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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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: 001-40187

 

PROMETHEUS BIOSCIENCES, INC.

(Exact name of Registrant as specified in its charter)

 

 

Delaware

 

81-4282653

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

3050 Science Park Road

San Diego, California

 

92121

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (858) 422-4300

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, $0.0001 par value per share

 

RXDX

 

Nasdaq Global Select Market

 

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

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

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

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

 

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

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

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

As of May 10, 2022, the registrant had 39,197,891 shares of common stock ($0.0001 par value) outstanding.

 

 

 


 

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

Item 1

 

Unaudited Condensed Financial Statements

2

 

 

Unaudited Condensed Balance Sheets

2

 

 

Unaudited Condensed Statements of Operations

3

 

 

Unaudited Condensed Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)

4

 

 

Unaudited Condensed Statements of Cash Flows

5

 

 

Notes to Unaudited Condensed Financial Statements

6

Item 2

 

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

20

Item 3

 

Quantitative and Qualitative Disclosures About Market Risk

30

Item 4

 

Controls and Procedures

30

 

PART II. OTHER INFORMATION

 

Item 1

 

Legal Proceedings

31

Item 1A

 

Risk Factors

31

Item 2

 

Unregistered Sales of Equity Securities and Use of Proceeds

31

Item 3

 

Defaults Upon Senior Securities

31

Item 4

 

Mine Safety Disclosures

31

Item 5

 

Other Information

31

Item 6

 

Exhibits

32

 

 

Exhibit Index

 

 

 

Signatures

33

 

 

1

 


 

PART I. FINANCIAL INFORMATION

Item 1.Financial Statements (unaudited)

 

PROMETHEUS BIOSCIENCES, INC.

Unaudited Condensed Balance Sheets

(in thousands, except share and par value amounts)

 

 

 

March 31,

2022

 

 

December 31,

2021

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

227,034

 

 

$

257,254

 

Accounts receivable

 

 

1,288

 

 

 

1,079

 

Prepaid expenses and other current assets

 

 

6,662

 

 

 

7,050

 

Total current assets

 

 

234,984

 

 

 

265,383

 

Property and equipment, net

 

 

2,453

 

 

 

1,447

 

Deferred financing costs

 

 

565

 

 

 

 

Right-of-use asset

 

 

14,608

 

 

 

 

Other assets

 

 

971

 

 

 

971

 

Total assets

 

$

253,581

 

 

$

267,801

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,812

 

 

$

1,153

 

Accrued compensation

 

 

1,616

 

 

 

5,378

 

Accrued expenses and other current liabilities

 

 

10,488

 

 

 

6,050

 

Payable to PLI

 

 

385

 

 

 

193

 

Deferred revenue

 

 

2,132

 

 

 

3,668

 

Lease liabilities, current portion

 

 

891

 

 

 

 

Total current liabilities

 

 

17,324

 

 

 

16,442

 

Deferred revenue, non-current

 

 

15,802

 

 

 

16,204

 

Lease liabilities, net of current portion

 

 

13,732

 

 

 

 

Total liabilities

 

 

46,858

 

 

 

32,646

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock—$0.0001 par value; 40,000,000 shares authorized

   at March 31, 2022 and December 31, 2021; No shares issued

   and outstanding at March 31, 2022 and December 31, 2021

 

 

 

 

 

 

Common stock—$0.0001 par value; 400,000,000 shares authorized as of

   March 31, 2022 and December 31, 2021; 39,103,107

   shares and 38,960,716 shares issued at March 31, 2022 and December 31, 2021,

   respectively; 39,089,812 shares and 38,943,110 shares outstanding at March 31,

   2022 and December 31, 2021, respectively;

 

 

4

 

 

 

4

 

Additional paid-in capital

 

 

428,126

 

 

 

424,492

 

Accumulated deficit

 

 

(221,407

)

 

 

(189,341

)

Total stockholders’ equity

 

 

206,723

 

 

 

235,155

 

Total liabilities and stockholders’ equity

 

$

253,581

 

 

$

267,801

 

 

See accompanying notes.

2

 


 

PROMETHEUS BIOSCIENCES, INC.

