10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2024

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-40708

 

ELIEM THERAPEUTICS, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

83-2273741

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

PMB #117

2801 Centerville Road 1st Floor

Wilmington, DE

19808-1609

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: 1-877-ELIEMTX (354-3689)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

 

Common Stock, par value $0.0001 per share

 

ELYM

 

The Nasdaq Stock Market LLC

(The Nasdaq Global Market)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

 

 

 

 

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☒ No ☐

As of May 9, 2024, the registrant had 29,091,166 shares of common stock, $0.0001 par value per share, outstanding.

 


 

 

 

 


 

 

Table of Contents

 

 

 

Page

 

 

 

PART I.

FINANCIAL INFORMATION

1

 

 

 

Item 1.

Condensed Consolidated Financial Statements (unaudited)

1

 

Condensed Consolidated Balance Sheets

1

 

Condensed Consolidated Statements of Operations and Comprehensive Loss

2

 

Condensed Consolidated Statements of Stockholders’ Equity

3

 

Condensed Consolidated Statements of Cash Flows

4

 

Notes to Unaudited Condensed Consolidated Financial Statements

5

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results and Operations

16

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

22

Item 4.

Controls and Procedures

22

 

 

 

 

 

 

PART II.

OTHER INFORMATION

24

 

 

 

Item 1.

Legal Proceedings

24

Item 1A.

Risk Factors

24

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

63

Item 3.

Defaults Upon Senior Securities

63

Item 4.

Mine Safety Disclosures

63

Item 5.

Other Information

63

Item 6.

Exhibits

64

Signatures

65

 

 

 

 


 

PART I - FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements (unaudited)

 

Eliem Therapeutics, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share amounts)

(unaudited)

 

Assets

 

March 31, 2024

 

 

December 31, 2023

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

105,031

 

 

$

93,112

 

Short-term marketable securities

 

 

 

 

 

13,686

 

Prepaid expenses and other current assets

 

 

4,192

 

 

 

3,457

 

Total current assets

 

$

109,223

 

 

$

110,255

 

Operating lease right-of-use assets

 

 

111

 

 

 

199

 

Other long-term assets

 

 

 

 

 

15

 

Total assets

 

$

109,334

 

 

$

110,469

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

 

85

 

 

 

66

 

Accrued expenses and other current liabilities

 

 

2,640

 

 

 

2,433

 

Operating lease liabilities

 

 

225

 

 

 

334

 

Total current liabilities

 

$

2,950

 

 

$

2,833

 

Operating lease liabilities, net of current portion

 

 

 

 

 

15

 

Other long-term liabilities

 

 

 

 

 

22

 

Total liabilities

 

$

2,950

 

 

$

2,870

 

Commitments and contingencies (Note 4)

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

Common stock, $0.0001 par value per share, 250,000,000 shares authorized; 27,723,824 and 27,699,446 shares issued and outstanding at March 31, 2024 and December 31, 2023, respectively

 

 

3

 

 

 

3

 

Additional paid-in capital

 

 

264,057

 

 

 

263,577

 

Accumulated other comprehensive loss

 

 

 

 

 

(2

)

Accumulated deficit

 

 

(157,676

)

 

 

(155,979

)

Total stockholders’ equity

 

$

106,384

 

 

$

107,599

 

Total liabilities and stockholders’ equity

 

$

109,334

 

 

$

110,469

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

1


 

Eliem Therapeutics, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except share and per share amounts)

(unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2024

 

 

2023

 

Operating expenses:

 

 

 

 

 

 

Research and development

 

$

1,091

 

 

$

5,720

 

General and administrative

 

 

1,914

 

 

 

17,718

 

Total operating expenses

 

 

3,005

 

 

 

23,438

 

Loss from operations

 

 

(3,005

)

 

 

(23,438

)

Other income (expense):

 

 

 

 

 

 

Foreign currency gain (loss)

 

 

(33

)

 

 

248

 

Interest income, net

 

 

1,341

 

 

 

900

 

Total other income (expense)

 

 

1,308

 

 

 

1,148

 

Net loss

 

$

(1,697

)

 

$

(22,290

)

Net loss per share, basic and diluted

 

$

(0.06

)

 

$

(0.84

)

Weighted-average number of shares outstanding used to compute net loss per share, basic and diluted

 

 

27,638,528

 

 

 

26,492,438

 

 

 

 

 

 

 

 

Comprehensive loss:

 

 

 

 

 

 

Net loss

 

$

(1,697

)

 

$

(22,290

)

Other comprehensive income:

 

 

 

 

 

 

Unrealized gain on investments, net of tax of $0

 

 

2

 

 

 

263

 

Comprehensive loss

 

$

(1,695

)

 

$

(22,027

)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

2


 

Eliem Therapeutics, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(In thousands, except share amounts)

(unaudited)

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional Paid-in Capital

 

 

Accumulated Other Comprehensive Loss

 

 

Accumulated Deficit

 

 

Total Stockholders' Equity

 

Balance as of December 31, 2023

 

 

27,626,435

 

 

$

3

 

 

$

263,577

 

 

$

(2

)

 

$

(155,979

)

 

$

107,599

 

Vesting of restricted stock awards and units

 

 

24,579

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of stock options

 

 

10,999

 

 

 

 

 

 

15

 

 

 

 

 

 

 

 

 

15

 

Stock-based compensation

 

 

 

 

 

 

 

 

465

 

 

 

 

 

 

 

 

 

465

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

2

 

 

 

 

 

 

2

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,697

)

 

 

(1,697

)

Balance as of March 31, 2024

 

 

27,662,013

 

 

$

3

 

 

$

264,057

 

 

$

 

 

$

(157,676

)

 

$

106,384

 

 

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional Paid-in Capital

 

 

Accumulated Other Comprehensive Loss

 

 

Accumulated Deficit

 

 

Total Stockholders' Equity

 

Balance as of December 31, 2022

 

 

26,390,186

 

 

$

3

 

 

$

249,930

 

 

$

(358

)

 

$

(120,860

)

 

$

128,715

 

Vesting of restricted stock awards

 

 

19,608

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of stock options

 

 

406,194

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

1

 

Stock-based compensation

 

 

 

 

 

 

 

 

10,171

 

 

 

 

 

 

 

 

 

10,171

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

263

 

 

 

 

 

 

263

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(22,290

)

 

 

(22,290

)

Balance as of March 31, 2023

 

 

26,815,988

 

 

$

3

 

 

$

260,102

 

 

$

(95

)

 

$

(143,150

)

 

$

116,860

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

3


 

Eliem Therapeutics, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2024

 

 

2023

 

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

 

$

(1,697

)

 

$

(22,290

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

Stock-based compensation

 

 

465

 

 

 

10,171

 

Non-cash operating lease expense

 

 

88

 

 

 

122

 

Accretion of discounts and amortization of premiums on investments, net

 

 

(63

)

 

 

(491

)

Foreign currency loss (gain) from remeasurement

 

 

28

 

 

 

(231

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

Prepaid expenses and other assets

 

 

216

 

 

 

25

 

Long-term assets

 

 

15

 

 

 

(1,119

)

Accounts payable

 

 

20

 

 

 

114

 

Accrued expenses and other liabilities

 

 

(745

)

 

 

(1,459

)

Operating lease liabilities

 

 

(124

)

 

 

(107

)

Long-term liabilities

 

 

(22

)

 

 

88

 

Net cash used in operating activities

 

$

(1,819

)

 

$

(15,177

)

Cash flows from investing activities:

 

 

 

 

 

 

Purchase of marketable securities

 

 

 

 

 

(17,452

)

Proceeds from maturities of marketable securities

 

 

13,751

 

 

 

23,249

 

Net cash provided by investing activities

 

$

13,751

 

 

$

5,797

 

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from the exercise of stock options

 

 

15

 

 

 

1

 

Net cash provided by financing activities

 

$

15

 

 

$

1

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(28

)

 

 

231

 

Net change in cash and cash equivalents

 

$

11,919

 

 

$

(9,148

)

Cash and cash equivalents at beginning of period

 

 

93,112

 

 

 

43,585

 

Cash and cash equivalents at end of period

 

$

105,031

 

 

$

34,437

 

Supplemental disclosure of cash operating activities:

 

 

 

 

 

 

Cash paid for leases included in operating cash outflows

 

$

133

 

 

$

121

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

Deferred transaction costs accrued but not yet paid

 

$

952

 

 

$

 

Right-of-use assets obtained in exchange for lease liabilities

 

$

 

 

$

313

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

4


 

Eliem Therapeutics, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Description of Organization and Summary of Significant Accounting Policies

Organization

Eliem Therapeutics, Inc. (Eliem or the Company) is a biotechnology company focused on developing novel therapies for neuronal excitability disorders to address unmet needs in psychiatry, epilepsy, chronic pain, and other disorders of the peripheral and central nervous systems. The Company was incorporated on October 18, 2018 as a Delaware corporation and is headquartered in Delaware.

On February 7, 2023, the Company’s board of directors approved a restructuring plan (the Restructuring Plan) to conserve financial resources and better align the Company’s workforce with current business needs, as a result of the decision to pause development of ETX-155 and focus on the Company’s preclinical Kv7 program. As part of the Restructuring Plan, the Company's workforce was reduced by approximately 55%, with substantially all of the reduction in personnel completed in the first half of 2023.

