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March 11, 2022, 6:06 a.m. EST

10-K: REGULUS THERAPEUTICS INC.

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(EDGAR Online via COMTEX) -- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis and our financial statements and related notes included elsewhere in this Annual Report. The following discussion contains forward-looking statements that involve risks and uncertainties. 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 "Risk Factors," under Part I, Item 1A of this Annual Report.







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OVERVIEW

We are a clinical-stage biopharmaceutical company focused on discovering and developing first-in-class drugs targeting microRNAs to treat diseases with significant unmet medical need. We were formed in 2007 when Alnylam and Ionis contributed significant intellectual property, know-how and financial and human capital to pursue the development of drugs targeting microRNAs pursuant to a license and collaboration agreement. Our lead product candidates are RG-012 and RGLS8429. RG-012 is an anti-miR targeting miR-21 for the treatment of Alport syndrome, a life-threatening kidney disease with no approved therapy available. In November 2018, we and Sanofi agreed to transition further development activities of our miR-21 programs, including our RG-012 program, to Sanofi. As a result, Sanofi became responsible for all costs incurred in the development of RG-012 and any other miR-21 programs. The transition activities were completed in the second quarter of 2019. RGLS8429, an anti-miR targeting miR-17, is our next-generation compound for the treatment of ADPKD, which is currently in IND-enabling studies. In addition to these programs, we continue to develop a pipeline of other preclinical drug product candidates.

Since our inception through December 31, 2021, we have relied primarily on the sale of our equity to fund company operations. We have received $416.4 million from the sale of our equity and convertible debt securities, $101.8 million from our collaborations, principally from upfront payments, research funding and preclinical and clinical milestones, and $19.8 million in net proceeds from our Term Loan. As of December 31, 2021, we had cash and cash equivalents of approximately $60.4 million.

FINANCIAL OPERATIONS OVERVIEW

Revenue

Our revenues generally consist of upfront payments for licenses or options to obtain licenses in the future, milestone payments and payments for other research services under collaboration agreements.

In the future, we may generate revenue from a combination of license fees and other upfront payments, payments for research and development services, milestone payments, product sales and royalties in connection with strategic collaborations. We expect that any revenue we generate will fluctuate from quarter-to-quarter as a result of the timing of our achievement of preclinical, clinical, regulatory and commercialization milestones, if at all, the timing and amount of payments relating to such milestones and the extent to which any of our products are approved and successfully commercialized by us or our strategic collaboration partners. If our current or future collaboration partners do not elect or otherwise agree to fund our development costs pursuant to our current or future strategic collaboration agreements, or we or our strategic collaboration partner fails to develop product candidates in a timely manner or obtain regulatory approval for them, our ability to generate future revenues, and our results of operations and financial position would be adversely affected.

Research and development expenses

Research and development expenses consist of costs associated with our research activities, including our drug discovery efforts and the development of our therapeutic programs. Our research and development expenses include:

employee-related expenses, including salaries, benefits, travel and stock-based compensation expense;

external research and development expenses incurred under arrangements with third parties, such as CROs, CMOs, other clinical trial related vendors, consultants and our scientific advisors;

license fees; and

facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities, amortization of leasehold improvements and equipment, and laboratory and other supplies.

We expense research and development costs as incurred. We account for nonrefundable advance payments for goods and services that will be used in future research and development activities as expenses when the service has been performed or when the goods have been received. Certain of the raw materials used in the process of manufacturing drug product are capitalized upon their acquisition and expensed upon usage, as we have determined these materials have alternative future use.

To date, we have conducted research on many different microRNAs with the goal of understanding how they function and identifying those that might be targets for therapeutic modulation. At any given time we are working on multiple targets, primarily within our therapeutic areas of focus. Our organization is structured to allow the rapid deployment and shifting of resources to focus on the most promising targets based on our ongoing research. As a result, in the early phase of our







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development programs, our research and development costs are not tied to any specific target. However, we are currently spending the vast majority of our research and development resources on our lead development programs.

Since our inception, we have incurred a total of approximately $391.2 million in research and development expenses through December 31, 2021.

The process of conducting clinical trials and preclinical studies necessary to obtain regulatory approval is costly and time consuming. We, or our strategic collaboration partners, may never succeed in achieving marketing approval for any of our product candidates. The probability of success for each product candidate may be affected by numerous factors, including preclinical data, clinical data, competition, manufacturing capability and commercial viability.

Successful development of future product candidates is highly uncertain and may not result in approved products. Completion dates and completion costs can vary significantly for each future product candidate and are difficult to predict. We anticipate we will make determinations as to which programs to pursue and how much funding to direct to each program on an ongoing basis in response to our ability to maintain or enter into new collaborations with respect to each program or potential product candidate, the scientific and clinical success of each future product candidate, as well as ongoing assessments as to each future product candidate's commercial potential. We will need to raise additional capital and may seek additional collaborations in the future in order to advance our various programs.