Unaudited Condensed Statements of Operations

(in thousands, except share and per share amounts)

 

 

 

Three Months Ended March 31,

 

 

 

2022

 

 

2021

 

Collaboration revenue

 

$

3,919

 

 

$

760

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

27,930

 

 

 

7,758

 

General and administrative

 

 

8,085

 

 

 

5,222

 

Total operating expense

 

 

36,015

 

 

 

12,980

 

Loss from operations

 

 

(32,096

)

 

 

(12,220

)

Other income (expense), net:

 

 

 

 

 

 

 

 

Interest income

 

 

30

 

 

 

18

 

Interest expense

 

 

 

 

 

(658

)

Change in fair value of preferred stock purchase right liability

 

 

 

 

 

(980

)

Change in fair value of preferred stock warrant liability

 

 

 

 

 

(105

)

Total other income (expense), net

 

 

30

 

 

 

(1,725

)

Net loss

 

 

(32,066

)

 

 

(13,945

)

Net loss per share, basic and diluted

 

$

(0.82

)

 

$

(1.67

)

Weighted average shares outstanding, basic and diluted

 

 

39,006,794

 

 

 

8,338,892

 

 

See accompanying notes.

3


 

PROMETHEUS BIOSCIENCES, INC.

Unaudited Condensed Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)

(in thousands, except share amounts)

 

 

 

Convertible Preferred Stock

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2021

 

 

 

 

$

 

 

 

 

38,943,110

 

 

$

4

 

 

$

424,492

 

 

$

(189,341

)

 

$

235,155

 

Issuance of common stock upon exercise of

   stock options

 

 

 

 

 

 

 

 

 

142,391

 

 

 

 

 

 

349

 

 

 

 

 

 

349

 

Vesting of early exercised stock options

 

 

 

 

 

 

 

 

 

4,311

 

 

 

 

 

 

6

 

 

 

 

 

 

6

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,279

 

 

 

 

 

 

3,279

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(32,066

)

 

 

(32,066

)

Balance at March 31, 2022

 

 

 

 

$

 

 

 

 

39,089,812

 

 

$

4

 

 

$

428,126

 

 

$

(221,407

)

 

$

206,723

 

 

 

 

Convertible

Preferred Stock

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

 

 

Total

Stockholders’

(Deficit)

 

 

 

Shares

 

 

Amount

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2020

 

 

160,864,434

 

 

$

126,023

 

 

 

 

1,713,622

 

 

$

 

 

$

1,605

 

 

$

(99,146

)

 

$

(97,541

)

Issuance of Series D-2 convertible preferred

   stock for cash, net of issuance costs of $94

 

 

86,775,740

 

 

 

73,763

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of Series D-2 convertible preferred

   stock for settlement of deferred purchase

   price

 

 

7,219,560

 

 

 

6,144

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification of convertible preferred stock

   purchase right liability

 

 

 

 

 

4,880

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of convertible preferred stock into

   common stock at initial public offering

 

 

(254,859,734

)

 

 

(210,810

)

 

 

 

25,485,955

 

 

 

3

 

 

 

210,807

 

 

 

 

 

 

210,810

 

Issuance of shares of common stock in initial

   public offering for cash, net of issuance

   costs of $18,662

 

 

 

 

 

 

 

 

 

11,500,000

 

 

 

1

 

 

 

199,837

 

 

 

 

 

 

199,838

 

Reclassification of convertible preferred stock

   warrants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

169

 

 

 

 

 

 

169

 

Issuance of common stock in exchange for

   services

 

 

 

 

 

 

 

 

 

500

 

 

 

 

 

 

3

 

 

 

 

 

 

3

 

Issuance of common stock upon exercise of

   stock options

 

 

 

 

 

 

 

 

 

56,645

 

 

 

 

 

 

64

 

 

 

 

 

 

64

 

Vesting of early exercised stock options

 

 

 

 

 

 

 

 

 

12,981

 

 

 

 

 

 

9

 

 

 

 

 

 

9

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

792

 

 

 

 

 

 

792

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13,945

)

 

 

(13,945

)

Balance at March 31, 2021

 

 

 

 

$

 

 

 

 

38,769,703

 

 

$

4

 

 

$

413,286

 

 

$

(113,091

)

 

$

300,199

 

 

See accompanying notes.

4


 

 

PROMETHEUS BIOSCIENCES, INC.

Unaudited Condensed Statements of Cash Flows

(in thousands)

 

 

Three Months Ended

March 31,

 

 

 

2022

 

 

2021

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(32,066

)

 

$

(13,945

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

87

 

 

 

39

 

Stock-based compensation expenses

 

 

3,279

 

 

 

792

 

Change in fair value of preferred stock purchase right liability

 

 

 

 

 

980

 

Change in fair value of preferred stock warrant liability

 

 

 

 

 

105

 

Common stock issued in exchange for services

 

 

 

 

 

3

 

Noncash interest expense

 

 

 

 

 

508

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(209

)

 

 

113

 

Prepaid expenses and other current assets

 

 

388

 

 

 

(4,258

)

Other assets

 

 

 

 

 

(468

)

Accounts payable

 

 

746

 

 

 

609

 

Accrued compensation

 

 

(3,762

)

 

 

(1,119

)

Accrued expenses and other current liabilities

 

 

