Item 1. Financial Statements.
Notes to Condensed Financial Statements (unaudited)
Note 1 – Organization and Nature of Operations
Description of Business
Rain Therapeutics Inc. (“Rain” or the “Company”) was incorporated in the state of Delaware in April 2017. Rain is a late-stage precision oncology company developing therapies that target oncogenic drivers for which the Company is able to genetically select patients it believes will most likely benefit. This approach includes using a tumor-agnostic strategy to select patients based on their tumors’ underlying genetics rather than histology. Rain’s lead product candidate, milademetan (RAIN-32), is a small molecule, oral inhibitor of MDM2, which is oncogenic in numerous cancers. In addition to milademetan, the Company is also developing a preclinical program that is focused on inducing synthetic lethality in cancer cells by inhibiting RAD52. The Company operates in one business segment and its principal operations are in the United States, with its headquarters in Newark, California.
Reverse Stock Split
On April 15, 2021 and April 16, 2021, the Company’s board of directors (the “Board of Directors”) and stockholders, respectively, approved an amended and restated certificate of incorporation of the Company to effect a 1-for-1.0799 reverse stock split of the Company’s common stock. The reverse stock split was effected on April 16, 2021. The Company’s outstanding stock options were also adjusted to reflect the 1-for-1.0799 reverse stock split of the Company’s common stock. Accordingly, all common stock and stock options and related per share amounts in these financial statements have been retroactively adjusted for all periods presented to give effect to the reverse stock split. Outstanding stock options were proportionately reduced and the respective exercise prices, if applicable, were proportionately increased. The reverse stock split resulted in an adjustment to the Series A and Series B convertible preferred stock conversion prices to reflect a proportional decrease in the number of shares of common stock to be issued upon conversion.
Initial Public Offering
On April 27, 2021, the Company completed its initial public offering (“IPO”) in which the Company issued and sold 7,352,941 shares of common stock at a public offering price of $17.00 per share. On May 11, 2021, the Company issued an additional 492,070 shares of common stock in connection with the exercise of the underwriters’ option to purchase additional shares at the public offering price. The Company’s net proceeds from the sale of shares in the IPO, including the sale of shares pursuant to the exercise of the underwriters’ option to purchase additional shares, was $121.5 million, net of underwriting discounts and commissions, and other offering fees. In connection with the IPO, the Board of Directors and stockholders approved an amended and restated certificate of incorporation, which authorized 260,000,000 shares of common stock, 200,000,000 shares of which are designated as “Common Stock” and 50,000,000 shares of which are designated as “Non-Voting Common Stock” and 10,000,000 shares of undesignated preferred stock that may be issued from time to time by the Company’s Board of Directors in one or more series.
Immediately prior to the closing of the IPO, 8,344,905 shares of the Company’s convertible preferred stock were exchanged for 7,727,470 shares of non-voting common stock. Upon the closing of the IPO, 7,928,501 shares of the Company’s convertible preferred stock were automatically converted into 7,341,860 shares of common stock. Following the IPO, there were no shares of convertible preferred stock outstanding.
Basis of Presentation
The accompanying interim unaudited condensed financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) and with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) related to a quarterly report on Form 10-Q. The year-end condensed balance sheet data was derived from the Company’s audited financial statements but does not include all disclosures required by U.S. GAAP. These condensed financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2020 included in the Company’s final prospectus for its IPO, filed pursuant to Rule 424(b) under the Securities Exchange Act of 1933, as amended, with the SEC on April 23, 2021 (the “Prospectus”). The unaudited financial information for the interim periods presented herein reflects all adjustments which,
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in the opinion of management, are necessary for a fair presentation of the financial condition and results of operation for the periods presented, with such adjustments consisting only of normal recurring adjustments.
Liquidity and Capital Resources
The Company has devoted substantially all of its efforts to drug discovery and development, raising capital and building operations. The Company has a limited operating history and has not generated any revenue since its inception, and the sales and income potential of the Company’s business is unproven. The Company has incurred net losses and negative cash flows from operating activities since its inception and expects to continue to incur net losses into the foreseeable future as it continues the development of its product candidates. From inception through June 30, 2021, the Company has funded its operations through net proceeds from its IPO in April 2021, and the issuance of convertible promissory notes and convertible preferred stock.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. Management believes that the Company’s current cash, cash equivalents and short-term investments, which include the net proceeds of approximately $121.5 million from its IPO in April 2021, will provide sufficient funds to enable the Company to meet its obligations for at least twelve months from the filing date of this report.
Note 2 – Summary of Significant Accounting Policies
Use of Estimates
The preparation of the Company’s financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that impact the reported amounts of assets, liabilities and expenses and the disclosure of contingent liabilities in the Company’s financial statements and accompanying notes. The most significant estimate in the Company’s financial statements relates to the clinical trial expense accruals. Management evaluates its estimates on an ongoing basis. Although these estimates are based on the Company’s historical experience, knowledge of current events and actions it may undertake in the future, actual results may ultimately materially differ from these estimates and assumptions.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents. Cash equivalents primarily represent funds invested in readily available checking and money market accounts.
