UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended September 30, 2021
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to
Commission file number 001-04321
(Exact name of registrant as specified in its charter)
| Not applicable | ||||||||||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||||||||
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
*Not for trading, but only in connection with the listing of the American Depositary Shares on The Nasdaq Stock Market, LLC.
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes o No x
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
| Large accelerated filer | o | Accelerated filer | o | ||||||||
x | Smaller reporting company | ||||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
The registrant had outstanding 89,900,916 ordinary shares as of November 15, 2021.
Summary of the Material Risks Associated with Our Business
Our business is subject to numerous risks and uncertainties that you should be aware of in evaluating our business. These risks are described more fully in Item 1A - Risk Factors, and include, but are not limited to, the following:
•We may not be successful in our efforts to use our differentiated asset-centric business model to build a pipeline of product candidates with commercial value.
•A single or limited number of subsidiaries may comprise a large proportion of our value.
•We face challenges, risks and expenses related to the integration of the operations of our asset-centric Centessa Subsidiaries, as well as the management of the expected growth in the scale and complexity of our operations.
•We, and our subsidiaries have incurred net losses since inception, and we expect to continue to incur losses for the foreseeable future and may never achieve or maintain profitability.
•We will need substantial additional funds to advance development of our product candidates, and we cannot guarantee that we will have sufficient funds available in the future to develop and commercialize our current or future product candidates.
•Our credit facility and payment obligations under the Note Purchase Agreement with Cocoon SA LLC, an affiliate of Oberland Capital as agent for the Purchasers, contain operating and financial covenants that restrict our business and financing activities, are subject to acceleration in specified circumstances and may adversely affect our financial position or results of operations and our ability to raise additional capital which in turn may increase our vulnerability to adverse regulatory developments or economic or business downturns or which may result in Oberland Capital taking possession of our assets and disposing of any collateral.
•Our product candidates are in various stages of development, including many in preclinical stages, and may fail in development or suffer delays that materially adversely affect their commercial viability.
•We may not be successful in our efforts to identify, discover, in-license or otherwise acquire additional product candidates and may fail to capitalize on programs or product candidates that may represent a greater commercial opportunity or for which there is a greater likelihood of success.
•Success in preclinical studies or early clinical trials may not be indicative of results obtained in later trials.
•We may encounter substantial delays or challenges in the initiation, conduct or completion of our clinical trials, and the results of clinical development are uncertain.
•Even if we complete the necessary preclinical studies and clinical trials, the marketing approval process is expensive, time-consuming and uncertain and may prevent us from obtaining approvals for the commercialization of our product candidates.
•We may be unable to obtain U.S. or foreign regulatory approval and, as a result, unable to commercialize our product candidates.
•We rely, and expect to continue to rely, on third parties to conduct our preclinical studies and clinical trials and if these third parties perform in an unsatisfactory manner, our business could be substantially harmed.
•We could experience manufacturing problems that result in delays in our development or commercialization of our programs or otherwise harm our business.
•Business interruptions resulting from the COVID-19 outbreak or similar public health crises could cause a disruption of the development of our product candidates and adversely impact our business.
•If we are unable to obtain and maintain sufficient patent and other intellectual property protection for our product candidates and technology or other product candidates that may be identified, or if the scope of the intellectual property protection obtained is not sufficiently broad, our competitors could develop and commercialize product candidates similar or identical to the product candidates, and our ability to successfully commercialize the product candidates and other product candidates that we may pursue may be impaired.
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Summary of the Material Risks Associated with Our Business (continued)
•The patent protection we obtain for our product candidates and technology may be challenged or not sufficient enough to provide us with any competitive advantage.
•A number of our programs and associated product candidates are heavily dependent on licensed intellectual property. If we were to lose our rights to licensed intellectual property, we may not be able to continue developing or commercializing our product candidates, if approved. If we breach any of the agreements under which we license the use, development and commercialization rights to our product candidates or technology from third parties or, in certain cases, we fail to meet certain development deadlines, we could lose license rights that are important to our business.
•We have never commercialized a product candidate and we may lack the necessary expertise, personnel and resources to successfully commercialize any of our products that receive regulatory approval on our own or together with collaborators.
•Our international operations may expose us to business, regulatory, legal, political, operational, financial, pricing and reimbursement risks associated with doing business across multiple jurisdictions outside of the United States.
•We are an emerging growth company and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies will make our ADSs less attractive to investors.
•We have material weaknesses in our internal control systems over financial reporting and will need to hire additional personnel and design and implement proper and effective internal controls over financial reporting. We may identify additional material weaknesses in the future that may cause us to fail to meet our reporting obligations or result in material misstatements in our financial statements. If we fail to remediate our material weaknesses, we may not be able to report our financial results accurately or to prevent fraud.
•If we fail to develop or maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired.
•Holders of ADSs may be subject to limitations on the transfer of their ADSs and the withdrawal of the underlying ordinary shares.
•There is substantial uncertainty as to whether we are or will be a “passive foreign investment company” (“PFIC”). If we are a PFIC, there could be material adverse U.S. federal income tax consequences to U.S. holders.
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TABLE OF CONTENTS
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Item 6. | ||||||||
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, or 10-Q, contains express or implied forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve substantial risks and uncertainties. In some cases, forward-looking statements may be identified by the words “may,” “might,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “objective,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” “ongoing,” or the negative of these terms, or other comparable terminology intended to identify statements about the future. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. The forward-looking statements and opinions contained in this 10-Q are based upon information available to our management as of the date of this 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. Forward-looking statements contained in this 10-Q include, but are not limited to, statements about:
•the initiation, timing, progress and results (preliminary, interim or final) of our preclinical studies and clinical trials, and our research and development programs;
•our ability to advance our product candidates into, and successfully complete, clinical trials;
•our reliance on the success of our product candidates and our pipeline programs;
•our ability to utilize our screening platform to identify and advance additional product candidates into clinical development;
•our ability to become the partner of choice to attract founder-subject matter experts with high conviction programs;
•the timing or likelihood of regulatory filings and approvals;
•the impact of the ongoing COVID-19 pandemic, including the impact of the delta and other variants, on our business and operations;
•the commercialization of our product candidates, if approved;
•our ability to develop sales and marketing capabilities;
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•the pricing, coverage and reimbursement of our product candidates, if approved;
•the implementation of our business model, strategic plans for our business, product candidates and technology;
•the scope of protection we are able to establish and maintain for intellectual property rights covering our product candidates and technology;
•our ability to operate our business without infringing the intellectual property rights and proprietary technology of third parties;
•cost associated with prosecuting and maintaining our intellectual property and with defending intellectual property infringement, product liability and other claims;
•legal and regulatory development in the United States, the European Union, the United Kingdom and other jurisdictions;
•estimates of our expenses, future revenues, capital requirements and our needs for additional financing;
•the potential benefits of strategic collaboration agreements and our ability to negotiate and enter into strategic arrangements;
•our ability to identify collaboration opportunities and to establish and maintain collaborations;
•our ability to obtain additional funding;
•our ability to fulfill our obligations under the Note Purchase Agreement with Oberland Capital;
•the rate and degree of market acceptance of any approved products;
•developments relating to our competitors and our industry, including competing therapies and our ability to respond to such developments;
•our ability to effectively manage our anticipated growth;
•our ability to attract and retain qualified employees and key personnel;
•our expectations regarding the period during which we qualify as an emerging growth company under the JOBS Act;
•statements regarding future revenue, hiring plans, expenses, capital expenditures, capital requirements and share performance;
•our expected use of proceeds of our IPO;
•the future trading price of the ADSs and impact of securities analysts’ reports on these prices; and
•other risks and uncertainties, including those listed under the caption “Risk Factors.”
