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March 23, 2022, 4:46 p.m. EDT

10-K: EQRX, INC.

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(EDGAR Online via COMTEX) -- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Throughout this section, unless otherwise noted, "we," "us," "EQRx" and the "Company" refer to EQRx, Inc. (formerly known as CM Life Sciences III Inc.) and its consolidated subsidiaries following the Business Combination with Legacy EQRx; references to "Legacy EQRx" refer to EQRx International, Inc. (formerly known as EQRx, Inc.) prior to the Business Combination; and references to "CMLS III" refer to CM Life Sciences III Inc. prior to the Business Combination.

You should read the following discussion and analysis of our financial condition and results of operations together with our audited consolidated financial statements and related notes and unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those discussed below and as set forth under "Risk Factors." Please also refer to the section under the heading "Cautionary Note Regarding Forward-Looking Statements."

Overview

We are a new type of pharmaceutical company committed to developing and delivering innovative medicines to patients at radically lower prices. Our mission is to improve health for all with great, innovative, affordable medicines so that people with life-changing or chronic conditions can gain access to the medicines they need, physicians can treat patients without barriers to prescribing, and health systems can afford to make those medicines available, without restrictions, to the populations they serve in a financially sustainable manner. Launched in January 2020, our "New Pharma" solution starts with assembling a catalog of medicines at significant scale, targeting some of the most innovative clinical opportunities and highest drug cost categories of today and tomorrow, with an initial focus on oncology and immune-inflammatory diseases. We are focused on developing programs that are innovative, branded, and patent-protected that, if approved, have potential to be equivalent or superior to other therapies in their class. However, there is no guarantee our product candidates will be equivalent or superior to such other therapies. We do not currently have, and may never have, any products approved for commercial sale and have not generated any revenue to date, and may never become profitable. In addition, our business and pricing model is untested and may never be successful or generate sufficient revenue to lead to profitability.

Our team of leading drug hunters is building our catalog through:

? In-licensing clinical and preclinical stage programs to accelerate our business model;

? Building alliances with cutting-edge drug engineering platforms to build an earlier-stage pipeline of programs; and

? Establishing partnerships with other biopharma companies to develop combination therapies.

Assuming we are successful in obtaining regulatory approval, we plan to offer our catalog of innovative medicines to payers and health systems at radically lower prices, through a simple and transparent pricing model without surprise price increases. We are also assembling a Global Buyers' Club by entering into long-term, trusted strategic partnerships with private and public payers, providers and health systems so they and the patients they serve can gain access to our, if approved, equally as good or better medicines at radically lower prices. We will offer simple and transparent pricing models to provide an opportunity for dramatic savings in these high-cost drug areas. Our current pipeline of product candidates includes two late-stage programs each acquired in 2020: aumolertinib (EQ143), a third-generation epidermal growth factor receptor (EGFR) inhibitor, in-licensed from (Shanghai) Healthtech Co., LTD and Jiangsu Hansoh Pharmaceutical Group Company LTD (collectively, Hansoh), and sugemalimab

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On December 17, 2021 (the Closing Date), we consummated the Business Combination pursuant to a definitive merger agreement dated August 5, 2021 (the Merger Agreement), by and among Legacy EQRx, CMLS III and Clover III Merger Sub, Inc. (Merger Sub). As contemplated by the Merger Agreement, Merger Sub merged with and into Legacy EQRx, with Legacy EQRx surviving the merger as a wholly-owned subsidiary of CMLS III. As a result of the Business Combination, CMLS III was renamed EQRx, Inc. and Legacy EQRx was renamed EQRx International, Inc. The post combination company received net proceeds of approximately $1.3 billion upon the closing of the Business Combination and is eligible to receive up to an additional 50,000,000 shares of CMLS III Class A common stock pursuant to the Merger Agreement. The newly combined business now operates under the current EQRx management team.

Since our inception, we have focused primarily on organizing and staffing our company, business planning, raising capital, acquiring product candidates, securing related intellectual property, establishing strategic collaborations with payers, integrated delivery networks and health systems, and conducting research and development activities for our programs. Since our inception, we have funded our operations primarily through private equity financings. To date, we have raised an aggregate of approximately $2.2 billion of gross proceeds from the sale of our convertible preferred shares, convertible preferred notes that were issued in 2019 and subsequently converted into shares of our Series A convertible preferred stock (Series A), and our merger with CMLS III and associated PIPE financing

Since inception, we have incurred significant operating losses. Our net losses were $100.0 million and $250.0 million for the years ended December 31, 2021 and 2020, respectively. We had an accumulated deficit of $358.5 million and $258.5 million as of December 31, 2021 and 2020, respectively. We expect to continue to incur significant and increasing expenses and operating losses for the foreseeable future, as we seek regulatory approvals for our pipeline candidates, manufacture drug product and drug supply, maintain and expand our intellectual property portfolio, as well as hire additional personnel, pay for accounting, audit, legal, regulatory and consulting services, and pay costs associated with maintaining compliance with Nasdaq listing rules and the requirements of the U.S. Securities and Exchange Commission (SEC), director and officer liability insurance, investor and public relations activities and other expenses associated with operating as a public company. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of our preclinical studies, our clinical trials and our expenditures on other research and development activities and the expansion of our pipeline.

