SEC Filing - Cabaletta Bio, Inc.

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caba-10q_20190930.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2019

☐	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: 001-39103

CABALETTA BIO, INC.

(Exact Name of Registrant as Specified in its Charter)

Delaware	82-1685768
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
2929 Arch Street, Suite 600	19104
Philadelphia, PA
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (267) 759-3100

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

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.00001 per share

CABA

The Nasdaq Global Select Market

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

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

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

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

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

As of December 5, 2019, the registrant had 24,034,022 shares of common stock, $0.00001 par value per share, outstanding.

Table of Contents

		Page
PART I.	FINANCIAL INFORMATION	2
Item 1.	Financial Statements (Unaudited)	2
	Condensed Balance Sheets	2
	Condensed Statements of Operations	3
	Condensed Statements of Convertible Preferred Stock and Stockholders’ Deficit	4
	Condensed Statements of Cash Flows	5
	Notes to Unaudited Condensed Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.	Controls and Procedures	26
PART II.	OTHER INFORMATION	28
Item 1.	Legal Proceedings	28
Item 1A.	Risk Factors	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	81
Item 3.	Defaults Upon Senior Securities	82
Item 4.	Mine Safety Disclosures	82
Item 5.	Other Information	82
Item 6.	Exhibits	83
Signatures		85

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

•

the success, cost and timing and conduct of our clinical trial program, initially our planned Phase 1 clinical trial of DSG3-CAART, and our other product candidates, including statements regarding the timing of initiation and completion of the clinical trials and the period during which the results of the clinical trials will become available;

•

the timing of and our ability to obtain and maintain regulatory approval of our product candidates, including DSG3-CAART, MuSK-CAART and DSG3/1-CAART, in any of the indications for which we plan to develop them, and any related restrictions, limitations, and/or warnings in the label of an approved product candidate;

•

our plans to pursue research and development of other product candidates;

•

our plan to infuse our DSG3-CAART product candidate without lymphodepletion or other preconditioning agents initially in our planned Phase 1 clinical trial;

•

the potential advantages of our proprietary Cabaletta Approach for selective B cell Ablation platform, called our CABA platform, and our product candidates;

•

the extent to which our scientific approach and CABA platform may potentially address a broad range of diseases;

•

the potential benefits and success of our arrangements with the Trustees of the University of Pennsylvania, or Penn, and the Children’s Hospital of Pennsylvania, or CHOP, and our scientific co-founders, Drs. Milone and Payne;

•

our ability to successfully commercialize our product candidates, including DSG3-CAART and our other product candidates;

•

the potential receipt of revenue from future sales of DSG3-CAART and our other product candidates;

•

the rate and degree of market acceptance and clinical utility of DSG3-CAART and our other product candidates;

•

our estimates regarding the potential market opportunity for DSG3-CAART and our other product candidates, and our ability to serve those markets;

•

our sales, marketing and distribution capabilities and strategy, whether alone or with potential future collaborators;

•

our ability to establish and maintain arrangements or a facility for manufacture of DSG3-CAART and our other product candidates;

•

our ability to obtain funding for our operations, including funding necessary to initiate and complete our planned Phase 1 clinical trial of DSG3-CAART and our ongoing preclinical studies of MuSK-CAART, DSG3/1-CAART and FVIII-CAART;

•

the potential achievement of milestones and receipt of payments under our collaborations;

•

our ability to enter into additional collaborations with existing collaborators or other third parties;

•

our expectations regarding our ability to obtain and maintain intellectual property protection for our product candidates and our ability to operate our business without infringing on the intellectual property rights of others;

•

the success of competing therapies that are or become available, and our competitive position;

•

the accuracy of our estimates regarding expenses, future revenues, capital requirements and needs for additional financing;

•

the impact of government laws and regulations in the United States and foreign countries; and

•

our ability to attract and retain key scientific or management personnel.

These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this Quarterly Report on Form 10-Q. The forward-looking statements contained in this Quarterly Report on Form 10-Q are made as of the date of this Quarterly Report on Form 10-Q, and we undertake no obligations to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

CABALETTA BIO, INC.

Condensed Balance Sheets

(in thousands, except share and per share amounts)

	September 30, 2019			December 31, 2018
Assets	(unaudited)
Current assets:
Cash and cash equivalents	$	71,041		$	33,017
Prepaid expenses and other current assets		708			977
Total current assets		71,749			33,994
Property and equipment, net		540			—
Deferred offering costs		2,563			180
Deposits		91			—
Total Assets	$	74,943		$	34,174
Liabilities, convertible preferred stock and stockholders’ deficit
Current liabilities:
Accounts payable	$	1,154		$	603
Accrued and other current liabilities		1,910			340
Total current liabilities		3,064			943
Commitments and Contingencies (see Note 6)
Convertible preferred stock:
Series A, A-1, A-2 and B convertible preferred stock, $0.00001 par value: 20,762,168 and 12,393,497 shares authorized as of September 30, 2019 and December 31, 2018, respectively; 19,356,835 and 12,393,047 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively; aggregate liquidation preference of $94,475 at September 30, 2019.		97,954			43,921
Stockholders’ deficit:
Common stock, $0.00001 par value: 29,000,000 and 21,147,115 shares authorized as of September 30, 2019 and December 31, 2018, respectively; 3,848,320 shares issued and outstanding at both December 31, 2018 and September 30, 2019		—			—
Additional paid-in capital		1,481			1,762
Accumulated deficit		(27,556	)		(12,452	)
Total stockholders’ deficit		(26,075	)		(10,690	)
Total liabilities, convertible preferred stock and stockholders’ deficit	$	74,943		$	34,174

The accompanying notes are an integral part of these financial statements.