On July 20, 2023, the Company announced that it made the determination to pause further development of its Kv7 program and to conduct a comprehensive exploration of strategic alternatives focused on maximizing stockholder value. As part of that effort, the Company is exploring a variety of options, including seeking a partner for further development of both Kv7 and ETX-155. The Company further reduced its workforce by 10 employees in October 2023.

 

On April 10, 2024, after a comprehensive review of strategic alternatives, including identifying and reviewing potential candidates for a strategic transaction, the Company entered into an Agreement and Plan of Merger and Reorganization (the Acquisition Agreement) with Tango Merger Sub, Inc. (Transitory Subsidiary), a Delaware corporation and a wholly owned subsidiary of the Company, Tenet Medicines, Inc. (Tenet), a Delaware corporation that is majority-owned by funds affiliated with RA Capital Management, L.P. (RA Capital Management), and, solely in his capacity as company equityholder representative, Stephen Thomas. The Acquisition Agreement provides for the acquisition of Tenet by the Company through the merger of Transitory Subsidiary into Tenet, with Tenet surviving as a wholly owned subsidiary of the Company (the Acquisition). Tenet is a privately held development stage biotechnology company focused on advancing its clinical stage program TNT119, an anti-CD19 monoclonal antibody designed for broad range of autoimmune disorders, including systemic lupus erythematosus (SLE), immune thrombocytopenia (ITP), and membranous nephropathy (MN).

Concurrently with the execution of the Acquisition Agreement, the Company entered into a Securities Purchase Agreement (the Securities Purchase Agreement) with several accredited institutional investors, pursuant to which the Company agreed to issue and sell to such investors in a private placement an aggregate of 31,238,282 shares of its common stock, at a price of $3.84 per share (the Private Placement). The Company expects to receive aggregate gross proceeds from the Private Placement of approximately $120.0 million, before deducting estimated offering costs.

 

For additional information on the Acquisition and Private Placement, please refer to Note 8, Subsequent Events, to the interim condensed consolidated financial statements.

Basis of Presentation and Principles of Consolidation

The accompanying interim condensed consolidated financial statements of the Company and its wholly owned subsidiary have been prepared in conformity with accounting principles generally accepted in the United States (U.S. GAAP) and accordance with the rules and regulations of the U.S. Securities and Exchange Commission (SEC) for Quarterly Reports on Form 10-Q. All intercompany transactions and balances have been eliminated in consolidation.

5


 

The accompanying condensed consolidated balance sheet as of March 31, 2024, and condensed consolidated statements of operations and comprehensive loss, condensed consolidated statements of cash flows, and condensed consolidated statements of stockholders’ equity for the three months ended March 31, 2024 and 2023, are unaudited. The consolidated balance sheet as of December 31, 2023 was derived from the audited financial statements as of and for the year ended December 31, 2023, but does not include all disclosures required by U.S. GAAP. The unaudited interim condensed financial statements have been prepared on a basis consistent with the audited annual financial statements as of and for the year ended December 31, 2023, and, in the opinion of management, reflect all adjustments, consisting solely of normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of March 31, 2024, the condensed results of its operations as of the three months ended March 31, 2024 and 2023, and its cash flows for the three months ended March 31, 2024 and 2023. The financial data and other information disclosed in these notes related to the three months ended March 31, 2024 and 2023 are also unaudited. The condensed results of operations for the three months ended March 31, 2024 are not necessarily indicative of the results to be expected for the full year ending December 31, 2024 or any other period. These interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in the Company’s Annual Report on Form 10-K filed with the SEC on March 28, 2024.

Liquidity

Since inception, the Company has experienced recurring losses from operations and generated negative cash flows from operations. The Company has an accumulated deficit of $157.7 million as of March 31, 2024 and expects to incur additional losses from operations in the future. The Company estimates the available cash and cash equivalents of $105.0 million as of March 31, 2024 will be sufficient to meet its projected operating requirements for at least the next twelve months from the filing date of these unaudited condensed consolidated financial statements and the Company anticipates that it will need to raise substantial financing in the future to fund its operations.

The Company may finance future cash needs through the sale of equity, debt financings, or other capital sources, which could include income from collaborations, strategic partnerships or other strategic arrangements. There are no assurances that the Company will be able to raise sufficient amounts of funding in the future on acceptable terms, or at all.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Estimates include those related to the accrual of research and development expenses, recoverable research and development tax credits, and the valuation of stock-based awards. The Company evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors and adjusts those estimates and assumptions when facts and circumstances dictate. Actual results could differ from those estimates.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, and marketable securities. The Company’s cash is held by two financial institutions in the United States (U.S.) and two financial institutions in the U.K. The Company does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships. The Company’s deposits held in the U.S. and U.K. may exceed the insured limits of the Federal Depository Insurance Corporation and Financial Services Compensation Scheme, respectively. As of March 31, 2024, the Company has investments in money market funds which are held in a segregated account at a third-party custodian. The Company has established guidelines relative to credit ratings and maturities intended to safeguard principal balances and maintain liquidity. Through March 31, 2024, and the date of this filing, the Company has not experienced any losses on such deposits.

Risks and Uncertainties

The Company is subject to risks and uncertainties common to early-stage companies in the biotechnology industry, including, but not limited to, development by competitors of new technological innovations, protection of proprietary technology, dependence on key personnel, reliance on single-source vendors and collaborators, availability of raw materials, patentability of the Company’s products and processes and clinical efficacy and safety of any product the Company may develop, compliance with government regulations and the need to obtain additional financing to fund operations. Any product candidates the Company may develop in the future will require significant additional research and development efforts, including extensive preclinical studies, clinical trials, and regulatory approval, prior to commercialization. These efforts will require significant amounts of additional capital, adequate personnel infrastructure and extensive compliance and reporting.

6


 

There can be no assurance that any future research and development will be successfully completed, that adequate protection for the Company’s intellectual property will be obtained or maintained, that any products developed will obtain necessary government regulatory approval or that any approved products will be commercially viable. Even if any future product development efforts are successful, it is uncertain when, if ever, the Company will generate revenue from product sales. The Company operates in an environment of rapid technological change and substantial competition from other pharmaceutical and biotechnology companies. In addition, the Company is dependent upon the services of its employees, consultants and other third parties.

Segments

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker (the CODM). The Company’s CODM is its executive chairman who reviews financial information together with certain operating metrics principally to make decisions about how to allocate resources and to measure the Company’s performance. Management has determined that the Company operates as a single operating and reportable segment. The Company’s CODM evaluates financial information on a consolidated basis. As the Company operates as one operating segment, all required segment financial information is found in the interim condensed consolidated financial statements.

Fair Value Measurement

Assets and liabilities recorded at fair value on a recurring basis in the balance sheet are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined as the exchange price that would be received for an asset or an exit price that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The Company measures fair value based on a three-tier hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value as follows:

Level 1—Observable inputs such as unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

Level 2—Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the assets or liabilities. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

In determining fair value, the Company utilizes quoted market prices, or valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value.

There were no transfers into or out of Level 3 for any of the periods presented.

The Company’s fair value measurements as of March 31, 2024 and December 31, 2023 was as follows (in thousands):

 

 

 

March 31, 2024

 

 

 

Level 1

 

 

Level 2

 

 

 

Balance

 

Assets:

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

103,239

 

 

$

 

 

 

$

103,239

 

Total assets

 

$

103,239

 

 

$

 

 

 

$

103,239

 

 

7


 

 

 

December 31, 2023

 

 

Level 1

 

 

Level 2

 

 

 

Balance

 

Assets:

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

89,197

 

 

$

 

 

 

$

89,197

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

 

8,962

 

 

 

 

 

 

 

8,962

 

U.S. government agency debt securities

 

 

 

 

 

4,724

 

 

 

 

4,724

 

Total marketable securities

 

 

8,962

 

 

 

4,724

 

 

 

 

13,686

 

Total assets

 

$

98,159

 

 

$

4,724

 

 

 

$

102,883

 

Summary of Significant Accounting Policies

Deferred Transaction Costs

The Company capitalized certain legal, accounting and other third-party fees that are directly associated with the Acquisition and the Securities Purchase Agreement. After consummation, the deferred transaction costs associated with the Acquisition will be included in the total purchase consideration and the deferred transaction costs associated with the Securities Purchase Agreement will be recorded as a reduction of additional paid-in capital generated as a result of the offering. As of March 31, 2024, deferred transaction costs, primarily legal fees, were $1.0 million, were recorded in prepaid expenses and other current assets and accrued expenses and other current liabilities in the condensed consolidated balance sheet. Should the Acquisition or Securities Purchase Agreement not be completed, the deferred transaction costs would be expensed immediately as a charge to operating expenses in the consolidated statement of operations and comprehensive loss.

See Note 2 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2023 for additional information.