We do not currently have, and may never have, any product candidates approved for sale and have not generated any revenue to date. We will not generate revenue from product sales unless and until we successfully obtain regulatory approval for our product candidates, if ever, and as appropriate, complete clinical development. In addition, if we obtain regulatory approval for our product candidates, we expect to incur significant expenses related to developing our commercialization capabilities to support product sales, manufacturing and distribution activities. As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of equity offerings and debt financings or other sources, such as potential collaboration agreements, strategic alliances and licensing arrangements. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on acceptable terms, or at all. Our failure to raise capital or enter into such agreements as, and when needed, could have a negative effect on our business, results of operations and financial condition.

Response to COVID-19

In March 2020, the World Health Organization characterized the novel COVID-19 virus as a global pandemic. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition, including expenses, clinical trials and research and development costs, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain or treat COVID-19, as well as the economic impact on local, regional, national and international markets. These situations, or others associated with COVID-19, could cause delays in our clinical trial plans, our ability to obtain regulatory approvals, and could

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increase expected costs, all of which could have a material adverse effect on our business and financial condition. We implemented work-from-home and other policies, and are adapting to evolving federal, state and local health regulations as they evolve. Because of the nature of our current operations, COVID-19 has not had a significant impact on our operations or financial results to date.

Business Combination Transaction

Pursuant to the terms of the Merger Agreement, on the Closing Date, each outstanding share of issued and outstanding common stock and preferred stock of Legacy EQRx was converted into the right to receive 0.627 shares (the Exchange Ratio) of the combined entity's common stock, par value $0.0001 per share (Common Stock), resulting in the issuance of a total of 343,060,309 shares of Common Stock. Additionally, on the Closing Date, each option to purchase common stock of Legacy EQRx became an option to purchase shares of Common Stock of the combined company, subject to adjustment in accordance with the Exchange Ratio.

As of the Closing Date, each of the issued and outstanding shares of Class A common stock and Class B common stock of CMLS III was reclassified as Common Stock, and each of the issued and outstanding 8,693,333 private warrants and 11,039,957 public warrants became exercisable for shares of Common Stock.

In connection with the Business Combination, CMLS III entered into agreements with existing and new investors to subscribe for and purchase an aggregate of 120.0 million shares of Common Stock (the PIPE Financing) that resulted in gross proceeds of $1.2 billion upon the closing of the PIPE Financing. The closing of the Business Combination was a precondition to the PIPE Financing.

Following the Closing Date, former holders of Legacy EQRx common stock, preferred stock and options (Earn-Out Service Providers) may receive a pro rata share of up to 35,000,000 additional shares of Common Stock if at any time between the 12-month anniversary of the Closing Date and the 36-month anniversary of the Closing Date (the Earn-Out Period), the Common Stock price is greater than or equal to $12.50 for a period of at least 20 out of 30 consecutive trading days, and up to 15,000,000 additional share of common stock if at any time during the Earn-Out Period the Common Stock price is greater than or equal to $16.50 for a period of at least 20 out of 30 consecutive trading days (the Earn-Out Shares).

The Business Combination has been accounted for as a "reverse recapitalization" in accordance with U.S. GAAP. Under the reverse recapitalization model, the Business Combination was treated as Legacy EQRx issuing equity for the net assets of CMLS III, with no goodwill or intangible assets recorded. Under this method of accounting, CMLS III is treated as the "acquired" company for financial reporting purposes. This determination is primarily based on the fact that subsequent to the merger, Legacy EQRx stockholders have a majority of the voting power of the combined company, Legacy EQRx operations comprise all of the ongoing operations of the combined entity, Legacy EQRx governing body comprises a majority of the governing body of the combined company, and Legacy EQRx senior management comprises all of the senior management of the combined company.

Financial Overview

Revenue

To date, we have not recognized any revenue, including from product sales. If our development efforts for our product candidates are successful and result in regulatory approval, or we out-license our products through license agreements with third parties, we may generate revenue in the future. However, there can be no assurance as to when we will generate such revenue, if at all.

