UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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:
(Exact Name of Registrant as Specified in its Charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer |
(Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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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 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 |
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Accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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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
As of September 10, 2021, the registrant had 19,714,592 shares of Class A common stock, $0.0001 par value per share, outstanding, and
Table of Contents
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PART I. |
6 |
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Item 1. |
RANI THERAPEUTICS HOLDINGS, INC. |
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RANI THERAPEUTICS, LLC |
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9 |
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Condensed Consolidated Statements of Operations and Comprehensive Loss |
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Condensed Consolidated Statements of Changes In Convertible Preferred Units and Members' Deficit |
11 |
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12 |
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Notes to Unaudited Condensed Consolidated Financial Statements |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
42 |
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PART II. |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 3. |
100 |
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Item 4. |
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Item 5. |
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Item 6. |
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2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations," contains forward-looking statements. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations and financial position, business strategy, product candidates, planned preclinical studies and clinical trials, results of clinical trials, research and development costs, manufacturing costs, regulatory approvals, timing and likelihood of success, as well as plans and objectives of management for future operations, are 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 terms such as “may,” “will,” “should,” “would,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “believe,” “estimate,” “predict,” “potential,” “seek,” “aim,” or “continue” or the negative of these terms or other similar expressions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:
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the progress and focus of our current and future clinical trials in the United States and abroad, and the reporting of data from those trials; |
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our ability to advance product candidates into and successfully complete clinical trials; |
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the beneficial characteristics, safety, efficacy, and therapeutic effects of our product candidates; |
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our potential and ability to successfully manufacture and supply our product candidates for clinical trials and for commercial use, if approved; |
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our ability to redesign and conduct additional preclinical and clinical studies of any future design of the RaniPill capsule to accommodate target payloads that are larger than the current capacity of the RaniPill capsule; |
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our ability to further develop and expand our platform technology; |
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our ability to utilize our technology platform to generate and advance additional product candidates; |
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the accuracy of our estimates regarding expenses, future revenue, capital requirements, and needs for additional financing; |
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our financial performance; |
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our plans relating to commercializing our product candidates, if approved; |
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our ability to selectively enter into strategic partnership and the expected potential benefits thereof; |
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the implementation of our strategic plans for our business and product candidates; |
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our ability to continue to scale and optimize our manufacturing processes by expanding our use of automation; |
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our estimates of the number of patients in the United States who suffer from the indications we target and the number of patients that will enroll in our clinical trials; |
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the size of the market opportunity for our product candidates in each of the indications we target; |
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our ability to continue to innovate and expand our intellectual property by developing novel formulations and new applications of the RaniPill capsule; |
3
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our plans and ability to obtain or protect intellectual property rights, including extensions of existing patent terms where available; |
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the scope of protection we are able to establish and maintain for intellectual property rights, including our technology platform and product candidates; |
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the sufficiency of our existing cash and cash equivalents to fund our future operating expenses and capital expenditure requirements; |
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our expectations regarding the impact of the COVID-19 pandemic on our business; |
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developments relating to our competitors and our industry, including competing product candidates and therapies; and |
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our expectations regarding the period during which we will qualify as an emerging growth company under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act"). |
We have based these forward-looking statements largely on our current expectations and projections about our business, the industry in which we operate and financial trends that we believe may affect our business, financial condition, results of operations, and prospects, and these forward-looking statements are not guarantees of future performance or development. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to a number of risks, uncertainties, and assumptions described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, or otherwise.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and you are cautioned not to unduly rely upon these statements.
4
RANI THERAPEUTICS HOLDINGS, INC.
CONDENSED BALANCE SHEETS
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June 30, |
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April 19, |
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2021 |
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2021 |
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(Unaudited) |
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Assets: |
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Cash |
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$ |
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$ |
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Total assets |
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$ |
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Stockholder’s Equity: |
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Common stock, $ |
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$ |
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Additional paid-in-capital |
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Total stockholder’s equity |
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$ |
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$ |
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The accompanying notes are an integral part of these condensed balance sheets.
5
PART I—FINANCIAL INFORMATION
RANI THERAPEUTICS HOLDINGS, INC.