Recently Adopted Accounting Pronouncements

In August 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging —Contracts in Entity’s Own Equity (Subtopic 815-40)—Accounting For Convertible Instruments and Contracts in an Entity’s Own Equity. The standard simplifies accounting for convertible instruments by removing major separation models required under current GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. ASU 2020-06 removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The standard also simplifies the diluted net income per share calculation in certain areas. The effective date of this update for non-public companies is for fiscal years beginning after December 15, 2023, including interim periods therein. Early adoption is permitted for fiscal years beginning after December 15, 2020 and interim periods therein. The Company adopted ASU 2020-06 on January 1, 2024, which did not have a material impact on its consolidated financial statements.

Recently Accounting Pronouncements Not Yet Adopted

In November 2023, the FASB issued ASU No. 2023-07 (ASU 2023-07), Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures which requires, among other things, the following: (i) enhanced disclosures about significant segment expenses that are regularly provided to the CODM and included in a segment's reported measure of profit or loss; (ii) disclosure of the amount and description of the composition of other segment items, as defined in ASU 2023-07, by reportable segment; and (iii) reporting the disclosures about each reportable segment's profit or loss and assets on an annual and interim basis. The provisions of ASU 2023-07 are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024; early adoption is permitted. The Company expects ASU 2023-07 to require additional disclosures in the notes to its consolidated financial statements.

8


 

In December 2023, the FASB issued ASU No. 2023-09 (ASU 2023-09), Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires, among other things, the following for public business entities: (i) enhanced disclosures of specific categories of reconciling items included in the rate reconciliation, as well as additional information for any of these items meeting certain qualitative and quantitative thresholds; (ii) disclosure of the nature, effect and underlying causes of each individual reconciling item disclosed in the rate reconciliation and the judgment used in categorizing them if not otherwise evident; and (iii) enhanced disclosures for income taxes paid, which includes federal, state, and foreign taxes, as well as for individual jurisdictions over a certain quantitative threshold. The amendments in ASU 2023-09 eliminate the requirement to disclose the nature and estimate of the range of the reasonably possible change in unrecognized tax benefits for the 12 months after the balance sheet date. The effective date of this update for non-public companies is for fiscal years beginning after December 15, 2025; early adoption is permitted. The Company expects ASU 2023-09 to require additional disclosures in the notes to its consolidated financial statements.

There were no other significant updates to the recently issued accounting standards other than as disclosed herewith for the three months ended March 31, 2024. Although there are several other new accounting pronouncements issued or proposed by the FASB, the Company does not believe any of those accounting pronouncements have had or will have a material impact on its financial position or operating results.

2. Investments

As of March 31, 2024, the Company had no available-for-sale securities.

As of December 31, 2023, investments consist of the following available-for-sale securities, all of which matured during the current period (in thousands):

 

 

 

December 31, 2023

 

 

 

Amortized Cost

 

 

 

Unrealized Loss

 

 

Estimated Fair Value

 

Short-term marketable securities:

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

8,962

 

 

 

$

 

 

$

8,962

 

U.S. government agency debt securities

 

 

4,726

 

 

 

 

(2

)

 

 

4,724

 

Total short-term marketable securities

 

$

13,688

 

 

 

$

(2

)

 

$

13,686

 

 

There was no material realized gain or loss on available-for-sale securities during the period ended March 31, 2024 or December 31, 2023.

As of December 31, 2023, investments in a continual unrealized loss position for less than 12 months consist of the following (in thousands):

 

 

 

December 31, 2023

 

 

 

Fair Value

 

U.S. Treasury securities

 

$

5,967

 

U.S. government agency debt securities

 

 

2,234

 

Total available-for-sale securities

 

$

8,201

 

 

3. Certain Balance Sheet Accounts

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following (in thousands):

 

 

 

March 31, 2024

 

 

December 31, 2023

 

Recoverable research and development tax credits

 

$

2,021

 

 

$

2,024

 

Deferred transaction costs

 

 

952

 

 

 

 

Other assets

 

 

625

 

 

 

552

 

Prepaid expenses

 

 

571

 

 

 

847

 

Prepaid research and development expenses

 

 

23

 

 

 

34

 

Total prepaid expenses and other current assets

 

$

4,192

 

 

$

3,457

 

 

 

9


 

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following (in thousands):

 

 

 

March 31, 2024

 

 

December 31, 2023

 

Accrued payroll expenses

 

$

1,025

 

 

$

1,111

 

Accrued transaction costs

 

 

952

 

 

 

 

Accrued restructuring expenses

 

 

315

 

 

 

1,066

 

Other accrued expenses

 

 

304

 

 

 

90

 

Accrued research and development expense

 

 

22

 

 

 

28

 

Other current liabilities

 

 

22

 

 

 

138

 

Total accrued expenses and other current liabilities

 

$

2,640

 

 

$

2,433

 

 

4. Commitments and Contingencies

Facility Leases

The Company leases office space in the U.S. and U.K. under non-cancelable operating leases.

In May 2021, the Company entered into an agreement for office space in Cambridge, U.K. The term of this lease is for a period of 24 months, which commenced on July 1, 2021. In March 2023, the Company agreed to extend this lease until June 30, 2024. This extension was accounted for as a lease modification under ASC 842, Leases and the ROU asset and lease liability were remeasured at the modification date. The remeasurement of the lease resulted in an increase in both the operating right-of-use asset and the operating lease liability of approximately $0.3 million.

In November 2021, the Company agreed to lease approximately 5,000 square feet of office space in Bellevue, Washington. The term of this lease is 39 months, which commenced on November 1, 2021. The lease contains rent escalation clauses and an option to extend the term of the lease for an additional 3-year period at a market rate determined according to the lease. At the lease's inception and as of December 31, 2023, the Company does not expect that it will exercise its option to extend the lease, and therefore the period covered by this option is not included in the lease term.

In July 2023, the Company entered into a non-cancellable sublease agreement for the Bellevue office space, under the terms of which the Company is entitled to receive $0.2 million in lease payments over the term of the sublease, which commenced in July 2023 and ends concurrently with the original lease in January 2025.

In advance of the sublease, the Company ceased use of and vacated the Bellevue office space in June 2023. The Company considered these circumstances to be an indicator of impairment and recorded an ROU asset impairment loss during the second quarter of 2023 of $0.2 million, which was the amount by which the carrying value of the lease ROU asset exceeded the fair value. The fair value is based on the discounted cash flows of anticipated net rental income for the office space subleased.

As of March 31, 2024, the remaining weighted-average lease term was 0.6 years and the weighted-average incremental borrowing rate used to determine the operating lease liability was 7.5%.

For each of the three months ended March 31, 2024 and 2023, the Company incurred $0.1 million in rent expense. Sublease income was $33,000 for the three months ended March 31, 2024, which was classified as a reduction in rent expense.

As of March 31, 2024, the annual future minimum lease payments due under the Company’s non-cancelable operating leases are as follows:

 

 

Operating Lease

 

 

Sublease

 

 

Net Operating

 

Year Ending December 31,

 

Payments

 

 

Income

 

 

Lease Payments

 

2024 (remaining 9 months)

 

$

215

 

 

 

(99

)

 

 

116

 

2025

 

 

15

 

 

 

(11

)

 

 

4

 

Total undiscounted lease payments

 

$

230

 

 

$

(110

)

 

$

120

 

Present value adjustment

 

 

(5

)

 

 

 

 

 

 

Total operating lease liabilities

 

$

225

 

 

 

 

 

 

 

 

10


 

Legal Proceedings

From time to time, the Company may have certain contingent liabilities that arise in the ordinary course of its business activities. The Company accrues a liability for such matters when it is probable that future expenditures will be made and that such expenditures can be reasonably estimated. Significant judgment is required to determine both probability and the estimated amount. As of the date of these condensed consolidated financial statements, the Company is not party to any material legal matters or claims.

Indemnification

In the ordinary course of business, the Company enters into agreements that may include indemnification provisions. Pursuant to such agreements, the Company may indemnify, hold harmless, and defend an indemnified party for losses suffered or incurred by the indemnified party. Some of the provisions will limit losses to those arising from third-party actions. In some cases, the indemnification will continue after the termination of the agreement. The maximum potential amount of future payments the Company could be required to make under these provisions is not determinable. The Company has never incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. The Company intends to enter into indemnification agreements with its directors and officers that may require the Company to indemnify its directors and officers against liabilities that may arise by reason of their status or service as directors or officers to the fullest extent permitted by Delaware corporate law. The Company currently has directors’ and officers’ insurance coverage that reduces its exposure and enables the Company to recover a portion of any future amounts paid. The Company believes the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is immaterial.

5. Stock-Based Compensation

2019 Plan

In 2019, the Company adopted the 2019 Equity Incentive Plan (the 2019 Plan). The 2019 Plan provides for the Company to grant qualified stock options, non-qualified stock options, and restricted stock awards to employees, non-employee directors and consultants of the Company under terms and provisions established by the Company's board of directors. Under the terms of the 2019 Plan, options are granted at an exercise price no less than fair value of the Company’s common stock on the grant date, except in certain cases related to employees outside of the U.S. Option awards granted typically have 10-year terms measured from the option grant date. While no shares are available for future issuance under the 2019 Plan, it continues to govern outstanding equity awards granted thereunder.

