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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2021

 

OR

 

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

 

For the transition period from _____________ to _____________

 

Commission File Number: 001-40544

 

AEROVATE THERAPEUTICS, INC.

(Exact Name of Registrant as Specified in its Charter)

 

Delaware   83-1377888

(State or other jurisdiction of

incorporation or organization)

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

930 Winter Street, Suite M-500

Waltham, MA 02451

  02116
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code: (617) 443-2400

 

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

 

Title of each class  

Trading

Symbol(s)

  Name of each exchange on which registered
Common stock, par value $0.0001 per share   AVTE   The Nasdaq Global Market

 

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

 

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

 

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

 

Large accelerated filer   Accelerated filer
         
Non-accelerated filer   Smaller reporting company
         
Emerging growth company      

 

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

 

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

 

As of November 12, 2021, the registrant had 24,410,393 shares of common stock, $0.0001 par value per share, outstanding.

 

 

 

 

 

 

Table of Contents

 

    Page
PART I. FINANCIAL INFORMATION 6
Item 1. Financial Statements (Unaudited) 6
  Condensed Consolidated Balance Sheets 6
  Condensed Consolidated Statements of Operations and Comprehensive Loss 7
  Condensed Consolidated Statements of Redeemable Convertible and Convertible Preferred Stock and Stockholders’ Equity (Deficit) 8
  Condensed Consolidated Statements of Cash Flows 9
  Notes to Unaudited Condensed Consolidated Financial Statements 10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 26
Item 4. Controls and Procedures 26
PART II. OTHER INFORMATION 28
Item 1. Legal Proceedings 28
Item 1A. Risk Factors 28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 77
Item 3. Defaults Upon Senior Securities 77
Item 4. Mine Safety Disclosures 77
Item 5. Other Information 77
Item 6. Exhibits 78
Signatures 79

 

2
Table of Contents

 

SUMMARY OF THE MATERIAL AND OTHER RISKS ASSOCIATED WITH OUR BUSINESS

 

Our business is subject to numerous material and other risks and uncertainties that you should be aware of in evaluating our business. These risks include, but are not limited to, the following:

 

  We are a clinical-stage biopharmaceutical company with a limited operating history.
  We have incurred significant operating losses since our inception and anticipate that we will continue to incur losses for the foreseeable future. We may never achieve or maintain profitability.
  We have no products approved for commercial sale and have not generated any revenue from product sales.
  Our business is entirely dependent on the successful development, regulatory approval and commercialization of AV-101, our only product candidate under development.
  We have only recently begun testing of AV-101, a dry powder formulation of imatinib for the treatment of PAH administered using a dry powder inhaler, to assess its safety and tolerability. Although we believe that AV-101 has therapeutic potential for PAH based on oral imatinib’s results in the Phase 3 IMPRES trial, we are utilizing a novel dry powder formulation which may not achieve better or similar levels of clinical activity or may have similar tolerability challenges as oral imatinib. The results of earlier studies and trials of oral imatinib in pulmonary arterial hypertension (“PAH”) patients and our Phase 1 clinical trial of AV-101 may not be predictive of future trial results for AV-101.
  If we encounter difficulties enrolling patients in our clinical trials, our clinical development activities could be delayed or otherwise adversely affected.
  We face, and will continue to face, significant competition and our failure to effectively compete may prevent us from achieving significant market penetration for AV-101, if approved. Most of our competitors have significantly greater resources than we do and we may not be able to successfully compete.
  We rely, and intend to continue to rely, on qualified third parties to supply all components of AV-101. As a result, we are dependent on several third parties, some of which are sole source suppliers, for the manufacture of AV-101 and our supply chain, and if we experience problems with any of these suppliers, or they fail to comply with applicable regulatory requirements or to supply sufficient quantities at acceptable quality levels or prices, or at all, it would materially and adversely affect our business.
  We rely, and intend to continue to rely, on third parties in the conduct of all of our clinical trials. If these third parties do not successfully carry out their contractual duties, fail to comply with applicable regulatory requirements or meet expected deadlines, we may be unable to obtain regulatory approval for AV-101.
  We may be unable to obtain regulatory approval for AV-101 under applicable regulatory requirements. The denial or delay of any such approval would delay commercialization of AV-101 and adversely impact our potential to generate revenue, our business and our results of operations.
  AV-101 is a drug-device combination product, which may result in additional regulatory risks.
  We plan to conduct clinical trials for AV-101 outside the United States, and the U.S. Food and Drug Administration, European Medicines Agency, and applicable foreign regulatory authorities may not accept data from such trials.
  We own many pending patent applications with respect to AV-101, but do not own any issued patents. We can provide no assurance that any of our current or future patent applications will result in issued patents.
  We will need to increase the size of our organization, and we may experience difficulties in managing growth.
  We are highly dependent on our key personnel and anticipate hiring new key personnel. If we are not successful in attracting and retaining highly qualified personnel, our business may be materially and adversely affected.
  The ongoing COVID-19 pandemic, or a similar pandemic, epidemic, or outbreak of an infectious disease, may materially and adversely affect our business and our financial results and could cause a disruption to the development of AV-101. As a result of medical complications associated with PAH, the patient populations that AV-101 targets may be particularly susceptible to COVID-19, which may make it more difficult for us to identify patients able to enroll in our current and future clinical trials and may impact the ability of enrolled patients to complete any such trials.

 

The material and other risks summarized above should be read together with the text of the full risk factors below and in the other information set forth in this Quarterly Report on Form 10-Q, including our condensed financial statements and the related notes, as well as in other documents that we file with the U.S. Securities and Exchange Commission (“SEC”). If any such material and other risks and uncertainties actually occur, our business, prospects, financial condition and results of operations could be materially and adversely affected. The risks summarized above or described in full under Item 1A of this Quarterly Report on Form 10-Q are not the only risks that we face. Additional risks and uncertainties not currently known to us, or that we currently deem to be immaterial may also materially adversely affect our business, prospects, financial condition and results of operations.

 

3
Table of Contents

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains express or implied forward-looking statements that are based on our management’s belief and assumptions and on information currently available to our management. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these statements relate to future events or our future operational or financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:

 

  the initiation, timing, progress, results and cost of our research and development program for AV-101 and our current and future clinical trials, including statements regarding the timing of initiation and completion of studies or trials and related preparatory work and the period during which the results of the trials will become available;
     
  our expectations regarding the potential market size and size of the potential patient populations for AV-101, if approved for commercial use;
     
  our clinical and regulatory development plans;
     
  our expectations with regard to the data to be derived from our planned Phase 2b/3 clinical trial; or any other product candidates that we may identify or develop;
     
  the timing or likelihood of regulatory filings and approvals for AV-101;
     
  our ability to commercialize AV-101, if approved;
     
  the pricing and reimbursement of AV-101, if approved;
     
  the implementation of our business model and strategic plans for our business and AV-101;
     
  estimates of our future expenses, revenues, capital requirements and our needs for additional financing, and our ability to obtain additional capital;
     
  the scope of protection we are able to establish and maintain for intellectual property rights covering AV-101, including the projected terms of patent protection;
     
  regulatory developments in the United States and foreign countries;
     
  our ability to enter into strategic collaborations, including for the commercialization of AV 101 outside the United States;
     
  the rate and degree of market acceptance of AV 101;
     
  our ability to contract with third-party suppliers, manufacturers and contract research organizations (“CROs”) and their ability to perform adequately;
     
  the success of competing therapies for PAH that are or may become available;
     
  developments relating to our competitors and our industry, including the impact of government regulation;
     
  our ability to attract and retain key scientific or management personnel;
     
  our ability to obtain additional funding for our operations, when needed, including funding necessary to complete further development and commercialization of AV-101, if approved;
     
  our financial performance;
     
  the effect of the ongoing COVID-19 pandemic, including mitigation efforts and economic effects, on any of the foregoing or other aspects of our business operations, including but not limited to our clinical trials and any future studies or trials; and
     
  other risks and uncertainties, including those listed under the section titled “Risk Factors.”

 

In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties, and other factors, which are, in some cases, beyond our control and which could materially affect results. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. If one or more of these risks or uncertainties occur, or if our underlying assumptions prove to be incorrect, actual events or results may vary significantly from those implied or projected by the forward-looking statements. No forward-looking statement is a guarantee of future performance. You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q and have filed with the SEC thereto completely and with the understanding that our actual future results may be materially different from any future results expressed or implied by these forward-looking statements.

 

4
Table of Contents

 

The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should therefore not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.

 

This Quarterly Report on Form 10-Q also contains estimates, projections and other information concerning our industry, our business and the markets for our product candidates. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances that are assumed in this information. Unless otherwise expressly stated, we obtained this industry, business, market, and other data from our own internal estimates and research as well as from reports, research surveys, studies, and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data and similar sources. While we are not aware of any misstatements regarding any third-party information presented in this Quarterly Report on Form 10-Q, their estimates, in particular, as they relate to projections, involve numerous assumptions, are subject to risks and uncertainties and are subject to change based on various factors, including those discussed under the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q.

 

5
Table of Contents

 

PART I-FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

Aerovate Therapeutics, Inc.

Condensed Balance Sheets

(Unaudited)

(in thousands, except share and per share amounts)

 

   September 30,   December 31, 
   2021   2020 
         [Note 2(a)] 
Assets          
Current assets:          
Cash and cash equivalents  $180,878   $4,573 
Prepaid expenses and other current assets   2,224    103 
Total current assets   183,102    4,676 
Property and equipment, net   162    39 
Operating lease right-of-use assets   583    - 
Other long-term assets   278    - 
Total assets  $184,125   $4,715 
           
Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)          
           
Current liabilities:          
Accounts payable (including related party amounts of $9 and $6, respectively)  $2,555   $618 
Accrued and other current liabilities (Note 3)  1,123   1,156 
Operating lease liabilities   147    - 
Total current liabilities   3,825    1,774 
Operating lease liabilities, net of current portion   452    - 
Total liabilities   4,277    1,774 
           
Commitments and contingencies (Note 9)          
Series A redeemable convertible preferred stock, $0.0001 par value; 0 and 40,052,154 shares authorized at September 30, 2021 and December 31, 2020, respectively; 0 and 6,489,534 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively   -    12,285 
Series Seed redeemable convertible preferred stock, $0.0001 par value; 0 and 4,000,000 shares authorized, issued and outstanding at September 30, 2021 and December 31, 2020, respectively   -    4,000 
Stockholders’ equity (deficit):          
Common stock, $0.0001 par value; 150,000,000 and 50,000,000 shares authorized at September 30, 2021 and December 31, 2020, respectively; 24,410,393 and 243,076 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively   2    - 
Additional paid-in capital   208,015    63 
Accumulated deficit   (28,169)   (13,407)
Total stockholders’ equity (deficit)   179,848    (13,344)
Total liabilities, redeemable convertible preferred stock and stockholders’ equity (deficit)  $184,125   $4,715 

 

See accompanying notes to unaudited interim condensed financial statements.

 

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Table of Contents

 

Aerovate Therapeutics, Inc.

Condensed Statements of Operations and Comprehensive Loss

(Unaudited)

(in thousands, except share and per share amounts)

 

   2021   2020   2021   2020 
  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
   2021   2020   2021   2020 
Operating expenses:                    
Research and development (includes related party amounts of $13, $23, $68 and $59, respectively)  $3,418   $1,966   $9,941   $4,643 
General and administrative (includes related party amounts of $3, $8, $14 and $23, respectively)   2,782    277    4,813    583 
Total operating expenses   6,200    2,243    14,754    5,226 
Loss from operations   (6,200)   (2,243)   (14,754)   (5,226)
Other income (expense):                    
Interest income (expense)   16    -    18    (75)
Change in fair value of convertible promissory notes   -    (64)   -    (644)
Other expense   -    -    (4)   - 
Total other income (expense)   16    (64)   14    (719)
Net loss and comprehensive loss  $(6,184)  $(2,307)  $(14,740)  $(5,945)
Net loss per share, basic and diluted  $(0.26)  $(10.13)  $(1.80)  $(25.20)
Weighted-average shares of common stock outstanding, basic and diluted   23,885,017    242,901    8,180,359    241,949 

 

See accompanying notes to unaudited interim condensed financial statements.

 

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Table of Contents

 

Aerovate Therapeutics, Inc.