Notes to THE UNAUDITED CONDENSED Financial Statement
1. Organization
Rani Therapeutics Holdings, Inc. ("Rani Holdings" or "the Company") was formed as a Delaware corporation on
In August 2021, the Company closed its initial public offering (“the Offering” or “IPO”) and related organization transactions whereby the Company became a holding company, was admitted to Rani LLC as the sole managing member, and its principal asset became the common units of Rani LLC that it owns. As the sole managing member of Rani LLC, the Company operates and controls all of the business and affairs of Rani LLC, and through its subsidiary, conducts its business. As a result, the Company will consolidate the financial results of Rani LLC and will report a non-controlling interest representing the Rani LLC interests held by InCube Labs, LLC, a Delaware limited liability company and certain of its affiliates (“ICL”) and certain current and former executive officers, employees and directors of Rani LLC.
2. Summary of Significant Accounting Policies
Basis of Presentation and Accounting
The accompanying unaudited condensed balance sheets have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to Form 10-Q of Regulation S-X of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Separate statements of operations, comprehensive income, changes in stockholder’s equity, and cash flows have not been presented as of June 30, 2021 because there have been no activities except in connection with the Company’s formation.
The condensed balance sheet presented as of April 19, 2021, has been derived from the audited balance sheet as of that date. The condensed balance sheets and notes are presented as permitted by Form 10-Q and do not contain all information that is included in the annual financial statements and notes thereto of the Company. Therefore, these interim condensed balance sheets and notes should be read in conjunction with the Company’s audited balance sheet and notes included in the Company’s Registration Statement on Form S-1 (No. 333-257809) filed with the SEC.
The financial statement has been prepared in accordance with GAAP.
The financial statement has been prepared assuming Rani Holdings will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business.
Use of Estimates
The preparation of 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 at the date of the balance sheet. Actual results could differ from those estimates.
Cash
Cash consists of a deposit in-transit.
3. Stockholder's Equity
On April 6, 2021, Rani Holdings was authorized to issue
6
4. Subsequent Events
Organization Transactions
In August 2021, and in connection with the completion of the Offering, the Company was party to the following organization transactions (the “Organization Transactions”):
The Continuing LLC Owners of Rani LLC may, subject to the terms of the Rani LLC Agreement, exchange their interests in Rani LLC ("LLC Interests") for the Company’s Class A common stock on a one-to-one basis with a corresponding number of such shares of Class B common stock; provided that, at the Company’s election, the Company may effect a direct exchange of such Class A common stock or make a cash payment equal to a volume weighted average market price of one share of Class A common stock for each LLC Interest redeemed. Any shares of Class B common stock will be cancelled on a one-for-one basis if the Company, at the election of the Continuing LLC Owners, redeem or exchange such LLC Interests pursuant to the terms of the Rani LLC Agreement. These exchanges and redemptions may result in increases in the tax basis of the assets of Rani LLC that otherwise would not have been available. Increases in tax basis resulting from such exchanges may reduce the amount of tax that Rani Holdings would otherwise be required to pay in the future. This tax basis may also decrease the gains (or increase the losses) on future dispositions of certain assets to the extent tax basis is allocated to those assets. Certain individuals who continue to own interests in Rani LLC but do not hold shares of our Class B common stock can exchange their units for
Initial Public Offering
In August 2021, the Company closed an initial public offering and sold
The Company used the proceeds from the Offering to purchase
Tax Receivable Agreement
In August 2021, in connection with the Offering, Rani Holdings entered into a tax receivable agreement with certain of the Continuing LLC Owners that provides for the payment by Rani Holdings to such Continuing LLC Owners of
7
Equity Incentive Plans
In July 2021, the Company adopted and its stockholders approved, the Rani Therapeutics Holdings, Inc. 2021 Equity Incentive Plan (the “2021 Plan”). The 2021 Plan provides for the grant of incentive stock options ("ISOs"), non-statutory stock options ("NSOs"), stock appreciation rights, restricted stock awards, restricted stock unit awards, performance-based awards and other awards for shares of the Company’s Class A common stock.
In July 2021, the Company's board of directors adopted and its stockholders approved, the Rani Therapeutics Holdings, Inc. 2021 Employee Stock Purchase Plan (the “ESPP”).
