0000950170-23-021995.txt : 20230515 0000950170-23-021995.hdr.sgml : 20230515 20230515090114 ACCESSION NUMBER: 0000950170-23-021995 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 54 CONFORMED PERIOD OF REPORT: 20230331 FILED AS OF DATE: 20230515 DATE AS OF CHANGE: 20230515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Terns Pharmaceuticals, Inc. CENTRAL INDEX KEY: 0001831363 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 000000000 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-39926 FILM NUMBER: 23918811 BUSINESS ADDRESS: STREET 1: 1065 EAST HILLSDALE BLVD., SUITE 100 CITY: FOSTER CITY STATE: CA ZIP: 94404 BUSINESS PHONE: 650-525-5535 EXT.101 MAIL ADDRESS: STREET 1: 1065 EAST HILLSDALE BLVD., SUITE 100 CITY: FOSTER CITY STATE: CA ZIP: 94404 10-Q 1 tern-20230331.htm 10-Q 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended March 31, 2023

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: 001-39926

 

Terns Pharmaceuticals, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

98-1448275

(State or other jurisdiction of

incorporation or organization)

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

1065 East Hillsdale Blvd., Suite 100

Foster City, California

94404

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (650) 525-5535

 

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

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, $0.0001 par value per share

 

TERN

 

The Nasdaq Global Select Market

 

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

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

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

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

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

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

As of May 5, 2023, the registrant had 56,680,148 shares of common stock, $0.0001 par value per share, outstanding.

 

 

 


 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements concerning our business, operations and financial performance and condition, as well as our plans, objectives and expectations for our business, operations and financial performance and condition. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that are in some cases beyond our control and may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

In some cases, you can identify forward-looking statements by terminology such as “aim,” “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “could,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective,” “plan,” “predict,” “potential,” “positioned,” “seek,” “should,” “target,” “will,” “would,” and other similar expressions that are predictions of or indicate future events and future trends, or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:

 

our expectations with regard to the results of our clinical studies, preclinical studies and research and development programs, including the timing and availability of data from such studies;
the timing of commencement of future nonclinical studies and clinical trials and research and development programs;
our clinical and regulatory development plans;
our expectations regarding the product profile, relative benefits and clinical utility of our product candidates;
our expectations regarding the potential market size and size of the potential patient populations for our product candidates and any future product candidates if approved for commercial use;
our ability to acquire, discover, develop and advance our product candidates into, and successfully complete, clinical trials;
our intentions and our ability to establish collaborations and/or partnerships;
the timing or likelihood of regulatory filings and approvals for our product candidates;
our commercialization, marketing and manufacturing capabilities and expectations;
our intentions with respect to the commercialization of our product candidates;
the pricing and reimbursement of our product candidates, if approved;
the implementation of our business model and strategic plans for our business and product candidates, including additional indications which we may pursue;
the scope of protection we are able to establish, maintain, protect and enforce for intellectual property rights covering our product candidates including the projected terms of patent protection;
estimates of our expenses, future revenue, capital requirements, our needs for additional financing and our ability to obtain additional capital and the timing of the sufficiency of our capital resources;
our future financial performance; and
developments and projections relating to our competitors and our industry, including competing products.

 

i


 

Table of Contents

 

Page

PART I.

FINANCIAL INFORMATION

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

1

Condensed Consolidated Balance Sheets

1

Condensed Consolidated Statements of Operations and Comprehensive Loss

2

Condensed Consolidated Statements of Stockholders’ Equity

3

Condensed Consolidated Statements of Cash Flows

4

Notes to Unaudited Condensed Consolidated Financial Statements

5

Item 2.

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

19

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

23

Item 4.

Controls and Procedures

23

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

24

Item 1A.

Risk Factors

24

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

25

Item 3.

Defaults Upon Senior Securities

25

Item 4.

Mine Safety Disclosures

25

Item 5.

Other Information

25

Item 6.

Exhibits

26

 

Signatures

27

 

 

 

 

 

 

 

ii


 

PART I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited).

Terns Pharmaceuticals, Inc.

