10-Q 1 crnx-20220331.htm 10-Q 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)





 

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

 

For the quarterly period ended March 31, 2022



 

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

 



For the transition period from to

Commission File Number: 001-38583

Crinetics Pharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

26-3744114

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

10222 Barnes Canyon Road, Bldg. #2,

San Diego, California

 

92121

(Address of principal executive offices)

 

(Zip code)



Registrant’s telephone number, including area code: (858) 450-6464

 

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

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.001 per share

 

CRNX

 

Nasdaq Global Select Market

 

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

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

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

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

 

Emerging growth company

 

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

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

As of May 9, 2022, the registrant had 53,505,809 shares of common stock ($0.001 per share par value) outstanding.

 

 

 


 

CRINETICS PHARMACEUTICALS, INC.

QUARTERLY REPORT ON FORM 10-Q

For the Quarter Ended March 31, 2022

TABLE OF CONTENTS

 

 

 

 

Page

 

PART I – FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Condensed Consolidated Financial Statements (unaudited):

 

3

 

 

Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021

 

3

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2022 and 2021

 

4

 

 

Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2022 and 2021

 

5

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and 2021

 

6

 

 

Notes to Condensed Consolidated Financial Statements

 

7

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

20

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

29

Item 4.

 

Controls and Procedures

 

29

 

 

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

30

Item 1A.

 

Risk Factors

 

30

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

30

Item 3.

 

Defaults Upon Senior Securities

 

30

Item 4.

 

Mine Safety Disclosures

 

30

Item 5.

 

Other Information

 

30

Item 6.

 

Exhibits

 

31

 

2


 

PART I — FINANCIAL INFORMATION

Item 1. Condensed Financial Statements

Crinetics Pharmaceuticals, Inc.

Condensed Consolidated Balance Sheets

(In thousands)

 

 

 

March 31,

 

 

December 31,

 

 

 

2022

 

 

2021

 

 

 

(Unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

145,548

 

 

$

200,695

 

Investment securities

 

 

174,177

 

 

 

133,012

 

Prepaid expenses and other current assets

 

 

8,524

 

 

 

11,013

 

Total current assets

 

 

328,249

 

 

 

344,720

 

Property and equipment, net

 

 

2,672

 

 

 

2,825

 

Operating lease right-of-use asset

 

 

1,797

 

 

 

1,892

 

Derivative asset

 

 

68

 

 

 

68

 

Investment in Radionetics

 

 

 

 

 

1,010

 

Restricted cash

 

 

500

 

 

 

500

 

Total assets

 

$

333,286

 

 

$

351,015

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

12,134

 

 

$

8,468

 

Accrued compensation and related expenses

 

 

4,452

 

 

 

6,588

 

Deferred revenue

 

 

2,706

 

 

 

 

Other current liabilities

 

 

965

 

 

 

939

 

Total current liabilities

 

 

20,257

 

 

 

15,995

 

Operating lease liability, non-current

 

 

2,822

 

 

 

3,074

 

Deferred revenue, non-current

 

 

7,163

 

 

 

 

Unvested stock liability

 

 

 

 

 

2

 

Total liabilities

 

 

30,242

 

 

 

19,071

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Preferred stock, $0.001 par; 10,000 shares authorized; no shares issued
     or outstanding at March 31, 2022 or at December 31, 2021

 

 

 

 

 

 

Common stock and paid-in capital, $0.001 par; 200,000 shares authorized;
    
47,801 shares issued and outstanding at March 31, 2022;
    
47,598 shares issued and 47,597 shares outstanding at December 31, 2021

 

 

615,118

 

 

 

607,581

 

Accumulated other comprehensive income

 

 

(2,192

)

 

 

(382

)

Accumulated deficit

 

 

(309,882

)

 

 

(275,255

)

Total stockholders’ equity

 

 

303,044

 

 

 

331,944

 

Total liabilities and stockholders’ equity

 

$

333,286

 

 

$

351,015

 

 

See the accompanying notes to these unaudited condensed consolidated financial statements.