The Company reserved
8
RANI THERAPEUTICS, LLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except unit amounts)
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June 30, |
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December 31, |
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2021 |
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2020 |
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(Unaudited) |
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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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Related party note receivable |
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Prepaid expenses |
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Total current assets |
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Deferred financing costs |
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Property and equipment, net |
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Total assets |
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$ |
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$ |
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Liabilities, Convertible Preferred Units and Members’ Deficit |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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Related party payable |
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Accrued expenses |
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Deferred revenue |
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Current portion of long-term debt |
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Total current liabilities |
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Preferred unit warrant liability |
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Long-term debt, less current portion |
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Total liabilities |
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Convertible preferred units, |
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Members’ deficit: |
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Common units, |
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Accumulated deficit |
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Total members’ deficit |
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( |
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( |
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Total liabilities, convertible preferred units and members’ deficit |
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$ |
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$ |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
9
RANI THERAPEUTICS, LLC
CONDENSED Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except unit and per unit amounts)
(Unaudited)
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2021 |
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2020 |
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2021 |
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2020 |
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Contract revenue |
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$ |
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$ |
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$ |
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$ |
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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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$ |
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$ |
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$ |
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$ |
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Loss from operations |
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( |
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Other income (expense), net |
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Interest income |
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Interest expense and other, net |
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( |
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( |
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( |
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Change in estimated fair value of preferred unit warrant |
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( |
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( |
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Loss before income taxes |
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( |
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( |
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( |
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( |
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Income tax expense |
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( |
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( |
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( |
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( |
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Net loss and comprehensive loss |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
( |
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Net loss per unit, basic and diluted |
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$ |
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$ |
( |
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$ |
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$ |
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Weighted-average common units outstanding—basic and diluted |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
10
RANI THERAPEUTICS, LLC
CONDENSED Consolidated Statements of Changes in Convertible Preferred Units and Members’ Deficit
(in thousands, except unit amounts)
(Unaudited)
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Convertible Preferred |
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Common |
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For the Six Months Ended June 30, |
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Units |
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Amount |
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Units |
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Amount |
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Accumulated |
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Total Members’ |
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Balance at December 31, 2019 |
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$ |
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$ |
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$ |
( |
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$ |
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Net loss |
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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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Balance at March 31, 2020 |
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$ |
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$ |
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$ |
( |
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$ |
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Net loss |
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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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Balance at June 30, 2020 |
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$ |
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$ |
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$ |
( |
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$ |
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Convertible Preferred |
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Common |
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For the Six Months Ended June 30, |
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Units |
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Amount |
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Units |
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Amount |
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Accumulated |
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Total Members’ |
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Balance at December 31, 2020 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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Issuance of Series E preferred units |
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— |
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— |
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— |
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— |
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Exercise of warrant for common |
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— |
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— |
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Equity-based compensation from secondary sales transactions |
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— |
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— |
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— |
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Net loss |
