CENTESSA PHARMACEUTICALS PLC The following discussion and analysis should be read in conjunction with the consolidated and combined financial statements and related notes thereto ofCentessa Pharmaceuticals plc ("Successor") and theCentessa Predecessor Group ("Predecessor"), included elsewhere herein.
Overview
We are a clinical-stage pharmaceutical company with a mission to discover, develop and ultimately deliver medicines that are transformational for patients. Our company was formed inOctober 2020 to pursue our mission within a unique, at-scale asset-centric operating model in a capital efficient manner. We refer to this concept as "asset-centricity." OnJanuary 29, 2021 , we acquired 11 pre-revenue, development stage biotechnology companies as direct subsidiaries (together referred to as the "Centessa Subsidiaries"), and inJune 2021 , we completed an IPO. Since early 2022, we have substantially changed how we manage the Centessa Subsidiaries, and where applicable, we have reorganized their assets into individual focused pipeline programs unified under theCentessa Pharmaceuticals corporate brand. We are advancing the registrational program for SerpinPC, our most advanced product candidate, for the treatment of HB. This registrational program includes a set of studies with multiple components. If the data from the registrational program are positive, we aim to submit a BLA to the FDA as well as potential additional applications worldwide. While the initial focus of our ongoing clinical development program is HB, with and without inhibitors, we believe SerpinPC has the potential to treat all types of hemophilia regardless of severity or inhibitor status and it may also prevent bleeding associated with other bleeding disorders. We continue to assess registrational plans for HA. Following clearance of our IND application from the FDA inJanuary 2023 , we initiated a Phase 1/2a first-in-human, clinical trial of LB101 for the treatment of solid tumors and dosed the first subject inMarch 2023 . We look to this study to provide validation to further advance LB101 and our LockBody technology platform. In addition, we continue to progress earlier stage development programs focused on high-value indications where there is unmet need, including ORX750 for the treatment of NT1, with potential expansion into NT2 and other sleep disorders, and MGX292 for the treatment of PAH. As part of ongoing portfolio management, we continuously review all of our programs with the goal of assembling a pipeline of product candidates with the potential to be first in class / best in class assets. Our portfolio decisions reflect the responsibility of the management team to expeditiously evaluate and potentially increase resources or suspend development based on whether the product profile or data meet our criteria for further investment. In particular, we apply our criteria to each program individually and evaluate the merits of each program individually. As a result, (1) earlier in 2022, we discontinued the development of the following programs: lixivaptan in ADPKD; ZF874 in AATD; a dual-STAT3/5 degrader program in AML; all programs associated with PearlRiver including the small molecule EGFR Exon20 insertion mutation inhibitor program and the C797S mutation inhibitor program for the treatment of NSCLC; (2) we divested PearlRiver inDecember 2022 ; and, (3) we evaluated strategic options for imgatuzumab, an anti-EGFR mAb; and subsequently divested this program in earlyJanuary 2023 through a company divestment of Pega-One. Additionally, inDecember 2022 , as a result of protocol defined stopping criterion having been met, we suspended dosing in the multiple ascending dose (MAD) stage of the Phase 1 study of CBS001, a neutralizing therapeutic mAb to the inflammatory membrane form of LIGHT for inflammatory / fibrotic diseases. We recently determined to deprioritize CBS001 and have paused all development activities pending strategic review. We are evaluating strategic partnerships to progress CBS004, a therapeutic mAb targeting BDCA-2 for the potential treatment of autoimmune diseases, into the clinic. InOctober 2021 , we entered into a financing agreement with funds managed byOberland Capital and drew down an initial tranche of funding in the amount of$75.0 million . Since inception, we have devoted substantially all of our resources to acquiring and developing product and technology rights, conducting research and development in our discovery and enabling stages, in our clinical and preclinical trials and raising capital. We have incurred recurring losses and negative cash flows from operations since inception and have funded operations primarily through the sale and issuance of our equity securities. The ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of current or future product candidates. We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future in connection with ongoing development activities related to the portfolio of programs as we advance the preclinical and clinical development of product candidates; perform research activities as we seek to discover and develop additional programs and product candidates; carry out maintenance, expansion enforcement, defense, and protection of our intellectual property portfolio; and hire additional research and development, clinical and commercial personnel. Further, inflation may affect our use of capital resources by increasing our cost of labor, research, manufacturing and clinical trial expenses. Based on our current 117
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operating model and development plan, we expect our cash and cash equivalents as ofDecember 31, 2022 of$393.6 million , to fund our operations into 2026 without drawing on the remaining available tranches under theOberland Capital financing agreement. Covid-19 Update We are continuing to proactively monitor the COVID-19 global pandemic, including the mutating Omicron variants, to assess the potential impact on our business, and to seek to avoid any unnecessary potential delays to our programs. At this time, our clinical programs and research activities remain largely on track, with some modest delays in clinical trial enrollment rates and supply chain activities for investigational clinical trial material. While we are unable to fully quantify the potential effects of this pandemic on our future operations, including any further delays to our preclinical and clinical programs, management continues to evaluate and to seek to mitigate risks. The safety and well-being of employees, patients and partners remains our highest priority.
