Tectonic Therapeutic Inc

Previous wording

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

Current wording

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

Previous wording

Since our inception in 2019, our operations have focused on organizing and staffing our company, business planning, raising capital, establishing our intellectual property portfolio and conducting preclinical studies and clinical trials. We do not have any product candidates approved for sale and have not generated any revenue from product sales. We have funded our operations primarily with proceeds from sales of Series A-1, A-2, A-3, and A-4 convertible preferred stock (collectively, the “Preferred Stock”), proceeds received from the Merger (as defined below), proceeds from the issuance of common stock, proceeds from issuance of convertible promissory notes, which were all converted to convertible preferred stock in March 2021 and proceeds from issuance of Simple Agreements for Future Equity (“SAFEs”) in October and December 2023. From inception through June 30, 2024, we have received $288.6 million in capital contributions from sales of Preferred Stock, issuance of convertible promissory notes, proceeds from issuance of SAFEs, proceeds from the Merger and proceeds from the issuance of common stock. As of June 30, 2024, we had $185.1 million in cash and cash equivalents. Based on our current operating plan, we believe that our existing cash and cash equivalents should be sufficient to fund our operations for at least the next twelve months following the issuance of our interim condensed consolidated financial statements.

Current wording

Since our inception in 2019, our operations have focused on organizing and staffing our company, business planning, raising capital, establishing our intellectual property portfolio and conducting preclinical studies and clinical trials. We do not have any product candidates approved for sale and have not generated any revenue from product sales. We have funded our operations with an aggregate of $288.6 million in proceeds from the sale of convertible preferred stock, the issuance of convertible promissory notes, the Merger (as defined below), and sale of common stock. As of September 30, 2024, we had $159.1 million in cash and cash equivalents. Based on our current operating plan, we believe that our existing cash and cash equivalents should be sufficient to fund our operations for at least the next twelve months following the issuance of our interim condensed consolidated financial statements.

Previous wording

Since inception, we have incurred significant operating losses. Our net losses were $12.7 million and $10.5 million for the three months ended June 30, 2024 and 2023, respectively, and $27.9 million and $24.9 million for the six months ended June 30, 2024 and 2023, respectively. As of June 30, 2024, we had an accumulated deficit of $118.5 million. We expect to continue to incur significant expenses and operating losses for the foreseeable future. We anticipate that our expenses will increase significantly in connection with our ongoing activities, as we:

Current wording

Since inception, we have incurred significant operating losses. Our net losses were $17.7 million and $10.1 million for the three months ended September 30, 2024 and 2023, respectively, and $45.6 million and $35.0 million for the nine months ended September 30, 2024 and 2023, respectively. As of September 30, 2024, we had an accumulated deficit of $136.2 million. We expect to continue to incur significant expenses and operating losses for the foreseeable future. We anticipate that our expenses will increase significantly in connection with our ongoing activities, as we:

Previous wording

Legacy Tectonic stockholders received approximately 10,956,614 shares of AVROBIO common stock in connection with the Merger, including 11,448 shares of AVROBIO common stock subject to vesting terms, based on the number of shares of Legacy Tectonic common stock outstanding immediately prior to the Merger, including Legacy Tectonic restricted stock, the number of shares of Legacy Tectonic common stock issued to investors participating in the Subscription Agreement and SAFEs, and Legacy Tectonic convertible preferred stock outstanding immediately prior to the Merger, which was converted into shares of Legacy Tectonic common stock on aone-for-one basis immediately prior to the closing of the Merger.

Current wording

Legacy Tectonic stockholders received 10,956,614 shares of AVROBIO common stock in connection with the Merger, including 11,447 shares of AVROBIO common stock subject to vesting terms, based on the number of shares of Legacy Tectonic common stock outstanding immediately prior to the Merger, including Legacy Tectonic restricted stock, the number of shares of Legacy Tectonic common stock issued to investors participating in the Subscription Agreement and SAFEs, and Legacy Tectonic convertible preferred stock outstanding immediately prior to the Merger, which was converted into shares of Legacy Tectonic common stock on a one-for-one basis immediately prior to the closing of the Merger.

