, pay dividends, transfer or dispose of assets, amend certain material agreements, including the Takeda License, or enter into various specified transactions. Upon the occurrence of an event of default, subject to any specified cure periods, all amounts owed by us would begin to bear interest at a rate that is 4.00% above the rate effective immediately before the event of default and may be declared immediately due and payable by Hercules, as collateral agent.
As of
Convertible Promissory Note Financings
From inception to
On
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outstanding principal and accrued interest on the Frazier Notes. The
Funding Requirements
Based on our current operating plan, we believe that our existing cash and cash equivalents will be sufficient to meet our anticipated cash requirements through at least the next 12 months. In particular, we expect that our existing cash and cash equivalents will allow us to complete enrollment and dosing in, and report top-line safety and clinical efficacy data for, our Phase 2b NEST-IN1 study and technical transfer and manufacturing readiness for producing clinical trial supply for a Phase 3 study. However, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. We have based this estimate on assumptions that may prove to be wrong, and we could deplete our capital resources sooner than we expect. Additionally, the process of testing vaccine candidates in clinical trials is costly, and the timing of progress and expenses in these trials is uncertain.
Our future capital requirements will depend on many factors, including:
•
the initiation, type, number, scope, results, costs and timing of, our planned clinical trials of HIL-214 and preclinical studies or clinical trials of other potential vaccine candidates we may choose to pursue in the future, including any modifications to clinical development plans based on feedback that we may receive from regulatory authorities;
•
the costs and timing of manufacturing for HIL-214 and placebo to be used in our planned clinical trials, as well as commercial scale manufacturing, if any vaccine candidate is approved;
•
the costs, timing and outcome of regulatory meetings and reviews of HIL-214 or any future vaccine candidates;
•
any delays and cost increases that may result from the COVID-19 pandemic or other disease outbreak;
•
the costs of obtaining, maintaining and enforcing our patents and other intellectual property rights;
•
our efforts to enhance operational systems and hire additional personnel to satisfy our obligations as a public company, including enhanced internal controls over financial reporting;
•
the costs associated with hiring additional personnel and consultants as our business grows, including additional officers and clinical development and commercial personnel;
•
the terms and timing of establishing and maintaining collaborations, licenses and other similar arrangements;
•
the timing and amount of the milestone, royalty or other payments we must make to Takeda and any future licensors;
•
the costs and timing of establishing or securing sales and marketing capabilities if HIL-214 or future vaccine candidates are approved;
•
our ability to receive recommendations from the ACIP or other foreign NITAGs, and achieve sufficient market acceptance, coverage and adequate reimbursement from third-party payors and adequate market share and revenue for any approved products;
•
vaccine recipients' willingness to pay out-of-pocket for any approved products in the absence of coverage and/or adequate reimbursement from third-party payors; and
•
costs associated with any products or technologies that we may in-license or acquire.
Until such time, if ever, as we can generate substantial product revenues to support our cost structure, we expect to finance our cash needs through equity offerings, the Loan Agreement, debt financings, or other capital sources, including potential collaborations, licenses and other similar arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be or could be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing and equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise funds through collaborations, or other similar arrangements with third parties, we may have to
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relinquish valuable rights to our technologies, intellectual property, future revenue streams, research programs or vaccine candidates or grant licenses on terms that may not be favorable to us and/or may reduce the value of our common stock. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market our vaccine candidates even if we would otherwise prefer to develop and market such vaccine candidates ourselves.
Cash Flows
The following table sets forth a summary of the net cash flow activity for each of the periods indicated (in thousands):
Year Ended December 31, 2022 2021 Net cash provided by (used in): Operating activities$ (61,989 ) $ (7,295 ) Investing activities (6,514 ) (2,808 ) Financing activities 224,969 134,212
Net increase in cash, cash equivalents and restricted cash
Operating Activities
Net cash used in operating activities of
Net cash used in operating activities of
Investing Activities
Net cash used in investing activities of
Net cash used in investing activities of
Financing Activities
Net cash provided by financing activities of
Net cash provided by financing activities of
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Contractual Obligations and Commitments
In
In
Under the Takeda License, we have milestone payment obligations that are
contingent upon the achievement of certain development milestones and specified
levels of product sales and are required to make certain royalty payments in
connection with the sale of products developed under the agreement. We are
currently unable to estimate the timing or likelihood of achieving the
milestones or making future product sales. In addition, we have payment
obligations under the
We enter into contracts in the normal course of business for contract research services, contract manufacturing services, professional services and other services and products for operating purposes. These contracts generally provide for termination after a notice period, and, therefore, are cancelable contracts.