3,879

 

 

 

(1,051

)

Payable to PLI

 

 

192

 

 

 

(897

)

Deferred revenue

 

 

(1,937

)

 

 

(405

)

Operating lease right-of-use assets and liabilities, net

 

 

15

 

 

 

 

Net cash used in operating activities

 

 

(29,388

)

 

 

(18,994

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(955

)

 

 

(298

)

Net cash used in investing activities

 

 

(955

)

 

 

(298

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from issuance of convertible preferred stock, net of issuance costs

 

 

 

 

 

73,749

 

Proceeds from sale of common stock in initial public offering

 

 

 

 

 

218,500

 

Payment of financing costs

 

 

 

 

 

(16,001

)

Deferred financing costs

 

 

(226

)

 

 

 

Proceeds from issuance of common stock upon stock option exercises

 

 

349

 

 

 

74

 

Net cash provided by financing activities

 

 

123

 

 

 

276,322

 

Net increase in cash and cash equivalents

 

 

(30,220

)

 

 

257,030

 

Cash and cash equivalents at beginning of period

 

 

257,254

 

 

 

54,201

 

Cash and cash equivalents cash at end of period

 

 

227,034

 

 

 

311,231

 

Supplemental schedule of non-cash investing and financing activities

 

 

 

 

 

 

 

 

Conversion of convertible preferred stock into common stock upon completion of

   initial public offering

 

$

 

 

$

210,810

 

Reclassification of preferred stock purchase right liability to equity due to issuance of

   Series D convertible preferred stock

 

$

 

 

$

4,880

 

Reclassification of warrant liability to equity due to conversion from preferred stock

   warrant to common stock warrant upon completion of initial public offering

 

$

 

 

$

169

 

Issuance of Series D-2 convertible preferred stock for the settlement of deferred purchase price

 

$

 

 

$

6,144

 

Financing costs incurred, but not paid, included in accrued expenses and accounts payable

 

$

339

 

 

$

1,209

 

Vesting of early exercised stock options

 

$

6

 

 

$

9

 

Costs incurred, but not paid, in connection with capital expenditures included in accounts payable

 

$

291

 

 

$

237

 

 

See accompanying notes.

 

5

 


 

PROMETHEUS BIOSCIENCES, INC.

Notes to Unaudited Condensed Financial Statements

1.

Organization

Prometheus Biosciences, Inc. (the Company) was incorporated in the state of Delaware on October 26, 2016 under the name Precision IBD, Inc. and is headquartered in San Diego, California. The Company changed its name to Prometheus Biosciences, Inc. on October 1, 2019. The Company’s business is focused on the discovery, development and commercialization of novel therapeutic and companion diagnostic products for the treatment of immune-mediated diseases, starting first with inflammatory bowel disease (IBD).

In June 2019, the Company acquired Prometheus Laboratories, Inc. (PLI) and the related intangible assets used by PLI. PLI was wholly owned by Nestlé Health Science US Holdings, Inc. and the related intangible assets were owned by Societé Des Produits Nestlé S.A (together, Nestlé). PLI markets and conducts several laboratory developed tests useful to gastroenterologists in monitoring their IBD patients’ disease state and informing their therapeutic decisions.

On December 31, 2020, the Company completed the spinoff of PLI by making an in-kind distribution of 100% of its interest in PLI to the Company’s stockholders of record on December 30, 2020.

Reverse Stock Split

On March 5, 2021, the Company effected a one-for-ten reverse stock split of the Company’s common stock (the Reverse Stock Split). The par value and the authorized shares of the common stock were not adjusted as a result of the Reverse Stock Split. All issued and outstanding common stock and the conversion prices and ratio of the convertible preferred stock have been retroactively adjusted to reflect this Reverse Stock Split for all periods presented.

Initial Public Offering

On March 16, 2021, the Company completed its initial public offering (IPO) with the sale of 11,500,000 shares of common stock, which included the exercise in full by the underwriters of their option to purchase 1,500,000 additional shares, at an initial public offering price of $19.00 per share and received gross proceeds of $218.5 million, which resulted in net proceeds to the Company of approximately $199.8 million, after deducting underwriting discounts and commissions of approximately $15.3 million and offering-related transaction costs of approximately $3.4 million.

In addition, in connection with the completion of the IPO, all outstanding shares of convertible preferred stock were converted into 25,485,955 shares of the Company’s common stock; outstanding warrants to purchase 148,848 shares of convertible preferred stock were converted into warrants to purchase 14,884 shares of the Company’s common stock; and the Company’s certificate of incorporation was amended and restated to authorize 400,000,000 shares of common stock and 40,000,000 shares of undesignated preferred stock.