You should refer to the section titled “Item 1A. Risk Factors” in this 10-Q for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot be assured that the forward-looking statements in this 10-Q will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, these statements should not be regarded as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
You should read this 10-Q and the documents that we reference in this 10-Q and have filed as exhibits to this 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Centessa Pharmaceuticals plc (Successor) and Centessa Predecessor Group (Predecessor)
Consolidated and Combined Balance Sheets
(unaudited)
(amounts in thousands except share and per share data)
| Successor | Predecessor | ||||||||||
| September 30, 2021 | December 31, 2020 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Tax incentive receivable | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Tax incentive receivable | |||||||||||
| Debt issuance costs | |||||||||||
Total assets | $ | $ | |||||||||
| Liabilities, convertible preferred shares, combined deficit and shareholders’ equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued expenses and other current liabilities | |||||||||||
| Convertible term notes | |||||||||||
| Term loans | |||||||||||
| Derivative liability | |||||||||||
| Total current liabilities | |||||||||||
| Contingent value rights | |||||||||||
Total liabilities | |||||||||||
| Commitments and contingencies (Note 7) | |||||||||||
Convertible preferred shares (£ | |||||||||||
| Combined deficit and shareholders’ equity: | |||||||||||
| Combined deficit | — | ( | |||||||||
Series A convertible preferred shares: £ | — | ||||||||||
Ordinary shares: £ | — | ||||||||||
| Additional paid-in capital | — | ||||||||||
| Accumulated other comprehensive income (loss) | — | ||||||||||
| Accumulated deficit | ( | — | |||||||||
Total combined deficit and shareholders' equity | |||||||||||
Total liabilities, convertible preferred shares, combined deficit and shareholders' equity | $ | $ | |||||||||
The accompanying notes are an integral part of these unaudited interim consolidated and combined financial statements.
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Centessa Pharmaceuticals plc (Successor) and Centessa Predecessor Group (Predecessor)
Consolidated and Combined Statements of Operations and Comprehensive Loss
(unaudited)
(amounts in thousands except share and per share data)
| Successor | Predecessor | ||||||||||||||||||||||||||||
| Three months ended September 30, 2021 | Period from January 30, 2021 through September 30, 2021 | Period from January 1, 2021 through January 29, 2021 | Three months ended September 30, 2020 | Nine months ended September 30, 2020 | |||||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||||||||
| Change in fair value of contingent value rights | |||||||||||||||||||||||||||||
| Acquired in-process research and development | |||||||||||||||||||||||||||||
| Loss from operations | ( | ( | ( | ( | ( | ||||||||||||||||||||||||
| Interest income (expense), net | ( | ( | ( | ||||||||||||||||||||||||||
| Amortization of debt discount | ( | ( | ( | ||||||||||||||||||||||||||
| Other income (expense), net | ( | ( | ( | ||||||||||||||||||||||||||
| Gain on extinguishment of debt | |||||||||||||||||||||||||||||
| Income tax charge | |||||||||||||||||||||||||||||
| Net loss | ( | ( | ( | ( | ( | ||||||||||||||||||||||||
| Other comprehensive loss: | |||||||||||||||||||||||||||||
| Foreign currency translation adjustment | ( | ( | |||||||||||||||||||||||||||
| Total comprehensive loss | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||
| Net loss per ordinary share - basic and diluted | $ | ( | $ | ( | |||||||||||||||||||||||||
| Weighted average ordinary shares outstanding - basic and diluted | |||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited interim consolidated and combined financial statements.
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Centessa Pharmaceuticals plc
Consolidated and Combined Statement of Shareholders' Deficit
(unaudited)
(amounts in thousands except share data)
| Series A Preferred | Ordinary Shares | Additional paid-in capital | Accumulated Other Comprehensive Loss | Accumulated Deficit | Total | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2021 | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Balance at January 29, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited interim consolidated and combined financial statements.
Centessa Pharmaceuticals plc (Successor)
Consolidated and Combined Statement of Shareholders' Equity
(unaudited)
(amounts in thousands except share data)
| Series A Preferred | Ordinary Shares | Additional paid-in capital | Accumulated Other Comprehensive Loss | Accumulated Deficit | Total | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at January 30, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||||||||
Sale of Series A convertible preferred shares, net of issuance costs of $ | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of Series A convertible preferred shares upon conversion of debt | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Acquisition of Centessa Subsidiaries | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Forgiveness of convertible term loan | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Repurchase of ordinary shares concurrent with acquisition of Centessa Subsidiaries | — | — | ( | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Stock option exercises | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Vesting of ordinary shares | — | — | ( | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | ( | ||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of Series A convertible preferred shares into ordinary shares | ( | ( | — | — | |||||||||||||||||||||||||||||||||||||||||||
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Sale of ordinary shares in connection with initial public offering, net of issuance costs of $ | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Sale of ordinary shares in connection with underwriters exercise of option to purchase in full following initial public offering | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Vesting of ordinary shares | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited interim consolidated and combined financial statements.