Condensed Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)

(Unaudited)

(in thousands, except share amounts)

 

   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   (Deficit) 
   Series A Redeemable Convertible   Series Seed Redeemable Convertible           Additional      

Total

Stockholders’

 
   Preferred Stock   Preferred Stock   Common Stock   Paid-In   Accumulated   Equity 
   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   (Deficit) 
Balance at December 31, 2020   6,489,534   $12,285    4,000,000   $4,000    243,076   $-   $63   $(13,407)  $              (13,344)
Issuance of Series A redeemable convertible preferred stock upon conversion of December 2019 convertible promissory notes to related party   -                                         
Issuance of Series A redeemable convertible preferred stock upon conversion of July 2020 convertible promissory notes to related party   -                                         
Issuance of Series A redeemable convertible preferred stock at $1.893 per share, net of issuance costs of $13   4,224,274    7,983    -    -    -    -    -    -    - 
Accretion of Series A redeemable convertible preferred stock to redemption value   -    13    -    -    -    -    -    (13)   (13)
Conversion of redeemable convertible preferred stock to common stock upon initial public offering   -    -                                    
Issuance of common stock upon initial public offering, net of issuance costs        -                                    
Issuance of common stock upon exercise of stock options        -                                    
Stock based compensation   -    -    -    -    -    -    23    -    23 
Net loss   -    -    -    -    -    -    -    (2,781)   (2,781)
Balance at March 31, 2021   10,713,808   $20,281    4,000,000   $4,000    243,076   $-   $86   $(16,201)  $(16,115)
Issuance of Series A redeemable convertible preferred stock at $1.893 per share, net of issuance costs of $9   29,338,346   $55,529    -   $-    -   $-   $-   $-   $- 
Accretion of Series A redeemable convertible preferred stock to redemption value   -    9    -    -    -    -    -    (9)   (9)
Stock based compensation   -    -    -    -    -    -    321    -    321 
Net loss   -    -    -    -    -    -    -    (5,775)   (5,775)
Balance at June 30, 2021   40,052,154   $75,819    4,000,000   $4,000    243,076   $-   $407   $(21,985)  $(21,578)
Conversion of redeemable convertible preferred stock to common stock upon initial public offering   (40,052,154)  $(75,819)   (4,000,000)  $(4,000)   14,182,854   $1   $79,818   $-   $79,819 
Issuance of common stock upon initial public offering, net of issuance costs   -    -    -    -    9,984,463    1    126,945    -    126,946 
Stock based compensation   -    -    -    -    -    -    845    -    845 
Net loss   -    -    -    -    -    -    -    (6,184)   (6,184)
Balance at September 30, 2021   -   $-    -   $-    24,410,393   $2   $208,015   $(28,169)  $179,848 

 

   Series A Redeemable Convertible   Series Seed Redeemable Convertible       Additional      

Total

Stockholders’

 
   Preferred Stock   Preferred Stock   Common Stock   Paid-In   Accumulated   Equity 
   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   (Deficit) 
Balance at December 31, 2019   -   $-    4,000,000   $4,000    241,467   $-   $-   $(3,643)  $                (3,643)
Stock based compensation   -    -    -    -    -    -    7    -    7 
Net loss   -    -    -    -    -    -    -    (1,436)   (1,436)
Balance at March 31, 2020   -   $-    4,000,000   $4,000    241,467   $-   $7   $(5,079)  $(5,072)
Stock based compensation   -   $-    -   $-    -   $-   $6   $-   $6 
Net loss   -    -    -    -    -    -    -    (2,202)   (2,202)
Balance at June 30, 2020   -   $-    4,000,000   $4,000    241,467   $-   $13   $(7,281)  $(7,268)
Issuance of Series A redeemable convertible preferred stock upon conversion of December 2019 convertible promissory notes to related party   1,700,343   $3,219    -   $-    -   $-    -   $-   $- 
Issuance of Series A redeemable convertible preferred stock upon conversion of July 2020 convertible promissory notes to related party   1,320,655    2,500    -    -    -    -    -    -    - 
Issuance of Series A redeemable convertible preferred stock at $1.893 per share, net of issuance costs of $153   3,468,536    6,413    -    -    -    -    -    -    - 
Accretion of Series A redeemable convertible preferred stock to redemption value   -    153    -    -    -    -    -    (153)   (153)
Issuance of common stock upon exercise of stock options   -    -    -    -    1,609    -    5    -    5 
Stock based compensation   -    -    -    -    -    -    21    -    21 
Net loss   -    -    -    -    -    -    -    (2,307)   (2,307)
Balance at September 30, 2020   6,489,534   $12,285    4,000,000   $4,000    243,076   $-   $39   $(9,741)  $(9,702)

 

See accompanying notes to unaudited interim condensed financial statements.

 

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Table of Contents

 

Aerovate Therapeutics, Inc.

Condensed Statements of Cash Flows

(Unaudited)

(in thousands)

 

   2021   2020 
   Nine Months Ended September 30, 
   2021   2020 
Cash flow from operating activities:          
Net loss  $(14,740)  $(5,945)
Adjustments to reconcile net loss to net cash used in operating activities:          
Stock based compensation expense   1,189    34 
Depreciation expense   7    - 
Non-cash interest expense   -    75 
Change in fair value of convertible promissory notes to related party   -    644 
Changes in operating assets and liabilities:          
Prepaid expenses and other current assets   (2,121)   (235)
Other long-term assets   (278)   - 
Accounts payable   1,654    30 
Accrued and other current liabilities   (33)   422 
Operating lease asset and liability, net   16    - 
Net cash used in operating activities   (14,306)   (4,975)
           
Cash flow from investing activities:          
Purchases of property and equipment   (96)   - 
Net cash used in investing activities   (96)   - 
           
Cash flow from financing activities:          
Proceeds from sale of Series A redeemable convertible preferred stock, net of issuance costs   63,512    6,413 
Proceeds from issuance of convertible promissory notes to related party   -    2,500 
Proceeds from exercise of stock options   -    5 
Proceeds from issuance of common stock, net of issuance costs   127,195    - 
Net cash provided by financing activities   190,707    8,918 
           
Net increase in cash   176,305    3,943 
Cash and cash equivalents at the beginning of the year   4,573    3,514 
Cash and cash equivalents at the end of the period  $180,878   $7,457 
           
Supplemental disclosure of noncash investing and financing activities:          
Right-of-use asset obtained in exchange for operating lease liability  $583   $- 
Deferred offering costs included in accounts payable  $250   $- 
Purchases of property and equipment in accounts payable  $34   $- 
Conversion of convertible promissory notes to related party to Series A redeemable convertible preferred stock  $-   $(3,219)
Conversion of convertible promissory notes to related party to Series A redeemable convertible preferred stock  $-   $(2,500)

 

See accompanying notes to unaudited interim condensed financial statements.

 

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Table of Contents

 

AEROVATE THERAPEUTICS, INC.

NOTES TO UNAUDITED INTERIM CONDENSED FINANCIAL STATEMENTS

 

(1) Organization and Nature of Operations

 

  (a) Organization and Nature of Operations

 

Aerovate Therapeutics Inc. (“Aerovate” or the “Company”) was incorporated in the state of Delaware in July 2018 and is headquartered in Boston, Massachusetts. The Company is a biotechnology company that is focused on the development of AV-101, a novel treatment for pulmonary arterial hypertension (“PAH”). The Company anticipates initiating a Phase 2b/3 trial of AV-101 in PAH patients in the second half of 2021.

 

  (b) Initial Public Offering

 

On July 2, 2021, the Company completed its initial public offering (“IPO”). The Company’s Registration Statement on Form S-1 (File No. 333-256949) relating to the IPO was declared effective by the Securities and Exchange Commission (“SEC”) on June 29, 2021. The shares began trading on The Nasdaq Global Market on June 30, 2021. The Company issued 9,984,463 shares of its common stock, including 1,302,321 shares associated with the full exercise of the underwriters’ option to purchase additional shares, at an offering price of $14.00 per share. Immediately prior to the closing of the Company’s IPO on July 2, 2021, all outstanding shares of the Company’s redeemable convertible preferred stock were converted into 14,182,854 shares of the Company’s common stock. In aggregate, the shares issued in the IPO generated approximately $126.9 million in net proceeds after deducting underwriting discounts and commissions and other offering costs.

 

  (c) Liquidity and Going Concern

 

Since inception, the Company has devoted substantially all of its resources to research and development activities, business planning, establishing and maintaining its intellectual property portfolio, hiring personnel, raising capital, and providing general and administrative support for these operations and has not realized revenues from its planned principal operations. The Company has incurred losses and negative cash flows from operations since inception. In addition, the Company expects to incur substantial operating losses for the next several years as it continues its research and development activities. As of September 30, 2021, the Company had cash and cash equivalents of $180.9 million.

 

Management plans to continue to incur substantial costs in order to conduct research and development activities and additional capital will be needed to undertake these activities. The Company intends to raise such capital through debt or equity financings or other arrangements to fund operations. Management believes that the Company’s current cash and cash equivalents will provide sufficient funds to enable the Company to meet its obligations for at least twelve months from the filing date of this report.

 

(2) Basis of Presentation and Significant Accounting Policies

 

  (a) Basis of Presentation

 

The accompanying unaudited condensed financial statements as of September 30, 2021 and for the three and nine months ended September 30, 2021 and 2020 have been prepared in conformity with generally accepted accounting principles (“GAAP”) in the United States of America for interim financial information and pursuant to Article 10 of Regulation S-X of the Securities Act of 1933, as amended (the Securities Act). Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. These unaudited condensed financial statements include only normal and recurring adjustments that the Company believes are necessary to fairly state the Company’s financial position and the results of its operations and cash flows. The results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results expected for the full fiscal year or any subsequent interim period. The condensed balance sheet as of December 31, 2020 has been derived from the audited financial statements at that date but does not include all disclosures required by GAAP for complete financial statements. Because all of the disclosures required by GAAP for complete financial statements are not included herein, these unaudited condensed financial statements and the notes accompanying them should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2020. Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”).

 

10

 

  (b) Reverse Stock Split

 

On June 22, 2021, the Company effected a 1-for-3.1060103 reverse stock split (the “Reverse Stock Split”) of its issued and outstanding common stock. Accordingly, the conversion ratio for the Company’s outstanding convertible preferred stock was proportionately adjusted such that the common stock issuable upon conversion of such preferred stock was decreased in proportion to the Reverse Stock Split. The par value of the common stock was not adjusted as a result of the Reverse Stock Split. All references to common stock, options to purchase common stock, early exercised options, share data, per share data, convertible preferred stock (to the extent presented on an as-converted to common stock basis) and related information contained in these financial statements have been retrospectively adjusted to reflect the effect of the Reverse Stock Split for all periods presented.

 

  (c) Leases

 

The Company determines if an arrangement is a lease at inception. Operating lease right-of-use assets represent the Company’s right to use an underlying asset for the lease term and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. For operating leases with an initial term greater than 12 months, the Company recognizes operating lease right-of-use assets and operating lease liabilities based on the present value of lease payments over the lease term at the commencement date. Operating lease right-of-use assets are comprised of the lease liability plus any lease payments made and excludes lease incentives. Lease terms include options to renew or terminate the lease when the Company is reasonably certain that the renewal option will be exercised or when it is reasonably certain that the termination option will not be exercised. The incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms and payments, and in similar economic environments. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company has elected the practical expedient to not separate lease and non-lease components.

 

  (d) Deferred Offering Costs

 

The Company capitalizes within other long-term assets certain legal, accounting and other third-party fees that are directly related to the Company’s in-process equity financings, including the planned initial public offering, until such financings are consummated. After consummation of the equity financing, these costs are recorded as a reduction of the proceeds received as a result of the offering. Should a planned equity financing be abandoned, terminated or significantly delayed, the deferred offering costs are immediately written off to operating expenses. As of September 30, 2021 and December 31, 2020, deferred offering costs of $0 were recorded within other long-term assets on the balance sheet.

 

11

 

  (e) Net Loss Per Share

 

The two-class method is applicable because the Series A redeemable convertible preferred stock meets the definition of a participating security. Basic net loss per share is calculated by dividing the net loss and increases in the carrying amount of redeemable preferred stock by the weighted-average number of common shares outstanding for the period. Diluted net loss per share is computed by dividing the net loss and increases in the carrying amount of redeemable preferred stock by the weighted average number of common shares and common share equivalents outstanding for the period. Common stock equivalents are only included when their effect is dilutive. The Company’s potentially dilutive securities include outstanding stock options under the Company’s equity incentive plan and the redeemable convertible preferred stock, which have been excluded from the computation of diluted net loss per share as they would be anti-dilutive to the net loss per share. For all periods presented, there is no difference in the number of shares used to calculate basic and diluted shares outstanding due to the Company’s net loss position as the inclusion of the potentially dilutive securities would be anti-dilutive.

