Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Throughout this section, unless otherwise noted, “we”, “our”, “us”, “enGene” and the “Company” refer to enGene Holdings Inc. and all of its subsidiaries post the consummation of the Reverse Recapitalization. enGene Holdings Inc. is the new, publicly traded parent company of the combined business in connection with the Reverse Recapitalization, in which shareholders of enGene Inc. and Forbion European Acquisition Company exchanged their shares for shares in enGene Holdings Inc.
The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements as of October 31, 2023 and 2022 and for the fiscal years ended October 31, 2023 and 2022, and the related notes and other financial information included elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. See the sections titled “Special Note Regarding Forward-Looking Statements” and “Risk Factors” for a discussion of forward-looking statements and important factors that could cause actual results to differ materially from the results described in or implied by these forward-looking statements.
We operate as a single operating segment focused on research, discovery, and clinical development of human gene therapy products. Our fiscal year is the year ended October 31.
Overview
Business Overview
We are a clinical-stage biotechnology company focused on developing gene therapies to improve the lives of patients. We are developing non-viral gene therapies based on our novel and proprietary dually derived chitosan, or “DDX”, gene delivery platform, which allows localized delivery of multiple gene cargos directly to mucosal tissues and other organs. We believe our DDX platform, with its broad tissue and disease application, has the potential to take gene therapy beyond rare genetic diseases into oncology and other underserved therapeutic areas. We have established integrated capabilities with this platform to support the clinical development and potential commercialization of our gene therapies.
Since our inception, we have devoted substantially all of our efforts to organizing and staffing our company, business planning, raising capital, establishing our intellectual property portfolio, acquiring or discovering product candidates, research and development activities for our primary program, EG-70, EG-i08 and other compounds. We do not have any products approved for sale and have not generated any revenue from product sales. We operate as a single operating segment focused on research, discovery, and clinical development of human gene therapy products. To date, we have financed our operations primarily through proceeds received through the merger with Forbion European Acquisition Company (“FEAC”) (the “Reverse Recapitalization”) and concurrent PIPE Financing (as defined below), along with the issuance of convertible debt and proceeds from sales of preferred shares by enGene Inc. (“Old enGene”). From inception to October 31, 2023, we have raised aggregate gross proceeds of approximately $77.8 million through the sale and issuance of Old enGene’s preferred shares, warrants, and convertible debentures, $49.0 million through Old enGene’s term loan and April and May 2023 note and warrant financings, $56.9 million from the PIPE Financing and $7.4 million from the FEAC trust account, net of the redemption to FEAC's public shareholders and FEAC expenses. Our primary uses of capital are, and we expect will continue to be, research and development activities, compensation and related expenses, and general overhead costs.
We have incurred significant operating losses since our inception. Our net losses were $99.9 million and $24.5 million for the years ended October 31, 2023 and 2022, respectively. As of October 31, 2023 and 2022, we had an accumulated deficit of $199.6 million and $99.7 million, respectively, and cash and cash equivalents of $81.5 million and $20.4 million, respectively. We expect to continue to incur net operating losses for at least the next several years, as we advance our product candidates through preclinical and clinical development and seek regulatory approvals, manufacture drug product and drug supply, maintain, enforce, defend and expand our intellectual property portfolio, as well as hire additional personnel, pay for accounting, audit, legal, regulatory and consulting services, and pay costs associated with maintaining compliance with listing rules and the requirements of the SEC, director and officer liability insurance, investor and public relations activities and other expenses associated with operating as a public company. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of our preclinical studies, our clinical trials and our expenditures on other research and development activities.
With the funds received as a result of the Reverse Recapitalization and PIPE Financing, we may be able to reach significant clinical milestones for EG-70. We could use our available capital resources sooner than we currently expect. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy. In addition, if we obtain regulatory approval for a product candidate and do not enter into a third-party commercialization partnership, we expect to incur significant expenses related to developing our commercialization capability to support product sales, marketing, manufacturing and distribution activities. As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of public or private equity offerings and debt financings, or other capital sources, which could include potential
85
collaboration agreements, strategic alliances, or additional licensing arrangements. We may be unable to raise additional funds or enter into such arrangements when needed, on favorable terms, or at all. Our failure to raise capital or enter into such agreements as, and when, needed, could have a material adverse effect on our business, results of operations and financial condition, including requiring us to have to delay, reduce or eliminate product development or future commercialization efforts.
As of October 31, 2023, we had $81.5 million in cash and cash equivalents. Our ability to continue as a going concern depends on our ability to successfully develop and commercialize our products, achieve and maintain profitable operations, as well as the adherence to conditions of outstanding loans. We will require additional financing in order to fund our future expected negative cash flows and management’s plans are to raise additional financing. While we have historically been successful in securing financing, raising additional funds is dependent on a number of factors outside of our control, and as such there is no assurance that we will be able to do so in the future. These conditions indicate the existence of a material uncertainty that raises substantial doubt about our ability to continue as a going concern and, therefore, that we may be unable to realize our assets and discharge our liabilities in the normal course of business. See the subsection titled “Liquidity and Capital Resources.”
Merger with Forbion European Acquisition Corp.
Forbion European Acquisition Corporation (“FEAC”) was a special purpose acquisition company (“SPAC”) formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, share purchase, reorganization or similar business combination with one or more business or entities. On October 31, 2023 (the “Closing Date”), the Company, FEAC, and enGene Inc., a corporation incorporated under the laws of Canada (now known as “enGene Inc” or “Old enGene”), consummated the merger (the “Reverse Recapitalization”) pursuant to a business combination agreement, dated as of May 16, 2023 (the “Merger Agreement”).
The transaction was accounted for as a “reverse recapitalization” in accordance with accounting principles generally accepted in the United States (“GAAP”). Under this method of accounting, FEAC was treated as the “acquired” company for financial reporting purposes. This determination is primarily based on the fact that subsequent to the Reverse Recapitalization, senior management of Old enGene continues as senior management of the combined company; Old enGene identifies a majority of the members of the board of directors of the combined company; the name of the combined company is enGene Holdings Inc. and it utilizes Old enGene’s current headquarters, and Old enGene’s operations comprise the ongoing operations of the combined company. Accordingly, for accounting purposes, the Company is considered to be a continuation of Old enGene, with the net identifiable assets of FEAC deemed to have been acquired by Old enGene in exchange for Old enGene common shares accompanied by a recapitalization, with no goodwill or intangible assets recorded. The number of common shares, net loss per common share, the number of warrants to purchase common shares, and the number of stock options and the related exercise prices of the stock options issued and outstanding, prior to the Reverse Recapitalization, have been retrospectively restated to reflect an exchange ratio of approximately 0.18048 (the “Exchange Ratio”) established in the Merger Agreement within the financial statements and this “Management's Discussion and Analysis of Financial Condition and Results of Operations.” The redeemable convertible preferred shares, prior to the Reverse Recapitalization, have not been restated. Operations prior to the Reverse Recapitalization are those of Old enGene.
The Reverse Recapitalization was effected in the following steps: (i) two entities were incorporated to effect the transaction, Can Merger Sub, a Canadian corporation and a wholly owned subsidiary of FEAC and Cayman Merger Sub, a Cayman Islands exempt company and a direct wholly owned subsidiary of the Company; (ii) immediately prior to the Closing Date, Cayman Merger Sub was merged with and into FEAC with FEAC as the surviving entity, resulting in FEAC becoming a wholly owned subsidiary of the Company (the “Cayman Merger”); (iii) on the Closing Date, Can Merger Sub and Old enGene amalgamated pursuant to a plan of arrangement (the “Amalgamation”), resulting in Old enGene becoming a wholly owned subsidiary of the Company. As a result of the Reverse Recapitalization, the Company became a publicly traded company, and listed its ordinary shares and warrants on the Nasdaq Global Market under the symbols "ENGN” and "ENGNW,” respectively, commencing trading on November 1, 2023, with Old enGene, a subsidiary of the Company continuing the existing business operations.
Upon the consummation of the Reverse Recapitalization, each FEAC Class A Share and FEAC Class B Share (collectively, the “FEAC Shares”) issued and outstanding immediately prior to the effective time of the Cayman Merger (including Forbion Growth Sponsor FEAC I B.V.’s, the “FEAC Sponsor”) shares but excluding any dissenting FEAC Shares, was transferred to the Company and (i) for each FEAC Share, the Company issued to each shareholder one validly issued Company Common Share; (ii) each warrant to purchase one FEAC share was assumed by the Company and converted into a warrant to purchase one Company Common Share at an exercise price of $11.50 per share; with all fractional shares rounded down to the nearest whole share. Concurrently with the Cayman Merger, the Company redeemed its 10 Class B common shares held by its sole shareholder for $1 CAD per share, which was equal to the amount of capital that the sole shareholder of the Company contributed. As a result of the Reverse Recapitalization, the 3,670,927 held by FEAC Sponsor and other shareholders were converted into the same number of the Company’s Common Shares and the 5,029,444 outstanding FEAC warrants held by FEAC warrant holders were converted into the same number of warrants. Each warrant may be exercised to purchase one Company Common Share.
On the Closing Date, each common share of Old enGene was cancelled and the holders thereof in exchange received approximately 0.18048 newly issued Company Common Shares. In addition, each share of Old enGene’s redeemable convertible preferred shares outstanding immediately prior to the close of the Reverse Recapitalization was exchanged for Company Common
86
Shares based on the same Exchange Ratio, with no dividends or distributions being declared or paid on Old enGene’s redeemable convertible preferred shares. Further, certain of Old enGene’s existing convertible notes outstanding immediately prior to the close of the Reverse Recapitalization were converted to Old enGene common shares at the conversion ratio in place at the time of conversion. In addition, all of Old enGene’s Class C warrants outstanding at the time of the Reverse Recapitalization were terminated and all outstanding warrants exercisable for Old enGene common shares were exchanged for warrants exercisable for the Company’s Common Shares with the same terms and conditions except adjusted by the aforementioned Exchange Ratio. At the closing of the Reverse Recapitalization, each share option of Old enGene common shares was cancelled in exchange for newly issued share options of the Company’s Common Shares based on the same Exchange Ratio. The modification of the share options did not result in any incremental compensation expense upon closing of the Reverse Recapitalization. Upon the close of the Reverse Recapitalization, 13,091,608 Company Common Shares were issued to Old enGene’s equity and convertible note holders, 2,679,432 Warrants to purchase Company Common Shares were issued to Old enGene’s warrant holders (which are inclusive of the shares and warrants issued to the FEAC Sponsor), and 2,706,941 common share options of the Company were issued to Old enGene’s share option holders.
As part of the Reverse Recapitalization, the Company received net proceeds of $7.4 million from the FEAC trust account, net of the redemption payment to FEAC’s public shareholders and FEAC expenses.
PIPE Financing
In connection with the Merger Agreement, FEAC, the Company, and certain investors (the “PIPE Investors”) entered into subscription agreements (the “Subscription Agreements”) pursuant to which, the PIPE Investors agreed to purchaseFEAC Class A Shares and FEAC Warrants (orthe Company’s Common Shares and Warrants when such obligation was assumed (the “Assumption”) by the Company after the completion of the Cayman Merger and prior to the consummation of the PIPE Financing), for an aggregate commitment amount of $56.9 million. Concurrent with the execution of the Merger Agreement, FEAC, the FEAC Sponsor, Forbion Growth Opportunities Fund I Cooperatief U.A. and the other holders of FEAC Class B Shares, Old enGene, the Company and the other parties named therein entered into the sponsor and insiders letter agreements (the “Side Letter Agreements”), pursuant to which the FEAC Sponsor agreed to surrender and in effect issue to PIPE Investors, 1,789,004 FEAC Class B Shares and 5,463,381 FEAC private placement warrants, immediately prior to the closing of the Reverse Recapitalization. Pursuant to the Subscription Agreements and the Side Letter Agreements and the Assumption, in connection with the Reverse Recapitalization, the Company issued 6,435,441 Common Shares and 2,702,791 Warrants to purchase Common Shares for an aggregate purchase price equal to $56.9 million. As a result, each investor in the PIPE Financing received approximately 1.1595 Common Shares and approximately 0.4870 Warrants for each $10.25 of subscription price. The party to the Non-Redemption Agreement received 26,575 Common Shares and 81,158 Warrants in consideration of such investor’s commitment to not redeem 166,665 shares of FEAC Class A Shares in connection with the consummation in connection with the consummation of the Reverse Capitalization. The Common Shares and Warrants issued to the Selling Holder party to the Non-Redemption Agreement were determined so as to put such Selling Holder in the same position had such Selling Holder invested in the PIPE Financing an amount equal to the foregone redemption proceeds.
Convertible Bridge Financing
Prior to the execution and delivery of the Reverse Recapitalization Agreement, Old enGene agreed to certain modifications of existing convertible indebtedness in an aggregate principal amount of $18.4 million (the “2022 Convertible Notes” and, together with the Old enGene warrants to be issued by Old enGene as consideration for such modifications, the “Amended 2022 Financing”). Concurrently with the execution and delivery of the Merger Agreement, Old enGene also entered into agreements pursuant to which it issued new convertible indebtedness and warrants (i) for cash in an aggregate principal amount of $30.0 million and (ii) in repayment of the April 2023 Notes in an aggregate principal amount of $8.0 million (collectively, the “May 2023 Notes” and, together with the warrants purchased concurrently, the “2023 Financing”; the 2023 Financing together with the Amended 2022 Financing, the “Convertible Bridge Financing”). In connection with the Reverse Recapitalization, the Convertible Bridge Financing indebtedness was converted into 35,349,238 Old enGene common shares at the conversion ratio in place at the time of conversion, which was exchanged to 6,379,822 Company Common Shares based on the aforementioned Exchange Ratio (see Note 9 for further detail).