Components of Results of Operations
Subsequent to the contribution of the Centessa Subsidiaries to Centessa, the financial activities of Centessa and all Centessa Subsidiaries are being presented on a consolidated basis and are denoted as "Successor" within management's discussion and analysis of the financial statements. The historical financial condition and results of operations for the periods presented may not be comparable due to the difference in basis of accounting for theCentessa Predecessor Group andCentessa Pharmaceuticals plc . Prior to the acquisition of the Centessa Subsidiaries onJanuary 29, 2021 , theCentessa Predecessor Group consisted of three of the acquired companies (Z Factor Limited ,LockBody Therapeutics Ltd andMorphogen-IX Limited ). Immediately following the acquisition of the Centessa Subsidiaries,Centessa Pharmaceuticals plc consisted of approximately 20 legal entities, inclusive of the parent company and all indirect subsidiaries.
Revenues
We have not generated any revenue. Our ability to generate product revenue and to become profitable will depend upon the ability to successfully develop, obtain regulatory approval and commercialize any current and future product candidates. Because of the numerous risks and uncertainties associated with product development and regulatory approval, we are unable to predict the amount or timing of product revenue.
Research and Development Expense
Research and development expenses consist primarily of costs incurred in connection with the discovery and development of the Company's clinical and preclinical programs, net of reimbursements. Research and development costs are expensed as incurred. These expenses include:
•expenses incurred to conduct the necessary preclinical studies and clinical trials required to obtain regulatory approval;
•milestone payments pursuant to the license agreements;
•personnel expenses, including salaries, benefits and share-based compensation expense for employees engaged in research and development functions;
•costs of funding research performed by third parties, including pursuant to agreements with contract research organizations ("CROs") for active and discontinued programs, as well as investigative sites and consultants that conduct preclinical studies and clinical trials;
•expenses incurred under agreements with contract manufacturing organizations ("CMOs"), including committed costs for discontinued programs, manufacturing scale-up expenses and the cost of acquiring and manufacturing preclinical study and clinical trial materials;
•fees paid to consultants who assist with research and development activities;
•expenses related to regulatory activities, including filing fees paid to regulatory agencies; and
•allocated expenses for facility costs, including rent, utilities, depreciation and maintenance.
Research and development activities are central to our business model. Product
candidates in later stages of clinical development will generally have higher
development costs than those in earlier stages of clinical development,
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primarily due to the increased size and duration of later-stage clinical trials. We expect research and development expenses to increase significantly over the next several years due to increases in personnel costs, including share-based compensation, increases in costs to conduct clinical trials for current product candidates and other clinical trials for future product candidates and prepare regulatory filings for any product candidates. The successful development of our current or future product candidates is highly uncertain. At this time, we cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the remainder of the development of current or future product candidates, or when, if ever, material net cash inflows may commence from product candidates. This uncertainty is due to the numerous risks and uncertainties associated with the duration and cost of clinical trials, which vary significantly over the life of a project as a result of many factors, including: •delays in regulators or institutional review boards authorizing us or its investigators to commence our clinical trials, or in our ability to negotiate agreements with clinical trial sites or CROs;
•the ability to secure adequate supply of product candidates for trials;
•the number of clinical sites included in the trials;
•the ability and the length of time required to enroll suitable patients;
•the number of patients that ultimately participate in the trials;
•the number of doses patients receive;
•any side effects associated with product candidates;
•the duration of patient follow-up;
•the results of clinical trials;
•significant and changing government regulations; and
•launching commercial sales of product candidates, if and when approved, whether alone or in collaboration with others.
Our expenditures are subject to additional uncertainties, including the terms and timing of regulatory approvals. We may never succeed in achieving regulatory approval for their product candidates. We may obtain unexpected results from clinical trials and may elect to discontinue, delay or modify clinical trials of product candidates. A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if theEuropean Medicines Agency ("EMA"), FDA or other comparable regulatory authorities were to require us to conduct clinical trials beyond those that are currently anticipated, or if we experience significant delays in enrollment in any clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development. Product commercialization will take several years, and we expect to spend a significant amount in development costs.
Research and Development Tax Incentives
We participate in research tax incentive programs that are granted to companies by theUnited Kingdom and certain European tax authorities in order to encourage them to conduct technical and scientific research. Expenditures that meet the required criteria are eligible to receive a tax credit that is reimbursed in cash. Estimates of the amount of the cash refund expected to be received are determined at each reporting period and recorded as reductions to research and development expenses. We may not be able to continue to claim the most beneficial payable research and development tax credits in the future if we cease to qualify as a small or medium enterprise, based on size criteria concerning employee headcount, turnover and gross assets. In addition, unless our subsidiaries qualify for an exemption, there are limitations to how much tax incentive can be claimed. This limitation is calculated as the total of the Company's relevant expenditure on employees in the period, multiplied by 300%, plus £20,000.
