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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended March 31, 2021

OR

 

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

For the transition period from ________to_________.

Commission File Number: 001-40187

 

PROMETHEUS BIOSCIENCES, INC.

(Exact name of Registrant as specified in its charter)

 

 

Delaware

 

82-4282653

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

9410 Carroll Park Drive

San Diego, California

 

92121

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (858) 684-1300

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

 

RXDX

 

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, a 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 10, 2021, the registrant had 38,864,841 shares of common stock ($0.0001 par value) outstanding.

 

 

 


 

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

Item 1

 

Unaudited Condensed Consolidated Financial Statements

2

 

 

Unaudited Condensed Consolidated Balance Sheets

2

 

 

Unaudited Condensed Consolidated Statements of Operations

3

 

 

Unaudited Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)

4

 

 

Unaudited Condensed Consolidated Statements of Cash Flows

5

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

6

Item 2

 

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

22

Item 3

 

Quantitative and Qualitative Disclosures About Market Risk

32

Item 4

 

Controls and Procedures

32

 

PART II. OTHER INFORMATION

 

Item 1

 

Legal Proceedings

33

Item 1A

 

Risk Factors

33

Item 2

 

Unregistered Sales of Equity Securities and Use of Proceeds

79

Item 3

 

Defaults Upon Senior Securities

79

Item 4

 

Mine Safety Disclosures

79

Item 5

 

Other Information

79

Item 6

 

Exhibits

80

 

 

Exhibit Index

 

 

 

Signatures

82

 

 

1

 


 

PART I. FINANCIAL INFORMATION

Item 1.Financial Statements (unaudited)

 

PROMETHEUS BIOSCIENCES, INC.

Unaudited Condensed Consolidated Balance Sheets

(in thousands, except share and par value amounts)

 

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

311,231

 

 

$

54,201

 

Accounts receivable

 

 

973

 

 

 

1,086

 

Prepaid expenses and other current assets

 

 

6,416

 

 

 

2,169

 

Total current assets

 

 

318,620

 

 

 

57,456

 

Equipment, net

 

 

913

 

 

 

447

 

Deferred financing costs

 

 

 

 

 

1,730

 

Other assets

 

 

468

 

 

 

 

Total assets

 

$

320,001

 

 

$

59,633

 

Liabilities, Convertible Preferred Stock and Stockholders’ Equity (Deficit)

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,082

 

 

$

958

 

Accrued compensation

 

 

1,603

 

 

 

2,722

 

Accrued expenses and other current liabilities

 

 

2,451

 

 

 

2,894

 

Amounts due to Nestlé, current—related party

 

 

 

 

 

5,675

 

Payable to PLI

 

 

233

 

 

 

1,130

 

Deferred revenue

 

 

2,418

 

 

 

1,876

 

Total current liabilities

 

 

8,787

 

 

 

15,255

 

Long-term debt, net

 

 

7,365

 

 

 

7,399

 

Deferred revenue, non-current

 

 

3,650

 

 

 

4,597

 

Preferred stock purchase right liability

 

 

 

 

 

3,900

 

Total liabilities

 

 

19,802

 

 

 

31,151

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

Convertible preferred stock—$0.0001 par value; No shares and 254,983,985 shares

   authorized at March 31, 2021 and December 31, 2020, respectively; No shares and

   160,864,434 shares issued and outstanding at March 31, 2021 and December 31,

   2020, respectively; liquidation preferences of $0 and $130,487 at March 31, 2021

   and December 31, 2020, respectively

 

 

 

 

 

126,023

 

Stockholders’ equity (deficit):

 

 

 

 

 

 

 

 

Preferred stock—$0.0001 par value; 40,000,000 shares and no shares authorized

   at March 31, 2021 and December 31, 2020, respectively; No shares issued and

   outstanding at March 31, 2021 and December 31, 2020

 

 

 

 

 

 

Common stock—$0.0001 par value; 400,000,000 shares and 325,000,000 shares

   authorized as of March 31, 2021 and December 31, 2020, respectively; 38,811,425

   shares and 1,768,325 shares issued at March 31, 2021 and December 31, 2020,

   respectively; 38,769,703 shares and 1,713,622 shares outstanding at March 31,

   2021 and December 31, 2020, respectively;

 

 

4

 

 

 

 

Additional-paid in capital

 

 

413,286

 

 

 

1,605

 

Accumulated deficit

 

 

(113,091

)

 

 

(99,146

)

Total stockholders’ equity (deficit)

 

 

300,199

 

 

 

(97,541

)

Total liabilities, convertible preferred stock and stockholders’ equity (deficit)

 

$

320,001

 

 

$

59,633

 

 

See accompanying notes.