2021 Plan and ESPP

The compensation committee of the Company's board of directors adopted and the Company's stockholders approved the 2021 Equity Incentive Plan (the 2021 Plan) and the 2021 Employee Stock Purchase Plan (the ESPP), which became effective in August 2021. The 2021 Plan provides for the grant of incentive stock options, non-statutory stock options, restricted stock awards, restricted stock units, stock appreciation rights and other stock-based awards. The Company's employees, officers, directors and consultants are eligible to receive awards under the 2021 Plan. Under the terms of the 2021 Plan, options are granted at an exercise price no less than fair value of the Company’s common stock on the grant date, except in certain cases related to significant corporate transactions. Option awards granted typically have 10-year terms measured from the option grant date. As of March 31, 2024, the total number of shares authorized for issuance under the 2021 Plan was 6,912,316. Any shares that are returned under the 2019 Plan as a result of cancellation or forfeiture become available under the 2021 Plan. Further, the number of shares of common stock reserved for issuance under the 2021 Plan automatically increases on January 1 of each year, beginning on January 1, 2022, and continuing through and including January 1, 2031, by 5% of the total number of shares of common stock outstanding on December 31 of the immediately preceding calendar year, or a lesser number of shares determined by the Company's board of directors prior to the applicable January 1st.

11


 

The ESPP allows employees, including executive officers, to contribute up to 15% of their earnings, subject to certain limitations, for the purchase of the Company's common stock at a price per share equal to the lower of (a) 85% of the fair market value of a share of common stock on the first day of the offering period, or (b) 85% of the fair market value of a share of common stock on the last day of the offering period. As of March 31, 2024, there were 1,064,225 shares of common stock reserved for future issuance under the ESPP. The number of shares of common stock reserved for issuance under the ESPP will automatically increase on January 1 of each calendar year, beginning on January 1, 2022 and continuing through and including January 1, 2031, by the lesser of (1) 1% of the total number of shares of the Company's common stock outstanding on December 31 of the preceding calendar year or (2) a number of shares determined by the Company's board of directors. Shares subject to purchase rights granted under the ESPP that terminate without having been exercised in full will not reduce the number of shares available for issuance under the ESPP.

As of March 31, 2024, no shares have been granted or purchased under the ESPP.

Stock Options

Awards with vesting conditions under both plans typically include either: (i) vesting 25% on the first anniversary of the grant date with the remainder vesting monthly over the following three years or (ii) monthly vesting over four years.

No stock option awards were granted during the three months ended March 31, 2024 or 2023.

The activity for stock options is as follows:

 

 

 

Options
Outstanding

 

 

Weighted
Average
Exercise
Price

 

 

Weighted
Average
Remaining
Contract Terms
(in years)

 

 

Aggregate
Intrinsic
Values
(in thousands)

 

Balance as of December 31, 2023

 

 

4,586,476

 

 

$

5.40

 

 

 

2.28

 

 

$

1,060

 

Options expired

 

 

(307,853

)

 

 

6.95

 

 

 

 

 

 

 

Options exercised

 

 

(10,999

)

 

 

1.32

 

 

 

 

 

 

17

 

Options forfeited

 

 

(6,097

)

 

 

13.8

 

 

 

 

 

 

 

Balance as of March 31, 2024

 

 

4,261,527

 

 

$

5.29

 

 

 

2.13

 

 

$

1,073

 

Vested and expected to vest, March 31, 2024

 

 

4,261,527

 

 

$

5.29

 

 

 

2.13

 

 

$

1,073

 

Options exercisable as of March 31, 2024

 

 

3,794,290

 

 

$

5.36

 

 

 

1.39

 

 

$

932

 

 

The aggregate intrinsic value disclosed in the above table is based on the difference between the exercise price of the stock option and the fair value of the Company’s common stock as of the respective period-end dates.

The Black-Scholes option pricing model for employee and nonemployee stock options incorporates the following assumptions:

Fair Value of Common Stock — The fair value of each share of common stock is based on the closing price of the Company's common stock on the date of grant as reported on the Nasdaq Global Market.
Volatility — The expected stock price volatilities are estimated based on the historical and implied volatilities of comparable publicly traded companies as the Company does not have sufficient history of trading its common stock.
Risk-free Interest Rate — The risk-free interest rates are based on US Treasury yields in effect at the grant date for notes with comparable terms as the awards.
Expected Term — The expected term represents the period that the Company’s stock options are expected to be outstanding and is determined using the simplified method (based on the mid-point between the vesting date and the end of the contractual term).
Dividend Yield — The expected dividend yield assumption is based on the Company’s current expectations about its anticipated dividend policy.

12


 

Restricted Stock

The Company has: (i) restricted stock awards with service conditions that vest 25% on the first anniversary of the grant date and the remainder vesting monthly over the following three years and (ii) restricted stock units that vest quarterly over a two year or two and a half year period. The restricted stock awards are subject to repurchase by the Company at the original purchase price in the event that the award recipient’s employment or relationship is terminated prior to the shares vesting.

The activity for restricted stock awards and units is as follows:

 

 

 

Number of Shares

 

 

Weighted-Average
Grant Date Fair Value

 

Unvested at December 31, 2023

 

 

149,975

 

 

$

6.03

 

Granted

 

 

63,000

 

 

 

2.81

 

Vested

 

 

(24,579

)

 

 

6.38

 

Unvested at March 31, 2024

 

 

188,396

 

 

$

4.91

 

Modifications & Accelerations

Certain equity awards are subject to provisions in which the vesting of these awards is automatically accelerated upon the occurrence of events such as an involuntary termination in connection with a reduction in force. Further, in connection with the Restructuring Plan, the Company modified the terms of certain equity awards for impacted employees including partial or full acceleration of vesting of stock options and restricted stock awards upon separation and extension of exercise periods for stock options post-separation. As a result of: (i) the contractual acceleration and (ii) the discretionary modification of equity awards in connection with the Restructuring Plan, the Company recorded incremental stock-based compensation expense of $9.0 million for the three months ended March 31, 2023, of which $0.5 million and $8.5 million is included in research and development expense and general and administrative expense, respectively.

Stock-Based Compensation

The following table sets forth stock-based compensation for stock options, restricted stock awards, and restricted stock units included in the Company’s condensed consolidated statements of operations and comprehensive loss (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2024

 

 

2023

 

Research and development expense

 

$

269

 

 

$

1,032

 

General and administrative expense

 

 

196

 

 

 

9,139

 

Total stock-based compensation expense

 

$

465

 

 

$

10,171

 

As of March 31, 2024, there was $1.5 million of total unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted average period of 1.75 years. Further, there was $0.9 million of unrecognized compensation cost related to unvested restricted stock awards and units, which is expected to be recognized over a weighted average period of 1.3 years.

6. Net Loss Per Share

The following table shows the computation of basic and diluted net loss per share (in thousands, except share and per share data):

 

 

 

Three Months Ended March 31,

 

 

 

2024

 

 

2023

 

Net loss

 

$

(1,697

)

 

$

(22,290

)

Weighted-average number of shares outstanding used to compute net loss per share, basic and diluted

 

 

27,638,528

 

 

 

26,492,438

 

Net loss per share, basic and diluted

 

$

(0.06

)

 

$

(0.84

)

 

13


 

The following outstanding shares of potentially dilutive securities were excluded from the computation of diluted net loss per share for the periods presented because their effect would have been anti-dilutive:

 

 

 

Three Months Ended March 31,

 

 

 

2024

 

 

2023

 

Common stock options

 

 

4,261,527

 

 

 

5,466,938

 

Unvested restricted stock awards and units

 

 

188,396

 

 

 

271,220

 

Total potentially dilutive shares

 

 

4,449,923

 

 

 

5,738,158

 

 

7. Restructuring Costs

On February 7, 2023, the Company's board of directors approved a restructuring plan to conserve financial resources and better align the Company's workforce with current business needs. As part of the Restructuring Plan, the Company's workforce was reduced by approximately 55%, with substantially all of the reduction in personnel completed in the first half of 2023. The Company further reduced its workforce by 10 employees in October 2023.

The Company incurred aggregate restructuring costs of $18.8 million, substantially all of which were recognized in 2023 and have been fully recognized as of March 31, 2024. Restructuring costs incurred during the three months ended March 31, 2024 were not material.

The activity in the restructuring liability was as follows for the three months ended March 31, 2024 (in thousands):

 

 

 

Restructuring Liability

 

Restructuring liability as of December 31, 2023

 

$

1,077

 

Restructuring costs incurred during the period

 

 

20

 

Restructuring costs paid during the period

 

 

(782

)

Restructuring liability as of March 31, 2024

 

$

315

 

Substantially all of the remaining restructuring liability as of March 31, 2024 was paid in April 2024.

During the three months ended March 31, 2023, the Company recorded restructuring costs of $15.8 million. These costs primarily related to severance payments, healthcare benefits and stock-based compensation.

