# Candel Therapeutics, Inc. (CADL) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Candel Therapeutics, Inc.'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1841387/000095017022004857/cadl-20211231.htm
Accession: 0000950170-22-004857
Filing date: 2022-03-29
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/CADL/
All MD&A years: /company/CADL/mda/
Next year: /company/CADL/mda/fy2022/ (FY 2022)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis contains forward-looking statements that involve risks and uncertainties. You should review the section titled “Risk factors” in this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described below.

Overview

We are a late clinical stage biopharmaceutical company focused on helping patients fight cancer with oncolytic viral immunotherapies. Our engineered viruses are designed to induce immunogenic death through direct viral-mediated cytotoxicity in cancer cells, thus releasing tumor neo-antigens and creating a pro-inflammatory microenvironment at the site of injection. Our approach combines an in-depth knowledge of viral immunotherapy with extensive clinical experience across a wide range of indications. Based on the broad range of data that we have generated from our preclinical models and clinical trials using our approach, we have observed what we believe to be systemic immune response against locally injected tumors and their distant metastases. We have established two oncolytic viral immunotherapy platforms based on novel, genetically modified adenovirus and herpes simplex virus (HSV) constructs. In our clinical results to date from CAN-2409, our lead product from our adenovirus platform, and CAN-3110, our lead product candidate from our HSV platform, we have observed that these candidates may have the potential to address significant unmet patient need and improve clinical outcomes in novel indications across broader patient populations.

Since our formation, we have devoted substantially all our resources to developing our oncolytic viral immunotherapy and our adenovirus platform, conducting research and development activities, including product candidate development, recruiting skilled personnel, establishing our intellectual property portfolio, raising capital and providing general and administrative support for these operations. We have financed our operations primarily through proceeds from the sale of convertible notes, common stock and our convertible preferred stock. As of December 31, 2021, we have raised approximately $160.6 million through a combination of convertible notes, common stock, convertible preferred stock financings, and government grants.

We were incorporated under the laws of the State of Delaware in June 2003. Our principal executive office is located at 117 Kendrick St, Suite 450, Needham, Massachusetts 02494. On November 30, 2020, we formally changed our name to Candel Therapeutics, Inc., previously Advantagene, Inc. Since our formation, we have incurred significant operating losses and have not generated any revenue from the sale of products. Our ability to generate any product revenue or product revenue sufficient to achieve profitability will depend on the successful development and eventual commercialization of one or more of our product candidates. Our net losses were $36.1 million, $17.7 million for the years ended December 31, 2021 and 2020, respectively. As of December 31, 2021, we had an accumulated deficit of $80.3 million.

We will not generate revenue from product sales unless and until we successfully complete clinical development, obtain regulatory approval for, and successfully commercialize our product candidates. The lengthy process of securing marketing approvals for new drugs requires the expenditure of substantial resources. Any significant delay or failure to obtain regulatory approvals would materially adversely affect our product candidates development efforts and our business overall. In addition, if we obtain regulatory approval for any of our product candidates, we expect to incur significant expenses related to developing our commercialization capability to support product sales, marketing, manufacturing and distribution activities. In addition, following the closing of this offering, we expect to incur significant additional costs associated with operating as a public company. We anticipate that our expenses will increase significantly as we:

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advance the development of our product candidate pipeline;

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initiate and continue research and preclinical and clinical development of potential new product candidates;

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maintain, expand and protect our intellectual property portfolio;

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acquire or in-license additional product candidates and technologies;

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expand our infrastructure and facilities to accommodate our growing employee base and ongoing development activities;

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establish agreements with contract research organizations, or CROs, and third-party contract manufacturing organizations, or CMOs, in connection with our preclinical studies and clinical trials and the development of our manufacturing capabilities;

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develop the manufacturing process and capabilities for future clinical trials and commercialization;

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manufacture larger quantities of our product candidates for clinical development and potential commercialization;

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seek marketing approvals for our product candidates that successfully complete clinical trials, if any;

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establish a sales, marketing and distribution infrastructure to commercialize any products for which we may obtain marketing approval; and

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add operational, financial and management information systems and personnel, including personnel to support our research and development programs, any future commercialization efforts and our transition to operating as a public company.

As a result of these anticipated expenditures, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time, if ever, as we can generate significant revenue from product sales, we expect to finance our cash needs through a combination of public or private equity or debt financings and other sources, which may include collaborations, strategic alliances and licensing arrangements with third parties. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. Our inability to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy. We cannot assure you that we will ever generate sufficient revenue to achieve profitability.

Because of the numerous risks and uncertainties associated with the development of therapeutics, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we can generate revenue from product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be required to raise additional capital on terms that are unfavorable to us or we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.

Collaborations

We are a party to a number of license and collaboration agreements under which we license patents, patent applications and other intellectual property to and from third parties.