Critical Accounting Policies and Significant Judgments and Estimates
Our management's discussion and analysis of our financial condition and results
of operations is based on our consolidated financial statements, which have been
prepared in accordance with
While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements included in Item 8 of this Annual Report, we believe that the following accounting policies are the most critical for fully understanding and evaluating our financial condition and results of operations.
Accrued research and development expenses
As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued expenses as of each balance sheet date. This process involves reviewing open contracts and purchase orders, communicating with our 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 the actual cost. We make estimates of our accrued expenses as of each balance sheet date based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments, if necessary. The significant estimates in our accrued research and development expenses include the costs incurred for services performed by our vendors in connection with research and development activities for which we have not yet been invoiced.
We base our expenses related to research and development activities on our estimates of the services received and efforts expended pursuant to quotes and contracts with vendors that conduct research and development and contract manufacturing services 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 research and development expense. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be
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expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid expense accordingly. 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.
Although we do not expect our estimates to be materially different from amounts actually incurred, if our estimates of the status and timing of services performed differ from the actual status and timing of services performed, it could result in us reporting amounts that are too high or too low in any particular period. To date, there have been no material differences between our estimates of such expenses and the amounts actually incurred.
In-process research and development
We evaluate whether acquired intangible assets are a business under applicable accounting standards. Additionally, we evaluate whether the acquired assets have a future alternative use. Intangible assets that do not have future alternative use, such as the Takeda License, are considered acquired in-process research and development. When the acquired in-process research and development assets are not part of a business combination, the value of the consideration paid is expensed on the acquisition date.
Fair value of warrant liabilities and convertible promissory notes
As described above, prior to our IPO, our warrant liabilities and convertible promissory notes were revalued at each reporting period with changes in the fair value of the liabilities recorded as a component of other income (expense) in the consolidated statements of operations. See Note 2 to our consolidated financial statements included in Item 8 of this Annual Report for information concerning certain of the specific assumptions we used in determining the fair value of our warrant liabilities and convertible promissory notes. There are significant judgments and estimates inherent in the determination of the fair value of these liabilities. If we had made different assumptions including, among others, those related to the timing and probability of various corporate scenarios, discount rates, volatilities and exit valuations, the carrying values of our warrant liabilities and convertible promissory notes, and our net loss and net loss per common share could have been significantly different.
Stock-based compensation expense
Stock-based compensation expense represents the cost of the grant date fair
value of equity awards, primarily consisting of stock options and employee stock
purchase rights, recognized on a straight-line basis over the requisite service
period for stock options and over the respective offering period for employee
stock purchase plan rights, with forfeitures recognized as they occur. Since all
equity awards from inception to
We estimate the fair value of option grants using the Black-Scholes option pricing model. Estimating the fair value of equity awards as of the grant date using valuation models, such as the Black-Scholes option pricing model, is affected by assumptions regarding a number of variables, including the risk-free interest rate, the expected stock price volatility, the expected term of stock options, the expected dividend yield and the fair value of the underlying common stock on the date of grant. Changes in the assumptions can materially affect the fair value and ultimately how much stock-based compensation expense is recognized. These inputs are subjective and generally require significant analysis and judgment to develop. See Note 9 to our consolidated financial statements included elsewhere in this Annual Report for information concerning certain of the specific assumptions we used in applying the Black-Scholes option pricing model to determine the estimated fair value of our stock options granted during 2022 and 2021.
Common stock valuations
Prior to obtaining the Takeda License in
Following the completion of our IPO, the fair value of our common stock is based on the closing price as reported on the date of grant on the primary stock exchange on which our common stock is traded.
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As an emerging growth company under the Jumpstart Our Business Startups Act of 2012 (the JOBS Act), we can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of this exemption and, therefore, we will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. We intend to rely on other exemptions provided by the JOBS Act, including without limitation, not being required to comply with the auditor attestation requirements of Section 404(b) of Sarbanes-Oxley. As a result, our consolidated financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
We will remain an emerging growth company until the earliest of (i) the last day
of the fiscal year following the fifth anniversary of the consummation of our
IPO, (ii) the last day of the fiscal year in which we have total annual gross
revenue of at least
We are also a smaller reporting company as defined in the Exchange Act. We may
continue to be a smaller reporting company even after we are no longer an
emerging growth company. We may take advantage of certain of the scaled
disclosures available to smaller reporting companies and will be able to take
advantage of these scaled disclosures for so long as our voting and non-voting
common stock held by non-affiliates is less than
Recent Accounting Pronouncements
See Note 2 to our consolidated financial statements included in Item 8 of this Annual Report.
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