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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended September 30, 2022

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 001-39538

 

GRAYBUG VISION, INC.

(Exact name of Registrant as specified in its Charter)

 

 

Delaware

 

45-2120079

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

203 Redwood Shores Parkway, Suite 620

Redwood City, CA 94065

(Address of principal executive offices including zip code)

Registrant’s telephone number, including area code: (650487-2800

 

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

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

 

GRAY

 

The Nasdaq Global Market

 

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

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

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

 

Large accelerated filer

 

 

 

Accelerated filer

 

 

Non-accelerated filer

 

 

 

Smaller reporting company

 

 

 

 

 

Emerging growth company

 

 

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

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES      NO  

The number of shares of the Registrant’s common stock outstanding as of November 7, 2022 was 21,562,523.

 

 

 


 

Table of Contents

 

 

 

 

Page

 

 

PART I—FINANCIAL INFORMATION

 

Item 1.

 

Financial Statements

 

 

 

Condensed Consolidated Balance Sheets

4

 

 

Condensed Consolidated Statements of Operations

5

 

 

Condensed Consolidated Statements of Comprehensive Loss

6

 

 

Condensed Consolidated Statements of Stockholders’ Equity

7

 

 

Condensed Consolidated Statements of Cash Flows

9

 

 

Notes to the Condensed Consolidated Financial Statements

10

Item 2.

 

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

19

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

29

Item 4.

 

Controls and Procedures

29

 

 

 

 

 

 

PART II—OTHER INFORMATION

 

Item 1.

 

Legal Proceedings

30

Item 1A.

 

Risk Factors

30

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

78

Item 3.

 

Defaults Upon Senior Securities

78

Item 4.

 

Mine Safety Disclosures

78

Item 5.

 

Other Information

78

Item 6.

 

Exhibits

79

SIGNATURES

80

 

In this Quarterly Report on Form 10-Q, “we,” “our,” “us,” “Graybug” and the “Company” refer to Graybug Vision, Inc. This report contains references to trademarks belonging to other entities, which are the property of their respective holders. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

 

2


 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements, other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our future financial condition, business strategy and plans, and objectives of management for future operations, are forward-looking statements. In some cases you can identify these statements by forward-looking words such as “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan,” “expect” or the negative or plural of these words or similar expressions. These forward-looking statements include, but are not limited to, statements concerning the following:

 

the timing and outcome of our exploration of potential strategic alternatives;

 

the potential of our technologies and our ability to execute on our corporate strategy;

 

our ability to fund our working capital needs; and

 

our ability to extend our operating capital.

These statements are only current predictions and are subject to known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from those anticipated by the forward-looking statements. We discuss many of these risks in greater detail under the heading “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. You should not rely upon forward-looking statements as predictions of future events. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risks and uncertainties.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by law, after the date of this report, we are under no duty to update or revise any of the forward-looking statements, whether as a result of new information, future events or otherwise.

We obtained industry, market and competitive position data in this report from our own internal estimates and research as well as from industry and general publications and research surveys and studies conducted by third parties. These data involve a number of assumptions and limitations, and you are cautioned not to give undue weight to such information or estimates.

 

3


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

 

 

 

GRAYBUG VISION, INC.

Condensed Consolidated Balance Sheets

(in thousands)

 

 

 

September 30,

2022

 

 

December 31,

2021

 

 

 

(unaudited)

 

 

(See Note 2)

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

10,170

 

 

$

13,364

 

Short-term investments

 

 

33,457

 

 

 

50,306

 

Assets held for sale

 

 

350

 

 

 

 

Prepaid expenses and other current assets

 

 

1,094

 

 

 

3,408

 

Total current assets

 

 

45,071

 

 

 

67,078

 

Property and equipment, net

 

 

 

 

 

1,981

 

Operating lease right-of-use asset

 

 

290

 

 

 

 

Prepaid expenses and other non-current assets

 

 

 

 

 

29

 

Total assets

 

$

45,361

 

 

$

69,088

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

498

 

 

$

527

 

Accrued research and development

 

 

200

 

 

 

304

 

Operating lease liability, current

 

 

302

 

 

 

 

Other current liabilities

 

 

2,762

 

 

 

3,226

 

Total current liabilities

 

 

3,762

 