Previous wording

Concurrently with the closing of the Merger, on June 20, 2024, certain investors completed the purchase of shares of Legacy Tectonic common stock pursuant to the Subscription Agreement at a price of approximately $12.40 per share for an aggregate purchase price of approximately $96.6 million. The shares of Legacy Tectonic common stock that were issued pursuant to the Subscription Agreement were converted into 4,163,606 shares of our common stock upon the closing of the Merger based on the exchange ratio, pursuant to the Merger Agreement.

Current wording

Concurrently with the closing of the Merger, on June 20, 2024, certain investors completed the purchase of shares of Legacy Tectonic common stock pursuant to the Subscription Agreement at a price of $12.40 per share for an aggregate purchase price of $96.6 million. The shares of Legacy Tectonic common stock that were issued pursuant to the Subscription Agreement were converted into 4,163,606 shares of our common stock upon the closing of the Merger based on the exchange ratio, pursuant to the Merger Agreement.

Previous wording

We have not generated any revenue since our inception and do not expect to generate any revenue from the sale of products in the foreseeable future, if at all. If our development efforts for our product candidates are successful and result in regulatory approval, or in collaboration or license agreements with third parties, we may generate revenue in the future from product sales or payments from collaboration or license agreements that we may enter into with third parties, or any combination thereof. We cannot predict if, when or to what extent we will generate revenue from the commercialization and sale of our product candidates. We may never succeed in obtaining regulatory approval for any of our product candidates.

Current wording

We have not generated any revenue since our inception and do not expect to generate any revenue from the sale of products in the foreseeable future, if at all. If our development efforts for our product candidates are successful and result in regulatory approval, or if we enter collaboration or license agreements with third parties, we may generate revenue in the future from product sales or payments from collaboration or license agreements, or any combination thereof. We cannot predict if, when or to what extent we will generate revenue from the commercialization and sale of our product candidates. We may never succeed in obtaining regulatory approval for any of our product candidates.

Previous wording

Our direct research and development expenses relate to the development of our lead product candidate, TX45, as well as the nonclinical safety pharmacology and toxicology testing of our product candidates. Our external services expenses consist of the external costs and fees paid to consultants and other research laboratories in connection with our preclinical development and clinical development activities.

Current wording

Our direct research and development expenses relate to the development of TX45, as well as the nonclinical safety pharmacology and toxicology testing of our product candidates. Our external services expenses consist of the external costs and fees paid to consultants and other research laboratories in connection with our preclinical development and clinical development activities.

Previous wording

Costs that are deployed across multiple of our programs, including the HHT program and programs aimed at the discovery and development of potential therapies for fibrotic disease, and our platform technology and are not directly attributable to any single program are not allocated to any single program and, as such, are not separately classified. These costs include multi-program employee costs, cross-program payments made under third-party licensing agreements, costs of laboratory supplies and facilities expenses, including rent, depreciation and other indirect costs, the costs of our discovery efforts and projects are included in unallocated employee-related expenses, laboratory supplies and other expenses.

Current wording

Costs that are deployed across multiple internal programs, including the HHT program and programs aimed at the discovery and development of potential therapies for fibrotic disease, and our platform technology and are not directly attributable to any single program are not allocated to any single program and, as such, are not separately classified. These costs include multi-program personnel-related costs, cross-program payments made under third-party licensing agreements, costs of laboratory supplies and facilities expenses, including rent, depreciation and other indirect costs, the costs of our discovery efforts and projects, and other expenses.

Previous wording

General and administrative expenses consist primarily of salaries and personnel-related costs, including share-based compensation, for our personnel in executive, legal, finance and accounting, human resources and other administrative functions. General and administrative expenses also include legal fees relating to patents and corporate matters, professional fees paid for accounting, auditing, consulting and tax service, insurance costs, travel expenses, office and information technology costs and facilities, depreciation and other expenses related to general and administrative activities, which include direct or allocated expenses for rent and maintenance of facilities and utilities.