CABALETTA BIO, INC.

Condensed Statements of Operations

(in thousands, except share and per share amounts)

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Operating expenses:
Research and development	$	3,220		$	2,589		$	8,645		$	3,228
General and administrative		1,811			491			4,178			900
Total operating expenses		5,031			3,080			12,823			4,128
Loss from operations		(5,031	)		(3,080	)		(12,823	)		(4,128	)
Other income:
Interest income		381			48			1,283			75
Fair value adjustments on convertible notes		—			(6,244	)		—			(6,244	)
Net loss		(4,650	)		(9,276	)		(11,540	)		(10,297	)
Deemed dividend		—			—			(5,326	)		—
Net loss attributable to common stockholders	$	(4,650	)	$	(9,276	)	$	(16,866	)	$	(10,297	)
Net loss per share, basic and diluted	$	(2.17	)	$	(9.47	)	$	(9.34	)	$	(5.44	)
Weighted-average number of shares used in computing net loss per share, basic and diluted		2,142,958			979,069			1,806,494			1,891,456

The accompanying notes are an integral part of these financial statements.

CABALETTA BIO, INC.

Condensed Statements of Convertible Preferred Stock and Stockholders’ Deficit

(in thousands, except share amounts)

(unaudited)

	Convertible Preferred Stock				Common Stock				Additional Paid-in			Accumulated			Total Stockholders’
	Shares		Amount		Shares		Amount		Capital			Deficit			Deficit
Balance—December 31, 2017		—	$	—		3,333,332	$	—	$	1		$	(250	)	$	(249	)
Issuance of common stock		—		—		33,670		—		—			—			—
Stock-based compensation		—		—		—		—		131			—			131
Net loss		—		—		—		—		—			(1,021	)		(1,021	)
Balance—June 30, 2018		—		—		3,367,002		—		132			(1,271	)		(1,139	)
Stock-based compensation		—		—		—		—		195			—			195
Net loss		—		—		—		—		—			(9,276	)		(9,276	)
Balance—September 30, 2018		—	$	—		3,367,002	$	—	$	327		$	(10,547	)	$	(10,220	)
Balance—December 31, 2018		12,393,047	$	43,921		3,848,320	$	—	$	1,762		$	(12,452	)	$	(10,690	)
Issuance of convertible preferred stock, net of issuance costs of $1,293		6,963,788		48,707		—		—		—			—			—
Exchange of convertible preferred stock, including deemed dividend		—		5,326		—		—		(2,674	)		(2,652	)		(5,326	)
Stock-based compensation		—		—		—		—		912			—			912
Net loss		—		—		—		—		—			(6,890	)		(6,890	)
Balance—June 30, 2019		19,356,835		97,954		3,848,320		—		—			(21,994	)		(21,994	)
Reclassification (see Note 1)		—		—		—		—		912			(912	)		—
Stock-based compensation		—		—		—		—		569			—			569
Net loss		—		—		—		—		—			(4,650	)		(4,650	)
Balance—September 30, 2019		19,356,835	$	97,954		3,848,320	$	—	$	1,481		$	(27,556	)	$	(26,075	)

The accompanying notes are an integral part of these financial statements.

CABALETTA BIO, INC.

Condensed Statements of Cash Flows

(in thousands)

(unaudited)

	Nine Months Ended September 30,
	2019			2018
Cash flows from operating activities:
Net loss	$	(11,540	)	$	(10,297	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation		1,481			326
Change in fair value of convertible notes		—			6,244
Obligation to issue common stock for research and development		—			1,155
Depreciation		53			—
Changes in operating assets and liabilities:
Prepaid expenses and other current assets		449			(220	)
Deposits		(91	)
Accounts payable		552			(140	)
Accrued and other current liabilities		934			179
Net cash used in operating activities		(8,162	)		(2,753	)
Cash flows from investing activities:
Purchases of property and equipment		(420	)		—
Net cash used in investing activities		(420	)		—
Cash flows from financing activities:
Proceeds from issuance of convertible notes		—			12,535
Proceeds from issuance of convertible preferred stock		50,000			—
Issuance costs of convertible preferred stock		(1,293	)		—
Payments of deferred offering costs		(2,101	)		—
Net cash provided by financing activities		46,606			12,535
Net increase in cash and cash equivalents		38,024			9,782
Cash and cash equivalents—beginning of period		33,017			1
Cash and cash equivalents—end of period	$	71,041		$	9,783
Supplemental disclosures of non-cash financing activities:
Exchange of convertible preferred stock, including deemed dividend	$	10,090		$	—
Deferred offering costs in accrued expenses at end of period	$	462		$	43
Property and equipment in accrued expenses at end of period	$	174		$	—

The accompanying notes are an integral part of these financial statements.

CABALETTA BIO, INC.

Notes to Unaudited Condensed Financial Statements

(in thousands, except share and per share amounts.)

1. Basis of Presentation

Cabaletta Bio, Inc. (the Company or Cabaletta) was incorporated in April 2017 in the State of Delaware as Tycho Therapeutics, Inc. and, in August 2018, changed its name to Cabaletta Bio, Inc. The Company is headquartered in Pennsylvania. Cabaletta is a clinical-stage biotechnology company focused on the discovery and development of T cell therapies for B cell-mediated autoimmune diseases.