 

 

4,057

 

Deferred rent, long term portion

 

 

 

 

 

8

 

Total liabilities

 

 

3,762

 

 

 

4,065

 

Commitments and contingencies (Note 5)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock

 

 

 

 

 

 

Common stock

 

 

2

 

 

 

2

 

Additional paid-in capital

 

 

239,110

 

 

 

234,225

 

Accumulated deficit

 

 

(197,390

)

 

 

(169,188

)

Accumulated other comprehensive loss

 

 

(123

)

 

 

(16

)

Total stockholders’ equity

 

 

41,599

 

 

 

65,023

 

Total liabilities and stockholders’ equity

 

$

45,361

 

 

$

69,088

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

4


GRAYBUG VISION, INC.

Condensed Consolidated Statements of Operations

(in thousands, except share and per share amounts)

(Unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

3,249

 

 

$

4,021

 

 

$

13,364

 

 

$

14,635

 

General and administrative

 

 

4,299

 

 

 

3,996

 

 

 

12,669

 

 

 

12,611

 

Restructuring, impairment and other costs of terminated programs

 

 

2,435

 

 

 

 

 

 

2,435

 

 

 

 

Total operating expenses

 

 

9,983

 

 

 

8,017

 

 

 

28,468

 

 

 

27,246

 

Loss from operations

 

 

(9,983

)

 

 

(8,017

)

 

 

(28,468

)

 

 

(27,246

)

Interest income

 

 

171

 

 

 

28

 

 

 

266

 

 

 

100

 

Net loss

 

$

(9,812

)

 

$

(7,989

)

 

$

(28,202

)

 

$

(27,146

)

Net loss per share—basic and diluted

 

$

(0.46

)

 

$

(0.38

)

 

$

(1.32

)

 

$

(1.28

)

Weighted-average number of shares outstanding used in

   computing net loss per share—basic and diluted

 

 

21,536,622

 

 

 

21,287,498

 

 

 

21,443,252

 

 

 

21,153,185

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

5


 

GRAYBUG VISION, INC.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

(Unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Net loss

 

$

(9,812

)

 

$

(7,989

)

 

$

(28,202

)

 

$

(27,146

)

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

   net of tax

 

 

56

 

 

 

 

 

 

(107

)

 

 

10

 

Comprehensive loss

 

$

(9,756

)

 

$

(7,989

)

 

$

(28,309

)

 

$

(27,136

)

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

6


 

 

GRAYBUG VISION, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share amounts)

(Unaudited)

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Accumulated

 

 

Accumulated

Other

Comprehensive

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Loss

 

 

Equity

 

Balance—December 31, 2021

 

 

21,357,773

 

 

$

2

 

 

$

234,225

 

 

$

(169,188

)

 

$

(16

)

 

$

65,023

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

1,542

 

 

 

 

 

 

 

 

 

1,542

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(10,149

)

 

 

 

 

 

(10,149

)

Unrealized loss on available-for-sale

   securities, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(160

)

 

 

(160

)

Balance—March 31, 2022

 

 

21,357,773

 

 

 

2

 

 

 

235,767

 

 

 

(179,337

)

 

 

(176

)

 

 

56,256

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

1,749

 

 

 

 

 

 

 

 

 

1,749

 

Issuance of common stock upon vesting of restricted

   stock units, net of shares withheld for employee taxes

 

 

159,909

 

 

 

 

 

 

(69

)

 

 

 

 

 

 

 

 

(69

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(8,241

)

 

 

 

 

 

(8,241

)

Unrealized loss on available-for-sale

   securities, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3

)

 

 

(3

)

Balance—June 30, 2022

 

 

21,517,682

 

 

 

2

 

 

 

237,447

 

 

 

(187,578

)

 

 

(179

)

 

 

49,692

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

1,680

 

 

 

 

 

 

 

 

 

1,680

 

Issuance of common stock upon vesting of restricted

   stock units, net of shares withheld for employee taxes

 

 

44,841

 

 

 

 

 

 

(17

)

 

 

 

 

 

 

 

 

(17

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(9,812

)

 

 

 

 

 

(9,812

)

Unrealized gain on available-for-sale

   securities, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

56

 

 

 

56

 

Balance—September 30, 2022

 

 

