(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the accompanying notes included in this Quarterly Report on Form 10-Q and the audited consolidated financial information and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019, which was filed with the Securities and Exchange Commission, or SEC, on March 16, 2020.
This discussion contains certain forward-looking statements that involve risks and uncertainties. Forward-looking statements are identified by words such as "believe," "will," "may," "estimate," "continue," "anticipate," "intend," "should," "plan," "expect," "predict," "could," "potentially" or the negative of these terms or similar expressions. You should read these statements carefully because they discuss future expectations, contain projections of future results of operations or financial condition, or state other "forward-looking" information. These statements relate to our future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in the "Risk Factors" section of our Annual Report on Form 10-K and in this Quarterly Report on Form 10-Q. Forward-looking statements are based on our management's beliefs and assumptions and on information currently available to our management. These statements, like all statements in this Quarterly Report on Form 10-Q, speak only as of their date, and except as required by law, we undertake no obligation to update or revise these statements in light of future developments. We caution investors that our business and financial performance are subject to substantial risks and uncertainties.
We are a genome editing company focused on developing medicines to durably treat rare diseases in pediatric patients with significant unmet medical need using GeneRide, our proprietary technology platform. Our GeneRide technology is designed to precisely integrate corrective genes into a patient's genome to provide a stable therapeutic effect. Because GeneRide is designed to have this durable therapeutic effect, we are initially targeting rare liver disorders in pediatric patients where it is critical to provide treatment early in a patient's life before irreversible disease pathology can occur. We have demonstrated proof of concept of our therapeutic platform in animal models for a number of diseases and are focusing on development of our lead product candidate, LB-001, for the treatment of Methylmalonic Acidemia, or MMA, a life-threatening disease that presents at birth.
Based on our GeneRide technology, we are developing our lead product candidate, LB-001, to treat MMA. In January 2020, we announced the submission of an investigational new drug application, or IND, to support the initiation of a Phase 1/2 clinical trial in pediatric patients with MMA, which the FDA has placed on clinical hold. Subsequently, we received a letter from the FDA specifying its questions related to the clinical hold. The clinical hold was based on questions that were clinical and nonclinical in nature, including questions related to the studies conducted for our IND filing, but did not relate to chemistry, manufacturing, and controls. We expect to have interactions with the FDA regarding their questions through mid-2020, after which we plan to provide guidance on the anticipated timing for the initiation of the Phase 1/2 clinical trial for LB-001.
We believe that achieving clinical proof of concept in an inherited liver disease such as MMA will validate our platform technology, including its potential application to other organs and diseases. In January 2020, we announced a research agreement with Takeda Pharmaceutical Company Limited, or Takeda, to further develop LB-301 in Crigler-Najjar syndrome, or CN, the second indication to be pursued using the GeneRide platform. In addition to MMA and CN, we have demonstrated proof of concept of our platform in hemophilia B and alpha-1-antitrypsin deficiency, or A1ATD, animal disease models. We expect to select future product candidates from these genetic diseases or others addressed by targeting the liver initially, and later by targeting the central nervous system, or CNS, and muscle.
Since our inception in 2014, we have devoted the majority of our efforts to business planning, research and development, developing and protecting our intellectual property, raising capital and recruiting management and technical staff. We do not have any products approved for sale and our only revenue has consisted of service revenue related to research cost reimbursement received under the Takeda agreement. As of March 31, 2020, we have raised approximately $9.8 million in net proceeds through the loan and security agreement in July 2019, approximately $72.3 million in net proceeds through our initial public offering, or IPO, in October 2018 and approximately $33.1 million in net proceeds from the sale of our convertible preferred stock in 2016 and 2017. We have incurred significant operating losses since our inception. Our ability to generate product revenue sufficient to achieve profitability will depend on the successful development and commercialization of our product candidate and any future product candidates. Our net loss was $9.5 million for the three months ended March 31, 2020 and our accumulated deficit was $76.8 million as of March 31, 2020. We expect to continue to incur significant expenses and operating losses for the foreseeable future in connection with our ongoing activities.
Impact of COVID-19
We have been actively monitoring the COVID-19 pandemic and its impact globally. Our objectives have remained the same throughout the pandemic: to support the safety of our team members and their families and to continue our research and development activities to develop genetic medicines that have the potential to durably treat rare diseases in patients with significant unmet medical need.