2

 


 

PROMETHEUS BIOSCIENCES, INC.

Unaudited Condensed Consolidated Statements of Operations

(in thousands, except share and per share amounts)

 

 

 

Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

Collaboration revenue

 

$

760

 

 

$

228

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

7,758

 

 

 

4,265

 

General and administrative

 

 

5,222

 

 

 

2,387

 

Total operating expense

 

 

12,980

 

 

 

6,652

 

Loss from operations

 

 

(12,220

)

 

 

(6,424

)

Other income (expense), net:

 

 

 

 

 

 

 

 

Interest income

 

 

18

 

 

 

2

 

Interest expense

 

 

(658

)

 

 

(534

)

Change in fair value of preferred stock purchase right liability

 

 

(980

)

 

 

 

Change in fair value of preferred stock warrant liability

 

 

(105

)

 

 

2

 

Total other income (expense), net

 

 

(1,725

)

 

 

(530

)

Loss from continuing operations

 

 

(13,945

)

 

 

(6,954

)

Loss from discontinued operations

 

 

 

 

 

(6,174

)

Net loss

 

$

(13,945

)

 

$

(13,128

)

Net loss per share, basic and diluted:

 

 

 

 

 

 

 

 

Continuing operations

 

$

(1.67

)

 

$

(5.06

)

Discontinued operations

 

 

 

 

 

(4.50

)

Net loss per share, basic and diluted

 

$

(1.67

)

 

$

(9.56

)

Weighted average shares outstanding, basic and diluted

 

 

8,338,892

 

 

 

1,373,050

 

 

See accompanying notes.

3


 

PROMETHEUS BIOSCIENCES, INC.

Unaudited Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)

(in thousands, except share amounts)

 

 

 

Convertible

Preferred Stock

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Deficit

 

Balance at December 31, 2020

 

 

160,864,434

 

 

$

126,023

 

 

 

 

1,713,622

 

 

$

 

 

$

1,605

 

 

$

(99,146

)

 

$

(97,541

)

Issuance of Series D-2 convertible preferred

   stock for cash, net of issuance costs of $94

 

 

86,775,740

 

 

 

73,763

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of Series D-2 convertible preferred

   stock for settlement of deferred purchase

   price

 

 

7,219,560

 

 

 

6,144

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification of convertible preferred stock

   purchase right liability

 

 

 

 

 

4,880

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of convertible preferred stock into

   common stock at initial public offering

 

 

(254,859,734

)

 

 

(210,810

)

 

 

 

25,485,955

 

 

 

3

 

 

 

210,807

 

 

 

 

 

 

210,810

 

Issuance of shares of common stock in initial

   public offering for cash, net of issuance

   costs of $18,662

 

 

 

 

 

 

 

 

 

11,500,000

 

 

 

1

 

 

 

199,837

 

 

 

 

 

 

199,838

 

Reclassification of convertible preferred stock

   warrants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

169

 

 

 

 

 

 

169

 

Issuance of common stock in exchange for

   services

 

 

 

 

 

 

 

 

 

500

 

 

 

 

 

 

3

 

 

 

 

 

 

3

 

Issuance of common stock upon exercise of

   stock options

 

 

 

 

 

 

 

 

 

56,645

 

 

 

 

 

 

64

 

 

 

 

 

 

64

 

Vesting of early exercised stock options

 

 

 

 

 

 

 

 

 

12,981

 

 

 

 

 

 

9

 

 

 

 

 

 

9

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

792

 

 

 

 

 

 

792

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13,945

)

 

 

(13,945

)

Balance at March 31, 2021

 

 

 

 

$

-

 

 

 

 

38,769,703

 

 

$

4

 

 

$

413,286

 

 