Liquidity

The Company has incurred net losses since inception, experienced negative cash flows from operations, and as of March 31, 2022, has an accumulated deficit of $221.4 million. The Company has historically financed its operations primarily through private placements of convertible preferred stock and proceeds from the Company’s IPO in March 2021. The Company expects operating losses and negative cash flows from operations to continue for the foreseeable future. The Company believes its current capital resources will be sufficient for the Company to continue as a going concern for at least one year from the issuance date of these condensed financial statements.

The Company will be required to raise additional capital, however, there can be no assurance as to whether additional financing will be available on terms acceptable to the Company, if at all. If sufficient funds on acceptable terms are not available when needed, it would have a negative impact on the Company’s financial condition and could force the Company to delay, limit, reduce, or terminate product development or future commercialization efforts or grant rights to develop and market product candidates or testing products that the Company would otherwise plan to develop.

2.

Summary of Significant Accounting Policies

Basis of Presentation and Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requires management to make estimates and assumptions that impact the reported amounts of assets, liabilities, and expenses

6

 


 

and the disclosure of contingent assets and liabilities in the Company’s condensed financial statements and accompanying notes. Although these estimates are based on the Company’s knowledge of current events and actions it may undertake in the future, actual results may materially differ from these estimates and assumptions.

On an ongoing basis, management evaluates its estimates, primarily related to revenue recognition, stock-based compensation, fair value of common stock, fair value of the convertible preferred stock, fair value of the preferred stock purchase right liability, and accrued research and development costs. These estimates are based on historical data and experience, as well as various other factors that management believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Estimates relating to the valuation of stock require the selection of appropriate valuation methodologies and models, and significant judgment in evaluating ranges of assumptions and financial inputs.

Unaudited Interim Financial Information

The unaudited financial statements at March 31, 2022, and for the three months ended March 31, 2022 and 2021, have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (SEC), and with GAAP applicable to interim financial statements. These unaudited financial statements have been prepared on the same basis as the audited financial statements and include all adjustments, consisting of only normal recurring accruals, which in the opinion of management are necessary to present fairly the Company’s financial position as of the interim date and results of operations for the interim periods presented. Interim results are not necessarily indicative of results for a full year or future periods. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ materially from those estimates. These unaudited financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2021, included in the Annual Report on Form 10-K filed with the SEC on March 9, 2022.

Segment Reporting

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by management in making decisions regarding resource allocation and assessing performance. The Company manages its operations as a single operating segment in the United States for the purposes of assessing performance and making operating decisions.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. The cash and cash equivalents balance at March 31, 2022 and December 31, 2021 represents cash in readily available checking and money market accounts.

Concentration of Credit Risk

Financial instruments, which potentially subject the Company to concentration of credit risk, consist primarily of cash, cash equivalents, and accounts receivable. The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. Management believes that the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held.

Accounts Receivable

Accounts receivable is stated at the original invoice amount and consists of certain clinical trial costs subject to reimbursement under the Company’s collaboration agreements. The Company did not record any allowance for doubtful accounts as of March 31, 2022 and December 31, 2021.

Property and Equipment, Net

Property and equipment is stated at cost less accumulated depreciation. Depreciation is recorded using the straight-line method over the estimated useful lives of the related assets, which ranges from two to seven years. Repairs and maintenance charges that do not increase the useful life of the assets are charged to operating expenses as incurred.

7


 

Long-Lived Assets

The Company’s long-lived assets are comprised principally of its property and equipment.

If the Company identifies a change in the circumstances related to its long-lived assets that indicates the carrying value of any such asset may not be recoverable, the Company will perform an impairment analysis. A long-lived asset is not recoverable when the undiscounted cash flows expected to be generated by the asset (or asset group) are less than the asset’s carrying amount. Any required impairment loss would be measured as the amount by which the asset’s carrying value exceeds its fair value, and would be recorded as a reduction in the carrying value of the related asset and a charge to operating expense.

Deferred Financing Costs

Deferred financing costs consist of legal, accounting, and underwriting commissions that the Company has capitalized that are directly related to the Company’s “at the market” offering. Deferred financing costs associated with the offering will be reclassified to additional paid-in capital as the Company sells common stock pursuant to the Open Sale Market Agreement.

Revenue Recognition

The Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers (ASC 606). In accordance with ASC 606, the Company performs the following steps in determining the appropriate amount of revenue to be recognized as it fulfills its obligations under each of these agreements: (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; and (v) recognition of revenue when, or as, the Company satisfies each performance obligation. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

To date, all of the Company’s collaboration revenue has been derived from its collaboration agreement with Dr. Falk Pharma GmbH and its collaboration agreement with Millennium Pharmaceuticals, Inc., a subsidiary of Takeda Pharmaceutical Company Limited (collectively, Takeda) as described in Note 5. The terms of these arrangements include the following types of payments to the Company: non-refundable, up-front license fees; development, regulatory and commercial milestone payments; payments for research and development services provided by the Company; and royalties on net sales of licensed products. At the initiation of an agreement, the Company analyzes whether each unit of account results in a contract with a customer under ASC 606 or in an arrangement with a collaborator subject to guidance under ASC 808, Collaborative Arrangements (ASC 808).

