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June 8, 2022, 4:28 p.m. EDT

10-Q: HILLEVAX, INC.

(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis and the unaudited interim financial statements included in this Quarterly Report on Form 10-Q should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2021 and the related Management's Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in the Prospectus dated April 28, 2022 filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended (the Securities Act), with the Securities and Exchange Commission (SEC) on April 29, 2022 (the Prospectus).

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). All statements other than statements of historical facts contained in this Quarterly Report, including statements regarding our future results of operations and financial position, business strategy, research and development plans, the anticipated timing, costs, design and conduct of our ongoing and planned preclinical studies and planned clinical trials for our product candidates, the timing and likelihood of regulatory filings and approvals for our product candidates, our ability to commercialize our product candidates, if approved, the impact of the COVID-19 pandemic on our business, plans and objectives of management for future operations and future results of anticipated product development efforts, are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as "anticipate," "believe," "continue" "could," "estimate," "expect," "intend," "may," "plan," "potential," "predict," "project," "should," "target" or "will" or the negative of these terms or other similar expressions. These forward-looking statements are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report and are subject to a number of risks, uncertainties and assumptions, including, without limitation, the risk factors described in Part II, Item 1A, "Risk Factors" of this Quarterly Report. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise. All forward-looking statements are qualified in their entirety by this cautionary statement, which is made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

Overview

We are a clinical-stage biopharmaceutical company focused on developing and commercializing novel vaccines. Our initial program, HIL-214, is a VLP-based vaccine candidate for the prevention of moderate-to-severe 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 September 2021, an open IND was transferred to us from Takeda, under which we initiated a Phase 2b clinical trial, NOR-212, in May 2022 to evaluate the safety, immunogenicity, and efficacy of HIL-214 in infants. In May 2022, we completed enrollment of the prespecified 200 subject run-in for NOR-212. We expect to resume enrollment in NOR-212 in the third quarter of 2022, following the prespecified safety assessment by the clinical trial's data monitoring committee. We expect to report interim immunogenicity results for the first 200 subjects of NOR-212 in the first half of 2023, and top-line safety and clinical efficacy results in the second half of 2023. We believe HIL-214 has the potential to be the first ever vaccine approved for norovirus-related illness and will help grow HilleVax into a leading global vaccines company.

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 our planned 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. As of March 31, 2022, we had cash and cash equivalents of $111.3 million. From inception to March 31, 2022, we raised aggregate gross proceeds of $137.2 million from the issuance of convertible promissory notes. On May 3, 2022, we

completed our initial public offering (IPO), whereby we sold 13,529,750 shares of common stock at a public offering price of $17.00 per share, for net proceeds of approximately $210.3 million, after deducting underwriting discounts, commissions and offering costs of approximately $19.7 million.

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 three months ended March 31, 2022 and 2021 were $67.9 million and $1.5 million, respectively. As of March 31, 2022, we had an accumulated deficit of $173.1 million. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of our clinical development activities, other research and development activities and pre-commercialization activities. We expect our expenses and operating losses will increase substantially as we advance HIL-214 through clinical trials, seek regulatory approval for HIL-214, expand our clinical, regulatory, quality, manufacturing and commercialization capabilities, incur significant commercialization expenses for marketing, sales, manufacturing and distribution in anticipation of obtaining potential marketing approval for HIL-214, obtain, maintain, protect and enforce our intellectual property, expand our general and administrative support functions, including hiring additional personnel, and incur additional costs associated with operating as a public company.

Based on our current operating plan, we believe that our existing cash and cash equivalents, together with the net proceeds from our IPO, 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 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 HilleVax (formerly MokshaCo, Inc. and also the receiving entity), North Bridge V, Inc. (North Bridge V) and YamadaCo III, Inc. (YamadaCo III), prior to being merged into a single entity effective February 8, 2021. Our financial statements also include the accounts of our wholly-owned subsidiary HilleVax GmbH subsequent to its formation in May 2021. The functional currency of our Company and HilleVax GmbH is the U.S. dollar. HilleVax, North Bridge V and YamadaCo III were entities under common control of Frazier Life Sciences X, L.P. or its affiliates (Frazier), as a result of, among other things, Frazier's: (i) ownership of a majority of the outstanding capital stock of each of the companies; (ii) financing of each of the companies; (iii) control of board of directors of each of the companies; and

License Agreement with Takeda

On July 2, 2021, we and Takeda Vaccines, Inc. (Takeda), a subsidiary of Takeda Pharmaceutical Company Limited, entered into a license agreement (the Takeda License), pursuant to which we exclusively in-licensed certain intellectual property rights to commercialize HIL-214 products worldwide (excluding Japan) (the Territory). We will be responsible, at

our cost, for the development, manufacture and commercialization of HIL-214 products. We are obligated to use commercially reasonable efforts to develop and commercialize HIL-214 products in the Territory, and to seek regulatory approval for such products throughout the world.