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— |
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— |
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— |
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( |
) |
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( |
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Balance at March 31, 2021 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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Equity-based compensation |
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— |
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— |
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— |
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Net loss |
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— |
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— |
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— |
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( |
) |
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( |
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Balance at June 30, 2021 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
11
RANI THERAPEUTICS, LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
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Six Months Ended June 30, |
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2021 |
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2020 |
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Cash flows from operating activities |
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Net loss |
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$ |
( |
) |
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$ |
( |
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Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization |
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Equity-based compensation expense |
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Change in fair value of preferred unit warrant liability |
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( |
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Other |
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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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Accounts receivable |
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( |
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Related party receivable |
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( |
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Accounts payable |
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Accrued expenses |
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( |
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Related party payable |
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( |
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Deferred revenue |
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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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|
( |
) |
|
|
( |
) |
Net cash used in investing activities |
|
|
( |
) |
|
|
( |
) |
Cash flows from financing activities |
|
|
|
|
|
|
||
Proceeds from issuance of preferred units, net of issuance costs |
|
|
|
|
|
|
||
Proceeds from exercise of warrants for common units |
|
|
|
|
|
|
||
Proceeds from the Paycheck Protection Program Loan |
|
|
|
|
|
|
||
Payment of deferred financing costs |
|
|
( |
) |
|
|
|
|
Principal and interest repayments from related party for note receivable |
|
|
|
|
|
|
||
Net cash provided by financing activities |
|
|
|
|
|
|
||
Net decrease in cash and cash equivalents |
|
|
( |
) |
|
|
( |
) |
Cash and cash equivalents, beginning of period |
|
|
|
|
|
|
||
Cash and cash equivalents, end of period |
|
$ |
|
|
$ |
|
||
Supplemental disclosures of cash flow information |
|
|
|
|
|
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||
Cash paid for interest |
|
$ |
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|
$ |
|
||
Supplemental disclosures of non-cash investing and financing activities |
|
|
|
|
|
|
||
Property and equipment purchases included in accounts payable and accrued expenses |
|
$ |
|
|
$ |
|
||
Deferred financing costs included in accounts payable and accrued expenses |
|
$ |
|
|
$ |
|
||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
12
RANI THERAPEUTICS, LLC
Notes to THE UNAUDITED CONDENSED Consolidated Financial Statements
1. Organization and Nature of Business
Description of Business
Rani Therapeutics, LLC (“Rani” or the “Company”) is a clinical stage biotherapeutics company advancing technologies to enable the development of orally administered biologics. The Company has developed the RaniPill capsule, which is a novel, proprietary and patented platform technology, intended to replace subcutaneous or intravenous injection of biologics with oral dosing. The Company was organized under the laws of the State of California in February 2012, as a limited liability company. The Company is managed by a board of managers (“Board of Managers”) as prescribed by its operating agreement. The Company formed a wholly-owned subsidiary, Rani Management Services, Inc. (“RMS”) in November 2019. The Company is headquartered in San Jose, California and operates in one segment.
Up to December 31, 2019, Rani maintained no employees of its own and contracted with InCube Labs, LLC (“ICL”), the majority common unit holder of the Company and a related party, to provide research, development and administrative services. ICL and Rani have common management and interest holders and, in the course of performing under the terms of the service agreements, ICL employees acted on behalf of Rani. Effective January 1, 2020, the ICL personnel that were substantially dedicated to providing services to Rani were hired by RMS as full-time employees (see Note 6).
Rani Therapeutics Holdings, Inc. (“Rani Holdings”) was incorporated in April 2021 for the purpose of facilitating an initial public offering in order to carry on the Company’s business. In August 2021, Rani Holdings closed its initial public offering (the “Offering” or "IPO") of
In connection with the Offering, Rani Holdings became a holding company and its principal asset is the Class A common units of Rani that it owns. As the sole managing member of the Company, Rani Holdings operates and controls all of the Company’s operations, and through Rani and its subsidiary, conducts all of Rani’s business.
Liquidity
The Company has incurred recurring losses since its inception, including net losses of $
The Company’s ability to raise additional capital through either the issuance of equity or debt, is dependent on a number of factors including, but not limited to, the demand for the Company, which itself is subject to a number of development and business risks and uncertainties, as well as the uncertainty that the Company would be able to raise such additional capital at a price or on terms that are favorable to the Company.
2. Summary of Significant Accounting Policies
Basis of Presentation
13
Unaudited Interim Financial Information
The accompanying condensed consolidated balance sheet at June 30, 2021, condensed consolidated statements of operations and comprehensive loss and condensed consolidated statements of changes in convertible preferred units and members’ deficit for the three-month and six-month periods ended June 30, 2021 and 2020 and the condensed consolidated statements of cash flows for the six-month periods ended June 30, 2021 and 2020 are unaudited. In management’s opinion, the unaudited condensed consolidated financial statements have been prepared on the same basis as the audited annual consolidated financial statements, and include all adjustments necessary to state fairly the financial position as of June 30, 2021, the results of its operations for the three and six months ended June 30, 2021 and 2020 and the condensed consolidated statement of changes in convertible preferred units and members’ deficit for the three months and six months ended June 30, 2021 and 2020. The consolidated balance sheet as of December 31, 2020 included herein was derived from the audited consolidated financial statements as of that date. The results for the three months and six months ended June 30, 2021 are not necessarily indicative of the operating results to be expected for the full fiscal year or any future period. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted. Therefore, these interim condensed financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in Rani Holdings' Registration Statement on Form S-1 (No. 333-257809) filed with the SEC.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities in the Company’s consolidated financial statements and accompanying notes. These estimates and assumptions are based on current facts, historical experience and various other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of expenses that are not readily apparent from other sources. Significant estimates include, but are not limited to, recovery of long-lived assets, unvested equity-based compensation expense, research and development accruals, the fair value of Profits Interests, and the fair value of the Company’s preferred unit warrants. Actual results may differ materially and adversely from these estimates.
