UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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:
(Exact name of registrant as specified in its charter)
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Registrant’s Telephone Number, Including Area Code
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Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Securities registered pursuant to Section 12(b) of the Act:
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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.
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).
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.
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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).
As of May 10, 2023, there were
TABLE OF CONTENTS
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 27 | |
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA
This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains forward-looking statements which reflect our current views with respect to, among other things, our operations and financial performance. Such statements are based upon our current plans, estimates and expectations that are subject to various risks and uncertainties that could cause actual results to differ materially from such statements. The inclusion of forward-looking statements should not be regarded as a representation that such plans, estimates and expectations will be achieved. Words such as “anticipate,” “expect,” “project,” “intend,” “believe,” “may,” “will,” “should,” “plan,” “could,” “continue,” “target,” “contemplate,” “estimate,” “forecast,” “guidance,” “predict,” “possible,” “potential,” “pursue,” “likely,” and words and terms of similar substance used in connection with any discussion of future plans, actions or events identify forward-looking statements. All statements, other than historical facts, including statements regarding estimations of projected cash runway; our future product development plans; the potential, safety, efficacy, and regulatory and clinical progress of our product candidates, including the anticipated timing for initiation of clinical trials and release of clinical trial data and the expectations surrounding potential regulatory submissions, approvals and timing thereof; and any assumptions underlying any of the foregoing, are forward-looking statements. Important factors that could cause actual results to differ materially from our plans, estimates or expectations could include, but are not limited to: (i) our ability and plan to develop and commercialize DKN-01, FL-301 and our preclinical programs; (ii) status, timing and results of our preclinical studies and clinical trials; (iii) the potential benefits of DKN-01, FL-301 and our preclinical programs; (iv) the timing of our development programs and seeking regulatory approval of DKN-01, FL-301 and our preclinical programs; (v) our ability to obtain and maintain regulatory approval; (vi) our estimates of expenses and future revenues and profitability; (vii) our estimates regarding our capital requirements and our needs for additional financing; (viii) our estimates of the size of the potential markets for DKN-01, FL-301 and our preclinical programs; (ix) the benefits to be derived from any collaborations, license agreements, or other acquisition efforts, including the acquisition of Flame Biosciences and the ongoing collaboration with BeiGene; (x) sources of revenues and anticipated revenues, including contributions from any collaborations or license agreements for the development and commercialization of products; (xi) the rate and degree of market acceptance of DKN-01, FL-301 or our preclinical products; (xii) the success of other competing therapies that may become available; (xiii) the manufacturing capacity for our products; (xiv) our intellectual property position; (xv) our ability to maintain and protect our intellectual property rights; (xvi) our results of operations, financial condition, liquidity, prospects, and growth and strategies; (xvii) the industry in which we operate; (xviii) the trends that may affect the industry or us; (xix) our ability to successfully integrate the Flame operations and realize the anticipated benefits of the acquisition of Flame; (xx) whether our stockholders approve the conversion of the Series X Non-Voting Convertible Preferred Stock; (xxi) exposure to inflation, currency rate and interest rate fluctuations, as well as fluctuations in the market price of our traded securities; (xxii) that the initiation, conduct, and completion of clinical trials, laboratory operations, manufacturing campaigns, and other studies may be delayed, adversely affected, or impacted by ongoing COVID-19 related issues, global conflict or supply chain related issues; and (xxiii) our ability to comply with the continued listing requirements of the Nasdaq Capital Market.
By their nature, forward-looking statements involve risks and uncertainties because they relate to events, competitive dynamics and industry change, and depend on economic circumstances that may or may not occur in the future or may occur on longer or shorter timelines than anticipated. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Quarterly Report, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from the forward-looking statements contained in this Quarterly Report. In addition, even if our results of operations, financial condition and liquidity, and events in the industry in which we operate are consistent with the forward-looking statements contained in this Quarterly Report, they may not be predictive of results or developments in future periods. You should carefully read this Quarterly Report and any documents that we have filed as exhibits to this Quarterly Report completely.
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You should refer to Part II, Item 1A, Risk Factors in this Quarterly Report and Part I, Item 1A, Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the Securities and Exchange Commission on March 24, 2023, for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Quarterly Report will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard any such statement as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified timeframe, or at all. Any forward-looking statement that we make in this Quarterly Report speaks only as of the date of such statement, and, except to the extent required by applicable law, we undertake no obligation to update such statements to reflect events or circumstances after the date of this Quarterly Report or to reflect the occurrence of unanticipated events. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.
DKN-01 and FL-301 are investigational drugs undergoing clinical development and have not been approved by the U.S. Food and Drug Administration (the “FDA”), nor have they been submitted to the FDA for approval. DKN-01 and FL-301 have not been, and may never be, approved by any regulatory agency or marketed anywhere in the world. Statements contained in this Quarterly Report should not be deemed to be promotional.
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INTRODUCTORY COMMENT
References to Leap
Throughout this Quarterly Report on Form 10-Q, the “Company,” “Leap,” “Leap Therapeutics,” “we,” “us,” and “our,” except where the context requires otherwise, refer to Leap Therapeutics, Inc. and its consolidated subsidiaries, and “Board of Directors” refers to the board of directors of Leap Therapeutics, Inc.