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Centessa Predecessor Group (Predecessor)
Combined Statement of Convertible Preferred Shares and Combined Deficit
(unaudited)
(amounts in thousands except share data)
| Convertible Preferred Shares | Combined Deficit | ||||||||||||||||||||||||||||||||||||||||
| Series A | Series B | Series Seed | |||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2021 | $ | $ | $ | $ | ( | ||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||
| Balance at January 29, 2021 | $ | $ | $ | $ | ( | ||||||||||||||||||||||||||||||||||||
Centessa Predecessor Group (Predecessor)
Combined Statement of Convertible Preferred Shares and Combined Deficit
(unaudited)
(amounts in thousands except share data)
| Convertible Preferred Shares | Combined Deficit | ||||||||||||||||||||||||||||||||||||||||
| Series A | Series B | Series Seed | |||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2020 | $ | $ | $ | $ | ( | ||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||
| Balance at March 31, 2020 | ( | ||||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||
| Balance at June 30, 2020 | ( | ||||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | $ | ( | ||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited interim consolidated and combined financial statements.
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Centessa Pharmaceuticals plc (Successor) and Centessa Predecessor Group (Predecessor)
Consolidated and Combined Statements of Cash Flow
(unaudited)
(amounts in thousands)
The accompanying notes are an integral part of these unaudited interim consolidated and combined financial statements.
| Successor | Predecessor | |||||||||||||
| Period from January 30, 2021 through September 30, 2021 | Period from January 1, 2021 through January 29, 2021 | Nine months ended September 30, 2020 | ||||||||||||
| Cash flows from operating activities: | ||||||||||||||
| Net loss | $ | ( | $ | ( | ( | |||||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||||
| Acquired in-process research and development | ||||||||||||||
| Share-based compensation expense | ||||||||||||||
| Depreciation and amortization | ||||||||||||||
| Non-cash interest | ||||||||||||||
| Amortization of unpaid D&O insurance premiums | ||||||||||||||
| Amortization of debt discount | ( | |||||||||||||
| Gain on extinguishment of debt | ( | |||||||||||||
| Change in fair value of contingent consideration | ||||||||||||||
| Changes in operating assets and liabilities: | — | — | ||||||||||||
| Tax incentive receivable | ( | ( | ||||||||||||
| Prepaid expenses and other assets | ( | |||||||||||||
| Accounts payable | ( | ( | ||||||||||||
| Accrued expenses and other liabilities | ( | ( | ||||||||||||
| Net cash used in operating activities | ( | ( | ( | |||||||||||
| Cash flows from investing activities: | ||||||||||||||
| Cash acquired upon acquisition of Centessa Subsidiaries | ||||||||||||||
| Cash paid to acquire in-process research and development | ( | |||||||||||||
| Purchase of property and equipment | ( | |||||||||||||
| Net cash provided by investing activities | ||||||||||||||
| Cash flows from financing activities: | ||||||||||||||
| Proceeds from the sale of Series A convertible preferred shares, net of issuance costs | ||||||||||||||
| Proceeds from the sale of ordinary shares in connection with initial public offering, net of issuance costs paid in cash | ||||||||||||||
| Repurchase of ordinary shares | ( | |||||||||||||
| Repayment of related party loan | ( | |||||||||||||
| Proceeds from option exercises | ||||||||||||||
| Proceeds from related party loan | ||||||||||||||
| Net cash provided by financing activities | ||||||||||||||
| Effect of exchange rate on cash and cash equivalents | ( | |||||||||||||
| Net increase (decrease) in cash and cash equivalents | ( | ( | ||||||||||||
| Cash and cash equivalents at beginning of period | ||||||||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||||||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||||||||
| Issuance of ordinary shares upon acquisition of Centessa Subsidiaries | $ | $ | ||||||||||||
| Issuance of contingent value rights upon acquisition of Centessa Subsidiaries | $ | |||||||||||||
| Issuance of Series A convertible preferred shares upon conversion of debt | $ | $ | ||||||||||||
| Forgiveness of convertible term loan | $ | $ | ||||||||||||
| Repurchase of ordinary shares concurrent with acquisition of Centessa Subsidiaries | $ | ( | $ | |||||||||||
Unpaid debt issuance costs at September 30, 2021 | $ | $ | ||||||||||||
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Centessa Pharmaceuticals plc (Successor) and Centessa Predecessor Group (Predecessor)
Notes to the Unaudited Interim Consolidated and Combined Financial Statements
1. Organization and Description of Business
Centessa Pharmaceuticals plc (“Centessa” or “the Company”) is a pharmaceutical company conceived to bring impactful new medicines to patients by combining the strengths of an asset-centric model with the benefits of scale and diversification typical of larger R&D organizations. Centessa was incorporated on October 26, 2020 as a limited liability company under the laws of England and Wales. In connection with the IPO, we re-registered Centessa Pharmaceuticals Limited as an English public limited company and renamed it as Centessa Pharmaceuticals plc.
In January 2021, the management and equity holders of ApcinteX Limited, Capella Biosciences Limited, Inexia Limited, Janpix Limited, LockBody Therapeutics Ltd, Morphogen-IX Limited, Orexia Limited, Palladio Biosciences, Inc., PearlRiver Bio GmbH, Pega-One S.A.S., and Z Factor Limited (together, the “Centessa Subsidiaries”), contributed the Centessa Subsidiaries to Centessa, in a share for share exchange, after which these companies became wholly-owned subsidiaries of Centessa.
As the Company had no significant operations prior to the contribution of the Centessa Subsidiaries, and the registrant was required to present two years of historical financial statements in its prospectus filed with the SEC on June 2, 2021, the Company’s management (“Management”) sought to identify a predecessor, for which it could include audited historical financial statements, to satisfy the filing requirement. As such, Management sought to identify the predecessor from the population of portfolio companies, which would represent a sizable portion of the historical results of the entities later contributed to Centessa.
Entities affiliated with Medicxi manage multiple investment funds, including – Medicxi Ventures I LP, Medicxi Growth I LP, and Medicxi Secondary I LP. In addition, entities affiliated with Medicxi act as sub advisors to Index Ventures Life VI (Jersey) Limited which advises the managing general partner of Index Ventures Life VI (Jersey), L.P. (all funds collectively are referred to as the “Funds”). Management determined the companies owned by Index Ventures Life VI (Jersey), LP individually represent some of the earliest investments by the Funds. These companies (together, the “Centessa Predecessor Group” or the “Group”) are:
•Z Factor Limited (“Z Factor”)
•LockBody Therapeutics Ltd (“LockBody”)
•Morphogen-IX Limited (“Morphogen-IX”)
As the above entities that comprise the Centessa Predecessor Group were historically under the common control of Index Ventures Life VI (Jersey), LP, the financial statements of the Group are being presented on a combined basis and are denoted as “Predecessor” within these unaudited interim financial statements.