In relation to the Amended 2022 Financing, the holders of the 2022 Convertible Notes received warrants to purchase Old enGene common shares and the holders of the 2023 Convertible Notes were issued warrants in connection with the issuance of the 2023 Convertible Notes. As a result of the Reverse Recapitalization, these warrants were converted at closing into 2,679,432 Warrants to purchase Company Common Shares based on the aforementioned Exchange Ratio.
Immediately after giving effect to the Reverse Recapitalization and the PIPE Financing, the Company had 23,197,976 Common Shares and 10,411,641 Warrants outstanding.
Components of Our Results of Operations
Revenue
We do not have any product candidates approved for sale, have not generated any revenue since our inception and do not expect to generate any revenue from the sale of products or from other sources in the near future, if at all. We will not generate revenue from
87
product sales unless and until we successfully complete clinical development and obtain regulatory approval for a product candidate, if ever. If our development efforts for our current lead product candidate, EG-70, EG-i08 or additional product candidates that we may develop in the future are successful and result in marketing approval or if we enter into collaboration or license agreements with third parties, we may generate revenue in the future from a combination of product sales or payments from such collaboration or license agreements.
Operating Expenses
Research and Development
Research and development expenses account for a significant portion of our operating expenses and consist primarily of costs incurred for our research activities, including our drug discovery efforts and the development of our product candidates. We expense research and development costs as incurred, which include:
Direct Costs:
•
expenses incurred under agreements with Contract Research Organization (CROs) that are primarily engaged in the oversight and conduct of our clinical trials; Contract Development and Manufacturing Organization (CDMOs) that are primarily engaged to provide drug substance and product for our clinical trials, research and development programs, as well as investigative sites and consultants that conduct our clinical trials, nonclinical studies and other scientific development services;
•
the cost of acquiring and manufacturing nonclinical and clinical trial materials, including manufacturing registration and validation batches;
•
costs of outside consultants, including their fees, share-based compensation and related travel expenses;
•
costs related to compliance with quality and regulatory requirements; and
•
payments made under third-party licensing agreements.
Indirect Costs:
•
personnel-related expenses including, salaries, benefits, share-based compensation and other related costs for individuals involved in research and development activities; and
•
facilities and other expenses not directly tied to a program.
We expense research and development costs as incurred. We recognize direct development costs based on an evaluation of the progress to completion of specific tasks using information provided to us by our vendors or our estimate of the level of service that has been performed at each reporting date. Payments for these development activities are based on the terms of the individual agreements, which may differ from the pattern of costs incurred, and are reflected in our financial statements as prepaid expenses or accrued expenses.
A significant portion of our research and development costs to date have been third-party costs, which we track on an individual product candidate basis after a clinical product candidate has been identified. Currently, our main clinical product candidate is EG-70. Our indirect research and development costs are primarily personnel-related costs, facilities and other costs. Employees and infrastructure are not directly tied to any one program and are deployed across our programs. As such, we do not track these costs on a specific program basis. We utilize third party contractors for our research and development activities and CDMOs for our manufacturing activities and we do not have our own laboratory or manufacturing facilities.
Research and development activities are central to our business model. Currently, the Company’s sole research and development facility is located in Montreal, Quebec, Canada, and as such, the majority of the Company’s research and development and other operating expenses are incurred in Canada and denominated in the Canadian Dollar. We expect that our research and development expenses will continue to increase for the foreseeable future as we progress our ongoing Phase 1/2 clinical trial for EG-70, continue to discover and develop additional product candidates, expand our headcount and maintain, expand and enforce our intellectual property portfolio. If EG-70 or any future product candidates enter into later stages of clinical development, they will generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. There are numerous factors associated with the successful development and commercialization of any product candidates we may develop in the future, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development. Additionally, future commercial and regulatory factors beyond our control will impact our clinical development program and plans.
Our research and development expenses may vary significantly in the future based on factors, such as:
•
the number and scope of nonclinical and IND-enabling studies;
88
•
per patient trial costs;
•
the number of trials required for approval;
•
the number of sites included in the trials;
•
the countries in which the trials are conducted;
•
the length of time required to enroll eligible patients;
•
the number of patients that participate in the trials;
•
the drop-out or discontinuation rates of patients;
•
potential additional safety monitoring requested by regulatory agencies;
•
the duration of patient participation in the trials and follow-up;
•
the cost and timing of manufacturing our product candidates;
•
the phase of development of our product candidates;
•
the efficacy and safety profile of our product candidates;
•
the extent to which we establish additional collaboration or license agreements; and
•
whether we choose to partner any of our product candidates and the terms of such partnership.
Any changes in the outcome of any of these variables with respect to the development of EG-70 or any future product candidates in nonclinical and clinical development could mean a significant change in the costs and timing associated with the development of these product candidates. For example, if the FDA or another regulatory authority were to delay our planned start of clinical trials or require us to conduct clinical trials or other testing beyond those that we currently expect, or if we experience significant delays in enrollment in any clinical trials following the applicable regulatory authority’s acceptance and clearance, we could be required to expend significant additional financial resources and time to complete clinical development than we currently expect. We may never obtain regulatory approval for any product candidates that we develop.
The successful development of EG-70, EG-i08 or any product candidates we may develop in the future is highly uncertain. Therefore, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete the development and commercialization of EG-70, EG-i08 and any other product candidates we may develop. We are also unable to predict when, if ever, material net cash inflows will commence from the sale of EG-70, EG-i08 or any future product candidate, if approved. This is due to the numerous risks and uncertainties associated with product development.
General and Administrative
General and administrative expenses consist primarily of personnel-related expenses, including salaries, benefits, and share-based compensation expenses for personnel in executive and other administrative functions. Other significant general and administrative expenses include professional services, including legal, accounting and audit services and other consulting fees as well as facility costs not otherwise included in research and development expenses, insurance, and other operating costs.
We expect that our general and administrative expenses will continue to increase in the foreseeable future as our business expands to support our continued research and development activities, including our clinical trials. These increases will likely include increased costs related to the hiring of additional personnel and fees for outside consultants, among other expenses. We also anticipate increased expenses associated with operating as a public company, including costs for accounting, audit, legal, regulatory, and tax-related services related to compliance with the rules and regulations of the SEC, listing standards applicable to companies listed on a national securities exchange, director and officer insurance premiums and investor relations costs. In addition, if we obtain regulatory approval for our current product candidate or any product candidates we may develop in the future and do not enter into a third-party commercialization collaboration, we expect to incur significant expenses related to building a sales and marketing team to support product sales, marketing and distribution activities.
Other (Income) Expense, Net
Change in fair value of convertible debenture embedded derivative liabilities
Old enGene’s convertible debentures consisted of a debt instrument, a minimum interest obligation, and a share conversion feature. Old enGene identified embedded derivatives related to share conversion features within the convertible notes that required bifurcation as a single compound derivative instrument and were classified as liabilities on our consolidated balance sheets. The convertible debenture embedded derivative liabilities were initially recorded at fair value upon the date of issuance using a probability weighted expected return model and were subsequently remeasured to fair value at each reporting date. The estimated probability and timing of
89
underlying events triggering the conversion features contained within the convertible debentures are inputs used to determine the estimated fair value of the embedded derivative. Changes in the fair value of the convertible debenture embedded derivative liabilities were recognized in change in fair value of convertible embedded derivative liabilities as a component of other expense in our consolidated statements of operations and comprehensive loss. Upon the close of the Reverse Recapitalization Old enGene’s convertible debentures were exchanged for Common Shares of the Company, or settled through repayment, resulting in an extinguishment of the convertible debentures and related embedded derivative liabilities.
Change in fair value of warrant liabilities
Old enGene issued warrants to purchase redeemable convertible preferred shares as part of the issuance of certain redeemable convertible preferred shares and convertible debentures. Old enGene accounted for the redeemable convertible preferred shares warrants issued based upon the characteristics and provisions of the instrument and determined that the warrants were liability classified. The redeemable convertible preferred share warrants were recognized at their fair value on the date of issuance and remeasured to fair value at each reporting period, with the changes in fair value recognized in the change in fair value of warrant liabilities as a component of other expense in our consolidated statements of operations and comprehensive loss. Upon the close of the Reverse Recapitalization, the preferred share warrants were surrendered for no consideration and the fair value was determined to be zero.
The warrants issued by Old enGene as part of the 2023 Financing (the “2023 Warrants”) were concluded to be freestanding, liability classified instruments upon issuance, which were subsequently reclassified to equity upon the consummation of the Reverse Recapitalization. The fair value of the 2023 Warrants was estimated based on the underlying quoted market price of the FEAC public warrants, prior to the close of the Reverse Recapitalization. The 2023 Warrants were classified as a Level 2 measurement given they were substantially similar to FEAC public warrants. The 2023 Warrants were initially measured at fair value and were subsequently remeasured at fair value with any changes in fair value recorded as a component of other expense in our consolidated statements of operations and comprehensive loss, so long as they remain liability classified. Upon the execution of the PIPE Financing and consummation of the Reverse Recapitalization, the 2023 Warrants were reclassified to equity as the number of warrants became fixed and it was determined that the warrants met the fixed for fixed criteria that is required for a contract to be considered indexed to the Company’s own stock as prescribed by ASC 815.
Change in fair value of convertible debentures
Old enGene issued convertible debentures and warrants in 2023 for which the fair value option of accounting was elected for the convertible debentures. The convertible debentures were initially recorded at fair value upon the date of issuance using a probability weighted expected return model and were subsequently remeasured to fair value at each reporting date. The estimated probability and timing of underlying events triggering the conversion contained within the convertible debentures are inputs used to determine the estimated fair value of the notes during the year ended October 31, 2023. Changes in the fair value of the convertible debentures were recognized in change in fair value of convertible debentures as a component of other expense in our consolidated statements of operations and comprehensive loss. Upon the close of the Reverse Recapitalization, convertible debentures were exchanged for Common Shares of the Company, resulting in an extinguishment of the convertible debentures.
Interest Expense
Interest expense is made of interest paid on our convertible notes and third-party debt, as well as non-cash interest expense for amortization of our debt discounts.
Interest Income
Interest income is associated with our interest-bearing cash and cash equivalents.
Other expense, net
Other expense, net primarily consists of foreign exchange gains and losses.
Loss on extinguishment of convertible debentures
Loss on extinguishment of convertible debentures consists of the differences between the carrying value of Old enGene’s convertible debentures and the fair value of the settlement amounts upon repayment of the convertible debentures and exchange of the convertible debentures into shares of the Company.
Income Taxes
Since our inception, we have not recorded any income tax benefits for the net losses we have incurred in each period or for deductible temporary differences, as we believe, based upon the weight of available evidence, that it is more likely than not that all of
90
our net operating loss carryforwards and tax credits will not be realized. As of October 31, 2023 and 2022, we have recorded a full valuation allowance against our deferred tax assets.
Results of Operations
Comparison of the Years Ended October 31, 2023 and 2022
The following table summarizes our results of operations for each of the periods presented (in thousands):
Year Ended October 31,
Operating expenses:
Other (income) expense, net:
Change in fair value of convertible debentures 56,212 — 56,212
Loss on extinguishment and modifications of debentures 3,091 — 3,091
Provision for income tax 17 22 (5 )
Research and Development Expenses
The following table summarizes our research and development expenses for each of the periods presented (in thousands):
Year Ended October 31,
Direct costs:
Indirect costs:
Facilities and depreciation and amortization 160 207 (47 )
Research and development expenses increased by $1.0 million from $15.5 million for the year ended October 31, 2022 to $16.5 million for the year ended October 31, 2023. This increase was attributable to the following:
•
a $1.0 million increase in personnel-related costs primarily due to an increase in share-based compensation expenses and in employee headcount. Included within personnel-related costs is $0.8 million and $31 thousand of share-based compensation, for the years ended October 31, 2023 and 2022, respectively;
•
a $0.8 million increase in indirect costs relating to professional fees, primarily relating to third party CMC research and development costs;
•
a $0.3 million reduction in refundable tax credits as a result of the loss of our CCPC status and reduction in our maximum refundable tax credits due to our taxable capital, as defined by the tax authorities, which occurred in fiscal year 2023;
•
a $0.1 million increase in direct costs relating to the research and nonclinical development of early stage and other discovery programs; and
91
•
a $0.1 million increase in other expenses primarily attributable to an increase in laboratory supplies.
The decreases were partially offset by the following:
•
a $1.0 million decrease in direct costs related to the nonclinical development of our main program, EG-70, based on the stage and progression of the drug development process; and
•
a $0.3 million decrease in patent and licensing fees expenses primarily attributable to a decrease in patent applications; and
General and Administrative Expenses
The following table summarizes our general and administrative expenses for each of the periods presented (in thousands):
Year Ended October 31,
Total general and administrative expenses $ 9,602 $ 3,960 $ 5,642
General and administrative expenses increased by $5.6 million from $4.0 million for the year ended October 31, 2022 to $9.6 million for the year ended October 31, 2023. This increase was primarily attributable to the following:
•
a $2.7 million increase in personnel-related expenses primarily driven by share based compensation expense. Included within personnel-related costs is $2.6 million and $0.1 million of share-based compensation, for the years ended October 31, 2023 and 2022, respectively;
•
a $2.4 million increase in costs related to professional fees primarily driven by accounting and audit related fees; and
•
a $0.4 million increase in patent maintenance and legal expenses.