21,562,523

 

 

$

2

 

 

$

239,110

 

 

$

(197,390

)

 

$

(123

)

 

$

41,599

 

 

See accompanying notes to unaudited condensed consolidated financial statements


7


 

 

GRAYBUG VISION, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share amounts)

(Unaudited)

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Accumulated

 

 

Accumulated

Other

Comprehensive

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Income (Loss)

 

 

Equity

 

Balance—December 31, 2020

 

 

20,979,265

 

 

$

2

 

 

$

228,155

 

 

$

(133,367

)

 

$

(4

)

 

$

94,786

 

Stock issued on exercise of stock

   options

 

 

76,679

 

 

 

 

 

 

92

 

 

 

 

 

 

 

 

 

92

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

1,129

 

 

 

 

 

 

 

 

 

1,129

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(11,449

)

 

 

 

 

 

(11,449

)

Unrealized gain on available-for-sale

   securities, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4

 

 

 

4

 

Balance—March 31, 2021

 

 

21,055,944

 

 

 

2

 

 

 

229,376

 

 

 

(144,816

)

 

 

 

 

 

84,562

 

Stock issued on exercise of stock

   options

 

 

228,732

 

 

 

 

 

 

495

 

 

 

 

 

 

 

 

 

495

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

1,312

 

 

 

 

 

 

 

 

 

1,312

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(7,708

)

 

 

 

 

 

(7,708

)

Unrealized gain on available-for-sale

   securities, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6

 

 

 

6

 

Balance—June 30, 2021

 

 

21,284,676

 

 

 

2

 

 

 

231,183

 

 

 

(152,524

)

 

 

6

 

 

 

78,667

 

Stock issued on exercise of stock

   options

 

 

11,915

 

 

 

 

 

 

27

 

 

 

 

 

 

 

 

 

27

 

Issuance of common stock upon

   vesting of restricted stock units

 

 

20,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

1,431

 

 

 

 

 

 

 

 

 

1,431

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(7,989

)

 

 

 

 

 

(7,989

)

Balance—September 30, 2021

 

 

21,316,591

 

 

$

2

 

 

$

232,641

 

 

$

(160,513

)

 

$

6

 

 

$

72,136

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

8


 

 

GRAYBUG VISION, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

Operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(28,202

)

 

$

(27,146

)

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

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

4,971

 

 

 

3,872

 

Depreciation

 

 

338

 

 

 

383

 

Loss on sale/disposal of assets

 

 

97

 

 

 

 

Noncash lease expense

 

 

277

 

 

 

 

Accretion of premium and discounts on short-term investments

 

 

(128

)

 

 

74

 

Acquired in-process research and development

 

 

2,194

 

 

 

 

Impairment of capital equipment

 

 

1,309

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other current and non-current assets

 

 

2,343

 

 

 

2,844

 

Accounts payable

 

 

86

 

 

 

(513

)

Accrued research and development

 

 

(104

)

 

 

(1,092

)

Operating lease liability

 

 

(281

)

 

 

 

Other current and non-current liabilities

 

 

(706

)

 

 

(968

)

Deferred rent, long term portion

 

 

 

 

 

1

 

Net cash used in operating activities

 

 

(17,806

)

 

 

(22,545

)

Investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(308

)

 

 

(484

)

Purchases of investments

 

 

(29,729

)

 

 

(72,610

)

Maturity of investments

 

 

46,599

 

 

 

73,059

 

Acquisition of in-process research and development

 

 

(1,944

)

 

 

 

Proceeds from sale of fixed assets

 

 

80

 

 

 

 

Net cash provided by (used in) investing activities

 

 

14,698

 

 

 

(35

)

Financing activities:

 

 

 

 

 

 

 

 

Payment of taxes on vested restricted stock units

 

 

(86

)

 

 

 

Proceeds from exercise of stock options

 

 

 

 

 

614

 

Net cash (used in) provided by financing activities

 

 

(86

)

 

 

614

 

Net decrease in cash and cash equivalents

 

 

(3,194

)

 

 

(21,966

)

Cash and cash equivalents at beginning of period

 

 

13,364

 

 

 

33,418

 

Cash and cash equivalents at end of period

 

$

10,170

 

 

$

11,452

 