Available-for-Sale Investments
The Company holds investment grade securities consisting of money market funds, commercial paper, corporate debt securities, U.S. government securities and U.S. agency bonds, classified as available-for-sale (“AFS”) securities at the time of purchase, since it is the Company’s intent that these investments be available for current operations. The Company has classified all of its AFS securities as current assets on the balance sheets even though the stated maturity date may be one year or more beyond the current balance sheet date, which reflects management’s intention to use the proceeds from sales of these securities to fund its operations, as necessary.
The Company carries these securities at fair value and reports unrealized gains and losses, if any, as a separate component of accumulated other comprehensive loss. The cost of debt securities is adjusted for amortization of purchase premiums and accretion of discounts to maturity. Such amortization and accretion are included in interest income in the statements of operations and comprehensive loss. Realized gains and losses on sales of securities are determined using the specific identification method and recorded in other income (expense), net in the condensed statement of operations and comprehensive loss.
Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary. The Company consults with its investment managers and considers available quantitative and qualitative evidence in evaluating potential impairment of its investments on a quarterly basis. If the cost of an individual investment exceeds its fair value, the Company evaluates among other factors, general market conditions, the duration and extent to which the fair value is less than cost, and the Company’s intent and ability to hold the investment. Once an impairment is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis in the investment is
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established. Declines in the value of AFS securities determined to be other than temporary are included in other income (expense), net.
Deferred Offering Costs
The Company capitalized deferred offering costs consisting of all direct and incremental legal, professional, accounting and other third-party fees incurred in connection with the Company’s IPO. Upon the completion of the IPO in April 2021, the total deferred offering costs of $2.5 million were reclassified to additional paid-in capital on the balance sheets.
Research and Development Costs
Research and development costs primarily consist of costs associated with the Company’s research and development activities, including its drug discovery efforts, and the preclinical and clinical development of its product candidates. Research and development costs are expensed as incurred.
Preclinical Studies and Clinical Trial Accruals
The Company is required to estimate its expenses resulting from its obligations under contracts with vendors, consultants, clinical research organizations and clinical site agreements in connection with conducting preclinical activities and clinical trials. The financial terms of these contracts are subject to negotiations which vary from contract to contract and may result in payment flows that do not match the periods over which materials or services are provided under such contracts. The Company reflects preclinical study and clinical trial expenses in its financial statements by matching those expenses with the period in which services and efforts are expended. The Company accounts for these expenses according to the progress of the preclinical study or clinical trial as measured by the timing of various aspects of the preclinical study, clinical trial or related activities. The Company determines accrual and prepaid estimates through review of the underlying contracts along with preparation of financial models taking into account correspondence with clinical and other key personnel and third- party service providers as to the progress of preclinical studies, clinical trials or other services being conducted. During the course of a preclinical study or clinical trial, the Company adjusts its expense recognition if actual results differ from its estimates. To date, the Company has not experienced any material differences between accrued costs and actual costs incurred.
Stock-Based Compensation
Stock-based compensation expense represents the cost of the grant date fair value of equity awards recognized over the requisite service period of the awards (generally the vesting period) on a straight-line basis. The Company recognizes forfeitures as they occur. The Company estimates the fair value of stock option grants using the Black-Scholes option pricing model. Prior to the IPO, the exercise price for all stock options granted was at the estimated fair value of the underlying common stock as determined on the date of grant by the Company’s Board of Directors.
Comprehensive Loss
Comprehensive loss is defined as a change in equity during a period from transactions and other events and circumstances from non-owner sources. The Company’s comprehensive loss was the same as its reported net loss for the periods presented.
Net Loss Per Share
Basic net loss per share is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding for the period, without consideration of potential dilutive securities. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders by the sum of the weighted-average number of shares of common stock plus the potential dilutive effects of potential dilutive securities outstanding during the period. Potential dilutive securities are excluded from diluted earnings or loss per share if the effect of such inclusion is antidilutive. The Company’s potentially dilutive securities, which include convertible preferred stock, unvested common stock and outstanding stock options under the Company’s equity incentive plan, have been excluded from the computation of diluted net loss per share as they would be anti-dilutive to the net loss per share.
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For the period presented, there is no difference in the number of shares used to calculate basic and diluted shares outstanding due to the Company’s net loss position.
Recent Accounting Pronouncements
Financial Instruments. In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The objective of the standard is to provide information about expected credit losses on financial instruments at each reporting date and to change how other-than temporary impairments on investment securities are recorded. The guidance is effective for the Company beginning on January 1, 2023, with early adoption permitted. The Company is currently evaluating the impact the standard may have on its financial statements and related disclosures.
Income Taxes. In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which simplifies the accounting for income taxes. ASU 2019-12 is effective for the Company for the fiscal year beginning after December 15, 2021 and early adoption is permitted. The Company is currently evaluating the impact the adoption of ASU 2019-12 will have on the Company’s financial statements.
Debt and Equity Instruments. In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40), which addresses the complexity associated with applying generally accepted accounting principles for certain financial instruments with characteristics of liabilities and equity. The guidance is effective for the Company beginning on January 1, 2024, with early adoption permitted. The Company elected to adopt this standard on January 1, 2020 under the modified retrospective transition method with no material impact on its financial statements and disclosures.