Periphagen. On December 9, 2019, we entered into a series of agreements, including an exclusive license agreement, a novation agreement, an equipment purchase agreement and an intellectual property assignment agreement, collectively the Periphagen Agreements, with Periphagen, whereby we acquired certain assets and licensed certain rights (including specified patent rights and know-how, or the Licensed IP Rights) of Periphagen, primarily consisting of exclusive rights to their technology platform and a portfolio of pre-clinical, development stage virus vectors. The primary classes of assets are HSV-derived assets expressing neurotrophin-3 (or NT-3 Assets) and other HSV-derived assets (Gene Transfer Neuro-Assets). Under the license agreement, Periphagen granted us a worldwide exclusive license with the right to grant sublicenses through multiple tiers under the Licensed IP Rights to conduct research and to develop, make, have made, use, have used, offer for sale, have sold, export and import products incorporating the Licensed IP Rights in all fields of use except the treatment, diagnosis, and prevention of nononcologic skin diseases and conditions (including use as an aesthetic).

MGB. On January 20, 2018, we entered into an exclusive option agreement, or the Option Agreement, with MGB. Pursuant to the Option Agreement, we obtained the exclusive right from MGB to negotiate a world-wide, royalty-bearing license to develop and commercialize products covered by certain MGB patents, including those patents covering CAN-3110, in the field of gene therapy and oncolytic vector therapy for the treatment or prevention of cancerous tumors in humans or animals, as such field is further detailed in the Option Agreement, or the Licensed Field. In consideration for MGB’s granting of the exclusive option, we paid MGB a non-refundable fee of $40,000.

Under the Option Agreement, we were required to use reasonable efforts to enter into a clinical trial agreement with MGB. We entered into such clinical trial agreement with MGB, or the MGB Clinical Trial Agreement, on June 19, 2018. Under the MGB Clinical Trial Agreement, we have committed to remitting financial support for the performance of a specified Phase 1 clinical trial by MGB pursuant to a protocol summary contained in the Option Agreement.

On September 15, 2020, we exercised our option and entered into an exclusive patent license agreement with MGB, or the MGB License Agreement. Under the MGB License Agreement, MGB granted to us (a) an exclusive, royalty-bearing license under certain of MGB’s patents to make, have made, use, have used, sell and have sold certain products covered by such licensed patents, or the Licensed Products and otherwise practice processes covered by such licensed patents, or Licensed Processes; and (b) a non-exclusive, royalty-bearing license under certain other of MGB’s patents to make, have made, use, have used, sell and have sold Licensed Products, but not to sell or have sold Licensed Processes. The foregoing rights are sublicensable, subject to sublicensing terms set forth in the MGB License Agreement. In connection with executing the MGB License Agreement, we paid a license issue fee and also agreed to reimburse MGB for all reasonable fees and expenses MGB had incurred and will incur for the preparation, filing, prosecution and maintenance of the licensed patent rights.

Ventagen. On March 1, 2014, we entered into an exclusive license agreement, or the Ventagen Agreement, with Ventagen, a related party. The Ventagen Agreement provides Ventagen an exclusive license, with rights to grant

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sublicense (subject to certain terms and conditions) under any worldwide patent rights and know-how owned or controlled by us during the term of the Ventagen Agreement which cover applicable technology utilizing the delivery method of the herpes derived TK protein to tumors or other tissues via a viral vector (as further specified therein), to research, use, have used, import, have imported, export, have exported, offer for sale, have sold, sell, distribute and market certain products for the prevention or treatment of cancer in humans and any use in animals (or the Field of Use), or the Licensed Products, for commercial sale and distribution within Mexico, Belize, Guatemala, Honduras, El Salvador, Costa Rica, Nicaragua, Panama, Colombia and Bolivia. Ventagen is 49.5% owned by certain of our shareholders.

As of December 31, 2021, we had cash and cash equivalents of $82.6 million. On February 24, 2022, we entered into a loan and security agreement (the Loan Agreement) with a bank pursuant to which the bank has agreed to provide term loans to the Company in an aggregate principal amount of up to $25.0 million. We borrowed $20.0 million upon entering into the Loan Agreement. We believe the existing cash and cash equivalents on hand as of December 31, 2021 plus the proceeds under the Loan Agreement will enable us to fund our operating expenses and capital expenditure requirements into the fourth quarter of 2023. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. See “Liquidity and capital resources.”

Components of our results of operations

Revenue

To date, we have not generated any revenue from product sales and do not expect to generate any revenue from sales of products in the foreseeable future. We are recognizing as research and development service revenue $1.0 million that we received in 2014 and 2015 from Ventagen for an exclusive license to develop products for commercial sale and development within certain countries. The $1.0 million is being recognized as revenue over the period during which we provide services under the license agreement.

Operating expenses

Our operating expenses since inception have consisted solely of research and development costs and general and administrative costs.