3


 

Crinetics Pharmaceuticals, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except per share data)

(Unaudited)

 

 

 

Three months ended March 31,

 

 

 

 

2022

 

 

2021

 

 

License revenues

 

$

3,131

 

 

$

 

 

Operating expenses:

 

 

 

 

 

 

 

Research and development

 

 

28,252

 

 

 

17,584

 

 

General and administrative

 

 

8,706

 

 

 

5,334

 

 

Total operating expenses

 

 

36,958

 

 

 

22,918

 

 

Loss from operations

 

 

(33,827

)

 

 

(22,918

)

 

Other income (expense):

 

 

 

 

 

 

 

Interest income

 

 

193

 

 

 

30

 

 

Other income (expense), net

 

 

17

 

 

 

(13

)

 

Total other income (expense), net

 

 

210

 

 

 

17

 

 

Loss before equity method investment

 

 

(33,617

)

 

 

(22,901

)

 

Loss on equity method investment

 

 

(1,010

)

 

 

 

 

Net loss

 

 

(34,627

)

 

 

(22,901

)

 

Net loss per share:

 

 

 

 

 

 

 

Net loss per share - basic and diluted

 

$

(0.73

)

 

$

(0.69

)

 

Weighted average shares - basic and diluted

 

 

47,712

 

 

 

33,012

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

Unrealized loss on investment securities

 

 

(1,810

)

 

 

(6

)

 

Comprehensive loss

 

$

(36,437

)

 

$

(22,907

)

 

 

See the accompanying notes to these unaudited condensed consolidated financial statements.

4


 

Crinetics Pharmaceuticals, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(In thousands)

(Unaudited)

 

 

Common Stock

 

 

Common stock
and Paid-In

 

 

Accumulated
Other
Comprehensive

 

 

Accumulated

 

 

Total
Stockholders’

 

 

 

Shares

 

 

Capital

 

 

Income

 

 

Deficit

 

 

Equity

 

Balance at January 1, 2022

 

 

47,597

 

 

$

607,581

 

 

$

(382

)

 

$

(275,255

)

 

$

331,944

 

Vesting of shares subject to repurchase

 

 

1

 

 

 

2

 

 

 

 

 

 

 

 

 

2

 

Exercise of stock options

 

 

203

 

 

 

1,780

 

 

 

 

 

 

 

 

 

1,780

 

Stock-based compensation

 

 

 

 

 

5,755

 

 

 

 

 

 

 

 

 

5,755

 

Comprehensive loss

 

 

 

 

 

 

 

 

(1,810

)

 

 

 

 

 

(1,810

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(34,627

)

 

 

(34,627

)

Balance at March 31, 2022

 

 

47,801

 

 

$

615,118

 

 

$

(2,192

)

 

$

(309,882

)

 

$

303,044

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2021

 

 

33,001

 

 

$

336,508

 

 

$

25

 

 

$

(167,614

)

 

$

168,919

 

Vesting of shares subject to repurchase

 

 

3

 

 

 

5

 

 

 

 

 

 

 

 

 

5

 

Exercise of stock options

 

 

13

 

 

 

57

 

 

 

 

 

 

 

 

 

57

 

Stock-based compensation

 

 

 

 

 

3,406

 

 

 

 

 

 

 

 

 

3,406

 

Comprehensive loss

 

 

 

 

 

 

 

 

(6

)

 

 

 

 

 

(6

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(22,901

)

 

 

(22,901

)

Balance at March 31, 2021

 

 

33,017

 

 

$

339,976

 

 

$

19

 

 

$

(190,515

)

 

$

149,480

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See the accompanying notes to these unaudited condensed consolidated financial statements.

5


 

Crinetics Pharmaceuticals, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2022

 

 

2021

 

Operating activities:

 

 

 

 

 

 

Net loss

 

$

(34,627

)

 

$

(22,901

)

Reconciliation of net loss to net cash used in operating activities:

 

 

 

 

 

 

Stock-based compensation

 

 

5,755

 

 

 

3,406

 

Depreciation and amortization

 

 

240

 

 

 

224

 

Noncash lease expense

 

 

95

 

 

 

80

 

Accretion of purchase discounts and amortization
   of premiums on investment securities, net

 

 

322

 

 

 

83

 

Loss on equity method investment

 

 

1,010

 

 

 

 

Increase (decrease) in cash resulting from changes in:

 

 

 

 

 

 