$

(113,091

)

 

$

300,199

 

 

 

 

Convertible

Preferred Stock

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Deficit

 

Balance at December 31, 2019

 

 

58,145,867

 

 

$

43,740

 

 

 

 

1,351,380

 

 

$

 

 

$

483

 

 

$

(37,451

)

 

$

(36,968

)

Issuance of Series C convertible preferred

   stock for cash, net of issuance costs of $62

 

 

28,063,500

 

 

 

28,001

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vesting of common shares issued to founders

 

 

 

 

 

 

 

 

 

18,281

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock upon exercise of

   stock options

 

 

 

 

 

 

 

 

 

23,750

 

 

 

 

 

 

12

 

 

 

 

 

 

12

 

Vesting of early exercised stock options

 

 

 

 

 

 

 

 

 

8,800

 

 

 

 

 

 

3

 

 

 

 

 

 

3

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

147

 

 

 

 

 

 

147

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13,128

)

 

 

(13,128

)

Balance at March 31, 2020

 

 

86,209,367

 

 

$

71,741

 

 

 

 

1,402,211

 

 

$

-

 

 

$

645

 

 

$

(50,579

)

 

$

(49,934

)

 

See accompanying notes.

 

 

4


 

PROMETHEUS BIOSCIENCES, INC.

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)

 

 

 

Three Months Ended

March 31,

 

 

 

2021

 

 

2020

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(13,945

)

 

$

(13,128

)

Loss from continuing operations

 

 

(13,945

)

 

 

(6,954

)

Loss from discontinued operations, net of income taxes

 

 

 

 

 

(6,174

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

39

 

 

 

22

 

Stock-based compensation expenses

 

 

792

 

 

 

115

 

Change in fair value of preferred stock purchase right liability

 

 

980

 

 

 

 

Change in fair value of preferred stock warrant liability

 

 

105

 

 

 

(2

)

Common stock issued in exchange for services

 

 

3

 

 

 

 

Noncash interest expense

 

 

508

 

 

 

421

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

113

 

 

 

(125

)

Prepaid expenses and other current assets

 

 

(4,258

)

 

 

(802

)

Other assets

 

 

(468

)

 

 

 

Accounts payable

 

 

609

 

 

 

189

 

Accrued compensation

 

 

(1,119

)

 

 

164

 

Accrued expenses and other current liabilities

 

 

(1,051

)

 

 

127

 

Payments received from PLI

 

 

 

 

 

2,393

 

Payable to PLI

 

 

(897

)

 

 

 

Deferred revenue

 

 

(405

)

 

 

202

 

Net cash used in operating activities – continuing operations

 

 

(18,994

)

 

 

(4,250

)

Net cash used in operating activities – discontinued operations

 

 

 

 

 

(1,009

)

Net cash used in operating activities

 

 

(18,994

)

 

 

(5,259

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(298

)

 

 

(171

)

Net cash used in investing activities – continuing operations

 

 

(298

)

 

 

(171

)

Net cash used in investing activities – discontinued operations

 

 

 

 

 

(877

)

Net cash used in investing activities

 

 

(298

)

 

 

(1,048

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from issuance of convertible preferred stock, net of issuance costs

 

 

73,749

 

 

 

27,961

 

Proceeds from issuance of long-term debt, net of issuance costs

 

 

 

 

 

7,338

 

Proceeds from sale of common stock in initial public offering

 

 

218,500

 

 

 

 

Payment of financing costs

 

 

(16,001

)

 

 

 

Proceeds from issuance of common stock upon stock option exercises

 

 

74

 

 

 

9

 

Net cash provided by financing activities

 

 

276,322

 

 

 

35,308

 

Net increase in cash and cash equivalents

 

 

257,030

 

 

 

29,001

 

Cash and cash equivalents at beginning of period – continuing operations

 

 

54,201

 

 

 

4,450

 

Cash and cash equivalents at beginning of period – discontinued operations

 

 

 

 

 

3,921

 

Cash and cash equivalents cash at end of period

 

 

311,231

 

 

 

37,372

 

Cash and cash equivalents at end of period – discontinued operations

 

 

 

 

 

2,035

 

Cash and cash equivalents at end of period – continuing operations

 