Other (Income) Expense, Net
Other (income) expenses, net increased by approximately $68.8 million from expense of $5.0 million for the year ended October 31, 2022 to expense of $73.8 million for the year ended October 31, 2023. This increase is attributable to a $56.2 million increase on the loss recorded on the change in fair value of convertible debentures as a result of using the quoted market price for FEAC's common share on October 31, 2023, which was $21.70 per share on that date, to determine the fair value of the common shares, a $21.4 million increase on the loss recorded on the change in fair value of the convertible debenture embedded derivative liabilities due to changes in the terms of the SPAC conversion option, changes in the valuation assumptions in the year ended October 31, 2023, and settlement of convertible debenture embedded derivative liabilities upon the closing of the Reverse Recapitalization, a $3.5 million increase in interest expense due to the amount of time the principal was outstanding on the 2022 Notes which were issued in October 2022, and a $3.1 million increase attributable to loss on extinguishment of convertible debentures as a result of the repayment and exchange into Common Shares of the Company upon the close of the Reverse Recapitalization. These increases were partially offset by a $14.2 million increase on the gain recorded on the change in fair value of warrant liabilities primarily driven by recording the value of the Series C preferred share warrants to zero upon the Reverse Recapitalization as a result of the cancellation of the Series C preferred share warrants, a $1.0 million increase in interest income due to increases in cash invested from financing transactions, and a $0.5 million decrease in other expenses which were primarily driven by foreign exchange losses. Changes in the valuation assumptions include an increase in the probability percentage of a SPAC transaction occurring and the decrease in probability of the other more unfavorable conversion scenarios, a decrease in the price of the underlying preferred shares caused by the increase in the probability of a SPAC transaction that results in some of the enterprise value shifting from the preferred shareholders to the common shareholders, and a decrease in the expected life of Series C preferred share warrants as a result of entering into the Merger Agreement scenario resulted in the cancellation of these warrants.
Liquidity and Capital Resources
Sources of Liquidity
Since our inception, we have incurred significant losses in each period and on an aggregate basis. We have not yet commercialized any product candidates, and we do not expect to generate revenue from sales of any product candidates or from other sources for several years, if at all. As of October 31, 2023, we had $81.5 million in cash and cash equivalents, and we had an accumulated deficit of $199.6 million. To date, we have financed our operations primarily through proceeds received through the PIPE Financing and FEAC trust account, net of redemptions, as part of the Reverse Recapitalization, along with the issuance of convertible debt and proceeds from sales of preferred shares by Old enGene. From inception to October 31, 2023, we have raised aggregate gross proceeds of approximately $77.8 million through the sale and issuance of Old enGene’s preferred shares, warrants, and convertible debentures, $49.0 million
92
through Old enGene’s term loan and April and May 2023 note and warrant financings, $56.9 million from the PIPE Financing and $7.4 million from the FEAC trust account, net of the redemption payment to FEAC’s public shareholders and FEAC expenses.
We will need substantial additional funding to support our continuing operations and pursue our development strategy. Until such time as we can generate significant revenue from sales of our product candidates, if ever, we expect to finance our operations through the sale of equity, debt financings or other capital sources, including potential collaborations with other companies or other strategic transactions. Adequate funding may not be available to us on acceptable terms, if at all. Should we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back, or discontinue the development and commercialization of our product candidates or delay our efforts to expand our product pipeline. We may also be required to sell or license to other parties’ rights to develop or commercialize our product candidates that we would prefer to retain.
Our ability to continue as a going concern depends on our ability to successfully develop and commercialize our products, achieve and maintain profitable operations, as well as our ability to obtain additional financing and on the continued financial support of our shareholders and debt holders. While we have historically been successful in securing financing, raising additional funds is dependent on a number of factors outside of our control, and as such there is no assurance that we will be able to do so in the future. These conditions indicate the existence of a material uncertainty that raise substantial doubt on our ability to continue as a going concern and, therefore, that we may be unable to realize our assets and discharge our liabilities in the normal course of business.
Sources of Liquidity
Based on our current operating plan, we expect that our existing cash and cash equivalents as of October 31, 2023 together with the $50 million debt facility with Hercules Capital entered in December 2023, of which we have drawn $22.5 million, will be sufficient to fund our planned operating expenses and capital expenditure requirements and pay our debt service obligations as they become due into the second quarter of 2025, without giving effect to any potential milestone debt tranches we may be eligible to drawdown further under our debt facility with Hercules Capital. We have based this estimate on assumptions that may prove to be wrong, such as our clinical development costs, particularly as the process of testing drug candidates in clinical trials is costly and the timing of progress in these trials is uncertain. As a result, we could use our capital resources sooner than we expect.
Cash Flows
Comparison of the years ended October 31, 2023 and 2022
The following table provides information regarding our cash flows for each of the periods presented (in thousands):
Year Ended October 31,
Net cash used in operating activities $ (24,743 ) $ (17,592 )
Net cash used in investing activities (318 ) (153 )
Net cash provided by financing activities 86,147 27,967
Effect of exchange rate changes on cash 1 (805 )
Net increase in cash and cash equivalents $ 61,087 $ 9,417
Net Cash Used in Operating Activities
Net cash used in operating activities for the fiscal year ended October 31, 2023 was $24.7 million and was primarily due to our net loss of $99.9 million, partially offset by adjustments for non-cash charges totaling $75.6 million. The non-cash charges consisted of non-cash interest expense of $0.8 million, a loss on extinguishment of debt of $3.1 million, changes in fair value of convertible debentures of $56.2 million, changes in fair value of convertible debenture embedded derivative liabilities of $21.4 million, $0.9 million of debt issuance costs associated with debt for which the fair value of accounting was elected, $0.6 million of unrealized foreign exchange losses, share-based compensation expense of $3.5 million, and depreciation of property and equipment of $0.2 million, offset by changes in the fair value of warrant liabilities of $10.9 million. Further there were changes in operating assets and liabilities of $0.5 million, which was primarily associated with a $1.0 million increase in the investment tax credit receivable, and a $0.7 million increase in prepaid expenses and other assets, which was partially offset by a $1.2 million increase in accounts payable and accrued expenses and other liabilities.
Net cash used in operating activities for the fiscal year ended October 31, 2022 was $17.6 million and was primarily due to our net loss of $24.5 million, partially offset by adjustments for non-cash charges totaling $4.7 million which was primarily driven by non-cash interest expense of $0.6 million and changes in fair value of warrant liabilities of $3.3 million, as well as changes in operating assets and liabilities of $2.2 million, primarily associated with a $2.3 million increase in accrued expenses and other liabilities.
93
Net Cash Used in Investing Activities
Net cash used in investing activities for each of the fiscal years ended October 31, 2023, and 2022 was $0.3 and $0.2 million, respectively, consisting of purchases of property and equipment.
Net Cash Provided by Financing Activities
Net cash provided by financing activities for the fiscal year ended October 31, 2023 was $86.1 million, resulting from proceeds of $38.0 million received from the issuance of convertible debentures, and $64.3 million gross proceeds received from the PIPE Financing and Reverse Recapitalization, partially offset by the repayment of scheduled principal payments of the Hercules term loan of $1.6 million, full repayment of the BDC convertible debentures of $3.2 million, payment of debt issuance costs of $0.9 million and payment of transaction costs in connection with the Reverse Recapitalization and PIPE of $10.5 million.
Net cash provided by financing activities for the fiscal year ended October 31, 2022 was $28.0 million, resulting from proceeds of $18.4 million received from the issuance of convertible debentures, and $11.0 million gross proceeds received from the issuance of our Hercules term loan, partially offset by the repayment of debt of $1.0 million and payment of debt issuance costs of $0.4 million.
Hercules Loan Agreement
On December 30, 2021, we entered into a Loan and Security Agreement (the “Loan Agreement”) with Hercules Capital, Inc. (“Hercules” or “the Bank” or the “Lender”) for the issuance of a term loan facility of up to an aggregate principal amount of up to $20.0 million (the “Term Loan”). The Loan Agreement has remained in place upon consummation of the Reverse Recapitalization. The Loan Agreement provides for (i) an initial term loan advance of $7.0 million, which closed on December 30, 2021, (ii) subject to the achievement of certain Clinical Milestones (the “Clinical Milestone”), a right of the Company to request that the Lender make additional term loan advances to us in an aggregate principal amount of up to $4.0 million from the achievement of the Clinical Milestone through June 15, 2022, which was drawn in June 2022, and (iii) subject to the achievement of certain financial milestones (the “Financial Milestone”), a right of the Company to request that the Lender make additional term loan advances to the Company in an aggregate principal amount of up to $9.0 million from achievement of the Financial Milestone through December 15, 2022, which was not achieved. We are required to pay an end of term fee (the “End of Term Charge”) equal to 6.35% of the aggregate principal amount of the Term Loans advances upon repayment. The financing agreement contains negative covenants that, among other things and subject to certain exceptions, could restrict our ability to incur additional liens, incur additional indebtedness, make investments, including acquisitions, engage in fundamental changes, sell or dispose of assets that constitute collateral, including certain intellectual property, pay dividends or make any distribution or payment on or redeem, retire or purchase any equity interests, amend, modify or waive certain material agreements or organizational documents and make payments of certain subordinated indebtedness.
The Term Loans mature on July 1, 2025, with no option for extension (the “Maturity Date”).
The Term Loan bears interest at an annual rate equal to the greater of (i) 8.25% plus the prime rate of interest as reported in the Wall Street Journal minus 3.25% and (ii) 8.25% provided, that, from and after the date we achieve the financial milestone, as defined within the agreement, the reference to 8.25% in clauses (i) and (ii) is reduced to 8.15%. Borrowings under the Loan and Security Agreement are repayable in monthly interest-only payments through June 2023. After the interest-only payment period, borrowings under the Loan and Security Agreement are repayable in equal monthly payments of principal and accrued interest until the Maturity Date. At our option, we may elect to prepay all, but not less than all, of the outstanding term loan by paying the entire principal balance and all accrued and unpaid interest thereon plus a prepayment charge equal to the following percentage of the principal amount being prepaid: (i) 3.0% of the principal amount outstanding if the prepayment occurs in any of the first twelve months following the closing date of the last draw down; (ii) 2.0% of the principal amount outstanding if the prepayment occurs after the first twelve months following the closing date of the last draw down, but on or prior to twenty-four months following the closing date of the last draw down; and 1.0% of the principal amount outstanding at any time thereafter but prior to the Maturity Date.
In connection with the Loan Agreement, we granted Hercules a security interest senior to any current and future debts and to any security interest, in all of the Company’s right, title, and interest in, to and under all of Company’s property and other assets, and certain equity interests and accounts of enGene, subject to limited exceptions including the Company's intellectual property. The Loan Agreement also contains certain events of default, representations, warranties and non-financial covenants of the Company. The Company has been in compliance with the financial covenants and non-financial covenants since inception of the loan.
The debt discount and issuance costs are being accreted to the principal amount of debt and being amortized from the date of issuance through the Maturity Date to interest expense using the effective-interest rate method. The effective interest rate of the outstanding debt under the Loan Agreement is approximately 18.28% and 15.90% as of October 31, 2023 and 2022, respectively.
94
As of October 31, 2023 and 2022 the carrying value of the note payable consists of the following:
Year Ended October 31,
Note payable, including End of Term Charge $ 10,144 $ 11,699
Debt discount, net of accretion (474 ) (891 )
Note payable, net of discount $ 9,778 $ 10,914
During the fiscal years ended October 31,2023 and 2022, the Company recognized $1.8 and $1.0 million of interest expense related to the Loan Agreement, respectively.
During the fiscal year ended October 31, 2023, we borrowed $11.0 million under the Loan Agreement and incurred $1.1 million of debt discount and issuance costs inclusive of facility fees, legal fees, End of Term Charge and fair value of the warrant on issuance.
Estimated future principal payments due under the Loan Agreement, including the contractual End of Term Charge as of October 31, 2023, and prior to the amendment of the Term Loan (see below) are as follows:
Total principal payments, including End of Term Charge $ 10,144
As of October 31, 2023, the Company classified $0.6 million of the note payable as current, which represents the principal payments due and amortization of the debt discount between October 31, 2023 and the date the Term Loan was amended in December 2023 (see below). Subsequent to the amendment to the Term Loan, we are not required to make any principal payments until at least July 1, 2025.
The Hercules term loan is our only outstanding debt instrument at October 31, 2023.
On December 22, 2023, the Company entered into an Amended and Restated Loan and Security Agreement (the “Amended Loan Agreement”), with Hercules, as agent and lender, and the several banks and other financial institutions or entities from time to time parties thereto (with Hercules, the “Lenders”). The Amended Loan Agreement amends and restates in its entirety that certain Loan and Security Agreement with Hercules dated December 30, 2021 (the “Prior Loan Agreement”).
