ACELYRIN(SLRN) - 2023 Q1 - Quarterly Report

Special Note Regarding Forward-Looking Statements This report contains forward-looking statements concerning future operations and financial performance, which are subject to significant risks and uncertainties - The report contains forward-looking statements regarding future operations, financial position, business strategy, product candidates, clinical trials, regulatory submissions, and commercialization plans, which are subject to known and unknown risks and uncertainties[8][9][10] PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) This section presents the unaudited condensed consolidated financial statements and accompanying notes for the period Condensed Consolidated Balance Sheets The balance sheets show a decrease in total assets and an increase in total liabilities and stockholders' deficit Balance Sheet Highlights | Metric | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :-------------------------------- | :----------------------------- | :------------------------------ | | Cash and cash equivalents | $289,194 | $267,110 | | Short-term marketable securities | $- | $47,510 | | Total current assets | $291,856 | $316,064 | | Total assets | $298,519 | $319,923 | | Accounts payable | $10,770 | $5,947 | | Accrued R&D expenses | $14,087 | $5,717 | | Severance liability | $3,280 | $- | | Total current liabilities | $33,664 | $15,901 | | Total liabilities | $45,278 | $26,192 | | Accumulated deficit | $(283,528) | $(107,078) | | Total stockholders' deficit | $(143,352) | $(102,862) | Condensed Consolidated Statements of Operations and Comprehensive Loss The statements reveal a significant increase in operating expenses and net loss, driven by higher R&D costs Statement of Operations Highlights | Metric | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | Change (in thousands) | Change (%) | | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | :-------------------- | :--------- | | Research and development | $167,920 | $13,003 | $154,917 | 1191.4% | | General and administrative | $11,913 | $3,082 | $8,831 | 286.5% | | Total operating expenses | $179,833 | $16,085 | $163,748 | 1018.0% | | Loss from operations | $(179,833) | $(16,085) | $(163,748) | 1018.0% | | Interest income | $3,299 | $- | $3,299 | 100% | | Net loss | $(176,450) | $(16,085) | $(160,365) | 997.0% | | Net loss per share, basic and diluted | $(8.61) | $(17.89) | $9.28 | -51.9% | | Weighted-average common shares outstanding | 20,492,101 | 899,319 | 19,592,782 | 2178.6% | Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders' Deficit This statement details changes in equity, including the impact of the ValenzaBio acquisition and net loss Changes in Stockholders' Deficit | Metric | Balance at Dec 31, 2022 (in thousands) | ValenzaBio Acquisition (in thousands) | Stock-based Compensation (in thousands) | Net Loss (in thousands) | Unrealized Gain (in thousands) | Balance at Mar 31, 2023 (in thousands) | | :------------------------------------ | :------------------------------------ | :------------------------------------ | :------------------------------------ | :---------------------- | :----------------------------- | :------------------------------------ | | Redeemable Convertible Preferred Stock | $396,593 | $- | $- | $- | $- | $396,593 | | Common Stock | $- | $- | $- | $- | $- | $- | | Additional Paid-in Capital | $4,302 | $128,735 | $7,139 | $- | $- | $140,176 | | Accumulated Deficit | $(107,078) | $- | $- | $(176,450) | $- | $(283,528) | | Accumulated Other Comprehensive Loss | $(86) | $- | $- | $- | $86 | $- | | Total Stockholders' Deficit | $(102,862) | $128,735 | $7,139 | $(176,450) | $86 | $(143,352) | - The company issued 18,885,731 shares of Class A Common Stock as consideration for the ValenzaBio acquisition, valued at $128.7 million[21][28][51] - Stock-based compensation expense for the three months ended March 31, 2023, was $7.1 million[21][24] Condensed Consolidated Statements of Cash Flows The cash flow statement highlights increased cash used in operations and cash provided by investing activities Cash Flow Summary | Metric | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | | :------------------------------------ | :------------------------------------------ | :------------------------------------------ | | Net cash used in operating activities | $(25,329) | $(14,572) | | Net cash provided by investing activities | $47,542 | $- | | Net cash (used in) provided by financing activities | $(129) | $124,974 | | Net increase in cash and cash equivalents | $22,084 | $110,402 | | Cash and cash equivalents at end of period | $289,194 | $212,644 | - Cash used in operating activities increased by $10.8 million, from $14.6 million in Q1 2022 to $25.3 million in Q1 2023, primarily due to the increased net loss and acquisition-related expenses[24][198][199] - Investing activities provided $47.5 million in cash in Q1 2023, mainly from $47.8 million in maturities of short-term marketable securities and $10.0 million cash acquired from ValenzaBio, partially offset by $10.0 million paid for the Pierre Fabre license[24][201] Notes to the Condensed Consolidated Financial Statements Note 1. Description of Business, Organization and Liquidity This note describes the company's business focus, recent acquisition, and financial standing, including its IPO - ACELYRIN, INC. is a late-stage clinical biopharma company focused on identifying, acquiring, and accelerating the development and commercialization of transformative medicines, incorporated in Delaware on July 27, 2020[26] - The company acquired ValenzaBio, Inc. on January 4, 2023, adding lonigutamab and SLRN-517 to its portfolio[28] - The company effected a 