Condensed Consolidated Balance Sheets

(Unaudited; in thousands, except share and per share data)

 

 

 

March 31, 2023

 

 

December 31, 2022

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

184,354

 

 

$

143,235

 

Marketable securities

 

 

113,172

 

 

 

139,879

 

Prepaid expenses and other current assets

 

 

2,138

 

 

 

2,071

 

Total current assets

 

 

299,664

 

 

 

285,185

 

Property and equipment, net

 

 

683

 

 

 

757

 

Operating lease assets

 

 

901

 

 

 

1,047

 

Other assets

 

 

37

 

 

 

37

 

Total assets

 

$

301,285

 

 

$

287,026

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

2,690

 

 

$

1,645

 

Accrued expenses and other current liabilities

 

 

8,763

 

 

 

6,162

 

Current portion of operating lease liabilities

 

 

656

 

 

 

661

 

Total current liabilities

 

 

12,109

 

 

 

8,468

 

Taxes payable, non-current

 

 

1,107

 

 

 

1,071

 

Operating lease liabilities, non-current

 

 

386

 

 

 

544

 

Total liabilities

 

 

13,602

 

 

 

10,083

 

Commitments and contingencies

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Common stock, $0.0001 par value, 150,000,000 shares
   authorized at March 31, 2023 and December 31, 2022;
   
56,669,596 and 53,723,171 shares issued and outstanding at
   March 31, 2023 and December 31, 2022, respectively

 

 

5

 

 

 

5

 

Additional paid-in capital

 

 

552,040

 

 

 

520,178

 

Accumulated other comprehensive loss

 

 

(416

)

 

 

(822

)

Accumulated deficit

 

 

(263,946

)

 

 

(242,418

)

Total stockholders’ equity

 

 

287,683

 

 

 

276,943

 

Total liabilities and stockholders’ equity

 

$

301,285

 

 

$

287,026

 

 

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

1


 

Terns Pharmaceuticals, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited; in thousands, except share and per share data)

 

 

 

Three Months Ended March 31,

 

 

 

2023

 

 

2022

 

Operating expenses:

 

 

 

 

 

 

Research and development

 

$

17,056

 

 

$

8,136

 

General and administrative

 

 

7,101

 

 

 

5,689

 

Total operating expenses

 

 

24,157

 

 

 

13,825

 

Loss from operations

 

 

(24,157

)

 

 

(13,825

)

Other income:

 

 

 

 

 

 

Interest income

 

 

2,693

 

 

 

69

 

Other (expense) income, net

 

 

(4

)

 

 

4

 

Total other income, net

 

 

2,689

 

 

 

73

 

Loss before income taxes

 

 

(21,468

)

 

 

(13,752

)

Income tax expense

 

 

(60

)

 

 

(21

)

Net loss

 

$

(21,528

)

 

$

(13,773

)

 

 

 

 

 

 

Net loss per share, basic and diluted

 

$

(0.31

)

 

$

(0.55

)

Weighted average common stock outstanding, basic and diluted

 

 

69,778,420

 

 

 

25,269,271

 

 

 

 

 

 

 

Other comprehensive loss:

 

 

 

 

 

 

Net loss

 

$

(21,528

)

 

$

(13,773

)

Unrealized gain (loss) on available-for-sale securities, net of tax

 

 

418

 

 

 

(551

)

Foreign exchange translation adjustment, net of tax

 

 

(12

)

 

 

(7

)

Comprehensive loss

 

$

(21,122

)

 

$

(14,331

)

 

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

2


 

Terns Pharmaceuticals, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited; in thousands, except share data)

 

Three Months Ended March 31, 2023

 

 

 

Common Stock

 

 

Additional
Paid-in

 

 

Accumulated
Other
Comprehensive

 

 

Accumulated

 

 

Total
Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Equity

 

Balances at December 31, 2022

 

 

53,723,171

 

 

$

5

 

 

$

520,178

 

 

$

(822

)

 

$

(242,418

)

 

$

276,943

 

Issuance of common stock in at-the-market offering

 

 

2,929,922

 

 

 

 

 

 

27,924

 

 

 

 

 

 

 

 

 

27,924

 

Vesting of restricted stock units

 

 

16,503

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

3,938

 

 

 

 

 

 

 

 

 

3,938

 

Unrealized gain on available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

418

 

 

 

 

 

 

418

 

Foreign exchange translation adjustment

 

 

 

 

 

 

 

 

 

 

 

(12

)

 

 

 

 

 

(12

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(21,528

)

 

 

(21,528

)

Balances at March 31, 2023

 

 

56,669,596

 

 

