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

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended March 31, 2022

OR

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

For the transition period from ___________________ to ___________________

Commission File Number: 001-40384

 

TALARIS THERAPEUTICS, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

83-2377352

( State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

93 Worcester St.
Wellesley, MA

02481

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (502) 398-9250

 

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

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

 

TALS

 

The Nasdaq Global Market

 

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

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

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

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

 

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

 

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

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

As of May 2, 2022, the registrant had 41,463,782 shares of common stock, $0.0001 par value per share, outstanding.

 


 

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

1

Item 1.

Financial Statements (Unaudited)

1

 

Condensed Consolidated Balance Sheets

1

 

Condensed Consolidated Statements of Operations

2

 

Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity

3

 

Condensed Consolidated Statements of Cash Flows

4

 

Notes to Unaudited Condensed Consolidated Financial Statements

5

Item 2.

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

18

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28

Item 4.

Controls and Procedures

28

PART II.

OTHER INFORMATION

28

Item 1.

Legal Proceedings

28

Item 1A.

Risk Factors

29

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

76

Item 3.

Defaults Upon Senior Securities

76

Item 4.

Mine Safety Disclosures

76

Item 5.

Other Information

76

Item 6.

Exhibits

77

Signatures

78

 

i


 

SUMMARY OF THE MATERIAL RISKS ASSOCIATED WITH OUR BUSINESS

Our business is subject to numerous risks and uncertainties, including those described in Part II, Item 1A. "Risk Factors" in this Quarterly Report on Form 10-Q (this "Quarterly Report"). The principal risks and uncertainties affecting our business include the following:

Our business substantially depends upon the successful development and regulatory approval of FCR001, our lead product candidate. If we are unable to obtain regulatory approval for FCR001, our business may be materially harmed.
We are a late-stage clinical biotechnology company and we have incurred net losses since our inception. We anticipate that we will continue to incur significant net losses for the foreseeable future, and may never achieve or maintain profitability.
We have not yet completed any registrational trials and have no history of commercializing products, which may make it difficult to evaluate the success of our business to date and to assess our future viability.
Our product candidates represent a novel therapeutic approach that could result in heightened regulatory scrutiny. The regulatory landscape that applies to our Facilitated Allo-HSCT Therapy is rigorous, complex, uncertain and subject to change.
Clinical drug development involves a lengthy and expensive process with an uncertain outcome, and the inability to successfully and timely conduct clinical trials and obtain regulatory approval for our product candidates would substantially harm our business.
If we experience delays or difficulties in the enrollment of patients in clinical trials, development of our product candidate may be delayed or prevented, which would have a material adverse effect on our business.
The results of preclinical studies or earlier clinical trials are not necessarily predictive of future results. Our existing product candidates in clinical trials, and any other product candidate we advance into clinical trials, may not have favorable efficacy or safety in later clinical trials or receive regulatory approval.
Interim, “top line” or preliminary data from our clinical trials that we may announce or share with regulatory authorities from time to time may change as more patient data become available and are subject to audit and verification procedures that could result in material changes in the final data.
Our product candidates, or associated conditioning regimens or treatment protocols, may cause undesirable side effects such as infection or graft vs. host disease, or have other properties that could delay or prevent their regulatory approval, limit the commercial profile of an approved label or result in significant negative consequences following any regulatory approval.
We intend to develop FCR001, and potentially future product candidates, in other indications and in combination with other therapies, which exposes us to additional risks. Combination therapies and additional indications involve additional complexity and risk that could delay or cause our programs to stall or fail; development of such programs may be more costly, may take longer to achieve regulatory approval and may be associated with unanticipated adverse events.
Even if our product candidates receive regulatory approval, we will still face extensive ongoing regulatory requirements and continued regulatory review, which may result in significant additional expense, and our products may still face future development and regulatory difficulties.
We currently operate our own manufacturing facility and intend to scale-up our manufacturing and processing approaches to appropriately address our anticipated commercial needs for FCR001, which will require significant resources. We may fail to successfully operate our facility, which could adversely affect our clinical trials and the commercial viability of our product candidates.
Our product candidates are uniquely manufactured for each patient and we may encounter difficulties in production, particularly with respect to scaling our manufacturing capabilities.
If our manufacturing facility is damaged or destroyed or production at our manufacturing facility is otherwise interrupted, our business would be negatively affected.
We are dependent on a limited number of suppliers and, in some cases sole suppliers, for some of our components and materials used in our product candidates.
We rely on third parties to conduct our clinical trials and perform some of our research and preclinical studies. If these third parties do not satisfactorily carry out their contractual duties or fail to meet expected deadlines, our development programs may be delayed or subject to increased costs, each of which may have an adverse effect on our business and prospects.