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Part I – FINANCIAL INFORMATION
Item 1. Financial Statements
LEAP THERAPEUTICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
March 31, | December 31, | |||||
| 2023 |
| 2022 | |||
(Unaudited) | ||||||
Assets |
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Current assets: |
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Cash and cash equivalents | $ | | $ | | ||
Research and development incentive receivable |
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Prepaid expenses and other current assets |
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Total current assets |
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Property and equipment, net |
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Right of use assets, net | | | ||||
Research and development incentive receivable, net of current portion | | — | ||||
Deferred costs | — | | ||||
Other long term assets | | | ||||
Deposits |
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Total assets | $ | | $ | | ||
Liabilities and Stockholders’ Equity |
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Current liabilities: |
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Accounts payable | $ | | $ | | ||
Accrued expenses |
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Lease liability - current portion | | | ||||
Total current liabilities | | | ||||
Non current liabilities: | ||||||
Lease liability, net of current portion | | | ||||
Series X preferred stock warrant liability | — | |||||
Total liabilities | | | ||||
Mezzanine equity: | ||||||
Series X Convertible Preferred Stock, $ | | — | ||||
Stockholders’ equity: | ||||||
Common stock, $ | | | ||||
Additional paid-in capital |
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Accumulated other comprehensive income |
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Accumulated deficit |
| ( |
| ( | ||
Total stockholders’ equity |
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Total liabilities, mezzanine equity and stockholders' equity | $ | | $ | |
See notes to condensed consolidated financial statements.
6
LEAP THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
(Unaudited)
Three Months Ended March 31, | ||||||
| 2023 |
| 2022 | |||
Operating expenses: | ||||||
Research and development | | | ||||
General and administrative |
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Total operating expenses |
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Loss from operations |
| ( |
| ( | ||
Interest income |
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Interest expense | — | ( | ||||
Australian research and development incentives |
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Foreign currency gain (loss) | ( | | ||||
Change in fair value of Series X preferred stock warrant liability | | — | ||||
Net loss attributable to common stockholders | $ | ( | $ | ( | ||
Net loss per share | ||||||
Basic & diluted | ( | ( | ||||
Weighted average common shares outstanding | ||||||
Basic & diluted | | |
See notes to condensed consolidated financial statements.
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LEAP THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
Three Months Ended March 31, | |||||||
| 2023 |
| 2022 |
| |||
Net loss | $ | ( | $ | ( | |||
Other comprehensive income (loss): |
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Foreign currency translation adjustments | |
| ( | ||||
Comprehensive loss | $ | ( | $ | ( |
See notes to condensed consolidated financial statements.
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LEAP THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Three Months Ended March 31, 2022
(In thousands, except share amounts)
Accumulated | |||||||||||||||||
Additional | Other | Total | |||||||||||||||
Common Stock | Paid-in | Comprehensive | Accumulated | Stockholders’ | |||||||||||||
| Shares | Amount |
| Capital |
| Loss |
| Deficit |
| Equity | |||||||
Balances at December 31, 2021 |
| | $ | | $ | | $ | ( | $ | ( | $ | | |||||
Foreign currency translation adjustment |
| — |
| — |
| — |
| ( |
| — |
| ( | |||||
Stock-based compensation |
| — |
| — |
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| — |
| — |
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Net loss |
| — |
| — |
| — |
| — |
| ( |
| ( | |||||
Balances at March 31, 2022 |
| | $ | | $ | | $ | ( | $ | ( | $ | |
See notes to condensed consolidated financial statements.
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LEAP THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY
For the Three Months Ended March 31, 2023
(In thousands, except share amounts)
(Unaudited)
Mezzanine Equity | Stockholders Equity | |||||||||||||||||||||
Accumulated | ||||||||||||||||||||||
Series X Non Voting Convertiable | Additional | Other | Total | |||||||||||||||||||
Preferred Stock | Common Stock | Paid-in | Comprehensive | Accumulated | Stockholders’ | |||||||||||||||||
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Income |
| Deficit |
| Equity | |||||||
Balances at December 31, 2022 |
| — | $ | — | | $ | | $ | | $ | | $ | ( | $ | | |||||||
Issuance of Series X Preferred Stock in connection with Flame merger |
| |
| | — |
| — |
| — |
| — |
| — |
| — | |||||||
Issuance of common stock in connection with Flame merger | — | — | | | | — | — | | ||||||||||||||
Issuance of common stock warrants in connection with Flame merger | — | — | — | — | | — | — | | ||||||||||||||
Redemption of 2019 Warrants |
| — |
| — | — |
| — |
| ( |
| — |
| — |
| ( | |||||||
Issuance of common stock upon vest of restricted stock units |
| — |
| — | |
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| ( |
| — |
| — |
| — | |||||||
Foreign currency translation adjustment | — | — | — | — | — | | — | | ||||||||||||||
Stock-based compensation | — | — | — | — | | — | — | | ||||||||||||||
Net loss |
| — |
| — | — |
| — |
| — |
| — |
| ( |
| ( | |||||||
Balances at March 31, 2023 |
| | $ | | | $ | | $ | | $ | | $ | ( | $ | |
See notes to condensed consolidated financial statements.