Supplemental disclosure of noncash items:

 

 

 

 

 

 

 

 

Right-of-use asset obtained in exchange for operating lease liability

 

$

567

 

 

$

 

Acquired in-process research and development in accrued liabilities

 

$

250

 

 

$

 

Property and equipment purchases included in accounts payable and other current liabilities

 

$

 

 

$

115

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

9


 

 

GRAYBUG VISION, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Organization

Graybug Vision, Inc., the Company or Graybug, has historically been a clinical-stage biopharmaceutical company developing medicines for the treatment of diseases of the retina and optic nerve. On June 28, 2022, the Company announced that it would conduct a comprehensive review of strategic alternatives focused on maximizing shareholder value. As part of this review of strategic alternatives, the Company is exploring the potential for an acquisition, company sale, merger, divestiture of assets, private placement of equity securities, or other strategic transactions. Prior to this announcement, the Company had devoted substantially all of its resources to conducting research and development and raising capital. On August 18, 2022, the Company’s board of directors approved the restructuring plan which is described further in the Restructuring section below. The Company was founded in May 2011 and maintains facilities in Redwood City, California and Baltimore, Maryland.

The Company has historically been subject to risks common to clinical stage companies in the biopharmaceutical industry, including dependence on the clinical success of its product candidates, ability to obtain regulatory approvals of its product candidates, compliance with regulatory requirements, the need for substantial additional financing and protection of its proprietary technology.

Restructuring

On August 18, 2022, the Company’s board of directors approved certain strategic, operational and organizational steps for the Company to undertake in connection with its announcement on June 28, 2022 that the Company would conduct a comprehensive review of strategic alternatives focused on maximizing shareholder value. These steps include both the termination of all activities relating to the Company’s GB-102 and GB-401 programs and certain cost-reduction initiatives, including a reduction in its workforce by 71%. While clinical development of GB-501 remains on hold, preclinical work is still proceeding.

In connection with these actions, the Company recorded a restructuring charge of $2.4 million during the three months ended September 30, 2022. The restructuring charge includes: (i) the majority of severance and termination benefit expense for 20 employees terminated with separation dates between August 31, 2022 and October 31, 2022, (ii) a charge related to the impairment of research and development equipment in its Baltimore, Maryland facility, and (iii) costs to wind-down the GB-102 and GB-401 clinical development programs. Refer to Note 6 for additional information on the restructuring.

Going Concern Considerations

The Company incurred losses from operations and had negative cash flows from operating activities for the nine months ended September 30, 2022, and 2021, and the Company’s accumulated deficit at September 30, 2022 was $197.4 million. The Company’s current operating plan, which is subject to change based on the ongoing strategic review, indicates it will continue to incur losses from operations and generate negative cash flows from operating activities, given ongoing expenditures related to anticipated research and development and the Company’s lack of revenue-generating activities at this point in the Company’s life cycle. Even if the Company’s remaining product development efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales.

In March 2021, the Company decided not to proceed with the significant investment required to initiate two Phase 3 clinical trials for GB-102 in late 2021 and, in August 2022, terminated all activities relating to GB-102 and GB-401, and reduced its workforce by 71%. As a result, anticipated operating expenses have been significantly reduced and management continues to believe that the Company’s current cash, cash equivalents and short-term investments are adequate to meet its cash needs for at least 12 months from the issuance date of this Quarterly Report on Form 10-Q.

As part of the Company’s review of strategic alternatives, it is exploring the potential for an acquisition, company sale, merger, divestiture of assets, private placement of equity securities, or other strategic transactions. As part of this process the Company is exploring an outright sale or merger as well as a process to raise additional funds in order to further advance its remaining research and development programs, operate its business, secure research and development collaborations, and meet its obligations as they come due. The Company may pursue financing alternatives, similar to what it has previously executed, which include debt and equity financing. There are no assurances that this process will result in any such transaction and such sources of capital may not be available to the Company in the necessary time frame, in the amounts that the Company requires, on terms that are acceptable to the Company, or at all. If the Company is unable to consummate an acquisition, company sale, merger, divestiture of assets or other strategic transaction or raise the necessary funds when needed or reduce spending on currently planned activities, it may not be able to continue the preclinical development of its remaining products or it could be required to delay, scale back, or eliminate some or all of its research and development programs and other operations, including personnel, any of which may materially harm its business, financial position and results of operations.