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Operating Expenses

Research and Development Expenses

Research and development expenses consist primarily of costs incurred for our research activities, including our drug discovery efforts and the development of our product candidates, salaries and benefits, and third-party license fees. We expense research and development costs as incurred, which include:

employee-related expenses, including salaries, bonuses, benefits, stock-based ? compensation, and other related costs for those employees involved in research and development efforts;

external research and development expenses incurred under agreements with ? contract research organizations (CROs) as well as consultants that conduct our preclinical studies and development services;

? costs incurred under collaboration agreements;

? costs related to manufacturing material for our preclinical and clinical studies;

? costs related to compliance with regulatory requirements; and

? facilities, depreciation and other allocated expenses, which include direct and allocated expenses for rent, utilities and insurance.

We expense research and development costs as they are incurred. We estimate preclinical study and clinical trial expenses based on the services performed pursuant to contracts with research institutions, CROs, and clinical manufacturing organizations (CMOs), that conduct and manage preclinical studies and clinical trials on our behalf based on actual time and expenses incurred by them. Further, we accrue expenses related to clinical trials based on the level of patient activity according to the related agreement. We monitor patient enrollment levels and related activity to the extent reasonably possible and adjust estimates accordingly.

We account for nonrefundable advance payments for goods and services that will be used in future research and development activities as expenses when the services have been performed or when the goods have been received rather than when the payment is made.

We track external research and development costs on a program-by-program basis once we have identified a product candidate. We do not allocate employee costs, facilities costs, including depreciation, or other indirect costs, to specific programs because these costs are deployed across multiple programs and, as such, are not separately classified. We use internal resources primarily to conduct our research activities as well as for managing our preclinical development, clinical development and manufacturing activities.

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The following table summarizes our research and development expenses (in thousands):







                                                                       Year
                                                                      Ended
                                                                  December 31,
                                                                2021         2020
        EQ121                                                 $  12,035    $   4,057
        Lerociclib                                                8,557       26,872
        Aumolertinib                                             12,279       28,016
        Sugemalimab                                              21,805       80,745
        Nofazinlimab                                              2,654       71,374
        Preclinical assets                                       15,719        4,000
        Unallocated other research and development expense       16,439        4,158
        Unallocated compensation expense                         28,621        5,169
        Total research and development expense                $ 118,109    $ 224,391
        


The successful development of our product candidates is highly uncertain. We plan to substantially increase our research and development expenses for the foreseeable future as we continue the development of our product candidates and manufacturing processes, conduct discovery and research activities for our preclinical programs and expand our pipeline. 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 our product candidates due to the inherently unpredictable nature of preclinical and clinical development. Clinical and preclinical development timelines, the probability of success and development costs can differ materially from expectations. We anticipate that we will make determinations as to which product candidates to pursue and how much funding to direct to each product candidate on an ongoing basis in response to the results of ongoing and future preclinical studies and clinical trials, regulatory developments and our ongoing assessments as to each product candidate's commercial potential. Our clinical development costs are expected to increase significantly as we commence additional clinical trials. We anticipate that our expenses will increase substantially, particularly due to the numerous risks and uncertainties associated with developing product candidates, including the uncertainty of:

the scope, rate of progress, and expenses of our ongoing research activities as ? well as any preclinical studies, clinical trials and other research and development activities;

? establishing an appropriate safety profile with IND enabling studies;

? successful enrollment in and completion of clinical trials;

? whether our product candidates show safety and efficacy in our clinical trials;

? receipt of marketing approvals from applicable regulatory authorities;

? the progress of our discovery collaborations with strategic partners;

? establishing commercial manufacturing capabilities or making arrangements with third-party manufacturers;

? obtaining and maintaining patent and trade secret protection and regulatory exclusivity for our product candidates;

? commercializing product candidates, if and when approved, whether alone or in collaboration with others; and

? continued acceptable safety profile of products following any regulatory approval.

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Any changes in the outcome of any of these variables with respect to the development of our product candidates in preclinical and clinical development could mean a significant change in the costs and timing associated with the development of these product candidates. We may never succeed in achieving regulatory approval for any of our product candidates. We may obtain unexpected results from our clinical trials. We may elect to discontinue, delay or modify clinical trials of some product candidates or focus on other product candidates. For example, if the FDA, EMA, MHRA 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 on the completion of clinical development of that product candidate.

General and Administrative Expenses

General and administrative expense consists primarily of employee related costs, including salaries, bonuses, benefits, stock-based compensation and other related costs for our executive and administrative functions. General and administrative expense also includes professional services, including legal, accounting and audit services and other consulting fees, costs associated with the partnership contracts we have in place with certain payers, integrated delivery networks and health systems, as well as facility costs not otherwise included in research and development expenses, insurance and other general administrative expenses.

We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support our continued research activities and development of our product candidates. We also anticipate that we will incur significantly increased accounting, audit, legal, regulatory, compliance and director and officer insurance costs as well as investor and public relations expenses associated with operating as a public company. In addition, if and when we obtain regulatory approval for our pre-registrational programs, or any of our other product candidates, we expect to incur additional expenses related to the building of our team to support product sales and distribution activities.