The Company considers a variety of factors in determining the appropriate estimates and assumptions under these arrangements, such as whether the elements are distinct performance obligations, whether there are observable stand-alone prices, and whether any licenses are functional or symbolic. The Company evaluates each performance obligation to determine if it can be satisfied and recognized as revenue at a point in time or over time. Typically, license fees, non-refundable upfront fees, and funding of research activities are considered fixed, while milestone payments are identified as variable consideration which must be evaluated to determine if it is constrained and, therefore, excluded from the transaction price. The Company estimates the amount of variable consideration using the most likely amount, as milestone payments typically only have two possible outcomes. The Company recognizes revenue for sales-based royalty promised in exchange for the license of intellectual property only when the subsequent sale occurs.

The Company may allocate transaction price using a number of methods including estimating standalone selling price of performance obligations and using the residual approach when the standalone selling price of the license is highly variable or uncertain, and observable standalone selling prices exist for the other goods or services promised in the contract.

The Company receives payments from its collaborators based on terms established in each contract. Upfront payments and other payments may require deferral of revenue recognition to a future period until the Company is unconditional. The Company does not assess whether a contract has a significant financing component if the expectation at contract inception is such that the payment by the customer is akin to a deposit for research and development services.

Research and Development and Clinical Trial Accruals

Research and development costs are charged to expense as incurred. Research and development expenses include certain payroll and personnel expenses, laboratory supplies, consulting costs, external contract research and development expenses, and allocated overhead, including rent, property and equipment depreciation and utilities. Advance payments for goods or services for future research and development activities are deferred and expensed as the goods are delivered or the related services are performed.

8


 

The Company estimates preclinical studies and clinical trial expenses based on the services performed pursuant to contracts with research institutions and clinical research organizations that conduct and manage preclinical studies and clinical trials on the Company’s behalf. In addition, clinical study and trial materials are manufactured by contract manufacturing organizations. In accruing for these services, the Company estimates the time period over which services will be performed and the level of effort to be expended in each period. These estimates are based on communications with the third-party service providers and the Company’s estimates of accrued expenses and on information available at each balance sheet date. If the actual timing of the performance of services or the level of effort varies from the estimate, the Company will adjust the accrual accordingly.

Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at 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.

Stock-Based Compensation

The Company expenses stock-based compensation to employees and non-employees related to stock options, restricted stock units, and shares granted under the Company’s 2021 Employee Stock Purchase Plan (the ESPP). Stock-based compensation expense represents the cost of the grant date fair value of applicable awards recognized over the requisite service period (usually the vesting period) on a straight-line basis, net of actual forfeitures during the period. The Company estimates the fair value of stock options and shares purchased under the ESPP using the Black-Scholes option pricing model, and the assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. Stock-based compensation expense related to restricted stock units is determined based upon the fair market value of the Company’s stock on the grant date.

Valuation of Common Stock

Prior to the IPO, given the absence of a public trading market for the Company’s common stock, the Company’s board of directors exercised their judgment and considered a number of objective and subjective factors to determine the best estimate of the fair value of the Company’s common stock, such as: contemporaneous valuations performed by independent third-party specialists, its stage of development, including the status of its research and development efforts of its product candidates, the material risks related to its businesses and industry, its results of operations before discontinued operations and financial position, including its levels of capital resources, the prices at which its sold shares of its convertible preferred stock, the rights, preferences and privileges of its convertible preferred stock relative to those of its common stock, the conditions in the biotechnology industry and the economy in general, the stock price performance and volatility of comparable life sciences public companies, as well as recently completed mergers and acquisitions of peer companies, the likelihood of achieving a liquidity event for the holders of its common stock or convertible preferred stock, such as an IPO or a sale of the Company given prevailing market conditions, trends and developments in its industry, external market conditions affecting the life sciences and biotechnology sectors, and the lack of liquidity of its common stock, among other factors.

After the completion of the IPO, the fair value of each share of common stock is based on the closing price of the Company’s common stock as reported by the Nasdaq Global Select Market.