A summary of the restructuring costs recorded in the statement of operations and comprehensive loss for the three months ended March 31, 2023 is as follows (in thousands):

 

 

 

Three Months Ended March 31, 2023

 

 

 

Severance and Benefits Costs

 

 

Stock-based Compensation

 

 

Total Restructuring Cost Recorded

 

General and administrative expense

 

$

5,437

 

 

$

8,520

 

 

$

13,957

 

Research and development expense

 

 

1,342

 

 

 

488

 

 

 

1,830

 

Total restructuring costs

 

$

6,779

 

 

$

9,008

 

 

$

15,787

 

Employees affected by the reduction in workforce under the Restructuring Plan obtained involuntary termination benefits that are provided pursuant to a one-time benefit arrangement. For employees who were notified of their termination in February 2023 and have no requirement to provide future service beyond a minimum retention period, the Company recognized the liability for the full termination benefits at fair value in the first quarter of 2023. For employees who are required to provide services beyond a minimum retention period to receive their termination benefits, the Company recognizes the termination benefits ratably over their future service periods. The service periods began in February 2023 and the majority ended at various dates through the third quarter of 2023.

Employees who were notified of their termination in October 2023 had no requirement to provide future service beyond a minimum retention period, and therefore the Company recognized the liability for the full termination benefits at fair value in the fourth quarter of 2023.

14


 

8. Subsequent Events

Acquisition Agreement and Private Placement with a Related Party

On April 10, 2024, after a comprehensive review of strategic alternatives, including identifying and reviewing potential candidates for a strategic transaction, the Company entered into the Acquisition Agreement. The Acquisition Agreement provides for the acquisition of Tenet by the Company through the merger of Transitory Subsidiary into Tenet, with Tenet surviving as a wholly owned subsidiary of the Company. Tenet is a privately held development stage biotechnology company focused on advancing its clinical stage program, TNT119, an anti-CD19 monoclonal antibody designed for broad range of autoimmune disorders, including SLE, ITP, and MN.

Concurrently with the execution of the Acquisition Agreement, the Company entered into the Securities Purchase Agreement with several accredited institutional investors, pursuant to which the Company agreed to issue and sell to such investors in a private placement an aggregate of 31,238,282 shares of its common stock, at a price of $3.84 per share. The Company expects to receive aggregate gross proceeds from the Private Placement of approximately $120.0 million, before deducting estimated offering costs.

At the effective time of the Acquisition, by virtue of the Acquisition and without any action on the part of the holders of common stock of Tenet, (i) all issued and outstanding shares of the common stock of Tenet and (ii) all securities convertible into shares of common stock of Tenet will be converted into the right to receive, in the aggregate, a number of shares of the Company’s common stock (the Aggregate Consideration) (rounded to the nearest whole share) equal to fifteen and two-fifths percent (15.4%) of the outstanding shares of the Company’s common stock as of immediately following the closing of the Acquisition (and for the avoidance of doubt, before giving effect to the issuance of any securities pursuant to the Private Placement), calculated on a fully-diluted basis using the treasury stock method (including, for clarity, calculated by disregarding any out-of-the-money outstanding stock options of the Company).

Upon the unanimous recommendation of a special committee of the Company’s board of directors consisting solely of independent and disinterested directors, the Company’s board of directors determined that the terms of the Acquisition and the other transactions are fair to and in the best interests of the Company and the unaffiliated stockholders, approved the execution of the Acquisition Agreement and, subject to the terms and conditions of the Acquisition Agreement, recommended that the Company’s stockholders vote to, among other things, issue the Aggregate Consideration issuable in connection with the Acquisition under the rules of The Nasdaq Stock Market LLC (the Company Voting Proposals).

The Acquisition and the Private Placement are expected to close in the middle of 2024, subject to the satisfaction of customary closing conditions, including regarding receipt of the required approvals by the parties’ stockholders (including the affirmative vote of a majority of the aggregate voting power held by disinterested stockholders of the Company), the accuracy of the representations and warranties and compliance by the parties with their respective covenants.

The Acquisition Agreement contains certain termination rights of each of the Company and Tenet, including if the Company’s stockholders fail to adopt and approve the Company Voting Proposals. Upon termination of the Acquisition Agreement under specified circumstances, the Company may be required to pay Tenet a termination fee of $1.0 million and reimburse Tenet’s transaction-related expenses up to a maximum of $0.5 million.

Bridge Note with Related Party

On May 14, 2024, the Company and Tenet entered into a Senior Secured Promissory Note (the Note) providing for the Company to make short-term loans (the Loan or Loans) to Tenet up to an aggregate principal amount of $15.0 million. On or about the date of execution of the Note, the Company made an initial Loan to Tenet of $5.0 million. Tenet requested the Loan in order to provide it with sufficient cash to fund its operations prior to the consummation of the Acquisition. Tenet’s ability to borrow the remaining $10.0 million under the Note is subject to certain conditions and restrictions on use.

The Loans will bear simple interest at a fixed rate per annum of 6%. All outstanding Loans, together with accrued interest, will become due and payable upon the earlier of (i) 12 months from the date of issuance the Note, (ii) the occurrence of specified corporate transactions, or (iii) Tenet’s receipt of at least $15.0 million in gross proceeds from the closing of a bona fide equity and/or debt financing.

Under the Note, Tenet granted the Company a continuing, first-priority perfected security interest in all of Tenet’s present and future assets, properties and rights, whether tangible or intangible, including, without limitation, the intellectual property of Tenet. The Note contains certain customary representations and warranties and certain customary events of default.

 

 

 

15


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results and Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto as of and for the year ended December 31, 2023 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K filed with the SEC on March 28, 2024. Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “we,” “us” and “our” refer to Eliem Therapeutics, Inc. and its wholly owned subsidiary.
 

Forward-Looking Statements

The following discussion of our financial condition and results of operations contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. All statements other than statements of historical facts are “forward-looking statements” for purposes of these provisions, including those relating to future events or our future financial performance and financial guidance. In some cases, you can identify forward-looking statements by terminology such as “may,” “might,” “will,” “should,” “expect,” “plan,” “anticipate,” “project,” “believe,” “estimate,” “predict,” “potential,” “intend” or “continue,” the negative of terms like these or other comparable terminology, and other words or terms of similar meaning in connection with any discussion of future operating or financial performance. These statements are only predictions.

All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Any or all of our forward-looking statements in this document may turn out to be wrong. Actual events or results may differ materially. Our forward-looking statements can be affected by inaccurate assumptions we might make or by known or unknown risks, uncertainties and other factors. In evaluating these statements, you should specifically consider various factors, including the risks outlined under the caption “Risk Factors” set forth in Item 1A of Part II of this Quarterly Report on Form 10-Q, as well as those contained from time to time in our other filings with the SEC. We caution investors that our business and financial performance are subject to substantial risks and uncertainties.

Overview

We are a biotechnology company focused on developing novel therapies for neuronal excitability disorders to address unmet needs in psychiatry, epilepsy, chronic pain, and other disorders of the peripheral and central nervous systems.

Prior to July 2023, our lead program was ETX-123, a Kv7.2/3 potassium channel opener. ETX-123 is designed to harness the efficacy of the Kv7.2/3 channel mechanism while attempting to improve the safety and tolerability relative to earlier molecules, based on our insights into the mechanisms of toxicity and the potency and selectivity profile.

In July 2023, we made the determination to pause further development of our Kv7 program and to conduct a comprehensive exploration of strategic alternatives focused on maximizing stockholder value. As part of that effort, we are exploring a variety of options, including seeking a partner for further development of both Kv7 and ETX-155. We formed a Special Committee of independent and disinterested directors to oversee our exploration of strategic alternatives.

 

As a part of this process, our representatives and representatives of Tenet Medicines, Inc. (Tenet), which is majority-owned by funds affiliated with RA Capital, engaged in preliminary discussions in an effort to determine whether a potential transaction between the two companies could be mutually beneficial. On March 14, 2024, Tenet submitted a Non-Binding Term Sheet, that contemplated our acquisition of Tenet through a transaction whereby we would issue common stock to Tenet’s equityholders in exchange for all of the outstanding equity of Tenet, and Tenet would become our wholly owned subsidiary.

 

After a comprehensive review of strategic alternatives, including identifying and reviewing potential candidates for a strategic transaction, on April 10, 2024, we entered into an Agreement and Plan of Merger and Reorganization (the Acquisition Agreement) with Tango Merger Sub, Inc., a Delaware corporation and our wholly owned subsidiary (Transitory Subsidiary), Tenet, and, solely in his capacity as company equityholder representative, Stephen Thomas. The Acquisition Agreement provides for the acquisition of Tenet by us through the merger of Transitory Subsidiary into Tenet, with Tenet surviving as our wholly owned subsidiary (the Acquisition). Tenet is a privately held development stage biotechnology company focused on advancing its clinical stage development program, TNT119, an anti-CD19 monoclonal antibody designed for broad range of autoimmune disorders, including systemic lupus erythematosus (SLE), immune thrombocytopenia (IPT) and membranous nephropathy (MN).

16


 

Concurrently with the execution of the Acquisition Agreement, we entered into a Securities Purchase Agreement (the Securities Purchase Agreement) with several accredited institutional investors, pursuant to which we agreed to issue and sell to such investors in a private placement an aggregate of 31,238,282 shares of our common stock, at a price of $3.84 per share (the Private Placement). We expect to receive aggregate gross proceeds from the Private Placement of approximately $120.0 million, before deducting estimated offering costs.