Other Income (Expense)

Change in Fair Value of Contingent Earn-Out Liability

Change in fair value of contingent earn-out liability includes the changes in fair value of the Earn-Out Shares, which were classified as liabilities as part of the Business Combination consideration.

Change in Fair Value of Warrant Liabilities

Change in fair value of warrant liabilities includes the changes in fair value of the Private Warrants and the Public Warrants, which are classified as liabilities, and were assumed as part of the Business Combination.

Interest Income (Expense), Net

Interest income (expense), net primarily consists of income earned on our cash and cash equivalents.

Other Income (Expense), Net

Other income (expense) consists of miscellaneous income and expense unrelated to our core operations.

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):
                                              132
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                                                                            Year
                                                                           Ended
                                                                       December 31,
                                                                    2021           2020         Change
        Operating expenses:
        Research and development                                 $   118,109    $   224,391    (106,282)
        General and administrative                                    78,266         25,689       52,577
        Total operating expenses                                     196,375        250,080     (53,705)
        Loss from operations                                       (196,375)      (250,080)       53,705
        Other income (expense):
        Change in fair value of contingent earn-out liability         87,065              -       87,065
        Change in fair value of warrant liabilities                    8,880              -        8,880
        Interest income, net                                             436             97          339
        Other expense, net                                              (15)              -         (15)
        Total other income, net                                       96,366             97       96,269
        Net loss                                                 $ (100,009)    $ (249,983)      149,974
        


Research and Development Expenses

Research and development expense was $118.1 million for the year ended December 31, 2021, compared to $224.4 million for the year ended December 31, 2020. The decrease of $106.3 million was primarily driven by a decrease of $194.0 million in license and milestone fees associated with new compounds added to our pipeline during 2021 and 2020, partially offset by a $40.3 million increase in preclinical and clinical development costs, a $22.4 million increase in employee related expenses driven by significant growth in our research and development headcount to support the development of our pipeline, a $12.8 million increase in information technology, facilities and other allocated expenses that support our overall research and development activities, a $6.1 million increase in consulting and professional fees, and a $6.1 million increase in expense associated with our discovery collaboration agreements.

General and Administrative Expenses

General and administrative expense was $78.3 million for the year ended December 31, 2021, compared to $25.7 million for the year ended December 31, 2020. The increase of $52.6 million was primarily driven by a $39.4 million increase in employee related expenses driven by an increase in headcount to support the overall growth of the organization, a $9.5 million increase in consulting and professional fees, a $3.4 million increase in costs associated with the partnership contracts we have in place with certain payers, integrated delivery networks and health systems, and a $0.3 million increase in information technology, facilities, overhead allocations and other expenses.

Other Income, Net

Total other income, net was $96.4 million for the year ended December 31, 2021, compared to $0.1 million for the year ended December 31, 2020. The increase of $96.3 million was primarily due to $87.1 million and $8.9 million of non-cash income related to the remeasurement of the contingent earn-out liability and warrant liabilities, respectively, as of December 31, 2021.

Liquidity and Capital Resources

Sources of Liquidity

Since our inception, we have generated recurring net losses. We have not yet commercialized any product and we do not expect to generate revenue from sales of any products until 2023, if at all. Since our inception, we have funded our operations primarily through proceeds from the issuance of preferred stock and common stock.

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To date, we have raised an aggregate of approximately $2.2 billion of gross proceeds from the sale of convertible preferred shares, convertible preferred notes that were issued in 2019 and subsequently converted into shares of Legacy EQRx Series A convertible preferred stock, the Business Combination and the concurrent PIPE Financing. As of December 31, 2021, we had cash, cash equivalents and restricted cash of $1.7 billion.

Funding Requirements

We believe that, prior to the consideration of revenue and associated costs from the potential future sales of any of our investigational products that may receive regulatory approval, our existing cash and cash equivalents on hand as of December 31, 2021 of $1.7 billion will enable us to fund our operating expenses and capital expenditure requirements into 2025, based on certain assumptions regarding our development programs and business development plans. We have based this estimate on assumptions that may prove to be wrong and may change, and we could expend our capital resources sooner than we expect or slow our spend such that it will last longer than into 2025.

We expect to incur significant expenses and operating losses for the foreseeable future as we seek regulatory approval, advance our product candidates, pursue commercialization of any approved product candidates and advance other candidates in our pipeline through preclinical and clinical development. We expect that our research and development and general and administrative costs will increase in connection with our planned research and development and commercialization activities. In addition, we expect to incur additional costs associated with operating as a public company. Because of the numerous risks and uncertainties associated with research, development and commercialization of our product candidates, we are unable to estimate the exact amount of our working . . .

Mar 23, 2022

COMTEX_404659353/2041/2022-03-23T16:46:28

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