ii


 

We depend substantially on intellectual property licensed from the University of Louisville Research Foundation Inc. (“ULRF”), and termination of this license could result in the loss of significant rights, which would materially harm our business.
We expect the product candidates we develop will be regulated as biological products, or biologics, and therefore they may be subject to competition sooner than anticipated.
If we are unable to obtain and maintain sufficient intellectual property protection for our product candidates and manufacturing process, or if the scope of the intellectual property protection is not sufficiently broad, our ability to commercialize our product candidates successfully and to compete effectively may be adversely affected.
Our business has been adversely affected by the ongoing COVID-19 pandemic, and could be further adversely affected by the effects this and other of public health epidemics in regions where we, or third parties on which we rely have significant research, development or production facilities, concentrations of clinical trial sites or other business operations.
Geopolitical and military conflict such as the ongoing warfare in Ukraine, could cause a disruption of the development of our product candidates and adversely impact our business.

iii


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

TALARIS THERAPEUTICS, INC.

BALANCE SHEETS

(in thousands, except share and per share amounts)

(unaudited)

 

 

 

March 31, 2022

 

 

December 31, 2021

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

22,791

 

 

$

18,614

 

Marketable securities

 

 

202,738

 

 

 

225,357

 

Prepaid and other current assets

 

 

2,889

 

 

 

2,543

 

Total current assets

 

 

228,418

 

 

 

246,514

 

Property and equipment, net

 

 

5,486

 

 

 

4,804

 

Right-of-use assets

 

 

3,231

 

 

 

 

Other assets

 

 

111

 

 

 

104

 

Total assets

 

$

237,246

 

 

$

251,422

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

3,485

 

 

$

2,556

 

Accrued expenses

 

 

3,840

 

 

 

5,431

 

Lease liability, current

 

 

740

 

 

 

 

Total current liabilities

 

 

8,065

 

 

 

7,987

 

Share repurchase liability

 

 

492

 

 

 

593

 

Other liabilities

 

 

 

 

 

33

 

Lease liability, net of current

 

 

2,659

 

 

 

 

Total liabilities

 

 

11,216

 

 

 

8,613

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

Common stock, $0.0001 par value, 140,000,000 shares authorized and 39,873,868
   issued and outstanding and
10,000,000 non-voting shares authorized and 1,150,000
   issued and outstanding as of March 31, 2022 and
140,000,000 shares authorized
   and
39,763,049 issued and outstanding and 10,000,000 non-voting shares authorized
   and
1,150,000 issued and outstanding as of December 31, 2021

 

 

4

 

 

 

4

 

Additional paid-in-capital

 

 

336,058

 

 

 

333,730

 

Accumulated deficit

 

 

(109,106

)

 

 

(90,847

)

Accumulated other comprehensive loss

 

 

(926

)

 

 

(78

)

Total stockholders’ equity

 

 

226,030

 

 

 

242,809

 

Total liabilities and stockholders’ equity

 

$

237,246

 

 

$

251,422

 

 

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

1


 

TALARIS THERAPEUTICS, INC.

STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(in thousands, except share and per share amounts)

(unaudited)

 

 

 

Three months ended March 31,

 

 

 

2022

 

 

2021

 

Operating expenses

 

 

 

 

 

 

Research and development

 

$

14,196

 

 

$

6,468

 

General and administrative

 

 

4,218

 

 

 

2,537

 

Total operating expenses

 

 

18,414

 

 

 

9,005

 

Loss from operations

 

 

(18,414

)

 

 

(9,005

)

Interest and other income (expense), net

 

 

155

 

 

 

(294

)

Net loss

 

$

(18,259

)

 

$

(9,299

)

Unrealized gain (loss) on marketable securities

 

 

(848

)

 

 

22

 

Total other comprehensive loss

 

 

(848

)

 

 

(9,277

)

Total comprehensive loss

 

$

(19,107

)

 

$

(9,277

)

Net loss

 

$

(18,259

)

 

$

(9,299

)

Net loss per common share, basic and diluted

 

 

(0.45

)

 

$

(1.30

)

Weighted average number of common shares outstanding used in computation
   of net loss per common share, basic and diluted

 

 

40,980,213

 

 

 

7,160,631

 

 

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

2


 

TALARIS THERAPEUTICS, INC.

STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY

(in thousands, except share amounts)

(unaudited)

 

 

 

Series A
Convertible
Preferred Stock

 

 

Series A-1
Convertible Preferred
Stock

 

 

Series B
Convertible
Preferred Stock

 

 

 

Common Stock

 

 

Additional

 

 

 

 

 

Accumulated
Other

 

 

Total

 

 

 

Outstanding
Shares

 

 

Amount

 

 

Outstanding
Shares

 

 

Amount

 

 

Outstanding
Shares

 

 

Amount

 

 

 

Outstanding
Shares

 

 

Amount

 

 

Paid-in
Capital

 

 

Accumulated
Deficit

 

 

Comprehensive
Income (Loss)

 

 

Stockholders’
Equity (Deficit)

 

Balance at December 31,
   2020

 

 

40,000,000

 

 

$

37,383

 

 

 

28,000,000

 

 

$

34,272

 

 

 

62,499,993

 

 

$

114,496

 

 

 

 

7,087,130

 

 

$

1

 

 

$

4,879

 

 

$

(43,014

)

 

$

(13

)

 

 

(38,147

)

Issuance of common stock upon exercise
   of stock options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

117,181

 

 

 

 

 

 

123

 

 

 

 

 

 

 

 

 

123

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

835

 

 

 

 

 

 

 

 

 

835

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,299

)

 

 

 

 

 

(9,299

)

Unrealized gain on marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

22

 

 

 

22

 

Balance at March 31,
   2021

 

 

40,000,000

 

 

$

37,383

 

 

 

28,000,000

 

 

$

34,272

 

 

 

62,499,993

 

 

$

114,496

 

 

 

 

7,204,311

 

 

$

1

 

 

$

5,837

 

 

$

(52,313

)

 

$

9

 

 

$

(46,466

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31,
   2021

 

 

 

 

$

 

 

 

 

 

$

 

 

 

 

 

$

 

 

 

 

40,913,049

 

 

$

4

 

 

$

333,730

 

 

$

(90,847

)

 

$

(78

)

 

$

242,809

 

Issuance of common stock upon exercise
   of stock options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

110,819

 

 

 

 

 

 

131

 

 

 

 

 

 

 

 

 

131

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,197

 

 

 

 

 

 

 

 

 

2,197

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(18,259

)

 

 

 

 

 

(18,259

)

Unrealized loss on marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(848

)

 

 

(848

)

Balance at March 31,
   2022

 

 

 

 

$

 

 

 

 

 

$

 

 

 

 

 

$

 

 

 

 

41,023,868

 

 

$

4

 

 

$

336,058

 

 

$

(109,106

)

 

$

(926

)

 

$

226,030

 

 

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

3


 

TALARIS THERAPEUTICS, INC.

STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

Three months ended March 31,

 

 

 

2022

 

 

2021

 

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

 

$

(18,259

)

 

$

(9,299

)

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

 

 

 

 

 

 

Depreciation and amortization

 

 

297

 

 

 

135

 

Accretion and amortization of marketable securities, net

 

 

3

 

 

 

193

 

Amortization of right-of-use assets

 

 

191

 

 

 

 

Stock-based compensation expense

 

 

2,197

 

 

 

835

 

Fair value adjustment of contingent stock liability

 

 

 

 

 

360

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Prepaid and other current assets

 

 

(346

)

 

 

(400

)

Other assets

 

 

(7

)

 

 

 

Accounts payable

 

 

755

 

 

 

1

 

Accrued expenses

 

 

(1,054

)

 

 

(872

)

Operating lease liability

 

 

(129

)

 

 

 

Other liabilities

 

 

72

 

 

 

 

Net cash used in operating activities

 

 

(16,280

)

 

 

(9,047

)

Cash flows from investing activities:

 

 

 

 

 

 

Purchases of property and equipment

 

 

(1,341

)

 

 

(187

)

Purchases of marketable securities

 

 

(39,982

)

 

 

(34,297

)

Maturities of marketable securities

 

 

61,750

 

 

 

35,814

 

Net cash provided by investing activities

 

 

20,427

 

 

 

1,330

 

Cash flows from financing activities:

 

 

 

 

 

 

Preferred stock issuance costs

 

 

 

 

 

(11

)

Proceeds from exercise of stock options

 

 

30

 

 

 

28

 

Net cash provided by financing activities

 

 

30

 

 

 

17

 

Net increase (decrease) in cash and cash equivalents

 

 

4,177

 

 

 

(7,700

)

Cash and cash equivalents at beginning of period

 

 

18,614

 

 

 

17,589

 

Cash and cash equivalents at end of period

 

$

22,791

 

 

$

9,889

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

Property and equipment additions included in accounts payable and
   accrued expenses

 

$

667

 

 

$

106

 

Deferred issuance costs included in accounts payable and
   accrued expenses

 

$

 

 

$

1,039

 

 

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

4


 

TALARIS THERAPEUTICS, INC

NOTES TO FINANCIAL STATEMENTS

(unaudited)

 

1. Nature of Business and Liquidity

Talaris Therapeutics, Inc. (“Talaris” or the “Company”) is a late-clinical stage, cell therapy company developing an innovative method of allogeneic hematopoietic stem cell transplantation (“allo-HSCT”), called Facilitated Allo-HSCT Therapy, that the Company believes has the potential to transform the standard of care in solid organ transplantation, certain severe autoimmune diseases and certain severe non-malignant blood, immune and metabolic disorders. The Company believes that these indications, individually and collectively, represent a significant unmet need and commercial opportunity. The Company maintains corporate offices in Boston, Massachusetts, a laboratory in Houston, Texas and its cell processing facility in Louisville, Kentucky.

Initial Public Offering

The Company completed an initial public offering (“IPO”) on May 11, 2021 in which the Company issued and sold 8,825,000 shares of its common stock at a public offering price of $17.00 per share. The Company’s aggregate gross proceeds from the sale of shares in the IPO was $150.0 million before underwriting discounts and commissions and other expenses of approximately $12.9 million. Upon completion of the offering, the Company’s outstanding convertible preferred stock was automatically converted into shares of common stock and non-voting common stock. Following the IPO, there were no shares of preferred stock outstanding. Prior to the IPO, on April 30, 2021, the Company’s board of directors and shareholders approved a one-for-5.35 reverse share split of issued and outstanding common shares and incentive shares and a proportional adjustment to the existing conversion ratios for the Company’s convertible preferred stock.

Liquidity

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. Management has evaluated whether there are conditions and events that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financial statements are issued. Since its inception, the Company has incurred net losses and negative cash flows from operations. During the three months ended March 31, 2022 and the year ended December 31, 2021, the Company incurred a net loss of $18.3 million and $47.8 million, respectively, and used $16.3 million and $40.0 million in cash for operations, respectively. In addition, as of March 31, 2022, the Company had an accumulated deficit of $109.1 million. The Company expects to continue to generate operating losses and negative cash flows for the foreseeable future. The Company currently expects the cash and cash equivalents of $22.8 million and marketable securities of $202.7 million as of March 31, 2022, will be sufficient to fund its operating expenses and capital requirements for more than 12 months from the date the financial statements are available to be issued.

