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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

OR

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

Commission File Number 001-39782

 

4D Molecular Therapeutics, Inc.

(Exact name of Registrant as specified in its Charter)

 

 

Delaware

47-3506994

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

5858 Horton Street #455

Emeryville, CA

94608

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (510) 505-2680

 

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 $0.0001 per share

 

FDMT

 

The Nasdaq Global Select Market

 

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

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

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

 

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 12, 2022, there were 32,299,784 shares of 4D Molecular Therapeutics, Inc.'s common stock outstanding.

 

 

 


 

 

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

4

Item 1.

Condensed Unaudited Financial Statements

4

 

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

4

 

Condensed Statements of Operations for the Three Months Ended March 31, 2022 and 2021

5

 

Condensed Statements of Comprehensive Loss for the Three Months Ended March 31, 2022 and 2021

6

 

Condensed Statements of Stockholders’ Equity for the Three Months Ended March 31, 2022 and 2021

7

 

Condensed Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021

8

 

Notes to Unaudited Condensed Financial Statements

9

Item 2.

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

30

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

38

Item 4.

Controls and Procedures

39

 

 

 

PART II.

OTHER INFORMATION

40

Item 1.

Legal Proceedings

40

Item 1A.

Risk Factors

40

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

103

Item 3.

Default Upon Senior Securities

103

Item 4.

Mine Safety Disclosures

103

Item 5.

Other Information

103

Item 6.

Exhibits

104

Signatures

 

105

 

 

1


 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains forward-looking statements concerning our business, operations and financial performance and condition, as well as our plans, objectives and expectations for our business operations and financial performance and condition. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “aim,” “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “could,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective,” “plan,” “predict,” “potential,” “positioned,” “seek,” “should,” “target,” “will,” “would” and other similar expressions that are predictions of or indicate future events and future trends, or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:

 

the success, cost and timing of our development activities, preclinical studies and clinical trials, including our clinical trials for 4D-310, 4D-150, 4D-125, 4D-110 and 4D-710;
the timing of Investigational New Drug Application ("IND") enabling studies and results from such studies;
the timing and success of lead optimization for our product candidates in lead optimization;
the translation of our preclinical results and data into future clinical trials in humans;
the timing of any manufacturing runs for materials to be used in patient trials;
the number, size and design of our planned clinical trials, and what regulatory authorities may require to obtain marketing approval;
the potential effects of the COVID-19 pandemic on our preclinical and clinical programs and business;
the timing or likelihood of regulatory filings and approvals; our ability to obtain and maintain regulatory approval of our product candidates, and any related restrictions, limitations and/or warnings in the label of any approved product candidate;
our ability to obtain funding for our operations, including funding necessary to develop and commercialize our product candidates;
the rate and degree of market acceptance of our product candidates, if approved;
the success of competing products or platform technologies that are or may become available;
our plans and ability to establish sales, marketing and distribution infrastructure to commercialize any product candidates for which we obtain approval;
future agreements with third parties in connection with the commercialization of our product candidates;
the size and growth potential of the markets for our product candidates, if approved for commercial use, and our ability to serve those markets;
existing regulations and regulatory developments in the United States and foreign countries;
the expected potential benefits of strategic collaboration agreements, including our relationships with uniQure and Cystic Fibrosis Foundation ("CFF"), and our ability to attract collaborators with development, regulatory and commercialization expertise;
the scope of protection we are able to establish and maintain for intellectual property rights covering our product candidates and technology;
potential claims relating to our intellectual property and third-party intellectual property;
our ability to contract with third-party suppliers and manufacturers and their ability to perform adequately;

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the pricing and reimbursement of our product candidates, if approved;
our ability to attract and retain key managerial, scientific and medical personnel;
the accuracy of our estimates regarding expenses, future revenue, capital requirements and needs for additional financing;
our financial performance; and
our expectations regarding the period during which we qualify as an emerging growth company under the JOBS Act.

These forward-looking statements are based on management’s current expectations, estimates, forecasts and projections about our business and the industry in which we operate and management’s beliefs and assumptions and are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are in some cases beyond our control. As a result, any or all of our forward-looking statements in this Quarterly Report on Form 10-Q may turn out to be inaccurate. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Potential investors are urged to consider these factors carefully in evaluating the forward-looking statements. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future. You should, however, review the factors and risks we describe in the reports we will file from time to time with the SEC after the date of this Quarterly Report on Form 10-Q.