The Amended Loan Agreement provides for a term loan facility of up to $50 million available in multiple tranches (the “Amended Term Loan”), as follows: (i) an initial term loan advance (the “Tranche 1 Advance”) that was made on the Closing Date of $22.5 million, approximately $8.6 million of which was applied to refinance in full the term loans outstanding under the Prior Loan Agreement, (ii) subject to the achievement of the specified Interim Milestone (the “Interim Milestone”) and satisfaction of certain other conditions precedent, a right of the Company to request that the Lenders make additional term loan advances to us in an aggregate principal amount of up to $7.5 million from the achievement of the Interim Milestone through the earlier of (x) 60 days following the Interim Milestone and (y) March 31, 2025, and (iii) an uncommitted tranche subject to the Lenders’ investment committee approval and satisfaction of certain other conditions precedent (including payment of a 0.75% facility charge on the amount borrowed), pursuant to which the Company may request from time to time up to and including the Amortization Date (defined below) that the Lenders make additional term loan advances to the Company in an aggregate principal amount of up to $20.0 million. The Company is required to pay upon the earlier of January 1, 2028 (the “Maturity Date”) or payment in full of the Term Loans, an end of term fee equal to 5.50% of the aggregate principal amount of the Term Loans. The Company is also required to pay on July 1, 2025 or, if earlier, the date the Company prepays the Term Loans, $0.7 million representing the end of term charge under the Prior Loan Agreement.
The Term Loans mature on January 1, 2028, with no option for extension.
The Term Loan bears cash interest payable monthly at an annual rate equal to the greater of (a) the prime rate of interest as reported in the Wall Street Journal plus 0.75% (capped at 9.75%) and (b) 9.25%. The Term Loan also bears additional payment-in-kind interest at an annual rate of 1.15%, which is added to the outstanding principal balance of the Term Loan on each monthly interest payment date. Borrowings under the Amended Loan Agreement are repayable in monthly interest-only payments through the “Amortization Date”, which is either: (x) July 1, 2025 or (y) if the Interim Milestone is achieved and there has been no default, January 1, 2026, or (z) if the Interim Milestone and certain clinical milestones are achieved and there has been no default, July 1, 2026. After the Amortization Date, the outstanding Term Loans and interest shall be repayable in equal monthly payments of principal and accrued interest until the Maturity Date.
95
At the Company's option, the Company may elect to prepay all, but not less than all, of the outstanding Term Loan by paying the entire principal balance and all accrued and unpaid interest thereon plus a prepayment charge of 1.0% - 3.0% of the principal amount being repaid, the rate depending upon the date of repayment.
In connection with the Amended Loan Agreement, the Company granted Hercules a security interest senior to any current and future debts and to any security interest in all of the Company's right, title, and interest in, to and under all of the Company's property and other assets, subject to limited exceptions including the Company's intellectual property.
The Amended Loan Agreement contains negative covenants that, among other things and subject to certain exceptions, could restrict the Company's ability to incur additional liens, incur additional indebtedness, make investments, including acquisitions, engage in fundamental changes, sell or dispose of assets that constitute collateral, including certain intellectual property, pay dividends or make any distribution or payment on or redeem, retire or purchase any equity interests, amend, modify or waive certain material agreements or organizational documents and make payments of certain subordinated indebtedness. The Amended Loan Agreement also contains certain events of default and representations, warranties and non-financial covenants of the Company. Beginning from an initial test date of October 1, 2024 (which date can be extended based on certain milestones), the Amended Loan Agreement contains a minimum liquidity covenant requiring the Company to maintain at least 35% of the aggregate outstanding principal as unrestricted cash. This percentage can be lowered based on certain milestones and other events.
In connection with the Amended Loan Agreement, the Company also agreed to issue to the Lenders in connection with each advance of Term Loans warrants (“Warrants”) to purchase that number of the Company’s Common Shares as shall equal to 2% of the aggregate principal amount of such Term Loan advance divided by the Warrant per share exercise price of $7.21 (which exercise price equals the ten-day volume weighted average price for the ten (10) trading days preceding the Closing Date and is subject to customary adjustments under the terms of the Warrants). Warrants are exercisable for a period of seven years from issuance.
On the Closing Date, the Company issued to the Lenders 62,413 Warrants in connection with the Tranche 1 Advance of the Term Loans.
Under the terms of the Amended Loan Agreement, the maximum number of Warrants and resultant underlying Common Shares of the Company that could be issued is 138,696.
April 2023 Notes
On April 4, 2023, we entered into a note purchase agreement (the “April 2023 Notes”) for a principal amount of $8.0 million with Merck Lumira Biosciences Fund, L.P., Merck Lumira Biosciences Fund (Quebec), L.P., Lumira Ventures III, L.P., Lumira Ventures III (International), L.P., Lumira Ventures IV, L.P., Lumira Ventures IV (International), L.P., Fond de solidarité des travailleurs du Québec (F.T.Q.), and Forbion Capital Fund III Cooperatief U.A. (collectively the “April 2023 Investors”). The April 2023 Notes had an interest free period of 45 days from the date of issuance, and commencing on the 46th day, is to accrue interest at a rate of 15% per annum. The April 2023 Notes were classified as current as they mature on the earlier of (i) July 31, 2023; or (ii) the date the Company completes a qualified financing, as defined within the April 2023 Notes as a financing pursuant to which the Company sells convertible promissory notes, warrants, preferred shares, common shares, or a combination thereof of the Company for an aggregate amount of at least $20.0 million. Upon the completion of the financing in May 2023, we issued convertible debentures and warrants of the Company to the April 2023 Note Investors, on the same terms and conditions of the convertible debentures and warrants that were issued to the investors of the 2023 Financing, as repayment of the April 2023 Notes.
We elected the fair value option of accounting under ASC 825 for the April 2023 Notes. We recorded the April 2023 Notes at fair value upon the date of issuance, which was determined to be $8.0 million. As part the 2023 Financing, the terms of the April 2023 Notes were modified, in which the extinguishment of the April 2023 Notes resulted in the issuance of convertible debentures and warrants of the Company to the April 2023 Note Investors, on the same terms and conditions of the convertible debentures and warrants that were issued to the investors of the 2023 Financing. Upon the completion of the 2023 Financing in May 2023, we issued $8.0 million in convertible notes and warrants in extinguishment for the April 2023 Notes. No change in fair value was recorded on the April 2023 Notes during the year ended October 31, 2023, and prior to the repayment of the April 2023 Notes given the short period of time that the April 2023 Notes were outstanding. No gain or loss was recorded as a result of the extinguishment of the April 2023 Notes as the fair value of the notes upon extinguishment was determined to be equal to the fair value of the repayment amount.
May 2023 Notes
On May 16, 2023, concurrently with the execution and delivery of the Merger Agreement, we entered into agreements pursuant to which we issued new convertible indebtedness and warrants (i) for cash in an aggregate principal amount of $30.0 million and (ii) in extinguishment of the April 2023 Notes in an aggregate amount of $8.0 million (collectively, the “2023 Notes” and, together with the warrants purchased concurrently, the “2023 Financing”; the 2023 Financing together with the Amended 2022 Financing, the “Convertible Bridge Financing”).
The 2023 Financing occurred in two separate issuances with $28.0 million issued in May 2023 for $20.0 million in cash and $8.0 million in repayment of the April 2023 Notes, and an additional $10.0 million issued in June 2023 for $10.0 million in cash, of which
96
Forbion Growth Sponsor FEAC I B.V. funded an aggregate amount of $20.0 million of the total $38.0 million. The 2023 Notes issued as part of the 2023 Financing have an initial maturity date of three years from the closing date and are to accrue interest at 10% per annum, which is payable upon maturity. The 2023 Notes have the same conversion terms as the 2022 Notes (as described in Note 9 of the consolidated financial statements).
The warrants issued as part of the 2023 Financing were for the purchase of common shares of Old enGene. The number of 2023 Warrants issued to each participating investor in the 2023 Financing was equal to the number of warrants in the Company the investor would receive had they invested the same amount in the PIPE Financing, divided by the Company Exchange Ratio. The 2023 Warrants were only to become exercisable upon the completion of the merger. Upon the close of the Reverse Recapitalization the 2023 Warrants were exchanged for 2,679,432 warrants of the Company and have the same terms as the public warrants issued upon the FEAC initial public offering, with an exercise price of $11.50, and which will expire five years after the completion of the merger. The warrants issued as part of the 2023 Financing were concluded to be liability classified upon issuance, as they failed the fixed for fixed criteria that is required for a contract to be considered indexed to the Company’s own stock as prescribed by ASC 815. The terms of the warrants initially required the Company to issue a variable number of shares until the PIPE Financing was executed, at which time the number of warrants became fixed. The 2023 Warrants were initially and subsequently measured at fair value with any changes in fair value recorded as a component of other income and expense within the change in fair value of warrant liabilities. Refer to Note 3 of the consolidated financial statements. Upon the execution of the PIPE Financing and consummation of the Reverse Recapitalization, the warrants were reclassified to equity as the number of warrants became fixed and it was determined that the warrants met the fixed for fixed criteria that is required for a contract to be considered indexed to the Company’s own stock as prescribed by ASC 815.
We elected the fair value option of accounting for the May 2023 Notes. We recorded May 2023 Notes at fair value upon the date of issuance. At inception the fair value of the May 2023 Notes was determined to be $37.0 million and the fair value of the related warrants was determined to be $1.4 million, of which $0.5 million related to the fair value of the warrants issued to the holders of the 2022 Notes, as described above. During the year ended October 31, 2023, we recorded a change in fair value of the May 2023 Notes of $56.2 million, which is recorded as a component of other income and expense within the condensed consolidated statement of operations. The Company incurred $0.8 million of debt issuance costs associated with the May 2023 Notes which have been expensed and are included within general and administrative expenses. Refer to Note 3 of the consolidated financial statements.
On October 31, 2023 upon the close of the Reverse Recapitalization, the 2023 Notes were converted into 4,298,463 Common Shares of the Company. We accounted for the conversion as an extinguishment, with no gain or loss recorded on extinguishment as the fair value of the Common Shares issued was determined to equal the fair value of the 2023 Notes at the time of conversion.
Funding Requirements
Our primary uses of capital are, and we expect will continue to be, research and development activities, compensation and related expenses and general overhead costs. We expect to continue to incur significant expenses and operating losses for the foreseeable future. In addition, we expect to incur additional costs associated with operating as a public company subsequent to the closing of the Reverse Recapitalization. We anticipate that our expenses will increase significantly in connection with our ongoing activities. As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy.
Based on our current operating plan, we believe that our cash on hand is sufficient to fund our operations for twelve months from the date of issuance of our financial statements. We could use our available capital resources sooner than we currently expect. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy.
Because of the numerous risks and uncertainties associated with research, development and commercialization of product candidates, we are unable to estimate the exact amount of our working capital requirements. Our future funding requirements will depend on, and could increase significantly as a result of many factors, including:
•
the initiation, timing, costs, progress and results of our planned clinical trials of EG-70;
•
the scope, progress, results and costs of our earlier-stage research programs, including the progress of preclinical development and possible clinical trials;
•
the scope, progress, results and costs of our research programs and preclinical development of any future product candidates we may pursue;
•
the cost of regulatory submissions and timing of regulatory approvals;
•
the progress of the development efforts of parties with whom we may in the future enter into collaborations and/or research and development agreements;
•
the timing and amount of milestone and other payments we are obligated to make under our Nature Technology Corporation Agreement or any future license agreements;
97
•
the cash requirements of any future acquisitions or discovery of product candidates;
•
our ability to establish and maintain collaborations, strategic partnerships or marketing, distribution, licensing or other strategic arrangements with third parties on favorable terms, if at all;
•
the costs involved in prosecuting and enforcing patent and other intellectual property claims;
•
the costs of manufacturing our product candidates by third parties;
•
the cost of commercialization activities if our lead candidates or any future product candidates are approved for sale, including marketing, sales and distribution costs;
•
our efforts to enhance operational systems and hire additional personnel, including personnel to support development of our product candidates; and
•
the costs of operating as a public company.
A change in the outcome of any of these or other variables with respect to the development of our lead candidates or any product or development candidate we may develop in the future could significantly change the costs and timing associated with our development plans. Further, our operating plans may change in the future, and we may need additional funds to meet operational needs and capital requirements associated with such operating plans.
The Company was eligible to claim Canadian federal and provincial tax credits as a Canadian controlled private corporation (“CCPC”) on eligible scientific research and development expenditures (“SR&ED”) through September 2023, at which time the Company lost its status as a CCPC in connection with the Reverse Recapitalization. As such, the Company will no longer be eligible for cash refunds on federal tax credit earned with respect to federally eligible SR&ED expenditures. Following the loss of CCPC status, the Company’s federal SR&ED tax credits will be earned at a lower rate and may only be used to offset future federal taxes payable. Provincial tax credits earned in Québec in relation to SR&ED are anticipated to continue to result in a cash refund to the Company, albeit at a reduced rate.
Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings or other capital sources, which could include collaborations, strategic alliances or licensing arrangements. Adequate additional financing, if available, may not be available to us on acceptable terms, or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interests of our existing shareholders may be diluted, and the terms of these securities may include liquidation or other preferences that could adversely affect the rights of such shareholders. Debt financing, if available, may involve agreements that include restrictive covenants that limit our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends, that could adversely impact our ability to conduct our business. If we raise additional funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research program or product candidates, or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves. Our ability to raise additional funds may be adversely impacted by potential worsening global economic conditions and disruptions to and volatility in the credit and financial markets in the United States and worldwide. Because of the numerous risks and uncertainties associated with product development, there is no assurance that we will ever be profitable or generate positive cash flow from operating activities.