Additional funding will be needed to finance future clinical, pre-clinical, manufacturing and commercial activities. There is no assurance the Company will be successful in obtaining such additional financing on terms acceptable to it, if at all, and it may not be able to enter into other arrangements. If the Company is unable to obtain funding, it could be forced to delay, reduce or eliminate our research and development programs, portfolio expansion or commercialization efforts, which could adversely affect its business prospects and ability to continue operations.

The Company is subject to risks common to companies in the biopharmaceutical industry. There can be no assurance that the Company’s research and development will be successfully completed, that adequate protection for its intellectual property will be maintained, that any products developed will obtain required regulatory approval, or that any approved products will be commercially viable. Even if the development efforts are successful, it is uncertain when, if ever, the Company will generate significant product sales and ultimately net income.

Coronavirus Pandemic

In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. The worldwide COVID-19 pandemic has affected and may affect in the future the Company’s ability to initiate and complete preclinical studies, delay the initiation and completion of its current and planned clinical trials, disrupt regulatory activities or have other adverse effects on its business, results of operations, financial condition and prospects. In addition, the pandemic has caused substantial disruption in the financial markets and may adversely impact economies worldwide, both of which could adversely affect the Company’s business, operations and ability to raise funds to support its operations.

5


 

The Company cannot be certain what the overall impact of the COVID-19 pandemic will be on its business, and it has the potential to adversely affect its business, financial condition, results of operations and prospects.

2. Summary of Significant Accounting Policies

Basis of Presentation

The financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”).

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make judgments, assumptions, and estimates that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of financial statements, and the reported amounts of income and expense during the reporting period. The most significant estimates relate to the determination of the fair value of stock option grants and estimates related to the amount of prepaid and accrued research and development expenses as of the balance sheet date. For periods presented prior to the Company’s IPO, significant estimates were used in the determination of the fair value of the Company’s common stock. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, and makes adjustments when the facts and circumstances dictate. These estimates are based on information available as of the date of the financial statements; therefore, actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents. As of March 31, 2022 and December 31, 2021, cash and cash equivalents consisted primarily of checking and savings deposits, money market fund holdings, and commercial paper.

Marketable Securities

The Company classifies its marketable securities as available-for-sale securities, which are carried at their fair value based on the quoted market prices of the securities. Unrealized gains and losses are reported as accumulated other comprehensive loss, a separate component of stockholders’ deficit. Realized gains and losses on available-for-sale securities are included in net loss in the period earned or incurred.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Depreciation expense is recognized using the straight-line method over the estimated useful life of each asset. Equipment and furniture and fixtures are depreciated over five or seven year lives. Leasehold improvements are amortized over the shorter of the lease term or the five-year estimated useful life of the asset. Computer equipment and computer software are depreciated over three years. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in loss from operations. Expenditures for repairs and maintenance are expensed as incurred.

Impairment of Long-Lived Assets

The Company evaluates its long-lived assets, which consist primarily of property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. No impairments have been identified as of March 31, 2022 and December 31, 2021.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash and cash equivalents. The Company’s investment policy includes guidelines regarding the quality of the financial institutions and financial instruments and defines allowable investments that it believes minimizes the exposure to concentration of credit risk. The Company may invest in money market funds (minimum of $1 billion in assets), U.S. Treasury securities, corporate debt, bank debt, U.S.

6


 

government-related agency securities, other sovereign debt, municipal debt and commercial paper. These deposits may exceed federally insured limits. The Company has not experienced any losses historically in these accounts and believes that it is not exposed to significant credit risk as its deposits are held at financial institutions that management believes to be of high credit quality.

