UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
For the transition period from to
Commission File No.
(Exact name of registrant as specified in its charter)
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Securities registered pursuant to Section 12(b) of the Act:
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See 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 |
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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
The number of outstanding shares of the Registrant’s common stock, par value $0.0001, as of April 28, 2023 was
HARPOON THERAPEUTICS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED March 31, 2023
TABLE OF CONTENTS
Page
PART II. OTHER INFORMATION
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1A. |
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2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q are forward-looking statements. In some cases, you can identify forward-looking statements by words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will” or “would,” or the negative of these words or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:
These forward-looking statements are based on our management’s current expectations, estimates, forecasts and projections about our business and the industry in which we operate, and management’s beliefs and assumptions and are not guarantees of future performance or development. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in the "Risk Factor Summary" below, under the heading “Risk Factors” and elsewhere in this report. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this report. While we believe that information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance, or events and circumstances reflected in the forward-looking statements will be achieved or occur. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report to conform these statements to new information, actual results or changes in our expectations, except as required by law.
3
Unless the context otherwise requires, references in this Quarterly Report on Form 10-Q to the “company,” “Harpoon,” “we,” “us” and “our” refer to Harpoon Therapeutics, Inc.“TriTAC” is a registered trademark and “Harpoon Therapeutics,” “Harpoon,” the Harpoon logo and ProTriTAC are among the trademarks owned by Harpoon Therapeutics, Inc. This report also contains trademarks and trade names that are property of their respective owners.
4
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HARPOON THERAPEUTICS, INC.
Condensed Balance Sheets
(unaudited)
(in thousands, except share and per share data)
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March 31, |
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December 31, |
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2023 |
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2022 |
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Assets |
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Current assets |
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Cash and cash equivalents |
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$ |
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$ |
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Short-term marketable securities |
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Prepaid expenses and other current assets |
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Total current assets |
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Property and equipment, net |
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Operating lease right-of-use asset |
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Other assets |
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Total assets |
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$ |
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$ |
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Liabilities and stockholders' equity |
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Current liabilities |
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Accounts payable |
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$ |
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$ |
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Accrued liabilities |
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Deferred revenue, current |
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Operating lease liabilities, current |
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Total current liabilities |
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Deferred revenue, noncurrent |
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Operating lease liabilities, net of current portion |
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Derivative liability |
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Series A mandatorily redeemable preferred stock |
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Total liabilities |
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Stockholders' equity |
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Common stock, $ |
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Additional paid-in capital |
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Accumulated other comprehensive loss |
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Accumulated deficit |
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Total stockholders' equity |
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Total liabilities and stockholders' equity |
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$ |
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$ |
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The accompanying notes are an integral part of these condensed financial statements.
5
HARPOON THERAPEUTICS, INC.
Condensed Statements of Operations and Comprehensive Loss
(unaudited)
(in thousands, except share and per share data)
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For the Three Months Ended March 31, |
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2023 |
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2022 |
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Revenue |
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$ |
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$ |
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Total revenue |
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Operating expenses |
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Research and development |
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General and administrative |
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Total operating expenses |
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Loss from operations |
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Interest income, net |
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Interest expense |
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Other expense, net |
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Net loss attributable to common stockholders |
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( |
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Other comprehensive loss: |
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Net unrealized gain (loss) on marketable securities |
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Comprehensive loss |
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$ |
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$ |
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Net loss attributable to common stockholders per share, basic and diluted |
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$ |
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$ |
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Weighted-average shares used in computing net loss per share, basic and diluted |
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The accompanying notes are an integral part of these condensed financial statements.
6
HARPOON THERAPEUTICS, INC.