Research and development expenses

Research and development expenses consist primarily of costs incurred for our product development activities for our two primary drug candidates, CAN-2409 and CAN-3110. We expense research and development costs as incurred. These include the following:

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employee-related costs, including salaries, benefits and stock-based compensation expense, for personnel engaged in research, development and clinical management functions;

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expenses incurred under agreements with third party clinical sites for the treatment and follow-up for patients enrolled in our clinical trials;

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the cost of acquiring and manufacturing preclinical study materials, including manufacturing registration and validation batches;

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payments made under third-party licensing agreements;

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costs incurred to develop the manufacturing process and capabilities for future clinical trials and commercialization. Our clinical trial material for use in our existing clinical trials was manufactured in prior years;

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costs related to compliance with quality and regulatory requirements;

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costs of outside consultants, primarily related to regulatory; and

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facility-related expenses, which include direct depreciation costs and expenses for rent and maintenance of facilities and insurance, and other operating costs if specifically identifiable to research and development activities.

We expect that our research and development expenses will continue to increase substantially for the foreseeable future and will comprise a larger percentage of our total expenses as we complete our clinical trials and commence additional clinical trials, continue to discover and develop additional product candidates and develop and scale our manufacturing capabilities. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to increased scale and duration of later stage clinical trials.

We cannot determine with certainty the duration and costs of future clinical trials of CAN-2409 and CAN-3110 or any other product candidate we may develop or if, when, or to what extent we will generate revenue from the commercialization and sale of any product candidate for which we obtain marketing approval. At this time, we cannot accurately estimate or know the nature, timing and costs of the efforts that will be necessary to complete the clinical development of, or obtain regulatory approval for, any of our current or future product candidates. The duration, costs,

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and timing of clinical trials and development of CAN-2409 and CAN-3110 and any other product candidate we may develop will depend on a variety of factors, including:

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the scope, rate of progress, expense and results of clinical trials;

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our successful enrollment in and completion of clinical trials, including our ability to generate positive data from any such trials;

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our ability to add and retain key research and development personnel;

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the actual probability of success for our product candidates, including their safety and efficacy, early clinical data, competition, manufacturing capability, and commercial viability;

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significant and changing government regulation and regulatory guidance;

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the timing and receipt of any marketing approvals;

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the progress of the development efforts of parties with whom we may enter into collaboration agreements, and the terms and timing of any additional collaboration agreements, license or other arrangement, including the timing of any payments thereunder;

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our ability to enter into agreements with CMOs for the commercial manufacture of our product candidate CAN-2409 and the clinical scale manufacture of our product candidate CAN-3110 as well as complete the development, construction and qualification of our clinical manufacturing facility in Needham;

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costs related to manufacturing of our product candidates or to account for any future changes in our manufacturing plans;

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our ability to successfully commercialize our product candidates, if and when approved;

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raising additional funds necessary to complete clinical development of our product candidates;

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our ability to obtain and maintain third-party insurance coverage and adequate reimbursement for our product candidates, if and when approved;

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the acceptance of our product candidates, if approved, by patients, the medical community and third-party payors;

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effectively competing with other products if our product candidates are approved;

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the impact of any business interruptions to our operations, including the timing and enrollment of patients in our planned clinical trials, or to those of our manufacturers, suppliers, or other vendors resulting from the ongoing COVID-19 pandemic or similar public health crisis;

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our ability to maintain a continued acceptable safety profile for our therapies following approval;

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our ability to obtain and maintain patents, trade secret and other intellectual property protection and regulatory exclusivity for our product candidates, both in the United States and internationally; and

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the expense of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights.

A change in the outcome of any of these variables with respect to the development of a product candidate could significantly change the costs and timing associated with the development of that product candidate. We may never succeed in obtaining regulatory approval for any of our product candidates.

General and administrative expenses

General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation, for personnel in our executive, finance, business development, and administrative functions. General and administrative expenses also include legal fees relating to intellectual property and corporate matters; professional fees for accounting, auditing, tax and consulting services; insurance costs including directors and officers insurance; travel expenses; and facility-related expenses, which include direct depreciation costs and expenses for rent and maintenance of facilities, and other operating costs that are not specifically attributable to research and development activities.

We expect that our general and administrative expenses will increase in the future as we increase our personnel headcount to support our continued clinical development and manufacturing activities and to meet the requirements of a public company. We expect to incur increased expenses associated with being a public company, including costs of accounting, audit, legal, regulatory, and tax-related services associated with maintaining compliance with exchange listing and Securities and Exchange Commission, or SEC, requirements; director and officer insurance costs; and investor and public relations costs.

Grant income

Grant income consists of amounts received under a grant from the National Institute of Health for development of CAN-2409 for use as a therapy for pancreatic cancer.

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Interest, dividend, and investment income

Interest, dividend and investment income consists of amounts earned on investment of cash equivalents and short-term investments.