 

The following table summarizes the Company’s net loss per share (in thousands, except share and per share amounts):

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2021   2020   2021   2020 
Numerator:                    
Net loss and comprehensive loss  $(6,184)  $(2,307)  $(14,740)  $(5,945)
Accretion of Series A redeemable convertible preferred stock to redemption value   -    (153)   (22)   (153)
Net loss and comprehensive loss available to common stockholders  $(6,184)  $(2,460)  $(14,762)  $(6,098)
                     
Denominator:                    
Weighted-average common stock outstanding, basic and diluted   23,885,017    242,901    8,180,359    241,949 
Net loss per share, basic and diluted  $(0.26)  $(10.13)  $(1.80)  $(25.20)

 

Potentially dilutive securities not included in the calculation of diluted net loss per share attributable to common stockholders because to do so would have had an anti-dilutive effect are as follows (in common stock equivalent shares):

 

   As of September 30, 
   2021   2020 
Series Seed redeemable convertible preferred stock   -    1,287,825 
Series A redeemable convertible preferred stock   -    2,089,341 
Options to purchase common stock   2,800,574    221,064 
    2,800,574    3,598,230 

 

12

 

(3) Accrued and Other Current Liabilities

 

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

   September 30,   December 31, 
   2021   2020 
Accrued research and development  $578   $946 
Accrued payroll and other employee benefits   365    192 
Other   180    18 
Total accrued and other current liabilities  $1,123   $1,156 

 

 

(4) Convertible Promissory Notes

 

On December 30, 2019, the Company issued convertible promissory notes (the “2019 Notes”) totaling $2.5 million to RA Capital Healthcare Fund, L.P., Blackwell Partners LLC - Series A, and RA Capital Nexus Fund, L.P. (the “Holders”). The 2019 Notes accrued interest at a rate of 6% per annum and were payable at the demand of the Holders on or after the Maturity Date of December 30, 2021, subject to earlier conversion or repayment in the event of a qualified financing or a change of control, as defined in the convertible promissory notes agreement. Due to certain embedded features, the Company elected to account for the 2019 Notes and all their embedded features under the fair value option. The 2019 Notes were issued at fair value, as such no changes in fair value were recorded between December 30, 2019 and December 31, 2019. The 2019 Notes were converted into Series A redeemable convertible preferred stock in connection with the initial closing of Series A redeemable convertible preferred stock on August 5, 2020, with a conversion price of 80% of $1.893 per share (the “Series A Original Issue Price”). The Company recorded a change in fair value of $0.6 million for the period January 1, 2020 through conversion on August 5, 2020. In relation to the 2019 Notes, there was $0.1 million of interest expense for the nine months ended September 30, 2020.

 

On July 13, 2020, the Company issued convertible promissory notes (the “2020 Notes”) totaling $2.5 million to the Holders. The 2020 Notes accrued interest at a rate of 3% per annum and were payable at the demand of the Holders on or after the Maturity Date of October 31, 2020. The 2020 Notes converted into Series A redeemable convertible preferred stock in association with the initial closing of Series A redeemable convertible preferred stock on August 5, 2020. The 2020 Notes were issued at fair value and converted at the Series A Original Issue Price, as such no changes in fair value were recorded with respect to the 2020 Notes.

 

(5) Fair Value of Financial Instruments

 

The cash and cash equivalents balance as of September 30, 2021 consisted of cash in the amount of $1.6 million and money market funds in the amount of $179.3 million. Cash and cash equivalents are classified as Level 1 assets.

 

The following table provides a reconciliation of all liabilities measured at fair value using Level 3 significant unobservable inputs (in thousands):

 

    Convertible Promissory Notes  
Balance at December 31, 2019   $ 2,500  
Issuance of convertible promissory notes, related party   $ 2,500  
Change in fair value of convertible promissory notes, related party     644  
Exchange of convertible promissory notes (Note 4)     (5,644 )
Balance at September 30, 2020   $ -  

 

There are no liabilities measured at fair value for the three and nine months ended September 30, 2021.

 

13

 

(6) Stockholders’ Equity (Deficit)

 

Under the Amended and Restated Articles of Incorporation dated August 3, 2020, the Company had a total of 94,052,154 shares of capital stock authorized for issuance, consisting of 50,000,000 shares of common stock, par value of $0.0001 per share, and 44,052,154 shares of convertible preferred stock, par value of $0.0001 per share. Shares of authorized convertible preferred stock were designated as 4,000,000 shares of Series Seed redeemable convertible preferred stock and 40,052,154 shares of Series A redeemable convertible preferred stock.

 

In connection with the Reverse Stock Split on June 22, 2021, the Company filed a certificate of amendment to its certificate of incorporation, which provided 150,000,000 authorized shares of common stock with a par value of $0.0001 per share and 10,000,000 authorized shares of undesignated preferred stock with a par value of $0.0001 per share, effective upon completion of the Company’s IPO.

 

  (a) Redeemable Convertible Preferred Stock

 

In August 2018, the Company sold to RA Capital Health Care Fund, L.P. an aggregate of 4,000,000 shares of Series Seed redeemable preferred stock at a purchase price of $1.00 per share, for net proceeds of $4.0 million. On August 5, 2020, the Company entered into the Series A Preferred Stock Purchase Agreement (“Stock Purchase Agreement”). The Company’s initial closing of its Series A redeemable convertible preferred stock occurred on this date. The Company issued 3,468,536 shares of Series A redeemable convertible preferred shares for gross proceeds of $6.6 million at a price per share of $1.893. In addition to the cash proceeds, 3,020,998 shares of Series A redeemable convertible preferred stock were issued in connection with the conversion of the 2019 Notes and the 2020 Notes.

 

The Stock Purchase Agreement contained provisions that potentially obligated the Company to sell, outside of its control, an additional 33,562,620 shares of Series A redeemable convertible preferred stock at $1.893 per share for expected gross proceeds of $63.5 million, upon the occurrence of three subsequent Milestone Closings or earlier, at the option of any holder of the Series A redeemable convertible preferred stock. If the defined milestones were not achieved prior to the Company’s initial public offering, the holders had the right to purchase these shares prior to the completion of the initial public offering. If the shares were not purchased prior to the completion of the initial public offering, then this right to purchase these shares would have automatically expired.

 

On February 1, 2021, upon the completion of the First Milestone Closing, the Company sold 4,224,274 shares of Series A redeemable convertible preferred stock at the Series A Original Issue Price for aggregate gross proceeds of $8.0 million. On June 4, 2021, upon the completion of the Second Milestone Closing and the Third Milestone Closing, the Company sold 29,338,346 shares of Series A redeemable convertible preferred stock at the Series A Original Issue Price for aggregate gross proceeds of $55.5 million.

 

Immediately prior to the closing of the Company’s IPO on July 2, 2021, all outstanding shares of the Company’s redeemable convertible preferred stock converted into 14,182,854 shares of the Company’s common stock.

 

  (b) Common Stock

 

In August 2018, the Company issued 241,467 shares of common stock to RA Capital Healthcare Fund, L.P. at a price of $0.0012 per share. On July 2, 2021, in conjunction with the Company’s IPO, the Company issued 9,984,463 shares of its common stock and all outstanding shares of the Company’s redeemable convertible preferred stock were converted into 14,182,854 shares of the Company’s common stock.

 

The holders of the common stock are entitled to one vote for each share of common stock held at all meetings of stockholders.

 

14

 

As of September 30, 2021, the Company had reserved the following shares of common stock, on an as-converted basis, for future issuance:

 

   September 30, 
   2021 
Common stock options granted and outstanding   2,800,574 
Reserved for future option grants   1,738,380 
Reserved for future ESPP issuances   230,000 
Total   4,768,954 

 

(7) Share-Based Compensation

 

  (a) Stock Option Plan

 

The Company’s 2021 Stock Option and Incentive Plan (the “2021 Plan”) was adopted by the Company’s board of directors and approved by the Company’s stockholders in June 2021 and became effective as of June 29, 2021. Upon the effectiveness of the 2021 Plan, the Company’s 2018 Equity Incentive Plan (the “2018 Plan”) was terminated and no further grants may be made thereunder. The Company’s 2021 Plan allows for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, stock bonuses, restricted stock, stock units and other forms of awards including cash awards to its officers, directors, employees, consultants and advisors.

 

A total of 2,600,000 shares of the Company’s common stock is authorized for issuance with respect to awards granted under the 2021 Plan. The share limit will automatically increase on the first trading day in January of each year (commencing with 2022) by an amount equal to the lesser of (1) 4% of the total number of outstanding shares of the Company’s common stock on the last trading day in December in the prior year, or (2) such lesser number as determined by the Company’s board of directors. Any shares subject to awards granted under the 2021 Plan or the 2018 Plan that are not paid, delivered or exercised before they expire or are canceled or terminated, or otherwise fail to vest, as well as shares used to pay the purchase or exercise price of such awards or related tax withholding obligations, will become available for new award grants under the 2021 Plan. As of September 30, 2021, 861,620 awards had been granted under the 2021 Plan, and 1,738,380 shares authorized under the 2021 Plan were available for award purposes.

 

The options that are granted under the 2021 Plan and the 2018 Plan are exercisable at various dates as determined upon grant and terminate within 10 years of the date of grant. The vesting period generally occurs over three to four years.

 

The following table summarizes the option activity under the 2021 Plan and 2018 Plan for the nine months ended September 30, 2021:

   Options   Weighted-Average Exercise Price   Weighted- Average Remaining Contractual Term (in years)   Aggregate Intrinsic Value (in thousands) 
Vested and expected to vest at December 31, 2020   229,105   $1.74    9.69   $- 
Granted   2,571,469   $6.15    9.59    - 
Exercised   -                
Cancelled/Forfeited   -                
Outstanding at September 30, 2021   2,800,574   $5.79    9.54   $42,442 
Vested and exercisable at September 30, 2021   172,729   $4.35    9.27   $2,873 
Vested and expected to vest at September 30, 2021   2,800,574   $5.79    9.54   $42,442 

 

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All exercisable options are vested and all outstanding options are vested or expected to vest.

 

  (b) Employee Stock Purchase Plan

 

The Company’s Employee Stock Purchase Plan (the “ESPP”) was adopted by the Company’s board of directors and stockholders in June 2021 and became effective upon the consummation of the IPO. A total of 230,000 shares of the Company’s common stock is initially available for issuance under the ESPP. The ESPP allows eligible employees to purchase shares of the Company’s common stock at a discount through payroll deductions of up to 15% of their eligible compensation, subject to any plan limitations. The ESPP provides for six-month offering periods, and at the end of each offering period, employees are able to purchase shares at 85% of the lower of the fair market value of the Company’s common stock on the first trading day of the offering period or on the last trading day of the offering period. As of September 30, 2021, no shares had been issued under the ESPP, and the full number of shares authorized under the ESPP Plan was available for issuance purposes upon the effectiveness of the ESPP.

 

  (c) Share-Based Compensation Expense

 

The Company estimated the fair value of stock options using the Black-Scholes valuation model. The Company accounts for any forfeitures of options when they occur. Previously recognized compensation expense for an award is reversed in the period that the award is forfeited. The fair value of stock options was estimated using the following assumptions:

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2021   2020   2021   2020 
Expected term (in years)   5.2 - 5.8    5.5 - 6.1     5.2 - 6.1     5.5 - 6.1  
Expected volatility   69.4% - 69.5%   71.4% - 72.8%   68.7% - 69.6%   68.0% - 79.4%
Risk-free interest rate   0.9% - 1.1%   0.4%   0.9% - 1.2 %   0.4% - 1.5%
Expected dividend   -    -    -    - 

 

Stock-based compensation expense recognized for stock option grants has been reported in the statements of operations and comprehensive loss as follows (in thousands):

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2021   2020   2021   2020 
Research and development  $134   $15   $247   $17 
General and administrative   711    6    942    17 
Total  $845   $21   $1,189   $34 

 

As of September 30, 2021, there was approximately $8.8 million of total unrecognized stock-based compensation expense related to nonvested stock-based compensation arrangements granted under the 2021 Plan and 2018 Plan, which is expected to be recognized over a weighted-average period of approximately 3.5 years.