Since mid-March 2020, our non-laboratory employees have been working remotely in order to comply with social distancing and "stay at home" orders as well as applicable guidelines from the U.S. Centers for Disease Control and Prevention, or CDC. Our laboratory employees, whose work must be performed on premises, have been working in shifts to continue our in-house research and manufacturing activities on a decreased basis. We have also ceased all business travel for our employees. We plan to maintain these or similar restrictions on our business activities until we believe our employees can fully resume such business activities in accordance with federal, state and local requirements and guidelines.
Our research, development and manufacturing activities are dependent on our ability to continue our work on premises at our laboratory. We also rely on third parties located in countries that are affected by the COVID-19 pandemic, including the United States, for certain research, development and manufacturing activities. Similar to how we have restricted business activities at our premises, many of these third parties have also limited their staff from working on premises as part of their response to COVID-19. While we believe we and our third party vendors, suppliers and collaborators have largely been able to continue essential business activities to a certain degree, we cannot predict the impact of the progression of the COVID-19 pandemic on future results due to a variety of factors, including the health of our and their employees, our ability to maintain operations, the ability of our third party vendors, suppliers and collaborators to continue operations, any further government and/or public actions taken in response to the pandemic and ultimately the length of the pandemic.
In April 2020, as part of our effort to preserve capital, our leadership team volunteered to accept salary cuts ranging from 15% to 20%. We have also adopted certain other cost-cutting measures aimed at enhancing our capital position. During April and through May 7, 2020, we entered into "at-the-market" sales of our common stock resulting in gross proceeds of approximately $0.3 million. While we intend to continue to evaluate ways to enhance our liquidity and capital position, our efforts will largely depend on future developments that are highly uncertain and cannot be predicted with confidence at this time.
We plan to continue to closely monitor the COVID-19 pandemic in order to ensure the safety of our personnel and to continue advancing our research and development activities.
Components of Results of Operations
To date, the Company's only revenue has consisted of research cost reimbursements recognized as service revenue, all of which is attributable to the Company's January 2020 research agreement with Takeda to develop LB-301 in CN. The Company has not generated any revenue from product sales and does not expect to generate any revenue from product sales for the foreseeable future.
Research and Development Expenses
Research and development expenses consist primarily of costs incurred for our research activities, including our discovery efforts and the development of our product candidates, and include:
salaries, benefits and other related costs, including stock-based compensation expense, for personnel engaged in research and development functions;
license maintenance fees and milestone fees incurred in connection with various license agreements;
the costs of laboratory supplies and acquiring, developing and manufacturing preclinical study and, eventually, clinical trial materials;
expenses incurred under agreements with contract research organizations, or CROs, contract manufacturing organizations, or CMOs, as well as academic institutions and consultants that conduct our preclinical studies and other scientific development services;
facility-related expenses, which include direct depreciation costs and allocated expenses for rent and maintenance of facilities and other operating costs;
costs of outside consultants, including their fees, stock-based compensation and related travel expenses; and
costs related to compliance with regulatory requirements.
We expense research and development costs as incurred. Costs for external development activities are recognized based on an evaluation of the progress to completion of specific tasks. Payments for these activities are based on the terms of the individual agreements, which may differ from the pattern of costs incurred, and are reflected in our financial statements as prepaid or accrued research and development expenses.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation, for personnel in our executive, finance, corporate and business development and administrative functions. General and administrative expenses also include professional fees for legal, patent, accounting, auditing, tax and consulting services, travel expenses, and facility-related expenses, which include direct depreciation costs and allocated expenses for rent and maintenance of facilities and other operating costs.
Other Income (Expense), Net
Interest income consists primarily of interest on our cash and cash equivalents and investments. Interest expense consists of interest expense related to the aggregate $10.0 million principal amount of the Term A Loan borrowing under the loan and security agreement in July 2019. A portion of the interest expense on the Term A Loan is non-cash expense relating to the accretion of the debt discount and amortization of issuance costs. In the three months ended March 31, 2020, we recorded $0.3 million in interest expense, of which $0.2 million relates to cash interest paid and the remainder to the accretion of the debt discount and amortization of issuance costs. Other expense, net consists primarily of foreign exchange losses.
Results of Operations Comparison of the Three Months Ended March 31, 2020 and 2019 The following table summarizes our results of operations for the three months ended March 31, 2020 and 2019: Three Months Ended March 31, 2020 2019 (in thousands) REVENUE Service revenue $ 1,021 $ - Total revenue 1,021 - OPERATING EXPENSES Research and development 7,173 5,486 General and administrative 3,192 2,632 Total operating expenses 10,365 8,118 Loss from operations (9,344 ) (8,118 ) Other income (expense): Other (expense) income, net (111 ) 443 Loss before income taxes (9,455 ) (7,675 ) Income tax provision - (22 ) Net loss $ (9,455 ) $ (7,697 )
The Company's revenue for the three months ended March 31, 2020 consisted solely of the $1.0 million in research cost reimbursements recognized as service revenue under the January 2020 research agreement with Takeda.