Change in fair value of warrant liability

In connection with the November 13, 2018 issuance of Series B preferred stock we issued warrants to the purchasers of the Series B preferred stockholders, to purchase up to 7,344,982 shares of our common stock with an exercise price of $6.81 per share, and a warrant to the NC Incorporated Ohio Trust, an irrevocable trust funded by us, to purchase 162,740 shares of our common stock, $0.01 par value, at an exercise price of $1.46 per share, subject to adjustments as specified in the warrant agreement. Certain of those warrants are recorded as a liability on our balance sheet. The warrants recorded as a liability are remeasured to their fair value at each reporting date with changes in the fair value recognized as a component of other income (expense), net in the statements of operations and comprehensive loss. We will continue to recognize changes in the fair value of the warrant liability until the warrants are exercised, expire or qualify for equity classification. The fair value of the warrant liability is determined based on significant inputs not observable in the market. The fair value of the warrant liability uses various valuation methods, including the Monte Carlo method, the option-pricing method, probability-weighted expected return and the hybrid method, all of which incorporate assumptions and estimates, to value the common stock warrants. The hybrid method is often used when a company is expecting a liquidity event in the near future and is a combination of the option-pricing and probability-weighted expected return methods. Estimates and assumptions impacting the fair value measurement include the fair value per share of the underlying shares of common stock, risk-free interest rate, expected dividend yield, and the remaining contractual term of the warrants. Therefore, the fair value may not be appropriately captured by simple models.

Income taxes

Since our inception, we have generated cumulative federal and state net operating loss and research and development credit carryforwards for which we have not recorded any net tax benefit due to uncertainty around utilizing these tax attributes within their respective carryforward periods.

As of December 31, 2021, we had federal net operating loss carryforwards, or NOLs, of approximately $51.6 million and state NOLs of approximately $48.4 million which may be available to offset future taxable income. Our federal NOLs include $8.8 million available to reduce future taxable income through 2028 and approximately $42.8 million of NOLs that do not expire and are available to reduce future taxable income indefinitely. The state NOLs are available to offset future taxable income through 2032. As of December 31, 2021, we also had federal and state research and development tax credit carryforwards of $2.0 million and $1.1 million, respectively, which are available to offset federal and state tax liabilities through 2036 and 2028, respectively.

Realization of future tax benefits is dependent on many factors, including our ability to generate taxable income within the NOL period. Our management has evaluated the positive and negative evidence bearing upon the realizability of our deferred tax assets, which are comprised principally of net operating loss carryforwards and certain tax credits. Management has considered our history of cumulative net losses incurred since inception, as well as our lack of product revenue since inception, and has determined that it is more likely than not that we will not realize the benefits of its deferred tax assets. As a result, a full valuation allowance has been established at December 31, 2021.

NOL and tax credit carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant shareholders over a three-year period in excess of 50%, as provided under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, or the Code, as well as under similar state provisions. These ownership changes may limit the amount of NOLs that can be utilized annually to offset future taxable income. In general, an ownership change, as defined under Section 382 of the Code, or Section 382, results from transactions increasing the ownership of certain shareholders or public groups in the stock of a corporation by more than 50% over a three-year period. We have completed several financings and not yet determined if such a limitation would be placed against our NOL. We will make such a determination prior to the utilization of any NOL

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Results of operations

The following table summarizes our results of operations for the years ended December 31, 2021 and 2020 (in thousands):

[[GREPCENT_TABLE]]
[["","","YEAR ENDED DECEMBER 31,","","","INCREASE/"],["","","2021","","","2020","","","(DECREASE)"],["Research and development service revenue","","$","125","","","$","125","","","$","-"],["Operating expenses:"],["Research and development","","","15,178","","","","8,754","","","","6,424"],["General and administrative","","","10,673","","","","5,181","","","","5,492"],["Total operating expenses","","","25,851","","","","13,935","","","","11,916"],["Loss from operations","","","(25,726",")","","","(13,810",")","","","(11,916",")"],["Grant income","","","1,076","","","","624","","","","452"],["Interest, dividend and investment (expense) income, net","","","(53",")","","","111","","","","(164",")"],["Change in fair value of warrant liability","","","(11,421",")","","","(4,605",")","","","(6,816",")"],["Net loss","","$","(36,124",")","","$","(17,680",")","","$","(18,444",")"]]
[[/GREPCENT_TABLE]]

Comparison of the Years End December 31, 2021 and 2020

Revenue

We had research and development service revenue of $125,000 for each of the years ended December 31, 2021 and 2020. This represents the recognition as research and development service revenue of a portion of the $1.0 million that we received in 2014 and 2015 from Ventagen, a related party, which is being recognized over the period during which we provide the services.