Prepaid expenses and other assets

 

 

2,489

 

 

 

(487

)

Accounts payable and accrued expenses

 

 

1,530

 

 

 

(271

)

Deferred revenue

 

 

9,869

 

 

 

 

Operating lease liability

 

 

(226

)

 

 

(201

)

Net cash used in operating activities

 

 

(13,543

)

 

 

(20,067

)

Investing activities:

 

 

 

 

 

 

Purchases of investment securities

 

 

(55,017

)

 

 

(2,535

)

Maturities of investment securities

 

 

11,720

 

 

 

35,153

 

Purchases of property and equipment

 

 

(87

)

 

 

(116

)

Net cash (used in) provided by investing activities

 

 

(43,384

)

 

 

32,502

 

Financing activities:

 

 

 

 

 

 

Proceeds from exercise of stock options

 

 

1,780

 

 

 

57

 

Net cash provided by financing activities

 

 

1,780

 

 

 

57

 

Net change in cash, cash equivalents and restricted cash

 

 

(55,147

)

 

 

12,492

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

201,195

 

 

 

93,587

 

Cash, cash equivalents and restricted cash at end of period

 

$

146,048

 

 

$

106,079

 

Components of cash, cash equivalents and restricted cash:

 

 

 

 

 

 

Cash and cash equivalents

 

$

145,548

 

 

$

105,579

 

Restricted cash

 

 

500

 

 

 

500

 

Cash, cash equivalents and restricted cash at end of period

 

$

146,048

 

 

$

106,079

 

Noncash investing and financing activities:

 

 

 

 

 

 

Change in unvested stock liability

 

$

2

 

 

$

5

 

Amounts accrued for purchases of property and equipment

 

$

 

 

$

21

 

 

See the accompanying notes to these unaudited condensed consolidated financial statements.

 

6


 

Crinetics Pharmaceuticals, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

1. ORGANIZATION AND BASIS OF PRESENTATION

Description of Business

Crinetics Pharmaceuticals, Inc. (the “Company”) is a clinical-stage pharmaceutical company incorporated in Delaware on November 18, 2008 and based in San Diego, California. The Company is focused on the discovery, development and commercialization of novel therapeutics for rare endocrine diseases and endocrine-related tumors. In January 2017, the Company established a wholly-owned Australian subsidiary, Crinetics Australia Pty Ltd (“CAPL”), in order to conduct various preclinical and clinical activities for its development candidates.

Unaudited Interim Financial Information

The accompanying interim condensed consolidated balance sheet as of March 31, 2022, the condensed consolidated statements of operations and comprehensive loss for the three months ended March 31, 2022 and 2021, the condensed consolidated statements of stockholders’ equity for the three months ended March 31, 2022 and 2021, and the condensed consolidated statements of cash flows for the three months ended March 31, 2022 and 2021, and the related disclosures are unaudited. In management’s opinion, the unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of March 31, 2022 and the results of its operations and cash flows for the three months ended March 31, 2022 and 2021 in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The results for the three months ended March 31, 2022 are not necessarily indicative of the results expected for the full fiscal year or any other interim period.

Principles of Consolidation and Foreign Currency Transactions

The condensed consolidated financial statements include the accounts of the Company and CAPL. All intercompany accounts and transactions have been eliminated in consolidation. The functional currency of both the Company and CAPL is the U.S. dollar. Assets and liabilities that are not denominated in the functional currency are remeasured into U.S. dollars at foreign currency exchange rates in effect at the balance sheet date except for nonmonetary assets, which are remeasured at historical foreign currency exchange rates in effect at the date of transaction. Net realized and unrealized gains and losses from foreign currency transactions and remeasurement are reported in other income (expense), in the condensed consolidated statements of operations and were not material for all periods presented.

Segment Reporting

Operating segments are identified as components of an enterprise about which discrete financial information is available for evaluation by the chief operating decision-maker in making decisions regarding resource allocation and assessing performance. The Company views its operations and manages its business in one operating segment.