Research and Development Expenses The following table summarizes our research and development expenses for the three months ended March 31, 2020 and 2019: Three Months Ended March 31, 2020 2019 Increase (in thousands) LB-001 external development and manufacturing costs $ 3,494 $ 2,754 $ 740 Personnel-related costs 1,766 1,197 569 Other research and development costs 1,913 1,535 378 Total research and development expenses $ 7,173 $ 5,486 $ 1,687
Research and development expenses for the three months ended March 31, 2020 were $7.2 million, compared to $5.5 million for the three months ended March 31, 2019. The increase of approximately $1.7 million was primarily due to increases of approximately $0.7 million related to external development and manufacturing expenses for our lead product candidate, LB-001, $0.4 million in other research and development expenses as we increased our overall research and development activities related to general platform development and $0.6 million in personnel-related costs due to an increase in headcount. Personnel-related costs for the three months ended March 31, 2020 included stock-based compensation expense of $0.3 million, compared to $0.2 million for the three months ended March 31, 2019. While there may be fluctuations on a quarterly basis, we expect that our research and development costs will decrease over the next twelve months as we believe that we have already incurred a significant proportion of the LB-001 external development and manufacturing costs needed to bring LB-001 into clinical development.
General and Administrative Expenses
General and administrative expenses were $3.2 million for the three months ended March 31, 2020, compared to $2.6 million for the three months ended March 31, 2019. The increase of approximately $0.6 million was primarily due to an increase in personnel-related costs which include salaries, stock-based compensation and bonus. This increase was due to an increase in headcount, including at the executive level, as well as an increase in stock-based compensation expense. Stock-based compensation expense included in general and administrative expenses was $0.5 million and $0.1 million for the three months ended March 31, 2020 and 2019, respectively. We expect that our general and administrative expenses will remain relatively consistent over the next twelve months, although there may be fluctuations on a quarterly basis.
Other (Expense) Income, Net
Other expense, net was $0.1 million for the three months ended March 31, 2020, compared to other income, net of $0.4 million for the three months ended March 31, 2019. The net decrease was primarily related to a decrease in interest income due to lower interest rates and lower capital resource balances as well as interest expense related to the loan and security agreement.
Liquidity and Capital Resources
Since our inception and through March 31, 2020, we have not generated any sales revenue and have incurred significant losses and negative cash flows from our operations.
As a result of the uncertainties for our business caused by the COVID-19 pandemic, we have implemented certain measures as part of our effort to preserve capital as described further under the heading "Impact of COVID-19." As of March 31, 2020, we had cash and cash equivalents of $43.2 million, which we believe will be able to fund our operating expenses and capital expenditure requirements through the second quarter of 2021. While we intend to continue to evaluate ways to enhance our liquidity and capital position, our efforts will largely depend on future developments that are highly uncertain and cannot be predicted with confidence at this time. As such, there is substantial doubt about the Company's ability to continue as a going concern within one year of the date these financial statements are filed.
Cash Flows The following table summarizes our cash flows for the three months ended March 31, 2020 and 2019: Three Months Ended March 31, 2020 2019 (in thousands) Net cash used in operating activities $ (7,538 ) $ (8,232 ) Net cash provided by (used in) investing activities 17,500 (44,809 ) Net cash provided by financing activities 84 - Effect of foreign exchange rates on cash and cash equivalents - 5 Net increase (decrease) in cash, cash equivalents and restricted cash $ 10,046 $ (53,036 )
During the three months ended March 31, 2020, net cash used in operating activities was approximately $7.5 million, primarily related to our net loss adjusted for non-cash charges and changes in the components of working capital. The $0.7 million decrease in net cash used in operating activities during the three months ended March 31, 2020 as compared to the three months ended March 31, 2019, was primarily driven by an increase in our deferred revenue related to the January 2020 research agreement with Takeda.
During the three months ended March 31, 2020, net cash provided by investing activities was $17.5 million as the proceeds from our short-term investments that matured during the period were not reinvested and were instead held as cash and cash equivalents. During the three months ended March 31, 2019, net cash used in investing activities was $44.8 million which primarily related to outflows of our cash and cash equivalents into short-term investments.
During the three months ended March 31, 2020, net cash provided by financing activities was $0.1 million related to the exercise of stock options. During the three months ended March 31, 2019, there were no net cash inflows or outflows related to financing activities.