Revenue Recognition
The Company enters into evaluation arrangements with certain pharmaceutical partners, under which the Company performs evaluation services of the partner’s drug molecules using the RaniPill capsule.
Revenue is recognized when control of promised goods or services is transferred to a customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To determine revenue recognition for its arrangements with customers, 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 entity satisfies a performance obligation.
Revenue for an individual contract is recognized at the related transaction price, which is the amount the Company expects to be entitled to in exchange for transferring these services. The terms of the evaluation services agreements usually include payments for evaluation services and evaluation milestones based on a decision to extend the agreement. The transaction price of the evaluation services contracts may include variable consideration. Application of the constraint for variable consideration requires judgment. The constraint for variable consideration is applied such that it is probable a significant reversal of revenue will not occur when the uncertainty associated with the contingency is resolved. Application of the constraint for variable consideration is updated at each reporting period as a revision to the estimated transaction price. For arrangements where the anticipated period between timing of transfer of services and the timing of payment is one year or less, the Company has elected to not assess whether a significant financing component exists. The Company recognizes evaluation services revenue over the period in which evaluation services are provided. Specifically, the Company recognizes revenue using an output method to measure progress, using samples processed relative to total expected samples to be processed as its measure of progress. For services under these arrangements, costs incurred are included in research and development expenses in the Company’s consolidated statements of operations and comprehensive loss.
Customer options, such as options granted to allow a customer to acquire later stage evaluation services, are evaluated at contract inception in order to determine whether those options provide a material right (i.e., an optional good or service offered for free or at a discount) to the customer. If the customer options represent a material right, the material right is treated as a separate performance obligation at the outset of the arrangement. The Company allocates the transaction price to material rights based on the standalone selling price, and revenue is recognized when or as the future goods or services are transferred or when the option expires. Customer options that are not material rights do not give rise to a separate performance obligation, and as such, the additional consideration that would result from a customer exercising an option in the future is not included in the transaction price for the current contract. Instead, the option is deemed a marketing offer, and additional option fee payments are recognized or being
14
recognized as revenue when the licensee exercises the option. The exercise of an option that does not represent a material right is treated as a separate contract for accounting purposes.
Revenue is recognized for each distinct performance obligation as control is transferred to the customer. The Company recognizes revenue from its evaluation services over time as services are delivered, using a cost-based input method of revenue recognition over the contract term. The cost-based input measured is based on an estimate of total costs to be incurred to deliver the services over the contract period compared to costs incurred to date for each contract. The Company’s evaluation of estimated costs to perform the services typically includes estimates for effort related to contracted research, formulation, and animal testing. These estimates are based on the Company’s reasonable assumptions and its historical experience. Actual results may differ materially and adversely from these estimates.
Incremental costs of obtaining contracts are expensed when incurred when the amortization period of the assets that otherwise would have been recognized is one year or less. To date none of these costs have been material. The costs to fulfill the contracts are determined to be immaterial and are recognized as an expense when incurred.
Contract assets are generated when contractual billing schedules differ from revenue recognition timing and the Company records a contract receivable when it has an unconditional right to consideration.
Concentrations of Credit Risk and Other Risks and Uncertainties
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company maintains accounts in federally insured financial institutions in excess of federally insured limits. The Company also holds money market funds that are not federally insured. However, management believes the Company is not exposed to significant credit risk due to the financial strength of the depository institutions in which these deposits are held and of the money market funds and other entities in which these investments are made.