Liquidity

From inception, the Company has devoted substantially all of its efforts to drug discovery and development and conducting preclinical studies and clinical trials. The Company has a limited operating history and the sales and income potential of the Company’s business and market are unproven. Successful transition to attaining profitable operations is dependent upon achieving a level of revenues adequate to support the Company’s cost structure. The Company has experienced net losses and negative cash flows from operating activities since its inception and has an accumulated deficit of $309.9 million as of March 31, 2022.

As of March 31, 2022, the Company had $319.7 million in unrestricted cash, cash equivalents and investment securities, which the Company believes is sufficient to meet its funding requirements for at least the next 12 months. The Company also raised an additional $117.3 million through an underwritten follow-on offering of 5,625,563 shares of its common stock in April 2022 (see Note 11).

The Company expects to continue to incur net losses for the foreseeable future and believes it will need to raise substantial additional capital to accomplish its business plan over the next several years. The Company plans to continue to fund its losses from operations and capital funding needs through a combination of equity offerings, debt financings or other sources, including potential collaborations, licenses and other similar arrangements. If the Company is not able to secure adequate additional funding, the Company may be forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible, or suspend or curtail planned programs. Any of these actions could materially harm the Company’s business, results of operations and future prospects. There can be no assurance as to the availability or terms upon which such financing and capital might be available in the future.

COVID-19

7


 

The COVID-19 pandemic has caused significant business disruption around the globe. The extent of the impact of COVID-19 on the Company's operational and financial performance will depend on certain developments, including the duration of the pandemic and the impact on the Company's clinical trials, employees and vendors. To the extent possible, and consistent with applicable guidance from federal, state and local authorities, the Company is conducting business as usual, with necessary or advisable modifications to employee travel. The Company will continue to actively monitor the evolving situation related to COVID-19 and may take further actions that alter its operations, including those that may be required by federal, state or local authorities, or that the Company determines are in the best interests of its employees and other third parties with whom the Company does business. While the pandemic has not yet had a material effect on the Company’s financial results, the degree to which COVID-19, including the impact of new variants of the virus that causes COVID-19, may impact the Company's future financial condition or results of operations is uncertain. A prolonged outbreak could have a material adverse impact on financial results and business operations of the Company, including the timing and ability of Company to complete certain clinical trials and other efforts required to advance the development of its drug candidates and raise additional capital.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The Company’s condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of the Company’s condensed consolidated financial statements requires it to make estimates and assumptions that impact the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in the Company’s condensed consolidated financial statements and accompanying notes. The most significant estimates in the Company’s condensed consolidated financial statements relate to accrual of research and development expenses, valuation of stock-based awards, fair values of financial instruments, revenue recognition and equity method investment. Although these estimates are based on the Company’s knowledge of current events and actions it may undertake in the future, actual results may ultimately materially differ from these estimates and assumptions.

Equity Method Investment

The Company first analyzes its investment in another entity to determine if the entity is a variable interest entity (“VIE”) and if so, whether the Company is the primary beneficiary requiring consolidation. An entity is considered a VIE if (1) the entity does not have enough equity to finance its own activities without additional support, (2) the entity’s at-risk equity holders lack the characteristics of a controlling financial interest, or (3) the entity is structured with non-substantive voting rights. VIEs are consolidated by the primary beneficiary, which is the entity that has both the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits from the VIE that potentially could be significant to the VIE. Variable interests in a VIE can be contractual, ownership, or other financial interests. The Company re-assesses its investment upon reconsideration events to determine whether the Company is the primary beneficiary of the VIE, in which case the Company would consolidate the VIE.

If it has been determined that the Company is not the primary beneficiary or does not have control but does have the ability to exercise significant influence over the VIE, the Company accounts for the unconsolidated investment under the equity method of accounting.

As discussed in Note 8, in October 2021, the Company, together with 5AM Ventures ("5AM") and Frazier Healthcare Partners ("Frazier"), announced the formation of Radionetics Oncology, Inc. ("Radionetics"). Radionetics aims to develop a deep pipeline of novel, targeted, nonpeptide radiopharmaceuticals for the treatment of a broad range of oncology indications. Radionetics is considered to be a VIE. The Company maintains an equity interest in Radionetics and accounts for its investment in Radionetics under the equity method of accounting. The Company records its share of Radionetics income (loss) outside of operations in the statements of operations and comprehensive loss on a quarterly lag. Since the Company’s investment in Radionetics was obtained on October 15, 2021, the Company recorded its share of income (loss) beginning in the first quarter of 2022. As of March 31, 2022, the Company's equity method investment in Radionetics was written down to zero.