1.972-for-1 reverse stock split in April 2023 and closed its IPO on May 9, 2023, issuing 34,500,000 shares at $18.00 per share, generating net proceeds of approximately $573.7 million[29][30] Financial and Liquidity Summary | Metric | Three Months Ended March 31, 2023 (in millions) | Three Months Ended March 31, 2022 (in millions) | | :------------------------------------ | :------------------------------------------ | :------------------------------------------ | | Net loss | $(176.5) | $(16.1) | | Accumulated deficit (as of March 31, 2023) | $(283.5) | N/A | | Cash used in operating activities | $(25.3) | $(14.6) | | Cash and cash equivalents (as of March 31, 2023) | $289.2 | N/A | | Net IPO proceeds (May 9, 2023) | $573.7 | N/A | Note 2. Summary of Significant Accounting Policies This note outlines the key accounting principles and policies applied in preparing the financial statements - The financial statements are prepared in accordance with U.S. GAAP and SEC rules for interim financial reporting, consolidating ACELYRIN, INC. and its wholly-owned subsidiary, WH2, LLC[35][36] - The company operates as a single operating segment, with its CEO reviewing financial information on an aggregate basis[39] - The company adopted ASU 2016-02, "Leases (Topic 842)" as of January 1, 2022, recognizing right-of-use assets and lease liabilities for operating leases[42] - The company capitalizes certain legal, accounting, and other third-party fees directly associated with in-process equity financing as deferred offering costs; as of March 31, 2023, deferred IPO offering costs were $3.1 million[46][73] Note 3. ValenzaBio Acquisition This note details the accounting treatment and financial impact of the ValenzaBio asset acquisition - The acquisition of ValenzaBio, Inc. closed on January 4, 2023, and was accounted for as an asset acquisition, adding lonigutamab and SLRN-517 to the company's portfolio[28][49][50] ValenzaBio Purchase Consideration | Purchase Consideration Component | Amount (in thousands) | | :------------------------------- | :-------------------- | | Issued Class A Common Stock | $128,735 | | Transaction costs | $1,271 | | Cash | $8 | | Total Purchase Consideration | $130,014 | ValenzaBio Net Assets Acquired | Acquired Asset/Liability | Amount (in thousands) | | :----------------------- | :-------------------- | | Cash | $11,369 | | Prepaid expenses and other current assets | $2,074 | | In-process research and development assets | $123,057 | | Accounts payable | $(1,628) | | Accrued research and development expenses | $(4,805) | | Accrued compensation and other current liabilities | $(53) | | Total Net Asset Acquired | $130,014 | - The acquired IPR&D assets (lonigutamab at $114.8 million and SLRN-517 at $8.2 million) were expensed as research and development costs ($123.1 million) in January 2023, as they had no alternative future use[56] Note 4. Fair Value Measurements This note explains the methodology for measuring financial instruments at fair value across a three-tier hierarchy - The company's financial instruments are categorized into a three-tier fair value hierarchy: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1 prices), and Level 3 (unobservable inputs)[63][64] Fair Value of Financial Instruments | Financial Instrument | Fair Value as of March 31, 2023 (in thousands) | Level | | :------------------- | :------------------------------------------ | :---- | | Money market funds | $258,227 | 1 | | Derivative tranche liability | $10,144 | 3 | - The derivative tranche liability, a Level 3 financial liability, was estimated using a probability-weighted model with a 75% probability of achieving specified conditions, a Series C preferred stock fair value of $12.8180, and a 25% discount rate as of March 31, 2023[66][68] Note 5. Available-For-Sale Marketable Securities This note provides details on the composition and fair value of the company's marketable securities portfolio Marketable Securities (March 31, 2023) | Security Type | Amortized Cost (Mar 31, 2023, in thousands) | Unrealized Loss (Mar 31, 2023, in thousands) | Estimated Fair Value (Mar 31, 2023, in thousands) | | :------------ | :---------------------------------------- | :------------------------------------------- | :------------------------------------------------ | | Money market funds | $258,227 | $- | $258,227 | | Total | $258,227 | $- | $258,227 | Marketable Securities (December 31, 2022) | Security Type | Amortized Cost (Dec 31, 2022, in thousands) | Unrealized Loss (Dec 31, 2022, in thousands) | Estimated Fair Value (Dec 31, 2022, in thousands) | | :------------ | :---------------------------------------- | :------------------------------------------- | :------------------------------------------------ | | Money market funds | $238,223 | $- | $238,223 | | U.S. Government bonds | $25,506 | $(47) | $25,459 | | U.S. Treasury obligations | $11,430 | $(26) | $11,404 | | Corporate debt obligations | $2,145 | $(4) | $2,141 | | Federal agency obligations | $8,515 | $(9) | $8,506 | | Total | $285,819 | $(86) | $285,733 | Note 6. Consolidated Balance Sheet Components This note provides a detailed breakdown of specific current and non-current assets and liabilities Prepaid Expenses and Other Current Assets | Prepaid Expenses and Other Current Assets | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :---------------------------------------- | :----------------------------- | :------------------------------ | | Prepaid research and development expenses | $1,258 | $682 | | Prepaid other services | $689 | $288 | | Prepaid insurance and other current assets | $465 | $86 | | Research and development credit receivable | $250 | $250 | | Interest receivable | $- | $138 | | Total | $2,662 | $1,444 | Prepaid Expenses and Other Assets, Non-Current | Prepaid Expenses and Other Assets, Non-Current | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :--------------------------------------------- | :----------------------------- | :------------------------------ | | Deferred IPO offering costs | $3,082 | $774 | | Prepaid research and development expenses, non-current | $1,977 | $1,964 | | Security deposits | $34 | $- | | Acquisition transaction costs | $- | $1,121 | | Total | $5,093 | $3,859 | Accrued Compensation and Other Current Liabilities | Accrued Compensation and Other Current Liabilities | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :------------------------------------------------- | :----------------------------- | :------------------------------ | | Accrued professional service fees | $4,440 | $808 | | Accrued compensation | $930 | $3,068 | | Other accrued expenses and current liabilities | $157 | $361 | | Total | $5,527 | $4,237 | Note 7. Significant Agreements This note summarizes key licensing and collaboration agreements, including financial obligations and terms - Under the Affibody Agreement, ACELYRIN licensed worldwide rights to izokibep, paying $25.0 million upfront and owing up to $280.0 million in milestones plus royalties[27][75][77] - Upon the ValenzaBio acquisition, ACELYRIN assumed the Pierre Fabre Agreement for lonigutamab, paying a $10.0 million license fee and owing up to $489.5 million in milestones plus royalties[82][84][86] - Through ValenzaBio, ACELYRIN also assumed the Novelty License Agreement for SLRN-517, with obligations for up to $726.3 million in milestones plus tiered royalties[87][88] Note 8. Commitments and Contingent Liabilities This note discloses the company's contractual commitments, including lease obligations and potential milestone payments - The company has commitments for milestones and royalties under license agreements, but none were probable or accrued as of March 31, 2023[91] - In January 2023, the company entered a 65-month lease for office space, resulting in a $1.3 million right-of-use asset and operating lease liability[93][94] Operating Lease Liabilities Maturity Analysis | Operating Lease Liabilities Maturity Analysis (as of March 31, 2023) | Amount (in thousands) | | :--------------------------------------------------- | :-------------------- | | 2023 (remainder of the year) | $26 | | 2024 | $375 | | 2025 | $386 | | 2026 | $397 | | 2027 | $409 | | Thereafter | $280 | | Total future lease payments | $1,873 | | Less imputed interest | $(558) | | Total operating lease liability balance | $1,315 | Note 9. Redeemable Convertible Preferred Stock This note details the terms, issuance, and carrying value of the company's various series of preferred stock - In 2022, the company issued $125.0 million of Series B preferred stock and $150.0 million of Series C preferred stock[99][100] Preferred Stock Summary (March 31, 2023) | Preferred Stock Series | Shares Authorized | Shares Issued and Outstanding (as of Mar 31, 2023, in thousands) | Aggregate Liquidation Preference (in thousands) | Net Carrying Value (in thousands) | | :--------------------- | :---------------- | :------------------------------------------------------------- | :---------------------------------------------- | :-------------------------------- | | Series A | 8,000,000 | 4,056,795 | $8,000 | $7,916 | | Series B | 48,230,900 | 24,457,846 | $250,000 | $249,678 | | Series C | 48,230,736 | 12,228,881 | $150,000 | $138,999 | | Total | 104,461,636 | 40,743,522 | $408,000 | $396,593 | - All redeemable convertible preferred stock converted into Class A Common Stock immediately prior to the IPO closing on May 9, 2023, and the Series C Second Tranche Closing was terminated[102] Note 10. Derivative Tranche Liability This note describes the nature and valuation of the derivative liability associated with future stock issuance obligations - The company had a derivative tranche liability of $10.1 million as of March 31, 2023, representing an obligation to issue additional Series C preferred stock[113] - The fair value of the derivative tranche liability was estimated using a probability-weighted model, with a 75% probability of achieving specified conditions as of March 31, 2023[68][112] - The Series C Second Tranche Closing and the associated derivative tranche liability were terminated upon the IPO closing on May 9, 2023[111][113] Note 11. Common Stock This note provides information on the authorized and outstanding shares of common stock and shares reserved for future issuance - As of March 31, 2023, the company was authorized to issue 172,709,973 shares of Class A Common Stock and 96,461,636 shares of Class B Common Stock[114] Shares Reserved for Future Issuance | Shares Reserved for Future Issuance | March 31, 2023 | December 31, 2022 | | :---------------------------------- | :------------- | :---------------- | | Redeemable convertible preferred stock | 40,743,522 | 40,743,522 | | Outstanding stock options | 5,554,611 | 5,036,946 | | Options assumed upon ValenzaBio acquisition | 1,249,811 | - | | Outstanding restricted stock units | 1,107,213 | 1,107,213 | | Shares available for future grants under Equity Incentive Plan | 1,661,207 | 1,570,353 | | Total shares reserved | 50,316,364 | 48,458,034 | - Immediately prior to the IPO closing on May 9, 2023, all Class A Common Stock was reclassified into common stock, and no Class B Common Stock was outstanding as of March 31, 2023[117] Note 12. Equity Incentive Plan This note details the company's stock-based compensation plans, including option activity and related expenses - The company granted stock-based awards under the 2020 Stock Option Plan, reserving 