Fair Value of Financial Instruments

Fair value is defined as the price that the Company would receive to sell an investment in a timely transaction or pay to transfer a liability in a timely transaction with an independent buyer in the principal market, or in the absence of a principal market, the most advantageous market for the investment or liability. A framework is used for measuring fair value utilizing a three-tier hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 investments) and the lowest priority to unobservable inputs (Level 3 investments).

The three levels of the fair value hierarchy are as follows:

Level 1 inputs: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 inputs: Quoted prices in markets that are not considered to be active or financial instrument valuations for which all significant inputs are observable, either directly or indirectly; and
Level 3 inputs: Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

Financial instruments are categorized in their entirety based on the lowest level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment and considers factors specific to the investment.

The Company’s money market funds and marketable securities are carried at fair value determined according to the fair value hierarchy described above (Level 1 and Level 2, respectively).

The Company’s contingent stock liability as of March 31, 2021 (see Note 3) is carried at fair value determined according to the fair value hierarchy described above (Level 3).

Research and Development Expenses

Research and development expenses include (i) employee-related expenses, including salaries, benefits, travel and stock-based compensation expense; (ii) external research and development expenses incurred under arrangements with third parties, such as contract research organization agreements, investigational sites, and consultants; (iii) the cost of acquiring, developing, and manufacturing clinical study materials; (iv) costs associated with preclinical and clinical activities and regulatory operations; (v) costs incurred in development of intellectual property; and (vi) an allocated portion of facilities and other infrastructure costs associated with our research and development activities. Costs incurred in connection with research and development activities are expensed as incurred.

The Company enters into consulting, research, and other agreements with commercial entities, researchers, universities, and others for the provision of goods and services. Such arrangements are generally cancelable upon reasonable notice and payment of costs incurred. Costs are considered incurred based on an evaluation of the progress to completion of specific tasks under each contract using information and data provided by the respective vendors, including the Company’s clinical sites. These costs consist of direct and indirect costs associated with specific projects, as well as fees paid to various entities that perform certain research on behalf of the Company. Depending upon the timing of payments to the service providers, the Company recognizes prepaid expenses or accrued expenses related to these costs. These accrued or prepaid expenses are based on management’s estimates of the work performed under service agreements, milestones achieved, and experience with similar contracts. The Company monitors each of these factors and adjusts estimates accordingly.

Stock-Based Compensation

The Company measures all stock options and other stock-based awards granted to employees, nonemployees, and directors based on the fair value on the date of the grant and recognizes stock-based compensation expense of those awards over the requisite service period, which is generally the vesting period of the respective award. Generally, the Company issues stock option awards with only service-based vesting conditions and records the expense for these awards using the straight-line method. The Company’s policy is to account for forfeitures when they occur.

7


 

The Company classifies stock-based compensation expense in its statement of operations in the same manner in which the award recipient’s payroll costs are classified or in which the award recipients’ service payments are classified.

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The Company recently completed its IPO and lacks company-specific historical and implied volatility information. Therefore, it estimates its expected stock volatility based on the historical volatility of a publicly traded set of peer companies and expects to continue to do so until it has adequate historical data regarding the volatility of its own traded stock price. The expected term of the Company’s stock options has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options. The expected term of stock options granted to non-employees is equal to the contractual term of the option award. The risk-free interest rate is determined by reference to the US Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is zero because the Company has never paid cash dividends on common stock and does not expect to pay any cash dividends in the foreseeable future.

Prior to the Company’s IPO, the Company considered the estimated fair value of the common stock as of the measurement date in determining the exercise price for options granted. The estimated fair value of the common stock was determined at each grant date based upon a variety of factors, including the illiquid nature of the common stock, arm’s-length sales of the Company’s capital stock (including convertible preferred stock), the effect of the rights and preferences of the preferred shareholders, and the prospects of a liquidity event. Among other factors are the Company’s financial position and historical financial performance, forecasted future operations of the Company, an evaluation or benchmark of the Company’s competition, and the current business climate in the marketplace. Significant changes to the key assumptions underlying the factors used could result in different fair values of common stock at each valuation date. The fair value for options granted since the Company’s IPO are based on the closing stock price on grant date.