10


 

COVID-19 Pandemic

The impact of the worldwide spread of a novel strain of coronavirus, or COVID-19, has been unprecedented and unpredictable, including the emergence of new variants of the coronavirus, such as the Delta and Omicron variants, and resurgences in number and rates of infections, but based on the Company’s current assessment, the Company does not expect any material impact on its long-term strategic plans, operations, or its liquidity due to the worldwide spread of COVID-19. However, the Company is continuing to assess the effect on its operations by monitoring the spread of COVID-19 and the actions implemented to combat the virus and new variants thereof throughout the world and its assessment of the impact of COVID-19 may change.

2. Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission, or SEC, and, therefore, certain information and disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, have been omitted.

In the opinion of management, the information reflects all adjustments necessary to make the results of operations for the interim periods a fair statement of such operations. All such adjustments are of a normal recurring nature, except expenses related to restructuring and impairment, as discussed in Note 1. Interim results are not necessarily indicative of results for the full year. The condensed balance sheet at December 31, 2021 has been derived from the audited financial statements at that date, but does not include all information and footnotes required by GAAP for complete financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on March 11, 2022.

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, RainBio, Inc., or RainBio, which was acquired in March 2022 (see Note 5). All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates  

The preparation of condensed consolidated financial statements in conformity with GAAP requires the Company 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 reported amounts of expenses during the reporting periods. Actual results could differ from those estimates. Significant items subject to estimates include estimates related to accrued research and development expenses, contingent milestone payments, other long-lived assets, assets held for sale, stock-based compensation, incremental borrowing rates for leases and the valuation of deferred tax assets. The Company bases its estimates using historical experience, Company forecasts and future plans, current economic conditions, and information from third-party professionals 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 and recorded amounts of expenses that are not readily apparent from other sources, and adjusts those estimates and assumptions when facts and circumstances dictate.

The Company’s results can also be affected by economic, political, legislative, regulatory and legal actions. Economic conditions, such as recessionary trends, inflation, interest, changes in regulatory laws and monetary exchange rates, and government fiscal policies, can have a significant effect on operations. While the Company maintains reserves for anticipated liabilities, the Company could be adversely affected by civil, criminal, regulatory or administrative actions, claims, or related proceedings.

Leases

The Company adopted Accounting Standards Codification (ASC) Topic 842, Leases (ASC 842) on January 1, 2022, as discussed below in the section titled Recently Adopted Accounting Pronouncements. Under ASC 842, the Company determines if an arrangement is or contains a lease at contract inception.

Operating lease right-of-use assets represent the Company’s right and ability to use an underlying asset for the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized based on the present value of lease payments over the lease term at the commencement date of the lease. Right-of-use assets also include any initial direct costs incurred and any lease payments made at or before the lease commencement date, less any lease incentive received. The present value of lease payments is determined by using the interest rate implicit in the lease, if that rate is readily determinable; otherwise, the Company uses its incremental borrowing rate. The incremental borrowing rate reflects the rate of interest that a lessee would have to pay to borrow, on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment. Lease expense for an operating lease is recognized on a straight-line basis over the lease term.

11


 

The Company elected the practical expedient to not separate lease and non-lease components for all classes of assets. Additionally, the Company has elected an accounting policy to not recognize short-term leases, which have a lease term of twelve months or less, on the condensed consolidated balance sheet. Variable lease payments are primarily related to property taxes, insurance and common area maintenance, and are recognized as lease cost when incurred.

Restructuring, Impairment and Other Costs of Terminated Programs

 

Restructuring, impairment and other costs of terminated programs primarily consists of severance and termination benefit expense and non-cash impairment of capital equipment. These charges are included in restructuring, impairment and other costs of terminated programs in the condensed consolidated statement of operations.

 

The Company recognizes severance and termination benefits when it is probable that employees will be entitled to such benefits and the amount can be reasonably estimated and recorded at fair value. The timing of the recognition of expense for severance and termination benefits depends on whether employees are required to render service until they are terminated in order to receive the termination benefits. If employees are required to render service until they are terminated in order to receive the severance and termination benefits, a liability is recognized ratably over the future service period. Otherwise, a liability is recognized when management has committed to a restructuring plan and has communicated those actions to affected employees.