8,842,254 shares of common stock for issuance as of March 31, 2023[121] Stock Option Activity | Stock Option Activity | Number of Options (as of Mar 31, 2023) | Weighted Average Exercise Price Per Share | | :-------------------- | :------------------------------------- | :---------------------------------------- | | Outstanding at Dec 31, 2022 | 5,036,946 | $4.7872 | | Options granted | 558,182 | $7.2260 | | Options canceled/forfeited/expired | (40,517) | $5.8766 | | Outstanding at Mar 31, 2023 | 5,554,611 | $5.0243 | | Exercisable at Mar 31, 2023 | 635,778 | $3.1325 | Stock-Based Compensation Expense | Stock-Based Compensation Expense (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :---------------------------------------------- | :-------------------------------- | :-------------------------------- | | Research and development expenses | $3,765 | $240 | | General and administrative expenses | $3,374 | $1,370 | | Total stock-based compensation expense | $7,139 | $1,610 | - The company recognized $4.9 million in stock-based compensation expense related to assumed ValenzaBio options and $0.9 million for unvested options and RSAs net-settled at the acquisition closing[128][131] Note 13. Related Party Transactions This note discloses any transactions between the company and its related parties - During Q1 2022, the company reimbursed an investor $10,000 for Series B Stock issuance costs[132] Note 14. Net Loss Per Share Attributable to Common Stockholders This note explains the calculation of basic and diluted net loss per share Net Loss Per Share Calculation | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Net loss (in thousands) | $(176,450) | $(16,085) | | Weighted-average common shares outstanding, basic and diluted | 20,492,101 | 899,319 | | Net loss per share, basic and diluted | $(8.61) | $(17.89) | Potentially Dilutive Securities Excluded | Potentially Dilutive Securities Excluded | As of March 31, 2023 | As of March 31, 2022 | | :--------------------------------------- | :------------------- | :------------------- | | Redeemable convertible preferred stock | 40,743,522 | 28,514,641 | | Common stock subject to repurchase | 473,290 | 1,832,613 | | Outstanding options to purchase common stock | 5,554,611 | 1,907,163 | | Outstanding options to purchase common stock assumed upon ValenzaBio acquisition | 1,249,811 | - | | Unvested RSUs outstanding | 1,107,213 | 275,151 | | Total | 49,128,447 | 32,529,568 | Note 15. Income Taxes This note describes the company's income tax position, including its effective tax rate and deferred tax assets - The company did not record an income tax provision for Q1 2023 or Q1 2022[134] - A 100% valuation allowance is maintained on total deferred tax assets, resulting in a 0% effective tax rate[134] Note 16. Subsequent Events This note discloses significant events that occurred after the balance sheet date but before the financial statements were issued - In April 2023, the company granted options for 218,505 shares under the 2020 Plan and approved grants for 2,278,546 stock options under the new 2023 Plan, effective upon IPO[135][136] - A 1.972-for-1 reverse stock split was effected in April 2023[138] - The IPO closed on May 9, 2023, generating approximately $573.7 million in net proceeds from the sale of 34,500,000 common shares at $18.00 per share[30][139] - The company adopted the 2023 Equity Incentive Plan and 2023 Employee Stock Purchase Plan in April 2023, reserving 18,920,846 and 900,000 shares, respectively[140] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management discusses the company's financial condition, results of operations, key performance factors, and future outlook Overview The company is a late-stage clinical biopharma focused on developing transformative medicines for immunological indications - ACELYRIN is a late-stage clinical biopharma company focused on identifying, acquiring, and accelerating the development and commercialization of transformative medicines, particularly for immunological indications[143] - The company's lead product candidate, izokibep, is in development for multiple immunological indications, while lonigutamab and SLRN-517 are in Phase 1/2 trials[145] Financial Snapshot | Metric | Three Months Ended March 31, 2023 (in millions) | | :----- | :------------------------------------------ | | Net loss | $(176.4) | | Accumulated deficit (as of March 31, 2023) | $(283.5) | | Cash and cash equivalents (as of March 31, 2023) | $289.2 | | Net IPO proceeds (May 9, 2023) | $573.7 | - The Q1 2023 net loss includes $123.1 million for acquired in-process R&D assets and a $10.0 million license fee payment related to the ValenzaBio acquisition[148] Macroeconomic Trends and the Impact of the COVID-19 Pandemic The company monitors macroeconomic conditions and the COVID-19 pandemic, which have not yet materially impacted operations - The company monitors macroeconomic trends and the COVID-19 pandemic, which have not yet had a material financial statement impact or business disruption[151][154] - Negative macroeconomic conditions could impact future financing, and the COVID-19 pandemic could disrupt CMOs, CROs, and clinical trial sites, potentially delaying clinical programs[152][153] ValenzaBio Acquisition The acquisition of ValenzaBio added two product candidates to the company's portfolio - The acquisition of ValenzaBio, Inc. closed on January 4, 2023, adding lonigutamab and SLRN-517 to the company's portfolio[155] - Consideration included 18,885,731 shares of common stock issued to ValenzaBio stockholders and assumed options for 1,249,811 shares of common stock, which vested on March 31, 2023[155] License and Collaboration Agreements The company's product