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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, 2021

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.)

570 S. Preston St

Louisville, KY

40202

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (502398-9250

 

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 June 1, 2021, the registrant had 41,310,241 shares of common stock, $0.0001 par value per share, outstanding.

 

 

 


 

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

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’ Deficit

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

29

Item 4.

Controls and Procedures

29

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

30

Item 1A.

Risk Factors

30

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

77

Item 3.

Defaults Upon Senior Securities

77

Item 4.

Mine Safety Disclosures

77

Item 5.

Other Information

77

Item 6.

Exhibits

78

Signatures

79

 

 

i


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

TALARIS THERAPEUTICS, INC.

BALANCE SHEETS

(in thousands, except share and per share amounts)

(unaudited)

 

 

 

March 31, 2021

 

 

December 31, 2020

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

9,889

 

 

$

17,589

 

Marketable securities

 

 

130,212

 

 

 

131,899

 

Prepaid and other current assets

 

 

2,702

 

 

 

1,263

 

Total current assets

 

 

142,803

 

 

 

150,751

 

Property and equipment, net

 

 

2,083

 

 

 

2,013

 

Other assets

 

 

14

 

 

 

14

 

Total assets

 

$

144,900

 

 

$

152,778

 

Liabilities and Stockholders’ Deficit

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

769

 

 

$

767

 

Accrued expenses

 

 

2,812

 

 

 

2,637

 

Total current liabilities

 

 

3,581

 

 

 

3,404

 

Share repurchase liability

 

 

901

 

 

 

996

 

Contingent stock liability

 

 

733

 

 

 

373

 

Total liabilities

 

 

5,215

 

 

 

4,774

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

Convertible preferred stock

 

 

 

 

 

 

 

 

Series A convertible preferred stock, $0.0001 par value, 40,000,000

   shares authorized, issued and outstanding (liquidation preference of

   $40,000) as of March 31, 2021 and December 31, 2020

 

 

37,383

 

 

 

37,383

 

Series A-1 convertible preferred stock, $0.0001 par value, 28,000,000

   shares authorized, issued and outstanding (liquidation preference of

   $35,000) as of March 31, 2021 and December 31, 2020

 

 

34,272

 

 

 

34,272

 

Series B convertible preferred stock, $0.0001 par value, 62,499,993

   shares authorized, issued and outstanding (liquidation preference

   of $114,994) as of March 31, 2021 and December 31, 2020

 

 

114,496

 

 

 

114,496

 

Total convertible preferred stock

 

 

186,151

 

 

 

186,151

 

Stockholders’ deficit

 

 

 

 

 

 

 

 

Common stock, $0.0001 par value, 36,366,101 shares authorized and

   7,204,311 issued and outstanding as of March 31, 2021 and

   36,366,101 shares authorized and 7,087,130 issued and outstanding

   as of December 31, 2020

 

 

1

 

 

 

1

 

Additional paid-in-capital

 

 

5,837

 

 

 

4,879

 

Accumulated deficit

 

 

(52,313

)

 

 

(43,014

)

Accumulated other comprehensive income (loss)

 

 

9

 

 

 

(13

)

Total stockholders’ deficit

 

 

(46,466

)

 

 

(38,147

)

Total liabilities, convertible preferred stock and stockholders’ deficit

 

$

144,900

 

 

$

152,778

 

 

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,

 

 

 

2021

 

 

2020

 

Operating expenses

 

 

 

 

 

 

 

 

Research and development

 

$

6,468

 

 

$

3,535

 

General and administrative

 

 

2,537

 

 

 

1,439

 

Total operating expenses

 

 

9,005

 

 

 

4,974

 

Loss from operations

 

 

(9,005

)

 

 

(4,974

)

Interest and other income (expense), net

 

 

(294

)

 

 

126

 

Net loss

 

$

(9,299

)

 

$

(4,848

)

Unrealized gain on marketable securities

 

 

22

 

 

 

13

 

Total other comprehensive loss

 

 

(9,277

)

 

 

(4,835

)

Total comprehensive loss

 

$

(9,277

)

 

$

(4,835

)

Net loss attributable to common stockholders

 

$

(9,299

)

 

$

(4,848

)

Net loss per common share, basic and diluted

 

$

(1.30

)

 

$

(0.76

)

Weighted average number of common shares outstanding used in computation of net

   loss per common share, basic and diluted

 

 

7,160,631

 

 

 

6,390,771

 

 

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

 

2


 

 

TALARIS THERAPEUTICS, INC.

STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT

(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’

Deficit

 

Balance at December 31, 2019

 

 

40,000,000

 

 

$

37,383

 

 

 

16,000,000

 

 

$

19,307

 

 

 

 

 

$

 

 

 

 

6,390,137

 

 

$

1

 

 

$

3,204

 

 

$

(20,307

)

 

$

 

 

$

(17,102

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

123

 

 

 

 

 

 

 

 

 

123

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,848

)

 

 

 

 

 

(4,848

)

Unrealized loss on marketable

   securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13

 

 

 

13

 

Balance at March 31, 2020

 

 

40,000,000

 

 

$

37,383

 

 

 

16,000,000

 

 

$

19,307

 

 

 

 

 

$

 

 

 

 

6,390,137

 

 

$

1

 

 

$

3,327

 

 

$

(25,155

)

 

$

13

 

 

$

(21,814

)

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 loss 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

)

 

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,

 

 

 

2021

 

 

2020

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(9,299

)

 

$

(4,848

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

135

 

 

 

92

 

Accretion and amortization of marketable securities, net

 

 

193

 

 

 

(49

)

Stock-based compensation expense

 

 

835

 

 

 

123

 

Fair value adjustment of contingent stock liability

 

 

360

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid and other current assets

 

 

(400

)

 

 

(4

)

Accounts payable

 

 

1

 

 

 

138

 

Accrued expenses

 

 

(872

)

 

 

(695

)

Net cash used in operating activities

 

 

(9,047

)

 

 

(5,243

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(187

)

 

 

(349

)

Purchases of marketable securities

 

 

(34,297

)

 

 

(19,106

)

Maturities of marketable securities

 

 

35,814

 

 

 

 

Net cash used in investing activities

 

 

1,330

 

 

 

(19,455

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Preferred stock issuance costs

 

 

(11

)

 

 

 

Proceeds from exercise of stock options

 

 

28

 

 

 

 

Net cash provided by financing activities

 

 

17

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

(7,700

)

 

 

(24,698

)

Cash and cash equivalents at beginning of period

 

 

17,589

 

 

 

38,978

 

Cash and cash equivalents at end of period

 

$

9,889

 

 

$

14,280

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Property and equipment additions included in accounts payable and accrued expenses

 

$

106

 

 

$

35

 

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 and its cell processing facility in Louisville, Kentucky.

Initial Public Offering

As described in Note 13, the Company completed an initial public offering in May 2021. 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. Prior to the offering, 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, 2021 and the year ended December 31, 2020, the Company incurred a net loss of $9.3 million and $22.7 million, respectively, and used $9.0 million and $19.2 million in cash for operations, respectively. In addition, as of March 31, 2021, the Company had an accumulated deficit of $52.3 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 on hand of $9.9 million and marketable securities of $130.2 million as of March 31, 2021, together with the net proceeds from the Company’s initial public offering (“IPO”), after deducting underwriting discounts and commissions but before deducting offering costs, of approximately $139.5 million in May 2021, 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.

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.

5


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 fair value of the Company’s common stock, determination of the fair value of stock option grants and estimates related to the amount of accrued research and development expenses as of the balance sheet date. 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, 2021 and December 31, 2020, cash consists primarily of checking and savings deposits and money market fund holdings.

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, 2021 and December 31, 2020.

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. 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 our deposits are held at financial institutions that management believes to be of high credit quality.

6


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 and December 31, 2020 (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.

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.

7


The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The Company is a private company 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.

In determining the exercise prices for options granted, the Company has considered the estimated fair value of the common stock as of the measurement date. The estimated fair value of the common stock has been 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.

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, 2021 and December 31, 2020.

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 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.

8


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’ deficit. The Company’s comprehensive loss included unrealized gains related to marketable securities for the three months ended March 31, 2021 and 2020.

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 Company adopted ASC 326 in January 2021, and had no material impact on the 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. ASC 842 will be effective for the Company on January 1, 2022, with early adoption permitted. The Company is in the process of evaluating its lease contracts under the new standard and the adoption of ASC 842 is expected to result in the recognition of additional lease liability and right-to-use assets on the balance sheet.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (ASC 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. ASU No. 2018-13 removes certain disclosures, modifies certain disclosures, and adds additional disclosures. ASU No. 2018-13 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2019. The adoption of ASU 2018-13 in January 2020 had no material impact on the financial statements.

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, 2021

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds (cash equivalents)

 

$

877

 

 

$

877

 

 

$

 

 

$

 

Marketable securities

 

 

130,212

 

 

 

8,133

 

 

 

122,079

 

 

 

 

Total financial assets measured at fair value

 

$

131,089

 

 

$

9,010

 

 

$

122,079

 

 

$

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent stock liability

 

$

733

 

 

$

 

 

$

 

 

$

733

 

Total financial liabilities measured at fair value

 

$

733

 

 

$

 

 

$

 

 

$

733

 

 

 

 

December 31, 2020

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds (cash equivalents)

 

$

13,943

 

 

$

13,943

 

 

$

 

 

$

 

Marketable securities

 

 

131,899

 

 

 

11,169

 

 

 

120,730

 

 

 

 