Current wording

General and administrative expenses consist primarily of salaries and personnel-related costs, including stock-based compensation, for our personnel in executive, legal, finance and accounting, human resources and other administrative functions. General and administrative expenses also include legal fees relating to patents and corporate matters, professional fees paid for accounting, auditing, consulting and tax services, insurance, travel expenses, office and information technology costs and facilities and utilities, depreciation and other expenses related to general and administrative activities.

Previous wording

In October and December 2023, Legacy Tectonic issued SAFEs for proceeds of $34.1 million. The SAFEs were recorded as liabilities in the consolidated balance sheet at their fair value on the issuance dates. Until redemption, the SAFEs were measured at a fair value on a recurring basis, with subsequent changes in fair value recorded in other income and expenses on the consolidated statement of operations and comprehensive loss. We recorded a loss of $3.6 million resulting from the remeasurement of the SAFEs to fair value from March 31, 2024 to June 20, 2024.

Current wording

In October and December 2023, Legacy Tectonic issued SAFEs for proceeds of $34.1 million. The SAFEs were recorded as liabilities in the condensed consolidated balance sheets at their fair value on the issuance dates. Until redemption on June 20, 2024, the SAFEs were measured at a fair value on a recurring basis, with subsequent changes in fair value recorded in other income and expenses on the consolidated statement of operations and comprehensive loss.

Previous wording

Interest income increased by $0.1 million for the three months ended June 30, 2024 compared to the three months ended June 30, 2023 due to an increase in interest rates between the three months ended June 30, 2023 and the three months ended June 30, 2024.

Current wording

Interest income increased by $1.9 million for the three months ended September 30, 2024 compared to the three months ended September 30, 2023 primarily due to an increase in cash and cash equivalents as a result of the Merger.

Previous wording

The following table summarizes Tectonic’s results of operations for the six months ended June 30, 2024 and 2023:

Current wording

The following table summarizes our results of operations for the nine months ended September 30, 2024 and 2023:

Previous wording

The SAFE liabilities loss of $3.6 million resulted from the remeasurement of the SAFE liabilities to fair value during the six months ended June 30, 2024.

Current wording

The SAFE liabilities loss of $3.6 million resulted from the remeasurement of the SAFE liabilities to fair value during the nine months ended September 30, 2024, upon redemption in June 2024.

Previous wording

Interest income increased by $0.2 million for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 due to an increase in interest rates between the six months ended June 30, 2023 and the six months ended June 30, 2024.

Current wording

Interest income increased by $2.0 million for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 primarily due to an increase in cash and cash equivalents as a result of the Merger.

Previous wording

We do not currently have any approved products and have never generated any revenue from product sales. To date, we have funded our operations primarily through proceeds from sales of preferred stock and common stock, proceeds from issuance of convertible promissory notes, proceeds from issuance of SAFEs and proceeds received from the Merger. From inception through June 30, 2024, we had received $288.6 million in capital contributions from sales of Preferred Stock, issuances of convertible promissory notes, proceeds from issuance of SAFEs, proceeds from the Merger and proceeds from the sale of pursuant to the Subscription Agreement. As of June 30, 2024, we had $185.1 million in cash and cash equivalents and an accumulated deficit shares of $118.5 million. We believe that our cash, cash equivalents, and marketable securities will be sufficient to fund our anticipated operating and capital expenditure requirements at least into mid-2027. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our capital resources sooner than we expect.

Current wording

We do not currently have any approved products and have never generated any revenue from product sales. We have funded our operations with an aggregate of $288.6 million in proceeds from the sale of convertible preferred stock, the issuance of convertible promissory notes, the Merger, and sale of common stock. As of September 30, 2024, we had $159.1 million in cash and cash equivalents and an accumulated deficit of $136.2 million. We believe that our cash and cash equivalents will be sufficient to fund our anticipated operating and capital expenditure requirements into mid-2027. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our capital resources sooner than we expect.