 

 

3


 

4D Molecular Therapeutics, Inc.

Condensed Balance Sheets (Unaudited)

(In thousands, except share and per share amounts)

 

 

 

 

 

 

 

 

 

 

March 31,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

75,970

 

 

$

153,001

 

Marketable securities

 

 

160,183

 

 

 

94,776

 

Accounts receivable

 

 

 

 

 

47

 

Prepaid expenses and other current assets (includes $0 and $285 at March 31, 2022 and December 31, 2021, respectively, attributable to related parties)

 

 

6,894

 

 

 

8,456

 

Total current assets

 

 

243,047

 

 

 

256,280

 

Marketable securities, long-term

 

 

48,362

 

 

 

67,652

 

Property and equipment, net

 

 

18,456

 

 

 

14,391

 

Operating lease right-of-use assets, net

 

 

14,186

 

 

 

14,562

 

Other assets

 

 

875

 

 

 

602

 

Total assets

 

$

324,926

 

 

$

353,487

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Accounts payable

 

$

2,681

 

 

$

4,764

 

Accrued and other current liabilities

 

 

5,264

 

 

 

7,744

 

Deferred revenue

 

 

2,109

 

 

 

2,599

 

Operating lease liabilities, current portion

 

 

2,037

 

 

 

1,231

 

Total current liabilities

 

 

12,091

 

 

 

16,338

 

Deferred revenue, net of current portion

 

 

1,761

 

 

 

2,491

 

Derivative liability

 

 

221

 

 

 

214

 

Operating lease liabilities, long-term portion

 

 

14,782

 

 

 

15,217

 

Other liabilities

 

 

15

 

 

 

120

 

Total liabilities

 

 

28,870

 

 

 

34,380

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

Common stock, $0.0001 par value, 300,000,000 shares authorized at March 31, 2022 and December 31, 2021; 32,264,065 and 32,224,524 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively

 

 

3

 

 

 

3

 

Additional paid-in-capital

 

 

530,808

 

 

 

526,523

 

Accumulated other comprehensive loss

 

 

(1,421

)

 

 

(423

)

Accumulated deficit

 

 

(233,334

)

 

 

(206,996

)

Total stockholders’ equity

 

 

296,056

 

 

 

319,107

 

Total liabilities and stockholders’ equity

 

$

324,926

 

 

$

353,487

 

 

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

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4D Molecular Therapeutics, Inc.

Condensed Statements of Operations (Unaudited)

(In thousands, except share and per share amounts)

 

 

 

Three Months Ended March 31,

 

 

 

2022

 

 

2021

 

Revenue:

 

 

 

 

 

 

Collaboration and license revenue

 

$

1,219

 

 

$

2,000

 

Total revenue

 

 

1,219

 

 

 

2,000

 

Operating expenses:

 

 

 

 

 

 

Research and development (includes $134 and $148 for the three months ended March 31, 2022 and 2021, respectively, attributable to related parties)

 

 

19,381

 

 

 

12,769

 

General and administrative

 

 

8,230

 

 

 

5,543

 

Total operating expenses

 

 

27,611

 

 

 

18,312

 

Loss from operations

 

 

(26,392

)

 

 

(16,312

)

Other income (expense):

 

 

 

 

 

 

Interest income

 

 

100

 

 

 

7

 

Other expense, net

 

 

(46

)

 

 

(101

)

Total other income (expense), net

 

 

54

 

 

 

(94

)

Net loss

 

$

(26,338

)

 

$

(16,406

)

Net loss per share, basic and diluted

 

$

(0.82

)

 

$

(0.61

)

Weighted-average shares outstanding used in computing net loss per share, basic and diluted

 

 

32,232,378

 

 

 

26,690,167

 

 

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

 

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4D Molecular Therapeutics, Inc.

Condensed Statements of Comprehensive Loss (Unaudited)

(In thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2022

 

 

2021

 

Net loss

 

$

(26,338

)

 

$

(16,406

)

Other comprehensive loss:

 

 

 

 

 

 

Net unrealized loss on marketable securities

 

 

(998

)

 

 

 

Total comprehensive loss

 

$

(27,336

)

 

$

(16,406

)

 

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

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4D Molecular Therapeutics, Inc.