Research and development expenses

The following table summarizes our research and development expenses for the years ended December 31, 2021 and 2020 (in thousands):

[[GREPCENT_TABLE]]
[["","","YEAR ENDED DECEMBER 31,","","","INCREASE"],["","","2021","","","2020","","","(DECREASE)"],["Employee - related","","$","8,941","","","$","5,269","","","$","3,672"],["Clinical development costs","","","3,828","","","","2,156","","","","1,672"],["Recruiting costs","","","746","","","","-","","","","746"],["Depreciation and Impairment of fixed assets","","","717","","","","91","","","","626"],["Occupancy","","","584","","","","812","","","","(228",")"],["Other","","","362","","","","426","","","","(64",")"],["","","$","15,178","","","$","8,754","","","$","6,424"]]
[[/GREPCENT_TABLE]]

Research and development expenses for the year ended December 31, 2021 were $15.2 million, compared to $8.8 million for the year ended December 31, 2020 and consisted primarily of $8.9 million and $5.3 million, respectively, of employee-related costs, including $1.2 million and $847,000, respectively, of non-cash stock compensation expense, $3.8 million and $2.2 million, respectively, of clinical development costs related to our clinical trial sites and the cost of treating and following up on patients in our clinical trials, $746,000 and $0, respectively, of recruiting costs, $717,000 and $91,000, respectively, of depreciation and impairment charges on fixed assets, and $584,000 and $812,000, respectively, of facility and occupancy-related costs. The increase of $6.4 million in research and development expenses for the year ended December 31, 2021, was primarily due to an increase of $3.7 million in employee-related costs, an increase of $1.7 million in clinical development costs, 746,000 of search fees and costs to recruit research and development employees, and a $553,000 charge for the impairment of certain fixed assets. The decrease in occupancy cost is due to the termination of the lease on the Company’s lease on its prior facility at the end of 2020. The $3.7 million increase in employee-related costs was primarily due to the increase of $1.0 million in non-cash compensation expense and an increase in the research and development headcount.

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General and administrative expenses

The following table summarizes our general and administrative expenses for the years ended December 31, 2021 and 2020 (in thousands):

[[GREPCENT_TABLE]]
[["","","YEAR ENDED DECEMBER 31,","","","INCREASE"],["","","2021","","","2020","","","(DECREASE)"],["Employee-related","","$","5,555","","","$","2,656","","","$","2,899"],["Professional and consulting","","","2,972","","","","2,004","","","","968"],["Insurance","","","1,184","","","","27","","","","1,157"],["Occupancy","","","250","","","","256","","","","(6",")"],["Other","","","712","","","","238","","","","474"],["","","$","10,673","","","$","5,181","","","$","5,492"]]
[[/GREPCENT_TABLE]]

General and administrative expenses were $10.7 million for the year ended December 31, 2021 compared to $5.2 million for the year ended December 31, 2020 and consisted primarily of $5.6 million and $2.7 million, respectively, of employee-related costs, including $1.7 million and $1.3 million, respectively, of non-cash stock compensation expense, $3.0 million and $2.0 million, respectively, of professional and consulting fees and $1.2 million and $27,000, respectively, of insurance costs. The increase of $5.5 million in general and administrative expenses was primarily due to an increase of $2.9 million in employee – related costs as we increased our general and administrative headcount to manage growth and operate a public company, including an increase of $477,000 in non-cash compensation expense, an increase of $968,000 in professional and consulting fees, and an increase of $1.2 million in insurance expense. Insurance expense due to the cost of directors and officers insurance upon completion of the IPO. The increase in professional and consulting fees is primarily due to an increase in fees paid to personnel search firms, public relations consultants, commercial market research firms and legal and accounting firms.

Grant income

Grant income was $1.1 million for the year ended December 31, 2021 compared to $624,000 for the year ended December 31, 2020. Grant represents amounts received under a grant from the National Institutes of Health for development of CAN-2409 for use as a therapy for pancreatic cancer and in 2021, grant income also includes $464,000 for the forgiveness of a Paycheck Protection Plan loan in April 2021. The National Institutes of Health grant for development of CAN-2409 for use as a therapy for pancreatic cancer has expired at the end of 2021.

Interest, dividend and investment (expense) income, net

Interest, dividend and investment (expense) income, net was ($53,000) for the year ended December 31, 2021 compared to $111,000 of interest, dividend and investment income, net for the year ended December 31, 2020 and represents the earnings on our cash equivalents and short-term investments net of interest expense on outstanding debt obligations. The decrease in interest, dividend, and investment income in 2021 is primarily due to a decrease in the yields earned on cash equivalents.

Change in fair value of warrant liability

The change in fair value of our warrant liability was an increase in value of $11.4 million for the year ended December 31, 2021 compared to an increase in value of $4.6 million for the year ended December 31, 2020. The increase is primarily driven by an increase in the underlying value of our stock price.

Liquidity and capital resources

Since our inception, we have not generated any revenue from product sales and have incurred significant operating losses. We expect to continue to incur significant expenses and operating losses for the foreseeable future as we advance the clinical development of our product candidates. We expect that our research and development and general and administrative costs will continue to increase significantly, including in connection with conducting clinical trials for our product candidates, developing our manufacturing capabilities which may include the cost of establishing a relationship with contract manufacturers to support commercial launch of our product candidate CAN-2409 and costs associated with equipping our laboratory and clinical manufacturing facility to support clinical trials and commercialization and providing general and administrative support for our operations, including the cost associated with operating as a public company. As a result, we will need additional capital to fund our operations, which we may obtain from additional equity or debt financings, collaborations, licensing arrangements or other sources.