General and Administrative Expense
General and administrative expense consists primarily of personnel expenses, including salaries and benefits for employees and share-based compensation. General and administrative expense also includes facility costs, including rent,
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utilities, depreciation and maintenance, not otherwise included in research and development expense, as well as legal fees related to intellectual property and corporate matters and fees for accounting and consulting services.
Change in Fair Value of Contingent Value Rights
Change in fair value of contingent value rights reflects the fair market value
adjustment to the contingent value rights ("CVR") liability related to the
achievement of a specified development milestone for Palladio's product
candidate. In connection with the acquisition of the Centessa Subsidiaries, we
issued CVR to former shareholders and option holders of Palladio. The CVR
represented the contractual rights to receive shares valued, in aggregate, at
$39.7 million upon the first patient dosed in a Phase 3 pivotal study of
lixivaptan for the treatment of ADPKD in any of the United States , France ,
Germany , Italy , Spain , the United Kingdom and Japan (designated the ACTION
Study). The contingent CVR milestone was settled through the issuance of our
ordinary shares equal to the amount of the total CVR payable based on the per
share value of ordinary shares at the milestone date. We determined that the CVR
should be accounted for as a liability in accordance with ASC 480,
Distinguishing Liabilities from Equity. Accordingly, the fair value of the
contingent consideration was assessed quarterly until settlement occurred in
February 2022 .
Interest (Expense) Income, net
Interest (expense) income primarily consists of interest costs related to the Note Purchase Agreement, partially offset by interest income earned from our cash and cash equivalents. Other (Expense) Income, net
Other (expense) income, net consists primarily of foreign currency transaction gains and losses as well as the change in fair value of the Note Purchase Agreement.
Foreign Currency Translation
The Company's financial statements are presented inU.S. dollars ("USD"), the reporting currency of the Company. The functional currency ofCentessa Pharmaceuticals plc is USD and the functional currency of the Centessa Subsidiaries is their respective local currency. Income and expenses have been translated into USD at average monthly exchange rates prevailing during the period. Assets and liabilities have been translated at the rates of exchange on the balance sheets dates and equity accounts at their respective historical rates. The resulting translation gain and loss adjustments are recorded directly as a separate component of shareholders' equity as other comprehensive (loss) income. Transactions denominated in a currency other than the functional currency are remeasured based upon the exchange rate at the date of remeasurement with the resulting gain or loss included in the accompanying consolidated and combined statements of operations and comprehensive loss within Other (expense) income, net. The functional currency ofCentessa Pharmaceuticals plc had previously been British pounds ("GBP"), asCentessa Pharmaceutical plc's primary activities during formation were mostly denominated in GBP, including related transaction costs, the acquisition of Centessa subsidiaries predominantly with operations in GBP and the issuance of shares with a GBP nominal value as consideration in the acquisition. Beginning in the second quarter of 2021, the functional currency ofCentessa Pharmaceuticals plc changed from GBP to USD. The change in functional currency was the result of many factors including the completion of an IPO and receipt of proceeds in USD which resulted in USD denominated assets exceeding GBP denominated assets, the increase in the number ofU.S. -based employees, and the increase in costs denominated in USD, following completion of the Company's IPO on aU.S. stock exchange ("Nasdaq"). Given these significant changes, the Company considered the economic factors outlined in ASC 830, Foreign Currency Matters and concluded that the majority of the factors supported the use of the USD as the functional currency forCentessa Pharmaceutical plc . The change in functional currency forCentessa Pharmaceuticals plc was applied on a prospective basis beginning as of the second quarter of 2021 and translation adjustments for prior periods will continue to remain as a component of accumulated other comprehensive loss. The Company reclassified the presentation of foreign currency gains and losses recognized first quarter of 2021 from General & administration expense to Other income (expense), net to conform to the current period financial statement presentation. 120
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Results of Operations
The following table sets forth the Company (Successor)'s results of operations for the twelve months endedDecember 31, 2022 and for the period fromJanuary 30, 2021 throughDecember 31, 2021 and theCentessa Predecessor Group's results of operations for the period fromJanuary 1, 2021 throughJanuary 29, 2021 (amounts in thousands): Successor Predecessor Period from Twelve Months January 30, 2021 Period from Ended through January 1, 2021 December 31, December 31, through 2022 2021 January 29, 2021 Operating expenses: Research and development$ 155,083 $ 95,660 $ 662 General and administrative 55,200 42,888 121 Change in fair value of contingent value rights 1,980 15,082 - Acquired in-process research and development - 220,454 - Loss from operations (212,263) (374,084) (783) Interest expense, net (7,033) (1,172) (9) Amortization of debt discount - - (37) Debt issuance costs - (1,331) - Other income (expense), net 2,342 (4,370) - Loss before income taxes (216,954) (380,957) (829) Income tax (benefit) expense (747) 114 - Net loss$ (216,207) $ (381,071) $ (829) 121