Principal operations commenced in April 2018, when the Company executed sponsored research agreements with the Trustees of the University of Pennsylvania (Penn).

On October 16, 2019, the Company effected a 1-for-1.5 reverse split of the Company’s issued and outstanding shares of common stock, par value $0.00001 per share (Common Stock). Upon the effectiveness of the reverse stock split: (i) all shares of outstanding Common Stock were adjusted; (ii) the conversion price of the Series A, Series A-1, Series A-2 and Series B preferred stock (collectively, the Preferred Shares) was adjusted; (iii) the number of shares of Common Stock for which each outstanding option to purchase Common Stock is exercisable was adjusted; and (iv) the exercise price of each outstanding option to purchase Common Stock was adjusted. All of the outstanding Common Stock share numbers (including shares of Common Stock subject to the Company’s options and as converted for the outstanding convertible preferred stock shares), share prices, exercise prices and per share amounts contained in the condensed financial statements have been retroactively adjusted in the condensed financial statements to reflect this reverse stock split for all periods presented. The par value per share and the authorized number of shares of Common Stock and convertible preferred stock were not adjusted as a result of the reverse stock split.

On October 29, 2019, the Company completed its initial public offering (IPO) of 6,800,000 shares of Common Stock at an offering price of $11.00 per share. The Company received net proceeds of $66,164 after deducting underwriting discounts, commissions and estimated offering expenses. In connection with the IPO, the Company’s outstanding shares of convertible preferred stock were automatically converted into 12,904,534 shares of Common Stock. After the IPO, the Company had a total of 23,552,854 outstanding shares of Common Stock. In November 2019, the underwriters partially exercised their option and purchased an additional 475,501 shares of Common Stock resulting in net proceeds to the Company of approximately $4,864, after deducting underwriting discounts and commissions. The financial statements as of September 30, 2019, including share and per share amounts, do not include the effects of the IPO.

Risks and Uncertainties

The Company is subject to risks common to companies in the biotechnology industry including, but not limited to, new technological innovations, protection of proprietary technology, dependence on key personnel, compliance with government regulations and the need to obtain additional financing. As a result, the Company is unable to predict the timing or amount of increased expenses or when or if the Company will be able to achieve or maintain profitability. Further, the Company is currently dependent on Penn for much of its preclinical research, clinical research and development activities, and expects to be dependent upon Penn for initial manufacturing activities (Note 6). Product candidates currently under development will require significant additional research and development efforts, including extensive preclinical and clinical testing and regulatory approval, prior to commercialization. Even if the Company is able to generate revenues from the sale of its product candidates, if approved, it may not become profitable. If the Company fails to become profitable or is unable to sustain profitability on a continuing basis, then it may be unable to continue its operations at planned levels and be forced to reduce its operations.

Liquidity

The Company expects that its operating losses and negative cash flows will continue for the foreseeable future. As of the issuance date of these unaudited condensed financial statements as of and for the nine months ended September 30, 2019, the Company expects that the $71,028 net proceeds from its IPO and the partial exercise of the underwriters’ option to purchase additional shares together with its cash and cash equivalents as of September 30, 2019 will be sufficient to fund its operating expenses and capital expenditure requirements through at least the first quarter of 2022. The future viability of the Company beyond that date is dependent on its ability to raise additional capital to finance its operations.

2. Summary of Significant Accounting Policies

Unaudited Interim Financial Information

The accompanying unaudited interim financial statements have been prepared in conformity with generally accepted accounting principles (GAAP) and the applicable rules and regulations of the Securities and Exchange Commission (SEC) regarding interim financial reporting. Any reference in these notes to applicable guidance is meant to refer to GAAP as found in the Accounting Standards Codification and Accounting Standards Updates (ASU) of the Financial Accounting Standards Board (FASB). As permitted under these rules, certain footnotes and other financial information that are normally required by GAAP have been condensed or omitted.

In the opinion of management, the accompanying unaudited interim financial statements include all normal and recurring adjustments (which consist primarily of accruals and estimates that impact the financial statements) considered necessary to present fairly the Company’s financial position as of September 30, 2019 and the results of its operations and its cash flows for the nine months ended September 30, 2019 and 2018. The results for the nine months ended September 30, 2019 are not necessarily indicative of results to be expected for the year ending December 31, 2019, any other interim periods, or any future year or period. The balance sheet as of December 31, 2018 included herein was derived from the audited financial statements as of that date. The unaudited interim financial statements, presented herein, do not contain the required disclosures under GAAP for annual financial statements. These unaudited financial statements should be read in conjunction with the Company’s audited financial statements, which are included in the Company’s prospectus dated October 24, 2019, that forms a part of the Company’s Registration Statements on Form S-1 (File Nos. 333-234017 and 333-234315), as filed with the SEC pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended.

Use of Estimates

The preparation of financial statements in conformity with 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 financial statements and the reported amounts of expenses during the reporting period. Significant estimates and assumptions made in the accompanying financial statements include, but are not limited to, the fair value of common stock, stock-based compensation, the valuation allowance on the Company’s deferred tax assets, and the fair value of convertible debt. The Company evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors and adjusts those estimates and assumptions when facts and circumstances dictate. Actual results could differ from those estimates.