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LEAP THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended March 31, | ||||||
| 2023 |
| 2022 | |||
Cash flows from operating activities: |
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Net loss | $ | ( | $ | ( | ||
Adjustments to reconcile net loss to net cash |
| — |
| — | ||
used in operating activities: |
| — |
| — | ||
In-process research and development costs acquired in connection with the acquistion of Flame | | — | ||||
Depreciation expense |
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Amortization of right-of-use assets | | | ||||
Stock-based compensation expense |
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Foreign currency transaction (gain) loss | | ( | ||||
Change in fair value of warrant liability | ( | — | ||||
Changes in operating assets and liabilities: |
| — |
| — | ||
Prepaid expenses and other assets |
| ( |
| | ||
Research and development incentive receivable |
| ( |
| ( | ||
Accounts payable and accrued expenses |
| ( |
| ( | ||
Lease liability | ( | ( | ||||
Other assets | | | ||||
Net cash used in operating activities |
| ( |
| ( | ||
Cash flows from investing activities: |
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Cash acquired in connection with the acquistion of Flame | | — | ||||
Payment of direct and incremental costs of the asset acquisition | ( | — | ||||
Net cash provided by investing activities |
| |
| — | ||
Cash flows from financing activities: |
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| ||||
Payment of redemption of 2019 warrants |
| ( |
| — | ||
Payment of deferred costs | — | ( | ||||
Net cash used in financing activities |
| ( |
| ( | ||
Effect of exchange rate changes on cash and cash equivalents |
| ( |
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Net increase (decrease) in cash and cash equivalents |
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| ( | ||
Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period | $ | | $ | | ||
Supplemental disclosure of non-cash financing activities: | ||||||
Issuance of Series X Preferred Stock in connection with acquisition of Flame | $ | | $ | — | ||
Issuance of warrants to purchase convertible Series X preferred stock in connection with the acquisition of Flame | $ | | $ | — | ||
Issuance of common stock in connection with the acquisition of Flame | $ | | $ | — | ||
Issuance of warrants for the purchase of common stock in connection with the acquisition of Flame | $ | | $ | — | ||
Direct and incremental costs of the asset acquisition recorded in accounts payable | $ | | $ | — | ||
Issuance of common stock up on the vesting of restricted stock units | $ | | $ | — | ||
Net liabilities assumed from acquistion of Flame | $ | | $ | — |
See notes to condensed consolidated financial statements.
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Leap Therapeutics, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
(Unaudited)
1. Nature of Business, Basis of Presentation and Liquidity
Nature of Business
Leap Therapeutics, Inc. was incorporated in the state of Delaware on January 3, 2011. During 2015, HealthCare Pharmaceuticals Pty Ltd. (“HCP Australia”) was formed and is a wholly owned subsidiary of the Company.
On December 15, 2021, Leap Securities Corp. was formed and is a wholly owned subsidiary of the Company.
On January 17, 2023, the Company entered into a merger agreement with Flame Biosciences, Inc., a privately held, biotechnology corporation (“Flame”), whereby Flame became a wholly owned subsidiary of the Company under the name Flame Biosciences, LLC.
The Company is a biopharmaceutical company developing novel biomarker-targeted antibody therapies designed to treat patients with cancer by inhibiting fundamental tumor-promoting pathways, targeting cancer-specific cell surface molecules, and harnessing the immune system to attack cancer cells. The Company’s strategy is to identify, acquire, and develop molecules that will rapidly translate into high impact therapeutics that generate durable clinical benefit and enhanced patient outcomes. The Company’s lead clinical stage program is DKN-01, a monoclonal antibody that inhibits Dickkopf-related protein 1, or DKK1. The Company is currently studying DKN-01 in multiple ongoing clinical trials in patients with esophagogastric cancer, gynecologic cancers, or colorectal cancer. Its second clinical stage program is FL-301, a monoclonal antibody that targets cells that express Claudin18.2 on their cell surface. The Company also has two preclinical antibody programs, FL-302 and FL-501.
In January 2020, the Company entered into an Option and License Agreement with BeiGene, Ltd., or BeiGene, which granted BeiGene an option to obtain an exclusive license from the Company that would grant to BeiGene the right to develop and commercialize DKN-01 in Asia (excluding Japan), Australia, and New Zealand. In March 2023, BeiGene notified the Company that it did not intend to exercise its option, and the agreement is continuing as a clinical collaboration.
The Company intends to apply its extensive experience identifying and developing transformational products to build a pipeline of programs that have the potential to change the practice of cancer medicine.
Basis of Presentation
The accompanying condensed consolidated financial statements as of March 31, 2023, and for the three months ended March 31, 2023 and 2022 have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto for the year ended December 31, 2022, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 24, 2023.
The condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements. In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments which are necessary for the fair presentation of the Company’s financial position as of March 31, 2023, statements of operations and statements of comprehensive loss for the three months ended March 31, 2023, and 2022 and statements of cash flows for the three months ended March 31, 2023 and 2022. Such adjustments are of a normal and recurring nature. The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2023.
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Liquidity
Since inception, the Company has been engaged in organizational activities, including raising capital, and research and development activities. The Company does not yet have a product that has been approved by the FDA, has not generated any product sales revenues and has not yet achieved profitable operations, nor has it ever generated positive cash flows from operations. There is no assurance that profitable operations, if achieved, could be sustained on a continuing basis. Further, the Company’s future operations are dependent on the success of the Company’s efforts to raise additional capital, its research and commercialization efforts, regulatory approval, and, ultimately, the market acceptance of the Company’s products.