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Research and Development Expenses
The following table summarizes research and development expenses by program incurred for the following periods (amounts in thousands):
Successor Predecessor
Period from
Twelve Months January 30, Period from
Ended 2021 through January 1, 2021
December 31, December 31, through
2022 2021 January 29, 2021
Prioritized programs:
SerpinPC (ApcinteX) $ 24,175 $ 2,926 $ -
LB101/LockBody platform (LockBody) 20,934 5,397 241
OX2R (Orexia) 19,110 19,411 -
MGX292 (Morphogen-IX) 9,248 5,127 187
Discontinued or other programs
Lixivaptan (Palladio) 29,120 17,365 -
ZF874 (Z Factor) 10,102 8,577 323
CBS001/CBS004 (Capella) 6,121 6,275 -
Dual-STAT3/5 (Janpix) 4,630 5,962 -
Imgatuzumab (Pega-One) 3,943 12,870 -
EGFR Exon20/C797S (PearlRiver) 609 2,857 -
Non-program specific costs:
Personnel expenses 37,684 21,239 98
Research tax incentives (12,608) (13,839) (222)Other preclinical and clinical development expenses 2,015
1,493 35
$ 155,083 $ 95,660 $ 662
Research and development expenses for the Company (Successor) for the twelve
months ended December 31, 2022 and for the period from January 30, 2021 through
December 31, 2021 were $155.1 million and $95.7 million , respectively. The
increase in 2022 compared with 2021 primarily reflected higher development costs
for our most advanced programs, including SerpinPC ($21.2 million ) consistent
with the Company advancing the registrational program for SerpinPC for the
treatment of HB, and LB101 ($15.5 million ), which reflected higher preclinical
costs compared to the prior year and costs related to the IND submission for
LB101 in December 2022 . Additionally, costs in 2022 reflected increased
personnel costs of $16.4 million , which included employee severance costs of
approximately $3 million related to discontinuing certain research and
development programs as well as increased headcount and higher share-based
compensation expense of $6.1 million .
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General and Administrative Expense
The following table summarizes the general and administrative expenses for the following periods (amounts in thousands):
Successor Predecessor
Period from
Twelve Months January 30, Period from
Ended 2021 through January 1, 2021
December 31, December 31, through January
2022 2021 29, 2021
Personnel expenses $ 25,921 $ 17,858 $ -
Legal and professional fees 15,060 14,831 117
Other expenses 12,865 9,570 4
Facilities and supplies 1,354 629 -
$ 55,200 $ 42,888 $ 121
General and administrative expenses for the Company (Successor) for the twelve
months ended December 31, 2022 were $55.2 million and for the period from
January 30, 2021 through December 31, 2021 were $42.9 million . The increase in
2022 is primarily attributable to higher public company costs subsequent to the
Company's IPO in June 2021 , higher personnel costs and increased costs related
to the implementation of Oracle software. The increase in personnel related
expenses included an increase in headcount and higher share-based compensation
expense of $4.1 million which is primarily attributable to the equity awards
issued at the time of the acquisition and the subsequent issuances of awards
through December 31, 2022 .
During the period fromJanuary 30, 2021 throughDecember 31, 2021 , in connection with the acquisition of the Centessa Subsidiaries, the Company (Successor) recognized$220.5 million of expense associated with research and development projects of the Centessa Subsidiaries which were in-process with no alternative future use.
Change in Fair Value of Contingent Value Rights
OnFebruary 18, 2022 , we commenced dosing in the Phase 3 clinical trial evaluating lixivaptan as a potential treatment for ADPKD. Such event was the milestone trigger for payment of contingent value rights originally issued to the former shareholders and option holders of Palladio, in connection with its acquisition by Centessa inJanuary 2021 . The contingent value rights entitled such holders to a number of ordinary shares of the Company (including in the form of ADSs) in an aggregate amount of approximately$39.7 million based on the Volume Weighted Average Price of the Company's ADSs over the five day trading period ending on the date of the milestone trigger. The aggregate number of ordinary shares, issued as ADSs, in satisfaction of such contingent value rights, to the former shareholders and option holders of Palladio was 3,938,423. The number of ADSs issued to employee recipients reflected in this figure is net of tax withholding, which the Company satisfied with cash payments to tax authorities. The ADSs were issued in exchange for the previously-issued contingent value rights of the Company. We recognized a remaining$2.0 million adjustment of fair value in its consolidated statement of operations and comprehensive loss in its first quarter of 2022, while a corresponding fair value adjustment of$15.1 million was recognized in our consolidated statement of operations and comprehensive loss during the period fromJanuary 30, 2021 throughDecember 31, 2021 . Interest Expense, net Interest expense, net for the twelve months endedDecember 31, 2022 and for the period fromJanuary 30, 2021 throughDecember 31, 2021 was$7.0 million and$1.2 million , respectively. The increase reflected higher interest expense from the issuance of the Note Purchase Agreement inOctober 2021 , partially offset by interest earned on higher cash balances.