There were no other significant updates to the recently issued accounting standards other than as disclosed herein for the six months ended June 30, 2021. Although there are several other new accounting pronouncements issued or proposed by the FASB, based on the Company’s preliminary assessment, the Company does not believe any of those accounting pronouncements have had or will have a material impact on its financial position or operating results.
Note 3 – Fair Value Measurements
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 non-recurring 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: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2: Quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
The carrying amounts of prepaid expenses and other current assets, accounts payable, accrued liabilities and other current liabilities are reasonable estimates of their fair value due to the short-term nature of these accounts.
The Company’s cash and cash equivalents are classified using Level 1 inputs within the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. There were no transfers between levels of the fair value hierarchy during the six months ended June 30, 2021.
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The following table summarizes financial assets that the Company measured at fair value on a recurring basis, classified in accordance with the fair value hierarchy (in thousands):
|
|
Fair Value Measurements at Reporting Date Using:
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
As of June 30, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
113,238
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
113,238
|
|
Commercial paper
|
|
|
—
|
|
|
|
31,961
|
|
|
|
—
|
|
|
|
31,961
|
|
U.S. government securities
|
|
|
—
|
|
|
|
9,108
|
|
|
|
—
|
|
|
|
9,108
|
|
U.S. agency bonds
|
|
|
—
|
|
|
|
6,062
|
|
|
|
—
|
|
|
|
6,062
|
|
Corporate debt securities
|
|
|
—
|
|
|
|
3,502
|
|
|
|
—
|
|
|
|
3,502
|
|
Total investments
|
|
$
|
113,238
|
|
|
$
|
50,633
|
|
|
$
|
—
|
|
|
$
|
163,871
|
|
Reported as:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
117,237
|
|
Short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,634
|
|
Total investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
163,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using:
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
As of December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
19,257
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
19,257
|
|
Cash Equivalents and AFS Securities
Financial assets measured at fair value on a recurring basis consist of the Company’s cash equivalents and AFS securities. The Company obtains pricing information from its investment manager and generally determines the fair value of investment securities using standard observable inputs, including reported trades, broker/dealer quotes, and bids and/or offers.
Investments are classified as Level 1 within the fair value hierarchy if their quoted prices are available in active markets for identical securities. Investments in money market funds were classified as Level 1 instruments.
Investments in commercial paper, corporate debt securities, U.S. government securities and U.S. agency bonds are valued using Level 2 inputs. The Company classifies investments within Level 2 if the investments are valued using model driven valuations using observable inputs such as quoted market prices, benchmark yields, reported trades, broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency. Investments are held by custodians who obtain investment prices from a third-party pricing provider that incorporates standard inputs in various asset price models.
As of June 30, 2021, the amortized cost of the Company’s AFS securities approximated their fair value. There was no material realized or unrealized gains or losses, either individually or in the aggregate.
The contractual maturities of the Company’s AFS securities were as follows (in thousands):
|
June 30,
2021
|
|
Due within one year
|
$
|
31,464
|
|
Due within one to two years
|
|
15,170
|
|
Total
|
$
|
46,634
|
|
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Convertible Promissory Notes
As further described in Note 5, the Company issued convertible promissory notes in October 2019 (the “2019 Notes”) and in June 2020 (the “2020 Notes”) to investors. The Company elected the fair value option for the convertible promissory notes. The fair value of the convertible promissory notes was determined using a scenario-based analysis that estimated the fair value of the convertible promissory notes based on the probability-weighted present value of expected future investment returns, considering possible outcomes available to the noteholders, including conversions in subsequent equity financings. The 2019 Notes and 2020 Notes were valued upon issuance, remeasured to fair value each reporting period and remeasured immediately prior to conversion into Series B convertible preferred stock based on changes in the expected time to closing ranging from 0 to 0.67 years and the relevant discount rate of 25% during the period. In September 2020, the 2019 Notes and 2020 Notes were converted to 1,905,688 shares of Series B convertible preferred stock.
There were no liabilities measured at fair value on a recurring basis as of June 30, 2021 and December 31, 2020.
The following table provides a reconciliation of all liabilities measured at fair value using Level 3 significant unobservable inputs (in thousands):
|
Convertible
Promissory
Notes
|
|
Fair value as of December 31, 2019
|
$
|
2,751
|
|
Change in fair value of convertible promissory notes (Note 5)
|
|
133
|
|
Fair value as of June 30, 2020
|
$
|
2,884
|
|
Note 4 – Related Party Transactions
As further described in Note 5, the Company issued the 2019 Notes in October 2019 to certain holders of convertible preferred stock, for an aggregate purchase price of $2.5 million and the 2020 Notes in June 2020 to certain holders of convertible preferred stock, for an aggregate purchase price of $6.4 million. In September 2020, all outstanding convertible promissory notes with a total fair value of $11.2 million and accrued interest of $167,000 were converted to 1,905,688 shares of Series B convertible preferred stock. The change in fair value of the convertible promissory notes for the three and six months ended June 30, 2020 was $5,000 and $133,000, respectively.
