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Bicycle Therapeutics(BCYC) - 2020 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) This section presents the unaudited condensed consolidated financial statements for Bicycle Therapeutics plc, including the balance sheets, statements of operations and comprehensive loss, statements of convertible preferred shares and shareholders' equity (deficit), and statements of cash flows, along with detailed notes explaining the company's business, accounting policies, and financial instruments Condensed Consolidated Balance Sheets The condensed consolidated balance sheets provide a snapshot of the company's financial position as of September 30, 2020, compared to December 31, 2019, showing significant increases in cash, total current assets, and total liabilities | Metric | September 30, 2020 ($ thousands) | December 31, 2019 ($ thousands) | | :----------------------------------- | :------------------------------- | :------------------------------ | | Cash | 149,842 | 92,117 | | Total current assets | 164,158 | 104,146 | | Total assets | 170,059 | 110,194 | | Total current liabilities | 17,047 | 8,821 | | Total liabilities | 60,508 | 16,996 | | Total shareholders' equity | 109,551 | 93,198 | Condensed Consolidated Statements of Operations and Comprehensive Loss The condensed consolidated statements of operations and comprehensive loss highlight the company's financial performance for the three and nine months ended September 30, 2020 and 2019, showing increased collaboration revenues but also higher operating expenses, leading to larger net losses | Metric | Three Months Ended Sep 30, 2020 ($ thousands) | Three Months Ended Sep 30, 2019 ($ thousands) | Nine Months Ended Sep 30, 2020 ($ thousands) | Nine Months Ended Sep 30, 2019 ($ thousands) | | :------------------------------------------------ | :-------------------------------------------- | :-------------------------------------------- | :------------------------------------------- | :------------------------------------------- | | Collaboration revenues | 3,842 | 614 | 6,542 | 8,520 | | Research and development expenses | 7,363 | 6,078 | 23,091 | 18,891 | | General and administrative expenses | 7,154 | 4,789 | 18,351 | 11,164 | | Total operating expenses | 14,517 | 10,867 | 41,442 | 30,055 | | Loss from operations | (10,675) | (10,253) | (34,900) | (21,535) | | Net loss | (10,138) | (9,482) | (33,577) | (26,202) | | Net loss per share (basic and diluted) | (0.52) | (0.53) | (1.81) | (3.00) | Condensed Consolidated Statements of Convertible Preferred Shares and Shareholders' Equity (Deficit) This section details the changes in convertible preferred shares and shareholders' equity (deficit) for the nine months ended September 30, 2020 and 2019, reflecting share issuances, share-based compensation, foreign currency adjustments, and net losses | Metric | Balance at Dec 31, 2019 ($ thousands) | Balance at Sep 30, 2020 ($ thousands) | | :------------------------------------ | :------------------------------------ | :------------------------------------ | | Ordinary Shares (Amount) | 227 | 264 | | Additional Paid-in Capital | 195,056 | 246,391 | | Accumulated Other Comprehensive Loss | (1,535) | (2,977) | | Accumulated Deficit | (100,550) | (134,127) | | Total Shareholders' Equity (Deficit) | 93,198 | 109,551 | - Issuance of ordinary shares upon exercise of share options and warrants contributed to additional paid-in capital9 - Issuance of ADSs, net of commissions and offering expenses, significantly increased additional paid-in capital by $46,287 thousand for the nine months ended September 30, 20209 Condensed Consolidated Statements of Cash Flows The condensed consolidated statements of cash flows present the cash inflows and outflows from operating, investing, and financing activities for the nine months ended September 30, 2020 and 2019, showing a substantial increase in cash from financing activities in 2020 | Metric | Nine Months Ended Sep 30, 2020 ($ thousands) | Nine Months Ended Sep 30, 2019 ($ thousands) | | :------------------------------------ | :------------------------------------------- | :------------------------------------------- | | Net cash used in operating activities | (1,172) | (23,694) | | Net cash used in investing activities | (716) | (1,164) | | Net cash provided by financing activities | 61,099 | 58,318 | | Effect of exchange rate changes on cash | (1,486) | (886) | | Net increase in cash | 57,725 | 32,574 | | Cash at end of period | 149,842 | 95,954 | - Net cash provided by financing activities in 2020 was primarily driven by $46.4 million from ATM offerings and $15.0 million from debt issuance11 Notes to Condensed Consolidated Financial Statements These notes provide detailed explanations and disclosures supporting the condensed consolidated financial statements, covering the company's business, significant accounting policies, financial instruments, debt, equity, and collaboration agreements 1. Nature of the business and basis of presentation Bicycle Therapeutics plc is a clinical-stage biopharmaceutical company focused on developing novel Bicycles® for underserved diseases, primarily in oncology. The notes detail the company's structure, GAAP compliance, liquidity, and risks, including the impact of the COVID-19 pandemic - The Company is a clinical-stage biopharmaceutical company developing Bicycles® for diseases underserved by existing therapeutics, with initial internal programs focused on oncology12 - Lead product candidates include BT1718 (targeting MT1-MMP), BT5528 (targeting EphA2), and BT8009 (targeting Nectin-4), all in Phase I/II clinical trials12 - The company completed an IPO in May 2019, raising $56.4 million net proceeds, and an at-the-market (ATM) offering program in 2020, selling 2,830,713 ADSs for $46.3 million net proceeds as of September 30, 202014 - On September 30, 2020, the company entered into a loan agreement with Hercules Capital, Inc. for up to $40.0 million, with $15.0 million funded on that date14 - The company has incurred recurring losses since inception, with net losses of $10.1 million and $33.6 million for the three and nine months ended September 30, 2020, respectively, and an accumulated deficit of $134.1 million as of September 30, 202015 - The COVID-19 pandemic has caused limited financial and operational impacts but poses risks of delays in research, clinical trials, and supply chain disruptions19 2. Summary of significant accounting policies This section outlines the company's significant accounting policies, including the use of estimates, foreign currency translation, government grants, and recently issued accounting pronouncements, emphasizing the adoption of USD as the functional currency for the parent company - The company adopted the U.S. dollar (USD) as its functional currency on June 1, 2019, due to its primary financing source shifting to the U.S. capital markets21 - Foreign currency translation adjustments are recorded as a component of accumulated other comprehensive income (loss)22 | Metric | Three Months Ended Sep 30, 2020 ($ thousands) | Three Months Ended Sep 30, 2019 ($ thousands) | Nine Months Ended Sep 30, 2020 ($ thousands) | Nine Months Ended Sep 30, 2019 ($ thousands) | | :------------------------------------ | :-------------------------------------------- | :-------------------------------------------- | :------------------------------------------- | :------------------------------------------- | | Foreign exchange loss | (700) | (800) | 700 (gain) | (400) (loss) | | Government grants (reduction of R&D) | 100 | 200 | 300 | 500 | - The company is evaluating the impact of ASU No. 2016-13 (Credit Losses) and ASU No. 2019-12 (Income Taxes) on its financial statements2425 3. Fair value of financial assets and liabilities This note discusses the classification and disclosure of financial assets and liabilities at fair value, noting that most current assets and liabilities approximate fair value due to their short-term nature, and there were no assets or liabilities measured at fair value on a recurring basis as of September 30, 2020, and December 31, 2019 - The carrying values of accounts receivable, R&D incentives receivable, other current assets, accounts payable, and accrued expenses approximate their fair values due to their short-term nature25 - The carrying value of long-term debt approximates its fair value as it's based on market interest rates for similar borrowings25 - No assets or liabilities were measured at fair value on a recurring basis as of September 30, 2020, and December 31, 201925 4. Property and equipment, net This section provides a breakdown of property and equipment, net, and associated depreciation expenses, showing a slight decrease in net property and equipment from December 31, 2019, to September 30, 2020 | Category | September 30, 2020 ($ thousands) | December 31, 2019 ($ thousands) | | :------------------------------------ | :------------------------------- | :------------------------------ | | Laboratory equipment | 4,790 | 4,326 | | Leasehold improvements | 371 | 300 | | Computer equipment and software | 185 | 229 | | Furniture and office equipment | 189 | 120 | | Total gross property and equipment | 5,535 | 4,975 | | Less: Accumulated depreciation and amortization | (3,496) | (2,683) | | Property and equipment, net | 2,039 | 2,292 | | Metric | Three Months Ended Sep 30, 2020 ($ thousands) | Three Months Ended Sep 30, 2019 ($ thousands) | Nine Months Ended Sep 30, 2020 ($ thousands) | Nine Months Ended Sep 30, 2019 ($ thousands) | | :----------------------- | :-------------------------------------------- | :-------------------------------------------- | :------------------------------------------- | :------------------------------------------- | | Depreciation expense | 300 | 200 | 900 | 700 | 5. Accrued expenses and other current liabilities This note provides a detailed breakdown of accrued expenses and other current liabilities, showing an increase from December 31, 2019, to September 30, 2020, primarily driven by accrued external research and development expenses and professional fees | Category | September 30, 2020 ($ thousands) | December 31, 2019 ($ thousands) | | :------------------------------------ | :------------------------------- | :------------------------------ | | Accrued employee compensation and benefits | 2,559 | 2,514 | | Accrued external research and development expenses | 2,742 | 2,055 | | Accrued professional fees | 1,723 | 867 | | Current portion of operating lease liabilities | 684 | 640 | | Other | 90 | 68 | | Total | 7,798 | 6,144 | 6. Long-term debt This note details the company's long-term debt, including a new loan agreement with Hercules Capital, Inc. for up to $40.0 million, with $15.0 million funded on September 30, 2020, and outlines the interest rates, repayment terms, and collateral - On September 30, 2020, the company entered into a loan agreement with Hercules Capital, Inc. for up to $40.0 million, with an initial term loan of $15.0 million funded29 - Borrowings bear interest at the greater of 8.85% or 5.60% plus the Wall Street Journal prime rate, with an effective interest rate of 12.1% at September 30, 202029 - The loan includes interest-only payments until November 1, 2022 (potentially extended to May 1, 2023), followed by principal and interest payments through October 1, 202429 | Metric | September 30, 2020 ($ thousands) | | :------------------------------------ | :------------------------------- | | Term loan payable | 15,000 | | Unamortized debt issuance costs | (573) | | Carrying value of term loan | 14,427 | | Year Ending December 31, | Principal Payments ($ thousands) | | :----------------------- | :------------------------------- | | 2020 | — | | 2021 | — | | 2022 | 1,148 | | 2023 | 7,262 | | 2024 | 7,340 | | Total | 15,750 | 7. Convertible preferred shares This note describes the company's history of issuing Series A, B1, and B2 convertible preferred shares, and their automatic conversion into ordinary shares upon the completion of the IPO in May 2019 - The company previously issued Series A, B1, and B2 convertible preferred shares31 - Upon the closing of the IPO in May 2019, all outstanding convertible preferred shares automatically converted into 11,647,529 ordinary shares on a 1:1.429 basis33 8. Warrant liability This note explains the accounting for warrant liabilities, which were remeasured to fair value at each reporting date prior to the IPO and reclassified to additional paid-in capital upon the IPO's completion, as warrants became exercisable for ordinary shares - Prior to the IPO, warrants to subscribe for Series A and B1 Preferred Shares were recorded as a liability and remeasured to fair value at each reporting date34 - Upon the IPO's closing on May 28, 2019, unexercised warrants became warrants to subscribe for ordinary shares and were reclassified to additional paid-in capital34 | Metric | Nine Months Ended Sep 30, 2020 ($ thousands) | Nine Months Ended Sep 30, 2019 ($ thousands) | | :------------------------------------ | :------------------------------------------- | :------------------------------------------- | | Other expense related to warrant liability remeasurement | 0 | 5,400 | 9. Ordinary shares This note outlines the rights of ordinary shareholders, including voting and dividend entitlements, and states the authorized and outstanding share counts as of September 30, 2020, and December 31, 2019 - Each ordinary share holder is entitled to one vote per share and to receive dividends when declared35 - As of September 30, 2020, the company had 31,995,653 