Other Income (Expense), net
Other income (expense), net for the twelve months endedDecember 31, 2022 was$2.3 million , primarily reflecting a$5.9 million gain related to remeasuring the Note Purchase Agreement at fair value as ofDecember 31, 2022 , 123
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partially offset by foreign currency transaction losses of$2.8 million . The unrealized gain related to the Note Purchase Agreement was primarily driven by an increase in the discount rate due to a higher risk free rate and an increase in credit spreads. Other income (expense), net for the Company during the period fromJanuary 30, 2021 throughDecember 31, 2021 was$(4.4) million , largely reflecting foreign currency transaction losses.
Liquidity and Capital Resources
Sources of Liquidity
As ofDecember 31, 2022 , we had cash and cash equivalents of$393.6 million . Concurrent with the acquisition of the Centessa Subsidiaries by the Company (Successor) inJanuary 2021 , we completed a$250.0 million Series A convertible preferred financing that was comprised of$245.0 million in proceeds and the$5.0 million conversion of a convertible debt instrument. InJune 2021 , we completed our IPO and shortly after the close of the IPO, the underwriters exercised their option in full to purchase an additional 2,475,000 ADSs at the initial public offering price of$20.00 per ADS. We received aggregate net proceeds of$344.1 million which includes the full exercise of the underwriters' option. InOctober 2021 , we entered into a financing agreement with funds managed byOberland Capital , which provides us additional funds to further scale up our development activities and to enhance balance sheet flexibility for potential pipeline extension. Under the terms of the agreement,Oberland Capital will purchase up to$300.0 million of 6-year, interest-only (initial interest rate is 8.0% per annum), senior secured notes from us including$75.0 million , funded onOctober 4, 2021 ,$125.0 million available in tranches of$75.0 million and$50.0 million available throughSeptember 2023 andDecember 2023 , respectively, at our option, and$100.0 million available to fund M&A, in-licensing, or other strategic transactions, at the option of the Company andOberland Capital . Under the financing agreement, as amended, we are required to maintain a cash balance in an amount equal to 90% of the aggregate outstanding principal amount of all issued Notes, as defined in the Note Purchase Agreement, that have been issued. Also pursuant to the agreement, upon the sale of any of our assets, if the Purchaser Agent elects to have us repurchase the notes, such repurchase amounts will be subject to a$100 million deductible such that the Purchaser Agent will not collect any repurchase amounts until$100 million has been received by us from such sale event. In addition, the reduced payment cap that is triggered by the Purchaser Agent opting into a repayment in the event of an asset sale, extends to the second loan tranche, if drawn. InJuly 2022 , we filed a shelf registration statement (Form S-3) with theSEC , under which we may offer and sell from time to time up to$350.0 million in the aggregate of its ordinary shares, each of which may be represented by one American Depositary Share; senior or subordinated debt securities; warrants to purchase any securities that may be sold under the prospectus; units or any combination of such securities as described in such registration statement. OnJanuary 27, 2023 , the Company entered into a sales agreement withSVB Securities LLC ("SVB") pursuant to which the Company may offer and sell its ordinary shares, represented by American Depositary Shares, having an aggregate offering price of up to$125.0 million from time to time in "at-the-market" offerings through SVB, acting as our agent (the "ATM Offering"). The Company has not sold any ordinary shares, or American Depositary Shares, or received any proceeds from any offerings under the ATM Offering. We have no other ongoing material financing commitments, such as lines of credit or guarantees, that are expected to affect liquidity over the next five years. The maturity date of the Oberland Capital Notes isOctober 4, 2027 . 124
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Cash Flow
The following table shows a summary of cash flows for the periods indicated (in
thousands):
Successor Predecessor
Period from
Twelve Months January 30, Period from
Ended 2021 through January 1, 2021
December 31, December 31, through
2022 2021 January 29, 2021
Net cash (used in) provided by:
Operating activities $ (200,546) $ (135,109) $ (1,049)
Investing activities (931) 63,256 -
Financing activities 457 660,147 -
Exchange rate effect on cash and cash
equivalents (418) 1,822 80
Net (decrease) increase in cash and cash
equivalents $ (201,438) $ 590,116 $ (969)
Operating Activities
During the twelve months ended December 31, 2022 , the Company (Successor) used
$200.5 million of cash in operating activities, reflecting a net loss of $216.2
million , partially offset by a noncash charge of $25.0 million for share-based
compensation.
During the period from January 30, 2021 through December 31, 2021 , the Company
(Successor) used $135.1 million of cash in operating activities. Cash used in
operating activities reflected a net loss of $381.1 million , offset by a $220.5
million non-cash charge for acquired in-process research and development in
connection with the acquisition of the Centessa Subsidiaries, $15.8 million in a
non-cash change in fair value of contingent value rights and debt, $14.9 million
in non-cash share-based compensation expense, and a $(5.8) million net change in
operating assets and liabilities.