$

311,231

 

 

$

35,337

 

Supplemental schedule of non-cash investing and financing activities

 

 

 

 

 

 

 

 

Conversion of convertible preferred stock into common stock upon completion of

   initial public offering

 

$

210,810

 

 

$

 

Reclassification of preferred stock purchase right liability to equity due to issuance of

   Series D convertible preferred stock

 

$

4,880

 

 

$

 

Reclassification of warrant liability to equity due to conversion from preferred stock

   warrant to common stock warrant upon completion of initial public offering

 

$

169

 

 

$

 

Issuance of Series D-2 convertible preferred stock for the settlement of deferred purchase price

 

$

6,144

 

 

$

 

Vesting of unvested issued common stock

 

$

9

 

 

$

3

 

Financing costs incurred, but not paid, included in accrued expenses and accounts payable

 

$

1,209

 

 

$

 

Costs incurred, but not paid, in connection with capital expenditures included in accounts payable

 

$

237

 

 

$

 

Amounts included in accounts receivable related to Series C convertible preferred stock

 

$

 

 

$

100

 

 

See accompanying notes.

 

5

 


 

PROMETHEUS BIOSCIENCES, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

1.

Organization

Prometheus Biosciences, Inc. (the Company) was incorporated in the state of Delaware on October 26, 2016 under the name Precision IBD, Inc. and is headquartered in San Diego, California. The Company changed its name to Prometheus Biosciences, Inc. on October 1, 2019. The Company’s business is focused on the discovery, development and commercialization of novel therapeutic and companion diagnostic products for the treatment of immune-mediated diseases, starting first with inflammatory bowel disease (IBD).

In June 2019, the Company acquired Prometheus Laboratories, Inc. (PLI) and the related intangible assets used by PLI. PLI was wholly owned by Nestlé Health Science US Holdings, Inc. and the related intangible assets were owned by Societé Des Produits Nestlé S.A (together, Nestlé) (see Note 6). PLI markets and conducts several laboratory developed tests useful to gastroenterologists in monitoring their IBD patients’ disease state and informing their therapeutic decisions.

On December 31, 2020, the Company completed the spinoff of PLI by making an in-kind distribution of 100% of its interest in PLI to the Company’s stockholders of record on December 30, 2020 (see Note 6).

Reverse Stock Split

On March 5, 2021, the Company effected a one-for-ten reverse stock split of the Company’s common stock (the Reverse Stock Split). The par value and the authorized shares of the common stock were not adjusted as a result of the Reverse Stock Split. All issued and outstanding common stock and the conversion prices and ratio of the convertible preferred stock have been retroactively adjusted to reflect this Reverse Stock Split for all periods presented.

Initial Public Offering

On March 16, 2021, the Company completed its initial public offering (IPO) with the sale of 11,500,000 shares of common stock, which included the exercise in full by the underwriters of their option to purchase 1,500,000 additional shares, at an initial public offering price of $19.00 per share and received gross proceeds of $218.5 million, which resulted in net proceeds to the Company of approximately $199.8 million, after deducting underwriting discounts and commissions of approximately $15.3 million and offering-related transaction costs of approximately $3.4 million.

In addition, in connection with the completion of the Company’s initial public offering on March 16, 2021, all outstanding shares of convertible preferred stock were converted into 25,485,955 shares of the Company’s common stock; outstanding warrants to purchase 148,848 shares of convertible preferred stock were converted into warrants to purchase 14,884 shares of the Company’s common stock; and the Company’s certificate of incorporation was amended and restated to authorize 400,000,000 shares of common stock and 40,000,000 shares of undesignated preferred stock.

Liquidity

The Company has incurred net losses since inception, experienced negative cash flows from operations, and as of March 31, 2021, has an accumulated deficit of $113.1 million. The Company has historically financed its operations primarily through private placements of convertible preferred stock. The Company expects operating losses and negative cash flows from operations to continue for the foreseeable future. The Company believes its current capital resources will be sufficient for the Company to continue as a going concern for at least one year from the issuance date of these condensed consolidated financial statements.