Deferred Offering Costs

The Company capitalizes certain legal, accounting and other third-party fees that are directly associated with in-process equity financings as deferred offering costs until such financings are consummated. After consummation of the equity financing, these costs are recorded in stockholders’ deficit as a reduction of additional paid-in capital generated as a result of the offering. Should the in-process equity financing be abandoned, the deferred offering costs will be expensed immediately as a charge to operating expenses in the statements of operations.

Fair Value Measurement

Assets and liabilities recorded at fair value on a recurring basis in the balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined as the exchange price that would be received for an asset or an exit price that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows:

Level 1—Observable inputs such as unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

Level 2—Inputs (other than quoted prices included in Level 1) that are either directly or indirectly observable for the asset or liability. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Reclassification

A reclassification of $912 has been made increasing additional paid-in capital and increasing accumulated deficit in the three month period ended September 30, 2019 with respect to the exchange of convertible preferred stock recorded in January 2019. The reclassification had no impact to the Statements of Operations, including Net Income and Earnings Per Share, Total Assets and Total Equity.

Related Party Transactions

The Company engaged a firm controlled by a former executive (until February 2019) of the Company for professional services related to accounting, finance and other administrative functions. For the three month periods ended September 30, 2019 and 2018, the costs incurred under this arrangement totaled $180 and $30, respectively. For the nine month periods ended September 30, 2019 and 2018, the costs incurred under this arrangement totaled $445 and $41, respectively. These amounts were recorded as general and administrative expense in the accompanying statements of operations. As of September 30, 2019, amounts owed under this arrangement totaled $47 and are included in accounts payable in the accompanying balance sheets.

The Company engaged the services of its current Chief Executive Officer and President prior to his employment in October 2018. For the three and nine month periods ended September 30, 2018, the costs incurred under this arrangement totaled $103 and $168, respectively, which were recorded as general and administrative expense in the accompanying statements of operations.

Emerging Growth Company Status

The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the JOBS Act). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act, until such time as those standards apply to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that it (i) is no longer an emerging growth company or (ii) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. As a result, these financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), with guidance regarding the accounting for and disclosure of leases. The update requires lessees to recognize the liabilities related all leases, including operating leases, with a term greater than 12 months on the balance sheet. This update also requires lessees and lessors to disclose key information about their leasing transactions. This guidance is effective for public companies for annual and interim periods beginning after December 15, 2018. For all other entities, this standard is effective for annual reporting periods beginning after December 15, 2020, and interim periods within annual periods beginning after December 15, 2021. Early adoption is permitted. The Company has yet to evaluate the effect that ASU 2016-02 will have on its financial statements or financial statement disclosures.

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting effect. For public business entities, the amendments in Part I of ASU 2017-11 are effective for fiscal years and interim periods within those years beginning after December 15, 2018. For all other entities, the amendments in Part I of this update are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted for all entities, including adoption in an interim period. The Company is currently assessing the potential impact of adopting ASU 2017-11 on its financial statements and financial statement disclosures.

3. Fair Value Measurements

The following tables present financial information about the Company’s financial assets measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values:

	September 30, 2019
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets
Cash equivalents:
Money market funds	$	71,041	$	71,041	$	—	$	—
Total	$	71,041	$	71,041	$	—	$	—

	December 31, 2018
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets
Cash equivalents:
Money market funds	$	33,017	$	33,017	$	—	$	—
Total	$	33,017	$	33,017	$	—	$	—

The fair value of the convertible notes (Note 5) is a recurring Level 3 fair value measurement. Below is a rollforward of the fair value of the convertible notes for the nine months ended September 30, 2018:

	Convertible Notes
Fair value at December 31, 2017	$	—
Fair value upon the May 2018 closing		12,535
Change in fair value at September 30, 2018		6,244
Fair value at September 30, 2018	$	18,779

There were no transfers among Level categories in the periods presented.

4. Accrued and Other Current Liabilities

Accrued and other current liabilities consist of the following:

	September 30, 2019		December 31, 2018
Research and development services	$	458	$	181
General and administrative services		202		36
Accrued offering costs		462		—
Compensation		631		121
Other		157		2
	$	1,910	$	340

5. Convertible Notes

In May 2018, the Company issued convertible notes (the Notes) with aggregate proceeds to the Company in an initial closing of $12,535, including $5,000 issued to Penn. The Notes carried a stated interest rate of 7.5% per annum. All unpaid principal, together with the then accrued interest, for the Notes was due and payable at the earlier of May 4, 2021 or upon an event of default. The terms of the Notes provided for an additional milestone-based closing of $12,567 upon the achievement of certain Company-specific events. The Notes contained a number of provisions addressing automatic and optional conversion, events of default and prepayment provisions.

The Notes were amended in September 2018 to adjust the terms of the automatic and optional conversion provisions. In October 2018, the Notes were amended again to reduce the qualified financing threshold, make a qualified financing a milestone event, revise the structure of a milestone-based closing and reallocate milestone closing purchase rights to new purchasers and the existing noteholders. On the same day, immediately following the amendment of the Notes, the Company completed a qualified financing, issuing 3,146,551 shares of Series A convertible preferred stock (Series A Preferred) for gross proceeds of $12,744 (Note 7). At this time, the Company issued 4,553,452 shares of Series A-1 convertible preferred stock (Series A-1 Preferred) in connection with the milestone-based closing resulting in $12,567 of proceeds ($2.76 per share) and the Notes together with interest accrued thereon ($409) were converted into 2,819,267 shares of Series A-1 Preferred and 1,873,777 shares of Series A-2 convertible preferred stock (Series A-2 Preferred), reflecting a conversion price per share of $2.76.