Condensed Statements of Stockholders' Equity (Unaudited)

(In thousands, except share amounts)

 

 

 

Common Stock

 

 

Additional
Paid-In

 

 

Accumulated Other Comprehensive

 

 

Accumulated

 

 

Total
Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Equity

 

Balances at December 31, 2021

 

 

32,224,524

 

 

$

3

 

 

$

526,523

 

 

$

(423

)

 

$

(206,996

)

 

$

319,107

 

Issuance of common stock upon exercise of stock options

 

 

39,541

 

 

 

 

 

 

330

 

 

 

 

 

 

 

 

 

330

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

3,933

 

 

 

 

 

 

 

 

 

3,933

 

Vesting of common stock warrants issued for services

 

 

 

 

 

 

 

 

22

 

 

 

 

 

 

 

 

 

22

 

Net unrealized loss on marketable securities

 

 

 

 

 

 

 

 

 

 

 

(998

)

 

 

 

 

 

(998

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(26,338

)

 

 

(26,338

)

Balances at March 31, 2022

 

 

32,264,065

 

 

$

3

 

 

$

530,808

 

 

$

(1,421

)

 

$

(233,334

)

 

$

296,056

 

 

 

 

Common Stock

 

 

Additional
Paid-In

 

 

Accumulated Other Comprehensive

 

 

Accumulated

 

 

Total
Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Equity

 

Balances at December 31, 2020

 

 

26,681,983

 

 

$

3

 

 

$

392,063

 

 

$

 

 

$

(135,679

)

 

$

256,387

 

Issuance of common stock upon exercise of stock options

 

 

12,396

 

 

 

 

 

 

99

 

 

 

 

 

 

 

 

 

99

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

2,329

 

 

 

 

 

 

 

 

 

2,329

 

Vesting of common stock warrants issued for services

 

 

 

 

 

 

 

 

22

 

 

 

 

 

 

 

 

 

22

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(16,406

)

 

 

(16,406

)

Balances at March 31, 2021

 

 

26,694,379

 

 

$

3

 

 

$

394,513

 

 

 

 

 

$

(152,085

)

 

$

242,431

 

 

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

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4D Molecular Therapeutics, Inc.

Condensed Statements of Cash Flows (Unaudited)

(In thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2022

 

 

2021

 

Cash flows from operating activities

 

 

 

 

 

 

Net loss

 

$

(26,338

)

 

$

(16,406

)

Adjustments to reconcile net loss to net cash used in operating
   activities

 

 

 

 

 

 

Stock-based compensation expense

 

 

3,933

 

 

 

2,329

 

Vesting of common stock warrants

 

 

22

 

 

 

22

 

Change in fair value of derivative liability

 

 

7

 

 

 

92

 

Depreciation and amortization

 

 

406

 

 

 

383

 

Amortization of right-of-use assets

 

 

376

 

 

 

365

 

Net amortization (accretion) of premium (discount) on marketable securities

 

 

582

 

 

 

 

Changes in operating assets and liabilities

 

 

 

 

 

 

Accounts receivable

 

 

47

 

 

 

521

 

Prepaid expenses and other current assets

 

 

1,017

 

 

 

773

 

Accounts payable

 

 

(1,680

)

 

 

(601

)

Accrued and other liabilities

 

 

(1,074

)

 

 

(1,450

)

Deferred revenue

 

 

(1,219

)

 

 

(1,035

)

Operating lease liabilities

 

 

371

 

 

 

(365

)

Net cash used in operating activities

 

 

(23,550

)

 

 

(15,372

)

Cash flows from investing activities

 

 

 

 

 

 

Purchases of marketable securities

 

 

(59,694

)

 

 

 

Maturities of marketable securities

 

 

11,997

 

 

 

 

Acquisition of property and equipment

 

 

(6,413

)

 

 

(642

)

Net cash used in investing activities

 

 

(54,110

)

 

 

(642

)

Cash flows from financing activities

 

 

 

 

 

 

Payment of offering costs

 

 

(246

)

 

 

(946

)

Issuance of common stock upon exercise of stock options and warrants

 

 

875

 

 

 

99

 

Net cash provided by (used in) financing activities

 

 

629

 

 

 

(847

)

Net decrease in cash and cash equivalents

 

 

(77,031

)

 

 

(16,861

)

Cash and cash equivalents, beginning of period

 

 

153,001

 

 

 

276,726

 

Cash and cash equivalents, end of period

 

$

75,970

 

 

$

259,865

 

Supplemental disclosures of noncash investing and financing
   information

 

 

 

 

 

 

Decrease in right-of-use assets due to reduction in operating lease liabilities upon modification

 

$

 

 

$

(478

)

Unpaid offering costs

 

$

178

 

 

$

 

Purchases of property and equipment in accounts payable
   and accrued and other liabilities

 

$

257

 

 

$

145

 

 

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

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4D Molecular Therapeutics, Inc.