Condensed Statements of Stockholders’ Equity
(unaudited)
(in thousands, except share data)
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Additional |
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Accumulated Other |
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Total |
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Common Stock |
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Paid-In |
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Comprehensive |
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Accumulated |
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Stockholders' |
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Shares |
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Amount |
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Capital |
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Income (Loss) |
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Deficit |
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Equity |
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Balances at December 31, 2022 |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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Issuance of common stock under equity incentive plan |
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— |
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— |
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— |
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Issuance of common stock warrants in connection with the sale of Series A mandatorily redeemable preferred stock, net of issuance cost of $ |
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— |
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— |
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— |
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Issuance of common stock pursuant to ATM facility, net of issuance costs of $ |
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— |
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— |
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— |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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Net loss attributable to common stockholders |
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— |
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— |
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— |
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— |
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( |
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( |
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Unrealized gain on marketable securities |
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— |
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— |
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— |
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— |
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Balances at March 31, 2023 |
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$ |
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$ |
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$ |
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$ |
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$ |
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Additional |
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Accumulated Other |
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Total |
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Common Stock |
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Paid-In |
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Comprehensive |
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Accumulated |
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Stockholders' |
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Shares |
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Amount |
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Capital |
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Income (Loss) |
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Deficit |
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Equity |
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Balances at December 31, 2021 |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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Issuance of common stock under equity incentive plan including exercise of stock options |
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— |
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— |
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— |
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Vesting of early exercised stock options |
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— |
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— |
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— |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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Net loss attributable to common stockholders |
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— |
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— |
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— |
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— |
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( |
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( |
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Unrealized loss on marketable securities |
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— |
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— |
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— |
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( |
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— |
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( |
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Balances at March 31, 2022 |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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7
HARPOON THERAPEUTICS, INC.
Condensed Statements of Cash Flows
(unaudited)
(in thousands)
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Three Months Ended March 31, |
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2023 |
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2022 |
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Cash flows from operating activities |
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Net loss attributable to common stockholders |
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$ |
( |
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$ |
( |
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Adjustments to reconcile net loss attributable to common stockholders to net cash provided by (used in) operating activities |
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Stock-based compensation expense |
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Depreciation and amortization |
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Non-cash lease expense |
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Accretion of redemption value discount |
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Gain on sale of equipment |
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Net amortization of discounts on marketable securities |
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Changes in operating assets and liabilities: |
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Prepaid expenses and other assets |
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( |
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Other assets |
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Accounts payable |
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( |
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Accrued liabilities |
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( |
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Deferred revenue |
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( |
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( |
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Operating lease liabilities |
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( |
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( |
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Net cash used in operating activities |
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( |
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( |
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Cash flows from investing activities |
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Purchases of property and equipment |
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Purchases of marketable securities |
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Maturity of marketable securities |
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Proceeds from sale of equipment |
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Net cash provided by investing activities |
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Cash flows from financing activities |
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Proceeds from issuance of common stock in connection with employee benefit plans |
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Proceeds from issuance of common stock, net of issuance cost |
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Proceeds from issuance of Series A mandatorily redeemable preferred stock |
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Net cash provided by financing activities |
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Net increase in cash, cash equivalents, and restricted cash |
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Cash, cash equivalents, and restricted cash at beginning of period |
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Cash, cash equivalents, and restricted cash at end of period |
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$ |
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$ |
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Supplemental disclosures of non-cash investing and financing information |
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Accrued issuance cost in the Series A mandatorily redeemable preferred stock liability |
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$ |
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$ |
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Accrued issuance cost in additional paid-in capital for the Warrants |
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$ |
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$ |
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Purchases of property and equipment included in accrued liabilities and accounts payable |
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$ |
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$ |
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Reclassification of employee stock liability to equity upon vesting |
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$ |
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$ |
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The accompanying notes are an integral part of these condensed financial statements.
8
HARPOON THERAPEUTICS, INC.