At the effective time of the Acquisition, by virtue of the Acquisition and without any action on the part of the holders of common stock of Tenet, (i) all issued and outstanding shares of the common stock of Tenet and (ii) all securities convertible into shares of common stock of Tenet will be converted into the right to receive, in the aggregate, a number of shares of our common stock (the Aggregate Consideration) (rounded to the nearest whole share) equal to fifteen and two-fifths percent (15.4%) of the outstanding shares of our common stock as of immediately following the closing of the Acquisition (and for the avoidance of doubt, before giving effect to the issuance of any securities pursuant to the Private Placement), calculated on a fully-diluted basis using the treasury stock method (including, for clarity, calculated by disregarding any out-of-the-money outstanding stock options of our company).

Upon the unanimous recommendation of a special committee of our board of directors consisting solely of independent and disinterested directors, our board of directors determined that the terms of the Acquisition and the other transactions are fair to and in the best interests of our company and the unaffiliated stockholders, approved the execution of the Acquisition Agreement and, subject to the terms and conditions of the Acquisition Agreement, recommended that our stockholders vote to, among other things, issue the Aggregate Consideration issuable in connection with the Acquisition under the rules of The Nasdaq Stock Market LLC (the Company Voting Proposals).

The Acquisition and the Private Placement are expected to close in the middle of 2024, subject to the satisfaction of customary closing conditions, including regarding receipt of the required approvals by the parties’ stockholders (including the affirmative vote of a majority of the aggregate voting power held by disinterested stockholders of our company), the accuracy of the representations and warranties and compliance by the parties with their respective covenants.

The Acquisition Agreement contains certain termination rights of each of us and Tenet, including if our stockholders fail to adopt and approve the Company Voting Proposals. Upon termination of the Acquisition Agreement under specified circumstances, we may be required to pay Tenet a termination fee of $1.0 million and reimburse Tenet’s transaction-related expenses up to a maximum of $0.5 million.

Our future operations are highly dependent on the success of the Acquisition and Private Placement, and there can be no assurances that the Acquisition and Private Placement will be successfully consummated. In the event that we do not complete the Acquisition and Private Placement, we may explore strategic alternatives, including, without limitation, another strategic transaction.

We have incurred significant operating losses since inception, as we have devoted substantially all of our resources to organizing and staffing our company, identifying potential product candidates, business planning, raising capital, undertaking research, executing preclinical studies and clinical development trials, and providing general and administrative support for business activities. We incurred net losses of $1.7 million and $22.3 million for the three months ended March 31, 2024 and 2023, respectively. We had an accumulated deficit of $157.7 million and $156.0 million as of March 31, 2024 and December 31, 2023, respectively.

Since our inception, we have primarily funded our operations with an aggregate of $208.3 million in net proceeds from the sale and issuance of shares of our redeemable convertible preferred stock and our initial public offering of our common stock, and to a lesser extent from cash received pursuant to U.K. research and development tax credits and incentives. We had cash and cash equivalents of $105.0 million as of March 31, 2024 and cash, cash equivalents, and marketable securities of $106.8 million as of December 31, 2023. Based on our current operating plan, we estimate that our cash and cash equivalents will be sufficient to fund our planned operations through at least 12 months following the filing date of this Form 10-Q.

17


 

If the Acquisition or other strategic transaction is not consummated and/or if product development is resumed, we will require substantial additional funding to support our continuing operations. Until such time as we can generate significant revenue from product sales, if ever, we may finance our operations through the sale of equity, debt financings or other capital sources, which could include income from collaborations, strategic partnerships or other strategic arrangements. Adequate funding may not be available when needed or on terms acceptable to us, or at all. If we are unable to raise additional capital as needed, we may have to significantly delay, scale back or discontinue any future development of our product candidates. Our ability to raise additional funds may be adversely impacted by potential worsening global economic conditions and the recent disruptions to, and volatility in, the credit and financial markets in the United States and worldwide, resulting from increased volatility in the trading prices for shares in the biopharmaceutical industry, the ongoing pandemic, or otherwise. In addition, our ability to continue to benefit from research and development tax credits and incentives will depend on our ability to continue meet the applicable requirements for them. If we fail to obtain necessary capital when needed on acceptable terms, or at all, it could force us to delay, limit, reduce or terminate our product development programs, commercialization efforts or other operations. Insufficient liquidity may also require us to relinquish rights to product candidates at an earlier stage of development or on less favorable terms than we would otherwise choose.

We do not have any products approved for sale and have not generated any revenue from product sales since our inception. To the extent we continue to pursue clinical development of any future product candidate, our ability to generate product revenue will depend on the successful development, regulatory approval and eventual commercialization of one or more of our product candidates, if approved. We cannot assure you that we will ever be profitable or generate positive cash flow from operating activities. We expect to continue to incur operating losses for the foreseeable future in connection with the Acquisition and Private Placement.

Restructuring Costs

On February 7, 2023, our board of directors approved a restructuring plan (the Restructuring Plan) to conserve financial resources and better align our workforce with current business needs, as a result of the decision to pause development of ETX-155 and focus on our preclinical Kv7.2/3 program. As part of the Restructuring Plan, our workforce was reduced by approximately 55%, with substantially all of the reduction in personnel completed in the first half of 2023. We further reduced our workforce by 10 employees in October 2023.

We incurred aggregate restructuring costs of $18.8 million, substantially all of which were recognized in 2023 and have been fully recognized as of March 31, 2024. Restructuring costs incurred during the three months ended March 31, 2024 were not material.

During the three months ended March 31, 2023, we recorded restructuring costs of $15.8 million. These costs primarily related to severance payments, healthcare benefits and stock-based compensation.

A summary of the restructuring costs recorded in the statement of operations and comprehensive loss for the three months ended March 31, 2023 is as follows (in thousands):

 

 

 

Three Months Ended March 31, 2023

 

 

 

Severance and Benefits Costs

 

 

Stock-based Compensation

 

 

Total Restructuring Cost Recorded

 

General and administrative expense

 

$

5,437

 

 

$

8,520

 

 

$

13,957

 

Research and development expense

 

 

1,342

 

 

 

488

 

 

 

1,830

 

Total restructuring costs

 

$

6,779

 

 

$

9,008

 

 

$

15,787

 

Components of Operating Results

Operating Expenses

Our operating expenses consist of (i) research and development expenses and (ii) general and administrative expenses.

Research and Development

Our research and development expenses consist primarily of direct and indirect costs incurred in connection with our discovery efforts, preclinical studies, and clinical trial activities related to our pipeline, including our paused product candidates ETX-123 and ETX-155.

Our direct research and development costs include:

expenses incurred in connection with research, laboratory consumables and preclinical and clinical trial activities;

18


 

the cost to manufacture drug products for use in our preclinical studies and clinical trials; and
consulting fees.

Our indirect research and development costs include:

personnel-related expenses, such as salaries, bonuses, benefits, stock-based compensation expense, and termination benefits, for our scientific personnel performing research and development activities; and
facility rent.

We expense research and development costs as incurred. Non-refundable advance payments for goods and services that will be used over time for research and development are capitalized and recognized as goods are delivered or as the related services are performed.

Given our stage of development and the utilization of our resources across our various programs, we have not historically tracked our research and development costs by program. Research and development expenses are presented net of refundable research and development tax credits from the U.K. government.

General and Administrative

Our general and administrative expenses consist primarily of personnel-related expenses such as salaries, bonuses, benefits, stock-based compensation, and termination benefits, for our personnel in executive, finance and accounting, human resources, business development and other administrative functions. Other significant general and administrative expenses include legal fees relating to intellectual property and corporate matters, professional fees for accounting, audit, regulatory, tax and consulting services, insurance costs, as well as investor and public relations costs.

Other Income (Expense)

Foreign Currency Gain (Loss)

Our foreign currency gain (loss) consists of foreign exchange losses resulting from remeasurement and foreign currency transactions between the British Pound and the U.S. Dollar.

Interest Income, net

Our interest income consists of interest earned on our cash, cash equivalents and marketable securities and adjustments related to amortization of purchase premiums and accretion of discounts of marketable securities.

Results of Operations

The following table sets forth our results of operations (dollars in thousands):

 

 

 

Three Months Ended March 31,

 

 

Change

 

 

 

2024

 

 

2023

 

 

$

 

 

%

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

1,091

 

 

$

5,720

 

 

$

(4,629

)

 

 

(80.9

)%

General and administrative

 

 

1,914

 

 

 

17,718

 

 

 

(15,804

)

 

 

(89.2

)%

Total operating expenses

 

 

3,005

 

 

 

23,438

 

 

 

(20,433

)

 

 

(87.2

)%

Loss from operations

 

 

(3,005

)

 

 

(23,438

)

 

 

20,433

 

 

 

(87.2

)%

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency gain (loss)

 

 

(33

)

 

 

248

 

 

 

(281

)

 

 

(113.3

)%

Interest income, net

 

 

1,341

 

 

 

900

 

 

 

441

 

 

 

49.0

%

Total other income (expense)

 

 

1,308

 

 

 

1,148

 

 

 

160

 

 

 

13.9

%

Net loss

 

$

(1,697

)

 

$

(22,290

)

 

$

20,593

 

 

 

(92.4

)%

 

19


 

 

Comparison of the Three Months Ended March 31, 2024 and March 31, 2023

Operating Expenses

Research and Development

Research and development expenses decreased by 80.9% from $5.7 million for the three months ended March 31, 2023 to $1.1 million for the three months ended March 31, 2024. The decrease was due to a (i) a $3.2 million reduction in personnel-related expenses, which was driven by restructuring costs of $1.8 million in the prior period and $1.3 million from reduced headcount, and (ii) a $2.5 million decrease in direct clinical and preclinical expenses, primarily due to the pause of ETX-123 in July 2023 and ETX-155 in February 2023. This decrease was partially offset by a $1.0 million decrease in the U.K. refundable research and development tax credits due to the overall reduction in qualifying research and development expenses.