Notes to Unaudited Condensed Financial Statements

1. The Company

4D Molecular Therapeutics, Inc. (the “Company”) was formed as a limited liability company in September 2013 under the name 4D Molecular Therapeutics, LLC. The Company changed its name and converted into a corporation which was incorporated in the state of Delaware in March 2015. The Company is a clinical-stage gene therapy company pioneering the development of product candidates using its targeted and evolved adeno-associated virus (“AAV”) vectors.

Initial Public Offering

In December 2020, the Company sold and issued 9,660,000 shares of common stock at a price to the public of $23.00 per share, which included shares sold upon the underwriters’ exercise of their overallotment option to purchase 1,260,000 additional shares. The Company received an aggregate of $204.7 million in net proceeds, after deducting underwriting discounts and commissions, and offering costs.

Upon the closing of the Company’s initial public offering in December 2020 (the “IPO”), all outstanding shares of redeemable convertible preferred stock automatically converted into 11,575,984 shares of common stock. Subsequent to the closing of the IPO, there were no shares of redeemable convertible preferred stock outstanding.

 

Follow On Public Offering

In November 2021, the Company completed its second underwritten public offering ("Follow-on Offering") in which 4,750,000 shares of the Company's common stock were sold at an offering price of $25.00 per share pursuant to an effective Registration Statement on Form S-1. The net proceeds from the Follow-on Offering were $111.1 million, after deducting underwriting discounts and commissions and offering expenses.

Liquidity

The Company has incurred significant losses and negative cash flows from operations and had an accumulated deficit of $233.3 million as of March 31, 2022. The Company believes that its cash and cash equivalents and marketable securities as of March 31, 2022 are sufficient for the Company to fund planned operations for at least one year from the issuance date of these unaudited condensed financial statements. The Company has historically financed its operations primarily through the sale of equity securities, and to a lesser extent, from cash received pursuant to its collaboration and license agreements. To date, none of the Company’s product candidates have been approved for sale, and therefore, the Company has not generated any revenue from product sales. Management expects operating losses and negative cash flows from operations to continue for the foreseeable future. The Company plans to raise additional funding as required based on the status of its clinical trials and projected cash flows. There can be no assurance that, in the event the Company requires additional financing, such financing will be available on terms acceptable to the Company, if at all. Failure to generate sufficient cash flows from operations, raise additional capital and reduce discretionary spending should additional capital not become available could have a material adverse effect on the Company’s ability to achieve its business objectives.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed financial statements have been prepared in accordance with United States Generally Accepted Accounting Principles (“U.S. GAAP”) and the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim reporting.

Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. Accordingly, the unaudited condensed financial statements should be read in conjunction with the audited financial statements and the related

9


 

notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC.

The accompanying financial information for the three months ended March 31, 2022 and 2021 are unaudited. The unaudited condensed financial statements have been prepared on the same basis as the annual audited financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s financial position as of March 31, 2022 and December 31, 2021 and its results of operations and cash flows for the three months ended March 31, 2022 and 2021. The results for interim periods are not necessarily indicative of the results expected for the full fiscal year or any other periods.

Use of Estimates and Judgements

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and judgements that affect the reported amounts of assets, liabilities, revenue and expenses and disclosure of contingent assets and liabilities as of the date of the financial statements. Such estimates include the determination of useful lives for property and equipment, the contract term, transaction price and costs of collaboration agreements, as well as estimates of the fair value of common stock (prior to the IPO), stock options, derivative instrument and income tax uncertainties. Actual results could differ from those estimates.