We do not currently have any approved products and have never generated any revenue from product sales. We have financed our operations primarily through proceeds from government grants and proceeds from the sale of convertible notes, common stock, and our convertible preferred stock. As of December 31, 2021, we have raised approximately $160.6 million, including $15.4 million of government grants, $66.1 million from the sale of convertible preferred stock,

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and $79.1 million from the sale of our common in our IPO. Our cash and cash equivalents totaled $82.6 million as of December 31, 2021. We had $560,000 of long-term debt as of December 31, 2021 with a maturity in November 2027.

On February 24, 2022, the Company entered into a loan and security agreement Loan Agreement with a bank pursuant to which the bank has agreed to provide term loans to the Company in an aggregate principal amount of up to $25.0 million. The Company borrowed $20.0 million upon entering into the Loan Agreement. The Company can borrow up to an additional aggregate principal amount not to exceed $5.0 million, at any time on or prior to December 31, 2022, following the Company having provided evidence to the bank of (a) achievement of positive Phase 2 clinical activity data from the Company’s CAN-2409 NSCLC clinical trial, (b) dosing of its first patient in its Phase 3 CAN-2409 high grade glioma clinical trial and (c) receipt on or prior to December 31, 2022, of net cash proceeds in an amount equal to at least $75.0 million from the issuance and sale of equity securities to investors acceptable to SVB. The term loans are secured by substantially all of the Company’s properties, rights and assets, except for its intellectual property, which is subject to a negative pledge under the Loan Agreement.

The term loans bear interest at a floating rate per annum equal to the greater of (A) 5.75% and (B) the prime rate (as published in the money rates section of The Wall Street Journal) plus 2.50%. The Company is required to make monthly interest payments, and commencing on February 1, 2024, 24 consecutive installments of principal plus monthly payments of accrued interest. Upon repayment in full of the term loans, the Company will be required to pay a final payment fee equal to 4.50% of the original principal amount of any funded term loan being repaid.

The Loan Agreement permits voluntary prepayment of all, but not less than all, of the SVB Term Loans, subject to a prepayment premium of 1% to 3% based upon the timing of the prepayment.

Cash flows

The following table summarizes our sources and uses of cash for the periods presented (in thousands):

[[GREPCENT_TABLE]]
[["","","YEARS ENDED DECEMBER 31,"],["","","2021","","","2020"],["Net cash (used in) operating activities","","$","(22,218",")","","$","(9,071",")"],["Net cash provided by (used in) investing activities","","","(1,835",")","","","38,455"],["Net cash provided by financing activities","","","71,800","","","","490"],["Net increase in cash and cash equivalents","","$","47,747","","","$","29,874"]]
[[/GREPCENT_TABLE]]

Cash flows for the years ended December 31, 2021 and 2020

Operating activities

Net cash used in operating activities for the year ended December 31, 2021 was $22.2 million, primarily consisting of a net loss of $36.1 million as we incurred expenses associated with our clinical programs, we increased our headcount and had costs associated with being a public company in the second half of the year. In addition, we had non-cash charges of $14.8 million for the change in the fair value of the warrant liability, stock-based compensation expense, and impairment and depreciation of fixed assets. Net cash used in operating activities was also impacted by $876,000 in changes in operating assets and liabilities, primarily driven by an increase of $669,000 in accounts payable, $410,000 in deferred rent, $297,000 in accrued expenses, which were offset by an increase of $2.2 million in prepaids and other long term assets.

Net cash used in operating activities for the year ended December 31, 2020 was $9.1 million, primarily consisting of a net loss of $17.7 million as we incurred expenses associated with our clinical programs and we increased our headcount. In addition, we had non-cash charges of $6.8 million for the change in the fair value of the warrant liability, stock-based compensation expense and depreciation and amortization. Net cash used in operating activities was also impacted by $1.8 million in changes in operating assets and liabilities, primarily driven by an increase of $1.5 million in accrued expenses, $289,000 in accounts payable.

Investing activities

Net cash used in investing activities for the year ended December 31, 2021 was $1.8 million, which was attributable to the use of $1.8 million for purchases of fixed assets.

Net cash provided by investing activities for the year ended December 31, 2020 was $38.5 million, which was attributable to a net sale of $39.9 million in available-for-sale securities and the use of $1.5 million for purchases of fixed assets.

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Financing activities

Net cash provided by financing activities for the year ended December 31, 2021 was $71.8 million consisting of $71.3 million in net proceeds from our IPO and $465,000 in proceeds received from warrant and option exercises.

Net cash provided by financing activities for the year ended December 31, 2020 was $490,000 consisting of $460,000 received under the Paycheck Protection Program and $30,000 of proceeds from exercise of stock options.

Funding requirements

We expect our operating expenses to increase substantially in the future in connection with our ongoing activities, particularly as we advance CAN-2409 and CAN-3110 through research and development, clinical trials, develop our manufacturing capabilities and build our laboratory and clinical manufacturing facility, as we research and develop additional product candidates including preclinical activities and as we prepare for marketing approval and commercialization. We also expect to incur additional costs associated with operating as a public company.