Note 5 – Convertible Promissory Notes
In October 2019, the Company entered into a convertible note purchase agreement with certain holders of preferred stock and issued the 2019 Notes for an aggregate purchase price of $2.5 million. The 2019 Notes bore an interest rate of the lesser of (a) 5% per annum and (b) the maximum rate permissible by law. The 2019 Notes were due and payable on demand from the holders on or after 18 months after the date of issuance (“2019 Notes Maturity Date”), unless repaid in full or automatically converted per the Automatic Conversion feature. Under the Automatic Conversion feature, the 2019 Notes were to automatically convert to convertible preferred stock, upon the closing of the Company’s next issuance of preferred stock for capital-raising purposes resulting in net proceeds to the Company of at least $10.0 million (excluding any amounts received in connection with the conversion of the 2019 Notes) (“Future Qualifying Financing”). The 2019 Notes would convert into that whole number of shares of the securities equal to the number obtained by dividing the principal plus accrued interest of the 2019 Notes by 80% of the price per share paid by cash investors in the Future Qualifying Financing. The convertible notes included other optional redemption features as follows (i) optionally converted upon a non-qualified equity financing with a conversion price of 80% of the price paid per share in such financing, (ii) any time after the 2019 Notes Maturity Date, demand immediate repayment of an amount equal to the then-outstanding loan balance, or convert the outstanding loan balance into shares of common stock of the Company in an amount equal to the ratio of the then-outstanding loan balance over the ratio of $38.4 million divided by the number of shares of capital stock of the Company outstanding, (iii) automatically upon the occurrence of change in control or an IPO with a conversion of the loan balance into shares of common stock in an amount equal to the ratio of the then-outstanding loan balance over the ratio of $76.8 million divided by the fully diluted capitalization prior to the change in control or IPO, or demand immediate repayment of two times the outstanding loan balance, and (iv) upon certain events of default, immediately due and payable in full.
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In June 2020, the Company entered into a convertible note purchase agreement with certain holders of preferred stock and issued the 2020 Notes for an aggregate purchase price of $6.4 million. The 2020 Notes bore an interest rate of the lesser of (a) 5% per annum and (b) the maximum rate permissible by law. The 2020 Notes were due and payable on demand from the holders on or after 18 months after the date of issuance (“2020 Notes Maturity Date”), unless repaid in full or automatically converted per the Automatic Conversion feature. Under the Automatic Conversion feature, the 2020 Notes were to automatically convert to convertible preferred stock, upon the closing of the Company’s next issuance of preferred stock for capital-raising purposes resulting in net proceeds to the Company of at least $10.0 million (excluding any amounts received in connection with the conversion of the 2020 Notes) (“Qualifying Financing”). The 2020 Notes would convert into that whole number of shares of the securities equal to the number obtained by dividing the principal plus accrued interest of the 2020 Notes by 80% of the price per share paid by cash investors in the Qualifying Financing. The convertible notes included other optional redemption features as follows (i) optionally converted upon a non-qualified equity financing with a conversion price of 80% of the price paid per share in such financing, (ii) any time after the 2020 Notes Maturity Date, demand immediate repayment of an amount equal to the then-outstanding loan balance, or convert the outstanding loan balance into shares of common stock of the Company in an amount equal to the ratio of the then-outstanding loan balance over the ratio of $38.4 million divided by the number of shares of capital stock of the Company outstanding, (iii) automatically upon the occurrence of change in control or an IPO with a conversion of the loan balance into shares of common stock in an amount equal to the ratio of the then-outstanding loan balance over the ratio of $76.8 million divided by the fully diluted capitalization prior to the change in control or IPO, or demand immediate repayment of two times the outstanding loan balance, (iv) automatically upon the consummation of a transaction in which the Company merges with a public company and (v) upon certain events of default, immediately due and payable in full.
For the three and six months ended June 30, 2020, the Company recognized interest expense of $33,000 and $64,000, respectively, in connection with the 2019 Notes. In September 2020, all outstanding convertible promissory notes with a total fair value of $11.2 million and accrued interest of $167,000 were converted to 1,905,688 shares of Series B convertible preferred stock.
Note 6 – Convertible Preferred Stock and Stockholders’ Equity (Deficit)
In 2020, the Company amended its Certificate of Incorporation to authorize the issuance of 24,000,000 shares of common stock, par value $0.001 per share, and 16,273,406 shares of preferred stock, par value $0.001 per share, of which 3,731,208 shares were designated Series A convertible preferred stock and 12,542,198 shares were designated Series B convertible preferred stock.
In connection with the reverse stock split on April 16, 2021, the Company filed a certificate of amendment to its certificate of incorporation, which authorized 260,000,000 shares of capital stock, consisting of 250,000,000 shares of common stock, par value $0.001 per share, and 10,000,000 shares of undesignated preferred stock, par value $0.001 per share, that may be issued from time to time by the Company’s Board of Directors in one or more series. Of the 250,000,000 shares of common stock, 200,000,000 shares were designated as “Common Stock” and 50,000,000 shares were designated as “Non-Voting Common Stock”. As of June 30, 2021, there were no preferred stock issued and outstanding.
Convertible Preferred Stock
Series A Convertible Preferred Stock. In April 2018, the Company entered into a Series A convertible preferred stock purchase agreement, pursuant to which the Company issued 2,098,269 shares of Series A convertible preferred stock for an aggregate purchase price of $11.0 million, net of issuance costs. In December 2018, the Company issued an additional 1,390,788 shares of Series A convertible preferred stock for an aggregate purchase price of $7.3 million, net of issuance costs.