Preferred Stock Purchase Right Liabilities

From time to time, the Company entered into convertible preferred stock financings where, in addition to the initial closing, investors agreed to buy, and the Company agreed to sell, additional shares of that convertible preferred stock at a fixed price in the event that certain conditions are met, or agreed upon milestones are achieved. The Company evaluated this purchase right and assessed whether it met the definition of a freestanding instrument and, if so, determined the fair value of the purchase right liability and recorded it on the balance sheet with the remainder of the proceeds raised allocated to convertible preferred stock. The preferred stock purchase right liability was revalued at each reporting period with changes in the fair value of the liability recorded as change in fair value of preferred stock purchase right liability in the statements of operations. Upon the issuance of the shares of Series D-2 convertible preferred stock in January 2021, the preferred stock purchase right liability no longer required liability accounting and the then fair value of the preferred stock purchase right liability was reclassified into stockholders’ equity.

The Company performed the final remeasurement of the preferred stock purchase right liability as of the issuance of the shares of Series D-2 convertible preferred stock and recorded a $1.0 million change in fair value into other income (expense) for the three months ended March 31, 2021.

9


 

Net Loss Per Share

Basic net loss per share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common stock equivalents outstanding for the period determined using the treasury-stock method. The Company has excluded 16,169 and 47,999 weighted-average shares subject to repurchase or forfeiture from the weighted-average number of common shares outstanding for the three months ended March 31, 2022 and 2021, respectively. Dilutive common stock equivalents are comprised of options outstanding under the Company’s equity incentive plan, warrants to purchase common stock, and 2021 Employee Stock Purchase Plan (ESPP) shares pending issuance.

Basic and diluted net loss attributable to common holders per share is presented in conformity with the two- class method required for participating securities as the convertible preferred stock are considered participating securities. The Company’s participating securities do not have a contractual obligation to share in the Company’s losses. As such, the net loss was attributed entirely to common stockholders. Accordingly, for the three months ended March 31, 2022 and 2021, there is no difference in the number of shares used to calculate basic and diluted shares outstanding.

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

 

 

 

March 31,

 

 

 

2022

 

 

2021

 

Common stock options issued and outstanding

 

 

6,340,791

 

 

 

5,023,579

 

Warrants to purchase common stock

 

 

14,884

 

 

 

14,884

 

ESPP shares pending issuance

 

 

17,210

 

 

 

 

Total

 

 

6,372,885

 

 

 

5,038,463

 

Recent Accounting Standards

From time to time, new accounting standards are issued by the Financial Accounting Standards Board (FASB) or other standard setting bodies and adopted by the Company as of the specified effective date. Unless otherwise discussed, the impact of recently issued standards that are not yet effective will not have a material impact on the Company’s financial position or results of operations upon adoption.

New Accounting Standards Not Yet Adopted

In April 2012, the Jump-Start Our Business Startups Act (the JOBS Act) was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for an emerging growth company. As an emerging growth company, the Company may elect to adopt new or revised accounting standards when they become effective for non-public companies, which typically is later than when public companies must adopt the standards. The Company has elected to take advantage of the extended transition period afforded by the JOBS Act and, as a result, will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for emerging growth companies.

3.

Fair Value Measurements and Fair Value of Financial Instruments

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

 

 

 

 

Level 1

 

Quoted prices in active markets for identical assets or liabilities.

 

 

Level 2

 

Observable inputs other than Level 1 prices, 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.

10


 

 

 

Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability.

The carrying amounts of cash and cash equivalents, prepaid and other assets, accounts payable and accrued liabilities are considered to be representative of their respective fair values because of the short-term nature of those instruments. Based on the borrowing rates currently available to the Company for loans with similar terms, which is considered a Level 2 input, the Company believes that the fair value of long-term debt approximates its carrying value.

The Company’s financial instruments that are carried at fair value consist of Level 3 liabilities. There were no transfers within the hierarchy during the three months ended March 31, 2022 and 2021. At December 31, 2020, Level 3 liabilities that were measured at fair value on a recurring basis consisted of warrants to purchase shares of convertible preferred stock and a preferred stock purchase right liability. The Company had no Level 3 liabilities at March 31, 2022 and December 31, 2021 as the liabilities for the warrants to purchase shares of convertible preferred stock and the preferred stock purchase right was remeasured and reclassified to stockholders’ equity upon the closing of the Company’s IPO in March 2021 and the issuance of shares of Series D-2 convertible preferred stock in January 2021, respectively.

Convertible Preferred Stock Warrant Liability

The convertible preferred stock warrant liability was recorded at fair value utilizing the Black-Scholes option pricing model using significant unobservable inputs consistent with the inputs used for the Company’s stock-based compensation expense adjusted for the preferred stock warrants’ expected term and the fair value of the underlying preferred stock.