 

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(8) Related Party Transactions

 

Services Agreement

 

In August 2018, the Company entered into a services agreement (“Services Agreement”) with Carnot, LLC (“Carnot”), an entity owned and controlled by RA Capital Management, LLC under which Carnot provides research and other services to the Company. RA Capital Management, LLC is a related party due to its equity ownership of the Company. The Company pays Carnot for services performed and costs incurred. The Services Agreement is for a term of two years. The Company may terminate the Services Agreement by giving 30 days’ prior notice and either party can terminate the services agreement for a material breach, if not cured within 30 days following notice by the nonbreaching party.

 

In July 2019, the Services Agreement with Carnot was amended whereby research and other services are now performed by Carnot Pharma, LLC (“Carnot Pharma”), an entity owned and controlled by RA Capital Management, LLC, and the term was updated to the later of (i) two years from July 15, 2019 and (ii) completion of services under the agreement. Services remain ongoing as of September 30, 2021.

 

Expenses incurred by the Company under the Services Agreement with Carnot Pharma totaled $17,000 and $31,000 for the three months ended September 30, 2021 and 2020, respectively, and $0.1 million for the nine months ended September 30, 2021 and 2020 and are presented in the statement of operations and comprehensive loss as research and development and general and administrative expenses. As of September 30, 2021 and December 31, 2020, $9,000 and $6,000, respectively, was due to Carnot Pharma by the Company for services rendered under the Services Agreement.

 

(9) Commitments and Contingencies

 

In August 2021, the Company entered into a lease agreement (the “Waltham Lease”) for approximately 5,000 square feet of office space in Waltham, Massachusetts for the Company’s corporate headquarters. The Waltham Lease has a term of thirty-nine months (“Lease Term”), unless extended or earlier terminated. The Company has the option to extend the Waltham Lease for one additional period of three years. The Lease Term has an initial abatement period, and the initial base rent payable will be approximately $18,000 per month following the abatement period. The initial base rent payable will increase by approximately 2% per year over the Lease Term. The Waltham Lease commencement date was September 1, 2021.

 

The total operating lease expense for the three and nine months ended September 30, 2021 was $16,000.

 

As of September 30, 2021, the future minimum annual lease payments under the operating lease was as follows (in thousands):

 

2021  $18 
2022   216 
2023   221 
2024   206 
Total operating lease payments   661 
Less: Amount representing interest   (62)
Total operating lease liabilities  $599 
      
Weighted-average remaining lease term (in years)   3.2 
Weighted-average incremental borrowing rate   6%

 

 

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

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and the Prospectus for our initial public offering filed pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended, or the Securities Act, with the Securities and Exchange Commission, or SEC, on June 30, 2021. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this Quarterly Report on Form 10-Q, our actual results could differ materially from the results described in, or implied by, the forward-looking statements contained in the following discussion and analysis.

 

Overview

 

We are a clinical stage biopharmaceutical company focused on developing drugs that meaningfully improve the lives of patients with rare cardiopulmonary disease. Our initial focus is on advancing AV-101, our dry powder inhaled formulation of imatinib for the treatment of pulmonary arterial hypertension, or PAH, a devastating disease impacting approximately 70,000 people in the United States and Europe. Imatinib, marketed as Gleevec tablets, was originally developed for the treatment of multiple cancers. Oral imatinib also demonstrated statistically significant improvement on the primary endpoint, six-minute walk distance, and multiple secondary hemodynamic endpoints in PAH patients in an international Phase 3 trial conducted by Novartis but was poorly tolerated due to adverse events, or AEs, and never was approved for the treatment of PAH. AV-101, delivered using a dry powder inhaler, is designed to provide lung concentrations at or above those observed with the oral dose while limiting systemic levels of the drug. We have completed a Phase 1 study in healthy volunteers and AV-101 was generally well-tolerated with no serious adverse events reported. We anticipate initiating a Phase 2b/3 trial of AV-101 in PAH patients in the second half of 2021, and we have assembled a team with deep expertise in developing innovative PAH and inhaled therapies and commercializing novel drugs.

 

We commenced our operations in 2018 and have devoted substantially all of our resources to date to organizing and staffing our company, business planning, raising capital, meeting with regulatory authorities, developing and performing preclinical work for AV-101, preparing for and conducting our Phase 1 clinical trial of AV-101, establishing our intellectual property portfolio and providing other general and administrative support for these operations. Our historical operations have been funded through our initial public offering and the issuance of convertible preferred stock and convertible promissory notes. From our inception through September 30, 2021, we have raised aggregate net proceeds of $126.9 million from the initial public offering of our common stock, $73.9 million from the issuance of convertible preferred stock and $5.0 million from the issuance of convertible promissory notes. As of September 30, 2021, we had cash of $180.9 million and expect that our existing cash and cash equivalents will be sufficient to fund our planned operations into the second half of 2025. We could use our available capital resources sooner than we currently expect, in which case we would be required to obtain additional financing, which may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy. See the subsection titled “—Liquidity and Capital Resources.”

 

We do not have any products approved for sale and have incurred significant operating losses since our inception and expect to continue to incur significant operating losses for the foreseeable future. Our net losses for the three months ended September 30, 2021 and 2020 were $6.2 million and $2.3 million, respectively, and $14.7 million and $5.9 million for the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021, we had an accumulated deficit of $28.2 million. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of our clinical development activities, manufacturing efforts, other research and development activities and pre-commercialization activities. We expect to continue to incur significant expenses and increasing operating losses into the foreseeable future. We anticipate our expenses will increase substantially as we continue our research and development activities, including the clinical development of AV-101, seek regulatory approval for and potentially commercialize AV-101, as well as hire additional personnel, protect our intellectual property, and incur additional costs associated with being a public company.

 

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We do not expect to generate any revenue from product sales unless and until we successfully complete development and obtain regulatory approval for AV-101 or any other drug candidate, which will not be for at least the next several years, if ever. In addition, if we obtain regulatory approval for AV-101, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. Accordingly, until such time as we can generate significant revenue from sales of AV-101, if ever, we expect to finance our cash needs through a combination of equity offerings, debt financings, or other capital sources, including potential collaborations and licenses and other similar arrangements. However, we may not be able to secure additional financing or enter into such other arrangements in a timely manner or on favorable terms, if at all. Our failure to raise capital or enter into such other arrangements when needed would have a negative impact on our financial condition and on our ability to pursue our business plans and strategies. If we are unable to raise additional capital when needed, we could be forced to delay, limit, reduce or terminate our research and development programs or future commercialization efforts, or grant rights to develop and market AV-101 even if we would otherwise prefer to develop and market such drug candidate ourselves.

 

We do not own or operate manufacturing facilities. We currently rely on third-party manufacturers and suppliers for our drug candidate, and we expect to continue to do so to meet our preclinical, clinical and potential commercial activities. Our third-party manufacturers are required to manufacture our drug candidate under current good manufacturing practice, or current GMP, requirements and other applicable laws and regulations. We believe there are multiple sources for all of the materials required for the manufacture of AV-101, and we expect to continue to cost-effectively produce drug candidates at contract manufacturing facilities.

 

The global coronavirus disease 2019, or COVID-19, pandemic continues to evolve, and we will continue to monitor the COVID-19 situation. The extent of the impact of the ongoing COVID-19 pandemic on our business, operations and clinical development timelines, supply chain and plans remains uncertain, and will depend on certain developments, including the duration and spread of the outbreak, including the identification of new variants of the virus, and its impact on our clinical trial enrollment, trial sites, CROs, third-party manufacturers, and other third parties with whom we do business, as well as its impact on regulatory authorities and our key scientific and management personnel. The ultimate impact of the ongoing COVID-19 pandemic or a similar health epidemic is highly uncertain and subject to change. To the extent possible, we are conducting business as usual, with only necessary or advisable modifications to employee travel. From our inception through August 6, 2021, we had not leased any facilities as our entire organization has worked remotely. On August 6, 2021, we entered into a lease agreement for approximately 5,000 square feet of office space in Waltham, Massachusetts for our corporate headquarters. The commencement date of this lease was on September 1, 2021 for an initial term of 39 months. On October 7, 2021, we entered into a lease agreement for approximately 3,500 square feet of office space in Foster City, California for the Company’s employees based in California. The commencement date of the lease in Foster City was on October 26, 2021 for an initial term of approximately 8.5 months. Some of our employees have started voluntarily working out of our office space while others will remain fully remote. We will continue to actively monitor the rapidly evolving situation related to COVID-19 and may take further actions that alter our operations, including those that may be required by federal, state or local authorities, or that we determine are in the best interests of our employees and other third parties with whom we do business. At this point, the extent to which the ongoing COVID-19 pandemic may affect our business, operations and clinical development timelines and plans, including the resulting impact on our expenditures and capital needs, remains uncertain and is subject to change.

 

Components of Results of Operations

 

Revenue

 

We currently have no products approved for sale, and we have not generated any revenue to date. In the future, we may generate revenue from collaboration or license agreements we may enter into with respect to our drug candidate, as well as product sales from any approved product, which approval we do not expect to occur for at least the next several years, if ever. Our ability to generate product revenue will depend on the successful development and eventual commercialization of AV-101 and any other drug candidates we may pursue. If we fail to complete the development of AV-101 in a timely manner, or to obtain regulatory approval, our ability to generate future revenue and our results of operations and financial position would be materially adversely affected.

 

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Operating Expenses

 

Research and Development

 

To date, our research and development expenses have related to the development of AV-101. Research and development expenses are recognized as incurred and payments made prior to the receipt of goods or services to be used in research and development are capitalized until the goods or services are received.

 

Research and development expenses include:

 

  external research and development expenses incurred under agreements with CROs and consultants to conduct and support clinical trials of AV-101 and our preclinical studies;
     
  costs related to manufacturing AV-101 for use in clinical trials; and
     
  personnel-related costs, including salaries, payroll taxes, employee benefits, and stock-based compensation charges for those individuals involved in research and development efforts.

 

Our research and development expenses consist principally of direct costs, such as fees paid to CROs, investigative sites and consultants in connection with our clinical trials, preclinical and non-clinical studies, and costs related to manufacturing clinical trial materials. We deploy our personnel related resources across all of our research and development activities. We track direct expenses on a clinical and non-clinical basis.

 

We plan to substantially increase our research and development expenses for the foreseeable future as we continue the development of AV-101. We cannot determine with certainty the timing of initiation, the duration or the completion costs of current or future clinical trials and nonclinical studies of AV-101 or any future product candidates due to the inherently unpredictable nature of clinical and preclinical development. Clinical and preclinical development timelines, the probability of success and development costs can differ materially from expectations. We will need to raise substantial additional capital in the future.

 

Our future clinical development costs may vary significantly based on factors such as:

 

  per patient trial costs;
     
  the number of trials required for approval;
     
  the number of sites included in the trials;
     
  the countries in which the trials are conducted;
     
  the length of time required to enroll eligible patients;
     
  the number of patients that participate in the trials;
     
  the number of doses evaluated in the trials;
     
  the drop-out or discontinuation rates of patients;
     
  potential additional safety monitoring requested by regulatory agencies;
     
  the duration of patient participation in the trials and follow-up; and
     
  the efficacy and safety profile of the product candidate.

 

General and Administrative

 

General and administrative expenses consist primarily of personnel-related costs, including salaries, payroll taxes, employee benefits, and stock-based compensation charges for those individuals in executive, finance and other administrative functions. Other significant costs include legal fees relating to intellectual property and corporate matters, professional fees for accounting and consulting services, and insurance costs. We anticipate that our general and administrative expenses will increase for the foreseeable future to support our continued research and development activities, pre-commercial preparation activities and commercialization activities for AV-101. We also anticipate increased expenses related to audit, legal, regulatory, and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, director and officer insurance premiums, and investor relations costs associated with operating as a public company.

 

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Interest Income (Expense)

 

Interest expense consisted of interest on our convertible promissory notes at a per annum interest rate of 6%. All convertible promissory notes converted into shares of our Series A redeemable convertible preferred stock in August 2020. Interest income consists of interest earned on our cash and cash equivalents.

 

Change in Fair Value of Convertible Promissory Notes

 

We issued convertible promissory notes in 2020 and 2019 for which we elected the fair value option. We adjusted the carrying value of our convertible promissory notes to their estimated fair value at each reporting date, with any change in fair value of the convertible promissory notes recorded as an increase or decrease to change in fair value of convertible promissory notes in our statements of operations and comprehensive loss. All convertible promissory notes and related accrued interest converted into shares of Series A redeemable convertible preferred stock in August 2020.

 

Prior to their conversion into our Series A redeemable convertible preferred stock issued in August 2020, the fair value of convertible promissory notes issued through July 2020 was estimated using a scenario-based analysis that estimated the fair value of the convertible promissory notes based on the probability-weighted present value of expected future investment returns, considering possible outcomes available to the noteholders, including conversions in subsequent equity financings, change of control transactions, settlement and dissolution.