$

5

 

 

$

552,040

 

 

$

(416

)

 

$

(263,946

)

 

$

287,683

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2022

 

 

 

Common Stock

 

 

Additional
Paid-in

 

 

Accumulated
Other
Comprehensive

 

 

Accumulated

 

 

Total
Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Equity

 

Balances at December 31, 2021

 

 

25,269,271

 

 

$

3

 

 

$

342,711

 

 

$

(338

)

 

$

(182,073

)

 

$

160,303

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

2,744

 

 

 

 

 

 

 

 

 

2,744

 

Unrealized loss on available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

(551

)

 

 

 

 

 

(551

)

Foreign exchange translation adjustment

 

 

 

 

 

 

 

 

 

 

 

(7

)

 

 

 

 

 

(7

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13,773

)

 

 

(13,773

)

Balances at March 31, 2022

 

 

25,269,271

 

 

$

3

 

 

$

345,455

 

 

$

(896

)

 

$

(195,846

)

 

$

148,716

 

 

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

3


 

Terns Pharmaceuticals, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited; in thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2023

 

 

2022

 

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

 

$

(21,528

)

 

$

(13,773

)

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

 

 

 

 

 

 

Stock-based compensation expense

 

 

3,938

 

 

 

2,744

 

Depreciation and amortization expense

 

 

76

 

 

 

141

 

(Accretion) amortization on marketable securities

 

 

(806

)

 

 

613

 

Change in deferred taxes and uncertain tax positions

 

 

32

 

 

 

21

 

Amortization of operating lease assets

 

 

146

 

 

 

137

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

(67

)

 

 

(1,893

)

Accounts payable

 

 

1,324

 

 

 

(410

)

Accrued expenses and other current liabilities

 

 

2,666

 

 

 

(731

)

Operating lease liabilities

 

 

(163

)

 

 

(149

)

Net cash used in operating activities

 

 

(14,382

)

 

 

(13,300

)

Cash flows from investing activities:

 

 

 

 

 

 

Purchase of property and equipment

 

 

 

 

 

(242

)

Purchase of investments

 

 

(23,862

)

 

 

(24,434

)

Proceeds from sales and maturities of investments

 

 

51,793

 

 

 

34,164

 

Net cash provided by investing activities

 

 

27,931

 

 

 

9,488

 

Cash flows from financing activities:

 

 

 

 

 

 

Net proceeds from issuance of common stock in at-the-market offering

 

 

27,924

 

 

 

 

Payment of deferred offering costs

 

 

(344

)

 

 

 

Net cash provided by financing activities

 

 

27,580

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(10

)

 

 

(8

)

Net increase (decrease) in cash and cash equivalents

 

 

41,119

 

 

 

(3,820

)

Cash and cash equivalents at beginning of period

 

 

143,235

 

 

 

47,699

 

Cash and cash equivalents at end of period

 

$

184,354

 

 

$

43,879

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

Cash paid for amounts included in the measurement of lease liabilities

 

$

180

 

 

$

166

 

Supplemental disclosure of non-cash activities:

 

 

 

 

 

 

Right-of-use assets obtained in exchange for lease liabilities

 

$

 

 

$

1,513

 

 

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

4


 

Terns Pharmaceuticals, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

1. Organization, Basis of Presentation and Summary of Significant Accounting Policies

Terns Pharmaceuticals, Inc. (Terns) is a clinical-stage biopharmaceutical company developing a portfolio of small-molecule product candidates to address serious diseases including oncology, non-alcoholic steatohepatitis (NASH) and obesity.

Terns was incorporated as an exempted company in the Cayman Islands in December 2016. In December 2020, the Company effected a de-registration of the Company in the Cayman Islands and a domestication in the State of Delaware (the "Domestication"), pursuant to which it became a Delaware corporation. Terns owns all of the share capital of Terns Pharmaceutical HongKong Limited (Terns Hong Kong) and Terns, Inc., a Delaware corporation (Terns U.S. Opco). Terns Hong Kong holds all of the share capital of Terns China Biotechnology Co., Ltd. (organized in Shanghai, People’s Republic of China (PRC)) (Terns China) and Terns (Suzhou) Biotechnology Co., Ltd. (organized in Suzhou, PRC) (Terns Suzhou).