On issuance, the Company elected to account for the Notes at fair value with any changes in fair value being recognized through the statements of operations until the Notes settled. In this connection, the Company’s policy is to report a single non-operating income/(expense) line item to record fair value adjustments on convertible notes and does not report interest expense as a separate line item in the statements of operations. On issuance, total debt issuance costs of $53 were expensed and recognized as general and administrative expense in the accompanying statements of operations.

On issuance, the fair value of the Notes was determined to be equal to $12,535, which is the principal amount of the Notes. The fair value of the Notes upon settlement in October 2018 was determined based on the fair value of the Series A-1 Preferred and Series A-2 Preferred issued, which was determined to be $3.39 per share of Series A-1 Preferred and Series A-2 Preferred, using an option pricing method (OPM) framework and utilized the backsolve method for inferring and allocating the equity value predicated on the capital raise that transpired just prior to the valuation date. This method was selected as the Company concluded that the contemporaneous financing transaction was an arm’s-length transaction. Application of the OPM back-solve method involves making assumptions for the expected time to liquidity, volatility and risk-free rate and then solving for the value of equity such that value for the most recent financing equals the amount paid. The OPM allocation of total equity value was determined with reference to a recent financing transaction and the Company assumed a 71% volatility rate, a 1.3-year estimated term and a probability weighted average discount for lack of marketability of 35%. The fair value of the Notes as of September 30, 2018 was determined to be the same as that on settlement in October 2018 based on management’s determination of no material changes to the assumptions underlying the determination of the fair value of the Notes. For the nine months ended September 30, 2018, the Company recognized $6,244 in the accompanying statement of operations as other expense—fair value adjustments on the convertible notes.

6. Commitments and Contingencies

Operating Lease Agreement

In February 2019, the Company entered into an operating lease agreement for new office space in Philadelphia, Pennsylvania. The lease term commenced in May 2019 and will expire in July 2022. The initial annual base rent is $261, and such amount will increase by 2% annually on each anniversary of the commencement date. Rent expense related to this lease agreement recognized in the accompanying statements of operations was $67 for the three months ended September 30, 2019 and $110 for the nine months ended September 30, 2019.

As of September 30, 2019, the future minimum payments for operating leases are as follows:

October 1, 2019 to December 31, 2019	$	65
2020		263
2021		268
2022		158
Thereafter		—
	$	754

Research Service Agreement

In August 2018, the Company entered into a research service agreement with the Children’s Hospital of Philadelphia (CHOP) for the manufacturing of preclinical study and clinical trial material. Research and development expense related to this research service agreement with CHOP recognized in the accompanying statements of operations was $0 and $162 for the three months ended September 30, 2019 and 2018, respectively, and $201 and $162 for the nine months ended September 30, 2019 and 2018, respectively. There were no amounts due under the research service agreement with the Children’s Hospital of Philadelphia as of September 30, 2019.

License Agreement with the Trustees of the University of Pennsylvania

In August 2018, the Company entered into a license agreement with Penn (the Penn Agreement) and activated the license in October 2018 pursuant to which the Company obtained (a) a non-exclusive, non-sublicensable worldwide license to certain of Penn’s intellectual property to conduct research, product development, clinical trials, cell manufacturing and other activities, and (b) an exclusive, worldwide, royalty-bearing right and license, with a right to sublicense, on a target-by-target basis, under certain of Penn’s intellectual property to make, use, sell, offer for sale, import, and otherwise commercialize products for the treatment of autoimmune and alloimmune diseases. In July 2019, the Penn Agreement was amended and restated to include CHOP as a party to the agreement.

Unless earlier terminated, the Penn Agreement expires on the expiration or abandonment or other termination of the last valid claim in Penn’s intellectual property licensed by the Company. The Company may terminate the Penn Agreement at any time for convenience upon 60 days’ written notice. In the event of an uncured, material breach, Penn may terminate the Penn Agreement upon 60 days’ written notice.

Under the terms of the Penn Agreement, the Company is obligated to pay $2,000 annually for three years beginning August 2018 for funding to the laboratories of each of Drs. Milone and Payne (see Sponsored Research Agreements—Penn). During the term of the Penn Agreement until the first commercial sale of the first product, the Company is obligated to pay Penn a non-refundable, non-creditable annual license maintenance fee of $10. The Company is required to pay certain milestone payments upon the achievement of specified clinical and commercial milestones. Milestone payments are reduced by a certain percentage for the second product that achieves a milestone, by an additional percentage for the third product that achieves a milestone, and so on, for each subsequent product that achieves a milestone. In the event that the Company is able to successfully develop and launch multiple products under the Penn Agreement, total milestone payments could approach $20,000. Penn is also eligible to receive tiered royalties at percentage rates in the low single-digits, subject to an annual minimum royalty, on annual worldwide net sales of any products that are commercialized by the Company or its sublicensees that contain or incorporate, or are covered by, the intellectual property licensed by the Company. To the extent the Company sublicenses its license rights under the Penn Agreement, Penn would be eligible to receive tiered sublicense income at percentage rates in the mid-single to low double-digits.

There were no amounts due under the Penn Agreement as of September 30, 2019.