ordinary shares authorized and 20,935,853 shares issued and outstanding35 - No dividends have been declared as of September 30, 202035 10. Share-based compensation This note details the company's share-based compensation plans, including the 2020 and 2019 Share Option Plans, pre-IPO options, and the Employee Share Purchase Plan (ESPP), along with the associated compensation expenses and valuation assumptions - The 2020 Equity Incentive Plan, approved in June 2020, reserved 4,773,557 ordinary shares for issuance, with automatic annual increases36 - Share options generally vest over a four-year service period (25% on first anniversary, then monthly) and have a 10-year contractual life36 | Metric | Three Months Ended Sep 30, 2020 ($ thousands) | Three Months Ended Sep 30, 2019 ($ thousands) | Nine Months Ended Sep 30, 2020 ($ thousands) | Nine Months Ended Sep 30, 2019 ($ thousands) | | :------------------------------------ | :-------------------------------------------- | :-------------------------------------------- | :------------------------------------------- | :------------------------------------------- | | Research and development expenses | 668 | 417 | 4,950 | 2,000 | | General and administrative expenses | 842 | 402 | (Included in R&D total) | (Included in R&D total) | | Total share-based compensation expense | 1,510 | 819 | 4,950 | 2,000 | | Metric | Sep 30, 2020 | Dec 31, 2019 | | :------------------------------------ | :----------- | :----------- | | Outstanding share options (Number of Shares) | 3,779,785 | 2,634,346 | | Weighted Average Exercise Price | $10.24 | $9.57 | | Weighted Average Contractual Term (years) | 8.76 | 9.04 | | Aggregate Intrinsic Value ($ thousands) | 33,340 | 6,107 | - Total unrecognized compensation expense for unvested awards was $14.7 million as of September 30, 2020, to be recognized over 2.7 years48 11. Significant agreements This note details the company's collaboration agreements with various biopharmaceutical companies and organizations, outlining the terms, performance obligations, and revenue recognition for each, as well as a summary of contract assets and liabilities | Collaboration Partner | Three Months Ended Sep 30, 2020 ($ thousands) | Three Months Ended Sep 30, 2019 ($ thousands) | Nine Months Ended Sep 30, 2020 ($ thousands) | Nine Months Ended Sep 30, 2019 ($ thousands) | | :-------------------- | :-------------------------------------------- | :-------------------------------------------- | :------------------------------------------- | :------------------------------------------- | | AstraZeneca | 213 | 441 | 944 | 1,229 | | Sanofi | — | — | — | 6,016 | | Oxurion | 2,362 | — | 2,362 | — | | Dementia Discovery Fund | 58 | 173 | 170 | 275 | | Material transfer agreement | — | — | — | 1,000 | | Genentech | 1,209 | — | 3,066 | — | | Total collaboration revenues | 3,842 | 614 | 6,542 | 8,520 | - AstraZeneca collaboration involves research and development of Bicycle peptides for up to six targets, with potential milestone payments up to $29.0 million (development), $23.0 million (regulatory), and $110.0 million (commercial) per program, plus tiered mid-single digit royalties50 - Sanofi collaboration was terminated effective October 23, 2019; $5.3 million allocated to the Sickle Cell License Option Material Right was recognized as revenue in Q2 201963 - Oxurion collaboration recognized $2.4 million in revenue during Q3 2020 due to a milestone achieved for the initiation of a Phase II clinical trial of THR-14968 - Genentech collaboration, entered February 2020, included a $30.0 million upfront payment and potential milestones up to $200.0 million (development), $135.0 million (regulatory), and $200.0 million (sales) per program, plus tiered mid-single to low double-digit royalties76 | Deferred Revenue Source | Beginning Balance Jan 1, 2020 ($ thousands) | Additions ($ thousands) | Deductions ($ thousands) | Ending Balance Sep 30, 2020 ($ thousands) | | :------------------------------------ | :------------------------------------------ | :---------------------- | :----------------------- | :---------------------------------------- | | AstraZeneca collaboration | 4,913 | 433 | (118) | 5,090 | | DDF collaboration | 744 | — | (178) | 550 | | Genentech collaboration | — | 31,000 | (3,200) | 27,635 | | Total deferred revenue | 5,657 | 31,433 | (3,496) | 33,275 | 12. Income Taxes This note explains the company's income tax benefit, primarily from deferred tax assets in the United States, and its approach to UK corporate taxation, including R&D tax credits and valuation allowances against UK deferred tax assets | Metric | Three Months Ended Sep 30, 2020 ($ thousands) | Three Months Ended Sep 30, 2019 ($ thousands) | Nine Months Ended Sep 30, 2020 ($ thousands) | Nine Months Ended Sep 30, 2019 ($ thousands) | | :------------------------------------ | :-------------------------------------------- | :-------------------------------------------- | :------------------------------------------- | :------------------------------------------- | | Income tax benefit | 465 | 331 | 668 | 116 | - The income tax benefit is mainly from deferred tax assets in the United States due to intercompany service agreements91 - A full valuation allowance is maintained against UK deferred tax assets due to a history of cumulative net losses in the UK93 - UK R&D tax credits are recorded as a reduction to R&D expense and are fully refundable137 13. Commitments and Contingencies This note details the company's lease commitments for office and laboratory space, legal proceedings, founder royalty arrangements, and indemnification obligations, highlighting the ongoing Pepscan litigation and the associated risks | Year Ending December 31, | Operating Lease Commitments ($ thousands) | | :----------------------- | :---------------------------------------- | | 2020 | 226 | | 2021 | 766 | | 2022 | 444 | | 2023 | — | | Present value adjustment | (107) | | Total lease liabilities | 1,329 | | Less: current lease liabilities | (684) | | Long term lease liabilities | 645 | - The company is involved in litigation with Pepscan Systems B.V. regarding a non-exclusive patent license agreement, with an injunction granted against BicycleRD exploiting licensed patents and know-how100 - Founder Royalty Agreement entails low single-digit royalty payments on net product sales from Oxurion and AstraZeneca collaborations for 10 years from first commercial sale101 - The company has indemnification obligations to vendors, partners, and directors, with maximum potential amounts often unlimited, but no material costs incurred to date102 14. Net loss per share This note presents the calculation of basic and diluted net loss per share, indicating that potentially dilutive securities were excluded due to their anti-dilutive effect, resulting