We expect to continue to incur a significant amount of expenses in connection with our ongoing activities for the foreseeable future. In particular, we will incur significant expenses related to the preclinical activities and clinical trials of our product candidates and any future product candidates.
We expect that our expenses will increase substantially if and as we:
continue our research and preclinical development of any product candidates from our current or future research programs;
initiate clinical trials for LB-001 and any other product candidates we identify and develop;
seek to identify, assess, acquire and/or develop additional research programs and additional product candidates;
seek marketing approvals for any product candidate that successfully complete clinical trials;
develop, optimize, scale and validate a manufacturing process and analytical methods for any product candidates we may develop;
establish and build out internal process and analytical development capabilities and preclinical and clinical grade production;
obtain market acceptance of any product candidates we may develop as viable treatment options;
address competing technological and market developments;
maintain, expand and protect our intellectual property portfolio and provide reimbursement of third-party expenses related to our patent portfolio;
further develop our GeneRide technology platform;
hire additional technical, quality, regulatory, clinical, scientific and commercial personnel and add operational, financial and management information systems and personnel, including personnel to support our process and product development, manufacturing and planned future commercialization efforts;
make royalty, milestone or other payments under current and any future in-license agreements;
establish and maintain supply chain and manufacturing relationships with third parties that can provide adequate products and services, in both amount, timing and quality, to support clinical development and the market demand for any product candidate for which we obtain regulatory and marketing approval;
lease and build new facilities, including offices and labs, to support organizational growth;
validate and build-out a commercial-scale current Good Manufacturing Practices, or cGMP, manufacturing facility; and
establish a sales, marketing and distribution infrastructure to commercialize any product candidates for which we may obtain marketing approval.
We are unable to estimate the timing and amounts of increased capital outlays and operating expenses associated with completing the research and development of our product candidates because of the numerous risks and uncertainties associated with the development of LB-001 and any other product candidates and programs we may develop and because the extent to which we may enter into collaborations with third parties for development of LB-001 and any other product candidates we may develop is unknown. For example, in January 2020, we announced the submission of an IND to support the initiation of a Phase 1/2 clinical trial in pediatric patients with MMA, which the FDA has placed on clinical hold pending the resolution of certain clinical and nonclinical questions. Our future funding requirements, both near and long-term, will depend on many factors, including:
the initiation, scope, progress, timing, costs and results of drug discovery, preclinical development, laboratory testing, and planned clinical trials for LB-001 and any other product candidates;
the outcome, timing and cost of meeting regulatory requirements established by the U.S. Food and Drug Administration, or FDA, and other comparable foreign regulatory authorities, including resolving any potential clinical holds that may be imposed on us;
the impact of the COVID-19 pandemic on our ability to progress with our research, development, manufacturing and regulatory efforts, including our plans to resolve the clinical hold placed by the FDA on the IND for LB-001;
the cost of filing, prosecuting, defending and enforcing our patent claims and other intellectual property rights;
the cost of defending potential intellectual property disputes, including patent infringement actions;
the achievement of milestones or occurrence of other developments that trigger payments under any of our current agreements or other agreements we may enter into;
the extent to which we are obligated to reimburse, or entitled to reimbursement of, clinical trial and other research and development costs under future collaboration agreements, if any;
the effect of competing technological and market developments;
the cost and timing of completion of clinical or commercial-scale manufacturing activities;
the extent to which we in-license or acquire other products and technologies;
our ability to establish and maintain collaborations on favorable terms, if at all;
the cost of establishing sales, marketing and distribution capabilities for LB-001 and any other product candidates in regions where we choose to commercialize our product candidates, if approved; and
the initiation, progress, timing and results of our commercialization of LB-001 and any other product candidates, if approved, for commercial sale.
A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the research and development of that product candidate. For example, if the clinical hold on the IND for LB-001 causes significant delays in the progress of our MMA program, the FDA or another regulatory authority were to require us to conduct preclinical studies or clinical trials beyond those that we anticipate will be required, or if we experience significant trial delays due to patient enrollment or other reasons, we would be required to expend significant additional financial resources and time on preclinical and clinical research and development activities. Any significant delays in our programs may also require us to reevaluate our corporate strategy, resulting in the expenditure of significant resources and time. We may never succeed in obtaining regulatory approval for our product candidates or any future product candidates.
Until such time, if ever, that we can generate product revenue sufficient to achieve profitability, we expect to finance our cash needs through offerings of securities, private equity financing, debt financings, collaborations, government contracts or other strategic transactions. The terms of financing may adversely affect the holdings or the rights of our stockholders. If we are . . .
May 11, 2020
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