During the period from January 1, 2021 through January 29, 2021 , the Centessa
Predecessor Group used $1.0 million of net cash in operating activities. Cash
used in operating activities largely reflected a net loss of $0.8 million .
Investing Activities
During the twelve months endedDecember 31, 2022 , net cash used in investing activities for the Company (Successor) was$0.9 million , primarily related to the purchase of property and equipment. During the period fromJanuary 30, 2021 throughDecember 31, 2021 , net cash provided by investing activities for the Company (Successor) was$63.3 million and was largely attributable to$68.0 million of cash acquired in connection with the acquisition of the Centessa Subsidiaries, partially offset by related$4.6 million of transaction costs paid during the period. Financing Activities During the twelve months endedDecember 31, 2022 , net cash provided by financing activities for the Company (Successor) was$0.5 million , reflecting proceeds from the exercise of stock options partially offset by the payment of debt issuance costs. During the period fromJanuary 30, 2021 throughDecember 31, 2021 financing activities for the Company (Successor) provided$660.1 million in net cash proceeds and is primarily attributable to the sale of the Company (Successor)'s Series A preferred shares inJanuary 2021 , the IPO inJune 2021 , and the issuance of debt inOctober 2021 , net of issuance costs. The Company (Successor) also received$0.8 million in proceeds upon the exercise of stock options. Funding Requirements We expect expenses to increase in connection with ongoing activities, particularly as we continue the research and development of, continue or initiate clinical trials of, and seek marketing approval for any current and future product candidates. In addition, if marketing approval is obtained for any product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. In addition, inflation may affect our use of capital resources by increasing our cost of labor, research and clinical trial expenses. Accordingly, there 125
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will be a need to obtain substantial additional funding in connection with the continuing operations. For the foreseeable future, the Centessa Subsidiaries expect the significant majority of their funding to come from the Company. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate research and development programs or future commercialization efforts.
We anticipate that our expenses will increase substantially as we:
•seek to discover and develop current and future clinical and preclinical product candidates;
•scale up clinical and regulatory capabilities;
•adapt regulatory compliance efforts to incorporate requirements applicable to marketed products;
•establish a sales, marketing and distribution infrastructure and scale up external manufacturing capabilities to commercialize any product candidates for which regulatory approval may be obtained;
•maintain, expand and protect the intellectual property portfolio;
•hire additional internal or external clinical, manufacturing and scientific personnel or consultants;
•add operational, financial and management information systems and personnel, including personnel to support product development efforts; and
•incur additional legal, accounting and other expenses in operating as a public company.
Because of the numerous risks and uncertainties associated research, development and commercialization of product candidates, we are unable to estimate the exact amount of its working capital requirements. Future funding requirements will depend on and could increase significantly as a result of many factors, including:
•the scope, progress, results and costs of preclinical studies and clinical trials;
•the scope, prioritization and number of research and development programs;
•the costs, timing and outcome of regulatory review of product candidates;
•the ability to establish and maintain collaborations on favorable terms, if at all;
•the extent to which obligations to reimburse exist, or entitled to reimbursement of, clinical trial costs under collaboration agreements, if any;
•the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing intellectual property rights and defending intellectual property-related claims;
•the costs of securing manufacturing arrangements for commercial production; and
•the costs of establishing or contracting for sales and marketing capabilities if regulatory approvals are obtained to market product candidates.
Identifying potential product candidates and conducting preclinical studies and clinical trials is a time- consuming, expensive and uncertain process that takes many years to complete, and may never generate the necessary data or results required to obtain marketing approval and achieve product sales. In addition, product candidates, if approved, may not achieve commercial success. Commercial revenues, if any, will be derived from sales of product candidates that do not expect to be commercially available for the next couple of years, if at all. Accordingly, the need to continue to rely on additional financing to achieve our business objectives will exist. Adequate additional financing may not be available on acceptable terms, or at all.
Critical Accounting Policies
Management's discussion and analysis of its financial condition and results of operations is based on the consolidated and combined financial statements of theCompany (Successor) and Centessa Predecessor Group which have been prepared in accordance withU.S. generally accepted accounting principles. The preparation of these financial statements requires estimates and judgments be made that affect the reported amounts of assets, liabilities, and expenses and the disclosure of contingent assets and liabilities in the consolidated and combined financial statements. On an ongoing basis, an evaluation of estimates and judgments are required, including those related to accrued research and development expenses, the Note Purchase Agreement and share-based compensation. Estimates are based on historical experience, known trends and events, and various other factors that are believed to be reasonable under the circumstances, the results of 126
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which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. While the significant accounting policies are described in more detail in Note 2 to the Company (Successor)'s consolidated and the Group's combined financial statements, the following accounting policies are the most critical to the judgments and estimates used in the preparation of the financial statements.
Research and Development Accruals
Research and development expenses consist primarily of costs incurred in connection with the development of product candidates. Research and development costs are expensed as incurred.