Fair Value Measurements

The accounting guidance defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or non-recurring basis. Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the accounting guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1: Observable inputs such as quoted prices in active markets.

Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.

8


 

Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

The carrying amounts of the Company’s current financial assets, restricted cash and current financial liabilities are considered to be representative of their respective fair values because of the short-term nature of those instruments. The Company recorded the derivative asset (see Note 8) and investment securities (see Note 3) at fair value.

Cash, Cash Equivalents and Restricted Cash

Cash and cash equivalents include cash held in readily available checking and money market accounts, as well as short-term debt securities with maturities of three months or less when purchased. Restricted cash represents cash held as collateral for the Company’s facility lease and is reported as a long-term asset in the accompanying condensed consolidated balance sheets.

 

Investment Securities

All investments have been classified as “available-for-sale” and are carried at fair value as determined based upon quoted market prices or pricing models for similar securities at period end. Investments with contractual maturities less than 12 months at the balance sheet date are considered short-term investments. Investments with contractual maturities beyond one year are also classified as short-term due to the Company’s ability to liquidate the investment for use in operations within the next 12 months.

Realized gains and losses on investment securities are included in earnings and are derived using the specific identification method for determining the cost of securities sold. The Company has not realized any significant gains or losses on sales of available-for-sale investment securities during any of the periods presented. As all the Company’s investment holdings are in the form of debt securities, unrealized gains and losses that are determined to be temporary in nature are reported as a component of accumulated other comprehensive income (loss). A decline in the fair value of any security below cost that is deemed other than temporary results in a charge to earnings and the establishment of a new cost basis for the security. Interest income is recognized when earned and is included in investment income, as are the amortization of purchase premiums and accretion of purchase discounts on investment securities.

Derivative Asset

Derivatives are recorded at fair value and changes in fair value are recorded through the statements of operations and comprehensive loss each period. The Company has a single derivative instrument, a warrant ("Radionetics Warrant") received on October 15, 2021, to purchase the greater of 3,407,285 additional shares of common stock or the number of additional shares of common stock that would allow the Company to maintain an aggregate equity interest of 22% of the fully diluted capitalization of Radionetics. The Company records the Radionetics Warrant as long-term on the balance sheets due to the lack of marketability, such that it is not expected to be available for current operations. Changes in fair value of the Radionetics Warrant are recognized in other income (expense) in the accompanying condensed consolidated statements of operations and comprehensive loss.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents and investment securities. The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to significant risk on its cash balances due to the financial position of the depository institution in which those deposits are held. Additionally, the Company has established guidelines regarding approved investments and maturities of investments, which are designed to maintain safety and liquidity.

Leases

The Company determines if an arrangement is a lease at the inception of the arrangement. Leases with a term longer than 12 months that are determined to be operating leases are included in operating lease right-of-use assets, other current liabilities and noncurrent operating lease liabilities in the condensed consolidated balance sheets. The Company accounts for each separate lease and non-lease component as a single lease component. When the Company’s leases do not provide an implicit rate, an incremental borrowing rate is used based on the information available at commencement dates in determining the present value of lease payments. The incremental borrowing rate is the rate of interest that the Company would expect to pay to borrow over a similar term, and on a collateralized basis, an amount equal to the lease payments in a similar economic environment. The Company’s lease terms may include options to extend or terminate the lease when the Company is reasonably certain that it will exercise such options. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Lease agreements may contain variable costs such as common area maintenance, insurance, taxes or other costs. Such variable lease costs are expensed as incurred. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

Revenue Recognition

The Company has generated revenue from licensing arrangements. The Company recognizes revenues when, or as, the promised goods or services are transferred to customers in an amount that reflects the consideration to which it expects to be entitled in

9


 

exchange for those services. To determine revenue recognition for arrangements, the Company performs the following five steps: (1) identify the contract(s) with a customer; (2) identify the performance obligation(s) in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligation(s) in the contract; and (5) recognize revenue when (or as) the performance obligation(s) are satisfied. At contract inception, the Company assesses the goods or services promised within each contract, assesses whether each promised good or service is distinct and identifies those that are performance obligations. The Company recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when, or as, the performance obligation is satisfied.