The assumptions used in the Black-Scholes option pricing model to determine the fair value of the convertible preferred stock warrant liability at the date of the IPO were as follows:

 

 

 

IPO Date

 

 

Fair value of underlying preferred stock

 

$

1.90

 

 

Risk-free interest rate

 

 

1.70

%

 

Expected volatility

 

 

70.00

%

 

Expected term (in years)

 

 

9.0

 

 

Expected dividend yield

 

—%

 

 

 

Preferred Stock Purchase Right Liability

Upon the issuance of the shares of Series D-2 convertible preferred stock in January 2021, the liability was remeasured using a valuation model that considered: (i) the risk-free rate commensurate with the expected milestone timing of 0.09%; (ii) the probability of the Series D-2 tranche of 80.0%; (iii) volatility of 80.0%; (iv) consideration received for the Series D-1 preferred stock; (v) the number of shares to be issued to satisfy the preferred stock purchase right and at what price; and (vi) certain implied and provided assumptions needed to calibrate the Series D-1 value and the Series D-2 purchase right, and as a result of closing the sale of shares of Series D-2 convertible preferred stock, a charge of $1.0 million was recorded in the statement of operations for the three months ended March 31, 2021.  

Activity of Liabilities Using Fair Value Level 3 Measurements

The following table summarizes the activity of the financial instruments valued using Level 3 inputs (in thousands):

 

 

 

Convertible

Preferred

Stock Warrant

Liability

 

 

Series D

Convertible

Preferred

Stock Purchase

Right Liability

 

Balance at December 31, 2020

 

$

64

 

 

$

3,900

 

Change in fair value

 

 

105

 

 

 

980

 

Conversion/Settlement during 2021

 

 

(169

)

 

 

(4,880

)

Balance at March 31, 2021

 

$

 

 

$

 

 

11


 

 

4.

Balance Sheet Details

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following (in thousands):

 

 

 

March 31,

2022

 

 

December 31,

2021

 

Prepaid contract manufacturing expenses

 

$

881

 

 

$

3,808

 

Prepaid clinical trial expenses

 

 

2,802

 

 

 

1,397

 

Prepaid research and development expenses

 

 

300

 

 

 

627

 

Other prepaid expenses

 

 

2,679

 

 

 

1,218

 

Total

 

$

6,662

 

 

$

7,050

 

 

Property and equipment, Net

Property and equipment, net, consist of the following (in thousands):

 

 

 

March 31,

2022

 

 

December 31,

2021

 

Laboratory equipment

 

$

2,250

 

 

$

1,830

 

Computer equipment

 

 

223

 

 

 

24

 

Office equipment and furniture

 

 

474

 

 

 

 

 

 

 

2,947

 

 

 

1,854

 

Less accumulated depreciation

 

 

(494

)

 

 

(407

)

Total

 

$

2,453

 

 

$

1,447

 

 

Depreciation expense related to property and equipment was $0.1 million and $39,000 for the three months ended March 31, 2022 and 2021, respectively.

    

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following (in thousands):

 

 

 

March 31,

2022

 

 

December 31,

2021

 

Accrued research and development

 

$

2,900

 

 

$

2,123

 

Accrued clinical trial expenses

 

 

2,070

 

 

 

1,999

 

Accrued contract manufacturing expenses

 

 

4,337

 

 

 

906

 

Accrued legal expenses

 

 

407

 

 

 

531

 

Unvested early exercise liability

 

 

29

 

 

 

35

 

Accrued other

 

 

746

 

 

 

456

 

Total

 

$

10,488

 

 

$

6,050

 

 

5.

Collaboration and License Agreements

Exclusive License Agreement with Cedars-Sinai Medical Center

In September 2017, the Company entered into an Exclusive License Agreement with Cedars-Sinai Medical Center (Cedars-Sinai), a related party, as amended and restated (the Cedars-Sinai Agreement). Under the terms of the Cedars-Sinai Agreement, Cedars-Sinai granted the Company an exclusive, worldwide, royalty bearing license with respect to certain patent rights, information and materials related to therapeutic targets and companion diagnostic products, in each case to conduct research, develop, and commercialize therapeutic and diagnostic products for human use. The licensed technology includes information and materials arising out of Cedars-Sinai’s database and biobank, as well as exclusive access to this database and biobank, which is an integral part of the Company’s Prometheus360 platform.  In August 2021, the Company and Cedars-Sinai amended and restated the Cedars-Sinai Agreement to, among other things, add a joint steering committee and cover new intellectual property.