Expenses for preclinical studies and clinical trial activities performed by third parties are accrued based upon estimates of the proportion of work completed over the term of the individual trial and patient enrollment rates in accordance with agreements with CROs and clinical trial sites. Estimates are determined by reviewing external service providers as to the progress or stage of completion of trials or services and the agreed-upon fee to be paid for such services. However, actual costs and timing of clinical trials are highly uncertain, subject to risks and may change depending upon a number of factors, including the clinical development plan. Estimates of accrued expenses are made as of each balance sheet date in the financial statements based on facts and circumstances known at that time. If the actual timing of the performance of services or the level of effort varies from the estimate, an adjustment to the accrual will be made accordingly. Nonrefundable advance payments for goods and services, including fees for process development or manufacturing and distribution of clinical supplies that will be used in future research and development activities, are recognized as expense in the period that the related goods are consumed or services are performed. Milestone payments within the Company's licensing arrangements are recognized when achievement of the milestone is deemed probable to occur. To the extent products are commercialized and future economic benefit has been established, commercial milestones that become probable are capitalized and amortized over the estimated remaining useful life of the intellectual property. In addition, royalty expenses would be accrued and sublicense non-royalty payments, as applicable, for the amount it is obligated to pay, with adjustments as sales are made. Note Purchase Agreement As described in further detail in Note 6 - "Debt," in October 2021, we entered into a Note Purchase Agreement (the "Notes") withOberland Capital Management LLC ("Oberland Capital "). Under the terms of the agreement, amended,Oberland Capital will purchase up to$300.0 million of 6-year, interest-only (initial interest rate is 8.0% per annum), senior secured notes (the Notes) from us including$75.0 million , funded onOctober 4, 2021 ,$125.0 million available through 2023 at the Company's option, and$100.0 million available to fund Mergers and Acquisitions ("M&A"), in-licensing, or other strategic transactions, at the our option andOberland Capital . In addition, we are obligated to pay a Milestone payment equal to 30% of the aggregate principal amount issued under the Notes by us upon regulatory approval of any drug candidate. We evaluated the notes and determined that the notes include embedded derivatives that would otherwise require bifurcation as derivative liabilities. Neither the debt instrument nor any embedded features are required to be classified as equity. Therefore, the hybrid financial instrument comprised of the debt host and the embedded derivative liability may be accounted for under the fair value option. We elected to carry the Notes at fair value, and the debt instrument is outside the scope of ASC 480, Distinguishing Liabilities from Equity, and thus will be classified as a liability under ASC 470, Debt, in our financial statements. As we have elected to account for the Notes under the fair value option, debt issuance costs were immediately expensed. The fair value of the Note Purchase Agreement represents the present value of estimated future payments, including interest, principal as well as estimated payments that are contingent upon the achievement of specified milestones. The fair value of the notes is based on the cumulative probability of the various estimated payments. The fair value measurement is based on significant Level 3 unobservable inputs such as the probability of achieving the milestones, anticipated timelines, probability and timing of an early redemption of all obligations under the agreement and discount rate. Any changes in the fair value of the liability are recognized in the consolidated statement of operations and comprehensive loss until it is settled. 127
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Share-Based Compensation
We measure share-based awards at their grant-date fair value and record compensation expense on a straight-line basis over the vesting period of the awards. Following the completion of our IPO, the fair value of our ordinary shares was determined based on the quoted market price of our ADSs representing our ordinary shares. The Company (Successor) and thePredecessor Group account for forfeitures of stock option awards as they occur. We use the Black-Scholes option pricing model to value its stock option awards. The expected life of the stock options is estimated using the "simplified method," as we have limited historical information from which to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior for its stock option grants. The simplified method is the midpoint between the vesting period and the contractual term of the option. For share price volatility, we use comparable public companies as a basis for our expected volatility to calculate the fair value of option grants. The risk-free rate is based on theU.S. Treasury yield curve commensurate with the expected life of the option. As there was no public market for our ordinary shares prior to the IPO, the estimated fair value of our ordinary shares had been determined by our board of directors as of the date of each option grant, with input from management, considering third-party valuations of our ordinary shares, which were performed contemporaneously with events which management believed would have an impact on the valuation of our ordinary shares. Our board of directors considered various objective and subjective factors, along with input from management, to determine the fair value of our ordinary shares, including:
•our nascent stage of development and business strategy, including the status of research and development efforts of its product candidates and the material risks related to its business and industry;
•our results of operations and financial position, including our levels of available capital resources;
•the valuation of publicly traded companies in the life sciences and biotechnology sectors, as well as recently completed mergers and acquisitions of peer companies;
•the lack of marketability of our ordinary shares as a private company;
•the most recent price of our convertible preferred shares sold to investors in arm's length transactions and the rights, preferences and privileges of our convertible preferred shares relative to those of our ordinary shares;
•the likelihood of achieving a liquidity event for the holders of our ordinary shares, such as an initial public offering or a sale of our, given prevailing market conditions;
•trends and developments in our industry; and
•external market conditions affecting the life sciences and biotechnology industry sectors.