Contractual Obligations and Other Commitments
License Agreement with Nature Technology Corporation
On April 10, 2020, we entered into the License Agreement with NTC pursuant to which NTC granted us a worldwide non-exclusive, royalty-bearing and sublicensable license to certain patents and know-how relating to the NanoplasmidTM vector backbone that is used in detalamogene voraplasmid to research, develop, make, use, import, sell and offer and sell, any gene and cell therapy products incorporating the NanoplasmidTM vector backbone (excluding any such products in the field of dermatology). Unless terminated earlier, the License Agreement will continue until no valid claim of any licensed patent exists in any country. We can voluntarily terminate the License Agreement with prior notice to NTC.
We paid NTC an initial, upfront fee of $50,000 which was recorded as research and development expense upon entering into the License Agreement. Beginning on the first anniversary of the effective date of the License Agreement and on each subsequent anniversary, we are required to pay NTC a $50,000 annual maintenance fee until the first sale of a product for which a royalty is due. We are also required to make a payment to NTC of $50,000 upon assigning the License Agreement to a third-party. The License Agreement provides for a one-time payment of $50,000 for the first dose of a product covered by a valid claim of a licensed patent (a “Milestone Product”) in the first patient in a Phase I clinical trial or, if there is no Phase I clinical trial, in a Phase II clinical trial, as well
98
as a one-time payment of $450,000 upon regulatory approval of a Milestone Product by the U.S. Food and Drug Administration. The first milestone related to the first dose of a Milestone Product, was achieved during the year ended October 31, 2021. The second milestone, regulatory approval of a Milestone Product, has not yet been achieved as of the year ended October 31, 2023. We are also required to pay NTC a royalty percentage in the low single digits of the aggregate net product sales in a calendar year by us, our affiliates or sublicensees on a product-by-product and country-by-country basis, as long as the composition or use of the applicable product is covered by a valid claim in the country where the net sales occurred. Royalty obligations under the License Agreement will continue until the expiration of the last valid claim of a licensed patent covering such licensed product in such country. In the event that we or any of our affiliates or sublicensees manufactures any GMP lot of a licensed product, then we or any such affiliate or sublicensee will be obligated to pay NTC an amount per manufactured gram of GMP (or its equivalent) lot of product, which varies based on the volume manufactured. Such manufacturing payment will expire on a product-by-product basis upon receipt of regulatory approval to market a product in any country in the licensed territory.
For a more detailed description of this agreement, see the section titled Business of enGene – Intellectual Property – Strategic License Agreement and Note 7 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Lease Obligations
Our leases are comprised of all operating leases for office and lab space. We have a month-to-month office and lab space lease located in Montreal, Quebec, Canada, which commenced in November 2021 and had an initial term of 12 months that expired on October 31, 2022. The lease includes options to renew for consecutive twelve-month periods upon landlord consent, at new lease rates. In October 2022, we entered into a lease amendment to extend the lease for an additional term of six months through April 2023, with an option to extend the lease through September 2023. In April 2023, the Company extended the lease through September 2023. In September 2023, the Company extended the lease term through November 5, 2023. The amendment resulted in $0.2 million of additional lease commitments to be paid during the extended term, inclusive of the extension through November 5, 2023.
On December 29, 2022, we signed a new lease for approximately 10,620 square feet of new laboratory and office space at 4868 Rue Levy, Montreal, QC. The term of the lease is for 10 years beginning on the commencement date and requires an annual initial base rent of $36.50 Canadian Dollar (“CAD”) per square foot, which is subject to annual increases of 2%. As of October 31, 2023, the term of the lease had not commenced and we did not have access to the space as of that date.
Purchase and Other Obligations
We enter into contracts in the normal course of business with CROs, CDMOs and other third-party vendors for nonclinical research studies and testing, clinical trials and testing and manufacturing services. Most contracts do not contain minimum purchase commitments and are cancellable by us upon written notice. Payments due upon cancellation consist of payments for services provided or expenses incurred, including those incurred by subcontractors of our suppliers.
The Company does not have material capital expenditure commitments at October 31, 2023.
Critical Accounting Estimates
This management’s discussion and analysis is based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of our consolidated financial statements and related disclosures requires us to make judgments and estimates that affect the reported amounts of assets, liabilities and expenses, as well as related disclosures during the reported periods. We base our estimates on historical experience, known trends and events, and various other factors that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. On an ongoing basis, we evaluate our judgments and estimates in light of changes in circumstances, facts and experience. The effects of material revisions in estimates, if any, will be reflected in the financial statements prospectively from the date of change in estimates.
While our accounting policies are described in more detail in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, we believe the following accounting policies used in the preparation of our financial statements require the most significant judgments and estimates.
Accrued and Prepaid Research and Development Expenses
As part of the process of preparing our financial statements, we are required to estimate our accrued and prepaid third-party research and development expenses as of each balance sheet date. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf, and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met. We make estimates of our accrued and prepaid expenses as of each balance sheet date based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. The
99
significant estimates in our accrued and prepaid research and development expenses include the costs incurred for services performed by our vendors in connection with research and development activities for which we have not yet been invoiced.
We base our expenses related to research and development activities on our estimates of the services received and efforts expended pursuant to quotes and contracts with vendors that conduct research and development activities on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the research and development expense. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid balance accordingly. Non-refundable advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made.
Although we do not expect our estimates to be materially different from amounts incurred, if our estimates of the status and timing of services performed differ from the actual status and timing of services performed, it could result in us reporting amounts that are too high or too low in any particular period.
Warrant Liabilities
Old enGene issued warrants to purchase shares of redeemable convertible preferred shares as part of the issuance of certain of its redeemable convertible preferred shares, convertible debentures, and term loan (the “Preferred Share Warrants”). The fair value of the Preferred Share Warrant liabilities was estimated using a Modified Black-Scholes option-pricing model, which includes assumptions that are based on the individual characteristics of the Preferred Share Warrants on the valuation date, and assumptions related to the fair value of the underlying redeemable convertiblepreferred shares, expected volatility, expected life, dividends, risk-free interest rate and discount for lack of marketability (“DLOM”). Due to the nature of these inputs, the Preferred Share Warrants are considered a Level 3 liability. The weighted average expected life was estimated based on the weighting of scenarios considering the probability of different terms up to the contractual term of 10 years in light of the expected timing of a future exit event, which includes a SPAC transaction. The expected volatility was determined based on an analysis of reported data for a group of guideline companies that have issued instruments with substantially similar terms. The expected volatility has been determined using a weighted average of the historical volatility measures of this group of guideline companies. The risk-free interest rate is determined by reference to the Canadian Treasury yield curve in effect at the time of measurement of the warrant liabilities for time periods approximately equal to the weighted average expected life of the warrant. Old enGene did not pay any cash dividends on its redeemable convertible preferred shares; therefore, the expected dividend yield was assumed to be zero.
Because there was no public market for the underlying redeemable convertible preferred shares of Old enGene, its Board of Directors determined their fair value based on third-party valuations. Initially, the enterprise equity value of Old enGene was determined using a market approach and/or cost approach by considering the weighting of scenarios estimated using a back-solve method based on recent financing transactions of Old enGene. This value was then allocated towards Old enGene’s various securities of its capital structure using an option pricing method, or OPM, and a waterfall approach based on the order of the superiority of the rights and preferences of the various securities relative to one another. Significant assumptions used in the OPM to determine the fair value of preferred shares include volatility, DLOM, and the expected timing of a future liquidity event such as an initial public offering, SPAC transaction or sale of Old enGene, in light of prevailing market conditions. This valuation process creates a range of equity values both between and within scenarios.
In addition to considering the results of these valuations, Old enGene’s Board of Directors considered various objective and subjective factors to determine the fair value of our preferred shares as of each valuation date, including the prices at which Old enGene sold redeemable convertible preferred in the most recent transactions, external market conditions, the progress its research and development programs, our financial position, including cash on hand, and our historical and forecasted performance and operating results, and the lack of an active public market for its redeemable convertible preferred shares, among other factors. As part of entering into the Merger Agreement with FEAC, the holders have agreed to surrender the preferred share warrants for no consideration immediately prior to the completion of the Reverse Recapitalization. Upon the close of the Reverse Recapitalization, the Preferred Share Warrants were surrendered for no consideration and the fair value was determined to be zero.
The warrants issued by Old enGene as part of the 2023 Financing (the “2023 Warrants”) were concluded to be freestanding, liability classified instruments upon issuance, as they failed the fixed-for-fixed criteria that is required for a contract to be considered indexed to the Company’s own stock as prescribed by ASC 815. The terms of the warrants initially required Old enGene to issue a variable number of shares until the PIPE Financing was executed, at which time the number of warrants became fixed, and it was determined that the warrants met the fixed for fixed criteria that is required for a contract to be considered indexed to the Company’s own stock as prescribed by ASC 815. The 2023 Warrants were initially and subsequently measured at fair value with any changes in fair value recorded as a component of other income and expense within the change in fair value of warrant liabilities.
100
Old enGene estimated the fair value of the 2023 Warrants based on the underlying quoted market price of the FEAC public warrants, prior to the close of the Reverse Recapitalization. The 2023 Warrants were classified as a Level 2 measurement given they are substantially similar to FEAC public warrants. The price used to value the 2023 Warrants as of the issuance date and immediately prior to the consummation of the Reverse Recapitalization was $0.53 and $0.74, per warrant, respectively, which represented the quoted market price of the FEAC public warrants on each date.
Convertible Debentures Embedded Derivative Liabilities
Old enGene’s convertible debentures contain equity conversion options and certain repayment features, that have been identified as a single compound embedded derivative requiring bifurcation from the host contract for the convertible debentures for which the fair value has not been elected. The convertible debenture embedded derivative liabilities is initially measured at fair value on issuance and is subject to remeasurement at each reporting period with changes in fair value recognized in the change in fair value of derivative liabilities, net in the consolidated statements of operations and comprehensive loss. Upon the close of the Reverse Recapitalization the 2022 Notes were exchanged for Common Shares of the Company, resulting in an extinguishment of the 2022 Notes and related embedded derivative liability, and the BDC Note was repaid in full.
Old enGene estimated the fair value of the convertible debenture embedded derivative liabilities on issuance and at each reporting period using a probability weighted scenario expected return model. The estimated probability and timing of underlying events triggering the conversion and liquidity repayment features and probability of exercise of the extension features within the convertible debentures, as well as discount rates, volatility and share prices, are inputs used to determine the estimated fair value of the embedded derivative. Immediately prior to the conversion and exchange of the 2022 Notes for Common Shares of the Company upon the Reverse Recapitalization, the Company remeasured the convertible debenture embedded derivative liability using a 100% probability of conversion upon the Reverse Recapitalization and the quoted market price for FEAC's common share on October 31, 2023, which was $21.70 per share, as the fair value of the common shares.
Fair Value Option
Old enGene elected the fair value option of accounting of ASC 825 for the April 2023 Notes and the May 2023 Notes from their issuance date in order to not have to bifurcate any embedded derivatives in accordance with ASC 815. The notes for which the fair value option of accounting is elected are recorded at fair value upon the date of issuance and subsequently remeasured to fair value at each reporting period. Changes in the fair value of the April 2023 Notes and May 2023 Notes, which include accrued interest, if any, are recorded as a component of other expense (income), net in the consolidated statement of operations and comprehensive loss. We have not elected to present interest expense separately from changes in fair value and therefore will not present interest expense associated with the notes. Any changes in fair value caused by instrument-specific credit risk are presented separately in other comprehensive income. During the year ended October 31, 2023, we did not record any changes in fair value related to instrument-specific credit risk.
No change in fair value was recorded on the April 2023 Notes during the year ended October 31, 2023, given the close proximity between the issuance date of the notes and the repayment date. As of October 31, 2023, the April 2023 Notes are no longer outstanding.
Old enGene initially estimated the fair value of the May 2023 Notes using a probability weighted scenario expected return model. The estimated probability and timing of underlying events within the convertible debentures as well as discount rates, volatility and share prices are inputs used to determine the estimated fair value of the May 2023 Notes. Due to the nature of these inputs, the May 2023 Notes initially represented a Level 3 measurement within the fair value hierarchy.
Immediately prior to the conversion and exchange of the May 2023 for Common Shares of the Company upon the Reverse Recapitalization, the Company remeasured the fair value of the convertible debentures using the quoted market price for FEAC's common share on October 31, 2023, which was $21.70 per share, as the fair value of the common shares for which the May 2023 Notes were exchanged for.
The assumptions underlying these valuations represented management’s best estimate, which involved inherent uncertainties and the application of management’s judgment and these valuations are sensitive to changes in the unobservable inputs. As a result, if we had used different assumptions or estimates, or if there are changes to the unobservable inputs, the fair value of the April 2023 and May 2023 Notes could have been materially different.
Share-Based Compensation
We measure all share-based awards granted to employees, officers, directors and non-employees based on the fair value on the date of the grant and recognize compensation expense for those awards over the requisite service period, which is generally the vesting period of the respective award. Our share-based payments related only to stock options issued to date. We account for forfeitures of our share-based awards as they occur. We have historically issued share-based awards with only service-based vesting conditions. In July 2023, we issued 1,046,764 stock options which have performance conditions tied to the closing of the Reverse Recapitalization and the
101
filing of an effective registration statement. For share-based awards with service-based vesting conditions, we record the expense using the straight-line method including when such awards have graded vesting. For performance-based awards, we record the expense when achievement of the performance condition is deemed probable using an accelerated attribution method, as if each vesting tranche was treated as an individual award.