Notes to the Condensed Financial Statements
(unaudited)
1. Organization
Description of Business
Harpoon Therapeutics, Inc. (the “Company”) is a clinical-stage immunotherapy company developing a novel class of T cell engagers that harness the power of the body’s immune system to treat patients suffering from cancer and other diseases. T cell engagers are engineered proteins that direct a patient’s own T cells to kill target cells that express specific proteins, or antigens, carried by the target cells. Using a proprietary Tri-specific T cell Activating Construct (“TriTAC”), platform, the Company is developing a pipeline of novel T cell engagers, or TriTACs, initially focused on the treatment of solid tumors and hematologic malignancies. The Company is also developing its ProTriTAC platform, which builds upon the core elements of the TriTAC platform by utilizing a prodrug approach designed to allow T cell engagers to address cancer targets that would otherwise be limited by on-target toxicities. The Company's third proprietary technology platform, extended release TriTAC-XR, is designed to mitigate cytokine release syndrome. The Company was incorporated in Delaware in
Liquidity
Since inception, the Company has incurred significant losses and has negative cash flows from operations. As of March 31, 2023, the Company had an accumulated deficit of $
In March 2023, the Company sold and issued (i)
On November 14, 2022, the Company announced a corporate restructuring designed to reduce operating expenses and align the Company's core activities with its focused clinical programs that are expected to drive long-term growth. This restructuring reflects the Company's ongoing plans to focus its resources on its clinical programs, including: HPN217, B-cell maturation antigen, ("BCMA"), HPN328, Delta-like canonical Notch ligand 3 or ("DLL3"), and future clinical programs such as HPN601, epithelial cell adhesion molecule ("EpCAM”).
The Company estimates that it will incur costs of up to approximately $
As of March 31, 2023, the Company had cash and cash equivalents of $
The Company will need to raise additional capital to support its research and development activities. There can be no assurance that additional funds will be available to the Company on acceptable terms on a timely basis, if at all. The Company’s activities are subject to significant risks and uncertainties, including failing to secure additional funding to continue to operationalize the Company’s current technology and to advance the development of its product candidates. If the Company is unsuccessful in its efforts to raise additional financing, the Company will likely be required to further reduce its operations.
9
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of SEC Regulation S-X for interim financial information.
The accompanying unaudited condensed financial statements and notes should be read in conjunction with the audited annual financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on March 27, 2023 (the “2022 Annual Report on Form 10-K”). The Balance Sheet as of December 31, 2022 was derived from the audited annual financial statements as of the period then ended. Certain information and footnote disclosures typically included in the Company's audited annual financial statements have been condensed or omitted. The accompanying unaudited condensed financial statements reflect all adjustments that, in the opinion of management, are necessary for a fair statement of the results of the interim periods presented. All such adjustments are of a normal recurring nature except for the impacts of adopting new accounting standards discussed below. The accompanying unaudited condensed financial results are not necessarily indicative of results expected for the full fiscal year or for any subsequent interim period.
Except where noted below, there were no material changes to the Company's significant accounting and financial reporting policies in the accompanying unaudited condensed financial statements from those reflected in the 2022 Annual Report on Form 10-K. For further information with regard to the Company’s Significant Accounting Policies, please refer to Note 2, “Summary of Significant Accounting Policies,” to the Company’s audited annual financial statements included in the 2022 Annual Report on Form 10-K which have been prepared in accordance with GAAP.
Updates to Significant Accounting Policies
As a result of the adoption on January 1, 2023 of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and subsequent amendments to the initial guidance: ASU 2018-19 and ASU 2019-04 (collectively, “2016-13”), the Company has made the following updates to its significant accounting policies described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
Available-for-Sale Securities
The Company is exposed to credit losses through its investments in available-for-sale securities("AFS"). An investment is impaired if the fair value of the investment is less than its amortized cost basis. The Company reviews each impaired AFS security held in its portfolio to determine whether the decline in fair value below its amortized cost basis is the result of credit losses or other factors. An allowance for credit losses is to be recorded as a charge to net loss attributable to common stockholders in an amount equal to the difference between the impaired security’s amortized cost basis and the amount expected to be collected over the lifetime of security, limited by the amount that the fair value is less than its amortized cost basis. Any remaining difference between its amortized cost basis and fair value is deemed not to be due to expected credit losses and is recorded as a component of accumulated other comprehensive loss.