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 will 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. This right expired in connection with our IPO and no additional warrant was issued. We also paid Takeda $2.5 million in cash upon the consummation of our convertible note financing in August 2021 and paid Takeda $2.5 million in March 2022 upon release of certain drug products and completion of certain regulatory activities. We are required to make to Takeda a one-time payment of $7.5 million upon achievement of a specified development milestone and commercial milestone payments of up to $150.0 million in the aggregate if certain annual sales targets for HIL-214 products are met in the Territory. We agreed to pay Takeda tiered high-single digit to low-teen percentage royalties on net sales of HIL-214 products in the Territory, subject to specified offsets and reductions, and Takeda agreed to pay us tiered mid-single digit to low-double digit percentage royalties on net sales of HIL-214 products in Japan, subject to specified offsets and reductions. Royalties will be payable, on a product-by-product and country-by-country basis beginning on the first commercial sale of such product in such country, until the later of (i) the expiration of the licensed patents covering the applicable product, (ii) the expiration of regulatory exclusivity in such country, or (iii) 20 years following the first commercial sale of such product in such country.

Transitional Services Agreement with Takeda

As contemplated by the Takeda License, on December 17, 2021, we and Takeda entered into a Transitional Services Agreement (the TSA). Pursuant to the TSA, Takeda has agreed to provide, on a transitional basis following the effective date of the Takeda License, certain services related to research and development and regulatory assistance services, oversight and management of ongoing clinical and research studies, and maintenance of certain third party vendor contracts. In consideration for the services provided under the TSA, we have agreed to pay certain specified amounts to Takeda in cash for such services and certain pass-through costs. For the three months ended March 31, 2022, we incurred $1.4 million of research and development expenses for Takeda's services.

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:

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:

In-Process Research and Development

In-process research and development expenses for the three months ended March 31, 2022 relate to the Takeda License, and include an aggregate $2.5 million contingent payment upon the release of certain drug products and the completion of certain regulatory activities, which have no alternative future use.

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 SEC requirements, director and officer insurance premiums, and investor relations costs associated with operating as a public company.

Interest Income

Interest income consists of interest on money market funds.

Interest Expense

Interest expense consists of interest on our outstanding convertible promissory notes.

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 are accounted for as liabilities as they do not meet 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. We adjust the carrying value of our warrant liabilities 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 condensed consolidated statements of operations.

In connection with our IPO, the Takeda Warrants will be reclassified to stockholders' equity as a result of meeting the criteria for equity classification and require a final adjustment to fair value.

Change in Fair Value of Convertible Promissory Notes

We issued convertible promissory notes in 2019, 2020 and 2021 for which we have elected the fair value option. We adjust 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 condensed consolidated statements of operations. All outstanding convertible promissory notes and related accrued interest converted into shares of our common stock upon the closing of our IPO.

The fair value of our convertible promissory notes has been 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, equity financing, corporate transactions and dissolution scenarios.







        Results of Operations
        Comparison of the Three Months Ended March 31, 2022 and 2021
        The following table summarizes our results of operations for the periods
        indicated (in thousands):
                                                             Three Months Ended
                                                                 March 31,
                                                            2022            2021          Change
        Operating expenses:
        Research and development                         $     6,211     $      267     $    5,944
        In-process research and development                    2,500              -          2,500
        General and administrative                             2,603          1,198          1,405
        Total operating expenses                              11,314          1,465          9,849
        Loss from operations                                 (11,314 )       (1,465 )       (9,849 )
        Other income (expense):
        Interest income                                            6              -              6
        Interest expense                                      (2,064 )           (9 )       (2,055 )
        Change in fair value of convertible promissory
        notes                                                (17,073 )          (73 )      (17,000 )
        Change in fair value of warrant liabilities          (37,424 )            -        (37,424 )
        Other income (expense)                                   (18 )            1            (19 )
        Total other income (expense)                         (56,573 )          (81 )      (56,492 )
        Net loss                                         $   (67,887 )   $   (1,546 )   $  (66,341 )
        