In accordance with Accounting Standards Codification (“ASC”) 205-40, Going Concern, the Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the condensed consolidated financial statements are issued. As of March 31, 2023, the Company had cash and cash equivalents of $
The Company believes that its cash and cash equivalents of $
In addition, to support its future operations, the Company will likely seek additional funding through public or private equity financings or government programs and will seek funding or development program cost-sharing through collaboration agreements or licenses with larger pharmaceutical or biotechnology companies. If the Company does not obtain additional funding or development program cost-sharing, or exceeds its current spending forecasts or fails to receive the research and development tax incentive payment, the Company has the ability and would be forced to delay, reduce or eliminate certain clinical trials or research and development programs, reduce or eliminate discretionary operating expenses, and delay company and pipeline expansion, any of which could adversely affect its business prospects. The inability to obtain funding, as and when needed, could have a negative impact on the Company’s financial condition and ability to pursue its business strategies.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions are eliminated upon consolidation.
Use of Estimates
The presentation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Research and development incentive income and receivable
The Company recognizes other income from Australian research and development incentives when there is reasonable assurance that the income will be received, the relevant expenditure has been incurred, and the consideration can be reliably measured. The
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research and development incentive is one of the key elements of the Australian Government’s support for Australia’s innovation system and is supported by legislative law primarily in the form of the Australian Income Tax Assessment Act 1997, as long as eligibility criteria are met.
Management has assessed the Company’s research and development activities and expenditures to determine which activities and expenditures are likely to be eligible under the research and development incentive regime described above. At each period end, management estimates the refundable tax offset available to the Company based on available information at the time.
Under the program, a percentage of eligible research and development expenses incurred by the Company through its subsidiary in Australia are reimbursed. The percentage was
The research and development incentive receivable represents an amount due in connection with the above program. The Company recorded a research and development incentive receivable of $ and $
The following table shows the change in the research and development incentive receivable from January 1, 2022 to March 31, 2023 (in thousands):
Balance at January 1, 2022 |
| $ | |
Australian research and development incentive income, net |
| | |
Cash received for 2021 eligible expenses |
| ( | |
Foreign currency translation |
| ( | |
Balance at December 31, 2022 | | ||
Australian research and development incentive income, net | | ||
Foreign currency translation | ( | ||
Balance at March 31, 2023 | $ | |
Foreign Currency Translation
The financial statements of the Company’s Australian subsidiary are measured using the local currency as the functional currency. Assets and liabilities of this subsidiary are translated into U.S. dollars at an exchange rate as of the consolidated balance sheet date. Equity is translated at historical exchange rates. Revenues and expenses are translated into U.S. dollars at average rates of exchange in effect during the period. The resulting cumulative translation adjustments have been recorded as a separate component of stockholders’ equity. Realized and unrealized foreign currency transaction gains and losses are included in the results of operations.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to credit risk consist principally of cash and cash equivalents. All cash and cash equivalents are held in United States or Australian financial institutions and money market funds. At times, the Company may maintain cash balances in excess of the federally insured amount of $250 per depositor, per insured bank, for each account ownership category. Although the Company currently believes that the financial institutions with whom it does business will be able to fulfill their commitments to the Company, there is no assurance that those institutions will be able to continue to do so. The Company has not experienced any credit losses associated with its balances in such accounts for the year ended December 31, 2022 or for the three months ended March 31, 2023.
Deposits
As of March 31, 2023 and December 31, 2022, there were $
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Warrants
The Company will recognize on a prospective basis the value of the effect of the down round feature in the warrants to purchase shares of common stock that were issued in a private placement in November 2017 (the “2017 Warrants”) and in the warrants that were issued in a private placement in March 2020 (the “March 2020 Coverage Warrants”) when it is triggered (i.e., when the exercise price is adjusted downward). This value is measured as the difference between (1) the financial instrument’s fair value (without the down round feature) using the pre-trigger exercise price and (2) the financial instrument’s fair value (with the down round feature) using the reduced exercise price. The value of the effect of the down round feature will be treated as a dividend and a reduction to income available to common stockholders in the basic EPS calculation.
The Company classifies the warrants that are exercisable for shares for Series X non-voting convertible preferred stock (the “January 2023 Series X Preferred Stock Warrants”) as a liability on its condensed consolidated balance sheet. The Company initially recorded the January 2023 Series X Preferred Stock Warrants as a liability on January 17, 2023, and the warrant liability will be subsequently remeasured to fair value at each reporting date until the Stockholder Approval to convert shares of Series X Preferred Stock into shares of common stock is obtained. Changes in the fair value of the warrant liability are recognized as gains (losses) in the Company’s condensed consolidated statement of operations.
Fair Value of Financial Instruments
Certain assets and liabilities are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:
● | Level 1—Quoted prices in active markets for identical assets or liabilities. |
● | Level 2—Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data. |
● | Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques. |
A summary of the assets and liabilities carried at fair value in accordance with the hierarchy defined above is as follows (in thousands):
| Total |
| Level 1 |
| Level 2 |
| Level 3 | |||||
March 31, 2023 | ||||||||||||
Assets: | ||||||||||||
Cash equivalents | $ | | $ | | $ | — | $ | — | ||||
Total assets | $ | | $ | | $ | — | $ | — | ||||
Liabilities: | ||||||||||||
Series X Preferred Stock warrant liability | $ | | $ | — | $ | — | $ | | ||||
Total liabilities | $ | | $ | — | $ | — | $ | | ||||
December 31, 2022 | ||||||||||||
Assets: | ||||||||||||
Cash equivalents | $ | | $ | | $ | — | $ | — | ||||
Total assets | $ | | $ | | $ | — | $ | — |
Cash equivalents of $
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The carrying values of the research and development incentive receivable, accounts payable and accrued liabilities approximate their fair value due to the short-term nature of these assets and liabilities.