In December 2019, a novel strain of coronavirus, which causes the disease known as COVID-19, was reported to have surfaced in Wuhan, China. Since then, COVID-19 coronavirus has spread globally. In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. The COVID-19 pandemic has impacted and may continue to impact the Company’s third-party manufacturers and suppliers, which could disrupt its supply chain or the availability or cost of materials. The effects of the public health directives and the Company’s work-from-home policies may negatively impact productivity, disrupt its business, and delay clinical programs and timelines and future clinical trials, the magnitude of which will depend, in part, on the length and severity of the restrictions and other limitations on the Company’s ability to conduct business in the ordinary course. These and similar, and perhaps more severe, disruptions in the Company’s operations could negatively impact business, results of operations and financial condition, including its ability to obtain financing. To date, the Company has not incurred impairment losses in the carrying values of its assets as a result of the pandemic and is not aware of any specific related event or circumstances that would require the Company to revise its estimates reflected in these condensed consolidated financial statements.
The Company cannot be certain what the overall impact of the COVID-19 pandemic will be on its business and prospects. The extent to which the COVID-19 pandemic will further directly or indirectly impact its business, results of operations, financial condition, and liquidity, including planned and future clinical trials and research and development costs, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19, the actions taken to contain or treat it, and the duration and intensity of the related effects. In addition, the Company could see some limitations on employee resources that would otherwise be focused on its operation, including but not limited to sickness of employees or their families, the desire of employees to avoid contact with large groups of people, and increased reliance on working from home. If the financial markets and/or the overall economy are impacted for an extended period, the Company’s business, financial condition, results of operations and prospects may be adversely affected.
Fair Value of Financial Instruments
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use
15
of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.
The carrying values of the Company’s cash equivalents, prepaid expenses, accounts payable, and accruals approximate their fair value due to their short-term nature. The fair value of the Company’s long-term debt approximates its carrying value based on borrowing rates currently available to the Company for debt with similar terms and maturities (Level 2 inputs).
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 judgement exercised by the Company in determining fair value is greatest for instruments categorized in Level 3 (see Note 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 of the instrument.
Research and Development Costs
Research and development costs are expensed as incurred. Research and development expenses consist primarily of contract research fees and process development, outsourced labor and related expenses for personnel, facilities cost, fees paid to consultants and advisors, depreciation and supplies used in research and development and costs incurred under our evaluation agreements. Payments made prior to the receipt of goods or services to be used in research and development activities are recorded as prepaid expenses until the related goods or services are received. Until future commercialization is considered probable and the future economic benefit is expected to be realized the Company does not capitalize pre-launch inventory costs. Costs of property and equipment related to scaling-up of the manufacturing capacity for clinical trials and to support commercialization are capitalized as property and equipment unless the related asset does not have an alternative future use.
Clinical and preclinical costs are a component of research and development expense. The Company accrues and expenses clinical and pre-clinical trial activities performed by third parties based upon actual work completed in accordance with agreements established with its service providers. The Company determines the actual costs through discussions with internal personnel and external service providers as to the progress or stage of completion of services and the agreed-upon fee to be paid for such services.
Equity-Based Compensation
The Company has granted equity-based awards to employees of ICL performing services for the Company, employees of and Board Managers of the Company and consultants in the form of non-vested incentive units (“Profits Interests”) and/or options to purchase common units. All awards of Profits Interests and options to purchase common units are measured based on the estimated fair value of the award on the date of grant. Forfeitures are recognized when they occur. All of the Profits Interests are subject to service and performance-based conditions and the Company evaluates the probability of achieving each performance-based condition at each reporting date and begins to recognize distribution of equity for ICL employee awards and equity-based compensation expense for Company and consultant awards when it is deemed probable that the performance-based condition will be met using the accelerated attribution method over the requisite service period.
The Company utilizes estimates and assumptions in determining the fair value of its Profits Interests and options to purchase common units on the date of grant. As the Company was not a publicly traded company in the six months ended June 30, 2021 and 2020, the Company utilized various valuation methodologies in accordance with the framework of the American Institute of Certified Public Accountants Technical Practice Aid, Valuation of Privately Held Company Equity Securities Issued as Compensation, to estimate the fair value of its preferred units, common units and Profits Interests. Each valuation methodology includes estimates and assumptions that require the Company’s judgment. These estimates and assumptions include several objective and subjective factors, including probability weighting of events, volatility, time to an exit event, a risk-free interest rate, the prices at which the Company sold preferred units, the superior rights, and preferences of the preferred units senior to the Company’s common units at the time, and a discount for the lack of marketability. Changes to the key assumptions used in the valuations could result in different fair values at each valuation date.