Sponsored Research Agreements

Penn

The Company has sponsored research agreements with two faculty members at Penn, who are also scientific co-founders of the Company and members of the Company’s scientific advisory board. Under the agreements, the Company has committed to funding a defined research plan for three years through April 2021. The total $8,500 under the two agreements satisfies the Company’s annual obligation under the Penn Agreement (see License Agreement with the Trustees of the University of Pennsylvania above). Research and development expense related to these Penn faculty member research agreements recognized in the accompanying statements of operations was $710 for the three months ended September 30, 2019 and 2018 and $2,131 and $1,247 for the nine months ended September 30, 2019 and 2018, respectively. Advance payments under the Penn faculty member sponsored research agreements included in prepaid expenses and other current assets in the accompanying balance sheets were $174 as of September 30, 2019.

The Regents of the University of California

In October 2018, the Company executed a research agreement with The Regents of the University of California. Under the agreement, the Company has committed to funding scientific research through October 2020 in an immaterial amount. There were no amounts due under this research agreement with The Regents of the University of California as of September 30, 2019.

Master Translational Research Services Agreement

In October 2018, the Company entered into a service agreement (the Services Agreement) with Penn for additional research and development services from various laboratories within Penn. The research and development activities will be detailed in Penn organization-specific addenda to be separately executed.

In October and November 2018, the Company executed three project addenda under this agreement for research and development work. The three projects commenced in 2019 and are anticipated to conclude in 2019.

In January 2019, the Company executed two project addenda under the Services Agreement for manufacturing and preclinical work. The two projects are commenced in 2019. The manufacturing addendum is expected to occur through September 2020. The preclinical addenda concluded in the nine months ended September 30, 2019.

In July 2019, the Company executed four project addenda under the Services Agreement for manufacture of the Company’s clinical supply of DGS3-CAART, the Company’s lead product candidate, for its Phase 1 clinical trial. Pursuant to the addendum, the Company will pay Penn a fee for dedicated resources as well as the cost to manufacture the clinical supply.

Research and development expense related to executed addenda under the master translational research service agreement with Penn recognized in the accompanying statements of operations in the three months ended September 30, 2019 was $286 and for the nine months ended September 30, 2019 and 2018 was $1,970 and $0, respectively. Amounts due under the master translational research service agreement with Penn were $324 as of September 30, 2019.

Subscription and Technology Transfer Agreement

In July 2019, the Company entered into a subscription and technology transfer agreement pursuant to which the Company will pay Penn an upfront subscription fee and a nominal non-refundable royalty on the net sales of products, a portion of which will be credited toward milestone payments and royalties, respectively, under the Amended License Agreement. Technology transfer activities will be at the Company’s cost and subject to agreement as to the technology to be transferred. Under this agreement, the Company recognized $250 to research and development expense for the three and nine month periods ended September 30, 2019.

Alliance Management

In July 2019, the Company entered into an alliance agreement with Penn pursuant to which the Company will pay Penn a nominal annual fee in order for Penn to provide an adequate and consistent level of support to the services that it provides to the Company.

7. Convertible Preferred Stock

The Company has issued Series A Preferred, Series A-1 Preferred, Series A-2 Preferred, and Series B convertible preferred stock (Series B Preferred) (collectively, the Convertible Preferred Stock). The Company classifies Convertible Preferred Stock outside of stockholders’ deficit because the shares contain deemed liquidation rights that are a contingent redemption feature not solely within the control of the Company. There was no Convertible Preferred Stock issued during the nine months ended September 30, 2018 or outstanding as of September 30, 2018. The following table summarizes the Company’s Convertible Preferred Stock issued in the nine months ended September 30, 2019 and outstanding as of September 30, 2019:

	Series A Preferred				Series A-1 Preferred				Series A-2 Preferred						Series B Preferred					Total Convertible Preferred Stock
	Shares		Amount		Shares		Amount		Shares			Amount			Shares		Amount			Shares		Amount
Balance—December 31, 2018		3,146,551	$	12,575		7,372,719	$	24,994		1,873,777		$	6,352			—	$	—			12,393,047	$	43,921
Issuance		—		—		—		—		—			—			6,963,788		50,000			6,963,788		50,000
Exchange, including deemed dividend		—		—		—		—		(1,405,332	)		(4,764	)		1,405,332		10,090			—		5,326
Issuance costs		—		—		—		—		—			—			—		(1,293	)		—		(1,293	)
Balance—September 30, 2019		3,146,551	$	12,575		7,372,719	$	24,994		468,445		$	1,588			8,369,120	$	58,797			19,356,835	$	97,954

Non-Voting Common Stock Election

In October 2019, certain holders of the Company’s Convertible Preferred Stock elected to have such shares convert into 6,409,519 shares of non-voting Common Stock following the closing of the Company’s proposed initial public offering. The non-voting shares of Common Stock shall have the same rights and preferences as the Common Stock but shall be non-voting.

8. 2018 Stock Option and Grant Plan

In September 2018, the Company adopted the 2018 stock option and grant plan (the 2018 Plan), which provides for the Company to sell or issue common stock, or other stock-based awards, to employees, members of the board of directors and consultants of the Company. The 2018 Plan is administered by the board of directors, or at the discretion of the board of directors, by a committee of the board of directors. The exercise prices, vesting and other restrictions are determined at the discretion of the board of directors, or their committee if so delegated, except that the exercise price per share of stock options may not be less than 100% of the fair market value of the share of common stock on the date of grant and the term of stock option may not be greater than 10 years. The Company generally grants stock-based awards with service conditions only (service-based awards), although there has been one grant with performance conditions. Stock options granted under the 2018 Plan generally vest over three to four years. There were 2,580,453 shares reserved under the 2018 Plan for the future issuance of equity awards and, as of September 30, 2019, 638,042 shares were available for grant.