General and administrative expenses

General and administrative expenses consist primarily of salaries and related benefits, including stock-based compensation, related to our executive, finance, legal, business development and support functions. Other general and administrative expenses include allocated facility-related costs not otherwise included in research and development expenses and professional fees for auditing, tax and legal services, some of which are incurred as a result of being a publicly-traded company.

Other income (expense), net

Other income (expense) consists primarily of interest income and expense and various income or expense items of a non-recurring nature, including forgiveness of our PPP Loan in the second quarter of 2021. We earn interest income from interest-bearing accounts and money market funds for cash and cash equivalents. Interest expense is primarily attributable to interest charges associated with borrowings under our secured Term Loan.

CRITICAL ACCOUNTING ESTIMATES

The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the revenues and expenses incurred during the reported periods. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Clinical Trial and Preclinical Study Accruals

We make estimates of our accrued expenses for clinical trial and preclinical study activities based on the facts and circumstances known to us at the time. These accruals are based upon estimates of costs incurred and fees that may be associated with services provided by clinical trial investigational sites and CROs and for other clinical trial-related activities. In accruing for these services, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If possible, we obtain information regarding unbilled services directly from these service providers. However, we may be required to estimate these services based on other information available to us by reviewing contracts, vendor agreements and purchase orders, and through discussions with internal clinical and preclinical personnel and external service providers as to the progress or stage of completion of services and the agreed-upon fee to be paid for such services. If we underestimate or overestimate the activities or fees associated with a study or service at a given point in time, adjustments to research and development expenses may be necessary in future periods. Historically, our estimated accrued liabilities have approximated actual expense incurred. Subsequent changes in estimates may result in a material change in our accruals.

Our significant accounting policies are described within "The Business, Basis of Presentation and Summary of Significant Accounting Policies" of our financial statements included elsewhere in this Annual Report.







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Recent Accounting Pronouncements

For a discussion of recently issued accounting pronouncements, refer to the section titled "Recent Accounting Pronouncements" within "The Business, Basis of Presentation and Summary of Significant Accounting Policies" of our financial statements included elsewhere in this Annual Report.

RESULTS OF OPERATIONS

Comparison of the years ended December 31, 2021 and 2020

The following table summarizes our results of operations for the years ended December 31, 2021 and 2020 (in thousands):







                                                          Years ended
                                                          December 31,
                                                       2021          2020
        Revenue under collaborations                $      -      $ 10,006
        Research and development expenses             17,794        15,347
        General and administrative expenses           10,022         8,814
        Interest and other income (expenses), net          9        (1,575)
        


Revenue under collaborations

Our revenues are generated from ongoing collaborations, and generally consist of upfront payments for licenses or options to obtain licenses in the future, milestone payments, program material sales payments and payments for other research services. Revenue under collaborations was zero for the year ended December 31, 2021, compared to $10.0 million for the year ended December 31, 2020. Revenue recognized for the year ended December 31, 2020 was attributable to the recognition of the Enrollment Milestone under the 2020 Sanofi Amendment and the recognition of program-related materials under the 2020 Sanofi Amendment as revenue.

Research and development expenses

The following table summarizes the components of our research and development expenses for the periods indicated, together with year-over-year changes (dollars in thousands):







                                                                                                                                        Increase (decrease)
                                                 2021              % of total              2020              % of total                 $                  %
        Research and development
           Personnel and internal expenses    $  6,156                      35  %       $  5,864                      38  %       $       292                5  %
           Third-party and outsourced
        expenses                                10,374                      58  %          8,342                      54  %             2,032               24  %
        Non-cash stock-based compensation          821                       5  %            693                       5  %               128               18  %
        Depreciation                               443                       2  %            448                       3  %                (5)              (1) %
        Total research and development
        expenses                              $ 17,794                     100  %       $ 15,347                     100  %       $     2,447               16  %
        


Research and development expenses increased by $2.4 million for the year ended December 31, 2021 compared to the year ended December 31, 2020. These amounts reflect the internal and external costs associated with advancing our clinical and preclinical pipeline. The aggregate increase was driven by a $2.0 million increase in external development costs, which was primarily driven by an increase in spend on third-party drug manufacturing for our RGLS8429 product candidate.

General and administrative expenses

General and administrative expenses were $10.0 million for the year ended December 31, 2021, compared to $8.8 million for the year ended December 31, 2020. These amounts reflect personnel-related and ongoing general business operating costs. The increase during the year ended December 31, 2021, as compared to the year ended December 31, 2020, is primarily attributable to personnel-related costs and a general increase in costs associated with being a publicly traded entity.







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Interest and other income (expenses), net

Net interest and other income was less than $0.1 million for the year ended December 31, 2021, compared to net interest and other expense of $1.6 million for the year ended December 31, 2020. Net interest and other income for the year ended December 31, 2021 included a $0.7 million gain on forgiveness of our Paycheck Protection Program loan during the second quarter of 2021, partially offset by interest charges associated with our outstanding Term Loan. Net interest and other expenses for the year ended December 31, 2020 were primarily related to interest charges associated with our outstanding Term Loan.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2021, we had cash and cash equivalents of approximately $60.4 million. We believe that our existing cash and cash equivalents will be sufficient to fund our anticipated and operating capital expenditure requirements through 2023. If we are unable to maintain sufficient financial resources, our business, financial condition and results of operations will be materially and adversely affected. We will need to raise additional capital to develop our product candidates and implement our operating plans. There can be no assurance that we will be able to obtain this needed financing on acceptable terms or at all. Additionally, equity or debt financings may have a dilutive effect on the holdings of the Company's existing stockholders.