Series B Convertible Preferred Stock. In September 2020, the Company entered into a Series B convertible preferred stock purchase agreement, pursuant to which the Company issued 10,636,510 shares of Series B convertible preferred stock for an aggregate purchase price of $63.2 million, net of issuance costs.
Prior to the IPO, the Company’s Series A and Series B convertible preferred stock were classified as temporary equity on the accompanying balance sheet instead of in stockholders’ equity (deficit) as events triggering redemption were not solely within the Company’s control because the preferred stockholders had the ability to effect a liquidation event.
On April 27, 2021, immediately prior to the closing of the IPO, 8,344,905 shares of the Company’s convertible preferred stock were exchanged for 7,727,470 shares of non-voting common stock and 7,928,501 shares of the Company’s convertible preferred stock converted into 7,341,860 shares of common stock. There were no outstanding shares of the Company’s convertible preferred stock as of June 30, 2021.
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Equity Incentive Plan
In August 2020, the Company’s Board of Directors amended the Amended and Restated 2018 Stock Option—Stock Issuance Plan (the “2018 Plan”) to increase the maximum number of shares of common stock that may be issued over the term of the plan. The 2018 Plan provides for the grant of stock options, non-statutory stock options, incentive stock options and stock issuances to employees, nonemployees and consultants of the Company.
In April 2021, the Company’s 2021 Equity Incentive Plan (the “2021 Plan”) was approved by the Company’s Board of Directors and became effective on April 15, 2021. Upon the effectiveness of the 2021 Plan, no further grants may be made under the Company’s 2018 Plan.
The 2021 Plan allows the Company to grant equity-based awards to its officers, employees, directors and other key persons (including consultants). The Company initially reserved up to 3,246,120 shares of common stock for issuance under the 2021 Plan, plus (i) 1,722 shares that remained available for the issuance of awards under the 2018 Stock Option—Stock Issuance Plan (the “Plan”) at the time the 2021 Plan became effective, and (ii) any shares subject to outstanding options or other share awards that were granted under the Plan that terminate or expire prior to exercise or settlement; are forfeited because of the failure to vest; or are reacquired or withheld (or not issued) to satisfy a tax withholding obligation or the purchase or exercise price. The 2021 Plan provides that the number of shares reserved and available for issuance under the plan will automatically increase each January 1, beginning on January 1, 2022 and each January 1 thereafter through January 31, 2032, by 4.0% of the outstanding number of shares of common stock on the immediately preceding December 31, or such lesser number of shares as determined by the Company’s Board of Directors.
A summary of the Company’s stock option activities during the six months ended June 30, 2021 is as follows (in thousands, except share and per share amounts and years):
|
Total Options
|
|
Weighted-
Average
Exercise
Price Per
Share
|
|
Weighted-
Average
Remaining
Contract
Term
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding as of December 31, 2020
|
|
882,942
|
|
$
|
3.72
|
|
|
9.0
|
|
$
|
1,263
|
|
Granted
|
|
691,196
|
|
$
|
11.58
|
|
|
|
|
|
|
|
Exercised
|
|
(21,430
|
)
|
$
|
3.95
|
|
|
|
|
|
|
|
Forfeited or cancelled
|
|
(14,858
|
)
|
$
|
3.99
|
|
|
|
|
|
|
|
Outstanding as of June 30, 2021
|
|
1,537,850
|
|
$
|
7.25
|
|
|
9.2
|
|
$
|
14,676
|
|
Vested and expected to vest as of June 30, 2021
|
|
1,537,850
|
|
$
|
7.25
|
|
|
9.2
|
|
$
|
14,676
|
|
Vested and exercisable as of June 30, 2021
|
|
450,607
|
|
$
|
3.71
|
|
|
8.2
|
|
$
|
4,471
|
|
The weighted-average grant date fair values of employee option grants during the six months ended June 30, 2021 and 2020 were $11.58 and $2.34 per share, respectively. The weighted-average grant date fair values of employee options forfeited during the six months ended June 30, 2021 was $3.07 per share. There were no employee options forfeited during the six months ended June 30, 2020.
Employee Stock Purchase Plan
The 2021 Employee Share Purchase Plan (the “ESPP”) was approved by the Board of Directors and became effective on April 15, 2021. The ESPP initially reserved and authorized the issuance of up to 259,689 shares of common stock to participating employees. Under the ESPP, eligible employees can contribute up to 15% of their eligible compensation, as defined in the ESPP, towards the purchase of the Company’s common stock at a price of 85% of the lower of the fair market value of the Company’s common stock on the first trading day of the offering period or on the last trading day of the offering period. The ESPP provides for twenty-four-month offering periods with four six-month purchase periods in each offering period. The ESPP provides that the number of shares reserved and available for issuance will automatically increase each January 1, beginning on January 1, 2022 and each January 1 thereafter through January 31, 2032, by 1.0% of the total number of shares of common stock outstanding on December 31 of the preceding calendar year. As of June 30, 2021, no shares had been issued under the ESPP, and the full number of shares authorized under the ESPP was available for issuance.