For all stock options granted at fair value of the underlying Common Shares at the time of the grant with service-based vesting, the fair value of each stock option is estimated on the date of grant using the Black- Scholes option-pricing model, which requires inputs based on certain subjective assumptions, including the fair value of our Common Shares, expected share price volatility, the expected term of the award, the risk-free interest rate for a period that approximates the expected term of the option, and our expected dividend yield. We determine the volatility for awards granted based on an analysis of reported data for a group of guideline companies that have issued options with substantially similar terms. The expected volatility has been determined using a weighted average of the historical volatility measures of this group of guideline companies. The expected option term for share-based awards with only service-based vesting was calculated based on the simplified method, which uses the midpoint between the vesting date and the contractual term, as we do not have sufficient historical data to develop an estimate based on participant behavior. The expected option term for performance-based awards has been determined using management’s best estimate considering the characteristics of the award, contractual life, the timing of the expected achievement of the performance conditions, the remaining time-based vesting period, and comparison to expected terms used by peers. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. We have not paid, and do not anticipate paying, cash dividends on our Common Shares; therefore, the expected dividend yield is assumed to be zero.
Prior to the Reverse Recapitalization, because there was no public market for Old enGene’s common shares, its Board of Directors approved the fair value of its common share based on third-party valuations of its common shares. Initially, the enterprise equity value of Old enGene was determined using a market approach and/or cost approach by considering the weighting of scenarios estimated using a back-solve method based on recent financing transactions of the Company. This value was then allocated towards the Company’s various securities of its capital structure using an option pricing method, or OPM, and a waterfall approach based on the order of the superiority of the rights and preferences of the various securities relative to one another. Significant assumptions used in the OPM to determine the fair value of common shares include volatility, discount for lack of marketability, and the expected timing of a future liquidity event such as an initial public offering, or sale of our Company in light of prevailing market conditions. This valuation process creates a range of equity values both between and within scenarios. In addition, various objective and subjective factors were considered to determine the fair value of our Common Shares as of each grant date of stock options, including, among other factors:
•
the prices at which we sold shares of preferred shares and the superior rights and preferences of the preferred shares relative to its Common Shares at the time of each grant,
•
the estimated value of each security both outstanding and anticipated,
•
the anticipated capital structure that will directly impact the value of the currently outstanding securities,
•
our financial position, including cash on hand, and our historical and forecasted performance and operating results,
•
the progress of our research and development programs,
•
our stage of development and business strategy and the material risks related to our business and industry,
•
the likelihood of achieving a liquidity event for the holders of our Common Shares, such as an initial public offering or a sale of our company, given prevailing market conditions,
•
external market conditions affecting the biotechnology industry sectors,
•
local and global economic conditions, and
•
the lack of an active public market for our Common Shares and redeemable convertible preferred shares.
The assumptions underlying these valuations represented management’s best estimate, which involved inherent uncertainties and the application of management’s judgment and these valuations are sensitive to changes in the unobservable inputs. As a result, if we had used different assumptions or estimates, or if there are changes to the unobservable inputs, the fair value of its Common Shares and share-based compensation expense could have been materially different.
Subsequent to the consummation of the Reverse Recapitalization, the fair value of the Common Shares used in the Black- Scholes option-pricing model to determine the fair value of the stock option will be determined based on the quoted price of our Common Shares.
Our share-based compensation expense is recorded in general and administrative and research and development expenses in the Company’s consolidated statements of operations and comprehensive loss. We recorded share-based compensation expense of $3.5 million and $0.1 million for the fiscal years ended October 31, 2023 and 2022, respectively.
Old enGene’s Board of Directors granted 1,046,764 options to employees on July 7, 2023 for non-voting common shares of Old enGene at an exercise price of $5.87 CAD ($4.24 USD). The exercise price of $5.87 CAD ($4.24 USD) was approved by Old enGene's
102
Board of Directors and determined to be equal to the fair value of its common shares on the grant date based on a valuation performed by an independent third-party valuation specialist and considering (i) the lapse of time between the date of the valuation as of May 31, 2023 and the grant of the award was limited , and (ii) events between the valuation date and grant date that would affect the valuation of common shares. Significant assumptions used in the valuation to determine the fair value of common shares include expected value of common shares, discount rate, DLOM, and the expected timing of a future liquidity event such as an initial public offering, SPAC transaction or sale of Old enGene, in light of prevailing market conditions. These options are not exercisable unless and until the completion of the Merger Agreement and there is an effective registration statement for the shares underlying such granted options and the options would have terminated automatically in the event of the termination of the Merger Agreement. We have valued these awards at the grant date using Black-Scholes pricing model in which the fair value of the stock on the grant date was equal to the exercise price of the award. Upon meeting the exercisability conditions, 794,643 of the issued options will be fully vested and exercisable, and the remaining 252,121 options will vest over varying terms up to four years. We recognize compensation expense when achievement of the performance condition is deemed probable using an accelerated attribution method, as if each vesting tranche was treated as an individual award. During the year ended October 31, 2023, $2.6 million of stock-based compensation expense associated with the 1,046,764 stock options granted in July 2023 was recorded because the Merger Agreement was effected and while an effective registration statement was not in place as of October 31, 2023, the Company determined that it is probable to occur. As of October 31, 2023, there was $0.6 million of unrecognized compensation expense related to outstanding stock options, which is expected to be recognized over a weighted-average period of 3.68 years.
Recoverability of Investment Tax Credits Receivable
In September 2023 we lost our status as a Canadian controlled private corporation (“CCPC”) and as a result, the rates at which we can claim Canadian federal and provincial tax credits on eligible research and development expenditures are reduced. The Canadian federal government offers a tax incentive to companies performing research and development activities in Canada and this tax incentive can be refunded or used to reduce federal income taxes in Canada otherwise payable. Such credits, if not refunded or used in the year earned, can be carried forward for a period of twenty years. Upon the loss of our CCPC status, the federal tax credit is no longer refundable. The Quebec provincial government offers a similar refundable incentive. The investment tax credits recorded are based on management’s estimates of amounts expected to be recovered and are subject to audit by the taxation authorities, the resulting adjustments of which could be significant. Following the loss of CCPC status, and as we continue to grow and expand our research and development activities outside of Canada, we anticipate our eligible research and development expenditures tax credits to decrease over time.
During the fiscal years ended October 31, 2023, and 2022, we recorded $1.1 million and $1.4 million, respectively, as a reduction of research and development expense associated with research and development investment tax credits. We have outstanding investment tax credits receivable of $2.3 million and $1.3 million as of October 31, 2023, and 2022, respectively.
Emerging Growth Company and Smaller Reporting Company Status
Under Section 107(b) of the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, an “emerging growth company” can delay the adoption of new or revised accounting standards until such time as those standards would apply to private companies. However, we do not elect this exemption in relation to accounting standards. We will continue to be an “emerging growth company” until the earliest of the following: (i) the last day of the fiscal year following the fifth anniversary of the date of FEAC's initial public offering; (ii) the last day of the fiscal year in which our total annual gross revenue is equal to or more than $1.07 billion; (iii) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.
We are also a “smaller reporting company,” meaning that the market value of our stock held by non-affiliates plus the proposed aggregate amount of gross proceeds to us as a result of this offering is less than $700.0 million and our annual revenue is less than $100.0 million during the most recently completed fiscal year. We may continue to be a smaller reporting company if either (i) the market value of our stock held by non-affiliates is less than $250.0 million or (ii) our annual revenue is less than $100.0 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than $700.0 million.
If we are a smaller reporting company at the time, we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations including regarding executive compensation.
Recent Accounting Pronouncements
We have reviewed all recently issued accounting pronouncements and have determined that, other than as disclosed in Note 2 to our annual consolidated financial statements included elsewhere in this Annual Report on Form 10-K and disclosed above, such standards will not have a material impact on our financial statements or do not otherwise apply to our operations.
103
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates, resulting from the Federal Reserve’s rising of interest rates. Our Term Loan has a variable interest rate that fluctuates with the U.S. prime rate.
Credit Risk
Our primary exposure to credit risk is through financial instruments and consist primarily of cash and cash equivalents. We regularly maintain deposits in accredited financial institutions in excess of federally insured limits. As of October 31, 2023, we held cash deposits in Canada at the National Bank of Canada, or NBC in excess of CDIC insured limits, and in the United States at Silicon Valley Bank, or SVB, in excess of FDIC insured limits. On March 10, 2023, SVB was closed by the California Department of Financial Protection and Innovation, and the Federal Deposit Insurance Corporation, or FDIC, was appointed as receiver. No losses have been incurred by us on deposits that were held at SVB to date.
We are dependent on third-party CDMO’s (“Contract Development and Manufacturing Organization”) and CRO’s (“Contract Research Organization”) with whom we do business. In particular, we rely and expect to continue to rely on a small number of manufacturers to supply us with the requirements of active pharmaceutical ingredients and formulated drugs in order to perform research and development activities in its programs. We also rely on a limited number of third-party CROs to perform research and development activities on its behalf. These programs could be adversely affected by significant interruption from these providers.
Foreign Currency Exchange Risk
Prior to November 1, 2022, the functional currency of enGene Inc. was the Canadian Dollar and the functional currency of the Company’s subsidiary, enGene U.S., Inc. is the U.S. Dollar (“USD”). During the current reporting period, enGene Inc. reassessed its functional currency and determined that the functional currency of enGene Inc. changed from the Canadian dollar to the U.S. dollar based on management’s analysis as a result of evaluating criteria within Accounting Standards Codification (“ASC”) 830, and considering our increased exposure to the USD through increased research and development activities in the United States, the recent financings in USD and contemplated future financings in USD, and the business combination with FEAC. The change in functional currency is accounted for prospectively from November 1, 2022, and prior year financial statements have not been restated for the change in functional currency. All assets and liabilities were reported using the same USD values as previously reported under the USD reporting currency described above. As a result, the cumulative translation adjustment balance as of October 31, 2022, is carried forward and will remain unchanged. The reporting currency is the US Dollar throughout all periods presented.
Non-monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing at the date of the transaction. Exchange gains or losses arising from foreign currency transactions that are conducted in a currency other than the Company’s functional currency are included in other expenses, net in the Consolidated Statements of Operations and Comprehensive Loss. Prior to November 1, 2022, the financial statements of subsidiaries which had a functional currency other than the Canadian Dollar were translated from their functional currency into the parent company’s functional currency of CAD, and then into the reporting currency as follows: assets and liabilities were translated at the exchange rates at the balance sheet dates, revenue and expenses were translated at the average exchange rates and shareholders’ (deficit) equity was translated based on historical exchange rates. Translation adjustments were not included in determining net loss but were included as a foreign exchange adjustment to accumulated other comprehensive income, a component of shareholders’ (deficit) equity. Beginning on November 1, 2022, due to the change in functional currency of the parent company to USD, all entities in the reporting group have a functional currency in USD and the cumulative translation adjustment balance as of October 31, 2022, is carried forward and will remain unchanged.
Our operating expenses are denominated in the currencies of the countries in which our operations are located, which are primarily in Canada and the United States. Our consolidated results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates and may be adversely affected in the future due to changes in foreign exchange rates. To date, we have not entered into any hedging arrangements with respect to foreign currency risk or other derivative financial instruments, although we may choose to do so in the future.
104
Effects of Inflation
Inflation generally affects us by increasing our cost of labor and clinical trial costs. We have experienced a general increase in costs as a result of global inflation however we believe that inflation has not had a material effect on our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Item 8. Financial Statements and Supplementary Data.
Our consolidated financial statements, together with the reports of our independent registered public accounting firms, appear beginning on page F-1 of this Annual Report on Form 10-K.
105
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As of October 31, 2023, management, with the participation of our Principal Executive Officer and Principal Financial and Accounting Officer, performed an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including the Principal Executive Officer and the Principal Financial and Accounting Officer, to allow timely decisions regarding required disclosures.
In connection with our preparation and the audit of our consolidated financial statements as of and for the years ended October 31, 2023 and 2022, management and our independent registered public accounting firm identified material weaknesses, as defined under the Exchange Act and by the Public Company Accounting Oversight Board (United States), in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our consolidated financial statements will not be prevented or detected on a timely basis. The material weaknesses identified related to: lack of formal policies, procedures and controls related to the design of internal controls over financial reporting including risk assessment process and control activities for certain key financial reporting processes; lack of sufficient accounting and financial reporting personnel to perform appropriate accounting analysis and review procedures; lack of personnel with requisite knowledge and experience in the application of GAAP; general information technology controls that were not designed appropriately (access and system changes); and lack of appropriate segregation of duties in the preparation and review of account reconciliations and journal entries.
We intend to and have begun to implement in the near term measures designed to improve our internal control over financial reporting to remediate these material weaknesses, including formalizing our processes and internal control documentation and strengthening supervisory reviews by our financial management; hiring additional qualified accounting and finance personnel with requisite knowledge and experience in the application of complex areas of GAAP, engaging financial consultants to enable the implementation of internal control over financial reporting and improving segregation of duties among accounting and finance personnel in the preparation and review of account reconciliations and journal entries. We will also review and improve the design of our general information technology controls including managing user access and privileged access, managing changes in the information system and segregation of duties.
While we are implementing these measures, we cannot assure you that these efforts will remediate our material weaknesses in a timely manner, or at all, or prevent restatements of our financial statements in the future. If we are unable to successfully remediate our material weaknesses, or identify any future material weaknesses, the accuracy and timing of our financial reporting may be adversely affected, we may be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports, and the market price of our Common Shares may decline as a result.