Due to the coronavirus (“COVID-19”) pandemic, there has been uncertainty and disruption in the global economy and financial markets. The Company is not aware of any specific event or circumstance that would require an update to its estimates or judgments or a revision of the carrying value of its assets or liabilities as of March 31, 2022. While there was not a material impact to the Company's unaudited condensed financial statements as of March 31, 2022, these estimates may change, as new events occur and additional information is obtained, as well as other factors related to the COVID-19 pandemic that could result in material impacts to the unaudited condensed financial statements in future reporting periods.

Segment Information

The Company operates and manages its business as one reportable and operating segment. The Company’s chief executive officer, who is the chief operating decision maker, reviews financial information on a company-wide basis for purposes of allocating resources and assessing financial performance.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents, marketable securities and accounts receivable. The Company’s cash is held at two financial institutions in the United States of America. The Company’s cash equivalents are invested in money market funds. The Company also invests in U.S. Treasuries, commercial paper and corporate bonds. The Company has not experienced any losses on its deposits of cash and cash equivalents. Such deposits may, at times, exceed federally insured limits.

The Company’s partners in collaboration and license agreements who represent 10% or more of the Company’s total revenue are as follows:

 

 

 

Three Months Ended March 31,

 

 

2022

 

2021

 Customer A

 

*

 

80%

 Customer B

 

98%

 

20%

Total

 

98%

 

100%

 

* Less than 10%

10


 

The Company’s partners in collaboration and license agreements who represent 10% or more of the Company’s total accounts receivable are as follows:

 

 

 

March 31,
2022

 

December 31,
2021

Customer A

 

0%

 

100%

Total

 

0%

 

100%

 

The Company’s total revenues by geographic region, based on the location of the customer, are as follows (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2022

 

 

2021

 

Netherlands

 

$

1,191

 

 

$

392

 

Switzerland

 

 

 

 

 

1,605

 

United States

 

 

28

 

 

 

3

 

Total revenue

 

$

1,219

 

 

$

2,000

 

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents. Cash equivalents consist of money market funds.

Marketable Securities

Marketable securities consist of commercial paper, corporate bonds and U.S. Treasuries and are included in current and noncurrent assets. The Company classifies its marketable securities as available-for-sale and carries them at fair value on its condensed balance sheet. Fair value is estimated using independent pricing sources based on quoted prices in active markets for similar securities. Unrealized gains and losses on the marketable securities are reported as a component of stockholders' equity in accumulated other comprehensive loss. The amortized cost of marketable securities is adjusted for amortization of premiums and accretion of discounts to maturity, which is included in interest income on the condensed statements of operations. Realized gains and losses are included in interest income on the condensed statements of operations.

The Company periodically evaluates its marketable securities to assess whether those with unrealized loss positions are other than temporarily impaired. The Company considers various factors in determining whether to recognize an impairment charge. If the Company determines that the decline in an investment's fair value is other-than-temporary, the difference is recognized as an impairment loss in the condensed statements of operations.

Other Risks and Uncertainties

The Company is subject to risks and uncertainties common to early-stage companies in the biotechnology industry, including, but not limited to, development by competitors of new technological innovations, protection of proprietary technology, dependence on key personnel, suppliers for key raw materials, contract manufacturing organizations (“CMOs”) and contract research organizations (“CROs”), compliance with government regulations and the need to obtain additional financing to fund operations. Product candidates currently under development will require significant additional research and development efforts, including extensive preclinical studies, clinical trials and regulatory approval, prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel and infrastructure and extensive compliance and reporting.

There can be no assurance that the Company’s research and development will be successfully completed, that adequate protection for the Company’s intellectual property will be obtained or maintained, that any products developed will obtain necessary government regulatory approval or that any approved products will be commercially viable. Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the Company will generate significant revenue from product sales. The Company operates in an environment of rapid change in technology and substantial competition from other

11


 

pharmaceutical and biotechnology companies. In addition, the Company is dependent upon the services of its employees, consultants and other third parties (including for clinical trials and some aspects of research and preclinical testing).

The extent of the impact of the COVID-19 pandemic on the Company’s business will depend upon the duration and spread of the outbreak and the extent and severity of the impact on the Company’s clinical trial activities, research activities and suppliers, all of which are uncertain and cannot be predicted. The extent to which the coronavirus outbreak may materially impact the Company’s financial condition, liquidity or results of operations is uncertain.