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 these unaudited interim financial statements.
Initial Public Offering
In June 2021, the Company completed an initial public offering (“IPO”) of its ordinary shares through the sale and issuance of 16,500,000 American Depository Shares (“ADSs”), at an initial price of $20.00 per ADS. Each ADS represents one ordinary share with a nominal value of £0.002 per ordinary share. Following the close of the IPO, the underwriters fully exercised their option to purchase an additional 2,475,000 ADSs at the initial public offering price of $20.00 per ADS. The Company received aggregate net proceeds of $344.1 million in connection with the IPO and subsequent exercise of the underwriter’s options after deducting underwriting discounts, commissions and other offering expenses paid or to be paid.
Risks and Liquidity
The Group and the Company are subject to risks common to other life science companies in various stages of development including, but not limited to, uncertainty of product development and commercialization, lack of marketing and sales history, development by its competitors of new technological innovations, dependence on key personnel, market acceptance of products, product liability, protection of proprietary technology, ability to raise additional financing and
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Notes to the Unaudited Interim Consolidated and Combined Financial Statements
compliance with government regulations, in the markets in which the Company is seeking approvals, including U.S. Food and Drug Administration (“FDA”) regulations. If the Company does not successfully advance its programs, including the Centessa Subsidiaries’ programs, into and through human clinical trials and/or enter into collaborations for its programs and commercialize any of its product candidates, it may be unable to produce product revenue or achieve profitability. For more information on risks, please see Part II Item 1A of this Form 10-Q – Risk Factors.
The Group and the Company have incurred losses and negative cash flows from operations since inception and the Company had an accumulated deficit of $(324.9 ) million as of September 30, 2021. The Company anticipates incurring additional losses until such time, if ever, that it can generate significant sales of the product candidates currently in development by the Centessa Subsidiaries. Substantial additional capital will be needed by the Company to fund its operations (including those of the Centessa Subsidiaries) and to develop its product candidates.
In October 2021, the Company entered into a Note Purchase Agreement with Oberland Capital Management LLC (Oberland Capital). 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 (the Notes) from the Company including $75.0 million, funded on October 4, 2021, $125.0 million available within 24 months 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 option of the Company and Oberland Capital (See - Note 12 – "Subsequent Events").
The Company expects its existing cash and cash equivalents will be sufficient to fund its expected operating expenses and capital expenditure requirements for at least the next 12 months from the date of issuance of these unaudited consolidated financial statements. Based on the current non-risk-adjusted operating plan, the Company expects the cash and cash equivalents as of September 30, 2021 of $578.8 million, plus the net proceeds of the First Purchase Note of $74.6 million received on October 4, 2021, supplemented by the additional funds available under the Oberland Capital Note Purchase Agreement, if drawn, to fund its operations into mid-2024.
Global Pandemic – COVID-19
On March 10, 2020, the World Health Organization characterized the novel COVID-19 virus as a global pandemic. The Company is continuing to proactively monitor the COVID-19 global pandemic, to assess the potential impact on the business, and to seek to avoid any unnecessary potential delays to the Company’s programs. As of September 30, 2021, the clinical programs and research activities remain largely on track, with some modest delays in clinical trial enrollment rates and supply chain activities. While we are unable to fully quantify the potential effects of this pandemic on our future operations, including potential 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.
2. Summary of Significant Accounting Policies
References to the unaudited interim combined financial statements of the Centessa Predecessor Group refer to three of the eleven Centessa Subsidiaries that were deemed to represent the predecessor entity prior to the Company’s acquisition of the Centessa Subsidiaries in January 2021. The Centessa Predecessor Group includes the combined financial information of Z Factor, Morphogen-IX and LockBody. The successor includes the consolidated financial information of Centessa and all Centessa Subsidiaries subsequent to the acquisition.
Accordingly, the accompanying unaudited interim consolidated and combined financial statements are presented in accordance with Securities and Exchange Commission (“SEC”) requirements for predecessor and successor financial statements, which include the financial results of both the Company and the Centessa Predecessor Group. The results of operations contained in the unaudited interim consolidated and combined financial statements include the Centessa Predecessor Group’s combined financial results for the three and nine months ended September 30, 2020, and the period from January 1, 2021 through January 29, 2021 and the Company’s consolidated financial results for the three months ended September 30, 2021 and for period from January 30, 2021 through September 30, 2021. The unaudited interim consolidated and combined balance sheets present the combined financial position of the Centessa Predecessor Group as of December 31, 2020 and the consolidated financial position of the Company on September 30, 2021.
The accompanying unaudited interim consolidated and combined financial statements should be read in conjunction with the annual audited combined financial statements of the Centessa Predecessor Group (Predecessor) and related notes as of and for the year ended December 31, 2020 and accompanying audited financial statements of Centessa Pharmaceuticals Limited
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Notes to the Unaudited Interim Consolidated and Combined Financial Statements
and related notes as of December 31, 2020 found in the prospectus filed with the SEC on June 2, 2021. The Summary of Significant Accounting Policies included in the Company’s annual financial statements and the Centessa Predecessor Group’s annual combined financial statements that can be found in the prospectus, have not materially changed, except as set forth below.
Basis of Presentation and Combination / Consolidation
The accompanying unaudited interim consolidated and combined financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Any reference in these notes to applicable guidance is meant to refer to GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASUs”) promulgated by the Financial Accounting Standards Board (“FASB”).
In the opinion of management, the accompanying unaudited interim consolidated and combined financial statements include all normal and recurring adjustments (which consist primarily of accruals, estimates and assumptions that impact the financial statements) considered necessary to present fairly:
•the Company’s financial position as of September 30, 2021 and the Predecessor’s financial position as of December 31, 2020;
•the Company’s results of operations for the three months ended September 30, 2021 and the period from January 30, 2021 through September 30, 2021, and cash flows for the period from January 30, 2021 through September 30, 2021; and
•the Predecessor’s results of operations for the period from January 1, 2021 through January 29, 2021 and for the three and nine month periods ended September 30, 2020, and cash flows for the period from January 1, 2021 through January 29, 2021 and nine months ended September 30, 2020.