12
Table of Contents
Liability for Restricted Stock
In 2017, the Company entered into restricted stock purchase agreements with various employees for 3,518,842 shares of common stock, which are subject to time-based vesting. The Company has the option to repurchase any unvested shares at the original purchase price upon any voluntary or involuntary separation of an employee from the Company. The shares purchased pursuant to the restricted stock purchase agreements are not deemed, for accounting purposes, to be outstanding until those shares vest. The cash received in exchange for unvested shares of the restricted stock granted were recorded as a liability on the accompanying condensed balance sheet and were transferred into common stock and additional paid-in capital as the restricted stock vests.
The Company issued 532,455 shares in 2020 in connection with the vesting of the restricted stock. As of December 31, 2020, no shares remained subject to repurchase by the Company.
Stock-Based Compensation Expense
The Company recognized stock-based compensation expense as follows (in thousands):
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Research and development
|
|
$
|
634
|
|
|
$
|
118
|
|
|
$
|
769
|
|
|
$
|
245
|
|
General and administrative
|
|
|
159
|
|
|
|
78
|
|
|
|
189
|
|
|
|
150
|
|
|
|
$
|
793
|
|
|
$
|
196
|
|
|
$
|
958
|
|
|
$
|
395
|
|
The weighted-average assumptions used in the Black-Scholes option pricing model to determine the fair value of the stock option grants were as follows:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Risk-free interest rate
|
|
0.8%–1.1%
|
|
|
0.4%
|
|
|
0.8%–1.1%
|
|
|
0.4%–0.9%
|
|
Expected volatility
|
|
115.3%–116.6%
|
|
|
100.0%
|
|
|
115.3%–118.7%
|
|
|
96.9%–100.0%
|
|
Expected term (in years)
|
|
5.0–6.1
|
|
|
5.7
|
|
|
5.0–6.1
|
|
|
5.3–5.7
|
|
Expected dividend yield
|
|
0%
|
|
|
0%
|
|
|
0%
|
|
|
0%
|
|
As of June 30, 2021, the unrecognized compensation cost related to outstanding options was $8.5 million and is expected to be recognized as expense over approximately 3.5 years.
The weighted average assumptions used Black-Scholes option pricing model to estimate the fair value of purchase rights granted under the ESPP were as follows:
|
|
|
|
Three Months Ended
June 30, 2021
|
|
Risk-free interest rate
|
|
|
|
0.1%
|
|
Expected volatility
|
|
|
|
127.8%
|
|
Expected term (in years)
|
|
|
|
1.4
|
|
Expected dividend yield
|
|
|
|
0%
|
|
As of June 30, 2021, there was $0.7 million of unrecognized compensation cost related to the ESPP and is expected to be recognized over approximately 2.0 years.
The determination of the fair value of share-based payment awards utilizing the Black-Scholes option-pricing model is affected by the Company’s stock price and the following assumptions:
Risk-free interest rate. The risk-free interest rate assumption is based on the U.S. Treasury instruments, the terms of which were consistent with the expected term of the Company’s stock-based awards.
13
Table of Contents
Expected volatility. Due to the Company’s limited operating history and lack of company-specific historical or implied volatility as a private company, the expected volatility assumption was determined by examining the historical volatilities of a group of industry peers whose share prices are publicly available.
Expected term. The expected term represents the weighted-average period the stock-based awards are expected to be outstanding. The Company uses the simplified method for estimating the expected term. The simplified method calculates the expected term as the average of the time-to-vesting and the contractual life of the stock-based awards.
Expected dividend yield. The expected dividend assumption is based on the Company’s history and expectation of dividend payouts. The Company has not paid and does not intend to pay dividends.
Forfeitures. The Company reduces stock-based compensation expense for actual forfeitures during the period.
Common Stock Reserved for Future Issuance
Common stock reserved for future issuance consist of the following:
|
|
June 30,
2021
|
|
|
December 31,
2020
|
|
Stock options
|
|
|
1,537,850
|
|
|
|
882,942
|
|
Reserved for future equity award grants
|
|
|
3,139,842
|
|
|
|
582,203
|
|
Reserved for future ESPP issuances
|
|
|
259,689
|
|
|
|
—
|
|
Convertible preferred stock
|
|
|
—
|
|
|
|
15,069,330
|
|
Total
|
|
|
4,937,381
|
|
|
|
16,534,475
|
|
Note 7 – License Agreements
The Company has entered into license agreements, accounted for as asset acquisitions, under which the Company is required to use commercially reasonable efforts to meet certain specified development and regulatory milestones related to the licensed technologies within specified time periods. In consideration of the rights granted to the Company under the agreements, the Company is required to make cash milestone payments to the licensors upon the completion of certain development, regulatory and commercial milestones. For the arrangements that the Company accounted for as asset acquisitions, contingent consideration liabilities are recorded as an additional cost of the acquired assets when the contingency is resolved, and the consideration is paid or becomes payable. Additionally, the Company has agreed to pay royalties on net sales of products applicable to the license agreements. The Company may terminate the agreements upon written notice to the licensors.