Fair Value Measurements

The Company applies fair value accounting for all financial assets and liabilities and nonfinancial assets and liabilities that are recognized or disclosed at fair value in the unaudited condensed financial statements on a recurring basis. Fair value is 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 on the measurement date. 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, a three-level fair value hierarchy has been established, which prioritizes the inputs used in measuring fair value as follows:

Level 1 — Observable inputs that reflect unadjusted quoted market prices in active markets for identical assets or liabilities that are accessible at the measurement date.
Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company accounts for transfers of financial instruments between levels of the fair value hierarchy on the date of the event or change in circumstance that caused the transfer.

Common Stock Warrants

The Company accounts for common stock warrants which meet the definition of a derivative as liabilities if the warrant requires net cash settlement or gives the holder the option of net cash settlement. The Company accounts for common stock warrants as equity if the contract requires physical settlement or net physical settlement or if the Company has the option of physical settlement or net physical settlement. Common stock warrants classified as liabilities are initially recorded at fair value and remeasured at fair value each condensed balance sheet date with the offset adjustments recorded in other income (expense), net within the condensed statements of operations. Common stock warrants classified as equity are initially measured at fair value on the grant date and are not subsequently remeasured.

Leases

On December 31, 2021, the Company adopted Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842), ("ASC 842") using the alternative modified transition method effective as of January 1, 2021. As a result, the Company has retrospectively changed its previously issued condensed financial statements as of March 31, 2021 and for the three months ended March 31, 2021 as presented within the Company's March 31, 2021 Quarterly Report on Form 10-Q to reflect the adoption of ASC 842 on January 1, 2021. The condensed financial statements for the three months ended March 31, 2021 presented herein differ from the Company's condensed financial statements included in the Company's March 31, 2021 Quarterly Report on Form 10-Q as those condensed financial statements were prepared using the former accounting standard referred to as ASC Topic 840, Leases.

12


 

The impact of adoption on ASC 842 on the condensed statements of operations for the three months ended March 31, 2021 was immaterial. The following table summarizes the effect of the adoption of ASC 842 on the condensed statement of cash flows for the three months ended March 31, 2021 (in thousands):

 

 

 

Pre ASC 842

 

 

 

 

 

After ASC 842

 

 

 

Three Months Ended

 

 

ASC 842

 

 

Three Months Ended

 

 

 

March 31, 2021

 

 

Adjustments

 

 

March 31, 2021

 

Adjustments to reconcile net loss to net cash
   used in operating activities

 

 

 

 

 

 

 

 

 

Amortization of right-of-use assets

 

$

 

 

$

365

 

 

$

365

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

 

Operating lease liabilities

 

 

 

 

 

(365

)

 

 

(365

)

Supplemental disclosures of noncash investing and financing information

 

 

 

 

 

 

 

 

 

Decrease in right-of-use assets due to reduction in operating lease liabilities upon modification

 

 

 

 

 

(478

)

 

 

(478

)

 

At contract inception, the Company determines if an arrangement is or contains a lease. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. If determined to be or contain a lease, the lease is assessed for classification as either an operating or finance lease at the lease commencement date, defined as the date on which the leased asset is made available for use by the Company, based on the economic characteristics of the lease.

A right-of-use asset represents the economic benefit conveyed to the Company by the right to use the underlying asset over the lease term. A lease liability represents the obligation to make lease payments arising from the lease. Operating lease right-of-use assets represent the Company's right to use an underlying asset for the lease term and operating lease liabilities represent the Company's obligation to make payments arising from the lease. Operating right-of-use assets and liabilities are recognized at the commencement date of the lease and are measured at the present value of the fixed payments due over the expected lease term less the present value of any incentives, rebates, or abatements the Company expects to receive from the lessor. The Company records amortization of operating right-of-use assets and accretion of lease liabilities as a single lease cost on a straight-line basis over the lease term. No lease renewal options are recognized as part of the right-of-use assets and lease liabilities.

The Company's operating leases are presented in the condensed balance sheets as operating lease right-of-use assets, classified as noncurrent assets, and operating lease liabilities, classified as current and noncurrent based on the discounted lease payments to be made within the proceeding twelve months.

As the Company’s leases do not provide an implicit interest rate, the Company uses its incremental borrowing rate to discount lease payments. The incremental borrowing rate represents an estimated rate of interest that the Company would have to pay to borrow equivalent funds on a collateralized basis at the lease commencement date.

Revenue Recognition

The Company determines revenue recognition for arrangements within the scope of Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASC 606") by performing the following five steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations based on estimated selling prices; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.