Previous wording

The following table shows a summary of our cash flows for the six months ended June 30, 2024 and 2023:

Current wording

The following table shows a summary of our cash flows for the nine months ended September 30, 2024 and 2023:

Previous wording

During the six months ended June 30, 2024 and 2023, net cash used in investing activities was $0 and $0.2 million, respectively. The change in net cash used in investing activities during the six months ended June 30, 2023 was due to purchases of property, equipment, and improvements.

Current wording

During each of the nine month periods ended September 30, 2024 and 2023, net cash used in investing activities was $0.2 million related to purchases of property, equipment, and improvements.

Previous wording

During the six months ended June 30, 2024 and 2023, net cash provided by and used in financing activities was $179.1 million and $0.3 million, respectively. Net cash provided by financing activities during the six months ended June 30, 2024 was primarily due to $94.6 in net proceeds after offering costs from the sale of shares pursuant to the Subscription Agreement, $85.2 million in gross proceeds before net cash deductions from the Merger and $0.6 million in proceeds from the exercise of stock options, partially offset by $1.2 million of payments of Merger transaction costs and $0.2 million in payments on our financing lease liability. Net cash used in financing activities during the six months ended June 30, 2023 was primarily due to $0.3 million of repayment of finance lease obligations.

Current wording

During the nine months ended September 30, 2024, net cash provided by financing activities was $172.8 million, primarily due to net proceeds of $94.6 million from the sale of shares pursuant to the Subscription Agreement, $85.2 million in gross proceeds from the Merger and $0.7 million in proceeds from the exercise of stock options, partially offset by cash paid for transaction costs related to the Merger of $7.4 million. Net cash used in financing activities during the nine months ended September 30, 2023 was primarily due to $0.4 million of repayment of finance lease obligations.

Previous wording

As partial consideration for the Harvard License Agreement, we agreed to pay Harvard aone-time license fee of $170,000, with such fee to be paid in equal installments over three years. In July 2022, we paid Harvard $56,666 and in July 2023 we paid Harvard $56,666. The final installment of $56,668 under the Harvard License Agreement is due in July 2024. As partial consideration for the Harvard License Agreement, we entered into a subscription agreement with Harvard in July 2022, pursuant to which Harvard was granted 227,486 shares of our common stock with a fair market value in the mid six digits.

Current wording

As partial consideration for the Harvard License Agreement, we agreed to pay Harvard a one-time license fee of $170,000, with such fee to be paid in equal installments over three years. The first two installments were paid in July 2022 and 2023 and the third installment was made in July 2024. As partial consideration for the Harvard License Agreement, we entered into a subscription agreement with Harvard in July 2022, pursuant to which Harvard was granted 227,486 shares of our common stock with a fair market value in the mid six digits.

Previous wording

We are required to pay an annual maintenance fee ranging from the low five digits to the low six digits until the first commercial sale of a royalty-bearing product, following which the annual maintenance fee will increase to a low six digits for the remainder of the term of the Harvard License Agreement. We are required to pay aone-time milestone payment of $100,000 for each discovered product granted FDA marketing authorization as well as for the first licensed product orknow-how enabled product to reach certain clinical developmental milestones, up to $8.5 million and for the first licensed product orknow-how enabled product to reach certain commercial milestones, up to $2.0 million. We are also obligated to pay tiered royalties as a percentage in the low single digits on net sales of licensed products, as a percentage in the low single digits on the net sales ofknow-how enabled products and a single royalty as a percentage in the low single digits on the net sales of discovered products, subject to a reduction for third-party licenses, as well as a percentage between 10-20% ofnon-royalty income we receive in connection with a sublicense, strategic partnership orknow-how enabled license. With respect to any net sales of licensed products andknow-how enabled products sold in certain countries outside of the United States and Europe, we and Harvard will negotiate a royalty percentage on acountry-by-country basis.