A roll-forward of the recurring fair value measurements of the warrant liability categorized with Level 3 inputs are as follows (in thousands):
Balance at January 17, 2023 |
| $ | |
Change in fair value |
| ( | |
Balance at March 31, 2023 | $ | |
The warrant liability in the table above is composed of the fair value of the January 2023 Series X Preferred Stock Warrants. The fair value of the warrant liability was determined based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The Company utilized the Black-Scholes option valuation model to fair value the warrant liability. The expected life was estimated to be the term from the valuation date to the warrant expiry date. The expected volatility was based on the historical volatility of the Company. The risk-free interest rate was based on the continuous rates provided by the U.S. Treasury with a term approximating the expected life of the option. The expected dividend yield was
Leases
The Company accounts for leases in accordance with Accounting Standards Codification, or ASC, Topic 842, Leases.
At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present. Most leases with a term greater than one year are recognized on the balance sheet as right-of-use assets, lease liabilities and, if applicable, long-term lease liabilities. The Company has elected not to recognize on the balance sheet leases with terms of one year or less. Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected remaining lease term. The Company has determined that the rate implicit in the lease is not determinable and the Company does not have borrowings with similar terms and collateral. Therefore, the Company considered a variety of factors, including observable debt yields from comparable companies and the volatility in the debt market for securities with similar terms, in determining that
In accordance with the guidance in Topic 842, components of a lease should be split into three categories: lease components (e.g. land, building, etc.), non-lease components (e.g. common area maintenance, maintenance, consumables, etc.), and non-components (e.g. property taxes, insurance, etc.). Then the fixed and in-substance fixed contract consideration (including any related to non-components) must be allocated based on fair values to the lease components and non-lease components.
Although separation of lease and non-lease components is required, certain practical expedients are available. Entities may elect the practical expedient to not separate lease and non-lease components. Rather, they would account for each lease component and the related non-lease component together as a single component. The Company has elected to account for the lease and non-lease components of each of its operating leases as a single lease component and allocate all of the contract consideration to the lease component only. The lease component results in an operating right-of-use asset being recorded on the consolidated balance sheets and amortized such that lease expense is recorded on a straight line basis over the term of the lease.
Net Loss per Share
Basic net loss per share is computed using the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed using the weighted average number of common shares outstanding during the period and, if dilutive, the weighted average number of potential shares of common stock, including the assumed exercise of stock options and warrants.
Subsequent Events
The Company considers events or transactions that occur after the balance sheet date but prior to the issuance of the financial statements to provide additional evidence for certain estimates or to identify matters that require additional disclosure. Subsequent events have been evaluated as required.
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Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements please refer to Note 2, “Summary of Significant Accounting Policies.” in the Company’s previously filed Annual Report on Form 10-K for the year ended December 31, 2022.
3. Acquisition of Flame Biosciences
Merger
On January 17, 2023 (the “Effective Date”), Leap acquired
Pursuant to the Merger, Leap issued to the stockholders of Flame (the “Flame Stockholders”)
The Company accounted for the acquisition of Flame as an asset acquisition allocating the purchase price under GAAP of $
Leap primarily acquired cash of $
The following table summarizes the net assets acquired based on their estimated fair values as of January 17, 2023 (in thousands):
Acquired IPR&D |
| $ | |
Cash and cash equivalents |
| | |
Accounts payable and accrued liabilities |
| ( | |
Total acquisition value | $ | |
17
The fair value assigned to each component of the purchase consideration, including direct costs of the acquisition of $
|
|
| Equivalent common |
|
| ||
Number of shares | shares | Fair Value | |||||
Leap common stock (par value $0.0001 per share) |
| |
| | $ | | |
Leap Series X Preferred Stock (1000:1) |
| |
| |
| | |
Warrants on Leap common stock |
| |
| |
| | |
Warrants on Leap Series X Preferred Stock (1000:1) |
| |
| |
| | |
Direct and incremental costs of the asset acquisition |
|
|
|
|
| | |
Total |
|
|
| | $ | |
In addition, subject to and upon the terms and conditions set forth in the Merger Agreement, the Company may also (i) pay Contingent Merger Consideration (as defined in the Merger Agreement) that may become payable if, and only if, certain assets of Flame related to Flame’s FL-101 program and/or FL-103 program are sold after the consummation of the Merger pursuant to the FL-101/103 Disposition Agreement (as defined in the Merger Agreement), which Contingent Merger Consideration shall be
Series X Preferred Stock
Pursuant to the Merger, the Company issued
Conversion
Subject to stockholder approval and the terms of any reverse stock split approved by the stockholders and effected by the Board of Directors, the Series X Preferred Stock is convertible into common stock at a rate of approximately
Voting Rights
Except as otherwise required by law, the Series X Preferred Stock does not have voting rights. However, as long as any shares of Series X Preferred Stock are outstanding, the Company will not, without the affirmative vote of the holders of a majority of the then-outstanding shares of the Series X Preferred Stock, (a) alter or change adversely the powers, preferences or rights given to the Series X Preferred Stock, (b) alter or amend the Series X Certificate of Designation, (c) amend its certificate of incorporation or other charter documents in any manner that adversely affects any rights of the holders of Series X Preferred Stock, (d) issue shares of Series X Preferred Stock (other than pursuant to, and in accordance with, the Merger Agreement), or increase the number of authorized shares of Series X Preferred Stock, or decrease the number of authorized shares of Series X Preferred Stock below an aggregate number of shares of Series X Preferred Stock then outstanding plus the total number of shares of Series X Preferred Stock issuable pursuant to the Merger Agreement that have not then previously been issued, (e) prior to the requisite approval of the conversion of the Series X Preferred Stock to common stock by the stockholders of Leap, consummate a Fundamental Transaction or any merger or
18
consolidation of Leap with or into another entity or any stock sale to, or other business combination in which the stockholders of Leap immediately before such transaction do not hold at least a majority of the capital stock of Leap immediately after such transaction, or (f) enter into any agreement with respect to any of the foregoing. The Series X Preferred Stock shall rank, as to distributions of assets upon liquidation, as follows: (i) senior to any class or series of capital stock of Leap created after the closing date specifically ranking by its terms junior to the common stock (“Junior Securities”); (ii) on parity with the common stock and any other class or series of capital stock of Leap created after the closing date specifically ranking by its terms on parity with the Series X Preferred Stock or the common stock (“Parity Securities”); and (iii) junior to any class or series of capital stock of Leap created after the closing specifically ranking by its terms senior to the common stock (“Senior Securities”).