pipeline is built upon key in-licensing agreements with third parties - The Affibody Agreement grants exclusive worldwide rights to izokibep for inflammatory and autoimmune disorders, with ACELYRIN retaining final decision-making authority for global development[156][157][158] - The Pierre Fabre Agreement, assumed via ValenzaBio acquisition, provides exclusive worldwide licenses for lonigutamab for non-oncology indications[159][160] - The Novelty Nobility License Agreement, also assumed via ValenzaBio, grants a worldwide exclusive license for SLRN-517 as a therapeutic treatment[161] Components of Results of Operations Research and Development R&D expenses consist of costs incurred for technology acquisition and clinical development of product candidates - R&D expenses are expensed as incurred and include costs for acquiring technology, clinical development (CROs, CMOs), and professional consulting services[165] - Internal R&D costs cover personnel-related expenses and allocated facilities/overhead[165] - R&D expenses are projected to increase significantly due to advancing product candidates through clinical trials, seeking regulatory approval, and expanding the product pipeline[166] General and Administrative G&A expenses include personnel costs, legal services, and other corporate overhead - G&A expenses are mainly personnel-related costs, legal and external consulting services, and allocated overhead[171] - The company anticipates a substantial increase in G&A expenses due to operational expansion, preparation for commercialization, and costs associated with public company compliance[172] Other Income, Net Other income primarily consists of interest income from marketable securities and changes in derivative liability value - Other income (expense), net, is primarily composed of interest income, net amortization/accretion on marketable securities, foreign currency transaction loss, and gain on derivative tranche liability remeasurement[173] Results of Operations Comparison of the Three Months Ended March 31, 2023 and 2022 This section compares operating results between Q1 2023 and Q1 2022, highlighting significant variances Operating Results Comparison | Metric | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | Change (in thousands) | Change (%) | | :-------------------------------- | :------------------------------------------ | :------------------------------------------ | :-------------------- | :--------- | | Research and development | $167,920 | $13,003 | $154,917 | 1191.4% | | General and administrative | $11,913 | $3,082 | $8,831 | 286.5% | | Total operating expenses | $179,833 | $16,085 | $163,748 | 1018.0% | | Loss from operations | $(179,833) | $(16,085) | $(163,748) | 1018.0% | | Interest income | $3,299 | $- | $3,299 | 100% | | Net loss | $(176,450) | $(16,085) | $(160,365) | 997.0% | Research and Development Expenses R&D expenses increased dramatically due to acquired IPR&D assets and expanded clinical development activities R&D Expense Breakdown | R&D Expense Category | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | Change (in thousands) | Change (%) | | :------------------- | :------------------------------------------ | :------------------------------------------ | :-------------------- | :--------- | | License fees and acquired in-process R&D expenses | $133,057 | $- | $133,057 | 100% | | CRO, CMO and Affibody transition services | $23,040 | $11,190 | $11,850 | 106% | | Professional consulting services | $5,065 | $136 | $4,929 | * | | Personnel-related costs | $6,393 | $1,669 | $4,724 | 283% | | Facilities and overhead costs | $365 | $8 | $357 | * | | Total R&D expense | $167,920 | $13,003 | $154,917 | * | - The $133.1 million increase in license fees and acquired IPR&D expenses includes $123.1 million for lonigutamab and SLRN-517 assets and $10.0 million for the Pierre Fabre Agreement amendment[178] - CRO and CMO expenses for izokibep development increased by $14.4 million, and new expenses of $2.3 million for lonigutamab and $1.3 million for SLRN-517 were incurred in Q1 2023[179][181] - Personnel-related costs increased by $4.7 million, including $2.5 million in severance obligation expense and $1.7 million in salaries/benefits due to increased headcount[183] General and Administrative Expenses G&A expenses rose due to increased headcount, stock-based compensation, and professional services supporting growth - G&A expenses increased by $8.8 million to $11.9 million in Q1 2023[185] - This increase includes $2.7 million in stock-based compensation and $2.4 million in severance obligation expense related to the ValenzaBio acquisition[186] - Employee salaries and benefits increased by $1.5 million due to a higher headcount (from 7 to 22 employees)[186] - Professional consulting services expenses increased by $2.8 million to $3.4 million, supporting company growth and business development[186] Total Other Income, Net Other income was driven by interest from marketable securities and a gain on a derivative liability - Total other income, net, for Q1 2023 included $3.3 million in interest income from marketable securities[187] - A $0.1 million gain was recognized from the change in fair value of the Series C derivative tranche liability, which was terminated upon the IPO closing in May 2023[188][189] Liquidity, Capital Resources and Capital Requirements Sources of Liquidity The company has funded operations through preferred stock sales and its recent IPO - The company has primarily funded operations through sales of redeemable convertible preferred stock and its May 2023 IPO[190] Liquidity Position | Metric | As of March 31, 2023 (in millions) | Net IPO Proceeds (May 2023, in