There were no awards in the nine months ended September 30, 2018. A summary of the stock option activity under the 2018 Plan is presented below:

	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value
Outstanding as of January 1, 2019		971,353		$	1.01		—	$	—
Granted		988,058			7.11
Forfeited		(17,000	)		1.01
Outstanding as of September 30, 2019		1,942,411			4.11		9.2		10,547
Options Exercisable at September 30, 2019		108,378			2.36		6.2		778

The aggregate intrinsic value of options granted is calculated as the difference between the exercise price of the options and the estimated fair value of the Company’s common stock. The weighted average grant-date fair value of stock options granted during the nine months ended September 30, 2019 was $4.77. The aggregate grant-date fair value of options vested during the nine months ended September 30, 2019 was $276.

The Company uses the Black-Scholes option pricing method to calculate the grant-date fair value of an award. The fair values of options granted during the nine months ended September 30, 2019 were calculated using the following assumptions: risk-free interest rate of 1.39%—2.59% percent; expected term of 0.3—6.1 years; expected volatility of 70.3%—75.5% percent; and no expected dividend.

Stock-based Compensation

The Company recognizes stock-based compensation with respect to equity awards under the 2018 Plan and with respect to vesting common stock issued to founders. The Company has recorded stock-based compensation in the accompanying statements of operations as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Research and development	$	365	$	151	$	962	$	252
General and administrative		204		44		519		74
Total	$	569	$	195	$	1,481	$	326

As of September 30, 2019, there was $5,650 of unrecognized compensation cost related to unvested option awards, including $527 with respect to one grant with performance-based vesting terms, which is expected to be recognized over a weighted-average period of 2.8 years. As of September 30, 2019, there was $1,088 of unrecognized compensation cost related to unvested stock awards granted to several Company founders, which is expected to be recognized over a weighted-average period of 1.6 years.

9. Income Taxes

The Company did not record an income tax benefit in its statements of operations for the nine months ended September 30, 2019 and 2018 as it is more likely than not that the Company will not recognize the federal and state deferred tax benefits generated by its losses. The Company has provided a valuation allowance for the full amount of its net deferred tax assets and liabilities as of December 31, 2018 and September 30, 2019, as management has determined it is more likely than not that any future benefit from deductible temporary differences and net operating loss and tax credit carryforwards would not be realized. The Company has not recorded any amounts for unrecognized tax benefits as of December 31, 2018 or September 30, 2019.

10. Net Loss Per Share

The following outstanding potentially dilutive shares have been excluded from the calculation of diluted net loss per share, as their effect is anti-dilutive:

	As of September 30,
	2019		2018
Convertible Preferred Stock		19,356,835		—
Stock options to purchase common stock		1,942,411		—
Non-vested common stock		1,619,772		2,386,858
		22,919,018		2,386,858

11. Subsequent Events

The Company has evaluated subsequent events through the issuance date of these interim financial statements.

Refer to Note 1 regarding the completion of the Company’s IPO on October 29, 2019. In connection with the IPO, the Company secured directors and officers liability insurance effective as of October 24, 2019 for an annual premium of $2,300.

2019 Stock Option and Incentive Plan

The 2019 Stock Option and Incentive Plan (2019 Plan) was approved by the Company’s board of directors on October 14, 2019, and became effective on October 23, 2019. The 2019 Plan provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock units, restricted stock awards, unrestricted stock awards, cash-based awards and dividend equivalent rights to the Company’s officers, employees, directors and consultants. The number of shares initially reserved for issuance under the 2019 Plan is 2,342,288, which shall be cumulatively increased on January 1, 2020 and each January 1 thereafter by 4% of the number of shares of the Company’s common stock outstanding on the immediately preceding December 31 or such lesser number of shares determined by the Company’s board of directors or compensation committee of the board of directors.

2019 Employee Stock Purchase Plan

The 2019 Employee Stock Purchase Plan (2019 ESPP) was approved by the Company’s board of directors on October 14, 2019, and became effective on October 23, 2019. A total of 234,229 shares of common stock were initially reserved for issuance under the 2019 ESPP, which shall be cumulatively increased on January 1, 2020 and each January 1 thereafter by 1% of the number of shares of the Company’s common stock outstanding on the immediately preceding December 31 or such lesser number of shares determined by the Company’s board of directors or compensation committee of the board of directors.

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

You should read the following discussion and analysis of our financial condition and results of operations together with the section entitled “Risk Factors” and our unaudited interim condensed financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and with our audited financial statements and the notes thereto for the year ended December 31, 2018 included in our prospectus dated October 24, 2019 filed with the Securities and Exchange Commission pursuant to Rule 424(b) under the Securities Act of 1933, as amended. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the section entitled “Risk Factors,” our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. You should carefully read the section entitled “Risk Factors” to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements.