Total financial assets measured at fair value

 

$

145,842

 

 

$

25,112

 

 

$

120,730

 

 

$

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent stock liability

 

$

373

 

 

$

 

 

$

 

 

$

373

 

Total financial liabilities measured at fair value

 

$

373

 

 

$

 

 

$

 

 

$

373

 

9


 

 

The contingent stock liability in the table above represents 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 (see Note 8). A rollforward of the contingent common stock liability, which is measured at fair value for the three months ended March 31, 2021 and the year ended December 31, 2020, is represented as follows (in thousands):

 

Fair value as of January 1, 2020

 

$

63

 

Change in fair value

 

 

310

 

Fair value as of December 31, 2020

 

 

373

 

Change in fair value

 

 

360

 

Fair value as of March 31, 2021

 

$

733

 

 

Valuation techniques used to measure fair value maximize the use of relevant observable inputs and minimize the use of unobservable inputs. The Company’s contingent stock liability is classified within Level 3 of the fair value hierarchy because its fair value measurement is based, in part, on significant inputs not observed in the market, which incorporates assumptions and estimates to value the Company’s common stock. As there has been no public market for the Company’s common stock to date, the estimated fair value has been determined by the Company’s board of directors with input from management, considering the most recently available third-party valuations of common stock, and the board of directors’ assessment of additional objective and subjective factors that it believed were relevant and which may have changed from the date of the most recent valuation. Historically, these third-party valuations of the Company’s common stock were performed contemporaneously when events have occurred which management believes would have an impact on the valuation of the Company. The Company’s common stock valuation was prepared using the option-pricing method, (“OPM”), which uses a market approach to estimate enterprise value. Company management utilized an internal estimate for the common stock valuation as of March 31, 2021. The same underlying assumptions from the OPM method utilized by the Company’s third-party valuation expert to determine the common stock value as of January 25, 2021 were utilized by the Company. Company management adjusted the time-based present value factor to account for the change in expected timing to IPO as well as increased the percentage of the IPO valuation scenario for the March 31, 2021 estimate. Changes in the fair value of the contingent stock liability are recognized within interest and other income, net in the statement of operations. The fair values of the Company’s common stock used to value the contingent stock liability as of March 31, 2021 and December 31, 2020 were $11.23 and $5.72, respectively.

4. Marketable Securities

The fair value of the Company’s marketable securities as of March 31, 2021 and December 31, 2020 is based on level 1 and level 2 inputs. The Company’s investments consist mainly of U.S. government and agency securities, government-sponsored bond obligations and certain other corporate debt securities. Fair value is determined by taking into consideration valuations obtained from third-party pricing services. The third-party pricing services utilize industry standard valuation models, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities; issuer credit spreads; benchmark securities; and other observable inputs. There were no transfers between levels within the hierarchy during the three months ended March 31, 2021 and the year ended December 31, 2020. The Company has assessed U.S. government treasuries as level 1 and all other marketable securities as level 2 within the fair value hierarchy of ASC 820. The Company classifies its entire investment portfolio as available-for-sale as defined in ASC 320, Debt Securities. Securities are carried at fair value with the unrealized gains (losses) reported in other comprehensive loss.

As of March 31, 2021 and December 31, 2020, none of the Company’s investments were determined to be other than temporarily impaired.

The following table summarizes the Company’s investments (in thousands):

 

 

 

March 31, 2021

 

 

 

Amortized

Cost

 

 

Unrealized

Gain

 

 

Unrealized

(Loss)

 

 

Estimated

Fair Value

 

Commercial paper

 

$

88,425

 

 

$

9

 

 

$

(2

)

 

$

88,432

 

Government and agency securities

 

 

22,198

 

 

 

8

 

 

 

 

 

 

22,206

 

Corporate debt securities

 

 

19,580

 

 

 

 

 

 

(6

)

 

 

19,574

 

Total

 

$

130,203

 

 

$

17

 

 

$

(8

)

 

$

130,212

 

10


 

 

 

 

December 31, 2020

 

 

 

Amortized

Cost

 

 

Unrealized

Gain

 

 

Unrealized

(Loss)

 

 

Estimated

Fair Value

 

Commercial paper

 

$

73,331

 

 

$

3

 

 

$

(10

)

 

$

73,324

 

Corporate debt securities

 

 

33,319

 

 

 

1

 

 

 

(11

)

 

 

33,309

 

Government and agency securities

 

 

25,262

 

 

 

4

 

 

 

 

 

 

25,266

 

Total

 

$

131,912

 

 

$

8

 

 

$

(21

)

 

$

131,899

 

 

5. Prepaid and Other Current Assets

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

 

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

Deferred offering costs

 

$

1,289

 

 

$

 

Contract research organization prepaid

 

 

556

 

 

 

558

 

Tax credit receivable

 

 

294

 

 

 

 

Interest receivable