Income Taxes

The Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the financial statements or in the Company’s tax returns. Deferred tax assets and liabilities are determined on the basis of the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it believes, based upon the weight of available evidence, that it is more likely than not that all or a portion of the deferred tax assets will not be realized, a valuation allowance is established through a charge to income tax expense. Potential for recovery of deferred tax assets is evaluated by estimating the future taxable profits expected and considering prudent and feasible tax planning strategies.

The Company accounts for uncertainty in income taxes recognized in the financial statements by applying a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination by the taxing authorities. If the tax position is deemed more likely than not to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. The provision for income taxes includes the effects of any resulting tax reserves, or unrecognized tax benefits, that are considered appropriate as well as the related net interest and penalties.

The Company provides reserves for potential payments of tax to various tax authorities related to uncertain tax positions. These reserves are based on a determination of whether and how much of a tax benefit taken by the Company in its tax filings or positions is more likely than not to be realized following resolution of any potential contingencies present related to the tax benefit. Potential interest and penalties associated with such uncertain tax positions are recorded as a component of income tax expense. The Company had no significant uncertain tax positions as of March 31, 2022 and December 31, 2021.

Basic and Diluted Net Loss Per Share

The Company calculates basic and diluted net loss per share using the two-class method. The two-class method requires income available to common stockholders for the period to be allocated between common stock and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed. The Company’s Series A convertible preferred stock, Series A-1 convertible preferred stock and Series B convertible preferred stock are participating securities. These participating securities do not contractually require the holders of such shares to participate in the Company’s losses. As such, net losses for the years presented were not allocated to the Company’s participating securities. Accordingly, basic net loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period, without consideration of potential dilutive securities. Diluted net loss per share is computed by dividing the net loss by the sum of the weighted average number of common shares outstanding during the period plus the dilutive effects of potentially dilutive securities outstanding during the period. Potentially dilutive

8


 

securities include vested and unexercised stock options, restricted stock issued upon early exercise of stock options, convertible preferred shares and contingent stock liabilities. The dilutive effect of stock options and contingent stock liabilities are computed using the treasury stock method and the dilutive effect of convertible preferred shares is calculated using the if-converted method. The Company has generated a net loss for all periods presented, therefore diluted net loss per share is the same as basic net loss per share since the inclusion of potentially dilutive securities would be anti-dilutive.

Segments

Operating segments are defined as components of an entity for which separate financial information is made available and is regularly evaluated by the chief operating decision maker (“CODM”) in making decisions regarding resource allocation and assessing performance. The Company’s CODM is the chief executive officer and operations are managed as a single segment for the purposes of assessing performance and making operating decisions.

Comprehensive Loss

Comprehensive loss represents net loss for the period plus the results of certain other changes in stockholders’ equity (deficit). The Company’s comprehensive loss included unrealized gains related to marketable securities for the three months ended March 31, 2022 and 2021.

Recently Issued Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments—Credit Losses, (“ASC 326”), which introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. The new model will apply to (1) loans, accounts receivable, trade receivables, and other financial assets measured at amortized cost; (2) loan commitments and certain other off-balance-sheet credit exposures; (3) debt securities and other financial assets measured at fair value through other comprehensive income; and (4) beneficial interests in securitized financial assets. The adoption of ASC 326 in January 2021 had no material impact on the Company’s financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), and subsequently has issued additional guidance (collectively, “ASC 842”), which requires companies to generally recognize operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet. The Company adopted ASC 842 on January 1, 2022 using the modified retrospective approach, with no restatement of prior periods. Upon adoption, the Company elected the package of transitional practical expedients which allowed the Company to carry forward prior conclusions related to whether any expired or existing contracts are or contain leases, the lease classification for any expired or existing leases and initial direct costs for existing leases. In addition, the Company made an accounting policy election to not apply the recognition requirements in the leasing standards to short-term leases, which is a lease that at commencement date has a lease term of 12 months or less and does not contain a purchase option that it is reasonably certain to exercise.