The Company will be required to raise additional capital, however, there can be no assurance as to whether additional financing will be available on terms acceptable to the Company, if at all. If sufficient funds on acceptable terms are not available when needed, it would have a negative impact on the Company’s financial condition and could force the Company to delay, limit, reduce, or terminate product development or future commercialization efforts or grant rights to develop and market product candidates or testing products that the Company would otherwise plan to develop.

2.

Summary of Significant Accounting Policies

Basis of Presentation and Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requires management to make estimates and assumptions that impact the reported amounts of assets, liabilities, and expenses and the disclosure of contingent assets and liabilities in the Company’s condensed consolidated financial statements and

6

 


 

accompanying notes. Although these estimates are based on the Company’s knowledge of current events and actions it may undertake in the future, actual results may materially differ from these estimates and assumptions.

On December 31, 2020, the Company completed the spinoff of PLI. The results of operations for the three months ended March 31, 2020 have been presented as discontinued operations in the accompanying condensed consolidated financial statements in accordance with Accounting Standards Codification (ASC) 205-20, Presentation of Financial Statements—Discontinued Operations. Unless otherwise noted, discussion within these notes to the condensed consolidated financial statements relates to continuing operations (see Note 6 for additional information on discontinued operations).

On an ongoing basis, management evaluates its estimates, primarily related to revenue recognition, stock-based compensation, accrued research and development costs, and for periods prior to its IPO, the fair value of common stock, the fair value of the convertible preferred stock, and the fair value of the preferred stock purchase right liability. These estimates are based on historical data and experience, as well as various other factors that management believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Estimates relating to the valuation of stock require the selection of appropriate valuation methodologies and models, and significant judgment in evaluating ranges of assumptions and financial inputs.

Unaudited Interim Financial Information

The unaudited financial statements at March 31, 2021, and for the three months ended March 31, 2021 and 2020, have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (SEC), and with GAAP applicable to interim financial statements. These unaudited financial statements have been prepared on the same basis as the audited financial statements and include all adjustments, consisting of only normal recurring accruals, which in the opinion of management are necessary to present fairly the Company’s financial position as of the interim date and results of operations for the interim periods presented. Interim results are not necessarily indicative of results for a full year or future periods. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ materially from those estimates. These unaudited financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2020, included in the Prospectus dated March 11, 2021 filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended, with the SEC on March 12, 2021.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and until December 31, 2020, the date at which the spinoff was completed, its wholly-owned subsidiary, PLI, and have been prepared in conformity with GAAP. All intercompany accounts and transactions have been eliminated in consolidation.

Segment Reporting

The Company’s Chief Executive Officer, who is considered to be the chief operating decision maker (CODM), reviews financial information presented on a consolidated basis, accompanied by information about operating segments for purposes of making operating decisions and assessing financial performance. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the CODM in deciding how to allocate resources and in assessing performance.

Prior to the spinoff of PLI in December 2020, the Company determined its operating segments to be the therapeutics and diagnostic services businesses. The therapeutics business derives substantially all of its revenue from collaboration agreements and devotes all of its efforts to development of product candidates and companion diagnostics in the IBD space. The diagnostic services business, which is recorded as discontinued operations, derives its revenue from diagnostic services in the IBD space generated from the conduct of laboratory developed tests. Subsequent to the spinoff, the Company operates in one segment. The Company operates solely in the United States.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. The cash and cash equivalents balance at March 31, 2021 and December 31, 2020 represents cash in readily available checking and money market accounts.

7


 

Concentration of Credit Risk

Financial instruments, which potentially subject the Company to concentration of credit risk, consist primarily of cash, cash equivalents, and accounts receivable. The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. Management believes that the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held.

Deferred Financing Costs

At December 31, 2020, financing costs, consisting of legal, accounting, printer and filing fees related to the Company’s IPO, totaled $1.7 million.  Upon the completion of the IPO in March 2021, all of these expenses were offset against the proceeds from the IPO.