The Company’s impairment review considers several factors to determine if an expected credit loss is present including the discounted present value of expected cash flows of the security, the capacity to hold a security or sell a security before recovery of the decline in amortized cost, the credit rating of the security and forecasted and historical factors that affect the value of the security.
The Company's AFS held at December 31, 2022 matured during the three months ended March 31, 2023 at full face value and all proceeds were received. The Company made no purchases of AFS for the three months ended March 31, 2023.
10
Use of Estimates
The preparation of unaudited condensed financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the unaudited condensed financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates and assumptions made in the accompanying unaudited condensed financial statements include, but are not limited to, valuation of the Series A Preferred Stock, valuation of the derivative liabilities, allowance for credit losses, the fair value of stock options and warrants, the research period of the collaboration agreements with AbbVie Biotechnology Ltd. (“AbbVie”), operating lease asset and lease liabilities, income tax uncertainties and certain accruals.
As of March 31, 2023, the Company has not experienced a significant financial impact directly related to the COVID-19 pandemic.
Segment Reporting
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the Company’s Chief Operating Decision Maker in making decisions regarding resource allocation and assessing performance. To date, the Company has viewed its operations and manages its business as
Cash, Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments purchased with original maturities of
As of March 31, 2023 and December 31, 2022, the Company classified $
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the unaudited condensed balance sheets that sum to the total of the same amounts shown in the unaudited condensed statements of cash flows.
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As of |
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March 31, 2023 |
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March 31, 2022 |
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(in thousands) |
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Balance Sheets |
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Cash and cash equivalents |
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$ |
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$ |
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Restricted cash (included in other assets) |
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Cash, cash equivalents and restricted cash in the unaudited condensed Statements of Cash Flows |
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$ |
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$ |
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Marketable Securities
The Company generally invests its excess cash in money market funds and investment grade short-term to intermediate-term fixed income securities. Such investments are included in cash and cash equivalents, short-term marketable securities or long-term marketable securities on the unaudited condensed balance sheets. Marketable securities with a maturity date greater than 90 days and less than one year at each unaudited condensed balance sheet date are classified as short-term. Marketable securities with a maturity date greater than one year at each unaudited condensed balance sheet date are classified as long-term. All of the Company’s marketable securities are considered available-for-sale and are reported at fair value with unrealized gains and losses included as a component of stockholders’ equity. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity, which is included in interest income, net on the unaudited condensed statements of operations and comprehensive loss. Realized gains and losses, if any, on marketable securities are included in interest income, net on the unaudited condensed statements of operations and comprehensive loss. The cost of securities sold is determined using specific identification.
The Company periodically evaluates its available-for-sale marketable debt securities for impairment. When the fair value of a marketable debt security is below its amortized cost, the amortized cost is reduced to its fair value if it is more likely than not that the Company is required to sell the impaired security before recovery of its amortized cost basis, or the Company has the intention to sell the security. If neither of these conditions are met, the Company determines whether the impairment is due to credit losses by comparing the present value of the expected cash flows of the security with its amortized cost basis. The amount of impairment recognized is limited to the excess of the amortized cost over the fair value of the security. An allowance for credit losses for the
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excess of amortized cost over the expected cash flows is recorded in other income (expense), net on the unaudited condensed statements of operations and comprehensive loss. Impairment losses that are not credit-related are included in accumulated other comprehensive loss in stockholders’ equity.
Concentration of Credit Risk
The Company is subject to credit risk from its portfolio of cash equivalents and marketable securities. The Company invests in money market funds through a major U.S. bank and is exposed to credit risk in the event of default by the financial institution to the extent of amounts recorded on the unaudited condensed balance sheets. The Company invests in money market funds and investment grade short- to intermediate-term fixed income securities. Under its investment policy, the Company limits amounts invested in such securities by credit rating, maturity, industry group, investment type and issuer, except for securities issued by the U.S. government. The Company is not exposed to any significant concentrations of credit risk from these financial instruments. The goals of the Company’s investment policy, in order of priority, are as follows: preservation of principal, liquidity of investments, fiduciary control of cash and investments, prevention of inappropriate concentrations of investments, and obtaining the best yields. The Company minimizes the amount of credit exposure by investing cash that is not required for immediate operating needs in money market funds and marketable securities.