millions) | | :----- | :--------------------------------- | :--------------------------------------- | | Cash and cash equivalents | $289.2 | N/A | | Net IPO proceeds | N/A | $573.7 | - Management estimates that existing cash and cash equivalents, including IPO proceeds, will be sufficient to fund operating and capital expenditure requirements for at least the next 12 months[150][191] Future Funding Requirements The company anticipates significant future expenses and will require additional capital to fund its long-term plans - The company expects significant and increasing expenses for the foreseeable future, primarily for R&D, corporate infrastructure expansion, and potential commercialization[192] - Future funding requirements are dependent on factors such as the timing and progress of preclinical/clinical development, regulatory approvals, and manufacturing costs[194][195] - The company plans to finance operations through equity offerings, debt financings, or other capital sources like collaborations, with risks including dilution of ownership or unfavorable terms[196] Cash Flows This section analyzes the changes in cash flows from operating, investing, and financing activities Cash Flow Summary | Cash Flow Category | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | | :----------------- | :------------------------------------------ | :------------------------------------------ | | Operating activities | $(25,329) | $(14,572) | | Investing activities | $47,542 | $- | | Financing activities | $(129) | $124,974 | | Net increase in cash and cash equivalents | $22,084 | $110,402 | - Net cash used in operating activities increased to $25.3 million in Q1 2023, primarily due to the net loss of $176.5 million, partially offset by non-cash adjustments like $123.1 million for acquired IPR&D assets[198][199] - Net cash provided by investing activities was $47.5 million in Q1 2023, driven by $47.8 million from marketable securities maturities and $10.0 million cash acquired from ValenzaBio[201] - Net cash used in financing activities was $0.1 million in Q1 2023 for IPO costs, a significant decrease from $125.0 million provided in Q1 2022 from preferred stock issuance[202] Contractual Obligations and Commitments The company's primary commitments relate to operating leases and potential milestone payments under license agreements - The company's agreements with suppliers, CROs, and CMOs generally provide for termination with less than one-year notice, making non-cancelable obligations immaterial[203] - Milestone, royalty, and other payments under existing license and collaboration agreements were not probable to occur as of March 31, 2023, and December 31, 2022[204] Leases The company has a multi-year operating lease for its office space - The company leased 10,012 square feet of office space in January 2023 for a term of 65 months[205] Operating Lease Liabilities Maturity Analysis | Operating Lease Liabilities Maturity Analysis (as of March 31, 2023) | Amount (in thousands) | | :--------------------------------------------------- | :-------------------- | | 2023 (remainder of the year) | $26 | | 2024 | $375 | | 2025 | $386 | | 2026 | $397 | | 2027 | $409 | | Thereafter | $280 | | Total future lease payments | $1,873 | | Less imputed interest | $(558) | | Total operating lease liability balance | $1,315 | Recently Issued Accounting Pronouncements No new accounting pronouncements have materially impacted the company's financial statements - No new accounting pronouncements were adopted, and no material changes to significant accounting policies occurred during Q1 2023[34][48] - As an "emerging growth company," the company has elected to use the extended transition period for complying with new or revised accounting standards[47][209] Critical Accounting Policies and Significant Judgments and Estimates There were no material changes to the company's critical accounting policies during the period - No material changes to critical accounting policies and estimates occurred during the three months ended March 31, 2023[207] Off-Balance Sheet Arrangements The company has no off-balance sheet arrangements - The company has no off-balance sheet arrangements[208] Emerging Growth Company Status The company qualifies as an emerging growth company, allowing for reduced reporting requirements - The company is an "emerging growth company" under the JOBS Act, benefiting from reduced reporting requirements and an extended transition period for new accounting standards[209][463][465] - This status may last up to five years, or until the company becomes a "large accelerated filer" or generates $1.24 billion in annual gross revenue[464] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section discusses the company's exposure to market risks, primarily from interest rate and foreign currency fluctuations Interest Rate and Market Risk The company's primary market risk exposure is related to interest rate changes on its cash and investments - The company is exposed to market risks from changes in interest rates on cash equivalents and short-term investments[210] - A hypothetical 10% increase or decrease in interest rates is not expected to have a material effect on the company's financial statements[210] Foreign Currency Exchange Fluctuations The company has exposure to foreign currency risk from payments to international vendors - The company utilizes R&D service vendors outside the U.S., leading to exposure to foreign currency exchange rate fluctuations[211] - Foreign currency transaction gains and losses have not been material, and a hypothetical 10% change in exchange rates is not expected to have a material effect on financial statements[211] Effects of Inflation Inflation has not had a