Based on this evaluation, our Principal Executive Officer and Principal Financial and Accounting Officer concluded that, as of October 31, 2023, the Company did not have effective disclosure controls and procedures designed and implemented as of that date due to the material weakness previously identified which has not yet been remediated.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Annual Report on Form 10-K that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our Principal Executive Officer and Principal Financial Officer, concluded that, as of October 31, 2023, our disclosure controls and procedures and internal control over financial reporting were not effective at a reasonable assurance level due to the material weakness described above. However, our management does not expect that effective disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Furthermore, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations
106
include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Management’s Report on Internal Control Over Financial Reporting
This annual report does not include a report of management's assessment regarding internal control over financial reporting or an attestation report of the company's registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for newly public companies. On October 31, 2023, we completed the business combination with Forbion European Acquisition Corporation (“FEAC”) and enGene Inc. (“Old enGene”). Prior to the business combination, we were a private corporation formed for the purpose of consummating the business combination and to become the parent company of the combined operating business following consummation of the business combination. The business combination is accounted for as a reverse recapitalization in accordance with GAAP. Under this method of accounting, FEAC is treated as the acquired company for financial reporting purposes, whereas Old enGene is treated as the accounting acquirer and predecessor. As a result, we are not a successor to FEAC, and as a result, the prior reports of FEAC are not considered when evaluating our internal control over financial reporting obligations.
Item 9B. Other Information.
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
107
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Board of Directors and Management
The following table sets forth, as of January 25, 2024, certain information regarding our directors and executive officers who are responsible for overseeing the management of our business.
Name Age Position
Executive Officers
Jason D. Hanson 54 Chief Executive Officer and Director
Ryan Daws 49 Chief Financial Officer
Dr. Alex Nichols 38 President and Chief Operating Officer
Dr. Richard Bryce 66 Chief Medical Officer
Dr. Anthony T. Cheung 52 Chief Technology Officer
Dr. James C. Sullivan 45 Chief Scientific Officer
Non-Executive Directors
Jasper Bos 49 Director
Gerry Brunk 55 Director
Dr. Richard Glickman 65 Director
Lota Zoth 64 Director
Executive Officers
Jason D. Hanson has served as Chief Executive Officer and as a Director of enGene since August 8, 2023. Mr. Hanson has served as Chief Executive Officer and as a Director of enGene Inc. since July 2018. He also served as President of enGene Inc. from July 2018 to December 2022. From August 2016 to November, 2017, Mr. Hanson served as President and Chief Executive Officer of Ohana Biosciences, a biotechnology company based in Cambridge, MA, and as member of the Ohana Board of Directors and consultant to Ohana from November 2017 to June 2018. Mr. Hanson previously served as Executive Vice President and Chief Strategy Officer for NuVasive, Inc. from November 2015 to August 2016. Mr. Hanson served as Corporate Vice President of General Electric Company and member of the senior executive team of GE Healthcare, a global pharmaceutical, medical device and healthcare services business from May 2014 to October 2015. In January 2013, Mr. Hanson served as Company Group Chairman and Executive Vice President of Valeant Pharmaceuticals International, Inc. (now Bausch Health Companies Inc.). Previously, he served in various roles at Medicis Pharmaceutical Corporation, including as Executive Vice President and Chief Operating Officer between July 2006 and December 2012. Mr. Hanson also served in numerous roles at GE Healthcare, including General Counsel roles, from April 1999 to July 2006. Mr. Hanson holds a B.S. from Cornell University and a J.D. from Duke University School of Law.
Ryan Daws has served as Chief Financial Officer and Head of Business Development of enGene since November 27, 2023. Mr. Daws joined the Company from Obsidian Therapeutics, Inc., where he was Chief Financial Officer and Head of Business Development from July 2019 to November 2023. Prior to that, from June 2017 to March 2019, he served as a Managing Director in the Healthcare Investment Banking Group at Robert W. Baird & Co. with a focus on life sciences companies. Prior to Baird, Mr. Daws was the Chief Financial Officer and Head of Business Development of Concert Pharmaceuticals, Inc. from January 2014 to June 2017, and a life-science-focused investment banker at Stifel, Nicolaus and Company from September 2010 to June 2013.
Dr. Alex Nichols has served as President and Chief Operating Officer of enGene since November 1, 2023 and in the same capacity for enGene Inc. since December 2022. Prior to joining enGene Inc. Dr. Nichols served as President, CEO, and co-founder of Mythic Therapeutics, Inc., a clinical-stage product-platform company developing a pipeline of antibody-drug conjugates (“ADCs”). In this role, Dr. Nichols co-invented the company’s technology platform and lead program, raised more than $130 million across several financing rounds and helped grow the company into an emerging ADC innovator. From November 2014 to September 2016, Dr. Nichols worked as an associate at Flagship Pioneering Inc., where he was part of the co-founding team of Cogen Therapeutics (now Repertoire Immune Medicines). Alex holds a B.A. in Biochemistry from Oberlin College and Ph.D. in Biophysics from Harvard University.
Dr. Richard Bryce has served as Chief Medical Officer of enGene since November 1, 2023 and in the same capacity for enGene Inc. since September 2023. From April 2021 to June 2023 Dr. Bryce served as Chief Medical Officer at Rain Oncology, a late-stage company developing precision oncology therapeutics, where he built a clinical development team and oversaw multiple clinical studies. From August 2017 to April 2021, Dr. Bryce was Chief Medical & Scientific Officer at Puma Biotechnology, where he led the development strategy for neratinib. Dr. Bryce also served as Senior Vice President, Clinical Research & Development at Puma Biotechnology from June 2012 to July 2017. Earlier in Dr. Bryce’s career, from August 2008 to June 2012, he served as Senior Director of Clinical Science for Onyx Pharmaceuticals, where he oversaw the Phase 3 registrational studies for carfilzomib. Dr. Bryce obtained his Bachelor of Medicine and Bachelor of Surgery (MBChB) Degrees from the University of Edinburgh and is certified in the EU in primary care/general practice and pharmaceutical medicine. He holds numerous postgraduate specialist clinical qualifications including
108
those from the Royal College of Obstetricians & Gynaecologists and the Royal College of Physicians. Dr. Bryce also served as a Surgeon Lieutenant Commander in the Royal Navy.
Dr. Anthony T. Cheung co-founded our Company and has served enGene and enGene Inc. in various capacities since the company’s inception. Dr. Cheung has served as Chief Technology Officer of enGene since August 7, 2023 and in the same capacity for enGene Inc. since July 2018. From February 2013 to July 2018, Dr. Cheung served as the President and Chief Executive Officer of enGene Inc. From May 2011 to February 2013, Dr. Cheung served as Interim Chief Executive Officer. From March 2004 to May 2011, Dr. Cheung served as the Chief Scientific Officer of enGene Inc. From November 1999 to February 2015, Dr. Cheung served as the Corporate Secretary of enGene Inc. From November 1999 to March 2004, Dr. Cheung served as the President and Chief Executive Officer of enGene Inc. Dr. Cheung has co-authored numerous book chapters, review articles and peer-reviewed journals, and is named investor on numerous patents, in the areas of gene therapy and polymer chemistry. Dr. Cheung holds a B.Sc. from University of British Columbia and a Ph.D. in Physiology from the Tulane University School of Medicine.
Dr. James C. Sullivan has served as Chief Scientific Officer at enGene since November 1, 2023 and in the same capacity for enGene Inc. since February 2022. In this role, Dr. Sullivan oversees Research and Preclinical Development. From January 2021 to January 2022, Dr. Sullivan served as Vice President, Head of Pulmonary Discovery at Translate Bio, Inc. Before joining Translate Bio, Dr. Sullivan was Executive Director, Head of Translational Biology at Sana Biotechnology, Inc from August 2019 to January 2021. He also served at Vertex Pharmaceuticals, Inc. from January 2008 to August 2019, where he where he was an IND and/or s/NDA team member for several products, including, for cystic fibrosis, Kalydeco®, Orkambi® and Symdeko®, as well as Incivek® for Hepatitis C. Dr. Sullivan was also an IND team member for multiple assets currently in clinical development to treat alpha-1-antitrypsin (AAT) deficiency and the first-ever CRISPR-based gene editing therapeutic product for the treatment of certain hemoglobinopathies (exagamglogene autotemcel). Dr. Sullivan holds a B.S. in Biology from Boston College, a M.Sc. from University College Dublin, and a Ph.D. from Boston University.
Non-Employee Directors
Jasper Bos, Ph.D., has served as a member of enGene’s Board since August 8, 2023. Mr. Bos, the former Chief Executive Officer of FEAC, is a former Merck executive and joined Forbion Growth as a General Partner in May 2021. Before joining Forbion’s Naarden-based headquarters, Mr. Bos was Senior Vice President and Managing Director at M Ventures, leading the venture capital arm of pharmaceutical company Merck, which he joined in 2009. At M Ventures, he led a team of 21 investment professionals and with a fund size of €400 million invested in over 50 portfolio companies spanning biotech, life sciences tools, and tech companies with investment activities ranging from seed-stage to cross-over and IPO. In addition, as Country Speaker Merck Netherlands, he assumed responsibility and liaised between all Merck activities in the Netherlands. His track record as an investor includes the successful exits of Prexton Therapeutics, Epitherapeutics, Galecto, ObsEva, Translate Bio, and F-Star, and has served on multiple boards of privately-owned biotech companies. He has experience in several operational roles in portfolio companies and played a key role in the creation of multiple successful spin-out companies out of Merck. Mr. Bos holds a Ph.D. in Pharmacy from the University of Groningen, the Netherlands.
Gerry Brunk has served as a member of enGene’s Board since August 8, 2023 and as a member of the board of enGene Inc. since October 2017. He currently serves as chair of the Board’s Compensation Committee. Mr. Brunk is a co-founder and Managing Director at Lumira Ventures, a healthcare venture capital firm. Prior to beginning his venture capital career in 2002, Mr. Brunk was an entrepreneur and co-founder of several venture-capital funded healthcare companies and served as an Engagement Manager in the healthcare practice of The Boston Consulting Group from July 1994 to May 1999. Earlier, Mr. Brunk was a member of the investment banking group of Credit Suisse First Boston in New York from June 1990 to June 1992. Mr. Brunk received an MBA from Stanford University Graduate School of Business and a B.A. from the University of Virginia.
Dr. Richard M. Glickman has served as a member of enGene’s Board since April 24, 2023, and as chair of the board of enGene Inc. since January 2015, where he also served as a member of that board since October 2011. He currently serves as chair of the Board’s Nominating and Corporate Governance Committee. Dr. Glickman was a co-founder of Aurinia Pharma Corp. where he served as its Chairman and CEO since February 2017. He was also the founding and current Chairman of the Board of Essa Pharmaceuticals Inc. Previously, Dr. Glickman was a co-founder of Apsreva Pharmaceuticals where he served as its Chairman and CEO from 2001 to 2006. Dr Glickman is the recipient of numerous awards including the Ernst and Young Entrepreneur of the Year and Canada’s Top 40 under 40. Dr. Glickman holds a B.S. in Microbiology and Immunology from the McGill University.
Lota Zoth has served as a member of enGene’s Board and as chair of the Board’s Audit Committee since December 18, 2023. Ms. Zoth is a Certified Public Accountant and has also served as a member of the board of directors of 89BIO, Inc. (Nasdaq: ETNB), a clinical-stage biopharmaceutical company, since June 2020. She has served as a member of the board of directors and as chair of the audit committee of Lumos Pharma, Inc. (Nasdaq: LUMO) (previously, NewLink Genetics Corporation), a biopharmaceutical company, since November 2012. She has also served as a member of the board of directors and chair of the audit committee of Inovio Pharmaceuticals, Inc. (Nasdaq: INO), a biotechnology company, since January 2018 and August 2018, respectively. Ms. Zoth previously served as a member of the board of directors and chair of the audit committee of Zymeworks Inc. (NYSE: ZYME), a clinical-stage biopharmaceutical company, from November 2016, as chair of the board of directors from September 2019 to January 2022 and as lead director since January 2022, until stepping down from the Zymeworks Inc. board in December 2023. In addition, she previously served
109
as a member of the board of Spark Therapeutics, Inc., a gene therapy platform company, from January 2016 to December 2019, Circassia Pharmaceuticals, plc (LON: CIR), a specialty biopharmaceutical company, from February 2015 to February 2019, Orexigen Therapeutics, Inc., a biopharmaceutical company, from April 2012 to May 2019, Aeras, a nonprofit product development organization, from November 2011 to October 2018, Hyperion Therapeutics, Inc., a commercial-stage biopharmaceutical company, from February 2008 to May 2015 and Ikaria., Inc., a commercial stage biopharmaceutical company, from January 2008 to February 2014. Prior to her retirement, Ms. Zoth most recently served as Senior Vice President and Chief Financial Officer of MedImmune, Inc., a biotechnology company, from April 2004 to July 2007 and as Vice President, Controller & Chief Accounting Officer from August 2002 to April 2004. Ms. Zoth received her B.B.A. from Texas Tech University.
Role of Board in Risk Oversight
One of the key functions of the Board is informed oversight of the Company’s risk management process. The Board does not have a standing risk management committee, but rather administers this oversight function directly through the Board as a whole, as well as through the Board’s various standing committees that address risks inherent in their respective areas of oversight. Specifically, the audit committee of the Board (the “Audit Committee”) is responsible for overseeing the management of risks associated with the Company’s financial reporting, accounting, and auditing matters, and the compensation committee of the Board (the “Compensation Committee”) oversees the management of risks associated with the Company’s compensation policies and programs.