in the same weighted average ordinary shares outstanding for both basic and diluted calculations | Metric | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :------------------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net loss attributable to ordinary shareholders ($ thousands) | (10,138) | (9,482) | (33,577) | (26,202) | | Weighted average ordinary shares outstanding | 19,426,833 | 17,900,978 | 18,504,013 | 8,734,943 | | Net loss per share (basic and diluted) | (0.52) | (0.53) | (1.81) | (3.00) | - Potentially dilutive securities (share options, convertible preferred shares, warrants, unvested restricted shares) were excluded from diluted EPS calculation as their effect would be anti-dilutive103106 15. Benefit plans This note describes the company's employee benefit plans, including the 401(k) Plan for U.S. employees and a pension contribution plan for UK employees, detailing the contributions made for the reported periods | Plan | Three Months Ended Sep 30, 2020 ($ thousands) | Three Months Ended Sep 30, 2019 ($ thousands) | Nine Months Ended Sep 30, 2020 ($ thousands) | Nine Months Ended Sep 30, 2019 ($ thousands) | | :-------------------- | :-------------------------------------------- | :-------------------------------------------- | :------------------------------------------- | :------------------------------------------- | | 401(k) Plan | 34 | 26 | 100 | 100 | | U.K. Plan | 100 | 100 | 300 | 200 | 16. Related party transactions This note discloses transactions with related parties, including founder royalty arrangements and consultancy services provided by entities associated with board members - The company has Founder Royalty Agreements with its founders and initial investors, but no royalties have been earned or paid to date109 | Related Party | Three Months Ended Sep 30, 2020 ($ thousands) | Three Months Ended Sep 30, 2019 ($ thousands) | Nine Months Ended Sep 30, 2020 ($ thousands) | Nine Months Ended Sep 30, 2019 ($ thousands) | | :------------------------------------ | :-------------------------------------------- | :-------------------------------------------- | :------------------------------------------- | :------------------------------------------- | | Stone Sunny Isles, Inc. (Chairman) | 40 | 40 | 100 | 100 | | 10X Capital Inc. (Former Chairman) | 0 | 0 | 0 | 50 | 17. Geographic information This note provides geographic information on the company's long-lived assets, indicating operations in the United States and the United Kingdom, with collaboration revenues attributed to UK operations | Geographic Region | September 30, 2020 ($ thousands) | December 31, 2019 ($ thousands) | | :---------------- | :------------------------------- | :------------------------------ | | United States | 1,672 | 2,017 | | United Kingdom | 1,826 | 2,331 | | Total | 3,498 | 4,348 | - All collaboration revenues are attributed to the company's operations in the United Kingdom111 18. Subsequent events This note discloses subsequent events, specifically the completion of the initial $50.0 million at-the-market (ATM) offering and the registration of an additional $75.0 million ATM offering in October 2020 - On October 1, 2020, the company completed the sale of the initial $50.0 million under its ATM program, selling 98,100 ADSs for $1.8 million net proceeds111 - On October 2, 2020, the company registered an offer and sale of ADSs for up to an additional $75.0 million under the ATM program111 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations, discussing its business overview, the impact of COVID-19, financial performance, liquidity, and critical accounting policies. It highlights the company's focus on developing Bicycle® medicines, its significant operating losses, and its need for additional funding Overview Bicycle Therapeutics plc is a clinical-stage biopharmaceutical company developing Bicycles®, a novel class of synthetic short peptides, for diseases with high unmet medical needs, particularly in oncology, and through collaborations in other therapeutic areas - Bicycle Therapeutics is a clinical-stage biopharmaceutical company developing Bicycles®, novel synthetic short peptides combining biologic pharmacology with small molecule properties114 - The company's initial internal programs focus on oncology, with lead candidates BT1718, BT5528, and BT8009 in Phase I/II clinical trials115 - Collaborations extend beyond oncology to antibacterial, cardiovascular, ophthalmology, dementia, and respiratory indications114115 COVID-19 Business Update The company has implemented business continuity plans to mitigate the impact of the COVID-19 pandemic, which has caused limited financial and operational disruptions but led to temporary pauses in clinical trial enrollment and potential future impacts on supply chain and financial markets - The company established a cross-functional task force and implemented business continuity plans to address COVID-19 impacts117 - Clinical sites for the BT1718 Phase I/IIa trial temporarily paused new patient enrollment in H1 2020 due to COVID-19, but enrollment resumed in Q2 2020118 - The company anticipates potential impacts on patient enrollment, study drug supply, trial results reporting, and interactions with regulators due to the ongoing pandemic118 Financial Overview Since inception, the company has focused on R&D, incurring significant operating losses and accumulating a deficit of $134.1 million as of September 30, 2020. Operations are financed through equity sales, collaboration payments, and debt, with substantial additional funding expected to be required for future development and potential commercialization - The company has incurred significant operating losses since inception, with a net loss of $33.6 million for the nine months ended September 30, 2020, and an accumulated deficit of $134.1 million123 - Funding has come from $241.3 million in equity sales, $61.9 million from collaboration agreements, and $15.0 million from debt123 - Expenses and capital requirements are expected to increase substantially with ongoing clinical trials, preclinical activities, and potential commercialization efforts123 Components of Our Results of Operations This section breaks down the key components of the company's results of operations, including collaboration revenues, research and development expenses, general and administrative expenses, other income/expense, and benefit from income taxes, explaining the factors influencing each Collaboration Revenues Collaboration revenues are the company's primary revenue source, including upfront payments, milestone payments, option exercise payments, and R&D services under agreements with partners like Genentech, AstraZeneca, Sanofi, Oxurion, and DDF, with future fluctuations expected based on payment timing - Collaboration revenue is the