 

Results of Operations

 

Comparison of the Three Months Ended September 30, 2021 and 2020 (Unaudited)

 

The following table summarizes our results of operations for the three months ended September 30, 2021 and 2020 (in thousands):

 

   Three Months Ended September 30, 
   2021   2020   Change 
       (unaudited)     
Operating expenses:               
Research and development expenses  $3,418   $1,966   $1,452 
General and administrative expenses   2,782    277    2,505 
Total operating expenses   6,200    2,243    3,957 
Loss from operations   (6,200)   (2,243)   (3,957)
Other income (expense):               
Interest income   16    -    16 
Change in fair value of convertible promissory notes   -    (64)   64 
Total other income (expense)   16    (64)   80 
Net loss and comprehensive loss  $(6,184)  $(2,307)  $(3,877)

 

Research and Development Expenses

 

Research and development expenses for the three months ended September 30, 2021 were $3.4 million compared to $2.0 million for the three months ended September 30, 2020. The increase of $1.4 million was primarily due to increases of $0.8 million in clinical costs and $1.4 million in manufacturing costs, partially offset by lower preclinical costs of $0.8 million.

 

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General and Administrative Expenses

 

General and administrative expenses for the three months ended September 30, 2021 were $2.8 million compared to $0.3 million for the three months ended September 30, 2020. The increase of $2.5 million was primarily due to increases of $1.1 million in payroll and professional fees, including stock-based compensation of $0.7 million, $0.7 million in professional services related to other consulting expenses, corporate legal fees and audit and accounting services and $0.7 million in insurance expense.

 

Total Other Income (Expense)

 

Other income for the three months ended September 30, 2021 was $16,000 compared to other expense of $64,000 for the three months ended September 30, 2020. The change of $80,000 was due to interest income for the three months ended September 30, 2021 and the change in fair value of the convertible promissory notes for the three months ended September 30, 2020.

 

Comparison of the Nine Months Ended September 30, 2021 and 2020 (Unaudited)

 

The following table summarizes our results of operations for the nine months ended September 30, 2021 and 2020 (in thousands):

 

   Nine Months Ended September 30, 
   2021   2020   Change 
       (unaudited)     
Operating expenses:               
Research and development expenses  $9,941   $4,643   $5,298 
General and administrative expenses   4,813    583    4,230 
Total operating expenses   14,754    5,226    9,528 
Loss from operations   (14,754)   (5,226)   (9,528)
Other income (expense):               
Interest income (expense)   18    (75)   93 
Change in fair value of convertible promissory notes   -    (644)   644 
Other expense   (4)   -    (4)
Total other income (expense)   14    (719)   733 
Net loss and comprehensive loss  $(14,740)  $(5,945)  $(8,795)

 

Research and Development Expenses

 

Research and development expenses for the nine months ended September 30, 2021 were $9.9 million compared to $4.6 million for the nine months ended September 30, 2020. The increase of $5.3 million was primarily due to increases of $2.9 million in clinical costs, $2.6 million in clinical manufacturing costs and $0.7 million in payroll, stock-based compensation and other expenses, partially offset by lower pre-clinical related costs of $0.9 million.

 

General and Administrative Expenses

 

General and administrative expenses for the nine months ended September 30, 2021 were $4.8 million compared to $0.6 million for the nine months ended September 30, 2020. The increase of $4.2 million was primarily due to increases of $1.8 million in payroll and recruiting fees, included stock-based compensation of $0.9 million, $1.7 million in professional services related to audit and accounting services, corporate legal fees and other consulting expenses and $0.7 million in insurance expense .

 

Total Other Income (Expense)

 

Other income and expense for the nine months ended September 30, 2021 was $14,000 compared to $0.7 million of other expense for the nine months ended September 30, 2020. The change of $0.7 million was due to the change in fair value of the convertible promissory notes and interest expense on the convertible promissory notes for the nine months ended September 30, 2020.

 

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Liquidity and Capital Resources

 

From our inception through September 30, 2021, we have received aggregate net proceeds of $79.4 million from the sale of shares of our convertible preferred stock and $5.0 million from convertible promissory notes to related parties. In July 2021, we completed our IPO of 9,984,463 shares of our common stock at a price to the public of $14.00 per share, including the exercise in full by the underwriters of their option to purchase 1,302,321 additional shares of our common stock. Including the option exercise, our aggregate net proceeds from the offering were $126.9 million, net of underwriting discounts, commissions and estimated offering costs.

 

Future Funding Requirements

 

We have prepared operating plans and cash flow forecasts which indicate that our existing cash and cash equivalents on-hand of $180.9 million will be sufficient to fund our planned operations into the second half of 2025. However, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. We have based this estimate on assumptions that may prove to be wrong, and we could deplete our capital resources sooner than we expect. Additionally, the process of conducting clinical trials is costly, and the timing of progress and expenses in these trials is uncertain.

 

Our future capital requirements will depend on many factors, including:

 

  the type, number, scope, results, costs and timing of preclinical studies and clinical trials of AV-101, including changes to our development plan based on feedback received from regulatory authorities, and preclinical studies or clinical trials of other potential drug candidates or indications we may choose to pursue in the future;
     
  the costs and timing of manufacturing for AV-101 or any other product candidates, including commercial scale manufacturing;
     
  the costs, timing and outcome of regulatory review and approval of AV-101 or any other drug candidates;
     
  the costs of obtaining, maintaining and enforcing our patents and other intellectual property rights;
     
  our efforts to enhance operational systems and hire additional personnel to satisfy our obligations as a public company, including enhanced internal controls over financial reporting;
     
  the costs associated with hiring additional personnel and consultants as our business grows, including additional clinical development personnel;
     
  the terms and timing of establishing and maintaining collaborations, licenses and other similar arrangements;
     
  the timing and amount of the milestone or other payments we must make to any future licensors, if we enter into any license agreements;

 

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  the costs and timing of establishing or securing sales and marketing capabilities if AV-101 or any other product candidate is approved;
     
  our ability to achieve sufficient market acceptance, coverage and adequate reimbursement from third- party payors and adequate market share and revenue for any approved products;
     
  patients’ ability and willingness to pay out-of-pocket costs for any approved products in the absence of coverage and/or adequate reimbursement from third-party payors; and
     
  costs associated with any products or technologies that we may in-license or acquire.

 

Until such time, if ever, as we can generate substantial product revenue to support our cost structure, we expect to finance our cash needs through equity offerings, debt financings, or other capital sources, potentially including collaborations, licenses and other similar arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be or could be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing and equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise funds through collaborations, or other similar arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or drug candidates or grant licenses on terms that may not be favorable to us and/or may reduce the value of our common stock. Our failure to raise capital or enter into such other arrangements when needed could have a negative impact on our financial condition and on our ability to pursue our business plans and strategies. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market our drug candidates even if we would otherwise prefer to develop and market such drug candidates ourselves.

 

Cash Flows

 

Comparison of the Nine Months Ended September 30, 2021 and 2020 (Unaudited)

 

The following table sets forth a summary of the net cash flow activity for the nine months ended September 30, 2021 and 2020 (in thousands):

 

   Nine Months Ended September 30, 
   2021   2020 
Net cash used in operating activities  $(14,306)  $(4,975)
Net cash used in investing activities   (96)   - 
Net cash provided by financing activities   190,707    8,918 
Net increase in cash and cash equivalents  $176,305   $3,943 

 

Operating Activities

 

Net cash used in operating activities for the nine months ended September 30, 2021 was $14.3 million, consisting primarily of our net loss incurred during the period of $14.7 million adjusted for non-cash charges of $1.2 million for stock-based compensation expense and $0.8 million for net changes in operating assets and liabilities. The net change in operating assets and liabilities primarily related to a $2.4 million increase in prepaid expenses and other current assets and other long-term assets from prepaid insurance, partially offset by $1.6 million increase in accounts payable and accrued and other current liabilities.

 

Net cash used in operating activities for the nine months ended September 30, 2020 was $5.0 million, consisting primarily of our net loss incurred during the period of $5.9 million adjusted for $0.7 million of non-cash charges and $0.2 million for net changes in operating assets and liabilities. Non-cash charges consisted of $0.6 million in change in fair value of convertible promissory notes to related party and non-cash interest expense of $0.1 million. The net change in operating assets and liabilities related to a $0.5 million increase in accounts payable and accrued and other current liabilities, partially offset by a $0.2 million decrease in prepaid expenses and other current assets.

 

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Investing Activities

 

Net cash used in investing activities for the nine months ended September 30, 2021 was $0.1 million for purchases of property and equipment to support our research activities and leasehold improvements, furniture and fixtures for our office space in Waltham, Massachusetts.

 

Financing Activities

 

Net cash provided by financing activities for the nine months ended September 30, 2021 was $190.7 million due to $63.5 million in net proceeds received from the First Milestone Closing, Second Milestone Closing and Third Milestone Closing of Series A redeemable convertible preferred stock, net of issuance of costs, and $127.2 million in net proceeds from the issuance of common stock, net of issuance costs, in connection with the closing of the Company’s IPO on July 2, 2021.

 

Net cash provided by financing activities for the nine months ended September 30, 2020 was $8.9 million, primarily related to $6.4 million in net proceeds received from the Initial Closing of Series A redeemable convertible preferred stock and through the issuance and conversion of $2.5 million of convertible promissory notes to related parties issued in July 2020.

 

Contractual Obligations and Commitments

 

In August 2021, we entered into a lease agreement, or the Waltham Lease, for approximately 5,000 square feet of office space in Waltham, Massachusetts. The base rent under the Waltham Lease is $43.00 per rentable square foot, or approximately $18,000 per month and is subject to scheduled annual increases of $1.00 per rentable square foot during the lease term. The term of the Waltham Lease is thirty-nine months, unless extended or earlier terminated pursuant to the terms of the Waltham Lease. We have the option to extend the Waltham Lease for one additional period of three years.

 

As of September 30, 2021, we do not have any other operating lease obligations, long-term debt obligations, capital lease obligations, purchase obligations or long-term liabilities.

 

We enter into contracts in the normal course of business for contract research services, contract manufacturing services, professional services and other services and products for operating purposes. These contracts generally provide for termination after a notice period, and, therefore, are cancelable contracts and not included above.

 

Critical Accounting Policies and Significant Judgments and Estimates

 

Our financial statements are prepared in accordance with generally accepted accounting principles in the United States (GAAP). The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, costs, and expenses and the disclosure of contingent assets and liabilities in our financial statements and accompanying notes. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience, known trends and events, and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions.

 

There have been no material changes in our critical accounting policies and estimates during the nine months ended September 30, 2021, as compared to the critical accounting policies and estimates disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 1 to the audited financial statements for the fiscal year ended December 31, 2020 included in our final Prospectus filed with the SEC pursuant to Rule 424(b)(4) on June 30, 2021.

 

Emerging Growth Company Status

 

As an emerging growth company under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, we can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to “opt out” of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we will adopt the new or revised standard at the time public companies adopt the new or revised standard. The decision to opt out of the extended transition period under the JOBS Act is irrevocable.

 

Off-Balance Sheet Arrangements

 

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

 

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Recently Issued Accounting Pronouncements

 

We have reviewed all recently issued accounting pronouncements by the FASB and other standard-setting bodies and have determined that, other than as disclosed in Note 2 to our financial statements included in Part I, Item 1, “Notes to Unaudited Interim Condensed Financial Statements,” of this Quarterly Report on Form 10-Q, such standards that do not require adoption until a future date are not expected to have a material impact on our condensed consolidated financial statements, if adopted, or do not otherwise apply to our operations.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Interest Rate Fluctuation Risk

 

We hold certain financial instruments for which a change in prevailing interest rates may cause the principal amount of the cash equivalents to fluctuate. Financial instruments that potentially subject us to significant concentrations of credit risk consist primarily of cash and cash equivalents. We invest our excess cash primarily in money market funds. The primary objectives of our investment activities are to ensure liquidity and to preserve principal while at the same time maximizing the income we receive without significantly increasing risk. We do not believe interest rate fluctuations have had a material effect on our results of operations during the three and nine months ended September 30, 2021 and 2020.

 

Foreign Currency Fluctuation Risk

 

We are exposed to market risk related to changes in foreign currency exchange rates. We contract with vendors that are located outside the United States and certain invoices are denominated in foreign currencies. We are subject to fluctuations in foreign currency rates in connection with such arrangements. We do not currently hedge our foreign currency exchange risk. We do not believe exchange rate fluctuations have had a material effect on our results of operations during the three and nine months ended September 30, 2021 and 2020.