Overview

We are a clinical-stage biotechnology company focused on the discovery and development of engineered T cell therapies for B cell-mediated autoimmune diseases. Our proprietary technology utilizes CAAR T cells that are designed to selectively bind and eliminate B cells that produce disease-causing autoantibodies, or pathogenic B cells, while sparing normal B cells. Our lead CAAR T cell product candidate was designed based on chimeric antigen receptor, or CAR T, cell technology that has been successfully developed and is marketed for the treatment of B cell cancers. We believe our technology, in combination with our proprietary Cabaletta Approach for selective B cell Ablation platform, called our CABA platform, has applicability across over two dozen B cell-mediated autoimmune diseases that we have identified, reviewed and prioritized. In order to accelerate product development for our lead program and to access a proven cell therapy manufacturing platform, we have entered into a collaboration with the Trustees of the University of Pennsylvania, or Penn. We hold multiple agreements with Penn to develop CAAR T cell therapies for the treatment of these diseases. Our goal is to leverage our team’s expertise in autoimmunity and engineered T cell therapy and our collaboration with Penn to rapidly discover and develop our portfolio of CAAR T product candidates. Our initial focus is on pemphigus vulgaris, or PV, which is an autoimmune blistering skin disease. We submitted an Investigational New Drug application, or IND, to the U.S. Food and Drug Administration, or the FDA, in August 2019. Our IND was accepted in September 2019, and we plan to advance our lead product candidate, DSG3-CAART, into a Phase 1 clinical trial for the treatment of mucosal pemphigus vulgaris, or mPV, in 2020. We are also advancing additional product candidates currently in discovery-stage or preclinical development for the treatment of MuSK MG, mucocutaneous PV, or mcPV, and Hemophilia A with FVIII alloantibodies.

We were incorporated in April 2017. In August 2018, we entered into multiple agreements with Penn to develop the CAAR T technology to treat B cell-mediated autoimmune diseases. Our operations to date have been financed primarily by net proceeds of $86.4 million from the sale of convertible notes and convertible preferred stock. As of September 30, 2019, we had $71.0 million in cash and cash equivalents.

Since inception, we have incurred significant operating losses, much of which is attributable to research and development costs pursuant to sponsored research and research services agreements. Our net losses were $4.7 million and $9.3 million for the three month periods ended September 30, 2019 and 2018, respectively, and $11.5 million and $10.3 million for the nine month periods ended September 30, 2019 and 2018, respectively. As of September 30, 2019, we had an accumulated deficit of $27.6 million. Our primary use of cash is to fund operating expenses, which consist primarily of research and development expenditures and, to a lesser extent, general and administrative expenditures. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our accounts payable and accrued expenses. We expect to continue to incur net losses for the foreseeable future, and we expect our research and development expenses, general and administrative expenses, and capital expenditures will continue to increase. In particular, we expect our expenses to increase as we continue our development of, and seek regulatory approvals for, our product candidates, and begin to commercialize any approved products, as well as hire additional personnel, develop commercial infrastructure, pay fees to outside consultants, lawyers and accountants, and incur increased costs associated with being a public company such as expenses related to services associated with maintaining compliance with Nasdaq listing rules and U.S. Securities and Exchange Commission, or SEC, requirements, insurance and investor relations costs. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of our clinical trials and our expenditures on other research and development activities.

Based upon our current operating plan, we believe that the net proceeds of $71.0 million from our October 2019 initial public offering and November 2019 underwriters’ partial exercise of their option to purchase additional shares, together with our existing cash and cash equivalents as of September 30, 2019, will enable us to fund our operating expenses and capital expenditure requirements through at least the first quarter of 2022. To date, we have not had any products approved for sale and have not generated any product sales. We do not expect to generate any revenues from product sales unless and until we successfully complete development and obtain regulatory approval for one or more of our product candidates, which we expect will take a number of years. If we obtain regulatory approval for any of our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. As a result, until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through equity offerings, debt financings or other capital sources, including

collaborations, licenses and other similar arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed or on favorable terms, if at all. Any failure to raise capital as and when needed could have a negative impact on our financial condition and on our ability to pursue our business plans and strategies. If we are unable to raise capital, we will need to delay, reduce or terminate planned activities to reduce costs.

Amended and Restated License Agreement with The Trustees of the University of Pennsylvania

In July 2019, we entered into the License Agreement with Penn and the Children’s Hospital of Philadelphia, or CHOP, which we collectively refer to as the Institutions, pursuant to which we obtained (a) a non-exclusive, non-sublicensable, worldwide research license to make, have made and use products in two subfields of use, (b) effective as of October 2018, an exclusive, worldwide, royalty-bearing license, with the right to sublicense, under certain of the Institutions’ intellectual property to make, use, sell, offer for sale and import products in the same two subfields of use, and (c) effective as of October 2018, a non-exclusive, worldwide, royalty-bearing license, with limited rights to sublicense, under certain of Penn’s know-how to make, have made, use, sell, offer for sale, import and have imported products in the same two subfields of use. Our rights are subject to the rights of the U.S. government and certain rights retained by the Institutions.

Unless earlier terminated, the License Agreement will expire with respect to a product upon the later of (a) the expiration of the last to expire patent or patent application covering such product or (b) 10 years after the first commercial sale of such product. We may terminate the License Agreement in its entirety or on a subfield-by-subfield basis at any time for convenience upon a certain number of days’ written notice. Penn may terminate the License Agreement in its entirety or on a subfield-by-subfield basis for our uncured material breach, including for our failure to meet certain diligence obligations and milestone events. We, however, may extend the achievement date of any milestone event for an additional period of time by making a payment in a certain amount, subject to certain limitations in the number of times each event may be extended.