Revenue Recognition

The Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers (ASC 606). In accordance with ASC 606, the Company performs the following steps in determining the appropriate amount of revenue to be recognized as it fulfills its obligations under each of these agreements: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when, or as, the Company satisfies each performance obligation. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

To date, all of the Company’s collaboration revenue has been derived from its collaboration agreement with Millennium Pharmaceuticals, Inc., a subsidiary of Takeda Pharmaceutical Company Limited (collectively, Takeda) and its collaboration agreement with Dr. Falk Pharma GmbH as described in Note 5. The terms of these arrangements include the following types of payments to the Company: non-refundable, up-front license fees; development, regulatory and commercial milestone payments; payments for research and development services provided by the Company; and royalties on net sales of licensed products. At the initiation of an agreement, the Company analyzes whether each unit of account results in a contract with a customer under ASC 606 or in an arrangement with a collaborator subject to guidance under ASC 808, Collaborative Arrangements (ASC 808).

The Company considers a variety of factors in determining the appropriate estimates and assumptions under these arrangements, such as whether the elements are distinct performance obligations, whether there are observable stand-alone prices, and whether any licenses are functional or symbolic. The Company evaluates each performance obligation to determine if it can be satisfied and recognized as revenue at a point in time or over time. Typically, license fees, non-refundable upfront fees, and funding of research activities are considered fixed, while milestone payments are identified as variable consideration which must be evaluated to determine if it is constrained and, therefore, excluded from the transaction price. The Company estimates the amount of variable consideration using the most likely amount, as milestone payments typically only have two possible outcomes. The Company recognizes revenue for sales-based royalty promised in exchange for the license of intellectual property only when the subsequent sale occurs.

The Company may allocate transaction price using a number of methods including estimating standalone selling price of performance obligations and using the residual approach when the standalone selling price of the license is highly variable or uncertain, and observable standalone selling prices exist for the other goods or services promised in the contract.

The Company receives payments from its collaborators based on terms established in each contract. Upfront payments and other payments may require deferral of revenue recognition to a future period until the Company is unconditional. The Company does not assess whether a contract has a significant financing component if the expectation at contract inception is such that the payment by the customer is akin to a deposit for research and development services.

Research and Development and Clinical Trial Accruals

Research and development costs are charged to expense as incurred. Research and development expenses include certain payroll and personnel expenses, laboratory supplies, consulting costs, external contract research and development expenses, and allocated overhead, including rent, equipment depreciation and utilities. Advance payments for goods or services for future research and development activities are deferred and expensed as the goods are delivered or the related services are performed.

8


 

The Company estimates preclinical studies and clinical trial expenses based on the services performed pursuant to contracts with research institutions and clinical research organizations that conduct and manage preclinical studies and clinical trials on the Company’s behalf. In addition, clinical study and trial materials are manufactured by contract manufacturing organizations. In accruing for these services, the Company estimates the time period over which services will be performed and the level of effort to be expended in each period. These estimates are based on communications with the third-party service providers and the Company’s estimates of accrued expenses and on information available at each balance sheet date. If the actual timing of the performance of services or the level of effort varies from the estimate, the Company will adjust the accrual accordingly.

Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.

Stock-Based Compensation

The Company expenses stock-based compensation to employees and non-employees over the requisite service period (usually the vesting period) on a straight-line basis, net of actual forfeitures during the period, based on the estimated grant-date fair value of the awards. The Company estimates the fair value of stock option grants using the Black-Scholes option pricing model, and the assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment.

Valuation of Common Stock

Prior to the IPO, given the absence of a public trading market for the Company’s common stock, its board of directors exercised their judgment and considered a number of objective and subjective factors to determine the best estimate of the fair value of the Company’s common stock, such as: contemporaneous valuations performed by independent third-party specialists, its stage of development, including the status of its research and development efforts of its product candidates, the material risks related to its businesses and industry, its results of operations before discontinued operations and financial position, including its levels of capital resources, the prices at which its sold shares of its convertible preferred stock, the rights, preferences and privileges of its convertible preferred stock relative to those of its common stock, the conditions in the biotechnology industry and the economy in general, the stock price performance and volatility of comparable life sciences public companies, as well as recently completed mergers and acquisitions of peer companies, the likelihood of achieving a liquidity event for the holders of its common stock or convertible preferred stock, such as an IPO or a sale of the Company given prevailing market conditions, trends and developments in its industry, external market conditions affecting the life sciences and biotechnology sectors, and the lack of liquidity of its common stock, among other factors.