 

Inflation Fluctuation Risk

 

Inflation generally affects us by increasing our cost of labor and research and development contract costs. We do not believe inflation has had a material effect on our results of operations during the three and nine months ended September 30, 2021 and 2020.

 

Item 4. Controls and Procedures.

 

Disclosure Controls and Procedures

 

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosures controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of September 30, 2021. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2021, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at a reasonable assurance level.

 

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Changes in Internal Control over Financial Reporting

 

Management determined that, as of September 30, 2021, there were no changes in our internal control over financial reporting that occurred during the fiscal quarter then ended that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

From time to time, we may be involved in lawsuits, claims, investigations and proceedings, consisting of intellectual property, commercial, employment and other matters which arise in the ordinary course of business. While the outcome of any such proceedings cannot be predicted with certainty, as of September 30, 2021, we were not party to any legal proceedings that we would expect to have a material adverse impact on our financial position, results of operations or cash flow.

 

Item 1A. Risk Factors.

 

In evaluating the Company and our business, careful consideration should be given to the following risk factors, in addition to the other information set forth in this Quarterly Report on Form 10-Q and in other documents that we file with the SEC. Investing in our common stock involves a high degree of risk. If any of the following risks and uncertainties actually occurs, our business, prospects, financial condition or results of operations could be materially and adversely affected. The risks described below are not intended to be exhaustive and are not the only risks facing the Company. New risk factors can emerge from time to time, and it is not possible to predict the impact that any factor or combination of factors may have on our business, prospects, financial condition or results of operations.

 

Risks Related to Our Limited Operating History, Financial Position, and Capital Requirements

 

We are a clinical-stage biopharmaceutical company with a limited operating history.

 

We are a clinical-stage biopharmaceutical company established in July 2018 with a limited operating history. Since our inception, we have devoted substantially all of our efforts to organizing and staffing our company, research and development of AV-101, our initial product candidate, business planning, raising capital, and providing general and administrative support for these operations. We have limited experience and have not yet demonstrated an ability to successfully overcome many of the risks and uncertainties frequently encountered by companies in new and rapidly evolving fields, particularly in the pharmaceutical industry. We have completed our Phase 1 clinical trial of AV-101. We plan to initiate our Phase 2b/3 clinical trial for AV-101 in PAH patients in the second half of 2021. We may explore additional indications for AV-101, but do not intend to conduct research on additional product candidates at this time. We have no products approved for commercial sale and therefore have never generated any revenue from product sales, and we do not expect to in the foreseeable future. We have no other experience as a company conducting clinical trials, submitting applications for regulatory approvals, such as a new drug application, or NDA, or commercializing any products.

 

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We have incurred significant operating losses since our inception and anticipate that we will continue to incur losses for the foreseeable future. We may never achieve or maintain profitability.

 

We have incurred significant operating losses in each year since our incorporation in July 2018, do not expect to become profitable in the near future, and may never achieve profitability. Our net losses were $14.7 million and $5.9 million for the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021, we had an accumulated deficit of $28.2 million. Biopharmaceutical product development is a highly speculative undertaking and involves a substantial degree of risk. We have no products approved for commercial sale, have not generated any revenue from product sales and have incurred losses in each year since our inception in July 2018. Substantially all of our operating losses have resulted from costs incurred in connection with our research and development program of AV-101 and from general and administrative costs associated with our operations. AV-101 will require substantial additional development time and resources before we would be able to apply for or receive regulatory approvals and begin generating revenue from product sales. We also do not yet have a sales organization or commercial infrastructure and, accordingly, we will incur significant expenses to develop a sales organization or commercial infrastructure in advance of generating any commercial product sales. In addition, as a public company, we will continue to incur additional costs associated with operating that we did not incur as a private company. As a result, we expect to continue to incur significant expenses and operating losses for the foreseeable future, and we anticipate these losses will increase as we continue to develop AV-101 through clinical trials and regulatory submissions. Because of the numerous risks and uncertainties associated with developing pharmaceutical products, we are unable to predict the extent of any future losses or when we will become profitable, if at all. Even if we do become profitable, we may not be able to sustain or increase our profitability on a quarterly or annual basis. Our prior losses, combined with expected future losses, have had and will continue to have an adverse effect on our stockholders’ deficit and working capital.

 

The amount of our future losses is uncertain and our quarterly and annual operating results may fluctuate significantly or may fall below the expectations of investors or securities analysts, each of which may cause our stock price to fluctuate or decline. Our quarterly and annual operating results may fluctuate significantly in the future due to a variety of factors, many of which are outside of our control and may be difficult to predict, including the following:

 

  the timing and success or failure of the clinical development of AV-101, or any other change in the competitive landscape of our industry, including consolidation among our competitors or partners;
     
  our ability to successfully open clinical trial sites for AV-101 and recruit and retain subjects for clinical trials, and any delays caused by difficulties in such efforts;
     
  our ability to obtain regulatory approval for AV-101, and the timing and scope of any such approvals we may receive;
     
  the timing and cost of, and level of investment in, research and development activities relating to AV-101, which may change from time to time;
     
  the cost of manufacturing AV-101, should it receive regulatory approval, which may vary depending on the quantity of production and the terms of our agreements with manufacturers;
     
  the experience of any delays or any issues with any of the above, including but not limited to failed studies, complex results, safety issues or other regulatory challenges;
     
  our ability to attract, hire and retain qualified personnel;
     
  the establishment of a sales, marketing, access and distribution infrastructure and the scaling-up manufacturing capabilities, whether alone or with third parties, to commercialize any product candidates for which we may obtain regulatory approval, if any;
     
  expenditures that we will or may incur to pursue additional indications for AV-101 or develop or acquire additional product candidates;
     
  the level of demand for AV-101, should it receive regulatory approval, which may vary significantly;
     
  the risk/benefit profile, cost and reimbursement policies with respect to AV-101, if approved, and existing and potential future therapeutics that compete with AV-101;
     
  the changing and volatile United States and global economic environments, including as a result of the ongoing coronavirus disease 2019, or COVID-19, pandemic;
     
  future accounting pronouncements or changes in our accounting policies; and
     
  changes to government policies and/or regulation impacting the commercialization of pharmaceutical products.

 

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The cumulative effects of these factors could result in large fluctuations and unpredictability in our quarterly and annual operating results. As a result, comparing our operating results on a period-to-period basis may not be meaningful. This variability and unpredictability could also result in our failing to meet the expectations of industry or financial analysts or investors for any period. If our revenue or operating results fall below the expectations of analysts or investors or below any forecasts we may provide to the market, or if the forecasts we provide to the market are below the expectations of analysts or investors, the price of our common stock could decline substantially. Such a stock price decline could occur even when we have met any previously publicly stated guidance we may provide.

 

We have no products approved for commercial sale and have not generated any revenue from product sales.

 

Our ability to become profitable depends upon our ability to generate revenue. To date, we have not generated revenue, and we do not expect to generate any revenue in the near future. We do not expect to generate significant revenue unless and until we obtain regulatory approval of, and begin to sell AV-101. Our ability to generate revenue depends on a number of factors, including, but not limited to, our ability to:

 

  successfully enroll subjects in, and complete, our ongoing and planned clinical trials for AV-101;
     
  obtain sufficient safety data required to obtain United States and foreign regulatory approval for AV-101;
     
  timely file and receive U.S. Food and Drug Administration, or FDA, acceptance of our NDA for AV-101 for review;
     
  receive regulatory approvals from the FDA and foreign regulatory authorities for AV-101 in order to commence marketing of AV-101;
     
  establish commercial manufacturing capabilities or make arrangements with third-party manufacturers for clinical supply and commercial manufacturing;
     
  obtain and maintain patent and trade secret protection or non-patent regulatory exclusivity for AV-101;
     
  execute a commercial launch of AV-101, if approved, whether alone or in collaboration with others;
     
  obtain and maintain acceptance of AV-101, if and when approved, by patients, the medical community and third-party payors;
     
  position AV-101 to effectively compete with other therapies;
     
  obtain and maintain healthcare coverage and adequate reimbursement;
     
  enforce and defend intellectual property rights and claims;
     
  implement measures to help minimize the risk of COVID-19 or any of its variants to our employees as well as patients and subjects enrolled in our clinical trials; and
     
  maintain a continued acceptable safety profile of AV-101 following approval.

 

If we do not achieve one or more of these factors in a timely manner or at all, we could experience significant delays or an inability to successfully commercialize AV-101, which would materially harm our business. If we do not receive regulatory approvals for AV-101, we may not be able to continue our operations.

 

We will require additional capital to finance our operations, which may not be available on acceptable terms, or at all. If we are unable to raise capital when needed, we would be forced to delay, reduce or terminate our product development or commercialization efforts.

 

Since our inception, we have invested substantially all of our efforts and financial resources in the development of AV-101 to address the core disease processes of PAH. We believe that we will continue to expend substantial resources for the foreseeable future in connection with the clinical development of AV-101, including in connection with our Phase 2b/3 clinical trial. These expenditures will include costs associated with clinical trials, obtaining regulatory approvals, manufacturing and supply, as well as commercializing AV-101, if approved for sale. In addition, other unanticipated costs may arise. Because the outcome of any clinical trial is highly uncertain, we cannot reasonably estimate the actual amounts necessary to successfully complete the development and commercialization of AV-101.

 

As of September 30, 2021, we had cash and cash equivalents of $180.9 million. On July 2, 2021, we completed our IPO, and expect the net proceeds of approximately $126.9 million from the IPO, together with our existing cash will be sufficient to fund our planned operations into the second half of 2025. However, our operating plans may change as a result of many factors currently unknown to us, and we may need to seek additional funds sooner than planned. In addition, we may seek additional capital due to favorable market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans.

 

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Our future capital requirements depend on many factors, including:

 

  the scope, timing, rate of progress, results and costs of our preclinical studies and clinical trials for AV-101;
     
  the number and scope of additional product candidates we decide to pursue;
     
  the extent to which we discover and develop additional product candidates;
     
  the scope and costs of manufacturing development and commercial manufacturing activities;
     
  the cost, timing and outcome of regulatory review of AV-101 and any additional product candidates;
     
  the cost of building a medical affairs and commercial organization including a sales force in anticipation of commercialization of AV-101 and any additional product candidates;
     
  the cost and timing associated with commercializing AV-101 and any additional product candidates, if approved;
     
  the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims;
     
  any product liability or other lawsuits related to AV-101 and any additional product candidates;
     
  our efforts to enhance operational systems and our ability to attract, hire and retain qualified personnel, including personnel to support the development of AV-101 and any additional product candidates;
     
  the extent to which we pursue additional indications for AV-101;
     
  the extent to which we acquire or in-license other product candidates;
     
  our ability to establish and maintain collaborations on favorable terms, if at all;
     
  the costs associated with being a public company;
     
  the potential additional expenses attributable to adjusting our development plans (including any supply related matters) to the ongoing COVID-19 pandemic; and
     
  the timing, receipt and amount of sales of AV-101 and any additional product candidates, if approved.

 

Additional funds may not be available when we need them, on terms that are acceptable to us, or at all. If adequate funds are not available to us on a timely basis, we may be required to:

 

  delay, limit, reduce or terminate clinical studies or other medical and development activities for AV-101; or
     
  delay, limit, reduce or terminate our efforts to establish manufacturing and sales and marketing capabilities or other activities that may be necessary to commercialize AV-101, or reduce our flexibility in developing or maintaining our sales and marketing strategy.

 

We also could be required to seek funds through arrangements with collaborators or others that may require us to relinquish rights to some of our technologies or AV-101 that we would otherwise pursue on our own. We do not expect to realize revenue from sales of AV-101 in the foreseeable future, if at all, and unless and until AV-101 is clinically tested, approved for commercialization and successfully marketed. To date, we have funded our operations through private placements of convertible preferred stock, convertible notes and proceeds from our IPO. We will be required to seek additional funding in the future and currently intend to do so through public or private equity offerings or debt financings, credit or loan facilities or a combination of one or more of these funding sources.

 

If we raise additional funds by issuing equity securities, our stockholders will suffer dilution and the terms of any financing may adversely affect the rights of our stockholders. In addition, as a condition to providing additional funds to us, future investors may demand, and may be granted, rights superior to those of existing stockholders. Debt financing, if available, is likely to involve restrictive covenants limiting our flexibility in conducting future business activities, and, in the event of insolvency, debt holders would be repaid before holders of our equity securities received any distribution of our corporate assets.