Operating results for the Company from the period from January 30, 2021 through September 30, 2021 are not necessarily indicative of the results that may be expected for the period from January 30, 2021 through December 31, 2021, or for any future period. The unaudited interim consolidated and combined financial statements, presented herein, do not contain all of the required disclosures under U.S. GAAP for annual financial statements. Therefore, these unaudited interim consolidated and combined financial statements should be read in conjunction with the annual audited combined financial statements and related notes for Centessa Pharmaceuticals Limited and Centessa Predecessor Group found in the prospectus filed with the SEC on June 2, 2021.
The Company’s unaudited interim consolidated financial statements include the accounts of Centessa Pharmaceuticals plc, its wholly-owned subsidiary, Centessa Pharmaceuticals, Inc. and the wholly-owned Centessa Subsidiaries. The Centessa Predecessor Group’s unaudited interim combined financial statements included the accounts of Z Factor, Morphogen-IX and LockBody. All intercompany accounts and transactions have been eliminated in consolidation and combination.
Segments
Operating segments are defined as components of an enterprise with separate discrete information available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Centessa Pharmaceuticals plc (Successor) and the Centessa Predecessor Group (Predecessor) view its operations and manage its business as one segment.
Reclassifications
Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period financial statements. These reclassifications had no effect on previously reported net loss or comprehensive loss.
Foreign Currency Translation
The Company’s financial statements are presented in U.S. dollars (USD), the reporting currency of the Company. The functional currency of the Centessa Pharmaceuticals plc is USD and the functional currency of the Centessa Subsidiaries is their
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Notes to the Unaudited Interim Consolidated and Combined Financial Statements
respective local currency. Income and expenses have been translated into USD at average 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 income (loss). 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 unaudited interim consolidated and combined statements of operations and comprehensive loss within Other income (expense), net.
Since its formation in October 2020, the functional currency of Centessa Pharmaceuticals plc had been British pounds (GBP), as Centessa Pharmaceutical plc’s primary activities were formation, related transaction costs, primarily denominated in GBP, 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 as of the second quarter of 2021, the functional currency of Centessa Pharmaceuticals plc, changed from GBP to USD. The change in functional currency is 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 its U.S. based employees, and the increase in costs denominated in USD, following completion of the Company’s IPO on a U.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 for Centessa Pharmaceutical plc.
The change in functional currency for Centessa 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 in the first quarter of 2021 from General & administration expense to Other income (expense), net to conform to the current period financial statement presentation.
Use of Estimates
The preparation of unaudited interim financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the unaudited interim consolidated and combined financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.
Estimates and assumptions are periodically reviewed and the effects of revisions are reflected in the unaudited interim consolidated and combined financial statements in the period they are determined to be necessary. Significant areas that require management’s estimates include share-based compensation assumptions, derivative liability and contingent value rights assumptions, accrued research and development expenses, and, prior to the IPO, the fair value of the Company’s ordinary shares.
Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, then an impairment charge is recognized for the
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Notes to the Unaudited Interim Consolidated and Combined Financial Statements
Contingent Value Rights
The fair value of the contingent value rights liability represents the estimated future payments that will be settled by issuing a variable number of shares and that are contingent upon the achievement of a specified development milestone for Palladio Biosciences, Inc.’s product candidate. The fair value of the contingent value rights is based on the cumulative probability of achieving the specified milestone which is currently expected by the first quarter of 2022. The fair value measurement is based on significant Level 3 unobservable inputs such as the probability of achieving the milestone, anticipated timelines, and discount rate. Changes in the fair value of the liability are recognized in the consolidated statement of operations and comprehensive loss until it is settled.
Acquired In-Process Research and Development Expenses
Acquired in-process research and development (“IPR&D”), consists of the initial up-front payments incurred in connection with the acquisition or licensing of products or technologies in transactions that do not meet the definition of a business under FASB ASC Topic 805, Business Combinations.
Share-Based Compensation
The Company and the Predecessor 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.
Estimating the fair value of share-based awards requires the input of subjective assumptions, including the estimated fair value of the Company and the Predecessor’s ordinary shares, and, for stock options, the expected life of the options and share price volatility. The Company and the Predecessor account for forfeitures of stock option awards as they occur. The Company uses the Black-Scholes option pricing model to value its stock option awards. The assumptions used in estimating the fair value of share-based awards represent management’s estimate and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and management uses different assumptions, share-based compensation expense could be materially different for future awards.
The expected life of the stock options is estimated using the “simplified method,” as the Company has 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, the Company uses comparable public companies as a basis for its expected volatility to calculate the fair value of option grants. The risk-free rate is based on the U.S. Treasury yield curve commensurate with the expected life of the option.
Awards granted for ordinary shares of Centessa Pharmaceuticals plc (Successor) are accounted for as restricted share-based awards. The estimated fair value of the restricted shares is based upon the estimated fair value of Centessa Pharmaceutical plc’s (Successor) ordinary shares at grant date.
Net Loss Per Ordinary Share
Basic loss per ordinary share is computed by dividing net loss by the aggregate weighted-average number of ordinary shares outstanding. Diluted loss per ordinary share includes the effect, if any, from the potential exercise or conversion of securities, such as convertible preferred shares, stock options, unvested restricted ordinary shares and convertible debt which would result in the issuance of incremental ordinary shares. For diluted net loss per ordinary share, the weighted-average number of ordinary shares is the same for basic net loss per ordinary share due to the fact that when a net loss exists, dilutive securities are not included in the calculation as the impact is anti-dilutive.
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| Unvested ordinary shares | |||||
| Stock options | |||||
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Notes to the Unaudited Interim Consolidated and Combined Financial Statements
Recently Issued Accounting Pronouncements
In July 2021, the FASB issued ASU 2021-05, Lease (Topic 842): Lessors - Certain Leases with Variable Lease Payments ("ASU 2021-05"). The guidance in ASU 2021-05 amends the lease classification requirements for the lessors under certain leases containing variable payments to align with practice under ASC 840. The lessor should classify and account for a lease with variable lease payments that do not depend on a reference index or a rate as an operating lease if both of the following criteria are met: 1) the lease would have been classified as a sales-type lease or a direct financing lease in accordance with the classification criteria in ASC 842-10-25-2 through 25-3; and 2) the lessor would have otherwise recognized a day-one loss. The amendments in ASU 2021-05 are effective for fiscal years beginning after December 15, 2021, with early adoption permitted. The Company is currently evaluating the impact of adoption to the unaudited interim consolidated and combined financial statements and related disclosures.