Leases
The Company evaluates arrangements at inception to determine if an arrangement is or contains a lease. Operating lease assets represent the Company’s right to use an underlying asset for the lease term and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at the commencement date of the lease based upon the present value of lease payments over the lease term. When determining the lease term, the Company includes options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The Company uses an incremental borrowing rate that the Company would expect to incur for a fully collateralized loan over a similar term under similar economic conditions to determine the present value of the lease payments.
The lease payments used to determine the Company’s operating lease assets may include lease incentives and stated rent increases and are recognized in the Company’s operating lease assets in the unaudited condensed balance sheets. Operating lease liabilities are accreted over the term of the lease using the incremental borrowing rate and the associated expense is recorded to operating expenses in the unaudited condensed statement of operations and comprehensive loss. The Company recognizes lease expenses on a straight-line basis over the lease term. Variable lease payments are recognized as the associated obligation is incurred.
Fair Value Measurement
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability, or an exit price, in the principal or most advantageous market for that asset or liability in an orderly transaction between market participants on the measurement date, and established a fair value hierarchy that requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value.
The Company measures fair value based on a three-level hierarchy of inputs, of which the first two are considered observable and the last unobservable. Unobservable inputs reflect the Company’s own assumptions about current market conditions. The three-level hierarchy of inputs is as follows:
Level 1—Observable inputs such as unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;
Level 2—Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active; and
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.
To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
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The carrying amounts reflected in the accompanying unaudited condensed balance sheets for cash and cash equivalents, restricted cash, short-term marketable securities, prepaid expenses, other current assets, accounts payable, accrued expenses and other current liabilities approximate their fair values due to their short-term nature.
Property and Equipment, Net
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed on a straight-line basis over the estimated useful lives of the related assets, generally to
Impairment of Long-Lived Assets
The Company evaluates its long-lived assets, including property and equipment, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets or group of assets may not be fully recoverable. If indicators of impairment exist and the undiscounted future cash flows that the assets are expected to generate are less than the carrying amount of the assets, the Company reduces the carrying amount of the assets through an impairment charge to their estimated fair values based on a discounted cash flow approach or, when available and appropriate, to comparable market values. There were
Revenue Recognition
In accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“Topic 606”), the Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that the Company determines are within the scope of Topic 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that it will collect the consideration it is entitled to in exchange for the goods and services it transfers to the customer. At contract inception, the Company assesses the goods or services promised within each contract that falls under the scope of Topic 606, 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.
The Company enters into corporate collaborations under which it may obtain upfront license fees, research and development funding, and development, regulatory and commercial milestone payments and royalty payments. The Company’s performance obligations under these arrangements may include licenses of intellectual property, distribution rights, research and development services, delivery of manufactured product and/or participation on joint steering committees.
Licenses of intellectual property: If the license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenue from upfront license fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license. For licenses that are bundled with other promises, the Company utilizes judgement to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring proportional performance for purposes of recognizing revenue from non-refundable, up-front fees. The Company evaluates the measure of proportional performance each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition. The Company recognizes collaboration revenue by measuring the progress toward complete satisfaction of the performance obligation using an input measure. In order to recognize revenue over the research and development period, the Company measures actual costs incurred to date compared to the overall total expected costs to satisfy the performance obligation. Revenues are recognized as the program costs are incurred. The Company will re-evaluate the estimate of expected costs to satisfy the performance obligation each reporting period and make adjustments for any significant changes.