primary revenue source, including upfront payments, milestones, option exercise payments, and R&D services126 - Future revenue is expected to fluctuate based on the timing and amount of license, research, development, and milestone payments126 Research and Development Expenses Research and development expenses are expensed as incurred and include employee-related costs, third-party contract services, lab supplies, and regulatory compliance. These costs are expected to increase significantly as product candidates advance through clinical development, with UK R&D tax credits offsetting some expenses - R&D expenses include employee costs, third-party contract services (preclinical, clinical, manufacturing), consultants, lab supplies, and regulatory compliance128 - UK R&D tax credits and government grant funding are recorded as an offset to R&D expense128 - R&D expenses are expected to increase substantially due to expanded product candidate portfolio and progression into later-stage clinical trials130 - The successful development of product candidates is highly uncertain, with numerous risks including the impact of COVID-19, clinical trial failures, and regulatory approvals130 General and Administrative Expenses General and administrative expenses primarily cover salaries, share-based compensation for executive and administrative functions, professional fees, and facility-related costs. These expenses are expected to increase as the company grows and incurs costs associated with being a public company, with foreign currency fluctuations also impacting these costs - G&A expenses include salaries, share-based compensation, professional fees (legal, accounting, consulting), insurance, and facility costs133 - Foreign exchange differences from transactions in non-functional currencies are recorded in G&A expense133 - G&A expenses are expected to increase with headcount growth and costs associated with public company operations133 Other Income (Expense) Other income (expense) primarily consists of interest earned on cash and, prior to the IPO, changes in the fair value of warrant liabilities. Interest expense is expected to increase due to the new loan agreement with Hercules - Interest and other income, net, primarily consists of interest earned on cash134 - Other expense, net, prior to the IPO, included changes in the fair value of warrant liability; no additional expense is expected from this in future periods136 - Interest expense is expected to increase in future periods due to the Loan Agreement with Hercules134 Benefit From Income Taxes The company's income tax benefit primarily stems from US operating activities generating taxable income through intercompany service arrangements, while UK R&D tax credits are recorded as a reduction to R&D expenses, and a full valuation allowance is maintained against UK deferred tax assets - Income tax benefit represents the tax impact from US operating activities, which generated taxable income in certain periods137 - UK R&D tax credits are recorded as a reduction to R&D expenses and are fully refundable137 - The company maintains a full valuation allowance on its UK deferred tax assets due to a history of cumulative net losses in the UK93 Results of Operations This section provides a comparative analysis of the company's financial results for the three and nine months ended September 30, 2020, versus 2019, detailing changes in collaboration revenues, research and development expenses, general and administrative expenses, and other income/expense Comparison of the Three Months Ended September 30, 2020 and 2019 For the three months ended September 30, 2020, collaboration revenues increased significantly due to a milestone from Oxurion and revenue from Genentech. Operating expenses also rose, driven by increased R&D for clinical programs and higher G&A costs for public company operations, leading to a larger net loss | Metric | 3 Months Ended Sep 30, 2020 ($ thousands) | 3 Months Ended Sep 30, 2019 ($ thousands) | Change ($ thousands) | | :------------------------------------ | :---------------------------------------- | :---------------------------------------- | :------------------- | | Collaboration revenues | 3,842 | 614 | 3,228 | | Research and development | 7,363 | 6,078 | 1,285 | | General and administrative | 7,154 | 4,789 | 2,365 | | Total operating expenses | 14,517 | 10,867 | 3,650 | | Loss from operations | (10,675) | (10,253) | (422) | | Net loss | (10,138) | (9,482) | (656) | - Collaboration revenues increased by $3.2 million, primarily due to a $2.4 million milestone from Oxurion and $1.2 million from the Genentech collaboration138 - R&D expenses increased by $1.3 million, driven by higher direct program spend for BT5528 and BT8009, increased personnel costs, and share-based compensation, partially offset by decreased unallocated discovery expense139 - G&A expenses increased by $2.4 million, mainly due to higher professional fees, personnel costs, and share-based compensation to support public company operations141 Comparison of the Nine Months Ended September 30, 2020 and 2019 For the nine months ended September 30, 2020, collaboration revenues decreased due to the termination of the Sanofi agreement and a one-time payment in 2019, despite new revenues from Genentech and Oxurion. Operating expenses significantly increased across R&D and G&A, leading to a larger net loss, while other income (expense) improved due to the absence of warrant liability remeasurement costs from the prior year | Metric | 9 Months Ended Sep 30, 2020 ($ thousands) | 9 Months Ended Sep 30, 2019 ($ thousands) | Change ($ thousands) | | :------------------------------------ | :---------------------------------------- | :---------------------------------------- | :------------------- | | Collaboration revenues | 6,542 | 8,520 | (1,978) | | Research and development | 23,091 | 18,891 | 4,200 | | General and administrative | 18,351 | 11,164 | 7,187 | | Total operating expenses | 41,442 | 30,055 | 11,387 | | Loss from operations | (34,900) | (21,535) | (13,365) | | Net loss | (33,577) | (26,202) | (7,375) | - Collaboration revenues decreased by $2.0 million, primarily due to a $6.0 million decrease from the Sanofi termination and a $1.0 million decrease from a 2019 Material Transfer Agreement, partially offset by $3.1 million from Genentech and $2.4 million from Oxurion144 - R&D expenses increased by $4.2 million, driven by a $2.4 million increase in direct program spend (clinical and TICA programs) and higher personnel costs, offset by a $2.2 million decrease in other unallocated discovery expense145 - G&A expenses increased by $7.2 million, mainly due to higher professional fees, personnel costs, and share-based compensation to support public company operations148 - Other income (expense), net, increased