In May 2021, the FASB issued ASU 2021-04, Issuer's Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options, ("ASU 2021-04") which clarifies the accounting for modifications or exchanges of freestanding equity-classified written call options that remain equity classified after modification or exchange. Specifically, ASU 2021-04 requires the issuer to treat a modification of an equity-classified warrant as an exchange of the original warrant. The difference between the fair value of the modified warrant and the fair value of the warrant immediately before modification is then recognized as an issuance cost or discount of the related transaction. ASU 2021-04 is effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years, with early adoption permitted. ASU 2021-04 should be applied prospectively to modifications or exchanges occurring after the effective date. Either the full or modified retrospective adoption method is allowed. We do not have any equity-classified written call options that would be subject to this guidance. Therefore, we do not expect any impact on the Company's unaudited interim consolidated and combined financial statements and related disclosures.
In October 2020, the FASB issued ASU 2020-10-Codification Improvements. For public business entities, the amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The amendments in this update do not change U.S. GAAP and, therefore, are not expected to result in a significant change in practice. Section A was removed from the final update of ASU 2020-10. Section B of this update contains amendments that improve the consistency of the Codification by including all disclosure guidance in the appropriate Disclosure Section (Section 50). Section C of this update contains Codification improvements that vary in nature. The Company adopted ASU 2020-10 on January 30, 2021 and it did not have a material impact to the Company’s unaudited interim consolidated and combined financial statements and related disclosures.
In August 2020, the FASB issued ASU 2020-06, “(Subtopic 470-20): Debt—Debt with Conversion and Other Options” (“ASU 2020-06”) to address the complexity associated with applying GAAP to certain financial instruments with characteristics of liabilities and equity. ASU 2020-06 includes amendments to the guidance on convertible instruments and the derivative scope exception for contracts in an entity’s own equity and simplifies the accounting for convertible instruments which include beneficial conversion features or cash conversion features by removing certain separation models in Subtopic 470-20. Additionally, ASU 2020-06 will require entities to use the “if-converted” method when calculating diluted earnings per share for convertible instruments. ASU 2020-06 is effective for fiscal years beginning after December 15, 2023 (fiscal year 2024 for the Group), including interim periods within those fiscal years. The Company is currently evaluating the impact of ASU 2020-06 to the unaudited interim consolidated and combined financial statements and related disclosures.
In March 2020, the FASB issued ASU 2020-03, “Codification Improvements to Financial Instruments”: The amendments in this update are to clarify, correct errors in, or make minor improvements to a variety of ASC topics. The changes in ASU 2020-03 are not expected to have a significant effect on current accounting practices. The ASU improves various financial instrument topics in the Codification to increase stakeholder awareness of the amendments and to expedite the improvement process by making the Codification easier to understand and easier to apply by eliminating inconsistencies and providing clarifications. The ASU is effective for smaller reporting companies for fiscal years beginning after December 15, 2022 with early application permitted. The Company is currently evaluating the impact the adoption of this guidance may have on its unaudited interim consolidated and combined financial statements.
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for fiscal years beginning after December 15, 2021. The Company is currently evaluating ASU 2019-12 and its impact on the unaudited interim consolidated and combined financial statements.
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Notes to the Unaudited Interim Consolidated and Combined Financial Statements
3. Acquisition of Centessa Subsidiaries
In January 2021, the Company entered into a contribution or merger agreement with each Centessa Subsidiary whereby the Company acquired 100 % of the outstanding Centessa Subsidiaries’ shares in exchange for, in aggregate, 44,758,079 ordinary shares of the Company. In addition, the Company issued certain contingent value rights to the selling shareholders of Palladio Biosciences, Inc.
As part of the acquisition, the Company issued replacement equity awards to select employees and consultants of certain Centessa Subsidiaries. The awards consisted of options and restricted shares with vesting provisions generally consistent with the original awards prior to the acquisition. The Company determined that a portion of the fair value of the replacement awards should be a component of consideration paid to acquire the Centessa Subsidiaries, with the remaining value of the award accounted for as post-combination share-based compensation expense.
The acquisition of each Centessa Subsidiary has been treated as a separate asset acquisition as the Company determined that none of the Centessa Subsidiaries meet the definition of a business due to substantially all of the fair value of each entity being concentrated in a single asset or group of assets which represent the IPR&D or the entity did not have the requisite inputs and substantive processes to be considered a business. The Company’s acquired IPR&D expense of $223.6 million, of which $3.1 million was in connection with transaction costs recognized prior to January 30, 2021, and reflects the fair value of consideration ascribed to the product candidates in each subsidiary, as the Company determined the assets had no alternative future use.
The total purchase price for the asset acquisitions was calculated as follows (amounts in thousands):
| Estimated fair value of Centessa ordinary shares issued | $ | ||||
| Estimated fair value of replacement equity awards allocated to consideration paid | |||||
| Estimated fair value of contingent value rights | |||||
| Transaction costs | |||||
| Total consideration given | $ | ||||
The following table summarizes the assets acquired and liabilities assumed as of the acquisition date for the asset acquisitions (in thousands):
| Assets acquired: | |||||
| Cash and cash equivalents | $ | ||||
| Tax incentive receivable | |||||
| Prepaid expenses and other current assets | |||||
| Other assets | |||||
| In-process research and development assets | |||||
| Total assets acquired | |||||
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Notes to the Unaudited Interim Consolidated and Combined Financial Statements
| Liabilities assumed: | |||||
| Accounts payable | |||||
| Accrued expenses and other current liabilities | |||||
| Convertible notes | |||||
| Loan with related party | |||||
| Total liabilities assumed | |||||
| Net assets acquired | $ | ||||
The Company’s determinations of the fair value of the ordinary shares were performed using methodologies, approaches and assumptions 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, (“Practice Guide”). In accordance with the Practice Guide, the Company (Successor) considered the following methods for allocating the enterprise value across its classes and series of capital shares to determine the fair value of its ordinary shares at each valuation date.
•Option Pricing Method (“OPM”). The OPM estimates the value of the ordinary equity of the Company using the various inputs in the Black-Scholes option pricing model. The OPM treats the rights of the holders of ordinary shares as equivalent to that of call options on any value of the enterprise above certain break points of value based upon the liquidation preferences of the holders of the Company’s convertible preferred shares, as well as their rights to participation, and the share prices of the outstanding options. Thus, the value of the ordinary shares can be determined by estimating the value of its portion of each of these call option rights. Under this method, the ordinary shares have value only if the funds available for distribution to shareholders exceed the value of the liquidation preference at the time of a liquidity event, such as a merger or sale. Given the ordinary shares represents a non-marketable equity interest in a private enterprise, an adjustment to the preliminary value estimates had to be made to account for the lack of liquidity that a shareholder experiences. This adjustment is commonly referred to as a discount for lack of marketability (“DLOM”).