Dividends
Holders of Series X Preferred Stock are entitled to receive dividends on shares of Series X Preferred Stock equal, on an as-if-converted-to-common-stock basis, and in the same form as dividends actually paid on shares of the common stock.
Liquidation and Dissolution
Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary (“Liquidation”), each holder of Series X Preferred Stock shall be entitled to receive, in preference to any distributions to the holders of the Junior Securities, pari passu with any distributions to the holders of the Parity Securities, and subject and junior to the prior and superior rights of the holders of any Senior Securities to receive any distributions, an equivalent amount of distributions as would be paid on the common stock underlying such holder’s shares of Series X Preferred Stock, determined on an as-converted to common stock basis by treating all then outstanding shares of Series X Preferred Stock as if they had been converted to common stock (without regard to the Beneficial Ownership Limitation) and all then outstanding Parity Securities that are entitled to receive distributions on substantially the same terms as the Series X Preferred Stock as if such then outstanding Parity Securities had been converted to common stock (without regard to any beneficial ownership limitation similar to the Beneficial Ownership Limitation), plus, without duplication, an additional amount equal to any dividends declared but unpaid on such holder’s shares of Series X Preferred Stock, before any distributions to holders of any class of any Junior Securities. If, upon any such Liquidation, the assets of the Company shall be insufficient to pay the holders of shares of the Series X Preferred Stock the amount required under the preceding sentence, then all remaining assets of the Company available for distribution to the stockholders of the Company shall be distributed ratably to the holders and the holders of Parity Securities in accordance with the respective amounts that would be payable on all outstanding Series X Preferred Stock and all outstanding Parity Securities if all amounts payable thereon upon any such Liquidation were paid in full.
Redemption
If Stockholder Approval is not obtained within six months from the date of issuance of the Series X Preferred Stock and the Series X Preferred Stock becomes eligible to be settled in cash, the Company will be required to recognize changes in the redemption value immediately as it occurs and then subsequently adjust the carrying amount of the Series X Preferred Stock to equal the redemption value at the end of each reporting period as if the end of the reporting period were also the redemption date for the Series X Preferred Stock. The change in fair value of the Series X Preferred Stock would be recognized as a deemed dividend, which adjusts retained earnings and earnings available to common stockholders in computing basic and diluted earnings per share. Upon cash settlement, if the fair value of the consideration transferred is greater than the carrying amount of the Series X Preferred Stock surrendered, (1) retained earnings should be reduced by the difference and (2) earnings available to common stockholders would be reduced by the difference in accordance with ASC 260-10, Earnings Per Share.
January 2023 Common Stock Warrants and January 2023 Series X Preferred Stock Warrants
In January 2023, pursuant to the Merger, the warrants held by the Flame Warrant Holders became exercisable for
Also in January 2023, pursuant to the Merger, the warrants held by the Flame Warrant Holders became exercisable for
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The Company classifies the January 2023 Series X Preferred Stock Warrants as a liability on its consolidated balance sheet. The Company initially recorded the January 2023 Series X Preferred Stock Warrants as a liability on the Effective Date and the warrant liability will be subsequently remeasured to fair value at each reporting date until the Stockholder Approval to convert shares of Series X Preferred Stock into shares of common stock (from mezzanine equity into permanent equity) is obtained.
Changes in the fair value of the warrant liability are recognized as gains (losses) in the Company’s consolidated statement of operations. During the three months ended March 31, 2023, the Company recorded a gain of $
4. Accrued Expenses
Accrued expenses consist of the following:
March 31, |
| December 31, | ||||
| 2023 |
| 2022 | |||
Clinical trials | $ | | $ | | ||
Professional fees |
| |
| | ||
Payroll and related expenses |
| |
| | ||
Accrued expenses | $ | | $ | |
5. Leases
The Company has operating leases for real estate in the United States and does not have any finance leases. The Company’s leases may contain options to renew and extend lease terms and options to terminate leases early. Reflected in the right-of-use asset and lease liability on the Company’s consolidated balance sheets are the periods provided by renewal and extension options that the Company is reasonably certain to exercise, as well as the periods provided by termination options that the Company is reasonably certain to not exercise.