Basis of Presentation

The accompanying condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and include the accounts of Terns and its wholly owned subsidiaries Terns U.S. Opco and Terns Hong Kong and its wholly owned subsidiaries Terns China and Terns Suzhou. The Company’s condensed consolidated financial statements have been prepared in conformity with U.S. GAAP. All intercompany balances and transactions have been eliminated in consolidation. The condensed consolidated balance sheet as of December 31, 2022 has been derived from audited consolidated financial statements at that date but does not include all of the information required by U.S. GAAP for complete financial statements.

Operating results for the three months ended March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023 or for any future period.

At-the-Market Offering

In March 2022, the Company entered into a Sales Agreement with Cowen and Company, LLC (Cowen) as sales agent, pursuant to which the Company has the ability to offer and sell, from time to time, through Cowen, shares of its common stock having an aggregate offering price of up to $75.0 million in an at-the-market offering. The shares are offered pursuant to the Company's shelf registration statement on Form S-3 filed with the Securities and Exchange Commission, or SEC. As of March 31, 2023, there were 7,052,550 shares of our common stock sold for aggregate net proceeds of $52.8 million after deducting commissions and offering expenses pursuant to this agreement. The Company sold 2,929,922 shares for aggregate net proceeds of $27.9 million pursuant to this agreement during the three months ended March 31, 2023.

August 2022 Financing

In August 2022, the Company issued 12,250,000 shares of its common stock at a price of $2.42 per share and, to certain investors in lieu of common stock, pre-funded warrants to purchase 14,630,000 shares of common stock at a price of $2.4199 per pre-funded warrant. The purchase price per share of each pre-funded warrant represents the per share offering price for the common stock, minus the $0.0001 per share exercise price of such pre-funded warrant. Aggregate net proceeds were $60.7 million after deducting underwriting discounts and commissions and offering expenses.

The pre-funded warrants were classified as a component of permanent stockholders’ equity within additional paid-in capital and were recorded at the issuance date using a relative fair value allocation method. The pre-funded warrants are equity classified because they (i) are freestanding financial instruments that are legally detachable and separately exercisable from the equity instruments, (ii) are immediately exercisable, (iii) do not embody an obligation for the Company to repurchase its shares, (iv) permit the holders to receive a fixed number of shares of common stock upon exercise, (v) are indexed to the Company’s common stock and (vi) meet the equity classification criteria. In addition, such pre-funded warrants do not provide any guarantee of value or return. The Company valued the pre-funded warrants at issuance, concluding that their sales price approximated their fair value, and allocated net proceeds from the sale proportionately to the common stock and pre-funded warrants, of which $33.0 million was allocated to the pre-funded warrants and recorded as a component of additional paid-in capital.

 

5


 

December 2022 Financing

 

In December 2022, the Company entered into an Underwriting Agreement with Jefferies LLC and Cowen and Company, LLC, as representatives of the several underwriters, relating to the underwritten public offering of 10,350,000 shares of the Company's common stock at a public offering price per share of $7.25. Under the terms of the Underwriting Agreement, the Company granted the underwriters an option, exercisable within 30 days from the date of the Underwriting Agreement, to purchase up to 1,552,500 additional shares of common stock, which the Underwriters exercised in full. Aggregate net proceeds were $80.8 million after deducting underwriting discounts and commissions and offering expenses.

Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of expenses during the reporting period. Significant estimates and assumptions made in the accompanying consolidated financial statements include, but are not limited to, the estimates for accruals of research and development expenses, accrual of research contract costs, unrecognized tax benefits, fair value of common stock and stock option valuations. On an ongoing basis, the Company evaluates its estimates and judgments, using historical and anticipated results and trends and on various other assumptions that management believes to be reasonable under the circumstances. Actual results could materially differ from those estimates.

Unaudited Interim Financial Information

These unaudited condensed consolidated financial statements include all adjustments necessary, consisting of only normal recurring adjustments, to fairly state the financial position and the results of the Company’s operations and cash flows for interim periods in accordance with U.S. GAAP. Interim period results are not necessarily indicative of results of operations or cash flows for a full year or any subsequent interim period. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto in the Company’s Annual Report on Form 10-K (“Annual Report”) for the fiscal year ended December 31, 2022, as filed with the SEC on March 27, 2023. There have been no significant changes to the Company's significant accounting policies described in Note 1, Organization, Basis of Presentation and Summary of Significant Accounting Policies, in Notes to Consolidated Financial Statements in Item 8 of Part II of the Form 10-K for the fiscal year ended December 31, 2022.