The Company has entered into licensing and collaboration agreements that mainly include the following: (i) upfront considerations; (ii) payments associated with achieving certain milestones; and (iii) royalties based on specified percentages of net product sales, if any. At the initiation of an agreement, the Company analyzes each unit of account within the contract to determine if the counterparty is a customer in the context of the unit of account.

The Company considers a variety of factors in determining the appropriate estimates and assumptions under the arrangements, such as whether the elements are distinct performance obligations, whether there are observable standalone prices, and whether the license is functional or symbolic. The Company evaluates each performance obligation to determine if it can be satisfied and recognized as revenue at a point in time or over time.

At the inception of arrangements that include variable consideration, the Company uses judgment to estimate the amount of variable consideration to include in the transaction price using the most likely method. If it is probable that a significant revenue reversal will not occur, the estimated amount is included in the transaction price. Milestone payments that are not within the Company's or the licensee’s control, such as regulatory approvals, are not included in the transaction price until those approvals are received. At the end of each reporting period, the Company re-evaluates estimated variable consideration included in the transaction price and any related constraint and, as necessary, adjusts the estimate of the overall transaction price. Any adjustments will be recorded on a cumulative catch-up basis, which would affect revenues and earnings in the period of adjustment.

The Company develops estimates of the standalone selling price for each distinct performance obligation. Variable consideration that relates specifically to efforts to satisfy specific performance obligations is allocated entirely to those performance obligations. Other components of the transaction price are allocated based on the relative standalone selling price, over which management has applied significant judgment. The Company develops assumptions under the adjusted market based approach that require judgment to determine the standalone selling price for license-related performance obligations, which may include forecasted revenues, development timelines, discount rates and probabilities of success. the Company estimates the standalone selling price for the data exchange performance obligation (see Note 8) by forecasting the expected costs of satisfying a performance obligation plus a predetermined margin.

In the case of a license that is a distinct performance obligation, the Company recognizes revenue allocated to the license from non-refundable, up-front fees at the point in time when the license is transferred to the licensee and the licensee can use and benefit from the license. For licenses that are bundled with other distinct or combined obligations, the Company uses judgment to assess the nature of the performance obligation to determine whether the performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue. If the performance obligation is satisfied over time, the Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.

The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. Revenue is recorded proportionally as costs are incurred. The Company has used the cost-to-cost measure of progress because it best depicts the transfer of control to the customer which occurs as the Company incurs costs. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation, which is considered an input method. The Company uses judgment to estimate the total cost of these over time performance obligations, which include subcontractors’ costs, labor, materials, other direct costs and an allocation of indirect costs. The Company evaluates these cost estimates and the progress each reporting period and, as necessary, the Company adjusts the measure of progress and related revenue recognition.

Sales-based milestones and royalties are recognized at the later of when the subsequent sale or usage occurs or the performance obligation for which some or all of the sales-based milestones and royalties have been allocated to has been satisfied or partially satisfied.

Research and Development Expenses

Research and development (“R&D”) expenses consist primarily of salaries, payroll taxes, employee benefits and stock-based compensation for individuals involved in R&D efforts, as well as consulting expenses, third-party R&D expenses, laboratory supplies, clinical materials and overhead, including facilities and depreciation costs, offset by the Australian Tax Incentive discussed below. R&D expenses are charged to expense as incurred. Payments made prior to the receipt of goods or services to be used in R&D are capitalized until the goods or services are received.

10


 

Costs incurred under contracts with contract research organizations that conduct and manage the Company’s clinical trials are also included in research and development expenses. The financial terms and activities of these agreements vary from contract to contract and may result in uneven expense levels. Generally, these agreements set forth activities that drive the recording of expenses such as start-up and initiation activities, enrollment and treatment of patients, or the completion of other clinical trial activities. Expenses related to clinical trials are accrued based on estimates and/or representations from service providers regarding work performed, including actual level of patient enrollment, completion of patient studies and progress of the clinical trials. Other incidental costs related to patient enrollment or treatment are accrued when reasonably certain. If the amounts that the Company is obligated to pay under its clinical trial agreements are modified (for instance, as a result of changes in the clinical trial protocol or scope of work to be performed), the Company adjusts its accruals accordingly on a prospective basis. Revisions to contractual payment obligations are charged to expense in the period in which the facts that give rise to the revision become reasonably certain.