Specifically, our costs and expenses will increase as we:

▪
advance the clinical development of CAN-2409 and CAN-3110;

▪
pursue the preclinical and clinical development of other product candidates using our HSV platform;

▪
develop our manufacturing capabilities, including establishing a relationship with a contract manufacturer for commercial manufacturing of our product candidate CAN-2409 and the construction of our laboratory and clinical manufacturing facility for our product candidate CAN-3110; and

▪
expand our operational, financial, and management systems and increase personnel, including personnel to support our operations as a public company.

We believe that our existing cash and cash equivalents, including the receipt of $20.0 million on February 24, 2022 under the Loan Agreement with a bank, will enable us to fund our operating expenses and capital expenditure requirements into the fourth quarter of 2023. We have based this estimate on assumptions that may prove to be incorrect, and we could utilize our available capital resources sooner than we currently expect.

Because of the numerous risks and uncertainties associated with the research, development, and commercialization of therapeutics, it is difficult to estimate with certainty the amount of our working capital requirements. Our future funding requirements will depend on many factors, including:

▪
the progress, costs, and results of our clinical development and clinical trials for CAN-2409 and CAN-3110;

▪
the progress, costs, and results of our additional research and preclinical development programs;

▪
the costs, timing and outcome of regulatory review of our product candidates;

▪
our ability to establish and maintain collaborations on favorable terms, if at all;

▪
the outcome, timing and cost of meeting regulatory requirements established by the FDA and comparable foreign regulatory authorities, if applicable, for our product candidates;

▪
the costs and timing of internal process development for our manufacturing capabilities;

▪
the scope, progress, results, and costs of any product candidates that we may derive from our HSV platform or with collaborators;

▪
the costs of preparing, filing and prosecuting patent applications, obtaining, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims; hire additional personnel in research, manufacturing, and regulatory and clinical development, as well as management personnel;

▪
the extent to which we in-license or acquire rights to other products, product candidates, or technologies;

▪
additions or departures of key scientific or management personnel;

▪
the costs and timing of future commercialization activities, including product manufacturing, marketing, sales, and distribution for any of our product candidates for which we obtain marketing approval;

▪
the amount of revenue, if any, received from commercial sales of our product candidates, should any of our product candidates receive marketing approval; and

▪
the costs of operating as a public company.

Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our cash needs through a combination of public or private equity or debt financings and other sources, which may include collaborations strategic alliances and licensing arrangements with third parties. We do not have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest may be diluted, and the terms of these securities may include liquidation or other preferences that could adversely affect your rights as a common stockholder. Debt financing and preferred equity financing, if available,

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may involve agreements that include restrictive covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends, that could adversely impact our ability to conduct our business. If we raise additional funds through other sources, such as collaboration agreements, strategic alliances, licensing arrangements or marketing and distribution arrangements, we may have to relinquish valuable rights to our technologies, future revenue streams, product development, and research programs or product candidates, or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds 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 products or product candidates that we would otherwise prefer to develop and market ourselves.

Our primary contractual obligation is our facility lease which extends to August of 2026. The table below summarizes the contractual obligations that will become due as of December 31, 2021:

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(1)
Represents future minimum lease payments under our operating leases for office and laboratory space at our Needham, Massachusetts facility (see our financial statements included elsewhere in this Annual Report on Form 10-K for additional information on these lease agreements).

We also enter into contracts in the normal course of business with hospitals, clinics, universities, and other third parties for clinical trials and testing and with construction contractors and process developers for the construction of our manufacturing facility. These contracts do not contain minimum purchase commitments and are cancelable by us upon prior written notice. Payments due upon cancelation consist only of payments for services provided or expenses incurred, including noncancelable obligations of our service providers, up to the date of cancelation. These payments are not included in the table above as the amount and timing of such payments are not known.

Critical accounting estimates

Our management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of our financial statements and related disclosures requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, costs and expenses, and the disclosure of contingent assets and liabilities in our financial statements. These items are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future. 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. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may materially differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, we believe that the following accounting policies are those most significant to the judgments and estimates used in the preparation of our consolidated financial statements.

Accrued Research and Development Expenses

As part of the process of preparing our financial statements, we are required to estimate our accrued research and development expenses. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf, and estimating the level of service performed and the associated costs incurred for the services when we have not yet been invoiced or otherwise notified of the actual costs. Most of our service providers invoice us in arrears for services performed, on a pre-determined schedule or when contractual milestones are met; however, some require advance payments. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of these estimates with the service providers and make adjustments, if necessary. Examples of estimated accrued research and development expenses include fees paid to the following:

▪
contractors and vendors working on the construction and development of our commercial-scale manufacturing facility;

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▪
clinical trial sites where patients are being treated with our product candidates; and

▪
consultants providing services related to process development, regulatory and other services.

Actual services performed may vary from our estimates, resulting in adjustments to research and development costs or inventories in future periods. Changes in these estimates that result in material changes to our accruals could materially affect our results of operations.