by $5.4 million, primarily due to the absence of a $5.4 million other expense related to warrant liability remeasurement in 2019149 Liquidity and Capital Resources The company has historically incurred significant operating losses and relies on equity offerings, collaboration payments, and debt financing. As of September 30, 2020, cash was $149.8 million, expected to fund operations for at least 12 months. Substantial additional funding will be required for future development and commercialization, with risks including market disruptions from COVID-19 and potential dilution or restrictive covenants from new financing - The company has incurred significant operating losses and negative cash flows since inception, with no product sales revenue149 - Funding sources include $241.3 million from equity sales, $61.9 million from collaboration agreements, and $15.0 million from debt147 | Cash Flow Category | 9 Months Ended Sep 30, 2020 ($ thousands) | 9 Months Ended Sep 30, 2019 ($ thousands) | | :------------------------------------ | :---------------------------------------- | :---------------------------------------- | | Net cash used in operating activities | (1,172) | (23,694) | | Net cash used in investing activities | (716) | (1,164) | | Net cash provided by financing activities | 61,099 | 58,318 | | Net increase in cash | 57,725 | 32,574 | | Cash at end of period | 149,842 | 95,954 | - Existing cash of $149.8 million as of September 30, 2020, is expected to fund operating expenses and capital expenditure requirements for at least 12 months155 - Future funding requirements are substantial and depend on the progress of product candidates, regulatory approvals, commercialization costs, and intellectual property protection155 | Obligation Type | Total ($ thousands) | Less than 1 year ($ thousands) | 1 to 3 years ($ thousands) | 3 to 5 years ($ thousands) | | :-------------------------- | :------------------ | :----------------------------- | :------------------------- | :------------------------- | | Operating lease commitments | 1,436 | 875 | 561 | — | | Debt obligations | 19,891 | 1,239 | 17,194 | 1,458 | | Total | 21,327 | 2,114 | 17,755 | 1,458 | Critical Accounting Policies and Significant Judgments and Estimates This section refers to the company's 2019 Annual Report for a detailed discussion of critical accounting policies and significant judgments and estimates, noting no significant changes since then, other than those disclosed in Note 2 of the current report - Critical accounting policies and significant judgments and estimates are consistent with those disclosed in the 2019 Annual Report on Form 10-K, with no significant changes other than those in Note 2162 Off-Balance Sheet Arrangements The company states that it has not entered into any off-balance sheet arrangements and does not hold any interests in variable interest entities - The company has not entered into any off-balance sheet arrangements163 - The company does not have any holdings in variable interest entities163 Emerging Growth Company and Smaller Reporting Company Status The company qualifies as an 'emerging growth company' (EGC) and 'smaller reporting company,' allowing it to take advantage of reduced disclosure requirements, though it has opted out of the extended transition period for new accounting standards - The company is an 'emerging growth company' (EGC) and will remain so until the earlier of December 31, 2024, or meeting certain revenue/market value thresholds163 - The company has irrevocably elected to 'opt out' of the extended transition period for complying with new or revised financial accounting standards163 - As an EGC and smaller reporting company, it can rely on exemptions from certain disclosure requirements, including auditor attestation on internal controls and reduced executive compensation disclosures163165 Item 3. Quantitative and Qualitative Disclosure About Market Risk This section discusses the company's exposure to market risks, specifically interest rate sensitivity and foreign currency exchange risk, and its strategies for managing these risks Interest Rate Sensitivity The company's exposure to interest rate sensitivity is primarily from its cash holdings and term debt. Due to the conservative nature of its investments, a one percentage point change in interest rates is not expected to materially affect its portfolio's fair value, though debt interest expense would increase - As of September 30, 2020, the company had $149.8 million in cash, invested in interest-bearing savings accounts166 - An immediate one percentage point change in interest rates is not expected to materially affect the fair market value of the investment portfolio166 - A 10% increase in interest rates on the $15.0 million term debt outstanding with Hercules would result in approximately $0.1 million in incremental annualized interest expense166 Foreign Currency Exchange Risk The company is exposed to foreign currency exchange risk due to international operations, particularly fluctuations between the pound sterling, U.S. dollar, and euro. While the parent company's functional currency is USD, its UK subsidiaries use GBP. Exchange gains/losses are recorded in net loss, and translation adjustments in other comprehensive income/loss. The company does not currently hedge currency exposure - The functional currency of Bicycle Therapeutics plc and Bicycle Therapeutics Inc. is USD, while UK subsidiaries (BicycleTx Limited and BicycleRD Limited) use British Pound Sterling167 | Metric | 3 Months Ended Sep 30, 2020 ($ thousands) | 3 Months Ended Sep 30, 2019 ($ thousands) | 9 Months Ended Sep 30, 2020 ($ thousands) | 9 Months Ended Sep 30, 2019 ($ thousands) | | :------------------------------------ | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | | Foreign exchange loss (gain) | (700) | (800) | 700 (gain) | (400) (loss) | - The company does not currently engage in currency hedging activities169 Item 4. Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and procedures as of September 30, 2020, and reports no material changes in internal control over financial reporting during the quarter - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2020169 - There were no changes in internal control over financial reporting that materially affected, or are reasonably likely to materially affect, internal control over financial reporting during the three months ended September 30, 2020169 PART II - OTHER INFORMATION Item 1. Legal Proceedings This section details ongoing legal proceedings, primarily focusing on the license litigation with Pepscan Systems B.V. regarding patent rights for BicycleRD's scaffold technology, including appeals, inter partes reviews, and European patent opposition proceedings - BicycleRD is involved in ongoing license litigation with Pepscan Systems B.V. regarding a non-exclusive patent license agreement from 2009172 - The Court of Appeal of The Hague ruled in February 2020 that Pepscan was entitled to terminate the license and granted a worldwide injunction against BicycleRD, which BicycleRD has appealed to the Dutch Supreme Court172 - BicycleRD filed two petitions for inter partes review (IPR) with the USPTO in September 2020, challenging the validity of Pepscan's U.S. Patents No. 8,742,070 and No. 8,748,105, both expiring in February 2024171174 - European Patent Opposition Proceedings are ongoing for foundational and divisional patents related to the company's technology platform, with hearings scheduled or decisions pending174 Item 1A. Risk Factors This section outlines significant risks associated with investing in the company, covering financial position, product development, regulatory approvals, commercialization, international operations, dependence on third parties, intellectual property, employee matters, and ownership of securities Risks Related to Our Financial Position and Need for Additional Capital The company has a history of significant operating losses and an accumulated deficit, requiring substantial additional funding for future development and commercialization. Failure to raise capital could delay or eliminate programs, and existing debt obligations could limit cash flow or lead to acceleration of repayment - The company has incurred recurring losses since inception, with a $33.6 million net loss for the nine months ended September 30, 2020, and an accumulated deficit of $134.1 million176 - Substantial additional funding is required to advance product candidates, seek marketing approvals, establish manufacturing and commercial infrastructure, and operate as a public company178180 - Existing cash of $149.8 million (as of Sep 30, 2020) is expected to fund operations for at least 12 months, but this estimate may be wrong182 - Failure to comply with covenants or payment obligations under the Hercules term loan facility ($15.0 million outstanding) could result in increased interest, accelerated repayment, or other adverse actions184 Risks Related to the Discovery, Development and Regulatory Approval of Our Product Candidates The company's success heavily depends on its internal development programs and product candidates, which are in early stages and face high risks of failure in preclinical and clinical trials. Challenges include unpredictable outcomes, difficulties in patient enrollment (exacerbated by COVID-19), potential for unacceptable side effects, and the need for companion diagnostics, all of which could delay or prevent regulatory approval - Future success is heavily dependent on the success of BTC and tumor-targeted immune cell agonist programs, including BT1718, BT5528, BT8009, and BT7480188 - Preclinical studies and clinical trials are long, expensive, unpredictable, and have a high risk of failure, with potential delays from patient enrollment difficulties (exacerbated by COVID-19)190192194 - Unacceptable side effect profiles could lead to suspension or termination of clinical trials or denial of regulatory approval202 - Failure to successfully validate, develop, and obtain regulatory approval for companion diagnostics could harm the drug development strategy200 Risks Related to Commercialization of Our Product Candidates and Other Regulatory Compliance Matters Commercialization of product candidates faces significant hurdles, including the expensive and uncertain marketing approval process, lack of internal sales infrastructure, limited market opportunities, and challenges in obtaining adequate insurance coverage and reimbursement. The company is also subject to extensive healthcare fraud and abuse laws, and legislative reforms could negatively impact its business - The marketing approval process is lengthy, expensive, and uncertain, potentially leading to delays, rejections, or limited approvals210212 - The company lacks internal marketing, sales, and distribution infrastructure, requiring significant investment or reliance on third-party collaborations, which carry inherent risks212214 - Market opportunities may be limited to specific patient populations or later-line therapies, potentially hindering profitability215 - Failure to obtain or maintain adequate insurance coverage and reimbursement for approved products could limit marketability and revenue generation223224 - The company is subject to federal and state healthcare fraud and abuse laws (e.g., Anti-Kickback Statute, False Claims Act, HIPAA), with potential for substantial penalties for non-compliance227229 - Healthcare legislative reforms (e.g., ACA, drug pricing initiatives) could negatively impact the business by imposing stricter regulations, cost containment measures, or reduced reimbursement232234236 Risks Related to Our Business and Our International Operations Operating internationally exposes the company to economic, political, and regulatory risks, including the impact of COVID-19, foreign currency fluctuations, and restrictive data protection regulations like GDPR. Brexit also introduces significant uncertainty regarding regulatory approvals, trade, and data transfers between the UK and EU - The COVID-19 pandemic could materially affect operations, clinical trials, and supply chains, with potential for delays, reduced productivity, and negative economic impacts242244 - International operations expose the company to risks such as economic weakness, differing regulatory requirements, intellectual property protection challenges, and changes in currency exchange rates244 - European data collection is governed by GDPR, which imposes strict requirements on personal data handling and cross-border transfers, with potential for significant fines for non-compliance246248249 - Brexit introduces legal, political, and economic uncertainty, potentially impacting regulatory approvals in the EU/UK, increasing costs, and disrupting operations and data transfers209251253 - Fluctuations in exchange rates, particularly between GBP, USD, and EUR, may materially affect results of operations and financial condition, as the company does not currently hedge currency exposure254 Risks Related to Our Dependence on Third Parties The company heavily relies on third-party collaborators, clinical investigators, and manufacturers for product development and commercialization. Failures by these third parties to perform as expected, conflicts arising from collaborations, or disruptions in manufacturing could significantly delay or impair the company's ability to obtain regulatory approvals, generate revenue, and protect its intellectual property - The company depends on development and commercialization collaborators (e.g., Genentech, AstraZeneca, Oxurion, CRUK) to develop, conduct