Accrued R&D expenses were $7.4 million at March 31, 2022 and $4.2 million at December 31, 2021 and are included in accounts payable and accrued expenses in the condensed consolidated balance sheets.

Australian Tax Incentive

CAPL is eligible to obtain a cash refund from the Australian Taxation Office for eligible R&D expenditures under the Australian R&D Tax Incentive Program (the “Australian Tax Incentive”). The Australian Tax Incentive is recognized as a reduction to R&D expense when there is reasonable assurance that the Australian Tax Incentive will be received, the relevant expenditure has been incurred, and the amount can be reliably measured.

The Company recognized a reduction to R&D expense of $146,000 and $55,000 for the three months ended March 31, 2022 and 2021, respectively.

Stock-Based Compensation

Stock-based compensation expense represents the estimated grant date fair value of the Company’s equity awards, consisting of stock options, restricted stock units and shares issued under the Company’s Employee Stock Purchase Plan, recognized over the requisite service period of such awards (usually the vesting period) on a straight-line basis. The Company estimates the fair value of all stock option grants using the Black-Scholes option pricing model and recognizes forfeitures as they occur. Restricted stock units are valued using the grant date stock price. For stock awards for which vesting is subject to performance-based milestones, the expense is recorded over the remaining service period after the point when the achievement of the milestone is probable, or the performance condition has been achieved.

Comprehensive Loss

Comprehensive loss is comprised of the Company’s net loss and the unrealized gain or loss on the Company’s investment securities held for all periods presented.

Net Loss Per Share

Basic net loss per share is computed by dividing the net loss by the weighted-average number of common shares outstanding for the period, without consideration for potentially dilutive securities. Diluted net loss per share is computed by dividing the net loss by the weighted-average number of shares of common stock and dilutive common stock equivalents outstanding for the period determined using the treasury-stock and if-converted methods. Dilutive common stock equivalents are comprised of common stock subject to repurchase and stock options outstanding under the Company’s stock option plan. For all periods presented, there is no difference in the number of shares used to calculate basic and diluted shares outstanding as inclusion of the potentially dilutive securities would be antidilutive.

Potentially dilutive securities not included in the calculation of diluted net loss per share because to do so would be anti-dilutive are shown below in common stock equivalent shares (in thousands):

 

 

 

As of March 31, 2022

 

 

 

2022

 

 

2021

 

Common stock awards

 

 

8,279

 

 

 

5,996

 

Unvested common stock subject to repurchase

 

 

 

 

 

12

 

Total

 

 

8,279

 

 

 

6,008

 

Recently Adopted Accounting Pronouncements

ASU 2021-04

In May 2021, the Financial Accounting Standards Board (“FASB") issued Accounting Standards Update (“ASU") 2021-04, Earnings Per Share ("Topic 260"), Debt-Modifications and Extinguishments ("Subtopic 470-50"), Compensation-Stock Compensation ("Topic 718"), and Derivatives and Hedging-Contracts in Entity’s Own Equity ("Subtopic 815-40"): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options, which intends to clarify and reduce diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants)

11


 

that remain equity classified after modification or exchange. The Company adopted ASU 2021-04 as of January 1, 2022, which did not have an impact on its condensed consolidated financial statements.

Recent Accounting Pronouncements

ASU 2016-13

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“Topic 326”), subsequently amended by various standard updates. Topic 326 amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP, however Topic 326 will require that credit losses be presented as an allowance rather than as a write-down. This ASU update affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. This update is effective for the Company for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is currently evaluating the impact of the pending adoption of this new standard on its condensed consolidated financial statements.