The Company’s existing lease includes variable lease and non-lease components that are not included in the right-of-use asset and lease liability and are reflected as an expense in the period incurred. Such payments primarily include common area maintenance charges and increases in rent payments that are driven by factors such as future changes in an index (e.g., the Consumer Price Index).
In calculating the present value of future lease payments, the Company utilized its incremental borrowing rate based on the lease term. The Company has elected to account for each lease component and its associated non-lease components as a single lease component and has allocated all of the contract consideration across lease components only. This will potentially result in the initial and subsequent measurement of the balances of the right-of-use asset and lease liability for leases being greater than if the policy election was not applied. The Company has existing net leases in which the non-lease components (e.g. common area maintenance, maintenance, consumables, etc.) are paid separately from rent based on actual costs incurred and therefore are not included in the right-of-use asset and lease liability and are reflected as an expense in the period incurred. During the year ended December 31, 2022, the Company extended the term of its operating lease and recorded an additional right-of-use asset and lease of $
Future lease payments under non-cancelable operating leases as of March 31, 2023 are detailed as follows:
Future Operating Lease Payments | |||
2023 |
| | |
2024 | | ||
Total Lease Payments |
| | |
Less: imputed interest |
| ( | |
Total operating lease liabilities | $ | |
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6. Warrants
As of March 31, 2023, the number of shares of common stock and Series X Preferred Stock issuable upon the exercise of outstanding warrants, consisted of the following:
March 31, 2023 | ||||||||||
Number of Common Shares | ||||||||||
Description |
| Issuable |
| Number of Series X Preferred Shares Issuable |
| Exercise Price |
| Expiration Date | ||
January 23 2017 Warrants | | — | $ | | Upon M&A Event | |||||
2017 Warrants | | — | $ | | November 2024 | |||||
2019 Warrants | | — | $ | | February 2026 | |||||
March 2020 Pre-funded Warrants | | — | $ | | No Expiry | |||||
March 2020 Coverage Warrants | | — | $ | | Jan - March 2027 | |||||
September 2021 Pre-funded Warrants | | — | $ | | No Expiry | |||||
January 2023 Common Stock Warrants | | — | $ | | February 2025 | |||||
January 2023 Series X Preferred Stock Warrants (Convertible | — | | $ | | February 2025 | |||||
| |
2017 Warrants
The 2017 Warrants contain full ratchet anti-dilution protection provisions. The Company will recognize on a prospective basis the value of the effect of the down round feature in the 2017 Warrants when it is triggered (i.e., when the exercise price is adjusted downward). This value is measured as the difference between (1) the financial instrument’s fair value (without the down round feature) using the pre-trigger exercise price and (2) the financial instrument’s fair value (with the down round feature) using the reduced exercise price. The value of the effect of the down round feature will be treated as a dividend and a reduction to income available to common stockholders in the basic EPS calculation.
2019 Warrants
On February 5, 2019, in connection with the 2019 Public Offering, the Company issued immediately exercisable warrants (the “2019 Warrants”) to purchase
During the three months ended March 31, 2023, the Company redeemed
March 2020 Warrants
On January 3, 2020, the Company entered into a Securities Purchase Agreement with investors, providing for a private placement transaction exempt from the Securities Act of 1933, as amended, pursuant to which the Company issued and sold
On March 5, 2020, the Company’s stockholders approved the conversion of the Series A Preferred Stock into a pre-funded warrant to purchase
The March 2020 Coverage Warrants contain full ratchet anti-dilution protection provisions, relating to the issuance of “Convertible Securities”, as defined therein. The Company will recognize on a prospective basis the value of the effect of the down
21
round feature in the Coverage Warrants when it is triggered (i.e., when the exercise price is adjusted downward). This value is measured as the difference between (1) the financial instrument’s fair value (without the down round feature) using the pre-trigger exercise price and (2) the financial instrument’s fair value (with the down round feature) using the reduced exercise price. The value of the effect of the down round feature will be treated as a dividend and a reduction to income available to common stockholders in the basic EPS calculation.
During the year ended December 31, 2022, there were cashless exercises of
June 2020 Warrants
On June 22, 2020, the Company completed a public offering (the “2020 Public Offering”) whereby the Company issued
During the year ended December 31, 2022, there were cashless exercises of
September 2021 Warrants
On September 24, 2021, the Company completed a public offering (the “2021 Public Offering”) whereby the Company issued
During the year ended December 31, 2022, there were cashless exercises of
January 2023 Common Stock Warrants
In January 2023, pursuant to the Merger, the warrants held by the Flame Warrant Holders became exercisable for
January 2023 Series X Preferred Stock Warrants
In January 2023, pursuant to the Merger, the warrants held by the Flame Warrant Holders also became exercisable for
The Company classifies the January 2023 Series X Preferred Stock Warrants as a liability on its consolidated balance sheet. The Company initially recorded the January 2023 Series X Preferred Stock Warrants as a liability on the Effective Date and the warrant liability will be subsequently remeasured to fair value at each reporting date until the Stockholder Approval to convert shares of Series X Preferred Stock into shares of common stock (from mezzanine equity into permanent equity) is obtained.
Changes in the fair value of the warrant liability are recognized as gains (losses) in the Company’s consolidated statement of operations. During the three months ended March 31, 2023, the Company recorded a gain of $
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7. Common Stock
Each share of common stock entitles the holder to
Acquisition of Flame – January 2023
On January 17, Leap acquired
In accordance with Nasdaq listing rules, holders of shares of common stock issued by the Company as consideration for the acquisition of Flame are not entitled to vote any of such shares at any shareholder meeting on the approval of the conversion of the Series X Preferred Stock into common stock.