Cash, Cash Equivalents and Marketable Securities

Cash and cash equivalents consist of standard checking accounts and money market funds. The Company considers all highly liquid investments with an original maturity of 90 days or less at the date of purchase to be cash equivalents.

The Company classifies as available-for-sale marketable securities with a remaining maturity when purchased of greater than three months. The Company’s marketable securities are maintained by investment managers and consist of U.S. government and non-U.S. government securities, corporate debt securities and commercial paper. Debt securities are carried at fair value with the unrealized gains and losses included in other comprehensive loss as a component of stockholders’ equity until realized. Any premium arising at purchase is amortized to the earliest call date and any discount arising at purchase is accreted to maturity. Amortization and accretion of premiums and discounts are recorded in interest income and/or expense.

The Company assesses its available-for-sale debt securities for impairment as of each reporting date in order to determine if a portion of any decline in fair value below carrying value is the result of a credit loss. The Company records credit losses in the consolidated statements of operations and comprehensive loss as credit loss expense within other income (expense), net, which is limited to the difference between the fair value and the amortized cost of the security. To date, the Company has not recorded any credit losses on its available-for-sale debt securities.

Interest receivable related to the Company's available-for-sale debt securities is presented as marketable securities on the Company's condensed consolidated balance sheets. The Company writes off interest receivable once it has determined that the asset is not realizable. To date, the Company has not written off any interest receivables associated with its marketable securities.

6


 

Operating Leases and Rent Expense

At the inception of a contractual arrangement, the Company determines whether the contract contains a lease by assessing whether there is an identified asset and whether the contract conveys the right to control the use of the identified asset in exchange for consideration over a period of time. If both criteria are met, upon lease commencement, the Company records a lease liability which represents the Company’s obligation to make lease payments arising from the lease, and a corresponding right-of-use (“ROU”) asset which represents the Company’s right to use an underlying asset during the lease term.

Operating lease right-of-use assets and liabilities are recognized on the balance sheet at the lease commencement date based on the present value of the future minimum lease payments over the lease term. In determining the net present value of the lease payments, the Company uses its incremental borrowing rate applicable to the underlying asset unless the implicit rate is readily determinable. Any lease incentives received are deferred and recorded as a reduction of the ROU asset and amortized over the term of the lease. The Company does not separate lease and non-lease components and instead treats them as a single component. Rent expense, comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term. The Company determines the lease term as the noncancellable period of the lease and may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise such options.

The Company elected to not apply the recognition requirements of the new leasing standard to short term leases with terms of 12 months or less. As a result, leases with a term of 12 months or less are not recognized on the balance sheet.

Research and Development Expenses

Research and development costs are expensed as incurred. Research and development expenses consist of costs incurred to discover, research and develop drug candidates, including personnel expenses, stock-based compensation expense, allocated facility-related and depreciation expenses, third-party license fees and external costs, including fees paid to consultants and contract research organizations, or CROs, in connection with nonclinical studies and clinical trials and other related clinical trial fees, such as for investigator grants, patient screening, laboratory work, clinical trial database management, clinical trial material management and statistical compilation and analysis. Non-refundable prepayments for goods or services that will be used or rendered for future research and development activities are recorded as prepaid expenses. Such amounts are recognized as an expense as the goods are delivered or the related services are performed, or until it is no longer expected that the goods will be delivered, or the services rendered. Costs incurred in obtaining technology licenses are charged immediately to research and development expense if the technology licensed has not reached technological feasibility and has no alternative future uses.

The Company has from time to time entered into various research and development and other agreements with commercial firms, researchers, universities and others for provisions of goods and services. These agreements are generally cancelable, and the related costs are recorded as research and development expenses as incurred. The Company records accruals for estimated ongoing research and development costs. When evaluating the adequacy of the accrued liabilities, the Company analyzes progress of the studies or clinical trials, including the phase or completion of events, invoices received and contracted costs. Significant judgments and estimates are made in determining the accrued balances at the end of any reporting period. Actual results could differ materially from the Company’s estimates. Since inception, the Company’s historical accrual estimates have not been materially different from the actual costs.