Board Composition and Election of Directors
Board Composition
Our board of directors consists of (i) Jason D. Hanson, the Chief Executive Officer of enGene, (ii) Jasper Bos, (iii) Gerry Brunk (iv) Dr. Richard Glickman and (v) Lota Zoth. Pursuant to the Business Combination Agreement, as amended by the Waiver and Consent Letter, enGene will elect a full slate of directors no later than on or immediately following enGene’s 2024 annual meeting of shareholders. The full slate of directors will consist of seven (7) directors. Under the BCBCA, a director may be removed with or without cause by a resolution passed by a special majority of the votes cast by shareholders present in person or by proxy at a meeting and who are entitled to vote. Following the continuance of enGene under the BCBCA, the director residency requirements in the CBCA have now ceased to apply.
Staggered Board Provisions
Under the Articles, for the purposes of facilitating staggered terms of the directors on the board, the following provisions, or the staggered board provisions, shall apply:
(i)
one-third of the directors (or if the number of directors is not divisible by three, then that number of directors that is one-third of the directors rounded up to the next whole number) shall initially hold office for a three-year term expiring on the third annual general meeting of enGene following the date noted at the end of the Articles;
(ii)
one-third of the directors (or if the number of directors is not divisible by three, then that number of directors that is one-third of the directors rounded up to the next whole number) shall initially hold office for a two-year term expiring on the second annual general meeting of enGene following the date noted at the end of the Articles; and
(iii)
the remaining number of directors shall initially hold office for a one-year term expiring on the first annual general meeting of enGene following the date noted at the end of the Articles.
While the staggered board provisions apply, at every annual general meeting and in every unanimous shareholder resolution in lieu thereof, all of the directors whose terms expire shall cease to hold office immediately before the election or appointment of directors, but are eligible for re-election or re-appointment. The shareholders entitled to vote at the annual general meeting for the election of directors may elect, or in a unanimous resolution appoint, the number of directors required to fill any vacancies created. The directors will hold office for the applicable terms contemplated in the staggered board provisions. Upon resignations of a director, the remaining directors may fill the casual vacancy resulting from such resignation for the remainder of the unexpired term.
Following the expiry of the directors’ initial terms of office as set out above, the directors may be elected in the manner provided in Article 14.2 of the Articles to hold office for three-year terms expiring on the third annual general meeting following their election.
Accordingly, in accordance with the preceding, the initial terms of office for each of the enGene directors are as follows:
(i)
Jason D. Hanson and Jasper Bos have terms expiring on the third annual general meeting following the Closing Date.
(ii)
Gerry Brunk and Richard Glickman have terms expiring at the second annual general meeting following the Closing Date; and
(iii)
Lota Zoth has a term expiring at the first annual meeting following the Closing Date.
110
Upon the expiry of the initial terms described above, the directors will be elected pursuant to Article 14.2 of the Articles to hold office for three-year terms expiring on the third annual general meeting following their election.
Replacement or Removal of Directors
Under the BCBCA and the Articles, a director may be removed with or without cause by a special resolution passed by a special majority (being two-thirds) of the votes cast by shareholders present in person or by proxy at a duly convened meeting and who are entitled to vote.
To the extent directors are elected or appointed to fill casual vacancies or vacancies arising from the removal of directors, in both instances whether by shareholders or directors, the directors shall hold office until the remainder of the unexpired portion of the term of the departed director that was replaced.
Under the Articles, the number of directors of enGene will be set at a minimum of three (3). The directors will be authorized to determine the actual number of directors to be elected from time to time.
Diversity
enGene does not have a formal policy nor measurable objectives (such as a target) regarding board diversity or for the representation of women on their board of directors, management team or executive officers. enGene expects that its priority in the selection of enGene’s Board members will be to identify members who will further the interests of its shareholders through their established record of professional accomplishment, the ability to contribute positively to the collaborative culture among board members, and knowledge of enGene’s business and understanding of the competitive landscape. enGene’s nominating and corporate governance committee and management team are expected to take gender and other diversity representation into consideration as part of their overall recruitment and selection process.
enGene expects to facilitate the representation of women on its board and in executive officer positions by ensuring that diversity considerations are taken into account in senior management, monitoring the level of female representation on the board and in senior management positions, continuing to broaden recruiting efforts to attract and interview qualified female candidates, and committing to retention and training to ensure that enGene’s most talented employees are promoted from within the organization.
Director Term Limits and Other Mechanisms of Board Renewal
enGene’s Board of Directors has not adopted director term limits or other automatic mechanisms of board renewal. Rather than adopting formal term limits, mandatory age-related retirement policies and other mechanisms of board renewal, enGene expects that the nominating and corporate governance committee of its board of directors will develop a skills and competencies matrix for enGene’s Board of Directors as a whole and for individual directors. enGene further expects that the nominating and corporate governance committee will also conduct a process for the assessment of its board of directors, each committee and each director regarding their or its effectiveness and contribution, and will report evaluation results to its board of directors on a regular basis.
Independence of the Members of the Board of Directors
Director Independence
Applicable Nasdaq rules require a majority of a listed company’s board of directors to be comprised of independent directors. Under applicable Nasdaq rules, a director will only qualify as an “independent director” if, in the opinion of the listed company’s board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. Under NI 58-101, a director is considered to be independent if that person is independent within the meaning of National Instrument 52-110 — Audit Committees (“NI 52-110”). Pursuant to NI 52-110, an independent director is a director who is free from any direct or indirect relationship which could, in the view of enGene’s Board of Directors, be reasonably expected to interfere with a director’s independent judgment.
enGene's Board has determined that each of Gerry Brunk, Richard Glickman and Lota Zoth is an independent director under applicable Nasdaq rules and pursuant to NI 52-110.
The independent directors of enGene’s Board of Directors will hold regularly scheduled meetings at which non-independent directors and members of management are not in attendance.
111
Mandate of the Board of Directors
enGene’s Board of Directors is responsible for the stewardship of the Company and providing oversight as to the management of enGene and its affairs, including providing guidance and strategic oversight to management. enGene’s Board has adopted a formal mandate that includes the following:
•
appointing enGene’s Chief Executive Officer;
•
developing the corporate goals and objectives that enGene’s Chief Executive Officer is responsible for meeting and reviewing the performance of enGene’s Chief Executive Officer against such corporate goals and objectives;
•
taking steps to satisfy itself as to the integrity of enGene’s Chief Executive Officer and other executive officers and that enGene’s Chief Executive Officer and other executive officers create a culture of integrity throughout the organization;
•
reviewing and approving enGene’s Code of Conduct (as defined herein) and reviewing and monitoring compliance with the Code of Conduct and enGene’s enterprise risk management processes;
•
adopting a strategic planning process to establish objectives and goals for enGene’s business and reviewing, approving, and modifying, as appropriate, the strategies proposed by management to achieve such objectives and goals; and
•
reviewing and approving material transactions not in the ordinary course of business.
Meetings of Directors
enGene’s Board of Directors may meet together for the conduct of business, adjourn and otherwise regulate their meetings as they think fit, and meetings of the directors held at regular intervals may be held at the place, at the time and on the notice, if any, as the directors may from time to time determine. The independent members of enGene’s Board of Directors will also meet, as required, without the non-independent directors and members of management before or after each regularly scheduled board meeting.
A director who has a material interest in a matter before enGene’s Board of Directors or any committee on which they serve is required to disclose such interest as soon as the director becomes aware of it. In situations where a director has a material interest in a matter to be considered by enGene’s Board of Directors or any committee on which they serve, such director may be required to absent themselves from the meeting while discussions and voting with respect to the matter are taking place. Directors will also be required to comply with the relevant provisions of the BCBCA regarding conflicts of interest.
Board Committees
The standing committees of the board of directors consist of an audit committee, a compensation committee and a nominating and corporate governance committee. The board of directors may from time to time establish other committees.
Our chief executive officer and other executive officers will regularly report to the non-executive directors and the audit, the compensation and the nominating and corporate governance committees to ensure effective and efficient oversight of our activities and to assist in proper risk management and the ongoing evaluation of management controls. We believe that the leadership structure of the board of directors provides appropriate risk oversight of our activities.
Audit Committee
enGene has established an audit committee comprised of independent directors as required by applicable SEC, Nasdaq rules and NI 52-110. At least one member of the audit committee will qualify as an “audit committee financial expert”, as such term is defined the rules and regulation established by the SEC, and all members of the audit committee are “financially literate”, as such term is defined in NI 52-110 (except as may be permitted by NI 52-110). The principal purpose of enGene’s audit committee will be to assist its Board of Directors in its oversight of:
•
the quality and integrity of enGene’s financial statements and related information;
•
the independence, qualifications, appointment and performance of enGene’s external auditor;
•
enGene’s disclosure controls and procedures, internal control over financial reporting and management’s responsibility for assessing and reporting on the effectiveness of such controls;
•
enGene’s compliance with applicable legal and regulatory requirements; and
•
enGene’s enterprise risk management processes.
enGene’s Board of Directors has established a written charter setting forth the purpose, composition, authority and responsibility of its audit committee, consistent with the rules of the Nasdaq, the SEC and NI 52-110.
112
enGene’s audit committee has access to all of its books, records, facilities and personnel and may request any information about enGene as it may deem appropriate. It also has the authority in its sole discretion and at enGene’s expense, to retain and set the compensation of outside legal, accounting or other advisors as necessary to assist in the performance of its duties and responsibilities.
The Audit Committee currently consists of Lota Zoth, Chair, Gerry Brunk and Richard Glickman. The Board has determined that Ms. Zoth qualifies as an audit committee financial expert.
Compensation Committee
Under SEC and the Nasdaq rules, there are heightened independence standards for members of the compensation committee. enGene’s compensation committee members meet this heightened standard and are also independent for purposes of NI 58-101. The functions of the compensation committee include:
•
reviewing and making recommendations with respect to compensation policy and programs and determining and recommending option grants under enGene’s incentive stock plan;
•
reviewing and recommending to enGene’s Board of Directors the manner in which executive compensation should be tied to corporate goals and objectives;
•
reviewing and approving annually the corporate goals and objectives applicable to the compensation of the Chief Executive Officer, evaluating at least annually the Chief Executive Officer’s performance in light of those goals and objectives and determining and approving the Chief Executive Officer’s compensation level based on this evaluation;
•
making recommendations to enGene’s Board of Directors regarding the compensation of all other executive officers;
•
reviewing and making recommendations to enGene’s Board of Directors regarding incentive compensation plans and equity-based plans;
•
authority to oversee enGene’s non-executive incentive compensation plans and equity-based plans, including the discharge of any duties imposed on the compensation committee by any of those plans; and
•
reviewing director compensation for service on enGene’s Board of Directors and board committees at least once a year and to recommending any changes to its Board of Directors.
enGene’s Board of Directors has established a written charter that sets forth the purpose, composition, authority and responsibility of enGene’s compensation committee consistent with the rules of the Nasdaq, the SEC and the guidance of the Canadian Securities Administrators.
The Compensation Committee currently consists of Gerry Brunk, Chair, and Richard Glickman.
Nominating and Corporate Governance Committee
The members of the nominating and governance committee are independent for purposes of NI 58-101.
enGene’s Board of Directors has established a written charter that sets forth the purpose, composition, authority and responsibility of enGene’s nominating and corporate governance committee. The nominating and corporate governance committee’s purpose is to assist enGene’s Board of Directors in:
•
identifying individuals qualified to become members of enGene’s Board of Directors;
•
selecting or recommending that enGene’s Board of Directors select director nominees for the next annual meeting of shareholders and determining the composition of its Board of Directors and its committees;
•
developing and overseeing a process to assess enGene’s Board of Directors, the Chair of the board, the committees of the board, the chairs of the committees, individual directors and management; and
•
developing and implementing enGene’s corporate governance guidelines.
In identifying new candidates for enGene’s Board of Directors, the nominating and corporate governance committee will consider what competencies and skills its board of directors, as a whole, should possess and assess what competencies and skills each existing director possesses, considering enGene’s board of directors as a group, and the personality and other qualities of each director, as these may ultimately determine the boardroom dynamic.
It is the responsibility of the nominating and corporate governance committee to regularly evaluate the overall efficiency of enGene’s Board of Directors and its Chair and all board committees and their chairs. As part of its mandate, the nominating and corporate governance committee will conduct the process for the assessment of enGene’s Board of Directors, each committee and each director regarding their or its effectiveness and contribution, and report evaluation results to its board of directors on a regular basis.
113
The Nominating and Corporate Governance Committee currently consists of Richard Glickman, Chair, and Gerry Brunk.
Code of Business Conduct and Ethics
enGene has established a code of business conduct and ethics (the “Code of Conduct”) applicable to all of enGene’s directors, officers and employees, including its Chief Executive Officer, Chief Financial Officer, controller or principal accounting officer, or other persons performing similar functions, which will be a “code of ethics” as defined in Item 406(b) of Form 10-K promulgated by the SEC and which will be a “code” under NI 58-101. The Code of Conduct sets out the fundamental values and standards of behavior that are expected from enGene’s directors, officers, employees, consultants and contractors with respect to all aspects of its business. The objective of the Code of Conduct is to provide guidelines to promote integrity and deter wrongdoing.