3. INVESTMENT SECURITIES

The Company reports its available-for-sale investment securities at their estimated fair values based on quoted market prices for identical or similar instruments. The following is a summary of the available-for-sale investment securities held by the Company as of March 31, 2022 and December 31, 2021 (in thousands):

 

 

 

As of March 31, 2022

 

 

 

Amortized
Cost

 

 

Gross
Unrealized
Gains

 

 

Gross
Unrealized
Losses

 

 

Fair
Market
Value

 

Available-for-sale investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency obligations

 

$

99,095

 

 

$

 

 

$

(971

)

 

$

98,124

 

Certificates of deposit

 

 

4,507

 

 

 

 

 

 

(42

)

 

 

4,465

 

Corporate debt securities

 

 

70,355

 

 

 

 

 

 

(1,172

)

 

 

69,183

 

Asset-backed securities

 

 

2,412

 

 

 

 

 

 

(7

)

 

 

2,405

 

Total

 

$

176,369

 

 

$

 

 

$

(2,192

)

 

$

174,177

 

 

 

 

As of December 31, 2021

 

 

 

Amortized
Cost

 

 

Gross
Unrealized
Gains

 

 

Gross
Unrealized
Losses

 

 

Fair
Market
Value

 

Available-for-sale investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency obligations

 

$

54,637

 

 

$

 

 

$

(180

)

 

$

54,457

 

Certificates of deposit

 

 

5,735

 

 

 

1

 

 

 

(4

)

 

 

5,732

 

Corporate debt securities

 

 

70,600

 

 

 

6

 

 

 

(204

)

 

 

70,402

 

Asset-backed securities

 

 

2,421

 

 

 

 

 

 

 

 

 

2,421

 

Total

 

$

133,393

 

 

$

7

 

 

$

(388

)

 

$

133,012

 

 

As of March 31, 2022 and December 31, 2021, available-for-sale investment securities by contractual maturity were as follows (in thousands):

 

 

 

As of March 31, 2022

 

As of December 31, 2021

 

 

 

Amortized
Cost

 

 

Fair
Market
Value

 

Amortized
Cost

 

 

Fair
Market
Value

 

Available-for-sale investment securities:

 

 

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

90,230

 

 

$

89,810

 

$

31,101

 

 

$

31,078

 

Due after one year through five years

 

 

86,139

 

 

 

84,367

 

 

102,292

 

 

 

101,934

 

Total

 

$

176,369

 

 

$

174,177

 

$

133,393

 

 

$

133,012

 

 

The Company reviewed its investment holdings as of March 31, 2022 and December 31, 2021 and determined that its unrealized losses were not considered to be other-than-temporary based upon (i) the financial strength of the issuing institution and (ii) the fact

12


 

that no securities have been in an unrealized loss position for twelve months or more. As such, the Company has not recognized any impairment in its financial statements related to its available-for-sale investment securities.

4. FAIR VALUE MEASUREMENTS

Investment Securities

The Company holds investment securities that consist of highly liquid, investment grade debt securities. The Company determines the fair value of its investment securities based upon one or more valuations reported by its investment accounting and reporting service provider. The investment service provider values the securities using a hierarchical security pricing model that relies primarily on valuations provided by an industry-recognized valuation service. Such valuations may be based on trade prices in active markets for identical assets or liabilities (Level 1 inputs) or valuation models using inputs that are observable either directly or indirectly (Level 2 inputs), such as quoted prices for similar assets or liabilities, yield curves, volatility factors, credit spreads, default rates, loss severity, current market and contractual prices for the underlying instruments or debt, and broker and dealer quotes, as well as other relevant economic measures.

Derivative Asset

On October 15, 2021, the Company received the Radionetics Warrant to purchase the greater of 3,407,285 additional shares of common stock or the number of additional shares of common stock that would all the Company to maintain an aggregate equity interest of 22% of the fully diluted capitalization of Radionetics. The valuation method and primary inputs used in valuing the Radionetics Warrant are discussed in Note 8. Such valuation is based on valuations provided by a third-party valuation specialist using unobservable inputs due to little to no market data (Level 3 inputs). There were no material changes in the inputs or total the valuation of the Radionetics Warrant between October 15, 2021 and subsequent reporting periods.

Financial assets measured at fair value on a recurring basis as of March 31, 2022 and December 31, 2021 were as follows (in thousands):

 

 

 

As of March 31, 2022

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency obligations

 

$

86,840

 

 

$

11,284

 

 

$

 

 

$

98,124

 

Certificates of deposit