General and Administrative

General and administrative expenses decreased 89.2% from $17.7 million for the three months ended March 31, 2023 to $1.9 million for the three months ended March 31, 2024. This decrease was due to (i) a $15.0 million reduction in personnel-related expenses, which was driven by restructuring costs of $14.0 million in the prior period and $1.0 million from reduced headcount, and (ii) a $0.8 million decrease in other general and administrative expenses, largely due to a reduction in legal expenses, consulting fees, and insurance costs.

Other Income (Expense)

Foreign Currency Gain (Loss)

Foreign currency loss increased from a $0.2 million gain for the three months ended March 31, 2023 to a $33,000 loss for the three months ended March 31, 2024. The increase was driven by unfavorable changes in foreign currency exchange rates between the British Pound and the U.S. Dollar in the current period.

Interest Income net

Interest income, net increased from $0.9 million for the three months ended March 31, 2023 to $1.3 million for the three months ended March 31, 2024, which was driven by an increase in investment income. The increase was due to greater rates of return on our investments as a result of higher interest rates in the current period.

Liquidity and Capital Resources

Sources of Liquidity

We primarily generate cash and cash equivalents from the sale of our equity securities, including common stock and redeemable convertible preferred stock, and to a lesser extent from cash received pursuant to U.K. research and development tax credits and incentives. From our inception to March 31, 2024, we raised aggregate proceeds of $208.3 million from the issuance of shares of our redeemable convertible preferred stock and from our initial public offering of our common stock. We have not generated any revenue from product sales or otherwise. We have incurred net losses from operations since our inception and anticipate we will continue to incur net losses for the foreseeable future. We had cash and cash equivalents of $105.0 million as of March 31, 2024 and cash, cash equivalents, and marketable securities of $106.8 million as of December 31, 2023. As of March 31, 2024 and December 31, 2023, we had an accumulated deficit of $157.7 million and $156.0 million, respectively.

Funding Requirements

We believe our cash and cash equivalents of $105.0 million as of March 31, 2024 will be sufficient to meet our projected operating requirements for at least the next twelve months following the filing date of this Form 10-Q. Continued cash generation is highly dependent on our ability to finance our operations through the sale of equity, debt financings or other capital sources, which could include income from collaborations, strategic partnerships or other strategic arrangements. However, our resource requirements could materially change depending on the outcome of our ongoing strategic alternative review process, including to the extent we identify and enter into any potential strategic transaction, and future operations are highly dependent on the success of the Acquisition and the closing of the Private Placement.

20


 

Cash Flows

The following table summarizes our cash flows (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2024

 

 

2023

 

Net cash used in operating activities

 

$

(1,819

)

 

$

(15,177

)

Net cash provided by investing activities

 

 

13,751

 

 

 

5,797

 

Net cash provided by financing activities

 

 

15

 

 

 

1

 

Operating activities

For the three months ended March 31, 2024, net cash used in operating activities was $1.8 million. This consisted primarily of net loss of $1.7 million and changes in our operating assets and liabilities that resulted in a net decrease in cash of $0.6 million. The decrease in cash was partially offset by total non-cash adjustments of $0.5 million that primarily related to stock-based compensation expense.

For the three months ended March 31, 2023, net cash used in operating activities was $15.2 million. This consisted primarily of net loss of $22.3 million and changes in our operating assets and liabilities that resulted in a net decrease in cash of $2.5 million, primarily related to personnel and research and development activities. The decrease in cash was partially offset by total non-cash adjustments of $9.6 million that included stock-based compensation expense of $10.2 million and non-cash lease expense of $0.1 million, as well as accretion of discounts on investments of $0.5 million, and foreign currency gain on remeasurement of $0.2 million.

Investing activities

For the three months ended March 31, 2024, net cash provided by investing activities was $13.8 million, which consisted of proceeds received from maturities of marketable securities.

 

For the three months ended March 31, 2023, net cash provided by investing activities was $5.8 million. This consisted of $23.2 million of proceeds received from maturities of marketable securities, partially offset by purchases of $17.4 million of marketable securities.

Contractual Commitments and Obligations

In the normal course of business, we enter into contracts with contract research organizations (CROs), contract development and manufacturing organizations (CDMOs), and other third parties for preclinical studies and clinical trials, research and development supplies, and other testing and manufacturing services. These contracts do not contain material minimum purchase commitments and generally provide us with the option to cancel, reschedule and adjust our requirements based on our business needs, prior to the delivery of goods or performance of services. However, it is not possible to predict the maximum potential amount of future payments under these agreements due to the conditional nature of our obligations and the unique facts and circumstances involved in each agreement.

As of March 31, 2024, our restructuring liability was $0.3 million, substantially all of which was paid in April 2024.

Off Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of March 31, 2024 and December 31, 2023.

Critical Accounting Policies and Estimates

This management’s discussion and analysis of our financial condition and results of operations is based on our audited consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of our condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and notes to the condensed consolidated financial statements. Some of those judgments can be subjective and complex, and therefore, actual results could differ materially from those estimates under different assumptions and conditions.

A summary of our critical accounting policies is presented in our audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2023 included in our Annual Report on Form 10-K. There were no material changes to our critical accounting policies during the three months ended March 31, 2024.

21


 

Recent Accounting Pronouncements

See Note 1 in our condensed consolidated financial statements included herein and see Note 2 to our annual consolidated financial statements included in our Annual Report on Form 10-K.

Emerging Growth Company Status

We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act (JOBS Act). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. Other exemptions and reduced reporting requirements under the JOBS Act for emerging growth companies include presentation of only two years audited consolidated financial statements in a registration statement for an IPO, an exemption from the requirement to provide an auditor’s report on internal controls over financial reporting pursuant to the Sarbanes-Oxley Act, an exemption from any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation, and less extensive disclosure about our executive compensation arrangements. We have elected to use the extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that (i) we are no longer an emerging growth company or (ii) we affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act.

As a result, our consolidated financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates. We will remain an emerging growth company under the JOBS Act until the earliest of (i) the last day of our first fiscal year in which we have total annual gross revenue of $1.24 billion or more, (ii) the date on which we have issued more than $1.0 billion of non-convertible debt instruments during the previous three fiscal years, (iii) the date on which we are deemed a “large accelerated filer” under the rules of the SEC with at least $700.0 million of outstanding equity securities held by non-affiliates, or (iv) December 31, 2026.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As a smaller reporting company, we are not required to provide the information requested by this item pursuant to Item 305(e) of Regulation S-K.

Item 4. Controls and Procedures

Disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our executive chairman (who is our principal executive and financial officer) or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Based on our evaluation, our executive chairman has concluded that the Company’s disclosure controls and procedures (as such term is defined in Rule(s) 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were not effective as of March 31, 2024 because of the material weaknesses in our internal control over financial reporting described below.

Notwithstanding the material weaknesses, management believes the condensed consolidated financial statements as included in Part I of this Quarterly Report on Form 10-Q present fairly, in all material respects, the Company's financial condition, results of operations and cash flows as of and for the periods presented in accordance with generally accepted accounting principles in the United States.

Material Weaknesses in Internal Control Over Financial Reporting

Management identified material weaknesses in our internal control over financial reporting. A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim consolidated financial statements will not be prevented or detected on a timely basis. The material weaknesses are as follows:

We did not design or maintain an effective control environment. Specifically, we lacked a sufficient number of professionals with an appropriate level of accounting knowledge, training and experience to appropriately analyze, record and disclose accounting matters commensurate with accounting and reporting requirements. The lack of personnel contributed to the following material weakness.

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We did not design and maintain formal accounting policies, procedures and controls to achieve complete, accurate and timely financial accounting, reporting and disclosures, including segregation of duties and controls over the preparation and review of journal entries, account reconciliations and consolidation.

These material weaknesses did not result in a misstatement to the condensed consolidated financial statements. However, these material weaknesses could result in a misstatement of our account balances or disclosures that would result in a material misstatement of our annual or interim consolidated financial statements that would not be prevented or detected.

Remediation Efforts to Address Material Weaknesses

Management has concluded that the material weaknesses in internal control over financial reporting were due to the fact that we were a private company with limited resources when the material weaknesses were identified and did not have the necessary business processes and related internal controls formally designed and implemented, coupled with the appropriate resources with the appropriate level of experience and technical expertise, to oversee our business processes and controls.