Drexel License Agreement and Sponsored Research Agreement
On July 30, 2020 (the “Effective Date”), the Company entered into an intellectual property license agreement (the “Drexel License Agreement”) with Drexel University (“Drexel”). Pursuant to the Drexel License Agreement, Drexel granted to the Company (i) a worldwide, exclusive license to make and commercialize products under a single issued patent and two patent applications related to RAD52 inhibitors for the treatment of cancer (the “Patent Rights”) and (ii) a worldwide, nonexclusive license to make, use and commercialize certain technical information and know-how related to the Patent Rights. The license grant includes the right to sublicense after the first anniversary of the Effective Date, subject to express conditions set forth in the Drexel License Agreement.
The Company is obligated to use commercially reasonable efforts to (i) develop, commercialize, market and sell licensed products in a manner consistent with a development plan and (ii) achieve certain milestone events, including, among other things, receiving investigational new drug application (“IND”) approval for a licensed product by the fourth anniversary of the Effective Date. Under the Drexel License Agreement, for a period of five years from the Effective Date, the Company is granted a first option to license Drexel’s rights in certain improvements, developments or inventions developed by Drexel (or jointly by the parties) during the five-year period that are directly related to the licensed products or to RAD52 or compounds that have been generated to specifically target RAD52.
14
Table of Contents
In addition to a one-time, non-refundable initiation fee of $20,000 paid in four equal installments of $5,000 each within ten days after the Effective Date and six, twelve and eighteen months after the Effective Date, the Drexel License Agreement requires the Company to make further payments to Drexel of up to an aggregate of $6.25 million, for the achievement of specified development milestones for certain licensed products. The Company is also required to reimburse Drexel (i) after the filing of the first IND for the first licensed product, for all costs related to the filing, prosecution and maintenance of the Patent Rights accumulated prior to the Effective Date, and (ii) for all reasonable costs related to the filing, prosecution and maintenance of the Patent Rights after the Effective Date. In addition, the Company is also required to pay Drexel, on a quarterly basis, a low single digit royalty on net sales by the Company, its affiliates and sublicensees of certain licensed products, subject to specified reductions and a minimum quarterly royalty payment of up to $6,250.
Unless sooner terminated or extended, the term of the Drexel License Agreement with respect to any licensed product and country continues until the later of (i) the expiration or abandonment of the last-to-expire valid claim of the Patent Rights that covers the sale of such licensed product in such country, (ii) the expiration of any granted statutory period of marketing and/or data exclusivity for such licensed product that confers upon the Company exclusive commercialization, (iii) the month of the first sale of a generic equivalent of such licensed product in such country and (iv) ten years after the first sale of the first licensed product.
The Company made payments of nil and $19,000 under the Drexel License Agreement for the three and six months ended June 30, 2021, respectively. No similar payment was made for the three and six months ended June 30, 2020.
Daiichi Sankyo License Agreement
On September 2, 2020, the Company licensed the rights to milademetan (DS-3032b) for all human prophylactic or therapeutic uses in all countries and territories of the world from Daiichi Sankyo Company, Limited, (“Daiichi Sankyo”), a Japanese corporation (the “Daiichi Sankyo License Agreement”). Daiichi Sankyo conducted clinical studies of milademetan prior to the Company’s licensing the rights to this product. The Company refers to this product candidate as milademetan.
Under the Daiichi Sankyo License Agreement, the Company obtained worldwide, sublicensable exclusive rights to seven families of patents with respect to milademetan. While the Company is solely responsible under the Daiichi Sankyo License Agreement for the research, development and registration of milademetan, Daiichi Sankyo has the right to continue to conduct three ongoing clinical trials and prepare final reports with respect to these clinical trials. The Company has agreed to reimburse Daiichi Sankyo certain third-party expenses incurred while conducting such trials.
The Company is obligated to use commercially reasonable efforts to develop, commercialize and manufacture milademetan and to commercially launch milademetan as soon as reasonably practicable after receiving the requisite approvals from the authorities in any given country. The Company is also obligated to use commercially reasonable efforts to receive at least three full approvals for use in each of the following countries: France, Germany, Italy, Spain, the United Kingdom, the United States and one country outside of the United States and the European Union. In accordance with the terms of the Daiichi Sankyo License Agreement, the Company paid Daiichi Sankyo an initial upfront payment of $5.0 million in September 2020. The Company is required to make aggregate future milestone payments of up to an aggregate of $225.0 million on the attainment of certain development and sales milestones. None of the milestones have been achieved. Additionally, the Company is required to pay Daiichi Sankyo a high single digit royalty based on the annual net sales of milademetan, to be reduced to an agreed rate upon expiration of the licensed patent in the particular country wherein sales are made. To date, no royalty payments have been made to Daiichi Sankyo under the Daiichi Sankyo License Agreement. The royalty obligation terminates on a country-by-country and on a product-by-product basis on the later of: (i) loss of all market exclusivity for such product in such country, (ii) the last-to-expire patent that covers the licensed compound or the product in such country and (iii) twelve years from launch of the first product sold by the Company in such country.
Unless sooner terminated or extended, the Daiichi Sankyo License Agreement will remain in full force and effect until the Company, its affiliates and its sublicensees cease all development and commercial activity related to milademetan. Either party may terminate the Daiichi Sankyo License Agreement for cause in the event of an uncured material breach (subject to a 90-day cure period).