•Probability-Weighted Expected Return Method (“PWERM”). The PWERM is a scenario-based analysis that estimates the value per share based on the probability-weighted present value of expected future investment returns, considering each of the possible outcomes considered by the Company, as well as the economic and control rights of each share class.
•Hybrid Method. The Hybrid Method is a hybrid between the PWERM and OPM, estimating the probability-weighted value across multiple scenarios, but using the OPM to estimate the allocation of value within one or more of those scenarios. Weighting allocations are assigned to the OPM and PWERM methods factoring possible future liquidity events.
The Company estimated the fair value of its ordinary shares based on the Hybrid Method. Subjective factors considered by the Company’s board of directors and management included the pending addition of new executive members and the election of new independent directors to the Company’s board of directors, as well as definitive plans to undertake an IPO. There are significant judgments and estimates inherent in the determination of the fair value of ordinary shares. These judgments and estimates include assumptions regarding the Company’s future operating performance, the time to complete an initial public offering or other liquidity event and the determination of the appropriate valuation methods. If the Company had made different assumptions, its ordinary shares could have been significantly different.
At the time of the acquisitions, all outstanding unvested share-based awards of the Centessa Predecessor Group vested immediately. The unrecognized compensation expense of $4.1 million was recognized at the time of the acquisitions.
In connection with the acquisition of the Centessa Subsidiaries, the Company issued contingent value rights (CVR), to former shareholders and option holders of Palladio. The CVR represent the contractual rights to receive payment of $39.7 million upon the first patient dosed in a Phase 3 pivotal study of lixivaptan for the treatment of autosomal dominant polycystic kidney disease (“ADPKD”) in any of the United States, France, Germany, Italy, Spain, the United Kingdom and Japan (designated the ACTION Study). The contingent CVR milestone, if triggered, will be settled through the issuance of the
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Notes to the Unaudited Interim Consolidated and Combined Financial Statements
4. Fair Value Measurement
Fair value is the price that could be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value determination in accordance with applicable accounting guidance requires that a number of significant judgments be made. Additionally, fair value is used on a nonrecurring basis to evaluate assets for impairment or as required for disclosure purposes by applicable accounting guidance on disclosures about fair value of financial instruments. Depending on the nature of the assets and liabilities, various valuation techniques and assumptions are used when estimating fair value. The carrying amounts of certain of the Company’s financial instruments, including prepaid expense and accounts payable are shown at cost, which approximates fair value due to the short-term nature of these instruments. The Company follows the provisions of FASB ASC Topic 820, Fair Value Measurement, for financial assets and liabilities measured on a recurring basis. The guidance requires fair value measurements be classified and disclosed in one of the following three categories:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liabilities.
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
The following fair value hierarchy table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis (in thousands):
| Fair value measurement at reporting date using | |||||||||||||||||
| Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | |||||||||||||||
| September 30, 2021 (Successor) | |||||||||||||||||
| Liabilities | |||||||||||||||||
| Contingent Value Rights | $ | $ | $ | ||||||||||||||
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Notes to the Unaudited Interim Consolidated and Combined Financial Statements
| Fair value measurement at reporting date using | |||||||||||||||||
| Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | |||||||||||||||
| December 31, 2020 (Predecessor) | |||||||||||||||||
| Liabilities | |||||||||||||||||
| Derivative liability | $ | $ | $ | ||||||||||||||
The Centessa Predecessor Group evaluated a redemption feature within the convertible term notes and determined bifurcation of the redemption feature was required. The redemption feature is classified as a liability on the accompanying consolidated and combined balance sheet at December 31, 2020. The liability is marked-to-market each reporting period with the changes in fair value recorded in the unaudited interim consolidated and combined statements of operations and comprehensive loss until it is settled. The derivative liability was considered a Level 3 liability because its fair value measurement was based, in part, on significant inputs not observed in the market. The fair value of the derivative was estimated primarily on the probability of the next fund raising occurring and the timing of such event. Upon completion of the acquisition of the Centessa Subsidiaries in January 2021, the derivative liability was settled and is no longer subject to remeasurement.
The acquisition-date fair value of the contingent valuation rights liability represents the future payments that are contingent upon the achievement of a specified development milestone for Palladio’s product candidate. The fair value of the contingent value rights is based on the cumulative probability of achieving the specified milestone which is currently expected by the first quarter of 2022. The fair value measurement is based on significant Level 3 unobservable inputs such as the probability of achieving the milestone, anticipated timelines, and discount rate. Changes in the fair value of the liability will be recognized in the unaudited interim consolidated and combined statement of operations and comprehensive loss until it is settled.