We have implemented measures designed to improve internal control over financial reporting to remediate the control deficiencies that led to our material weaknesses. The remediation measures we have taken include:

Hired qualified personnel with appropriate expertise to perform specific functions and ensure adequate segregation of key duties and responsibilities;
Designed and implemented improved policies, processes, and internal controls, including senior management review and audit committee oversight, to achieve complete, accurate and timely financial accounting, reporting and disclosures;
Implemented and formalized policies, processes, and internal controls to identify and assess complex accounting transactions and other technical accounting and financial reporting matters; and
Implemented financial systems to improve segregation of duties and controls and reliability of system generated data.

We believe we have made substantial progress toward achieving the effectiveness of our internal control over financial reporting and disclosure controls and procedures. The actions that have been taken are subject to continued review and testing by management as well as oversight by the audit committee of our board of directors. We will not be able to conclude whether the steps we have taken will fully remediate these material weaknesses in our internal control over financial reporting until we have completed our remediation efforts and subsequent evaluation of their effectiveness.

Changes in Internal Control over Financial Reporting

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter to which this Report relates that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

 

 

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

 

From time to time, in the ordinary course of business, we may be involved in various claims, lawsuits and other proceedings. As of the date of filing of this Quarterly Report on Form 10-Q, we were not involved in any material legal proceedings.

Item 1A. Risk Factors.

 

RISK FACTORS
 

The following information sets forth risk factors that could cause our actual results to differ materially from those contained in forward-looking statements we have made in this Quarterly Report on Form 10-Q and those we may make from time to time. You should carefully consider the risks described below, in addition to the other information contained in this Quarterly Report on Form 10-Q and our other public filings. Our business, financial condition or results of operations could be harmed by any of these risks. The risks and uncertainties described below are not the only ones we face. Additional risks not presently known to us or other factors not perceived by us to present significant risks to our business at this time also may impair our business operations.

 

Risk Factor Summary

Our business is subject to numerous risks and uncertainties, including those risks discussed in further detail below. These risks include, among others, the following:

Failure to complete the Acquisition could adversely impact our company, including resulting in us paying a termination fee to Tenet and a decline in the price of our common stock and an adverse impact on our future business and operations.
If the conditions to the Acquisition are not satisfied or waived, the Acquisition may not be consummated and the Private Placement will likely not close.
Some of our and Tenets directors, executive officers and principal stockholders, including RA Capital Management, have interests in the Acquisition that are different from yours and that may influence them to support or approve the Acquisition without regard to your interests.
Our stockholders may not realize a benefit from the Acquisition and the Private Placement commensurate with the ownership dilution they will experience in connection with the Acquisition and the Private Placement.
If the Acquisition and the Private Placement are not completed, the price of our common stock may decline or fluctuate significantly.
The number of shares of our common stock that we will issue to former Tenet stockholders in the Acquisition is based on a formula and is uncertain.
We have incurred significant losses since our inception, anticipate that we will incur substantial losses for the foreseeable future, and may never achieve or maintain profitability.
If we are unable to access capital when needed, it could force us to delay, reduce or terminate our product development programs, commercialization efforts, or other operations.
We currently have no source of product revenue, and we may never become profitable.
Our future success is dependent primarily on regulatory approval and commercialization of our future product candidates.
Even if our future product candidates receive regulatory approval, they may still face future development and regulatory difficulties.
Preclinical and clinical development involves a lengthy, complex and expensive process with an uncertain outcome. The outcome of preclinical testing and early clinical trials may not be predictive of the success of later clinical trials, and the results of any future clinical trials may not satisfy the requirements of the Food and Drug Administration (FDA) or comparable foreign regulatory authorities.
We have never commercialized a product candidate and we may lack the necessary expertise, personnel and resources to successfully commercialize any of our products that receive regulatory approval on our own or together with collaborators.

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We face significant competition from other pharmaceutical and biotechnology companies and other research organizations and our operating results will suffer if we fail to compete effectively.
We rely, and expect to continue to rely, on third parties to conduct, supervise, and monitor our preclinical studies and clinical trials. If these third parties do not properly and successfully carry out their contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval of or commercialize our product candidates.
If we are unable to obtain, maintain and protect sufficient patent and other intellectual property rights for our product candidates and technology, or if the scope of patent and other intellectual property rights obtained is not sufficiently broad, we may not be able to compete effectively in our market.
We have identified material weaknesses in our internal control over financial reporting. If we are unable to remediate these material weaknesses, or if we identify additional material weaknesses in the future or otherwise fail to maintain effective internal control over financial reporting, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect our business.

Risks Related to the Acquisition and the Private Placement

Failure to complete the Acquisition could adversely impact our company, including resulting in us paying a termination fee to Tenet and a decline in the price of our common stock and an adverse impact on our future business and operations.

If the Acquisition is not completed, we are subject to the following risks, among others:

if the Acquisition Agreement is terminated under specified circumstances, we will be required to pay Tenet a termination fee of $1.0 million and reimburse Tenet’s transaction-related expenses up to a maximum of $0.5 million;
the price of our common stock may decline and could fluctuate significantly; and
we may be required to pay certain costs related to the Acquisition, such as legal and accounting fees, whether or not the Acquisition is consummated.

If the Acquisition Agreement is terminated and our board of directors determines to seek another strategic or financial transaction, there can be no assurance that we will be able to identify and/or consummate such a transaction that would yield greater benefits than the benefits to be provided under the Acquisition Agreement.

If the conditions to the Acquisition are not satisfied or waived, the Acquisition may not be consummated.

The closing of the Acquisition is subject to a number of conditions as set forth in the Acquisition Agreement that must be satisfied or waived, including, among others, approval of our stockholders at the meeting of our stockholders to approve the Acquisition.

There can be no assurance as to whether or when the conditions to the closing of the Acquisition will be satisfied or waived or as to whether or when the Acquisition will be consummated. If the conditions are not satisfied or waived, the Acquisition may not be consummated or the closing of the Acquisition may be delayed, and we and Tenet each may lose some or all of the intended benefits of the Acquisition.

If the Acquisition is not consummated, the Private Placement will likely not close.

In connection with the Acquisition, on April 10, 2024, we entered into the Securities Purchase Agreement with the certain investors, pursuant to which such investors agreed to purchase 31,238,282 shares of our common stock upon the closing of the Private Placement, which is expected to occur immediately following the closing of the Acquisition. The expected gross proceeds from the Private Placement are approximately $120.0 million, before deducting estimated offering expenses. The closing of the Private Placement is subject to a number of conditions as set forth in the Securities Purchase Agreement that must be satisfied or waived, including, among others, the approval of our stockholders at the meeting of our stockholders to approve the Acquisition, the closing of the Acquisition and certain other conditions. In the event of any such failure to meet the conditions precedent, if the investors in the Private Placement do not waive our requirement to satisfy such conditions (to the extent applicable), then the Private Placement will not close.

 

 

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The Acquisition may be completed even though a material adverse effect may result from the announcement of the Acquisition, industry-wide changes or other causes.

In general, neither we nor Tenet is obligated to complete the Acquisition if there is a “material adverse effect” affecting the other party between April 10, 2024, the date of the Acquisition Agreement, and the closing of the Acquisition. However, certain types of changes are excluded from the concept of a “material adverse effect.” Such exclusions include, but are not limited to, changes in general business or economic conditions affecting the industry in which we and/or Tenet, as applicable, operates, changes in GAAP, change in, or compliance with or action taken for the purpose of complying with any laws, rules, regulations of general applicability or GAAP or interpretations thereof, natural disasters, pandemics and related or associated epidemics, acts of war, outbreak or escalation of hostilities or acts of terrorism, changes in financial, banking, securities markets, or general economic, regulatory, legislative or political conditions, changes resulting from the announcement or pendency of the Acquisition, and failures to meet internal expectations or projections of results of operations. Therefore, if any of these events were to occur impacting us or Tenet, the other party would still be obliged to consummate the closing of the Acquisition. If any such adverse changes occur and we and Tenet consummate the Acquisition, the price of our common stock following the closing of the Acquisition may suffer. This in turn may reduce the value of the Acquisition to our stockholders, Tenet’s stockholders or both.

Some of our and Tenet’s directors, executive officers and principal stockholders, including RA Capital Management, have interests in the Acquisition that are different from yours and that may influence them to support or approve the Acquisition without regard to your interests.

Some of our and Tenet’s directors, executive officers and principal stockholders, such as RA Capital Management, have interests in the Acquisition that are different from, or in addition to, the interests of our stockholders generally. These interests with respect to our directors and executive officers may include, among others, that our directors and certain of our executive officers are expected to continue to serve as directors and executive officers, respectively, of the combined company after the closing of the Acquisition (Post-Closing Eliem); that certain of Tenet’s current executive officers are expected to enter into employment agreements with us on or prior to the closing of the Acquisition; and that our directors and executive officers are entitled to certain indemnification and liability insurance coverage pursuant to the terms of the Acquisition Agreement. These interests with respect to Tenet’s directors and executive officers may include, among others, transaction bonus payments, discretionary annual performance bonuses and the payment of base salaries or consulting compensation, as applicable. Additionally, certain of our and Ten