Research and development expenses. Research and development expenses were $6.2 million and $0.3 million for the three months ended March 31, 2022 and 2021, respectively. The increase of $5.9 million primarily consisted of $3.0 million of clinical development expenses for HIL-214, $1.6 million of personnel-related expenses, $0.8 million of consulting expenses, $0.3 million of facility and related expenses and $0.2 million of stock-based compensation.

In-process research and development expenses. We had $2.5 million of in-process research and development expenses for the three months ended March 31, 2022 related to the payment in March 2022 of an aggregate $2.5 million contingent payment under the Takeda License upon the release of certain drug products and the completion of certain regulatory activities.

General and administrative expenses. General and administrative expenses were $2.6 million and $1.2 million for the three months ended March 31, 2022 and 2021, respectively. The increase of $1.4 million primarily consisted of $0.6 million of personnel-related expenses, $0.5 million in professional services expenses for accounting, audit, tax, valuation and other services, $0.1 million of stock-based compensation and $0.3 million of other expenses, offset by a decrease of $0.1 million in legal fees related to corporate and other matters.

Other income (expense). Other expense of $56.6 million for the three months ended March 31, 2022 primarily consisted of $2.1 million of interest expense on our outstanding convertible promissory notes, $17.1 million of other expense related to the increase in fair value of our convertible promissory notes and $37.4 million of other expense related to the increase

in fair value of the Takeda Warrant. Other expense of $0.1 million for the three months ended March 31, 2021 primarily consisted of $0.1 million of other expense related to the increase in the fair value of our convertible promissory notes.

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. We have funded our operations to date primarily through the issuance of convertible promissory notes and the net proceeds raised from our IPO. As of March 31, 2022, we had cash and cash equivalents of $111.3 million. On May 3, 2022, we completed our IPO, whereby we sold 13,529,750 shares of common stock at a public offering price of $17.00 per share, for net proceeds of approximately $210.3 million, after deducting underwriting discounts, commissions and offering costs of approximately $19.7 million.

Term Loan Facility

On April 18, 2022, we entered into a Loan and Security Agreement (Loan Agreement) with Hercules Capital, Inc. (Hercules), as administrative and collateral agent, and the lenders party thereto, providing for term loans (Term Loans) of up to $75.0 million in the aggregate. We borrowed $5.0 million on April 18, 2022 and have the right to borrow up to an additional $10.0 million through December 15, 2022 and up to an additional $15.0 million through June 30, 2023 (collectively, Term Loan 1). We also have the right to borrow up to $20.0 million through June 30, 2023 (Term Loan 2). In addition, we have the right to borrow up to $25.0 million through March 31, 2024 (Term Loan 3), provided that on or prior to March 31, 2023, (i) we have announced that our planned Phase 2b clinical trial evaluating the safety, immunogenicity, and efficacy of HIL-214 in infants (HIL-214 Vaccine Trial) will continue without material adverse modification after completion of our planned interim safety and immunogenicity analysis on the first 200 evaluable subjects in the HIL-214 Vaccine Trial and

The Term Loans bear (a) cash interest at a floating rate of the higher of (i) the Wall Street Journal prime rate (or 5.00% if less) plus 1.05%, or (ii) 4.55%, and (b) additional interest at a per annum rate equal to 2.85%, with such interest being added to the outstanding principal balance of the Term Loans on a monthly basis. The monthly payments consist of interest-only through June 1, 2025 or, if prior to April 30, 2025, (x) the conditions to Term Loan 3 have been satisfied and (y) we have reasonably determined that (i) the HIL-214 Vaccine Trial has achieved the protocol-specified primary efficacy endpoint and (ii) HIL-214 has demonstrated acceptable safety results in the HIL-214 Vaccine Trial, and, as a result, we support the initiation of a Phase 3 registrational trial as the next immediate step in the development of HIL-214, in each case subject to reasonable verification by Hercules, through June 1, 2026. Subsequent to the . . .

Jun 08, 2022

COMTEX_408395265/2041/2022-06-08T16:28:24

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