8. Equity Incentive Plans
Equity Incentive Plans
In September 2012, the Company adopted the 2012 Equity Incentive Plan, as amended, which provides designated employees of the Company and its affiliates, certain consultants and advisors who perform services for the Company and its affiliates, and nonemployee members of the Board of Directors of the Company and its affiliates with the opportunity to receive grants of incentive stock options, nonqualified stock options and stock awards. During the year ended December 31, 2022, the 2012 Equity Plan expired.
On January 20, 2017, the Company’s stockholders approved the 2016 Equity Incentive Plan (the “2016 Plan”). Beginning on January 1, 2018, the number of shares of common stock authorized for issuance pursuant to the 2016 Plan was increased each January 1 by an amount equal to
On June 16, 2022, the Company’s stockholders approved the 2022 Equity Incentive Plan (the “2022 Plan”), which provides for a total of
As of March 31, 2023, there were
A summary of stock option activity under the Equity Plans is as follows:
|
|
| Weighted |
|
| |||
| Average |
| Weighted |
| Aggregate | |||
| Exercise Price |
| Average Remaining |
| Intrinsic | |||
| Options |
| Per Share |
| Life in Years |
| Value | |
Outstanding at December 31, 2022 |
| | |
|
| — | ||
Granted | | | ||||||
Forfeited |
| ( | |
| ||||
Outstanding at March 31, 2023 |
| | |
| — | |||
Options exercisable at March 31, 2023 |
| | |
| — | |||
Options vested and expected to vest at March 31, 2023 |
| | |
| — |
The grant date fair value of the options granted during the three months ended March 31, 2023 and 2022 was estimated at the date of grant using the Black-Scholes option valuation model. The expected life was estimated using the “simplified” method as defined by the SEC’s Staff Accounting Bulletin 107, Share-Based Payment. The expected volatility was based on the historical volatility of the Company. The risk-free interest rate was based on the continuous rates provided by the U.S. Treasury with a term approximating the expected life of the option. The expected dividend yield was
23
The weighted average grant date fair value for the stock options granted during the three months ended March 31, 2023 and 2022 was $
The assumptions that the Company used to determine the grant-date fair value of stock options granted to employees and directors during the three months ended March 31, 2023 and 2022 were as follows, presented on a weighted average basis:
Three Months | Three Months | ||||
Ended March 31, | Ended March 31, | ||||
| 2023 |
| 2022 | ||
Expected volatility | % | | % | ||
Weighted average risk-free interest rate | % | | % | ||
Expected dividend yield | % | | % | ||
Expected term (in years) |
Stock options generally vest over a
Restricted Stock Units
During the three months ended March 31, 2022, the Company granted
The following table presents RSU activity under the 2016 Plan during the three months ended March 31, 2023:
Weighted | |||||
Average Grant | |||||
| Number of Shares |
| Date Fair Value | ||
Outstanding at December 31, 2022 |
| | $ | | |
Vested | ( | $ | | ||
Outstanding at March 31, 2023 |
| | $ | |
As of March 31, 2023, there were
The Company recognized stock-based compensation expense related to the issuance of stock option awards and RSUs to employees and non-employees in the condensed consolidated statements of operations during the three months ending March 31, 2023 and 2022 as follows:
Stock Based Compensation Expense
Three Months Ended March 31, | ||||||
|
| 2023 |
| 2022 | ||
Research and development |
| $ | | $ | | |
General and administrative |
| |
| | ||
Total | $ | | $ | |
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9. Net Loss Per Share
Basic and diluted net loss per share for the three months ended March 31, 2023 and 2022 was calculated as follows (in thousands except share and per share amounts).
Three Months Ended March 31, | ||||||
| 2023 |
| 2022 | |||
Numerator: |
|
|
| |||
Net loss | $ | ( | $ | ( | ||
Net loss attributable to common stockholders for basic and diluted loss per share | ( | ( | ||||
Denominator: |
|
| ||||
Weighted average number of common shares outstanding – basic and diluted |
| |
| | ||
Net loss per share attributable to common stockholders – basic and diluted | ( | ( |
Included within weighted average common shares outstanding for the three months ended March 31, 2023 and 2022 are
All warrants and shares of Series X Preferred Stock issued participate on a one-for-one basis with common stock in the distribution of dividends, if and when declared by the board of directors, on the Company’s common stock. For purposes of computing EPS, these warrants are considered to participate with common stock in earnings of the Company. Therefore, the Company calculates basic and diluted EPS using the two-class method. Under the two-class method, net income for the period is allocated between common stockholders and participating securities according to dividends declared and participation rights in undistributed earnings. No income was allocated to the warrants and Series X Preferred Stock for the three months ended March 31, 2023 and 2022, as results of operations were a loss for the period.
The Company’s potentially dilutive securities include RSUs, stock options and warrants. These securities were excluded from the computations of diluted net loss per share for the three months ended March 31, 2023 and 2022, as the effect would be to reduce the net loss per share. The following table includes the potential shares of common stock, presented based on amounts outstanding at each period end, that were excluded from the computation of diluted net loss per share attributable to common stockholders for the periods indicated because including them would have had an anti-dilutive effect:
| Three Months Ended March 31, |