Refer to Note 6 for additional information on the severance expense that the Company recognized for employees terminated in connection with the August 2022 reduction-in-force.

Assets Held for Sale

 

The Company classifies assets as held for sale when management has approved to sell the assets, the sale is probable to occur during the next 12 months at a price that is reasonable in relation to its current estimated fair value and certain other specified criteria are met. The assets classified as held for sale is recorded at the lower of the carrying value and estimated fair value, less cost to sell. If the carrying value of the assets exceeds its estimated fair value, less cost to sell, a loss is recognized and reported in the condensed consolidated statement of operations.

Refer to Note 6 for additional information on the assets held for sale in connection with restructuring.

Long-lived Asset Impairment

 

The Company assesses long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amounts of the asset or group of assets may not be recoverable. During the three months ended September 30, 2022, the Company commenced restructuring activities which indicated that the carrying amount of the long-lived assets might not be recoverable. The Company evaluated the long-lived assets, consisting primarily of capital equipment, for impairment. If the carrying amount of an asset group exceeds its estimated undiscounted net future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset group exceeds its fair value. To the extent available, the Company will also consider third-party valuations of an asset group that were prepared for other business purposes. An impairment charge is recognized for the amount by which the carrying value exceeds its estimated fair value. When an impairment loss is recognized for equipment to be held and used, the adjusted carrying amounts are depreciated over their remaining useful life.

All of the Company’s equipment in its Maryland facility was either sold during the three months ended September 30, 2022 or sold shortly thereafter. As such, the Company recorded impairment charges which reflect the net selling prices for each of those assets.  The assets are classified as “assets held for sale” on the condensed consolidated balance sheet as of September 30, 2022. Refer to Note 6 for additional information regarding the impairment charge recorded in connection with the Company’s restructuring.

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued Accounting Standards Update (ASU) 2016-02, Leases (Topic 842), as amended, with guidance regarding the accounting for and disclosure of leases. The update requires lessees to recognize on the balance sheet the liabilities related to all leases, including operating leases, with a term greater than 12 months. This update also requires lessees and lessors to disclose key information about their leasing transactions. As an emerging growth company, this standard is effective for the Company for fiscal years beginning after December 15, 2021, and interim periods within annual periods beginning after December 15, 2022. The Company adopted this standard on January 1, 2022, using the modified retrospective method by applying the new standard to all leases existing as of the effective date and not restating comparative periods. The Company elected the “package of practical expedients”, which permits the Company to not reassess under this standard its prior conclusions about lease identification, lease classification and initial direct costs. In addition, the Company elected the short-term lease recognition exemption for all leases that qualify. The impact of adoption and additional disclosures required by the standard have been included in “Summary of Significant Accounting Policies – Leases” above and in Note 5. As a result of the adoption of the new lease accounting guidance, the Company recognized, on January 1, 2022, operating lease right-of-use asset of $0.6 million and operating lease liability of $0.6 million in the unaudited condensed consolidated balance sheet. Prior period amounts before January 1, 2022

12


 

have not been adjusted and continue to be reported in accordance with the Company’s historical accounting under previous lease guidance, ASC Topic 840, Leases (ASC 840).

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which removes certain exceptions and amends certain requirements in the existing income tax guidance to ease accounting requirements. As an emerging growth company, this standard is effective for the Company for fiscal years beginning after December 15, 2021, and interim periods within annual periods beginning after December 15, 2022, and must be applied on a retrospective basis. The Company adopted ASU 2019-12 on January 1, 2022, and the adoption did not have a material impact on its condensed consolidated financial statements.

3. Fair Value Measurements

The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following three levels:

 

Level 1: Observable inputs such as unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date.

 

Level 2: Inputs (other than quoted prices included in Level 1) that are either directly or indirectly observable for the asset or liability. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

 

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.

The following tables present information about the Company’s financial assets measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values (in thousands):

 

 

 

September 30, 2022

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

8,627

 

 

$

 

 

$

 

 

$

8,627

 

Commercial paper

 

 

 

 

 

993

 

 

 

 

 

 

993

 

Total cash equivalents

 

 

8,627

 

 

 

993