material impact on the company's operations to date - Inflation affects the company by increasing labor and R&D costs[212] - Inflation has not had a material effect on the company's business, results of operations, or financial condition[212] ITEM 4. CONTROLS AND PROCEDURES Management concluded that disclosure controls were not effective due to material weaknesses in internal control over financial reporting Evaluation of Disclosure Controls and Procedures Disclosure controls and procedures were deemed not effective as of the end of the period - Disclosure controls and procedures were deemed not effective as of March 31, 2023[214] - Material weaknesses identified include insufficient accounting professionals, an ineffective risk assessment process, and inadequate segregation of duties for journal entries and account reconciliations[216] - These material weaknesses could result in a material misstatement of financial statements not being prevented or detected in a timely manner[217] Remediation Plans The company is taking steps to remediate the identified material weaknesses - Remediation efforts include hiring additional accounting personnel, such as a VP and Controller and a Director of Technical Accounting[219] - The company is implementing a formal risk assessment process and designing sufficient controls over segregation of duties[219] - Material weaknesses will not be considered remediated until controls are designed, implemented, and tested as effective over a sufficient period[219] Changes in Internal Control over Financial Reporting No material changes to internal controls occurred during the quarter - No material changes in internal control over financial reporting occurred during Q1 2023[220] Limitations on the Effectiveness of Controls All control systems have inherent limitations and cannot provide absolute assurance - Control systems have inherent limitations and provide only reasonable, not absolute, assurance of achieving control objectives[221] - Limitations include faulty judgments, simple errors, and circumvention by individual acts, collusion, or unauthorized overrides[221] PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The company is not currently involved in any material legal proceedings - The company is not aware of any pending legal proceedings that could have a material adverse effect on its financial position, results of operations, or cash flows[223] ITEM 1A. RISK FACTORS This section details significant risks related to the company's financial position, product development, operations, and stock ownership Risk Factor Summary The company faces substantial risks as a clinical-stage entity with a limited history and significant losses - The company is a clinical-stage biopharma with a limited operating history, no approved products, and substantial, increasing losses[226] - Preclinical and clinical development is lengthy, expensive, and uncertain, with no guarantee of successful completion or commercialization of product candidates[226] - The company requires substantial additional financing, and failure to obtain it could delay or terminate product development[226] - Material weaknesses in internal control over financial reporting have been identified, which could affect financial reporting accuracy and investor confidence[230] Risks Related to Our Financial Position and Need for Capital The company has a history of losses, expects increasing expenses, and requires significant additional capital - The company is a clinical-stage biopharma with no products approved for commercial sale and has incurred substantial losses since inception, with a net loss of $176.4 million for Q1 2023 and an accumulated deficit of $283.5 million[228][229] - The company anticipates substantial increases in expenses for further clinical trials, acquiring new product candidates, manufacturing, regulatory approvals, and commercialization[231] - The company relies on equity offerings, debt financings, or collaborations for capital, and failure to obtain sufficient funding could lead to delays, reductions, or termination of product development[242][243] Risks Related to Product Candidate Development and Commercialization Product development is uncertain, competitive, and subject to significant regulatory and commercialization hurdles - Clinical development is lengthy, expensive, and uncertain, with a high risk of failure, and earlier trial results may not predict future outcomes[233] - Clinical trials may reveal significant adverse events that could delay or prevent regulatory approval or market acceptance[244][245][247] - The company faces intense competition from large pharmaceutical and biotechnology companies with greater resources and approved therapies[254][255][256] - Successful commercialization depends on obtaining coverage, adequate reimbursement, and favorable pricing policies from governmental authorities and health insurers[264][265] Risks Related to Our Business and Operations The company's success is dependent on its product candidates, organizational growth, and internal controls - The business is entirely dependent on the successful development, regulatory approval, and commercialization of product candidates, which is uncertain and may never occur[274][275][278] - The company needs to grow its organization and manage expansion, which includes hiring personnel and building commercial capabilities, posing management challenges[285] - Material weaknesses in internal control over financial reporting have been identified, which could lead to material misstatements and adversely affect investor confidence[316][318][319] - The company's operations are concentrated in California, making it vulnerable to natural disasters