Milestone payments: At the inception of each arrangement that includes development, regulatory or commercial milestone payments, the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price. Topic 606 suggests two alternatives to use when estimating the amount of variable consideration: the expected value method and the most likely amount method. Under the expected value method, an entity considers the sum of
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probability-weighted amounts in a range of possible consideration amounts. Under the most likely amount method, an entity considers the single most likely amount in a range of possible consideration amounts. Whichever method is used, it should be consistently applied throughout the life of the contract; however, it is not necessary for the Company to use the same approach for all contracts. The Company expects to use the most likely amount method for development and regulatory milestone payments. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the Company’s or the licensee’s control, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. The transaction price is then allocated to each performance obligation on a relative stand-alone selling price basis. The Company recognizes revenue as or when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, the Company re-evaluates the probability or achievement of each such milestone and any related constraint, and if necessary, adjusts its estimates of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues and earnings in the period of adjustment.
Commercial milestones and royalties: For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and in which the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue when the related sales occur. To date, the Company has not recognized any royalty revenue resulting from its collaboration arrangements.
Upfront payments and fees are recorded as deferred revenue upon receipt or when due, and may require deferral of revenue recognition to a future period until the Company performs its obligations (i.e. research and development services) under these arrangements. Amounts due to the Company are recorded as accounts receivable when the Company’s right to consideration is unconditional. Amounts recognized as revenue prior to receipt are recorded as contract assets included in prepaid expenses and other current assets on the Company’s unaudited condensed balance sheet. If the Company expects to have an unconditional right to receive the consideration in the next twelve months, this will be classified in current assets.
Research and Development Expenses and Accrued Research and Development Costs
The Company expenses research and development costs as incurred. Research and development expenses consist of personnel costs for the Company’s research and product development employees. Also included are non-personnel costs such as professional fees payable to third parties for preclinical studies, clinical trials, research services, production of materials for clinical trials, laboratory supplies and equipment maintenance and depreciation, intellectual property licenses and other consulting costs.
The Company estimates preclinical and clinical study and research expenses based on the services performed, pursuant to contracts with research institutions that conduct and manage preclinical studies, clinical trials and research services and manufacturing organizations in connection with the production of materials for clinical trials on its behalf. The Company estimates these expenses based on discussions with internal management personnel and external service providers as to the progress or stage of completion of services and the contracted fees to be paid for such services. The Company records the estimated costs of research and development activities based upon the estimated amount services provided but not yet invoiced and includes these costs in development expenses. The Company accrues for these costs based on factors such as estimates of the work completed and in accordance with agreements established with its third-party service provides under the service agreements. The Company makes significant judgments and estimates in determining the accrued liabilities balance in each reporting period. As actual costs become known, the Company adjusts its accrued liabilities. The Company has not experienced any material differences between accrued costs and actual costs incurred. However, the status and timing of actual services performed may vary from the Company’s estimates, resulting in adjustments to expense in future periods. Changes in these estimates that result in material changes to the Company’s accruals could materially affect the Company’s results of operations. Payments associated with licensing agreements to acquire exclusive license to develop, use, manufacture and commercialize products that have not reached technological feasibility and do not have alternate future use are expensed as incurred.
Payments made to third parties under these arrangements in advance of the performance of the related services by the third parties are recorded as prepaid expenses until the services are rendered. Such payments are evaluated for current or long-term classification based on when such services are expected to be received.
Stock-Based Compensation
The Company maintains a stock-based compensation plan as a long-term incentive for employees, consultants and members of the Company’s board of directors (the “Board”). The plan allows for the issuance of non-statutory options (“NSOs”) and incentive stock options to employees and NSOs to non-employees.
Share-based payments are measured using fair-value-based measurements and recognized as compensation expense over the service period in which the awards are expected to vest. The Company’s fair-value-based measurements of awards to employees, directors and consultants as of the grant date utilize the single-option award-valuation approach, and the Company uses the straight-line method for expense attribution. The fair-value-based measurements of options granted to non-employees are remeasured at each
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period end until the options vest and are amortized to expense as earned. The valuation model used for calculating the estimated fair value of stock awards is the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires the Company to make assumptions and judgments about the variables used in the calculations, including the expected term (weighted-average period of time that the options granted are expected to be outstanding), the expected volatility of the Company’s common stock, the related risk-free interest rate and the expected dividend yield. The Company has elected to recognize forfeitures of share-based payment awards as they occur.