clinical trials, obtain regulatory approvals, and market product candidates255 - Risks include collaborators not performing obligations, delaying trials, abandoning candidates, or developing competing products, which could reduce or eliminate future revenue257 - Conflicts with collaborators or licensors, such as the ongoing litigation with Pepscan, could adversely affect the business and intellectual property rights259260 - Reliance on third-party CROs and clinical investigators to conduct trials means the company has limited control over their performance, and any failures could delay regulatory approval262263 - Outsourcing all manufacturing to third parties increases risks of production delays, insufficient supplies, quality issues, and non-compliance with cGMP requirements264265 - Sharing trade secrets with third parties increases the risk of misappropriation or disclosure, potentially impairing the company's competitive position266 Risks Related to Intellectual Property The company's ability to protect its products and candidates relies on patents, trade secrets, and contractual provisions, but these offer limited protection. Challenges include the uncertainty of patent issuance and enforceability, potential infringement claims from third parties, and the difficulty of protecting trade secrets. Failure to maintain intellectual property rights could severely impact the business and competitive position - The company's intellectual property portfolio includes patent families directed to novel scaffolds, platform technology, bicyclic conjugates, and clinical indications268 - Patent applications may not issue as patents, or resulting patents may not provide a competitive advantage or sufficient protection against competitors268 - Issued patents could be found invalid or unenforceable if challenged in court or administrative proceedings, such as the ongoing Pepscan litigation and European patent oppositions271 - Reliance on trade secrets and know-how is risky, as they are difficult to protect and may become known or independently developed by competitors270273 - Changes in patent law (e.g., Leahy-Smith America Invents Act) and judicial interpretations could diminish the value of patents and impair protection efforts277 - Being sued for infringing third-party intellectual property rights could be costly, time-consuming, and prevent or delay development/commercialization of product candidates281283 Risks Related to Employee Matters and Managing Growth The company's success is highly dependent on its limited number of key employees, consultants, and advisors, and its ability to attract and retain qualified personnel in a competitive industry. Expected organizational expansion and reliance on IT systems also pose risks related to managing growth, potential misconduct, and cyber-attacks - The company has a limited number of 81 full-time or part-time employees as of September 30, 2020, and relies heavily on key personnel289 - Future success depends on the ability to retain key employees, consultants, and advisors, and to attract, retain, and motivate qualified personnel in a competitive industry292 - Cyber-attacks or failures in IT systems could result in information theft, data corruption, and significant business disruption, especially with increased remote work due to COVID-19290292 - Employees, contractors, and collaborators may engage in misconduct or improper activities, leading to significant liability and reputational harm293294 - Expected organizational expansion poses challenges in managing growth, including implementing systems, expanding facilities, and recruiting/training personnel294 Risks Related to Ownership of Our Securities The market price of the company's ADSs is highly volatile and influenced by numerous factors, including clinical trial results, funding, and market perception. Future sales of securities could dilute existing shareholders, and the company's broad discretion in using cash reserves may not always enhance shareholder value. As an English company, shareholder rights may differ from those in the U.S., and U.S. civil liabilities may not be enforceable. The company's status as an EGC and smaller reporting company allows for reduced disclosures, which may affect investor attractiveness - The market price of ADSs is highly volatile, influenced by clinical trial results, funding, regulatory decisions, competition, and broader market factors, including the COVID-19 pandemic295297298 - Future sales of a substantial number of securities by existing shareholders or through equity incentive plans could adversely affect ADS price and dilute shareholders303305 - Management has broad discretion in using cash reserves, which may not always improve results or enhance shareholder value306 - As an English company, shareholder rights differ from typical U.S. corporations, and U.S. civil liabilities may not be enforceable against the company or its non-U.S. directors/management307309322324 - The company's status as an 'emerging growth company' and 'smaller reporting company' allows for reduced disclosure requirements, which may make ADSs less attractive to some investors309310 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the use of proceeds from the company's initial public offering (IPO) in May 2019, including the aggregate net proceeds and how they have been utilized to advance product development programs and for general corporate purposes - The company completed its IPO in May 2019, raising approximately $56.4 million in aggregate net proceeds327 - As of September 30, 2020, approximately $47.4 million of the net proceeds have been used to advance BT1718, BT5528, BT8009, BT7480, BT7455, and other discovery development programs, as well as for working capital and general corporate purposes327 - The remaining net proceeds from the IPO are invested in interest-bearing cash accounts327 Item 3. Defaults Upon Senior Securities This item states that there are no defaults upon senior securities to report - Not Applicable327 Item 4. Mine Safety Disclosures This item states that there are no mine safety disclosures to report - Not Applicable327 Item 5. Other Information This item indicates that there is no other information to report - None327 Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including articles of association, letter agreements, loan and security agreements, and certifications - Exhibits include Articles of Association, Letter Agreement with Citibank, N.A., Loan and Security Agreement with Hercules Capital, Inc., and certifications of principal executive and financial officers328 SIGNATURES This section contains the signatures of the company's Chief Executive Officer and Chief Financial Officer, certifying the accuracy of the Form 10-Q - The report is signed by Kevin Lee, Ph.D., MBA, Chief