After the completion of the IPO, the fair value of each share of common stock is based on the closing price of the Company’s common stock as reported by Nasdaq.

Preferred Stock Purchase Right Liabilities

From time to time, the Company enters into convertible preferred stock financings where, in addition to the initial closing, investors agree to buy, and the Company agrees to sell, additional shares of that convertible preferred stock at a fixed price in the event that certain conditions are met or agreed upon milestones are achieved. The Company evaluates this purchase right and assesses whether it meets the definition of a freestanding instrument and, if so, determines the fair value of the purchase right liability and records it on the balance sheet with the remainder of the proceeds raised allocated to convertible preferred stock. The preferred stock purchase right liability is revalued at each reporting period with changes in the fair value of the liability recorded as change in fair value of preferred stock purchase right liability in the statements of operations. Upon the issuance of the shares of Series D-2 convertible preferred stock in January 2021, the preferred stock purchase right liability no longer required liability accounting and the then fair value of the preferred stock purchase right liability was reclassified into stockholders’ equity.

The Company performed the final remeasurement of the preferred stock purchase right liability as of the issuance of the shares of Series D-2 convertible preferred stock and recorded a $1.0 million change in fair value into other income (expense) for the three months ended March 31, 2021.

9


 

Net Loss Per Share

Basic net loss per share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common stock equivalents outstanding for the period determined using the treasury-stock method. The Company has excluded 47,999 and 214,721 weighted-average shares subject to repurchase or forfeiture from the weighted-average number of common shares outstanding for the three months ended March 31, 2021 and 2020, respectively. Dilutive common stock equivalents are comprised of convertible preferred stock and options outstanding under the Company’s stock option plan.

Basic and diluted net loss attributable to common holders per share is presented in conformity with the two- class method required for participating securities as the convertible preferred stock are considered participating securities. The Company’s participating securities do not have a contractual obligation to share in the Company’s losses. As such, the net loss was attributed entirely to common stockholders. Accordingly, for three months ended March 31, 2021 and 2020, there is no difference in the number of shares used to calculate basic and diluted shares outstanding.

Potentially dilutive securities not included in the calculation of diluted net loss per share because to do so would be anti-dilutive are as follows (in common stock equivalent shares):

 

 

 

March 31,

 

 

 

2021

 

 

2020

 

Convertible preferred stock outstanding

 

 

 

 

 

8,620,936

 

Common stock options issued and outstanding

 

 

5,023,579

 

 

 

1,719,446

 

Warrants to purchase common stock

 

 

14,884

 

 

 

 

Warrants to purchase convertible preferred stock outstanding

 

 

 

 

 

11,250

 

Total

 

 

5,038,463

 

 

 

10,351,632

 

Recent Accounting Standards

From time to time, new accounting standards are issued by the Financial Accounting Standards Board (FASB) or other standard setting bodies and adopted by the Company as of the specified effective date. Unless otherwise discussed, the impact of recently issued standards that are not yet effective will not have a material impact on the Company’s financial position or results of operations upon adoption.

In April 2012, the Jump-Start Our Business Startups Act (the JOBS Act) was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for an emerging growth company. As an emerging growth company, the Company may elect to adopt new or revised accounting standards when they become effective for non-public companies, which typically is later than when public companies must adopt the standards. The Company has elected to take advantage of the extended transition period afforded by the JOBS Act and, as a result, will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for emerging growth companies, which are the dates included below.

Adoption of New Accounting Standards

 

In February 2016, the FASB issued Accounting Standards Update (ASU) 2016-02, Leases (Topic 842), which supersedes FASB ASC Topic 840, Leases (Topic 840), and provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method for finance leases or on a straight-line basis over the term of the lease for operating leases. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of classification. The Company early adopted this standard on January 1, 2021 by applying the modified retrospective approach (see Note 9).  The Company made accounting policy elections to exclude leases with terms of 12 months or less from the recognition requirements and to not separate lease and non-lease components.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses: Measurement of credit Losses on Financial Instruments (ASU 2016-13), which amends the impairment model by requiring entities to use a forward looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables and available-for sale debt securities. The Company early adopted this standard on January 1, 2021 by applying the modified retrospective approach and determined there was no cumulative-effect transition adjustment required to the opening balance of accumulated deficit for the

10


 

recognition of additional credit losses upon adoption of this standard based on its outstanding accounts receivable, the composition and credit quality of its short-term investments, and current economic conditions as of that date.