As consideration for the license rights, in September 2017 the Company issued (i) 257,500 shares of fully vested common stock, and (ii) 335,000 shares of unvested restricted common stock, all of which is vested as of December 31, 2020. The fair value of all of the shares were measured at the date of issuance. The shares of unvested restricted common stock had vesting conditions tied to

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continuing services required of certain Cedars-Sinai employees pursuant to consulting agreements with the Company. One third of the restricted shares were released from restriction annually on the anniversary of the Cedars-Sinai Agreement over a three-year period. Additionally, the Company is obligated to pay Cedars-Sinai low- to mid-single digit percentage royalties on net sales of products covered under the Cedars-Sinai Agreement. The term of, and the Company’s royalty obligations under, the Cedars-Sinai Agreement expires on a licensed product-by-product and country-by-country basis on the later of ten years from the date of first commercial sale or when there is no longer a valid patent claim covering such licensed product in such country.

Co-Development and Manufacturing Agreement with Dr. Falk Pharma GmbH

In July 2020, the Company entered into a Co-Development and Manufacturing Agreement (the Falk Agreement) with Dr. Falk Pharma GMBH (Falk), pursuant to which the parties will co-develop and commercialize, exclusively in their respective territories, therapeutic product candidates targeting members of the TNF super family for the treatment of UC and CD under the Company’s PR600 program. Under the Falk Agreement, the Company is obligated to use commercially reasonable efforts to conduct development activities under an agreed development plan and the Company is responsible for regulatory approvals and commercialization of any products in the United States and the rest of the world, other than the Falk territory. Falk is responsible for regulatory approvals and commercialization of any products in the European Union, United Kingdom, Switzerland, the countries of the European Economic Area (excluding Malta and the Republic of Cyprus), Australia and New Zealand (Falk territory). Falk agreed to fund 25% of the Company’s third-party development costs set forth in the development plan.

Under the agreement, Falk paid the Company an upfront payment of $2.5 million and made a second payment of $2.5 million following the parties’ mutual agreement on the development plan. In addition, in June 2021, Falk made a milestone payment to the Company of $10 million upon the selection of a clinical candidate for the PR600 program and, in December 2021, Falk made the final milestone payment of $5 million, based on the Company’s development of a companion diagnostic candidate for the PR600 program. Falk is also obligated to pay the Company a mid-single to low-double digit royalty on net sales of all products incorporating antibodies covered by the agreement in the Falk territory, and the Company agreed to pay Falk a low-single digit royalty on net sales for such products in the Company’s territory.

 

The Company has identified one performance obligation for all the deliverables under the Falk Agreement. Accordingly, the Company is recognizing revenue for the transaction price allocated to the performance obligation in an amount proportional to the collaboration expenses incurred and the total estimated collaboration expenses over the eight-year period over which it expects to satisfy its performance obligation. The Company included the upfront payment and all milestone payments in the transaction price as it was deemed not probable of significant reversal at the inception of the agreement. In connection with the Falk Agreement, the Company recognized revenue of $2.7 million and $0.6 million for the three months ended March 31, 2022 and 2021, respectively, and had deferred revenue of $17.9 million and $18.7 million as of March 31, 2022 and December 31, 2021, respectively. This deferred revenue balance is expected to be recognized proportionally as expenses are incurred over the estimated eight-year term.

Companion Diagnostics Development Agreement with Millennium Pharmaceuticals, Inc.

In March 2019, the Company entered into a Companion Diagnostics Development and Collaboration Agreement (the Takeda Agreement) with Millennium Pharmaceuticals, Inc., a wholly-owned subsidiary of Takeda, pursuant to which the Company agreed to develop a companion diagnostic product for drug targets selected by Takeda, and Takeda agreed to develop and commercialize any therapeutic clinical candidates that it develops directed against any selected drug targets for the treatment of IBD. Under the Takeda Agreement, Takeda paid the Company an upfront technology access fee and agreed to reimburse the Company for certain research and development expenses. The Company was also eligible to receive various contingent payments, subject to the terms and conditions set forth in the Takeda Agreement.

The Company had identified one performance obligation per target for all the deliverables under the agreement since the delivered elements are not distinct within the context of the contract. Accordingly, the Company recognized revenue for the transaction price in an amount proportional to the collaboration expenses incurred and the total estimated collaboration expenses over the four-year period over which it expected to satisfy its performance obligations. The Company included one milestone in the transaction price as it was deemed not probable of significant reversal at the inception of the agreement. Due to the uncertainty in the achievement of the developmental and commercial milestones, the variable consideration associated with these future milestone payments was fully constrained (excluded) from the transaction price. These estimates were re-assessed at each reporting period. In March 2022, the Company and Takeda mutually agreed to terminate the agreement, effective April 2022, and the Company plans to focus its companion diagnostics resources on its proprietary targets and programs. As no remaining performance obligation existed at the time of signing of this agreement, all remaining deferred revenue was recognized in March 2022. In connection with the Takeda Agreement, the Company recognized revenue of $1.2 million and $0.2 million for the three months ended March 31, 2022 and 2021, respectively, and had deferred revenue of