The Company’s revenue is primarily derived through its license, research, development and commercialization agreements. The terms of these types of agreements may include (i) licenses to the Company’s technology, (ii) research and development services, and (iii) services or obligations in

13


 

connection with participation in research or steering committees. Payments to the Company under these arrangements typically include one or more of the following: nonrefundable upfront and license fees, research funding, milestone and other contingent payments to the Company for the achievement of defined collaboration objectives and certain preclinical, clinical, regulatory and sales-based events, as well as royalties on sales of any commercialized products. Arrangements that include upfront payments are recorded as deferred revenue upon receipt or when due and are recognized as revenue as the performance conditions are met. The event-based milestone payments, royalties and cost reimbursements represent variable consideration, and the Company uses the most likely amount method to estimate this variable consideration. Royalty payments are recognized when earned or as the sales occur. The Company records cost reimbursements as accounts receivable when right to consideration is unconditional.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC 606. The Company allocates the total transaction price to each performance obligation based on the estimated standalone selling price and recognizes revenue when, or as, the performance obligation is satisfied. The Company includes the unconstrained amount of estimated variable consideration in the transaction price. At the end of each reporting period, the Company re-evaluates the estimated variable consideration included in the transaction price and any related constraint, and if necessary, adjusts its estimate of the overall transaction price.

Significant management judgment is required to determine the level of effort required under an arrangement and the period over which the Company expects to complete its performance obligations under the arrangement. Changes in these estimates can have a material effect on revenue recognized.

Embedded Derivative

Embedded derivatives that are required to be bifurcated from the underlying host instrument are accounted for and valued as a separate financial instrument. An embedded derivative exists in the award agreement with the Cystic Fibrosis Foundation (“CFF”). As described in Note 14, the embedded derivative has been bifurcated and is classified as a liability on the condensed balance sheets and is separately accounted for at its fair value. The derivative liability is subject to remeasurement to fair value each reporting period. Changes in the fair value of the derivative liability are recognized as a component of other income (expense), net within the condensed statements of operations.

Net Loss Per Share, Basic and Diluted

Basic net loss per share is calculated by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by giving effect to all potentially dilutive common shares outstanding for the period. For purposes of this calculation, stock options to acquire shares of common stock and common stock warrants are considered potentially dilutive common shares, but have been excluded from the calculation of diluted net loss per share as their effect is antidilutive.

Recent Accounting Pronouncement

New Accounting Pronouncement Not Yet Adopted

As an “emerging growth company,” the Jumpstart Our Business Startups Act (“JOBS Act”) allows the Company to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. The Company has elected to use this extended transition period under the JOBS Act. The adoption dates discussed below reflect this election.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, as clarified in subsequent amendments. ASU 2016-13 changes the impairment model for certain financial instruments. The new model is a forward-looking expected loss model and will apply to financial assets subject to credit losses and measured at amortized cost and certain off-balance sheet credit exposures. This includes loans, held-to-maturity debt securities, loan commitments, financial guarantees and net investments in leases, as well as trade receivables. For available-for-sale debt securities with unrealized losses, credit losses will be measured in

14


 

a manner similar to today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. In October 2019, the FASB voted to delay the effective date of this standard. Topic 326 will be effective for the Company for fiscal years beginning after December 15, 2022. Early adoption is permitted. The Company is in the process of evaluating the impact of this new guidance on its condensed financial statements.

3. Fair Value Measurements

The following tables represent the Company’s fair value hierarchy for financial assets and financial liabilities measured at fair value on a recurring basis as of March 31, 2022 and December 31, 2021 (in thousands):

 

 

 

Basis for Fair Value Measurements

 

 

Fair Value as of

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

March 31, 2022

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

54,437

 

 

$

 

 

$

 

 

$

54,437

 

Commercial paper

 

 

 

 

 

42,557

 

 

 

 

 

 

42,557

 

Corporate bonds

 

 

 

 

 

95,383

 

 

 

 

 

 

95,383

 

US Treasuries

 

 

 

 

 

70,605

 

 

 

 

 

 

70,605

 

Total

 

$

54,437

 

 

$

208,545

 

 

$

 

 

$

262,982

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liability

 

$

 

 

$

 

 

$

221

 

 

$

221

 

Total

 

$

 

 

$