Determination of fair value of warrants

In connection with the Series B Convertible Preferred Stock issuance, the Company issued warrants to purchase shares of common stock of which certain warrants are shown as a liability on the balance sheet. The fair value of the warrant liability was determined based on significant inputs not observable in the market. The fair value of the warrant liability uses various valuation methods, including the Monte Carlo method, the option-pricing method, probability-weighted expected return and the hybrid method, all of which incorporate assumptions and estimates, to value the common stock warrants. The hybrid method is often used when a company is expecting a liquidity event in the near future and is a combination of the option-pricing and probability-weighted expected return methods. Estimates and assumptions impacting the fair value measurement include the fair value per share of the underlying shares of common stock prior to the IPO, risk-free interest rate, expected dividend yield, expected volatility of the price of the underlying preferred stock, and the remaining contractual term of the warrants. The most significant assumption in the model impacting the fair value of the common stock warrants is the fair value of the Company’s common stock as of each remeasurement date. Prior to the IPO, the Company determined the fair value per share of the underlying common stock by taking into consideration the most recent sales of preferred stock, results obtained from third-party valuations and additional factors that are deemed relevant.

Stock-based compensation

We measure stock options and other stock-based awards granted to our employees, directors, consultants, advisors based on the fair value on the date of the grant, awards, net of actual forfeitures, over the requisite service period, which is generally the vesting period of the respective award. For stock-based awards granted to non-employees, compensation expense is recognized over the vesting period which approximates the period over which services are rendered by such non-employees.

We estimate the fair value of each stock option grant on the date of grant using the Black-Scholes option-pricing model, which uses as inputs the fair value of our common stock and assumptions we make for the expected volatility of our common stock, the expected term of our stock options, the risk-free interest rate for a period that approximates the expected term of our stock options, and our expected dividend yield.

Determination of fair value of common stock

Prior to the IPO, there had been no public market for our common stock and as such, the estimated fair value of our common stock had been determined by our board of directors as of the date of each option grant, with input from management, taking into consideration our most recently available third-party valuations of common stock at the time of the grants, as well as our board of directors’ assessment of additional objective and subjective factors that it believed were relevant and which may have changed from the date of the most recent valuation through the date of the grant. Third-party valuations, or valuation reports, were performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants’ Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation.

For the December 1, 2020, January 1, 2021, and June 15, 2021 third-party prepared valuation reports, a probability-weighted expected return method was used to determine the fair value of the common stock. The present value of the common stock under each of these three identified scenarios was weighted based on the probability of each scenario occurring to determine the value of the common stock. These third-party valuations resulted in a valuation of our common stock of $3.96, $4.97 and $6.64 per share as of December 1, 2020, January 1, 2021 and June 15, 2021, respectively.

In addition to considering the results of the valuation reports, our board of directors considered various objective and subjective factors to determine the fair value of our common stock as of each grant date, including:

▪
the prices at which we sold shares of convertible preferred stock and the superior rights and preferences of the convertible preferred stock relative to our common stock at the time of each grant;

▪
the progress of our research and development programs, including the status and results of preclinical studies and clinical trials for our product candidates;

▪
our stage of development and commercialization and our business strategy;

▪
external market conditions affecting the biotechnology industry and trends within that industry;

▪
our financial position, including cash on hand, and our historical and forecasted performance and operating results;

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▪
the lack of an active public market for our common stock and our convertible preferred stock;

▪
the likelihood of achieving a liquidity event, such as an initial public offering, or IPO, or sale of our company considering prevailing market conditions; and

▪
the analysis of IPOs and the market performance of similar companies in the biotechnology industry.

The assumptions underlying these valuations were highly complex and subjective and represented management’s best estimates, which involved inherent uncertainties and the application of management’s judgment. As a result, if we had used different assumptions or estimates, the fair value of our common stock and our stock-based compensation expense could be materially different.

Subsequent to the IPO, a public trading market for our common stock has been established and it is no longer necessary for our board of directors to estimate the fair value of our common stock in connection with our accounting for granted stock options and other such awards we may grant, as the fair value of our common stock is determined based on the quoted market price of our common stock.

Recent accounting pronouncements

A description of recent accounting pronouncements that may potentially impact our financial position, results of operations, or cash flows is disclosed in Note 2 to our audited consolidated financial statements included elsewhere in this Annual Report on form 10-K.

Emerging growth company status

In April 2012, the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, was enacted. Section 107 of the JOBS Act provides that an “emerging growth company,” or an EGC, can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. Thus, an EGC can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to use the extended transition period for new or revised accounting standards during the period in which we remain an emerging growth company; however, we may adopt certain new or revised accounting standards early.

We will remain an emerging growth company until the earliest to occur of: (1) the last day of the fiscal year in which we have more than $1.07 billion in annual revenue; (2) the date we qualify as a “large accelerated filer,” with at least $700.0 million of equity securities held by non-affiliates; (3) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period; and (4) the last day of the fiscal year ending after the fifth anniversary of our initial public offering.

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