 

The Company determines if an arrangement is a lease at contract inception. The Company’s contracts are determined to contain a lease when all of the following criteria based on the specific circumstances of the arrangement are met: (1) there is an identified asset for which there are no substantive substitution rights; (2) the Company has the right to obtain substantially all of the economic benefits from the identified asset; and (3) the Company has the right to direct the use of the identified asset.

 

At the commencement date, operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of future lease payments over the expected lease term. The Company’s lease agreements do not provide an implicit rate. As a result, the Company utilizes an estimated incremental borrowing rate to discount lease payments, which is based on the rate of interest the Company would have to pay to borrow a similar amount on a collateralized basis over a similar term. Certain adjustments to the right-of-use asset may be required for items such as lease incentives received. Operating lease cost is recognized over the expected term on a straight-line basis.

The expected lease term for those leases commencing prior to January 1, 2022 did not change with the adoption of the new leasing standards. The expected lease term for leases commencing after the adoption of the new leasing standards includes noncancelable lease periods and, when applicable, periods covered by an option to extend the lease if the Company is reasonably certain to exercise that option, as well as periods covered by an option to terminate the lease if the Company is reasonably certain not to exercise that option.

As a result of the adoption of the new leasing standards, on January 1, 2022, the Company recorded right-of-use assets of $3.4 million and operating lease liabilities of $3.5 million. The adoption did not have a material impact on the statement of operations or the statement of cash flows. For additional information on the adoption of the new leasing standard, refer to Note 8.

9


 

The following table presents the cumulative effect of adoption of ASC 842 on January 1, 2022 (in thousands):
 

 

 

January 1, 2022
(in thousands)

 

 

 

Prior to adoption of new leasing standards

 

 

Adjustment for adoption of new leasing standards

 

 

As adjusted

 

Right-of-use assets (1)

 

$

 

 

$

3,422

 

 

$

3,422

 

Deferred rent (2)

 

$

105

 

 

$

(105

)

 

$

 

Operating lease liability (3)

 

$

 

 

$

645

 

 

$

645

 

Operating lease liability, net of current portion (3)

 

$

 

 

$

2,882

 

 

$

2,882

 

 

 

 

 

 

 

 

 

 

 

(1) Represents capitalization of operating right-of-use assets

 

 

 

 

 

 

 

 

 

(2) Represents reclassification of deferred rent and incentives as a reduction of operating right-of-use assets

 

 

 

 

 

 

 

 

 

(3) Represents recognition of operating right-of-use assets

 

 

 

 

 

 

 

 

 

 

3. Fair Value of Financial Assets and Liabilities

The following table presents information about the Company’s financial instruments that are measured at fair value on a recurring basis and indicates the fair value hierarchy of the inputs the Company utilized to determine such fair value (in thousands):

 

 

 

March 31, 2022

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds (cash equivalents)

 

$

17,248

 

 

$

17,248

 

 

$

 

 

$

 

Marketable securities

 

 

202,738

 

 

 

34,887

 

 

 

167,851

 

 

 

 

Total financial assets measured at fair value

 

$

219,986

 

 

$

52,135

 

 

$

167,851

 

 

$

 

 

 

 

December 31, 2021

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds (cash equivalents)

 

$

10,319

 

 

$

10,319

 

 

$

 

 

$

 

Marketable securities

 

 

225,357

 

 

 

27,186

 

 

 

198,171

 

 

 

 

Total financial assets measured at fair value

 

$

235,676

 

 

$

37,505

 

 

$

198,171

 

 

$

 

 

The Company had a contingent stock liability that represented the fair value of contingent equity consideration equal to 65,186 shares of common stock contingently issuable to the University of Louisville Research Foundation Inc. (“ULRF”) in connection with its amended and restated exclusive license agreement with the Company. In conjunction with the Company’s IPO, the Company issued 48,889 shares of common stock and paid the cash equivalent fair value of 16,297 shares, or $0.3 million, to ULRF in May 2021 (see Note 8).