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities included the following:

 

(in thousands)

 

March 31, 2023

 

 

December 31, 2022

 

Research and development costs

 

$

5,924

 

 

$

1,209

 

Compensation and benefit costs

 

 

832

 

 

 

3,843

 

Accrued professional fees

 

 

1,644

 

 

 

925

 

Other

 

 

363

 

 

 

185

 

Total accrued expenses and other current liabilities

 

$

8,763

 

 

$

6,162

 

 

7


 

Income Taxes

The provision for income taxes primarily relates to projected federal, state and foreign income taxes. To determine the quarterly provision for income taxes, the Company uses an estimated annual effective tax rate, which is generally based on expected annual income and statutory tax rates in the various jurisdictions in which the Company operates. In addition, the tax effects of certain significant or unusual items are recognized discretely in the quarter during which they occur and can be a source of variability in the effective tax rates from quarter to quarter.

Income taxes are computed using the asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s financial statements. In estimating future tax consequences, the Company considers all expected future events including the enactment of changes in tax laws or rates. A valuation allowance is recorded, if necessary, to reduce net deferred tax assets to their realizable values if management does not believe it is more likely than not that the net deferred tax assets will be realized. In making such a determination, management considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, and ongoing prudent and feasible tax planning strategies in assessing the amount of the valuation allowance. When the Company establishes or reduces the valuation allowance against its deferred tax assets, its provision for income taxes will increase or decrease, respectively, in the period such determination is made.

The Company assesses accounting for uncertainty in income taxes by modeling for the recognition, measurement and disclosure in financial statements any uncertain income tax positions that the Company has taken or expects to take on a tax return. As of each balance sheet date, unresolved uncertain tax positions are reassessed. The Company accrues interest and related penalties, if applicable, on all tax exposures for which reserves have been established consistent with jurisdictional tax laws. The Company includes interest and penalties related to unrecognized tax benefits within the provision for income taxes.

The Company recorded income tax expense for the three months ended March 31, 2023 and 2022 of less than $0.1 million. The expenses are primarily related to foreign income tax expenses from China.

Comprehensive Loss

Comprehensive loss is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources.

Stock-Based Compensation

Stock-based compensation expense, including grants of stock options and restricted stock awards issued under the Company’s equity incentive plan and rights to acquire stock granted under the Company’s employee stock purchase plan (ESPP), is measured at the grant date based on the fair value of the awards and is recognized as an expense on a straight-line basis over the requisite service period, which is generally the vesting period. The Company’s determination of the fair value of stock options with time-based vesting and rights to acquire stock under the ESPP utilizes the Black-Scholes option-pricing model. The Company lacks sufficient 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 such time as it has adequate historical data regarding the volatility of its own traded stock price. The Company estimates risk-free rates using the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term and dividend yield using the Company’s expectations and historical data. The Company uses the simplified method to calculate the expected term of stock option grants as the Company has limited historical information from which to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior for its stock option grants. Under the simplified method, the expected term is estimated to be the mid-point between the vesting date and the contractual term of the option. The fair value of each stock option grant and right to acquire stock under the ESPP is calculated based upon the Company’s common stock valuation on the date of the grant. The Company accounts for forfeitures of stock option grants as they occur.

8


 

Net Loss Per Share of Common Stock

The Company follows the two-class method when computing net income (loss) per share of common stock as the Company has issued shares that meet the definition of participating securities. The two-class method determines net income (loss) per share of common stock for each class of common and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires income available to common stockholders for the period to be allocated between common and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed.

Basic net income (loss) per share of common stock is computed by dividing the net income (loss) per share of common stock by the weighted average number of shares of common stock outstanding for the period. The weighted-average shares of common stock outstanding as of March 31, 2023 included pre-funded warrants to purchase up to an aggregate of 14,630,000 shares of common stock that were issued in connection with the August 2022 Financing.

Diluted net income (loss) per share of common stock is computed by adjusting net income (loss) to reallocate undistributed earnings based on the potential impact of dilutive securities. Diluted net loss per share of common stock is computed by dividing the diluted net loss by the weighted average number of shares of common stock outstanding for the period, including potential dilutive shares. For purposes of this calculation, outstanding stock options and convertible preferred stock are considered potential dilutive shares. The Company’s convertible preferred stock outstanding prior to the IPO contractually entitled the holders of such shares to participate in dividends but did not contractually require the holders of such shares to participate in losses of the Company. Accordingly, in periods in which the Company reported a net loss, such losses were not allocated to such securities.