Income Taxes
Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates applied to taxable income in the years in which those temporary differences are expected to be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income in the period that includes the enactment date. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized. Financial statement effects of uncertain tax positions are recognized when it is more-likely-than-not, based on the technical merits of the position, that it will be sustained upon examination. Interest and penalties related to unrecognized tax benefits are included as a component of Other expense, net. To date, there have been
The Company accounts for uncertain tax positions in accordance with ASC 740-10, Accounting for Uncertainty in Income Taxes. The Company assesses all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge by relevant taxing authorities. Assessing an uncertain tax position begins with the initial determination of the position’s sustainability and is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. As of each balance sheet date, unresolved uncertain tax positions must be reassessed, and the Company will determine whether (i) the factors underlying the sustainability assertion have changed and (ii) the amount of the recognized tax benefit is still appropriate. The recognition and measurement of tax benefits requires significant judgment. Judgment concerning the recognition and measurement of a tax benefit might change as new information becomes available.
The Company includes any penalties and interest expense related to income taxes as a component of the provision for income tax, as necessary. To date, there have been
Net Loss Per Share Attributable to Common Stockholders
Basic net loss per share attributable to common stockholders is calculated by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period, without consideration for potentially dilutive securities.
As discussed in Note 10 Net Loss Per Share Attributable to Common Stockholders, unexercised common stock warrants and outstanding options are excluded from the computation of weighted-average common shares. Diluted net loss attributable to common stockholders per share is the same as basic net loss attributable to common stockholders per share for each period presented since the effects of potentially dilutive securities are antidilutive given the net loss attributable to common stockholders of the Company.
Comprehensive Loss
Comprehensive loss includes net loss attributable to common stockholders and certain changes in stockholders’ equity that are excluded from net loss attributable to common stockholders, primarily unrealized gains or losses on the Company’s marketable securities.
Emerging Growth Company Status
The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that the Company (i) is no longer an emerging growth company or (ii) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. As a result, the accompanying unaudited condensed financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.
Recent Accounting Pronouncements Adopted
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In June 2016, the Financial Accounting Standards Board (the FASB) issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which requires that expected credit losses relating to financial assets measured on an amortized cost basis and available-for-sale debt securities be recorded through an allowance for credit losses. ASU 2016-13 limits the amount of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and requires the reversal of previously recognized credit losses if fair value increases. In April, May and November 2019, the FASB issued additional amendments to the new guidance related to transition and clarification. In November 2019, the FASB issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, which deferred the effective date of this standard for all entities except SEC filers that are not smaller reporting companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.
The Company adopted ASU 2016-13 effective January 1, 2023 on a modified retrospective basis. The adoption of ASU 2016-13 did not have an impact on the Company’s unaudited condensed financial statements.
3. Fair Value Measurement
The following table presents information about the Company’s financial assets that are measured at fair value and indicates the fair value hierarchy of the valuation:
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March 31, 2023 |
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Total |
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Level 1 |
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Level 2 |
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Level 3 |
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(in thousands) |
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Assets |
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Cash equivalents: |
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Money market funds |
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$ |
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$ |
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$ |
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$ |
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Total cash equivalents |
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$ |
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$ |
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$ |
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$ |
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Liabilities |
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Derivative liability |
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$ |
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$ |
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$ |
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$ |
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Total liabilities |
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$ |
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$ |
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$ |
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$ |
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The Company's Level 3 derivative liability was valued utilizing a probability-weighted cash flow approach, including variables for the timing of the related events and other probability estimates, which are deemed to be Level 3 inputs in the fair value hierarchy.
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