 

Our ability to raise additional funds will depend on financial, economic and other factors, many of which are beyond our control. Any additional fundraising efforts may divert our management from their day-to-day activities, which may adversely affect our ability to develop and commercialize AV-101. Disruptions in the financial markets in general, and more recently due to the ongoing COVID-19 pandemic, may make equity and debt financing more difficult to obtain, and may have a material adverse effect on our ability to meet our fundraising needs. We cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all.

 

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Our recurring losses from operations could continue to raise substantial doubt regarding our ability to continue as a going concern. Our ability to continue as a going concern requires that we obtain sufficient funding to finance our operations.

 

We have incurred significant operating losses since our inception and have never generated product revenue, and it is possible we will never generate product revenue or profit. Meaningful revenues will likely not be available until and unless AV-101 is approved by the FDA or comparable regulatory agencies in other countries and successfully marketed, either by us or a partner, an outcome which may not occur. In its report on our financial statements for the year ended December 31, 2020, our independent registered public accounting firm included an explanatory paragraph stating that our recurring losses from operations and net capital deficiency raise substantial doubt about our ability to continue as a going concern. In our unaudited condensed financial statements for the period ended September 30, 2021, after considering the additional proceeds from our IPO and existing cash on-hand, we concluded that we will have sufficient working capital on-hand to fund operations for at least 12 months from the date the unaudited condensed financial statements are issued. However, the perception that we may not be able to continue as a going concern may cause others to choose not to deal with us due to concerns about our ability to meet our contractual obligations.

 

Our ability to continue as a going concern requires that we obtain sufficient funding to finance our operations. If we are unable to obtain sufficient funding, our business, prospects, financial condition and results of operations will be materially and adversely affected and we may be unable to continue as a going concern. If we are unable to continue as a going concern, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our audited financial statements, and it is likely that investors will lose all or a part of their investment. If we seek additional financing to fund our business activities in the future and there remains substantial doubt about our ability to continue as a going concern, investors or other financing sources may be unwilling to provide additional funding to us on commercially reasonable terms or at all.

 

Risks Related to the Development of AV-101

 

Our business is entirely dependent on the successful development, regulatory approval and commercialization of AV-101, our only product candidate under development.

 

We have invested substantially all of our efforts and financial resources in the development of AV-101 for the treatment of PAH, which has not been approved for sale or commercial use. Currently, AV-101 is our only product candidate and we have not licensed, acquired, or invented any other product candidates for preclinical or clinical evaluation. This may make an investment in our company riskier than similar companies that have multiple product candidates in active development and that therefore may be able to better sustain a failure of a lead candidate. The success of our business, including our ability to finance our company and generate any revenue in the future, will, at this point, depend entirely on the successful development, regulatory approval and commercialization of AV-101, which may never occur. We may have inadequate financial or other resources to advance AV-101 through the clinical trial process, depending on the requirements of the FDA and similar foreign regulatory agencies. In addition, our clinical development program for AV-101 may not lead to regulatory approval from the FDA and similar foreign regulatory agencies if we fail to demonstrate that AV-101 is safe and effective in our planned Phase 2b/3 clinical trial, and we may therefore fail to commercialize AV-101. Further, AV-101 may not receive regulatory approval even if it is successful in planned and future clinical trials. Any failure to obtain regulatory approval of AV-101 would have a material and adverse impact on our business. Even if we successfully obtain regulatory approvals to market AV-101, our revenue will be dependent, in part, upon the size of the markets in the territories for which we gain regulatory approval. If the markets or patient subsets that we are targeting are not as significant as we estimate, we may not generate significant revenues from sales of AV-101, even if approved.

 

We plan to seek regulatory approval to commercialize AV-101 in the United States and in selected foreign countries. The clinical and commercial success of AV-101 will depend on a number of factors, including the following:

 

  our ability to raise any additional required capital on acceptable terms, or at all;
     
  timely completion of our preclinical studies and clinical trials, which may be significantly slower or cost more than we currently anticipate and will depend substantially upon the performance of third-party contractors;
     
  whether we are required by the FDA or similar foreign regulatory agencies to conduct additional clinical trials or other studies beyond those planned to support approval of AV-101;
     
  our ability to consistently manufacture AV-101 on a timely basis;

 

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  our ability, and the ability of any third parties with whom we contract, to remain in good standing with regulatory agencies and develop, validate and maintain commercially viable manufacturing processes that are compliant with current Good Manufacturing Practices, or current GMPs;
     
  our ability to demonstrate to the satisfaction of the FDA and similar foreign regulatory authorities the safety, efficacy and acceptable risk-benefit profile of AV-101;
     
  the prevalence, duration and severity of potential side effects or other safety issues experienced with AV-101;
     
  the timely receipt of necessary marketing approvals from the FDA and similar foreign regulatory authorities;
     
  achieving and maintaining, and, where applicable, ensuring that our third-party contractors achieve and maintain, compliance with our contractual obligations and with all regulatory requirements applicable to AV-101;
     
  the differentiation of AV-101 from other available approved, or investigational, drugs and treatments of PAH, and the willingness of physicians, operators of hospitals and clinics and patients to adopt and utilize AV-101 administered using a dry powder inhaler, or DPI;
     
  our ability to successfully develop a commercial strategy and thereafter commercialize AV-101 in the United States and internationally, if approved for marketing, sale and distribution in such countries and territories, whether alone or in collaboration with others;
     
  the availability of coverage and adequate reimbursement from managed care plans, private insurers, government payors (such as Medicare and Medicaid and similar foreign authorities) and other third-party payors for AV-101;
     
  patients’ ability and willingness to pay out-of-pocket for AV-101 in the absence of coverage and/or adequate reimbursement from third-party payor;
     
  the convenience of the administration of AV-101 using our DPI;
     
  acceptance by physicians, payors and patients of the benefits, safety and efficacy of AV-101, if approved;
     
  patient demand for AV-101, if approved;
     
  our ability to establish and enforce intellectual property rights in and to AV-101; and
     
  our ability to avoid third-party patent interference, intellectual property challenges or intellectual property infringement claims.

 

These factors, many of which are beyond our control, could cause us to experience significant delays or an inability to obtain regulatory approvals or commercialize AV-101. Even if regulatory approvals are obtained, we may never be able to successfully commercialize AV-101. Accordingly, we cannot provide assurances that we will be able to generate sufficient revenue through the sale of AV-101 to continue our business or achieve profitability.

 

While the scope of regulatory approval generally is similar in other countries, in order to obtain separate regulatory approval in other countries we must comply with numerous and varying regulatory requirements of such countries regarding safety and efficacy. For example, European regulatory authorities generally require a trial comparing the efficacy of the new drug to an existing drug prior to granting approval. Other countries also have their own regulations governing, among other things, clinical trials and commercial sales, as well as pricing and distribution of AV-101, and we may be required to expend significant resources to obtain regulatory approval and to comply with ongoing regulations in these jurisdictions. Regulatory approval in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in others.

 

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The ongoing COVID-19 pandemic, or a similar pandemic, epidemic, or outbreak of an infectious disease, may materially and adversely affect our business and our financial results and could cause a disruption to the development of AV-101. As a result of medical complications associated with PAH, the patient populations that AV-101 targets may be particularly susceptible to COVID-19, which may make it more difficult for us to identify patients able to enroll in our current and future clinical trials and may impact the ability of enrolled patients to complete any such trials.

 

Public health crises such as pandemics or similar outbreaks could adversely impact our business. In December 2019, a novel strain of a virus named SARS-CoV-2 (severe acute respiratory syndrome coronavirus 2), or coronavirus, which causes COVID-19, spread to most countries across the world, including all 50 states within the United States. The COVID-19 pandemic is evolving, with new variants of the SARS-CoV-2 virus identified, and has led to the implementation of various responses, including government-imposed quarantines, travel restrictions, vaccine mandates and other public health safety measures. The extent to which the coronavirus impacts our operations or those of our third party partners, including our preclinical studies or clinical trial operations, will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, developments or perceptions regarding the safety of vaccines, new information concerning the severity of the coronavirus and any additional preventative and protective actions taken to contain the coronavirus or treat its impact, among others. The continued spread of COVID-19 globally, including the identification of new variants of COVID-19, could adversely impact our clinical trial operations, including our ability to recruit and retain patients and principal investigators and site staff who, as healthcare providers, may have heightened exposure to COVID-19 if an outbreak occurs in their geography. Similar to other biopharmaceutical companies, we may experience protocol deviations or delays in initiating or completing our planned Phase 2b/3 clinical trial of AV-101, enrolling our clinical trial, or dosing of patients in our clinical trial as well as activating new trial sites. For example, we experienced a short delay in our Phase 1 trial when the study site shut down due to COVID-19. COVID-19 may also affect the third-party manufacturers of AV-101 and the DPI we plan to use in our Phase 2b/3 clinical trial, which could impact our ability to procure sufficient supplies and cause delays in our trial.

 

In addition, as a result of medical complications associated with PAH, the patient populations that AV-101 targets may be particularly susceptible to COVID-19, which may make it more difficult for us to identify patients able to enroll in our current and future clinical trials and may impact the ability of enrolled patients to complete any such trials. Any negative impact the ongoing COVID-19 pandemic has to patient enrollment or treatment or the execution of our AV-101 clinical trials could cause costly delays to clinical trial activities, which could adversely affect our ability to obtain regulatory approval for and to commercialize AV-101, increase our operating expenses, and have a material adverse effect on our financial results. Timely enrollment in planned clinical trials is dependent upon clinical trial sites which could be adversely affected by global health matters, such as pandemics. We plan to conduct our Phase 2b/3 clinical trial for AV-101 in geographies which are currently affected by the COVID-19 pandemic. Some factors from the ongoing COVID-19 pandemic that have the potential to delay or otherwise adversely affect enrollment in the clinical trials of AV-101, as well as our business generally, include:

 

  the potential diversion of healthcare resources away from the conduct of clinical trials to focus on pandemic concerns, including the attention of physicians serving as our clinical trial investigators, hospitals serving as our clinical trial sites and hospital staff supporting the conduct of our prospective clinical trials;
     
  limitations on travel that could interrupt key trial and business activities, such as clinical trial site initiations and monitoring, domestic and international travel by employees, contractors or patients to clinical trial sites, including any government-imposed travel restrictions or quarantines that will impact the ability or willingness of patients, employees or contractors to travel to our clinical trial sites or secure visas or entry permissions, a loss of face-to-face meetings and other interactions with potential partners, any of which could delay or adversely impact the conduct or progress of our prospective clinical trials;
     
  the potential negative affect on the operations of our third-party manufacturers;
     
  interruption in global shipping affecting the transport of clinical trial materials, such as investigational drug product, our DPIs and other supplies used in our clinical trials;
     
  business disruptions caused by potential workplace, laboratory and office closures and an increased reliance on employees working from home, disruptions to or delays in ongoing laboratory experiments;
     
  operations, staffing shortages, travel limitations or mass transit disruptions, any of which could adversely impact our business operations or delay necessary interactions with local regulators, ethics committees and other important agencies and contractors;
     
  changes in local regulations as part of a response to the ongoing COVID-19 pandemic, which may require us to change the ways in which our clinical trials are conducted, which may result in unexpected costs, or to discontinue such clinical trials altogether; and

 

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  interruption or delays in the operations of the FDA or other regulatory authorities, which may impact review and approval timelines.

 

We may be required to develop and implement additional clinical trial policies and procedures designed to help protect subjects from the COVID-19 virus. For example, in March 2020, the FDA issued a guidance, which the FDA has continued to periodically revise, on conducting clinical trials during the pandemic, which describes a number of considerations for sponsors of clinical trials impacted by the pandemic. We cannot presently predict the scope and severity of the planned and potential shutdowns or disruptions of businesses and government agencies, such as the SEC, or FDA.

 

These and other factors arising from the ongoing COVID-19 pandemic could worsen in countries that are already afflicted with COVID-19, particularly as new variants of the virus continue to be identified, or could continue to spread to additional countries. Any of these factors, and other factors related to any such disruptions that are unforeseen, could have a material adverse effect on our business and our results of operations and financial condition. Further, uncertainty around these and related issues could lead to adverse effects on the economy of the United States and other economies, which could impact our ability to raise the necessary capital needed to develop and commercialize AV-101. We will continue to monitor the latest developments, disruptions and uncertainties relating to the COVID-19 pandemic, including the pace of vaccinations and the emergence of new and more contagious strains of the virus, and any resulting impact on our business, financial condition, results of operations and prospects. Any resulting financial impact cannot be reasonably estimated at this time and may have a material adverse impact on our business, financial condition and results of operations.