16
The Company determines the grant-date fair value of options to purchase common units using the Black-Scholes option-pricing model which requires inputs based on certain subjective assumptions, including the expected stock price volatility, the expected term of the unit option, the risk-free interest rate for a period that approximates the expected term of the option, and the Company’s expected dividend yield. The grant-date fair value of awards is amortized over the employees’ requisite service period on a straight-line basis, or the consultants' vesting period as the services are rendered. Equity-based compensation is classified in the accompanying condensed consolidated statements of operations and comprehensive loss based on the function to which the related services are provided.
Comprehensive Loss
Comprehensive loss is defined as a change in equity of a business enterprise during a period, resulting from transactions and other events and/or circumstances from non-owner sources. The Company did not have any other comprehensive loss for any of the periods presented, and therefore comprehensive loss was the same as the Company’s net loss.
Net Loss Per Unit
Basic net loss per unit is computed using the weighted-average number of common units outstanding for the period, without consideration of potential dilutive securities. Diluted net loss per unit is computed using the weighted-average number of common units outstanding during the period and, if dilutive, the weighted-average number of potential common units. Net loss per unit attributable to common unitholders is calculated using the two-class method, which is an earnings allocation formula that determines net loss per unit for the holders of the Company’s common units and participating securities.
The preferred unit warrants and convertible note are non-participating securities, while the Profits Interests participate in the gains and losses of the Company once the participation threshold is reached. The Company’s convertible preferred units contain participation rights in any dividend paid by the Company and are deemed to be participating securities. The convertible preferred units do not include a contractual obligation to participate in losses of the Company and are not included in the calculation of net loss per unit in the periods in which a net loss is recorded. The Company’s convertible preferred units, common unit warrants, preferred unit warrants, convertible notes and Profits Interests are considered potentially dilutive.
The Company makes adjustments to diluted net loss to reflect the reversal of gains on the change in the value of preferred unit warrant liabilities, assuming conversion of warrants to acquire convertible preferred units at the beginning of the period or at time of issuance, if later, to the extent that those preferred unit warrants are dilutive. The Company computes diluted net loss per unit after giving consideration to all potentially dilutive common units outstanding during the period, determined using the treasury stock and if-converted methods, as applicable, except where the effect of including such securities would be antidilutive.
For the six months ended June 30, 2021 and 2020, the Company reported a net loss. The potentially dilutive common units were anti-dilutive, except for the series B preferred unit warrants, which were considered dilutive but did not affect the net loss per share. As a result, basic and diluted net loss per unit were the same.
Deferred financing costs
New Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU 2016-02, Leases (“Topic 842”), as subsequently amended, to improve financial reporting and disclosures about leasing transactions. Topic 842 requires companies that lease assets to recognize on the condensed consolidated balance sheet the assets and liabilities for the rights and obligations created by those leases, where the lease terms exceed 12 months. The recognition, measurement, and presentation of expense and cash flows arising from a lease by a lessee will depend primarily on its classification as a finance or operating lease; both types of leases will be recognized on the condensed consolidated balance sheet. Topic 842 also requires disclosures to help financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. On June 3, 2020, the FASB amended the effective dates of Topic 842 to give immediate relief from business disruptions caused by the COVID-19 pandemic and provided a one-year deferral of the effective date for nonpublic companies. As a result of the Company having elected the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act, and assuming the Company continues to be considered an emerging growth company, Topic 842 will be effective for the Company on January 1, 2022. The
17
Company has not yet determined the effects of Topic 842 on its condensed consolidated financial statements but does expect the adoption of Topic 842 will have a material impact on the Company’s consolidated financial statements and related notes to the recognition of right of use (“ROU”) assets and lease liabilities on the Company’s consolidated balance sheets, but it will not have a material impact on the Company’s consolidated statement of income. The adoption of Topic 842 will also result in enhanced disclosures.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (“ASU 2016-13”) to require the measurement of expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable forecasts. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. As a result of the Company having elected the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act, and assuming the Company continues to be considered an emerging growth company, ASU 2016-13 will be effective for the Company on January 1, 2023. The Company has not yet determined the potential effects of ASU 2016-13 on its condensed consolidated financial statements and disclosures.
3. Fair Value Measurements
The following table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis and indicates the level of inputs used in such measurements (in thousands):