Current wording

We are required to pay an annual maintenance fee ranging from the low five digits to the low six digits until the first commercial sale of a royalty-bearing product, following which the annual maintenance fee will increase to a low six digits for the remainder of the term of the Harvard License Agreement. We are required to pay a one-time milestone payment of $100,000 for each discovered product granted FDA marketing authorization as well as for the first licensed product or know-how enabled product to reach certain clinical developmental milestones, up to $8.5 million and for the first licensed product or know-how enabled product to reach certain commercial milestones, up to $2.0 million. We are also obligated to pay tiered royalties as a percentage in the low single digits on net sales of licensed products, as a percentage in the low single digits on the net sales of know-how enabled products and a single royalty as a percentage in the low single digits on the net sales of discovered products, subject to a reduction for third-party licenses, as well as a percentage between 10-20% of non-royalty income we receive in connection with a sublicense, strategic partnership or know-how enabled license. With respect to any net sales of licensed products and know-how enabled products sold in certain countries outside of the United States and Europe, we and Harvard will negotiate a royalty percentage on a country-by-country basis.

Previous wording

For a more detailed description of this agreement, see Note 7 to the interim condensed consolidated financial statements included elsewhere in this Quarterly Report.

Current wording

For a more detailed description of this agreement, see Note 7 “Commitments and Contingencies” to the interim condensed consolidated financial statements included elsewhere in this Quarterly Report.

Previous wording

On November 29, 2021, we executed a license agreement with Alloy Therapeutics, LLC (“ATX”), whereby we will use ATX technology for the purpose of preclinical development, clinical development and commercialization of potential product candidates, for an initial period of three years, with the option to extend the term for an additional two years. We will pay ATX anon-refundable andnon-creditable annual fee of $0.1 million on each anniversary of the agreement. On November 7, 2022, we amended the agreement and extended the period of payment for the first fee due in May 2023. Additionally, we will be responsible for annual partnering fees if we decide to pursue clinical development of a product candidate using the ATX technology. The partnering fees may be creditable against future milestone development fees paid by us. We will also be responsible to pay ATX development milestone payments for the movement of certain product candidates through clinical trials, which range from the low six digits to the low seven digits upon completion of each milestone and amount to $4.8 million in total milestone payments under the license agreement. Provided we are able to commercialize a product using ATX technology, we will be responsible to pay ATX commercial payments in the low seven digits per year during the first six years of commercial sales, amounting to an amount in the high eight digits in total commercial payments under the license agreement.

Current wording

On November 29, 2021, we executed a license agreement with Alloy Therapeutics, LLC (“ATX”), whereby we will use ATX technology for the purpose of preclinical development, clinical development and commercialization of potential product candidates, for an initial period of three years, with the option to extend the term for an additional two years. We will pay ATX a non-refundable and non-creditable annual fee of $0.1 million on each anniversary of the agreement. On November 7, 2022, we amended the agreement and extended the period of payment for the first fee due, which was paid in May 2023. Additionally, we will be responsible for annual partnering fees if we decide to pursue clinical development of a product candidate using the ATX technology. The partnering fees may be creditable against future milestone development fees paid by us. We will also be responsible to pay ATX development milestone payments for the movement of certain product candidates through clinical trials, which range from the low six digits to the low seven digits upon completion of each milestone and amount to $4.8 million in total milestone payments under the license agreement. Provided we are able to commercialize a product using ATX technology, we will be responsible to pay ATX commercial payments in the low seven digits per year during the first six years of commercial sales, amounting to an amount in the high eight digits in total commercial payments under the license agreement. Pursuant to the terms of the agreement, the Company had no expense for the three and nine months ended September 30, 2024, and less than $0.1 million during the three and nine months ended September 30, 2023. We intend to terminate the agreement with ATX effective November 14, 2024.

Previous wording

On May 1, 2023, we entered into a discovery agreement with Adimab, LLC (“Adimab”), an antibody discovery company, whereby we and Adimab are collaborating on human antibody discovery in accordance with an agreed upon research program. Legacy Tectonic paid an upfront technology access fee totaling $20,000 upon execution of the Adimab agreement during the year ended December 31, 2023.

Current wording

On May 1, 2023, we entered into a discovery agreement with Adimab, LLC (“Adimab”), an antibody discovery company, whereby we and Adimab are collaborating on human antibody discovery in accordance with an agreed upon research program. Legacy Tectonic paid an upfront technology access fee totaling $20,000 upon execution of the Adimab agreement during the year ended December 31, 2023. This agreement was terminated effective July 25, 2024.

Previous wording

While our significant accounting policies are described in greater detail in Note 2 to our audited annual consolidated financial statements, we believe that the following accounting policies are those most critical to the judgements and estimates used in the preparation of our interim condensed consolidated financial statements.

Current wording

While our significant accounting policies are described in greater detail in Note 2 “Summary of Significant Accounting Policies” to our audited annual consolidated financial statements, we believe that the following accounting policies are those most critical to the judgements and estimates used in the preparation of our interim condensed consolidated financial statements.

Previous wording

As part of the process of preparing our interim condensed consolidated financial statements, we are required to estimate our prepaid and accrued research and development expenses. This process involves estimating the level of service performed and the associated cost incurred for the services when we have not yet been invoiced or otherwise notified of actual costs. The majority of our service providers invoice us in arrears for services performed, on apre-determined schedule or when contractual milestones are met; however, some require advance payments. We make estimates of our prepaid and accrued research and development expenses as of each balance sheet date in the interim condensed consolidated financial statements based on facts and circumstances known to us at that time, which includes corroboration of these estimates with the service providers. Estimated research and development expenses include those related to fees paid to vendors in connection with clinical, discovery and preclinical development activities and any research organizations in connection with clinical and preclinical studies and testing. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in changes in estimates reported in the current period. To date, there have not been any material adjustments to our prior estimates of prepaid and accrued research and development expenses.

Current wording

As part of the process of preparing our interim condensed consolidated financial statements, we are required to estimate our prepaid and accrued research and development expenses. This process involves estimating the level of service performed and the associated cost incurred for the services when we have not yet been invoiced or otherwise notified of actual costs. The majority 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 prepaid and accrued research and development expenses as of each balance sheet date in the interim condensed consolidated financial statements based on facts and circumstances known to us at that time, which includes corroboration of these estimates with the service providers. Estimated research and development expenses include those related to fees paid to vendors in connection with clinical, discovery and preclinical development activities and any research organizations in connection with clinical and preclinical studies and testing. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in changes in estimates reported in the current period. To date, there have not been any material adjustments to our prior estimates of prepaid and accrued research and development expenses.

Previous wording

We measure stock options granted to employees andnon-employees based on their fair value on the date of the grant using the Black-Scholes-Merton (“BSM”) option pricing model. Compensation expense for those awards is recognized over the requisite service period, which is generally the vesting period of the respective award for employees. Compensation expense for awards tonon-employee with service-based vesting conditions is recognized in the same manner as if we had paid cash in exchange for the goods or services, which is generally the over the vesting period of the award. We use the straight-line method to recognize the expense of awards with service-based vesting conditions. We account for forfeitures of stock options as they occur.

Current wording

We measure stock options granted to employees and non-employees based on their fair value on the date of the grant using the Black-Scholes-Merton (“BSM”) option pricing model. Compensation expense for those awards is recognized over the requisite service period, which is generally the vesting period of the respective award for employees. Compensation expense for awards to non-employee with service-based vesting conditions is recognized in the same manner as if we had paid cash in exchange for the goods or services, which is generally the over the vesting period of the award. We use the straight-line method to recognize the expense of awards with service-based vesting conditions. We account for forfeitures of stock options as they occur.