In August 2020, the FASB issued ASU No. 2020-06, Debt – Debt with Conversion and Other options (Subtopic 470-20) and Derivative and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40). The amendments in this ASU reduce the number of accounting models for convertible debt instruments and convertible preferred stock, as well as, amend the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusion. In addition, this ASU improves and amends the related EPS guidance. The amendments in this ASU are effective for the Company on January 1, 2024, including interim periods within those fiscal years. The Company early adopted this standard on January 1, 2021 by applying the modified retrospective approach.  The adoption of ASU 2020-06 had no material impact on the Company’s condensed financial statements and accompanying footnotes.

3.

Fair Value Measurements and Fair Value of Financial Instruments

The accounting guidance defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the accounting guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

 

 

 

Level 1

 

Quoted prices in active markets for identical assets or liabilities.

 

 

Level 2

 

Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

 

Level 3

 

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability.

The carrying amounts of cash and cash equivalents, prepaid and other assets, accounts payable and accrued liabilities are considered to be representative of their respective fair values because of the short-term nature of those instruments. Based on the borrowing rates currently available to the Company for loans with similar terms, which is considered a Level 2 input, the Company believes that the fair value of long-term debt approximates its carrying value.

The Company’s financial instruments that are carried at fair value consist of Level 3 liabilities. There were no transfers within the hierarchy during the three months ended March 31, 2021 and 2020. At December 31, 2020, Level 3 liabilities that were measured at fair value on a recurring basis consisted of warrants to purchase shares of convertible preferred stock and a preferred stock purchase right liability. The Company had no Level 3 liabilities at March 31, 2021 as the liabilities for the warrants to purchase shares of convertible preferred stock and the preferred stock purchase right was remeasured and reclassified to stockholders’ equity upon the closing of the Company’s IPO in March 2021 and the issuance of shares of Series D-2 convertible preferred stock in January 2021, respectively.

Convertible Preferred Stock Warrant Liability

The convertible preferred stock warrant liability was recorded at fair value utilizing the Black-Scholes option pricing model using significant unobservable inputs consistent with the inputs used for the Company’s stock-based compensation expense adjusted for the preferred stock warrants’ expected term and the fair value of the underlying preferred stock.

11


 

The assumptions used in the Black-Scholes option pricing model to determine the fair value of the convertible preferred stock warrant liability at the date of the IPO and December 31, 2020 were as follows:

 

 

 

IPO Date

 

 

December 31,

2020

 

Fair value of underlying preferred stock

 

$

1.90

 

 

$

0.83

 

Risk-free interest rate

 

 

1.70

%

 

 

1.70

%

Expected volatility

 

 

70.00

%

 

 

70.00

%

Expected term (in years)

 

 

9.0

 

 

 

9.2

 

Expected dividend yield

 

—%

 

 

—%

 

 

Preferred Stock Purchase Right Liability

At December 31, 2020, the preferred stock purchase right liability was determined using a valuation model that considered: (i) the risk-free rate commensurate with the expected milestone timing of 0.09%; (ii) the probability of the Series D-2 tranche of 80.0%; (iii) volatility of 80.0%; (iv) consideration received for the Series D-1 preferred stock; (v) the number of shares to be issued to satisfy the preferred stock purchase right and at what price; and (vi) certain implied and provided assumptions needed to calibrate the Series D-1 value and the Series D-2 purchase right. Upon the issuance of the shares of Series D-2 convertible preferred stock in January 2021, the liability was remeasured and as a result of closing the sale of shares of Series D-2 convertible preferred stock, a charge of $1.0 million was recorded in the statement of operations for the three months ended March 31, 2021.  

Activity of Liabilities Using Fair Value Level 3 Measurements

The following table summarizes the activity of the financial instruments valued using Level 3 inputs (in thousands):

 

 

 

Convertible

Preferred

Stock Warrant

Liability

 

 

Series D

Convertible

Preferred

Stock Purchase

Right Liability

 

Balance at De