The third-party valuations of our ordinary shares that our board of directors considered in making its determinations were performed in accordance with the guidance outlined in the "Practice Guide", which prescribes several valuation approaches for determining the value of an enterprise, such as cost, market and income approaches, and various methodologies for allocating the value of an enterprise to its capital structure and specifically the ordinary shares.
Contractual Obligations and Other Commitments
As of
"Commitment and contingencies" and Note 6 - "Debt" , we had no material
contractual obligations and other commitments associated with contracts that are
enforceable and legally binding and that specify all significant terms,
including fixed or minimum services to be used, fixed, minimum or variable price
provisions, and the approximate timing of the actions under the contracts.
We have entered into collaborative arrangements to develop and commercialize
intellectual property. These arrangements typically involve two (or more)
parties who are active participants in the collaboration and are exposed to
significant risks and rewards dependent on the commercial success of the
activities. These collaborations usually involve various activities by one or
more parties, including research and development, marketing and selling and
distribution. Often, these collaborations require upfront, milestone and royalty
or profit share payments, contingent upon the occurrence of certain future
events linked to the success of the asset in development. Amounts due to
collaborative partners related to development activities are generally reflected
as research and development expenses. See "Intellectual Property and License
Agreements" in Item 1. Business of this Form 10-K for additional information on
these arrangements.
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The contractual obligations we have disclosed do not include any potential development, regulatory and commercial milestone payments and potential royalty payments that we may be required to make under the various license agreements entered into by the Centessa Subsidiaries and collaboration agreement. We excluded these payments given that the timing of any such payments cannot be reasonably estimated at this time.
Incentivization Agreements
InJanuary 2021 , we established incentivization arrangements pursuant to which certain members of the senior management teams of each subsidiary are eligible to earn certain payments based on the attainment of corresponding milestone performance by and/or an exit event of such subsidiary, as applicable to each executive. As defined in the incentivization agreements, an "exit event" includes the sale or disposition (including via an out-licensing) of all or substantially all of the applicable subsidiary's commercially valuable assets or, in the case of subsidiaries with more than one asset, sale or disposition of one or more of such assets, or any sale or disposition of the applicable subsidiary's equity which results in the purchaser of the equity acquiring a controlling interest in the applicable subsidiary. Milestones may include the designation of a product candidate or the attainment of approvals, licenses, permits, certifications registrations or authorizations necessary for the sale of a particular product candidate or related molecules inthe United States ,France ,Germany ,Italy ,Spain or theUnited Kingdom . The milestone payment amount for each subsidiary is in the low eight figure range to be divided among the members of the respective subsidiary's senior management team and employees according to the terms of its respective incentivization agreement. Any milestone payment earned will be payable in a lump sum within twenty (20) days after attainment of the milestone. In addition, if a sale of a controlling interest in a subsidiary or sale (or grant of an exclusive license) of its respective product candidate occurs prior to attainment of the milestone or within the three (3) year period following attainment of the milestone, an exit payment equal in the range of single digit to low teens percentage of the sales proceeds less any amounts previously paid as a milestone payment (if any) and any fees, costs and expenses of the sale (excluding any earn out, milestone, royalty payment or other contingent payments but including any escrow, holdback or similar amount) will become due and payable to certain employees and members of the subsidiary's senior management team. To the extent an exit event occurs following the occurrence of an adverse event (which includes the failure to achieve milestones within the specified time period), no exit payment will become due unless sale proceeds are in excess of an amount in the eight-figure range. The incentivization agreements contain standard termination provisions providing that the agreements shall terminate upon the occurrence of certain events, or automatically onDecember 31, 2035 . Other events that may trigger termination include: •an exit event;
•the occurrence of certain asset sales in conjunction with certain milestones; and
•the date that is three years following achievement of certain milestones.
Emerging Growth Company and Smaller Reporting Company Status
We are an emerging growth company, as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay the adoption of new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. Other exemptions and reduced reporting requirements under the JOBS Act for emerging growth companies include presentation of only two years of audited financial statements in a registration statement for an initial public offering, an exemption from the requirement to provide an auditor's report on internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, as amended, an exemption from any requirement that may be adopted by thePublic Company Accounting Oversight Board regarding mandatory audit firm rotation and less extensive disclosure about our executive compensation arrangements. We have elected to use the extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that (i) we are no longer an emerging growth company or (ii) we affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. We will remain an emerging growth company until the earliest of (i) the last day of our first fiscal year in which we have total annual gross revenues of$1.235 billion or more, (ii) following the fifth anniversary of the closing of our initial public offering, (iii) the date on which we are deemed to be a "large accelerated filer," under the rules of theSEC , which means the market value of equity securities that is held by non-affiliates exceeds$700.0 million as of the priorJune 30th and (iv) the date on which we have issued more than$1.0 billion in non-convertible debt securities during the prior three-year period. 129
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We are also a "smaller reporting company" as defined in the Securities Exchange Act of 1934 (the "Exchange Act"). If we are still a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation.
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