 

We have only recently begun testing of AV-101, a dry powder formulation of imatinib for the treatment of PAH administered using a DPI, to assess its safety and tolerability. Although we believe that AV-101 has therapeutic potential for PAH based on oral imatinib’s results in the Phase 3 IMPRES trial, we are utilizing a novel dry powder formulation which may not achieve better or similar levels of clinical activity or may have similar tolerability challenges as oral imatinib. The results of earlier studies and trials of oral imatinib in PAH patients and our Phase 1 clinical trial of AV-101 may not be predictive of future trial results for AV-101.

 

The results of our Phase 1 clinical trial, as well as clinical testing of oral imatinib in PAH patients by third-parties, may not be predictive of the results of our planned Phase 2b/3 clinical trial. In the second half of 2021, we plan to initiate our Phase 2b/3 trial of AV-101 with a target enrollment of 200 patients in the Phase 2b portion and expect to report topline data from the Phase 2b portion of the trial in the middle of 2023. Our belief that AV-101 has a potential therapeutic benefit for PAH patients is based in part on the Phase 3 IMPRES trial conducted by Novartis AG, or Novartis, which showed oral administration of imatinib, marketed as Gleevec for multiple cancers, led to statistically significant improvements across both primary and secondary endpoints in PAH patients on top of PAH standard of care therapies. Despite the statistically significant improvements in 6MWD and hemodynamics, there was no difference between oral imatinib and placebo in time to clinical worsening (TTCW), a composite endpoint consisting of death, hospitalization due to worsening PAH, worsening functional class, and a 15% reduction in 6MWD. Oral imatinib was associated with significant adverse events that precluded its approval as a therapy for PAH. AV-101 is our proprietary inhaled dry powder formulation of imatinib that delivers the medicine directly to the lung tissues using a DPI. While we have completed a Phase 1 clinical trial in 82 healthy volunteers, in which AV-101 demonstrated lower plasma levels of imatinib compared to 400 mg of oral imatinib and a favorable tolerability profile at a dose of up to 90 mg twice a day, AV-101 has not yet been tested in any patients with PAH to assess its efficacy and AV-101 may not have the same clinical activity as oral imatinib seen in the IMPRES trial. We also cannot be certain that AV-101 will continue to show similar tolerability when dosed in PAH patients as it did in healthy volunteers, and we may not be able to demonstrate to the satisfaction of the FDA the safety, efficacy and acceptable risk-benefit profile of AV-101 during our planned Phase 2b/3 clinical trial. As a result, even if AV-101 does achieve lower imatinib plasma concentrations in our Phase 2b/3 clinical trial, there can be no assurance that AV-101 will exhibit similar tolerability as compared to our Phase 1 trial or improved tolerability as compared to the IMPRES trial of oral imatinib. Product candidates in later stages of clinical trials may fail to show the desired pharmacological properties or safety and efficacy traits despite having progressed through preclinical studies and initial clinical trials. A number of companies in the pharmaceutical and biotechnology industries, including Novartis in the IMPRES trial of oral imatinib, have suffered significant setbacks in Phase 3 clinical trials, even after positive results in earlier clinical trials. These setbacks have been caused by, among other things, preclinical findings made while clinical trials were underway and safety or efficacy observations made in clinical trials, including previously unreported adverse events. Notwithstanding any promising results in our Phase 1 clinical trial, we cannot be certain that we will not face similar setbacks.

 

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Additionally, we may utilize “open-label” trial designs or open-label extensions to our clinical trials in the future. An “open-label” clinical trial is one where both the patient and investigator know whether the patient is receiving the investigational product candidate or either an existing approved drug or placebo. Most typically, open-label clinical trials test only the investigational product candidate and sometimes may do so at different dose levels. Open-label clinical trials are subject to various limitations that may exaggerate any therapeutic effect as patients in open-label clinical trials are aware when they are receiving treatment. Open-label clinical trials may be subject to a “patient bias” where patients perceive their symptoms to have improved merely due to their awareness of receiving an experimental treatment. In addition, open-label clinical trials may be subject to an “investigator bias” where those assessing and reviewing the physiological outcomes of the clinical trials are aware of which patients have received treatment and may interpret the information of the treated group more favorably given this knowledge. The results from an open-label trial or extension may not be predictive of future clinical trial results with AV-101 when studied in a controlled environment with a placebo or active control.

 

As a result of the foregoing, even if we are able to complete any planed and future clinical trials of AV-101, the results may not be sufficient to obtain regulatory approval.

 

If we encounter difficulties enrolling patients in our clinical trials, our clinical development activities could be delayed or otherwise adversely affected.

 

The timely completion of clinical trials in accordance with their protocols depends, among other things, on our ability to enroll a sufficient number of patients who remain in the study until its conclusion. We may experience difficulties in patient enrollment in our clinical trials for a variety of reasons. We plan to initiate our Phase 2b/3 clinical trial of AV-101 in the second half of 2021. The Phase 2b portion of this trial will be a dose-ranging trial in which PVR will be the primary endpoint and will have a target enrollment of 200 patients. The Phase 3 portion of the trial will be based on the optimal dose selected in the Phase 2b portion with 6MWD as the primary endpoint. The enrollment of patients depends on many additional factors, including:

 

  size and nature of the patient population and process for identifying patients;
     
  the severity of the disease under investigation;
     
  the availability and efficacy of approved drugs for the disease under investigation;
     
  the patient eligibility criteria defined in the protocol;
     
  the impact of the ongoing COVID-19 pandemic on our ability to identify patients able to enroll in our clinical trials and the ability of enrolled patients to complete our clinical trials;
     
  the general willingness of patients to enroll in the trial;
     
  the size of the patient population required for analysis of the trial’s primary endpoints;
     
  the proximity of patients to trial sites;
     
  the design of the trial;
     
  our ability to recruit clinical trial investigators with the appropriate competencies and experience, and to obtain Investigational Review Board, or IRB, approval to conduct our trial at U.S. sites, and similar approvals at sites outside the U.S.;
     
  the patient referral practices of physicians;
     
  the ability to monitor patients adequately during and after treatment;
     
  clinicians’ and patients’ perceptions as to the potential advantages of the product candidate being studied in relation to other available therapies, including any new therapies that may be approved for the indications we are investigating;
     
  competition for patients from other investigational clinical trials in PAH being conducted at the same time as our Phase 2b/3 trial;
     
  the clinical site’s ability to obtain and maintain patient consents;
     
  delays in or temporary suspension of the enrollment of patients in our planned clinical trial due to the ongoing COVID-19 pandemic; and
     
  the risk that patients enrolled in clinical trials will drop out of the trials before completion, including as a result of contracting COVID-19 or other health conditions or being forced to quarantine.

 

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Enrollment risks are heightened with respect to indications that are rare or orphan diseases, which may limit the pool of patients that may be enrolled in our planned clinical trials. We are developing AV-101 for the treatment of PAH, which is an orphan disease and does not have a large patient population. As a result, we may encounter difficulties enrolling subjects in our clinical trials evaluating AV-101 for the treatment of PAH due, in part, to the small size of this patient population.

 

In addition, our clinical trials may compete with other clinical trials for product candidates that seek to treat PAH, and this competition will reduce the number and types of patients available to us, because some patients who might have opted to enroll in our trials may instead opt to enroll in a trial being conducted by one of our competitors. Since the number of qualified clinical investigators is limited, we may conduct some of our clinical trials at the same clinical trial sites that some of our competitors use, which will reduce the number of patients who are available for our clinical trials in such clinical trial sites.

 

Delays in patient enrollment may result in increased costs or may affect the timing or outcome of the planned clinical trials, which could prevent completion of these trials and adversely affect our ability to advance the development of AV-101.

 

Clinical development involves a lengthy and expensive process with an uncertain outcome, and delays can occur for a variety of reasons outside of our control.

 

Clinical development is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the clinical trial process. We have completed our Phase 1 trial of AV-101 in healthy volunteers and expect to commence our Phase 2b/3 dose-ranging clinical trial in PAH patients in the second half of 2021. The FDA has agreed in principle with the proposed study design of our Phase 2b/3 efficacy trial, dose strengths, statistical analysis and that a single efficacy study with strong results could be sufficient to support a 505(b)(2) NDA. However, changes in regulatory requirements and guidance may occur and we may need to amend our clinical trial protocol to reflect these changes with appropriate regulatory authorities. In addition, we may experience delays in initiating or completing our planned studies and trials of AV-101. Furthermore, we cannot be certain that studies or trials for AV-101 will begin on time, not require redesign, enroll an adequate number of subjects on time or be completed on schedule, if at all. Clinical trials can be delayed or terminated for a variety of reasons, including delays or failures related to:

 

  the FDA or comparable foreign regulatory authorities disagreeing as to the design or implementation of our clinical trials;
     
  delays in obtaining regulatory authorization to commence a trial;
     
  reaching agreement on acceptable terms with prospective CROs and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;
     
  obtaining institutional review board, or IRB, approval at each trial site;
     
  recruiting an adequate number of suitable patients to participate in a trial;
     
  the number of patients required for clinical trials of our product candidates may be larger than we anticipate;
     
  having subjects complete a trial or return for post-treatment follow-up;
     
  clinical sites deviating from trial protocol or dropping out of a trial;
     
  addressing subject safety concerns that arise during the course of a trial;
     
  adding a sufficient number of clinical trial sites; or
     
  obtaining sufficient quantities of AV-101 for use in clinical trials from third-party suppliers on a timely basis.
     
  We may experience numerous adverse or unforeseen events during, or as a result of, preclinical studies and clinical trials that could delay or prevent our ability to receive marketing approval or commercialize AV-101, including:
     
  we may receive feedback from regulatory authorities that requires us to modify the design of our clinical trials;
     
  clinical trials of AV-101 may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical trials or abandon our development program for AV-101;
     
  the number of patients required for clinical trials of AV-101 may be larger than we anticipate, enrollment in these clinical trials may be slower than we anticipate, or participants may drop out of these clinical trials at a higher rate than we anticipate;
     
  we or our third-party contractors may fail to comply with regulatory requirements, fail to maintain adequate quality controls, or be unable to produce sufficient product supply to conduct and complete clinical trials of AV-101 in a timely manner, or at all;
     
  we or our investigators might have to suspend or terminate clinical trials of AV-101 for various reasons, including non-compliance with regulatory requirements, a finding that AV-101 has undesirable side effects or other unexpected characteristics, or a finding that the participants are being exposed to unacceptable health risks;

 

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  the cost of clinical trials of AV-101 may be greater than we anticipate;
     
  the quality of our active pharmaceutical ingredient or other materials necessary to conduct clinical trials of AV-101 may be insufficient or inadequate;
     
  the FDA may determine that we cannot rely on the Section 505(b)(2) approval pathway for AV-101, in which case we may be required to conduct additional clinical trials and provide additional data and information and meet additional standards for product approval;
     
  the FDA may determine that we have identified the wrong listed drug(s), or LD, or that approval of a Section 505(b)(2) application for AV-101 is blocked by patent or non-patent exclusivity of the LD or LDs;
     
  regulators may revise the requirements for approving AV-101, or such requirements may not be as we anticipate; and
     
  future collaborators may conduct clinical trials in ways they view as advantageous to them but that are sub-optimal for us.
     
  If we are required to conduct additional clinical trials or other testing of AV-101 beyond those that we currently contemplate, if we are unable to successfully complete clinical trials of AV-101 or other testing, if the results of these trials or tests are not positive or are only moderately positive or if there are safety concerns, we may:
     
  incur unplanned costs;
     
  be delayed in obtaining marketing approval for AV-101 or not obtain marketing approval at all;
     
  obtain marketing approval in some countries and not in others;
     
  obtain marketing approval for indications or patient populations that are not as broad as intended or desired;
     
  obtain marketing approval with labeling that includes significant use or distribution restrictions or safety warnings, including boxed warnings;
     
  be subject to additional post-marketing testing requirements, which could be expensive and time consuming; or
     
  have the treatment removed from the market after obtaining marketing approval.

 

We could also encounter delays if a clinical trial is suspended or terminated by us, by the IRBs or ethics committees of the institutions in which such trials are being conducted, by the Safety Monitoring Committee, if any, for such clinical trial or by the FDA or other regulatory authorities. Such authorities may suspend or terminate a