like wildfires and earthquakes[310] Risks Related to Intellectual Property The company's success hinges on obtaining, maintaining, and defending its intellectual property rights - The company's success depends on obtaining and maintaining patent protection for its product candidates and operating without infringing third-party rights[325][327] - The patent application process is expensive, time-consuming, and uncertain, with no assurance that pending applications will result in issued patents[328][330][332] - The company relies on in-licensed patents and could lose critical rights if it fails to comply with license obligations[337][339] - The company may be involved in costly and time-consuming lawsuits to protect its IP or defend against infringement claims from third parties[361][364] Risks Related to Government Regulation The biopharmaceutical industry is subject to extensive and complex government regulation - The regulatory approval process for the company's product candidates is highly uncertain, costly, and time-consuming, with no guarantee of success[388][389][390] - Even if approved, product candidates will be subject to extensive and ongoing regulatory requirements, including manufacturing, labeling, and post-approval monitoring[394][395] - Healthcare reform measures and governmental scrutiny of drug pricing may increase costs and reduce reimbursement for approved products[398][399][402] - Product candidates regulated as biologics may face competition sooner than anticipated from biosimilars approved through abbreviated pathways[405][406] Risks Related to Our Reliance on Third Parties The company depends on third-party contractors for clinical trials, manufacturing, and supply - The company relies on third parties (CROs, CMOs) to conduct preclinical studies and clinical trials, reducing control over timing and quality[432][435] - The company relies on third-party manufacturers for drug substances and products, exposing it to risks of supply limitations, interruptions, and quality issues[439][443] - Dependence on sole-source and limited-source suppliers for critical materials could lead to delays in clinical trials and increased costs[445][446] - Biopharmaceutical manufacturing is complex and susceptible to issues like contamination, equipment failure, and scaling difficulties[448][449] Risks Related to Ownership of Our Common Stock Ownership of the company's common stock involves risks including price volatility and limited investor rights - Quarterly and annual operating results are expected to fluctuate significantly, leading to potential volatility in the common stock price[455][458] - The company's "emerging growth company" status allows for reduced reporting requirements, which may make its common stock less attractive to some investors[463][465] - Anti-takeover provisions in charter documents and Delaware law could prevent or delay beneficial acquisitions and limit stockholders' ability to bring certain claims[466][471] - The company does not anticipate paying dividends in the foreseeable future, meaning capital appreciation will be the sole source of gain for stockholders[476] General Risk Factors The company is subject to general business risks, including economic conditions and public company compliance costs - Unstable economic and market conditions, including inflation, rising interest rates, and geopolitical instability, may adversely affect the business, financial condition, and stock price[477] - Operating as a public company incurs increased costs and requires substantial management time for compliance with SEC and Nasdaq requirements[479] - Failure to maintain effective internal control over financial reporting could adversely affect the business, investor confidence, and lead to securities litigation[481][483][485] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS This section details unregistered equity sales and confirms the planned use of IPO proceeds Unregistered Sales of Equity Securities The company issued common shares and options in connection with its acquisition and employee compensation plans - The company issued 18,885,731 common shares to ValenzaBio stockholders and assumed options for 1,249,811 common shares in connection with the ValenzaBio acquisition[491] - Options to purchase 558,182 common shares were granted to employees under the 2020 Stock Option and Grant Plan[491] - These securities were exempt from registration under Section 4(a)(2) or Rule 701 of the Securities Act[486] Use of Proceeds The use of proceeds from the May 2023 IPO remains consistent with the prospectus - The IPO closed on May 9, 2023, with 34,500,000 common shares sold at $18.00 per share, yielding $621.0 million gross proceeds and approximately $573.7 million net proceeds[487] - The planned use of IPO proceeds remains consistent with the description in the Final Prospectus[488] ITEM 3. DEFAULTS UPON SENIOR SECURITIES This item is marked "Not applicable," indicating no defaults upon senior securities - Not applicable[489] ITEM 4. MINE SAFETY DISCLOSURES This item is marked "Not applicable," indicating no mine safety disclosures - Not applicable[490] ITEM 5. OTHER INFORMATION This item is marked "Not applicable," indicating no other information to disclose - Not applicable[491] ITEM 6. EXHIBITS This section lists the exhibits filed with the Form 10-Q - The exhibits include the Merger Agreement, Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws, Section 302 and 906 certifications, and Inline XBRL documents[493] SIGNATURE The report is duly signed on behalf of the company by its Chief Financial Officer - The report was signed by Mardi C. Dier, Chief Financial Officer and Chief Business Officer, on June 15, 2023[497]