The reconciliation of the redemption feature measured at fair value on a recurring basis using significant unobservable inputs (Level 3) is as follows (amounts in thousands):
| Contingent Value Rights | Derivative Liability | ||||||||||
Balance at January 1, 2021 (Predecessor) | $ | — | $ | ||||||||
| Additions | — | ||||||||||
| Change in fair value | — | ||||||||||
| Settlements | — | ( | |||||||||
Balance at January 29, 2021 (Predecessor) | $ | — | $ | ||||||||
Balance at January 30, 2021 (Successor) | $ | $ | — | ||||||||
| Additions | — | ||||||||||
Balance at March 31, 2021 (Successor) | — | ||||||||||
| Change in fair value of contingent value rights | — | ||||||||||
Balance at June 30, 2021 (Successor) | $ | $ | — | ||||||||
| Change in fair value of contingent value rights | — | ||||||||||
| Balance at September 30, 2021 (Successor) | $ | $ | — | ||||||||
5. Balance Sheet and Combined Deficit Components
22
Centessa Pharmaceuticals plc (Successor) and Centessa Predecessor Group (Predecessor)
Notes to the Unaudited Interim Consolidated and Combined Financial Statements
| Successor | Predecessor | |||||||||||||
| September 30, 2021 | December 31, 2020 | |||||||||||||
| D&O Insurance | $ | $ | ||||||||||||
| Value added tax receivable | ||||||||||||||
| Research and development costs | ||||||||||||||
| Other | ||||||||||||||
| $ | $ | |||||||||||||
Accrued expenses and other current liabilities consist of the following (in thousands):
| Successor | Predecessor | |||||||||||||
| September 30, 2021 | December 31, 2020 | |||||||||||||
| Research and development expenses | ||||||||||||||
| Personnel related expenses | ||||||||||||||
| Professional fees | ||||||||||||||
| Other | ||||||||||||||
| $ | $ | |||||||||||||
Combined deficit of the Centessa Predecessor Group at December 31, 2020 consisted of the following (in thousands):
| Predecessor | |||||
| December 31, 2020 | |||||
| Morphogen-IX deficit | |||||
| Ordinary shares | $ | ||||
| Additional paid-in capital | |||||
| Accumulated other comprehensive income | |||||
| Accumulated deficit | ( | ||||
| Total Morphogen-IX deficit | $ | ( | |||
| Z Factor deficit | |||||
| Ordinary shares | $ | ||||
| Additional paid-in capital | |||||
| Accumulated other comprehensive income | |||||
| Accumulated deficit | ( | ||||
| Total Z Factor deficit | $ | ( | |||
| LockBody deficit | |||||
| Ordinary shares | $ | ||||
| Additional paid-in capital | |||||
| Accumulated other comprehensive income (loss) | ( | ||||
| Accumulated deficit | ( | ||||
| Total LockBody deficit | $ | ( | |||
| Total combined deficit | $ | ( | |||
6. Debt
Centessa Pharmaceuticals Limited Convertible Term Notes
In December 2020, the Company entered into a convertible loan agreement (the Agreement) with Medicxi Growth, whereby the Company issued $5.0 million of unsecured convertible term notes to Medicxi Growth. The convertible loans were
23
Centessa Pharmaceuticals plc (Successor) and Centessa Predecessor Group (Predecessor)
Notes to the Unaudited Interim Consolidated and Combined Financial Statements
issued as a bridge financing in contemplation of completing the Series A financing. The convertible term notes had a stated interest rate of 8 % per annum, which was not payable until settlement of the principal, being the maturity date June 29, 2021. Upon completion of the Company’s Series A preferred financing in January 2021, the Company issued 568,181 shares of its Series A convertible preferred shares and settled all outstanding principal and unpaid interest associated with the convertible term notes.
LockBody Therapeutics Ltd Convertible Term Notes
In July 2019, LockBody entered into a convertible term note agreement to issue up to £5.0 million of convertible term notes of which £3.0 million was received in July 2019 and an additional £1.0 million was received in November 2020.
The convertible term notes had a stated interest rate of 2 % per annum, which was not payable until settlement of the principal, being the maturity date of August 2, 2021.
The principal and accrued interest due under the convertible term notes converts:
•into the class of LockBody’s shares issued in LockBody’s next qualified fund raising, at a conversion price after applying a 20 % discount to the purchase price per share paid for the shares.
•on a change of control, at a conversion price after applying a 50 % discount to the purchase price per share paid for the shares.
As a result of the fact that the convertible term notes were convertible into a variable number of preferred shares, the Centessa Predecessor Group evaluated the conversion provision as a redemption feature. The redemption feature was evaluated as an embedded derivative and bifurcated from the convertible term notes due to the substantial premium paid upon redemption and accounted for as a derivative instrument. Upon bifurcating the redemption feature, the Group recorded aggregate debt discounts of $0.7 million that is recognized in interest expense over the term of the convertible term notes. The notes and the derivative liability were assumed in connection with the acquisition of the Centessa Subsidiaries in January 2021 and immediately forgiven. The forgiveness was recognized as $6.2 million contribution within the Successor consolidated statement of shareholders’ equity during the period from January 30, 2021 through September 30, 2021.
7. Commitments and Contingencies
Commitments
As of September 30, 2021, the Company had non-cancellable commitments for purchase of clinical materials, contract manufacturing, maintenance, and committed funding of up to $17.1 million, of which the Company expects to pay $15.9 million within one year and the remaining $1.2 million over one to three years. The amount and timing of these payments vary depending on the rate of progress of development. Future clinical trial expenses have not been included within the purchase commitments because they are contingent on enrollment in clinical trials and the activities required to be performed by the clinical sites.
Contingencies
From time to time, the Company may have certain contingent liabilities that arise in the ordinary course of its business activities. The Company accrues a liability for such matters when it is probable that future expenditures will be made, and such expenditures can be reasonably estimated.
Litigation
The Company, to its knowledge, is not a party to any litigation as of September 30, 2021, that, if determined adversely, would have a material adverse effect on its business and operations.
24
Centessa Pharmaceuticals plc (Successor) and Centessa Predecessor Group (Predecessor)
Notes to the Unaudited Interim Consolidated and Combined Financial Statements
8. Convertible Preferred Shares
As of December 31, 2020, the Centessa Predecessor Group had Series A, Series B and Seed Series convertible preferred shares outstanding that were subject to redemption under certain “deemed liquidation” events, as defined in each of the Centessa Predecessor Group entities’ articles of association. The Series A, Series B and Seed Series convertible preferred shares are classified outside of combined deficit as the deemed liquidation events are outside of the each of the Centessa Predecessor Group entities’ control. Upon consummation of the acquisition of the Centessa Subsidiaries, all outstanding convertible preferred shares of the Centessa Predecessor Group were converted into ordinary shares of the Centessa Predecessor Group and ultimately were exchanged for ordinary shares of Centessa Pharmaceuticals Limited at the time of acquisition. Immediately following the acquisition, the Centessa Subsidiaries became wholly-owned subsidiaries of the Centessa Pharmaceuticals Limited whereby no convertible preferred shares were issued and outstanding at the Centessa Subsidiaries level.
Ordinary Shares
Ordinary shares confer upon its holders voting rights, the right to receive cash and stock dividends, if declared, and the right to share in excess assets upon liquidation of the Company. The holders of ordinary shares are entitled to one vote per share. In January 2021, the Company issued 45,137,984 ordinary shares in connection with the acquisition of the Centessa Subsidiaries of which 379,905 shares were replacement share-based awards and subject to future vesting requirements. Concurrent with the acquisition, the Company repurchased 4,450,000 of its A ordinary shares from several of its founders for a nominal amount.
Series A Convertible Preferred Shares
In January 2021, the Company sold 22,272,721 shares of its Series A convertible preferred shares at a purchase price of $11.00 per share in exchange for gross proceeds of $245.0 million. Upon completion of the Series A preferred financing, the Company issued