Our future capital requirements are difficult to forecast and will depend on many factors, including:

the terms and timing of any strategic collaboration, licensing and other arrangements that we may establish;

the initiation, progress, timing and completion of preclinical studies and clinical trials for our development programs and product candidates, and associated costs;

the number and characteristics of product candidates that we pursue;

the outcome, timing and cost of regulatory approvals;

delays that may be caused by changing regulatory requirements;

the cost and timing of hiring new employees to support our continued growth;

the costs involved in filing and prosecuting patent applications and enforcing and defending patent claims;

the costs and timing of procuring clinical and commercial supplies of our product candidates;

the costs and timing of establishing sales, marketing and distribution capabilities, and the pricing and reimbursement for any products for which we may receive regulatory approval;

the extent to which we acquire or invest in businesses, products or technologies;

payments under our Term Loan.

To date, we have funded our operations primarily through the sale of equity, and to a lesser extent, through convertible debt, up-front payments, research funding and milestone payments under collaborative arrangements. Since inception, we have primarily devoted our resources to funding research and development, including discovery research, and preclinical and clinical development activities. To fund future operations, we will likely need to raise additional capital. We anticipate that we will seek to fund our operations through public or private equity or debt financings or other sources, such as potential collaboration agreements. We cannot make assurances that anticipated additional financing will be available to us on favorable terms, or at all. Although we have previously been successful in obtaining financing through our equity securities offerings, there can be no assurance that we will be able to do so in the future. As a result of the COVID-19 pandemic and actions taken to slow its spread, the global credit and financial markets have experienced extreme volatility, including in liquidity and credit availability, declines in consumer confidence, declines in economic growth, and uncertainty about economic stability. There can be no assurance that deterioration in credit and financial markets and confidence in economic conditions will not occur. If equity and credit markets deteriorate, it may make any necessary debt or equity financing more difficult to obtain, more costly and/or more dilutive.

The following table shows a summary of our cash flows for the years ended December 31, 2021 and 2020 (in thousands):







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                                                 Years ended
                                                 December 31,
                                             2021           2020
        Net cash (used in) provided by:
        Operating activities              $ (24,128)     $ (12,536)
        Investing activities                   (251)           (11)
        Financing activities                 53,737          9,513
        Total                             $  29,358      $  (3,034)
        


Operating activities

Net cash used in operating activities increased to $24.1 million for the year ended December 31, 2021, compared to $12.5 million for the year ended December 31, 2020. Net cash used in operating activities were primarily attributable to net losses of $27.8 million and $15.7 million for the years ended December 31, 2021 and 2020, respectively.

Investing activities

Net cash used in investing activities was $0.3 million for the year ended December 31, 2021, compared to less than $0.1 million for the year ended December 31, 2020.

Financing activities

Net cash provided by financing activities was $53.7 million for the year ended December 31, 2021, compared to net cash provided by financing activities of $9.5 million for the year ended December 31, 2020. Net cash provided by financing activities for the year ended December 31, 2021 was attributable to (i) total net proceeds received from our private placement of common stock and non-voting convertible preferred stock in November 2021 of $32.4 million and (ii) net proceeds from the issuance of our common stock pursuant to our Common Stock Sales Agreement with H.C. Wainwright & Co., LLC of $20.6 million. Net cash provided by financing activities for the year ended December 31, 2020 was attributable to total net proceeds received from our private placement of common stock, warrants to purchase common stock and non-voting convertible preferred stock in December 2020 of $18.2 million, partially offset by the remittance of $10.0 million of principal amortization payments under our Term Loan.







        Material Cash Requirements
        The following table summarizes our contractual obligations and commitments as of
        December 31, 2021 that will affect our future liquidity (in thousands):
                                                                                    Payments due by period
                                                       Total           <1 year           1-3 years           3-5 years           >5 years
        Facility operating lease obligations        $  3,431          $   754          $    1,576          $    1,101          $       -
        Term Loan obligations                          6,732              426               6,306                   -                  -
        Total                                       $ 10,163          $ 1,180          $    7,882          $    1,101          $       -
        


We enter into contracts in the normal course of business with clinical sites for the conduct of clinical trials, CROs for clinical research studies, professional consultants for expert advice and other vendors for clinical supply manufacturing or other services. These contracts generally provide for termination on notice, and therefore are cancellable contracts and not included in the table of contractual obligations and commitments.

In addition to the contractual obligations above, we also expect to have future material cash requirements related to our preclinical and clinical programs and personnel expenses.

Mar 11, 2022

COMTEX_403942206/2041/2022-03-11T06:05:51

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