The Company made no payments under the Daiichi Sankyo License Agreement for the six months ended June 30, 2021 and 2020.
15
Table of Contents
Note 8 – Commitments and Contingencies
Leases
In September 2018, the Company entered into a noncancelable operating lease agreement for office space for its corporate headquarters in Newark, California with an initial term of 5.25 years. The lease commenced in January 2019 and ends March 2024. Under the terms of the lease, the Company pays annual base rent, subject to an annual fixed percentage increase of 3% on March 1st of each year. The Company is obligated to pay for its share of direct expenses including operating expense and taxes, which are considered variable lease costs and are expensed as incurred.
In March 2020, Governor Newsom issued State of California Executive Order No. N-33-20 instructing all individuals in California to stay at home due to the COVID-19 pandemic. In connection with such order, the Company entered into an amendment to the noncancelable operating lease agreement in June 2020. The amendment provided the Company rent relief for three months in 2020. In consideration of the rent relief, the Company agreed to adjust the base rent annual fixed percentage increase of 3% on February 1st of each year and extend the lease until September 2024. The amendment was determined to be a lease modification that qualified as a change of accounting on the existing lease and not a separate contract. Remeasurement of the right-of-use asset and operating lease liabilities at the date of modification did not result in a material increase of the right-of-use asset and operating lease liabilities.
The future minimum lease payments required under the operating lease as of June 30, 2021, are summarized as follows (in thousands):
2021 - remainder
|
|
$
|
81
|
|
2022
|
|
|
167
|
|
2023
|
|
|
171
|
|
2024
|
|
|
129
|
|
Total minimum lease payments
|
|
$
|
548
|
|
Less: amount representing interest
|
|
|
(76
|
)
|
Present value of operating lease liabilities
|
|
$
|
472
|
|
Operating lease liabilities, current
|
|
|
157
|
|
Operating lease liabilities, non-current
|
|
|
315
|
|
Total operating lease liabilities
|
|
$
|
472
|
|
Weighted-average remaining lease term (in years)
|
|
|
3.2
|
|
Weighted-average incremental borrowing rate
|
|
|
10.0
|
%
|
The table below summarizes the Company’s lease costs and cash payments in connection with operating lease obligations (in thousands):
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Total operating lease expense
|
|
$
|
40
|
|
|
$
|
40
|
|
|
$
|
80
|
|
|
$
|
80
|
|
Operating cash flows used for operating lease
|
|
|
41
|
|
|
|
39
|
|
|
|
81
|
|
|
|
78
|
|
Contingencies
In the event the Company becomes subject to claims or suits arising in the ordinary course of business, the Company would accrue a liability for such matters when it is probable that future expenditures will be made, and such expenditures can be reasonably estimated.
16
Table of Contents
Note 9 – Net Loss Per Share
The following tables summarize the computation of the basic and diluted net loss per share (in thousands, except share and per share data):
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(8,183
|
)
|
|
$
|
(2,624
|
)
|
|
$
|
(14,983
|
)
|
|
$
|
(5,193
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares of common stock outstanding, basic and diluted
|
|
|
20,825,334
|
|
|
|
3,518,842
|
|
|
|
12,225,929
|
|
|
|
3,518,841
|
|
Less: weighted-average unvested common stock
|
|
|
—
|
|
|
|
(158,454
|
)
|
|
|
—
|
|
|
|
(268,802
|
)
|
Weighted-average shares used to compute net loss per share, basic and diluted
|
|
|
20,825,334
|
|
|
|
3,360,388
|
|
|
|
12,225,929
|
|
|
|
3,250,039
|
|
Net loss per share, basic and diluted
|
|
$
|
(0.39
|
)
|
|
$
|
(0.78
|
)
|
|
$
|
(1.23
|
)
|
|
$
|
(1.60
|
)
|
The following table sets forth the outstanding potentially dilutive securities that have been excluded in the calculation of diluted net loss per share because their inclusion would be anti-dilutive:
|
|
As of June 30,
|
|
|
|
2021
|
|
|
2020
|
|
Stock options granted and outstanding
|
|
|
1,537,850
|
|
|
|
577,361
|
|
Series A convertible preferred stock
|
|
|
—
|
|
|
|
3,731,208
|
|
Series B convertible preferred stock
|
|
|
—
|
|
|
|
—
|
|
Unvested common stock subject to repurchase
|
|
|
—
|
|
|
|
116,673
|
|
Total
|
|
|
1,537,850
|
|
|
|
4,425,242
|
|
Note 10 – Subsequent Events
On July 20, 2021, the Company announced that the first patient has been randomized in the multicenter, open-label, Phase 3 registrational trial (MANTRA) evaluating milademetan, an oral mouse double minute 2 (MDM2) inhibitor, for the treatment of de-differentiated liposarcoma. Accordingly, under the Daiichi Sankyo License Agreement, the Company is obligated to pay Daiichi Sankyo $2.5 million in a milestone payment within 30 days upon receipt of invoice. The Company made no payments under the Daiichi Sankyo License Agreement for the six months ended June 30, 2021 and 2020.
17
Table of Contents