The Company reported a net loss for the three months ended March 31, 2023 and 2022. In periods in which the Company reported a net loss, diluted net loss per share of common stock was the same as basic net loss per share of common stock, since dilutive shares were not assumed to have been issued if their effect is anti-dilutive. The Company excluded the following potential shares of common stock, presented based on amounts outstanding at each period end, from the computation of diluted net loss attributable to common stockholders per share of common stock for the periods indicated because including them would have had an anti-dilutive effect:

 

 

March 31,

 

 

 

2023

 

 

2022

 

Options to purchase common stock

 

 

7,729,844

 

 

 

4,308,952

 

Unvested restricted stock units

 

 

388,103

 

 

 

74,830

 

Shares issuable under employee stock purchase plan

 

 

106,308

 

 

 

59,247

 

Total

 

 

8,224,255

 

 

 

4,443,029

 

Deferred Offering Costs

The Company capitalizes certain legal, professional accounting and other third-party fees that are directly associated with in-process equity financings as deferred offering costs until such financings are consummated.

After consummation of the equity financing, these costs are recorded as a reduction to the carrying value of stockholders’ equity as a reduction of additional paid-in capital or equity generated as a result of such offering. Should an in-process equity financing be abandoned, the deferred offering costs will be expensed immediately as a charge to operating expenses in the consolidated statements of operations and comprehensive loss.

Commitments and Contingencies

From time to time, the Company may have certain contingent liabilities that arise in the ordinary course of business. The Company accrues a liability for such matters when it is probable that future expenditures will be made, and such expenditures can be reasonably estimated. For all periods presented, the Company was not a party to any pending material litigation or other material legal proceedings.

9


 

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies. The Company is an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012, as amended (JOBS Act). Under the JOBS Act, emerging growth companies have extended transition periods available for complying with new or revised accounting standards. The Company has elected to use this exemption to delay adopting new or revised accounting standards until such time as those standards apply to private companies. Where allowable, the Company has early adopted certain standards as described below.

Recently Adopted Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. For non-public entities, ASU 2016-13 is effective for annual reporting periods, and interim periods within those fiscal years, beginning after December 15, 2022. Under the JOBS Act, emerging growth companies have extended transition periods available for complying with new or revised accounting standards. The Company adopted the new standard on January 1, 2023 on a prospective basis and the adoption did not have a material impact on the Company’s consolidated financial statements and related disclosures.

Recently Issued Accounting Pronouncements Not Yet Adopted

There are no recently issued accounting pronouncements that are expected to have a material effect on our financial condition, results of operations or cash flows.

2. Cash Equivalents and Marketable Securities

The amortized cost and fair value of cash equivalents and marketable securities by major security type is as follows:

 

 

 

March 31, 2023

 

(in thousands)

 

Amortized Cost

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

Fair Value

 

Money market funds

 

$

169,405

 

 

$

 

 

$

 

 

$

169,405

 

U.S. government securities

 

 

39,282

 

 

 

5

 

 

 

(85

)

 

 

39,202

 

Corporate debt securities

 

 

14,236

 

 

 

 

 

 

(19

)

 

 

14,217

 

Commercial paper

 

 

59,750

 

 

 

3

 

 

 

 

 

 

59,753

 

Total

 

$

282,673

 

 

$

8

 

 

$

(104

)

 

$

282,577

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Classified as:

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

$

169,405

 

Marketable securities

 

 

 

 

 

 

 

 

 

 

 

113,172

 

Total

 

 

 

 

 

 

 

 

 

 

$

282,577

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2022

 

(in thousands)

 

Amortized Cost

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

Fair Value

 

Money market funds

 

$

23,029

 

 

$

 

 

$

 

 

$

23,029

 

U.S. government securities

 

 

44,555

 

 

 

31

 

 

 

(383

)

 

 

44,203

 

Non-U.S. government securities

 

 

3,024

 

 

 

 

 

 

(16

)

 

 

3,008

 

Corporate debt securities

 

 

36,411

 

 

 

 

 

 

(146

)

 

 

36,265

 

Commercial paper

 

 

56,403

 

 

 

 

 

 

 

 

 

56,403

 

Total

 

$

163,422

 

 

$

31

 

 

$

(545

)

 

$

162,908

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Classified as: